S. HRG. 108–779

Senate Hearings

Before the Committee on Appropriations

Departments of Transportation,

Treasury and General Government,

and Related Agencies

Appropriations

Fiscal Year 2005

108th CONGRESS, SECOND SESSION 

H.R. 5025/S. 2806

DEPARTMENT OF THE TREASURY 

DEPARTMENT OF TRANSPORTATION 

NONDEPARTMENTAL WITNESSES 

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Appropriations, 2005 (H.R. 5025/S. 2806) 
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92–164 PDF 2005

S. HRG. 108–779

DEPARTMENTS OF TRANSPORTATION, TREASURY

AND GENERAL GOVERNMENT, AND RELATED

AGENCIES APPROPRIATIONS FOR FISCAL YEAR

2005

HEARINGS

BEFORE A

SUBCOMMITTEE OF THE 

COMMITTEE ON APPROPRIATIONS 

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

ON

H.R. 5025/S. 2806

AN ACT MAKING APPROPRIATIONS FOR THE DEPARTMENTS OF TRANSPORTATION AND TREASURY, THE EXECUTIVE OFFICE OF THE PRESIDENT, AND CERTAIN INDEPENDENT AGENCIES FOR THE FISCAL 

YEAR ENDING SEPTEMBER 30, 2005, AND FOR OTHER PURPOSES

Department of the Treasury 

Department of Transportation 

Nondepartmental witnesses 

United States Postal Service

Printed for the use of the Committee on Appropriations

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/senate
(II)

COMMITTEE ON APPROPRIATIONS 

TED STEVENS, Alaska, Chairman 

THAD COCHRAN, Mississippi 

ARLEN SPECTER, Pennsylvania 

PETE V. DOMENICI, New Mexico 

CHRISTOPHER S. BOND, Missouri 

MITCH MCCONNELL, Kentucky 

CONRAD BURNS, Montana 

RICHARD C. SHELBY, Alabama 

JUDD GREGG, New Hampshire 

ROBERT F. BENNETT, Utah 

BEN NIGHTHORSE CAMPBELL, Colorado 

LARRY CRAIG, Idaho 

KAY BAILEY HUTCHISON, Texas 

MIKE DEWINE, Ohio 

SAM BROWNBACK, Kansas 

ROBERT C. BYRD, West Virginia 

DANIEL K. INOUYE, Hawaii 

ERNEST F. HOLLINGS, South Carolina 

PATRICK J. LEAHY, Vermont 

TOM HARKIN, Iowa 

BARBARA A. MIKULSKI, Maryland 

HARRY REID, Nevada 

HERB KOHL, Wisconsin 

PATTY MURRAY, Washington 

BYRON L. DORGAN, North Dakota 

DIANNE FEINSTEIN, California 

RICHARD J. DURBIN, Illinois 

TIM JOHNSON, South Dakota 

MARY L. LANDRIEU, Louisiana 

JAMES W. MORHARD, Staff Director 

LISA SUTHERLAND, Deputy Staff Director 

TERENCE E. SAUVAIN, Minority Staff Director 

SUBCOMMITTEE ON TRANSPORTATION, TREASURY AND GENERAL GOVERNMENT, AND

RELATED AGENCIES

RICHARD C. SHELBY, Alabama, Chairman 

ARLEN SPECTER, Pennsylvania 

CHRISTOPHER S. BOND, Missouri 

ROBERT F. BENNETT, Utah 

BEN NIGHTHORSE CAMPBELL, Colorado 

KAY BAILEY HUTCHISON, Texas 

MIKE DEWINE, Ohio 

SAM BROWNBACK, Kansas 

TED STEVENS, Alaska (ex officio) 

PATTY MURRAY, Washington 

ROBERT C. BYRD, West Virginia 

BARBARA A. MIKULSKI, Maryland 

HARRY REID, Nevada 

HERB KOHL, Wisconsin 

RICHARD J. DURBIN, Illinois 

BYRON L. DORGAN, North Dakota

Professional Staff

PAUL DOERRER

LULA EDWARDS

ALAN HANSON

PETER ROGOFF (Minority) 

KATE HALLAHAN (Minority) 

DIANA GOURLAY HAMILTON (Minority)

Administrative Support

MATTHEW MCCARDLE

MEAGHAN L. MCCARTHY (Minority) 
(III)

C O N T E N T S 

TUESDAY, MARCH 9, 2004

Page 

Department of Transportation: Office of the Secretary ........................................ 1

THURSDAY, APRIL 1, 2004

United States Postal Service .................................................................................. 115

WEDNESDAY, APRIL 7, 2004

Department of the Treasury: Internal Revenue Service ...................................... 155

TUESDAY, APRIL 20, 2004

Department of the Treasury: Office of the Secretary ........................................... 277

THURSDAY, APRIL 22, 2004

Department of Transportation: 

Federal Aviation Administration .................................................................... 397 

Office of the Inspector General ........................................................................ 411

Material Submitted by Agencies Not Appearing for Formal Hearings ............... 477 

Saint Lawrence Seaway Development Corporation ....................................... 477 

Merit Systems Protection Board ..................................................................... 483 

U.S. Access Board ............................................................................................. 487 

Office of Personnel Management ..................................................................... 495 

Office of the Inspector General ................................................................ 498 

General Services Administration: 

Public Buildings Service ........................................................................... 500 

General Services Administration ............................................................. 501 

Department of Transportation: 

Federal Motor Carrier Safety Administration ........................................ 505 

Bureau of Transportation Statistics ........................................................ 509 

Research and Special Programs Administration .................................... 511 

Department of the Treasury: 

Financial Crimes Enforcement Network ................................................. 513 

Alcohol and Tobacco Tax and Trade Bureau .......................................... 520 

U.S. Office of Special Counsel ......................................................................... 524 

Federal Election Commission .......................................................................... 527 

Office of National Drug Control Policy ........................................................... 530 

Surface Transportation Board ......................................................................... 534 

Office of Government Ethics ............................................................................ 539

Nondepartmental Witnesses ................................................................................... 543

(1)

DEPARTMENTS OF TRANSPORTATION, TREASURY AND GENERAL GOVERNMENT, AND RELATED AGENCIES APPROPRIATIONS FOR 

FISCAL YEAR 2005 

TUESDAY, MARCH 9, 2004 

U.S. SENATE, SUBCOMMITTEE OF THE COMMITTEE ON APPROPRIATIONS, Washington, DC. 

The subcommittee met at 10:01 a.m., in room SD–138, Dirksen 

Senate Office Building, Hon. Richard C. Shelby (chairman) presiding. 

Present: Senators Shelby, Bennett, Stevens, and Murray. 

DEPARTMENT OF TRANSPORTATION 

OFFICE OF THE SECRETARY

STATEMENT OF HON. NORMAN Y. MINETA, SECRETARY 

OPENING STATEMENT OF SENATOR RICHARD C. SHELBY

Senator SHELBY. Good morning. The committee will come to 

order. 

This is the first hearing of the Transportation, Treasury Subcommittee for the year, fiscal year 2005. Today we welcome a familiar face, Secretary Norman Mineta, back to this subcommittee. 

Mr. Secretary, welcome. We are pleased to have you with us today 

to discuss the Department’s budget for the upcoming fiscal year 

and to hear your report on progress towards your goals for the Department of Transportation (DOT). 

I believe it is only fitting that we begin our hearings with an 

overview of the budgetary and management challenges facing the 

Department of Transportation. Clearly the budget pressures faced 

by the administration and the Congress are reflected in this budget. Secretary Mineta, I looked through the budget submission for 

good news and I found myself at the end of the story with little 

to cheer about, as I am sure you have. 

I want to applaud you though for not proposing any new user 

fees in this year’s request that affect the budget. With our economy 

struggling to recover, I believe that now would be the worst time 

to increase the burden on transportation users or on the economy 

through the imposition of new transportation taxes. Our goal 

should be to do more with less and to relieve unnecessary impediments to efficiency in the transportation system. This budget provides the opportunity to explore how to do more with less. 
2

I also want to commend you, Mr. Secretary, for the request for 

highway spending. While it is not as high as I hoped for, I am 

pleased that the budget abandons the RABA mechanism that 

would have generated a much lower amount of highway investment 

number for fiscal years 2004 and 2005. While the highway request 

is relatively flat, I want my colleagues to realize that it could have 

been much, much worse if the administration had blindly followed 

the previous authorization’s flawed budget mechanism. Mr. Secretary, you are to be applauded for not embracing that folly. 

As important as any of the shortcomings in this request, I am 

concerned with the National Highway Traffic Safety Administration’s (NHTSA) request as it relates to anti-impaired driving efforts. I am saddened to note that alcohol-related deaths were up in 

2002. NHTSA has made great strides over the last couple of years 

to improve seatbelt usage rates but this is something that I think 

we must do better. 

I am also concerned about the lack of progress on the Amtrak 

fair bid concept for State-supported trains included in the fiscal 

year 2004 appropriations measure. I have been told that several 

States have contacted the Federal Railroad Administration for 

guidance on implementation of the language and nothing has been 

forthcoming. 

Mr. Secretary, given the request for Amtrak for this coming year 

and its abysmal performance over the past 20 years, I would think 

this language would be an opportunity for the Department to take 

a positive step for people who want to ride trains and for the American taxpayer. I would also like to hear your thoughts on when the 

Department will move forward on this important initiative and 

would welcome your thoughts on what we should be doing to stop 

the financial bleeding at Amtrak. 

As predictable as the request for Amtrak may have been, Mr. 

Secretary, no area of the Department’s request was more unexpected than the Federal Aviation Administration (FAA) budget. 

Just a couple of months ago, shortly before the submission of your 

2005 request to OMB, the administration made an all-out push for 

passage of the Vision 100 aviation reauthorization legislation. Now 

I look at this budget request and I am surprised to see that the 

FAA’s capital account does not reflect the investment levels anticipated in that legislation. Your budget, Mr. Secretary, calls for a 

13.6 percent reduction, roughly $400 million, to the Federal Aviation Administration’s capital account to update air traffic control 

facilities and equipment. 

I am concerned not only about the timing of the cut, but also 

about its effect. The administration’s budget proposal puts this 

committee in the untenable position of having to find an additional 

$400 million or being subject to points of order in the Senate. It 

is difficult and unseemly to support budgetary protections and 

points of order protecting capital investment levels and, at the 

same time, to also support the kinds of cuts your budget proposes 

for the FAA capital account. 

Within the reduced account, I am disappointed that the FAA has 

protected troubled acquisition programs and has shelved others 

that show real promise. Tighter budgets do not translate to greater 

discipline at the FAA. I do not know how the Department expects 
3

to develop the Next Generation Air Traffic Control System if the 

FAA continues to spare from critical evaluation or from the budget 

axe the programs that have unbridled cost growth, schedule delays, 

and deferred capabilities. 

Mr. Secretary, if the calculus in the F&E submission was to try 

to protect the most bloated of programs with the expectation that 

Congress would restore funding for the needed new technologies for 

efficiency and safety, there may be a few surprised faces at the 

FAA’s procurement shop. 

Before recognizing Senator Murray, I would like to raise one 

more issue. Although only briefly mentioned in budget documents, 

your staff has begun briefing the Hill on a major Department reorganization proposal affecting several modes. Clearly, the Department needs to improve the coordination of the enforcement of hazardous materials regulations and inspection of hazmat shipments. 

In fact, the Inspector General has identified this issue as one of the 

top 10 management challenges at the Department. 

While improvement is warranted, I think we must be mindful 

that previous reorganization efforts have failed. And, I want to register my strong reservation about centralizing HAZMAT inspection 

and enforcement activities within the Office of the Secretary. The 

Office of the Secretary does some things well, such as policy development, but the modal administrations are better staffed and 

structured to execute operational functions like the HAZMAT program. It is highly unusual, and I would argue risky, to establish 

an operations function in the Secretary’s office. 

Senator Murray. 

STATEMENT OF SENATOR PATTY MURRAY

Senator MURRAY. Thank you, Mr. Chairman. Mr. Chairman, I 

am pleased that Secretary Mineta can be with our subcommittee 

this morning. I understand he testified before the House Transportation Appropriations Subcommittee just a few days ago and I understand during that hearing the Secretary explained this budget 

reflects the President’s top priorities. If this is true, then it is true 

that the President places an extremely low priority on the needs 

of our Nation’s transportation system. At a time when congestion 

on our Nation’s highways is getting worse and when our road, rail, 

airport and air traffic control infrastructure is deteriorating, the 

President’s budget for the Transportation Department is effectively 

frozen. While there are increases in some select programs, these increases are offset by deep cuts to our efforts to modernize our air 

traffic control system and to provide air service to rural America. 

Once again the administration is proposing a cut to Amtrak’s 

budget that is so deep it will throw the railroad into bankruptcy 

if it is enacted. I cannot and will not agree with these priorities 

and I hope that my colleagues on this subcommittee will also reject 

them. For me this is about our jobs, our economy and our productivity. If we make the right investments in transportation we will 

create millions of jobs here at home, we will make our businesses 

and workers more productive, and we will lay the foundation for 

our future economic growth. 

The Senate has also recognized the importance of transportation 

for our economy. Less than a month ago more than three-quarters 
4

of the United States Senate voted in favor of a surface transportation authorization bill that placed an appropriate priority on investment in America’s mobility, America’s productivity, and the 

creation of American jobs. That bill called for substantial growth in 

our Federal highway, transit, and safety programs. It financed 

those increases by closing tax loopholes. The bill not only addressed 

America’s broader needs to relieve congestion and improve aging 

infrastructure, it also addressed the unique needs of different regions of the country. 

For example, I was successful in including an amendment to triple the amount of funding available for our Nation’s ferry systems. 

Ferries are not just a tourist attraction in my State. They are the 

way thousands of my constituents get to work each and every day. 

The Bush Administration greeted that entire surface transportation bill with a promise to veto it. Yet when an amendment was 

offered on the Senate floor to reduce the size of the bill to a level 

that the President said he could accept, that amendment received 

only 20 votes. 

That vote was less than 4 weeks ago but, boy, things have 

changed. Today the Senate is debating a budget resolution that 

was reported by the Budget Committee just last week that actually 

cuts funding for highways and transit back to the level assumed in 

the President’s budget. This budget resolution will allow for $45 

billion less in funding over the next 6 years for highways and transit than the levels the Senate endorsed just last month. That $45 

billion reduction translates into more than 2.1 million jobs that will 

not be created as a result of the President’s budget policy and this 

budget resolution. To my home State of Washington that is a cut 

of roughly $807.8 million. That corresponds to a loss of more than 

38,000 jobs in Washington State over 6 years. 

The President’s cut will have a significant impact on every State. 

I hope my colleagues will reflect on that fact before they vote to 

pass this budget resolution. This budget negates every statement 

that we made a month ago about the importance of highway construction, new transit systems, congestion mitigation, and job creation. Mr. Chairman, this is hardly the first time that an administration has threatened to veto a highway bill because it is too 

large. In fact veto threats have been issued against each of the last 

three highway bills over last 18 years. But this may be the first 

time that a Congress has started to show signs of giving in to objections from the executive branch. 

We need to pass a 6-year surface transportation bill that invests 

in America and America’s workers in a meaningful way. We should 

not succumb to the view that investment in a mission to Mars is 

more important than investments in our country and in our own 

people. No one made this point better than Norman Mineta when 

he implored his colleagues to ignore the veto threat of the administration of George Herbert Walker Bush and pass the Intermodal 

Surface Transportation Efficiency Act. 

Mr. Mineta said, and I will quote you, ‘‘this legislation comes at 

the time when it is desperately needed, both in terms of our infrastructure and for Nation’s economic health. At a time when the 

White House continues to deny the effects of the economic recession 

we have before us legislation that will create 2 million jobs over the 
5

next 6 years. While the people of 1600 Pennsylvania Avenue have 

not seen or felt the effects of the recession, Mr. Speaker, you have 

only to ask the people of Bethlehem, Pennsylvania if there is a recession, or the people of Chicago, or the people of Lafayette, or the 

people of San Jose. They will tell you that our economy is hurting. 

They will tell you that America needs this legislation and we need 

it now.’’

‘‘Mr. Speaker, this legislation will improve how Americans get 

from here to there as well as the air we breathe, our quality of life, 

and the future of our economy. Mr. Speaker, America’s deserves 

nothing less.’’

Secretary Mineta, those words are as pertinent and on target 

today as they were when you delivered them on the floor of the 

House on November 26, 1991. America does deserve nothing less. 

We should send the highway and transit bill that the Senate 

passed last month to the President’s desk, and I believe that if he 

listens to his Transportation Secretary he will sign it. 

Thank you, Mr. Chairman. 

Before I yield I do want to mention a couple of happy and surprising developments that have taken place within the past week 

on this subcommittee family. As you know, our majority clerk sitting to your left, Paul Doerrer, got engaged over the weekend to 

Leigha Shaw. We congratulate him. Leigha is a friend to all of us. 

She serves on the staff of the companion subcommittee in the 

House and I want to congratulate both of them and wish them 

well. 

PREPARED STATEMENT

And to my right, Peter Rogoff, who has been with the Appropriations Committee for 17 years, I believe 15 years on transportation, 

is celebrating his birthday today. I will not share with you which 

one, but I do want to say happy birthday to him as well and we 

wish both of you the very best. 

Thank you, Mr. Chairman. 

[The statement follows:]

PREPARED STATEMENT OF SENATOR PATTY MURRAY

I’m pleased that Secretary Mineta can be with the subcommittee this morning. 

He testified before the House Transportation Appropriations Subcommittee just a 

few days ago. I understand that during that hearing, the Secretary explained this 

budget reflects the President’s top priorities. 

If this is true, then it’s clear that the President places an extremely low priority 

on the needs of our Nation’s transportation system. At a time when congestion on 

our Nation’s highways is getting worse, and when our road, rail, airport and air 

traffic control infrastructure is deteriorating, the President’s budget for the transportation department is effectively frozen. 

While there are increases in some select programs, these increases are offset by 

deep cuts to our efforts to modernize our air traffic control system and to provide 

air service to rural America. And once again, the administration is proposing a cut 

to Amtrak’s budget that is so deep it will throw the railroad into bankruptcy if it 

is enacted. 

I cannot and will not agree with these priorities, and I hope that my colleagues 

on this subcommittee will also reject them. For me, this is about jobs, our economy 

and our productivity. If we make the right investments in transportation we will 

create millions of jobs here at home, we’ll make our businesses and workers more 

productive, and we’ll lay the foundation for our future economic growth. 

The Senate has also recognized the importance of transportation for our economy. 

Less than 1 month ago, more than three-quarters of the United States Senate voted 
6

in favor of a surface transportation authorization bill that placed an appropriate priority on investment in America’s mobility, America’s productivity, and the creation 

of American jobs. That bill called for substantial growth in our Federal highway, 

transit and safety programs. It financed these increases by closing tax loopholes. 

The bill not only addressed America’s broader needs to relieve congestion and improve aging infrastructure, it also addressed the unique needs of different regions 

of the country. For example, I was successful in including an amendment to triple 

the amount of funding available for our Nation’s ferry systems. Ferries are not a 

tourist attraction in my State. They are the way thousands of my constituents get 

to work each day. The Bush Administration greeted that surface transportation bill 

with a promise to veto it. 

Yet, when an amendment was offered on the Senate Floor to reduce the size of 

the bill to a level that the President said he could accept—that amendment received 

only 20 votes. That vote was less than 4 weeks ago, but my, how things have 

changed. 

Today, the Senate is debating a Budget Resolution that was reported by the Budget Committee just last week and that actually cuts funding for highways and transit 

back to the level assumed in the President’s budget. This Budget Resolution will 

allow for $45 billion less in funding over the next 6 years for highways and transit 

than the levels the Senate endorsed just last month. That $45 billion reduction 

translates into more than 2.1 million jobs that will not be created as a result of the 

President’s budget policy and this Budget Resolution. For Washington State, that 

is a cut of roughly $807.8 million. That corresponds to a loss of more than 38,000 

jobs in Washington State over 6 years. 

The President’s cut will have a significant impact on every State. I hope my colleagues will reflect on that fact before they vote to pass this Budget Resolution. This 

budget negates every statement that we made a month ago about the importance 

of highway construction, new transit systems, congestion mitigation and job creation. 

Mr. Chairman, this is hardly the first time that an administration has threatened 

to veto a highway bill because it is too large. In fact, veto threats have been issued 

against each of the last 3 highway bills over the last 18 years. But this may be the 

first time that a Congress has started to show signs of giving in to objections from 

the Executive Branch. We need to pass a 6-year surface transportation bill that invests in America and America’s workers in a meaningful way. We should not succumb to the view that investment in a mission to Mars is more important than investments in our own country and our own people. 

No one made this point better than Norman Y. Mineta when he implored his colleagues to ignore the veto threat of the administration of George Herbert Walker 

Bush and pass the Intermodal Surface Transportation Efficiency Act. Chairman Mineta said:

‘‘[t]his legislation comes at a time when it is desperately needed—both in terms 

of our infrastructure, and for our Nation’s economic health. At a time when the 

White House continues to deny the effects of the economic recession, we have before 

us legislation that will create two million jobs over the next 6 years. And while the 

people of 1600 Pennsylvania Avenue haven’t seen or felt the effects of the recession, 

Mr. Speaker, you have only to ask the people of Bethlehem, PA, if there is a recession. Or the people of Chicago. Or the people of Lafayette, LA. Or the people of San 

Jose, CA. They will tell you that our economy is hurting. They will tell you that 

America needs this legislation, and we need it now. Mr. Speaker, this legislation 

will improve how Americans get from here to there, as well as the air we breathe, 

our quality of life, and the future of our economy. Mr. Speaker, America deserves 

nothing less.’’

Secretary Mineta, these words are as pertinent and on target today as they were 

when you delivered them on the Floor of the House on November 26, 1991. 

America does deserve nothing less. We should send the highway and transit bill 

that the Senate passed last month to the President’s desk. I believe that, if he listens to his Transportation Secretary, he will sign it. Thank you, Mr. Chairman.

Senator SHELBY. Thank you, Senator Murray. 

Senator Bennett. 
7

STATEMENT OF SENATOR ROBERT F. BENNETT

Senator BENNETT. Thank you very much, Mr. Chairman. With 

that announcement I think we can expect some late night conferences between the House and the Senate. 

Mr. Secretary, let me welcome you here and publicly thank you 

for the continued support that has come from the Department of 

Transportation for transportation concerns in Utah. We are particularly pleased with the support and assistance we received from 

the Federal Transit Administration. Administrator Jenna Dorn and 

her staff have always been responsive and I would be remiss if I 

did not publicly acknowledge that here and in a forum directly with 

you. We think we have a model program going in the transit system along the Wasatch Front has proven to be very successful, exceeded all expectations and projections as to ridership and we are 

enormously proud of it. But we recognize that if we had not had 

the kind of support and responsive reaction that has come from Administrator Dorn we would not be where we are. So in a time when 

people are beating other people up on all kinds of issues, I want 

to have the record show how grateful we are for the work that you 

have done. 

We do have an issue which I will deal with in some detail perhaps during the question period. In the wide open spaces of the 

West, particularly following 9/11, we have had a shift in air transportation away from what people call the main line carriers into 

the regional carriers, and a regional carrier that is very successful 

in Utah, SkyWest in particular, has added some new jets and some 

new routes. The economics of what happened after 9/11 has dictated this. 

But it has created a problem in that DOT and FAA regulations 

regarding the transportation of medical specimens for diagnosis 

has hit us because the regional carrier is not designated to handle 

these specimens as much as the trunk carriers are, and with the 

University of Utah Medical Center serving the entire region, not 

just the State of Utah, we have to get some of those diagnostic 

specimens to the University of Utah. They would be transferred to 

regional carrier flights rather than the trunk line flights before. 

This is an issue that we have just found out about. I am not sure 

that you are aware of it either but I wanted to raise it here and 

we might get into it at some point. 

With that, Mr. Chairman, I will be happy to hear the witness. 

Senator SHELBY. Thank you. 

Mr. Secretary, your written testimony will be made part of the 

record in its entirety. You may proceed as you wish. Welcome again 

to the committee. 

STATEMENT OF NORMAN Y. MINETA

Secretary MINETA. Thank you very much, Mr. Chairman, and 

members of the subcommittee. Thank you for this opportunity to 

appear before you today to discuss the administration’s fiscal year 

2005 budget request for the Department of Transportation. I might 

say parenthetically in response to Senator Murray, then is then 

and now is now. 
8

As we begin our discussion, I want to thank the members of the 

subcommittee for your support of the work of the Department of 

Transportation. I am confident that together we will continue to 

build a strong economy by providing a safer, simpler, and smarter 

transportation system for our great Nation. Let us turn now to the 

budget specifics. President Bush is requesting $58.7 billion in total budgetary resources for the Department of Transportation. As you are very well 

aware, last year we sent the President’s proposal for reauthorizing 

our surface transportation programs for the next year to the Congress. This legislation, the Safe, Accountable, Flexible and Efficient 

Transportation Equity Act, or SAFETEA, is a responsible plan. It 

supports the economy through record investments in our highway 

and transit and safety programs without raising gasoline taxes, 

without increasing the Federal deficit, and without taking money 

from other important programs. So I look forward to working with 

the Congress on enactment of the President’s 2005 budget for highway, safety, and transit programs. While it does not fall under the 

jurisdiction of this committee, I do want to underscore the need for 

swift action on this pending SAFETEA proposal by the Congress. 

FUNDING FOR SURFACE TRANSPORTATION

The 2005 budget reaffirms the President’s commitment to SAFETEA by providing a total of $256 billion over the 6-year life 

of the bill up from the $247 billion in the original proposal. For 

highway and transit programs, the budget would continue the recently enacted 2004 funding level, and within this level we are increasing funding for transit new starts. These new start projects 

will carry over 243 million passengers annually and they will save 

over 121 million hours in travel time and significantly improve air 

quality and mobility in America. The budget specifically designates more than $14 billion for 

transportation safety with increases in annual funding for safety 

initiatives in both the National Highway Traffic Safety Administration, NHTSA, and the Federal Motor Carrier Safety Administration, FMCSA. Today, travel on America’s highway is safer than in 

recent memory. Statistics show that 75 percent of all Americans 

are using their safety belts, the highest level in our Nation’s history. We are proud of this progress and will continue the Department’s aggressive efforts to save lives and to reduce the more than 

$230 billion that the economy loses each year because of traffic 

crashes. 

FUNDING FOR RAILROADS AND AMTRAK

For railroads, the President’s 2005 budget includes $188 million 

for the Federal Railroad Administration to support enhanced track 

inspection and research activities. The President’s Amtrak reform 

legislation, the Passenger Rail Investment Reform Act, is also 

pending before the Congress. The 2005 budget requests $900 million for Amtrak in 2005 with the potential for an increase to $1.4 

billion in the years 2006 through 2009 if the Administration’s management and financial reforms are enacted. Now these reforms are 

critical if we are to justify further spending of taxpayer dollars on 

Amtrak service. 
9

FUNDING FOR THE FEDERAL AVIATION ADMINISTRATION

The President’s 2005 budget for the Federal Aviation Adminis- tration provides $14 billion in overall funding. We recognize that 

air travel has become a cornerstone of our transportation system 

in the more than 100 years since the Wright brothers’ first flight. 

While holding the line on Federal spending, the President’s budget 

makes a modern and efficient air transportation system a key priority. Let me assure you that we are making the necessary investments to keep America flying safely and smoothly. 

Our plans include continued near-term investments in aviation 

systems and technology to avoid gridlock in the skies and to improve air safety. At the same time we support the design of the 

next generation air transportation system to secure America’s place 

as a global leader in aviation’s second century. We are constantly 

considering new and better ways to make sure that transportation 

supports the Nation’s growing economy. One option that we are exploring would enable the Maritime Administration and the Lawrence Seaway Development Corporation to expand capacity to use 

our ports and waterways to move commercial freight. Giving businesses reliable and affordable options for moving commercial goods 

has the potential to lessen truck traffic on our highways. 

Transportation research plays a vital role in developing transportation solutions. That is why I have asked our staff to study reorganizing the research programs, hazardous materials oversight, and 

pipeline safety within the Department. I believe that there are 

ways to strengthen and improve our work in all of these important 

areas and you will be hearing more from us on these plans. 

Finally, I want to close by underscoring my continued commitment to the President’s management agenda initiative. The Department of Transportation has made significant improvements in all 

management areas. Consequently, we are delivering results for the 

American people, helping the President build a strong economy 

through a strong transportation system. There is still much to be 

done, but I am confident that we are on the right path. 

PREPARED STATEMENT

I have touched on only a few key highlights and you will find additional details within my full written statement submitted to the 

committee as well in our Budget in Brief, which all of you have received. It is this multicolored pamphlet. At this time, Mr. Chairman, I would be more than happy to answer your questions. 

[The statement follows:]

PREPARED STATEMENT OF NORMAN Y. MINETA

Mr. Chairman, Members of the subcommittee, thank you for the opportunity to 

appear before you today to discuss the administration’s fiscal year 2005 budget request for the Department of Transportation. President Bush is requesting $58.7 billion in total budgetary resources for transportation programs—nearly the same as 

the fiscal year 2004 enacted level. I am particularly pleased that within this total 

funding level more than $14 billion will support transportation safety projects—my 

top priority. 

Today, travel on America’s highways is safer than in recent memory. Statistics 

show that 79 percent of all Americans are using their safety belts—the highest level 

in the Nation’s history. We are proud of this progress and of the Department of 

Transportation’s role in encouraging safety belt use. Yet sadly, more than 40,000 

people still die in traffic crashes each year. Many die needlessly just because they 
10

failed to ‘‘buckle-up’’. This is a tragic statistic that affects all of us and one that both 

the President and I have pledged to address. We are committed to reducing traffic 

fatalities. The President’s fiscal year 2005 budget request acknowledges this priority 

and includes annual funding increases for our important safety programs. 

Over the past year, the Department of Transportation provided to the Congress 

legislative proposals to reauthorize our Nation’s surface, aviation, and intercity-passenger rail programs. As a result, the ‘‘Vision 100—Century of Aviation Reauthorization Act’’ was passed providing the Federal Aviation Administration with a blueprint from which to guide its work over the next 4 years. 

The fiscal year 2005 President’s budget reflects the administration’s commitment 

to aviation and the key role it plays in keeping America moving. On December 17, 

2003, we celebrated the 100-year anniversary of the Wright Brothers’ first flight. 

Today, air travel has become a cornerstone of our transportation system. Continued 

investment in aviation systems and technology is critical to ensuring the reliability 

of air travel. The recent passage of the ‘‘Vision 100’’ which authorizes aviation programs for the next 4 years, includes more than $60 billion in Federal resources—

a 31 percent increase above previous authorization levels for aviation. 

The fiscal year 2005 President’s budget request is $14 billion for the Federal Aviation Administration (FAA). The fiscal year 2005 request will enable the agency to 

continue to fund the level of service it provides today, while ensuring that critical 

capital investments stay on track. In addition, ‘‘Vision 100’’ will result in hundreds 

of thousands of additional jobs in the aviation industry over the 4-year life of the 

bill while at the same time providing a plan for guiding FAA’s programs in the future. 

Although we have new aviation reauthorization, work continues to provide reauthorization legislation for our surface programs, and long-term legislative solutions 

have not been completed to date. The recently enacted surface transportation extension bill is an interim step that falls short of addressing the long-term needs of 

these programs. We welcome the opportunity to work with the Congress to complete 

a 6-year reauthorization bill that meets the administration’s principles recently outlined in a letter Treasury Secretary Snow and I sent to the Senate Majority Leader 

and that will provide the resources and planning horizon to keep our surface transportation programs moving forward. 

Enactment of the administration’s surface transportation reauthorization proposal—the ‘‘Safe, Accountable, Flexible, and Efficient Transportation Equity Act’’, or 

‘‘SAFETEA’’ would accomplish this goal. Last May, the President proposed 

‘‘SAFETEA’’—the largest investment in history for America’s surface transportation 

programs. The President’s fiscal year 2005 budget reaffirms the principles outlined 

in ‘‘SAFETEA’’ while amending our proposal to include a total of $256 billion over 

the 6-year life of the bill—an additional $8.6 billion more than the $247 billion in 

our original ‘‘SAFETEA’’ funding request—and a 21 percent increase over the funding included in the Transportation Equity Act for the 21st Century (TEA21). Much 

of this investment will be used to provide improvements on our roads and highways 

which will reduce traffic congestion. 

Our revised proposal would continue the funding levels for the Federal Highway 

Administration and the Federal Transit Administration enacted in fiscal year 2004 

for each year 2005 through 2009. Moreover, the fiscal year 2005 President’s budget 

request includes annual increases beginning in 2005 through 2009 for both the National Highway Traffic Safety Administration (NHTSA) and the Federal Motor Carrier Safety Administration (FMCSA) to ensure that improvements in safety are enhanced. 

Our fiscal year 2005 budget proposal accomplishes the administration’s safety, 

mobility, and congestion relief goals by providing a historic level of surface transportation spending without raising taxes. Instead, the administration’s request relies 

on spending resources available in the Highway Trust Fund while ensuring that a 

cash balance of approximately $5 billion is maintained throughout the authorization 

period. Further, the President’s request would redirect the resources from the 21⁄2

cents per gallon levied on gasohol, and currently deposited in the General Fund, to 

the Highway Trust fund. This redirection will increase annual receipts to the Highway Trust Fund by over $700 million per year—a change that, if enacted, will provide the resources needed to support the proposed annual funding increases for our 

safety programs. 

‘‘SAFETEA’’ provides a plan that will enable us to reach our goals, while providing the vision necessary to guide our surface transportation programs in a fiscally responsible manner. I urge the Congress to act quickly to pass ‘‘SAFETEA’’ 

and the fiscal year 2005 President’s budget request for our surface transportation 

programs. Every day we delay is a missed opportunity to benefit America. 
11

Although highway, transit and highway safety programs play a major role in surface transportation, we also rely on railroads to move people and goods across our 

country. Intercity passenger rail is an essential element of the Nation’s multi-modal 

transportation system. Accordingly, last year, in addition to our SAFETEA proposal, 

the administration sent to Congress the President’s Passenger Rail Investment Reform Act. This proposal would align passenger rail programs with other transportation modes, under which States work in partnership with the Federal Government, in owning, operating, and maintaining transportation facilities, infrastructure 

and services. Putting passenger rail on a solid foundation of planning and investment will give this important mode of transportation the support it needs to grow. 

The President’s fiscal year 2005 budget requests $900 million for Amtrak and includes the potential for an increase to $1.4 billion in each of fiscal years 2006 

through 2009—if the administration’s management and financial reforms are enacted. 

The fiscal year 2005 President’s budget also includes a proposal for funding the 

Essential Air Service (EAS) program that would include a limited cost-sharing arrangement with selected communities participating in the program. Currently, the 

EAS program subsidizes scheduled air service to communities that received scheduled service at the time of deregulation in 1978. Although there have been tremendous changes in the industry since then, the program has remained static. The administration believes that requiring a modest contribution from communities benefiting from this program may energize civic officials and business leaders at the 

local and State levels to think more creatively about the potential of the program 

and about different means to meet the transportation needs of the community. 

The President’s fiscal year 2005 budget request will continue to guarantee air 

service to the most isolated communities by restructuring the program to require 

communities to contribute either 10 or 25 percent of the total subsidy, depending 

on their degree of isolation, and to expand service provided to include ground transportation, single-engine, single-pilot operations, air taxi, charter service or regional 

service. With these reforms, the Department would keep the most isolated communities connected to the national air transportation system with a $50 million budget 

funded entirely from overflight fees. We look forward to working with you on this 

plan. 

Although transportation continues to improve, we still have many challenges before us. Highway congestion and expected increases in air travel are issues we must 

be prepared to address. At the Department of Transportation, we are looking for 

new ways to address growing commercial freight transportation needs, consistent 

with our freight action plan. The President’s budget includes programs to reduce 

bottlenecks in and around seaports and land borders with Canada and Mexico and 

to introduce technological innovations for improved freight efficiency and security. 

In addition, the Maritime Administration and the Saint Lawrence Seaway Development Corporation are advancing programs to expand our capacity to use ports and 

waterways to move freight and transport goods efficiently, thereby reducing dependence on our highways to meet growing freight needs. 

Over the past year, I have considered the important role that transportation research plays in developing transportation solutions. That is why I have asked our 

staff to study reorganizing the research programs, hazardous materials, and pipeline oversight within the Department. I believe there are ways to strengthen and 

improve our work in all of these important areas. As we continue to study alternative approaches, we will work closely with you and our colleagues within the administration to ensure that any potential reorganization will continue to serve the 

Nation’s needs. 

I also want to highlight the fiscal year 2005 President’s budget request for the 

new Department of Transportation headquarters building project. In fiscal year 

2004, the Congress included $42 million for our new headquarters building in the 

General Services Administration’s budget. Our request of $160 million in fiscal year 

2005 would fund the next construction phase and the information technology infrastructure in the building. This would keep the project on track making it possible 

for the Department to begin taking occupancy as planned. Your support for this endeavor will ensure that the Department of Transportation will have an alternative 

site available when our current lease expires in 2006. 

In closing, I would like to share with you my continued commitment to the President’s Management Agenda. President Bush has asked all Federal agencies to work 

towards improvements in the following five key areas: 

—enhanced budget requests that focus on results and performance; 

—improved financial management and strengthened financial controls; 

—targeted human capital initiatives that ensure our human resources are used 

as effectively as possible; 
12

—use of competitive sourcing as a resource solution; and 

—government-wide use of electronic government tools to improve efficiency. 

My team at the Department of Transportation is working hard to implement 

these initiatives and I am proud to note that we have already made significant 

progress towards these goals. I believe we are on the path to success and we are 

committed to continuing these improvements as stewards of the American public’s 

resources. Thank you again for the opportunity to testify today. I look forward to working 

closely with all of you, and with the entire Congress, as you consider the fiscal year 

2005 President’s budget request and I look forward to responding to any questions 

you may have.

FUNDING FOR AIR TRAFFIC CONTROLLERS

Senator SHELBY. Thank you, Mr. Secretary. The budget proposes a $370 million increase for FAA operations, $141 million more than the authorized amount. FAA is taking modest steps to control costs, but it cannot afford continued increases 

in the operations account of 5 percent to 8 percent annually. FAA 

salaries continue to increase sharply. We raised this issue last year 

when the average controller’s salary was more than $106,000, and 

I am told that in the calendar year 2003 some controllers made 

more than $200,000. Controllers’ salaries will further increase 

when the full 2004 pay increase is implemented. 

Mr. Secretary, what steps is the Department taking to get the 

FAA’s payroll under control, or how can you do it? 

Secretary MINETA. There are two ways that we are doing that. 

The first is through the contract negotiations that we have going 

on with the separate labor units. The one specifically for NATCA 

is one in which we have arrived at an impasse. We have submitted 

our letter of impasse to the Congress relating to the contract negotiations that we have going on. Much of that has to do with pay, 

because under the program that Congress passed for the FAA, we 

have pay and procurement practices that are different from the 

regular civil service. One of the things that are incorporated is payfor-performance. 

One of the things that is involved in the impasse is the whole 

issue of multi-units and whether or not—and NATCA’s proposal is 

that they want the full pay increase that everyone is getting, plus 

1 percent. What we are looking at is not only individual performance but also whether the units themselves are meeting their performance goals. So we were not able to come to an agreement on 

that issue, and that has now been submitted for impasse. 

The other method of controlling costs, of course, is the typical 

budgetary restraint. After our initial submission to OMB and the 

passback, when we get our final amount, we then have to 

reprioritize and allocate those financial resources. So to the extent 

that we can look at what our pay will be, or what our financial resources will be, we can match those to what we anticipate in pay 

increases in the outyears. 

FEDERAL TRANSIT ADMINISTRATION ADMINISTRATIVE EXPENSES

Senator SHELBY. Mr. Secretary, I would like to discuss the budget request for FTA administrative expenses. People have been concerned about the annual increases for FAA operations for some 

time. As we review your budget submission, I note that the Federal 

Transit Administration’s administrative expenses are growing at a 
13

faster rate than FAA’s operations. This would catch anybody’s attention. Why are FTA’s administrative expenses growing so sharply? 

Secretary MINETA. I think one of the areas in which the FTA program is growing is transit services, both in urban areas as well as 

the increasing amount that is going to rural areas. These services 

require thorough reviews, and with the growth of the urban, rural, 

and the new starts programs, we are just spending a lot more time 

on going through the applications that are submitted to us. Even 

though most of these are earmarked programs, we still have to 

make sure that the ridership and financial capability of the system 

support what they are asking for. It takes a great deal of effort to 

go through those applications. 

STATE SUPPORT FOR PASSENGER RAIL SERVICE

Senator SHELBY. Mr. Secretary, I mentioned in my opening statement that FRA has not issued guidance to implement the fair bid 

procedure for State-supported rail service. The funds that were set 

aside in the 2004 appropriations act expire at the end of the year 

and I would be disappointed if we let this opportunity to infuse 

competition into passenger rail slip away, especially given the interest of several States. When can we expect FRA to move forward 

on this initiative? 

Secretary MINETA. FRA has been moving forward, Mr. Chairman, with Missouri, St. Louis to Kansas City, and they got no outside bidders other than Amtrak on that route. There are other 

States that have submitted requests or inquiries about the fair bid, 

and I am not sure—I am not up to date on where we are on those 

States. But we will be utilizing the fair bid process because we 

think that that is the right approach. 

MOTOR FUEL TAX EVASION

Senator SHELBY. Mr. Secretary, fuel tax evasion is a subject we 

get into from time to time. According to the Federal Highway Administration, the highway trust fund forgoes approximately $1 billion annually due to non-payment or fraudulent evasion of motor 

fuel taxes. Are you satisfied as the Secretary with the steps taken 

by the Internal Revenue Service to identify the scope of the diversion and stop this from happening in the future? In other words, 

that is a lot of money that we are missing. 

Secretary MINETA. It is a lot of money, and I am not happy with 

the level of enforcement on this issue. That is why our SAFETEA 

proposal has specific amounts for the Department of Treasury to 

enforce the Federal fuel tax, including the coloring of the fuel and 

tracing where it is going. 

Senator SHELBY. This might be a subject that we can bring up 

with the IRS. Senator Murray and I have worked in that area before and we will take this up with the Internal Revenue Service 

too. You would not mind, I am sure. 

Secretary MINETA. Not at all. I would be pleased to join in the 

conversation. 
14

IMPAIRED DRIVING

Senator SHELBY. Impaired driving. We are concerned about the 

increase in the number of alcohol-related traffic fatalities which 

have risen steadily since 1999. To what factors do you attribute 

this disturbing trend and how do you assess the Department’s current efforts at curbing impaired driving? In other words, how are 

you going to reverse the trend? 

One last thing. I have a related point. I heard a report on a news 

program a couple days ago that said that if a drunk pedestrian 

walked in front of an automobile operated by a sober driver and 

was killed, the death would be treated as a drunk driving fatality. 

I do not understand the logic of that. Could you find out how the 

statistics are collected here and explain what has changed? In 

other words, how reliable are the statistics? If you are counting a 

drunk pedestrian that is killed by a sober driver, something is 

wrong. I do not know if that is right, but it would be worth looking 

into. 

Secretary MINETA. Let me take a look at that and find out, but 

it just does not make common sense. 

[The information follows:]

Crashes involving a sober driver and a drunk pedestrian are not considered by 

NHTSA as DWI (Driving while Intoxicated). Rather, NHTSA considers them ‘‘Alcohol-Related’’ crashes. NHTSA’s definition of an Alcohol-Related Crash, in particular 

a fatal crash, is a motor vehicle traffic crash in which any of the actively involved 

persons (drivers, pedestrians or pedalcyclists) had a Blood Alcohol Concentration 

(BAC) of 0.01 g/dl or more (a positive BAC). 

Most alcohol-related crashes involve at least one driver with a positive BAC. Some 

of these crashes also may involve a pedestrian or bicyclist with a positive BAC. 

However, there are also some crashes in each year in which no driver had a positive 

BAC but an involved pedestrian or bicyclist had a positive BAC. The data in 

NHTSA’s Fatality Analysis Reporting System allows us to distinguish between these 

two categories, when analyzing alcohol-related crashes, as depicted in the following 

chart:
15

SAFETY BELT LAWS

Secretary MINETA. In terms of the alcohol-related deaths, the 18-

to-34 age group is the largest cause of fatal accidents. That combined with the issue of the seatbelt usage is why we are working 

very hard to get States to enact a primary safety belt law. In the 

SAFETEA legislation, there are incentives for States that have a 

primary safety belt law or a secondary safety belt law and attain 

90 percent safety belt use. 

There are, frankly, no States that get anywhere close to that 

level of safety belt use with a secondary safety belt law. But the 

two, alcohol-related deaths and safety belt usage, work hand-inhand. Those are two programs that we work at very hard. 

OVERSIGHT OF HIGHWAY CONSTRUCTION PROJECTS

Senator SHELBY. Mr. Secretary, ineffective management and 

oversight have led to significant cost increases, financing problems, 

schedule delays and technical or construction difficulties on highway construction projects. For example, the cost for the Springfield 

interchange in Virginia has increased more than 180 percent from 

$241 million to $677 million, in part because State officials initially 

excluded basic cost items such as construction management, inflation, preliminary engineering, and even the design. 

What can you do or have you done to establish minimum standards for cost estimates so that basic cost items such as inflation, 

construction management, and design will not be excluded from estimates of what a highway project will cost? In other words, this 
16

seems to be lowballing the original cost. How do you analyze this 

and project costs to ensure that they are close to what they claim 

they will be? 

Secretary MINETA. Lowballing, of course, is always a problem 

and you try to catch this when you see change orders coming in. 

But what has happened more recently is the volatile steel prices. 

As I understand it, this has impacted on highway projects. But on 

large, what we call mega-projects, we have now assigned project 

managers to make sure that from a financial standpoint as well as 

scheduling and quality, if it is a 10-sack concrete job then we are 

in fact getting 10 sacks of concrete and not getting shortchanged 

in terms of the quality that goes into that work. Quality also impacts on the lifespan of that infrastructure. So we now have a specific project manager on those so-called megaprojects. 

Senator SHELBY. Senator Murray, thanks for your indulgence. 

FUNDING FOR AIR TRAFFIC CONTROL MODERNIZATION

Senator MURRAY. Mr. Secretary, the only proposed cut in your budget that is larger than your proposed cut in Amtrak is the $400 

million you are proposing in the FAA to modernize our air traffic 

control equipment. In your formal opening statement, you take the 

time to point out that the President signed the Vision 100 bill 

which authorizes more than $60 billion in Federal resources, which 

is a 31 percent increase above previous authorizations for the FAA, 

yet your actual budget request, rather than honoring the increased 

authorizations in that Vision 100 bill, actually cuts investments for 

air traffic control modernization by 14 percent next year. When you 

look at the Bush Administration’s multi-year budget it says that 

you want to cut modernization even lower in 2006. In total for the 

4-year life of the Vision 100 bill the Administration plans to 

underfund the authorized level of air traffic control modernization 

by more than $2 billion. 

What has changed since the date that the President signed the 

Vision 100 bill and today that has caused you to do such a sudden 

reversal when it comes to modernizing our air traffic control equipment? 

Secretary MINETA. First of all, we are not doing anything to impact on the modernization. There are programs that we feel, as we 

reevaluated the program, needed to, frankly, be shelved and not 

move forward at this time. But in terms of the overall next generation air transportation system, we are not shortchanging improvements in capacity, safety, delays, or better information for air traffic controllers. Whether it be the STARS program or ASDX, the 

programs that will improve the system are funded by the 2005 

budget and in the outyears as well. 

What we are doing is reevaluating, from a priority perspective, 

what we have done in the past and asking ourselves whether we 

need to do those in the future. Many of those lower priority programs have been set aside. But important programs like WAAS 

and others are moving forward under the air traffic control modernization program, and we have funded it. 

Senator MURRAY. A lot of the equipment out there is dozens of 

years old and was scheduled to be replaced many years ago. We 

have systems operating in our air traffic control system that are no 
17

longer supported by their vendors and are still years away from 

being replaced. So how can we believe that a funding cut of this 

size will not have any impact on the pace at which we replace that 

aging equipment and the overall safety of our air traffic control 

system? 

Secretary MINETA. I will submit that for the record. I do not have 

it with me right now. All of the equipment at the air traffic control 

towers and en route centers is still being shoehorned into the budget that we proposed. 

Senator MURRAY. You will submit that to us for the record? 

Secretary MINETA. I will submit that for the record. 

Senator MURRAY. I will look at that. 

[The information follows:]

The reductions in FAA’s Facilities and Equipment (F&E) in the fiscal year 2005 

budget were concentrated in new technologies that do not replace existing equipment, such as Data Link, the Local Area Augmentation System (LAAS), and 

Nexcom 1B (next generation communications). These new technologies were going 

to be expensive for both the agency and the industry. While there was support for 

these items by the users, it was not clear it made sense to move forward with them 

at this time given the economics of both the airline industry and Federal budget. 

The FAA did not make any significant reductions to any programs that are currently necessary to modernize the airspace system. Funding levels for major modernization efforts like En Route Automation Modernization, the Standard Terminal 

Automation Replacement System (STARS), airport surveillance radars (ASR–9 and 

ASR–11), NEXCOM 1A, Advanced Technologies and Oceanic Procedures (ATOP), 

and the Voice Switching and Control System (VSCS) will continue to move forward 

in fiscal year 2005. The reduction in the size of the F&E budget will not affect the 

success of these modernization efforts.

SAFETEA FUNDING LEVELS

Senator MURRAY. Mr. Secretary, in my opening statement I 

voiced concern, as you heard, over the President’s insistence that 

he will not support or sign a highway bill that exceeds $256 billion. 

One concern I have since we’re talking about a 6-year authorization 

bill is that the President might support a bill authorizing funding 

at a certain level and then not live up to that commitment in his 

budgets. 

For example, when the Bush Administration sent up its own 

aviation reauthorization bill it requested a total of $12 billion for 

air traffic control modernization over a 4-year period. Now when 

we look at the President’s budget request for 2005 and beyond we 

see that he plans to request $2 billion less than the amount that 

he himself asked to be authorized. He only wants to fund 83 percent of the level he himself asked to be authorized. 

Now when it comes to the surface transportation authorization 

bill, President Bush has said that he will not support a highway 

and transit bill that exceeds $256 billion over 6 years. Is the President committed to actually requesting that $256 billion in future 

budgets or is this merely a statement on what he will allow to be 

authorized? 

Secretary MINETA. First of all, when we were putting SAFETEA 

together over a year ago, we talked to the President and he laid 

out certain principles such as no new taxes, no bonding mechanisms, and no increase in the deficit. So taking those directions, we 

then fashioned our SAFETEA proposal. The original proposal was 
18

for $247 billion. Then within the last 3 or 4 months, it was raised 

to $256 billion. 

But that action was based on the principles he laid out, principles that he still stands by. In fact, prior to the Senate consideration of the SAFETEA legislation, Treasury Secretary Snow and I 

submitted a letter reflecting the administration’s position, saying 

that any bill that violated these principles and that went above 

$256 billion would be considered for veto. 

Senator MURRAY. What I am actually asking is, when the Presi- dent sent up his aviation reauthorization bill he requested $12 billion. We are now seeing his request come in much lower than that; 

in fact $2 billion less. What assures us that the President will actually fund the $256 billion if that is what we authorize? Even 

though I disagree with that, I am just asking you, what is the assurance that a year from now we are not going to see less requested than even that $256 billion? 

Secretary MINETA. We took the enacted 2004 levels and have reflected those in the budget proposal and in SAFETEA as well. 

Senator MURRAY. What I am asking is, will the President commit 

to asking for the budgets every year that meet that authorization, 

whatever it is, that he signs into law? 

Secretary MINETA. Based on our submitted SAFETEA proposal, 

we do that. 

HIGHWAY SAFETY

Senator MURRAY. Mr. Secretary, we have not always agreed on 

budget matters when it comes to your department. One area where 

we have always agreed has been the overarching importance of improving safety in all transportation modes. I want to really commend you, Mr. Secretary, for including funding in this year’s budget for paid TV advertising to enhance seatbelt use and reduce 

drunk driving. The Committee has added funding for the last 2 

years and the administration has finally requested funding in its 

2005 budget request. This has been a very successful effort, as you 

know. 

This year the administration gave its surface transportation authorization the title of SAFETEA, as you mentioned, to highlight 

the importance of safety provisions in the bill. Could you just take 

a minute to share with this committee what you consider to be the 

most critical safety enhancements that were included in the administration’s bill? 

Secretary MINETA. There is probably no single silver bullet that 

addresses the whole issue of safety. Safety can be engineering. 

Safety can be education. Safety can be a number of things. All of 

these are reflected in the SAFETEA proposal. 

But also in the 2005 budget, we are putting a great deal of emphasis—in fact I am doing a lot of traveling on the issue of both 

safety belt use and driving while under the influence, DUI. I am 

traveling to different States right now to try to get primary safety 

belt laws, and have found this to be a responsive chord with many 

States. But we only have, I believe, 20 States with primary safety 

belt laws, so we have a long way to go. But we think that this is 

a good effort and we are enlisting a lot of new players into the program. I am going down to the NASCAR races in Richmond, in May 
19

I believe, and they will be endorsing the whole safety belt program 

and initiating their program of promoting safety belt usage. 

We are doing this with a number of different new constituent 

groups to increase safety belt use in our country. 

Senator MURRAY. I commend you on that and want to keep working with you on that. 

CONTRACTING OUT FAA FUNCTIONS

Mr. Secretary, as you know, the only reason that the FAA bill 

was allowed to pass the Senate was because FAA Administrator 

Blakey provided a letter to the Senate Commerce Committee promising that she would not contract out any additional FAA functions 

to the private sector during fiscal year 2004. I suspect this could 

become a very serious issue for the fiscal year 2005 appropriations 

bill because we do not have a commitment from you or Administrator Blakey for fiscal year 2005 or beyond. 

As of now, are you aware of any areas where the FAA is considering contracting government work in fiscal year 2005 or beyond? 

Secretary MINETA. Nothing additional that I anticipate. I think 

the letter that Administrator Blakely submitted for fiscal year 2004 

still stands. There was consideration at one point about additional 

contract towers, but after the letter was sent——

Senator MURRAY. What areas are under consideration? 

Secretary MINETA. The ones that we had under consideration 

prior to that letter relating to fiscal year 2004 were general aviation towers for VFR, visual flight rule towers. We do not have any 

further plans beyond the 2004 letter that she submitted. 

Senator MURRAY. Can we get an identical letter for fiscal year 

2005? 

Secretary MINETA. Let me consult with Administrator Blakey on 

that and get back to you on that. 

[The information follows:]

The Federal Aviation Administration is engaged in completing the public/private 

competition of the Flight Service Station (FSS) Services. The competition’s results 

are expected in March 2005.

Senator MURRAY. Mr. Chairman, I will wait for the remainder of 

my questions. Thank you. 

Senator SHELBY. Senator Bennett. 

HIGHWAY FUNDING

Senator BENNETT. Thank you very much, Mr. Chairman. 

Mr. Secretary, I have searched for things to question you about, 

areas to probe and prod, and things are going so well I do not have 

anything to complain about. 

Secretary MINETA. You did such a great job as Assistant Secretary of Transportation that——

Senator BENNETT. It is the legacy of my service there. 

Secretary MINETA. That is right. 

Senator BENNETT. Last night we were alerted to this issue that 

I mentioned in my opening statement. I know that it catches you 

completely by surprise, as it did us. So I raise it now just so that 

we can be in correspondence with you on this issue and see if we 

cannot get it resolved. 
20

For the record, I support the President’s effort to get a SAFETEA 

program in place, but I think at some point we are going to have 

to spend more money. And if after he is safely reelected he were 

to come back to the Congress and suggest that for the first time 

since Ronald Reagan’s presidency it is time to raise the gas tax, he 

would find a fairly sympathetic ear, at least with this Senator. I 

know I am taking my own political career in my hands when I say 

that because I am up for election this year too. 

But the needs of our highway system, compound with the increasing population and the age of the interstate highway system—

and one of the things that has happened that was not foreseen by 

any means when the interstate highway system was conceived is 

that interstates have now become the Main Streets of our major 

metropolitan areas. The interstate system was supposed to bypass 

downtowns so that people could go quickly across the whole country and never run into a traffic jam. Now the metropolitan centers 

have relocated themselves around the interstate and the interstate 

has become the main urban artery and therefore jam up now at 

rush hour. The whole purpose of getting the interstate system in 

place as conceived during the Eisenhower administration has been 

frustrated by that. 

There is a solution to it, and it is financial. We are going to have 

to face up to that at some point in the future. So if you are back 

here next year and I am back here next year, and both of those depend on two separate elections, I will be happy to talk to you about 

increased funding through that particular source. 

Secretary MINETA. Thank you, Senator. We will respond. 

Senator BENNETT. Thank you. 

Senator SHELBY. Mr. Secretary, we will get into another round, 

with your patience. 

Secretary MINETA. Surely. 

FULL FUNDING GRANT AGREEMENTS

Senator SHELBY. The Senate passed a 6-year reauthorization on 

the surface transportation legislation, as you well know. The House 

has not yet acted and the House Transportation and Infrastructure 

Committee chairman has floated a proposal to pass a 2-year authorization bill. If a 2-year extension of TEA21 is enacted into law, 

is enough additional commitment authority created to execute a 

full funding agreement for all of the projects listed as pending and 

proposed in your 2005 budget request? 

Do you want to get back with us for the record on that? 

Secretary MINETA. We will get back to you on that for the record. 

[The information follows:]

The 6-year surface transportation bill, the Safe, Accountable, Flexible, and Efficient Transportation Equity Act, (SAFETEA) passed by the Senate on February 12, 

2004, provides over $9.6 billion in budget authority over the fiscal year 2004–2009 

period. Within this amount, $3.6 billion is needed to fully fund all approved or pending full funding grant agreements (FFGAs). This includes all projects with previous 

commitments or reserved authority under TEA21. 

Under the Senate-passed bill, $2.1 billion will cover anticipated FFGAs for the following projects: the first increment of New York East Side Access; Central Phoenix 

East Valley Corridor; Charlotte-South Corridor LRT; Raleigh-Regional Rail; and, 

Pittsburgh-North Shore Corridor. An additional $3.9 billion would be available for 

future commitments and funding of projects anticipated after fiscal year 2005.
21

Senator SHELBY. If there is not enough commitment authority to 

cover all of the proposed funding agreements in the request, how 

would FTA choose the projects that it would enter into a full funding agreement? You would have to make some decisions. We would 

be very interested in that. What would your methodology be? 

SHIP DISPOSAL

Ship disposal. MARAD has made progress in contracting for the 

disposal of obsolete ships from the National Defense Reserve Fleet. 

Recently, environmental concerns and legal proceedings have hindered these efforts. What steps are being taken to address the environmental issues, and what assurances is the Department providing to the countries receiving these ships that there is no environmental danger to them? Do you want to do that for the record? 

Secretary MINETA. Let me do that for the record. We have 13 

ships under contract to a United Kingdom firm, of which four have 

already been delivered and are sitting in the shipyard in Teaside, 

England. With our 2005 budget request we hope to increase that 

to 21 ships. 

We have a very strict environmental process to go through in certifying those ships for movement to an overseas location. We used 

to sell the ships to Bangladesh or India just to get rid of them. But 

that is no longer possible. We have strict environmental requirements that have to be met. We do need the additional funding in 

fiscal year 2005 to dispose of these additional ships. 

[The information follows:]

MARAD is pursuing all disposal alternatives in order to find the most cost-effective, environmentally sound disposal capacity available. Disposal alternatives include domestic recycling, foreign recycling, artificial reefing, deep sinking, vessel donation and vessel sales. The export of ships for recycling is a promising alternative 

that has provided an increase in competition and capacity, which allows more ships 

to be disposed of with available disposal funding. The ability to export ships for recycling will expedite the elimination of high-priority ships, significantly mitigate the 

environmental threat of oil discharge at the fleets and reduce the total number of 

obsolete vessels significantly. Although foreign facilities are not subject to the same 

worker and environmental laws as domestic facilities, MARAD’s current process requires foreign companies to demonstrate to MARAD and the EPA that they can accomplish responsible vessel recycling in a manner that protects worker safety and 

health. 

MARAD’s actions to ensure that the ship disposal process does not harm the environment include activities while the vessels are at our fleet anchorages, during tow 

preparations and while at the contractor’s facility. Programmatic ship disposal priorities and decisions are also made in order to mitigate any threat to the environment. 

AT THE FLEET ANCHORAGE

MARAD has three reserve fleets sites where its non-retention, obsolete vessels are 

moored—the James River Reserve Fleet in Virginia, the Beaumont Reserve Fleet in 

Texas and the Suisun Bay Reserve Fleet in California. While the obsolete vessels 

are at the fleet anchorages awaiting disposal, four activities take place that are important to ensuring the environment is protected: 

—Condition assessments—the material condition of each vessel is assessed, rated 

and ranked. Information from this assessment is factored into programmatic 

disposal decisions. 

—Vessel condition monitoring—vessels are monitored for trim, stability, hull and 

fuel tank integrity, overall deterioration and adequate mooring. 

—Vessel protective measures—cathodic hull protection systems are utilized to inhibit underwater hull deterioration and advanced mooring systems are used to 

secure the ships and protect them against damage from high winds and storms. 
22

—Corrective repairs/maintenance—as required repairs and maintenance activities 

include pumping, patching, securing watertight closures, etc. 

DURING TOW PREPARATIONS & TOW EVOLUTIONS

MARAD’s contracts require the prime contractor to accomplish tow preparations 

and the safe towing of the vessel to the contractor’s facility. Proper tow preparations 

are ensured through the requirement for a U.S. Coast Guard inspection and 

issuance of a loadline certificate prior to the commencement of the tow. The contractor is also required to have in place an approved Emergency Spill Management 

Plan and a Spill Management Company to be on call to respond if needed throughout the duration of the tow. The contractor and tow company are also required to 

carry the appropriate level of insurance to cover response and cleanup costs in the 

event of a discharge incident. 

AT THE CONTRACTOR’S FACILITY

During the solicitation process prior to contract award, prospective contractors are 

assessed for their working knowledge of applicable environmental regulations. Technical Compliance Plans, required from the contractors, must provide comprehensive 

information related to environmental compliance measures to be followed during the 

course of the work. The contractor’s documentation related to environmental activities is closely reviewed during the evaluation process, and a pre-award survey of the 

contractor’s facility is accomplished if the contractor is new to MARAD. 

MARAD’s ship disposal contracts require the contractor and sub-contractors to 

comply with all municipal, State and Federal regulations related to the removal, 

handling, storage, transport and disposal of hazardous materials. This includes 

prime and subcontractor compliance with regulations associated with permits and 

licenses associated with hazardous material remediation activities. MARAD’s Office 

of Environmental Activities provides on-site oversight over all project environmental 

activities either directly or through the use of third-party commercial environmental 

monitoring companies. MARAD’s oversight at disposal facilities is in addition to onsite inspections and oversight provided by regional EPA and OSHA offices. 

PROGRAMMATIC PRIORITIES

MARAD’s ship disposal program priority remains focused on disposal of MARAD’s 

worse condition, non-retention vessels. The material condition of the ship and the 

amount of residual fuels/oils contained onboard our vessels are factors that are considered in all vessel disposal decisions. Disposal of the ‘‘worse ships first’’ that contain the most residual oils/fuels mitigates the environmental threat at MARAD’s 

fleet sites. MARAD’s solicitations for disposal services include the higher priority 

vessels, and negotiations involving proposals that do not specify vessels will target 

the inclusion of higher priority vessels.

FUNDING FOR FAA CAPITAL PROGRAMS

Senator SHELBY. The FAA is requesting $2.5 billion for its capital account which is $400 million less than the authorized level 

and more than $300 million less than last year’s enacted level. 

Hard decisions will have to be made there, Mr. Secretary. How will 

this impact the overall effort to modernize the air traffic control 

system? How are you going to do more with less? I would like to 

hear it. I would like to see you do it, but I do not know if you can. 

Secretary MINETA. There are a lot of things that were once part 

of the capital program that we had to reevaluate with a smaller 

pool of resources. Some of the programs that were in prior facilities 

and equipment budgets are not as high priority today as they 

might have been when we had more money available. We are setting those aside and the more high-priority items where we get 

more value for the dollars expended are the ones we are moving 

foreword. 

Safety, capacity and delay are our mantra. Those three criteria 

are what we use to look at what is in F&E and say, not as much 

is needed today as when we were more flush with funds. So we are 
23

doing a lot of reprioritizing to make sure that we can get more with 

less. It is not that we are adding more on top of what is already 

there, but we are taking some of the lower priority items and setting those aside, admittedly. 

AMTRAK

Senator SHELBY. Mr. Secretary, the administration has requested a subsidy of $900 million for Amtrak in 2005. Amtrak has once 

again asked Congress for $1.8 billion and continues to express a 

need for similar amounts over the next several years. Funding an 

increase above the current year level of $1.2 billion will be extremely difficult. What is your long-term plan for Amtrak if the 

current reauthorization proposal is not enacted? 

Secretary MINETA. Mr. Chairman, the President’s reform proposal that is before Congress is very important. We have requested 

$900 million for Amtrak, but we have also indicated that we would 

support $1.4 billion in the outyears, in fiscal years 2006 to 2009, 

conditional on Congress adopting the management and financial reforms that are in the President’s reform proposal. We have already expended over $35 billion on Amtrak since 

1973, and we cannot continue down that path. The President is 

very supportive of intercity passenger rail, but not on the present 

path that we are on. We feel very strongly that there has to be reform of Amtrak. So if the Congress were to adopt the President’s 

reform legislation, then we would support $1.4 billion in the outyears. 

Another thing that has helped Amtrak is the action taken by the 

Appropriations Committees to direct that Federal grants for Amtrak be approved by DOT before going to Amtrak. 

Amtrak has to submit an annual operating and capital financial 

plan. We reviewed Amtrak’s plan in fiscal year 2003, and we are 

now doing that for fiscal year 2004. We have just approved the operating grant agreement with Amtrak, and FRA is now renewing 

the capital grant agreement. I think that has been a very effective 

tool in making sure that the financial management of Amtrak is 

kept under control. 

COMMERCIAL DRIVER’S LICENSE PROGRAM

Senator SHELBY. In spite of the greater attention that it has 

drawn in recent years, the practice of fraudulently obtaining a commercial driver’s license continues to pose a significant national 

risk, both in terms of highway safety and terrorism prevention. 

While the Department is to be commended, and I think we should 

do this, for the efforts it has taken thus far to curb commercial 

driver’s license abuse, I think a lot of work needs to be completed 

in order to properly address the problem. 

Mr. Secretary, what measures are being implemented and what 

do you plan to undertake during the next year in order to end, as 

much as you can, commercial driver’s license fraud? How does the 

Department plan to oversee and coordinate with the States in order 

to assure that commercial driver’s license fraud issuance is being 

conducted in accordance with Federal guidelines? 

Secretary MINETA. Mr. Chairman, let me properly respond to you 

in writing, but one of the things that we are doing is to complete 
24

17 Federal compliance reviews of State commercial driver’s license 

programs. The end result is to increase oversight of the commercial 

driver’s license program. 

As you know, this has been the subject of some FBI fraud investigations, and we are making sure that we plug that hole. We are 

requesting $22 million for fiscal year 2005 for the State improvement of driver’s license programs. 

[The information follows:]

FMCSA has taken numerous actions to help prevent fraud in the Commercial 

Driver’s License (CDL) Program. FMCSA’s CDL State Compliance Review requirement is in the fourth year of implementation. These compliance reviews are a necessary part of the CDL program to ensure States have the statutes, administrative 

procedures, and equipment to administer their CDL programs in compliance with 

Federal requirements. Field personnel are receiving training on conducting compliance reviews and identifying testing and licensing procedures that may be susceptible to fraudulent activities. In continuation of supporting fraud prevention, 

FMCSA is funding the updating of the CDL Identification Manual. The manual contains color photographs of all U.S., Canadian, and Mexican commercial licenses for 

use by State licensing and enforcement officials to help identify fraudulent CDLs. 

FMCSA is addressing the 22 recommendations made by the Office of the Inspector 

General (OIG) in the May 8, 2002, audit report on ‘‘Improving Testing and Licensing 

of Commercial Drivers,’’ including ones related directly to fraud. Also in response 

to an OIG recommendation, FMCSA issued a policy memo on July 1, 2002, specifically recommending States use covert monitoring of CDL examiners as the preferred 

method of driver licensing oversight and control. Eighteen States have set up covert 

monitoring programs with CDL grant funds. 

The CDL grant program has six priority areas. Two of them include detection and 

prevention of fraudulent activities including covert monitoring and implementation 

of the social security number (SSN) verification for CDL drivers. FMCSA received 

a $5.1 million fiscal year 2002 supplemental appropriation from Congress to verify 

all existing and new CDL driver’s names, dates of birth and SSN with Social Security Administration (SSA) records to help prevent fraudulent identities from being 

created. To date, 40 States are verifying the CDL driver’s identify through the SSA. 

The remaining States are being encouraged to establish SSN verification programs. 

Finally, FMCSA, in cooperation with the American Association of Motor Vehicle 

Administrators (AAMVA), identified 14 tasks to detect and reduce fraudulent activities related to driver licensing. FMCSA received an $8 million fiscal year 2002 supplemental appropriation to help fund these tasks through a cooperative agreement. 

In addition, through the cooperative agreement FMCSA and AAMVA have funded 

revisions and upgrades to the CDL Knowledge Tests and software that can generate 

multiple versions of the tests. To further the fraud prevention initiative AAMVA has 

formed a Special Task Force on Identification Security to identify strategies to 

achieve intended outcomes. FMCSA is working closely with AAMVA through participation on the Task Force working groups and is providing funding for these efforts.

Senator SHELBY. Senator Murray. 

MOTOR CARRIER SAFETY COMPLIANCE REVIEWS

Senator MURRAY. Thank you, Mr. Chairman. 

Just following up on that, the number of compliance reviews, as 

I understand, have dropped significantly. Are you aware of that? In 

December 2002, FMCSA did 817 compliance reviews but only completed 472 as of December 2003. Since that is one of the most reliable ways to identify unsafe motor carriers why has there been 

such a precipitous drop in the number of reviews? 

Secretary MINETA. I am not sure of those figures. I know that 17 

compliance reviews are going on right now. Let me check on that 

State compliance number. 

Senator MURRAY. Can you get the historical numbers for us? 

Secretary MINETA. I will. 

[The information follows:]
25

In fiscal year 2003, FMCSA began implementation of Section 210 of the Motor 

Carrier Safety Improvement Act of 1999 (MCSIA). MCSIA required FMCSA to establish regulations specifying minimum requirements for new entrant motor carriers seeking Federal interstate operating authority. There are approximately 

40,000 to 50,000 new entrant carriers seeking operating authority each year. 

During December 2002, 280 compliance reviews (CRs) were completed, which was 

significantly lower than the normal average of 800 compliance reviews per month. 

This was a result of an increased emphasis on conducting Security Sensitivity Visits 

(SSVs) in response to the events surrounding the terrorist attacks on September 11, 

2001. In December 2003, 817 compliance reviews were completed, an increase of 537 

(192 percent) from the previous December. This shows that FMCSA returned to its 

normal CR production level. Overall, 7,584 compliance reviews were completed in 

fiscal year 2002 and 9,060 were completed in fiscal year 2003, an increase of 1,476 

(19 percent) for the year. 

During the first 5 months of fiscal year 2004, FMCSA completed 3,348 compliance 

reviews, which is on target to meet FMCSA’s projected goal of completing 8,000 

compliance reviews for fiscal year 2004. While the fiscal year 2004 target is lower 

than the actual number of compliance reviews that were completed in fiscal year 

2003, this is attributed to an increased emphasis on conducting New Entrant Safety 

Audits, as mandated by Congress.

AMTRAK

Senator MURRAY. Thank you. Also following up on the Chairman’s comments on Amtrak—I know he is surprised that I am—

as you know, the reforms that you are requiring have to be considered by the Commerce Committee. This committee has to set the 

number for fiscal year 2005. So I know that you are asking for the 

Commerce Committee to follow up on that, and then if they do it 

then you will go to the $1.4 billion in 2006 and beyond. But we are 

looking at 2005. 

A 26 percent reduction in the dollars to Amtrak is said by Amtrak’s president to take it into bankruptcy. Your own Department 

of Transportation Inspector General has testified in the past that 

a precipitous cut of size would mean bankruptcy for Amtrak. So 

that does not get us to 2006, if the Commerce Committee even 

moves forward on this. I know you are a member of Amtrak’s board 

of directors. Do you know something that we do not know that will 

allow them to somehow manage to make it on a huge cut like this 

until reforms are enacted, if they are enacted? 

Secretary MINETA. The operating financial management reviews 

that are going on right now, separate from the capital reviews, provide for some modicum of operational support. We cannot fund the 

full amount because that would require—I think you folks appropriated $1.3 billion in——

Senator MURRAY. One-point-two billion dollars. 

Secretary MINETA [continuing]. And that was on a request of $1.8 

billion from Amtrak. They are able to survive on $1.2 billion. Again 

they’re requesting $1.8 billion and again we are taking a very hard 

look at——

Senator MURRAY. But your budget request is for $900 million. 

Secretary MINETA. Nine hundred million dollars. 

Senator MURRAY. That is significantly below this year’s level, 

and both the Amtrak president and your own IG have said that 

Amtrak cannot survive at that level. 

Secretary MINETA. Again, unless management and financial reforms are adopted——
26

Senator MURRAY. So you are basically saying that if your reforms 

are not adopted that go into effect by 2006, Amtrak is not going 

to survive? 

Secretary MINETA. We are still holding by the need for reform. 

Senator MURRAY. I hope the President takes a really active approach with the Commerce Committee. 

Secretary MINETA. As I understand it, Senator McCain is about 

to introduce an Amtrak reform bill. 

Senator MURRAY. We have been down this road before. I would 

just warn all of us that if this is the bar that we have to be held 

to, we are going to be again looking at a shutdown in Amtrak I do 

not think any of us wants to see. 

CONTRACTING OUT FEDERAL JOBS

Mr. Secretary, earlier today you talked about your efforts in advancing the President’s management agenda. Last year this subcommittee, as you will remember, was very involved in the issue 

of establishing standards for contracting out Federal jobs. One of 

the provisions that was included in last year’s bill was a prohibition against using fiscal year 2004 funds to contract out any Federal job overseas. I was really surprised to see that the President’s 

budget specifically requests that that provision be deleted for 2005. 

Could you cite for us some of the instances the Department of 

Transportation might look at to take work that is currently being 

conducted by Federal employees and send that work overseas? 

Secretary MINETA. I do not have any knowledge of that. I will 

have to take a look at that. 

Senator MURRAY. I can see all of your staff shaking their heads. 

Then can you tell us why the President wants flexibility if you 

have no place that you actually want to send jobs overseas why he 

is asking to eliminate that provision? 

Secretary MINETA. The President’s request is a generic, government-wide request. But I am not familiar with any plan within our 

Department right now. Generally, we do not like to see these types 

of prohibitions in legislative language. In any event, I am not 

aware of any plans right now to send any jobs——

Senator MURRAY. I assume you would not object to that language 

staying in for fiscal year 2005? 

Secretary MINETA. On behalf of the administration, of course. 

But in terms of any plans for, other than normal FAA employees 

that are in foreign positions, I have got people in Iraq, Afghanistan—not Afghanistan, but Iraq right now. We have got air traffic 

controllers in overseas spots. We have other positions. But we are 

not—I do not see, other than——

Senator MURRAY. But you do not see any problem with putting 

the provision in again that does not allow any contracting out of 

new jobs? 

Secretary MINETA. Again, I do not like to see those kinds of prohibitions placed in legislative language. 

Senator MURRAY. But you have no plans to contract anything 

out? 

Secretary MINETA. I do not believe so. 

[The information follows:]
27

The general provision in the President’s budget to delete the restriction on contracting out Federal jobs overseas would apply government-wide, not just to the Department of Transportation. The administration believes the restriction against contracting out Federal jobs overseas is generally unnecessary because the government 

wins a vast majority of the work and many activities that are the subject of competitive sourcing must be performed domestically, for example facilities maintenance, 

repair, and construction. In addition, the restriction could violate international 

agreements that accord our trading partners non-discriminatory treatment in government procurement. These agreements generally provide for non-discriminatory 

treatment to suppliers of foreign entities—i.e., they provide flexibility for both foreign and domestic contractors to perform work where performance will make the 

contractor most competitive.

AIR TRAFFIC CONTROL MAINTENANCE STAFFING LEVELS

Senator MURRAY. Mr. Secretary, last Monday a Federal arbitrator ruled that the FAA has not met the minimum staffing levels 

needed for the agency’s air traffic control maintenance functions 

based on the agreement that was reached in fiscal year 2000 between the FAA and the union that represents the maintenance 

technicians. The arbitrator ruled that the FAA must immediately 

take action to raise the total number of technical employees to a 

minimum staffing of 6,100. How was the FAA allowed to drop 

below the agreed upon minimum staffing level? 

Secretary MINETA. I will have to get back to you for the record 

on that. 

[The information follows:]

The Federal Aviation Administration believes that employees in operational control centers should be included in the air traffic control maintenance staffing level 

of 6,100.

NEED FOR FULL COMPLEMENT OF TECHNICIANS

Senator MURRAY. Given the funding cuts you are requesting for 

modernizing air traffic control equipment, would you not agree that 

it would be prudent to have a full complement of technicians on 

board to maintain and repair the FAA’s aging air traffic control 

system? 

Secretary MINETA. I will have to check on the labor negotiation 

with the technicians group, the Professional Airway System Specialist (PASS) union, and the budgetary amount. 

[The information follows:]

The Professional Airways Systems Specialists (PASS) union disagrees with the 

Federal Aviation Administration’s (FAA) position that employees in operational control centers should be included in the air traffic control maintenance staffing level. 

A Federal arbitrator ruled in favor of PASS, and the FAA has appealed the decision 

to the Federal Labor Relations Authority.

DECISION OF THE FEDERAL ARBITRATOR

Senator MURRAY. If you could do that, and if you could let us 

know how quickly you expect the FAA to comply with the decision 

of the Federal arbitrator as well. 

Secretary MINETA. Right. I am not sure whether they are binding 

agreements or if there are any appeal provisions to that arbitrator. 

I will have to check on that as well. 

[The information follows:]

The Federal Aviation Administration (FAA) had 30 days from the date of the Federal arbitrator’s award (March 1, 2004) to file exceptions with the Federal Labor Relations Authority (FLRA). After reviewing the award, the FAA felt that the arbi-
28

trator exceeded his authority and abrogated management of its right to determine 

where employees would be assigned, a right that management chose not to waive 

according to the managers who were present in negotiations. The FAA’s exceptions 

were filed on March 25, 2004, and we do not know how long the FLRA will take 

before rendering a decision. The FLRA will allow the Professional Airways Systems 

Specialists (PASS) union time to submit a response to the Agency exceptions and 

will then issue a decision. There is no statutory time frame in which the FLRA must 

issue a decision.

THIRD RUNWAY AT SEATAC INTERNATIONAL AIRPORT

Senator MURRAY. One last question. Mr. Secretary, a lot has 

been said about the need to streamline the environmental review 

process for highways, runways, and rail systems. Unfortunately, 

the poster child project for long delays that impact many projects 

is the third runway project at Seattle Tacoma International Airport. 

As you know, we have been trying to complete construction of 

that third runway for more than 16 years. The added costs for complying with the environmental rules for the construction of that 

runway as well as the associated cost for delays have grown by 

over $200 million just in the last 4 years. As you can imagine, this 

has put an incredible amount of pressure on the ability of the airport authority to finance the completion of that project. Are you 

aware of that situation at Seattle Tacoma International Airport? 

Secretary MINETA. I was just made aware of this $198.1 million 

request that SeaTac is making of FAA 2 days ago. This is the third 

request on the part of SeaTac. The original agreement for a letter 

of intent was in 1997 for, I believe, $198 million, or $190 million 

or so then. Then that was revised several years ago by an additional $55 million, $57 million. This is the third request for an increase in the letter of intent for the SeaTac Airport. We will have 

to take a look at what we are doing with that whole program. 

[The information follows:]

In 1997, the FAA issued a Letter of Intent (LOI) to Seattle Tacoma International 

Airport (SeaTac) for construction of a third runway, committing $161.5 million in 

AIP funds over the period of fiscal year 1998–2010 towards the then estimated $587 

million total project cost. This represented a 28 percent Federal share of the total 

cost; higher than recent projects of a similar scope (e.g., Atlanta and St. Louis were 

around 18–20 percent). The LOI was amended in 2000 to add $55 million in funds 

over the period fiscal year 2001–2010 to help offset unanticipated increases to the 

project cost, then estimated at $773 million. This raised the total LOI amount to 

$216.5 million, but kept the Federal share around 28 percent. 

SeaTac has recently submitted an application for a second amendment to the LOI, 

this time for an additional $198.1 million over the period fiscal year 2005–2014. 

This would raise the LOI total to $414.6 million and the Federal share to 37 percent 

of the total project cost, now estimated at $1.1 billion. 

The Federal Aviation Administration is still reviewing SeaTac’s application. There 

is some concern about the high level of Federal funding—the precedent-setting Federal share of 37 percent that would result from this amendment, which is significantly higher than similar recent projects. While we support the SeaTac third runway project, and are sensitive to the environmental burdens which have caused 

some of the cost increase, we need to examine the application in detail before committing to a funding decision. As part of that examination the FAA is retaining the 

services of an outside financial consultant to review SeaTac’s financial condition.

Senator MURRAY. I appreciate that. I am currently pursuing an 

amendment to the airport’s existing Federal commitment to ensure 

that there is adequate financing to meet all of those new environmental costs. As you know, a lot of it has been because of Federal 
29

environmental laws and I want to pursue that with you, and I 

would like to ask——

Secretary MINETA. I think that it is not only Federal environmental laws, but also local lawsuits that have been brought 

against——

Senator MURRAY. Under Federal environmental laws. That is 

why the lawsuits have been brought. 

I just want to know from you, is DOT still committed to the completion of the third runway project and the economic benefits that 

it will bring to the Northwest region? 

Secretary MINETA. I assume so. I assume that it still is. 

Senator MURRAY. Would you be willing to sit down with myself, 

Marion Blakey and the appropriate airport officials to talk about 

this issue? 

Secretary MINETA. Absolutely. 

Senator MURRAY. I would appreciate that very much. 

Secretary MINETA. Absolutely. 

Senator MURRAY. Thank you. 

Thank you, Mr. Chairman, and thank you for your indulgence. 

ENVIRONMENTAL REVIEWS FOR ALASKAN HIGHWAY PROJECTS

Senator SHELBY. Senator Stevens, thank you for joining us. 

STATEMENT OF SENATOR TED STEVENS

Senator STEVENS. Thank you very much. I am pleased to be here 

to be with young men who have brand new ideas. That is an inhouse story up here, Mr. Secretary. I am pleased to have a chance 

to come before you because there are some significant transportation problems in Alaska in which the process seems to be 

changed, and it becomes significant because the increased reviews 

are burdensome and sometimes unwarranted as far as our State is 

concerned. I am sure you know, we have a fairly small allowance 

for highway construction in Alaska, and to take more of it for the 

environmental review is becoming burdensome. 

Let me just state this to you. The Federal Highway Administrator brought a training team to Alaska to assist in management 

and planning of environmental steps required in Title 23 of the 

Federal aid program. In addition, it relocated a third environmental review person in Juneau to help review the environmental 

documents prepared under the National Environmental Protection 

Act. 

Apparently, this work has become rather than an assistance to 

get the job done quicker, it has added additional thresholds for the 

transportation projects. We previously used some categorical exclusions versus an environmental assessment (EA) and now we are 

getting into the environmental impact statement (EIS) on very 

small items. 

For instance, an erosion control project on the Dalton Highway, 

that is the highway that goes north from Fairbanks to the North 

Slope, was slated for an EA. Last year it was processed as a categorical exclusion. It is a dirt highway. It has been there for years 

and it was an erosion control item that should have been handled 

just as routine maintenance as a matter of fact. 
30

A bridge replacement of an existing bridge on the Alaska Highway—that is our only highway that goes out to the south 48—now 

requires a full EIS. This is a bridge that is critical to the gas pipeline that we are planning now, and I understand that the EIS on 

this bridge replacement will delay the project by 1 to 2 years. It 

could well add another year to two to the building of the pipeline. 

There is a brush cutting project that was performed by Saga, 

that is an AmeriCorps nonprofit, who was told to seek an EA. That 

is the environmental assessment. These always have been the categorical exclusion type things, just brush cutting. We are entirely 

in favor of strict environmental protection, but when it comes to 

have an increase in the level of requirements that have to be 

achieved, the heightened review is causing delays, increasing costs, 

moving projects from one year to another because of the short construction season that we have in Alaska. 

This is not associated only with the interior of Alaska. The Knik 

Arm Bridge project, the Juneau Access Road, the Gravina Road, all 

priority projects that are in the TEA21 reauthorization have now 

been indicated to have the highest level of environmental review to 

proceed. 

I would like to see if you could explain why at this time we 

have—by the way, I think we have the highest level of unemployment per capita in the country. We have a declining economy because of the loss of our oil industry, our mining industry, our timber industry, the basic industries associated with the harvesting of 

timber. I cannot tell you—we have now got a series of projects that 

would have provided employment during this coming work season, 

hopefully, provide a slight bridge for many people over into the 

next year when some of these other things might be started up 

again. 

But why can we not go back to the simple processes that were 

used for years in connection with these highway projects and not 

go up the ladder in terms of environmental protection unless there 

is a significant new perspective involved. All the things I am talking about are facilities in place that require improvement or maintenance. 

Secretary MINETA. Mr. Chairman, I am not familiar enough with 

these projects to be able to respond, but let me get back to you in 

writing after talking to our Federal highway folks. I would think 

that if a new person has been dispatched to Juneau to deal with 

environmental reviews, it was done in the hope of speeding up the 

process. Let me find out why categorical exclusion for a maintenance project now requires an environmental assessment. I just do 

not know these projects or the process well enough to be able to 

respond. 

[The information follows:]

The U.S. Department of Transportation is actively working to facilitate the environmental review processes in Alaska. For example, the Federal Highway Administration (FHWA) entered into an agreement with the Alaska Department of Transportation and Public Facilities (DOTPF) that allows many projects with minor environmental impacts to be processed as categorical exclusions without project-specific 

review by FHWA. Other projects do involve a FHWA review, but are determined 

to qualify as categorical exclusions. The net result is that the vast majority of Alaska DOTPF’s projects are advanced as categorical exclusions. In a small number of 

cases, where the project facts do not support a categorical exclusion, FHWA will 

work with the Alaska DOTPF to prepare an environmental assessment (EA). In 
31

those situations where environmental impacts are found to be significant, a full environmental impact statement is required by law. 

With respect to the specific projects mentioned, the FHWA has reached an understanding with Alaska DOTPF that allows the projects to advance with the appropriate level of environmental review. For example, the brush cutting projects mentioned all qualify for a categorical exclusion under FHWA’s agreement with the 

Alaska DOTPF. The Tanana River Bridge is being advanced with an environmental 

assessment because of potential impacts involving historic resources, native lands, 

hazardous wastes, and recreational lands. The Dalton Highway erosion control 

project was done with an environmental assessment, because the project involved 

extensive channelization of an environmentally important stream. The Alaska Division approved the EA for the Dalton project on April 7, 2004, and the Division expects to issue a Finding of No Significant Impact (FONSI) in the near future. 

FHWA is fully committed to efficient environmental review processes in Alaska. 

To position itself for success, FHWA has recently worked with Alaska DOTPF to 

host a number of training and process improvement efforts. FHWA is confident that 

these efforts will lead to timely project approvals and environmental outcomes that 

fully respect Alaska’s unique environmental resources.

Senator STEVENS. I would hope personally you would take the 

time to come up this summer and go see some of these. 

Secretary MINETA. I will, yes, sir. 

Senator STEVENS. In the last decade we have only had one court 

review of any environmental matter related to highways. We have 

been perfectly operating with total cooperation. Now it seems that 

because of the elevated requirement in each instance, we are building towards more and more court review. Since these are routine 

projects, brush cutting, bridge replacement, erosion control, I just 

do not quite understand it. So I would hope that you would take 

the time this summer sometime and come up and we will get a 

small plane and go out and look at some of these. 

Secretary MINETA. I would be more than happy to accept that invitation. 

Senator STEVENS. Thank you. I shall give you some appropriate 

dates. 

Secretary MINETA. Great. 

SHORT SEA SHIPPING

Senator SHELBY. Thank you, Chairman Stevens. 

Mr. Secretary, the Maritime Administration is considering exploring the potential for short sea freight shipping to assist in reducing highway congestion. Can you tell us more about this proposal? 

Secretary MINETA. The goal of short sea shipping is to utilize our 

ports and inland waterways. There are two factors that are driving 

this. One is that ships are getting larger with more containers onboard, and our own ports are unable to handle these larger container ships. When the larger ships come in, you can take the containers, put them on barges and lighters and then move the containers from Boston to New York to Baltimore to Savannah, or 

wherever their transshipment points might be. This can provide 

some relief to the traffic that is already on the highways, especially 

along the Eastern I–95 seaboard. 

Senator SHELBY. What about the Tennessee-Tombigbee down in 

the southeast? 

Secretary MINETA. That is an inland waterway. We would look 

at inland waterways as part of this whole effort. 
32

FEDERAL TRANSIT ADMINISTRATION REORGANIZATION

Senator SHELBY. Although FTA’s senior management contends 

that its reorganization proposal is preliminary, the subcommittee 

has evidence that could lead a reasonable person to conclude that 

the plans have been finalized, Mr. Secretary, without your approval 

or Congressional approval. For example, we have information regarding staffing decisions, implementation schedules, and even office farewell parties. Not for you, of course. 

I would like to work with you, I think the committee would, to 

ensure that FTA follows internal Departmental guidelines and the 

requirements expressed in the appropriations act. Are you willing 

to do that? 

Secretary MINETA. Absolutely. There are situations where we 

have to ask what comes first? We have to abide by OPM regulations and by OMB regulations. The first body we have to look at 

related to reorganization is OPM. 

There are a lot of things that need to be started in a preliminary 

way. None of these are set in concrete because we have to come to 

you for reprogramming requests. The requests have to clear our 

own internal channels within the Department and with OMB as 

well. In terms of my own reorganization of the Department, there 

are a number of things going on related to hazmat and to other 

parts of our Department. 

So, yes, word gets out about intended organizational changes, but 

they are not carved in stone yet. We have to make sure that we 

are in compliance with what OPM says and OMB says. But we will 

definitely work with you, and we know that we have to do that. It 

is not a question of having to do it, we want to do it. 

ADDITIONAL COMMITTEE QUESTIONS

Senator SHELBY. Thank you. 

Senator Murray, do you have any other questions? 

Senator MURRAY. No. 

[The following questions were not asked at the hearing, but were 

submitted to the Department for response subsequent to the hearing:]

QUESTIONS SUBMITTED BY SENATOR RICHARD C. SHELBY

NATCA: PAY FOR PERFORMANCE

Question. Secretary Mineta, you stated earlier in testimony before the subcommittee that there are problems with NATCA units in delivering pay for performance. Please provide the Department’s assessment of the problems that you alluded 

to in your testimony. 

Answer. As we stated, the impasse was submitted to Congress. The statutory 60-

day timeframe for Congress to act on the impasse has passed, so the FAA is now 

proceeding to implement its pay plan in the remaining NATCA bargaining units. 

The FAA is currently considering what its next steps are in this regard. 

FTA ADMINISTRATIVE EXPENSES

Question. Please break out in detail the reasons for the administrative cost increases at the FTA. 

Answer. The $4.8 million dollar increase in FTA’s administrative expenses is necessary to carry out its mission. Funds will be used to strategically manage human 

resources, competitively outsource commercial functions, expand electronic government, improve financial management, and integrate budget and performance, as 

outlined in the President’s Management Agenda. In doing so, FTA will enable the 
33

long-term management of its workforce and fosters a citizen-centered, results-based 

government that is well organized, flexible, and will improve in performance. 

Additional administrative expenses are needed as follows: 

—An increase of $1.5 million is necessary to cover the annualized fiscal year 2004 

pay raise and the annualized January 2005 pay raise, health benefits increase, 

and mandatory within grade increases. 

—An increase of $1.02 million is needed to support ten additional FTEs. These 

resources are needed to comply with the expanded technical assistance requirements of projects in the planning process, implement statutory requirements for 

New Starts projects, meet the requirements of major program initiatives, and 

coordinate projects and reviews with other agencies, States and local project 

sponsors. 

—An increase of $0.2 million is required due to the inability of the General Services Administration and the owner of the Headquarters’ Nassif building to negotiate a new lease agreement at fair market value. 

—An increase of $0.5 million is needed to cover inflation and increased service 

costs, which increases are in line with the OMB deflator for non-pay activities. 

Failure to fund inflation results in the agency’s inability to pay the full cost of 

essential non-pay activities. 

—An increase of $1.1 million is needed to continue improving our information 

technology infrastructure, which includes: application security and accreditation 

of information technology systems; an increase in the Transportation Award 

and Management System to facilitate grant processing and contract approval; 

and ensuring that the Information Technology infrastructure works with emerging technologies to support cost accounting and core accountabilities. 

—An additional $0.5 million is needed to support workforce planning and training 

to ensure that there is available staff of the appropriate skill mix to carryout 

program development and oversight responsibilities. 

MOTOR FUEL TAX EVASION

Question. Mr. Secretary, what suggestions do you have for getting the IRS to improve its efforts to reduce the estimated $1 billion in fuel tax evasion that occurs 

each year? Please provide for the record any correspondence from DOT to the Department of the Treasury about the importance of this issue. 

Answer. The Department has proposed the authorization of $54.5 million for fiscal 

year 2005 to address motor fuel tax evasion. Of this amount, State enforcement 

agencies would share $4.5 million to enhance programs at the State level including 

but not limited to motor fuel tax audits and examinations, dyed fuel sampling, and 

training. Two million dollars would be set aside for intergovernmental enforcement 

efforts including specific projects coordinated with Federal and State agencies that 

are not traditionally involved in motor fuel tax enforcement as well as those that 

have been involved in the past, but currently may not be working on the issue. 

The Internal Revenue Service (IRS) would receive the remaining $48 million. Of 

that amount, $4.5 million would be provided for the operation and maintenance of 

the automated fuel tracking system mandated by the Transportation Equity Act for 

the 21st Century. Forty-four million dollars would be used by the IRS to begin development, operation, and maintenance of a registration system for pipelines, vessels, and barges and their operators, that make bulk transfers of taxable fuels, including developing a decal/transponder to be used to display proof of payment. It 

would also be used to establish, operate and maintain an electronic database of 

heavy vehicle highway use tax payments; and for additional enforcement efforts including audits, examinations and criminal investigations. 

The automated fuel tracking system provides an important tool to the IRS and 

the States for monitoring fuel tax compliance. The additional requirement of electronic reporting will allow the IRS to have more complete information on the movement of fuel into and out of terminals thus assisting IRS and State enforcement efforts. 

The proposal to give the IRS significantly more funding than in the past comes 

with additional accountability. The IRS would be required to submit reports on 

progress made in the development of any new automated systems, criminal investigations, audits and examinations. Also, the Federal Highway Administration 

(FHWA) will be more involved in the development of any work plans related to new 

program requirements and in the oversight of such projects. 

The expanded resources that will be available to the IRS for improved database 

systems and greater enforcement efforts will allow the agency more flexibility in its 

role as enforcer. The combined efforts of the IRS and the States resulting from the 
34

significant increase in funding will provide an opportunity to reduce motor fuel tax 

evasion. 

Interaction between the FHWA and the IRS most often takes place over the telephone or through face-to-face meetings. A memorandum of understanding between 

the FHWA and the IRS was signed to provide for the development of the automated 

fuel tracking system mandated in the TEA21. A scanned copy is provided.
35
36
37

OVERSIGHT OF MEGA-PROJECTS

Question. In your earlier testimony you indicated that project managers will provide improved oversight of mega-projects. What estimated cost savings can the committee expect to see in these types of projects? What type of review occurs prior to 

awarding a contract to determine if the contractor has actually underbid the true 

costs? Should more oversight occur in this area? What results could we expect to 

see? 

Answer. The Federal Highway Administration (FHWA) is assigning a designated 

Project Oversight Manager to each active major project, dedicated full-time to that 

specific major project. The Oversight Manager may draw upon resources from within his/her Division Office in order to form an integrated project team that is responsible for providing proper Federal stewardship and oversight of the major project. 

The Project Oversight Manager is responsible for the overall administration and operation of the Project from a Federal stewardship/oversight perspective. He/she 

maintains an ongoing review process to ensure that proper oversight and controls 

are in place and functioning including cost containment and financial management. 

While the cost savings are difficult to quantify, having an FHWA official on-site has 

resulted in efficiencies in project management. In addition, the FHWA’s independent 

review of the costs and schedules via finance plans and annual updates have contributed to efficiencies in cost and schedule control. 

Title 23, Code of Federal Regulations (CFR), part 635, section 114(a) requires design-bid-build Federal-aid contracts to be awarded only on the basis of the lowest 

responsive bid submitted by a bidder meeting the criteria of responsibility. This requirement applies to all Federal-aid projects, including major projects. For Federalaid projects that are determined to be ‘‘State-approved projects’’, the State Transportation Agency (STA) may act for the FHWA in the bid analysis and award process, 

but must follow the justification and documentation procedures of 23 CFR 

635.114(b–j) by documenting the project files. STAs may follow their own justification and documentation procedures for non-NHS projects. 

Bid analysis is the basis for justifying contract award or rejection of the bids. The 

bid analysis process, pursuant to 23 CFR 635.114(c), is an examination of the unit 

bid prices for reasonable conformance with the engineer’s estimated prices and other 

factors beyond the comparison of prices. A proper bid analysis helps to ensure that 

funds are being used in the most effective manner. The FHWA’s review of the bids 

should parallel the STA’s review. Together, both agencies should be assured that 

good competition and the lowest possible price were received. The FHWA’s concurrence in award is a step in the obligation and expenditure of Federal funds and is 

the authorization to proceed with construction. 

The current oversight of the bidding process is adequate. Division Offices are actively involved with the processes of the State DOTs to assure that 23 CFR requirements are met. In addition, the concurrence in award process serves as an additional check and is only provided after receipt and review of the tabulation of bids. 

This applies to all Federal-aid oversight projects, including major projects. Division 

Offices also conduct process reviews of the bidding process when appropriate. 

The oversight provided by the Major Project Oversight Manager model has been 

successful and has provided for adequate oversight. However, the Agency is constantly striving to provide the employees in these positions the tools to enhance 

their abilities to improve their oversight. For instance, in the upcoming year, the 

Agency will be providing multidisciplinary training in several core competency 

areas: project management, financial management, cost estimating, communications, and leadership. In addition, the FHWA Contract Administration Course contains modules which address the bidding process. 

By continuing to improve the core competencies of the Major Project Oversight 

Managers, the Agency can expect to see a cadre of FHWA managers who are able 

to provide more of a collaborative leadership role to major projects. In this role, the 

Managers will work together with the entire project delivery team to deliver major 

projects that maintain the public’s trust and confidence in our ability to deliver the 

Federal-aid Highway Program. The additional training provided about the bidding 

process to both Federal and State employees via the Contract Administration 

Course results in an awareness of the bidding process requirements and sound procedures that optimize process efficiencies and limits opportunities for legal challenges and fraud. 

For the Federal Transit Administration (FTA) and the oversight of mega-projects, 

future projects will be tightly managed to ensure the project cost will not exceed 

5 percent of the baseline project cost. A project recovery plan will be required when 

the projected baseline cost is going to exceed more than 5 percent. To determine 

whether a contractor may have underbid the cost, a bid analysis will continue to 
38

be performed prior to awarding the contract. FTA will continue to review the grantee’s bid analysis to ensure project cost control. Increased oversight reviews will result in more successful projects such as the New Orleans Canal Streetcar Line, Dallas North Central LRT and Interstate Max LRT in Portland. 

As for the Federal Aviation Administration (FAA), they too have a process to review the costs of major airport improvement projects and continue to perform significant oversight functions. All Airport Improvement Program grantees must perform an analysis of cost or price for all procurement actions, including contract 

modifications. 

FULL FUNDING GRANT AGREEMENT COMMITMENT AUTHORITY

Question. Earlier in the hearing, Mr. Secretary, you were asked how FTA would 

chose from among projects that it has proposed to enter into full funding contracts 

during fiscal year 2005 without sufficient commitment authority to cover all of the 

projects. Please explain this for the record. What methodology would be used? 

Answer. There is sufficient commitment authority to cover all of the projects recommended for Section 5309 New Starts funding in the President’s Budget for fiscal 

year 2005 and the Annual Report on New Starts: Proposed Allocations of Funds for 

fiscal year 2005 (the current ‘‘Annual New Starts Report’’). Year by year, in each 

Presidential Budget and Annual New Starts Report for the coming fiscal year, the 

Department and FTA make recommendations for New Starts funding only insofar 

as there is sufficient commitment authority available to cover those recommendations—the Department and FTA never exceed the amount of available commitment 

authority. 

In any given year, the selection of projects for proposed Full Funding Grant 

Agreements is based on: (1) the relative merits of the projects under consideration, 

and (2) the ‘‘readiness’’ of each project under consideration to begin construction. 

Specifically, the relative merits of each project are determined through FTA’s application of both the project justification and local financial commitment criteria established by 49 U.S.C. § 5309(e) and fleshed out by the regulations at 49 C.F.R. Part 

611. The ‘‘readiness’’ of each project is a judgment of the reliability of the cost, budget, and schedule for that project, in light of a number of factors, including the grantee’s demonstration of its technical capacity to build and operate the project, its execution of all principal third-party agreements relevant to the project, an assessment 

of the risks inherent in the project that could affect cost and schedule, and the level 

of engineering and final design that has been completed. 

MOTOR CARRIER SAFETY AUDITS

Question. Given the high passage rate of FMCSA safety audits, some critics 

charge that the FMCSA safety audit procedure has become more of an outreach and 

education campaign than a safety assurance mechanism. Please explain why the administration of the Safety Audit process of the New Entrant program by FMCSA 

is an optimal use of the resources allocated to ensuring that unqualified carriers are 

kept off the roads. 

Answer. Data shows that new entrants are identified as at-risk carriers. The program was originally designed as an outreach and education effort. FMCSA is retooling the program to give it a greater enforcement focus. The concept is to engage carriers at the beginning of operations so there is not as a great a need to perform 

compliance reviews, a more optimal use of Agency resources. FMCSA will work to 

tie new entrant audits and compliance reviews together as the programs advance. 

FMCSA is developing a rulemaking proposal that would strengthen the pass/fail 

criteria for the new entrant program. The rulemaking enhancements will identify 

carriers without basic safety management controls. As a result of our proposed 

changes, FMCSA anticipates a significant increase in the number of enforcement actions taken against new entrant carriers. 

MOTOR CARRIER COMPLIANCE REVIEWS

Question. As FMCSA has increased the number of new entrant safety audits, the 

number of compliance reviews it undertakes has dropped significantly. Why has the 

number of compliance reviews dropped so sharply in recent months? Is the level of 

funding that is requested in fiscal year 2005 sufficient to meet the goals of the agency? Do you believe that a safety audit can substitute for a compliance review? Do 

you intend to increase the number of compliance reviews in the remainder of fiscal 

year 2004 and fiscal year 2005? 

Answer. The number of compliance reviews has dropped significantly due primarily to the focus on Safety Security Visits as a result of September 11, 2001, and 

the implementation of the new entrant program. Prior to the program’s implementa-
39

tion, FMCSA conducted approximately 12,000 compliance reviews per year. Currently, the Agency conducts approximately 8,000 per calendar year. In fiscal year 

2004, more States will begin to conduct safety audits. However, FMCSA does not 

expect to realize fully the benefit of State participation until fiscal year 2005. 

The new entrant audit was originally designed as an educational tool for carriers 

beginning interstate operations rather than a substitute for the compliance review 

program. A compliance review may be conducted on new entrants during the safety 

monitoring period if their performance warrants such a review. To meet the Motor 

Carrier Safety Improvement Act’s statutory requirement to conduct these new entrant safety audits, FMCSA diverted resources from the conduct of compliance reviews to the conduct of 40,000–50,000 new entrant audits annually. As a result, 

FMCSA expects to conduct approximately 7,500 compliance reviews in fiscal year 

2004, which is 500 lower than FMCSA’s goal of completing 8,000 compliance reviews 

in fiscal year 2004. However, FMCSA expects to meet its target of 8,000 compliance 

reviews in fiscal year 2005. 

INTELLIGENT TRANSPORTATION SYSTEMS ADVISORY COMMITTEE

Question. The Department disbanded the Intelligent Transportation Systems 

(ITS) Advisory Committee more than a year ago. Do you plan to appoint new members to the ITS Advisory Board or is this body no longer necessary? 

Answer. Two years ago, the Department of Transportation’s (DOT) leadership undertook an internal review of the future direction of the ITS program. A key decision 

resulting from that examination was to establish a Federal Advisory Committee to 

the DOT for ITS. From the ITS program’s inception a dozen years ago until June 

2003, ITS America had served in this advisory capacity and was well positioned to 

bring government and industry together in development of the ITS program. As the 

ITS industry and the DOT’s ITS program matured, DOT leadership concluded that 

the time was right to consider a new Advisory Committee. This tested method of 

consultation with the public serves the Department well across other modes of 

transportation, and the ITS Advisory Committee would give the Department a new 

and valuable consultative asset. A new DOT Advisory Committee is being considered under the Federal Advisory Committee Act. Organizations and individuals with 

resources and expertise to offer meaningful advice would be invited to serve. 

SHIP DISPOSAL

Question. How many obsolete vessels from the National Defense Reserve Fleet 

will be disposed of with the funds provided in fiscal year 2004? 

Answer. The Maritime Administration (MARAD) has removed 13 ships so far in 

fiscal year 2004, resulting from contracts awarded with fiscal year 2003 funding. 

MARAD anticipates awards, utilizing funds provided in fiscal year 2004, to result 

in the disposal of an additional 12 obsolete ships from the NDRF. 

Question. How many ships does MARAD plan to dispose of in fiscal year 2005 if 

the requested amount is provided? 

Answer. MARAD plans to dispose of approximately 15 vessels from the National 

Defense Reserve Fleet. 

Question. What is MARAD’s plan for meeting the 2006 deadline to dispose of all 

of the obsolete fleet? 

Answer. While the Congressionally mandated September 30, 2006 deadline was 

for the removal of all vessels, a more achievable goal is to remove all vessels that 

have a high or moderate risk by 2006. To reach that goal, MARAD plans to eliminate the backlog of vessels that accumulated in the 1990’s; remove all ‘‘high’’ and 

‘‘moderate’’ priority ships (approximately 65 ships) at a rate of 20–24 ships per year; 

and maintain only ‘‘low’’ priority ships at the fleet sites. MARAD’s annual target 

is to maintain no more than 40–60 low priority vessels at all three fleet sites. With 

the projected designation of 45 ships as obsolete over the next 3–5 years, an annual 

disposal rate of 20–24 ships will have to be maintained for 3–4 years beyond 2006, 

to achieve and maintain an obsolete vessel fleet size at a maximum range of 40–

60 ships. 

In addition to maintaining only ‘‘low’’ priority obsolete ships at the fleets, further 

mitigation of environmental risks will be achieved by continuing to use the established protocol for the acceptance of vessels into the National Defense Reserve Fleet 

and the practices used when downgrading vessels to non-retention status. This includes accomplishment of material condition and liquid load surveys, removal of 

readily removable hazardous materials, preliminary residual hazardous material 

characterization, and defueling of vessels to the maximum extent. In addition, as 

newer vessels (built after 1980) are downgraded to non-retention status and enter 

the fleets, a decline in the quantities of hazmats, such as, PCBs will be evident. 
40

While MARAD will continue to pursue all disposal options to ensure the best 

value disposal decisions, having foreign recycling as a viable disposal option in 

2004–2006 and beyond will help MARAD achieve the annual goal of reducing the 

inventory by 20–24 vessels. 

MARITIME GUARANTEED LOANS (TITLE XI)

Question. Public Law 108–11 prohibited the obligation of funds under the Title 

XI program until the Inspector General (IG) certifies that MARAD has adopted and 

implemented the recommendations of No. CR–2003–031 to his satisfaction. What is 

the status of the implementation of these recommendations? 

Answer. MARAD and the Office of the Inspector General have been working closely to adopt and implement the recommendations contained in the report. A formal 

IG report providing the certification is expected in June 2004. 

PRESIDENTIAL AND POLITICAL APPOINTEES

Question. Please provide the number of presidential and political appointees currently on board at the Department and break out by operating administration and 

office of the Office of the Secretary as well as by title and grade. 

Answer. The information follows.

PRESIDENTIAL, SENIOR EXECUTIVE SERVICE NON-CAREER, AND SCHEDULE C APPOINTEES AS OF 

MAY 4, 2004

Title Grade 

OFFICE OF THE SECRETARY

Presidential Appointee—Immediate Office of the Secretary: 

Secretary ............................................................................................................................................................... EX–I 

Non-career SES—Immediate Office of the Secretary: 

Chief of Staff ....................................................................................................................................................... ES–00 

Assistant to the Secretary for Policy ................................................................................................................... ES–00 

Assistant to the Secretary for Policy ................................................................................................................... ES–00 

Deputy Chief of Staff ........................................................................................................................................... ES–00

Schedule C—Immediate Office of the Secretary: 

White House Liaison ............................................................................................................................................. GS–15 

Assistant to the Secretary for Policy ................................................................................................................... GS–15 

Assistant to the Secretary for Policy ................................................................................................................... GS–14 

Special Assistant to the Secretary and Deputy Director for Scheduling and Advance ...................................... GS–14 

Director for Scheduling and Advance .................................................................................................................. GS–15 

Special Assistant for Scheduling and Advance .................................................................................................. GS–13 

Scheduling and Advance Assistant ..................................................................................................................... GS–7

Limited Term SES—Office of the Deputy Secretary: 

Acting Deputy Secretary/Counselor to the Secretary ........................................................................................... ES–00

Schedule C—Office of the Deputy Secretary: 

Counselor to the Deputy Secretary ...................................................................................................................... GS–15

Presidential Appointee—Office of the Under Secretary of Transportation for Policy: 

Under Secretary .................................................................................................................................................... EX–II 

Non-career SES—Office of the Under Secretary of Transportation for Policy: 

Counselor to the Under Secretary ........................................................................................................................ ES–00

Schedule C—Office of the Under Secretary of Transportation for Policy: 

Executive Assistant to the Under Secretary ........................................................................................................ GS–12

Non-career SES—Executive Secretariat: 

Director ................................................................................................................................................................. ES–00

Non-career SES—Office of Civil Rights: 

Director ................................................................................................................................................................. ES–00

Non-career SES—Office of Small & Disadvantaged Business Utilization: 

Director ................................................................................................................................................................. ES–00

Non-career SES—Office of the Chief Information Officer: 

Chief Information Officer ..................................................................................................................................... ES–00

Non-career SES—Office of Public Affairs: 

Assistant to the Secretary and Director of Public Affairs .................................................................................. ES–00

Schedule C—Office of Public Affairs: 

Deputy Director of Public Affairs ......................................................................................................................... GS–15 

Deputy Director of Communications .................................................................................................................... GS–15 

Associate Director for Speechwriting ................................................................................................................... GS–15 

Speechwriter ......................................................................................................................................................... GS–15 
41

PRESIDENTIAL, SENIOR EXECUTIVE SERVICE NON-CAREER, AND SCHEDULE C APPOINTEES AS OF 

MAY 4, 2004—Continued

Title Grade 

Speechwriter ......................................................................................................................................................... GS–14 

Special Assistant to the Director ......................................................................................................................... GS–14 

Special Assistant for Public Affairs .................................................................................................................... GS–10

Presidential Appointee—Assistant Secretary for Budget and Programs: 

Assistant Secretary & CFO ................................................................................................................................... EX–IV 

Non-career SES—Office of the Assistant Secretary for Budget and Programs: 

Deputy Assistant Secretary for Management and Budget .................................................................................. ES–00

Presidential Appointee—Office of the General Counsel: 

General Counsel ................................................................................................................................................... EX–IV 

Presidential Appointee—Office of the Assistant Secretary for Transportation Policy: 

Assistant Secretary .............................................................................................................................................. EX–IV 

Non-career SES—Office of the Assistant Secretary for Transportation Policy: 

Deputy Assistant Secretary .................................................................................................................................. ES–00

Schedule C—Office of the Assistant Secretary for Transportation Policy: 

Special Assistant to the Assistant Secretary ...................................................................................................... GS–12

Presidential Appointee—Office of the Assistant Secretary for Aviation and International Affairs: 

Assistant Secretary .............................................................................................................................................. EX–IV 

Non-career SES—Office of the Assistant Secretary for Aviation and International Affairs: 

Deputy Assistant Secretary .................................................................................................................................. ES–00

Schedule C—Office of the Assistant Secretary for Aviation and International Affairs: 

Special Assistant ................................................................................................................................................. GS–15

Presidential Appointee—Office of the Assistant Secretary for Governmental Affairs: 

Assistant Secretary .............................................................................................................................................. EX–IV 

Non-career SES—Office of the Assistant Secretary for Governmental Affairs: 

Deputy Assistant Secretary .................................................................................................................................. ES–00

Schedule C—Office of the Assistant Secretary for Governmental Affairs: 

Special Assistant to the Assistant Secretary ...................................................................................................... GS–15 

Associate Director for Governmental Affairs ....................................................................................................... GS–14 

Associate Director for Governmental Affairs ....................................................................................................... GS–13 

Associate Director for Governmental Affairs ....................................................................................................... GS–13 

Associate Director for Governmental Affairs ....................................................................................................... GS–13 

Associate Director for Intergovernmental Affairs ................................................................................................ GS–14

OFFICE OF INSPECTOR GENERAL

Presidential Appointee: 

Inspector General ................................................................................................................................................. EX–IV

FEDERAL AVIATION ADMINISTRATION

Presidential Appointee: 

Administrator ........................................................................................................................................................ EX–II 

Deputy Administrator ........................................................................................................................................... EX–IV 

Non-career SES: 

Chief Counsel ....................................................................................................................................................... FJ–4 

Associate Administrator for Airports .................................................................................................................... FJ–4 

Assistant Administrator for International Aviation .............................................................................................. FJ–4 

Assistant Administrator for Aviation Policy, Planning & Environment ............................................................... FJ–4 

Assistant Administrator for Government & Industry Affairs ............................................................................... FJ–4 

Assistant Administrator for Public Affairs .......................................................................................................... FJ–4

Schedule C: 

Special Assistant to the Deputy Administrator ................................................................................................... GG–15

FEDERAL HIGHWAY ADMINISTRATION

Presidential Appointee: 

Administrator ........................................................................................................................................................ EX–II 

Non-career SES: 

Deputy Administrator ........................................................................................................................................... ES–00 

Chief Counsel ....................................................................................................................................................... ES–00 

Associate Administrator for Public Affairs .......................................................................................................... ES–00 

Associate Administrator for Policy ....................................................................................................................... ES–00

Schedule C: 

Special Assistant to the Administrator ............................................................................................................... GS–15 

Special Assistant ................................................................................................................................................. GS–14 

Special Assistant to the Policy Director .............................................................................................................. GS–14 
42

PRESIDENTIAL, SENIOR EXECUTIVE SERVICE NON-CAREER, AND SCHEDULE C APPOINTEES AS OF 

MAY 4, 2004—Continued

Title Grade 

Special Assistant to the Chief Counsel ............................................................................................................... GS–13

FEDERAL RAILROAD ADMINISTRATION

Presidential Appointee: 

Administrator ........................................................................................................................................................ EX–III 

Non-career SES: 

Deputy Administrator ........................................................................................................................................... ES–00

Schedule C: 

Director of Public Affairs ..................................................................................................................................... GS–13

NATIONAL HIGHWAY TRAFFIC SAFETY ADMINISTRATION

Presidential Appointee: 

Administrator ........................................................................................................................................................ EX–III 

Non-career SES: 

Deputy Administrator ........................................................................................................................................... ES–00 

Chief Counsel ....................................................................................................................................................... ES–00 

Associate Administrator for External Affairs ....................................................................................................... ES–00

Schedule C: 

Special Assistant ................................................................................................................................................. GS–15

FEDERAL MOTOR CARRIER SAFETY ADMINISTRATION

Presidential Appointee: 

Administrator ........................................................................................................................................................ EX–III 

Non-career SES: 

Deputy Administrator ........................................................................................................................................... ES–00 

Chief Counsel ....................................................................................................................................................... ES–00

Schedule C: 

Director, Office of Communications & Senior Policy Advisor .............................................................................. GS–15 

Special Assistant to the Administrator for Intergovernmental Affairs ............................................................... GS–14

FEDERAL TRANSIT ADMINISTRATION

Presidential Appointee: 

Administrator ........................................................................................................................................................ EX–III 

Non-career SES: 

Deputy Administrator ........................................................................................................................................... ES–00 

Chief Counsel ....................................................................................................................................................... ES–00

Schedule C: 

Staff Assistant ..................................................................................................................................................... GS–10

RESEARCH AND SPECIAL PROGRAMS ADMINISTRATION

Non-career SES: 

Deputy Administrator ........................................................................................................................................... ES–00

Schedule C: 

Director of Policy and Program Support .............................................................................................................. GS–15

SAINT LAWRENCE SEAWAY DEVELOPMENT CORPORATION

Presidential Appointee: 

Administrator ........................................................................................................................................................ EX–IV

SURFACE TRANSPORTATION BOARD

Presidential Appointee: 

Chairman .............................................................................................................................................................. EX–III

MARITIME ADMINISTRATION

Presidential Appointee: 

Administrator ........................................................................................................................................................ EX–III 

Non-career SES: 

Deputy Administrator ........................................................................................................................................... ES–00 

Chief Counsel ....................................................................................................................................................... ES–00

Schedule C: 

Director, Office of Congressional and Public Affairs .......................................................................................... GS–15 

Special Assistant to the Administrator ............................................................................................................... GS–14
43

Question. Please provide by operating administration or office of the Office of the 

Secretary the number of vacant presidential and political positions and the grade 

and 2005 salary for each position. 

Answer. The information follows.

VACANT PRESIDENTIAL AND POLITICAL POSITIONS—AS OF MAY 04, 2004

Title Grade Salary 

Office of the Secretary: 

Deputy Secretary ................................................................................................... EX–II ........................ $158,100 

Special Assistant for Scheduling and Advance ................................................... GS–7 ........................ 34,184 

Director of Drug Enforcement and Program Compliance .................................... GS–15 ...................... 100,231 

Deputy Assistant Secretary for Governmental Affairs ......................................... ES–0 ........................ 125,264

Associate Director for Governmental Affairs ....................................................... GS–14 ...................... 96,572

Federal Aviation Administration: 

Deputy Assistant Administrator for Government and Industry Affairs ............... GS–15 ...................... 110,256

Maritime Administration: 

Senior Policy Advisor ............................................................................................ GS–15 ...................... 113,597

National Highway Traffic Safety Administration: 

Director, Office of Public and Consumer Affairs ................................................. GS–15 ...................... 113,597 

Director of Intergovernmental and Congressional Affairs ................................... GS–15 ...................... 113,597

Federal Transit Administration: 

Associate Administrator for Communications and Legislative Affairs ............... ES–0 ........................ 137,000

Research and Special Programs Administration: 

Administrator ........................................................................................................ EX–III ....................... 145,600 

Special Assistant .................................................................................................. GS–12 ...................... 68,722 

Director of Public Affairs ..................................................................................... GS–15 ...................... 113,597

Bureau of Transportation Statistics: 

Director ................................................................................................................. EX–V ........................ 128,200

Surface Transportation Board: 

Board Member ...................................................................................................... EX–IV ....................... 136,900 

Board Member ...................................................................................................... EX–IV ....................... 136,900 

NOTES.—The PAS salaries are based on the statutory pay level. The SES salaries are based on the middle of the new senior executive pay 

range, or a salary determined for the proposed incumbent. The GS salaries are based on the middle of the range (step 5) for each grade (as 

previously encumbered), or as proposed. 

Question. How many new political positions are requested for fiscal year 2005? 

Answer. There are 10 new political positions being requested for fiscal year 2005. 

Question. Please display by office of the Office of the Secretary or operating administration, each new political position and its grade and salary. 

Answer. The information follows.

Title Grade Salary 

Office of the Secretary: 

Special Counsel .................................................................................................... GS–15 ...................... $113,597 

Special Assistant (to the A/S for Trans. Policy) .................................................. GS–15 ...................... 113,597 

Special Assistant (to the A/S for Aviation & International Affairs ..................... GS–14 ...................... 96,572 

Security Liaison .................................................................................................... GS–15 ...................... 113,597 

Special Assistant for Information Technology Security ....................................... GS–15 ...................... 113,597 

Federal Railroad Administration: 

Deputy Administrator ............................................................................................ ES–0 ........................ 125,264 

Special Assistant .................................................................................................. GS–15 ...................... 113,597 

Federal Transit Administration: 

Special Assistant for Intergovernmental Affairs ................................................. GS–15 ...................... 113,597 

Federal Motor Carrier Safety Administration 

Special Assistant .................................................................................................. GS–12 ...................... 68,722 

Research and Special Programs Administration: 

Special Assistant .................................................................................................. GS–12 ...................... 68,722

The SES position salaries are estimated at the middle of the new senior executive 

pay range, or based on a salary determined for the proposed incumbent. 

The GS salaries are estimated at the middle of the range (step 5) for each grade 

proposed. 

Question. Please provide a timetable for filling vacant political positions up to the 

statutory cap. 

Answer. The information follows.
44

VACANT POLITICAL POSITIONS—AS OF MAY 04, 2004 

Title Grade Salary Incumbent Status 

Office of the Secretary: 

Deputy Secretary ............................................................................ EX–II $158,100 Pending Senate Confirmation Candidate to 

come aboard—6/13/04 

Special Assistant for Scheduling and Advance ............................ GS–15 100,231 Candidate to come 

aboard—6/13/04 

Director of Drug Enforcement and Program Compliance ............. ES–00 125,264 Interviewing—candidate 

to come aboard 

Associate Director for Governmental Affairs ................................. GS–14 96,572 Interviewing 

Federal Aviation Administration: 

Deputy Assistant Administrator for Government and Industry Affairs.GS–15 110,256 Candidate to come on 

Board—6/13/04

Maritime Administration: 

Senior Policy Advisor ..................................................................... GS–15 113,597 Interviewing 

National Highway Traffic Safety Administration: 

Director, Office of Public and Consumer Affairs .......................... GS–15 113,597 Interviewing 

Director of Intergovernmental and Congressional Affairs ............ ............... ..................

Federal Transit Administration: 

Associate Administrator for Communications and Legislative Affairs.ES–0 137,000 Candidate to come 

aboard—6/1/04

Research and Special Programs Administration: 

Administration ............................................................................... EX–III 145,600 Interviewing 

Special Assistant ........................................................................... GS–12 68,722 Interviewing 

Director of Public Affairs .............................................................. GS–15 113,597 Interviewing 

Bureau of Transportation Statistics: 

Director .......................................................................................... EX–V 128,200 Interviewing 

Surface Transportation Board: 

Board Member ............................................................................... EX–IV 136,900 Pending Senate Confirmation 

Board Member ............................................................................... EX–IV 136,900 Pending Senate Confirmation 

Question. Please provide a table that compares the number of political appointees 

by agency or by office of the Office of the Secretary over the last 5 years. 

Answer. The information follows.

Operating Administration 

Fiscal Year 

2000 2001 2002 2003

2004

As of

5/4/04 

Secretarial Offices ....................................................................................... 25 20 29 25 25 

Budget and Programs ................................................................................. 3 1 1 0 2 

General Counsel ........................................................................................... 0 1 1 1 1 

Governmental Affairs ................................................................................... 9 7 9 8 8 

Administration ............................................................................................. 1 0 0 0 0 

Transportation Policy ................................................................................... 6 1 3 3 3 

Federal Aviation Administration .................................................................. 5 4 7 9 9 

Federal Highway Administration .................................................................. 5 1 9 7 9 

National Highway Traffic Safety Administration ......................................... 7 2 7 5 5 

Federal Railroad Administration .................................................................. 4 2 3 2 3 

Federal Transit Administration .................................................................... 3 2 5 5 4 

Saint Lawrence Seaway Development Corp ................................................ 1 1 1 1 1 

Research and Special Programs Administration ........................................ 4 2 3 3 2 

Office of the Inspector General ................................................................... 1 1 1 1 1 

Bureau of Transportation Statistics ............................................................ 1 1 1 0 0 

Surface Transportation Board ..................................................................... 3 3 2 1 1 

Maritime Administration .............................................................................. 5 1 5 5 5

TOTAL .............................................................................................. 85 51 90 82 87
45

OST STAFFING

Question. Please provide a table that compares the estimated average grade for 

each office of the Office of the Secretary for fiscal year 2005 with the past 5 fiscal 

years. 

Answer. The information follows.

FISCAL YEAR 2001–2005 AVERAGE GRADES 

Office Fiscal 

Year 2001

Fiscal 

Year 2002

Fiscal 

Year 2003

Fiscal 

Year 2004 

(Est.) 

Secretarial Offices ................................................................................................ 10.9 10.9 11.1 11.1 

Budget & Programs .............................................................................................. 11.6 11.8 11.8 11.3

General Counsel .................................................................................................... 11.8 11.7 11.9 12.0 

Governmental Affairs ............................................................................................ 10.1 11.0 11.6 11.2 

Administration ...................................................................................................... 11.8 11.4 11.1 11.2 

Aviation & Int’l Affairs ......................................................................................... 11.0 11.1 11.1 11.1 

Transportation Policy ............................................................................................ 10.6 10.0 10.0 10.3

NOTE.—Fiscal year 2005 data not available. 

Question. Please provide a table listing by office of the Office of the Secretary, onboard staffing and FTE for fiscal year 2000, through 2004 and the fiscal year 2005 

requested full-time positions and FTE. 

Answer. The information follows.
46

OST STAFFING SALARIES AND EXPENSES—POSITIONS AND FTE 

Office 

Fiscal Year 2000 

Actual 

Fiscal Year 2001 

Actual 

Fiscal Year 2002 

Actual 

Fiscal Year 2003

Request 

Fiscal Year 2004 

Request 

Fiscal Year 

2005 Request 

FTP FTE FTP FTE FTP FTE FTP FTE FTP FTE FTP FTE 

General Counsel ..................................................................................................................................... 87 81 92 81 112 92 112 106 106 100 106 100 Under Sec Transportation Policy ............................................................................................................ 34 30 33 29 33 29 133 129 132 128 132 128 Aviation/International Affairs 1 ............................................................................................................... 94 94 92 87 92 92 ............ ............ .......... .......... .......... ..........Budget and Programs ............................................................................................................................ 56 56 56 51 56 44 56 56 55 55 55 55 Governmental Affairs .............................................................................................................................. 24 24 24 18 24 21 24 24 24 24 24 24 Administration 2 ...................................................................................................................................... 81 61 81 67 82 99 83 79 86 84 86 84 Public Affairs .......................................................................................................................................... 21 20 21 18 21 19 21 21 21 21 21 21 Office of the Secretary ........................................................................................................................... 23 22 22 22 22 21 22 22 22 22 22 22 Office of the Deputy Secretary ............................................................................................................... 7 6 7 4 7 6 7 7 7 7 7 7 Office of Intermodalism3 ....................................................................................................................... 10 10 .......... .......... .......... .......... ............ ............ .......... .......... .......... ..........Office of the Executive Secretariat ........................................................................................................ 15 15 15 14 15 15 15 15 15 15 15 15 Board of Contract Appeals ..................................................................................................................... 6 5 6 5 5 5 6 6 6 6 6 6 Small and Disadvantaged Business ...................................................................................................... 12 12 12 9 12 10 12 12 11 11 11 11 Intelligence and Security 4 ..................................................................................................................... 12 11 12 11 12 8 [15] [14] 15 15 15 15 Ofc of the Chief Information Officer ...................................................................................................... 21 21 21 21 21 22 25 23 25 25 25 25

Total staffing, Salaries & Expenses ......................................................................................... 503 468 494 437 514 483 516 500 525 513 525 513

1 Beginning in fiscal year 2003, the Office of Aviation/International Affairs is consolidated in the Office of the Under Secretary of Transportation for Policy. 2 For fiscal year 2002, the Office of Administration includes FTE associated with the standup of the Transportation Security Administration. 3 For fiscal years 2001 and 2002, the Office of Intermodalism is funded within FHWA. The fiscal year 2003 budget transfers the Office of Intermodalism from FHWA to OST Under Secretary of Transportation for Policy. 4 For fiscal year 2003, the Office of Intelligence and Security is funded under reimbursable agreement. 
47

FUNDING LEVELS FOR OST OFFICES

Question. Please provide a table displaying the enacted level for fiscal years 2002, 

2003, 2004 for each office of the Office of the Secretary and the amount of any transfers of funds between offices (or to date for fiscal year 2004). 

Answer. The table below provides the enacted level for fiscal years 2002, 2003, 

2004 for each office of the Office of the Secretary. There were no enacted transfers 

of funds between OST offices for fiscal years 2002, 2003, or 2004 (as of May 31, 

2004).

OFFICE OF THE SECRETARY ENACTED LEVELS FOR FISCAL YEAR 2002 THRU FISCAL YEAR 2004 

[In thousands of dollars] 

Accounts Fiscal Year 2002 Enacted 

Fiscal Year 2003 Enacted Fiscal Year 2004 Enacted 

SALARIES & EXPENSES: 

Office of the Secretary .................................................................... 1,929 2,197 2,179 

Office of the Deputy Secretary ....................................................... 619 804 690 

Office of the Under Secretary of Transportation for Policy ............ ........................ 12,300 12,141 

Aviation/International Affairs 1 ....................................................... 10,479 ........................ ..........................

Office of Intermodalism2 ................................................................ ........................ ........................ ..........................

Board of Contract Appeals ............................................................. 507 607 690 

Office of Small & Disadvantaged Business Utilization ................. 540 1,259 1,251 

Office of Intelligence & Security 3 .................................................. 1,321 [1,631] 1,972 

Office of the Chief Information Officer .......................................... 6,141 13,026 7,396 

Office of General Counsel ............................................................... 13,355 15,466 14,985 

Office of Governmental Affairs ....................................................... 2,282 2,423 2,267.6 

Office of the Assistant Secretary for Budget ................................. 7,728 8,273 8,418 

Office of the Assistant Secretary of Administration ...................... 19,250 28,717 22,984 

Office of Public Affairs ................................................................... 1,723 1,903 1,889

TOTAL: SALARIES & EXPENSES ................................................... 67,078 88,357 78,290

TRANSPORTATION PLANNING RESEARCH & DEVELOPMENT (TPR&D) ...... 11,580 23,463 20,426

OFFICE OF CIVIL RIGHTS .......................................................................... 8,362 8,514 8,365

MINORITY BUSINESS OUTREACH .............................................................. 3,000 2,949 2,958

MINORITY BUSINESS RESOURCE CENTER PROGRAM (MBRC) ................. 900 894 895

ESSENTIAL AIR SERVICE/PAYMENTS TO AIR CARRIERS ........................... 62,952 51,761 51,662

NEW HEADQUARTERS BUILDING ............................................................... 0 0 0

TOTALS ........................................................................................ 153,872 175,938 162,596

1 Beginning in fiscal year 2003, the Office of Aviation/International Affairs is consolidated in the Office of the Under Secretary of Transportation for Policy. 2 For fiscal year 2002, the Office of Intermodalism was funded within FHWA. Beginning in fiscal year 2003 the Office of Intermodalism 

transfers from FHWA to OST Office of the Under Secretary of Transportation for Policy. 3 In fiscal year 2003, the Office of Intelligence and Security was funded through a reimbursable agreement. 

DETAILS TO THE OFFICE OF THE SECRETARY

Question. Are any staff of the operating administrations detailed to the Office of 

the Secretary? 

Answer. Three employees from the Federal Highway Administration are detailed 

to the Office of the Secretary. 

OST TRAVEL COSTS

Question. Are any travel costs for the Office of the Secretary expected to be paid 

by the modes? 

Answer. In certain circumstances, travel costs for the Secretary are paid for by 

the operating administrations. For example, if the Secretary attends an event related to airports, the Federal Aviation Administration may pay for the Secretary’s 

travel expenses. The Secretary’s attendance at these events helps to enhance the 

missions of the operating administrations. 

Question. Please provide a table indicating the amount of travel costs for the Office of the Secretary that operating administrations paid for in part or in total. 

Please breakdown by operating administrations for the past 5 years. 

Answer. The information follows.
48

IMMEDIATE OFFICE OF THE SECRETARY 

Direct Fiscal Year 2000

Fiscal Year 2001Fiscal Year 2002Fiscal Year 2003Fiscal Year 2004 

MARAD ..................................................................................... ................ ................ ................ $1,400 ................

FAA ........................................................................................... ................ ................ ................ ................ $2,826 

NHTSA ...................................................................................... ................ ................ ................ ................ 12,633 

FTA ........................................................................................... $1,638 ................ $3,804 541 122 

FRA ........................................................................................... 156 $703 ................ ................ ................

FHWA ........................................................................................ 1,865 1,891 1,339 730 988 

FMCSA ...................................................................................... ................ ................ ................ 724 584 

RSPA ........................................................................................ ................ ................ ................ ................ 654 

USCG ........................................................................................ 462 ................ ................ ................ ................

Total ........................................................................... 4,121 2,594 5,143 3,395 17,807

Question. Are there guidelines from the Office of the Secretary to the operating 

administrations that define the circumstances under which the Secretarial travel is 

paid by the modes? If so, please provide for the record. 

Answer. There are no formal written guidelines, but in practice, the modes may 

be asked to cover the cost of the Secretary’s advance staff if an administrator requests the Secretary’s presence at an event or conference that deals specifically with 

the mission of that particular mode. The Secretary’s own travel and per diem costs 

are paid by his immediate office. 

Question. Has the DOT General Counsel ever looked at the practice of operating 

administrations paying for OST travel costs to be in compliance with the general 

provision carried annually in appropriations Acts prohibiting assessments? Please 

provide the legal opinion, if there is one, for the record. 

Answer. Staff attorneys in the Office of the General Counsel have periodically provided oral advice to agency officials and staff concerning applicable restrictions on 

making assessments to help fund OST travel costs that are contained in our annual 

appropriations acts. The General Counsel and his staff have not issued any legal 

opinions that address this subject. 

CHARGES TO THE MODES BY OST

Question. Please provide a list of all accounts that are financed by charges to the 

modes from OST. 

Answer. There are no OST accounts that are financed by charges to the modes. 

However, for services provided by OST to the modes, charges are collected through 

reimbursable agreements. For fiscal year 2004, Salaries and Expense and Office of 

Civil Rights accounts have reimbursable agreements with the modes. 

PROPOSALS TO REORGANIZE OST OFFICES

Question. Is there any proposal to consolidate or reorganize any office of the Office 

of the Secretary assumed in the fiscal year 2005 budget request? 

Answer. No, there was no proposal to consolidate or reorganize any office of the 

Office of the Secretary assumed in the fiscal year 2005 request; however, on June 

25, 2004, President Bush transmitted a fiscal year 2005 budget amendment to Congress that would place the operational responsibility for the Office of Emergency 

Transportation and Crisis Management Center from the Research and Special Programs Administration to the Office of the Secretary. 

PROPOSALS TO CONSOLIDATE OST BUDGET ACTIVITIES

Question. Does the fiscal year 2005 budget request reflect any proposals to consolidate budget activities of the Office of the Secretary? 

Answer. The fiscal year 2005 request reflects a consolidated budget activity for 

the Office of the Secretary, the Office of the Deputy Secretary and the Executive 

Secretariat. This will provide greater flexibility in the day-to-day management of 

the Offices. 

PROPOSALS TO REORGANIZE MODAL OFFICES

Question. Are there any proposals or plans to consolidate, reorganize, or restructure any offices of the operating administrations in fiscal year 2005? 

Answer. In fiscal year 2005, the Department plans to consolidate, reorganize, or 

restructure the following offices: 
49

Federal Aviation Administration (FAA) 

The FAA continues to reorganize lines of business and services within the newly 

created Air Traffic Organization. Also, the Flight Service Stations are currently undergoing an A–76 study which will result in the contracting out or a restructuring 

of this operation within FAA. Results of this will not be finalized until March 2005. 

Research and Special Programs Administration (RSPA)/Office of the Secretary of 

Transportation (OST) 

On June 25, 2004, President Bush transmitted a fiscal year 2005 budget amendment to Congress that would place the operational responsibility for the Office of 

Emergency Transportation and Crisis Management Center from RSPA to OST. 

IMMEDIATE OFFICE OF THE SECRETARY

Question. Please provide detailed justification for the fiscal year 2005 budget request for the Immediate Office of the Secretary by object class. 

Answer. The information follows.

[In thousands of dollars] 

Object Class Amount 

Full-time permanent ............................................................................................................................................ 1,522 

Other than full-time permanent .......................................................................................................................... 364 

Other personnel compensation ............................................................................................................................ 29

Total personnel compensation ................................................................................................................ 1,915

Civilian personnel benefits .................................................................................................................................. 507 

Travel & transportation of things ........................................................................................................................ 209 

Other services ...................................................................................................................................................... 14 

Supplies and materials ........................................................................................................................................ 12

Total ........................................................................................................................................................ 2,738

Question. Please explain in detail the assumptions used to develop the fiscal year 

2005 budget request for personnel compensation and benefits of the Immediate Office of the Secretary. 

Answer. The assumptions used to develop the Immediate Office of the Secretary’s 

budget request for personnel compensation and benefits are computed as follows: (1) 

Salary and related benefits from the previous year (fiscal year 2004) are computed 

based on enacted levels; (2) The fiscal year 2004 enacted level is annualized to fund 

the full year cost of the fiscal year 2004 pay raise (4.1 percent for an additional onefourth of a year) and to fully fund the cost of any other personnel actions that occurred in fiscal year 2004; (3) The fiscal year 2005 base is inflated by the proposed 

fiscal year 2005 pay raise estimated at 1.5 percent (for three-fourths of a year). No 

new staff increases are proposed for fiscal year 2005. 

Question. Please provide the number of staffing positions and FTE requested, indicating direct and reimbursable, for the Immediate Office of the Secretary. 

Answer. The information follows.

Positions FTE 

Direct ....................................................................................................................................... 15 15

Reimbursable .......................................................................................................................... 7 7

Question. Please provide a table listing current staffing for the Immediate Office 

of the Secretary compared to levels at the end of each quarter of past 5 fiscal years. 

Answer. The 5-year FTE history is as follows:

FISCAL YEAR 2001 ACTUAL .................................................................................................................................. 22

FISCAL YEAR 2002 ACTUAL .................................................................................................................................. 21

FISCAL YEAR 2003 ACTUAL .................................................................................................................................. 20

FISCAL YEAR 2004 ENACTED ............................................................................................................................... 22 

FISCAL YEAR 2004 ON-BOARD ............................................................................................................................. 1 23 

FISCAL YEAR 2005 REQUEST ............................................................................................................................... 22

1 As of March 30, 2004. 

Question. Please provide details on anticipated contract expenses in the Immediate Office of the Secretary. 
50

Answer. Anticipated contract expenses in the Immediate Office of the Secretary 

consist of:

Description of Services Amount 

Subscriptions ........................................................................................................................................................ $10,300 

Other small contracts .......................................................................................................................................... 4,000

IMMEDIATE OFFICE OF THE DEPUTY SECRETARY

Question. Please provide detailed justification for the fiscal year 2005 budget request for the Office of the Deputy Secretary by object class. 

Answer. The information follows.

[In thousands of dollars] 

Object Class Amount 

Full-time permanent ............................................................................................................................................ 534 

Other than full-time permanent .......................................................................................................................... 214 

Other personnel compensation ............................................................................................................................ 40

Total personnel compensation ................................................................................................................ 788

Civilian personnel benefits .................................................................................................................................. 200 

Travel & transportation of things ........................................................................................................................ 67 

Other services ...................................................................................................................................................... 11 

Supplies and materials ........................................................................................................................................ 4

Total ........................................................................................................................................................ 1,070

Question. Please explain in detail the assumptions used to develop the fiscal year 

2005 budget request for personnel compensation and benefits of the Office of the 

Deputy Secretary. 

Answer. The assumptions used to develop the Office of the Deputy Secretary’s 

budget request for personnel compensation and benefits are computed as follows: (1) 

Salary and related benefits from the previous year (fiscal year 2004) are computed 

based on enacted levels; (2) The fiscal year 2004 enacted level is annualized to fund 

the full year cost of the fiscal year 2004 pay raise (4.1 percent for an additional onefourth of a year) and to fully fund the cost of any other personnel actions that occurred in fiscal year 2004; (3) The fiscal year 2005 base is inflated by the proposed 

fiscal year 2005 pay raise estimated at 1.5 percent (for three-fourths of a year). No 

new staff increases are proposed for fiscal year 2005. 

Question. Please provide the number of staffing positions and FTE requested, indicating direct and reimbursable, for the Office of the Deputy Secretary. 

Answer. The information follows.

Positions FTE 

Direct ....................................................................................................................................... 7 7

Reimbursable .......................................................................................................................... 0 0

Question. Please provide a table listing current staffing for the Office of the Deputy Secretary compared to levels at the end of each quarter of past 5 fiscal years. 

Answer. The 5-year FTE history is as follows:

FISCAL YEAR 2001 ACTUAL .................................................................................................................................. 4

FISCAL YEAR 2002 ACTUAL .................................................................................................................................. 6

FISCAL YEAR 2003 ACTUAL .................................................................................................................................. 5

FISCAL YEAR 2004 ENACTED ............................................................................................................................... 7 

FISCAL YEAR 2004 ON-BOARD ............................................................................................................................. 1 6

FISCAL YEAR 2005 REQUEST ............................................................................................................................... 7

1 As of March 30, 2004. 

Question. Please provide details on anticipated contract expenses in the Office of 

the Deputy Secretary. 

Answer. Anticipated contract expenses in the Office of the Deputy Secretary consist of:
51

Description of Services Amount 

Subscriptions ........................................................................................................................................................ $7,000 

OFFICE OF THE EXECUTIVE SECRETARIAT

Question. Please provide detailed justification for the fiscal year 2005 budget request for the Office of the Executive Secretariat by object class. 

Answer. The information follows.

[In thousands of dollars] 

Object Class Amount 

Full-time permanent ............................................................................................................................................ 1,159 

Other than full-time permanent .......................................................................................................................... 35 

Other personnel compensation ............................................................................................................................ 10

Total personnel compensation ................................................................................................................ 1,204

Civilian personnel benefits .................................................................................................................................. 255 

Other services ...................................................................................................................................................... 39 

Supplies and materials ........................................................................................................................................ 2

Total ........................................................................................................................................................ 1,500

Question. Please explain in detail the assumptions used to develop the fiscal year 

2005 budget request for personnel compensation and benefits of the Office of the Executive Secretariat. 

Answer. The assumptions used to develop the Office of the Executive Secretariat’s 

budget request for personnel compensation and benefits are computed as follows: (1) 

Salary and related benefits from the previous year (fiscal year 2004) are computed 

based on enacted levels; (2) The fiscal year 2004 enacted level is annualized to fund 

the full year cost of the fiscal year 2004 pay raise (4.1 percent for an additional onefourth of a year) and to fully fund the cost of any other personnel actions that occurred in fiscal year 2004; (3) The fiscal year 2005 base is inflated by the proposed 

fiscal year 2005 pay raise estimated at 1.5 percent (for three-fourths of a year). No 

new staff increases are proposed for fiscal year 2005. 

Question. Please provide the number of staffing positions and FTE requested, indicating direct and reimbursable, for the Office of the Executive Secretariat. 

Answer. The information follows.

Positions FTE 

Direct ....................................................................................................................................... 15 15

Reimbursable .......................................................................................................................... 0 0

Question. Please provide a table listing current staffing for the Office of the Executive Secretariat compared to levels at the end of each quarter of past 5 fiscal years. 

Answer. The 5-year FTE history is as follows:

FISCAL YEAR 2001 ACTUAL .................................................................................................................................. 14 

FISCAL YEAR 2002 ACTUAL .................................................................................................................................. 15 

FISCAL YEAR 2003 ACTUAL .................................................................................................................................. 14 

FISCAL YEAR 2004 ENACTED ............................................................................................................................... 15 

FISCAL YEAR 2004 ON-BOARD ............................................................................................................................. 1 12 

FISCAL YEAR 2005 REQUEST ............................................................................................................................... 15

1 As of March 30, 2004. 

Question. Please provide details on anticipated contract expenses in the Office of 

the Executive Secretariat. 

Answer. Anticipated contract expenses in the Office of the Executive Secretariat 

consist of:

Description of Services Amount 

Enhancements & maintenance of scheduling system ........................................................................................ $38,600
52

OFFICE OF THE UNDER SECRETARY FOR TRANSPORTATION POLICY

Question. Please provide detailed justification for the fiscal year 2005 budget request for the Office of the Under Secretary for Transportation Policy by object class. 

Answer. The information follows.

[In thousands of dollars] 

Object Class Amount 

Full-time permanent ............................................................................................................................................ 9,779 

Other than full-time permanent .......................................................................................................................... 666 

Other personnel compensation ............................................................................................................................ 56

Total personnel compensation ................................................................................................................ 10,501

Civilian personnel benefits .................................................................................................................................. 2,102 

Travel & transportation of things ........................................................................................................................ 207 

Other services ...................................................................................................................................................... 101 

Supplies and materials ........................................................................................................................................ 7

Total ........................................................................................................................................................ 12,918

Question. Please explain in detail the assumptions used to develop the fiscal year 

2005 budget request for personnel compensation and benefits of the Office of the 

Under Secretary for Transportation Policy. 

Answer. The assumptions used to develop the Office of the Under Secretary for 

Transportation Policy’s budget request for personnel compensation and benefits are 

computed as follows: (1) Salary and related benefits from the previous year (fiscal 

year 2004) are computed based on enacted levels; (2) The fiscal year 2004 enacted 

level is annualized to fund the full year cost of the fiscal year 2004 pay raise (4.1 

percent for an additional one-fourth of a year) and to fully fund the cost of any other 

personnel actions that occurred in fiscal year 2004; (3) The fiscal year 2005 base 

is inflated by the proposed fiscal year 2005 pay raise estimated at 1.5 percent (for 

three-fourths of a year). No new staff increases are proposed for fiscal year 2005. 

Question. Please provide the number of staffing positions and FTE requested, indicating direct and reimbursable, for the Office of the Under Secretary for Transportation Policy. 

Answer. The information follows.

Positions FTE 

Direct ....................................................................................................................................... 128 124 

Reimbursable .......................................................................................................................... 4 4

Question. Please provide a table listing current staffing for the Office of the Under 

Secretary for Transportation Policy compared to levels at the end of each quarter 

of past 5 fiscal years. 

Answer. The 5-year FTE history is as follows:

FISCAL YEAR 2001 ACTUAL .................................................................................................................................. 116 

FISCAL YEAR 2002 ACTUAL .................................................................................................................................. 121 

FISCAL YEAR 2003 ACTUAL .................................................................................................................................. 105 

FISCAL YEAR 2004 ENACTED ............................................................................................................................... 128 

FISCAL YEAR 2004 ON-BOARD ............................................................................................................................. 1 115 

FISCAL YEAR 2005 REQUEST ............................................................................................................................... 128

1 As of March 30, 2004. 

Question. Please provide details on anticipated contract expenses in the Office of 

the Under Secretary for Transportation Policy. 

Answer. Anticipated contract expenses in the Office of the Under Secretary for 

Transportation Policy consist of:

Description of Services Amount 

Translation services ............................................................................................................................................. $19,200 

Interpreters ........................................................................................................................................................... 41,000 

Embassy charges ................................................................................................................................................. 41,000
53

BOARD OF CONTRACT APPEALS

Question. Please provide detailed justification for the fiscal year 2005 budget request for the Board of Contract Appeals by object class. 

Answer. The information follows.

[In thousands of dollars] 

Object Class Amount 

Full-time permanent ............................................................................................................................................ 660 

Other personnel compensation ............................................................................................................................ 1

Total personnel compensation ................................................................................................................ 661

Civilian personnel benefits .................................................................................................................................. 112 

Travel & transportation of things ........................................................................................................................ 6 

Other services ...................................................................................................................................................... 22

Total ........................................................................................................................................................ 801

Question. Please explain in detail the assumptions used to develop the fiscal year 

2005 budget request for personnel compensation and benefits of the Board of Contract Appeals. 

Answer. The assumptions used to develop the Board of Contract Appeals’ budget 

request for personnel compensation and benefits are computed as follows: (1) Salary 

and related benefits from the previous year (fiscal year 2004) are computed based 

on enacted levels; (2) The fiscal year 2004 enacted level is annualized to fund the 

full year cost of the fiscal year 2004 pay raise (4.1 percent for an additional onefourth of a year) and to fully fund the cost of any other personnel actions that occurred in fiscal year 2004; (3) The fiscal year 2005 base is inflated by the proposed 

fiscal year 2005 pay raise estimated at 1.5 percent (for three-fourths of a year). No 

new staff increases are proposed for fiscal year 2005. 

Question. Please provide the number of staffing positions and FTE requested, indicating direct and reimbursable, for the Board of Contract Appeals. 

Answer. The information follows.

Positions FTE 

Direct ....................................................................................................................................... 6 6

Reimbursable .......................................................................................................................... 0 0

Question. Please provide a table listing current staffing for the Board of Contract 

Appeals compared to levels at the end of each quarter of past 5 fiscal years. 

Answer. The 5-year FTE history is as follows:

FISCAL YEAR 2001 ACTUAL .................................................................................................................................. 5 

FISCAL YEAR 2002 ACTUAL .................................................................................................................................. 5 

FISCAL YEAR 2003 ACTUAL .................................................................................................................................. 4

FISCAL YEAR 2004 ENACTED ............................................................................................................................... 6

FISCAL YEAR 2004 ON-BOARD ............................................................................................................................. 1 5 

FISCAL YEAR 2005 REQUEST ............................................................................................................................... 6

1 As of March 30, 2004. 

Question. Please provide details on anticipated contract expenses in the Board of 

Contract Appeals. 

Answer. Anticipated contract expenses in the Board of Contract Appeals consist 

of:

Description of Services Amount 

Court reporting services for trials ....................................................................................................................... $8,000 

Subscriptions to publications .............................................................................................................................. 13,000 

Other small contracts .......................................................................................................................................... 1,000

OFFICE OF SMALL AND DISADVANTAGED BUSINESS UTILIZATION

Question. Please provide detailed justification for the fiscal year 2005 budget request for the Office of Small & Disadvantaged Business Utilization by object class. 

Answer. The information follows.
54

[In thousands of dollars] 

Object Class Amount 

Full-time permanent ............................................................................................................................................ 1,087 

Civilian personnel benefits .................................................................................................................................. 199 

Other services ...................................................................................................................................................... 4 

Supplies and materials ........................................................................................................................................ 5

Total ........................................................................................................................................................ 1,295

Question. Please explain in detail the assumptions used to develop the fiscal year 

2005 budget request for personnel compensation and benefits of the Office of Small 

& Disadvantaged Business Utilization. 

Answer. The assumptions used to develop the Office of Small & Disadvantaged 

Business Utilization’s budget request for personnel compensation and benefits are 

computed as follows: (1) Salary and related benefits from the previous year (fiscal 

year 2004) are computed based on enacted levels; (2) The fiscal year 2004 enacted 

level is annualized to fund the full year cost of the fiscal year 2004 pay raise (4.1 

percent for an additional one-fourth of a year) and to fully fund the cost of any other 

personnel actions that occurred in fiscal year 2004; (3) The fiscal year 2005 base 

is inflated by the proposed fiscal year 2005 pay raise estimated at 1.5 percent (for 

three-fourths of a year). No new staff increases are proposed for fiscal year 2005. 

Question. Please provide the number of staffing positions and FTE requested, indicating direct and reimbursable, for the Office of Small & Disadvantaged Business 

Utilization. 

Answer. The information follows.

Positions FTE 

Direct ....................................................................................................................................... 11 11

Reimbursable .......................................................................................................................... 0 0

Question. Please provide a table listing current staffing for the Office of Small & 

Disadvantaged Business Utilization compared to levels at the end of each quarter 

of past 5 fiscal years. 

Answer. The 5-year FTE history is as follows:

FISCAL YEAR 2001 ACTUAL .................................................................................................................................. 9 

FISCAL YEAR 2002 ACTUAL .................................................................................................................................. 10 

FISCAL YEAR 2003 ACTUAL .................................................................................................................................. 10 

FISCAL YEAR 2004 ENACTED ............................................................................................................................... 11 

FISCAL YEAR 2004 ON-BOARD ............................................................................................................................. 1 9 

FISCAL YEAR 2005 REQUEST ............................................................................................................................... 11

1 As of March 30, 2004. 

Question. Please provide details on anticipated contract expenses in the Office of 

Small & Disadvantaged Business Utilization. 

Answer. Anticipated contract expenses in the Office of Small & Disadvantaged 

Business Utilization are as follows:

Description of Services Amount 

Working Capital Fund Service Agreements .......................................................................................................... $3,000

OFFICE OF INTELLIGENCE AND SECURITY

Question. Please provide detailed justification for the fiscal year 2005 budget request for the Office of Intelligence and Security by object class. 

Answer. The information follows.

[In thousands of dollars] 

Object Class Amount 

Full-time permanent ............................................................................................................................................ 1,402 

Other than full-time permanent .......................................................................................................................... 5 

Total personnel compensation ................................................................................................................ 1,407

Civilian personnel benefits .................................................................................................................................. 394 
55

[In thousands of dollars] 

Object Class Amount 

Travel & transportation of things ........................................................................................................................ 72 

Other services ...................................................................................................................................................... 367 

Supplies and materials ........................................................................................................................................ 10 

Equipment ............................................................................................................................................................ 10

Total ........................................................................................................................................................ 2,260

Question. Please explain in detail the assumptions used to develop the fiscal year 

2005 budget request for personnel compensation and benefits of the Office of Intelligence and Security. 

Answer. The assumptions used to develop the Office of Intelligence and Security’s 

budget request for personnel compensation and benefits are computed as follows: (1) 

Salary and related benefits from the previous year (fiscal year 2004) are computed 

based on enacted levels; (2) The fiscal year 2004 enacted level is annualized to fund 

the full year cost of the fiscal year 2004 pay raise (4.1 percent for an additional onefourth of a year) and to fully fund the cost of any other personnel actions that occurred in fiscal year 2004; (3) The fiscal year 2005 base is inflated by the proposed 

fiscal year 2005 pay raise estimated at 1.5 percent (for three-fourths of a year). No 

new staff increases are proposed for fiscal year 2005. 

Question. How many officials besides the Secretary does the Office of Intelligence 

and Security serve? 

Answer. S–60 provides day-to-day support to the Office of the Secretary and to 

the Operating Administrations by providing intelligence, security policy guidance 

and information. The office assures that security issues are identified and properly 

coordinated between the modes and the DHS, TSA and the HSC. The following individuals and their senior staffs are served by S–60: 

—Under Secretary of Transportation for Policy 

—General Counsel 

—Assistant Secretary for Transportation Policy 

—Assistant Secretary for Aviation and International Affairs 

—Assistant Secretary for Budget and Programs 

—Assistant Secretary for Administration 

—Assistant Secretary for Governmental Affairs 

—Assistant Secretary for Public Affairs 

—Inspector General 

—Federal Highway Administrator 

—Federal Railroad Administrator 

—Federal Transit Administrator 

—National Highway Traffic Safety Administrator 

—St. Lawrence Seaway Development Corporation Administrator 

—Maritime Administrator 

—Research and Special Programs Administrator 

—Federal Motor Carrier Safety Administrator. 

Question. Please provide a list of all performance measures related to the Office 

of Intelligence and Security. 

Answer. Department’s Performance Goals: 

—Ensure the security of people and goods and advance our national security interests in support of the National Security Strategy; and 

—Rapid Recovery of Transportation in all modes from intentional harm and natural disasters. 

In support of these goals, S–60 provides timely intelligence briefings and products 

to senior DOT officials, prepares the Secretary and Deputy Secretary for Principals 

and Deputies meetings on Homeland Security, is responsible for all aspects of the 

Transportation Security Policy and is the DOT liaison to the Department of Homeland Security, as well as law enforcement and intelligence agencies. 

Question. Does DOT produce intelligence or is the Department only a consumer 

of intelligence? 

Answer. DOT is predominately an Intelligence consumer. However, our Intelligence Analysts have produced limited intelligence analytical produces directly related to transportation and hazardous materials issues. They also work with the Intelligence Community to assure that intelligence concerning threats to transportation are identified and communicated to those in DOT with a need to know. 

Question. Please provide the number of staffing positions and FTE requested, indicating direct and reimbursable, for the Office of Intelligence and Security. 
56

Answer. The information follows.

Positions FTE 

Direct ....................................................................................................................................... 15 15

Reimbursable .......................................................................................................................... 0 0

Question. Please provide a table listing current staffing for the Office of Intelligence and Security compared to levels at the end of each quarter of past 5 fiscal 

years. 

Answer. The 5-year FTE history is as follows:

FISCAL YEAR 2001 ACTUAL .................................................................................................................................. 11 

FISCAL YEAR 2002 ACTUAL .................................................................................................................................. 8 

FISCAL YEAR 2003 ACTUAL .................................................................................................................................. 7 

FISCAL YEAR 2004 ENACTED ............................................................................................................................... 15 

FISCAL YEAR 2004 ON-BOARD ............................................................................................................................. 1 11 

FISCAL YEAR 2005 REQUEST ............................................................................................................................... 15

1 As of March 30, 2004. 

Question. Please provide details on anticipated contract expenses in the Office of 

Intelligence and Security. 

Answer. Anticipated contract expenses in the Office of Intelligence and Security 

consist of:

Description of Services Amount 

Security Liaison .................................................................................................................................................... $140,000 

Renovation of Secure Information Facility ........................................................................................................... 200,000 

Secure communication at DOT alternate COOP site ........................................................................................... 26,600

OFFICE OF THE CHIEF INFORMATION OFFICER

Question. Please provide detailed justification for the fiscal year 2005 budget request for the Office of the Chief Information Officer by object class. 

Answer. The information follows.

[In thousands of dollars] 

Object Class Amount 

Full-time permanent ............................................................................................................................................ 2,691 

Other than full-time permanent .......................................................................................................................... 146 

Other personnel compensation ............................................................................................................................ 22

Total personnel compensation ................................................................................................................ 2,859

Civilian personnel benefits .................................................................................................................................. 551 

Travel & transportation of things ........................................................................................................................ 34 

Other services ...................................................................................................................................................... 13,278 

Supplies and materials ........................................................................................................................................ 10 

Equipment ............................................................................................................................................................ 10

Total ........................................................................................................................................................ 16,742

Question. Please explain in detail the assumptions used to develop the fiscal year 

2005 budget request for personnel compensation and benefits of the Office of the 

Chief Information Officer. 

Answer. The assumptions used to develop the Office of the Chief Information Officer’s budget request for personnel compensation and benefits are computed as follows: (1) Salary and related benefits from the previous year (fiscal year 2004) are 

computed based on enacted levels; (2) The fiscal year 2004 enacted level is 

annualized to fund the full year cost of the fiscal year 2004 pay raise (4.1 percent 

for an additional one-fourth of a year) and to fully fund the cost of any other personnel actions that occurred in fiscal year 2004; (3) The fiscal year 2005 base is inflated by the proposed fiscal year 2005 pay raise estimated at 1.5 percent (for threefourths of a year). No new staff increases are proposed for fiscal year 2005. 

Question. Please provide the number of staffing positions and FTE requested, indicating direct and reimbursable, for the Office of the Chief Information Officer. 

Answer. The information follows.
57

Positions FTE 

Direct ....................................................................................................................................... 25 25

Reimbursable .......................................................................................................................... 0 0

Question. Please provide a table listing current staffing for the Office of the Chief 

Information Officer compared to levels at the end of each quarter of past 5 fiscal 

years. 

Answer. The 5-year FTE history is as follows:

FISCAL YEAR 2001 ACTUAL .................................................................................................................................. 21 

FISCAL YEAR 2002 ACTUAL .................................................................................................................................. 22 

FISCAL YEAR 2003 ACTUAL .................................................................................................................................. 21 

FISCAL YEAR 2004 ENACTED ............................................................................................................................... 25 

FISCAL YEAR 2004 ON-BOARD ............................................................................................................................. 1 20 

FISCAL YEAR 2005 REQUEST ............................................................................................................................... 25

1 As of March 30, 2004. 

Question. Please provide details on anticipated contract expenses in the Office of 

the Chief Information Officer. 

Answer. Anticipated contract expenses in the Office of the Chief Information Officer consist of:

Description of Services Amount 

Capital Planning Investment Control (CPIC) and Enterprise Architecture (EA) ................................................. $1,900,000 

Local Area Network (LAN) support for the Office of the Secretary (OST) ........................................................... 1,700,000 

IT services and user support designed to meet the IT requirements of the DOT .............................................. 4,500,000 

Working Capital Fund service agreements .......................................................................................................... 3,300,000 

E-gov Initiatives ................................................................................................................................................... 1,500,000 

Other small contracts .......................................................................................................................................... 378,000

OFFICE OF THE ASSISTANT SECRETARY FOR GOVERNMENTAL AFFAIRS

Question. Please provide detailed justification for the fiscal year 2005 budget request for the Office of the Assistant Secretary for Governmental Affairs by object 

class. 

Answer. The information follows.

[In thousands of dollars] 

Object Class Amount 

Full-time permanent ............................................................................................................................................ 1,156 

Other than full-time permanent .......................................................................................................................... 860 

Other personnel compensation ............................................................................................................................ 7

Total personnel compensation ................................................................................................................ 2,023

Civilian personnel benefits .................................................................................................................................. 502 

Travel & transportation of things ........................................................................................................................ 36 

Other services ...................................................................................................................................................... 22 

Supplies and materials ........................................................................................................................................ 2 

Equipment ............................................................................................................................................................ 2

Total ........................................................................................................................................................ 2,587

Question. Please explain in detail the assumptions used to develop the fiscal year 

2005 budget request for personnel compensation and benefits of the Office of the Assistant Secretary for Governmental Affairs. 

Answer. The assumptions used to develop the Office of the Assistant Secretary for 

Governmental Affairs’ budget request for personnel compensation and benefits are 

computed as follows: (1) Salary and related benefits from the previous year (fiscal 

year 2004) are computed based on enacted levels; (2) The fiscal year 2004 enacted 

level is annualized to fund the full year cost of the fiscal year 2004 pay raise (4.1 

percent for an additional one-fourth of a year) and to fully fund the cost of any other 

personnel actions that occurred in fiscal year 2004; (3) The fiscal year 2005 base 

is inflated by the proposed fiscal year 2005 pay raise estimated at 1.5 percent (for 

three-fourths of a year). No new staff increases are proposed for fiscal year 2005. 
58

Question. Please provide the number of staffing positions and FTE requested, indicating direct and reimbursable, for the Office of the Assistant Secretary for Governmental Affairs. 

Answer. The information follows.

Positions FTE 

Direct ....................................................................................................................................... 24 24

Reimbursable .......................................................................................................................... 0 0

Question. Please provide a table listing current staffing for the Office of the Assistant Secretary for Governmental Affairs compared to levels at the end of each 

quarter of past 5 fiscal years. 

Answer. The 5-year FTE history is as follows:

FISCAL YEAR 2001 ACTUAL .................................................................................................................................. 18 

FISCAL YEAR 2002 ACTUAL .................................................................................................................................. 21 

FISCAL YEAR 2003 ACTUAL .................................................................................................................................. 21 

FISCAL YEAR 2004 ENACTED ............................................................................................................................... 24 

FISCAL YEAR 2004 ON-BOARD ............................................................................................................................. 1 16

FISCAL YEAR 2005 REQUEST ............................................................................................................................... 24

1 As of March 30, 2004. 

Question. Please provide details on anticipated contract expenses in the Office of 

the Assistant Secretary for Governmental Affairs. 

Answer. Anticipated contract expenses in the Office of the Assistant Secretary for 

Governmental Affairs consist of:

Description of Services Amount 

Gallery Watch Legislative Monitoring .................................................................................................................. $11,000 

Subscriptions ........................................................................................................................................................ 5,000 

Other small contracts .......................................................................................................................................... 6,000

OFFICE OF THE GENERAL COUNSEL

Question. Please provide detailed justification for the fiscal year 2005 budget request for the Office of the General Counsel by object class. 

Answer. The information follows.

[In thousands of dollars] 

Object Class Amount 

Full-time permanent ............................................................................................................................................ 9,417 

Other than full-time permanent .......................................................................................................................... 596 

Other personnel compensation ............................................................................................................................ 105

Total personnel compensation ................................................................................................................ 10,118

Civilian personnel benefits .................................................................................................................................. 2,123 

Travel & transportation of things ........................................................................................................................ 246 

Printing and reproduction .................................................................................................................................... 269 

Other services ...................................................................................................................................................... 4,143 

Supplies and materials ........................................................................................................................................ 21

Total ........................................................................................................................................................ 16,920

Question. Please explain in detail the assumptions used to develop the fiscal year 

2005 budget request for personnel compensation and benefits of the Office of the 

General Counsel. 

Answer. The assumptions used to develop the Office of the General Counsel’s 

budget request for personnel compensation and benefits are computed as follows: (1) 

Salary and related benefits from the previous year (fiscal year 2004) are computed 

based on enacted levels; (2) The fiscal year 2004 enacted level is annualized to fund 

the full year cost of the fiscal year 2004 pay raise (4.1 percent for an additional onefourth of a year) and to fully fund the cost of any other personnel actions that occurred in fiscal year 2004; (3) The fiscal year 2005 base is inflated by the proposed 

fiscal year 2005 pay raise estimated at 1.5 percent (for three-fourths of a year). No 

new staff increases are proposed for fiscal year 2005. 
59

Question. Please provide the number of staffing positions and FTE requested, indicating direct and reimbursable, for the Office of the General Counsel. 

Answer. The information follows.

Positions FTE 

Direct ....................................................................................................................................... 106 100

Reimbursable .......................................................................................................................... 0 0

Question. Please provide a table listing current staffing for the Office of the General Counsel compared to levels at the end of each quarter of past 5 fiscal years. 

Answer. The 5-year FTE history is as follows:

FISCAL YEAR 2001 ACTUAL .................................................................................................................................. 81 

FISCAL YEAR 2002 ACTUAL .................................................................................................................................. 92 

FISCAL YEAR 2003 ACTUAL .................................................................................................................................. 100

FISCAL YEAR 2004 ENACTED ............................................................................................................................... 100

FISCAL YEAR 2004 ON-BOARD ............................................................................................................................. 1 102 

FISCAL YEAR 2005 REQUEST ............................................................................................................................... 100

1 As of March 30, 2004. 

Question. Please provide details on anticipated contract expenses in the Office of 

the General Counsel. 

Answer. Anticipated contract expenses in the Office of the General Counsel consist of:

Description of Services Amount 

Dockets Management System .............................................................................................................................. $1,035,000 

Integrated Disabilities Hotline Maintenance and Operations ............................................................................. 1,235,000 

Technical Assistance Manual and Modal Training Program & Public & Industry Outreach to Assist in Ensuring the Air Travel Environment is Free of Discrimination ......................................................................... 655,000 

Administrative Litigation Costs for Enforcement Aviation Economic and Civil Rights Matters ........................ 50,000 

Rulemaking Management System Support .......................................................................................................... 97,000 

Regulatory Management System, List Serve & Automated Coordination Maintenance ...................................... 115,000 

E-gov Rulemaking Assessment ............................................................................................................................ 800,000 

Other small contracts .......................................................................................................................................... 156,000

OFFICE OF THE ASSISTANT SECRETARY FOR BUDGET AND PROGRAMS

Question. Please provide detailed justification for the fiscal year 2005 budget request for the Office of the Assistant Secretary for Budget and Programs by object 

class. 

Answer. The information follows.

[In thousands of dollars] 

Object Class Amount 

Full-time permanent ............................................................................................................................................ 5,039 

Other than full-time permanent .......................................................................................................................... 285 

Other personnel compensation ............................................................................................................................ 44

Total personnel compensation ................................................................................................................ 5,368

Civilian personnel benefits .................................................................................................................................. 1,539 

Travel & transportation of things ........................................................................................................................ 14 

Other services ...................................................................................................................................................... 1,952 

Supplies and materials ........................................................................................................................................ 6 

Equipment ............................................................................................................................................................ 10

Total ........................................................................................................................................................ 8,889

Question. Please explain in detail the assumptions used to develop the fiscal year 

2005 budget request for personnel compensation and benefits of the Office of the Assistant Secretary for Budget and Programs. 

Answer. The assumptions used to develop the Office of the Assistant Secretary for 

Budget and Programs’ budget request for personnel compensation and benefits are 

computed as follows: (1) Salary and related benefits from the previous year (fiscal 

year 2004) are computed based on enacted levels; (2) The fiscal year 2004 enacted 
60

level is annualized to fund the full year cost of the fiscal year 2004 pay raise (4.1 

percent for an additional one-fourth of a year) and to fully fund the cost of any other 

personnel actions that occurred in fiscal year 2004; (3) The fiscal year 2005 base 

is inflated by the proposed fiscal year 2005 pay raise estimated at 1.5 percent (for 

three-fourths of a year). No new staff increases are proposed for fiscal year 2005. 

Question. Please provide the number of staffing positions and FTE requested, indicating direct and reimbursable, for the Office of the Assistant Secretary for Budget and Programs. 

Answer. The information follows.

Positions FTE 

Direct ....................................................................................................................................... 54 54

Reimbursable .......................................................................................................................... 1 1

Question. Please provide a table listing current staffing for the Office of the Assistant Secretary for Budget and Programs compared to levels at the end of each 

quarter of past 5 fiscal years. 

Answer. The 5-year FTE history is as follows:

FISCAL YEAR 2001 ACTUAL .................................................................................................................................. 51 

FISCAL YEAR 2002 ACTUAL .................................................................................................................................. 44 

FISCAL YEAR 2003 ACTUAL .................................................................................................................................. 46

FISCAL YEAR 2004 ENACTED ............................................................................................................................... 55

FISCAL YEAR 2004 ON-BOARD ............................................................................................................................. 1 51

FISCAL YEAR 2005 REQUEST ............................................................................................................................... 55

1 As of March 30, 2004. 

Question. Please provide details on anticipated contract costs in the Office of the 

Assistant Secretary for Budget and Programs. 

Answer. Anticipated contract expenses in the Office of the Assistant Secretary for 

Budget and Programs consist of:

Description of Services Amount 

Departmental Accounting and Financial Information System ............................................................................. $145,000 

Travel Management System ................................................................................................................................. 20,000 

Accounting Services ............................................................................................................................................. 818,000 

CIO IT Support ...................................................................................................................................................... 365,000 

Payroll Reimbursement to FAA ............................................................................................................................. 147,000 

FTA Web Support for OST Payroll Reports ........................................................................................................... 50,000 

CFO Web Support ................................................................................................................................................. 50,000 

CRTS Database Support ....................................................................................................................................... 20,000 

Bearing Point ....................................................................................................................................................... 321,000 

Other small contracts .......................................................................................................................................... 16,000

OFFICE OF THE ASSISTANT SECRETARY FOR ADMINISTRATION

Question. Please provide detailed justification for the fiscal year 2005 budget request for the Office of the Assistant Secretary for Administration by object class. 

Answer. The information follows.

[In thousands of dollars] 

Object Class Amount 

Full-time permanent ............................................................................................................................................ 5,825 

Other than full-time permanent .......................................................................................................................... 102 

Other personnel compensation ............................................................................................................................ 67

Total personnel compensation ................................................................................................................ 5,994

Civilian personnel benefits .................................................................................................................................. 1,438 

Travel & transportation of things ........................................................................................................................ 35 

Rental payments to GSA ...................................................................................................................................... 9,147 

Other services ...................................................................................................................................................... 16,291 

Supplies and materials ........................................................................................................................................ 30

Total ........................................................................................................................................................ 32,935
61

Question. Please explain in detail the assumptions used to develop the fiscal year 

2005 budget request for personnel compensation and benefits of the Office of the Assistant Secretary for Administration. 

Answer. The assumptions used to develop the Office of the Assistant Secretary for 

Administration’s budget request for personnel compensation and benefits are computed as follows: (1) Salary and related benefits from the previous year (fiscal year 

2004) are computed based on enacted levels; (2) The fiscal year 2004 enacted level 

is annualized to fund the full year cost of the fiscal year 2004 pay raise (4.1 percent 

for an additional one-fourth of a year) and to fully fund the cost of any other personnel actions that occurred in fiscal year 2004; (3) The fiscal year 2005 base is inflated by the proposed fiscal year 2005 pay raise estimated at 1.5 percent (for threefourths of a year). No new staff increases are proposed for fiscal year 2005. 

Question. Please provide the number of staffing positions and FTE requested, indicating direct and reimbursable, for the Office of the Assistant Secretary for Administration. 

Answer. The information follows.

Positions FTE 

Direct ....................................................................................................................................... 66 65

Reimbursable .......................................................................................................................... 20 19

Question. Please provide a table listing current staffing for the Office of the Assistant Secretary for Administration compared to levels at the end of each quarter 

of past 5 fiscal years. 

Answer. The 5-year FTE history is as follows:

FISCAL YEAR 2001 ACTUAL .................................................................................................................................. 67 

FISCAL YEAR 2002 ACTUAL .................................................................................................................................. 99 

FISCAL YEAR 2003 ACTUAL .................................................................................................................................. 77

FISCAL YEAR 2004 ENACTED ............................................................................................................................... 84

FISCAL YEAR 2004 ON-BOARD ............................................................................................................................. 1 69 

FISCAL YEAR 2005 REQUEST ............................................................................................................................... 84

1 As of March 30, 2004. 

Question. Please provide details on anticipated contract costs in the Office of the 

Assistant Secretary for Administration. 

Answer. Anticipated contract expenses in the Office of the Assistant Secretary for 

Administration consist of:

Description of Services Amount 

MSI Program ......................................................................................................................................................... $130,000 

E-Grants ............................................................................................................................................................... 350,000 

Electronic Business Process ................................................................................................................................ 943,000 

Online Internet Research ..................................................................................................................................... 110,000 

Security Investigations ......................................................................................................................................... 85,000 

New Headquarters Building Security ................................................................................................................... 130,000 

Training ................................................................................................................................................................ 183,000 

Corporate Recruitment ......................................................................................................................................... 500,000 

Consolidated Benefits Assistance ........................................................................................................................ 400,000 

Federal Personnel & Payroll System .................................................................................................................... 846,800 

OST Cost to WCF .................................................................................................................................................. 10,030,000 

Reimbursements to USCG Clinic ......................................................................................................................... 37,000 

Workforce Improvements Initiative ....................................................................................................................... 208,000 

DOT-wide Admin and Management Services ....................................................................................................... 143,000 

Subscriptions ........................................................................................................................................................ 28,300 

Procurement Strategy Council .............................................................................................................................. 45,000 

Electronic Official Personnel Folders ................................................................................................................... 1,000,000 

Centralized Workers’ Compensation ..................................................................................................................... 250,000 

E-training Initiative .............................................................................................................................................. 750,000 

CPMIS Charges ..................................................................................................................................................... 85,000 

Federal Employments Information Services ......................................................................................................... 36,700

OFFICE OF PUBLIC AFFAIRS

Question. Please provide detailed justification for the fiscal year 2005 budget request for the Office of Public Affairs by object class. 
62

Answer. The information follows.

[In thousands of dollars] 

Object Class Amount 

Full-time permanent ............................................................................................................................................ 1,120 

Other than full-time permanent .......................................................................................................................... 385 

Other personnel compensation ............................................................................................................................ 9

Total personnel compensation ................................................................................................................ 1,514

Civilian personnel benefits .................................................................................................................................. 387 

Travel & transportation of things ........................................................................................................................ 51 

Other services ...................................................................................................................................................... 69 

Supplies and materials ........................................................................................................................................ 11 

Equipment ............................................................................................................................................................ 2

Total ........................................................................................................................................................ 2,034

Question. Please explain in detail the assumptions used to develop the request for 

personnel compensation and benefits of the Office of Public Affairs. 

Answer. The assumptions used to develop the Office of Public Affairs’ budget request for personnel compensation and benefits are computed as follows: (1) Salary 

and related benefits from the previous year (fiscal year 2004) are computed based 

on enacted levels; (2) The fiscal year 2004 enacted level is annualized to fund the 

full year cost of the fiscal year 2004 pay raise (4.1 percent for an additional onefourth of a year) and to fully fund the cost of any other personnel actions that occurred in fiscal year 2004; (3) The fiscal year 2005 base is inflated by the proposed 

fiscal year 2005 pay raise estimated at 1.5 percent (for three-fourths of a year). No 

new staff increases are proposed for fiscal year 2005. 

Question. Please provide the number of staffing positions and FTE requested, indicating direct and reimbursable, for the Office of Public Affairs. 

Answer. The information follows.

Positions FTE 

Direct ....................................................................................................................................... 19 19

Reimbursable .......................................................................................................................... 2 2

Question. Please provide a table listing current staffing for the Office of Public Affairs compared to levels at the end of each quarter of past 5 fiscal years. 

Answer. The 5-year FTE history is as follows:

FISCAL YEAR 2001 ACTUAL .................................................................................................................................. 18

FISCAL YEAR 2002 ACTUAL .................................................................................................................................. 19

FISCAL YEAR 2003 ACTUAL .................................................................................................................................. 16

FISCAL YEAR 2004 ENACTED ............................................................................................................................... 21

FISCAL YEAR 2004 ON-BOARD ............................................................................................................................. 1 16

FISCAL YEAR 2005 REQUEST ............................................................................................................................... 21

1 As of March 30, 2004. 

Question. Please provide details on anticipated contract costs in the Office of Public Affairs. 

Answer. Anticipated contract expenses in the Office of the Public Affairs consist 

of:

Description of Services Amount 

Associated Press Service ..................................................................................................................................... $16,000 

News Wire Service ................................................................................................................................................ 12,500 

Subscriptions ........................................................................................................................................................ 10,000 

Transcription Service ............................................................................................................................................ 5,000 

Bacon’s Media Service and Publications ............................................................................................................ 6,000 

Video Monitoring Service ...................................................................................................................................... 8,000 

Other small contracts .......................................................................................................................................... 11,200
63

OST SAFETY PERFORMANCE GOALS

Question. Why is reducing train accidents and highway-rail incidents the only 

safety area that OST is requesting funds under the safety performance goal? 

Answer. The Office of the Secretary addresses all aspects of transportation safety 

through its management of the DOT Operating Administrations. The funds requested in the OST budget are for cross-cutting programs or specific issues led by 

OST program offices. DOT’s ten Operating Administrations address mode-specific 

safety issues in their individual budgets. 

The programs attributed to this objective support the Department’s overall goal 

to ‘‘enhance public health and safety by working toward the elimination of transportation-related deaths and injuries.’’ The programs planned for fiscal year 2006 and 

included in OST’s submission address two areas of concern. The first is the issue 

of safe pedestrian right-of-way access at rail crossings and the second is improved 

GPS performance for improved transportation safety across all modes, including 

rail. Breaking down this second study across all safety performance measures may 

have diminished its importance and provided a presentation that was difficult to follow; therefore, these two areas were both attributed to rail safety targets. 

TRANSPORTATION PLANNING, RESEARCH AND DEVELOPMENT

Question. How much is the Department requesting for PC&B and other administrative costs of the Transportation Planning, Research, and Development appropriation? Please explain in detail. How does this compare to fiscal years 2002, 2003, and 

2004? 

Answer. The information follows.

[In thousands of dollars] 

Object Class 

Fiscal Year 

2002

Actual 

Fiscal Year 

2003

Actual 

Fiscal Year 

2004

Enacted 

Fiscal Year 

2005

Request 

Full-time permanent ..................................................................................... 1,640 1,814 3,202 3,267 

Other than full-time permanent ................................................................... 497 593 147 150 

Other personnel compensation ..................................................................... 29 27 9 9

Total personnel compensation ........................................................ 2,167 2,434 3,358 3,426

Civilian personnel benefits ........................................................................... 388 498 456 499 

Travel & transportation of things ................................................................ 219 234 53 54 

Other services ............................................................................................... 8,704 13,158 16,824 6,802 

Supplies and materials/Equipment .............................................................. 191 164 19 20

Total ................................................................................................ 11,669 16,489 20,709 10,800

Question. Administrative costs for studies funded with the Transportation Planning, Research, and Development appropriation generally account for 35 to 39 percent of the requested amount. Why is this much necessary for administration? How 

does this compare to the past 3 fiscal years? 

Answer. The administrative costs in the TPR&D budget consist of Personnel Costs 

and Benefits for 31 FTE. These individuals monitor the contract studies and actually do the studies as in-house expertise allows. In addition, it provides for payment 

to the Working Capital Fund for TPR&D support services such as the printing and 

distribution of reports and studies and other research related activities. Lastly, it 

provides for other administrative such as travel, office supplies, subscriptions, and 

equipment. 

Question. Please indicate which office of the Office of the Secretary will be 

charged with administration and development of each study that is funded by the 

Transportation Planning, Research, and Development (TPR&D) appropriation. 

Answer. The information follows. 

Office of the Assistant Secretary for Transportation Policy 

—Safe and Accessible Transportation for Older and Disabled Americans 

—Safety and Human Factors 

—Navigation Systems (GPS) Protection, Coordination and Policy Development 

—Spectrum Protection, Coordination and Policy Development 

—Examination of Policy Instruments to Encourage Sustainability 

—DOT National Freight Action Plan 

—Non-Work Trips and Congestion 

—DOT–HUD Joint Research on Transportation and Regional Development 
64

—Alternatives for Financing Surface Transportation Improvements 

—Passenger Rail Demand 

—Value Pricing 

—Implementing Successful Intermodal Passenger Terminal Projects 

—Energy, Environment and Climate 

—DOT Long Range Policy Analysis—Phase III 

Assistant Secretary for Aviation and International Affairs 

—Modernization of Aviation Data Systems 

—Study to Determine the Demand for Scheduled Air Transportation Carrier Impact of the North American Free Trade Agreement 

—Aviation Economic Model 

—Analysis of Changes in Airline Cost Structures 

—Comprehensive Study on the Role of International Airline Alliance in a Potential U.S.-European Union Aviation Area 

—Longer-term Implications of Large-scale Implementation of Regional Jet Service 

—Analysis of Small Community Air Service 

—Impact of Taxes and Fees on Demand for Air Services and the Financial Condition of the Airline Industry 

Question. Please provide administrative costs of TPR&D in detail. 

Answer. The information follows.

[In thousands of dollars] 

Object Class 

Fiscal Year 2002

Actual 

Fiscal Year 2003

Actual 

Fiscal Year 2004

Enacted 

Fiscal Year 2005

Request 

Full-time permanent ..................................................................................... 1,640 1,814 3,202 3,267 

Other than full-time permanent ................................................................... 497 593 147 150 

Other personnel compensation ..................................................................... 29 27 9 9

Total personnel compensation ........................................................ 2,167 2,434 3,358 3,426

Civilian personnel benefits ........................................................................... 388 498 456 499 

Travel & transportation of things ................................................................ 219 234 53 54 

Other services ............................................................................................... 8,704 13,158 16,824 6,802 

Supplies and materials/Equipment .............................................................. 191 164 19 20

Total ................................................................................................ 11,669 16,489 20,709 10,800

Question. Please indicate which TPR&D studies are new initiatives for fiscal year 

2005 and which have received previous funding. Also, please provide a schedule and 

cost profile for each study that is proposed to be conducted and funded for more 

than 1 year. 

Answer. The information follows.

TPR&D Studies New Previous 

Safe and Accessible Transportation for Older and Disabled Americans ..................................................... X 

Safety and Human Factors ........................................................................................................................... X 

Navigation Systems (GPS) Protection, Coordination and Policy Development ............................................. X 

Spectrum Protection, Coordination and Policy Development ........................................................................ X 

Examination of Policy Instruments to Encourage Sustainability ................................................................. X

DOT National Freight Action Plan ................................................................................................................. X 

Non-Work Trips and Congestion ................................................................................................................... X 

DOT–HUD Joint Research on Transportation and Regional Development .................................................... X 

Alternatives for Financing Surface Transportation Improvements ............................................................... X 

Passenger Rail Demand ................................................................................................................................ X 

Value Pricing ................................................................................................................................................. X 

Implementing Successful Intermodal Passenger Terminal Projects ............................................................ X 

Energy, Environment and Climate ................................................................................................................ X 

DOT Long Range Policy Analysis—Phase III ................................................................................................ X 

Modernization of Aviation Data Systems ...................................................................................................... X 

Study to Determine the Demand for Scheduled Air Transportation ............................................................. X 

Carrier Impact of the North American Free Trade Agreement ..................................................................... X

Aviation Economic Model .............................................................................................................................. X 

Analysis of Changes In Airline Cost Structures ........................................................................................... X 

Comprehensive Study on the Role of International Airline Alliance in a Potential U.S.-European Union 

Aviation Area.

X 

Longer-term Implications of Large-scale Implementation of Regional Jet Service ..................................... X 
65

TPR&D Studies New Previous 

Analysis of Small Community Air Service .................................................................................................... X 

Impact of Taxes and Fees on Demand for Air Services and the Financial Condition of the Airline Industry.X 

Each proposed study is to be conducted and funded in 1 year. Only factors beyond 

our control would force a multiyear contract. However, as is the nature of research, 

unexpected or unusual result may suggest a follow up contract. 

Question. Please list all TPR&D studies that are included in the fiscal year 2005 

congressional justification in order of priority or importance to OST. 

Answer. This account includes funding for a variety of program areas and strategic goals, each of which is a priority for the Department. Studies and activities 

funded by this account provide the basis for policy and program decisions that are 

vital to the mobility and security of our Nation. 

OVERFLIGHT FEES

Question. Please provide a history of administrative or regulatory actions and litigation involving overflight fees since authorized by Congress in 1996. 

Answer. The Federal Aviation Reauthorization Act of 1996 directed the FAA to 

establish a fee schedule to recover the costs it incurs in providing air traffic control 

and related services to overflights, that is, flights that pass through United Statescontrolled airspace without taking off or landing. See 49 U.S.C. § 45301(b)(1). Overflight fees are imposed by other countries and are generally collected at higher rates 

than those rates imposed under the FAA’s rule, that is, $33.72 per 100 nautical 

miles for flights conducted within the Enroute air traffic environment and $15.94 

per 100 nautical miles for flights conducted within the Oceanic air traffic environment. At the direction of Congress, revenue secured from overflight fees is to be 

used to fund the Department’s Essential Air Service program which, pursuant to 

statutory provisions set forth at 49 U.S.C. § 41734(a), subsidizes commercial air 

service to communities in the United States in circumstances where without such 

subsidies no commercial air service would exist. 

The FAA’s Final Rule, and each of its previous Interim Final Rules, has been 

challenged in judicial proceedings brought by a number of foreign air carriers. The 

D.C. Circuit’s April 8, 2003 decision was the third time that the Court has reviewed 

FAA’s attempt to implement Congress’ direction to establish an overflight rule and 

the third time that the Court has found FAA’s efforts wanting. See Asiana Airlines 

v. FAA, 134 F.3d 393 (D.C. Cir. 1998) (vacating FAA’s original rule because it depended, in part, on the use of a Ramsey Pricing model); Air Transport Ass’n of Canada v. FAA, 254 F.3d 271 (D.C. Cir.), rehearing granted and amended 276 F.3d 599 

(D.C. Cir. 2001) (remanding FAA’s second interim rule for further analysis of whether the FAA’s costs of providing air traffic control and related services in Enroute 

and Oceanic airspace were the same for overflights and for aircraft that take off and 

land within the United States). 

In response to these judicial decisions, Congress amended section 45301(b)(1) in 

2001 to provide that overflight fees had only to be ‘‘reasonably related,’’ not ‘‘directly 

related,’’ to the FAA’s cost of providing air traffic control and related services, that 

the determination of actual costs was committed to the discretion of the FAA Administrator, and that the Administrator’s cost determination could not be subject to 

judicial review. See Aviation and Transportation Security Act, Public Law 107–71, 

115 Stat. 597 (November 19, 2001) (‘‘ATSA’’). 

While we believe that Congress intended these provisions to apply to the thencurrent rule, it nevertheless also adopted a general savings provision in the ATSA, 

section 141(d), which provides as follows:

‘‘This Act shall not affect suits commenced before the date of the enactment of 

this Act . . . In all such suits, proceedings shall be had, appeals taken, and judgments rendered in the same manner and with the same effect as if this Act had 

not been enacted.’’

The focus of the savings provision was intended to be ongoing suits involving activities that were transferred from the FAA to the Transportation Security Administration, and the provision was never intended to ‘‘save’’ ongoing overflight challenges from application of the new standards. But having said this, the plain language of the section had, in the Court’s view, precisely that effect, and the most recent challenge to the overflight rule was ‘‘commenced before the date of the enactment’’ of ATSA. On that basis the Court found the amendment to section 45301 and 

ATSA, section 141(d) to be inapplicable to the current litigation. 
66

Finding that the more lenient provisions of section 45301(b)(1) as amended by 

ATSA were inapplicable as a result of the savings provision, the D.C. Circuit applied 

the stricter ‘‘directly related’’ standard of the prior version of the statute and determined that under that standard the FAA had not fully supported certain of its conclusions concerning the labor costs it incurred in providing air traffic control services to overflights. Noting that this was ‘‘the third time . . . we find that the FAA 

disregarded its statutory mandate,’’ Slip op. at 2, the Court vacated the rule and 

remanded the matter to the FAA. 

FAA sought panel rehearing in order to clarify the scope of the Court’s mandate 

that had set aside the entire rule. After that request was summarily rejected, FAA 

later obtained a 30-day extension of the time within which to file a certiorari request. A second 30-day request was denied by Chief Justice Rehnquist, thereby rendering the Court of Appeals’ April 8, 2003 decision final for all purposes, including 

the application of Plaut v. Spendthrift Farms, Inc., 514 U.S. 211 (1995), which in 

certain circumstances bars retroactive application of statutes affecting prior judicial 

decisions. 

In November, 2003 Congress passed the Vision 100—Century of Aviation Reauthorization Act, Public Law 108–176, Section 229 of which directly addresses the 

issue of Overflight Fees. The Act was signed into law by the President on December 

12, 2003. Section 229 accomplished a number of things. 

First, it provides in subparagraph (a)(1) that Congress specifically intended that 

the more flexible ‘‘reasonably related’’ standard imposed by the Aviation and Transportation Security Act, 49 U.S.C. § 44901, did apply to pending litigation and that 

that test should have been used by the D.C. Circuit in evaluating whether the Overflight Fees imposed under the Interim Rule and the Final Rule were properly based 

upon the FAA’s costs in providing air traffic control services to overflights. Subparagraph (a)(1) also clarifies that Congress intended that even in pending litigation the 

Administrator’s determination of the FAA’s costs for purposes of computing Overflight Fees is conclusive and not subject to judicial review. The D.C. Circuit’s April 

8 decision had held these standards to be inapplicable to the Interim Final Rule and 

the Final Rule, which were pending when the new standards were enacted. 

Second, subsection (a)(2) specifically provides that ‘‘[t]he interim and final rule 

[adopted by the FAA], including the fees issued pursuant to those rules, are adopted, legalized, and confirmed as fully to all intents and purposes as if the same had, 

by prior Act of Congress, been specifically adopted, authorized, and directed as of 

the date those rules were originally issued.’’ Thus, section 229 establishes legislatively imposed Overflight Rules and fees that, in effect, retroactively and prospectively mirror the rules and fees vacated by the D.C. Circuit in its April 8 decision. 

However, notwithstanding the fact that subsection (a)(2) adopts the FAA’s Interim 

Rule and Final Rule ‘‘as of the date those rules were originally issued, [i.e., May 

30, 2000 and August 13, 2001, respectively]’’ subsection (a)(3) states that all of subsection (a) ‘‘applies to fees assessed after November 19, 2001 [i.e. the date on which 

the Aviation and Transportation Security Act was enacted] and before April 8, 2003 

[i.e. the date of the D.C. Circuit’s most recent decision on this matter] . . .’’. 

The United States is still evaluating the effect of section 229 of Vision 100 on the 

D.C. Circuit’s April 8, 2003 decision. Section 229 also requires that FAA hold consultations with overflight operators concerning international aspects of the overflight rule and report to Congress on issues raised by the D.C. Circuit’s April 8, 

2003 decision. FAA is pursuing these matters. 

Question. What is the current status of litigation related to overflight fees? 

Answer. Section 45301 of title 49, United States Code (as amended by section 273 

of the Federal Aviation Reauthorization Act of 1996 (Public Law 104–264)) authorizes the collection of user fees for services provided by the FAA to aircraft that neither take off nor land in the United States, known as overflight fees. The FAA’s regulations implementing 49 U.S.C. 45301 have been in litigation since 1997. 

Following the court’s decision in Air Transport Association of Canada v. Federal 

Aviation Administration, 323 F.3d 1093, (April 8, 2003), Congress, in Section 229 

of the Vision 100—Century of Aviation Reauthorization Act, (Public Law 108–176), 

legislatively adopted the FAA’s final rule relating to overflight fees as of the date 

on which each rule was initially issued. Congress directed the FAA’s Administrator 

to defer collecting new overflight fees until the Administrator has reported to Congress responding to the issues raised by the court in Air Transport Association of 

Canada v. Federal Aviation Administration, and consults with users and other interested parties regarding the consistency of the overflight fees with the international obligations of the United States. Vision 100 was signed into law by the 

President on December 12, 2003. 

While negotiations and consultations concerning the FAA’s overflight fees regulations are ongoing, it is reasonable for the Department to rely on such funds for the 
67

Essential Air Service program in fiscal year 2005 because the Department will have 

addressed the requirements in Sec. 229(b) before the start of fiscal year 2005. With 

such requirements met, the Department will be authorized to collect overflight fees, 

and funding for the EAS program will be available. 

Question. Have the overflight fees that were collected but were tied up in litigation been spent? 

Answer. No. Because of the litigation these fees have been held in a special account by the FAA in case they need to be refunded. 

Question. Are there any legal or other restrictions to prevent the funds that were 

collected previously from overflight fees from being spent? 

Answer. Yes. Although at present there is no legal prohibition precluding the use 

of these funds, the Administrator’s Order, which releases these funds, will not be 

final until October 4, 2004, assuming no appeal is filed. 

Question. Are there any legal or other restrictions to prevent the funds that were 

collected previously from overflight fees from being spent? 

Answer. Yes. There is a significant degree of uncertainty at the present time as 

to how much of the currently collected overflight fees will ultimately remain available for spending. 

ESSENTIAL AIR SERVICE

Question. How much funding in the EAS program was carried over at the end of 

fiscal years 2002 and 2003? 

Answer. The total funds carried over for fiscal year 2002 and fiscal year 2003 

were $12.4 million and $7.5 million, respectively. 

Question. Based on current obligation rate for the Essential Air Service program, 

what will the unobligated balance of funds be at the end of fiscal year 2004? 

Answer. We anticipate that we will have obligated all funding available by the 

end of fiscal year 2004, leaving no unobligated balance. 

Question. Please explain in detail the proposal to restructure the Essential Air 

Service program. 

Answer. We are proposing a fundamental change in the way that the government 

supports transportation services to rural America. As you may know, the EAS program subsidizes scheduled air services to communities that received scheduled service at the time of deregulation—25 years ago. Although there have been tremendous 

changes in the industry since then, the program has remained static. For too long, 

many communities—there are a few exceptions—have taken air service for granted 

as an entitlement and done little or nothing to help make the service successful. Requiring a modest contribution should energize civic officials and business leaders at 

the local and State levels to encourage use of the service, and, as stakeholders in 

their service, the communities will become key architects in designing their specific 

transportation package. 

Accordingly, the President’s Budget proposes some reforms. For the most isolated 

communities, we would continue to subsidize air service to the extent of 90 percent 

of the total subsidy required. Communities that are within a close drive of major 

airports would qualify for subsidies constituting 50 percent of the total costs for providing surface transportation. Specifically, communities within: (a) 100 driving miles 

of a large or medium hub airport, (b) 75 miles of a small hub, or (c) 50 miles of 

a non-hub with jet service would not qualify for subsidy for air service. (Some EAS 

communities are very close to small hubs but maintain their standing in the program because the nearby airport does not meet the medium-hub threshold.) 

At all other subsidized EAS communities, we would offer an array of options, including paying for 75 percent of the cost of the traditional EAS-type scheduled service. In addition, we would work with the communities and State DOT’s to procure 

charter service, single-engine, single-pilot service, regionalized service or ground 

transportation in cases where they seem to be more responsive to communities’ 

needs. 

All service would be subject to budget limitations ($50 million). 

Question. If any communities would no longer be eligible for Essential Air Service 

funding if the Department’s proposal is enacted into law, please identify those communities for the record. 

Answer. There is no way of knowing if, and if so how many, communities would 

not be eligible for EAS funding. The reason is that we do not know how many communities will be unwilling to contribute to the costs of providing their air service. 

While we believe that $50 million would be sufficient to provide air service to all 

communities that are willing to contribute, in the highly unlikely event that all communities were willing to contribute, some of the lesser-isolated communities would 

not receive funding. Table I attached shows all of the communities and their re-
68

quired contribution levels assuming that every community contributes its required 

share. 

Question. The Congressional Justification indicates that $1,300,000 will be used 

to pay salaries and administrative costs for staff to administer the Essential Air 

Service program. Please breakdown in greater detail and compare to the past 3 fiscal years. 

Answer. The information follows.

[In thousands of dollars] 

Object Class Fiscal Year 

2002 Actual 

Fiscal Year 

2003 Actual 

Fiscal Year 

2004 Enacted 

Fiscal Year 

2005 Request 

Full-time permanent ..................................................................... 871 920 947 958 

Other personnel compensation ..................................................... 4 5 0 0

Total personnel compensation ........................................ 876 925 947 958

Civilian personnel benefits ........................................................... 169 173 180 183 

Travel & transportation of things ................................................ 1 0 15 16 

Other services ............................................................................... 240 121 121 124 

Supplies and materials/Equipment .............................................. 10 4 20 21 

Grants, subsidies, & contributions .............................................. 99,470 105,726 100,717 48,699

Total ................................................................................ 100,765 106,949 102,000 50,000

Question. Please provide the number of on-board staff and FTE requested, indicating direct and reimbursable, for staff who administer the EAS program compared 

to fiscal years 2003 and 2004. 

Answer. The information follows.

Fiscal Year 2005

Requested 

Fiscal Year 2004

Enacted 

Fiscal Year 2003

Actual 

Direct .................................................................................................................................. 10 ................ ................

Reimbursable ..................................................................................................................... ................ 10 10

Question. What office or operating administration is responsible for writing and 

implementing and collecting the overflight fees? 

Answer. The Federal Aviation Administration. 

Question. Are any of the legislative changes proposed to the EAS program in the 

budget request authorized by Public Law 108–176? 

Answer. The legislative changes proposed in the fiscal year 2005 Budget Request 

for the Essential Air Service (EAS) program do not rely on the EAS amendments 

made to chapter 417 of title 49, United States Code (Transportation), by Public Law 

108–176 (December 12, 2003). 

Question. If Congress does not enact the legislative changes to the EAS program, 

what is the full cost to continue the program to all current communities in fiscal 

year 2005? 

Answer. The EAS budget is driven by a number of exogenous factors, such as fuel 

prices, the health and structure of the major carriers, and aircraft fleet decisions 

made by regional carriers generally to upsize to larger aircraft. The single biggest 

uncertainty is how many last carriers serving an EAS community will file a notice 

to suspend service, thus triggering a hold-in and first-time subsidy. Our best estimate is that $120 million would be required for fiscal year 2005 if no changes are 

made. 

AVIATION DATA SYSTEMS

Question. Does the request for $800,000 complete the third phase of the modernization of Aviation Data Systems? 

Answer. The $800,000 will be used to begin the process of designing and building 

the new data system which will collect, validate, and disseminate the re-designed 

airline traffic data to reduce the reporting burden on the airlines and increase the 

timeliness, accuracy, and utility of the data which is mission-critical for government 

agencies, airlines, airports, and other commercial aviation stakeholders. The construction and implementation of this system will complete the modernization of the 

airline traffic data. 

Question. What specific aviation data is being updated? What new data will be 

collected? Will any data that had been collected no longer be collected? 
69

Answer. The traffic data modernization changes the reporting carrier, reporting 

frequency, and a number of reported data elements for the Origin-Destination Survey of Airline Passenger Traffic (14 CFR Part 241 Section 19–7). It also changes 

some reported data elements for the Schedule T–100 Air Carrier Traffic and Capacity Data by Nonstop Segment and On-Flight Market Segment (14 CFR Part 217 and 

14 CFR Part 241) to ensure greater statistical correlation between the revised Origin-Destination Survey and the revised Schedule T–100. Current traffic statistics no 

longer adequately measure the size, scope, and operating and competitive structures 

of the scheduled passenger airline industry. The changes will eliminate ambiguity, 

reduce manual data collection by reporting carriers, minimize reporting exemptions, 

expand the breadth and scope of information collected, and modernize the methods 

of data submission and dissemination to capture fundamental industry changes. 

Question. Who will have access to the Aviation Data Systems? 

Answer. All aviation stakeholders inside and outside the government will have access to the data. These data are particularly important to airlines who use it in 

planning their businesses and to all government agencies responsible for making 

policy decisions which affect this critical industry. 

Question. Do any non-governmental entities have to pay for access to the aviation 

data systems? 

Answer. Currently, some data is made available free over the Internet, while 

more granular data is sold on tapes for a very nominal fee to cover the costs of production. The new system will make the data much more accessible to a broad range 

of non-governmental users using web-based technologies. In its Notice of Proposed 

Rulemaking, the Department will solicit comments from all stakeholders on the 

data products they would like to see produced from the raw data collected under 

the new system. 

Question. What are the benefits of the new system? 

Answer. The traffic data modernization will support the Secretary’s obligation to 

be responsive to the needs of the public and disseminate information to make it 

easier to adapt the air transportation system to the present and future needs of the 

commerce of the United States. These data are fundamentally important for both 

public policy and airline business planning. The proposed changes to the Origin-Destination Survey will eliminate ambiguity, reduce manual data collection by reporting carriers, minimize reporting exemptions, expand the breadth and scope of information collected, and modernize the methods of data submission and dissemination 

to capture fundamental industry changes. Data enhancements will enable the Department and other stakeholders to better assess changes in traffic flows due to 

seasonality, carrier route changes, and carrier preference as well as aid the Department in international negotiations. Flight-stage data assists carriers in business 

planning, demand forecasting, and new service impact analyses. 

OFFICE OF THE ASSISTANT GENERAL COUNSEL FOR AVIATION ENFORCEMENT AND

PROCEEDINGS

Question. Please breakdown the request for the Office of the Assistant General 

Counsel for Aviation Enforcement and Proceedings in greater detail. 

Answer. Our fiscal year 2005 request can be found in Organizational Excellence 

and Global Connectivity goals. See page 1 of Organizational Excellence and pp. 12 

and 21 of Global Connectivity goals of the submission. 

In addition to personnel cost and benefits needed, funding in fiscal year 2005 is 

requested to operate and maintain the Congressionally-mandated disabilities hotline 

($1,235,000), to continue a cell phone contract to ensure the appropriate individuals 

can be reached to assist hotline operators address time-sensitive disability related 

air travel complaints ($15,000), to complete the technical assistance manual and 

model training program and to conduct outreach to assist in ensuring the air travel 

environment is free of discrimination ($655,000), and to protect air travelers 

through enforcement of aviation economic and civil rights matters in administrative 

hearings ($50,000). 

Question. Please describe any new initiatives and the corresponding costs that are 

requested for the Office of the Assistant General Counsel for Aviation Enforcement. 

Answer. The Office of the Assistant General Counsel for Aviation Enforcement 

(Aviation Enforcement Office) is not requesting any funds for new initiatives. All of 

the funds being requested for fiscal year 2005 will be used to continue work that 

began in prior years. 

EMPLOYEE TRAINING AND DEVELOPMENT

Question. Please compare the request for employee training and development for 

OST and each operating administration to the past 4 fiscal years. 
70

Answer. The information follows.

EMPLOYEE TRAINING AND DEVELOPMENT 

[In thousands of dollars] 

Fiscal Year 2002 Actual Fiscal Year 2003 Actual Fiscal Year 2004 Estimate Fiscal Year 2005 Estimate 

Office of the Secretary ................................................. ........................ 1,892 256 198 

Federal Aviation Administration ................................... 144,806 157,477 153,929 158,398 

Federal Highway Administration ................................... 3,898 3,985 4,579 4,579 

Federal Motor Carrier Safety Administration ................ 5,518 3,903 5,486 4,223 

National Highway Traffic Safety Admininistration ....... 223 227 227 275 

Federal Railroad Administration ................................... 909 1,086 1,513 2,216 

Federal Transit Administration ..................................... 460 475 485 505 

St. Lawrence Seaway Development Corp ..................... 51 55 56 90 

Research and Special Programs Admin ....................... 173 190 190 237 

Office of the Inspector General .................................... 425 389 447 447 

Surface Transportation Board ...................................... 41 41 28 28 

Bureau of Transportation Statistics ............................. 237 148 341 200 

Maritime Administration ............................................... 373 238 350 350

Total ................................................................ 157,114 170,106 167,887 171,746

NOTE.—Excludes Working Capital Fund. 

ATTORNEYS IN DOT

Question. Please provide a table displaying the number of attorneys in the Office 

of General Counsel and in each modal administration compared to the last 3 fiscal 

years. 

Answer. The information follows.

Fiscal Year 2004Fiscal Year 2003Fiscal Year 2002

Federal Aviation Administration ........................................................................................ 184 195 188 

General Counsel, Office of the Secretary .......................................................................... 64 68 69 

Federal Highway Administration ........................................................................................ 45 47 46 

Federal Railroad Administration ........................................................................................ 31 30 30 

Federal Transit Administration .......................................................................................... 25 25 27 

Maritime Administration .................................................................................................... 25 23 22 

National Highway Traffic Safety Admin. ........................................................................... 22 26 24 

Federal Motor Carrier Safety Admin. ................................................................................. 33 25 29 

Research & Special Programs Admin. .............................................................................. 19 17 18 

Inspector General ............................................................................................................... 5 4 4 

St. Lawrence Seaway Development Corp. .......................................................................... 1 1 1 

Bureau of Transportation Statistics .................................................................................. 1 1 1

Question. How many attorneys in the Office of General Counsel work primarily 

on aviation-related issues? 

Answer. There are 34 attorneys who work primarily on aviation-related issues. 

Question. Do the all the attorneys in the operating administrations report to the 

modal administrator or to the Department’s General Counsel? 

Answer. The attorneys in the operating administrations do not report to the Department’s General Counsel. However, the General Counsel exercises professional 

supervision, including coordination and review, over the legal work of the legal offices of the Department. 

Question. Who approves the performance appraisals for attorneys paid by the operating administrations? 

Answer. The performance appraisals are approved by each operating administration. 

Question. Please provide the number of attorneys on staff for each operating administration and Office of the Secretary. 

Answer. The information follows.

Federal Aviation Administration ........................................................................................................................... 184 

Federal Highway Administration .......................................................................................................................... 45 

Federal Railroad Administration .......................................................................................................................... 31 
71

Federal Transit Administration ............................................................................................................................ 25 

Maritime Administration ...................................................................................................................................... 25 

National Highway Traffic Safety Admin. .............................................................................................................. 22 

Federal Motor Carrier Safety Admin. ................................................................................................................... 33 

Research & Special Programs Admin. ................................................................................................................. 19 

Inspector General ................................................................................................................................................. 5 

St. Lawrence Seaway Development Corp. ............................................................................................................ 1 

Bureau of Transportation Statistics .................................................................................................................... 1 

General Counsel, Office of the Secretary ............................................................................................................ 64

Question. For the attorneys involved in aviation issues, how is their workload related to the Office of the Assistant Secretary for Aviation and International Affairs? 

Answer. Attorneys in the Office of the Assistant General Counsel for Environmental, Civil Rights, and General Law (‘‘General Law’’) provide services on aviationrelated issues generally do so for clients in the Office of the Assistant Secretary for 

Aviation and International Affairs. Primary clients are those in the immediate Office of the Assistant Secretary, and the Offices of Aviation Analysis and Planning 

and Special Projects. The advice and services provided by these attorneys related 

most routinely to the Essential Air Service Program; to Small Community air Service grants; on competition plans, congestion management, and other aviation policy 

matters; and on slot exemption and air carrier compensation issues. However, there 

can be a myriad of other circumstances on which an ‘‘aviation-related’’ issue may 

arise in the Office of the Assistant Secretary for Aviation and International Affairs 

on which assistance is sought from the attorneys in General Law. These include 

matters involving appropriations, finance, national security, Freedom on Information matters, statutory interpretation, bankruptcy, intellectual property, and environmental law. 

Under a long-standing understanding with the Department of Justice, litigation 

attorneys defend, with little or no DOJ assistance, aviation decisions of the Department when they are challenged in judicial proceedings. We also work with the Office 

of the Assistant Secretary for Aviation and International Affairs by providing policy 

guidance on legal matters and drafting assistance, particularly in areas of antitrust 

issues and computer reservation system and travel agent matters. 

The attorneys in the Office of the Assistant General Counsel for Regulation and 

Enforcement coordinate the Office of the Secretary’s review of modal proposed and 

final regulations, including aviation regulations. Accordingly, they work closely with 

the Office of the Assistant Secretary for Aviation and International Affairs to ensure 

full review of aviation regulatory documents. Frequently, the attorneys in this office 

will meet with personnel from Aviation and International Affairs about any regulatory questions or issues that arise, and it is their job to try to resolve outstanding 

issues before a document is submitted for Secretarial review. In addition, the Office 

of the Assistant Secretary for Aviation and International Affairs generates its own 

rules, on matters such as computer reservations systems and access for disabled 

travelers. When it does so, our office provides drafting assistance as well as coordination and review. More broadly, the attorneys in this office provide legal advice 

as necessary on regulatory matters to the Office of the Assistant Secretary for Aviation and International Affairs. 

The Legislative Office provides support for the Assistant Secretary for Aviation 

and International Affairs through the preparation and clearance through DOT and 

OMB of all Departmental legislative proposals intended to carry out the Department’s initiatives and programs related to aviation activities. It also administers 

DOT/OMB clearance of the Assistant Secretary’s testimony before Congress on aviation issues. Finally, they provide DOT/OMB clearance of comments or revisions originating with the Assistant Secretary’s office on all draft legislation, draft testimony 

and draft reports to Congress that may originate within other Departments but are 

related to aviation issues. 

Attorneys in the Aviation Enforcement Office work in close consultation with staff 

in the Office of the Assistant Secretary for Aviation and International Affairs to develop policies to improve air service and/or access to the commercial aviation system 

as well as policies on anticompetitive practices in the airline industry. The Aviation 

Enforcement Office also assists the Office of the Assistant Secretary for Aviation 

and International Affairs in its review of U.S. air carrier requests for economic authority, and provides assistance on public charter and fitness issues. 

Attorneys provide legal support and facilitation of the Department’s international 

aviation program goals implemented by the Assistant Secretary for Aviation and 

International Affairs, including transportation negotiations with foreign countries, 

international aviation trade matters, international transportation safety and security, international trade, international aviation pricing, Alaska and international 
72

mail rates, aviation licensing and regulatory matters involving international transportation, aviation war risk insurance issues, international aviation sanctions, and 

interdiction of illegal drugs and other contraband. At international transportation 

negotiations, the Office provides legal support as a member of the U.S. Delegation, 

legal advisor and chief drafter of all documents. 

ACCESSIBILITY FOR ALL AMERICA PROGRAM

Question. Please compare the request for the Accessibility for All America program to the past 3 fiscal years. 

Answer. The Department’s request for Accessibility for All America the past 3 fiscal years is as follows:

Fiscal Year 2002 Fiscal Year 2003 Fiscal Year 2004

Accessibility for All America ...................................................................... $2,494,000 $2,101,000 $2,533,000

Question. Please breakdown the request for the Accessibility for All America program in greater detail. 

Answer. The information follows.

Fiscal Year 2005 

Request 

Disabilities Hotline including cell phone contract .............................................................................................. $1,250,000

Tech Assist. Manual, Outreach & Translations ................................................................................................... 655,000

TOTAL ...................................................................................................................................................... 1,905,000

In fiscal year 2005, the office is requesting funding to continue operating and 

maintaining the congressionally mandated toll-free hotline to educate and assist individuals in resolving disability-related air travel problems. Funding is also requested to complete work on the statutorily-required ACAA technical assistance 

manual (including a model training program), to continue ensuring that a wider audience can use the materials DOT’s Aviation Enforcement Office issues (e.g., translating documents into Braille and Spanish) and to encourage collaborative policymaking and enhanced cooperation between carriers, airport, and civil rights organizations by convening air travel civil rights forums. 

Question. Please identify which initiatives under the accessibility program are 

new, which continue efforts started in previous years, and what the base funding 

is for each on-going effort. 

Answer. The Office of the General Counsel is not requesting any funds for new 

initiatives related to the accessibility program. All of the funds being requested for 

fiscal year 2005 are necessary to continue the ongoing work set out below.

Fiscal Year 2002 Fiscal Year 2003 Fiscal Year 2004 Fiscal Year 2005 

(Request) 

Integrated Disabilities Hotline ...................................... $870,000 $870,015 $1,239,807 $1,250,000 

Technical Assistance Outreach and Translations ........ ........................ 669,366 ........................ 655,000

Base funding of $870,000 was provided in fiscal year 2002 to develop and implement a congressionally-mandated toll-free hotline, staffed 7 days per week from 7 

a.m. until 11 p.m. to answer questions from disabled air travelers and assist such 

persons in resolving disability-related air travel problems in ‘‘real time.’’ Implementation occurred in December 2003 which allowed the program to remain funded at 

the same level through the remaining three quarters of fiscal year 2003. The 

$1,239,807 enacted for fiscal year 2004 and the $1,235,000 requested for fiscal year 

2005 are necessary to maintain the hotline for each full fiscal year. 

Base funding of $669,366 was provided in fiscal year 2003 to: (1) begin work on 

a comprehensive technical assistance manual as well as a model training program 

to guide airlines in assisting air travelers with disabilities and to educate airlines 

about the proscription against discrimination based on race, national origin, ethnicity, or religion in air travel; (2) translate civil rights-related publications into different languages; and (3) encourage collaborative policymaking between carriers and 

civil rights organizations by convening air travel civil rights forums. These developmental efforts continued in fiscal year 2004 but a reduced funding level for the office 

forced a redirection of base funds elsewhere. Now implemented, the program needs 
73

base funding of $655,000 in fiscal year 2005 to maintain these essential elements 

of the program. 

BOARD OF CONTRACT APPEALS

Question. In fiscal year 2004, the Board of Contract Appeals continued to hear 

Coast Guard appeals pursuant to a Memorandum of Understanding between DOT 

and the Department of Homeland Security. Will the board continue to hear Coast 

Guard appeals in fiscal year 2005? 

Answer. Yes, the Board of Contract Appeals will continue to hear Coast Guard 

appeals in fiscal year 2005 pursuant to a Memorandum of Understanding between 

DOT and the Department of Homeland Security, in addition to other new appeals 

from the Department of Homeland Security. 

Question. Has DHS established its own board of contract appeals? 

Answer. No, the Department of Homeland Security has not established its own 

board of contract appeals. The Memorandum of Understanding between the Department of Transportation and the Department of Homeland Security provides for the 

DOT Board of Contract Appeals to hear and decide all appeals arising out of DHS 

contracts. 

Question. Does DHS reimburse DOT for hearing DHS appeals? 

Answer. Yes, DHS reimburses DOT for hearing DHS appeals. 

Question. Please breakdown in greater detail the Board’s workload that is projected for fiscal year 2005 compared to the past 4 fiscal years. 

Answer. The information follows.

STATISTICAL BREAKDOWN OF BOARD’S WORKLOAD—FISCAL YEAR 2001-FISCAL YEAR 2004

Fiscal Year Appeals Received Appeals Closed On Docket End of Fiscal Year 

2001 ........................................................................................................... 29 50 66 

2002 ........................................................................................................... 21 32 55 

2003 ........................................................................................................... 29 36 48 

2004 ........................................................................................................... 1 277 2 120 ........................

1 Total appeals received in fiscal year 2004 to 6/18/04. 

2 Total appeals closed in fiscal year 2004 to 6/18/04. 

The Board anticipates approximately 25 percent more appeals in fiscal year 2005 

as a result of hearing and deciding Department of Homeland Security appeals. 

OFFICE OF INTELLIGENCE AND SECURITY

Question. Please compare the budget request for the Office of Intelligence and Security with the past 5 fiscal years. 

Answer. The information follows.

[In thousands of dollars] 

Amount 

Fiscal Year 2000 ................................................................................................................................................ $1,574 

Fiscal Year 2001 ................................................................................................................................................ 3,494 

Fiscal Year 2002 ................................................................................................................................................ 1,321 

Fiscal Year 2003 ................................................................................................................................................ 1 [2,100] 

Fiscal Year 2004 ................................................................................................................................................ 2,225 

Fiscal Year 2005 ................................................................................................................................................ 2,260

1 The Office was funded through a reimbursable agreement with DHS/TSA. 

Question. Are any of the funds requested for the Office of Intelligence and Security to provide for the physical security of the Secretary or DOT building? 

Answer. No, both the physical security of the Secretary and the security of the 

DOT buildings are budgeted under the Office of the Assistant Secretary for Administration. 

Question. Please list the positions that are vacant in the Office of Intelligence and 

Security and provide the grade, title, and PC&B cost for each position. 

Answer. The SES position of Director of the Office and Intelligence and Security 

has been filled with a temporary assignment of a Senior Executive within the department. 

There are currently two specialist vacancies in the Office (see below). The duties 

of these positions are currently being discharged by details of employees from the 

Operating Administrations while recruitment actions are underway.
74

Position Title Grade PC&B Cost 

National Security Specialist ....................................... GS–14 ........................................................................ $132,000

Border Security Specialist .......................................... GS–14 ........................................................................ 132,000

Question. The Congressional Justification states that DOT was the lead Federal 

agency for 7 of 17 transportation security tasks outlined by DHS and HSC for Operation Liberty Shield. What tasks did DOT lead? What were the other tasks and 

what agency was directed to lead them? Did DOT have a role on the tasks that it 

did not lead? 

Answer. Operation Liberty Shield and the specific agency tasks were classified at 

the Secret level. The seven transportation security tasks that DOT was the lead 

Federal agency on related to rail security, hazardous materials (3 tasks), pipeline 

security, trucking and highway security and aviation. 

DOT’s support role in the other tasks was limited primarily to information dissemination and communications. However, the Homeland Security Advisory System 

(HSAS) was raised to ‘‘Orange’’ in conjunction with Liberty Shield. This required 

DOT to complete dozens of additional tasks to implement the heightened posture. 

Question. The report to the Committee regarding the Office of Intelligence and Security states that DOT has explicit statutory security responsibilities in the areas 

of HAZMAT, national airspace, and rail transportation. What specific statutory security responsibilities in aviation were not transferred to the Transportation Security Administration? 

Answer. FAA has responsibility under 49 U.S.C., Transportation, Subtitle VII, 

Aviation Programs, for the security of its own operations, including the National 

Airspace System; briefly, FAA is responsible for ensuring that its personnel, its air 

navigation facilities, and other parts of its integrated system of air traffic control 

are protected from unlawful interference. 

Question. Does DOT have any explicit statutory security responsibilities in the 

area of transit? 

Answer. No. 

Question. What was the Department’s role in the TOPOFF exercises? 

Answer. Since transportation has been identified as a key target for terrorists, 

DOT has played a key role in the TOPOFF exercises, all of which had transportation events as part of their transportation scenarios. The Department’s authority 

to restrict or close airspace, redirect rail, vehicle and motor carrier traffic and coordinate with mass transit authorities, have been exercised in all TOPOFF scenarios. 

In addition, the DOT is a permanent member of the Homeland Security Interagency Incident Management Group (IIMG). The IIMG is the body which is responsible for providing recommendations to the Secretary of DHS for: the threat countermeasure needed, response to an attack, and recovery measures in the event of an 

attack or natural disaster. 

FEDERAL PERSONNEL PAYROLL SYSTEM

Question. Has the Department completed the migration to the Federal Personnel 

Payroll System (FPPS)? 

Answer. No. The non-FAA components of DOT are scheduled to migrate to FPPS 

in April 2005 and the FAA is scheduled to migrate in October 2005. 

Question. Are any funds requested in the fiscal year 2005 budget request for development, implementation, integration, or other costs associated with FPPS? 

Answer. No funds are currently in the fiscal year 2005 budget request because 

the migration to FPPS was originally scheduled to be completed in fiscal year 2004. 

Due to greater than anticipated FPPS system changes to meet DOT requirements, 

the schedule, with OMB approval, was adjusted to implement the non-FAA components of DOT in April 2005 and the FAA in October 2005. The system changes and 

schedule shift resulted in an unfunded requirement of $9.4 million for fiscal year 

2005. 

Question. Can any savings be identified with the deployment of FPPS? 

Answer. No specific savings have been identified at this time. 

OFFICE OF THE ASSISTANT SECRETARY FOR AVIATION AND INTERNATIONAL AFFAIRS

Question. What percentage of the workforce and budget request for the Assistant 

Secretary for Aviation and International Affairs is related to international aviation 

activities? How much of the workload is related to aviation economic issues and regulations? What work in each area is expected in fiscal year 2005? How does this 

compare to fiscal year 2003 and fiscal year 2004? 
75

Answer. Approximately 15 percent of the work of the Office of Aviation Analysis 

is devoted to international aviation activities, with all of the work performed in the 

Economic and Policy Analysis Division. The international aviation activities performed by this Division are all related to aviation economic issues and regulations. 

Work expected in fiscal year 2005 depends largely on changes and developments in 

the airline industry which is undergoing its most fundamental restructuring since 

airline deregulation. Similar to work completed in fiscal year 2003 and fiscal year 

2004, it will likely include a variety of in-depth analysis of emerging industry issues 

to ensure that DOT policy remains consistent with commercial developments in such 

areas as congestion, competition policy, airport access and business practices, mergers, international alliances, and applications for antitrust immunity for joint ventures between United States and foreign carriers. As the United States moves toward a multilateral approach to air service agreements, an understanding of longterm trends in the airline industry’s operating and competitive structures will be 

required to formulate effective negotiating strategies to ensure pro-competitive liberalization. The Office of Aviation Analysis within the Office of Aviation and International Affairs performs all domestic and international aviation analysis for the 

Department’s aviation economic policies. 

Under the Emergency Support Function No. 1 (ESF–1) of the National Response 

Plan, the Department is the lead agency in mobilizing transportation in order to respond to and/or assist in recovery from a terrorist attack or natural disaster. 

OFFICE OF THE CHIEF INFORMATION OFFICER

Question. Please provide a table to breakout projects funded under the object class 

‘‘other costs’’ in the Office of the CIO and compare to the fiscal year 2004 enacted 

level after the across the board rescission. Also, please include the amount that was 

rescinded pursuant to Division H, sec. 168(b) of Public Law 108–199. 

Answer. The information follows.

Other Fiscal Year 2004 Fiscal Year 2005

Office of the Chief Information Officer (OCIO) pay, benefits, unfilled positions .................. $500,728 $1,000,360 

Gartner Group memberships ................................................................................................... 56,525 200,000 

Information Technology (IT) Services Assessment ................................................................. 400,000 50,000 

Travel/Training/Supplies .......................................................................................................... 90,000 90,000

The OCIO Fiscal Year 2004 rescission was 0.59 percent=$44,250. 

Question. Please provide a table of all charge backs to the modes to supplement 

the CIO budget. 

Answer. The Chief Information Officer’s (CIO’s) budget is not supplemented 

through charge backs to the modes. In fiscal year 2004, reprogramming authority 

was requested to cover a funding shortfall in the enterprise IT security program 

area that affected security coverage across DOT Operating Administrations. The 

table below reflects that reprogramming allocation.

IT SECURITY FISCAL YEAR 2004 CHARGES FOR TCI RESPONSE CENTER AND C&A 

Email 

Count Percent TCI Response Center 

No. of 

Systems Percent C&A OA TOTAL 

Reprogram Summary: 

BTS ....................................... 286 0.49 $6,281 ............ 0.00 .................... $6,281

FAA ........................................ 45,046 77.47 $989,247 69 55.65 $556,452 $1,545,699

FHWA ..................................... 4,826 8.30 $105,983 3 2.42 $24,194 $130,176

FMCSA ................................... 1,465 2.52 $32,173 1 0.81 $8,065 $40,237

FRA ....................................... 1,041 1.79 $22,861 ............ 0.00 .................... $22,861

FTA ........................................ 691 1.19 $15,175 18 14.52 $145,161 $160,336

MARAD .................................. 648 1.11 $14,231 7 5.65 $56,452 $70,682

NHTSA ................................... 1,524 2.62 $33,468 3 2.42 $24,194 $57,662

OIG ........................................ 471 0.81 $10,344 ............ 0.00 .................... $10,344

RSPA ..................................... 654 1.12 $14,362 1 0.81 $8,065 $22,427

SLSDC ................................... 88 0.15 $1,933 ............ 0.00 .................... $1,933

VOLPE ................................... 1,409 2.42 $30,943 22 17.74 $177,419 $208,362

Reprogram Subtotal ......... 58,149 100.00 $1,277,000 124 100.00 $1,000,000 $2,277,000

OST Additional Contribution .......... ............ .............. .................... ............ .............. .................... $200,000

Total Reprogramming and 

OST Contribution ......... ............ .............. .................... ............ .............. .................... $2,477,000
76

IT SECURITY

Question. The Office of the Chief Information Officer is requesting funds to implement a proactive cyber threat intelligence capability. Will this be accomplished by 

contracting for such services? 

Answer. The Transportation Cyber Incident Response Center (TCIRC), which 

serves as DOT’s proactive cyber threat intelligence capability, is staffed by contractor personnel and managed by a Federal security specialist. The TCIRC is a 24/

7/365 capability required by OMB Circular A–130, Appendix III and is designed to 

detect, react and respond to cyber security incidents that may occur throughout the 

Department’s critical IT infrastructure and systems. 

Question. How much of the $5,227,000 that has been requested for information 

technology security is for program administration? 

Answer. For fiscal year 2005, $428,556 has been budgeted for IT Security program 

administration. 

Question. Please provide a detailed breakdown of the scope of work and budget 

for each program that the CIO has planned or executed for fiscal year 2003, 2004, 

and 2005 in the area of IT security. 

Answer. The following table presents the fiscal year 2003, fiscal year 2004, and 

fiscal year 2005 IT Security Budget by program, scope and funding.

FISCAL YEAR 2003-FISCAL YEAR 2005 IT SECURITY BUDGET & FUNDING REQUEST 

Program Scope Fiscal Year 

2003 Budget 

Fiscal Year 

2004 Budget 

Fiscal Year 

2005 Request 

Federal Information Management 

Security Act (FISMA).

Information Technology (IT) security reviews, reporting and remediation planning as required by the 2002 Electronic 

Government Act, Title Ill.

$1,131,266 .................... ....................

Transportation Cyber Incident 

Response Center (TCIRC).

Provides 24-7-365 cyber security incident 

response to prevent, detect, and respond to incident within the DOT IT infrastructure as required by OMB Circular A–130, Appendix III.

$793,360 $1,630,675 $3,727,000

Certification and Accreditation 

(C&A).

C&A provides an acceptable level of assurance that security controls are implemented and functioning properly to 

ensure that IT systems and infrastructure operate appropriately. The authorization (accreditation is required by 

OMB Circular A–130,.

$1,213,905 $1,391,325 ....................

Common Access Architecture 

(CAA).

To define DOT requirements for an enterprise-wide CAA that includes physical 

and logical access, smart cards, public 

key infrastructure (PKI)—digital signature and e-Authentication in order to 

meet Federal standards and to ensure a 

more secure DOT.

$549,832 $25,000 $1,000,000

Enterprise Security Project

(ESP).

Contractor support for security compliance 

reviews, training and awareness, security assessments.

.................... .................... $500,000

Total .............................. ...................................................................... $3,688,363 $3,047,000 $5,227,000

Question. What is the projected out-year funding requirement by fiscal year for 

IT security? 

Answer. Out-year security funding requirements are: fiscal year 2006—

$5,354,000; fiscal year 2007—$17,344,000; fiscal year 2008—$9,942,000; and fiscal 

year 2009—$12,348,000. 

The spike in fiscal year 2007 funding requirements is due to the full implementation of the Common Access Architecture in the new DOT headquarters building. 

Question. Please provide a list of major contractors supporting the CIO’s IT security program, including consulting services, the project they are supporting, and the 

value of each contract. 

Answer. The following is a list of the current major contractors supporting the 

CIO’s IT security program.
77

MAJOR CONTRACTOR SUPPORTING OCIO IT SECURITY 

Contractor Program Value 

SAIC ................................................ Certification & Accreditation (C&A) ....................................................... $958,322

Mainstay ......................................... C&A ........................................................................................................ $347,000

Breakwater ...................................... Transportation Cyber Incident Response Center (TCIRC) ...................... $190,000

Indus ............................................... TCIRC ...................................................................................................... $164,000

Foundstone ..................................... TCIRC ...................................................................................................... $85,000

Working Capital Fund ..................... TCIRC ...................................................................................................... $1,302,678

Total .................................. ................................................................................................................. $3,047,000

Question. The Congressional Justifications state that the IT security program will result in savings of more than $5 million per year. When will the savings materialize and are the savings recurring? Will the savings occur at the Departmental 

level or will they be spread among the operating administrations? If these costavoidance measures are realized by the modes, how much will each one save? 

Answer. DOT will recognize savings through cost avoidance in several areas, 

through: (1) centralized purchasing and implementation of enterprise-wide hardware/software; and (2) the provision of scaleable security services. In terms of hardware/software, the DOT OCIO has already made a one-time purchase of a security 

tool that has resulted in a savings of $140,768 in software licensing costs for the 

Department’s modes. These types of cost avoidance are expected to continue and 

grow as more enterprise-wide license agreements are initiated for security software 

and tools. The DOT OCIO is also implementing DOT-wide TCIRC operations. If 

these TCIRC functions were to be performed centrally, it is estimated that each 

mode would avoid approximately $774,076 per year in recurring software and contract labor costs beginning with full implementation of a centralized IT security program. 

Question. What is the CIO doing to protect critical IT systems from attack and 

what contingency planning is occurring to ensure business continuity in an emergency? 

Answer. The CIO protects critical systems through a multi-faceted security program. DOT OCIO has implemented an enterprise wide vulnerability remediation 

program to ensure that all critical systems are protected from cyber attack. Weekly 

vulnerability scans are performed using an automated vulnerability scanner. The results of these scans are reviewed monthly by the Chief Information Security Officer. 

Currently, staff provides follow-up on patch installation as well as other remediation 

efforts. Follow-up consists of assisting modal IT staff with the patch installations 

and remediation steps. The OCIO has established a compliance review program to 

ensure that implementation of security controls, including business continuity plans, 

for mission critical systems is in accordance with Federal and departmental regulations. The OCIO has established a disaster recovery site to support communications 

capabilities for all modes in the event of emergency situations.

COMMON ACCESS ARCHITECTURE

Question. Is the $1,000,000 that the CIO is requesting for the Common Access Architecture being augmented by funding requests in the operating administrations for 

fiscal year 2005? If so, please provide a table indicating how much each operating 

administration is requesting? 

Answer. The CIO is not requesting augmentation of funding for the Common Access Architecture from the Operating Administrations. 

Question. Please provide a detailed profile, including past and current efforts, of 

the scope of work, milestone schedule, and anticipated costs for the Common Access 

Architecture project. 

Answer. The scope of the Common Access Architecture (CAA) project is to define 

Department of Transportation (DOT) requirements for an enterprise-wide CAA that 

includes physical and logical access, smart cards, public key infrastructure (PKI)-

digital signature and e-Authentication in order to meet Federal standards and to 

ensure a more secure DOT environment. With $574,832 funding to date, DOT has 

completed a CAA requirements analysis, a detailed business case, a communication 

plan, architecture, an implementation approach document, and is implementing two 

proof of concept projects for the CAA. The fiscal year 2005 budget request of $1 million will integrate several applications into CAA authentication in order to provide 

proof of concept for application authentication and to refine integration support procedures so that other DOT applications encounter as smooth a transition as possible 

as the application owners begin to migrate their applications to CAA authentication. 
78

Once the proof of concept is established from the controlled pilots, the project will 

result in a common access architecture that: (1) improves physical access control; 

(2) improves logical access control; and (3) interoperates with the federated identify 

authentication services. DOT’s strategy for this program is to fund the program 

from the DOT OCIO budget through fiscal year 2009, and then to collaborate with 

operating administrations to establish fiscal year 2010 and beyond requirements. 

The following project plan highlights CAA milestones and schedule.

Question. What is the projected out-year funding requirement by fiscal year for 

the Common Access Architecture project? 

Answer. The information follows.

Fiscal year 2006 .................................................................................................................................................. $2,530,000 

Fiscal year 2007 .................................................................................................................................................. 11,590,000 

Fiscal year 2008 .................................................................................................................................................. 2,980,000 

Fiscal year 2009 .................................................................................................................................................. 4,690,000

Fiscal year 2007 includes costs for full implementation of CAA infrastructure 

within the Department. 
79

Question. How much of the requested amount will be allocated to studies of biometrics and other technologies? Answer. In fiscal year 2005, $25,000 is allocated for studies of biometrics and 

other technologies. DOT expects to minimize the cost of studies based on the previous work that has been accomplished in these areas by government and industry 

and to adopt existing Federal standards where practical. 

Question. How much of the request for Common Access Architecture is for program administration? 

Answer. The fiscal year 2005 Common Access Architecture request for program 

administration is $400,000. 

ENTERPRISE ARCHITECTURE

Question. Please provide a list of major contractors and consulting services supporting the CIO’s Enterprise Architecture Implementation project and the value of 

each contract. 

Answer. The information follows: 

—Contractor.—Bowhead Transportation Company, Inc. 

—Services.—Enterprise Architecture Sustainment and Expert Support. 

—Contract Value (Fiscal Year 2004 Funds).—$544,552. 

DOT’s current EA support task order with Bowhead Transportation Company concludes on September 30, 2004. A new contract has not been awarded. The fiscal year 

2004 contract value was $544,552 for Enterprise Architecture sustainment and expert support. And while fiscal year 2005 work will be similar, the proposed contract 

dollar value will be for full effort funding at $1,933,918, rather than the significantly reduced amount required by the fiscal year 2004 funding level. 

Question. How much of the request for Enterprise Architecture Implementation 

is for program administration? 

Answer. In fiscal year 2004, $306,082 has been requested for Enterprise Architecture (EA) Implementation program administration. 

Question. Please provide a schedule and funding profile for each project identified 

under Enterprise Architecture Implementation. 

Answer. The Enterprise Architecture implementation activities are all interrelated and do not lend themselves to being broken out as discrete projects. The 

DOT Enterprise Architecture Program Management Office (EAPMO), supported by 

contracted expert consultants, will be evaluating numerous business needs/requirements of the Department in support of the IT infrastructure consolidation efforts for 

the move to the new DOT Headquarters Building, as well as the attainment of the 

goals set forth in our EA Modernization Blueprint. These project activities are 

scheduled to run throughout fiscal year 2005. Estimated funding to provide support 

for these activities in fiscal year 2005 is $2,515,000. For individual project and 

scheduling details for the Enterprise Architecture Implementation for fiscal year 

2005, please see the proposed DOT fiscal year 2004 IT Roadmap v.8 below.

Activity Start Finish 

IT GOVERNANCE ................................................................................................................... 10/1/04 ............ 9/1/05 

Develop Fiscal Year 2006 Implementation Plan ................................................................. 10/1/04 ............ 11/11/04 

Departmental IRB—Investments ........................................................................................ 10/15/04 .......... 10/15/04 

Conduct Fiscal Year 2004 Implementation Plan Outreach Mtgs with OA’s ...................... 10/20/04 .......... 11/26/04 

Departmental IRB—Control ................................................................................................ 11/12/04 .......... 11/12/04 

Departmental IRB—Investments ........................................................................................ 1/14/05 ............ 1/14/05 

ARB ...................................................................................................................................... 1/11/05 ............ 1/11/05 

Departmental IRB—Control Review .................................................................................... 2/11/05 ............ 2/11/05 

ARB ...................................................................................................................................... 2/8/05 .............. 2/8/05 

CIO Council .......................................................................................................................... 2/3/05 .............. 2/3/05 

Initial Fiscal Year 2006 IT Budget Guidance ..................................................................... 3/1/05 .............. 3/31/05 

ARB ...................................................................................................................................... 3/8/05 .............. 3/8/05 

CIO Council .......................................................................................................................... 3/10/05 ............ 3/10/05 

ARB ...................................................................................................................................... 4/12/05 ............ 4/12/05 

CIO Council .......................................................................................................................... 4/7/05 .............. 4/7/05 

Departmental IRB—Investments ........................................................................................ 4/15/05 ............ 4/15/05 

Revised Fiscal Year 2006 IT Budget Guidance .................................................................. 5/3/05 .............. 5/3/05 

ARB ...................................................................................................................................... 5/10/05 ............ 5/10/05 

CIO Council .......................................................................................................................... 5/5/05 .............. 5/5/05 

Departmental IRB—Control ................................................................................................ 5/13/05 ............ 5/13/05 

ARB ...................................................................................................................................... 6/14/05 ............ 6/14/05 

CIO Council .......................................................................................................................... 6/2/05 .............. 6/2/05 

Departmental IRB—Control ................................................................................................ 7/15/05 ............ 7/15/05 
80

Activity Start Finish 

ARB ...................................................................................................................................... 7/12/05 ............ 7/12/05 

CIO Council .......................................................................................................................... 7/7/05 .............. 7/7/05 

ARB ...................................................................................................................................... 8/9/05 .............. 8/9/05 

CIO Council .......................................................................................................................... 8/4/05 .............. 8/4/05 

Departmental IRB—Investments ........................................................................................ 8/26/05 ............ 8/26/05 

CIO Council .......................................................................................................................... 9/1/05 .............. 9/1/05

IT CPIC—SELECT ................................................................................................................. 10/27/04 .......... 9/6/05 

Update Screening and Scoring Criteria .............................................................................. 10/27/04 .......... 11/30/04 

Update Prioritization Process .............................................................................................. 11/3/04 ............ 12/3/04 

Update IT Portfolio Management Process and Analysis ..................................................... 11/3/04 ............ 12/31/04 

Conduct Fiscal Year 2006 Passback and Revised Exhibit 53 Support ............................. 11/26/04 .......... 2/1/05 

Provide Preliminary Fiscal Year 2007 Portfolio Support ..................................................... 4/5/05 .............. 5/30/05 

Present Proposed Fiscal Year 2007 Portfolio to OA IRB .................................................... 5/16/05 ............ 5/20/05 

OA’s Submit Exhibit 300s to OST/OCIO .............................................................................. 6/1/05 .............. 6/1/05 

Present Proposed Fiscal Year 2006 Portfolio Development & Prioritization to ARB/CIO 

Council.

6/13/05 ............ 6/17/05 

Conduct Capital Planning Working Group (CPWG) Internal Reviews of Fiscal Year 2007 

Exhibit 300s.

6/1/05 .............. 6/30/05 

OA’s Submit Exhibit 53’s to OST/OCIO ............................................................................... 7/29/05 ............ 7/29/05 

Submit Final Exhibit 300’s to OST/OCIO ............................................................................ 8/12/05 ............ 8/12/05 

Present Final Fiscal Year 2007 Portfolio to Departmental IRB for Approval Prior to OMB 

Submission.

8/26/05 ............ 8/26/05 

Submit Final Exhibit 300’s and 53’s to OMB .................................................................... 9/6/05 .............. 9/6/05

IT CPIC—CONTROL .............................................................................................................. 10/18/04 .......... 7/15/05 

OA Initiative Owners Submit Control Data ......................................................................... 10/18/04 .......... 10/22/04 

Departmental IRB/Control Review ....................................................................................... 11/12/04 .......... 11/12/04 

Quarterly Portfolio Assessment ........................................................................................... 12/31/04 .......... 1/13/05 

OA Initiative Owners Submit Control Data ......................................................................... 1/24/05 ............ 1/28/05 

Departmental IRB/Control Review ....................................................................................... 2/11/05 ............ 2/11/05 

Quarterly Portfolio Assessment ........................................................................................... 3/31/05 ............ 4/13/05 

OA Initiative Owners Submit Control Data ......................................................................... 4/25/05 ............ 4/29/05 

Departmental IRB/Control Review ....................................................................................... 5/13/05 ............ 5/13/05 

Quarterly Portfolio Assessment ........................................................................................... 7/1/05 .............. 7/7/05 

OA Initiative Owners Submit Control Data ......................................................................... 7/1/05 .............. 7/7/05 

Departmental IRB/Control Review ....................................................................................... 7/15/05 ............ 7/15/05

IT CPIC—EVALUATE ............................................................................................................. 2/1/05 .............. 7/6/05 

Revise PIR Methodology Based on Pilot Results ................................................................ 2/1/05 .............. 2/28/05 

Conduct PIR for Major System ............................................................................................ 4/4/05 .............. 5/17/05 

Conduct PIR for Major System ............................................................................................ 6/2/05 .............. 7/6/05 

eCPIC ................................................................................................................................... 4/4/05 .............. 4/15/05 

Conduct Refresher User Training ........................................................................................ 4/4/05 .............. 4/15/05

OST/OCIO TRAINING ............................................................................................................. 11/26/04 .......... 7/11/05 

Supplemental OA Budget Support for OMB Passback Issues, as needed ......................... 11/26/04 .......... 1/31/05 

Enterprise Architecture (BRM, PRM, TRM, DRM, SRM) ....................................................... 2/25/05 ............ 2/25/05 

Earned Value Analysis ......................................................................................................... 2/21/05 ............ 2/23/05 

Risk Management ................................................................................................................ 4/4/05 .............. 4/4/05 

IT Security, Cost Estimating Tool, Privacy Impact Assessments ....................................... 4/18/05 ............ 4/18/05 

Lifecycle Costs/Alternative Analysis .................................................................................... 2/14/05 ............ 2/14/05 

Performance Measurement .................................................................................................. 3/7/05 .............. 3/11/05 

OMB Update Training—Revisions to A–11 ........................................................................ 7/11/05 ............ 7/11/05

ENTERPRISE ARCHITECTURE (EA) ........................................................................................ 10/1/04 ............ 9/30/05 

Update 2005 Communications Plan ................................................................................... 10/1/04 ............ 11/1/04 

Update Technical Reference Model ..................................................................................... 10/1/04 ............ 11/18/04 

Update DOT EA Methodology ............................................................................................... 10/1/04 ............ 11/16/04 

Provide Guidance to OA’s on EA Baseline, Target, and Implementation Plan Development.12/2/04 ............ 2/1/05 

Update EA Repository .......................................................................................................... 1/3/05 .............. 1/31/05 

Identify Fiscal Year 2007 Enterprise Initiatives ................................................................. 1/3/05 .............. 1/31/05 

Provide Input for OMB Exhibit 300s ................................................................................... 2/1/05 .............. 6/16/05 

Develop Baseline/Target for all Cross Cutting LOB Identified as Priority ......................... 3/1/05 .............. 6/29/05 

Provide Guidance to OA’s to Develop Their Baseline/All Mission LOBs ............................. 3/1/05 .............. 6/29/05 

OA’s Deliver Mission Baselines & Targets .......................................................................... 6/30/05 ............ 6/30/05 

Develop High Level Implementation Timelines for Cross-Cutting LOBs ............................ 4/4/05 .............. 9/2/05 

OA’s Deliver High Level Implementation Timelines ............................................................ 6/1/05 .............. 9/2/05 

Executive Briefing Highlighting EA Plans Developed ......................................................... 8/1/05 .............. 9/30/05
81

DOT INVESTMENT REVIEW BOARD

Question. How does the Department Investment Review Board (IRB) decide which 

topics or issues to focus on? 

Answer. The DOT Office of the CIO (OCIO) maintains a system inventory database containing current performance, schedule, cost, measurement, risk and other 

information for all major IT projects. Also, basic information on non-major IT 

projects for which the Operating Administrations (OA) have primary responsibility 

is maintained in the database. The investment system information is the same as 

required by Federal Information Security Management Act (FISMA). The Departmental IRB conducts control reviews on at risk IT projects at least on a quarterly 

basis throughout the year. Projects are selected for review based upon one or more 

of the following factors: 

—Criticality to achieving Presidential Management Agenda goals. 

—Criticality to achieving DOT strategic goals and objectives. 

—High dollar value. 

—High risks. 

—Significant performance variances, and schedule or cost variances exceeding 10 

percent. 

—Overall need for executive level management attention to ensure project success. 

—Need for information to support planned project funding requests. 

On an annual basis, the Departmental IRB and its staff performs a comprehensive select review of all IT projects in support of the budget process. This ensures 

that the DOT-wide portfolio of IT projects meet modernization goals and contains 

an appropriate and affordable mix of projects that will assure accomplishment of 

DOT missions. The DOT CIO makes recommendations to the IRB to consolidate redundant IT spending amongst the Operating Administrations and to establish crosscutting initiatives that will benefit multiple agencies. 

Question. Please provide a list of projects that the IRB reviewed during fiscal year 

2003 and to date in fiscal year 2004. 

Answer. The DOT IRB reviewed the following projects in fiscal year 2003: 

—Artemis (Tread Act Implementation)—NHTSA 

—Delphi (Departmental Financial System)—OST 

—Federal Personnel and Payroll System (FPPS)—OST 

—Geospatial—BTS 

—Safety Monitoring and Reporting Tool (SMART)—RSPA 

—Intermodal Transportation Data Base (ITD)—BTS 

—National Transit Database (NTD)—FTA 

The DOT IRB reviewed the following projects as of the second quarter of fiscal 

year 2004: 

—Artemis (Tread Act Implementation)—NHTSA 

—Financial Management Information System (FMIS)—FHWA 

—Motor Carrier Management Information System (MCMIS)—FMCSA 

—ASDE–X (Surface Surveillance)—FAA 

—Operational and Supportability Implementation System (OASIS)—FAA 

—Wide Area Augmentation System (WAAS)—FAA 

Question. In the last fiscal year, what percentage of the overall IT projects did 

the IRB actively review? 

Answer. In fiscal year 2003, the Departmental IRB reviewed 2 percent ($34.2 million) of the Department’s Major IT Projects ($1,715.5 million). In fiscal year 2004 

to date, the Departmental IRB reviewed 6.4 percent ($105.2 million) of the Department’s Major IT Projects ($1,642.1 million). 

Question. What are the costs of the IT projects that the IRB reviewed? What are 

the total costs by operating administration of all IT modernization occurring in the 

department? 

Answer. In fiscal year 2003, the Departmental IRB reviewed 2 percent ($34.2 million) of the Department’s Major IT Projects ($1,715.5 million). In fiscal year 2004 

to date, the Departmental IRB reviewed 6.4 percent ($105.2 million) of the Department’s Major IT Projects ($1,642.1 million). The following table identifies the total 

cost by Operating Administration (OA) for all IT modernization occurring in the Department for fiscal year 2004 and fiscal year 2005 as reported by the OAs in their 

OMB exhibit 53 submissions.
82

DEVELOPMENT/MODERNIZATION/ENHANCEMENT (DME) BY OA FROM EXHIBIT 53 IT PORTFOLIO 

[In thousands of dollars] 

Organization Fiscal Year 

2004 IT DME 2004 Fiscal Year 2005 IT DME 2005

BTS ........................................................................................ 5.6 0.8 7.1 2

FAA ........................................................................................ 2,459.70 1,512.20 2,298.70 1,315.50

FHWA ..................................................................................... 42.3 3.7 63.5 2.2

FMCSA ................................................................................... 24.3 15 25.9 13.3

FRA ........................................................................................ 19.1 3.5 12.3 1.9

FTA ........................................................................................ 12.9 ...................... 15.6 ......................

MARAD .................................................................................. 9.8 6.5 11.3 7.5

NHTSA ................................................................................... 23 3.3 20.4 3

OIG ........................................................................................ 1 ...................... 0.9 ......................

OST ........................................................................................ 216.8 80.5 300.8 136.7

RSPA ..................................................................................... 19.1 1.7 18.8 1.2

SLSDC ................................................................................... 0.1 ...................... 0.1 ......................

STB ........................................................................................ 1.5 ...................... 1.6 ......................

WCF ....................................................................................... 2 ...................... 2 ......................

TOTAL ....................................................................... 2,837.2 1,627.2 2,779 1,483.3

Question. How many IT investment projects did the IRB terminate or seriously 

modify through a corrective action plan? 

Answer. To date, the Departmental IRB has not terminated any projects. However, in fiscal year 2003 seven investments (total value $37.5 million) were required 

to take corrective actions based on the IRB review. In fiscal year 2004 five (total 

value $96.8 million) were required to take corrective actions. All of these projects 

have accomplished, or are on schedule, with regard to required corrective actions. 

Question. In the past, operating administrations have contracted with the Volpe 

Center to develop and define requirements for IT systems. What is the assessment 

of the CIO of Volpe’s capability in this regard? 

Answer. Volpe performance has been varied. Volpe has had both successful and 

marginal engagements and is changing its contracting and management practices 

to achieve better consistency. 

Question. What guidance, support, or oversight does the CIO provide to FAA for 

facility and equipment acquisition? 

Answer. The CIO performs Exhibit 300 (business Case) review and training. 

Question. Do the CIO or the IRB review all of the IT requests throughout the Department before the budget is submitted to OMB? 

Answer. Yes. The CIO office conducts reviews of IT requests delineated in the 

budget process. The IRB reviews the final DOT IT portfolio and the recommendations made by the CIO each August prior to budget submission. 

Question. Does the CIO oversee the IT acquisitions made in the Office of Intelligence and Security? 

Answer. No. The CIO’s office does not oversee the IT acquisitions made in the Office of Intelligence and Security. 

IT CAPITAL PLANNING

Question. Are contractors or consulting services used to support the CIO’s capital 

planning and investment control (CPIC) process? If they are, please provide a list 

of major contractors, the services provided, and the value of each contract. 

Answer. The CIO employs one contractor performing two tasks in support of the 

Departmental CPIC process. 

—Contractor.—Booz-Allen & Hamilton 

—Services Provided.—IT CPIC Process Development and Implementation 

—Contract Value (Fiscal year 2004 funds).—$358,000 

—Contract Value (Fiscal year 2005 planned).—$539,689 (Contract Face Amount) 

—Contractor.—Booz-Allen & Hamilton 

—Services Provided.—e-CPIC Software and Database Support 

—Contract Value (Fiscal year 2004 funds).—$63,938 

—Contract Value (Fiscal year 2005 planned).—$75,000 (Planned Contract 

Amount) 
83

SECTION 508 COMPLIANCE

Question. What percentage of DOT websites comply with section 508 of the Rehabilitation Act? 

Answer. DOT has more than a thousand websites hosting over 2 million web 

pages. In 2004, DOT conducted an evaluation on whether its most frequently 

accessed web pages were accessible to people with disabilities. Across the Department, the OCIO evaluated the 259 web pages most visited by DOT stakeholders. 

Of the pages tested, 79 percent were in compliance. The remaining 21 percent are 

being remediated by webmasters/page owners. DOT plans to expand its Section 508 

website evaluation program over the next 2 years to determine DOT-wide 508 compliance as part of the CIO’s fiscal year 2005 budget request. 

IT SECURITY

Question. Is the DOT computer system a secure system? 

Answer. DOT has a complex array of integrated and independent computer systems in its inventory, many shared within individual agencies, and some shared 

across Operating Administrations. DOT also has a complex IT infrastructure supporting the communications requirements of its headquarters campus and support 

for remote locations. The DOT computer system and infrastructure environment is 

secure. Question. If it is secure, who certifies that it is secure? 

Answer. DOT computer systems go through a formal certification and accreditation (C&A) process. Numerous qualified C&A vendors conduct C&A review and documentation processes using recognized and approved criteria, standards and processes. C&A results are reviewed and signed off on by the Government’s system owners. The DOT CIO, in compliance with Clinger-Cohen, reviews and signs off on the 

systems’ security for FISMA. 

Question. What is the annual cost to maintain the system? 

Answer. DOT computer systems maintenance costs vary by system, type of maintenance, service provider, software and other attributes, including discounts. The 

fiscal year 2005 budget proposes $1,298.4 million for the maintenance of all DOT 

computer systems, with $166.1 million of that for maintenance of IT Infrastructure. 

A key benefit of the OCIO driven consolidation is to reduce the number of systems, 

components, and thus their maintenance overhead, as well as reduce the annual 

cost to maintain the Departments vast inventory of computer systems. 

Question. How many users have access to the system? 

Answer. Nearly 60,000 users have access to DOT systems. Users have access 

based on need and privilege, and include Government and contract employees. Some 

portions of the DOT network are accessed by several tens of thousands of users 

daily, typically for email and data entry and retrieval. OCIO security and common 

access architecture initiatives are key components in maintaining the integrity of 

DOT systems through standardized user access and security requirements and access monitoring. 

Question. Please describe in detail any contract or consulting expenses anticipated 

under the CIO’s strategic management effort. 

Answer. The following table describes detail concerning the CIO’s fiscal year 2005 

strategic management effort spend plan estimates regarding contractor support:

DEVELOPMENT/MODERNIZATION/ENHANCEMENT (DME) BY OA FROM EXHIBIT 53 IT PORTFOLIO 

[In thousands of dollars] 

Organization Fiscal Year 

2004 IT DME 2004 Fiscal Year 2005 IT DME 2005

BTS ........................................................................................ 5.6 0.8 7.1 2

FAA ........................................................................................ 2,459.70 1,512.20 2,298.70 1,315.50

FHWA ..................................................................................... 42.3 3.7 63.5 2.2

FMCSA ................................................................................... 24.3 15 25.9 13.3

FRA ........................................................................................ 19.1 3.5 12.3 1.9

FTA ........................................................................................ 12.9 ...................... 15.6 ......................

MARAD .................................................................................. 9.8 6.5 11.3 7.5

NHTSA ................................................................................... 23 3.3 20.4 3

OIG ........................................................................................ 1 ...................... 0.9 ......................

OST ........................................................................................ 216.8 80.5 300.8 136.7

RSPA ..................................................................................... 19.1 1.7 18.8 1.2

SLSDC ................................................................................... 0.1 ...................... 0.1 ......................

STB ........................................................................................ 1.5 ...................... 1.6 ......................
84

DEVELOPMENT/MODERNIZATION/ENHANCEMENT (DME) BY OA FROM EXHIBIT 53 IT PORTFOLIO—

Continued

[In thousands of dollars] 

Organization Fiscal Year 

2004 IT DME 2004 Fiscal Year 2005 IT DME 2005

WCF ....................................................................................... 2 ...................... 2 ......................

TOTAL ....................................................................... 2,837.2 1,627.2 2,779 1,483.3

In fiscal year 2003, the Departmental IRB reviewed 2 percent ($34.2 million) of 

the Department’s Major IT Projects ($1,715.5 million). In fiscal year 2004 to date, 

the Departmental IRB reviewed 6.4 percent ($105.2 million) of the Department’s 

Major IT Projects ($1,642.1 million). The following table identifies the total cost by 

Operating Administration (OA) for all IT modernization occurring in the Department for fiscal year 2004 and fiscal year 2005 as reported by the OAs in their OMB 

exhibit 53 submissions. 

IT CONSOLIDATION

Question. Please breakdown in greater detail the request for the CIO’s IT consolidation and operations support. 

Answer. The following provides a work breakdown structure (WBS) for the 

$4,200,000 budget request.

WBS Item Funds Requested 

Network/Server Co-Location ................................................................................................................................. $1,500,000 

Storage Consolidation .......................................................................................................................................... 1,000,000 

Digital Document Management ........................................................................................................................... 500,000 

Contract/Support Consolidation ........................................................................................................................... 300,000

Centralized Call Center/Full Remedy Implementation ......................................................................................... 300,000 

Standard Desktop Image Implementation ........................................................................................................... 300,000 

Centralized Help Desk .......................................................................................................................................... 300,000

Question. There appears to be a considerable amount of duplication in the justifications for IT consolidation and operations support with other projects in the 

CIO’s request—for example, ‘‘updated and new IT Security Policies,’’ ‘‘user identification and password administration,’’ and IT improvements related to the planned 

move to the new DOT headquarters building. Are these examples and others in the 

justification distinct from similar projects in IT security, Enterprise Architecture 

Implementation, and other activities? 

Answer. The Office of the CIO (OCIO) performs two distinct missions. One is policy and compliance and the other is operational. The specific missions are: (1) providing department-wide IT program strategy, policy, direction and compliance/oversight; and (2) delivering IT services to DOT customers that conform to departmental 

policies (i.e. IT security policies). Both missions are complementary but have different scopes and investment requirements. Both require funding as included in our 

fiscal year 2005 request. 

In the OCIO fiscal year 2005 justification, any apparent duplication of efforts between these two missions results when performance outputs are defined for: (1) the 

development of strategies and policies for a particular activity (e.g., update IT security policies, IT consolidation), and (2) for the operational implementation of the 

same activity. Each phase of the activity is categorized and managed separately 

within the OCIO’s office depending on if it is in the development stage or the implementation/operational stage. None of these activities are duplicative; rather, they 

are distinct phases of the same activity. The OCIO’s office recognizes the importance 

of managing these phases separately to ensure the most efficient use of its resources. 

In providing IT program leadership, the OCIO oversees the development of an enterprise architecture or blueprint for future IT investments and ensures compliance 

department-wide. It also provides departmental policies and guidance for securing 

IT systems, monitors departmental and operating administration compliance and 

leads strategic projects to improve enterprise security (e.g. the Common Access Architecture). Specifically, to ensure compliance with statutory requirements for the 

security of critical networks and systems across DOT, the OCIO manages the Transportation Cyber Incident Response Center (TCIRC) and department-wide testing of 
85

systems. In this enterprise security role, the DOT OCIO monitors approximately 

500 operational networks and systems throughout DOT, to include those within the 

FAA and the CIO-operated infrastructure. Funding has been requested for this policy/compliance mission in areas of Enterprise Architecture and Enterprise Security. 

In its role as an IT service provider to customers within DOT, the OCIO is directly responsible for running approximately 50 systems and one backbone network, 

and makes investments that improve service delivery and comply with the enterprise architecture. It also ensures that specific OST infrastructure and operational 

systems are secure based on departmental guidelines. Day-to-day operations include 

such diverse activities as implementing network controls, implementing software 

patches, the administration of passwords, installing virus software on servers and 

maintaining disaster recovery capabilities. 

The operational role of the CIO is expanding through the consolidation of multiple 

infrastructures within the DOT headquarters building. This effort offers a significant opportunity to improve infrastructure security, reduce service costs and facilitate the move to a new headquarters building. The Department’s Enterprise Architecture is providing a basis for building a common operating environment (COE) of 

desktops, servers, and telecommunications. The COE will become a one of over 25 

components of the Department’s enterprise architecture. Additionally, the common 

operating environment will improve security through investments in hardware and 

software to centralized security management of the entire infrastructure. Funding 

has be requested for IT operations and consolidation that includes investments to 

improve security of the infrastructure and to align with the DOT enterprise architecture. 

E-GOVERNMENT

Question. How much of the funding requested for e-government will be transferred to the President’s Management Council, Federal CIO, CFO and Procurement 

Executive Councils? How does this compare to fiscal year 2002 and fiscal year 2003? 

Answer. In fiscal year 2004, DOT transferred $492,020 to the GSA Interagency 

Council ‘‘Pass-the-Hat’’ initiative which supports Government-wide financial, information technology, procurement and other management innovations, initiatives, and 

activities as approved by the Director of OMB. The councils covered under this initiative for fiscal year 2004 are: the CFO Council, the CIO Council, the Federal Acquisition Council (FAC) and the Chief Human Capital Officers Council. 

In 2003, DOT paid $690,265 to GSA for this Pass-the-Hat initiative. 

In 2002, DOT also paid $690,265 to GSA for this initiative.

STRATEGIC MANAGEMENT FISCAL YEAR 2005 CONTRACT SUPPORT ESTIMATES 

GPEA/Forms/Digital Signatures/Records Management ........................................................................................ $115,000

Privacy Program Contract Services ...................................................................................................................... 100,000

Section 508 Software maintenance/program implementation ............................................................................ 82,000

Information Collection Burden program support ................................................................................................. 80,000

Performance Measurement/IT Workforce Planning .............................................................................................. 60,000

Total ........................................................................................................................................................ 437,000

Question. Please breakdown the request for e-government by planned activity. 

Answer. DOT continues to use technology to save taxpayer dollars and to improve 

how the Department provides services and information to citizens, business and 

other government agencies. The fiscal year 2005 funding request is for FTE and contractor staff to improve project management skills within DOT and to lead e-government initiatives to improve service delivery, manage risks and keep projects on 

schedule and within budget. 

The specific planned activities include: 

—Creating processes, standards, guidelines and a project life cycle framework to 

guide all DOT project managers; 

—Ensuring that 100 percent of all major new IT investments are managed by a 

qualified project manager; 

—Improving access to and quality of information internally and to citizens and 

business through enterprise content management capabilities; 

—Migrating DOT to a governmental personnel and payroll system; 

—Improving mission performance through web portals like Geospatial One-Stop, 

Grants.gov and Business Gateway; and 
86

—Improving the quality and consistency of human resource data by integrating 

multiple data bases and sharing information among multiple systems and processes. 

Question. Is funding requested for development of the Department’s internet home 

page? 

Answer. Yes. In fiscal year 2005 the CIO will invest $175,000 in improvements 

to the Department’s internet home page, including content management. 

Question. What is the funding request for development of an intranet? Would the 

modes have access to the intranet? Have any of the modes already developed 

intranets? If they do, how does the CIO plan to make them interoperable or compatible with a department-wide intranet? What capability does an intranet provided 

that does not exist currently? 

Answer. The CIO’s fiscal year 2005 funding request includes $50,000 for the DOT 

intranet. Modes have access to the current DOT intranet, and will have access to 

future DOT sponsored intranet services. The Federal Highway Administration, the 

Federal Aviation Administration, Federal Motor Carrier Safety Administration, National Highway Traffic Safety Administration, and the Federal Transit Administration have developed certain intranet capabilities accessible internally by their employees. Through the commonality of format and best practices content management 

and portal implementations, the CIO will drive intranet consistency across a department-wide intranet environment, improving such aspects as ease of use, information 

availability, and remote access. 

Question. What is your plan to get from ‘‘red’’ to ‘‘green’’ in the President’s management agenda? What progress does the Department expect to make in fiscal year 

2004? Since the fiscal year 2005 budget request was transmitted in February, what 

specific steps has CIO taken to work with OMB to get to ‘‘green’’? 

Answer. Through the Office of the Chief Information Officer, DOT has instituted 

three department-wide processes to get from red to green in the President’s Management Agenda. First, DOT has established a Department Wide Capital Planning and 

Investment Control Process, led by a Departmental Investment Review Board (IRB). 

This group, chaired by the DOT Deputy Secretary and comprised of the DOT Assistant Secretary for Budget and Programs, the Assistant Secretary for Administration, 

the General Counsel, four Operating Administrations executives; and the Chief Information Officer, meet quarterly, with reviews and approval oversight for all initiatives and business cases in DOT’s IT Portfolio. The IRB also provides control reviews of DOT IT programs to ensure they stay within 10 percent of cost, schedule, 

and performance goals. 

Second, the DOT has established an enterprise architecture and modernization 

blueprint that identifies DOT’s cross-cutting business processes, the IT initiatives 

supporting these processes, and outlines an implementation plan to eliminate redundant systems while strategically investing in programs that better support safety, mobility, and organizational excellence goals. 

Third, the DOT has implemented an Enterprise IT Security Program which has 

completed certification/accreditation of more than 90 percent of all DOT systems, 

and has implemented an Inspector General-verified Plan of Action and Milestone 

(POA&M) Remediation Process to resolve any remaining system weaknesses identified in the certification/accreditation process. 

Fourth, the DOT is currently supporting e-government initiatives that improve 

how DOT provides information and services to American citizens, businesses, other 

government entities and internally, and a Program Management Office to oversee 

these initiatives. 

In fiscal year 2004, DOT instituted the processes outlined above, resulting in the 

following accomplishments as of June 30, 2004: 

—All business cases have received a passing score from OMB; 

—All major IT initiatives programs are within 10 percent cost, schedule, performance variance or have a corrective action plan that will be tracked by the Departmental IRB on a quarterly basis; 

—A Modernization Blueprint that outlines DOT’s IT investment priorities and 

strategies has been completed; 

—Over 90 percent of all DOT systems have had certification/accreditation or have 

implemented an IG-verified POA&M process; and, 

—Active participation in e-government initiatives has been positive. 

IT MODERNIZATION

Question. What are the Department’s goals for modernization in fiscal year 2005? 

Answer. The DOT CIO’s mission is to support the Secretary’s vision of a safer, 

simpler, smarter transportation system. DOT has published the DOT Modernization 
87

Blueprint V.2. that outlines DOT’s specific modernization goals to accomplish this 

vision. DOT began implementing this modernization strategy in fiscal year 2004 and 

will continue implementing the strategy in fiscal year 2005 and beyond through the 

accomplishment of three primary goals: modernize cross-cutting systems as a means 

of eliminating redundant IT systems and services and reinvest those savings into 

mission support initiatives; consolidate redundant infrastructure operations into a 

common operating environment; and improve the security of critical DOT networks 

and systems. 

In terms of cross-cutting systems, as a first goal the DOT Investment Review 

Board (IRB) has established ten system modernization priorities: 

—Financial Management; 

—Grants Management; 

—Recruitment; 

—Personal/Payroll Systems; 

—Internal Rulemaking Tracking; 

—Procurement Management; 

—Enterprise Document Management; 

—Training; 

—Intermodal Transportation Data System (ITDS); and 

—Hazmat Data Sharing. 

Inter-modal teams have been established to create business cases and associated 

timeframes and to execute agreed upon strategies. In several cases, planning is 

being done with Federal e-government programs, such as the ITDS and Personal/

Payroll initiatives. In conjunction with this goal, the DOT is establishing a Program 

Management Office (PMO) to oversee these initiatives, and to ensure that Project 

Managers are qualified. 

The second modernization goal is to consolidate redundant IT infrastructure operations. DOT’s consolidation strategy consists of three major phases: 

Phase 1 (fiscal year 2004-fiscal year 2005).—Establish common network, server, 

and desktop standards and consolidate redundant infrastructures for all organizations (OST staff offices and Operating Administrations) moving to the new DOT 

Headquarters building into a Common Operating Environment (COE) based on 

these standards. 

Phase 2 (fiscal year 2006-fiscal year 2008).—Expand the COE to include DOT field 

offices and components of FAA where practical. 

Phase 3 (fiscal year 2008 and beyond).—Continue to modernize the DOT infrastructure to improve service and provide enhanced services to DOT stakeholders 

through the use of technology. 

The third modernization goal is to improve the security of DOT’s networks and 

systems. This goal will be accomplished through the CIO’s requested funding for the 

Enterprise IT Security Program, and will include: contractor staffing to operate a 

24/7 monitoring and incident detection/response center; improved and updated enterprise-wide policies, procedures, hardware and software to monitor and protect all 

systems within the Common Operating Environment; and through the execution of 

the Common Access Architecture Project, described later in this document. 

IT PROCUREMENT

Question. Does all centralized IT purchasing come through the CIO’s office? For 

all modes or just OST? What centralized purchases are made now that were not 

made in fiscal year 2003? 

Answer. The DOT does not have centralized IT purchasing. Each mode and OST 

has its own acquisition office to make IT purchases. However, to ensure that the 

department is making the right investments, the department uses its Enterprise Architecture processes to establish standards and establish enterprise licenses and the 

Capital Planning and Investment Control process to review proposed IT investments 

as a part of the budget process. Starting in fiscal year 2005, the department’s efforts 

to reduce redundant IT investments through the consolidation of IT infrastructures 

will lead to more centralized purchasing as the Department moves to a shared infrastructure among the modes. Also in fiscal year 2005 the DOT CIO will concur with 

all significant DOT IT procurement requests to ensure consistency with IT budget 

plans. 

Question. Breakout the FTEs by function in the CIO’s office. 

Answer. The following table shows the FTEs in the CIO’s office by function.
88

OFFICE OF THE CHIEF INFORMATION OFFICER—STAFFING BY FUNCTION 

Function Title 

Executive Management ................................................................................................................ CIO 

Executive Management ................................................................................................................ Deputy CIO 

Executive Administration ............................................................................................................. Prog Anal 

Executive Administration ............................................................................................................. Staff Asst 

Staff Administrative Support ....................................................................................................... Admin Asst 

Budget and Administration ......................................................................................................... Sup Prog Anal 

S&E Budget .................................................................................................................................. Prog Anal 

S&E Projects ................................................................................................................................ Prog Anal 

Internet/DOT Web ......................................................................................................................... Prog Anal 

Enterprise Architecture/Capital Planning; Strategic Integration; IT Security ............................. Assoc CIO IT Prog 

IT Security .................................................................................................................................... Comp Spec. 

IT Security .................................................................................................................................... Prog Anal 

Personnel/Systems Security ......................................................................................................... Prog Anal 

Enterprise Architecture/Capital Planning .................................................................................... Comp Spec. 

Enterprise Architecture/Capital Planning .................................................................................... Comp Spec. 

Enterprise Architecture/Capital Planning .................................................................................... Comp Spec. 

Enterprise Architecture/Capital Planning .................................................................................... Prog Anal 

Enterprise Architecture/Capital Planning .................................................................................... Sup Prog Anal 

Strategic Integration .................................................................................................................... Prog Anal 

Strategic Integration .................................................................................................................... Prog Anal 

Strategic Integration .................................................................................................................... Prog Anal 

IT Consolidation Program Office .................................................................................................. Doc Sys Prog Mgr 

IT Implementations ...................................................................................................................... Comp Spec. 

Enterprise Projects ....................................................................................................................... Sup Prog Anal 

Enterprise Projects ....................................................................................................................... Comp Spec. 

DELPHI

Question. Please provide the cost and justification data for Delphi. Is this system 

complete? If not, what is the estimated cost to complete? If it is complete, what is 

the cost to maintain the system? 

Answer. Delphi, DOT’s new financial management system, is a state-of-the-art, 

single-instance, non-customized, commercial off-the-shelf (COTS) accounting and financial management system. Delphi offers flexibility and maintainability at the 

functional user level; modular, tight integration of functional components; single 

source data capture; electronic routing and approval; web-enabled processes and report accessibility; electronic commerce capabilities; and, FFMIA compliance. 

Delphi uses release 11.5.9 of Oracle Federal Financials, which is COTS software 

from Oracle Corporation that has been certified by the Joint Financial Management 

Improvement Program as meeting all Federal accounting requirements. Delphi has 

replaced DOT’s outdated, non-compliant legacy accounting system, which was sunset in March 2004 and is no longer in production. 

Benefits of Delphi include: 

—Complies with Standard General Ledger. 

—Provides a single Accounting Classification Structure throughout DOT. 

—Provides Financial Statements from its core system, not external spreadsheets. 

—Enables DOT to meet OMB’s accelerated schedule for year-end closing and Financial Statements. 

—Provides the basis for Managerial Cost Accounting through the Project Accounting module. 

—Incorporates best business accounting practices. 

—Provides advanced security through audit trails and Roles and Responsibilities. 

—Offers simplified upgrading to take advantage of evolving capabilities. 

—Eliminates paper, makes documents immediately available to all, and provides 

sophisticated tracking through the integrated Invoice Imaging & Workflow System. 

Delphi is considered fully implemented and is a steady-state system. No funds are 

needed to complete Delphi. Delphi implementation costs from fiscal year 1998 

through fiscal year 2003 totaled $125 million. The cost to maintain Delphi in fiscal 

year 2004 is $22.05 million. 

TCI RESPONSE CENTER

Question. Please breakout the response center costs. 
89

Answer. The following table breaks out the ‘‘TCI Response Center Budget—Fiscal 

Year 2005.’’

TCI RESPONSE CENTER BUDGET—FISCAL YEAR 2005

Cost Category 

Enterprise TCIRC/

IT Security

Advice &

Assistance 

Personnel & Benefits: 

Manager ...................................................................................................................................................... $114,505

Vacant assistant position ........................................................................................................................... 114,505

Subtotal .................................................................................................................................................. 229,010

Travel .................................................................................................................................................................... 0

Contract Services: 

Senior Analyst ............................................................................................................................................. 163,637

Senior Analyst ............................................................................................................................................. 195,000

Mid-level analyst ......................................................................................................................................... 120,000

Mid-level analyst ......................................................................................................................................... 115,000

Senior level analyst ..................................................................................................................................... 190,000

TCIRC Staff Training ................................................................................................................................... 100,000

Subtotal Labor ........................................................................................................................................ 883,637

Supplies ................................................................................................................................................................ 15,000

Equipment, Non-Capital (software, scanning, patch mgmt, Security portal development, etc.) ...................... 1,632,144

Subtotal Other Costs .............................................................................................................................. 1,647,144

WCF Intrafund: 

Rent Intrafund ............................................................................................................................................. 77,427

Other (computers, supplies) ....................................................................................................................... 215,055

Contract costs ............................................................................................................................................. 61,136

Subtotal .................................................................................................................................................. 353,618

Overhead: 

IT Admin & Special Projects ....................................................................................................................... 36,902

Financial Mgt Group ................................................................................................................................... 44,302

WCF Overhead ............................................................................................................................................. 10,388

Enterprise Network Operations Center (7/24 monitoring) .......................................................................... 522,000

Subtotal .................................................................................................................................................. 613,591

Grand Total TCIRC .................................................................................................................................. 3,727,000

CRITICAL IT SYSTEMS

Question. What progress has the Department made in protecting critical IT systems at OST and the modes? 

Answer. In fiscal year 2003, the DOT OCIO initiated two major programs to protect OST and Operating Administration critical IT systems: (1) a program to certify 

and accredit all of the Department’s IT systems; and (2) implementation of the 

Transportation Cyber Incident Response Center (TCIRC). 

In terms of certification/accreditation, the DOT OCIO established a specialized 

team and standard methodology, worked with OST and the OAs to establish a 

schedule, and executed a plan completing certification/accreditation for over 90 percent of the DOT computer systems by June 2004. As of September 30, 2003, approximately 40 percent of DOT’s IT systems were certified and accredited in accordance with statutory, OMB, and NIST guidance. As of June 15, 2004, DOT has certified and accredited 95.6 percent of all IT systems. Efforts to now correct weaknesses identified through this process, and to test contingency planning efforts, will 

continue under this program in fiscal year 2005 and the DOT OCIO will also perform compliance reviews of modal IT systems to ensure that the certification and 

accreditations remain valid and all security controls are being implemented properly. 
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In terms of the TCIRC, DOT implemented this capability in fiscal year 2003. 

Today, the TCIRC monitors all DOT network access points, web sites, and other 

critical systems on a 24/7 basis, operates a vulnerability remediation management 

program that includes weekly vulnerability scanning and analysis, installs and 

configures intrusion detection at key network entry points, and provides critical system patch installation assistance to protect DOT IT systems from hackers and other 

threats. Based on the successful performance of the TCIRC, DOT has had no downtime of mission critical system networks or systems over the past year. 

Additionally, the TCIRC monitors all DOT IT systems across the country to determine if illegal software is installed on DOT computer systems, such as peer-to-peer 

software, which places networks at risk to intrusions or other illegal file sharing activities (such as sharing illegal music). Based on the successful efforts of the TCIRC 

to identify and eliminate the use of this software, DOT has decreased instances of 

this software from an average of 25 a month to 1 a month. By providing the TCIRC 

at the Department-level, DOT is able to capitalize on economies of scale in terms 

of contracting for specialized contract support, and purchasing hardware and software once to service the entire Department, and is also able to quarantine any potential problems found in one OA immediately so other OAs are not impacted. 

CIO CHARGES TO THE MODES

Question. Please provide a detailed break out of all CIO costs charged to the operating administrations, including what these costs are and how the cost was determined for fiscal years 2002, 2003, and 2004 to date. 

Answer. There are no CIO costs charged to the Operating Administrations in fiscal years 2002 or 2003. In fiscal year 2004, reprogramming authority was requested 

to cover a funding shortfall in the enterprise IT security program area that affected 

security coverage across DOT Operating Administrations. The table below reflects 

that reprogramming allocation.

IT SECURITY FISCAL YEAR 2004 CHARGES FOR TCI RESPONSE CENTER AND C&A 

Email 

Count Percent TCI Response Center 

No. of 

Systems Percent C&A OA TOTAL 

Reprogram Summary: 

BTS ....................................... 286 0.49 $6,281 ............ 0.00 .................... $6,281

FAA ........................................ 45,046 77.47 $989,247 69 55.65 $556,452 $1,545,699

FHWA ..................................... 4,826 8.30 $105,983 3 2.42 $24,194 $130,176

FMCSA ................................... 1,465 2.52 $32,173 1 0.81 $8,065 $40,237

FRA ....................................... 1,041 1.79 $22,861 ............ 0.00 .................... $22,861

FTA ........................................ 691 1.19 $15,175 18 14.52 $145,161 $160,336

MARAD .................................. 648 1.11 $14,231 7 5.65 $56,452 $70,682

NHTSA ................................... 1,524 2.62 $33,468 3 2.42 $24,194 $57,662

OIG ........................................ 471 0.81 $10,344 ............ 0.00 .................... $10,344

RSPA ..................................... 654 1.12 $14,362 1 0.81 $8,065 $22,427

SLSDC ................................... 88 0.15 $1,933 ............ 0.00 .................... $1,933

VOLPE ................................... 1,409 2.42 $30,943 22 17.74 $177,419 $208,362

Reprogram Subtotal ......... 58,149 100.00 $1,277,000 124 100.00 $1,000,000 $2,277,000

OST Additional Contribution .......... ............ .............. .................... ............ .............. .................... $200,000

Total Reprogramming and 

OST Contribution ......... ............ .............. .................... ............ .............. .................... $2,477,000

DISADVANTAGED BUSINESS ENTERPRISE

Question. Please provide an update on the work of the Secretary’s senior level 

task force on Disadvantaged Business Enterprise fraud. How often has this task 

force met? What recommendations, if any, have the task force produced? Have they 

met with the staff of the DOT IG to build on that office’s recommendations? 

Answer. The Task Force was established to examine the DBE Program and to develop recommendations on improving the ability of the program to meet its objectives. The Task Force was charged with reviewing the findings of the OIG on a 

number of fraud incidents as well as reviewing the findings of the report initiated 

at the request of the House Appropriations Committee. The DBE Task Force meets 

once bi-monthly and has regular meetings with the Department’s IG Office to discuss that office’s ongoing DBE recommendations. 
91

We expect to be able to implement a series of reforms which will have the effect 

of improving the management of the program, clarify its purpose, simplify its procedures and insure those who would misuse the DBE program are held to account. 

The Secretary charged the Task Force with developing recommendations on ways 

that the DOT can most efficiently and cost effectively increase oversight of the DBE 

Program, in order to reduce incidents of fraud. 

Additionally, the administration’s SAFETEA proposal contained a provision in 

Section 1802(d) which would mandate debarment of contractors who have been convicted of fraud related to Federal-aid highway or transit programs, and mandate the 

suspension of contractors who have been indicted for offenses relating to fraud. This 

would codify the debarment of convicted contractors, which under current DOT regulations is a discretionary measure. Under this provision, the Secretary would have 

the authority to waive suspension and debarment actions to address circumstances 

relating to non-affiliated subsidiaries of an indicted contractor, and national security 

concerns. 

WORKFORCE RECRUITMENT

Question. Please provide an update on what the Department is doing to recruit 

and retain the best talent available. The IG has identified that the Department of 

Homeland Security and the Department of Defense have personnel rules and pay 

flexibility to assist with retention and recruitment. What is the Department doing 

to ensure the same benefits for its workforce? 

Answer. In our quest to recruit and retain the best talent, DOT has obtained a 

synergy of effort through intermodal cooperation in implementing a corporate recruitment approach. In particular, during the last year, DOT convened an intermodal Corporate Recruitment Workgroup, consisting of 16 representatives from the 

different components and offices within DOT. It meets on a bi-monthly basis to collaboratively address ongoing DOT recruitment initiatives in support of closing the 

DOT skills gaps identified by our ONE DOT Workforce Plan; to identify those strategies that can assist Departmental efforts to develop the next generation of DOT 

employees; and to look for ways to present a corporate DOT image to the applicants 

we are trying to attract. 

One key activity of the Corporate Recruitment Workgroup is to identify 

redundancies in recruitment efforts across the Department. As a result, the modes 

saved money by sharing costs, and DOT jobs have greater visibility by reaching and 

attracting a wider diverse audience. We outreach to specific groups to recruit a high 

quality, diverse applicant pool, in cooperation with Selective Placement Coordinators. We continue to evaluate and refine our efforts through quarterly hiring reports 

(fiscal year 2004 will be our baseline for future outyear comparisons). 

We strongly encourage our components to use all of the flexibilities available to 

them whenever possible, including pay and bonus-related flexibilities (e.g., superior 

qualifications appointments and recruitment, retention, and relocation bonuses), 

scheduling flexibilities (e.g., telework and alternative work schedules), and the various special appointing authorities (e.g., the Federal Career Intern Program). Our 

largest component, the Federal Aviation Administration (FAA), has a number of 

unique statutory flexibilities that FAA uses to attract and retain a quality workforce. Once the results of the implementation of the Departments of Homeland Security and Defense flexibilities are apparent, we will be in a better position to know 

how we compete with them for a high quality, diverse workforce and whether similar statutory changes for DOT will be necessary to ensure successful recruitment 

and retention of the best talent available. 

DELPHI

Question. What is the status of the implementation of Delphi by the modal administrations? 

Answer. All DOT modal operating administrations (OAs) have implemented Delphi and are using it for accounting operations and financial management. The first 

OA to covert was the Federal Railroad Administration in April 2000 and the last 

was the Federal Aviation Administration on November 10, 2003. 

DOT is the first cabinet level agency to completely convert all its operating units 

to a single instance, state-of-the-art, fully compliant COTS financial software package. 

The Transportation Security Administration (TSA) was also set up on Delphi 

when TSA was created in DOT in February 2002. TSA has continued to use Delphi 

as its accounting system since being transferred to the new Department of Homeland Security (DHS) in March 2003. 
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Question. Are any of the development costs or operating costs of Delphi expected 

to be paid by the modal administrations? 

Answer. Through fiscal year 2004, all of the development and operating costs for 

Delphi and for the legacy accounting system that it replaced have been shared by 

the DOT modal administrations and TSA under an annual reimbursable agreement 

with the Federal Aviation Administration’s Mike Monroney Aeronautical Center in 

Oklahoma City, where Delphi is hosted, operated and maintained. 

The distribution of Delphi development and operating costs is reviewed annually 

and agreed to by the Delphi Management Committee (DMC). The DMC is composed 

of representatives from all Delphi customers, currently all DOT modal administrations and the Transportation Security Administration (TSA). TSA has informed 

DOT that they plan to convert from Delphi to the U.S. Coast Guard’s Oracle Federal 

Financials system in fiscal year 2005. 

COMPETITIVE SOURCING

Question. Please describe in greater detail the training proposal related to competitive sourcing. How many employees are expected to receive such training? 

Answer. OMB Circular A–76 requires the use of the Win.COMPARE software tool to accomplish competitions. The $15,000 training estimate was based on a contractor providing two Win.COMPARE courses that will allow us up to 20 students 

per class on site. The training is required to provide instruction for multiple study 

participants across the Department in the use of this mandated tool to accomplish 

both Standard and Streamlined competitions during the execution of the Department’s Competitive Sourcing ‘‘Green’’ Plan for the upcoming year and beyond. The 

Department will identify the exact number of employees that will benefit from this 

training once OMB has approved DOT’s ‘‘Green’’ Plan. 

ELECTRONIC GRANTS

Question. Which DOT grant making agencies are currently capable of processing 

grant applications and grant awards through electronic means? 

Answer. DOT’s E-Grant Task Group is currently in the process of conducting a 

comprehensive inventory of all electronic methods used in each one of the Department’s 59 grant programs. In conjunction with the inventory, they are also performing an analysis of the various system functionalities and the technologies used. 

This effort is expected to be completed within the next 90 days (September 2004) 

in concert with the Department’s initial e-grant plan. 

For purposes of clarification, the Department generally associates the terminology, ‘‘. . . grant applications and grant awards . . .’’, with competitive discretionary type programs. Approximately 99 percent of DOT programs are Mandatory 

type programs where funds are congressionally apportioned for each State, or based 

on Formula. DOT Mandatory/Formula programs require States to submit comprehensive State plans versus an ‘‘application’’, inasmuch as recipients are already 

determined along with funding apportionments, unlike discretionary programs that 

must undergo a ‘‘competitive’’ application process. However, for both mandatory and 

discretionary programs within the Department we expect the results of our inventory to show that several programs, use electronic methods to perform some function 

of their grants life cycle process. 

Question. What are the out-year cost estimates for the DOT contribution to the 

e-grant portal/system? 

Answer. The out-year cost estimates are as follows: fiscal year 2005—$754,467; 

fiscal year 2006—$754,467 to maintain, support and enhance the Grants.gov ‘‘find’’ 

and ‘‘apply’’ functionality that currently exists. In addition, OMB is sponsoring the 

Grants Line of Business initiative which is attempting to identify common internal 

grant processes. This initiative, for which a business case has not yet been developed (and for which agency contributions have not yet been determined), will be the 

follow-on to the Grants.gov initiative, enabling certain internal functions to be performed using shared technology services/tools. 

Question. How much has DOT obligated to date, by year, in support of this effort? 

Answer. DOT has obligated a total of $2,735,410 (fiscal year 2002—$88,590; fiscal 

year 2003—$1,411,410; fiscal year 2004—$1,235,410). There is also one DOT employee detailed for a period of 6 months to work in the Grants.gov Program Management Office. 

Question. Are the other partnering agencies making the same contribution? 

Answer. There are 26 grant making agencies in total. Currently 11 Partner agencies, including DOT, serve as part of the Grants.gov Executive Board and contribute 

both fiscal and personnel resources. In August 2002, a funding algorithm and payment schedule was approved by the Executive Board to allocate the funding require-
93

1Funding for the remaining $230,792 to meet the fiscal year 2004 DOT commitment of 

$775,000 has been requested from the U.S. Coast Guard and the Transportation Security Administration, who are users of the DOT dockets system. 

ments across the 11 Partner agencies. The specific amount of the contribution is determined by the agency’s designation as a ‘‘large’’, ‘‘medium’’ or ‘‘small’’ agency, 

based on the total grant dollars awarded. DOT is categorized as a ‘‘large’’ grant 

making agency; and is contributing the same amount as HHS, HUD and others in 

the same category. OMB has directed the Grants.gov PMO to move to a usage-based 

model in fiscal year 2005 that will require contributions by all grant making agencies. 

ELECTRONIC RULEMAKING

Question. What is the schedule and funding profile for the DOT contribution to 

the E-Rulemaking initiative? 

Answer. As the managing partner for this initiative, EPA established the following plan for implementing the Federal Dockets Management System (FDMS), 

the second phase of the E-Rulemaking initiative: —Develop agency implementation plans and dates.—July–August 2004; —Test the FDMS.—October–December 2004; —Migrate agencies to the FDMS.—January–October 2005. The DOT funding profile for this effort is: fiscal year 2004—$775,000; fiscal year 2005—$885,000; fiscal year 2006—$955,000 (estimated). 

All rulemaking documents published in the Federal Register by any DOT agency 

since the site was established are/were accessible via Regulations.gov, an internet 

portal (the first phase of the initiative). To date DOT has received 74 comments submitted from the site. Sixty-five were docketed and nine were rejected because they 

were either test entries, irrelevant, or blank. 

Question. How much has DOT obligated to date, by year in support of this effort? 

Answer. To date, DOT has obligated the following: 

—Fiscal year 2003.—$4,547,500; —Fiscal year 2004.—$544,208; 1

Question. Please list the other partnering agencies in the E-Rulemaking initiative 

and provide the contribution each is expected to make. 

Answer. EPA is the managing partner for this initiative and led the effort to define required contribution levels. Expected contributions for fiscal year 2005 for 

their partner agencies are:

Department of Transportation .............................................................................................................................. $885,000 

Department of Labor ............................................................................................................................................ 885,000 

Department of Agriculture ................................................................................................................................... 885,000 

Health and Human Services ................................................................................................................................ 885,000 

Federal Communications Commission ................................................................................................................. 355,000 

Department of Justice .......................................................................................................................................... 355,000 

Housing and Urban Development ........................................................................................................................ 355,000 

General Services Administration .......................................................................................................................... 180,000 

National Archives and Records Administration ................................................................................................... 100,000

Question. Are any other funds requested for E-Rulemaking besides the $800,000 

in the Office of General Counsel? 

Answer. No, this is the only amount being requested in the Department’s budget. 

ELECTRONIC BUSINESS PRACTICES

Question. Please compare the fiscal year 2005 budget request for electronic business practices with fiscal years 2003 and 2004. 

Answer. DOT’s funding requests for ‘‘Electronic Business Practices’’ for fiscal year 

2003 through fiscal year 2005 include different initiatives. In fiscal year 2003 

($125,000) and fiscal year 2004 ($176,000), for example, this request was primarily 

to cover the cost of DOT’s contribution to participate in government-wide electronic 

acquisition initiatives. In fiscal year 2005 ($875,000), however, the request significantly increased to reflect the estimated cost of procuring software licenses for a department-wide acquisition business system (i.e., a contract writing and management 

system), as mandated by the DOT Investment Review Board. 

Question. Please breakdown the request for consolidated HR benefits assistance 

by specific efforts and also provide a projection of the future developmental requirements under this program. 

Answer. The information follows.
94

ESI integrated solution procurement ........................................................................................................... $250,000 

ESI payroll data download ........................................................................................................................... $25,000 

Estimated DOI/FPPS programming start-up costs ...................................................................................... $30,000–$50,000 

Retirement and related benefits training (10–12 sessions including contractor time & travel) 1 ........... $75,000

1With the increasing number of employees who are becoming eligible for retirement, the demand for retirement and benefit counseling and 

information is increasing substantially. Contractor resources are necessary in order to deliver this service nationwide to DOT employees. 

The future developmental requirement under this program is the development 

and implementation of an electronic record keeping system that will replace the current official personnel file (OPF). 

HUMAN RESOURCES INFORMATION SYSTEM

Question. Please provide a schedule and funding history and plan of the Enterprise Human Resources Information System (EHRIS). Please include a breakdown 

of each modal administration’s anticipated share of the costs of development. 

Answer. The Enterprise Human Resources Information System (EHRIS) project 

was intended to implement an ORACLE enterprise application to meet the human 

resources, training administration, and time collection requirements of the Department of Transportation (DOT), excluding the Federal Aviation Administration 

(FAA). A companion project, the Corporate Human Resource Information System 

(CHRIS) was underway in the FAA, with the same goal. The projects were merged 

with the ORACLE Financial Management implementation within DOT in July, 

2002, but never got beyond the planning stage when the project was superseded by 

the e-Payroll initiative in December of 2002. EHRIS was projected to have been implemented by the end of fiscal year 2004. Approximately $10 million was included 

in the budget requests between fiscal year 2003 and 2004, of the total projected cost 

of $14.175 million. The cost distribution to the modal administrations is reflected 

below:

Administration As of

9/30/01 Percent Dollar Amount 

OST ........................................................................................................................... 539 3.59 $509,253

USCG ........................................................................................................................ 6,121 40.80 $5,783,188

FHWA ........................................................................................................................ 2,934 19.56 $2,772,076

FMCSA ...................................................................................................................... 787 5.25 $743,566

FRA ........................................................................................................................... 776 5.17 $733,173

SLSDC ....................................................................................................................... 152 1.01 $143,611

FTA ........................................................................................................................... 500 3.33 $472,406

NHTSA ....................................................................................................................... 660 4.40 $623,575

RSPA ......................................................................................................................... 964 6.43 $910,798

OIG ........................................................................................................................... 455 3.03 $429,889

MARAD ...................................................................................................................... 869 5.79 $821,041 

STB ........................................................................................................................... 142 0.95 $134,163

BTS ........................................................................................................................... 104 0.69 $98,260

Total ............................................................................................................ 15,003 100.00 $14,175,000

The funds requested for EHRIS for fiscal year 2003 and fiscal year 2004 were redirected to fund the Departmental migration to the e-Payroll initiative and no funds 

were requested in fiscal year 2005. 

Question. What is the status of the EHRIS contracts? 

Answer. The EHRIS contracts were for program management and systems integration support; the work orders issued on behalf of EHRIS have expired. 

Question. Please compare the projected requirements or capabilities of the Enterprise Human Resources Information System (EHRIS) to the Federal Personnel and 

Payroll System (FPPS). 

Answer. At a high level, EHRIS was projected to use Commercial Off the Shelf 

(COTS) software in an enterprise model to support human resources, training administration, and time collection requirements. EHRIS was not slated to replace the 

legacy DOT payroll system. The Federal Personnel and Payroll System, implemented in 1997, is an integrated human resources and payroll system. It does not 

support training administration or meet DOT requirements for time collection. 

Question. The justification states FPPS does not address training. Would EHRIS 

have addressed this? If this is a necessary requirement primarily because of FAA’s 

needs, then should FAA cover those costs? 

Answer. EHRIS was slated to address the DOT requirements for training administration, through the use of the ORACLE application software. 
95

With the discontinuation of the EHRIS project in fiscal year 2002, the eLMS system, implemented under the auspices of the e-Training initiative as part of—and 

funded by—the DOT FPPS migration project, is intended to meet the training administration requirements of all of DOT. Although the training needs of the FAA 

are highly visible, other modal administrations, such as the Federal Highways Administration, have vigorous training programs which require automated support. 

The operating costs of the training system will be shared proportionately, in relation 

to the size of workforce, among DOT’s Operating Administrations. 

Question. What are the out-year funding requirements for converting to FPPS? 

Answer. The funding for FPPS was based on the EHRIS budget which did not 

include the FAA requirements. There were no funds requested in the fiscal year 

2005 budget for EHRIS, subsequently there are none identified for FPPS. There currently is an estimated shortfall of $9.4 million in fiscal year 2005. It is currently 

anticipated that approximately $858,000 will be requested in fiscal year 2006 to 

support costs incurred in that year. 

OFFICE OF THE ASSISTANT SECRETARY FOR ADMINISTRATION

Question. Please provide a table to breakdown the object class ‘‘other costs’’ in the 

Office of Administration and compare the request to the fiscal year 2004 enacted 

level after the across the board rescission. Also, please include the amount that was 

rescinded pursuant to Division H, sec. 168(b) of Public Law 108–199. 

Answer. The information follows.

Object 

Class 

Fiscal Year 2004 

Enacted 

Fiscal Year 2005 

Estimate 

Recission pursuant to Division H, Sec 168(b) Public Law 108–199 ................... $145.0 ..........................

Across the board reduction per Title 5, Sec 517 of Public Law 108–199 .......... 1,482.0 ..........................

1XXX PC&B ...................................................................................................................... 6,265.0 $7,535.2 

21 Travel ..................................................................................................................... 53.0 70.0 

23 Rental payments to GSA ........................................................................................ 7,836.0 9,014.0

25 OTHER COSTS 

MSI Program .......................................................................................................... 0.0 130.0

E-Grants ................................................................................................................. 4.0 350.0

Electronic Business Process .................................................................................. 126.0 943.0

Online Internet Research Svcs .............................................................................. 68.0 110.0

Security Investigations ........................................................................................... 80.0 85.0

New Hqs Building Security .................................................................................... 0.0 130.0

Training .................................................................................................................. 25.0 183.0

Corporate Recruitment ........................................................................................... 0.0 500.0

Consolidated Benefits Assistance ......................................................................... 0.0 400.0

Federal Personnel and Payroll System .................................................................. 153.0 846.8

OST Cost to WCF .................................................................................................... 7,856.0 10,030.0

Reimbursement to USCG Clinic ............................................................................. 42.0 37.0

Workforce Improvements Initiative ........................................................................ 66.0 208.0

DOT-wide Admin and Mgmt Services .................................................................... 277.0 143.2

Subscriptions ......................................................................................................... 19.0 28.3

Procurement Strategy Council ............................................................................... 0.0 45.0

Electronic Official Personnel Folders ..................................................................... 0.0 1,000.0

Centralized Workers’ Compensation ...................................................................... 0.0 250.0

E-Training Initiative ............................................................................................... 0.0 750.0

CPMIS Charges ...................................................................................................... 65.0 85.0

Federal Employment Information Svcs .................................................................. 23.0 36.7

26 Supplies & Materials ............................................................................................. 27.0 24.8

Total .......................................................................................................... 24,612.0 32,935.0

OFFICE OF CIVIL RIGHTS

Question. Please provide detailed justification for the fiscal year 2005 budget request for the Office of Civil Rights by object class. 

Answer. 11 and 12.1 PC&B (Includes Transit Benefits and Workmen’s Comp).—

DOCR’s PC&B request in fiscal year 2005, $9,382, is based on the assumption that 

DOCR will maintain current fiscal year 2004 staffing levels. This relatively small 

increase is due to mandatory increases such as pay raises, within-grade-raises and 

inflation. 

21.1 Travel and Transportation of Things ($210).—DOCR staff travels to conduct 

EEO compliance reviews, participate in panels at conferences and workshops giving 
96

presentations and speeches, and to obtain training associated with carrying out the 

organization’s mission. DOCR’s IT Division provides IT infrastructure, telecommunication, application and database services to Departmental Office of Civil Rights 

(DOCR) employees located in Cambridge, MA, Atlanta, GA, Chicago, IL, Dallas, TX, 

and San Francisco, CA. Periodic inspections and routine modifications must be performed at each location to ensure adequacy, accuracy and timeliness of the delivery 

of many of the Departmental Office of Civil Rights (DOCR) mission products and 

services. 

25.2 Other Services ($2,686).—Other Services include: —Alternative Dispute Resolution.—DOCR has administrative responsibility for 

providing mediation services to DOT’s 10 operating administrations (OAs). 

DOCR ensures the program has skilled mediators and coordinates annual training to meet programmatic and EEOC requirements. DOCR also coordinates assignment of mediators and schedules mediation sessions, ensures that evaluations are completed, and tracks data relating to mediated cases. Finally, DOCR 

is available to assist OAs with training of EEO Counselors relative to the ADR 

program. While each OA has responsibility for training its managers and overall workforce, DOCR has increased its assistance for ADR training in order to 

promote and market the ADR program. —EEO Training and Other Training.—DOCR will conduct program reviews; and 

direct, administer, and manage DOT’s EEO and affirmative employment programs for managers, employees and applicants for employment. —Automated Case Tracking Systems (COS).—DOCR’s automated tracking systems—Web Case Management System (WebCMS), Disadvantage Business Enterprise (DBE) Appeals System, and the External Case Tracking System 

(XTRAK)—serve as the official Departmental repository for maintaining accurate complaint and appeals information. These critical systems ensure that 

DOCR meets Secretarial, statutory, regulatory and other reporting requirements. —Section 504 Studies & Evaluations.—Funding will be used to implement recommendations derived from the Department’s ongoing Section 504 Self Evaluation and Transition Plan for the accessibility of its facilities and programs to 

people with disabilities. —Final Agency Decision (FADs) Writing.—Funds will be used to fund preparation 

of FADs associated with equal employment opportunity (EEO) complaints filed 

against DOT, including decisions on the merits, compensatory damages assessments, sexual orientation complaint requests for reconsideration, and attorney’s 

fees. —Contractual Support.—DOCR utilizes contractual services to augment in-house 

EEO investigations. In addition, contractual EEO services are required for situations where a regional office may temporarily be short-staffed, or an urgent 

timeframe is ordered by EEOC or a Court Judge. DOCR also requires funding 

for contractual administrative and clerical support functions in order for organizational components to meet its critical mission needs in the most efficient manner possible. 

—Working Capital Fund.—Pays for administrative support services. These services include building security, copy centers, Departmental programs, the Disability Resource Center, DOT’s Worklife initiatives, and other proportional 

charges that are expended for common services. 

—Reimbursable Service Agreements (Regional Offices).—Provide for telecommunication resources, information technology support, administrative support, including mail service and employee transit benefits. 

—Relocation Expenses (San Francisco Regional Office).—DOCR prepared an Occupancy Agreement managed by General Services Administration (GSA) to relocate from San Francisco to Los Angeles, CA. DOCR expects to occupy new office 

space by December 2004. 

—Continuity of Operations.—The Federal Preparedness Circular, Number 65, 

dated July 6, 1999, issued by the Federal Emergency Management Agency, requires all agencies to have a facility from which continued essential agency 

functions remain operational should the primary facility be rendered unusable 

during an emergency. DOCR has met this requirement and must provide oversight, which requires site visits, for organizations contracted to provide these 

services on its behalf. 

—Program Evaluation.—Funds will be used to assess the manner and extent to 

which DOT civil rights programs achieve intended objectives. In addition, the 

President’s Management Agenda (2002) further identifies the need for devising 

aggressive strategies for improving the management of the Federal Government. 
97

—Telecommuting/Telework Program.—Funds are required to provide technological support for DOCR’s participation in DOT’s telecommuting/telework program. Information resources include hardware, software, data and records, and 

telecommunications connectivity. 

—Information Technology Services.—Funding will support one of the strategic 

goals outlined in the President’s Management Agenda—reducing the barriers of 

information and communication within DOT by implementing a new Civil 

Rights Case Management System. 

26.0 Supplies and Materials.—Supplies and materials are required to support 

daily operations, i.e. paper, writing utensils, ink cartridges, research manuals, periodicals, and subscription services. Supplies and materials are also needed to support 

staff participation at conferences and workshops. Funds are also used to support 

Presidential interagency efforts and other efforts such as the interagency Holocaust 

Remembrance event. 

31.0 Equipment.—The funding will be used to replace obsolete equipment and 

computers in DOCR. The Office of Information Technology (IT) and Program Evaluation division integrates equipment that can enhance DOT’s Civil Right’s business 

processes. The equipment supports testing and implementation of telecommuting, 

backup and recovery, presentations, document production and other functions. 

DOCR’s IT Division is responsible for procuring and maintaining all information 

technology equipment and hardware purchased with Federal funding in support of 

DOCR’s mission. Within the infrastructure, approximately 70 workstations, desktop 

and network printers, fax machines, digital senders, and scanners are used to provide an effective and efficient business environment to employees. This hardware requires periodic maintenance, upgrades or replacement. During fiscal year 2004 and 

fiscal year 2005, DOCR’s infrastructure must be prepared to support DOT security, 

telecommuting, human capital, and electronic initiatives. 

Question. Please explain in detail the assumptions used to develop the request for 

personnel compensation and benefits of the Office of Civil Rights. 

Answer. DOCR’s PC&B request in fiscal year 2005, $9,382, is based on the assumption that DOCR will maintain current fiscal year 2004 staffing levels. This relatively small increase is due to mandatory increases such as pay raises, withingrade-raises and inflation. 

Question. Please provide the number of staffing positions and FTE requested, indicating direct and reimbursable, for the Office of Civil Rights. 

Answer. In its fiscal year 2005 budget, DOCR requested 64 direct staffing positions and FTE. There are no reimbursable FTE. 

Question. Please provide a table listing current staffing for the Office of Civil 

Rights compared to levels at the end of each quarter of past 5 fiscal years. 

Answer. The information follows.
98

DEPARTMENT OF TRANSPORTATION DEPARTMENTAL OFFICE OF CIVIL RIGHTS STAFFING 

12/31/

2003

3/31/

2004

6/18/

2004

12/31/

2002

3/31/

2003

6/30/

2003

9/30/

2003

12/31/

2001

3/31/

2002

6/30/

2002

9/30/

2002

12/31/

2000

3/31/

2001

6/30/

2001

9/30/

2001

12/31/

1999

3/31/

2000

6/30/

2000

9/30/

2000

Fiscal Year 2004: 

1st Quarter .............................. 55 .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... ..........2nd Quarter ............................. .......... 58 .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... ..........3rd Quarter .............................. .......... .......... 57 .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... ..........

Fiscal Year 2003: 

1st Quarter .............................. .......... .......... .......... 52 .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... ..........2nd Quarter ............................. .......... .......... .......... .......... 52 .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... ..........3rd Quarter .............................. .......... .......... .......... .......... .......... 52 .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... ..........4th Quarter .............................. .......... .......... .......... .......... .......... .......... 53 .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... ..........

Fiscal Year 2002: 

1st Quarter .............................. .......... .......... .......... .......... .......... .......... .......... 47 .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... ..........2nd Quarter ............................. .......... .......... .......... .......... .......... .......... .......... .......... 48 .......... .......... .......... .......... .......... .......... .......... .......... .......... ..........3rd Quarter .............................. .......... .......... .......... .......... .......... .......... .......... .......... .......... 51 .......... .......... .......... .......... .......... .......... .......... .......... ..........4th Quarter .............................. .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... 52 .......... .......... .......... .......... .......... .......... .......... ..........

Fiscal Year 2001: 

1st Quarter .............................. .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... 44 .......... .......... .......... .......... .......... .......... ..........2nd Quarter ............................. .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... 45 .......... .......... .......... .......... .......... ..........3rd Quarter .............................. .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... 44 .......... .......... .......... .......... ..........4th Quarter .............................. .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... 44 .......... .......... .......... ..........

Fiscal Year 2000: 

1st Quarter .............................. .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... 38 .......... .......... ..........2nd Quarter ............................. .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... 39 .......... ..........3rd Quarter .............................. .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... 43 ..........4th Quarter .............................. .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... 43
99

Question. Please provide details on anticipated contract expenses in the Office of 

Civil Rights. 

Answer. Final Agency Decisions (FADs).—Transfer of U.S. Coast Guard to the Department of Homeland Security on September 30, 2003, decreased the workload, but 

the projected increase in cost per FAD estimated at 5 percent resulted in no change 

in the total contract amount requested, $250,000. 

Administrative and Clerical Support.—DOCR provides administrative and clerical 

support functions to organizational components to meet critical mission needs in the 

most efficient and effective manner possible. Clerical support is critical to accomplishing the workload in several of DOCR’s divisional offices, $225,000. 

EEO Investigations.—DOCR utilizes contractual services to augment in-house 

EEO investigations. During fiscal year 2004, many internal complaints of employment discrimination were outsourced for investigation to eliminate DOCR’s backlog 

of overage cases. While the goal of a zero-backlog was realized by September 30, 

2000, it is necessary to maintain funding for contractual services to prevent future 

backlogs. In addition, contractual EEO services are required for situations where a 

regional office may temporarily be short-staffed, or an urgent timeframe is ordered 

by EEOC or a district court judge, $250,000. 

Reimbursable Services.—In addition, DOCR obtains contractual support from 

DOT’s OAs for its regional offices that are located in DOT-owned facilities. The services provided include telecommunication resources, information technology, email, 

and lease charges, $220,000. 

Information Technology Support and Tracking Systems.—DOCR employs the services of IMSG Inc., Actionet, Inc., and Micropact, Inc., to support the products and 

services required by DOT’s internal and external customers. The services supplied 

by these contractors support the DOCR mission through software development, 

website and database hosting, software upgrades, and commercial off the shelf license renewal. In addition, DOCR utilizes IT contracts to support requirements outlined in the President’s Management Agenda, which include enterprise architecture 

administration, capital planning support, and security requirements. Finally, DOCR 

utilizes IT contract support to supply information to complex civil rights queries 

supporting the Equal Employment Opportunity Commission (EEOC), the Department of Justice, and many freedom of information requests, $300,000. 

Question. What is the current backlog of complaints at the Office of Civil Rights? 

Please compare to last 5 years. 

Answer. Currently, and over the past 5 years, DOCR has experienced no backlog 

of complaints. 

Question. What is the status of the relocation of the San Francisco Regional Office? 

Answer. DOCR conducted a site search in the Los Angeles area, identified a location, and prepared an occupancy agreement. The new leased site will be managed 

by the General Services Administration (GSA). DOCR expects to occupy the new location by December 2004. Thus, DOCR plans to close the San Francisco office and 

relocate to the new site in the Los Angeles area. GSA will assist in all aspects of 

the move. All employees in the San Francisco office have been notified of the pending move to the new location. DOT’s Human Resources office will issue a final letter 

to all employees. Following receipt of the letter, each employee will designate his 

or her intention to relocate to the new location or separate from Federal service. 

Question. Are the costs requested for the San Francisco Regional Office relocation 

one-time expenses? 

Answer. In fiscal year 2004, the cost of the initial relocation of SFRO employees 

to Los Angeles, CA, is estimated to cost $370,000. In order to obtain new office space 

(2,000 sq. ft.) and effect a reimbursable agreement with the Federal Aviation Administration’s Western Region located in Los Angeles, CA, DOCR requested startup funds of approximately $100,000. Other costs associated with the relocation include shipping furniture and equipment and the cost of relocating current employees. Miscellaneous costs, i.e., printing of stationery, is an example of a one-time expense. DOCR’s fiscal year 2005 budget request reflects an additional $250,000. This 

estimate is based on the more generous relocation allowance for real estate costs 

authorized in 2005 by the General Services Administration. As actual moves occur, 

some of these funds may be reallocated to personal services to support relocation 

costs properly reflected as benefits. It also reflects a small budget for shipping 

charges for supplies, subscriptions and equipment. 

MINORITY BUSINESS OUTREACH

Question. How much of the $3,000,000 fiscal year 2005 budget request for Minority Business Outreach funds PC&B? 
100

Answer. The $3,000,000 request for the Minority Business Outreach fund does not 

include PC&B cost. The Office of the Secretary’s Office of Small and Disadvantaged 

Business Utilization (OSDBU) provides oversight for this program; PC&B are included in the S&E fund. 

The Minority Business Outreach fund is used to support partnership agreements 

with chambers of commerce and trade associations which offer a comprehensive delivery system that targets services towards small Disadvantaged Business Enterprises (DBEs) by: (1) Increasing the number of disadvantaged businesses that enter 

into transportation-related contracts; (2) Increasing the number of DBE firms that 

receive surety bonds and working capital through DOT’s financial assistance Short 

Term Lending program and the Bonding Assistance Program; (3) Increasing the 

number of DBE businesses participating in hands-on-training that is related to specific disciplines required for obtaining transportation related contracts; and, (4) Operating the National Information Clearinghouse (NIC) which provides outreach and 

contract information to DBE firms. 

The Minority Business Outreach fund also supports the Entrepreneurial Training 

and Technical Assistance Program (ETTAP) through Partnership Agreements with 

Minority Educational Institutions (MEIs) including Historically Black Colleges and 

Universities, Hispanic Serving Institutions and Tribal Colleges. This program combines the efforts of MEIs, government, and the private sector to focus on providing 

transportation-related assistance and procurement information to women-owned and 

disadvantaged business enterprises (DBEs). 

Question. Please provide the number of requested staffing positions and FTE, indicating direct and reimbursable, under the Minority Business Outreach appropriation. 

Answer. FTE were not requested under the Minority Business Outreach appropriation. 

Question. Please provide a table listing current staffing under Minority Business 

Outreach compared to levels at the end of each quarter of past 5 fiscal years. 

Answer. There are no current or past staffing levels under the Minority Business 

Outreach fund. 

Question. Please describe efforts of the Minority Business Outreach program to 

encourage and assist Alaska Native Corporations to participate in DOT contracts 

and grants. 

Answer. The U.S. Department of Transportation (DOT) Short Term Lending Program (STLP) provides revolving lines of credit to finance accounts receivable arising 

from transportation-related contracts. The primary collateral consists of the proceeds of the contracts. One of our Bank Lenders is the Native American Bank, National Association (‘‘NAB’’) which is a federally-chartered bank that is owned by Native American Bank Corporation, a bank holding company that has been organized 

by a group of Tribal Nations and Alaska Native Corporations. 

Through this resource partner, we have established a significant Indian presence 

for our outreach efforts. We will continue to seek out opportunities to increase DOT 

contracting with Native Corporations and to increase the number of DBE Alaska 

Native Corporations who participate in transportation related contracts. Most of our 

DOT funds are administered by our contract and grant recipients, through the Federal Highway Administration (FHWA), the Federal Transit Administration (FTA), 

and the Federal Aviation Administration (FAA). All recipients are required to have 

a DBE program. Under the provisions of 49 CFR parts 23 and 26, Alaska Native 

Corporations are presumed to be qualified eligible for DBE program participation. 

Additionally, we assist Alaska Native Corporations in participating in DOT contracts. Bowhead, a Native Alaskan Corporation currently provides Information 

Technology services to the DOT Chief Information office under contract. 

During fiscal year 2004, the USDOT Northwest TEAM and the DOT Bond Agent 

from Seattle, Washington traveled to Anchorage, Alaska to participate in an outreach event, hosted by the Port of Anchorage to support the efforts of the Port of 

Anchorage International Expansion Project. The event was entitled ‘‘Industry Day’’. 

The Maritime Administration (MARAD) made a request of the OSDBU Minority Resource Center to send representatives to seek out Alaska firms who could bid on 

contracts with the Intermodal Expansion Project. This is a $260 million project 

funded through the Maritime Administration. Our TEAM service provider, accompanied by a staff member from HCDI, the Minority Resource Center/OSDBU’s contractor for the Marketplace Conferences project participated in this outreach event. 

The purpose of the ‘‘Industry Day’’ outreach event was to help inform local ANC 

and DBE firms about potential opportunities from the Port Expansion Project. Topics ranged from the specifics of the project, the project schedule and contract and 

subcontracting upcoming opportunities. 
101

Koniag Services, Inc. (KSI) a Native American 8(a) firm, was awarded the contract for project management for the ‘‘Industry Day’’ event and was responsible for 

hosting the meeting.

NEW DOT HEADQUARTERS BUILDING

Question. What is the unobligated balance of funds made available for the DOT 

headquarters building? 

Answer. The $42 million was apportioned by March 2004, and we are working 

with GSA to ensure obligation of the full amount by the end of the fiscal year. Onethird of the funds are being obligated by the end of June with the balance by the 

end of September 2004. 

Question. Please compare the projected lease rates of the new headquarters building with the terms of the lease of the Nassif building? 

Answer. The following chart compares the projected lease rates of the new headquarters building with the lease terms of Nassif building for the period of fiscal year 

2004 through fiscal year 2007. The current Nassif lease expires March 2006, and 

DOT’s projected move to the new facility will be completed in November 2006. It 

is anticipated DOT and GSA will request authority to exercise a short-term lease 

extension for approximately 10 months.

Rent Fiscal Year 2004 Fiscal Year 2005 Fiscal Year 2006 Fiscal Year 2007

New HQ Bldg. ............................................................... ........................ ........................ $32,928,750 $40,435,470

Nassif Building ............................................................. $37,000,000 $37,740,000 43,500,000 48,500,000

Question. Please provide a comprehensive list of projects and associated funding 

amounts for improvements to the Nassif building? 

Answer. The Nassif building has been occupied for almost 30 years. There are no 

comprehensive records going back that far to draw upon to provide the requested 

information. However, through anecdotal information, the following projects and 

funding for the Nassif building capital improvements was compiled.

Project Dates Cost 

Replacement of auxiliary cooling equipment .............................................................. 1995–1996 ............... $452,335

Conversion of below ground space from parking space to office space ................... 1995–1996 ............... 700,000

Fitness Center Renovation ........................................................................................... 1997 ......................... 482,000

500 KW Emergency Generator (This item will be relocated to new headquarters 

building.).

1999 ......................... 500,000

Emergency Command Center Expansion/Renovation ................................................... 2001–2002 ............... 804,938

Installation of Loading Dock Doors ............................................................................. 2001–2002 ............... 34,464

Question. Please breakdown in greater detail the fiscal year 2005 request for the 

new headquarters building. 

Answer. The information follows.

Description Soft Costs Fiscal Year 2005 Funds 

GSA Managed Contracts: 

Ai: 

Acoustical/Audio Visual Engineer ...................................................................................................... ........................

Engineering (MEP) DIDs ..................................................................................................................... ........................

Structural Engineering ....................................................................................................................... ........................

Architectural/Construction Admin. ..................................................................................................... ........................

Disaster Planning ............................................................................................................................... $101,115

Fitness Center Consultant ................................................................................................................. ........................

Food Service Consultant .................................................................................................................... ........................

Health Unit Consultant ...................................................................................................................... ........................

Signage Consultant ............................................................................................................................ ........................

Commissioning ................................................................................................................................... 200,000

LEEDS Certification ............................................................................................................................ 450,000

Building Automation System .............................................................................................................. 40,000

Financial Consultant .......................................................................................................................... ........................

GSA advanced funds .......................................................................................................................... ........................

ARA: Security DIDs ...................................................................................................................................... 50,000
102

Description Soft Costs Fiscal Year 2005 

Funds 

CQM Awardee: 

Project Administration for Estimating, Scheduling & Inspections for Customization Components) ............................................................................................................................................. 400,000

Other ................................................................................................................................................... 19,847

IT/Telecom Design .............................................................................................................................. ........................

Guard Service (Site Access/Dock/Floor) ............................................................................................. 1,300,000

Move Consultant ................................................................................................................................ ........................

Moves (Box, Telecommunications, Furn.) ........................................................................................... 1,350,000

Occupant Emergency Plan (OEP) Consultant .................................................................................... 135,000

Systems Furniture Consultant ............................................................................................................ 125,000

Interior Design Consultant ................................................................................................................. 100,000

MEP Consultant .................................................................................................................................. ........................

Document Repository .......................................................................................................................... 100,000

Employee Handbook ........................................................................................................................... 325,000

JBG: CDs—Developer’s A/E (26 Design Action Item) ......................................................................................... ........................

Subtotal .................................................................................................................................................. 4,895,962

GSA (WCF): Telecommunications Design ............................................................................................................. 0

DOT Contracts: Security Consultant .................................................................................................................... 100,000

TOTAL ...................................................................................................................................................... 4,995,962

Hard Costs: 

GSA: 

Furniture ............................................................................................................................................. 21,100,000

Security Equipment ............................................................................................................................ 8,265,000

JBG: 

Base Building Enhancements ............................................................................................................ 7,973,000

Interior Fitout ..................................................................................................................................... 30,000,000

Building Automation System .............................................................................................................. 2,500,000

Subtotal ......................................................................................................................................... 69,838,000

GSA (WCF): Telecommunications Hardware ......................................................................................................... 81,639,600

DOT ....................................................................................................................................................................... ........................

TOTAL ...................................................................................................................................................... 151,477,600

Other Costs: 

GSA FEE (PBS PM Fee) ............................................................................................................................... 526,438

GSA FEE (FSS Fee) ...................................................................................................................................... 3,000,000

TOTAL ...................................................................................................................................................... 3,526,438

TOTAL ...................................................................................................................................................... 160,000,000

Question. How much is the new building expected to cost? 

Answer. As identified in the lease agreement negotiated by the General Services 

Administration, the new facility direct base building construction cost is estimated 

to be $206 million. In addition, the land and tenant improvement allowance costs 

are $40.5 million and $23.8 million respectively. DOT’s estimated multi-year appropriated funding request for personal property, tenant fit-out and relocation expenses 

is estimated at $314.2 million. 

Question. Please define in detail what customization will be necessary and what 

the costs of each project are projected to be. 

Answer. Customization (tenant fit-out) costs are estimated at $40 million and are 

comprised of the following specific items: 

Interior Tenant Fit Out.—$40,000,000.00: 

—Carpet (150,000 SF@$35/SF=$5.25 million) 

—Raised Flooring (49,000 SF@$20/SF=$0.980 million) 

—Millwork (40,000 SF@$5/SF=$0.2 million) 

—Window Treatment (75,000 SF@$1.50/SF=$0.075 million) 

—Signage (1.35 million SF@$1/SF=$1.35 million) 

—Finishes (1.35 million SF@$35/SF=$5.25 million) 
103

—Pantries (1,280 SF@$30/SF=$.0384 million) 

—Upgrade to Building Standard: Lighting, HVAC (General office), Plumbing, 

Electrical, Telephone Infrastructure, Acoustical Ceiling Tiles and Grid, Hardware (Doors, hardware) (1.35 million SF@$19.90/SF=$26.865 million). 

DOT RENT

Question. Please compare what has been appropriated for rental of leased space 

to actual expenses over the past 5 years. 

Answer. Over the past 5 years, the Government’s annual appropriated rent payment has been approximately $37 million per year to cover actual rent expenditures 

for the DOT Nassif building. 

WORKING CAPITAL FUND

Question. Please provide a break out of what is included in the request of each 

modal administration for the Working Capital Fund and identify which account includes such funding. 

Answer. The information follows.

OPERATING ADMINISTRATIONS WORKING CAPITAL FUND REQUEST BY ACCOUNT 

[In thousands of dollars] 

Fiscal Year 2005 

Request 

Federal Aviation Administration: Operations ....................................................................................................... 24,626 

Federal Highway Administration: LAE .................................................................................................................. 8,299 

Federal Motor Carrier Safety Administration: Motor Carrier Safety Operations & Programs ............................. 3,586 

National Highway Traffic Safety Administration: 

General Fund ............................................................................................................................................... 7,660

Trust Fund ................................................................................................................................................... 7,660 

Federal Railroad Administration: Safety and Operations .................................................................................... 2,928 

Federal Transit Administration: Administrative Expense ..................................................................................... 3,152

St. Lawrence Seaway Development Corp: Saint Lawrence Seaway Development Corp ...................................... 376 

Research and Special Programs Admin: 

Research and Special Programs ................................................................................................................. 2,518

Pipeline Safety ............................................................................................................................................ 847 

Office of the Inspector General: Salaries and Expenses ..................................................................................... 2,218 

Surface Transportation Board: Salaries and Expenses ....................................................................................... 90 

Bureau of Transportation Statistics: Federal aid to Highways allocation .......................................................... 4,093 

Maritime Administration: Operations and Training ............................................................................................. 5,926 

Office of the Secretary: Salaries & Expenses, Office of Civil Rights ................................................................. 19,062

Total ........................................................................................................................................................ 93,040

Estimates are provided to the operating administrations to assist them in their 

budget formulation process. These estimates are used as a building block for the 

WCF budget request but do not represent the total WCF budget estimate. The WCF 

obligation request is built upon the customer estimates and additional obligation authority that is used to cover the potential to compete for business which results in 

higher demand levels for WCF services. For example, increases to demand come 

about during times of heightened security levels. The WCF budget estimate is developed based on the potential for the WCF to provide business services. Additionally, 

obligations for capital assets are required in 1 year but are provided to the operating administrations over multiple years based on the depreciation schedule. 

Question. Please breakout according to the fiscal year 2005 budget request, the 

obligations in the Working Capital Fund by line of business and compare to obligations over the past 3 fiscal years. 

Answer. The information follows.

WORKING CAPITAL FUND 

[In thousands of dollars] 

Fiscal Year 2002 Actual Fiscal Year 2003 Actual Fiscal Year 2004 Enacted Fiscal Year 2005 Estimate 

Office of the Deputy Assistant Secretary for Administration ....................................................................... 374 96 323 394
104

WORKING CAPITAL FUND—Continued

[In thousands of dollars] 

Fiscal Year 2002 Actual Fiscal Year 2003 Actual Fiscal Year 2004 Enacted Fiscal Year 2005 Estimate 

Office of Strategic Initiatives ....................................... 426 512 722 717

Office of Financial Management .................................. 5,935 5,749 16,095 13,980

Office of Human Resource Management ..................... 10,254 10,686 9,923 11,481

Office of Transportation and Facilities Services .......... 135,237 184,793 212,793 225,222

Office of Information Services ...................................... 24,087 18,421 20,007 21,966

Office of Headquarters Building and Space Management ......................................................................... 5,585 5,372 5,112 6,050

Office of Security .......................................................... 10,689 9,993 14,767 17,271

Office of the Senior Procurement Executive ................. 152,465 225,236 126,269 118,439

Total Office of the Assistant Secretary for 

Administration ............................................ 345,052 460,858 406,011 415,520

Total Office of the Chief Information

Officer ......................................................... 26,199 28,990 53,216 73,378

Total Working Capital Fund ............................ 371,251 489,848 459,227 488,898

AUTHORIZATION OF DOT PROGRAMS AND FEES

Question. Please list by agency of the Department of Transportation all appropriations or obligation limitations that are currently unauthorized. Also please provide 

the year in which the authorization expired. 

Answer. The information follows. 

The DOT accounts which require authorization/reauthorization in fiscal year 2005 

include the following:

APPROPRIATIONS NOT AUTHORIZED BY LAW 

[Dollars in thousands] 

Agency and Account 

Amount of Program or New Fees 

Last Year of

Authorization 

Authorization Level 

Appropriations in 

Last Year of

Authorization 

Federal Transit Administration: 

Administrative Expenses ...................................... $79,931 2004 2 $56,290 ........................

Formula Grants .................................................... ........................ 2004 2 2,862,262 ........................

University Transportation Research ..................... ........................ 2004 2 4,473 ........................

Transit Planning and Research ........................... ........................ 2004 2 93,942 ........................

Job Access and Reverse Commute ...................... ........................ 2004 2 93,196 ........................

Capital Investment Grants .................................. ........................ 2004 2 2,339,241 ........................

Major Capital Investment Grants ........................ 1 1,563,198 ........................ ........................ ........................

Formula Grants and Research ............................ 1 5,622,871 ........................ ........................ ........................

Research and Special Programs: 

Research and Special Programs (Hazardous Materials Safety) .................................................. 25,486 1997 19,670 $15,268

Emergency Preparedness Grants ......................... 14,300 1998 21,250 7,970

Federal Motor Carrier Safety Administration: 3

Motor Carrier Safety Operations and Programs .. 228,000 N/A N/A N/A 

Motor Carrier Safety Grants ................................ 227,000 N/A N/A N/A 

National Highway Traffic Safety Administration: 

Operations & Research—General Fund .............. 139,300 ........................ ........................ ........................

Operations & Research—Trust Fund .................. 90,000 2003 72,000 4 71,532

National Driver Register ...................................... 4,000 2003 2,000 4 1,987

Highway Traffic Safety Grants ............................ 456,000 2003 225,000 4 223,537

Federal Railroad Administration: 

Safety and Operations 5 ....................................... 142,396 1998 ........................ ........................

Railroad Safety .................................................... N/A 1998 90,739 57,050

Grants to the National Passenger Railroad

Corp. ................................................................ 900,000 2002 955,000 826,476

Surface Transportation Board ...................................... 20,621 1998 12,000 13,850
105

APPROPRIATIONS NOT AUTHORIZED BY LAW—Continued

[Dollars in thousands] 

Agency and Account 

Amount of

Program or New 

Fees 

Last Year of

Authorization 

Authorization 

Level 

Appropriations in 

Last Year of

Authorization 

Federal Highway Administration: Federal-aid Highway 

Program .................................................................... 6 34,282,000 2004 7 26,433,750 8 33,643,326

1Major Capital Investment Grants and Formula Grants and Research reflect a proposed restructuring of accounts. 

2 Reflects amounts authorized in Public Law 108–224 for the period October 1, 2003, to June 30, 2004. 

3 New Account Structure Proposed in Fiscal Year 2004 and Submitted Again in Fiscal Year 2005—Pending Enactment of SAFETEA. 

4 Fiscal year 2003 Appropriation reflects 0.65 percent across-the-board reduction pursuant to Public Law 108–7. 

5Was formerly the Office of the Administrator and Railroad Safety Accounts. The Office of the Administrator had general authority under 49 

U.S.C. Section 103, however, no specific amount was authorized. 6 Includes all elements except the Emergency Relief program. 

7 Reflects amounts authorized in Public Law 108–224 for the period October 1, 2003, to June 30, 2004. 

8 Represents the limitation on obligations enacted for fiscal year 2004 in Public Law 108–199, net of 0.59 percent rescission. Does not includes exempt obligations for Minimum Guarantee. 

Question. Please provide a list of all new programs or fees that require authorization. 

Answer. The information follows.

APPROPRIATIONS NOT AUTHORIZED BY LAW 

[Dollars in thousands] 

Agency and Account 

Amount of

Program or New 

Fees 

Last Year of

Authorization 

Authorization 

Level 

Appropriations in 

Last Year of

Authorization 

Federal Transit Administration: 

Major Capital Investment Grants ........................ 1 $1,563,198 ........................ ........................ ........................

Formula Grants and Research ............................ 1 5,622,871 ........................ ........................ ........................

Federal Motor Carrier Safety Administration: 2

Motor Carrier Safety Operations and Programs .. 228,000 N/A N/A N/A 

Motor Carrier Safety Grants ................................ 227,000 N/A N/A N/A 

National Highway Traffic Safety Administration: 

Operations & Research—General Fund .............. 139,300 ........................ ........................ ........................

Operations & Research—Trust Fund .................. 90,000 2004 3 $53,681 4 $71,575

National Driver Register ...................................... 4,000 2004 3 2,684 4 3,579

Highway Traffic Safety Grants ............................ 456,000 2004 3 167,754 4 223,673

Federal Highway Administration: Federal-aid Highway 

Program .................................................................... 5 34,282,000 2004 6 26,433,750 7 33,643,326

1Major Capital Investment Grants and Formula Grants and Research reflect a proposed restructuring of accounts. 

2 New Account Structure Proposed in Fiscal Year 2004 and Submitted Again in Fiscal Year 2005—Pending Enactment of SAFETEA. 

3 Reflects amounts authorized in Public Law 108–224 for the period October 1, 2003, to June 30, 2004. 

4 Represents the limitation on obligations enacted for fiscal year 2004 in Public Law 108–199, net of 0.59 percent rescission. 

5 Includes all elements except the Emergency Relief program. 

6 Reflects amounts authorized in Public Law 108–224 for the period October 1, 2003, to June 30, 2004. 

7 Represents the limitation on obligations enacted for fiscal year 2004 in Public Law 108–199, net of 0.59 percent rescission. Does not in- clude exempt obligations for Minimum Guarantee. 

AIRLINE STABILIZATION ACT

Question. What is the unobligated balance of funds made available by the Airline 

Stabilization Act? 

Answer. As of June 1, 2004, the program maintained a balance of approximately 

$270 million for remaining obligations, including the litigation reserve. 

Question. What is the amount of funds made available by the Airline Stabilization 

Act that is under consideration for payment or still being disputed or litigated? 

Answer. Two hundred seventy million dollars, including a ‘‘litigation reserve.’’ 

Were the Department not to prevail in its litigation with Federal Express and two 

other smaller carriers, it is possible that the Court of Appeals, in framing its decision, could be sufficiently broad in its language so as to permit some other carriers 

to attempt to revise their applications and seek supplemental payments. Thus, the 

full balance has been maintained so as to include this litigation reserve. We expect 

the Court to act very soon in issuing its decision, and are hopeful that this figure 

can be revised downward thereafter to reflect a favorable outcome in the case. 
106

QUESTIONS SUBMITTED BY SENATOR ROBERT F. BENNETT

TRANSPORTATION OF DIAGNOSTIC AND INFECTIOUS MEDICAL SPECIMENS

Question. The following Medical Specimen Transport White Paper was sent to me 

by ARUP Laboratories, a medical laboratory affiliated with the University of Utah’s 

Medical Center. I am submitting it for the record so that Secretary Mineta can comment on the concerns raised and the questions I will supply at the end of this document. 

‘‘Introduction 

‘‘As a result of recent interpretations provided to ARUP Laboratories by the Department of Transportation (DOT) and the Federal Aviation Administration (FAA), 

an atmosphere of uncertainty now exists within the air transportation system. Medical specimen shipments from hospitals and laboratories in a number of locations 

within the United States are being rejected for air transport, creating the potential 

to cause patient harm through delayed testing and result availability. 

‘‘Background 

‘‘Prior to February 14, 2003, the United States Department of Transportation 

(DOT) did not regulate the transportation of medical specimens sent for diagnostic 

purposes within the United States. Prior to January 1, 2003, the International Air 

Transport Association (IATA), a trade association of the airlines, instructed that 

medical specimens transported by air were to be divided into two categories: Diagnostic Specimens and Infectious Substances. This requirement was based on regulations put forth by the United Nations International Civil Aviation Organization (UN 

(ICAO)). Under UN (ICAO) and IATA, Infectious Substances were, and still are, regulated as hazardous materials. The Federal Aviation Administration (FAA), the enforcement agent for DOT, recognizes ICAO regulations, but does not reference IATA 

rules in their enforcement actions. 

‘‘Prior to January 1, 2003, medical specimens that were identified as Diagnostic 

Specimens could not contain any known or suspected infectious agent. Any specimen 

that was identified as having an infectious agent required shipment as an Infectious 

Substance. Infectious Substance shipments could only be transported by airlines 

that were considered as ‘Will Carry’ airlines, meaning that they provide formal 

training and handling information to cargo personnel on Hazardous Materials. Diagnostic Specimens could be shipped by any airline at that time. 

‘‘On February 14, 2003, revised DOT regulations went into effect that incorporated a definition for Diagnostic Specimens into the hazardous materials regulations. As a result of this revision, the DOT and FAA are now instructing any airline 

that is considered a ‘Will Not Carry’ airline to avoid carrying ALL Diagnostic Specimens. 

‘‘Airline routing changes and service discontinuation, partly due to the terrorist 

attacks of September 11, 2001, have resulted in an increasing number of areas now 

served almost exclusively by ‘Will Not Carry’ regional airlines. Under the new regulations, these airlines can no longer carry shipments they had previously been allowed to carry. Delays in diagnostic testing for patients in those areas have the potential to prolong patient management and hospital stays. This will increase medical costs, and could affect as many as 6,000 patients per day receiving results from 

ARUP Laboratories alone. Other laboratories may have similar issues. 

‘‘The DOT offers an exemption for specimens that are not considered infectious 

in DOT 49 CFR 173.134(b)(2). This exemption is not clearly defined, nor are there 

any specific instructions for the shipping of these specimens. If we assume, as we 

have been told, that this exemption creates a new unregulated category, i.e. medical 

specimen, there is no assurance airlines will recognize such an unregulated term. 

Because personnel training is a requirement of the regulations, it is, at present, unclear what terminology will be recognized for this category of unregulated specimens. Efforts to quickly and effectively revise existing medical specimen training 

programs will be further impeded until these concerns are resolved. 

‘‘In excess of 80 percent of clinical data is represented by laboratory results. The 

specimens from which 5 to 10 percent of this clinical data is derived are shipped 

between requesting and testing locations within the United States that may be affected by these regulatory changes. Lack of consistency between regulatory agencies, 

the transportation industry, and health care entities (as shippers) potentially create 

unnecessary liability and may compromise patient care. 

‘‘In conclusion, it is noteworthy that the laboratory industry for many years has 

been a leader in developing safe handling practices to deal with the fact that every 

single medical specimen is a potentially hazardous material. The industry as a 
107

whole has a remarkable and enviable safety record in the transportation of medical 

specimens.’’

Is it the intent of DOT regulations to limit the transport of diagnostic specimens 

by ‘‘will-not-carry’’ airlines? 

Answer. No, the Department of Transportation’s (DOT) Hazardous Materials Regulations (HMR; 49 CFR Parts 171–180) establish safety and security requirements 

for the commercial transportation of hazardous materials by all modes. The regulations are not intended to limit the transportation of hazardous materials by certain 

types of carriers; rather the regulations set forth the safety and security requirements that must be met by shippers and carriers who choose to transport hazardous 

materials. 

The decision not to carry one or more types of hazardous materials rests with individual carriers, not DOT. Since economic deregulation, air carriers have been able 

to accept or reject hazardous materials. Air carriers making a business decision to 

accept hazardous materials are called ‘‘will-carry’’ air carriers and those deciding not 

to accept hazardous materials are called ‘‘will-not-carry’’ air carriers. These business 

decisions are influenced by factors such as insurance rates and anticipated hazmat 

package volumes. Once an air carrier makes this decision, the Federal Aviation Administration (FAA) reviews its hazmat training program. Employees of will-carry air 

carriers are trained to recognize and accept hazardous materials while employees 

of will-not-carry air carriers are trained to recognize and reject hazmat. Although 

air carriers can change their will/will-not-carry status, the initial acceptance procedures applied by their employees is crucial and affects subsequent operational decisions. 

Under the Hazardous Materials Regulations (HMR), infectious substances are 

classed as Division 6.2 materials. An infectious substance is a material known to 

contain or suspected of containing a pathogen, which is a virus or microorganism 

that has the potential to cause disease in humans or animals. Infectious substances 

must be packaged, marked, and labeled in accordance with applicable regulatory requirements; further, shipments of infectious substances must be accompanied by a 

shipping paper and by appropriate emergency response information. Employees of 

shippers or carriers who handle infectious substances must be trained in the regulatory requirements that apply to these materials. 

Under the HMR, a diagnostic specimen is defined as human or animal material 

that is being transported for diagnostic or investigational purposes. A diagnostic 

specimen that, in the judgment of a medical professional, is known to contain or 

suspected to contain an infectious substance is regulated as a hazardous material 

under the HMR. However, the requirements applicable to the transportation of diagnostic specimens are less stringent than those for other types of infectious substances. For example, shipments of diagnostic specimens need not be accompanied 

by shipping papers or emergency response information, and the required training 

for hazmat employees is less rigorous than for other types of infectious substances. 

Under the HMR, a diagnostic specimen that, in the judgment of a medical professional, is not likely to contain an infectious substance is not regulated as a hazardous material and may be transported by a ‘‘will-not-carry’’ air carrier without 

limitation. Thus, no packaging, shipping documentation, marking or labeling, or 

training requirements would apply. 

Because the HMR exempts diagnostic specimens that do not contain infectious 

substances from all regulatory requirements, many packages identified as containing diagnostic specimens may not actually contain infectious substances and, 

thus, could be transported by will-not-carry air carriers. DOT is working with the 

Centers for Disease Control and Prevention and the International Civil Aviation Organization to consider whether a unique shipping name is necessary to distinguish 

infectious diagnostic specimens from non-infectious diagnostic specimens. 

Question. Has DOT done any analysis with regard to the impact of this regulation 

on States such as Utah and the Intermountain West that rely on regional air carriers to transport diagnostic specimens? 

Answer. No, DOT has not analyzed the impact of the regulations on States that 

rely on regional air carriers to transport diagnostic specimens. The decision to provide or not provide hazardous materials transportation service on a particular air 

route is a business decision of the air carrier. The regulations governing the transportation of infectious substances, including diagnostic specimens, were most recently revised and updated in a final rule that became effective on February 14, 

2003. The regulatory evaluation developed in support of that rulemaking examined 

the costs of several regulatory alternatives on shippers and carriers of diagnostic 

specimens and the benefits that would be expected to accrue from each regulatory 

alternative on the Nation as a whole. 
108

Representatives from the FAA have met with the Regional Airline Association and 

the Air Transport Association of America concerning the transport of diagnostic 

specimens to discuss various alternatives. One alternative would be for the will-notcarry air carrier to contact their diagnostic specimen shipping firms to determine 

if the packages being offered actually contain infectious substance. If the packages 

do not contain infectious substances, will-not-carry airlines would be able to accept 

and transport them. 

Question. What is the typical cost for a regional airline to provide training to its 

employees to qualify to handle ‘‘infectious substances’’? 

Answer. DOT does not collect nor require regional airlines to provide data on costs 

to qualify employees to handle infectious substances. 

The training requirements in the Hazardous Materials Regulations (HMR) are 

flexible performance standards that permit employers that assign employees to perform functions regulated by the HMR to meet the training requirements using a variety of methods, such as by utilizing classroom training, computer- or web-based 

training, on-the-job training, or some combination of these and other training methods. The training must include general awareness training that provides familiarity 

with the requirements of the HMR; function-specific training that provides an understanding of the requirements of the HMR applicable to the specific job each employee performs; safety training that provides information on responding to emergency, personal protection, and methods for avoiding accidents; and security awareness training that familiarizes the employee with the security risks associated with 

hazardous materials transportation. Training costs for an individual carrier will 

vary based on the number of people it employs whose job responsibilities directly 

affect the safety of hazardous materials in transportation and the training methods 

it elects to utilize. 

In addition, in accordance with FAA airworthiness requirements, all air carriers 

must provide hazmat training. Will-not-carry air carriers must provide some hazmat 

training to their employees on such topics as labeling, marking and general awareness so they can recognize hazmat. A rough estimate for a will-not-carry air carrier 

to provide initial training would be $320 per applicable employee. In addition, annual recurrent hazmat training for will-not-carry air carriers would be approximately $160 per applicable employee. These estimates include the cost of the employee’s salary while in training. A rough estimate for will-carry air carrier initial 

training would be an additional $880 (for a total of $1,200) per applicable employee. 

Annual recurrent hazmat training for will-carry air carriers would be an additional 

$160 (for a total of $320) per applicable employee. 

Question. What can DOT do to provide these regional/national clinical laboratories 

with regulatory relief so that they can move their specimens more efficiently? 

Answer. The Hazardous Materials Regulations (HMR) provide significant regulatory exceptions applicable to the transportation of diagnostic specimens. A diagnostic specimen that, in the judgment of a medical professional, is not likely to contain an infectious substance is not regulated as a hazardous material and, therefore, 

is not subject to any regulatory requirements. A diagnostic specimen that, in the 

judgment of a medical professional, contains or is suspected to contain an infectious 

substance is subject to minimal packaging and hazard communication requirements, 

but is not regulated as stringently as other types of infectious substances. 

For example, an infectious substance generally must be transported in a packaging that has been tested and certified to meet specific performance standards. A 

diagnostic specimen may be transported in a less stringent, and therefore less expensive, type of packaging. A package containing an infectious substance generally 

must be marked with the United Nations identification number and proper shipping 

name of the material and must be labeled with a Division 6.2 label and must be 

accompanied by a shipping paper and emergency response information. A package 

containing a diagnostic specimen must be marked only with the words ‘‘Diagnostic 

Specimen’’ and need not be accompanied by a shipping paper or emergency response 

information. Further, persons who ship or transport diagnostic specimen are exempt 

from the training requirements of the HMR; instead employees of such shippers and 

carriers must be informed about the requirements applicable to the transportation 

of diagnostic specimens. 

In addition, in December, 2003, the FAA corresponded with the Air Transport Association and the Regional Airline Association suggesting that will-not carriers may 

wish to contact shippers individually. As a result, one regional will-not-carry air carrier serving Utah and the Intermountain West, SkyWest, has developed a ‘‘shipper’s 

confirmation of non-infectious substance form’’ that is acceptable to the FAA. The 

form is available on the SkyWest website. In addition, it would be acceptable for 

those offering non-infectious diagnostic specimens to simply mark their packages as 

NOT containing hazardous material. In fact the ARUP Laboratories, a large shipper 
109

of medical specimens in Utah, indicates on their website that it will mark its packages ‘‘Medical Specimens, non HMR.’’ This would also be sufficient to allow will-notcarry air carriers to transport the ARUP non-infectious packages and is acceptable 

to the FAA. 

Question. What was the impetus for DOT’s revision of the regulations on February 

14, 2003, incorporating a definition for Diagnostic Specimens into hazardous material regulations? 

Answer. DOT’s adoption of the regulations for transporting infectious substances, 

including diagnostic specimens, that became effective February 14, 2003, was primarily intended to harmonize the Hazardous Materials Regulations (HMR) with 

international standards applicable to such transportation. 

Generally, to facilitate the safe and efficient transportation of infectious substances, the HMR permit shipments to be transported under provisions of the Technical Instructions for the Safe Transportation of Dangerous Goods by Air (Technical 

Instructions) issued by the International Civil Aviation Organization (ICAO), the 

International Maritime Dangerous Goods Code (IMDG Code) issued by the International Maritime Organization (IMO), and the Transportation of Dangerous Goods 

Regulations (TDG) issued by Transport Canada, as appropriate. Prior to our adoption of the new requirements, however, the HMR did not provide for the level of 

safety achieved by the ICAO Technical Instructions or the IMDG Code. Moreover, 

the HMR at that time included a complete exception from all requirements for shipments of diagnostic specimens, even those that contained extremely hazardous infectious substances. 

Harmonization of the HMR with the international standards has several important benefits. Carriers are able to train their hazmat employees in a single set of 

requirements for the classification, packaging, communication of hazards, handling, 

stowage, and the like, thereby minimizing the possibility for improperly transporting a shipment of infectious substances because of differences in national regulations. Similarly, many shippers find that consistency in regulations for the transportation of infectious substances aids their understanding of what is required, 

thereby permitting them to more easily comply with these safety regulations when 

shipping hazardous materials to many different countries. Uniformity of national 

and international hazardous materials transportation regulations is critical to safety 

and trade facilitation of hazardous materials transportation. Consistency between 

United States and international regulations enhances the safety of international 

hazardous materials transportation through better understanding of the regulations, 

an increased level of industry compliance, the smooth flow of hazardous materials 

from their points of origin to their points of destination, and consistent emergency 

response in the event of a hazardous materials incident. 

Question. How would DOT respond to the suggestion of a moratorium on the enforcement of the regulations regarding the classification of Diagnostic Specimens 

until such time as a study can be made to assess the impact of the regulations on 

patients, health care, and medical practice within the United States and the risks 

of allowing ‘‘Will-Not-Carry’’ airlines to carry Diagnostic Specimens? 

Answer. DOT strongly opposes an enforcement moratorium applicable to the 

transportation of diagnostic specimens. Surveillance and enforcement must reflect 

the underlying safety requirements. 

A diagnostic specimen known or suspected to contain an infectious substance 

poses a safety, health, and security risk in transportation that must be addressed. 

Diagnostic specimens that contain infectious agents such as the HIV or SARS viruses are routinely transported by air both domestically and internationally. The 

regulations governing such transportation in the HMR and in international standards protect transport workers and the general public from possible exposure to 

such infectious agents. The regulations applicable to the transportation of diagnostic 

specimens were developed through a process that balances their potential costs and 

other impacts with their benefits. The packaging and hazard communication requirements minimize the possibility that a transport worker or other individual will 

be exposed to an infectious agent and enhance the ability of carriers and emergency 

response personnel to effectively respond to an accident involving an infectious 

agent. 

Question. Would DOT consider the addition of laboratory health care professionals 

to groups studying and promulgating new regulations affecting the transport of laboratory specimens? 

Answer. DOT welcomes the participation of laboratory health care or other medical professionals as we consider proposals for revising the current regulatory requirements applicable to the transportation of diagnostic specimens and other types 

of infectious substances. 
110

Prior to the adoption of the February 14, 2003 regulations, the Federal Aviation 

Administration (FAA) met with laboratory professionals and carefully considered 

their comments and concerns as we developed the final regulations. In addition, the 

American Clinical Laboratory Association, the American Society of Clinical Pathologists, and the American Biological Safety Association were among dozens of organizations and individuals who offered comments to the rulemaking docket on this 

issue. The international standards applicable to the transportation of infectious substances were recently revised. DOT is currently considering revisions to the HMR 

to harmonize our domestic requirements with the most recent international revisions. FAA is working with the Centers for Disease Control and Prevention, the 

Food and Drug Administration, the U.S. Department of Agriculture, and other national agencies responsible for public health issues. 

In October 2003, FAA hosted a public meeting specifically to discuss issues related to the air transportation of diagnostic specimens and other infectious substances. In June 2004, the FAA is hosting a second meeting to discuss revisions to 

the international transportation standards, including revisions that should help 

make it easier for air carriers to distinguish between diagnostic specimens that are 

regulated for purposes of transportation and diagnostic specimens that are exempt 

from such regulation. 

QUESTIONS SUBMITTED BY SENATOR RICHARD J. DURBIN

AMTRAK

Question. Why did the administration only include $900 million for Amtrak in the 

fiscal year 2005 budget when this level of funding will send the company into insolvency? 

Answer. The administration believes that the Federal role in intercity passenger 

rail service needs significant change. While the administration supports intercity 

passenger rail service as a component of this Nation’s system of passenger mobility, 

we are not willing to commit increasing amounts of limited discretionary funds 

available for transportation investment on a business model that does not work. 

However, the administration is prepared to support higher levels of funding for a 

reformed system of intercity passenger rail service. The administration expects that 

if Amtrak were to receive $900 million, the corporation could remain solvent 

through fiscal year 2005 while Congress enacted intercity passenger rail reform legislation, through deferral of capital investments, reductions in overhead and, perhaps, some cuts in services. 

Question. Does the administration support reauthorization of Amtrak? Or would 

the administration rather break the intercity passenger railroad up and privatize 

operations? 

Answer. The administration’s legislative proposal, the Passenger Rail Investment 

Reform Act, outlines a third course of action. The administration believes that intercity passenger rail service should exist where the States, as the driving force behind 

surface transportation planning, determine that service is an important component 

of an intermodal plan for passenger mobility and thus worthy of investment. The 

States would competitively select operators for those services the States deem are 

important enough to warrant public support from among qualified firms, perhaps 

including a restructured Amtrak. While these operators would be private sector 

companies, they would receive operating support from the State(s) and capital investment from the States and Federal Government. 

AVIATION DELAYS

Question. How do you expect to proceed on addressing aviation congestion and 

flight delays at Chicago O’Hare International Airport in addition to the temporary, 

voluntary flight reductions during peak hours? When will data on the flight reductions be available? 

Answer. This administration is committed to addressing aviation congestion in 

both the short- and long-term by working with the carriers and local authorities. 

In Vision 100 (Public Law 108–176), Congress gave the Federal Aviation Administration (FAA) a number of new tools to use when demand exceeds capacity at an 

airport. Under Section 422, the FAA can schedule Delay Reduction Meetings; under 

Section 423, the FAA can engage in Collaborative Decision Making. In addition, the 

Administrator retains her authority to issue orders that concern the safety or efficiency of the airspace. While these are all short-term methods, FAA’s long-term goal 

to address congestion nationwide will be accomplished by gaining additional capacity at the Nation’s airports. FAA will continue to monitor delays and will adjust ap-
111

proaches to air traffic delays as needed during the busy summer flying season. Complete data on the effectiveness of the actions taken so far at O’Hare and possible 

future actions to reduce delays will not be available until after the busy summer 

flying season. 

LEVERAGED LEASE TRANSACTIONS

Question. As you know Mr. Secretary, at the request of the U.S. Treasury Department, the Federal Transportation Administration (FTA) formally suspended its 

practice of reviewing and approving proposals for leveraged lease transactions involving public transit assets. FTA’s decision to immediately comply with Treasury’s 

request and suspend consideration of the 15 pending transactions could have sizable 

budget implications for the entities that submitted those transactions and who, up 

until that time, had every reason to believe that FTA would proceed to review and 

approve those transactions in the same manner it has done for years. Each of these 

entities likely incurred significant costs in negotiating the leases, and had a reasonable expectation of realizing substantial revenue from them following FTA approval. 

What is the FTA’s plan to reconsider its decision to suspend pending leveraged lease 

transactions absent further action by Congress on this issue? 

Answer. The Department was informed by the Chairman of the Senate Finance 

Committee in November 2003, that his committee was conducting an investigation 

of abusive tax shelters involving subway systems and other assets funded with taxpayer dollars and asked for our cooperation in the investigation. Also in November 

2003, the Department received a direct request from the Treasury Department that 

the Federal Transit Administration suspend its review and approval of tax-advantaged lease transactions because of concerns about whether the asserted tax benefits 

are allowable. 

FTA notified the transit agencies whose assets would be involved in the leasing 

transactions that reviews would be suspended until the Department of Treasury 

completed its review of these and similar transactions. Should the Treasury Department complete its review and any rulemaking regarding these leasing transactions, 

FTA would then act in accordance with the resulting instructions from the Treasury 

Department. 

QUESTIONS SUBMITTED BY SENATOR BYRON L. DORGAN

ESSENTIAL AIR SERVICE FUNDING

Question. I am very upset that the administration continually tries to cut back 

this program which is so important for rural America. Last year, for fiscal year 

2004, President Bush proposed only $50 million for EAS, but we in Congress fought 

hard to maintain funding, and funded EAS at $102 million. This year, even though 

the FAA reauthorization bill allows up to $115 million for the basic program, plus 

another $12 million for pilot projects, the administration once again only funds EAS 

at $50 million. Could you tell me why the administration is not following Congress’ 

mandate in the FAA reauthorization bill? 

Answer. The administration believes that the EAS program must be reformed or 

the costs will escalate out of control. As more and more regional carriers upsize 

their fleets to larger turboprops or even regional jets, it will leave more communities 

reliant upon subsidized EAS. In addition, as the spread of low-fare carriers continues, more local communities will be unable to support their local airport’s service 

as passengers are willing to drive for a larger part of their journeys in order to take 

advantage of nearby, low-fare jet service. EAS service of two or three round trips 

a day cannot compete with low-fare jet service, and more and more communities are 

falling into this situation. For example, just a few years ago, Utica, New York generated about 24,000 passengers a year, and was served profitably without EAS subsidy. Shortly after Southwest inaugurated service at Albany and JetBlue at Syracuse (less than 50 miles away), annual, passenger levels fell to 3,500 and we were 

paying well over $1,000,000 in EAS subsidy in an attempt to compete with the lowfare, jet service nearby. This example illustrates why we need EAS reforms. 

ESSENTIAL AIR SERVICE COST-SHARING

Question. I was also disappointed that the President seeks to require all communities receiving EAS funds to provide non-Federal matching funds. Communities 

fewer than 100 highway miles from a large or medium hub airport, 75 miles from 

a small hub airport, or 50 highway miles from a non-hub airport with jet service 

would have to contribute not less than 50 percent and would only be eligible for surface transportation subsidies. Communities in North Dakota that participate in 
112

EAS, such as Devils Lake, Jamestown and Dickinson-Williston, are more than 210 

highway miles from a medium or large hub airport, and will have to provide 10 percent, and all others will have to provide not less than 25 percent. This is patently 

unfair and goes against the purpose of the EAS program to promote and protect air 

service to rural areas, and I will fight hard to prevent the President’s plan from taking effect. Given that Congress explicitly rejected such a harsh cost-sharing requirement in the FAA reauthorization process last year, why would the administration 

propose it now after the reauthorization bill has passed? Isn’t this patently unfair 

to rural America? 

Answer. Requiring a modest contribution would encourage civic officials and business leaders at the local and State levels to evaluate the need for the EAS program, 

given other local funding priorities, and, as stakeholders in their service, the communities will become key architects in designing their specific transportation package based on their need and requirements. 

AIR TRAFFIC CONTROL TRAINING

Question. According to the GAO, the FAA will likely need to hire thousands of 

air traffic controllers in the next decade to meet increasing traffic demands and to 

address the anticipated attrition of experienced controllers, predominately because 

of retirement. The GAO raised the point that ‘‘the FAA’s process of hiring replacements only after a current controller leaves does not adequately take into consideration the time it takes to train a replacement to become a fully certified controller—

up to 5 years, which might result in gaps of coverage or increased overtime.’’ To address this problem, I attached an amendment to expressly authorize the FAA to 

spend such sums as may be necessary to carry out and expand the Collegiate Training Initiative. As you may know, one of those schools participating is the John D. 

Odegard School of Aerospace Sciences at UND. Knowing this, what efforts are being 

taken at the FAA to address this problem? Would you support efforts to add funding 

for this initiative? 

Answer. Currently, the FAA has no plans to expand the Air Traffic Collegiate 

Training Initiative (AT–CTI) beyond the 13 colleges and universities. The AT–CTI 

candidate pool is fairly large and growing (about 361 waiting to be hired). The number of controllers to be hired in fiscal year 2004 and beyond is being evaluated. 

There has been no controller hiring since October 2003. We are reluctant to add additional colleges until the hiring picture is clearer and the need for additional training resources is better quantified. 

If the AT–CTI pool grows too large, FAA runs the risk of not being able to hire 

a significant enough percentage of graduates to make the program worthwhile to 

the colleges. Colleges market this program to their students and we maintain a balance between having enough candidates and not overstating our ability to hire 

them. Colleges can withdraw at any time; they are not obligated to the FAA. 

The FAA reauthorization bill Vision 100—Century of Aviation Reauthorization 

Act, Public Law 108–176, allows for AT–CTI expansion if necessary. However, the 

Departments of Transportation and Treasury and Independent Agencies fiscal year 

2004 House Appropriations Report 108–243 specifically directs FAA not to expand 

the AT–CTI program. It states, ‘‘While the Committee does not oppose continuation 

of the Air Traffic Control Collegiate Training Initiative, the Committee does not believe it should be expanded, and directs the FAA not to expand these programs.’’

AMTRAK

Question. I was disappointed that the administration has again proposed only 

$900 million for Amtrak this year. I am particularly concerned about the impact of 

any cuts to Amtrak on long distance trains, such as the Empire Builder. If enacted, 

what impact do you think your budget request would have on long distance train 

service? 

Answer. The administration believes that the Federal role in intercity passenger 

rail service needs significant change. While the administration supports intercity 

passenger rail service as a component of this Nation’s system of passenger mobility, 

we are not willing to commit increasing amounts of limited discretionary funds 

available for transportation investment on a business model that does not work. 

However, the administration is prepared to support higher levels of funding for a 

reformed system of intercity passenger rail service. The administration expects that 

if Amtrak were to receive $900 million, the corporation could remain solvent 

through fiscal year 2005 while Congress enacted intercity passenger rail reform legislation, through deferral of capital investments, reductions in overhead and, perhaps, some cuts in services. Amtrak would determine how to best operate with 

available resources. Therefore, I would prefer not to speculate which, if any, route 
113

or service type would be impacted in the short-term by the administration’s budget 

request of $900 million for Amtrak.

SUBCOMMITTEE RECESS

Senator SHELBY. Mr. Secretary, I thank you for your appearance. 

As usual, you bring a lot to the table and a past friendship too. 

Secretary MINETA. Thank you very much. 

Senator SHELBY. This concludes our hearing. 

[Whereupon, at 11:30 a.m., Tuesday, March 9, the subcommittee 

was recessed, to reconvene subject to the call of the Chair.] 

(115)

DEPARTMENTS OF TRANSPORTATION, TREASURY AND GENERAL GOVERNMENT, AND RELATED AGENCIES APPROPRIATIONS FOR 

FISCAL YEAR 2005

THURSDAY, APRIL 1, 2004 

U.S. SENATE, 

SUBCOMMITTEE OF THE COMMITTEE ON APPROPRIATIONS, 

Washington, DC. 

The subcommittee met at 10:03 a.m., in room SD–138, Dirksen 

Senate Office Building, Hon. Richard C. Shelby (chairman) presiding. 

Present: Senators Shelby, Stevens, and Murray. 

UNITED STATES POSTAL SERVICE 

STATEMENT OF JOHN POTTER, POSTMASTER GENERAL AND CEO 

OPENING STATEMENT OF SENATOR RICHARD C. SHELBY

Senator SHELBY. Good morning. The committee will come to 

order. 

Today the subcommittee will hear from the United States Postmaster General, John Potter. Mr. Potter has testified at a number 

of hearings in the last few months on postal reform, terror attacks 

using mail, and other issues facing the Postal Service. It has been 

several years, however, since the subcommittee has had the privilege of receiving testimony from the Postmaster General. We are 

pleased to welcome you here today. 

As a vital component of our Nation’s economy, it is absolutely 

crucial that the Postal Service maintain its role as a Federal Post 

and maintain the solemn obligation of universal service. In doing 

so, it is undeniable that the Postal Service must change and adapt 

in order to provide an affordable service that continues to tie our 

Nation together. 

Without question, the United States Postal Service has confronted some significant changes over the last few years. The current business model of the Postal Service is outdated and is not 

economically viable in the 21st century. The financial problems 

have been further complicated since the terrorist attacks that used 

the mail system to deliver biological weapons. 

Even as the number of customers and addresses that the Postal 

Service serves has increased, the volume of first class mail has 

dropped steadily since 2001. The Postal Service now faces stiff competition from a variety of electronic communications options that 
116

did not widely exist a few years ago, as well as from private sector 

delivery services. Furthermore, postage rate hikes have only caused 

consumers to further rely on alternative means of communications. 

All of these factors have become a self-fulfilling prophecy of future 

postage rate increases to offset the decline in volumes of first class 

mail. 

And as one who believes that a comprehensive Postal Service for 

all Americans, rural and urban, is one of the central elements of 

keeping the country connected, the first class revenue and volume 

dilemma is one we have to address and solve. 

As difficult as these challenges are, the Postal Service is also 

charged with ensuring the safety of the mail. The anthrax attacks 

in 2001 and the more recent attacks using the deadly toxin ricin 

create a daunting overlay on every aspect and element of the Postal Service’s operation. 

I need not elaborate today any further on the challenge this presents to the Postal Service and look forward to hearing what steps 

are being taken to prevent these attacks from happening in the future. 

I would also appreciate learning about your plan for screening 

the mail to provide for the safety of Postal customers and Postal 

employees while also ensuring timely delivery. 

In the wake of anthrax attacks, Congress provided the Postal 

Service with emergency funding to decontaminate sorting facilities 

and to procure biohazard detection equipment. The Postal Service 

has used this funding to install sensors that detect anthrax at several facilities. I have been told, however, by the General Accounting 

Office and others, that the system cannot adequately detect other 

agents. 

I am concerned that the prior investment may be too focused on 

reacting to the last threat and not focused enough on detecting 

other threats. 

The Postal Service submitted a budget request to Congress that includes $779 million for emergency preparedness activities. This 

funding, however, was not included in the President’s budget. I 

hope you will discuss the next steps for the Postal Service and 

what sort of investment we can expect in future years. 

Today, I would also like to discuss the reform plans that you 

have put in place and those legislative reforms that the Postal 

Service is pursuing in order to properly transform itself into a selfsustaining enterprise. 

The Postal Service has several advantages that are relevant in 

the 21st century. It is the only delivery service capable of reaching 

every household in America, by providing direct access to each and 

every mailbox. It connects communities, particularly those in rural 

areas. It also presents tremendous potential for those mailers who 

desire to reach 100 percent of the population in a given community 

or area. 

I look forward to hearing your thoughts, Mr. Potter, on how best 

to leverage these and other of the Postal Service’s unique attributes 

into increase revenues and market growth. 

The Postal Service has been granted significant relief from its retirement obligations through the recently enacted Postal Service 

Retirement System Funding Reform Act. I would appreciate hear-
117

ing your perspective on how the Postal Service expects to utilize 

these newly available resources. 

As part of any serious reform effort, the Postal Service must improve its focus on its core services. It has not been an effective competitor in commercial activities that are unrelated to its traditional 

responsibilities, and these forays have diverted funds from other 

necessary expenses. 

In addition, the post office must not lose sight of its efforts to 

control its costs. I commend the Postmaster General for streamlining the workforce by 10 percent over the last 5 years without 

layoffs. This is a good start, but more cost-cutting measures will be 

needed to reshape the Postal Service into a self-sustaining, commercially viable enterprise. 

We have basically two tracks that we can take. We can either do 

things better or do things differently. We hear time and again 

about processes that private businesses have put in place to become more competitive. Perhaps now we should find ways to challenge the Postal Service to bring their costs in line with what is 

offered in the domestic marketplace. 

And, perhaps now is the time to pursue reforms and performance 

measures that focus the Postal Service on those things that no one 

else can do and encourage American businesses to provide those 

services that they can do better. 

The Revenue Foregone Reform Act of 1993 retains free postage 

for visually impaired customers and for overseas absentee balloting 

materials. To pay for these services, the Act provides for an annual 

$29 million appropriation to continue through 2035. Since 1994, 

the Postal Service has used this annual appropriation to pay off 

debt accumulated in the early 1990s. In reviewing the administration’s budget request, I found that no funds were provided. 

In recent years, some have suggested that the Postal Service 

should reduce its days of operation, as well as the scope of its service to rural areas of the country, in order to cut costs. I am heartened that you and the Service have steadfastly resisted such shortsighted so-called reforms. In the course of your testimony today, I 

hope that you will renew your commitment to maintaining universal 6-day-a-week service. 

Mr. Postmaster General, as encouraged as I am by your defense 

of affordable universal service, I am concerned that the current 

moratorium on new construction has left many communities without adequate facilities for the dispatch and delivery of U.S. mail. 

For universal service to be meaningful, it must be reasonably accessible and convenient for customers. 

PREPARED STATEMENT

It is my express hope that you will, today, outline the Postal 

Service’s plan for again investing in the communities to which its 

service and presence are so vital and for innovative arrangements 

to keep the rural communities connected to the post office. 

Again, I want to welcome you to the subcommittee and look forward to discussing the important matters during the question and 

answer period. 

Senator Murray. 

[The statement follows:]
118

PREPARED STATEMENT OF SENATOR RICHARD C. SHELBY

Good morning. Today the subcommittee will hear from the United States Postmaster General John Potter. 

Mr. Potter has testified at a number of hearings in the last few months on postal 

reform, terror attacks using mail, and other issues facing the Postal Service. It has 

been several years, however, since the subcommittee has had the privilege of receiving testimony from the Postmaster General, and we are pleased to welcome you. 

As a vital component of our Nation’s economy, it is absolutely crucial that the 

Postal Service maintain its role as the Federal Post and maintain the solemn obligation of universal service. In doing so, it is undeniable that the Postal Service must 

change and adapt in order to provide an affordable service that continues to tie our 

Nation together. 

Without question, the United States Postal Service has confronted some significant challenges over the last few years. The current business model of the postal 

service is outdated and is not economically viable in the 21st century. The financial 

problems have been further complicated since the terrorist attacks that used the 

mail system to deliver biological weapons. 

Even as the number of customers and addresses that the Postal Service serves 

has increased, the volume of first class mail has dropped steadily since 2001. 

The Postal Service now faces stiff competition from a variety of electronic communications options that did not widely exist a few years ago as well as from private 

sector delivery services. 

Furthermore, postage rate hikes have only caused consumers to further rely on 

alternative means of communications. 

All of these factors have become a self-fulfilling prophecy of future postage rate 

increases to offset the declining volume of first class mail. And, as one who believes 

that a comprehensive postal service for all Americans—rural and urban—is one of 

the central elements of keeping the country connected, this first class revenue and 

volume dilemma is one we have to address and solve. 

As difficult as these challenges are, the Postal Service is also charged with ensuring the safety of the mail. The anthrax attacks in 2001 and the more recent attacks 

using the deadly toxin ricin create a daunting overlay on every aspect and element 

of the Postal Service’s operation. 

I need not elaborate any further on the challenge this presents to the Postal Service and look forward to hearing what steps are being taken to try to prevent these 

attacks from happening in the future. I would also appreciate learning about your 

plan for screening the mail to provide for the safety of Postal customers and Postal 

employees while also ensuring timely delivery. 

In the wake of the anthrax attacks, Congress provided the Postal Service with 

emergency funding to decontaminate sorting facilities and to procure biohazard detection equipment. The Postal Service has used this funding to install sensors that 

detect anthrax at several facilities. 

I have been told, however, by the General Accounting Office and others that the 

system cannot adequately detect for other agents. I am concerned that the prior investment may be too focused on reacting to the last threat and not focused enough 

on detecting other threats. 

The Postal Service submitted a budget request to Congress that includes $779 

million for emergency preparedness activities. This funding, however, was not included in the President’s budget. I hope you will discuss the next steps for the Postal Service and what sort of investment we can expect in future years. 

I would also like to discuss the reform plans that you have put in place and those 

legislative reforms that the Postal Service is pursuing in order to properly transform 

itself into a self-sustaining enterprise. 

The Postal Service has several advantages that are relevant in the 21st century. 

It is the only delivery service capable of reaching every household in America, by 

providing direct access to each and every mailbox. 

It connects communities, particularly those in rural areas. It also presents tremendous potential for those mailers who desire to reach 100 percent of the population in a given community or area. 

I look forward to hearing your thoughts, Mr. Potter, on how best to leverage these 

and other of the Postal Services’ unique attributes into increased revenues and market growth. 

The Postal Service has been granted significant relief from its retirement obligations through the recently-enacted Postal Civil Service Retirement System Funding 

Reform Act. I would appreciate hearing your perspective on how the Postal Service 

expects to utilize these newly available resources. 
119

As part of any serious reform effort, the Postal Service must improve its focus on 

its core services. It has not been an effective competitor in commercial activities that 

are unrelated to its traditional responsibilities, and these forays have diverted funds 

from other necessary expenses. 

In addition, the post office must not lose sight of its efforts to control its costs. 

I commend the Postmaster General for streamlining the workforce by 10 percent 

over the last 5 years, without layoffs. This is a good start, but more cost-cutting 

measures will be needed to reshape the Postal Service into a self-sustaining, commercially viable enterprise. 

We have basically two tacts we can take. We can either do things better or do 

things differently. We hear time and time again about processes that private businesses have put in place to become more competitive. 

Perhaps now we should find ways to challenge the postal service to bring their 

costs into line with what is offered in the domestic marketplace. And, perhaps now 

is the time to pursue reforms and performance measures that focus the Postal Service on those things that no one else can do and encourage American businesses to 

provide those services that they can do better. 

The Revenue Forgone Reform Act of 1993 retains free postage for the visually impaired customers and for overseas absentee balloting materials. To pay for these 

services, the Act provides for an annual $29 million appropriation to continue 

through 2035. Since 1994, the Postal Service has used this annual appropriation to 

pay off debt it accumulated in the early 1990’s. In reviewing the administration’s 

budget request, I found that no funds were provided. 

In recent years, some have suggested that the postal service should reduce its 

days of operation as well as the scope of its service to rural areas of the country 

in order to cut costs. I am heartened that you and the Service have steadfastly resisted such short-sighted so-called reforms. 

In the course of your testimony today, I hope that you will renew your commitment to maintaining universal, 6-day-a-week service. 

Mr. Postmaster General, as encouraged as I am by your defense of affordable universal service, I am concerned that the current moratorium on new construction has 

left many communities without adequate facilities for the dispatch and delivery of 

U.S. mail. For universal service to be meaningful, it must be reasonably accessible 

and convenient for customers. 

It is my express hope that you will, today, outline the Postal Service’s plan for 

again investing in the communities to which its service and presence are so vital 

and for innovative arrangements to keep the rural communities connected through 

the Post Office. 

Again, I welcome you before the subcommittee today and look forward to discussing these important matters during the question-and-answer period. 

With that, I yield to Senator Murray for her opening statement.

STATEMENT OF SENATOR PATTY MURRAY

Senator MURRAY. Thank you, Mr. Chairman. 

This is our subcommittee’s first hearing with the Postal Service 

since we took over appropriations jurisdiction for this critical Federal agency. 

I want to welcome the Postmaster General, John Potter, to the 

subcommittee. Mr. Potter is a true American hero. He worked his 

way up from the most junior ranks at the Postal Service to become 

the Postmaster General. 

Today the Postal Service faces unprecedented challenges as it 

seeks to cover its expenses through the postal revenues paid by the 

public. The same technologies that helped make our country more 

productive have undermined the financial foundation of the United 

States Postal Service. 

Today first class mail represents less than half of the volume of 

mail delivered by the post office. At the same time, mail service 

revenues continue to decline year after year. 

Many of the technological advances that have allowed our citizens to avoid first class mail were developed in my home State of 

Washington. Even so, I am concerned that we be attentive to the 
120

critical role that the Postal Service plays in all of our communities. 

The Postal Service’s existing business model is now viewed as 

unsustainable. 

Some of the alternatives being considered are ending mail service 

to all rural addresses and ending mail delivery on Saturdays. For 

high tech households in urban areas like Seattle that may be fine. 

They can pay their bills online and communicate through PDA’s, 

e-mails and cell phones. But that alternative is certainly not acceptable to retirees living on fixed incomes in Pend Orielle County 

or Klickitat County in Washington. They may be waiting on their 

Saturday mail delivery to get their Social Security check or their 

prescription drugs. 

We have got to be attentive to the ways that these proposed 

changes would affect all of our citizens in all of our communities. 

In his formal opening statement, Postmaster Potter will discuss 

the fact that the Department of Homeland Security and the Department of Health and Human Services are developing a plan 

through which our Nation’s letter carriers can be called on to deliver antibiotics to Americans in the event of a catastrophic incident involving a biological agent. 

This plan highlights the fact that our Postal Service is a critical 

standing army that touches all American households in all Congressional districts 6 days a week, no matter how rural, how isolated or how poor those households may be. We should take great 

care before we sacrifice this ready and able Federal force. We cannot envision today every reason why we may need them in the future. After all, before September 11th, 2001 we never envisioned 

the need for our Postal Service to perhaps deliver emergency vaccines in the event of a biological emergency. 

PREPARED STATEMENT

So I hope our subcommittee will be attentive to the very real appropriations needs that will be articulated by the Postmaster this 

morning. In many cases, the needs of the Postal Service have been 

ignored by the Bush Administration’s fiscal year 2005 budget request. For the first time ever, the Bush Administration is not even 

requesting funds to honor the Federal commitment to the Revenue 

Foregone Act of 1993. In 11 years no president has zeroed out 

funding for this activity. So here, as in many areas, the subcommittee may need to chart its own path to ensure that all Americans in all regions of the country are joined together through a vibrant and effective postal system. 

Thank you, Mr. Chairman. 

[The statement follows:]

PREPARED STATEMENT OF SENATOR PATTY MURRAY

Thank you, Mr. Chairman. This is our subcommittee’s first hearing with the Postal Service since we took over appropriations jurisdiction for this critical Federal 

agency. 

I want to welcome the Postmaster General, John Potter, to the subcommittee. Mr. 

Potter represents a true American hero. He worked his way up from the most junior 

ranks of the Postal Service to become the Postmaster General. 

Today the Postal Service faces unprecedented challenges as it seeks to cover its 

expenses through the postal revenues paid by the public. 

The same technologies that have helped make our country more productive have 

undermined the financial foundation of the United States Postal Service. 
121

Today, first class mail represents less than half of the volume of mail delivered 

by the Postal Service. At the same time, mail service revenues continue to decline 

year after year. 

Many of the technological advances that have allowed our citizens to avoid first 

class mail were developed in my home State of Washington. Even so, I am concerned that we be attentive to the critical role that the Postal Service plays in all 

of our communities. 

The Postal Service’s existing business model is now viewed as unsustainable. 

Some of the alternatives being considered are ending mail service to all rural addresses and ending mail delivery on Saturdays. 

For high tech households in urban areas like Seattle, that may be fine. They can 

pay their bills online and communicate through PDA’s, email, and cell phones. 

But that alternative is certainly not acceptable to retirees living on fixed incomes 

in Pend Oreille County or Klickitat County in Washington. 

They may be waiting on their Saturday mail delivery to get their Social Security 

check or their prescription drugs. We’ve got to be attentive to the ways that these 

proposed changes would affect all of our citizens in all communities. 

In his formal opening statement, Postmaster Potter will discuss the fact that the 

Department of Homeland Security and the Department of Health and Human Services are developing a plan through which our Nation’s letter carriers can be called 

on to deliver antibiotics to Americans in the event of a catastrophic incident involving a biological agent. 

This plan highlights the fact that our Postal Service is a critical standing army 

that touches all American households in all congressional districts 6 days a week, 

no matter how rural, how isolated or how poor those households may be. 

We should take great care before we sacrifice this ready and able Federal force. 

Today, we can’t envision every reason why we may need them in the future. 

After all, before September 11, 2001, we never envisioned the need for our Postal 

Service to perhaps deliver emergency vaccines in the event of a biological emergency. 

So I hope our subcommittee will be attentive to the very real appropriations needs 

that will be articulated by the Postmaster this morning. 

In many cases, the needs of the Postal Service have been ignored by the Bush 

Administration’s fiscal year 2005 budget request. 

Indeed for the first time ever, the Bush Administration is not even requesting 

funds to honor the Federal commitment to the Revenue Foregone Act of 1993. In 

11 years, no president, including the current president’s father, has zeroed out funding for this activity. 

So, here as in so many areas, the subcommittee may need to chart its own path 

to ensure that all Americans in all regions of the country are joined together 

through a vibrant and effective postal system. 

Thank you, Mr. Chairman.

Senator SHELBY. Mr. Postmaster General, your written statement will be made part of the record in its entirety. We have reviewed that. You proceed as you wish. Welcome again to the committee. 

STATEMENT OF JOHN E. POTTER

Mr. POTTER. Thank you, Mr. Chairman. 

Good morning to you and to Senator Murray. 

I appreciate this opportunity to speak with you today about the 

Postal Service, its accomplishments over the past years and our appropriations request for the next fiscal year. You have my detailed 

testimony, as the Chairman said, so I will keep my remarks brief. 

My thanks to the subcommittee for its support of the Civil Service Retirement System legislation that was enacted last year. We 

continue to work with the Congress on two open issues: the escrow 

account and military retirement provisions. We hope they will both 

be resolved as soon as possible. 

The legislation has helped our customers by providing for stable 

rates until 2006. Stable rates and strong service performance are 

key elements to enable the mailing industry to stabilize and grow 
122

again. I remain committed to a strong customer focus. I remain 

committed to a Postal Service that is financially strong. We continue to aggressively manage the business. We are doing more and 

doing it better with less. 

Last year we added more than 1.7 million new addresses to our 

delivery network. Service performance and customer satisfaction 

reached their highest levels ever. Total factor productivity grew for 

an unprecedented fourth straight year. We remain on schedule to 

remove at least $5 billion from our annual operating costs over the 

5-year period ending in 2006. Internally, key indicators point to an 

improving work place environment. 

Yet these successes mask a marketplace that continues to show 

signs of long-term erosions. In 2003 First Class volume fell by more 

than 3 billion pieces of mail. We have seen First Class continue its 

decline this year as well. 

It is clear that the Postal Service can no longer rely on a limited 

monopoly that assumed rising mail volumes would offset the costs 

of an ever-expanding delivery network. At the end of the day that 

means the level of universal service that America enjoys is in jeopardy unless we all act now. 

I encourage the Congress to continue to explore new models that 

will lead to modern day management flexibility in how we operate. 

As the reform process continues to unfold we are here today to 

address more immediate needs and to submit our appropriation request for fiscal year 2005. Our first request is for $29 million for revenue foregone reimbursements to cover the cost of services we provided from 1991 

through 1998. This will be the 12th of 42 interest-free payments. 

The administration’s budget submission for 2005 does not include 

provision for this statutory reimbursement. Failure to receive these 

funds may require us to treat the remaining payments of nearly 

$900 million as bad debt. That would put upward pressure on our 

rate structure. 

The second part of our request is for $75.9 million. This request 

provides funding for the free mailing of materials used by the blind 

and other handicapped persons. It also includes funding for absentee balloting materials that can be mailed free by members of the 

armed forces and other U.S. citizens residing outside the United 

States. 

The administration proposes $61.7 million and continues the 

practice where reimbursement is not made until the fiscal year 

after the mailings have been handled and delivered. 

The third part of our appropriation request is for homeland security preparedness costs of $779 million. We gratefully acknowledge 

the funding previously given to us for this purpose. Those funds enabled us to accelerate implementation of our emergency preparedness plan which was submitted to Congress in 2002, and which we 

updated last spring. 

The previous appropriation of $587 million enabled us to provide 

personal protective equipment for our employees, to provide equipment and facilities to treat mail for the legislative, executive and 

judicial branches of government to neutralize any biohazards that 

may exist in that mail, to undertake decontamination of major mail 

processing facilities in Washington, DC and Trenton, New Jersey, 
123

and the development, testing and purchase of state-of-the-art biohazard detection and ventilation and filtration systems for deployment to 282 mail processing facilities in every State in the union. 

The task ahead of us is both costly and critical to the safety of 

our employees and the millions of Americans who rely on the mail 

day in and day out to build their businesses and stay connected 

with families and loved ones. I believe it is imperative that we continue the work we have already begun on homeland security. 

The funds we request will enable us to complete that work. Specifically, the funding will support the full deployment of the biohazard detection system, the ventilation and filtration system and 

the construction of a Washington-based mail irradiation facility. 

Our request covers only the capital expenses of obtaining this 

equipment. After initial deployment, operation and maintenance 

will become part of the Postal Service’s normal operating expenses. 

At the same time, we recognize that the threat of bioterrorism 

is pervasive, that the threats we face today may be far different 

than in the future. With that knowledge, we continue to evaluate 

technologies that offer protection from other hazards. 

I wish these funds were not necessary. But as we learned from 

the anthrax attacks and the recent ricin incidents, the threats remain real. 

In a democratic society marked by free and open communications, there will always be the possibility that some person or 

group will use the mail’s unequaled tradition of privacy to mask an 

agenda of hate and destruction. As a Nation, we must be prepared 

to do what is necessary to neutralize the threat to the extent possible. 

We are more than willing to do our part on this war on terrorism. We are working with first responders as we deploy bioterrorism systems. In community after community we are acting as a 

catalyst to create dialogue and establish protocols consistent with 

standardized Federal response procedures. This is an important 

role that can save lives in the event of any future real attacks. 

In addition, the Postal Service’s efforts to contribute to homeland 

security were advanced by a joint agreement with the Department 

of Health and Human Services and the Department of Homeland 

Security. In the event of a catastrophic biological incident, our letter carriers would voluntarily deliver antibiotics to affected Americans. The procedures we develop will augment and not replace 

those of local communities. 

PREPARED STATEMENT

Finally Mr. Chairman, I want to add that although we are authorized by statute to request an annual public service appropriation of up to $460 million, we have not made that request since 

1982 and I am pleased to say we are not requesting that appropriation for fiscal year 2005. 

Thank you, Mr. Chairman. I will be pleased to respond to any 

questions you may have. 

[The statement follows:]

PREPARED STATEMENT OF JOHN E. POTTER

Good morning, Mr. Chairman and Members of the subcommittee. 
124

I appreciate this opportunity to speak with you today about the Postal Service, 

its accomplishments over the past years and our appropriations request for the next 

fiscal year. You have my detailed testimony, so I will keep these remarks brief. 

My thanks to the subcommittee for its support of the Civil Service Retirement 

System legislation that was enacted last year. We continue to work with Congress 

on two open issues—the escrow account and military retirement provisions. We hope 

they will both be resolved as soon as possible. 

The legislation has helped our customers by providing for stable rates until 2006. 

Stable rates and strong service performance are key elements to enable the mailing industry to stabilize and grow again. 

I remain committed to a strong customer focus, and I remain committed to a Postal Service that is financially strong. We continue to aggressively manage the business. 

We are doing more—and doing it better—with less. Last year, we added more 

than 1.7 million new addresses to our delivery network. Service performance and 

customer satisfaction reached their highest levels. 

Total factor productivity grew for an unprecedented fourth straight year. We remain on schedule to remove at least $5 billion from our annual operating costs over 

the 5-year period ending in 2006. 

Internally, key indicators point to an improving workplace environment. 

Yet these successes mask a marketplace that continues to show signs of long-term 

erosion. In 2003, First-Class volume fell by more than 3 billion pieces. We’ve seen 

First-Class continue its decline this year as well. 

It is clear that the Postal Service can no longer rely on a limited monopoly that 

assumed rising mail volumes would offset the costs of an ever-expanding delivery 

network. At the end of the day, that means the level of universal service that America enjoys is in jeopardy unless we all act now. 

I encourage the Congress to continue to explore new models that will lead to modern-day management flexibility in how we operate. 

As the reform process continues to unfold, we are here today to address more immediate needs and to submit our appropriations request for fiscal year 2005. 

Our first request is for $29 million for revenue foregone reimbursements to cover 

the cost of services we provided from 1991 through 1998. 

This would be the twelfth of 42 interest-free payments. The administration’s 

budget submission for 2005 does not include provision for this statutory reimbursement. 

Failure to receive these funds may require us to treat the remaining payments 

of nearly $900 million as a bad debt. That would put upward pressure on our rate 

structure. 

The second part of our request is for $75.9 million. This request provides funding 

for the free mailing of materials used by the blind. It also includes funding for absentee balloting materials that can be mailed free by members of the Armed Forces 

and other U.S. citizens residing outside the overseas. 

The administration proposes $61.7 million, and continues the practice where reimbursement is not made until the fiscal year after the mailings have been handled 

and delivered. 

The third part of our appropriations request is for homeland security preparedness costs of $779 million. 

We gratefully acknowledge the funding previously given to us for this purpose. 

Those funds enabled us to accelerate implementation of our Emergency Preparedness Plan which was submitted to Congress in 2002 and which we updated last 

spring. The previous appropriation of $587 million enabled us to: 

—Provide personal protective equipment for our employees; 

—To provide equipment and facilities to treat mail for the legislative, executive 

and judicial branches of government to neutralize any biohazards that may 

exist; 

—To undertake decontamination of major mail processing facilities in Washington 

DC, and Trenton, New Jersey and, 

—The development, testing, and purchase of state-of-the-art biohazard detection 

and ventilation, filtration equipment for deployment to 282 mail processing facilities in every State of the union. 

The task ahead of us is both costly and critical to the safety of our employees and 

the millions of Americans who rely on the mail day in and day out to build their 

businesses and to stay connected with families and loved ones. 

I believe it is imperative that we continue the work we’ve already begun to support homeland security. The funds we request will enable us to complete that work. 
125

Specifically, the funding will support the full deployment of the Biohazard Detection System, the Ventilation and Filtration System, and the construction of a Washington-based mail-irradiation facility. 

Our request covers only the capital expense of obtaining this equipment. After initial deployment, operation and maintenance would become part of the Postal Service’s normal operating expenses. 

At the same time, we recognize that the threat of bioterrorism is pervasive—that 

the threats we face today may be far different in the future. With that knowledge, 

we continue to evaluate technologies that offer protection from other hazards. 

I wish these funds were not necessary, but as we learned from the anthrax attacks and the three recent ricin incidents, the threats remain real. 

In a democratic society marked by free and open communications, there will always be the possibility that some person or group will use the mail’s unequalled tradition of privacy to mask an agenda of hate and destruction. As a Nation, we must 

be prepared to do what is necessary to neutralize the threat to the extent possible. 

We are more than willing to do our part on this war on terrorism. We are working 

with first responders as we deploy bioterrorism systems. In community after community, we are acting as a catalyst to create dialogue and establish protocols consistent with standardized Federal response procedures. 

This is an important role that can save lives in the event of any future real attacks. 

In addition, the Postal Service’s efforts to contribute to homeland security were 

advanced by a joint agreement with the Department of Health and Human Services 

and the Department of Homeland Security. 

In the event of a catastrophic biological incident, our letter carriers would voluntarily deliver antibiotics to affected Americans. The procedures we develop will augment—not replace—those of local communities. 

Finally, Mr. Chairman, I want to add that although we are authorized by statute 

to request an annual public service appropriation of up to $460 million, we have not 

made that request since fiscal year 1982. And I am pleased to say that we are not 

requesting that appropriation for fiscal year 2005. 

Thank you, Mr. Chairman. I will be pleased to respond to any questions.

EMERGENCY PREPAREDNESS

Senator SHELBY. I want to discuss emergency preparedness expenses if I could. 

Since 2002, Congress has provided emergency appropriations to 

support the Postal Service’s anthrax emergency preparedness activities. After the attacks, the Congress appropriated $762 million 

to decontaminate postal buildings and to buy and install biohazard 

detection equipment. The Postal Service reportedly has spent a 

total of $971 million on emergency preparation, which includes 

$209 million from its revenue. 

Provide us an overview, briefly, of what this funding has been 

spent on to date. In other words, give us an accounting. 

Mr. POTTER. The funding has been spent on—$268 million of it 

has been spent for building restoration; $402 million has been 

spent for biodetection systems; $271 million has been spent on ventilation and filtration systems; $9 million will be spent on a D.C. 

area irradiation facility. We have not committed to that. We are 

doing some environmental assessments but our intent is to spend 

it on that. 

Senator SHELBY. How much will that cost, roughly? 

Mr. POTTER. It will cost roughly $16 million. But we have bought 

the equipment to irradiate the mail and that is the $9 million of 

expense that we have. Our intent is to do it on the campus of the 

Brentwood facility, on the grounds of the Brentwood facility. 

Senator SHELBY. Since your emergency preparedness plan was 

submitted last spring, what additional steps have you taken to pre-
126

pare for another attack if there is one? We hope there is never another one. 

Mr. POTTER. One of the things that we are constantly doing, Mr. 

Chairman, is looking at other technologies that might be out there. 

Today we have a test underway for chemi-luminescence. That is a 

test that will not only detect biohazards as the polymer rays——

Senator SHELBY. Will that detect chemicals? 

Mr. POTTER. It will detect chemical. It will be able to detect ricin, 

biological and chemical, as well. 

And we have designed our system——

Senator SHELBY. How is the technology coming along? Are you 

testing it? 

Mr. POTTER. We are testing that as we speak. We are using the 

Department of Defense to help us with those tests. We have designed our biodetection system to be flexible enough to add new 

technologies to that system. 

So our base system is there. We are excited about the new technologies that are coming down, that appear to be on the horizon, 

and we are actively testing those that show promise. And we are 

doing that with the appropriate Federal agencies. 

Senator SHELBY. You submitted a request for $779 million to install biodetection equipment and to improve ventilation and filtration systems at postal facilities. Why is the Postal Service having 

difficulty with OMB getting that approved? 

Mr. POTTER. I believe that they understand the need for it. Obviously there are—given the fact that the country is at war, there are 

a number of priorities. And I believe that, in terms of their priorities and their immediate needs, they have made a decision about 

where that stands for fiscal year 2005. 

We wrote a letter of appeal to OMB when we heard about their 

decision because we believe that there is a need to provide these 

systems throughout the country to protect all communities. 

Senator SHELBY. You have been quoted as saying that funding 

for biohazard detection equipment is either going to come through 

an appropriation or rate increase. Is that the only choice you have? 

Or do you have money that you could get out of your escrow fund? 

Mr. POTTER. The only ways that the Postal Service can obtain 

money is through appropriations or through the rates process. So 

any cost, whatever it is, for the Postal Service, if it is not appropriated by Congress—and there are very limited amounts of funds 

that are appropriated by Congress, $29 million and the monies for 

the blind—the only way we have to raise money is through rates. 

Now I am not saying that this would mean that we have to raise 

rates tomorrow, but the funds would have to come through the 

rates process at some point in time in the future. 

Senator SHELBY. Detecting biohazards in the mail is the next 

subject I want to raise. We have been told by the GAO and others 

that the detecting systems that the Postal Service has acquired 

may not have the capability to detect other hazardous agents such 

as chemical or a radiological weapon. Would you explain the capabilities of these systems that you are getting? 

Mr. POTTER. The current system that we are——

Senator SHELBY. But you want to spend money wisely, and I 

know you do. 
127

Mr. POTTER. We are spending it wisely. But we also recognize 

there is an immediate need to move. 

Senator SHELBY. You have got to be thinking of the future. What 

else is out there, right? 

Mr. POTTER. Exactly. So we believe our system can be augmented. And we have designed a system that is flexible enough to 

add new technologies to it. 

So today we can detect DNA. Our systems are designed to detect 

DNA or measure DNA or look at DNA. Our system today can do 

that. 

We are working with the appropriate authorities to determine 

what other threats are out there that might be of a bio-nature. And 

we can add up to 10 agents being detected with the current system. 

In addition to that, we are looking at electro-chemiluminescence 

as an opportunity down the road to be able to now detect chemical 

or toxins. And it appears to be promising but we have to await the 

tests before we move on it. 

PERFORMANCE GOALS

Senator SHELBY. Performance measures. The European Union 

has agreed to a standard of 85 percent of cross-border letter mail 

must be delivered in 3 days and 97 percent must be delivered in 

5 days. Has the Postal Service established similar performance 

goals? And if you have not, do you contemplate it? And what are 

the standards used by the Postal Service to determine if the performance goals are being met? 

Mr. POTTER. The goals of the European Community have been 

shared and are measuring themselves against what was formed as 

part of the International Postal Corporation. The Postal Service is 

a member of that group. We do measure performance within a 

small community of nations, European, Canada and the Postal 

Service. The UPU, the United Nations Universal Postal Union is 

having a big meeting this year where they are going to discuss the 

notion of expanding what has been done within the IPC to the rest 

of the world. We certainly will embrace the notion of putting standards amongst the countries of the world. 

Obviously there are some Third World countries that would have 

problems meeting such a standard. But the Postal Service, the 

United States Postal Service, is engaged through the UPU in discussions on increasing the standards for delivery of mail throughout the world. 

Senator SHELBY. Are you going to those same standards? And if 

so, when do you think you will be doing that for the delivery of 

mail? 

Mr. POTTER. Right now within the IPC we are, for those communities. But it is not measured—beyond that small group of nations—mail is not measured. 

Senator SHELBY. Let us talk about the United States of America. 

Let us say from Seattle, Washington to Portland, Maine. What is 

the average first class delivery on that? 

Mr. POTTER. The standard is 3 days and we are achieving that, 

about a 90 percent on-time delivery. 
128

If you look at the United States, our overnight area which is generally within about 100 to 150 miles of an origin, our goal is overnight service. Right now we are achieving 95 percent. 

Within 500 or 600 miles is our 2-day standard. We are achieving 

a little over 90 percent. Three-day nationwide, our goal for areas 

beyond 600 miles, our goal is 3 days. Last quarter we achieved a 

90 percent. This quarter we are at about an 88 percent. The reason 

for the decline is the weather that we have experienced and the 

shutdown of airports around the country. 

Senator SHELBY. What would be the average mail performance of 

first class mail from Atlanta, Georgia to Birmingham, Alabama? It 

is about 150 miles. 

Mr. POTTER. It would probably be a 2-day standard and I can 

give you specifically in a follow-up what the actual achievement 

was. I would be guessing at best if I attempted to tell you. I hope 

it is very high, though. 

[The information follows:]

A First-Class letter mailed from Birmingham, AL, to Atlanta, GA, is delivered in 

2 days. During the first quarter of fiscal year 2004, First-Class Mail destined for 

overnight delivery in Alabama was delivered on time 93 percent of the time.

Senator SHELBY. I was going to use Spokane, Washington to Seattle. What is the delivery time there from Spokane to Seattle? I 

hope about half a day. 

COST REDUCTIONS

Cost reductions. Would you touch on cost reduction measures for 

just a minute? And also, how do you intend to implement the process of streamlining the Postal Service’s operations? 

Mr. POTTER. The first thing that we have done nationwide is to 

standardize our operations. 

Senator SHELBY. What do you mean by standardize? 

Mr. POTTER. By standardize I mean what we have done is we 

have benchmarked internally against ourselves and we have identified the top quartile of performers in the country in any operation, 

whether it is sorting mail, canceling mail. And what we have done 

is we have looked at the best practice—and we have done this 

about 3 years ago. 

We looked at what the best practices were that enabled them to 

be in the top quartile. We then, in turn, shared that throughout the 

country and said these are the practices that work, here is an expectation of how you should perform. And we set targets for improvement year by year. 

What you have seen is a continuous improvement in productivity 

throughout the country. You have seen us be able to not replace 

work force that we had habitually just replaced, as people leave, 

we replaced them. For every three people that leave the Postal 

Service we replace one. And largely it is because of the opportunity 

to improve productivity. 

We have also gone back and looked at all of our carrier routes 

to determine whether or not the 8-hour job that this route was 

based upon is still 8 hours. With the decline in mail volume over 

the years, what has happened is the average delivery in America 

which as recently as the year 2000 was reaching 1,870 pieces of 

mail per year, that has declined to 1,700 pieces of mail per year. 
129

Senator SHELBY. What percentage of those 1,700 is first class 

mail? 

Mr. POTTER. Just slightly less than half. 

And so as a result of the decline in volume per delivery, that has 

reduced the workload for a carrier and has enabled us to go back 

in and reconfigure those routes so they have more deliveries. 

So it is those kind of just basic practices that have enabled us 

to streamline and lower our costs. 

In addition to that, we have been very careful about the purchase 

of goods and services. Over the last 3 years we have reduced our 

annual spending on goods and services by $1 billion. So any time 

a truck route comes up for rebid, we review it. A lease for a facility, 

we review it and look at our needs and determine whether or not 

it is the most economical way to go. 

Senator SHELBY. Have you saved a lot of money that way? 

Mr. POTTER. We have saved over $1 billion in our base per year. 

Senator SHELBY. How many years have you been associated with 

the postal system? 

Mr. POTTER. Me, personally? Twenty-five. 

Senator SHELBY. So you have done just about every job? 

Mr. POTTER. Pretty much, yes. 

Senator SHELBY. Thank you. 

Senator Murray. 

APPROPRIATIONS REQUEST

Senator MURRAY. Thank you, Mr. Chairman. 

As the Chairman referred to, on security and emergency preparedness efforts, it is a big undertaking and one that is necessary 

so that our mail workers can be protected and the mail processing 

and deliveries will be as safe as possible. 

Congress was able to provide some initial funding in the amount of $762 million. Last year you requested $350 million, not even a 

dollar of which this subcommittee was able to provide. This year you are requesting $779 million, which includes the 

2005 request of $429 million plus the 2004 request that was not 

funded. 

If we are to do anything in support of this request it must be exempt from the spending cap set forth in the budget resolution. In 

other words, the only way to provide this funding would be if it 

were declared an emergency. 

You did not receive any appropriations last year for emergency 

preparedness and you were still able to proceed with anthrax decontamination and are now proceeding with plans to put in place 

biodetection devices in all of your plants. If that is the case, why 

are you asking for funding? 

Mr. POTTER. Because when the initial funding was provided, it 

was noted that it was an extraordinary circumstance that surrounded this whole biohazardous-material-in-the-mail issue. And at 

the time, the Congress said that it was providing funding because 

of these specific security concerns and the Congress’s notion that 

they wanted to help protect the mail system from biohazards. 

So consistent with that sentiment that was expressed a couple of 

years ago, we feel that we have continued down that path and 

asked for the funds again simply for the capital portion of these 
130

systems, with the Postal Service picking up the operating expenses. 

So again, we are responding to the sentiment of the Congress in 

the past and we would hope that it would continue on into the future. 

BIOHAZARD DETECTION SYSTEMS

Senator MURRAY. The biodetection systems that you referred to 

a few minutes ago that you are planning to install to detect anthrax, do you have an estimate yet on how much it would cost to 

retrofit the machines to detect ricin or other toxins? 

Mr. POTTER. We believe that they can be retrofitted. Our estimates are, if we move to the new technology, we could do it within 

the $779 million because of the fact that we have not fully deployed 

these systems and we can reduce the amount of the systems that 

we would have to deploy. So right now it looks like we could do it 

within the requested funding. 

Senator MURRAY. How can we be sure that those machines will 

be effective against anthrax or other toxins? And is there a chance 

it is going to be outdated before we get it installed? Is 

nanotechnology coming? 

Mr. POTTER. We were very concerned about a couple of things. 

One was, and very important, was the reliability of the system. Because a false-positive, as we have learned over the last several 

years, creates a lot of panic not only within the postal community 

and our workers but also within the communities that surround 

our facilities. 

And so we were very, very diligent in making sure that these 

systems were effective. And our requirement was that we have no 

more than one in every 500,000 tests be a false-positive. And that 

was a high hurdle for us to achieve and for our suppliers to 

achieve. And that is why it has taken quite a long time for us to 

do that. 

One of the things that we have done is we have tested in a lab 

environment a thing we call an anthrax simulant. So basically it 

is a non-virulent form of anthrax. And we have tested the system 

such that every time we put this non-virulent form of anthrax in, 

it has a 100 percent hit. We did not want to err on the side of lack 

of false-positives and in the process compromise the notion that if 

something was in the system it would be found. 

So we have again spent a lot of time, a lot of diligence coming 

up with a system that right now is state-of-the-art, that again we 

do not know and we cannot forecast what the equipment will be 

3 and 5 years down the road. But the need for us is immediate. 

We have had over 20,000 incidents where buildings have been 

closed, postal facilities have been closed because of anthrax hoaxes 

or just accidental spills. And we believe we need, again for the safety of our employees and the people in facilities, we do not want to 

get to the point where we become so callous to the fact that these 

incidents occur that when the real one does happen we are not 

ready to react. So we have to step up and move this equipment out. 

And I wish I knew what the best would be 10 years from now 

and I could buy it today but that is simply not the case. We have 

to move on the best we know. And we have used a whole army of 

folks in every agency that we could think of that could help us to 
131

determine what the best technology is today and to move out on 

it. 

Again, safety of our employees and safety of the communities is 

paramount. I wish we could wait but I do not think we have the 

time to. 

Senator MURRAY. Fair enough. 

POST OFFICE CONSOLIDATION

Mr. Potter, an issue that has always been a concern to this subcommittee is the consolidation or closure of small or rural post offices. In fact, every year we carry bill and report language prohibiting any of the funds provided from being used in the consolidation 

of or closing of rural and other small post offices. 

In addition, Title 39 of the U.S. Code stipulates that ‘‘no small 

post office shall be closed solely for operating a deficit, . . .’’. It is 

not altogether clear that consolidation or closures undertaken by 

the Postal Service are consistent with the law. 

Is the Postal Service planning to consolidate any operations or 

close any post offices this year? 

Mr. POTTER. The post office does suspend post office operations 

and has done so for years and will continue to do so. We have, just 

to describe it to you, we have over 2,500 post offices that serve less 

than 200 people. We have over 4,500 post offices that serve less 

than 200 deliveries. Now I am not here to tell you that any one 

of those post offices should or can be closed. 

But I also will tell you that we do have post offices that are in 

people’s living rooms. We have post offices that are in stores. And 

as these smaller communities, and I just described a profile of some 

of them, as these communities in some cases wither and die, we 

cannot get people to volunteer their living rooms to be post offices 

when somebody retires. 

Or if we are the last storefront in town and a flood wipes it out, 

we are not about to rebuild the post office. 

And we have had emergency closures and we have followed the 

procedures as laid out by the Postal Rate Commission. We followed 

those procedures for closures. But we have no wholesale plan. 

I think there is some assumption that someone in the Postal 

Service has a plan to close 20,000 facilities. There is no such plan. 

However, we do have these small units that by act of God or 

somebody retiring, you know, we have to make decisions about how 

we best serve those communities and we do. In many cases, what 

we do is we provide delivery to the door or delivery to the end of 

a person’s property versus them having to travel down to the post 

office. 

So we are committed to universal service. We will provide service 

to every American wherever they are and we have no game plan 

to close post offices en masse. There is nobody sitting with a secret 

list of 20,000 post offices to close, although people would have you 

believe that. But every time that there is an act of God or retirement we do consider okay, how do we best serve the community? 

VERTICAL IMPROVED MAIL

Senator MURRAY. In downtown Spokane, in my State, recently 

six of the satellite post offices were closed. Those six post offices 
132

served as kind of a collection point of mail for the majority of businesses that are in downtown Spokane. They have now been replaced with unstaffed mailrooms and locked mailboxes. And as a 

result there has been a lot of disruption of service to the buildings. 

My office has received a lot of phone calls and letters regarding 

that. 

Can you tell me if that type of consolidation is occurring in other 

parts of the country? 

Mr. POTTER. We call it a VIM room. 

Senator MURRAY. You call it what? 

Mr. POTTER. VIM, which stands for ‘‘Vertical Improved Mail’’. 

Years ago the Postal Service decided that as large buildings were 

constructed, we provide centralized delivery. And in many cases, 

the building owner provided us a room in which our employees 

could come and work and sort mail so that the people in the building could pick it up from the equivalent of a post office box. And 

they could pick up their packages by knocking on the door. 

What has happened over the course of time is the volume of mail 

for those vertical buildings, those big tall buildings, has gone away. 

Business-to-business delivery or business-to-business white communication letter and flat communication has dropped dramatically. 

Because the first group to move to electronic communication were 

businesses who were equipped to do that. 

And so what we have done is we have undertaken an evaluation 

of those delivery units that are only located in large buildings. 

They are not post offices. They were built to provide delivery. If our 

person can go in there and sort the mail for the building in 2 

hours, it makes no sense to leave the person there for 8 hours. 

And so we have gone throughout the country, and again the action is a result of a reduction in mail. In some of those cases what 

we have done is we have had two and three people working in 

those units and we have reduced the number of people. They may 

still get 8 hour coverage. But 40 percent of those units throughout 

the country have eliminated full-time staffing in those units. 

Again, it is a result of demand. If the customer is not using the 

mail, we are not going to leave that open. 

Senator MURRAY. I think one of the problems and the reason people were so upset is that the Spokane business community was not 

officially informed or told that any of this consolidation was happening. A lot of them learned about the service reduction from 

signs that the post office posted after the service reductions were 

made. And in some cases, the information on the signs was inaccurate and postal customers were really left in the lurch, which is 

why we are hearing from them. 

I would just encourage you to, if you have to do these kinds of 

things, really work with the business community especially in 

those areas to make sure they understand and are working with 

you. 

Mr. POTTER. You have my assurance, we will look at the whole 

communications effort. Because I think if people understood the 

background that I just described to you, they would know that we 

are making a good business decision. And our intent is not to reduce the level of service to those buildings but to maintain it, if not 

improve it. 
133

Senator MURRAY. Thank you. I really appreciate that. 

Thank you, Mr. Chairman. 

Senator SHELBY. Senator Stevens, thank you for joining us. 

STATEMENT OF SENATOR TED STEVENS

Senator STEVENS. Thanks very much, Mr. Chairman. 

We have several subcommittees meeting this morning at 9:30 

and 10 o’clock. So I am sorry I was not here at the beginning of 

it. Would you place my opening statement in the record? 

Senator SHELBY. Without objection, it will be made part of the 

record. 

[The statement follows:]

PREPARED STATEMENT OF SENATOR TED STEVENS

Thank you Chairman Shelby for holding this hearing. 

I commend Postmaster General Jack Potter for his efforts which have guided the 

Postal Service since June 1, 2001. Under his leadership, the Postal Service has increased productivity and has improved customer satisfaction. 

In the early 1970’s, I along with other senators, joined together to create the Postal Service out of the Old Post Office Department. In 1971, President Nixon signed 

into law the Postal Reorganization Act. Since the Postal Reorganization Act was 

originally adopted, technological advances coupled with the financial state of the 

Postal Service have demonstrated the need for postal modernization. 

Reducing the Post Office’s debt is a priority. I am committed to working with Senator Collins, Senator Carper, and other members of the Government Affairs committee to draft postal reform legislation to ensure the vitality of the Postal Service. 

For my State of Alaska, the Postal Service and the concept of universal service 

are essential. Alaska does not have access to the infrastructure found in the lower 

48. For many Alaskans the mail service is a lifeline. Each day the Postal Service 

delivers 2 million pieces of mail to Alaskan homes and businesses, including vital 

products that would not otherwise be available in bush Alaska. 

The services provided by the United States Postal Service reach every home and 

business in America and are essential to American commerce and society. 

I know the Postal Service is requesting funds for emergency preparedness and I 

believe it is important to ensure the Postal Service has adequate funds to safeguard 

this country from a hazardous substance attack. The Postal Service is a possible 

conduit for terrorist activity, therefore it is necessary for the Postal Service to have 

detection systems to not only protect postal employees, but to intercept mail carrying hazardous substances. 

I believe we should do what we can to help the Postal Service ensure this Nation’s 

safety.

Senator STEVENS. I do commend the Postmaster General for his 

handling of systems right now, particularly during this period of 

terrorism. And I want the subcommittee to know that I have personally visited with him concerning the emergency preparedness 

funding that is so essential. And after that, personally visited with 

the director of OMB. 

We are still trying to work out how we can handle this because 

the budget, as you know, has not handled it in the budget session. 

We will have to work with the Governmental Affairs Committee 

and members of our committee to see if we can get support for an 

emergency declaration for the money that they need. 

I believe that the Senate, in particular, should push this because 

after all we were the target of both the attacks. The terrorists’ use 

of the mails to come to the Senate, I think is something the Senate 

must respond to. 

And I do believe that if we declare that emergency that the 

House will accept it. 
134

So I cannot tell you we have got an agreement yet, Mr. Postmaster General, but we are still working on it. 

I do thank you for the new post office that is going to be brought 

to that little town I live in in Alaska, which is a very welcome development from our point of view. And I hope that you will be able 

to come up this summer and dedicate it. 

Maybe the Chairman would come, also. 

Senator SHELBY. I would like to do that. 

Senator STEVENS. And we will have a little event there. There 

are only 1,900 people living there, Mr. Chairman. 

Senator SHELBY. Do you have fish around there, Mr. Chairman? 

Senator STEVENS. Not right there but we might be able to travel 

to a place where they fish. 

I just pointed out to another subcommittee that when I was in 

Iraq and Afghanistan I pointed out that both of those nations 

would fit within my State with some space leftover. Actually, they 

are only each about the size of Texas. 

I just really came by to give my support to you, my friend, and 

to urge the committee to work with me and with Chairman Collins 

and see if we can find the support that what we have to have for 

this emergency declaration for the money that you seek. 

Mr. POTTER. Thank you, Senator. 

Senator STEVENS. Thank you. 

Senator SHELBY. Thank you, Chairman Stevens. 

Do you want to respond to any of that? 

Mr. POTTER. I would just like to thank Senator Stevens for his 

comments and to apologize to him. I did not realize how bad things 

were in Girdwood until I got there and found out that we had 

taken your post office box away and made you begin to get general 

delivery. 

So I am sorry that you had to get in line to get your mail, but 

we will rectify that situation and certainly there other safety issues 

there. So I appreciate your bringing them to my attention. 

Senator STEVENS. I may have failed to pay the rent, I am not 

sure. 

Senator SHELBY. Mr. Potter, what would be the time sequence on 

mailing a first class letter from Fairbanks to Anchorage? When 

would it get there? 

Mr. POTTER. Overnight. 

Senator SHELBY. Thank you. 

Senator STEVENS. That is called Alaska delivery. 

Senator SHELBY. We like that Alaska delivery. 

COMPETITION: E-COMMERCE

Competition. Why should the Postal Service, a $68 billion enterprise with a government monopoly, be allowed to compete with the 

private sector in areas other than its original mission? 

In other words, after reviewing the dismal financial results of 

virtually all the Postal Services’ commercial initiatives, would it 

not make more sense to concentrate your focus on the Postal Service’s core mission instead of risking new ventures? In other words, 

what steps have been taken by management to ensure that financial mistakes will not continue to happen? 
135

Mr. POTTER. I think you will be happy to know, Mr. Chairman, 

that I have eliminated practically all of those ventures that were 

beyond our core mission. We still have a mailing online electronic 

presence. We believe that people should be able to, through the 

Internet, access a printer and send cards and letters and we believe that is part of our core business. 

But for all intents and purposes, everything else has either been 

eliminated or the only thing that we lend to any of these ventures 

is our brand identity. We have pulled back from any expenditures 

that are beyond what we consider to be our core business. 

REVENUE FOREGONE

Senator SHELBY. The Revenue Foregone Reform Act, to which 

Senator Murray alluded, required an annual reimbursement to the 

Postal Service of $29 million to subsidize certain nonprofit mail. 

The total payment the Postal Service is expected to receive is $1.2 

billion. 

You have received payments for the past 11 years but this budget submission does not request funding this year for this reimbursement. 

What impact will this have on the Postal Service and its customers if this appropriation is not funded in 2005? 

Mr. POTTER. One might say what is $29 million to a $68 billion 

organization? The real concern for us is that there is still some 

$899 million owed and it is part of the statute that required a $29 

million-a-year payment. 

Our auditor has told us that if that revenue stream is not a real 

revenue stream, according to GAAP rules, we may have to declare 

that entire revenue stream as being lost to us. And so that is the 

immediate concern that we have, that we would have to write off 

that revenue stream as a bad debt owed to us. 

CIVIL SERVICE RETIREMENT SYSTEM

Senator SHELBY. Mr. Potter, the Postal Civil Service Retirement 

System Funding Reform Act, that is a mouthful, of 2003 reduced 

the Postal Service’s funding requirement for Civil Service Retirement System pensions after it was discovered that the Postal Service was overfunding its—that is unusual—its Civil Service Retirement System obligation. The Postal Service used the savings from 

the Act to reduce its debt by $3.8 billion. After 2004, the savings 

are to be held in escrow until otherwise provided by law. 

How do you plan to expend the escrow savings if allowed to use 

them? 

Mr. POTTER. The law required us to pay down debt last year with 

the savings, which we did. In fact, we paid down more debt than 

the savings were. This year it requires us also to take the ‘‘savings’’ 

and pay down debt. 

In 2005, the law assumes that we will use those funds for operating expenses. And our goal next year is to break even or do better than break even. 

In 2006 is when those monies would go into an escrow account. 

Now the escrow account, as we understood it, was created because 

there was concern on the part of some in Congress of how we would 

use those monies. 
136

And we have provided a plan to the Congress, to the House, a 

very specific plan, a very thick plan, on how those funds would be 

used. It includes, in particular, a concern about how we would handle and deal with capital investments because there was some concern that we were not going to capitalize future equipment requirements that would help make the Postal Service more efficient. 

So we have gone into great detail about what our capital investment plan is and we have talked about and addressed an issue of 

concern that was employee retiree health benefit funding. 

So I have had a hearing at the House since and the indications 

have been that that plan has at least met the needs of most of the 

Congressmen. We have a similar request from the Senate and we 

are to provide that, I believe, by the end of this week, a similar 

plan. We have done some minor modifications but it is essentially 

the same plan. 

So we believe we have addressed the concerns that caused folks 

to create the escrow account. 

We need the escrow account to be eliminated now that people understand how we spend the money because there are no—if we are 

in a break even mode in 2005, there are no funds to create a $3 

billion plus escrow account. And so we would like that to be eliminated. 

And the funds in 2006 would be used similar to the way they 

were used in 2005. Basically, they would be used for operating expenses and to fund the capital requirements. 

FACILITY ISSUES

Senator SHELBY. Regarding facilities repair and new construction, I would like to get back to this for a minute. 

In the last 3 years, the Postal Service has reduced capital expenditures by more than 50 percent by limiting capital commitments to levels that could be funded solely from cash flow. The infrastructure continues to age, as we all know. 

In addition, many facilities can no longer meet the needs of customers as the delivery network continues to expand, while other 

customers lack convenient access to the postal system altogether. 

What priority, Mr. Potter, has the Postal Service given to address new construction and expansion needs? And during the freeze 

on capital commitments, what has the Postal Service done to adequately maintain its existing infrastructure and preserve buildings 

in an economically effective manner? And, how will the Postal 

Service address infrastructure needs that have been deferred since 

the freeze on capital commitments commenced in 2001? 

Mr. POTTER. Life safety is our No. 1 issue and throughout this 

process we have not taken any funds out of life safety. If buildings 

have been destroyed by acts of God, we have spent the money to 

repair those facilities. We have a robust repair and alteration budget. We have not eliminated capital funds for repair and alteration. 

We have slowed the building of new buildings. We have 38,000 

buildings in the Postal Service. We only own 8,000 of those buildings. 

Senator SHELBY. Say that again? 

Mr. POTTER. There are 38,000 buildings in the Postal Service 

that we have. We only own 8,000 facilities. 
137

So we have continued with leased facilities, a concept that has 

gone on. But the capital side, the building of postal facilities was 

slowed. 

Now the rationales for slowing that down were a couple. One was 

cash flow. But another real important issue was what are our facility requirements going forward, particularly in light of the fact that 

we are seeing volumes decline, we are seeing a change in mailer 

behavior? 

Mailers have taken advantage of rates that allow them to deposit 

mail close to delivery. So where in 1990, if you were to mail an advertising piece of mail from Washington, DC to anywhere in the 

country it would be the same rate for you to mail it from Washington, DC to Spokane, Washington or to Chicago. 

Today we have rates that allow you to bring that mail well into 

the system, right down to the processing center. So I can bring the 

mail to the Seattle plant for mail in Washington and I pay a lower 

fee in order to do that. 

Mailers have taken advantage of that in a significant way over 

the last decade. And in the process of doing that, they have reduced the infrastructure that we are required to have. So we are 

constantly analyzing that infrastructure. 

Right now I believe we have more space in plants than we need. 

In addition to that, delivery units, if you go back historically in 

delivery units——

Senator SHELBY. You have more space in plants now? 

Mr. POTTER. That is the 282 processing centers. 

Now in delivery units, we have also stepped back to take a look 

at what our requirements are. Today, about 80 percent of the mail 

for a letter carrier, letter size mail, is walk-sequenced. It is presented to the carrier off of a machine that is in a plant, where a 

decade ago they would have to sort all of those letters into a case 

to take out on the street. It is now presented to them in a tray. 

So that case does not have to be as big as it was before. 

In addition to that, oversized letter mail, flat mail we call it, 

which is a catalog, a magazine or a large manila envelope. In the 

past all of that mail had to be sorted to the carrier route. So it 

would go to the post office, sort it to the carrier route in that unit 

by clerks at cases. Today, the bulk of that, over 90 percent of that 

sorting, has moved from that post office to the plant because we 

have automated equipment that sorts this mail at a very high productivity level. 

In fact, we have doubled the level of productivity on flat mail in 

the last couple of years because we have automated it. 

So where a post office used to have to have cases to sort mail, 

flat mail, to carriers and they would have to have carrier cases to 

sort mail for the walks along the way, the requirements of that 

unit have shrunk dramatically. 

In addition to that, the number of packages that we have in the 

system has declined. Priority Mail, Express Mail and package mail 

is down. So we are looking at the demands for space within that 

unit and what we are finding out is that we have enough space, 

we just have to change the methods that people are using. 
138

Now, that is not to say that we do not have growth areas like 

a Las Vegas, where we have whole new communities sprouting up. 

And in those cases we are building post offices. 

Senator SHELBY. Let me ask you another question. Could you 

save money, for example, in a lot of areas, like smaller communities, by following the business practice of UPS and Federal Express where they have bought businesses like the copying company, 

where they will pick up parcels. 

And it looks to me like in some of the smaller communities you 

might not need a new postal building. But if you could rent from 

a store there or if you could rent a little space in that store—and 

I know you do in certain instances—it looks like that would be economical. 

Mr. POTTER. It would, Senator, and we have over 5,000——

Senator SHELBY. That is what I want to hear. 

Mr. POTTER [continuing]. Contract post office units throughout 

the country. We also sell stamps at over 40,000 locations other 

than post offices. So we sell stamps in grocery stores, people can 

buy postage stamps through ATM’s. 

Senator SHELBY. You do not necessarily need a huge facility, do 

you? 

Mr. POTTER. We do not, to have a retail operation, we do not. 

Also, every one of our 60,000 rural routes are post offices on 

wheels. So they are designed to bring services to the customer. 

People now can access, through the Internet they can now access 

a system—we call it Click and Ship—to print a priority label and 

pay for postage online. 

So we are trying to bring as many services as we can to the doors 

of all Americans. We do not think that a traditional post office is 

the only way of doing it. 

Now that said, we are still going to need post offices throughout 

the country for post office box operations. Our carriers are going to 

have to be housed, they have to come and collect their mail. 

Senator SHELBY. But, you could have a facility without spending 

all of the money? 

Mr. POTTER. Exactly and we are doing that, sir. 

Senator SHELBY. Especially in smaller areas? 

Mr. POTTER. Exactly. 

CIVIL SERVICE RETIREMENT SYSTEM

Senator SHELBY. Let us go back a minute to the Civil Service Retirement System correction, you elaborated on that. Would you submit this plan to the committee when you get it? 

Mr. POTTER. Yes. 

Senator SHELBY. We would like that. 

Mr. POTTER. We would be happy to do that. 

CONSUMER ACCESS

Senator SHELBY. Expanded points of service. We were talking 

about this. 

The President’s Commission of the U.S. Postal Service proposed 

to revolutionize retail access by bringing a wider range of postal 

services and products to consumers in grocery stores, pharmacies, 

and other convenient locations. What is the current status of your 
139

efforts—I know I alluded to it a minute ago—to expand access to 

retail Postal Services at venues other than post offices? In other 

words, where people are. 

Mr. POTTER. We are actively engaged and talking with a number 

of national retail outlets. 

Senator SHELBY. I am not trying to promote Wal-Mart or Target. 

Mr. POTTER. You are pretty close there. 

Senator SHELBY. But look at the traffic that is going through 

these or Home Depot or Lowe’s. You go there and you see that 

there are thousands of people going through those stores all over 

America every day. 

Mr. POTTER. Right, and we are working closely with several of 

them. There are issues that we are dealing with, with some legal 

requirements but we are actively engaged in that. 

We recently had a deal with Hallmark Crown Stores. Seventy 

percent of all greeting cards end up in the mail, which I thought 

was a much higher number than I expected it to be. So we have 

worked out an arrangement with them where they will sell stamps, 

they will sell Priority Mail. And we are looking at all our options 

to do that. But we want to do it in an economical way. 

FINANCIAL TRANSPARENCY

Senator SHELBY. Mr. Potter, the President’s Commission has also 

proposed to try to enhance the transparency of the Postal Service’s 

financial reporting. What steps have you done, working with the 

Board of Governors, to enhance annual financial reporting? Is the 

Postal Service committed to report financial information in accordance with the SEC reporting requirements and disclosure statements? 

Mr. POTTER. The Postal Service has begun doing quarterly reports, that we believe are comparable to SEC. Obviously we are not 

a private corporation with stockholders but we have begun enhanced quarterly reporting. We have posted it on our web site. We 

have begun to report the equivalent of the 8–Q where basically if 

there is a major incident that might affect our finances, we are reporting that. 

We have changed our annual statement to become what we believe is more transparent. 

In addition to that, we are in contact and having discussions 

with the SEC and they are taking a look at our reports and we are 

looking forward to their recommendations on what we can do. 

Right now we believe we are probably more transparent than 

most, in terms of the level of information that we provide through 

the rates process and through all of the oversight that we have. 

Senator SHELBY. But first of all, you need to know your financial 

condition, the real financial condition. Otherwise, you really cannot 

run the place if you do not know what is going on. 

Mr. POTTER. One of the outcomes of doing that was the Civil 

Service Retirement legislation change. At the time people were saying, there were some saying we were underfunding our retirement 

benefits. 

Senator SHELBY. You certainly do not want to do that, either. 

Mr. POTTER. But we were of the opinion that we might have been 

overfunding. So there was the exploration and thanks to GAO and 
140

the administration, who took it upon themselves to help us with 

that, we were able to find out, thankfully, that we were in an overfunding condition. 

SPONSORSHIPS

Senator SHELBY. What return on investment has the Postal Service realized from sponsorship deals such as those with the New 

York Yankees, Tampa Bay Devil Rays, and Lance Armstrong? 

Mr. POTTER. The sponsorships, I do not have a specific return. 

Senator SHELBY. Would you furnish that for the record? 

Mr. POTTER. I can furnish a response. I do not know if we have 

a specific return. 

Senator SHELBY. You need some kind of way to measure that. 

Mr. POTTER. It is very subjective and we will provide you what 

our analysis is for the record. 

Senator SHELBY. But if you were advertising in private business, 

you would measure that advertising to see if you are selling cars 

or you are moving certain goods and services. Otherwise, you stop 

that advertising or you change it. 

Mr. POTTER. Exactly. We will provide it for the record. Some of 

the numbers are I believe, for example, some you will look at with 

a skeptical eye and say I do not think it is worth that much. I have 

that same skeptical eye when it comes to a few of these. 

Senator SHELBY. I am not in a position to say. 

Mr. POTTER. I am not either, so we will share with you what others’ analyses of it are. 

[The information follows:]

Sponsorships increase brand awareness, build positive corporate image, promote 

employees’ corporate pride and accrue positive public relations. While some of those 

attributes may be difficult to measure, the Postal Service did commission its advertising agency, Campbell-Ewald, to track and measure the level of media exposure 

for the Postal Service for the July-August 2003 timeframe, including the 2003 Tour 

de France. The value of domestic exposure for the Postal Service for this 2-month 

time frame represented in excess of $31 million. 

Regarding the other sponsorships, the Devil Rays sponsorship should be regarded 

more as an advertising purchase; it solely comprises a billboard in the outfield promoting Priority Mail. Most of what we pay for in our Yankees sponsorship is also 

about advertising exposure in the stadium. However, in the case of the Yankees relationship we also received permission to produce philatelic merchandise that includes Yankee images. From the sale of this merchandise we gross several million 

dollars annually.

DELIVERY GROWTH

Senator SHELBY. The postal mail volume has continually dropped 

since fiscal year 2000, while the number of new addresses has increased by 5.4 million annually. The volume of first class mail and 

the number of delivery points are moving in opposite directions it 

seems. 

How do you plan to address, Mr. Potter, the delivery requirements for communities with the rapid growth of homes and businesses? And once the determination has been made that a new 

postal facility is needed, what is the approval process? Is it too protracted or can you have a fast track? 

You know, you have got communities growing by leaps and 

bounds and you have got some that are shrinking. 
141

Mr. POTTER. We have got advance site acquisition where we actually go out and buy land in anticipation of growth. 

Senator SHELBY. Save you some money, will it not? 

Mr. POTTER. For example, out in Las Vegas we worked with the 

Bureau of Land Management, which has control over expansion beyond the city. And there are different actions that are taken——

Senator SHELBY. Did they give you the land? They should. 

Mr. POTTER. We have been able to do that. I do not want to publicize it. We have been able to work certain arrangements, but in 

other parts of the country we cannot do that. But that is an example of what we do. We have different strategies in different areas 

around the country. 

But advance site acquisition is one of the methods that we use 

where we anticipate growth. 

Senator SHELBY. You do that by demographic trends, among 

other things, do you not? 

Mr. POTTER. Exactly, and you just look at, for example, the midsection of the country, you look at Montana, South Dakota, Iowa, 

down to Oklahoma. We have seen 30 percent of the population has 

been reduced. And obviously, the growth is in other sections. 

We do look to build facilities in those areas of the country. And 

we have provided funds to do that and we are expanding the 

amount of money that we have spent on that. 

UNIVERSAL SERVICE

Senator SHELBY. As you look at the demographics of rural America, rural America is shrinking in population. How do you anticipate that to reduce the facilities and your costs? What about the 

political overtones there? 

Mr. POTTER. Well, reducing the facilities is a major issue and one 

that by law we cannot do for economic reasons. So we live within 

the law. It is one thing that we would hope that, if we were to get 

reform legislation, would be considered by the Congress. 

Senator SHELBY. It is universal mail service. 

Mr. POTTER. We are not going to back away from universal mail 

service. If we do, I do not think you need a Postal Service in this 

country. That is the reason that we were formed. There are communities in America that would not get service if it were not for 

the Postal Service. We recognize that and we believe that. 

And I think that based on everything that I have read about the 

creation of the Postal Service, that that is why we were formed, to 

assure that. Some people have suggested that we get out of the 

package business, for example. So I said, how did we get into it? 

It turns out in 1912 there was a law passed by Congress, prior 

to which the Postal Service was not able to carry anything that 

weighed more than 4 pounds. But what happened and what was 

happening throughout the country was that there were rural communities that were either getting no service or whatever service 

they were getting, was an infrequent service, they were paying exorbitant rates to get. 

There were inner-city communities, the less affluent inner-cities 

communities that were not getting regular package services. And 

when they were getting it they were paying exorbitant fees to receive it. 
142

So when I look back historically I think wow, think about it 

today. If we were not in certain areas, I am not sure that the private sector could step in or would step in and deliver without surcharges. 

And today, many of our competitors surcharge rural Americans 

for delivery of mail or companies that want to reach rural Americans. And certainly others do not have daily delivery to certain 

communities that are less affluent. 

So I think the role of the Postal Service still is relevant today 

in light of what we were founded to do and the notion that everybody has equal access to a system to conduct business and send 

messages. 

Senator SHELBY. At one time, you were in the banking business, 

too. 

Mr. POTTER. We were and I wish we could get back into it. If you 

look at foreign post, many of them are getting into the banking 

business because they have retail outlets in these small communities. 

Senator SHELBY. As chairman of the Banking Committee, I am 

not recommending that. 

Mr. POTTER. I can always try, right. 

ADDITIONAL COMMITTEE QUESTIONS

Senator SHELBY. Mr. Potter, we appreciate your appearance. We 

appreciate your candor and we have a number of requests you said 

you would get back with the record to us. 

[The following questions were not asked at the hearing, but were 

submitted to the Service for response subsequent to the hearing:]

QUESTIONS SUBMITTED BY SENATOR RICHARD C. SHELBY

DETECTING BIOHAZARDS IN THE MAIL

Question. I am told by GAO and others that the detecting systems that the Postal 

Service has acquired may not have the capability to detect other hazardous agents, 

such as a chemical or radiological weapon. Given that there are many other toxic 

agents that can be sent through the mail without being detected by your system, 

is the Postal Service still planning to deploy such detecting systems? 

Answer. Yes. We currently plan to install 1,708 Biohazard Detection Systems 

(BDS) at 282 facilities nationwide. National deployment of the BDS began in early 

April 2004. The 282 sites were selected because they represent our major processing 

facilities and cover our collection mail entry points for the entire postal network. 

Today, we have a total of 32 BDS systems in operation. 

Nationwide installation of the BDS will resume on June 5. The program experienced a slight delay for testing to determine why some systems were producing ‘‘inconclusive’’ test results. Inconclusive or non-determinant results do not mean that 

a threat was in the mail. It simply means that tests had to be rerun to get a valid 

result. 

Our goal through the testing, implementation and everyday use of the BDS has 

been to ensure the safety of every employee and the customers we serve. That is 

why it was critical that the system operated properly before installation continued. 

Postal Service Engineering, working along with the equipment contractors, conducted tests to determine the cause of the problem. The cause has been determined 

and changes to basic processes and procedures have been instituted to return BDS 

to normal performance levels. 

Our methodology has been to develop a threat assessment that outlines known 

threats to our resources. Based on that assessment, we have identified and developed technologies to mitigate those known threats. These technologies include the 

BDS, capable of detecting biohazards, the Ventilation and Filtration System, capable of containing biohazards, and an irradiation process that neutralizes biohazards. 
143

BDS was developed as a scaleable system. In its current state, the system can 

detect only for the presence of Anthrax. However, BDS can be expanded in the future to detect for other biological agents, as well as toxins such as Ricin. Working 

in conjunction with our primary contractor for the BDS program, Northrup Grumman, we are integrating a prototype device in the BDS equipment that is capable 

of detecting Ricin. Testing of the device is planned for the spring of 2004. 

Question. How many systems have been installed? Where have they been installed 

and at what cost? 

Answer. We currently have 31 production systems and 1 pre-production system 

operating. The pre-production system will be replaced with a production unit as part 

of the national deployment effort.

Unit Location Number of Units Costs (Approx) 

Cleveland, OH ............................................................. 9 Production Units ..................................................... $2,250,000

Baltimore, MD ............................................................. 11 Production Units ................................................... 2,750,000

Pittsburgh, PA ............................................................ 1 Pre-Production Unit ................................................ 250,000 

Lancaster, PA ............................................................. 5 Production Units ..................................................... 1,250,000

Queens, NY ................................................................. 6 Production Units ..................................................... 1,500,000

We estimate the manufacturing and installation costs for one BDS system to be 

approximately $250,000 to $180,000 for the hardware and $70,000 for logistical support and installation efforts. To date, we have awarded a contract for the first production phase that consists of the manufacture and installation of 742 BDS systems. 

Total funding committed to date is $212.1 million. 

Question. Will additional detection capabilities be added in the future? If so, how 

cost effective is it to address one threat at a time? 

Answer. We have developed a threat assessment that outlines known threats to 

our resources. Based on this assessment, we have identified and developed the Biohazard Detection System (BDS) capable of detecting biohazards. BDS was developed 

as a scaleable system. In its current state the system can detect only for the presence of Anthrax. However, BDS can be expanded in the future to detect for other 

biological agents, as well as toxins such as Ricin. Working in conjunction with the 

primary contractor (Northrop Grumman) for the BDS, we are integrating a prototype device within the BDS equipment that is capable of detecting Ricin. Testing 

of the device is planned for the spring of 2004. 

As threats are identified and required to be detected by BDS, we will aggressively 

pursue adding the capabilities to our detection systems. However, in order to add 

additional threats to BDS, specific reagent sets and processes must be developed 

and scientifically validated with respect to each individual threat. 

Question. Are there any analyses of how the Postal Service’s efforts compare to 

the steps that private sector mail companies have taken to detect hazardous agents? 

Answer. Yes. After the anthrax attacks of October 2001, the Postal Service consulted with the Joint Program Office (JPO) for Biological Defense as well as other 

military and Federal agencies. After these consultations, it was determined that a 

system did not exist that met the needs of the Postal Service. From October 2001 

to September 2002 more than 20 systems were tested. BDS was the only system 

that successfully passed all test protocols jointly established by the Postal Service 

and Bio-Defense experts. 

COST REDUCTIONS

Question. Please outline the cost-cutting measures planned for the Postal Service 

for fiscal year 2005. 

Answer. We are in the process of finalizing cost reduction plans for fiscal year 

2005, which will become a part of the fiscal year 2005 Integrated Financial Plan, 

scheduled for Board of Governors review in September. It is our expectation that 

we will plan for a sixth straight year of positive productivity gains as a result of 

continuing cost reduction efforts that has been successful in the past 5 years. 

We have achieved savings through a variety of measures, which we will build 

upon for fiscal year 2005. Postal management will continue to identify best practices 

and achieve savings through breakthrough productivity initiatives. We will continue 

to deploy automation that will save mail processing costs, and that also will have 

a positive effect on delivery productivity through higher levels of sequenced mail for 

the letter carrier. We will also continue to achieve additional savings and cost 

avoidances through streamlined transportation networks, refreshed communications/computer networks, centralized support functions and opportunities presented 

by supply chain management initiatives. 
144

Through stringent cost management, we have delivered $5 billion in cost savings 

since 2000. This includes $2.7 billon in savings resulting from Transformation Plan 

initiatives over the last 2 years. We are on track to surpass the $5 billion in savings 

called for by the Plan over the 5-year period ending in 2006. 

Question. What actions does the Postal Service intend to implement to continue 

the process of streamlining its operations? 

Answer. In its July 31, 2003 report, the President’s Commission on the United 

States Postal Service made a total of 35 recommendations derived from the findings 

of its four subcommittees that reviewed all aspects of Postal Service operations. Of 

those 35 recommendations, 17, or approximately 50 percent, aligned closely with the 

strategies that the Postal Service adopted as ‘‘near-term’’ strategies in its April 2002 

Transformation Plan. The ‘‘near-term’’ strategies are those the Postal Service can 

accomplish without statutory change. For example, the President’s Commission recommended that the Postal Service expand retail access to postal products and services. This was a key Transformation Plan strategy that is being implemented currently through such programs as retail access to postal services through partnerships with commercial retail stores, such as Safeway, and continuing expansion of 

product and service offerings over the Internet. 

For a complete review of the progress of Transformation Plan strategies please 

see the attached November 2003 Transformation Plan Progress Report. Please note 

that the Transformation Plan made two key commitments: to hold rates steady and 

to remove $5 billion in costs by the end of 2006. The Postal Service is well on its 

way to meeting these commitments. Rates will be held steady until 2006, and $2.7 

billion of the $5 billion commitment was achieved by the end of fiscal year 2003. 

Of the 18 remaining President’s Commission recommendations, most deal with 

issues that require statutory change, such as changes in the governing structure of 

the Postal Service. In the Transformation Plan the Postal Service associated such 

topics with structural change, and while it made some recommendations, it recognized that many of the policy issues are within the purview of the Congress, not 

the Postal Service. There were a small number of President’s Commission recommendations that the Postal Service did not address in its Transformation Plan 

in any form, such as personalized postage stamps and an independent advisory body 

for the evaluation, acquisition and deployment of technology. The Postal Service has 

been studying the feasibility of such recommendations. Early in 2004 the Citizens’ 

Stamp Advisory Committee, which reviews and approves subjects for printed postage stamps, recommended against implementation of personalized postage stamps 

by a vote of eight to three. The Committee cited nine reasons, including concerns 

about counterfeiting and negation of the social value of stamps as a unifying symbol 

of culture and community. 

E-COMMERCE INITIATIVES

Question. The 2003 Comprehensive Statement on Postal Operations states that 

the Postal Service is evaluating and modifying non-postal business plans. It is my 

understanding that e-commerce was an area of special concern. As a result of the 

e-commerce evaluation, what changes has the Postal Service made regarding commercial ventures, including e-commerce activities? 

Answer. We have aggressively reevaluated e-commerce initiatives and we have 

eliminated those that didn’t meet expectations. We are focusing on repositioned 

core-product initiatives to satisfy customer needs. Our Postal Service website, 

www.usps.com, is a logical extension of our core mission. Our customers may access 

this site to buy stamps, look up ZIP Codes, and even ship parcels through our new 

Click-N-Ship service, a convenient online shipping solution that allows customers to 

send mail without leaving their home or office. 

And we are moving toward greater reliance on private sector providers to eliminate postal expenses. For example, we repositioned Electronic Postmark and Mailing OnLine to private sector agreements. 

We will continue to support initiatives that align with our core mission. As we 

gain experience, we will assess performance and make determinations on a productby-product basis. 

Question. How do initiatives, such as the partnership with Hallmark Gold Crown, 

differ from prior e-commerce ventures? 

Answer. Our latest initiative is building upon previous initiatives designed to expand customer access without creating additional, permanent network costs. 

Recently, we have identified potential partnerships with sophisticated multi-location retailers, such as Hallmark, through standardized contract terms and conditions that are individually awarded. These limited-service contract postal at units 

will provide only the most desired postal products and services and times and in 
145

locations that are convenient to consumers. This relationship between two partners 

with an interest in ‘‘keeping customers in the mail’’ was not intended to replace post 

offices that offer a full line of services. 

These multi-location retailers are easily recognized and well respected brands that 

complement the USPS brand. These providers also have the marketing expertise 

and advertising funds to support the promotion of these units. These partners will 

provide retail services below the cost of the traditional post office. 

Hallmark was the first limited service CPU provider and the first to use Postal 

Service-provided postage evidencing devices to affix postage. By using this device, 

we reduce administrative costs in the field by eliminating stamp orders (stamps are 

provided under the consignment program) and eliminating daily financial reporting 

as well as auditing and bonding requirements. Because Hallmark stores pre-pay for 

the postage loaded onto the provided meters, the consumer benefits from conducting 

their store purchase with their postal purchase in one transaction and they can use 

their credit cards (credit card postal purchases are not allowed in traditional contract postal units.) 

By providing expanded access to Postal Service customers, contract postal units 

(CPUs) provide the Postal Service with a flexible and adjustable retail network that 

is a lower-cost alternative to Postal owned facilities. 

As customer behavior changes and they begin to access postal services through 

the Internet or through other means, and as they move to new communities, we will 

have the ability to adjust our retail network to meet the demand. CPU partners 

typically offer customers the convenience of providing postal services in the evenings 

and on weekends where customers live, work and shop. 

Customers can also purchase stamps ‘‘at post office prices’’ at participating 

Stamps-on-Consignment locations such as grocery stores, convenience stores, drug 

stores, banks and ATMs. Approximately 40,000 locations and ATMs are part of this 

network. These stamp channels also provide expanded hours and days of access. 

These stamps are provided to our consignees through our vendor. The Postal Service 

cost to sell stamps through consignment is one of our least expensive methods of 

selling postage. 

REVENUE FORECAST

Question. Is it possible to offset the revenue loss without additional rate increases? 

Answer. We continuously assess our products and services to identify ways to stabilize costs to offset any revenue losses independent of our rate increases. As mentioned earlier, we are on track to take $5 billion in cost out of the system by 2006. 

Concurrently, we are working to enhance our products to keep pace with customer 

needs and grow revenue. 

Question. What is the Postal Service doing to reverse the revenue losses it has 

experienced with Express Mail since 2000 and Priority Mail since 2001? 

Answer. In terms of Express Mail and Priority Mail, customers have told us that 

the four most important factors in choosing a shipping company are service/reliability, price, ease of use/access, and information. 

In late 2001, we entered into a transportation agreement with FedEx to fly a significant portion of our Express Mail and Priority Mail. As a result, costs were reduced and service levels are at an all time high. We are also regularly reviewing 

our Express Mail network for opportunities to expand our overnight reach. 

Some of the cost-reduction initiatives we are working on include processing and 

barcode standardization to increase automation of the parcel mail-stream. We recently awarded a contract for 75 Automated Package Processing Systems (APPS) 

that will provide high-speed parcel and bundle processing, reduce labor costs, and 

provide en route tracking information for customers. 

Another initiative to help generate revenue was our recent launch of a pre-paid 

Priority Mail Flat Rate envelope to make it easier for customers to use Priority Mail 

service. We are also evaluating a Flat Rate Priority Mail box. These products will 

make it easier for customers to mail documents and merchandise anywhere in the 

country for one flat rate without the need for weighing and rating to determine how 

much postage needs to be placed on their package. We also enhanced our parcel 

pickup capabilities by allowing customers to notify their local post office when they 

have prepaid Priority Mail and Express Mail packages to be shipped. The notification alerts their carrier to pickup the packages at the same time they deliver their 

mail. Since we are already at the address, there is no charge for the pickup. 
146

PUBLIC-PRIVATE PARTNERSHIP

Question. The President’s Commission stated that the Postal Service should continue to look for opportunities to offer discounts for additional work-shared products 

and to expand opportunities for small mailers to participate in them, particularly 

as new technologies are developed, that reflect the lowest combined public-private 

sector costs. 

Does the current rate-setting environment prevent the implementation and acceptance of work-sharing discounts with large mailers and cost the USPS potential 

sources of revenue? 

Does the Postal Service believe the work-share discounts are appropriate? 

What opportunities does the Postal Service foresee regarding additional worksharing and what impact will it have on the budget? 

Answer. The current rate setting environment has not prevented the implementation or acceptance of generic worksharing discounts. Generic discounts are available 

to all postal customers and are used by thousands of customers; they are applied 

in a standard manner for use at thousands of postal facilities. We note that these 

thousands of customers are not only large mailers, but also small, local businesses 

and nonprofit organizations. 

Many customers or groups of customers have different mail preparation capabilities. At the same time, the operations of different postal facilities can be enhanced 

by variations in mail preparations designed to accommodate unique mailing needs. 

This creates potential opportunities to design worksharing arrangements for small 

groups of customers (niche classifications) or individual customers (negotiated service agreements or NSAs.) The current rate setting process often involves protracted 

and expensive litigation for these relatively simple cases. For instance, a current 

small filing for Periodicals, which affects primarily one mail preparer and roughly 

a tenth of 1 percent of total mail volume, is 3 months into what is an ‘‘accelerated’’ 

schedule. Realistically, this process cannot be repeated for thousands of customers 

or customer niches. 

The Postal Service is a strong supporter of workshare discounts. In testimony before the President’s Commission on the U.S. Postal Service, Chief Marketing Officer 

Anita Bizzotto stated:

‘‘Partnering with customers through worksharing has been one of the major success stories of the U.S. Postal Service over the past 30 years. These partnerships, 

now valued at $15 billion a year, have provided affordable mailing alternatives for 

customers; reduced Postal Service costs; and; have been a primary source of mail 

volume growth. These partnerships and worksharing discounts have helped usher 

in the age of automation by encouraging customers to prepare machine-readable 

mail and have remained an important tool for aligning the mail with the operating 

environment.’’

Some opportunities for additional worksharing will come in the form of more customized arrangements. At the same time, there is still opportunity for new generic 

arrangements. For instance, we believe more incentives are needed to encourage the 

transporting of magazines and newspapers downstream closer to their points of delivery. Such destination entry incentives have been successful in holding down rate 

increases for parcel and advertising mail customers but current policy has limited 

the applicability of these incentives. We have not succeeded in extending 

worksharing opportunities to Priority Mail but we are looking for opportunities that 

would serve the needs of Priority Mail customers. 

Lastly, we are concerned that the language in some of the legislative proposals 

may have a harmful effect on workshare in the future. In general, the more rigid 

standards which are applicable only to worksharing rates run counter to attaining 

one of the enunciated goals of postal reform: a more flexible rate structure. Rigid 

standards for worksharing rates would limit the Postal Service’s ability to implement and maintain workable worksharing rates in a dynamic operating environment. 

RETAIL STORES REVENUE

Question. Has the Retail Network Optimization Plan been implemented? 

Answer. Since the initial development of the Transformation Plan, the Postal 

Service has established a retail direction that is focused on access, convenience, and 

ease of use for the customer. Building upon these goals, we have implemented a program that allows customers to purchase postage on-line, enabling letter carriers to 

pick up their postage materials when the carrier is delivering to the area. This is 

accomplished via the USPS Web site and eliminates the need for a special trip to 
147

the Post Office, which is a real convenience to small businesses and consumers who 

cannot always make a visit to the post office during normal businesses hours. 

Our retail network of access is evolving on a continuing basis and does not easily 

fit into an absolute optimization plan. For example, since the development of the 

Transformation Plan was announced, we have implemented a much more robust 

Web access channel. We do know that in order to serve the customer we must be 

where they work, shop, and live. Our focus is to provide that access and to adjust 

the network to meet those needs. 

In the Transformation Plan we talked about technology and the role it plays for 

retail. We have begun the roll-out of 2500 Automated Postal Centers (APCs), that 

enables our customers to perform 80 percent of the most common transactions that 

take place at our counters. They are located in our busiest offices and provide access 

to our products and services up to 24 hours a day, 7 days a week. Implementation 

will be completed by December of this year. 

The retail network continues to evolve, and like most businesses it is more than 

‘‘brick and mortar’’—all of the access points are critical in order to provide universal 

service. The Postal Service will continue to review, monitor, and adjust this network 

(expansion and consolidation) to ensure that it is operating as efficiently as possible 

and providing needed services to our communities. 

Question. How were threshold values (proximity to other postal facilities, retail 

productivity indicators, number of households, deliveries, walk-in revenue, and 

small business accounts) determined? 

Answer. We do not have established thresholds for the Postal Service. We have 

a database that contains this type of information that we provide to the field to help 

them determine how to adjust their retail operations to meet the needs of customers. 

EMERGENCY PREPAREDNESS EXPENSES

Question. Since 2002, Congress has provided emergency appropriations to support 

the Postal Service’s anthrax emergency preparedness activities. After the attacks, 

Congress appropriated $762 million to decontaminate postal buildings and to buy 

and install biohazard detection equipment. The Postal Service reportedly has spent 

a total of $971 million on emergency preparation, which include $209 million from 

its revenue. 

Please provide an overview of what this funding has been spent on to date. 

Answer. Following this paragraph, please find excerpts from the Postal Service’s 

fiscal year 2005 Budget Congressional Submission, which addresses emergency preparedness costs to date, as well as our appropriations request. The following is information quoted directly from this document. 

U.S. Postal Service Fiscal Year 2005 Budget Congressional Submission, page 12:

‘‘Pursuant to Public Law No. 107–117, the Postal Service submitted on March 6, 

2002, an Emergency Preparedness Plan that outlined and discussed in detail the activities considered necessary to provide for the safety of our employees and customers. The Plan covered a span of several years and the activities are categorized 

as Near-Term, Intermediate-Term and Long-Term in describing the time frames 

during which these activities are planned. At the request of the Appropriations 

Committee, an update to the Plan was submitted April 30, 2003. 

‘‘In the Plan, obligations for the Near-Term activities identified for fiscal year 

2002 were projected to total $587 million. Of this total, $500 million was funded by 

Public Law 107–117, and $87,000,000 was funded by Public Law 107–206. 

‘‘No funding for emergency preparedness was included in the initial Postal Service 

Fiscal Year 2003 Budget Request pending completion of the Emergency Preparedness Plan, however, a fiscal year 2003 budget amendment request was subsequently 

forwarded to the Office of Management and Budget to fund activities totaling $799.8 

million relating to fiscal year 2003. 

‘‘The Postal Service 2004 Budget requested $350 million to continue emergency 

preparedness activities. 

‘‘No additional funding beyond the $587 million, received in 2002, has been received. 

‘‘The Plan and related requests are dynamic and, as such, some modifications are 

necessary as our field-testing proceeds, our knowledge of biohazard detection increases, and as technology matures.’’ 

U.S. Postal Service Fiscal Year 2005 Budget Congressional Submission, page 13: 

‘‘Significantly more funds than originally anticipated were required to clean and 

restore two mail processing centers that had been closed due to anthrax contamina-
148

tion. Safety was the paramount concern in performing this task and actions were 

coordinated with several scientific, medical, and government agencies. Delays were 

experienced due to questions regarding indemnification of contractors performing 

the process and the sheer scale of the task for which EPA required additional testing and verification. Reimbursement is now requested for the additional costs required in the refurbishment of these facilities. 

‘‘A major portion of the $779 million Emergency Response funds requested for fiscal year 2005 and prior years will be used to continue acquisition and deployment 

of ventilation and filtration (VFS) equipment that was initiated with the funds provided previously. A portion of the $587 million provided during fiscal year 2002 is 

being used to develop, acquire and install VFS on our culling and canceling equipment. Our Emergency Preparedness Plan discussed further deployment of VFS 

equipment to be installed on our delivery barcode sorters (DBCS) and automated 

flat sorting machines (AFSM) 100 and loose mail systems. The $779 million includes 

funding for the DBCS and AFSM 100 VFS acquisition and deployment.’’

[In thousands of dollars] 

Item Prior Years Fiscal Year 2005 Total 

Building Restoration .................................................................................. 268,800 ........................ 268,800 

Biohazard Detection System ...................................................................... 402,700 24,000 426,700 

Ventilation and Filtration ........................................................................... 271,700 364,000 635,700 

DC Area Mail Irradiation Facility ............................................................... 9,000 7,000 16,000 

Other .......................................................................................................... 18,800 ........................ 18,800

Subtotal ........................................................................................ 971,000 395,000 1,366,000 

Appropriation Received .............................................................................. ¥587,000 ........................ ¥587,000

Total .............................................................................................. 384,000 395,000 779,000

QUESTIONS SUBMITTED BY SENATOR PATTY MURRAY

CONSOLIDATION OF RURAL POST OFFICES AND CLOSURE OF SMALL POST OFFICE

Question. There have been instances when the Postal Service does not consult 

with or officially inform the customers and community prior to closures or consolidation. Why not? What is the process employed by the Postal Service when it closes 

a facility or consolidates facilities? 

Answer. The Postal Service follows post office closing and community notification 

procedures outlined in Title 39. There are occasions, however, due to emergency situations such as loss of lease with no suitable alternate quarters, a natural disaster 

or flood where there are no suitable alternate quarters or other similar emergencies. 

The Postal Service considers a suspension a temporary situation until a decision is 

made to either re-open the facility or propose discontinuance. If discontinuance is 

proposed, then a community meeting along with customer questionnaires are sent 

out to gather input from the community. 

Attached are the Postal Service regulations governing the discontinuance and 

emergency suspension of postal facilities. 

POSTAL FACILITY CONSTRUCTION

Question. The fiscal year 2004 Omnibus Appropriations bill directed the Postal 

Service to report on localities that require a new postal facility, the current conditions of post offices in need of renovation, and when a new facility or replacement 

will be built. The report is required within 90 days of the enactment or by my count, 

April 22, 2004. Can you give me a preview of what the report will say? What is the 

status of postal facilities in Washington State and is there a need for any new construction or renovation in my State? 

Answer. In fiscal years 2001 and 2002 and part of 2003 due to financial constraints, the Postal Service implemented a freeze on capital and expense investments related to facilities. Exceptions to the freeze were allowed for ongoing construction and, on a case-by-case basis, projects were submitted to Headquarters for 

review and approval to address health and safety, emergency, legal, and lease preemption issues. Exceptions were also allowed for repair and alteration of facilities 

due to legal, health and safety, emergency, and maintenance of our infrastructure. 

During fiscal year 2003, the freeze was lifted. Annual budgets were established 

for repairs and alterations. Repair and alterations continue to be limited to projects 
149

addressing legal, health and safety, emergency, and infrastructure maintenance 

issues, within the budget provided. At the same time, a new national prioritization 

system was established for new or replacement customer service projects. This process focused on space deficiency and growth, and continued to allow exceptions to be 

submitted as part of the prioritization process and throughout the year for health 

and safety, emergency, legal, and lease preemptions issues, as well as those projects 

which generated favorable returns on investment. The projects included on the list 

depend on the funds available in the budget and the priority scores of the projects 

submitted. These do not include numerous other projects which are approved on an 

ongoing basis as exceptions. 

As a result of the actions above, we believe we are addressing our most critical 

facility needs and prioritizing projects within the funding available. 

Regarding Washington State facilities, the following is a list of projects being pursued as part of approved plans: 

New Facility Projects 

—Bickleton Main Post Office 

—Clarkston Main Post Office 

—Ford Main Post Office 

—Lake Stevens Carrier Annex 

—Lilliwaup Main Post Office 

—Seattle—Wedgewood Carrier Annex 

—Southworth Main Post Office 

—Spokane Vehicle Maintenance Facility 

—Union Main Post Office 

Repair and Alteration Projects 

—Auburn Main Post Office—lobby remodel 

—Colfax Main Post Office—life safety systems upgrade 

—Newport Main Post Office—heating/air conditioning replacement 

—Pasco—Processing & Distribution Facility—heating/air conditioning controls 

—Pullman Main Post Office—security upgrade 

—Spokane—Hillyard Station—enlarge collection box drop-off lane 

—Spokane Processing & Distribution Center—install concrete pad enclose dock 

—Tacoma Processing & Distribution Center—security upgrade 

—Vancouver—Downtown Station—window replacement 

—Veradale Main Post Office—enclose dock 

POSTAL REFORM/REGULATORY BOARD ISSUES

Question. Legislation enacted last year shifted the responsibility of funding civil 

service retirement benefits earned by postal employees while they served in the 

military from the Treasury Department to the Postal Service. I understand that 

most of the financial obligation is due to military service performed before the modern-day Postal Service was even created in 1970. The President’s Commission recommends that military service costs not be borne by the Postal Service. What would 

be the financial impact on the Postal Service if the Postal Service is to be responsible for this $27 billion cost? 

Answer. The Postal Service has submitted two proposals concerning the disposition of these funds. Our first proposal requests that the United States Treasury 

again be required to fund all CSRS costs associated with the military service of 

Postal Service employees and retirees. Our second proposal assumes that responsibility for funding military service costs is transferred to the Postal Service. 

Under the first proposal, in fiscal year 2006, the Postal Service will contribute $5 

billion to fund and pre-fund retiree health benefits for all career employees; under 

the second proposal it will contribute $1.9 billion to fund retiree health benefits and 

to pre-fund retiree health benefits for career employees hired after fiscal year 2002. 

The difference in the amounts reflects the fact that returning the funding of CSRS 

costs of military service to the Treasury increases the ‘‘savings’’ under the Act, and 

makes available additional funds that can be used to pre-fund retiree health benefits for career employees. 

Both proposals address the funding retiree health benefits, which we estimate to 

be valued at between $40 billion and $50 billion, depending on the long-term medical inflation assumption used, at the end of fiscal year 2002. At the end of fiscal 

year 2003, post-retirement health benefit obligations were estimated to be valued 

between $47 billion and $57 billion. 

Each proposal stands on its own merits. Neither was designed around its impact 

on rates. The first proposal returns to the U.S. Treasury the responsibility for funding CSRS pension costs earned by military service of Postal Service employees and 
150

uses funds made available from this adjustment to pre-fund retiree health benefits 

cost for current Postal Service employees. However, to provide the required level of 

funding, an additional $1.2 billion in funds would be necessary, causing a 2 percent 

increase in rates. 

In our second proposal, it is assumed that the transfer of CSRS military service 

costs to the Postal Service is not reversed and that retiree health benefits are prefunded only for new employees hired after fiscal year 2002, when the pension funding reform legislation was enacted. This would require approximately $200 million 

more in additional funds, causing a 0.3 percent increase in rates. It would be possible to select arbitrarily a different hire date for funding employee retiree health 

benefits for new employees to match the additional funding requirement of $1.2 billion, but it would be just that, arbitrary. 

Question. I also want to let you know that I have heard concerns from constituents about the recommendation to establish a new Postal Regulatory Board. This 

entity would replace the current Postal Rate Commission and significantly expand 

its authority. What are your views on this proposal? 

Answer. We understand the rationale the President’s Commission has defined for 

the Postal Regulatory Board. Yet regulators are normally required to operate within 

limits and guidelines. Regulated private companies and their shareholders have 

legal protections against arbitrary action by the regulator that the Postal Service 

cannot have as a government institution. 

At the least, there should be standards drawing a clear line between what is appropriately a managerial function within the oversight of the Governors or Directors, what is a regulatory function committed to the regulator, and what is a public 

policy function reserved to the Nation’s lawmakers. 

For instance, the Postal Regulatory Board can revisit the vital national issues of 

the postal monopoly and universal service. These are clearly issues of broad public 

policy that should be resolved as part of our management responsibilities, as determined by Congress. 

They are not regulatory issues. Without defined limits or guidelines, the regulator 

could conceivably limit the monopoly in such a way as to jeopardize universal service or even redefine the scope of the Nation’s mail service itself. 

The powers of the proposed Postal Regulatory Board could also affect the outcome 

of the collective-bargaining process. The Postal Service has been, and continues to 

be, a strong supporter of collective bargaining. This process of give and take assures 

that the interests of our employees—and the unions that represent them—are considered within the larger picture of the Postal Service’s financial situation and the 

needs of our customers. 

By determining the range within which wages may be negotiated, the Postal Regulatory Board could impede the ability of the parties to successfully negotiate agreements. 

REVENUE FOREGONE REIMBURSEMENT

Question. Mr. Potter, I understand that for the first time ever, the fiscal year 2005 

President’s Budget does not include the $29 million reimbursement to the Postal 

Service for the revenue foregone debt. Do you know why this has occurred? Do you 

consider this a violation of the agreement that has been in operation since the early 

1990’s when legislation was enacted that promised the Postal Service $29 million 

annually from 1994 through 2035? 

Answer. The Office of Management and Budget (OMB) did not provide us with 

their rationale for not including our request for payment of earned but unpaid Revenue Foregone appropriations in the President’s fiscal year 2005 budget request. 

In a December 3, 2003 letter to OMB Director Bolton, the Postal Service formally 

requested that OMB reconsider the funding reductions of the Postal Service, including reductions in revenue foregone payments, which OMB had proposed to include 

in the President’s budget request. An OMB official verbally informed us on December 17 that our requested changes had been denied. 

In accordance with the Revenue Foregone Act of 1993, the Postal Service is to receive $29 million annually through 2035. These payments, totaling $1.2 billion, 

cover the cost of services we provided in fiscal years 1991 through 1993, but for 

which there were insufficient amounts appropriated. They also cover payment for 

services provided from fiscal year 1994 through 1998. The payment requested for 

fiscal year 2005 would be the twelfth in the series of scheduled 42 annual payments. 

In an unusual departure from past Presidential budget submissions, the 2005 

budget is silent on this statutory reimbursement. The Postal Service is required 

under generally accepted accounting principles to reduce the value of an amount receivable to reflect any uncertainty as to full payment. As a result, the failure to re-
151

ceive these funds may require the Postal Service to treat these remaining payments, 

which amount to nearly $900 million, as a bad debt, significantly increasing our 

costs. As we work to address our long-term obligations in a responsible manner, it 

is counterproductive to increase costs by writing off a debt deferred by interest-free 

installment payments spread over a period of 42 years. 

The second part of our request is for $75.9 million for free mail for the blind and 

for overseas voting materials, as defined by statute. This provides funding for the 

free mailing of materials used by the blind and others who cannot use or read conventionally printed materials. It also includes absentee balloting materials that can 

be mailed free by members of the armed forces and other United States citizens residing outside of the United States, and balloting materials that can be mailed in 

bulk between State and local elections officials. 

Our appropriations request for free mail differs from the President’s budget proposal of $61.7 million. The President’s budget proposes to continue the practice of 

‘‘advance’’ funding the amount requested for free mail. This means that funding is 

‘‘advanced’’ until the fiscal year following the actual mailings and not made available to the Postal Service until after these mailings have been handled and delivered. The Postal Service is not authorized to control or limit these mailings to reduce the funding needed. And while that is not a role we seek, the simple fact is 

that we have no way to mitigate the shortfall in funding. Providing less than the 

requested amount will only compound the financial burden caused by the current 

‘‘advance’’ funding. 

The amounts due under this Act are for the absolute nominal costs incurred related to services previously performed. The Act’s requirements to reimburse the 

Postal Service over an extended time period with no payment of interest places additional cost burdens on other postal rate payers. For this reason, the Postal Service 

in the past has requested an accelerated repayment program. 

POSTMASTER VACANCIES

Question. According the Postal Service, there are more than 1,600 post offices 

with postmaster vacancies. Please explain what steps are being taken to fill these 

postmaster slots. 

Answer. Six hundred of the current 1,600 vacancies consist of emergency closings 

and/or other non-vacancy, leaving about 1,000 valid vacant postmaster positions. 

The attrition rate in the Postal Service is about 5 percent, which equates to approximately 1,380 (5 percent of the total post office count of 27,620). With about 1,000 

currently, we are below the number of postmaster vacancies that would be expected. 

The entire hiring and promotion process takes, at the very least, 90 days and includes the following: vacancy announcement posting, review of applications, interview of the most eligible applicants, and generating the selection and non-selection 

communication. 

Vacant post offices are often used to develop employees who have identified the 

position of postmaster as a career goal, with the average developmental assignment 

lasting about 90 days. As positions are filled, others become vacant, which creates 

a constant vacancy rate of about 3 to 5 percent or 830 to 1,380 positions. The Postal 

Service is currently within that range. 

QUESTIONS SUBMITTED BY SENATOR ROBERT C. BYRD

Question. The administration has proposed to permanently repeal the annual appropriation for foregone revenue. What effect do you anticipate the permanent repeal of this appropriation would have on postal rates? 

Answer. The receipt of these funds for past services performed is used to pay for 

current-period expenses. Accordingly, if the funds are not received, the price of 

stamps will increase directly related to these costs. 

If the entire sum were written off as bad debt, postal rates could increase by approximately 0.5 percent in the year of the write-off. In each of the remaining years 

of the payment period, lesser, but direct, rate increases would result. 

On average we would expect the rate increase to be similar for all mailers. However, since commercial mail comprises more than 70 percent of all mail, we would 

expect that in terms of absolute dollars, commercial mailers would shoulder the 

greatest burden. 

If any of the payments due as specified in the Revenue Foregone Reform Act of 

1993 are not received, the loss in reimbursement for services performed will increase postal rates directly. Accordingly, postal rate payers will fund the hundreds 

of millions in debt authorized to be paid through appropriation. 
152

Question. Under postal pension reform legislation (Public Law 108–18) enacted 

last year, the U.S. Postal Service will be required to assume all pension costs associated with Postal employees with military experience. What effect do you anticipate 

that this provision will have on postal rates? 

Answer. The Postal Service has submitted two proposals concerning the disposition of these funds. Our first proposes that the United States Treasury again be required to fund all CSRS costs associated with the military service of Postal employees and retirees. Our second proposal assumes that responsibility for funding military service costs is transferred to the Postal Service. Under the first proposal, in fiscal year 2006, the Postal Service will contribute $5 

billion to fund and pre-fund retiree health benefits for all career employees; under 

the second proposal it will contribute $1.9 billion to fund retiree health benefits and 

to pre-fund retiree health benefits for career employees hired after fiscal year 2002. 

The difference in the amounts reflects the fact that returning the funding of CSRS 

costs of military service to the Treasury increases the ‘‘savings’’ under the Act, and 

makes available additional funds that can be used to pre-fund retiree health benefits for career employees. 

Both proposals address funding retiree health benefits, which we estimate to be valued at between $40 and $50 billion, depending on the long-term medical inflation 

assumption used, at the end of fiscal year 2002. At the end of fiscal year 2003, postretirement health benefit obligations were estimated to be valued between $47 billion and $57 billion. 

Each proposal stands on its own merits. Neither was designed around its impact 

on rates. 

The first proposal returns to the U.S. Treasury the responsibility for funding 

CSRS pension costs earned by military service of Postal Service employees and uses 

funds made available from this adjustment to pre-fund retiree health benefits cost 

for current Postal Service employees. However, to provide the required level of funding, an additional $1.2 billion in funds would be necessary, causing a 2 percent increase in rates. 

In our second proposal, it is assumed that the transfer of CSRS military service 

costs to the Postal Service is not reversed and that retiree health benefits is prefunded only for new employees hired after fiscal year 2002, when the pension funding reform legislation was enacted. This would require approximately $200 million 

more in additional funds, causing a 0.3 percent increase in rates. It would be possible to select arbitrarily a different hire date for funding employee retiree health 

benefits for new employees to match the additional funding requirement of $1.2 billion, but it would be just that, arbitrary. 

Question. What are the likely financial ramifications of the sequestration of the 

U.S. Postal Service’s Civil Service Retirement System (CSRS) contribution savings 

as a result of Public Law 108–18? 

Answer. Under this reform legislation, it will be necessary to include the ‘‘savings’’ 

as an expense in the revenue requirement of future rate filings. Therefore, in order 

to obtain funds to place in an escrow account in fiscal year 2006, a 5.4 percent increase in postage rates will be required unless the law is amended. Additionally, biannual postage rate increases between 1.0 percent and 1.5 percent would be necessary just to cover the escrow requirements over the next 15 years. These escrowdriven rate increases will cause further declines in mail volume, contributing to the 

need for higher additional rate increases in order to fund the ever expanding delivery network. 

Question. How will the repeal of the foregone revenue appropriation, the assumption of military pension costs, and the sequestration of CSRS pension savings affect 

the Postal Service’s long-term transformation? 

Answer. These actions, all of which require the Postal Service to subsidize the 

Federal Government, are nothing more than a transfer of its obligations from taxpayers to postal ratepayers. These transfers, totaling billions of dollars, will jeopardize the financial viability of the Postal Service and its long-term transformation 

efforts. It makes no sense in any circumstance to retroactively transfer such costs 

to the Postal Service, a self-sustaining public organization. But, in order to defray 

the financial obligations of the Federal Government, these actions would: transfer 

to the Postal Service the Federal Government’s obligations of over $27 billion for 

military service pension costs; deny the Postal Service nearly $900 million in revenue foregone funds due for services it provided between 1991 and 1998; and deprive the Postal Service of an estimated almost $70 billion of its own pension overfunding. Further, in 2006, the Postal Service will be required to place the ‘‘savings’’ 

resulting from the Act in an escrow fund that, over time, would require postal rate 

payers to pay higher rates in order to fund the additional $70 billion escrow requirement. Taxing the Postal Service with these transfers at this time ignores the organi-
153

zation’s critical business needs and the significant financial challenges resulting 

from declining mail volumes and the requirement to fund an ever expanding delivery network necessary to provide universal service. 

Further, implementing these cost transfers to the Postal Service would ignore the 

stated concerns of the President’s Commission on the United States Postal Service 

regarding the fiscal health of the Postal Service and would run counter to the Commission’s recommendations for actions necessary to institute a transformative business model for the Postal Service. 

Question. What is the status of the implementation of the Postal Service’s Emergency Preparedness Plan? 

Answer. The Emergency Preparedness Plan covers four major areas: health-risk 

reduction, detection, intervention, and decontamination. First and foremost, we have 

been working swiftly over the past 2 years to ensure the safety and security of our 

employees and customers. While many efforts are underway, we are accomplishing 

this monumental task primarily through the development of leading-edge technologies and changes to our standard operating procedures. 

Health-Risk Reduction 

We have introduced improved standard operating procedures, including the use 

of High Efficiency Particulate Air (HEPA) vacuums to clean our mail processing 

equipment. Additionally, the Postal Service, in conjunction with the National Institute of Occupational Safety and Health (NIOSH), developed Ventilation and Filtration Systems (VFS). These systems are installed on key mail processing machines 

and function to collect and contain airborne particulates from the machines during 

mail processing operations. We have purchased over 1,300 systems to be deployed 

at our 282 major mail processing centers nationwide. National deployment of the 

systems began in April 2004. 

Detection 

The Postal Service has developed the Biohazard Detection System (BDS) to act 

as an early warning system against the threat of biohazards that may enter our 

mail network. We currently plan to install 1,708 detection systems at 282 facilities 

nationwide. National deployment of the BDS began in April 2004 and we currently 

have a total of 32 BDS systems in operation. 

In accordance with our threat assessment, we are also reviewing upgrades to the 

BDS that will allow for the detection of additional threats including toxins such as 

Ricin. 

Intervention 

We continue to irradiate government mail prior to its delivery. This process neutralizes hazardous substances that may be contained in the mail. We are meeting 

this commitment by contracting with IBA in Bridgeport, NJ to irradiate and sanitize 

the government mail. Additionally, we are considering plans to build and operate 

our own irradiation facility specifically designed to meet our needs. The facility will 

significantly reduce our annual operating expenses and improve our service with respect to government mail. 

Decontamination 

We have successfully decontaminated both Postal Service facilities that where 

closed due to the anthrax attacks of 2001. The Curseen/Morris facility (formerly 

known as the Brentwood facility) in Washington, DC resumed operations in December of 2003 and continues to operate today. The Trenton, NJ facility was successfully decontaminated in February 2004. Efforts are underway to refurbish this 

building and it is expected to begin operations in early 2005.

SUBCOMMITTEE RECESS

Senator SHELBY. We wish you well and thank you for appearing 

with us. 

Mr. POTTER. Thank you, Mr. Chairman. 

Senator SHELBY. The subcommittee is recessed. 

[Whereupon, at 11:14 a.m., Thursday, April 1, the subcommittee 

was recessed, to reconvene subject to the call of the Chair.] 

(155)

DEPARTMENTS OF TRANSPORTATION, TREASURY AND GENERAL GOVERNMENT, AND RELATED AGENCIES APPROPRIATIONS FOR 

FISCAL YEAR 2005 

WEDNESDAY, APRIL 7, 2004 

U.S. SENATE, 

SUBCOMMITTEE OF THE COMMITTEE ON APPROPRIATIONS, 

Washington, DC. 

The subcommittee met at 10:17 a.m., in room SD–138, Dirksen 

Senate Office Building, Hon. Richard C. Shelby (chairman) presiding. 

Present: Senators Shelby and Reid. 

DEPARTMENT OF THE TREASURY 

INTERNAL REVENUE SERVICE

STATEMENTS OF: 

MARK O. EVERSON, COMMISSIONER 

PAMELA J. GARDINER, ACTING TREASURY INSPECTOR GENERAL 

FOR TAX ADMINISTRATION, DEPARTMENT OF THE TREASURY 

Senator SHELBY. The subcommittee will come to order. 

Good morning. I would like to welcome Internal Revenue Service 

(IRS) Commissioner Mark Everson and Pamela Gardiner, the Acting Treasury Inspector General for Tax Administration (TIGTA) to 

this morning’s hearing. I look forward to hearing each of your 

views on the IRS’s administration and enforcement of our Nation’s 

tax code. 

As we all know, the April 15th tax filing season deadline is rapidly approaching. Each year the subcommittee requests that the 

IRS Commissioner appear before it in order to provide an update 

on how the Service is responding to the influx of questions and assistance that taxpayers need to correctly file their tax returns. This 

year we have also asked TIGTA to participate in order to provide 

a different perspective on the IRS’s performance. 

I have taken note of the IRS’s stated mission to provide America’s taxpayers with top quality service by helping them to understand and meet their tax responsibilities, and by applying the tax 

law with integrity and fairness to all. This mission statement is appropriate, but some might question whether we are making 

progress toward achieving that goal. 

The IRS continues to face numerous challenges in tax law enforcement, customer service, and the modernization of its computer 

systems. While some strides have been made in some areas, much 
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work remains to be completed. Each one of these tasks would prove 

difficult to undertake individually and to tackle all three at once 

is daunting indeed. 

I look forward to discussing each of these areas with both of you. 

The strength and weakness of our Nation’s Federal income tax system is its reliance on the voluntary compliance of American taxpayers. Most Americans make every effort to comply with the law 

and pay their taxes. But as with any law, some intentionally seek 

to avoid compliance or engage in outright fraud. That is why effective enforcement of our tax laws is so important. If enforcement is 

lax, ineffective, or uneven, it encourages more people to commit 

fraud. 

IRS ENFORCEMENT FUNDING

While it is uncertain whether tax fraud is on the rise, I am certain that funding for the IRS tax enforcement has been and will 

continue to be an important priority for the administration and for 

the Congress. Over the past several years Congress has consistently increased funding for tax law enforcement, including a $265 

million increase this past year. 

In each fiscal year since 2000, Congress provided the IRS with 

additional funding to increase its enforcement staff. Inexplicably, 

these staffing needs were not filled and the funds were instead 

used for other budgeted expenses. The use of these additional dollars to cover other funding shortfalls rather than increase staffing 

belies the priority the Service claims to place on enforcement. This 

diversion of funds is in direct contravention to your own statements, Mr. Commissioner, and is simply unacceptable. 

The first and foremost mission of the IRS must be to ensure the 

full and fair compliance of all U.S. taxpayers with their tax obligations. Yet, how can we ensure that the IRS is taking its enforcement responsibilities seriously if we continue to allow the Service 

to spend its funding for purposes other than that for which they 

have been requested and for which Congress has provided them? 

If there are administrative shortfalls caused by absorbing pay increases or diverting funds to other priorities and other unbudgeted 

items, then the IRS should ask for funding for these expenses and 

not hide behind claims of underfunding of initiatives such as customer service and enforcement. With 100,000 employees and an annual budget that exceeds $10 billion, I find it hard to believe that 

the IRS lacks the resources it needs to get the job done. 

I look forward to hearing both your comments and any update 

on how the IRS is utilizing the additional $265 million in enforcement and compliance funding appropriated recently. In the long 

term, a strong enforcement capability supported by necessary funding will continue to be a key part of combating tax non-compliance. 

But enforcement alone will never be enough. The IRS must provide 

high-quality customer service to assist taxpayers. I believe that 

many people who fail to comply with the code do so unintentionally 

because of its difficulty and complexity. Accurate and timely guidance from the Service is imperative to ensuring taxpayer compliance. 

The IRS is to be commended for the improvements it has made 

in customer service over the past few years. Helpful guidance is 
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now much more accessible by way of the Internet, telephone, and 

in-person assistance. The accessibility of e-file options has eased 

the burden of filing tax returns for both the Government and the 

taxpayer. 

While the IRS has improved its responsiveness to taxpayer questions, the troubling fact remains that nearly one in four callers to 

its toll-free helpline receive inaccurate guidance. The numbers are 

only slightly better for online questioners and considerably worse 

for those taxpayers who seek in-person assistance in an IRS-operated taxpayer assistance center. 

I was even more alarmed, Mr. Commissioner, after learning of 

TIGTA spot audit visits to 26 different assistance centers throughout the country that uncovered, ‘‘IRS employees incorrectly prepared 19 of 23 tax returns that they prepared,’’ during the audits. 

How can we expect taxpayers to understand and comply with the 

complexities of the tax code when IRS’s employees themselves have 

so much trouble understanding and explaining it? 

Our Federal tax code is a large part of the problem. The code and 

accompanying regulations are more than 54,000 pages long, and 

are too complex, too confusing and costly to comply with. Comprehensive reform of the tax code itself would go a long way towards reducing tax fraud by making the process simpler and the 

system fairer for all taxpayers. Additionally, a less complex tax 

code would provide fewer opportunities for cheaters and reduce the 

paperwork burden for all taxpaying Americans. 

I continue to believe that a simple and transparent tax structure 

would promote taxpayer compliance and lead to increased collections for the Treasury, while also markedly reducing the huge cost 

of administration and enforcement of our current tax system. 

BUSINESS SYSTEMS MODERNIZATION

Now I would like to focus for just a few minutes on an area of 

particular concern to me, the ongoing effort to modernize the IRS 

computer systems, known as Business Systems Modernization 

(BSM). This effort has been ongoing for a number of years, and it 

has consistently run over schedule and over budget while also failing to achieve meaningful milestones for its development. 

Mr. Commissioner, your budget request wisely seeks a decrease 

of $102 million for BSM. I agree that now is an appropriate time 

to focus on reengineering efforts to achieve the goals set for the 

BSM initiative. This initiative was supposed to be completed in 10 

years. However, I do not believe that anyone expects this schedule 

to be achievable as schedule delays continue to be the rule, not the 

exception, to this ongoing effort. 

By way of example, the Customer Account Data Engine (CADE), 

the centerpiece of the entire BSM effort, was originally scheduled 

to roll-out in January of 2002, 2 years ago. Former Acting Commissioner Wenzel last year testified that CADE would be ready in August of 2003. It is now April 2004, and there is still no sign of 

CADE. True to form, CADE is not only late but significantly over 

budget. These schedule slippages and cost overruns have been epidemic. In fact, the IRS is running late and is over budget on all 

seven core projects related to BSM. 
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I am very concerned that BSM is becoming the 21st-century 

version of the Tax Systems Modernization (TSM) program which 

was abandoned after consuming $4 billion of Federal tax dollars. 

That prior modernization effort was a complete loss. The current 

BSM effort began in 1998 and has already cost $1.7 billion. This 

program, like TSM before it, raises more questions than it answers. 

As you noted, Commissioner Everson, in February of 2002, ‘‘good 

intentions and good beginnings are not the measure of success. 

What matters in the end is completion, performance, and results.’’ 

Applying your own standard, Commissioner Everson, I think you 

will agree that the BSM effort has woefully under-performed. 

I look forward to hearing the thoughts of both witnesses as to the 

best approach to take to keep this all-important modernization program on track. Again, I welcome you to the committee. Your written testimony will be made part of the record in its entirety, and 

Mr. Commissioner, we will start with you. 

STATEMENT OF SENATOR HARRY REID

Senator REID. Excuse me, can I make a statement? 

Senator SHELBY. Senator Reid. Excuse me. 

Senator REID. I also feel at somewhat of a disadvantage. You are 

6 foot 4 and I am just a small guy, and you have got a pad under 

your chair and I am here in this hole. It does not seem fair to me, 

Mr. Chairman. 

Senator SHELBY. I do not think you would be at a disadvantage 

to anybody, Senator Reid. 

Senator REID. I briefly want to just say this. I have a statement 

that is prepared and I do not want to take the time of the committee, but I would ask your permission that it be made part of the 

record. 

Senator SHELBY. It will be made part of the record in its entirety 

and you may proceed as you wish. 

Senator REID. Mr. Chairman, let me just say this. I hope that we 

can give the Commissioner of the Internal Revenue Service (IRS) 

the money that has been requested. I hope we do not have to cut 

that. I say that because we in Nevada have been faced with someone who has been indicted, and I think that is good, but he has 

promulgated falsehoods around the country saying you do not have 

to pay your taxes, and thousands of people have followed his lead. 

As a result of that, it is just one indication of why we have to have 

an Internal Revenue Service that has the manpower to collect the 

money that is due the government, because it places an unfair burden on those of us who pay their taxes fairly, if others are not. 

PREPARED STATEMENT

Nobody likes to pay their taxes, but I would hope that we would 

give the Internal Revenue Service the tools they need to collect the 

taxes, and especially the tools to go after those people who are, like 

the person in Nevada, openly cheating. They do not have the manpower to do this adequately and I hope we can help them in that 

regard. 

[The statement follows:]
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PREPARED STATEMENT OF SENATOR HARRY REID

Mr. Chairman, I want to thank you for calling this important meeting to talk 

about one of the most serious challenges facing the Internal Revenue Service 

today—the mismatch between the resources devoted to the Service’s enforcement activities and the results that we in Congress and the public at large expect of it. 

Back in his 1996 State of the Union address, President Clinton declared that the 

‘‘era of big government is over.’’ Generally speaking, with the exception of homeland 

security and defense, that has continued to be the case. It’s a positive step to demand a more efficient, effective, and accountable government. Bloated and wasteful 

government is dangerous. 

But there is also danger in not having enough government to perform critical 

services in a responsible fashion. Take the S&L Crisis as an example. Back in the 

1980s and early 1990s, the pool of Federal bank regulators shrank dramatically in 

size, training, and experience. That was a material contributing factor in the savings and loan crisis that saw over a thousand S&Ls with over $500 billion in assets 

fail. The Federal bailout of S&Ls eventually cost us $124 billion. If we had employed 

a better-trained, more experienced, and larger team of examiners, we could have 

prevented that crisis at a miniscule fraction of what it eventually cost us. 

I view the IRS’s enforcement budget in much the same way. It’s not that we’re 

attempting to avert a crisis here—it’s just that we have to make sure that the IRS 

has the tools it needs to conduct its important work effectively. 

Nobody likes to pay their taxes, but taxes are necessary for our society to function. And the collection of those taxes should be efficient, accurate, and fair. Without 

an adequate staff and budget, the IRS can’t collect taxes efficiently, it can’t collect 

them accurately, and it can’t collect them fairly. 

Since 1996, the number of IRS agents has fallen from just under 23,000 to 16,750, 

which is a decline of nearly a third. The number of taxpayers audited fell from 1.9 

million to 849,000. Criminal cases against alleged tax offenders have fallen by about 

half, and civil cases have fallen by more than 60 percent. 

Those numbers indicate that the IRS is experiencing difficulty carrying out its mission—collecting revenue. Last year, the IRS chose not to pursue $16.5 billion of 

taxes owed on 2 million tax returns, mainly because of short-staffing. That represents 1.8 percent of the total individual and corporate income taxes expected for 

2003. According to officials of the Service, many of these taxpayers would pay their 

bills if an agent simply called them. 

The problem extends beyond the delinquent accounts. As was noted in yesterday’s USA Today, the Service estimates that it loses $250 billion every year from taxpayers who cheat, fail to file, or abuse tax shelters. The lost revenue constitutes 10 

percent of the Federal budget. That amounts to almost as much as we spend on 

Medicare! 

When the IRS has a limited organizational capacity to go after this money—which 

is fairly owed—it means that the tax burden just got a little bit heavier on everyone 

who pays their taxes honestly. That’s not right. 

Furthermore, especially at a time when the Federal budget deficit is $500 billion, 

we should be ensuring that everyone pays in full. 

Sometimes in our haste to create a smaller government, we settle for a considerably less efficient and productive government. That is unacceptable when it comes 

to the enforcement activities of the IRS, and I look forward to working with Commissioner Everson and his talented associates to ensure that they are equipped with 

the resources necessary to do their vital enforcement work.

Senator SHELBY. Thank you. 

Senator REID. I am sorry to be here late. 

PREPARED STATEMENT OF SENATOR PATTY MURRAY

Senator SHELBY. That is okay, Senator Reid. 

Senator Murray has submitted a prepared statement which will 

also be included in the record. 

[The statement follows:]

PREPARED STATEMENT OF SENATOR PATTY MURRAY

Thank you, Mr. Chairman. Over the past 3 years, our country has pursued a destructive and inequitable economic policy centered on providing tax cuts to the 

wealthiest Americans while restricting spending on programs that help all Americans. As a result, our Federal budget has gone from one of the greatest surpluses 
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in its history to the highest deficit ever known in the history of our country—$478 

billion—close to half a trillion dollars in the current fiscal year. 

But if that sea of red ink is not bad enough, it is even more disturbing when you 

consider that a growing percentage of Americans believe that it is okay to avoid the 

taxes that they do owe the Federal Government. 

Our IRS Commissioner, Mark Everson, is before the subcommittee today to report 

that the estimated tax gap, the difference between what the Nation’s taxpayers actually owe versus the amount of actual tax receipts paid has grown to the level of 

$255 billion. 

In about 1 week from today, millions of American families who work hard every 

day and play by the rules will struggle to write a check to the Internal Revenue 

Service to cover their Federal tax liability while the rich and the super-rich in this 

country will pay an increasingly smaller percent of their income in taxes. If that 

isn’t galling enough, the situation is made worse when you recognize that the Internal Revenue Service is very ill-equipped to catch and penalize those crooked Americans that do cheat on their taxes, especially the most wealthy and sophisticated of 

tax cheats. 

Indeed, the IRS’s own methods of prosecuting tax cheats and collecting old debts 

is so troubled that the Treasury Inspector General for Tax Administration recently 

reported that the IRS has failed to collect the taxes due even from dozens of individuals who have been convicted in court for tax evasion. This is an appalling situation 

where the government goes through the effort and expense of dragging these individuals into court and convicting them of cheating on their taxes. Even then, the 

IRS fails to collect the debts owed by these convicted criminals. This situation is 

unacceptable and it has got to change. The IRS must turn a corner and cease to 

be the laughing stock of the wealthy and super-wealthy tax cheaters in this country. 

I am pleased to say that, today, the IRS Commissioner Mark Everson is here to 

testify on behalf of a budget that seeks to do something about the problem. He is 

asking for a 9.4 percent boost in funding for tax law enforcement, including funding 

for 2,942 additional enforcement agents. However, there are several questions that 

surround the Commissioner’s request in this area that must be addressed in today’s 

hearing. 

The first question is: are the resources that the Commissioner is seeking enough 

to do the job? Recently, an oversight board appointed by the President said that the 

answer is ‘‘no.’’ That oversight board pointed out that, absent even more resources 

beyond the level requested by the administration, the IRS will actually have to curtail some of its most critical enforcement and collection efforts. 

A second question of equal importance is ‘‘will this subcommittee be in a position 

to fund the increased resources sought by the IRS?’’ Here, I believe that the Republican budget resolution adopted by the thinnest majority in the U.S. Senate indicates that the answer is ‘‘no.’’

At a time when the IRS is seeking a budget increase for tax law enforcement of 

9.4 percent, the budget resolution adopted by the Senate, which I voted against, allows for an overall funding increase in discretionary spending of less than 1 percent. 

This is precisely one of the reasons that I voted against the budget resolution. That 

budget calls for continuing tax cuts to the wealthiest Americans while forcing difficult and illogical choices when it comes to Federal spending. 

We know that when we provide for increased spending for the education of our 

young, we avoid even greater expenses down the road in job training, welfare payments, even the construction of new prisons. Similarly, if we can’t fund enhanced 

enforcement in the Internal Revenue Service, our Federal budget will not gain the 

tax revenue that it is due and our deficit will be far worse. It is estimated that an 

increase in IRS enforcement efforts of several hundred million of dollars could yield 

billions in additional revenue that is owed to the government. 

A third question that must be asked is whether the IRS can really do the job 

when it comes to hunting down and prosecuting tax cheats. The agency is working 

with very antiquated computer systems, and its efforts to modernize those computer 

systems have failed to produce promised results. Moreover, the President’s Budget 

singles out these modernization efforts for a 26.5 percent funding cut for the coming 

fiscal year. 

We have to recognize that it takes upwards of half a dozen years or longer for 

the IRS to finally pursue and prosecute individuals cheating on their taxes. We regularly have underpaid and overworked government lawyers going to court against 

handsomely paid private lawyers. Often times, those private lawyers are the very 

same lawyers that concocted the very complicated tax avoidance schemes that landed their client in court. 

So, I hope our hearing will, at a minimum, pursue these three central questions 

that surround the Commissioner’s request. I am glad that he is here to testify before 
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us. I should say that I believe his commitment to reversing the growing trend in 

tax avoidance and tax cheating is a sincere one and I look forward to hearing his 

testimony this morning. 

Thank you, Mr. Chairman.

Senator SHELBY. Mr. Commissioner. 

STATEMENT OF MARK W. EVERSON

Mr. EVERSON. Thank you, Mr. Chairman, Senator Reid. Nice to 

see you again. Thank you very much for your opening remarks. I 

am pleased to be here before the subcommittee today to speak 

about the President’s 2005 budget request for the IRS. I would also 

like to welcome the future taxpayers behind me to this hearing. 

Our working equation for the IRS is service plus enforcement 

equals compliance, not service or enforcement. The IRS must do 

both. We must run a balanced system of tax administration based 

on a foundation of taxpayer rights. 

Last month we released our enforcement statistics for fiscal year 

2003. They demonstrate that we have arrested the enforcement decline which began in the 1990s and worsened with the implementation of RRA 1998. Audits, criminal investigations and monies collected were all up. In particular, when compared with the fiscal 

year which started October 1, 2000, audits of taxpayers with incomes over $100,000 were up by over 50 percent. That is taxpayer’s 

income over $100,000. You can see how badly over a period of years 

this declined, as did a lot of our audit rates. But you can see we 

have turned that around and we have given great prominence to 

this category in particular.
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IRS ENFORCEMENT ACTIVITIES

The President’s 2005 budget request for the IRS will continue to 

rebuild our enforcement activities. I would note that two-thirds of 

the new monies requested will be devoted to enforcing our compliance efforts in the areas of high income individuals, corporations, 

and criminal activities. The extra $300 million in new monies that 

we seek will carry out our four objectives in enforcement. They are, 

discourage cheating and non-compliance, particularly by corporations, high income individuals and tax-exempt groups; help attorneys, accountants, and other professionals adhere to professional 

standards and obey the law; detect and deter domestic and offshore 

tax and financial criminal activity; and discourage and deter noncompliance within tax-exempt and government entities, and misuse 

of such entities by third parties for tax avoidance and other purposes. 

ADDRESSING NON-COMPLIANCE

These incremental resources will help us address the tax gap, the 

difference between what is owed and what is paid due to non-filing, 

underreporting and underpayment, and secure billions of dollars 

for the Treasury. Furthermore, over a 4-year period we have seen 

an increase in the percentage of Americans who think it is okay to 

cheat on their taxes; an increase from 11 percent to 17 percent. I 

find this alarming, as I am sure do you. I believe, however, that 

enhanced enforcement efforts will improve attitudes concerning 

compliance by reassuring the average American who pays his or 

her taxes that when he or she pays neighbors and competitors will 

do the same. 

Once we have hired and trained the new enforcement personnel 

as requested in the President’s budget, this direct return on investment would be 6 to 1. That is the dollars we would get back directly. Beyond the incremental revenues associated with the increased audits, investigations, and collection activities there will 

also be a favorable spillover effect. Other taxpayers will be discouraged from cheating when they observe that those who play fast and 

loose with the tax code are being held accountable. Behaviors at 

the margin will change. 

I am convinced we can augment our enforcement activities without diminishing our commitment to service. Our filing season results thus far in 2004 show that we can. Through last Friday, total 

returns filed have increased more than 1 percent. Our electronically filed returns are up 12 percent from last year. Electronic filing is more reliable both for the taxpayer and Service, and it is 

faster, allowing the IRS to issue refunds in half the time. Also 

noteworthy is that the Free File initiative, which helps low and 

middle-income taxpayers, has grown in volume by 23 percent from 

last year. 

Our other service indicators for the most part also show improvement. We have handled increased call volumes with stable resources and bettered our level of service. There is increased usage 

of automated services both on the phone and the Internet. While 

we made some changes to improve tax law accuracy and had some 
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startup problems earlier in the season, in recent weeks our results 

in this area have recovered. 

I want to assure you that should the Congress approve our budget request we will spend these resources wisely. I am aware of the 

problems in the past, particularly in the efforts to modernize information technology at the IRS. We are addressing our challenges in 

IT modernization and our plans in the 2005 budget take into account the necessity to improve as you indicated. 

PREPARED STATEMENT

In conclusion, let me note with gratitude the strong bipartisan 

support the President’s IRS budget request is getting here in the 

Senate. I was pleased by the letters of support from the leaders of 

the Governmental Affairs Committee to the Appropriations Committee as well as the letter from the Finance Committee to the 

Budget Committee. I think the tax administration can and should 

be a matter of broad bipartisan agreement. 

Thank you. 

[The statement follows:]

PREPARED STATEMENT OF MARK W. EVERSON

INTRODUCTION

Chairman Shelby, Ranking Member Murray, and Members of the subcommittee, 

thank you for the opportunity to testify today on the fiscal year 2005 budget request 

for the Internal Revenue Service. 

Our working equation at the IRS is service plus enforcement equals compliance. 

The better we serve the taxpayer, and the better we enforce the law, the more likely 

the taxpayer will pay the taxes he or she owes. 

This is not an issue of service OR enforcement, but service AND enforcement. As 

you know, IRS service lagged in the 1990’s. In response, we took important and necessary steps to upgrade service—we significantly improved the answering of taxpayer telephone inquiries and electronic filing to name just a couple areas. 

Unfortunately, improvement in service coincided with a drop in enforcement of 

the tax law. After 1996, the number of IRS revenue agents, officers, and criminal 

investigators dropped by over 25 percent. 

We currently have a serious tax gap—the difference between what taxpayers are 

supposed to pay and what is actually paid—in this country. By our best estimates, 

we lose a quarter trillion dollars each year due to non-filing, under-reporting, and 

underpayment. (This is a rough estimate based largely upon data from our old Taxpayer Compliance Measurement Program, most of which was collected in the 1980’s. 

Our estimates have been updated to reflect changes in the economy during the intervening years, but a key assumption is that compliance behavior has remained 

largely unchanged. If taxpayer compliance has changed in the last 15 years, the tax 

gap could well be much different than our estimate suggests.) 

In addition, over the last 4 years, the number of Americans saying it is OK to 

cheat on taxes rose from 11 to 17 percent. Sixty percent of Americans believe that 

people are more likely to cheat on taxes and take a chance on being audited. 

We must restore the balance between service and enforcement, but that will not 

come at the expense of continued improvements to taxpayer service. In recent years, 

we have begun to attack these declines by revitalizing our investigations, audits and 

prosecutions against those who do not pay their taxes. The President’s fiscal year 

2005 budget—if approved by Congress—will help with our efforts to boost enforcement while maintaining our levels of service. The submission requests an additional 

$300 million for enforcement activities over the fiscal year 2004 consolidated appropriations level. 

PRESIDENT’S FISCAL YEAR 2005 BUDGET SEEKS INCREASE IN ENFORCEMENT

The President has asked for an IRS fiscal year 2005 budget of $10.674 billion, a 

4.8 percent increase over the fiscal year 2004 consolidated appropriations level for 

the IRS. 
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This budget includes the goals of customer service, infrastructure/modernization 

and enforcement. After a period of declining enforcement resources, the IRS has stabilized and increased the amount of resources dedicated to enforcement. 

This budget has an increase of $300 million for a more vigorous enforcement of 

the tax laws. This strong commitment to tax administration will provide a significant augmentation of our enforcement resources. The additional $300 million will increase enforcement in several key ways: 

—Discourage and deter non-compliance, with emphasis on corrosive activity by 

corporations, high-income individual taxpayers and other contributors to the tax 

gap; 

—Assure that attorneys, accountants and other tax practitioners adhere to professional standards and follow the law; 

—Detect and deter domestic and off-shored based tax and financial criminal activity; 

—Discourage and deter non-compliance within tax-exempt and government entities and misuse of such entities by third parties for tax avoidance or other unintended purposes. 

Let me now provide more details on the broad categories of the budget request 

for the IRS. 

PROCESSING, ASSISTANCE, AND MANAGEMENT

We are seeking $4,148,403,000 for processing, assistance and management. This 

includes necessary expenses for pre-filing taxpayer assistance and education, filing 

and account services, shared services support, and general management and administration. Up to $4.1 million of the $4.1 billion total will be for the Tax Counseling 

for the Elderly Program and $7.5 million of the total will be available for low-income 

taxpayer clinic grants. 

The Processing, Assistance, and Management (PAM) appropriation handles all 

functions related to processing tax returns, including both manual and electronic 

submissions, and provides assistance and education to taxpayers to enable them to 

file accurate returns. The PAM appropriation issues refunds, maintains taxpayer accounts, and provides tax law assistance that includes tax law interpretation and rulings and agreements related to tax law issues. This appropriation is responsible for 

IRS personnel, facilities, and procurement services. 

The IRS will continue to focus on pre-filing services and is requesting funding for 

taxpayer communication and education to help all taxpayers comply with tax laws 

and assume their fair share of the tax burden. Funding is being requested for resources to warn taxpayers of abusive tax schemes and improve compliance by preventing fraud and abuse. The IRS is redirecting funding to enhance customer service by reengineering processes to complement new technology and to develop an outreach strategy for the Child Tax Credit. 

The IRS is reinvesting resources for filing and account services by providing funding for field assistance to reduce filing season details of compliance staff, funding 

the Business Master File workload increase, improving the level of telephone service 

to taxpayers, and updating processes to complement technology. 

As part of the shared services program, the IRS will reinvest resources in new 

training and training delivery methods to develop and to improve expert consultative skills. This effort will significantly improve administrative and resource management decisions that will enhance delivery of compliance initiatives. Additional 

resource reinvestments will be used to defer rent annualization costs (based on partial year costs extrapolated annually for approved fiscal year 2003 space expansion 

projects) to fulfill the IRS’s operational mission objectives. Shared services will implement HR Connect, the integrated Human Resources Management System over 

the next 2 years. This system will seamlessly link multiple Human Resource applications that should result in significant program efficiencies. 

The OMB Program Assessment Rating Tool (PART) review of Submissions Processing recommends that IRS successfully implement the Modernized E-File IT 

projects. IRS is enabling e-file growth by increasing the numbers of returns eligible 

to be electronically filed. In fiscal year 2005, the IRS plans to complete the architecture and engineering analysis required to develop and deploy functionality, allowing 

taxpayers to electronically file Forms 1065, 990T, and 1041. 

TAX LAW ENFORCEMENT

For enforcement, we are requesting $4,564,350,000. This appropriation ensures 

IRS’s ability to: provide equitable and appropriate enforcement of the tax laws, identify possible non-filers for examination, investigate violations of criminal statutes, 

support the Statistics of Income program, conduct research to identify compliance 
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issues and support the national effort to combat domestic and international terrorism. 

The resources in the Tax Law Enforcement (TLE) Appropriation provide service 

to taxpayers after a return is filed and support activities such as research to identify 

compliance and tax administration problems, as well as tabulation and publication 

of statistics related to tax filing. In fiscal year 2001, Tax Law Enforcement was realigned and redefined as mandated by the Internal Revenue Restructuring and Reform Act of 1998 (RRA 98) to better serve the needs of taxpayers. The modernized 

IRS structure is similar to those widely used in the private sector: organized around 

customers’ needs, in this case taxpayers. The IRS has set up four operating divisions 

to service the four major categories of taxpayers; Wage and Investment Income 

(W&I), Small Business and Self-Employed (SBSE), Tax Exempt and Government 

Entities (TEGE) and Large and Mid-Sized Business (LMSB). Each of these business 

units has substantial operations within the Tax Law Enforcement appropriation. 

The Criminal Investigation (CI) business unit investigates criminal violations of the 

Internal Revenue Code and also supports the national effort to combat terrorist financing by integrating CI special agents into the Joint Terrorism Task Forces and 

other anti-terrorism task forces. CI has the largest part of its operation within the 

Tax Law Enforcement appropriation. 

The TLE appropriation is the primary source of funding for the compliance functions of the IRS, including: (1) automated, in-person and correspondence collection 

of delinquent taxpayer liabilities, (2) the matching of reporting documents with taxpayer returns, to insure reporting compliance, (3) face-to-face examination to determine taxpayers’ correct income levels and corresponding tax liabilities, (4) service 

center support of the field examination function and correspondence with taxpayers 

regarding tax issues, (5) investigation of criminal violations of the tax laws, (6) processing of currency transaction reports over $10,000, (7) tax litigation, (8) acting as 

an advocate to provide prompt resolution of taxpayer problems and (9) a general 

counsel function to offer legal advice and guidance to all components of the IRS. 

I would specifically like to emphasize our continuing commitment to the administration’s efforts to combat terrorism. The funding provided in the President’s budget 

request will allow us to continue to make a significant contribution to this effort. 

The functions in TLE are essential to accomplishing the primary goals of the Fiscal Year 2005 Budget Request. To accomplish this goal, the IRS must restore the 

strength of the compliance function. Staffing devoted to compliance and enforcement 

operations has declined in recent years. Annual growth in return filings and additional work related to RRA 98 have contributed to a steady decline in enforcement 

presence, audit coverage and case closures in front-line compliance programs. 

The Fiscal Year 2004 Appropriations Act merged the Earned Income Tax Credit 

(EITC) Appropriation with the TLE Appropriation. The merge of EITC into the TLE 

appropriation will provide for customer service and public outreach programs, 

strengthened enforcement activities and enhanced research efforts to reduce over 

claims and erroneous filings associated with the Earned Income Tax Credit (EITC) 

compliance initiative. 

Customer service for the EITC initiative includes dedicated toll-free telephone assistance, community-based tax preparation sites and a coordinated marketing and 

educational effort (including paid advertising and direct mailings) to assist low-income taxpayers in determining their eligibility for EITC. Improved compliance activities include increased staff and systemic improvements in submission processing, 

examination, and criminal investigation programs. Increased examination coverage, 

prior to issuance of refunds, reduces overpayments and encourages compliance in 

subsequent filing periods; in addition, post-refund correspondence audits by service 

center staff aid in the recovery of erroneous refunds. Criminal investigation activities target individuals and practitioners involved in fraudulent refund schemes and 

generate referrals of suspicious returns for follow-up examination. Examination staff 

assigned to district offices audit return preparers and may apply penalties for noncompliance with ‘‘due diligence requirements.’’

OMB Program Assessment Rating Tool (PART) observations concluded that the 

IRS does not work enough collection cases with its current resources, work processes 

and technology to ensure fair tax enforcement. Each year IRS fails to work billions 

of dollars worth of collection cases. Consequently, the Budget includes a legislative 

proposal to allow IRS to hire private collection contractors to assist the IRS in addressing a significant number of cases. In addition to the increased resources requested, the IRS is making internal process improvements, including: developing 

models to better identify high priority work, better use of the predictive dialer, realigning the workforce to core hours and creating a performance support tool to provide employees with technical guidance while handling calls. The PART review also 

determined that IRS financial management systems remain weak. In response, the 
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IRS plans to modernize its collection technology to improve effectiveness. New technology tools will be developed for collection employees (e.g., electronic Automated 

Collection System, contact recording, and desktop integration), which will improve 

program efficiency. 

HEALTH INSURANCE TAX CREDIT ADMINISTRATION

We are requesting $34,841,000 for expenses necessary to implement the health insurance tax credit included in the Trade Act of 2002. This appropriation provides 

operating funding to administer the advance payment feature of the Trade Adjustment Assistance health insurance tax credit program to assist dislocated workers 

with their health insurance premiums. The Trade Act of 2002 created the tax credit 

program and it became effective in August of 2003. 

INFORMATION SYSTEMS

We are requesting $1,641,768,000 for information systems. This appropriation is 

for necessary expenses of the Internal Revenue Service for information systems and 

telecommunications support, including developmental information systems and operational information systems. 

It provides for IRS information systems operations and maintenance, investments 

to enhance or develop business applications for the IRS Business Units and staff 

support for the Service’s Modernization program. 

The appropriation includes staffing, telecommunications, hardware and software 

(including commercial-off-the-shelf), and contractual services. It also provides for 

Servicewide Information Systems (IS) operations, IRS staff costs for support and 

management of the Business Systems Modernization effort, and investments to support the information systems requirements of the IRS business units. It includes 

staffing, telecommunications, hardware and software (including commercial-off-theshelf software), and contractual services. 

Staffing in this activity develops and maintains the millions of lines of programming code supporting all aspects of the tax-processing pipeline as well as operating 

and administering the Service’s hardware infrastructure mainframes, 

minicomputers, personal computers, networks, and a variety of management information systems. 

In addition, the Information Systems ‘‘Tier B’’ modernization initiatives fund 

projects that modify or enhance existing IRS systems or processes, provide changes 

in systemic functionality, and establish bridges between current production systems 

and the new modernization architecture being developed as part of the Servicewide 

Business Systems Modernization efforts. Investment activities also include improvements or enhancements to business applications that support requirements unique 

to one of the IRS business units. These Tier B projects yield increased efficiency and 

allow the Service to progressively improve the quality of its interactions with the 

taxpaying public and its many other internal and external customers. 

BUSINESS SYSTEMS MODERNIZATION

We are seeking $285,000,000, for our Business Systems Modernization (BSM) efforts. This request is based upon the resizing efforts we began following the various 

internal and external reviews of BSM. 

This appropriation provides for the planning and capital asset acquisition of information technology systems, including related contractual costs of such acquisition 

and contractual costs associated with operations authorized by 5 U.S.C. 3109, to 

modernize IRS’s antiquated business systems. The IRS collects $1.7 trillion in revenues annually through an assortment of computer systems developed over a 40-year period. The IRS developed the most important systems that maintain all taxpayer records in the 1960’s and 1970’s. These outdated systems do not allow the IRS to meet today’s taxpayer and business needs. 

Failure to modernize IRS’s tax administration business systems will result in a significant increase in resources required to maintain legacy systems—systems that no 

longer efficiently or effectively serve America’s taxpayers. 

The BSM Appropriation provides for revamping business practices and acquiring 

new technology. The IRS is using a formal methodology to prioritize, approve, fund 

and evaluate its portfolio of BSM investments across the IRS Business Units and 

Modernization and Information Technology Services (MITS). This methodology enforces a documented, repeatable and measurable process for managing investments 

throughout their life cycle. The MITS Enterprise Governance (MEG) Committee, 

which includes the Chief Information Officer and other senior MITS executives, the 

Chief Financial Officer, and the heads of the Business Operating Divisions, approves investment decisions. This executive-level oversight ensures that products 
167

and projects delivered under the Business Systems Modernization program are fully 

integrated into IRS Business Units. The Department of the Treasury Investment 

Review Board also reviews the BSM expenditure Plan once the IRS executive-level 

oversight board approves the investment decisions. The plan is then cleared through 

OMB and submitted through the Appropriations Committees. 

The IRS has undergone an intensive servicewide portfolio prioritization effort, 

leading to a long-term modernization plan identifying selected modernization 

projects, a release sequence for each project, and estimated costs for each project. 

The effort is based on vision and strategy initiatives that created an enterprise-wide 

view, which unified the needs of the IRS Business Units. Fiscal year 2005 resources 

will fund the infrastructure, program management, and releases of business applications to support the successful delivery of a modernized tax administration system. 

More complete details are provided in the BSM Expenditure Plan. 

A partial Fiscal Year 2004 BSM Expenditure Plan was submitted by the Department of Treasury for Congressional approval in January 2004, and the full-year revision incorporating current project information should be completed by this spring. 

PROGRAM PERFORMANCE

The IRS expects to achieve the following levels of performance after attaining full 

performance of the requested fiscal year 2005 initiatives: 

—Examine an additional 30,000 investor returns in the Small Business and SelfEmployed (SB/SE) business unit and increase coverage of high-income taxpayers, generating an additional $170 million in fiscal year 2006. SB/SE also 

anticipates closing an additional 50,000 taxpayer delinquent accounts, resulting 

in an estimated $215 million in additional revenue. 

—Hire and train over 2,000 new staff in the Examination, Collection and Document Matching programs. These increases will generate some $2.8 billion in direct enforcement revenue through fiscal year 2007. Additional audits of investor 

returns and high-income taxpayers, together with 55,000 correspondence examinations, will yield more than $1.0 billion during that same period. Collection 

closures will increase by 240,000 and taxpayer contacts through the Automated 

Underreporter Program by some 300,000 through fiscal year 2007—generating 

an additional $1.8 billion. 

—Increase the overall audit coverage rate in the Large and Mid-Sized (LMSB) 

business unit from 5.1 percent in fiscal year 2004 to 9.6 percent in fiscal year 

2007 and increase projected return closures by 63 percent from 16,067 returns 

in fiscal year 2004 to 26,193 returns in fiscal year 2007. Enforcement revenue 

recommended for the 3 years fiscal year 2005 through fiscal year 2007 should 

increase by over $3 billion. 

—Complete 229 significant Corporate Fraud investigations through fiscal year 

2007. Tax-related completed investigations will increase by approximately 20 

percent over the fiscal year 2003 level by fiscal year 2007. In addition, CI is 

striving to reduce elapsed time on completed investigations by 30 percent from 

fiscal year 2002 levels. 

IMPROVING SERVICE

We are improving service to the taxpayer. Let me give a broader picture of service 

and compliance, and how the President’s budget will lead to more effective and fair 

collection of taxes. 

It was not long ago that IRS service was not all that it should be—some would 

even say it was poor. In many areas the service level we provided, or more accurately stated, failed to provide, frustrated taxpayers in their effort to understand 

and comply with the tax law. 

Regardless of the merits of some of the allegations directed against the IRS in 

the mid-1990’s, there was a significant gap between the quality of service that the 

IRS was providing taxpayers and the quality of service that the public had a right 

to expect. This shortfall in services clearly warranted the fundamental improvements and reorganization established under RRA 98. 

The reorganization of the IRS along customer lines of business and the other 

changes brought about by RRA 98 were, taken as a whole, sound reforms. The twin 

themes of the legislation were improvement of service and protection of taxpayer 

rights. 

Through an almost single-minded focus on RRA 98 implementation, the IRS has 

demonstrated unmistakable progress in improving customer service and increasing 

its recognition of, and respect for, taxpayer rights. While we still aim to reach a 

higher level of customer service, our improvement and commitment with respect to 

these core goals is measurable. 
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Last year 53 million individuals filed their returns electronically. Thus far this 

year, nearly 1 week away from ‘‘tax day’’, electronic filing is up again, by about 12 

percent. Electronic filing is more reliable, both for the taxpayer and the IRS. And 

it is faster. Over three-quarters of Americans get refunds, and we issue the refund 

in about half the time when a taxpayer files electronically. 

Another challenge in the 1990’s was getting through to the IRS at all. We now 

have a world-class telephone call routing system. A call is directed to the right person, someone who knows something about charitable contributions or IRA’s—whatever the subject may be—and the system balances workforce planning against predictable workload patterns to reduce waiting time. By 2003, overflows to the telephone system, such as busy signals—the crudest indication of service failure—decreased 99 percent from its worst performance of 400 million. We also reduced taxpayer call-waiting time by half since 2001, reduced the number of abandoned calls 

by half since 2002, and doubled the number of refund inquiries from our Spanishspeaking taxpayers. 

Meanwhile, we have delivered other applications that provide tangible benefits to 

taxpayers and improve the efficiency and effectiveness of our tax administration system. They include: 

—Where’s My Refund?/Where’s My Advance Child Tax Credit?, which gives taxpayers instant updates on the status of their tax refunds and advance child tax 

credits. Where’s My Refund? has provided almost 11 millions services and 

Where’s My Advance Child Tax Credit? has provided another 20 million services. By shifting a significant volume of customer demand to the Internet and 

automated telephone services, we have seen a measurable improvement in service for taxpayers who still need to talk with an IRS assistor. 

—e-Services, which includes preparer tax identification number (TIN) applications 

with instant delivery, individual TIN matching for third party payers, on-line 

registration for electronic e-Services, and on-line initiation of the electronic 

originator application (currently released to a controlled segment of external 

users). I am pleased to announce that we recently made the first part of e-Services available on our public website. The remaining parts will come out over the 

next several months. 

—Internet EIN, which permits small businesses to apply for, and receive, an Employer Identification Number on-line. 

—HR Connect, which allows IRS users to perform many personnel actions on-line. 

This technological advance will enable the Service to redirect hundreds of positions to enforcement activities by the time it is fully deployed, which we have 

planned for October 2005. 

Are we where we need to be on service? Not yet. As you know, I have been emphasizing enforcement, but I do not want this subcommittee or anyone to think the 

IRS will walk away from service. We still continue to maintain and improve service. 

Our objectives for improved taxpayer service are three-fold: 

—First, to improve and increase service options for the tax-paying public; 

—Second, to facilitate participation in the tax system by all sectors of the public; 

and 

—Third, to simplify the tax process. 

These are service objectives that recognize the dynamics of a rapidly changing 

world, one in which the Internet will be the dominant communications tool. Yet we 

realize there will remain a wide range of computer and technological literacy among 

individual taxpayers, and we must not fail to provide the same level of service to 

all taxpayers regardless of their technological sophistication. Our objectives also recognize an America with an increasingly diverse population, and that diversity will 

create challenges for us as tax administrators. Nevertheless, we are confident that 

we can and will serve all American effectively. 

Continued changes in traditional media will make it harder to cover the waterfront as we seek to educate taxpayers. Moreover, the complexity of our tax laws, 

along with the frequency of changes to these laws, is not only a challenge to taxpayers trying to comply with the tax laws, but a basis of cynicism about complying 

with the tax laws. The administration is committed to addressing this complexity. 

While it remains, we have an obligation to help taxpayers navigate these laws and 

make it as easy as possible for them to comply. 

In a world increasingly impatient for prompt and reliable information and transaction processing, all of these factors pose significant challenges to the IRS as it 

strives to improve the level of service provided to the American taxpayer. 

A good example of the challenges we will face is reconciling our desire to standardize our processes through electronic filing with the reality that some groups, 

such as immigrants and the elderly, will need different, targeted services. Electronic 

filing is important to the IRS and to taxpayers, but we cannot overemphasize it to 
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the detriment of services to taxpayer groups who will not utilize it. Addressing competing priorities on the service side of the IRS will not be easy, but we will work 

diligently to provide a balanced, effective program. 

EFFECTIVE ENFORCEMENT

Our focus on the strong mandate of RRA 98 to improve IRS services to the taxpaying public made it difficult for us to balance both the service and enforcement 

elements that are so necessary to the success of our tax system. Improved taxpayer 

service enhances compliance and respect for our laws among the vast majority of 

Americans who do their best to pay their fair share. Improved taxpayer service also 

may help discourage those who might not otherwise do what is necessary to comply 

with our tax laws. Taxpayer service, however, does not address those who actively 

seek to avoid paying their fair share. I believe most people would agree that we 

achieved improvement of IRS taxpayer services in large part at the expense of needed enforcement activities. 

Over a 5-year period beginning in 1997, the IRS refocused its enforcement resources significantly. The number of revenue agents (those who conduct audits), the 

number of revenue officers (those who collect monies due), and the number of criminal investigators (those who prepare cases for possible prosecution by the Justice 

Department) each declined by over a quarter. 

In essence, we did not observe the wise admonition of President John F. Kennedy 

that ‘‘Large continued avoidance of tax on the part of some has a steadily demoralizing effect on the compliance of others.’’ 

We are correcting our course and re-centering the agency. We are strengthening 

the IRS enforcement of the tax laws in a balanced, responsible fashion. And we will 

do so without compromising taxpayer rights. As the IRS enhances enforcement, we 

have four priorities: 

First, we are working to discourage and deter non-compliance, with emphasis on 

corrosive activity by corporations and high-income individuals. Attacking abusive 

tax shelters is the centerpiece of this effort. What is at stake is greater than many 

billions of dollars of lost tax revenues. Our surveys indicate that 80 percent of 

Americans believe it is very important for the IRS to enforce the law as applied to 

corporations and high-income individuals. Enforcing compliance in these sectors is 

critical to maintaining Americans’ faith that our system is fair. The abuses of recent 

years have to a very real degree strained the credibility of our tax administration 

system. 

The IRS is moving aggressively to attack these transactions. Working with our 

partners in the Treasury Department, we have accelerated the issuance of guidance 

identifying abusive and potentially abusive transactions and improved disclosure requirements to provide greater transparency—sorely needed in today’s complex 

world. And we have over 100 promoter audits underway, not to mention thousands 

of audits of high-income individuals and corporations who have entered into potentially abusive transactions. Where necessary, the Treasury Department, on behalf 

of the administration, has proposed legislation that would stop abusive transactions 

that we may not be able to fully or quickly address under existing law. 

However, we need to do better. We need to do more, and we particularly need to 

do it faster. The length of time it takes us to complete the audit of a large, complex 

corporation is 5 years from the date the return is filed, which in most cases is already 81⁄2 months after year end. And these figures don’t include the appeals process, which runs another 2 years before the matter is settled or goes to court. That 

means that half of our current inventory of large cases is from the mid 1990’s or 

the early 1990’s. In today’s rapidly changing world, we might as well be looking at 

transactions from the Civil War. 

Simply stated, the IRS did not detect and deter the abusive transactions that 

spread during the 1990’s on an adequate or timely basis because we did not have 

an informed view of current taxpayer behavior, only an historical understanding of 

events long past. And the challenge is becoming greater every day, as promoters of 

abusive tax transactions operate globally, without regard to national boundaries. 

The lessons we have learned make it imperative to get current in our audits, to 

identify transactions and shorten the feedback loop so that abusive transactions can 

be shut down promptly. I am convinced we can do it. Technology will help. Right 

now it takes 2 years on average before complicated corporate returns find their way 

into the hands of the assigned examiner. We are addressing this issue. Electronic 

filing by corporations will facilitate our analysis of data and help us calibrate risk. 

Through speedier audits we will provide better service to the compliant taxpayer by 

resolving ambiguity earlier, and hold accountable those who seek to game the sys-
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tem. And we are creating a web of disclosure, registration and maintenance of investor lists that will provide information about abusive transactions. 

Second, we are working to ensure that attorneys, accountants and other tax practitioners adhere to professional standards and follow the law. In recent decades, 

with an accelerated slide in the 1990’s, the model for accountants and attorneys 

changed. The focus shifted from independent audit and tax functions, premised on 

keeping the client out of trouble, to value creation and risk management. The tax 

shelter industry had a corrupting influence. It got so bad that in some instances 

blue-chip professionals actually treated compliance with the law—in this case IRS 

registration and list maintenance requirements—as a business decision. They 

weighed potential fees for promoting shelters but not following the law against the 

risk of IRS detection and the size of our penalties. 

Our system of tax administration depends upon the integrity of practitioners. The 

vast majority of practitioners are honest and scrupulous, but even they suffered 

from the erosion of ethics by being subjected to untoward competitive pressures. The 

IRS is acting. We have augmented our Office of Professional Responsibility by doubling its size and appointing as its director a tough, no-nonsense, former prosecutor; 

we are tightening the regulatory scheme; and we are receiving excellent support 

from the Justice Department in our promoter and associated investigations. But we 

need the Congress to enact the tougher penalties proposed by the administration for 

those promoters who have not yet gotten the message. 

Third, we must detect and deter domestic and offshore-based criminal tax activity, 

our traditional area of emphasis, and financial criminal activity. Our Criminal Investigation Division is a storied and proud law enforcement agency. Their expertise 

comprises not just criminal tax matters but other financial crimes. Our investigators 

are the best in law enforcement at tracking and documenting the flow of funds. In 

addition to our tax investigations, the IRS has over 100 agents assigned on an ongoing basis to support the President’s Corporate Fraud Task Force. We will continue 

and intensify these important efforts. 

Two factors account in significant part for America’s great economic vigor and success. They are our pervasive culture of entrepreneurship, on the one hand, and the 

stability and transparency of our markets on the other. The reputation and 

attractiveness of our markets have been compromised by the scandals of recent 

years. The President’s Corporate Fraud Task Force and the President and Congress 

with Sarbanes-Oxley have taken important steps to restore confidence. Through 

these three enforcement initiatives, the IRS will do its part so that sound tax administration contributes to public confidence in our economic system. 

We have one more enforcement priority. The stakes for America in this area are 

also important. We will discourage and deter non-compliance within tax exempt and 

government entities, and the misuse of such entities by third parties for tax avoidance or other unintended purposes. Non-compliance involving tax-exempt entities is 

especially disturbing because it involves organizations that are supposed to be carrying out some special or beneficial public purpose. Enforcement in this area has 

suffered as IRS staffing in the exempt organizations area fell from 1996 through 

2003. Enactment of the President’s budget would allow us to gradually build up 

staffing in this important area and step up enforcement. 

If we do not act to guarantee the integrity of our charities, there is a risk that 

Americans will lose faith in and reduce their support more broadly for charitable 

organizations, damaging a unique and vital part of our Nation’s social fabric. 

A case in point is credit-counseling agencies. These organizations have been 

granted tax-exempt status because they are supposed to be educating and assisting 

people who are experiencing credit or cash flow problems. Based on the information 

we have reviewed, we believe that a troubling number of these organizations, however, instead are operating for the benefit of insiders or in league with profit-making 

companies, such as loan companies, to generate income from lending to these distressed individuals and families. We are taking a close look at these organizations 

to ensure that they are operating within the bounds of the law. 

It is, of course, imperative as we reinvigorate the enforcement program that IRS 

employees maintain their respect for and diligence to all taxpayer due process rights 

and protections. 

We are making progress in our effort to reduce the annual tax gap. Our enforcement statistics for Fiscal 2003, released in early March, demonstrate that we have 

arrested the enforcement decline that began in the 1990’s and worsened with the 

implementation of RRA 98. Audits, criminal investigations and monies collected 

were all up. In particular, the number of high-income taxpayer audits again increased by 24 percent. Moreover, audits of taxpayers with income over $100,000 

were up over 50 percent from 2 years ago. Overall audits of all taxpayers increased 

to 849,296, an increase of 14 percent from 2002. 
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BUSINESS SYSTEMS MODERNIZATION AT THE IRS

While not as publicly visible as service or enforcement, modernization of IRS information technology is also a high priority. This effort is often referred to as Business Systems Modernization or BSM. Most of our tax administration systems are 

very old and difficult to keep current with today’s fast paced environment—they 

must be modernized. 

We are committed to resizing our modernization efforts to allow greater management capacity and to focus on the most critical projects and initiatives. Last summer, we used comprehensive studies to help us identify opportunities to improve 

management, re-engineer business processes and implement some new systems and 

technology. 

As I have noted, the IRS has made progress on applications such as improved 

telephone service, electronic filing, and a suite of e-services to tax practitioners. But 

we have failed thus far to deliver several important projects with which taxpayers 

are not directly involved. 

The projects include replacing our master file system, implementing the on-line 

security features, and building the modernized technological infrastructure on which 

all of our future modernization applications will depend. 

Four studies completed last year consistently identified the following problems in 

delivering the large information technology efforts: 

—Insufficient participation in the technology program by IRS business units; 

—An overly ambitious portfolio; 

—Inadequate performance by the contractor. 

The IRS is responding by to this challenge by: 

—Increasing business unit ownership of projects; 

—Resizing the project portfolio and reducing the modernization program from $388 million this year to $285 million in the President’s fiscal year 2005 request; 

—And revising our relationships with the contractor and ensuring joint accountability. 

While we have much work to do on modernization, I can assure you that it is one 

of my top priorities as Commissioner. We need to put in place the foundation upon 

which the tax system will build and rely for decades to come. 

Before I conclude my testimony, let me give you an update on the 2004 filing season and what we are doing to make the tax season easier and more convenient for 

the American taxpayer. 

2004 FILING SEASON

Mr. Chairman, I have been on the job for not quite a year so I am still going 

through my first filing season. Each year at the IRS, we process billions of tax-related documents. We process well over 100 million taxpayer returns. We send out 

about 100 million refunds. And we do a lot of other things as well. 

It all peaks, of course, on April 15, a little more than 1 week away. 

Here are some highlights as of March 26th (unless otherwise indicated): 

Return Receipts 

The IRS has received 74 million total individual returns. Twenty-nine million returns (39 percent) are paper and 45 million (61 percent) are e-file. 

—The number of online returns is at 10.5 million, a 22.9 percent increase from 

last year. 

—Through March 24th, 2.6 million Free File returns have been accepted, an increase of 24 percent from last year (2.1 million). 

Refunds 

Refund measures continue to show an increase over 2003. Total refunds are up 

from 2003 by 3.9 percent. Total dollars paid are 9.26 percent higher than last year, 

with an average refund of $2,113 paid. 

Telephone Measures 

As of March 28, assistor level of service, at 84.9 percent, is up 1.9 percent compared to last year. Assistors have answered approximately 729,000 more calls than 

they did during the same period in 2003. 

Automated calls completed are 183,000 more than the same period in 2003. A 

major contributor to this increase is Advanced Child Tax Credit (ACTC) related 

calls. 

We created automated ACTC applications for use in providing taxpayers the correct amount of ACTC to report on their 2003 tax return. These applications are 

available through telephone automation and interactive web applications. 
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Telephone Quality Rates 

We measure telephone quality two ways: (1) customer account accuracy and (2) 

tax law accuracy. While our customer account accuracy estimates, as of February 

29th are 89.76 percent, up 1.32 percent over the past year, our tax law accuracy 

has declined to 75.79 percent thus far in 2004 (down 6.69 percent from last year.) 

Fiscal Year 2004 Quality Review results indicate that two of our most frequent 

tax law defects are: incomplete research and applying tax law incorrectly. 

We are undertaking the following efforts to improve performance: 

—Identifying root cause of performance deficiencies and implementing corrective 

initiatives through analysis; 

—Establishing Quality Review Improvement Teams to determine the drivers of 

Customer Accuracy rates and to establish resolution priorities as needed; and 

—Strengthening accountability to the frontline managerial level to facilitate improvement in services provided. 

Taxpayer Assistance Centers (TAC’s) 

The number of taxpayers walking into a TAC for assistance has decreased as a 

result of streamlined services in the TAC’s and initiatives to educate taxpayers on 

alternate methods of obtaining services generally requiring a face-to-face contact. 

The advent of technological advances in irs.gov services such as ‘‘Free File’’ and 

‘‘Where’s My Refund’’, and the accessibility of forms online have all contributed to 

the decline in the number of customers walking into a TAC. 

CONCLUSION

The IRS has lagged behind, for reasons that are understandable, in tax enforcement. But that is changing. We will continue to improve service and respect taxpayer rights. But we will also enforce the law. We won’t relax until taxpayers who 

are unwilling to pay their fair share see that that is not a worthwhile course to follow. 

Mr. Chairman, the great majority of Americans honestly and accurately pay their 

taxes. Average Americans deserve to feel confident that, when they pay their taxes, 

their neighbors and competitors are doing the same. 

The President’s budget request will help us enforce the tax law more fairly and 

efficiently. I am most grateful for your support of increased enforcement, and I look 

forward to working with you on this important budget request. 

Thank you very much. I’d be happy to take your questions.

Senator SHELBY. Ms. Gardiner. 

STATEMENT OF PAMELA J. GARDINER

Ms. GARDINER. Chairman Shelby, I appreciate the opportunity to 

appear before you today to discuss the Internal Revenue Service’s 

budget and the related tax administration challenges. 

The IRS is critical to the functioning of our government. Each 

year the IRS collects over $2 trillion, processes over 200 million tax 

returns, and issues nearly 100 million tax refunds. It provides service to millions of taxpayers by telephone, Internet and in person. 

Since the enactment of the IRS Restructuring and Reform Act of 

1998, the IRS has made significant progress in identifying opportunities to improve its operations. 

For example, this filing season the IRS indicated it had received 

43 million e-filed returns as of March 19, 2004, an increase of over 

11 percent. The IRS has also made progress in providing information to taxpayers via its website, IRS.gov. Taxpayers have visited 

this website billions of times to obtain information. Just this tax 

season, the IRS stated taxpayers had made nearly 10 million visits 

by the end of February to obtain refund information from the 

‘‘Where’s My Refund?’’ section on this site. 

Even with this progress, the IRS faces significant challenges to 

meeting its mission. I will focus my remarks on two of these key 

challenges: systems modernization and customer service. 
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The IRS’s systems modernization program is in the sixth year of 

its effort to upgrade and modernize IRS information technology and 

business systems. This is an extremely complex effort and is expected to take up to 15 years at a cost of at least $7 billion. This 

program must be successful for IRS to reach its goals in customer 

service and tax compliance. Since 1999 about $1.5 billion has been appropriated and released 

for modernization. The Treasury Inspector General for Tax Administration (TIGTA) agrees with the IRS’s recent moves to scale back 

its systems modernization efforts to focus on ensuring that the 

most critical systems are implemented. In fact TIGTA has recommended such reductions in the modernization projects in the 

past. Our concerns are based on the cost and schedule overruns in 

the modernization program, including significant delays in the 

most critical project, the Customer Account Data Engine (CADE). 

CADE will eventually replace the existing Master File of taxpayer 

accounts and will enable the implementation of other modernized 

systems. 

We believe the IRS and the PRIME contractor must address the 

following modernization challenges to be successful: implement 

planned improvements in key management processes; manage the 

increasing complexity and risks of the modernization program; 

maintain continuity with experienced leadership; and ensure 

PRIME contractor performance and accountability. 

Improving customer service has been a key focus at the IRS for 

the last few years. Taxpayers have several options from which to 

choose when they need assistance from the IRS. These options include toll-free telephone assistance, walk-in service at the taxpayer 

assistance centers, or TACs, and the IRS Internet website. Each of 

these systems potentially effects the taxpayer’s ability and desire 

to voluntarily comply with the tax laws. 

The IRS’s toll-free telephone system is the contact method most 

taxpayers choose when seeking answers to tax law questions or trying to resolve tax account issues. Taxpayers called the IRS toll-free 

telephone system over 50 million times during the 2003 filing season. Access to the IRS’s toll-free telephone system has significantly 

improved. In comparison to the prior filing season, for example, the 

level of service increased, more calls were answered, and fewer taxpayers abandoned their calls. We evaluated the toll-free system 

and found that 78 percent of taxpayers received accurate answers 

to their account questions, and 73 percent of taxpayers received accurate answers to their tax law questions. 

The next most popular contact method is the taxpayer assistance 

centers which provide face-to-face assistance to taxpayers in meeting their filing and payment responsibilities. Significant improvements have occurred in the percentage of accurate answers to tax 

law questions that TAC employees provided to TIGTA auditors 

anonymously conducting visits during the past 2 years. IRS employees correctly answered 69 percent of the questions asked from 

July through December 2003, compared to only 57 percent during 

the same period in 2002. 

Although the IRS website has received billions of visits from taxpayers, most do not submit questions. Early statistics indicated approximately 75,000 questions had been received this year. Our past 
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1 Cost savings relate to the costs saved to process a tax return and do not include Information 

Technology and Customer Service costs as the IRS is still in the process of computing these 

costs. 2This no cost e-filing option is the result of the IRS entering into an agreement with tax preparation software companies and is available for taxpayers that meet certain requirements. 3 E-file providers may be electronic return originators, transmitters, software developers, tax 

practitioners, and States. 

audit work indicated that over 80 percent of Internet questions 

were answered correctly. 

PREPARED STATEMENT

In conclusion, I believe the improvements in the levels of service 

the IRS has provided to taxpayers are impressive. However, challenges continue in the modernization effort. It must succeed if IRS 

is going to operate at a level that taxpayers expect and are entitled 

to receive from their government. 

I would be happy to answer any questions. 

[The statement follows:]

PREPARED STATEMENT OF PAMELA J. GARDINER

Chairman Shelby, Ranking Member Murray, and distinguished Members of the 

subcommittee, I appreciate the opportunity to appear before you today to discuss the 

Internal Revenue Service’s (IRS) budget, and the challenges the IRS continues to 

face in using its funds to improve the economy, efficiency, and effectiveness of tax 

administration. 

The mission of the IRS is critical to the functioning of our government. Each year, the IRS processes over 200 million tax returns and collects over $2 trillion. The IRS 

also issues nearly 100 million tax refunds, provides service to millions of taxpayers 

in person and via telephone calls and the internet, and applies complex tax laws 

to help ensure taxpayers meet their tax obligations. 

E-filing provides significant benefits to both taxpayers and the IRS including 

quick acknowledgement to taxpayers that the IRS received their tax returns, more 

accurately processed tax returns, and faster refunds. In addition, the IRS estimates 

that the processing of an e-filed tax return compared to that of a paper tax return 

results in cost savings of approximately $2.30 1 per tax return. Since the enactment 

of the IRS Restructuring and Reform Act of 1998 (RRA 98), the IRS has made significant progress in attracting taxpayers to e-file and continues to identify opportunities and create incentives for taxpayers to e-file. These efforts have resulted in individual taxpayers being able to electronically sign their tax returns, e-file their 

State tax returns with their Federal tax returns, pay their taxes using a credit card, 

e-file 99 percent of all tax forms, and e-file at no cost.2 Furthermore, in an attempt 

to encourage paid preparers to submit tax returns electronically, the IRS offers specific support services and is in the process of providing incentives exclusive to e-file 

providers.3 These incentives include the ability to apply to become an e-file provider 

online, interact with the IRS by email, and obtain client transcripts online. This filing season, the IRS indicated it had received 43 million e-filed returns as of March 

19—an increase of over 11 percent. 

The IRS has also made progress in providing information to taxpayers via its 

internet website IRS.gov. Taxpayers have visited this website billions of times to obtain information. Just this tax season, the IRS stated taxpayers had made nearly 

10 million visits by the end of February to obtain refund information from the 

‘‘Where’s My Refund?’’ application which is featured on this site. This is almost double the number received last year at this time. 

Even with much progress, the IRS still faces significant challenges to meeting its 

mission. TIGTA has identified major management challenges in the following areas 

that could affect the IRS’s ability to help taxpayers address their tax responsibilities: 

—Systems Modernization. 

—Tax Compliance Initiatives. 

—Security of Employees, Facilities, and Information Systems. 

—Integrating Performance and Financial Management. 

—Complexity of the Tax Law. 

—Providing Quality Customer Service Operations. 

—Erroneous and Improper Payments. 
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4 Annual Assessment of the Business Systems Modernization Program (Reference Number 

2003–20–208, dated September 2003). Annual Assessment of the Internal Revenue Service’s 

Business Systems Modernization Program (Reference Number 2002–20–189, dated September 

2002). 

—Processing Returns and Implementing Tax Law Changes During the Tax Filing 

Season. 

—Taxpayer Protection and Rights. 

—Human Capital. 

Although each of these areas presents its own unique challenges, I have chosen 

to focus the remainder of my remarks on two of these key areas, Systems Modernization and Providing Quality Customer Service Operations. 

SYSTEMS MODERNIZATION

The IRS’s systems modernization program is in the sixth year of its effort to upgrade and modernize IRS information technology and business systems. It is expected that this program will take up to 15 years and cost at least $7 billion to complete. The modernization program is an extremely complex effort, since many of the 

IRS’s current business systems are a mixture of technologies that date back to the 

1960’s. While difficult, the program must nevertheless be successful if the IRS is to 

meet its goals and commitments of improving its customer service and tax compliance activities. To facilitate the success of its modernization efforts, the IRS hired 

the Computer Sciences Corporation as the PRIME contractor and integrator for the 

modernization program, and created the Business Systems Modernization Office to 

guide and oversee the work of the PRIME contractor. Through March 2004, the IRS 

has received approximately $1.59 billion to support the systems modernization program, and the IRS plans to request an additional $142 million for fiscal year 2004. 

Approximately $285 million has been included in the fiscal year 2005 budget to further fund systems modernization efforts. 

The Treasury Inspector General for Tax Administration (TIGTA) agrees with the 

IRS’s recent moves to resize and scale back its systems modernization efforts to 

place additional focus on ensuring the most critical systems are implemented. In 

fact, TIGTA has been recommending such a reduction in the modernization projects 

based on the concerns we have raised with cost and schedule overruns in the modernization program. The IRS Commissioner recently launched a comprehensive review of the modernization program resulting in 21 recommendations for improvement. Many of those recommendations were similar to those made in TIGTA reports 

issued during the past 4 years. 

Over the last 2 fiscal years,4 TIGTA cited four challenges that the IRS and the 

PRIME contractor must overcome to be successful: 

—Implement planned improvements in key management processes and commit 

necessary resources to enable success. 

—Manage the increasing complexity and risks of the modernization program. 

—Maintain the continuity of strategic direction with experienced leadership. 

—Ensure PRIME contractor performance and accountability are effectively managed. 

The fourth challenge has recently become critical as oversight groups are starting 

to lose confidence in the PRIME contractor’s ability to meet its commitments in 

modernizing the IRS’s business systems and have raised concerns about future 

funding. In light of this concern, effective contract management, always difficult on 

a project of this magnitude, is becoming an increasingly important challenge that 

needs to be overcome. 

The IRS has made progress in defining the management processes and capabilities needed to effectively acquire and implement information technology systems. 

For example, it has deployed the infrastructure system on which future modernized 

applications will run. Establishing this infrastructure is a necessary prerequisite to 

introducing the business applications that are intended to provide benefits to taxpayers and the IRS. The IRS also deployed several applications that have immediately produced taxpayer benefits. The ‘‘Where’s My Refund’’ application, as described earlier, has assisted taxpayers with millions of online inquiries to obtain refund information. Other applications that have been implemented allow businesses 

and taxpayers to obtain employer identification numbers online, tax preparers to 

apply to become an electronic filer and obtain an identification number for use in 

filing clients’ returns, and businesses to electronically file certain tax returns. 

In response to concerns of TIGTA and others, the revised fiscal year 2003 modernization spending plan submitted in March 2003 focused the program on a smaller portfolio of existing key projects. Although the IRS expressed high confidence in 
176

5The Master File is the IRS’s database that stores various types of taxpayer account information and includes individual, business, and employee plans and exempt organizations data.

the practicality of the revised plan and assured the Congress that it could timely 

deliver the revised fiscal year 2003 project portfolio, all of the projects experienced 

schedule delays and most incurred significant cost increases from fiscal year 2002 

estimates. Also, management decisions were made to delay some of the functionality 

that was originally planned for these systems until sometime in the future. 

These schedule delays, cost increases, and delayed functionality occurred, in part, 

because modernization project teams did not always follow defined management and 

project development processes. The IRS and the PRIME contractor have particularly 

struggled to develop adequate cost and schedule estimation techniques. As a result, 

delivery schedules and cost estimates were very aggressive and overly optimistic. 

Additionally, the IRS and the PRIME contractor had not fully implemented disciplined project testing processes and procedures. Testing processes have been substantially revised and refined based on lessons learned during the early testing efforts for modernization projects. However, TIGTA analyzed several key projects and 

found the project teams were not consistently following the established testing processes. We believe the inadequate implementation of the testing processes was the 

result of the modernization project teams attempting to meet overly optimistic 

project schedules. 

While progress has been made in the IRS’s modernization efforts, it did not 

achieve its goals for fiscal year 2003. This underachievement is disappointing considering that the expectations for the year were scaled back in hopes of being able 

to successfully deliver several key modernization projects. 

The delays in implementing projects can clearly be seen in the most critical modernization project, the Customer Account Data Engine (CADE). CADE will eventually replace the existing Master File 5 of taxpayer accounts, and will enable the implementation of other modernized systems that will improve customer service and 

compliance and allow the on-line posting and updating of taxpayer account and return data. Therefore, CADE will be the foundation for managing taxpayer accounts 

in the modernized IRS. The portion of CADE related to individual tax accounts will 

be incrementally deployed in five releases, each related to a specific taxpayer segment, over several years, as shown in the revised CADE release schedule below. 
177

CADE RELEASE SCHEDULE 

Release One Release Two Release Three Release Four Release Five 

Tax Return Types ......................... 1040EZ, Refund or Even

balance.

1040EZ, 1040 Sch A, B, D, 

1040A Sch 1, 3, with Refund or Even Balance.

1040, 1040A 1040EZ, Full

Paid.

All 1040 Family and supporting 

forms, Refund or Full Paid.

1040A Sch 2, Refund or Balance 

Due.

1040ES Pmts. .............................

All 1040 Family and supporting 

forms, Refund, Full Paid, and Balance Due.

941, 940, 720 Forms—Payroll, 

unemployment, and Excise returns for 1040 taxpayers.

All remaining individual tax returns. 

Filing Status ................................. Single .......................................... (Single, Married—Married once 

and no dependents).

All (including Head of Household). All ................................................ All. 

Account Characteristics ............... No account issues (Open or 

Closed).

No open account issues ............. No open account issues EITC ..... No open account issues ............. All accounts not included in 

previous releases. 

Est. Returns :1

Original estimate ................ 6 Million ...................................... 29 Million .................................... 41 Million .................................... 34 Million .................................... 12 Million. Revised June 2003 .............. 5 Million ...................................... 33 Million .................................... 57 Million .................................... 20 Million .................................... 15 Million. 

Est. Delivery: 

As of April 2000 ................. January 2002 .............................. August 2002 ............................... July 2003 .................................... July 2004 .................................... July 2005. As of March 2001 ............... January 2002 .............................. January 2003 .............................. January 2004 .............................. January 2005 .............................. January 2006. As of April 2003 ................. August 2003 ............................... January 2005 .............................. TBD ............................................. TBD ............................................. TBD. As of Jan. 2004 .................. Rel 1.1 2.—August 2004 ............ TBD ............................................. TBD ............................................. TBD ............................................. TBD. 

Rel 1.2/1.3.—January 2005/January 2006.

1 Estimated tax returns (electronic and paper) are based on 1999 statistics. 2 Release 1 has been divided up into three separate releases—1.1, 1.2, and 1.3. 
178

6 Assistor Availability is the measure the IRS uses to calculate how long its CSR’s are available to take calls when none are coming in for their specific applications. Achieving the optimum 

Assistor Availability level is critical for effective and efficient call site operations. 

CUSTOMER SERVICE

One of the Congress’ principal objectives in enacting the RRA 98 was to mandate 

that the IRS do a better job of meeting the needs of its customers. In the RRA 98, 

the Congress directed the IRS to achieve a better balance between its post-filing enforcement efforts and pre-filing taxpayer assistance through education and service. 

To comply with this Congressional mandate, the IRS revised its mission statement 

to refocus its emphasis on helping taxpayers understand and meet their tax responsibilities. Additionally, the IRS has enhanced its focus on increasing the levels of 

electronic filing. 

Taxpayers have several options from which to choose when they need assistance 

from the IRS. These options include toll-free telephone assistance, walk-in service 

at the Taxpayer Assistance Centers (TAC), and the IRS internet website IRS.gov. 

The effectiveness of each of these services potentially affects a taxpayer’s ability and 

desire to voluntarily comply with the tax laws. 

Toll-Free Telephone Assistance 

The IRS’s toll-free telephone system is the contact method most taxpayers choose 

when seeking answers to tax law questions or trying to resolve tax account-related 

issues. Taxpayers called the IRS toll-free telephone system over 50 million times 

during the 2003 Filing Season. The IRS’s strategy for handling this significant customer demand is to direct those taxpayers with less complicated issues to its automated services (i.e., recorded information and interactive applications) and allow its 

Customer Service Representatives (CSR) to assist taxpayers with more difficult 

issues. However, during fiscal year 2003, over 26 million of the calls were from taxpayers who had questions about their accounts and who chose to speak with a CSR. 

The TIGTA and others have raised continuing concerns about the IRS’s ability to 

effectively meet the significant annual taxpayer demand for access to its toll-free 

telephone system. Over the past several years, the IRS has made many technological changes, as well as organizational and process changes, to its toll-free telephone system in an effort to provide taxpayers with better access and improve the 

quality of its service. 

Many aspects of the taxpayer experience in accessing the IRS toll-free telephone 

system were significantly improved during the 2003 Filing Season. This improvement was reflected in the measures the IRS uses to gauge the performance of its 

toll-free telephone system. In comparison to the prior filing season, for example, the 

level of service increased, more calls were answered, and fewer taxpayers abandoned 

(i.e., hung up) their calls before receiving assistance. Further, taxpayers that called 

with account- or refund-related questions had shorter wait times to receive service, 

and taxpayers that called with account-related questions were more likely to receive 

assistance when they reached a CSR assigned to an account application. 

Although taxpayer access to its toll-free telephone services improved, the IRS has 

opportunities to further enhance the taxpayer experience and reduce the costs of 

providing toll-free telephone services. A major improvement opportunity involves 

implementing enhancements to automated call routing solutions so that much of the 

need for call screeners can be reduced or eliminated. For the 2003 Filing Season, 

using screeners to manually route calls cost the IRS almost $3.6 million in salaries 

and benefits that would not have been needed if the previously developed call routing solution had worked as planned. Another improvement opportunity involves reducing the high Assistor Availability levels 6 that have existed for at least the past 

two filing seasons. The IRS had planned for a level of 5.5 percent in fiscal year 

2003, but during the 2003 Filing Season, the rate was 11.2 percent, and had further 

increased to 12.15 percent through the end of June. We estimate that this cost the 

IRS nearly $6.4 million in CSR salaries and benefits. Finally, the IRS needs a financial system that will accurately track its cost-per-call for various toll-free telephone 

services to provide management and key stakeholders sufficient information to 

make critical decisions. 

The IRS receives calls from taxpayers with account issues and questions about 

various aspects of the tax law. During the 2003 Filing Season, we reviewed both 

account assistance and tax law assistance calls for professionalism, accuracy, and 

timeliness. 

Account Assistance.—TIGTA evaluated the professionalism, accuracy, and timeliness of account assistance obtained through the Toll-Free program. From a 

judgmental sample of 191 calls monitored between April 21 and May 16, 2003, we 
179

determined that CSR’s treated taxpayers professionally for 99 percent of the calls 

and provided timely service for 83 percent of the calls. In addition, 78 percent of 

taxpayers received accurate answers to their account questions. Using a statistical 

sample during the same period we reviewed, the IRS reported rates of 100 and 97 

percent, respectively, for professionalism and timeliness, and 88 percent for customer accuracy. 

Tax Law Assistance.—TIGTA monitored a judgmental sample of 294 toll-free tax 

law calls between January 27 and March 13, 2003, and compared the results to 

records from an IRS statistically valid sample of 6,011 calls monitored during the 

same period. The 2 samples showed that CSR performance was professional and 

timely in 98 percent or more of the total number of calls monitored. Although our 

sample showed a customer accuracy rate of 73 percent as compared to the IRS’ 

measured rate of 81 percent, the need for CSR’s to fully probe the taxpayer for information was clearly evident as an ongoing issue requiring improvement in both of 

the samples taken. The primary reason incorrect responses were given was because 

CSR’s were not effectively using the appropriate guidance. Without effective use of 

this guidance, CSR’s are unable to fully understand the taxpayer’s situation and 

may provide information that is incorrect or incomplete. 

Taxpayer Assistance Centers 

The primary emphasis of the TAC’s is to provide face-to-face assistance to taxpayers in meeting their filing and payment responsibilities, including educating taxpayers, providing self-help, interpreting tax laws and regulations, securing forms, 

resolving notices, and providing needs-based complimentary tax return preparation. 

The IRS has over 400 TAC’s that served over 8.5 million taxpayers in fiscal year 

2003. 

Significant improvements have occurred in the percentage of accurate answers to 

tax law questions TIGTA auditors asked when anonymously conducting site visits 

to TAC’s during the past 2 years. IRS employees correctly answered 69 percent of 

the questions asked and incorrectly referred only 2 percent to publications from July 

through December 2003, compared to correctly answering only 57 percent of the 

questions asked and incorrectly referring 12 percent to publications from July 

through December 2002. TIGTA commends the IRS for the improvements it has 

made in this level of accuracy. 

Auditors also had positive experiences when they visited the TAC’s. IRS employees were professional and courteous in 97 percent of the 194 TIGTA site visits to 

105 TAC’s. Wait time for service was 1 hour or less for 99 percent of the visits. In 

addition, 85 (81 percent) of the TAC’s visited by our auditors had office hours listed 

on the IRS internet website IRS.gov, which matched the hours posted at the TAC’s. 

Although improvements have occurred in accuracy of responses to taxpayer questions, the accuracy of tax return preparation at the TAC’s needs improvement. Complimentary tax return preparation and electronic filing is provided to those taxpayers whose returns meet certain requirements and limitations. For Tax Year 

2002, IRS employees at the TAC’s prepared 293,242 tax returns that involved refunds and tax liabilities totaling approximately $330 million and $6 million, respectively. 

Returns prepared at the TAC sites, however, are often inaccurate. From February 

through April 2003, TIGTA auditors made 34 anonymous visits to 26 TAC’s nationwide in an attempt to have a tax return prepared. IRS employees incorrectly prepared 19 of the 23 tax returns prepared during our visits. If these returns had been 

filed, the IRS would have inappropriately refunded $32,000 and inappropriately 

withheld $2,400 in tax refunds. IRS management has taken action to improve the 

accuracy of the tax returns prepared, and TIGTA has recommended additional actions to ensure taxpayers receive proper and accurate customer service when requesting assistance with tax return preparation. 

Service to Taxpayers via the Internet 

The use of the internet has increased dramatically. The latest statistics indicate 

that nearly 70 percent of the United States population are internet users. Since 

1995, the IRS has administered a program to answer taxpayer questions submitted 

through its internet website IRS.gov. This program offers individual and business 

taxpayers an accessible and convenient alternative to using the telephone or visiting 

an IRS office to obtain answers to tax law questions. Taxpayers have the ability to 

submit tax law questions 24 hours a day, 7 days a week. The IRS provides responses to taxpayer questions via an e-mail message. 

Past TIGTA testing indicated that the accuracy rate for the answers to the submitted questions was over 80 percent, which is higher than that received in TAC’s 

or via the toll-free assistance telephone program. However, the IRS did not respond 
180

to several of the questions TIGTA submitted anonymously to the program. Additionally, the number of questions submitted dropped from over 200,000 questions in the 

2000 Filing Season to about 120,000 in the 2002 Filing Season. TIGTA encouraged 

management to provide clear instructions to taxpayers to help them locate the area 

to input tax questions on the internet website. 

Statistics obtained from the IRS indicated that for the 2003 Filing Season, 

146,369 questions were received from taxpayers (a 23 percent increase over the 

prior year). However, the average response time for each question increased from 

2.4 days to 4.2 days. Thus far, for the 2004 Filing Season (through March 15, 2004), 

statistics indicate a reduction in the number of questions received—76,156 questions 

have been received (76 percent of the number received in the prior year during the 

same period) with an average response time of 3.6 days. 

In closing, I would like to reiterate that the improvements in the levels of service 

the IRS has provided to taxpayers are impressive. The IRS has made great strides 

in enhancing the level of electronic filing, providing information via its internet 

website, and improving the accuracy and availability of toll-free telephone service. 

The early IRS filing season statistics indicate a rise in electronic filing and an increase in the use of some of the services available via the internet. However, significant challenges remain to be addressed as the IRS strives to modernize its systems 

and provide world-class customer service to America’s taxpayers.

ACCURACY OF TAX RETURN PREPARATION

Senator SHELBY. I have a number of questions. The Treasury Inspector General for Tax Administration (TIGTA) reported that the 

IRS employees incorrectly prepared 19 of 23 tax returns during a 

spot check of 26 taxpayer assistance centers around the country. 

Ms. Gardiner, what recommendations do you have to ensure taxpayers receive proper and accurate customer service when requesting assistance in the preparation of a tax return? 

Ms. GARDINER. The biggest problem that we see when mistakes 

are made, whether it is preparing tax returns or answering questions on the toll-free line or walk-in assistance, is that the IRS employees do not ask appropriate probing questions. For example, the 

earned income tax credit is a complicated law and there are so 

many different little pieces that make a difference in whether you 

qualify or not. 

Senator SHELBY. I certainly would not be qualified——

Ms. GARDINER. A common problem is just simply the number of 

months that a child resides with the taxpayer that would determine whether they do or do not get the credit, and that is a common mistake. 

Senator SHELBY. There is a problem of verification, too, is it not? 

Ms. GARDINER. It is verification as well, but what we find is simply that they are not asking enough questions to get to the right 

answer. 

IMPROVING THE ACCURACY OF RETURN PREPARATION

Senator SHELBY. Mr. Commissioner, what actions have you taken 

to improve the accuracy of tax returns prepared by the IRS personnel? 

Mr. EVERSON. I think that as Ms. Gardiner has suggested, this 

is an area that needs our concern, and that is a relatively recent 

set of findings. We have had recent discussions—in fact, I think the 

issues here, Senator, extend beyond returns we prepare. As you 

may be aware, there are up to about 2 million returns that are prepared through volunteer organizations that work closely with the 

Service, to which people are referred and they may go visit one of 

these volunteer sites. 
181

Senator SHELBY. How accurate are those returns? 

Mr. EVERSON. I think we are seeing that there are some of the 

same issues. This comes back to what you spoke about, it comes 

back to the complexity of the code. That is a root cause here. I 

would just expand upon Ms. Gardiner’s remarks, which I think hit 

it correctly. There are a couple things that are difficult here. One 

is the true desire of our employers or others to help. If they are 

sitting there with you and they think they understand the situation, they may fail to ask that next probing question. It is on a 

script that they are supposed to be using, but they have made an 

assumption, and they probably should not have made that assumption. 

The way the scoring that TIGTA uses works and that we use 

works, sometimes it holds against them the fact they just have not 

asked that next question. Now, they may actually have been right 

but they did not fully follow the procedure, so there is a real risk 

that they have got the wrong answer. We need to keep working on 

our training. We are doing that. I think that this area——

Senator SHELBY. Does a lot of it go to training? 

Mr. EVERSON. Training is it, and getting good scripts. The same 

thing applies to the tax law accuracy question where we made 

some changes earlier this filing season. Overall, our filing season 

results are excellent, but we did have a dip in tax law accuracy, 

and that was because we were making changes to actually get better. We were changing some of these scripts. They proved a little 

more difficult to use. And we were also having some people who 

worked in the account area, which Ms. Gardiner talked about, that 

is the area where you call in and you say, ‘‘I cannot remember 

what my payment ought to be,’’ if you are on an installment plan, 

or ‘‘I got a notice from you,’’ or a question like that. We were taking 

some of those folks and having them work in the tax law area. Getting them properly trained and up to speed took a little more time 

than we thought. 

So this is an ongoing challenge. Whatever you can do to simplify 

the code, though, would really help us. 

Ms. GARDINER. Yes. 

Senator SHELBY. I have tried. 

Mr. EVERSON. I know you have. 

CORPORATE TAX SHELTERS

Senator SHELBY. Mr. Commissioner, I think we all know there 

have been a lot of abuse of tax shelters. We often hear of large corporations or high income taxpayers creating shelters that are obviously designed to avoid paying taxes. They do not have a real purpose, a business purpose, other than that. On top of that, these 

shelters are designed by a handful of attorneys, accountants, and 

tax practitioners whose standards and ethics are very, very questionable. You know this yourself. We have talked about it a little. 

Does the budget request reflect your plan for attacking these corporate shelters and the few unprofessional individuals who created 

them? I think you have got to go to the heart of this. 

Mr. EVERSON. Absolutely. If we could show the four enforcement 

priorities. We have very carefully constructed, through our plan-
182

ning process, four mutually reinforcing enforcement priorities. This 

issue is really at the heart of all four of these priorities.

ENFORCEMENT PRIORITIES

Senator SHELBY. Go over them. 

Mr. EVERSON. The first is to discourage and deter non-compliance, with emphasis on the corrosive activities of corporations and 

high income individuals. That is the meat of the shelter question. 

The second is to assure that——

Senator SHELBY. A lot of these people just exist to think of creative ways to beat the tax code, do they not? 

Mr. EVERSON. That is the second point here: assure that attorneys and accountants and other tax practitioners adhere to professional standards and follow the law. If you could indulge me for 

just a minute. I started out my career at Arthur Andersen in the 

mid-1970s. The firm had one of the best reputations, and the 

standard of any Big Eight accounting firm was clear, any good law 

firm: you make sure that your clients follow the law. This all 

changed over a period of decades to become about value creation 

and risk management, and now you have interlocking networks of 

investment banks, accounting firms, law firms, commercial 

brokerages. 

Senator SHELBY. Trying to beat the tax code? 

Mr. EVERSON. They are working to do this. So this element of it 

is terribly important. 

The third priority, augmenting our criminal investigations, gets 

to it too. Some of this gets to a criminal level. We have active 

criminal investigations, including against professionals, that will 

hold people to account. 
183

Senator SHELBY. You have to do this, do you not? 

Mr. EVERSON. We have to. We are getting excellent support from 

the Department of Justice. They have litigated for the first time, 

as you may have seen, against law firms who have acted as promoters. They are not providing traditional advice to clients. They 

are acting as promoters of generic tax products that have had a 

corrupting influence on the practice of law and accounting. 

IRS ENFORCEMENT PRIORITIES

Senator SHELBY. A lot of this advice has no real business purpose, does it? 

Mr. EVERSON. That is exactly right. And it gets even to the 

fourth point here, which is about the abuse of tax-exempt entities. 

This is a very serious one, where we have seen some of these charities are being used. We just prohibited a transaction last week 

where people would take advantage of charitable organizations in 

order to actually promote a tax avoidance scheme. If I could just 

show you one chart as to the problem we have got ourselves into 

over a period of years, and then I want to address one thing you 

said in your statement. 

Senator SHELBY. You go ahead.

IRS STAFFING

Mr. EVERSON. This green line, this is the growth over 6 years 

starting in 1995 in total assets of 501(c)(3) entities. This is the 

number of returns filed, together with some projections. This is 

what happened to the staffing at the IRS. What happened, basically, was we maintained—as you said, we kept working on service, 
184

and that was good. We needed to do that. But the fallout in this 

was a dramatic decline across-the-board—but this is just the people 

working on tax-exempt groups. And if you adjust for this volume 

increase in terms of number of charitable entities, this shows you 

how far we are down. 

This is bringing it back up. We brought it back up in 2004. What 

I wanted to say here, the only correction I would have, and I agree 

with your statement, is that in 2004 after I got here, the first thing 

I did was direct my two deputies to make sure that as we dealt 

with funding shortfalls we did not just take it out of enforcement. 

We stopped that last year, so that the fiscal year we are in now, 

we do have the enforcement increment the President and you want 

us to follow. 

But this just shows, we are bringing this back. This is a terribly 

important area because of what you just said. It is also terribly important because of abuses, the credit counseling industry——

Senator SHELBY. How much money are we talking about in 

abuses, in your judgment? 

Mr. EVERSON. In this area, in tax-exempt entities I would not 

have a precise figure but what I would tell you, let me give you——

Senator SHELBY. Could you furnish something for the record? 

[The information follows:]

We do not have data with which to provide a precise answer. Lost revenues would 

generally result from tax-exempt organizations that are not operating in accordance 

with their exempt status, and therefore should be subject to tax. The market segment studies we are currently undertaking will enable us to better estimate revenue 

losses in particular segments or industries, but will not provide data that can be 

extended to exempt organizations generally.

Mr. EVERSON. Let me tell you one statistic on this. There is a $1 

billion credit counseling industry that is operating as not-for-profit, 

calling around to people, taking advantage of the fact that they are 

exempted from the do-not-call list because they are a charity, taking advantage of the fact that they are not regulated by your State 

or others for consumer protection laws. They are preying, many of 

these entities are preying on good average Americans who have 

found themselves in trouble with debts, and they are no longer providing counseling and educational services, which is their mission 

under tax-exempt status. 

So we are going after them. We may very well lift some of the 

tax exemptions, and I believe there may very well be criminal referrals on some of these entities. 

Senator SHELBY. That is what you ought to do. 

Mr. EVERSON. This is all what needs to be done. To get back to 

your statement, I want to give you my personal commitment that 

as we go forward—I am obviously asking for the President’s full request. I am not asking for a penny more, but I am asking for the 

full request. I want to be crystal clear with you and your colleagues 

that we will protect that enforcement build and be very responsible 

at addressing shortfalls, should there be across-the-board rescissions and things like there have been in the past, or other gaps. 

Senator SHELBY. You have got to have the money to do your job. 

What percentage, and you might want to furnish this for the 

record, of 501(c)(3) tax-exempt groups are abusing their status? 
185

Mr. EVERSON. That is a very difficult question, and I would tell 

you, we have fallen so far behind——

Senator SHELBY. A lot of them are very clean, very straight-up. 

Mr. EVERSON. Yes. Most of them are. What is really at stake 

here, Senator, is that Americans could lose faith in the integrity of 

charities and stop supporting our charitable institutions, which are 

so important to our way of life. 

[The information follows:]

Currently, we do not have data that would yield a meaningful statistic. The 501(c) 

exempt organization community is made up of many different kinds of charities and 

other exempt organizations, with diverse activities and needs and correspondingly 

diverse compliance challenges. To address this diversity, we have divided the exempt organization community into several dozen market segments, and in fiscal 

year 2002 we began to conduct market segment studies. To date, we have begun 

studies looking at labor unions, business leagues, social clubs, community trusts, 

hospitals, colleges and universities, social services organizations, religious organizations (other than churches), private foundations, 509(a)(3) supporting organizations, 

fraternal organizations, elder housing organizations, arts & humanities organizations, as well as others. Although the results of these studies will allow us to make 

generalizations about compliance levels in particular segments or industries, we do 

not expect that they will allow us to make generalizations about the percentage of 

organizations that are not operating in accordance with their tax-exempt status. 

Recently, we have devoted more of our limited resources to enforcement areas 

with known or suspected compliance problems, such as donor advised funds, credit 

counseling organizations, excessive compensation issues, and others. Although we 

will continue with market segment studies, we anticipate that fewer resources will 

be devoted to new studies as we increasingly concentrate on existing areas of noncompliance.

EARNED INCOME TAX CREDIT

Senator SHELBY. Absolutely. 

Let us now focus on the earned income tax credit. As we all 

know, there is an estimated $8 billion to $10 billion of annual 

fraud. This is a lot of money. We were talking about $1 billion a 

minute ago, or $260 million, which is still a lot of money. But there 

is an estimated $8 billion to $10 billion dollars of annual fraud that 

occurs in the earned income tax credit program. What is the IRS 

doing currently to crack down on this? What is the status of your 

five-point initiative to improve the administration of the earned income tax credit (EITC)? And how and when does the IRS plan to 

determine whether the earned income tax credit pilot initiative, including the qualifying child certification filing status and income 

report, will be a success? Because we know a lot of people who receive the benefit do not abuse it. But we also know that there is 

a high rate of erroneous payments to people who should not receive 

it. It looks like it is a question of correlating information before you 

pay out, if you are double paying in areas. Do you want to respond? 

Mr. EVERSON. Certainly, Senator. 

Senator SHELBY. This is important. 

Mr. EVERSON. It is very important. We want to make sure that 

everybody who qualifies for this program takes advantage of this 

program. That is our first objective. But the second one is, we want 

to, obviously, make sure that we are not paying out monies to people who legitimately do not qualify. As was indicated before, Ms. 

Gardiner indicated, there is some complexity in the program, so I 

would not want anybody to draw the impression that it is all fraud 

in there. 
186

Senator SHELBY. No, it is not all fraud, but there is a lot of fraud. 

Mr. EVERSON. There is a legitimate error rate that accounts for 

a good chunk of what you talked about. Our studies have indicated 

an error rate somewhere between 25 and 30 percent, which is the 

highest in government. 

Let me draw the distinction, because your statement made reference to some things I said in my prior life over at OMB and this 

is something I looked at when we were there. The difference between this program and food stamps, or housing subsidies, is there 

is no front-end application process. In a lot of benefits programs, 

the government, either the Federal Government or a State entity, 

or somebody is going through an application process to determine 

whether you or I qualify for a benefit. That does not exist in the 

EITC. It is treated like it is embedded in the tax code. It is the 

largest means-tested program we have, so it is an odd animal. 

Senator SHELBY. How much money, overall, is involved in the 

Earned Income Tax Credit? 

Mr. EVERSON. Last year I believe it was about $36 billion with 

about 21 million filers who took advantage of the program. 

Senator SHELBY. A $36 billion program and, say, 25 percent of 

it’s more or less questionable? 

Mr. EVERSON. Yes, 25 percent of it. So let me come back directly 

to your question. We do have the five-point program which is 

geared to hit those objectives, to help people participate, simplify 

forms. We are working on all that. We are bringing in a backlog 

of the old audits. The core of this though is this certification pilot. 

Right now we have got a certification—

EARNED INCOME TAX CREDIT CERTIFICATION PILOT

Senator SHELBY. How does that work? 

Mr. EVERSON. We are asking people to demonstrate their eligibility this year at the time that they are filing for the credit, rather 

than getting—if they were in a high-risk category, rather than 

automatically getting their——

Senator SHELBY. Preapproval, in a sense? 

Mr. EVERSON. It is not quite preapproval, but in lieu of getting 

their refund held. What would happen in the past is, they might 

go down a corridor where if their return looked suspect—I will give 

you an example where you typically might see a problem. You see 

the same address for a husband and wife, but they are filing as 

head of household and splitting their kids. That is not the right 

thing to do, obviously, because the presumption would be that since 

they are living together that it is one family. That would be something—and there are other indicators where you might end up 

holding the refund. 

What we are doing here with this pilot group is we are looking, 

in a real-time basis, and asking them to complete the paperwork 

so that then their refund does not get held. I do not have the results for that yet. That is underway right now. My impression, and 

it is just an impression, is that so far, so good. But we are going 

to have an independent evaluation of this pilot done. We will not 

know until, I would tell you later in the summer, later in the year, 

how it has gone. 

Senator SHELBY. Will you let us know how it is going? 
187

Mr. EVERSON. Of course we will. We want to ramp this up, but 

only if we prove that it works and that it gets us a good answer, 

that it does not dampen the participation of those who qualify, and 

that it does the job that it is supposed to do, which is reduce the 

error rate. 

ADDRESSING FRAUD AT ALL INCOME LEVELS

Senator SHELBY. But you can have fraud at the highest level, the 

richest people, and you can have big fraud, as you pointed out, in 

the Earned Income Tax Credit. It is our job to root it out in both 

places, is it not? 

Mr. EVERSON. Absolutely correct. It is our job to run a balanced 

program. That is what I am seeking to do with this budget increase. But I do emphasize that where we start is at the high income and the corporate in the criminal area, because the basic 

sense of fairness of Americans is that the big guy should not get 

away with something here. 

Senator SHELBY. Absolutely. And the little guy should not get 

away with it either. 

Mr. EVERSON. We want everybody to be compliant. 

Senator SHELBY. Both of them. Because you cannot have fraud 

by anybody, can you? 

Mr. EVERSON. You cannot. 

Senator SHELBY. Ms. Gardiner, what are your thoughts about the 

pilot and other initiatives in this area? 

Ms. GARDINER. We have been looking at the pilot concept, the design of the original test, and it looked pretty good. We made some 

suggestions that in the early stages of planning for it, because they 

did not seem to have good measures on how they would determine 

whether the pilot was a success or not. They have improved that. 

Senator SHELBY. Does the pilot relate to a software program that 

can correlate all this information? 

Ms. GARDINER. No, it really is examining a sample of returns and 

related documentation, that would support the eligibility. So it is 

manual. The results could go into a database, of course. 

Senator SHELBY. But this is a lot of money involved, as the Commissioner has pointed out, over time. There is a lot of money involved here in cheating. There is a lot of money involved in these 

fraudulent tax shelters, too. 

Mr. EVERSON. Yes, sir. 

Senator SHELBY. If you could cut down on both tremendously it 

would mean a lot of savings to the IRS. It would mean a lot more 

revenue, legitimate revenue coming in, would it not, sir? 

TAX GAP

Mr. EVERSON. Senator, what you are getting to here is of great 

concern. It is what we call this tax gap. Our estimates are that this 

combination of non-filing, underreporting and underpayment is 

north of $250 billion a year. Now that number is not very precise 

and that is because it is based on a model that was last updated 

in the late 1980s, and adjusted for changes in demographics and 

economics. We are just now doing the research, through a new series of more in-depth audits, that will give us a basis for updating 

that number. 
188

My fear is that it might well be greater than the $250 billion a 

year because of these shelters, the changes in behavior, and this 

change in compliance attitudes. So this is a serious problem, but 

anything that we do—and this is why I am so anxious to get the 

money—we help out on the deficit, we help out States, because 

when we get a dollar for the Federal Government, on average the 

blended rates across the country is that the States get 20 cents. So 

it is important everywhere. 

Senator SHELBY. What are the current spending plans and 

changes the IRS has made to the Earned Income Tax Credit initiative as a result of the merger of appropriations with Tax Law Enforcement? 

Mr. EVERSON. Last year we had an increase from the previous 

year in the EITC, and if you look at 2004 versus 2005, the spending actually goes down. It is not going to affect this program that 

we are talking about or our ability to do more audits, because we 

were making some one-time investments as we got ready to do 

these pilots and some of the other educational data requirements. 

So that number has gone down from about $201 million in 2004, 

to, I believe, it is $176 million. But it will not hurt our ability to 

move forward and do just what we were talking about. 

FUEL TAX EVASION

Senator SHELBY. Mr. Commissioner, part of my duties as an appropriator of this subcommittee is transportation, as you know. 

Fuel tax fraud creates a drain on the Highway Trust Fund revenues which the Federal Highway Administration estimates could 

cost at least $1 billion a year. In testimony before this subcommittee, the Secretary of the Department of Transportation, Secretary Mineta, stated that he was not satisfied with the IRS’s effort 

to combat evasion of Federal motor fuel taxes. 

Mr. Commissioner, does the IRS agree with the Federal Highway 

Administration’s estimate of the loss; in other words, a loss of $1 

billion or more, from the fuel tax? 

Mr. EVERSON. I have not looked at that specific number. 

Senator SHELBY. Can you furnish that information? 

Mr. EVERSON. I have no reason to challenge it. I understand that 

there is a legislative fix pending that would actually provide the 

Service more resources to go after this important area. When I was 

recently traveling, I went to a fuel depot, a tank farm, and saw the 

testing procedures we have. This is a big issue, and it comes down 

to fairness again. If the fellow who is running a gas station sees 

the guy across the corner mixing his fuels, he has got a competitive 

advantage that is not fair. So we need to do more. I am hopeful 

that the fix that I have talked about will get the extra agents to 

keep on this issue. 

Senator SHELBY. Will that be a collaborative effort with the 

States? 

Mr. EVERSON. I think that is more our own area. I could be 

wrong about that, but I believe—these are our folks that do the 

work themselves, and the fellows I met were just Service employees. 

Senator SHELBY. It is still a lot of money involved. 
189

Mr. EVERSON. It is a lot of money and it goes into, again, business fraud. We need to be attentive, not just to individuals, but to 

the businesses here. 

WORKFORCE REALIGNMENT

Senator SHELBY. Mr. Commissioner, following the IRS’s reform 

legislation of 1998, the IRS realigned significant levels of resources 

out of tax enforcement and compliance activities to customer service, telephone assistance, and submission processing activities. How 

do your fiscal 2005 realignment proposals and new funding initiatives compare to the pre-reform legislation levels for the tax enforcement and compliance programs? 

Mr. EVERSON. Maybe I could show a chart on that.

This just shows you what happens. I am not quibbling with RRA 

1998. I want to be clear about that. The reforms that were contemplated were necessary to improve services. We were not doing 

everything we needed to do on service. I want to be clear about 

that. But as the IRS worked in a single-minded fashion to improve 

services—these are our service and infrastructure personnel—it 

kept those resources stable and invested in phone services, restructured the agency, did a lot of things to get things better. 

But what fell out was a decline in enforcement. This red dotted 

line represents FTEs as dollars turned into bodies for revenue 

agents, people who do audits, revenue officers, people who collect 

monies due, and criminal investigators. Over a period of time they 

fell by over a quarter. 

Now we have turned that back in 2004, as I indicated to you, by 

absorbing some of the shortfalls in congressional spending. Last 

year, you know we ended up $250 million short at the end of the 
190

day, plus the pay raise, plus the child credit; a series of factors. But 

for the first time what we did was, for this year, forced an allocation of these cuts in a way that protected enforcement, the enforcement initiative. 

We will bring this back further. There will be another several 

thousand FTEs that we will get through the 2005 increment and 

about 4,000 positions. So this will make a difference in 2005. It 

does not bring us all the way back. 

Senator SHELBY. It is progress, though. 

Mr. EVERSON. My commitment to the Secretary and to Josh 

Bolten at OMB is we will look at this on an ongoing basis to see 

that we run a balanced system. We are also improving our processes so that we get more leverage. You do not always have to have 

more money, but in this case we felt that we needed the money to 

improve our processes. 

IRS SERVICE AND STAFFING LEVELS

Senator SHELBY. Mr. Commissioner, does your fiscal year 2005 

request reflect a belief on your part that sufficient service and 

staffing levels have been achieved for the customer service and 

processing program areas? 

Mr. EVERSON. As a general rule, I would suggest that I would 

like to continue to maintain and improve services with a relatively 

stable resource commitment on the service. We are near inflation, 

if you look at what we have got in the 2005 request. I think that 

is appropriate. 

We need to challenge our people to get the same kind of productivity gains that you get in the private sector. That sometimes results in some painful adjustments in the workforce. You probably 

read of some of the actions we are taking. But I believe that it is 

difficult for me to come and ask you for money in this resourcestarved environment, and time of deficits, if I have not done everything I can to run the agency efficiently. So we are asking our people to look at that productivity, and I think that we can continue 

to run our services and improve them at a relatively stable investment level. 

TAX LAW ENFORCEMENT FUNDING

Senator SHELBY. Has the IRS invested all the resources appropriated by the Congress in recent years for tax law enforcement or 

have some of the new resources been reallocated to other areas? 

Mr. EVERSON. No, this is what we were just saying. The standing 

rule until I got here was that when there was a shortfall you took 

it out of enforcement to protect services. I have reversed that. 

Senator SHELBY. That would be a mistake. 

Mr. EVERSON. I am not in the business of challenging the past. 

I am not sure there was a great deal of choice, given the overall 

environment and the absolute imperative to improve services. But, 

clearly, now we need to rebuild the enforcement side and that is 

what I have started to do in the last year and I am asking your 

support for going down the road. 

Senator SHELBY. Mr. Commissioner, why has the IRS been unable, if this is true, to hire the revenue agents and revenue officers 

requested and funded in prior fiscal years? Is this about not com-
191

peting in the market? Is there not enough money to hire people? 

Are the salaries too low or what? 

Mr. EVERSON. It has been, I would tell you, primarily a funding 

question. It is dependent, obviously, on the overall economy and 

the desirability of Federal employment. Right now we are doing 

very well, as we look at this enforcement build. We are very 

pleased with the caliber and the interest we are getting. We are 

doing some creative things. 

Senator SHELBY. But you cannot do it overnight, can you? 

Mr. EVERSON. You cannot. This is why it is so important to get 

strong, continued support from you and your colleagues because 

what the IRS did, it stopped and started on its hiring. You do not 

develop a relationship with a good university to draw in accountants if you are there once and then you do not come back for 7 

years. You have got to be there every year, develop a reputation 

as a good employer and then you get good people. 

Senator SHELBY. Continuity is important. 

Mr. EVERSON. Continuity is important, and I think that we will 

be able to address demographics. The only other thing I would say 

on this is: in the group that works with our large and mid-size 

businesses, corporations over $10 million in assets, for the first 

time we are hiring outside the IRS from mid-career people; folks 

who have been 10, 15 years at companies or accounting firms. This 

is a good, helpful thing too, because as you know, people in America, they do not tend to stay with the same employer for their 

whole career any more. Why shouldn’t we in the government be 

able to take advantage of that a little bit too? 

Senator SHELBY. I think you can and you are. 

RETURN ON ENFORCEMENT INVESTMENT

What benefits does the IRS expect to derive from the additional $300 million that you have requested for 2005 in tax law enforcement? 

Mr. EVERSON. As we have looked at this, we think will get about 

a 6 to 1 return. That is a blended return in terms of the dollars 

that we are asking for. It will increase audit rates. Let me just give 

you one example. 

We will increase the penetration on corporations, largely mid-size 

corporations where we are not very active, from 7 percent up to 13 

percent. That is one area where we do not have adequate coverage, 

in my opinion, right now. This will get us more dollars, and it will 

also then have a derivative effect on behaviors. 

Same thing, we are going to be adding 350 special agents, plus 

support staff, to go after the crooks. Across the board there will—

the chart that I showed before, for the first time in many years we 

will be adding to our agents in the tax-exempt area so they can 

look at these charities that have problems. 

Senator SHELBY. Ms. Gardiner, is the IRS headed in the right direction, and can the Service execute the plan to improve the tax 

law enforcement without jeopardizing advances in taxpayer service? In other words, how do you balance that? 

Ms. GARDINER. I believe they are, because the areas in customer 

service where we find deficiencies rarely have anything to do with 

resources anymore. I would say several years ago that that was a 
192

problem. But now the phones are being answered, there are people 

available, the wait times are less than an hour. So there are people 

available to provide the customer service, so I would agree with the 

Commissioner’s conclusion that keeping a steady resource level 

there is appropriate. 

On the flip side, with enforcement, clearly, the volume and complexity of returns is growing. Those resources have declined. I 

share the Commissioner’s concern that the average American’s perception has grown that you can cheat on your tax returns. That 

needs to be addressed, so I think it is the appropriate thing to increase enforcement. 

RESOURCES FOR TAX ADMINISTRATION

Senator SHELBY. Mr. Commissioner, in recent testimony on Capitol Hill, you indicated that Congress has not provided you with the 

resources you need to meet your tax administration responsibilities. A review of your request by the subcommittee and independently confirmed by the General Accounting Office (GAO) shows 

that at least 98 percent, not all, but 98 percent, of the request has 

been funded. The GAO has estimated that even if this Subcommittee on Appropriations gives you every dime of your enforcement request, the IRS would have already spent at least one-third 

of any increase on unbudgeted expenses. Is this correct, or is the 

GAO wrong? 

Mr. EVERSON. The figure that we have overall is that—you know 

this. We are not the kind of agency that gets topped up in the appropriations process. If you look back over a 10-year period, the average shortfall to the President’s request, that could be President 

Bush or President Clinton, is about 3 percent. Now last year’s 

shortfall was $250 million. Now that has got a bunch of things in 

it. It has got things that you do here in the subcommittee or the 

full committee, and then it has got the overall, end-of-the-day rescissions that go across-the-board. 

That gets compounded further by a gap. Seventy percent of our 

costs are in the pay area. So that if the administration proposes a 

civilian pay raise at one level and the Congress funds it more generously, then of course we do have an additional handicap. 

What I would suggest to you, Senator, is I very much want 100 

percent of the President’s request. If we end up in a situation 

where there are issues like that I think it is reasonable for me to 

challenge my organization to find those levels. 

What happens is, if you work to absorb 1 percent or 2 percent 

and then you get further whacked by another 2 percent or 3 percent, then it gets a lot harder to redress some of the problems you 

have got. 

Senator SHELBY. To do your job. 

Mr. EVERSON. To do the job, yes, sir. 

COMMITMENT TO ENFORCEMENT FUNDING

Senator SHELBY. Mr. Commissioner, would you commit to this 

Subcommittee on Appropriations that any enforcement resources 

that we allocate to you will be used for the purpose it was appropriated for? In other words, for the enforcement initiatives which 

you have been pushing? 
193

Mr. EVERSON. Yes, sir, I will. The only exception I would give 

you is that if this problem you just talked about was so severe that 

if I had to take cuts, I will take them. I commit to you that I will 

take them across-the-board. I would take them at the service side, 

infrastructure, and I might have to touch some of the enforcement 

base. But we will make this build, the new programs on enforcement, we will do. 

DELINQUENT TAX INVENTORY

Senator SHELBY. Every year the IRS fails to collect billions in delinquent tax obligations. What headway will the IRS make in curbing the growing delinquent tax inventory that exists? Do you anticipate another large write-off of delinquent taxes as was the case 

last year? 

Mr. EVERSON. Collections are an important element of this enforcement build. The revenue officers that I mentioned, those are 

the folks that actually go out and work to collect the dollars owed. 

We will add many collection officers through this. 

The other thing you may be familiar with that is important to 

us, is pending legislation to get private collection agencies to do 

some of the work here. This is somewhat more controversial, but 

frankly, over 40 States have this, in terms of their own tax programs. We will run this with full protection of taxpayer rights. 

Senator SHELBY. But collection agencies would help you collect 

money that is owed to the government. 

Mr. EVERSON. Absolutely, and what it will enable us to do, sir, 

is focus on the more complicated matters, the ones—there was a 

hearing up here not too long ago on monies owed by defense contractors that we are not fully getting after. This initiative will enable us to work on things like that, if we have relatively more simple matters being attended to by some of the private collection 

agencies. 

Senator SHELBY. Ms. Gardiner, has your office, the Treasury Inspector General for Tax Administration, reviewed the efforts of the 

IRS to collect outstanding tax debts? Would you comment on the 

proposal to improve the collection case management? 

Ms. GARDINER. We actually did an audit some time ago of the 

original pilot for using outside contractors, and then we looked at 

what IRS was proposing in this newer effort and believe it is an 

appropriate effort. I would guess that if IRS is not going to get the 

money to collect it themselves then we do believe that using outside debt collection agencies is a good move. 

Our only concern there would be that IRS still would need a sufficient level of staffing themselves to provide proper oversight, because it would be a little tricky in terms of just monitoring the accounts that are turned over to the private collection agencies, ensuring that they do the work appropriately, protect taxpayers’ 

rights, and those issues. 

WORKFORCE REALIGNMENT

Senator SHELBY. Mr. Commissioner, you announced a realignment of your workforce in January. You also expect savings from 

a related initiative to close some facilities, such as the Brookhaven 
194

service center. How much do you expect to save from these costreduction efforts? 

Mr. EVERSON. Through a variety of programs, Senator, we would 

expect to save over $100 million on an annual basis. What these 

actions do is enable us to free up a couple thousand folks that 

would work on the enforcement side of the house. A lot of this is 

due to the tremendous success we have in electronic filing. As electronic filing increases—it was 53 million last year, up again 12 percent so far this year—you obviously do not need as many people 

opening the mail and doing the data entry. 

At the same time what we are doing is consolidating some of our 

processing operations where after we realigned the Service around 

four lines of business, we did not fully realign all of the support 

efforts, which a business would have done. Some of this is consolidation of activities, administrative activities that businesses did 10 

and 20 years ago. We are doing this because—I think, again, it 

goes back to our earlier dialogue—it is responsible that we be as 

efficient as possible. 

Senator SHELBY. Ms. Gardiner, how likely are the anticipated 

savings the IRS is talking about to materialize? 

Ms. GARDINER. Some things are tied to you just working smarter, 

not harder. The National Research Program is an example of that. 

As IRS can devote its resources, the limited resources in a smarter 

way, then they really should have savings. Modernization should 

bring about savings too. 

For these particular efforts, we would have to look into them to 

see if the savings actually materialized. 

TAX LAW ACCURACY

Senator SHELBY. The TIGTA testimony indicates that the telephone access rate for the IRS is steadily increasing. At the same 

time, the accuracy rate on tax law questions declined to 73 percent. 

Do you have a plan to bring that rate up? Does the telephone staff 

receive enough training? Are there specific questions that should 

not be answered by the telephone staff? How do you work all that? 

Mr. EVERSON. This comes back, Senator, to the conversation we 

had a little while ago about how we are continually trying to improve tax law accuracy both at the phones and also for the walkin centers. It comes down to training. We did some things, as I 

mentioned, earlier this year that we believe in the long term will 

actually increase the accuracy rate, but because of training some 

people who had been working on the accounts side of it, and rewriting the scripts, there was a short-term degradation and the accuracy went down about 6 percent. 

Our figures are just a little bit different from TIGTA’s, but they 

are basically consistent. They do show that decline. I think over 

time they will get better. We assess this on a weekly basis. We 

have real-time monitoring of conversations where supervisors are 

sitting in and listening randomly to the workers’ calls. So we are 

continually trying to improve this. 

But again, work on the simplification; it will help us too. 
195

BUSINESS SYSTEMS MODERNIZATION

Senator SHELBY. On the subject of modernization, the Congress 

has appropriated approximately $1.7 billion for the Business Systems Modernization (BSM) program. The IRS has requested an additional $285 million in this year’s fiscal year 2005 submission. 

This substantial investment is on top of almost $4 billion we provided and was lost by BSM’s predecessor, TSM. The investment in 

TSM was a total loss. That was before your time, I have to say that 

to both of you. After serving a year as Commissioner of the IRS, 

what is your assessment on the progress of BSM at this time? 

Mr. EVERSON. This is a very important question. I established 

three themes, as I testified before the Finance Committee before 

my confirmation, and I continue to believe that they are the correct 

themes. They are to continue to improve service and implement the 

reorganization that former Commissioner Rossotti and his team did 

a splendid job on before I got here. They are to augment the enforcement efforts, as we have been discussing. But it is also to successfully execute the modernization of the IRS. That is fundamental to achieving the first two. We will not be able to continue 

to improve service and help taxpayers, we will not be able to enforce the law adequately, if we do not modernize the IRS. So it is 

terribly important. 

After I arrived, we commissioned a series of studies last summer 

to look at this basket of projects. I would say to you that, first of 

all, it is not all bad news. I give the Service a mixed grade here. 

There are many successes. It is true, some of them have cost more 

than they should have. As a taxpayer, you can check the status of 

your refund on the Internet, and you can file electronically. Practitioners now can get employer identification numbers. There is a 

whole suite of products where I would suggest to you the IRS has 

improved its services to the taxpayer—I would be hard-pressed to 

find another government agency that has made the dramatic leaps 

that we have made largely through technology. So that is a lot of 

good news. 

Where we have failed, though, is on these big ticket projects, like 

CADE that you discussed, that are at the core of our master files. 

Or also another one that you did not mention—

Senator SHELBY. We cannot afford to fail this time. 

Mr. EVERSON. We cannot afford to fail. The other one was the financial system we have been struggling to put in. 

These studies indicated three problems. The first was that the 

IRS business units did not have adequate ownership of the 

projects. They were running as independent technical solutions, so 

that the businesses were not involved in setting specifications or 

the testing and development schedules. 

The second observation was we were trying to do too much. GAO 

had said this, and as we studied this I concurred with all those observations. 

The third was that we were getting uneven performance from the 

vendor. We are working on each of these. We have got the business 

units much more involved. They are participating every step of the 

way. We have resized the portfolio, as you indicated. I am comfortable with this. It will provide more focus. I believe in the long 
196

run we will actually get more done because as we change our work 

processes and hold people accountable to get things done, I think 

we will actually move faster. 

We are working with the contractor. I meet with the president 

and chief operating officer of CSC—a big company, Computer 

Sciences Corporation runs the consortium—every month and we go 

over the deliverables. We will see. Later this summer we will have 

that long-delayed first step of CADE, which works on a section of 

the 1040EZ filers. The feedback I am getting is pretty optimistic 

at this stage. It is not done till it is done. And the same thing is 

true on the financial system. I will report back to you. We will 

know for sure what is happening here. 

Just to close I would say, we have held the contractor accountable in a way that I would say is fairly unusual in government. I 

sent a letter after they missed their last deadline and I said, look, 

for the next big piece of work we are going to do, which is a filing 

and payment compliance system, we are going to not automatically 

award that to this PRIME alliance. We are going to open it up to 

competition. That is a strong statement, very strong statement because it hurts them financially, and I think it got their attention. 

Senator SHELBY. When do you expect BSM to be completed? 

Mr. EVERSON. I will have to get back to you on that. That is a 

big, complicated project. 

Senator SHELBY. It is an important question. 

Mr. EVERSON. It is important. I think we will have a much better 

idea as we adjust our programs here. If we are successful with 

CADE, this first section of CADE, I will tell you that in about a 

year we will have a better capability of giving you a longer term 

projection. 

[The information follows:]

The hallmark application of the Business Systems Modernization Program (BSM) 

is the Customer Account Data Engine (CADE), which is the application we are 

building to eventually replace the existing Individual Master File (IMF) and the 

Business Master File (BMF). CADE is now in service and handling its first filing 

season. Currently CADE is only handling a subset of Form 1040EZ filers, with the 

expectation that it will process approximately 1.9 million returns this calendar year. 

Our plans for CADE are now set for the next 2 years, with the expectation that 

CADE will handle 33 million returns in calendar year 2007. It is not possible, however, for us to predict when CADE will be fully implemented, since timing is based 

on a variety of unknown factors, including BSM funding levels, insertion of new 

technology to improve development productivity on CADE, and policy decisions regarding the extent to which CADE will need to handle returns from prior years. As 

a point of comparison, former Commissioner Charles Rossotti stated that he expected BSM implementation to last 10 years. Progress anticipated in the first 4 

years of the project, however, fell far short of our goals for reasons that we have 

publicly stated. In addition, we based that plan on extremely robust funding levels 

for fiscal year 2005 and fiscal year 2006. Because of steps we have taken to streamline and focus the work we are doing on BSM, we requested and received lower 

funding levels than Commissioner Rossotti anticipated when he provided his estimate. 

Additionally, given the size and complexity of the IRS’s IT assets, modernization 

must be an ongoing endeavor. Modernization programs at the IRS have been difficult, mainly due to the fact that we did not have a program of continual modernization of its IT assets. This deficiency has led to a situation of increasingly antiquated software applications that are not well documented, are difficult to maintain 

and upgrade, and are difficult with which to interface. Given that the heart of our 

IT efforts is to increase the effectiveness and efficiency of tax administration, modernization will always be an ongoing activity at the IRS.
197

RESOURCES NECESSARY TO COMPLETE MODERNIZATION

Senator SHELBY. Ms. Gardiner, I want to ask you a few of these 

questions since you are the Inspector General. How much more is 

needed to complete this effort to modernize the IRS’s outdated systems and processes? And how is the IRS’s 2005 budget request consistent with that vision? 

Ms. GARDINER. As far as what is needed, the estimates are that 

it would be $7 billion to complete the whole——

Senator SHELBY. Say it again. 

Ms. GARDINER. Seven billion dollars to complete the whole effort, 

and those are the estimates. 

Senator SHELBY. How many years? 

Ms. GARDINER. A total of 15, and I believe that includes the 6 

that have already passed. 

Senator SHELBY. That is a continuous modernization. 

Ms. GARDINER. Correct. Even with that, I am not sure that you 

will ever get to a point where you will say, okay, we are all done 

and we do not have to spend—you know, there will be upgrades 

and changes as time goes on. 

Senator SHELBY. You will have to continue to do that to keep up. 

Ms. GARDINER. But I agree with the Commissioner that getting 

CADE, the first release accomplished, that has to occur before you 

can make any projections on anything else. 

Senator SHELBY. When do you think that will be? 

Ms. GARDINER. I think everybody is giving it about 60 to 70 percent odds that the first part will be rolled out this year in August. 

Senator SHELBY. What do you think? You said everybody. 

Mr. EVERSON. I am interested in this answer. 

Ms. GARDINER. Actually I could answer it for IFS. I am not as 

sure for CADE. 

Senator SHELBY. Give me your best judgment. 

Ms. GARDINER. It does appear that the testing and everything is 

going well. Certainly, the contractor is on notice that they need to 

do this. I would say it is probably a very good bet that in August 

they will be——

Senator SHELBY. Who is the main contractor here? 

Ms. GARDINER. CSC is the one that is overseeing the whole effort. 

Senator SHELBY. What about the total cost overruns so far on 

this project? Does that bother you, Ms. Gardiner? You are the Inspector General. 

Ms. GARDINER. It does. We have been making recommendations 

for the past 2 years that we think have all been incorporated in 

these recent studies too, which is good, that it has validated what 

we have said and I think that that is getting the attention of 

Treasury and IRS and others. Some of the cost overruns were 

changing requirements. These projects are hard projects. They are 

totally new, and they are huge and complex. It would be one thing 

if you were just starting today to say, okay, let us create a master 

file. But the problem is they have to interface and talk to the old 

system. That is the biggest piece——

Senator SHELBY. Plus, you are doing business every day as you 

are doing this. 
198

1 Analysis of Business Systems Modernization Cost, Schedule, and Functionality Performance 

(Reference Number 2003–20–007, dated October 2003). 2 Business Systems Modernization: Internal Revenue Service Needs to Further Strengthen 

Program Management (GAO–04–438T, dated February 2004).

Ms. GARDINER. That is right. 

Mr. EVERSON. Let me just expand, if I could, for a second on that 

last remark. This tie back to the legacy systems is very difficult because the IRS did a lousy job over a period of decades of keeping 

documentation of all the multitude of changes it made to the systems each year when the tax code would change. So when people 

have done the work, they developed a road map, but then all of a 

sudden when they get into doing the work they find it is much, 

much more complicated than they had contemplated. That, together with governance issues, too many changes in overall requirements, they all contributed to a very bad cocktail, I would 

suggest. 

BSM COST OVERRUNS

Senator SHELBY. How much money are we talking about in overruns, hundreds of millions of dollars? 

Ms. GARDINER. I would have to get back to you on that. We do 

know that information and we keep track of it. 

[The information follows:]

Through BSM spend plans, the IRS requests funding for program level activities 

(e.g. MITRE Corporation assistance, PRIME Program Management Office, etc.) and 

modernization projects (e.g. Infrastructure Shared Services (ISS), Customer Account 

Data Engine (CADE), etc.). As of February 2002, we determined that 20 BSM 

projects had experienced costs increases of approximately $75 million.1

At the time of our analysis, the majority of the projects were in the planning 

phases. IRS officials responded that the reliability of costs estimates for the development and deployment phases would be much greater than that for the planning 

phases. This belief has not proven to be true. Most projects have now moved into 

the development and deployment phases and cost increases have risen, partially due 

to the fact that projects require more funds during the development and deployments phases. 

The GAO testified in February 2004 that the IRS had experienced cost variances 

of approximately $290 million for 10 completed or ongoing projects.2 The chart 

below is reprinted from the most recent data available (GAO testimony). 

Project Name Cost Variance

(In Thousands) 

Reported/Revised 

Estimated Cost 

(In Thousands) 

Completed Projects: 

Security and Technology Infrastructure Release 1 ........................................................ ∂$7,553 $41,287 

Customer Communications 2001 .................................................................................. ∂5,310 46,420 

Customer Relationship Management Exam ................................................................... ¥1,938 7,375 

Human Resources Connect Release 1 ........................................................................... ∂200 10,200 

Internet Refund/Fact Of Filing ....................................................................................... ∂12,923 26,432 

Ongoing Projects (as of 09/30/2003): 

Modernized e-File ........................................................................................................... ∂17,057 46,303 

e-Services ....................................................................................................................... ∂86,236 130,281 

CADE Release 1 ............................................................................................................. ∂36,760 97,905 

Integrated Financial System Release 1 ......................................................................... ∂53,916 153,786 

Custodial Accounting Project Release 1 ....................................................................... ∂72,058 119,219

TOTAL ......................................................................................................................... ∂290,075 ........................

Senator SHELBY. Mr. Commissioner, we hold the American taxpayers to a high standard: file your return by April 15 or face stiff 

penalties and interest payments. Why should we not hold the IRS 
199

acquisition process and the Service’s contractor to a similar standard and enforce penalties when deadlines are missed and costs are 

increased? Ms. Gardiner, what steps have been taken or would you 

recommend that the IRS take to improve acquisition and management and discipline? 

Ms. GARDINER. We actually have suggested that disincentives, or 

penalties so to speak, are built into contracts and that has not been 

looked on that favorably by the Service. 

Senator SHELBY. Who has not looked on it favorably? I know the 

contractors never look on it favorably. 

Ms. GARDINER. IRS as well. The folks that do the contracting 

have not really accepted those types of recommendations. They 

have accepted another, and that is that we have recommended 

early on that IRS use firm fixed-price contracts as often as possible. 

When we looked at it in the first year they were used very infrequently, and now they are using them more. So that puts the burden on the contractor and we think that certainly is a step in the 

right direction. 

Mr. EVERSON. If I could, the other thing I would note on this is—

after the contractor missed this deadline on the financial system, 

I did take that action of saying, we will open this up to competition 

for the next enforcement module. That is a very strong action because they contemplated, they had built their——

Senator SHELBY. That is a strong message. 

Mr. EVERSON. They built their business on a projection of how 

much work they were going to get over a period of years, and I just 

said, wait a minute, you have just potentially lost this piece of 

work. They can compete for it, but it is very different. I have run 

businesses, and when you have a 100 percent account, that is different than running an account where there are other players in 

there. So that is a strong statement. 

I have also communicated that these upcoming deliverables for 

CADE and IFS are critical to the maintenance of our continued relationship. So I think the stakes are very clear at this point. 

BSM MANAGEMENT

Senator SHELBY. Good. Mr. Commissioner, what is the IRS’s plan 

and schedule for fully implementing and institutionalizing all management processes and controls needed to effectively manage the 

BSM program? I know that is a big job. 

Mr. EVERSON. This goes back to the point a few minutes ago of 

first and foremost getting an overall business sensitivity to this 

project. After I arrived at the Service I created a second deputy. It 

follows a model that we put in over at Homeland where we consolidated all of the support functions, CFO, CIO, human resources, in 

our case, mission assurance, which is security. We have cyber-security and physical security, people security, all of that, plus facilities 

management under one individual. He was our senior career official—came out of the business units—so that we would get proper 

attention to the long-term needs of the Service in our functions including the CIO function. I appointed our CFO, moved him over to 

be the CIO, to shake this up and to make sure that we are addressing this on a long-term basis. 
200

I would suggest to you that—you mentioned earlier the $4 billion 

that had been squandered in the early 1990s. One of the reactions 

to that was the way this BSM project was done, perhaps too much 

was actually given to the PRIME alliance. We are taking a careful 

look at where we need to augment our own skills. It comes back 

to what Ms. Gardiner was saying before, it does not do us any good 

to just have contractors if you do not have enough people inside 

who are monitoring and working and understanding. So we are 

looking at that as well. 

Senator SHELBY. Ms. Gardiner, do you view BSM’s current problems as resource related, management related, or both? 

Ms. GARDINER. One of the big, broad issues was just matching 

the capability in-house with the portfolio of projects. That would be 

somewhat resource related because they tried to take on more than 

they really could. But I would say probably the bigger part is management. Things like, if your process says that you are going to 

clearly define requirements and you are going to follow certain 

steps before you go to the next stage of the project, that you have 

to stick with that, and that has been a problem. Or for testing, in 

order to move the project on to the next stage the same thing applies, that you have to test and make sure that defects are identified and fixed, and they really have had some problems with that. 

But they do recognize those problems and are addressing them. 

Senator SHELBY. As far as modernization is concerned, we both 

noted that $4 billion was lost, squandered or misused. Could you 

assure this subcommittee that your current refocus can put the 

program back on track so it will not go the way of TSM? That is 

important. In other words, we do not want it to go the way of TSM. 

TSM money was squandered or wasted, and it was $4 billion. 

Mr. EVERSON. Senator, I can tell you that this is getting a lot of 

my attention. I am doing my level best to make sure it is being 

done responsibly, and we will reach a very real decision point. If 

this first piece of CADE and the financial system do not roll out 

correctly now, I will have to very seriously reassess it because we 

would run the risk of going down that corridor. I do not expect that 

will be the case, but we are not home free until we make sure we 

get that far. I give you my commitment that this will not leave my 

attention. 

CUSTOMER ACCOUNT DATA ENGINE

Senator SHELBY. The Customer Account Data Engine (CADE), is 

the first major component of BSM and will replace the IRS’s Master Files with a modern database management system. That is the 

goal. It will serve as the foundation for the rest of the BSM initiative. Thus far, the delivery of the first of CADE’s five phases—I believe there are five phases—has already been delayed by at least 

3 years. I think it has gotten off to a poor start. When will CADE 

be delivered, if you can say within some time frame? The first 

phase? 

Mr. EVERSON. It is our expectation that this first phase will be 

delivered this summer. So far the testing is proceeding according 

to plan. 

Senator SHELBY. How much will CADE cost over the original estimate? 
201

Mr. EVERSON. I would want to respond for the record. It is many 

tens of millions of dollars. There are functions of complexity, also 

delay that have contributed to that problem. 

Senator SHELBY. Do you have a figure on that, Ms. Gardiner? 

Ms. GARDINER. No. 

Senator SHELBY. Can you give us a figure for the record? 

Mr. EVERSON. We will certainly do that. Let me say this though, 

we have just recently negotiated a cap on what this first module 

will cost, and that is responsive to what Ms. Gardiner was saying 

a few minutes ago about a change in philosophy in the last months 

that we have brought in, and we have worked very well with the 

vendor to do that. So that protects the Government’s interest a lot 

more. 

[The information follows:]

While we do not have current cost figures from the Automated Financial System 

(AFS) for the CADE, the following chart represents the funding that has been requested and received for the CADE project (all releases).

BSM Spend Plan Amount

Requested Amount Received 

Spend Plan #1 ........................................................................................................................ $3,500,322 $3,500,322 

Emergency Funding Release #1 ............................................................................................. 1,616,000 1,616,000 

Spend Plan #2 ........................................................................................................................ 15,312,000 15,312,000 

Emergency Funding Release #2 ............................................................................................. 1,400,000 1,400,000 

Spend Plan #3 ........................................................................................................................ ........................ ........................

Spend Plan #4 ........................................................................................................................ 40,038,000 40,038,000

Spend Plan #5 ........................................................................................................................ 53,974,000 53,974,000 

Spend Plan #6 ........................................................................................................................ 27,683,000 27,683,000 

Spend Plan #7 ........................................................................................................................ 62,800,000 62,800,000

TOTAL ......................................................................................................................... 1 206,323,322 1 206,323,322

1 This amount includes $15,574,000 that was requested in spend plan 5, but never spent on the CADE. 

As shown in the response to Question 1, the CADE Release 1 has experienced a 

$36,760,000 cost variance. 

Future releases of the CADE have also experienced cost variances of $25,723,000. 

Please see the table below.

Release or Activity 

Amount

Originally

Requested 

Current Estimate 

(As of September 

2003) 

Variance 

Release 2 ................................................................................................... $38,400,000 $44,755,000 $6,355,000

Business Rules Management (Phase 1) ................................................... ........................ 8,300,000 8,300,000

Business Rules Management (Phase 2) ................................................... 17,000,000 17,000,000 ........................

Release 3 ................................................................................................... 9,779,000 20,837,000 11,058,000

TOTAL ............................................................................................ ........................ ........................ 25,713,000

According to the CADE Baseline Business Case from March 2001, the overall estimated cost of CADE is $982 million over its life cycle. 

CADE COST OVERRUN (FROM THE ORIGINAL ESTIMATE) 

The description below explains the costs that GAO reported in their Audit of the 

fiscal year 2004 Expenditure Plan: 

(1) Design work from September 2000 to July 2001: 

—$15.3 million.—Initial estimate in March 2000 Expenditure Plan; 

—$19.3 million.—Actual cost; 

—$4.0 million.—Variance due to design period being extended by 3 months to add 

detail in some areas and to bridge to Development. 

(2) Development work from July 2001 to March 2004: 

—$40.0 million.—Initial estimate in March 2001 Expenditure Plan; 

—$53.6 million.—Actual cost; 
202

—$13.6 million.—A 2-month extension for a pilot using real tax returns (cost of 

$5.3 million) and the addition of capacity at the Martinsburg Computing Center 

to support Development and Testing (cost of $4.0 million) created $9.3 million 

of this variance. We incurred the cost of the delays outlined below, creating the 

remaining variance of $4.3 million. 

(3) Cost impact of 2-year delay in delivering CADE: 

—$2.4 million.—Hiring of non-PRIME contractors to support our IRS testing; 

—$1.9 million.—Establishing a CADE Program Office (work to build an organizational framework to support multiple CADE releases simultaneously); 

—$18.0 million.—Cost to apply tax law and other changes for 2003 and 2004 filing season. 

These costs do not reflect any changes since the GAO audit of the fiscal year 2004 

Expenditure Plan.

IRS ACTIONS IN REGARD TO THE PRIME

Senator SHELBY. Let me ask you a tough question. What steps 

will the IRS take, Mr. Commissioner, if the PRIME contractor fails 

to deliver? 

Mr. EVERSON. I have made it very clear through the action to 

date——

Senator SHELBY. You are on top of them. 

Mr. EVERSON [continuing]. That we will hold them accountable. 

And I have also said that we will have to reassess the very continuance of the relationship if we cannot do what we have said we will 

do. 

Senator SHELBY. You would change that if the effort continues to 

flounder? 

Mr. EVERSON. We will have to consider that, absolutely. 

Senator SHELBY. Would you change if you thought you needed 

to? 

Mr. EVERSON. I retain that latitude, yes. 

Senator SHELBY. What is your view, Ms. Gardiner, for the slowness of this program? 

Ms. GARDINER. I think some of it, as I mentioned, it certainly is 

complex. It is unique. 

Senator SHELBY. It is complex. 

Ms. GARDINER. But I do think a big part of it too is just the 

whole cost and scheduling process was flawed. It gave much more 

optimistic deadlines than it should have in the first place, so it 

caused people’s expectations to be higher than they should have 

been. 

For example, even just in simple segments of it for testing, they 

were so optimistic and they did not build in time for recovery in 

terms of if certain defects occurred, or there were failures, to fix 

those and then to start over again. So to some degree it is that, 

and then the rest is that it is very complex, and then also changing 

requirements. So I think everybody is disappointed, and we are too, 

as far as how long it is taking. 

Senator SHELBY. But your modernization program is essential. 

Mr. EVERSON. We cannot back away from this effort. We have to 

do it. We have got aging technology right now and we have got an 

aging workforce. I liken this, as I have said before, to the movie 

‘‘Space Cowboys’’, if you ever saw that, where they send Clint 

Eastwood out into outer space because they have got these old guys 

who are the only ones who understand the technology. We have a 

bunch of people who want to retire, but they are still helping us 
203

because we have got 1960s and 1970s technology that we are running. We cannot keep doing that forever. 

PERFORMANCE OF THE CONTRACTOR

Senator SHELBY. Do you believe that the contractor is up to the 

challenge here? This is a very complex undertaking, but it has to 

be done. You are spending a lot of money here to modernize the 

IRS, which we think is important. 

Mr. EVERSON. I feel that I have seen an improvement in the attitude and the work that is being done in the year that I have been 

involved with the Service, and I very much appreciate the leadership of Mike Laphen, is the president of the company. He has been 

in my office once a month. That is quite a devotion of resources for 

someone who is running, I think it is a $13 billion business. We 

have got a relationship that I believe is starting to improve. We 

had to let it all out, if you will. There had to be this accountability 

of what most recently happened. So I am cautiously optimistic that 

they can do this. 

Senator SHELBY. But you are also guarded because you know what happened to $4 billion with TSM. 

Mr. EVERSON. This is the old Ronald Reagan, ‘‘trust but verify’’, 

attitude. 

Senator SHELBY. We hope you will, and we wish you every success, and we will continue to help you. 

Mr. EVERSON. Thank you, sir. 

ADDITIONAL PREPARED STATEMENT

Senator SHELBY. The subcommittee has received a statement 

from the Internal Revenue Service Oversight Board which will be 

included in the record. 

[The statement follows:]

PREPARED STATEMENT OF THE INTERNAL REVENUE SERVICE OVERSIGHT BOARD

INTRODUCTION

The IRS Oversight Board thanks the Chairman for the opportunity to submit this 

statement to the Subcommittee on Transportation/Treasury and General Government of the Committee on Appropriations. The Internal Revenue Service (IRS) 

Oversight Board is required by 26 U.S.C. Section 7802(d) to review and approve the 

budget request prepared by the IRS, submit a request to Treasury, and ensure that 

the approved budget supports the annual and long-range strategic plans of the IRS. 

This year, the IRS drafted a special report presenting its recommended fiscal year 

2005 IRS budget, comparing it to the administration’s request, and explaining why 

the Board believes its recommended budget is needed to support the annual and 

long-term needs of the IRS. This statement discusses that report. The complete 

version is available on the Board’s website at www.irsoversightboard.treas.gov and 

the Board asks that this report be entered into the record as well. 

THE IRS OVERSIGHT BOARD BUDGET RECOMMENDATION

The IRS budget is more than dollars and cents. It represents the choices that we 

as a Nation make about the future of our tax administration system and how we 

help over 100 million American taxpayers deal with an increasingly complex tax 

code while ensuring that everyone pays his or her fair share of taxes. 

The IRS Oversight Board acknowledges that the IRS’s budget has increased in 

each year of President Bush’s Administration, and that the administration’s request 

for fiscal year 2005 is significant against other non-defense, non-homeland security 

discretionary funding. That commitment is commendable, and the Board recognizes 

and thanks Secretary Snow for his efforts, especially at a time when the Nation 

must balance many important and competing priorities. 
204

1 Nina Olson, National Taxpayer Advocate’s 2003 Annual Report to Congress, (Washington, 

DC: December 31, 2003) p. 20–21. This is based on a July 2001 IRS Office of Research report. 2 Charles O. Rossotti, Report to the IRS Oversight Board: Assessment of the IRS and the Tax 

System (Washington, DC: September 2002), p. 16. 3These estimates are based upon the projected revenue anticipated by hiring and training 

full-time employees who would audit or collect owed taxes in known cases of taxpayers who did 

not file or pay, or who substantially underreported their taxes, as described in former IRS Commissioner Charles O. Rossotti’s Report to the IRS Oversight Board: Assessment of the IRS and 

the Tax System, p. 16. 

However, the Board believes that now is a critical time for our tax system to be 

strengthened, not merely maintained at current levels. Enforcement activities are 

still at unacceptable levels. Our Nation’s tax gap is estimated at $311 billion,1 leaving billions of dollars on the table simply because the IRS does not have the resources to do its job.2

The Board’s own research shows that each year, more Americans believe it is acceptable to cheat on their taxes. At the same time, our already complex tax code 

continues to be a changing, tangled mystery to most honest taxpayers—and an asset 

to those intent on skirting the law. Every effort must be made to provide quality 

service to honest taxpayers who want to comply with the law. 

In crafting its fiscal year 2005 budget for the IRS, the Board addressed these concerns head on by reinvesting in the IRS to produce tangible benefits and results for 

America’s taxpayers and our Nation. It is a sensible and pragmatic budget that reflects the real world in which the IRS must operate and be funded. 

The Board recommends a 10 percent increase in funding from fiscal year 2004 to $11.204 billion, with a significant increase of 3,315 full-time equivalents (FTEs) to 

boost enforcement efforts. If enacted, the Board’s budget would increase our Nation’s 

revenue by approximately $5 billion each year once the IRS has hired and trained 

additional enforcement personnel.3

Under the Board’s budget, the IRS would have the additional resources to: 

—Close over an additional 1,000 cases involving high risk/high-income taxpayers 

and promoters who avoid paying income taxes by using offshore credit cards 

and abusive trusts and shelters. 

—Boost audit rates by 42 percent from fiscal year 2004 to examine companies 

that use aggressive tax avoidance tactics, such as offshore transactions and 

flow-through entities. 

—Contact an additional 200,000 taxpayers who fail to file or pay taxes due; a 40 

percent boost from fiscal year 2004 and a 27 percent increase from the administration’s request. This alone will allow the IRS to collect $84 million more in 

revenue owed than the administration’s request would allow. 

—Sustain the one-on-one assistance that millions of Americans rely on at tax 

time. The Board’s budget will ensure that the IRS will be able to maintain its 

improved service to taxpayers by answering eight out of ten phone calls. 

IRS MUST STAY THE COURSE ON CUSTOMER SERVICE

Mr. Chairman, the vast majority of Americans want to file their returns and pay 

their fair share, yet our Nation’s tax code continues to become more complex. Resources must be available so the IRS can answer taxpayers’ questions and promptly 

and accurately, whether it is over the phone, through the IRS website, by mail, or 

at walk-in center. 

Under the board’s proposed budget, customer service funding will remain at about 

the same level as fiscal year 2004; however, service should improve due to the deployment of self-service technology. 

For taxpayers, that means eight out of ten phone calls will be answered. For tax 

practitioners calling the IRS toll-free hotline to resolve problems regarding clients’ 

accounts, hold-time will remain at current levels. 

The IRS call-routing systems as well as website applications that allow taxpayers 

to check the status of their tax refunds have already shown dramatic benefits in 

speeding service to taxpayers. New systems, such as e-Services, will soon be available, providing additional automated services to tax practitioners. 

Clearly, service to taxpayers has improved in the past 5 years. Such improvements make it all the more imperative that we sustain them and not allow this 

positive trend to languish, or worse, decline. The agency must stay the course. 

DAYS OF ‘‘OUTMANNED AND OUTGUNNED’’ IRS MUST END

The IRS is doing a better job of identifying egregious noncompliance—now it 

needs the resources to fight back. In the past 2 years, the IRS sharpened its compliance focus to identify and pursue promoters and participants of abusive tax shelters 
205

4 Rossotti, p. 16. 

5 Roper ASW, 2003 IRS Oversight Board Annual Survey on Taxpayer Attitudes, September 

2003, p.17.

and tax evasion schemes. For example, the agency is now targeting its resources on 

promoters of illegal tax schemes that are often marketed to high-income individuals, 

but are also finding their way to middle-market businesses. 

Despite this focus, enforcement activities are still at an unacceptable level simply 

because the IRS does not have the resources needed to accomplish its mission. It 

continues to be outmanned and outgunned. In fiscal year 2003, the agency was able 

to pursue only 18 percent of known cases of abusive devices designed to hide income, leaving an estimated $447 million uncollected.4

TAX CHEATING: ALARMING TRENDS

Public attitudes towards tax cheating show some alarming trends, particularly 

among young Americans. The Board’s 2003 Survey on Taxpayer Attitudes found 

that support for total tax compliance diminished by four points over the previous 

year to 81 percent. In other words, nearly one out of five Americans now believe 

that it is acceptable to cheat at least a little on their taxes. Almost one-third (30 

percent) of young adults age 18–24 age are among those most likely to feel that any 

amount of cheating is acceptable, an increase of six points since last year. Yet ironically, ‘‘fear of being audited’’ has the greatest impact on these non-compliers at a 

time when actually being audited is near historic lows.5

The IRS must prove to the public that it can and will identify and pursue those 

who show contempt for the tax code. The Board’s proposed budget allows the IRS 

to begin to reverse this disturbing trend. 

The Board’s recommendation would increase our Nation’s revenue by almost $5 

billion each year once the IRS has hired and trained additional enforcement personnel. The Board believes the additional revenue achieved makes a strong business 

case for the recommended additional enforcement resources. While this is a modest 

boost in closing our compliance gap, it will also send a message to those contemplating tax avoidance: the IRS’s hands are no longer tied. 
206

6Larry R. Levitan, IRS Oversight Board Testimony before House Ways and Means Oversight 

Subcommittee Hearing on IRS BSM Program, February 10, 2004.

MODERNIZATION CRITICAL TO TAX ADMINISTRATION

In December 2003, the Oversight Board released an independent analysis of the 

IRS Business Systems Modernization (BSM) program. The Board called for nine 

specific recommendations for turning around the critical but troubled program that 

has experienced significant and unacceptable delays and cost overruns. 

However, the Board still believes that the overall Modernization plan is sound 

and well-designed. Moreover, it is critical to the future of tax administration. As a 

Nation, we must remain committed to the IRS’s computer modernization program. 

The Board testified before the House Ways & Means Subcommittee on Oversight on 

Feb 12, 2004:

‘‘The IRS Oversight Board firmly believes that the IRS Modernization program 

cannot be allowed to fail. The IRS cannot continue to operate with the outmoded 

and inefficient systems and processes it uses today. Over time, the existing systems 

will become impossible to maintain and at that point, the ability to administer our 

country’s tax system will be in grave danger. Such a risk to our nation is unacceptable. We remain convinced that the overall Modernization plan is sound and welldesigned. The challenge is executing that plan. The IRS and the Prime must get 

it right this time.’’6

The Board’s proposed budget provides the stable resources needed to focus and 

stabilize the steady stream of funding for the IRS’s computer modernization initiative. Special controls are in place to ensure that no funding in this account is spent 

until the IRS has the capability to spend it effectively. If the IRS does not correct 

the weaknesses in the BSM program by fiscal year 2005, the Board advocates that 

the funds earmarked for modernization should not be spent. However, the Board 

does not believe the IRS should plan for failure. The agency must be poised to move 

forward with BSM once it has demonstrated that it has corrected the program’s 

weaknesses. The funding level recommended by the Board sets the foundation for 

genuine progress for the program in fiscal year 2005. 

The Board expects that the Customer Account Data Engine (CADE) Release 1 will 

occur in 2004. Over the next year, the IRS will test and build upon that system. 

The IRS should continue to strengthen its ability to manage the program and the 

Prime to deliver projects on budget and on time. By the end of fiscal year 2005 and 

early fiscal year 2006, the IRS should be able to proceed with the remaining releases of CADE as quickly as possible. This will minimize future risk and the longterm cost of modernization while providing a basis to deliver tangible results for 

taxpayers. If the IRS’s fiscal year 2005 BSM funding is reduced to $285 million, as it is in 

the administration’s budget, future funding likely will be adversely affected. If that 

happens, the projects will drag on, risk will increase, and ultimately, the program 

will cost taxpayers much more. 

For that reason, the Board believes fiscal year 2005 BSM funding should be set at $400 million, with only $285 million put into the fiscal year 2005 spend plan. 

This will allow the IRS’s Business Systems Modernization fund to operate like a 

multi-year fund, as originally envisioned by Congress and as the Board has recommended each year since its inception. 

Further, as its archaic, tape-based computers begin to give way to modern business systems, the IRS must plan for a smooth transition. The Board’s budget recognizes that need. As new systems are incorporated, the IRS must plan to operate 

both the old and new systems in parallel for some time. The IRS must also retain 

employees with critical skills while training existing and new employees to use new 

systems. This will allow the IRS to reduce the risk of a catastrophic disruption to 

the system. 

In addition, the Board believes that the transition to modernization is a real cost 

that must be incurred. There are no short cuts to successful modernization—the 

IRS’s budget must reflect the real cost of maintaining legacy systems while simultaneously supporting modernized systems. Accordingly, the Board recommends an additional $25 million to cover these costs. The administration’s budget fails to acknowledge them. 

THE ADMINISTRATION’S FISCAL YEAR 2005 BUDGET REQUEST

By comparison, the Board believes the administration’s fiscal year 2005 budget 

cannot achieve its stated goal to add almost 2,000 personnel to bolster the IRS’s enforcement efforts, and will threaten hard-earned improvements in customer service. 
207

7 Recent public remarks by Treasury Secretary Bodman noted that the President’s budget extends through 2005 the temporary increase in the AMT exemption and the provision that allows 

certain personal credits to offset the AMT. These temporary provisions will keep the number 

of taxpayers affected by the AMT from rising significantly in the near-term. More importantly, 

they will allow the Treasury Department the time necessary to develop a comprehensive set of 

proposals to deal with the AMT in the long-term. Treasury Press Release JS–1250 contains the 

full statement of his remarks. 8Olson, p. 16.

This year’s request will lead to a $230 million shortfall in the IRS budget because 

it fails to budget adequately for the anticipated $130 million of congressionally-mandated civilian pay raises, rent increases, and at least $100 million of unfunded expenses. 

In its fiscal year 2005 budget recommendation, the Board anticipates a 3.5 percent pay raise for civilian employees, which achieves parity with the administration’s call for a 3.5 percent military pay raise. The administration, but contrast, 

calls for a 1.5 percent civilian pay raise. While discussions are now underway in 

Congress regarding parity, the Board believes that the 1.5 percent civilian pay increase fails to recognize recent history. 

In fact, fiscal year 2005 is the fourth year in a row in which the administration 

has called for IRS staff increases, while not covering pay raises or required expenses. 

As a result, the administration’s proposed increase in the IRS’s fiscal year 2005 

budget will erode before new employees can be hired, more taxpayer phone calls can 

be answered, or new audits of possible tax cheats can be conducted.

IMPACT OF $230 MILLION BUDGET SHORTFALL ON THREE MAJOR IRS FUNCTIONS 

Function Performance Measure Fiscal Year 2005 

Performance Goal 

Revised Goal 

After $230

Million Cut 

Field Collection .............................. Number of tax deliquent account cases resolved .... 981,000 463,000

Toll-free Telephone Level of

Service.

Calls answered .......................................................... 32,000,000 17,000,000

Field Exam ..................................... Exams of individual taxpayers <$100,000 AGI ........ 118,840 73,000

BOARD CITES COMPLEXITY AS FUNDAMENTAL FLAW

The IRS Oversight Board is precluded by law from addressing tax policy issues, 

but it would be remiss not to address the cost of our Nation’s complex tax system; 

a cost ultimately borne by taxpayers and the IRS. The administration’s legislative 

proposals contained in its budget request only begin to address the problems caused 

by complexity. The approach so far to tax simplification fails to address a fundamental flaw in our tax system: its costly, confusing, and debilitating complexity. The 

administration has, however, requested that Congress provide some relief in fiscal 

year 2005 on the Alternative Minimum Tax, but has not yet identified a long-term 

solution.7 In her annual report, IRS National Taxpayer Advocate Nina Olson recommended repeal of the AMT, saying: 

‘‘The AMT is extremely and unnecessarily complex and results in inconsistent and 

unintended impact on taxpayers... [T]he AMT is bad policy, and its repeal would 

simplify the Internal Revenue Code, provide more uniform treatment for all taxpayers, and eliminate the oddity of dual tax systems. AMT repeal would also allow 

the IRS to realign compliance resources to facilitate more efficient overall administration of the tax code.’’ 8

The Board fully concurs with her assessment, and urges the administration and 

Congress to consider accepting this recommendation in future legislation. 

CONCLUSION

The Board was established to bring to bear its collective expertise and familiarity 

with private sector best practices on the IRS’s problems. To the private-life Board 

members, investments in enforcement pay for themselves many times over, not only 

in revenue dollars but by the deterrence value of reinforcing the belief that all taxpayers are paying their fair share. A strong business case can be made for providing 

the IRS with several hundred million dollars so it can collect billions in revenue. 

At a time when Federal revenue as a percentage of the economy has shrunk to 
208

1950s levels and we face a $500 billion deficit, the Board believes it imperative that 

we strengthen our tax collection system. 

For that reason, the Board recommends that both Congress and the administration reevaluate their methodology by including the revenue value to the country 

when estimating budget requests for the IRS. Indeed, considering the positive impact of additional resources provides a better framework for making informed decisions and will lead to a more effective IRS. 

In conclusion, the Board calls for Congress to stay the course it set more than 

5 years ago with the passage of the IRS Restructuring and Reform Act. The IRS 

has made progress in carrying out the spirit and letter of the Act; we must now 

give it the resources to finish the job. 

ATTACHMENT 1.—IRS OVERSIGHT BOARD FISCAL YEAR 2005 IRS BUDGET

RECOMMENDATION AND ADMINISTRATION REQUEST: PROGRAM SUMMARY COMPARISON

ADMINISTRATION FISCAL YEAR 2005 BUDGET REQUEST PROGRAM SUMMARY 

[Dollars in millions] 

Appropriation Title Fiscal Year 2004 

Enacted 

Fiscal Year 2005 

OB Request 

Increase 

Enacted vs.

Request Percent 

Processing, Administration and Management ............. $4,009 $4,148 $139 3.5 

Tax Law Enforcement ................................................... 4,171 4,564 393 9.4 

Information Systems ..................................................... 1,582 1,642 60 3.8 

Business Systems Modernization ................................. 388 285 ¥103 ¥26.5 

Health Insurance Tax Credit Administration ................ 35 35 ........................ ........................

Appropriation ................................................... 10,185 10,674 490 4.8

IRS OVERSIGHT BOARD FISCAL YEAR 2005 BUDGET REQUEST PROGRAM SUMMARY 

[Dollars in millions] 

Appropriation Title Fiscal Year 2004 

Enacted 

Fiscal Year 2005 

OB Request 

Increase 

Enacted vs.

Request Percent 

Processing, Administration and Management ............. $4,009 $4,291 $282 7.0

Tax Law Enforcement ................................................... 4,171 4,770 598 14.3 

Information Systems ..................................................... 1,582 1,708 126 8.0 

Business Systems Modernization ................................. 388 400 12 3.1

Health Insurance Tax Credit Administration ................ 35 35 ........................ 0.3

Appropriation ................................................... 10,185 11,204 1,019 10.0

ATTACHMENT 2.—UNFUNDED IRS COSTS, FISCAL YEAR 2002–2003

UNFUNDED IRS COSTS, FISCAL YEAR 2002–2004

[Dollars in millions, rounded] 

Detail Fiscal Year 

2002

Fiscal Year 

2003

Fiscal Year 

2004

Labor Inflation: 

Unfunded Pay Raise Increase (President’s Request to Congressional Action) ... $42.3 $128

42.3 128

Non-Labor Inflation: 

Rent Shortfall ........................................................................................................ 32 54

Postage ................................................................................................................. 16 53

Corporate & Electronic Contracts ......................................................................... .................. 23

Health Service Contract ........................................................................................ 3 2

Interpreter’s Contract ............................................................................................ 0.5 0.3

Child Care Subsidy ............................................................................................... 1 ..................
209

UNFUNDED IRS COSTS, FISCAL YEAR 2002–2004—Continued

[Dollars in millions, rounded] 

Detail Fiscal Year 

2002

Fiscal Year 

2003

Fiscal Year 

2004

Increased Department of Labor EFAST Contract Processing Costs ..................... 2 ..................

TOTAL ................................................................................................................ 55 132

Added Requirements: 

Background Investigations ................................................................................... .................. 4

Increase Cash Awards from 1.24 percent to 1.42 percent ................................. 8 16

Competitive Sourcing ............................................................................................ .................. 8

Campus Security Response .................................................................................. 15 ..................

Congressional Mandates ....................................................................................... 5 ..................

Guard Services ...................................................................................................... 20 16

Public Transportation Subsidy .............................................................................. 9 ..................

TOTAL ................................................................................................................ 56 44

Total .................................................................................................................. 153 304

Total Less Pay Raise and Rent ........................................................................ 79 122

ATTACHMENT 3

WHERE THE ADDITIONAL ENFORCEMENT RESOURCES ARE APPLIED 

[Dollars in thousands, rounded] 

Enforcement Initiatives 

Oversight Board

Recommendation 

Administration

Recommendation 

Difference 

Budget FTE Budget FTE Budget FTE 

SBSE–2 Curb Egregious Non-Compliance ......... $159,264 1,408 $90,161 874 $69,103 534 

SBSE–3 Select High-Risk Cases for Examination ................................................................. 5,500 ................ ................ ................ 5,500 ................

SBSE–7 Savings through Consolidation—Case 

Processing ...................................................... 16,085 200 14,469 144 1,616 56

SBSE–8 Savings through Consolidation—Insolvency Processing ............................................ 7,656 69 5,531 65 2,125 4 

WAGE–2 Increase Individual Taxpayer Compliance ............................................................... 46,406 521 15,469 175 30,937 346 

WAGE–9 Improve ITIN Application Process ........ 15,484 50 ................ ................ 15,484 50 

WAGE–10 Eliminate Erroneous EITC

Payments ........................................................ 18,000 ................ ................ ................ 18,000 ................

LMSB–1 Combat Corporate Abusive Tax 

Schemes ......................................................... 60,017 394 36,100 207 23,917 187 

TEGE–1 Combat Diversion of Charitable

Assets ............................................................. 3,914 44 3,914 44 ................ ................

TEGE–5 Stop Abusive Transactions in the TEGE 

Community ..................................................... 11,140 100 11,140 100 ................ ................

CI–1 Combat Financial Fraud in the Corporate 

Sector ............................................................. 25,600 98 25,600 98 ................ ................

CI–2 Dismantle International and Domestic 

Terrorist Financing ......................................... 12,208 80 ................ ................ 12,208 80 

CI–3 Reinforce Core Mission Tax Enforcement 

Resources ....................................................... 34,086 130 34,086 130 ................ ................

CI–7 Forensic Electronic Evidence Acquisition 

and Analysis .................................................. 3,104 4 3,104 4 ................ ................

CI–10 Leverage/Enhance Special Agent Productivity ............................................................... 2,500 28 2,500 28 ................ ................

APPEALS–1 Resolve Appeals .............................. 13,945 112 7,000 56 6,945 56 

COUNSEL–1 Combat Abusive Tax Avoidance ..... 10,852 75 5,426 38 5,426 37 

NHQ–2 Deliver Strategic Compliance Data ....... 2,712 2 ................ ................ 2,712 2
210

WHERE THE ADDITIONAL ENFORCEMENT RESOURCES ARE APPLIED—Continued

[Dollars in thousands, rounded] 

Enforcement Initiatives 

Oversight Board

Recommendation 

Administration

Recommendation 

Difference 

Budget FTE Budget FTE Budget FTE 

Fiscal Year 2005 Enforcement

Increases .......................................... 448,472 3,315 254,500 1,963 193,972 1,352

ADDITIONAL COMMITTEE QUESTIONS

Senator SHELBY. There are some additional questions that will 

be submitted in writing for your response. 

[The following questions were not asked at the hearing, but were 

submitted to the Department for response subsequent to the hearing:]

QUESTIONS SUBMITTED TO THE INTERNAL REVENUE SERVICE

QUESTIONS SUBMITTED BY SENATOR RICHARD C. SHELBY

Question. Following the IRS Reform legislation of 1997, the IRS realigned significant levels of resources from Tax Enforcement and Compliance activities to customer service, telephone assistance, and submission processing activities. 

How do the fiscal year 2005 realignment proposals and the new funding initiatives proposed for 2005 compare to the pre-reform legislation levels for those programs? 

Answer. The proposed fiscal year 2005 realignment proposals and new funding 

initiatives strive to better balance service and enforcement. 

The IRS’s service lagged in the 1990’s. In response to the IRS Restructuring and 

Reform Act of 1998 (RRA 98), the IRS took important and necessary steps to upgrade service—significantly improving the answering of taxpayer telephone inquiries and electronic filing. Unfortunately, improvement in service coincided with a 

drop in enforcement activity. Since 1996, the number of IRS revenue agents, officers, and criminal investigators has dropped. 

The President’s fiscal year 2005 budget—if approved by Congress—will help with 

IRS efforts to continue strengthening enforcement activities while maintaining and 

enhancing levels of service. The submission requests an enforcement increase of 

$300 million over the fiscal year 2004 consolidated appropriations level. This increase will allow a partial recovery in the numbers of enforcement personnel, but 

will not fully restore the workforce.

Enforcement Workforce FTE Fiscal 

Year 1997

FTE Fiscal 

Year 2004

FTE Fiscal 

Year 2005 

Initiatives 

FTE Fiscal 

Year 2005

FTE Percent 

Change 

Revenue Agents ....................................................................... 14,592 12,172 841 13,387 ¥9

Revenue Officers ...................................................................... 7,333 5,238 332 5,734 ¥28

Criminal Investigators ............................................................. 3,244 2,553 160 2,739 ¥22

Question. Will IRS essentially restore those realignments from 1997, or does the 

request make real advances in tax compliance efforts? 

Answer. As in the past 2 years, the IRS has identified efficiency improvements 

that could generate resources to be applied to high priority areas. These resources 

will be applied to enforcement in fiscal year 2005. However, they are not sufficient 

to completely reverse the decline in enforcement performance. The IRS needs the 

increase in enforcement resources requested in the fiscal year 2005 budget to carry 

out an appropriate level of activity in the enforcement arena. 

The primary goal in the fiscal year 2005 budget request is to continue restoring 

the strength of the enforcement function. Staffing devoted to compliance and enforcement operations declined in the 1990’s as the IRS focused on customer service; 

it is just beginning to recover. The number of revenue agents, revenue officers, and 

criminal investigators each declined by over a quarter from fiscal year 1997 to fiscal 

year 2003. Annual growth in return filings and additional work related to RRA 98 

have contributed to a steady decline in enforcement presence, audit coverage, and 

case closures in front-line compliance programs. 
211

This budget has an increase of $300 million for a more vigorous enforcement of 

the tax laws. This strong commitment to tax administration will provide a significant augmentation of enforcement resources, but will not completely restore enforcement personnel to 1997 levels. Improvements will also come from productivity increases (e.g. reeningeering, better audit targeting). 

Question. Are the realignment proposals recognition that sufficient service and 

staffing levels have been achieved for IRS customer service and processing program 

areas? 

Answer. While the ultimate desired level of taxpayer service remains to be 

reached, the IRS has improved and increased recognition of, and respect for, taxpayer rights. The IRS has made steady gains in better serving American taxpayers. 

Each filing season and year is appreciably better than the previous one and the IRS 

continues to build on those successes.

FISCAL YEAR 2004 FILING SEASON SUCCESSES—DATA AS OF APRIL 23 COMPARED TO SAME 

PERIOD IN FISCAL YEAR 2003

Service1 Fiscal Year 2003

Fiscal Year 2004Percent 

Change 

Free Filed Returns ...................................................................................................... 2.7 3.4 26

Where’s My Refund .................................................................................................... 9.5 12.4 31

Telephone Level of Service (Percent) ......................................................................... 83 85 2

E-Filing From Home ................................................................................................... 11.7 14.2 21

1 Service usage in millions, except percentages. 

The IRS is doing a better job; however, much more remains to be done. The objectives for improved taxpayer service are three-fold: 

—improve and increase service options for the taxpaying public; 

—facilitate participation in the tax system by all sectors of the public; 

—simplify the tax administration process. 

Although the IRS is not requesting increases in fiscal year 2005 for taxpayer service initiatives, the IRS will be able to build upon its experience over the past 6 years 

and will continue to improve taxpayer service. In recognition of the need to rebalance service and enforcement activities, consistent with the formula of service plus 

enforcement equals compliance, the only increases the IRS requested in fiscal year 

2005 are for enforcement. 

Question. What headway will IRS’s request make in the growing delinquent tax 

inventory that exists, or do you still anticipate large write-offs of delinquent taxes 

similar to this past year, even with the resource requests in the fiscal year 2005 

budget? 

Answer. Delinquent tax write-offs declined by 35 percent from 818,000 in fiscal 

year 2001 to 533,000 in fiscal year 2003. The dollar value of this inventory declined 

from $10.5 billion in March 2001 to $7.4 billion in March 2004. The fiscal year 2005 

budget staffing increase will enable the IRS to continue this progress in reducing 

the delinquent tax inventory. Passage of the administration’s proposed Private Collection Agent legislation would further reduce delinquent inventory. 

Question. A continuing priority of the IRS has been to maintain and improve the 

Tax Fraud and Criminal Investigations program area. This committee has supported IRS requests in this area. 

Has IRS invested all the resources granted by the Congress in recent years for 

the Criminal Investigations area or have some of the new resources been reallocated 

to other areas in the IRS? 

Answer. The IRS has directed all the resources provided by the Congress for the 

Criminal Investigation area to the Criminal Investigation division (CI). None of the 

resources have been reallocated to other areas in the IRS; however, the IRS has applied any across-the-board rescissions or unfunded pay raises to CI proportionally. 

The IRS has protected all new CI initiatives. 

Question. The IRS, in recent testimony, indicated that Congress has not provided 

the resources it needs to meet tax administration responsibilities. A review of IRS 

requests by GAO has shown that more than 98 percent of IRS’s requests have been 

funded since fiscal year 2002, with most reductions relating to across-the-board reductions and absorptions beyond the control of this committee. 

What is the basis of IRS’s assessment on Congress’ review of your requests? 

Answer. The IRS has based its budget strategy on increasing productivity in current operations from reengineering, modernization, and increases in electronic filing 

to free up resources for reinvestment in taxpayer service and enforcement. The administration also has sought modest FTE increases in the last few years. If success-
212

ful, this strategy would have enhanced taxpayer service and met the demands of 

increased return workload. However, this strategy has not been as effective as anticipated due to unexpected cost increases. For example, the IRS absorbed $97 million to fund a portion of the fiscal year 2004 pay raise, in addition to an appropriation reduction of $252 million from the President’s Budget. 

The IRS absorbed these costs across the agency, protecting only the new fiscal 

year 2004 enforcement initiatives from reduction. Nevertheless, although the IRS 

protected these enforcement initiatives, the enforcement base absorbed a prorated 

share of these unexpected cost increases discussed above, and this resulted in FTE 

reductions in enforcement activities. 

Question. Does IRS’s assessment imply that the administration did not request 

sufficient resources for the IRS in past years’ budgets? 

Answer. The IRS has received the administration’s full support, and funding requests have been sufficient. However, unfunded expenses absorbed throughout the 

agency have negatively affected budget goals. These unfunded expenses have been 

driven primarily by pay raises higher than those proposed by the administration. 

Question. What is IRS’s assessment of the request for fiscal year 2005? Is it adequate to support IRS tax administration responsibilities? 

Answer. The proposed fiscal year 2005 budget takes a balanced, measured approach to the challenges facing the American tax system, with a needed emphasis 

on strengthening enforcement. The goal is to ensure that the tax system is fair for 

all while protecting taxpayer rights. 

The request, if funded, is adequate to support IRS tax administration responsibilities. However, the fiscal year 2005 budget request includes a 1.5 percent increase 

for the pay raise, as proposed by the administration. If Congress approves the 3.5 

percent increase proposed by some members, it would result in a shortfall of $109 

million. 

Question. What is IRS’s assessment of long term requirements? 

Answer. The vision of the IRS is to re-center the agency with the proper balance 

of service and enforcement poised to quickly meet technological and demographic 

changes, new challenges of taxpayer compliance, and customer expectations. 

The IRS’s goals remain the same—to improve taxpayer service, enhance enforcement through uniform application of the law, and improve the IRS infrastructure 

and modernize technology. The IRS’s working equation is that service plus enforcement equals compliance. The IRS is maintaining high levels of taxpayer service, 

while focusing on corrosive areas of non-compliance. Ensuring fairness will help 

maintain the taxpaying public’s faith in the Nation’s tax system. 

Question. How is the IRS’s fiscal year 2005 request consistent with that vision? 

Answer. The IRS will enforce the law and it will continue to improve service and 

respect taxpayer rights. The administration’s fiscal year 2005 budget request will 

help the IRS restore the balance between service and enforcement envisioned in the 

IRS’s Strategic Plan. 

The fiscal year 2005 request allocates $300 million toward enforcement initiatives 

designed to curb abusive tax practices, end the proliferation of abusive tax shelters, 

improve methods of identifying tax fraud, identify and stop promoters of illegal tax 

schemes and scams, and increase the number and effectiveness of audits to ensure 

compliance with the tax laws. This budget will allow the IRS to apply resources to 

areas where non-compliance is greatest: promotion of tax schemes, misuse of offshore accounts and trusts to hide income, abusive tax shelters, underreporting and 

non-reporting of income, and failure to file and pay large amounts of employment 

taxes. The administration also has proposed a number of legislative changes to significantly enhance current enforcement programs and prevent the promotion of abusive tax avoidance transactions. The goal of these initiatives is to ensure that the 

tax system is fair for all, while protecting taxpayer rights. 

Question. Besides the across the board reductions, what other expenses did the 

IRS pay that were not budgeted? 

Answer. Examples of the expenses incurred that were not budgeted include $97 

million for a portion of the unfunded pay raise, and unanticipated rent increases 

causing a shortage of $40 million. The IRS is working to manage our space inventory to minimize future rent increases to the extent possible. 

Question. The GAO states that IRS has requested more enforcement staff to be 

funded partly by budget increases and partly through internal savings. 

Please provide, for fiscal year 2002 and fiscal year 2003, a detailed breakout of 

the anticipated internal savings and the actual amount saved. 

Answer. In fiscal year 2002, the IRS intended to offset projected non-labor inflation of $57 million by reducing travel and contractual services and improving purchasing power through interdepartmental consolidation of procurements. Actual results of those actions in fiscal year 2002 were:
213

Object Class 

Obligations Variance From Fiscal 

Year 2001–2002 

Temporary Space Leases ...................................................................................................................................... ($19,765,165) 

Management and Professional Support Services ................................................................................................ (10,462,898) 

Contractual Labor—Private Sector ...................................................................................................................... (10,052,952) 

Training/Travel ..................................................................................................................................................... (4,114,005) 

Misc Expenses, Foreign Posts—Government ....................................................................................................... (3,151,254) 

Printing, Reproduction, & Related Services—Commercial ................................................................................. (1,900,000) 

Support Services—Private Sector ........................................................................................................................ (1,711,693) 

Local Telephone Service ....................................................................................................................................... (1,280,417) 

Services and Maintenance to Buildings and Space ........................................................................................... (1,088,284) 

Administrative Mail Costs .................................................................................................................................... (1,042,750) 

Telecommunications Equipment, Capitalized ...................................................................................................... (912,880) 

Communication, Telephone Service—EE ............................................................................................................. (811,571) 

Travel of Experts & Witnesses ............................................................................................................................. (577,566)

Total ........................................................................................................................................................ (56,871,435) 

The IRS highlighted specific initiatives for savings in fiscal year 2003. Actual results of those reductions were:

[Dollars in millions] 

Savings—Fiscal Year 2003

Budgeted Realized, EOY Difference 

Dollars FTE Dollars FTE Dollars FTE 

CI—Narcotics Program .................................. $14.6 85 $4.0 33 ($10.6) (52) 

CI—Realigned Attrition .................................. $11.6 80 $9.7 80 ($1.9) ..................

COUNSEL—Reduced Tax Court Cases ........... $0.6 5 $0.6 5 .................. ..................

WAGE—E-File ................................................. $18.5 490 $12.0 475 ($6.5) (15) 

WAGE—Reengineering/Quality

Improvements ............................................. $67.4 1,044 ................ ................ ($67.4) (1,044) 

WAGE, SBSE—e-services release .................. $4.0 69 $0.3 6 ($3.7) (63) 

LMSB—Customer Relationship Management 

(CRM) Exam ............................................... $11.9 119 $1.2 12 ($10.7) (107) 

MITS—Selected Tier B Projects ..................... $3.3 57 ................ ................ ($3.3) (57) 

SBSE—Reduced Field Innocent Spouse ........ $13.8 184 $7.7 103 ($6.1) (81) 

SBSE—Reduced Filing Season Support ........ $12.1 154 $17.9 230 $5.8 76

GRAND TOTAL .................................... $157.8 2,287 $53.4 944 ($104.4) (1,343) 

Question. The GAO states that the IRS realized only 32 percent of its claimed internal savings in fiscal year 2003. Is this correct? If so, does this point to a weakness in budget formulation at the IRS? 

Answer. The actual figure is 34 percent. The fiscal year 2003 budget submission 

is the first such submission to identify specific reduction initiatives that could be 

used to fund high priority initiatives. Since then, the IRS has been improving. For 

example, in fiscal year 2004, the IRS expects to achieve 68 percent of the projected 

savings. The savings result either from modernization projects or reengineered systems that generate productivity increases. Because the IRS starts development of 

budget estimates over 15 months prior to execution year, the assumptions made can 

change, and any changes in assumption will affect the actual savings realized. In 

many cases these savings have been delayed, but will eventually be realized. 

Question. Does it point to a lack of conviction to realize the savings promised to 

promote change at the IRS? If the IRS does not realize the savings assumed in its 

budget requests, how does it make up for the shortfall? 

Answer. The IRS’s prior experience in realizing specific reduction initiatives, particularly with respect to fiscal year 2003, in no way reflects a lack of commitment 

by the IRS to achieve cost savings and efficiencies. 

In most cases, the savings generated are used to fund other high priority areas 

in the same business unit. Therefore, there is an incentive to ensure that the reengineering actions are taken so that the new work can be done. However, if for 

some reason the savings are not generated at the time expected, then the business 

unit must either scale back its hiring plans, and, therefore, projected performance, 

or reduce non-labor costs in other areas to maintain its performance level. Part of 

the problem experienced in fiscal year 2003 and 2004 was that the IRS did not use 
214

generated savings to fund higher priority work, as planned in the budget, but used 

the savings mainly to fund unfunded mandates and unexpected costs. 

Question. Congress has appropriated approximately $1.7 billion for the Business 

Systems Modernization program. IRS has requested an additional $285 million in 

this year’s fiscal year 2005 budget. The current program is showing mounting delays 

in project milestones, with few results to show for the taxpayer. 

What is the current status of this program? 

Answer. The BSM program is—without a doubt—one of the largest, most visible, 

and most sensitive modernization programs ever undertaken in the world. 

The results have been mixed; but first, the good news. The IRS built a strong 

technical infrastructure and designed and implemented stringent security and control mechanisms into the infrastructure. The IRS also developed a rigorous enterprise life cycle methodology. Over the past 2 years, the IRS has been working toward instituting and integrating established streamlined governance and management processes. The IRS has made progress, but a major thrust now focuses on sustaining a solid balance of business commitment, accountability, and scope management. Finally, the IRS has achieved a great deal of success with the projects delivered to date. 

The IRS has fully deployed all e-Services Release 1.0 products and made them 

available over the Internet, including: registration and online address change access 

for third parties and IRS employees through secure user portals; Preparer Tax Identification Number (PTIN) online application; interactive Taxpayer Identification 

Number (TIN) matching; secure Electronic Return Originator (ERO) application 

processing; and access to e-Services registration and application processes by Modernized e-File (MeF) participants. 

E-Services Release 2.0 products are also now in production and available for use 

by IRS staff and taxpayers, including: Application for e-Filing (external); Electronic 

Account Resolution (EAR); Electronic TIN Bulk Matching (Bulk Requests); Disclosure Authorization (DA); and infrastructure support for outbound facsimile service. 

In March 2004, James D. Leimbach appeared before the Ways & Means Oversight 

Subcommittee on behalf of the National Association of Enrolled Agents (NAEA) and 

said, ‘‘This new capability is truly going to revolutionize the way we conduct future 

business with the IRS. The ultimate beneficiary is the American taxpayer. We are 

truly amazed and thrilled beyond description at this way of doing business with the 

IRS, and we would like for you to understand why we feel as we do.’’

The IRS delivered several additional applications that are providing tangible benefits to taxpayers and improving the efficiency and effectiveness of the tax administration systems such as Where’s My Refund?, Where’s My Advance Child Tax Credit?, Internet EIN, Modernized e-File, HR Connect, etc. The following chart highlights the applications the IRS has delivered, as well as the measurable business 

benefits being realized.
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BSM DELIVERS REAL BUSINESS VALUE (RESULTS AS OF 6/15/04) 

Project Description Recent Statistics 

Internet Refund Fact of Filing (2002) ........................ Improves customer self-service by providing instant refund status information and instructions for resolving refund problems to taxpayers with 

internet access.

—17.9 million inquiries in 2003; 22 million inquiries to date in 2004 (1/1/

04–6/6/04). 

—32 percent of all real time IRS assistance calls come from IRFoF. —Modest reduction of telecommunications costs (about $250,000). —Every 1,000 IRFoF contacts eliminate 1,500–2,000 refund assistance 

calls. 

Advanced Child Tax Credit (2003) ............................. Modifies the Internet Refund application to provide taxpayers with Advance 

Child Tax Credit refund status on the internet.

—15.5 million inquiries in 2003; 11.9 million inquiries to date in 2004 (10/

1/03–6/13/04). 

—Peak date 1.1 million interaction. 

Customer Communications (2001) ............................. Improves communications infrastructure, including telephone call management, call routing and customer self-service applications. —68,000 calls in one 3-minute period during initial week (coincided with start of Advanced Tax Refund of 2001). 

—50 percent reduction in waiting time for assistor to answer call. —50 percent reduction in abandoned calls. —Number of Spanish calls doubled. —More accurate pre-routing of calls. 

Internet Employee Identification Number (2003) ....... Allows businesses and taxpayers to apply for and receive employer identification numbers over the internet. —1.37 million internet EIN applications received to date (as of 6/5/04). HR Connect (2002) ..................................................... Delivers an enterprise solution to allow IRS employees to access and manage their human resources information online. —75,000 internal users. —Cited by Commissioner Everson as an enabling factor in the redirection of 

approximately 750 staff years to enforcement. 

—Treasury was selected as 2004 ComputerWorld Honors Laureate for HR 

Connect development and implementation. 

e-Services R1 (2003–2004) ........................................ Creates a web portal and value adding e-Services services to promote the 

goal of conducting most of the IRS’s transactions with tax practitioners electronically.

—Over 69,624 PTIN applications (W7P) entered to date, data entry productivity doubled (from 8/15/03–6/10/04). —Over 58,201 e-File applications to the Third-Party-Data-Store (TPDS) entered to date (from 8/15/03–6/10/04). —Approximately 24,939 Registered (and confirmed) User Portal (RUP) to 

date (from 10/1/03–6/10/04). 

Customer Relationship Management Exam (2001) .... Provides standard tax computation software to Large & Mid-Sized Business 

Revenue Agents.

—Deployed to almost 4,000 Revenue Agents. 

Modernized e-File (2004) ............................................ Provides e-filing to large businesses (1120 family) and tax exempt organizations (990 family). —Went live on 2/23/04. —Over 35,090 returns (1120 family) accepted as of 6/13/04. 

—Over 3,287 participating Electronic Return Originators as of 6/13/04. —Winner of Government Solutions ‘‘Best-of-the Best’’ Pioneer Solutions. 
216

The bad news, however, is major. Significant cost overruns and repeated schedule 

delays have plagued critical projects, such as the Customer Account Data Engine 

(CADE), the Integrated Financial System (IFS), and the Custodial Accounting 

Project (CAP). CADE replaces the current master files that are the IRS’s repository 

of taxpayer information. IFS will be the IRS’s new core accounting system. CAP provides an integrated link between tax administration (revenue) and internal management (administrative) financial information. 

The IRS has delayed the CADE program four times. It originally planned to deliver the first release of CADE in December 2001. The IRS then rescheduled it for 

August 2003, and later rescheduled it for April 2004. The IRS recently finalized the 

re-planning effort for CADE and set the latest delivery date for September 2004. 

While CADE is farther along than the IRS has ever been in replacing a component 

of the master file, there are still major hurdles to overcome. The CADE delays 

stemmed from infrastructure upgrades, initial poor software quality during the 

startup of systems integration testing combined with the failure to understand the 

complexity of balance and control, and the resolution of operational and performance 

issues that occurred during Phase 3 of the Release 1.0 pilot. 

Like CADE, IFS has been plagued with schedule delays. The IRS originally 

planned to deliver the first release of IFS in October 2003. The IRS then rescheduled it for January 2004. The IRS later rescheduled it for April 2004. The IRS has 

subsequently scheduled Release 1.0 for October 2004. The IRS delayed the first release of IFS because of the need to make technical changes to comply with the enterprise architecture, the inability to resolve key design and integration issues in 

a timely manner, the identification of the health coverage tax credit interface requirement late in the development process, and delays experienced in integration 

testing due to poor application quality and interface testing issues. 

IFS Release 1.0 will cover core accounting functions such as budget preparation, 

general ledger, accounts payable, accounts receivable, financial reporting, and purchasing. Problems continue to seriously jeopardize the scheduled delivery of this 

first release of IFS. The IRS is 2 weeks behind schedule on testing, which puts the 

data conversion schedule at risk. The IRS is negotiating a fixed price contract for 

the October delivery. 

The IRS is also encountering delays on the first release of the Custodial Accounting Project (CAP), which provides an integrated link between tax administration 

(revenue) and internal management (administrative) financial information. The first 

release of CAP will address revenue from individual taxpayers on initial tax payments. Later releases of CAP will address businesses and collections. CAP delays 

resulted from unstable CADE and IFS interface definitions, needing additional testing time due to a much larger than anticipated volume of data anomalies discovered 

during the conversion of data from the current Individual Master File (IMF), and 

the time required resolving system performance issues. 

In addition, though not directly responsible for CAP delays to date, the IRS has 

made some adjustments to the functionality that it needs to have in CAP Release 

1 to support the GAO financial audit as well as internal accounting and management. These adjustments will increase the cost of later sub-releases of CAP Release 

1. The IRS has now completed all testing for CAP Release 1, and is adding changes 

to reflect IMF changes from the start of the 2004 filing season (Release 1.1). The 

IRS plans to start production, which includes the initial load of IMF data, in midAugust. The IRS negotiated a fixed price contract for Release 1 and Release 1.1 in 

May 2004. 

Question. Are the current problems resource-related or management-related? 

Answer. The current problems experienced by the IRS are a combination of both. 

The IRS needs a more versatile team of seasoned executives to provide long-term 

stability to the program. The IRS is complementing the skills of experienced IRS 

tax executives with outside seasoned technology executives who have experience 

managing large-scale, complex IT projects. As such, the IRS is hiring two Associate 

Chief Information Officers to join the MITS organization, and an executive search 

firm is conducting searches for five senior executives with a wide range of diverse 

experience in developing and implementing large modernization systems. As a result of missing CADE and IFS key deliverables last summer, the Commissioner and 

Computer Sciences Corporation (CSC) commissioned external assessment studies 

from outside experts. The studies produced no major surprises; but, the IRS now 

understands more about the issues. All of the assessments confirmed that the IRS 

modernization effort is a massive, highly complex, high-risk program that is confronting a number of critical management and technological challenges. These studies also made it clear that the IRS should not turn back, but rather make a series 

of changes to strengthen the BSM program. 
217

While all of these studies assessed different components of the modernization program, three major recommendations emerged, including: 

—Scaling back the modernization portfolio to better align with IRS and CSC’s capacities; 

—Engaging IRS business units to drive the projects with a business focus; and, 

—Improving contractor performance on cost, scheduling, and functionality. 

The assessments also raised a number of other key improvement opportunities, 

including: 

—Adding outside expertise to help manage the program and to complement IRS 

skills; 

—Strengthening human resources capacity management; 

—Adhering to methodologies in areas such as configuration management, cost and 

schedule estimating, and contract management; 

—Reducing the burden from oversight organizations; 

—Simplifying the budget process; and, 

—Initiating the testing of the business rules engine on CADE. 

Question. How much more is needed to complete this effort and modernize IRS’s 

outdated systems and processes and is the fiscal year 2005 budget request consistent with that projection? 

Answer. It is virtually impossible to estimate how much more is needed to complete the modernization effort and modernize IRS’s outdated systems and processes. 

There are just too many unknown variables at this time. The IRS has a BSM Expenditure Plan in the approval process that includes a proposal on how it plans to 

allocate the $285 million in the administration’s fiscal year 2005 budget request for 

the BSM program. This is the first time that the Business Systems Modernization 

Office (BSMO) has forecast so far ahead in an Expenditure Plan. The purpose of 

providing a 2-year plan is twofold. First, the goal is to provide key stakeholders with 

a comprehensive understanding of the sequencing of activities and to show the impact of changes to the plan across multiple years. Second, the objective is to provide 

enough information in advance so that funding for future fiscal years can be made 

available earlier in the fiscal year. The IRS will provide an updated BSM fiscal year 

2005 Expenditure Plan in the summer of 2004, reflecting any adjustments made 

during the upcoming months. 

A key component to delivering on the challenge of modernizing America’s tax system is for the IRS to establish credibility with key stakeholders that it is identifying 

and addressing barriers to achieving business modernization success, and to show 

its constituents that it can and will get modernization done ‘‘right.’’ The IRS must 

gain the trust of its stakeholders by consistently delivering systems on time and 

within budget, and significantly improving its productivity, quality, and effectiveness in building modernized systems. 

Getting modernization ‘‘right’’ means building systems that meet the business 

needs of tax administration, while delivering tangible benefits to taxpayers. The 

right balance of IRS business leaders are now engaging with the modernization 

technology team to help determine how to best apply technology in order to improve 

service to taxpayers, support enforcement activities, and improve compliance. 

Sharing leadership roles requires clarifying responsibilities, empowering managers with decision making authority, and holding individuals (both contractors and 

employees) accountable for delivering measurable results on time and within budget. The IRS has implemented processes and procedures to enable and enforce accountability, such as establishing a governance structure, clearly defining roles and 

responsibilities, and defining project milestone requirements. 

Scope growth and unresolved issues can easily derail the best laid plans for developing and implementing large, complex, high-risk systems. The IRS resized the 

business systems modernization project portfolio, adopted policies to support the 

prompt escalation of issues, and reached an agreement to significantly control discretionary change requests. Maturing management processes, strategically driven 

business requirements, and improved project life cycle methodologies will define and 

drive the modernization initiative going forward. 

The IRS has placed an emphasis on increasing the timeliness and accuracy of 

BSM communications to ensure that key stakeholders are well informed of program 

goals and the status of projects against schedule and cost targets. 

There is much more work to do, but the Commissioner is committed to modernizing the IRS’s archaic computer systems. While progress to-date has been decidedly 

mixed, the IRS owes it to taxpayers to stay the course and put a solid foundation 

in place upon which the IRS can build for decades to come. 

Question. Please provide an update of all core systems being developed. In the update, please provide the original estimated cost of each program, the current cost 

estimate, the original estimated date of completion and the new completion date. 
218

Answer. Response is combined with the response to the subsequent question. 

Question. Please provide a list of any core system of the BSM program that the 

IRS has delivered on time and within the original budget estimate? 

Answer. The IRS and PRIME have not delivered any BSM projects on time and 

within the original budget estimate. The following describes the major projects and 

includes a table detailing cost and schedule variances to date. 

Modernized e-File (MeF) 

Modernized e-File Release 1.0, which provides electronic filing for the first time 

ever to large corporations and tax exempt organizations, went live in February 

2004. MeF provides 53 forms and schedules for 1120/1120S (corporations) and 990 

(tax exempt organization) e-filing. It also provides the functionality to support those 

forms including: 

—applicable interfaces; 

—validation; 

—retrieval and display options; 

—the capability for large taxpayers to file using the internet; and, 

—the capability to use Adobe files. 

Release 1.0 has exceeded project volume for the year after only 2 months of operation. The project won the Government Solutions Pioneer Award from Federal Computer Week Magazine (1 of 15). 

Modernized e-file release 2.0 will include 36 additional forms and schedules that 

are filed with Forms 1120/1120S (corporations) and 990 (tax exempt organizations). 

The IRS exited Release 2.0 Milestone 3 System design in March 2004. The IRS 

plans deployment for the summer of 2004. The IRS provides a chart listing the cost 

and schedule variances at the end of this response. 

E-Services 

The e-Services project focuses on providing electronic account resolution and fostering easy-to-use electronic products and services targeted at specific practitioner 

segments that will inform, educate, and provide service to the taxpaying public. In 

addition, e-Services will provide electronic customer account management or Indirect Channel Management capabilities to all businesses, individuals, and other customers in a safe and secure manner. This project will help the IRS move toward 

the Congressional goal of receiving 80 percent of tax returns and information filings 

by electronic transaction, while achieving a 90 percent customer and employee satisfaction rate by 2007. Taxpayers who e-file will have the benefit of quicker refunds, 

more accurate transaction processing, and access to an array of new electronic services. The IRS has made noticeable improvements in the 2003 and 2004 filing seasons, with considerable improvement resulting from a series of strategic enhancements resulting from a series of planned releases late in 2003. 

The IRS has delivered electronic services to tax practitioners, and other third parties such as banks and brokerage firms that report 1099’s. The IRS deployed all Release 1.0 and Release 2.0 initial operations functionality by the end of April 2004, 

except for Transcript Delivery System (TDS), which will be available in June 2004. 

The IRS conducted additional pilot and performance testing of both releases prior 

to deployment to the broad practitioner community. 

The IRS fully deployed, and made available over the Internet, all e-Services Release 1.0 products, including: registration and online address change access for third 

parties and IRS employees through secure user portals; Preparer Tax Identification 

Number (PTIN) online application; interactive Taxpayer Identification Number 

(TIN) matching; secure Electronic Return Originator (ERO) application process; and, 

access to e-Services registration and application processes by Modernized e-file 

(MeF) participants. 

E-Services Release 2.0 products are now in production and available for use by 

IRS staff and taxpayers, including: Application for e-Filing (external); Electronic Account Resolution (EAR), Electronic TIN Bulk Matching (Bulk Requests); Disclosure 

Authorization (DA); and infrastructure support for outbound facsimile service. A 

chart listing cost and schedule variances for the e-Services program is provided at 

the end of this response. 

Customer Account Data Engine (CADE) 

The IRS has delayed the CADE program four times. The IRS originally scheduled 

the first release of CADE for delivery in December 2001. The IRS then rescheduled 

it for August 2003 and again for April 2004. The IRS recently finalized the re-planning effort for CADE—under a fixed price contract—and set the latest delivery date 

for September 2004. 
219

While CADE is farther along than the IRS has ever been in replacing a component of the master file, there are still major hurdles to overcome. The CADE delays 

stemmed from: 

—Infrastructure upgrades; 

—Failure to understand the complexity and control function combined with poor 

software quality during the startup of systems integration testing; and, 

—Resolution of operational and performance issues that occurred during an initial 

release of the pilot. 

The delivery of the CADE project is particularly important because, for the first 

time, it moves taxpayer data from the outdated tape-to-tape reels into an updated 

tax administration data and processing system that can be accessed and updated 

in real time. Like the new online technical infrastructure that the IRS deployed, 

CADE is a core fundamental component of the modernized systems. As such, CADE 

is the IRS’s highest priority technology project. As of May 14, 2 weeks remained on 

2004 filing season release pilot (Reprocesses cycles 4–8 from earlier this year). The 

pilot has gone well. The IRS recently signed a fixed-price contract through initial 

operating capability (IOC) and has started work on the 2005 filing season release. 

Integrated Financial System (IFS) Release 1

Like CADE, IFS has been plagued with schedule delays. The IRS originally 

planned to deliver the majority of the first release of IFS in October 2003, and the 

balance in January 2004. The IRS later rescheduled it for April 2004. The IRS has 

subsequently scheduled Release 1.0 for October 2004. Delay of the first release of 

IFS occurred because of: 

—The need to make technical changes to comply with the enterprise architecture; 

—The inability to resolve key design and integration issues in a timely manner; 

—Identification of the health coverage tax credit interface requirement late in the 

development process; and 

—Delays experienced in integration testing due to poor application quality and 

interface testing issues. 

IFS Release 1.0 will cover core accounting functions such as budget preparation, 

general ledger, accounts payable, accounts receivable, financial reporting, and purchasing. Problems continue to seriously jeopardize the scheduled delivery of the first 

release of IFS. 

The IRS is currently negotiating a fixed-price contract for October delivery. Testing is behind schedule by 2 weeks and data conversion is at risk within the scheduled 6-week window. The IRS lists IFS cost and schedule variances in the chart at 

the end of this response. 

Custodial Accounting Project (CAP) Release 1

The IRS has encountered delays on the first release of the Custodial Accounting 

Project (CAP). This project provides an integrated link between the tax administration (revenue) and internal management (administrative) financial information. The 

first release of CAP will address revenue from individual taxpayers on initial tax 

payments. Later releases of CAP will address businesses and collections. CAP 

delays resulted from unstable CADE and IFS interface definitions. Additional testing time is necessary due to a much larger than anticipated volume of data anomalies discovered during the conversion of the data from the current individual Master 

File (IMF), and the time required resolving system performance issues. 

In addition, though not directly responsible for CAP delays to date, the IRS has 

made some adjustments to the functionality that it needs to have in CAP Release 

1 to support the GAO financial audit, as well as its internal accounting and management. These adjustments will increase the cost of later sub-releases of CAP Release 1. The IRS has now completed all testing for CAP Release 1, and is adding 

changes to reflect IMF changes from the start of the 2004 filing season (Release 

1.1). The IRS plans to start production, which includes the initial load of IMF data, 

in mid-August. 

The IRS has scheduled the completion of negotiations of a fixed price contract for 

Release 1.0/1/1 for no later than the end of June. Once those negotiations are complete, the IRS will begin negotiating a fixed price contract for Release 1.2 (mid-year 

2004 changes). The IRS lists cost and schedule variance information in the chart 

at the end of this response.
220

Project Initial Est. Cost Actual/Revised Est. Cost Cost Variance Initial Est. Completion Date Actual/Revised Est. Completion Date Schedule Vari- ance 

Customer Communications (CC) 2001 .......................................................... $41,110,000 $46,420,000 ∂$5,310,000 5/31/01 ................................... 2/26/02 (Full Deployment) ..... ∂9 mo. 

Improves communications infrastructure, including telephone call 

management, call routing, and customer self-service applications. 

Recent Statistics: 

—68,000 calls in one 3-minute period during initial week —50 percent reduction in waiting time for assistor to answer 

call 

—50 percent reduction in abandoned calls —Number of Spanish calls doubled —More accurate pre-routing of calls 

Customer Relationship Management Exam (CRM Exam) .............................. $9,313,000 $7,375,000 $(1,938,000) 6/30/02 ................................... 9/30/02 (Full Deployment) ..... ∂3 mo. 

Provides standard tax computation software to Large & Mid-Sized 

Business Revenue Agents. 

Recent Statistics: 

—Deployed to almost 4,000 Revenue Agents —Software meets 91 percent of LMSB requirements —Average case time reduced due to new automated tax computation —Improved accuracy in computing corporate taxes 

Security and Technology Infrastructure Release (STIR) Release 1 ............... $33,734,000 $41,287,000 ∂$7,553,000 8/31/01 ................................... 1/31/02 (Initial Operation) ..... ∂5 mo. Internet Refund/Fact of Filing (IR/FoF) .......................................................... $13,509,000 $26,432,000 ∂$12,923,000 7/31/02 ................................... 9/26/03 (Full Deployment) ..... ∂14 mo. 

Improves customer self-service by providing instant refund status 

information and instructions for resolving refund problems to taxpayers with Internet Access. 

Recent Statistics: 

—17.9 million inquiries in 2003, 19.2 million to date in 1994 

(1/1/04–4/25/04) 

—32 percent of all real time IRS assistance calls come from 

IR/FoF 

—Modest reduction of telecommunications costs (about 

$250,000) 

—Every 1,000 IR/FoF contacts eliminate 1,500–2,000 refund 

assistance calls 

Human Resources (HR) Connect Release 1 ................................................... $10,000,000 $10,200,000 ∂$200,000 12/31/02 ................................. 12/31/02 (Initial Operation) ... N/A. 
221

Delivers an enterprise solution to allow IRS employees to access and 

manage their human resources information online. 

Recent Statistics: 

—75,000 internal users —Cited by Commissioner Everson as an enabling factor in the 

redirection of approximately 750 staff years to enforcement 

—Treasury was selected as 2004 Computerworld Honors Laureate for HR Connect development and implementation 

E-Services ....................................................................................................... $44,045,000 $130,281,000 ∂$86,236,000 10/31/03 ................................. 4/30/05 (Full Deployment) ..... ∂18 mo. 

Creates a web portal and value adding e-Services services to promote the goal of conducting most of the IRS’s transactions with 

tax practitioners. 

Recent Statistics: 

—Over 57,000 PTIN applications (W7P) entered to date; data 

entry productivity doubled (from 8/15/03–4/21/04) 

—Over 56,000 e-file applications to the Third-Party-Data-Store 

(TPDS) entered to date (from 8/15/03–4/15/04) 

—Approximately 23,000 Registered (and confirmed) User Portal (RUP) to date from (10/14/03–4/21/03) —4.7 million Bulk TIN requests 

Modernized e-File (MeF) Release 1 ................................................................ $29,246,000 $46,303,000 ∂$17,057,000 ................................................. ................................................. ∂4.5 mo. 

Provides e-filing to large businesses (1120 family) and tax exempt 

organizations (990 family). 

Recent Statistics: 

—Went live 2/23/04—Over 30,600 returns (1120) family accepted as of 4/25/04 —Over 3,109 participating Electronic Return Originators as of 

4/25/04

........................ ........................ .......................... 11/3/03: Assurance Testing ...

12/22/03: Web-Filing .............1/9/04: Production .................

11/04/03: Assurance Testing2/9/04: Web-Filing .................2/23/04: Production ...............

∂1 day. ∂7 weeks. ∂6 weeks. 

Customer Account Data Engine (CADE)—Individual Master File (IMF) Release 1. $61,145,000 $97,905,000 ∂$36,760,000 12/31/02 ................................. September 2004 ..................... ∂21 mo. 1

Creates authoritative computations and stores data for individual 

taxpayer accounts and tax return information; it provides timely complete, accurate taxpayer information to IRS employees. 

Custodial Accounting Project (CAP) Release 1 .............................................. $47,161,000 $119,219,000 ∂$72,058,000 1/31/03 ................................... August 2004 ........................... 20 mo. 

Provides integrated, reliable tax operations and internal management information to support evolving decision analytics, performance measurement, and management information needs. 

Integrated Financial System (IFS) Release 1 ................................................ $99,870,000 $153,786,000 ∂$53,916,000 3/31/04 ................................... October/November 2004 ......... 7–8 mo. 
222

Project Initial Est. Cost Actual/Revised Est. Cost Cost Variance Initial Est. Completion Date Actual/Revised Est. Completion Date Schedule Vari- ance 

Modernizes IRS financial management systems by providing a single 

general edger for custodial and financial data and a platform to integrate core financial data with budget, performance, and cost accounting data. 

Customer Account Management (CAM) Release 1 ........................................ $57,578,000 TBD 2 TBD 2 10/31/04 ................................. TBD 2 (Initial Operation) ......... TBD. 2

Delivers an enterprise solution to support access to tax account 

data, contact management, case management, outbound correspondence management, and workflow management. 

1 CADE, CAP and IFS project schedules are currently under review. 2 CAM project work suspended following completion of preliminary design activities ($15,452,000 expended). No further work planned until at least fiscal year 2005.

Source: GAO analysis of IRS data contained in Business Systems Modernization (BSM) Expenditure Plans. 
223

Question. The budget contains an initiative related to Private Collection Agencies. 

Please provide some detail justifying this initiative. 

How will taxpayer privacy rights be protected? 

Answer. Private Collection Agencies (PCAs) will be required to comply with all 

taxpayer protections with which IRS employees are required to comply, including 

the provisions of RRA98, and would be prohibited from threatening or intimidating 

taxpayers, or otherwise suggesting that enforcement action will, or may be taken, 

if a taxpayer does not pay the liability. 

—In no case would a PCA be permitted to take enforcement action against a taxpayer. 

—PCAs will be required to comply with the Fair Debt Collection Practices Act. 

—Under the proposal, taxpayers would be permitted to seek damages from PCAs 

and their employees who violate the protections provided. 

—The IRS will approve PCA operational plans that will detail the actions a PCA 

will take to resolve IRS accounts. 

—The IRS will establish an oversight group with responsibility for managing case 

referrals, monitoring and evaluating PCA performance against the approved operations plan, and reviewing and approving PCA actions. 

—The IRS oversight function will use live phone monitoring, recorded phone monitoring, review of PCA systems for adherence to operation plans, and on-site reviews to ensure taxpayer rights are fully respected. 

Question. The IRS implemented a similar pilot program in 1996. What lessons 

were learned from that pilot? 

Answer. Implementation Period.—The IRS was required to implement, almost 

from scratch, the pilot program within the year of the appropriation legislation. —Funding.—The pilot program was funded from the IRS’s Tax Law Enforcement 

appropriation. —Processing and Communications.—At the time of the pilot program, IRS computer and communication systems were not adequate for the processing, delivery, and updating of liabilities being handled by the PCAs. —Selection of Accounts.—The pilot program required the IRS to place accounts 

where the IRS had previously made attempts to collect. Consequently, the pilot 

program involved the referral of many outstanding liabilities to PCAs that did 

not have realistic collection potential. This resulted in wasted effort by both the 

PCA and the IRS. —Taxpayer Information.—The pilot program overly restricted the amount of information that could be provided to PCAs for purposes of collecting outstanding 

liabilities. As a result, many debts had to be returned by the PCAs to the IRS 

due to the PCAs’ inability to respond to often-straightforward questions about 

a taxpayer liability. —Contract Structure.—The pilot program involved a fixed-price contract with incentive payments. 

Question. Have those lessons been implemented in the new initiative? 

Answer. The administration’s proposal reflects the lessons learned from the pilot 

program. The primary issues affecting the success of the pilot program, and the 

manner in which this proposal addresses those issues, are set out below. 

—Implementation Period.—In contrast, this proposal has been developed over the 

past 2 years and has involved discussions between the IRS, Treasury Department, Office of the National Taxpayer Advocate, Department of Justice, and 

prospective contractors. Moreover, even if authorizing legislation were enacted 

in the next 6 months, this proposal contemplates that an additional ramp-up 

period of over a year would be required before the PCA program could begin. 

This additional time would be required to ensure that the business processes, 

security and oversight measures, and taxpayer protections are brought on-line 

and fully tested before the program begins. 

—Funding.—The pilot program conducted in 1996/1997 was funded from IRS’s 

Tax Law Enforcement appropriation. Funding in this manner resulted in a net 

reduction to the IRS compliance resources. In contrast, the administration’s proposal to fund PCA activities from proceeds would allow PCAs to supplement, 

not displace, existing IRS resources. 

—Processing and Communications.—The IRS will invest in modernized Collection 

Decision and Inventory Management Systems to ensure the successful integration of PCA activities into the IRS collection process. 

—Selection of Accounts.—The IRS, under the administration’s proposal, would 

focus on ensuring that the outstanding liabilities referred to PCAs are those 

that not only are within the authority of the PCA to resolve but also represent 

cases with the greatest likelihood of payment if a PCA were to handle the liability. 
224

—Taxpayer Information.—Under the administration’s proposal, PCAs would have 

access to specific information regarding an outstanding tax liability (e.g., type 

of tax, tax years affected, dates of assessment, whether the assessment is based 

on a taxpayer’s own balance due return or an IRS notice, prior payments, and 

application of prior payments) in order to answer basic, but important, questions that a taxpayer may have regarding the liability. The taxpayer information that would be provided to PCAs would be strictly limited to the information 

required for the collection of the specific tax liability at issue. PCAs would not 

receive, for instance, information regarding a taxpayer’s total or adjusted income, sources of income, delinquency history for liabilities not being handled by 

the PCA, or employer information. 

All existing restrictions imposed by section 6103 of the Code would apply to 

the PCAs, and taxpayers would have the right to assert a claim against PCA 

employees who violate those protections. 

—Contract Structure.—The administration’s proposal would involve a competitive, 

fee-for-service, performance-based, incentive contract structure. The performance evaluation would be based on a balanced scorecard that would look to 

quality of service, taxpayer satisfaction, and case resolution, in addition to collection results. 

The allocation of accounts among the PCAs participating in the program 

would be based on this performance evaluation, thereby providing a further incentive for PCAs to respect all taxpayer rights and protections. This compensation structure is modeled on the successful FMS and Department of Education 

contracts. 

—Oversight.—The administration’s proposal would involve extensive IRS oversight of the PCAs participating in the program. This IRS oversight would ensure that procedures are followed, and that any issues are identified and resolved early. 

Question. How much outstanding tax debt owed to the Federal Government is 

likely to be collected if this initiative moves forward? 

Answer. The Treasury Department has estimated net revenue will total $1.5 billion over 10 years. The gross revenue collected in the Treasury calculations is $1.9 

billion over 10 years. 

Question. The Customer Account Data Engine (CADE) is the centerpiece of the 

modernization effort. It holds the promise of moving the IRS from the tape driven 

system of the 1960’s to a modern reliable database. 

What needs to occur to make this plan a reality for the IRS? 

Answer. As you have so appropriately noted, the delivery of the CADE project is 

particularly important because—like the new online technical infrastructure that 

the IRS deployed—CADE is a core fundamental component of the modernized systems. As such, CADE is the IRS’s highest priority technology project. 

The first release of CADE is scheduled for delivery in September 2004. The IRS 

has 2 weeks remaining on the fiscal year 2004 filing season release pilot. The pilot 

has gone well. The IRS is scheduled to go into initial production operation sometime 

in July or August under a fixed price contract through initial operating capacity. 

Question. What has caused the 30-plus month delay in the delivery of Phase 1 

of this system? 

Answer. The CADE delays stemmed from infrastructure upgrades, initial poor 

software quality during the startup of systems integration testing combined with 

the failure to understand the complexity of balance and control, and the resolution 

of operational and performance issues that occurred during Phase 3 of the Release 

1.0 pilot. 

Question. Why has the estimated cost gone from $61,145,000 to $97,905,000? 

When can the committee expect a delivery of Phase 1? What is the IRS doing to 

control the massive cost increases to this system? 

Answer. CADE Cost Overrun (from the original estimate of $61,145,000 to 

$97,905,000).—The description below explains the costs that GAO reported in their 

Audit of the fiscal year 2004 Expenditure Plan: 

Design Work from September 2000 to July 2001

$15.3 million—initial estimate in March 2000 Expenditure Plan. 

$19.3 million—actual cost. 

$4.0 million—variance due to design period being extended by 3 months to add 

detail in some areas and to bridge to Development. 

Development Work from July 2001 to March 2004

$40.0 million—initial estimate in March 2001 Expenditure Plan. 

$53.6 million—actual cost. 
225

$13.6 million—$9.3 million of the variance was due to a 2-month extension for a 

Pilot using real tax returns (cost of $5.3 million) and the addition of capacity at the 

Martinsburg Computing Center to support Development and Testing (cost of $4.0 

million). The remaining variance of $4.3 million was due to incurring the cost impact of delays (see first two items outlined below). 

Cost Impact of 2-Year Delay in Delivering CADE 

$2.4 million—hiring of non-PRIME contractors to support IRS testing. 

$1.9 million—establishing a CADE Program Office (work to build an organizational framework to support multiple CADE releases simultaneously). 

$18.0 million—cost to apply tax law and other changes for 2003 and 2004 filing 

season. 

These costs do not reflect any changes since the GAO audit of the fiscal year 2004 

Expenditure Plan. 

Question. Please provide the committee with an update of the review. 

Answer. The IRS used the results from independent studies commissioned during 

the summer of 2003 to create a BSM Challenges Plan comprised of 40 some action 

items. Given the strategic importance of the plan, the Commissioner appointed an 

IRS business unit deputy commissioner to oversee the implementation of the plan. 

As a first step, the BSM project team developed a crosswalk to ensure that the 

BSM Challenges Plan’s definition of the issues addressed and/or satisfied all of the 

recommendations from the four commissioned studies as well as the recommendations submitted by the IRS Oversight Board, and the Software Engineering Institute 

(SEI) study of CADE. 

While the deputy commissioner made significant progress in implementing the 

plan, the full closure of all actions items was unrealistic within the elapsed timeframe of the 6-month appointment. Concurrently, the CIO created a new direct report position for modernization management and assigned responsibility for implementing the plan to the individual recently hired into this newly created position. 

Under the leadership of the deputy commissioner, the IRS and CSC team brought 

closure to several key actions items, including: clarifying the roles of committees as 

advisory, identifying ‘‘blockers’’ on contracting issues, appointing business leaders to 

each project, establishing a risk-adjusted schedule and new baseline for CADE Releases 1.0 and 1.1, and increasing the frequency of CADE reviews with the business 

owner to twice monthly. The majority of the action items are still works-in-progress, 

some of which will take time to fully complete. Others will span the life of the BSM 

program. 

For example, strengthening systems engineering capabilities by hiring external 

candidates will take time since it involves conducting the searches, interviewing the 

candidates, and negotiating the new hires to come on board. The IRS and CSC developed ground rules for escalating issues, but they will need to be continually enforced throughout the life of the program. The IRS rewrote the charters of the governing committees to reflect their advisory role and clearly articulated their responsibilities, however, it will probably take a year to truly evaluate and measure their 

effectiveness. 

As stated, the IRS has made progress toward closing all the action items, but it 

has much more work to do in critical areas. For example, the IRS needs to religiously follow the proper methodologies and hold people accountable if they do not. 

The IRS must start ‘‘doing things right’’ as opposed to ‘‘doing things fast’’ such as 

exiting milestones prematurely. An ongoing challenge will be balancing the scope 

and pace of projects consistent with capacity, ensuring that the right people are in 

place before launching a project, and setting realistic delivery schedules and cost estimates. The IRS is committed to staying-the-course and delivering on its promise 

to modernize America’s tax systems, but it is important for everyone to acknowledge 

this is a monumental effort. 

The magnitude and evolution of the BSM program dictates that the IRS will always be going through an evolution of assessment and improvements. In that regard, the BSM Challenges Plan is still evolving and the IRS is using certain action 

items to continuously improve the program. 

Question. What changes need to be implemented to get this mission critical system back on track? 

Answer. As a result of missing CADE and IFS key deliverables last summer, the 

Commissioner and CSC commissioned external assessments studies from outside experts. The studies produced no major surprises; but the IRS now understands more 

about the issues. All of the assessments confirmed that the IRS modernization effort 

is a massive, highly complex, high-risk program that is confronting a number of critical management and technological challenges. These studies also made it clear that 
226

the IRS should not turn back, but rather make a series of changes to strengthen 

the BSM program. 

While all of these studies assessed different components of the modernization program, three major recommendations emerged including: 

—Scaling back the modernization portfolio to better align with IRS and CSC’s capacities; 

—Engaging IRS business units to drive the projects with a business focus; and 

—Improving contractor performance on cost, scheduling, and functionality. 

The assessments also raised a number of other key improvement opportunities, 

including: 

—Adding outside expertise to help manage the program and to complement IRS 

skills; 

—Strengthening our human resources capacity management; 

—Adhering to methodologies in areas such as configuration management, cost and 

schedule estimating, and contract management; 

—Reducing the burden from oversight organizations; 

—Simplifying the budget process; and 

—Initiating the testing of the business rules engine on CADE. 

The Software Engineering Institute (SEI) will periodically review the CADE program, and a third party (MITRE) will regularly assess the overall health of the modernization program reporting directly to the CIO. 

The IRS committed to scaling back the modernization efforts to better match its 

management capacity as well as the PRIME’s, and to focus on the most critical 

projects and initiatives. The IRS reduced the size and scope of the modernization 

program considerably, and has initially developed a human resource capacity planning model to help ensure the right people, with the right skills, are dedicated for 

the right amount of time to each IT project it undertakes. 

The Commissioner is holding IRS senior business unit managers accountable for 

the success of modernization efforts as it relates to defining, developing, and controlling business requirements. For example, the involvement and leadership of the 

Deputy Commissioner for Wage and Investment played a key role in the successful 

delivery of Modernized e-File. 

It was evident that CSC, as the PRIME contractor, needed to significantly improve their performance. While CSC has improved their performance somewhat, 

delays and cost increases persist, as evidenced by the continual delays in delivering 

CADE, IFS, and CAP. As a result, the IRS will expand the competition for the new 

enforcement projects that it plans to start later this year and next year. The IRS 

is also moving to capped or fixed price contracts for development work to balance 

the financial risk between the Government and the contractor in modernization 

projects. 

The IRS needs a more versatile team of seasoned executives to provide long-term 

stability to the program. It is complementing the skills of experienced IRS tax executives with outside seasoned technology executives who have experience managing 

large-scale, complex IT projects. As such, the IRS is hiring two Associate Chief Information Officers to join the MITS organization, and an executive search firm is 

conducting searches for five senior executives with a wide range of diverse experience in developing and implementing large modernization systems. 

The IRS has placed an emphasis on increasing the timeliness and accuracy of 

BSM communications to ensure that key stakeholders are well informed of program 

goals and the status of projects against schedule and cost targets. 

There is much more work to do, but the IRS is committed to modernizing its archaic computer systems. While progress to-date has been decidedly mixed—the IRS 

owes it to the taxpayers to stay-the-course and put a solid foundation in place upon 

which the IRS can build for decades to come. 

Question. The committee understands that the E-Services program is expected to 

be fully operational by fiscal year 2005. Is this program still on schedule? What has 

occurred to make this project cost go from $44,045,000 to $130,281,000? Why is it 

18 months behind schedule? 

Answer. The IRS has achieved a great deal of success with the e-Services project. 

The IRS has delivered electronic services to tax practitioners, and other third parties such as banks and brokerage firms that report 1099s. The IRS deployed all Release 1.0 and Release 2.0 initial operations functionality by the end of April 2004. 

The IRS conducted additional pilot and performance testing of both releases prior 

to deployment to the broad practitioner community. The response has been extremely positive. 

In March 2004, James D. Leimbach appeared before the Ways & Means Oversight 

Subcommittee on behalf of the National Association of Enrolled Agents (NAEA) and 

said, ‘‘This new capability is truly going to revolutionize the way we conduct future 
227

business with the IRS. The ultimate beneficiary is the American taxpayer. We are 

truly amazed and thrilled beyond description at this way of doing business with the 

IRS, and we would like for you to understand why we feel as we do.’’

All e-Services Release 1.0 products are fully deployed and available over the Internet, including: 

—Registration and online address change access for third parties and IRS employees through secure user portals; 

—Preparer Tax Identification Number (PTIN) online application; 

—Interactive Taxpayer Identification Number (TIN) matching for payers and/or 

authorized agents who submit any of six information returns subject to backup 

withholding (Forms 1099-B, INT, DIV, OID, PATR, and MISC); 

—Secure Electronic Return Originator (ERO) application process; and 

—Access to e-Services registration and application processes by Modernized e-file 

(MeF) participants. 

E-Services Release 2.0 products are now in production and available for use by 

IRS staff and taxpayers, including: 

—Electronic Account Resolution (EAR); 

—Electronic TIN Bulk Matching (Bulk Requests); 

—Disclosure Authorization (DA); and 

—Infrastructure support for outbound facsimile service. 

Statistics gathered as of May 13, demonstrate that the e-services program is providing important benefits for taxpayers and tax practitioners: 

—No. of Individuals registered=24,000; 

—No. of Individuals changing address during registration=3,000; 

—No. of Interactive TIN Match requests=221,000; 

—Bulk TIN Requests=4.7 million. 

There were five main causes for the schedule delays and cost increases from 

$44,045,000 to $130,281,000. 

Budget Omission for Infrastructure Functionality/Acquisition ($8–9 million).—The 

original project budget failed to consider the integration of the e-services application 

with the modernized infrastructure or budget for the acquisition of specific hardware or software to support e-Services development and production environments. 

Extended Testing and Infrastructure Integration ($15–17 million).—The quality of 

the software that CSC and Unisys delivered to the IRS for e-Services was lower 

than anticipated and the time it took to resolve each of the errors took longer than 

anticipated. In addition, there was a series of actual integration issues between the 

application and the infrastructure that were greater in number and took longer 

than anticipated to resolve. 

Modernized e-file 1040 e-file support ($4–6 million).—In reviewing the proposed 

design for the Modernized e-file project, it was discovered that the project plan 

called for a system that would not be multifunctional. The IRS developed an alternative plan to expand e-Services functionality to provide these services for Modernized e-file in a manner that was consistent with the Enterprise Architecture, which 

describes the business and information systems and technical infrastructure that 

are both in place (Current) and planned (Target). In addition, the Enterprise Architecture defines the architectural strategies to be followed and prescribes standards 

and technologies to be used. 

IRS Initiated changes including filing season changes ($8–10 million).—Due to the 

fact that it took longer than anticipated to build the e-Services system, the IRS 

made a number of significant changes to ensure that the e-Services system was consistent with filing season requirements and current production changes. 

Extension of MS5 and a misestimate of MS5 costs ($45–48 million—increased estimates for costs through 9/30/05).—Because the e-Services project ran over cost and 

schedule estimates, the IRS deployed the project using version 8.1 Peoplesoft, CRM. 

Peoplesoft will stop maintenance of this version of the software in 2005. The IRS 

must upgrade the production system to conform to latest Peoplesoft CRM 8.8 release. Due to the complexity of the upgrade, the BSM program had to make the 

changes before turning it over to ITS for operations and maintenance. The BSM program was originally scheduled to turn the e-Services project over in May 2004. The 

program will now be maintaining and upgrading the system a year longer, until 

May 2005. 

Question. Of the ten computer modernization projects ongoing as of September 

2003, nine are currently over their original cost estimate by a total of $292,013,000. 

What needs to occur for the IRS to better monitor the escalating costs of these 

systems? 

What types of oversight does the IRS provide over the contracts for development 

and acquisition of these projects? 
228

Answer. The IRS is currently putting in place several control mechanisms for 

Contractual, Enterprise Life Cycle, Earned Value Management, Performance and 

Cost and Schedule Estimating that directly address the estimate overruns. In particular, the IRS is enacting methodologies that will eliminate future ‘‘escalating 

costs.’’

The IRS has been working jointly with MITRE and CSC (the PRIME Contractor) 

to improve cost and schedule estimating capability. The IRS is using the well-recognized Carnegie Mellon Software Engineering Institute’s (SEIs) Requisites for Reliable Estimating Processes as a guide. The requisites provide for development and 

execution of the following key cost and schedule estimating objectives: 

—Maintaining historical data; 

—Structured estimating processes; 

—Mechanisms for extrapolating estimates from successful past projects; 

—Audit trails; and 

—Ensuring integrity in dealing with dictated costs and schedules. 

Both CSC and the IRS have made significant progress towards achieving these 

key objectives. The IRS has implemented procedures for validating contractors’ estimating systems and for reviewing cost and schedule estimates. The procedures provide guidance for evaluating reliability of documentation supporting individual estimates and for tracking compliance with sound estimating practices. Furthermore, 

the procedures also address professional development of personnel with the right 

skill set for developing and evaluating cost and schedule estimates. CSC has established a historical database, calibrated estimating models and developed detailed requirements for documenting and supporting bases of estimates along with related 

guidance and directives. Work is also in progress for continuing refinement and improvement in each of these elements. 

In addition, joint training is being conducted for IRS, CSC and MITRE personnel 

as an integral part of the overall plan to ensure competent deployment of improved 

processes and procedures. The IRS, with MITRE’s assistance, recently completed a 

review of CSC’s estimating system. The IRS is finalizing the results and will issue 

them in a report in the latter part of June. In general, there have been improvements. The report will include a time phased corrective action plan for addressing 

deficiencies. To ensure the tools, guidance, processes and procedures are part of a 

mature repeatable process, a concerted effort is underway to fully validate all aspects of the processes and procedures prior to official roll-out within the IRS. This 

pilot program is intended to verify the soundness of the processes and procedures 

and provide lessons learned, before full implementation is effected. 

Every effort is being made to hire qualified staff and fully implement improved 

tools, guidance, processes and procedures as soon as possible. However, this is taking more time than the IRS would like. This is a pervasive problem on programs 

of the size and complexity of the modernization initiative. Nonetheless, the IRS believes that there will be evidence of increased accuracy by the end of fiscal year 

2004 and continued improvements over time. 

Finally, all of these efforts are part of a highly visible set of plans geared to identifying, tracking, reporting, and reviewing the critical cost and schedule estimating 

commitments with IRS Executive Management and GAO/TIGTA. 

The following initiatives have been implemented (or are pending) to improve performance in the other areas: 

—Application of Performance-Based Contracting (PBC) Techniques.—Applying 

performance-based contracting techniques and leveraging lessons learned enhances the IRS’s ability to proactively establish expectations for and manage 

the PRIME contractor’s performance. 

—Determination of Task Order for Acquiring Modernization Systems.—To further 

improve modernization controls and capabilities, the IRS has established and is 

implementing a process for determining the type of task order to be awarded 

when acquiring modernization systems. The IRS issued a policy stating that 

contracts and task orders for the BSM projects in Milestones 4 and 5 (development and deployment) will be fixed price, as appropriate. This type of task 

order will shift most or all risks from the IRS to the PRIME. 

—Implementation of Fixed Price Contracting Policy.—The IRS’s Contracting organization and the Enterprise Life Cycle program are developing a joint approach 

to implement the fixed price contracting policy. 

—Identification of Issues and Tracking Progress.—The IRS is making use of 

Earned Value Management, Program Performance Measurements, and a sophisticated electronic analysis and reporting mechanism (the Dashboard) to track 

progress, identify variances early, and facilitate escalation of issues early in the 

life cycle. 
229

—Development of Metrics.—Finally, the Program Performance Management Office 

(PPMO) is developing efficiency and outcome metrics to: 

—decrease contracted program variances, 

—decrease requirements volatility, and, 

—increase contracted requirements delivery. 

These metrics support program management effectiveness, and provide the ability 

to assess achievement of program performance goals relative to cost, schedule, requirements scope, and requirements delivery. 

FUEL TAX EVASION

Question. The Federal Highway Administration (FHWA) Motor Fuel Tax Evasion 

Project supports Federal and State efforts to enhance motor fuel tax enforcement. 

The program was established by the Intermodal Surface Transportation Efficiency 

Act of 1991 (Public Law 102–240) and continued under the Transportation Equity 

Act for the 21st Century (TEA–21) (Public Law 105–178). 

Since 1998, the Department of Transportation has provided the Internal Revenue 

Service (IRS) $31 million from Highway Trust Fund revenues to enhance motor fuel 

tax enforcement, primarily by developing and operating an automated excise fuel 

tax reporting system, the Excise Fuel Information Reporting System (ExFIRS). The 

administration’s proposed Safe, Accountable, Flexible and Efficient Transportation 

Equity Act (SAFETEA) of 2003 includes $163 million for the IRS through fiscal year 

2009, and the Surface Transportation Authorization bill as passed by the Senate 

proposes about $300 million. 

The IRS has been struggling to modernize its automated systems. For example, 

the committee has been told that Commissioner Everson excluded one contractor 

from a project to update the IRS’s tax enforcement systems after learning the contractor would miss an April deadline for putting in a new general ledger accounting 

system. 

How is ExFIRS currently being used to enhance motor fuel tax enforcement and 

what are its capabilities? Is the system fully operational and functioning as envisioned? If not, what is needed to complete the systems development effort? 

Answer. ExFIRS is an umbrella system made up of several subsystems/modules 

that support the collection of motor fuel industry information, support automated 

analysis of this information, and help identify areas with the highest risk for nonpayment of excise tax liabilities (therefore offering higher potential for return on investigative and enforcement activities). The most important of the subsystems is the 

Excise Summary Terminal Activity Reporting System (ExSTARS), which tracks all 

petroleum movements, in and out, through approved terminals, and captures information that the IRS shares with State taxing agencies. 

ExSTARS is the information reporting system that was designed similar to the 

IRS 1099 matching system that matches information received from employers, financial institutions and other businesses with information reported by taxpayers. 

It enables the IRS to track all reported fuel transactions that occur within the fuel 

industry’s bulk shipping and storage system. It provides tracking capabilities of fuel 

from the pipeline/barge delivery system to the point of taxation for the Federal Excise Tax at the terminal. This information is then matched by the IRS to fuel sales 

transactions reported by taxpayers and to verify their tax liabilities reported on the 

quarterly Forms 720. 

ExSTARS was operational on April 1, 2001. However, the large volume of paper 

returns filed each month has hampered the maximum use and benefit of the system. 

ExSTARS requires information reporting from over 1,400 terminals registered to 

transact fuel sales in this country, as well as the pipelines and barge carriers that 

transport the fuel from the refineries to the terminals. The IRS receives information 

reports on 10 to 14 million fuel transactions monthly. Approximately 70 percent of 

these are filed electronically. Working with the remaining 30 percent filed on paper 

documents is both impractical and cost prohibitive. Senate Bill S. 1072, the Safe, 

Accountable, Flexible, and Efficient Transportation Equity Act of 2004 (SAFETEA), 

would require electronic filing of any return containing more then 25 transactions, 

as proposed in the administration’s SAFETEA bill. This legislation, if passed, will 

greatly enhance the tracking capabilities of ExSTARS. 

ExFIRS includes a Data Warehouse module that interfaces with ExSTARS. This 

module uses the information reported in ExSTARS, on the distribution of fuel, to 

match against the reported amounts on taxpayer’s 720 Excise Tax Returns. ExFIRS 

also includes legacy systems that the IRS used to track and monitor compliance in 

the motor fuel area. The Excise Tax Registration Authentication System (ExTRAS) 

contains the monitoring system for the registration program of taxpayers allowed 

to carry on tax free transactions within the fuel distribution system. The Excise 
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Fuel On-line Network (ExFON) is the management information system used to 

monitor the Dyed Fuel Program. The IRS included these systems in the ExFIRS 

Program because they are an integral part of the motor fuel tax program and must 

be included in the IRS’s tracking of activities that impact compliance in this area. 

The funding for the update and enhancement of these systems came from IRS operating funds. These systems have been operational for several years and the updated 

versions are in place and operating within the ExFIRS Program. The Excise Tax 

Agent Work Center (ExTAC) is an automated work center that will enable IRS Excise Tax Agents to receive tax returns in electronic format and to conduct examinations in an automated environment. ExTAC is a part of ExFIRS and will receive 

information from the system to assist in the examination of returns. ExTAC was 

funded by the IRS and is currently a working prototype version. The system will 

be in full production and used by agents by the end of the first quarter of fiscal 

year 2005. 

Question. Given the problems IRS has experienced fixing its other automated systems, what reasonable assurance can you provide this committee that taxpayers are 

getting a good return on their investment in ExFIRS and that the project is being 

properly managed? 

Answer. In 1998, Congress passed the Transportation Equity Act for the 21st Century, requiring the IRS to develop a fuel tracking system. This act required the IRS 

to use an outside contractor for the development and maintenance of the system. 

The IRS has met this requirement, and is using Software Engineering Institute 

(SEI) CMMI Level 2 development processes to manage the development efforts of 

the contractor and subcontractor personnel in order to ensure a continuous, uninterrupted, integrated approach to the development, installation and implementation of 

the ExFIRS subsystems. 

As stated above, the ExSTARS module of ExFIRS was operational April 1, 2001. 

The design and development of this system was a joint effort between the IRS, industry and the States. The IRS is using the system, but the ability to date to maximize the effectiveness has been limited by two factors. 

Due to the high volume of paper returns that contain thousands of individual 

transactions, the IRS only captures summary information from paper returns. This 

limits the IRS’s ability to meet the goal of matching ExSTARS information to filed 

Excise Tax returns. 

The filing requirements for ExSTARS required a significant investment for the 

fuel industry and at the time of ExSTARS becoming operational, some companies 

were not fully prepared to meet all of the filing requirements. Since April 1, 2001, 

the IRS has worked closely with industry filers to ensure accurate and timely filing 

of the information returns required for the operation of ExSTARS. The IRS formed 

a Data Perfection Team composed of IRS personnel along with outside contractors 

to work with and assist individual companies meet their filing requirements. Although the IRS has made great progress this area, some companies are still experiencing problems. The IRS has made a decision to continue to work in a cooperative 

manner with all companies that demonstrate a desire to address their problems and 

come into compliance with the ExSTARS filing requirements. 

The IRS is using the system today. It has the ability to track the movement of 

fuel in all States—but within the limitations of the problems outlined above. If the 

issue of paper returns is addressed, the IRS will be able to match individual filers 

to the ExSTARS database. This will enable the IRS to better determine where to 

allocate its enforcement resources to combat fuel tax non-compliance. This same information will allow States that have the same tax point as the Federal Excise Tax 

to ‘‘piggyback’’ on this data to enhance their own compliance efforts. 

On the question of the return on investment to the American taxpayers, one needs 

to look at the effectiveness of information reporting for compliance with income 

taxes. Matching information received from employers, financial institutions, and 

other businesses with information reported by taxpayers has long been recognized 

as one of the most powerful tools that the Internal Revenue Service has used to ensure income tax compliance. In fact, third parties report approximately 80 percent 

of the personal income received by taxpayers. Through its document matching programs, the Internal Revenue Service is able to use this data as an effective compliance tool. The ExFIRS Program will deliver the same effectiveness to the Excise 

Fuel Tax arena. The information gathered by the ExFIRS Program will be shared 

with all State motor fuel taxing agencies and will lead to increased compliance for 

the States. The States will directly benefit from the increased revenues that will be 

generated by a higher level of compliance in both the Federal and State areas. 

Question. How were systems requirements determined and were other Federal 

and State law enforcement agencies involved in defining the requirements? 
231

Answer. The design, development, and implementation of ExSTARS is a result of 

a working collaboration between the Internal Revenue Service, Contractors, Federal 

Highway Administration, State tax administrators, and industry stakeholders over 

more than a 5-year time period. A key goal in the development process was to create 

a system that would benefit State revenue agencies as well as the IRS. The system 

uses the Uniform Reporting Standards developed by the States to ensure all data 

is compatible with State systems. The Excise Tax On-line Exchange (ExTOLE) module was developed specifically for use by the States. ExTOLE allows States to exchange data that relates to motor fuel tax issues. 

Question. What is the total cost of ExFIRS to date? What is the cost, funding, and 

schedule status of any development effort still needed for the system? What is the 

annual cost to operate and maintain the system? 

Answer. The IRS and FhWA have provided funding for ExFIRS. The IRS funding 

is used to cover the incorporation of legacy system into ExFIRS. The two charts 

below show the cost to date:
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FHWA ExFIRS EXPENDITURES 

Cost Categories Fiscal Year 1999 Fiscal Year 2000 Fiscal Year 2001 Fiscal Year 2002 Fiscal Year 2003 Totals 

Initial Distribution from FHWA .................................................................................................................. $9,430,000 $7,923,000 $4,479,000 $4,609,000 $4,739,000 $31,180,000 Budget Reduction from FHWA ................................................................................................................... (180,000) ........................ (11,000) ........................ (32,500) (223,500) Total Available for Project ......................................................................................................................... 9,250,000 7,923,000 4,468,000 4,609,000 4,706,500 30,956,500 Contractors ................................................................................................................................................ 6,151,747 4,237,216 3,913,663 3,938,222 2,922,850 21,163,698 Labor .......................................................................................................................................................... 517,849 943,910 .......................... 114,489 .......................... 1,593,948 Training ..................................................................................................................................................... 20,615 33,270 85,320 112,165 96,653 348,023 Travel ......................................................................................................................................................... 521,052 968,000 .......................... 165,000 287,610 1,941,662 Background Investigations ........................................................................................................................ .......................... 32,175 20,000 4,000 5,425 61,600 Hardware ................................................................................................................................................... 1,871,037 772,693 89,015 108,315 271,358 3,112,418 Software ..................................................................................................................................................... .......................... 769,676 146,079 13,819 918,060 1,847,634 Maintenance .............................................................................................................................................. .......................... 2,000 28,140 2,990 54,544 87,674 Criminal Investigation Division ................................................................................................................. 150,000 150,000 150,000 150,000 150,000 750,000 Telecom ...................................................................................................................................................... .......................... 14,060 35,783 ........................ .......................... 49,843

Total Spent on Project ................................................................................................................. 9,232,300 7,923,000 4,468,000 4,609,000 4,706,500 30,956,500

IRS ExFIRS EXPENDITURES 

Cost Categories Fiscal Year 1999 Fiscal Year 2000 Fiscal Year 2001 Fiscal Year 2002 Fiscal Year 2003 Totals 

Initial Request from IRS ......................................................................................................................... $2,510,000 $2,101,000 $3,758,000 $5,204,000 $9,106,000 $22,679,000 Budget Reduction from IRS .................................................................................................................... (92,338) ........................ (1,037,469) (3,406,000) (7,220,000) (11,755,807) Total Available for Project ....................................................................................................................... 2,417,662 2,101,000 2,720,531 1,798,000 1,886,000 10,923,193 Contractors .............................................................................................................................................. 1,173,062 2,077,039 2,720,531 1,319,000 1,886,000 9,175,632 Labor ........................................................................................................................................................ .......................... ........................ .......................... .......................... .......................... ..........................Training ................................................................................................................................................... .......................... ........................ .......................... .......................... .......................... ..........................Travel ....................................................................................................................................................... .......................... ........................ .......................... .......................... .......................... ..........................Background Investigations ...................................................................................................................... .......................... ........................ .......................... .......................... .......................... ..........................Hardware ................................................................................................................................................. 967,462 8,000 .......................... 62,000 .......................... 1,037,462 Software ................................................................................................................................................... 149,998 15,961 .......................... .......................... .......................... 165,959 Maintenance ............................................................................................................................................ 127,140 ........................ .......................... 417,000 .......................... 544,140 Criminal Investigation Division ............................................................................................................... .......................... ........................ .......................... .......................... .......................... ..........................Telecom .................................................................................................................................................... .......................... ........................ .......................... .......................... .......................... ..........................

Total Spent on Project ............................................................................................................... 2,417,662 2,101,000 2,720,531 1,798,000 1,886,000 10,923,193
233

In addition, here are spreadsheets detailing future development, maintenance and 

operating cost through fiscal year 2006. Funding is provided each year to assist the 

IRS CI in their efforts on motor fuel issues.

ExFIRS SUPPORT CONTRACTOR COST ESTIMATES BY FISCAL YEAR 

[In thousands of dollars] 

ExFIRS SW Develop/Enhance/Maint Via TIPSS Type Contract 

Fiscal Year 

2004 Oct 

2003–Sep 2004

Fiscal Year 

2005 Oct 

2004–Sep 2005

Fiscal Year 

2006 Oct 

2005–Sep 2006

ExFON Dev/Maint/Enhancement (includes Legacy Maint, New ExFON Dev In 

Web Envir and Data Migration) .................................................................. 700.8 790.4 160.0

ExSTARS Dev/Maint/Enhancement (includes Maint of ExSTARS 1 and Dev/

Maint of ExSTARS 2) ................................................................................... 2,945.0 1,594.2 400.8

ExTRAS Dev/Maint/Enhancement (includes legacy maint and development 

in Web environment) ................................................................................... 80.0 372.8 160.0

BTRIS Dev/Maint/Enhancement (includes maint of current BTRIS and development of the Analyst Module) .............................................................. 424.0 1,118.2 225.0

ExCIDS Dev/Maint/Enhancement (includes devel of case mgt and workflow 

modules) ...................................................................................................... 190.6 1,182.7 120.0

ExTAC Dev/Maint/Enhancement (includes maint of current system, development of GM module, and migration to Web environment) ........................ 770.8 691.2 320.0

ExTOLE Maint/Enhancement (includes maint of current system and development of enhancements called out in SOW) ............................................ 80.0 160.0 120.0

ExMIS Dev/Maint/Enhancement (includes DW and ExCIS maint and analysis/reporting enhancements) ..................................................................... 546.0 597.1 120.0

Common Costs Associated with all Subsystems (includes Prog Mgt, Sys 

Engr, CM, QA, Testing, SEI/CMM, Security, Subcontract Mgt, travel expenses, etc.) ................................................................................................ 2,466.2 2,476.1 1,866.4

Infrastructure Costs—See Infrastructure sheet (includes SW/HW Upgrades/

Migrations, Tier 2 and Modernization Requirements, COTS and SW Licenses/Maintenance, Technology Advancements, Service Center Support, 

etc.) ............................................................................................................. 3,779.0 3,789.0 3,568.0

Subtotal .............................................................................................. 11,982.4 12,771.7 7,060.2

FhWA Funding at Current Rate ....................................................................... 4,200.0 4,200.0 4,200.0 

Projected Need ................................................................................................. 7,782.4 8,571.7 2,860.2 

IRS Funding Allotted ........................................................................................ 4,959.0 4,250.0 3,453.0

Funding Shortfall ............................................................................................. 2,823.4 4,321.7 ¥592.8

ExFIRS INFRASTRUCTURE COST ESTIMATES BY FISCAL YEAR 

[In thousands of dollars] 

ExFIRS Infrastructure Estimates 

Fiscal Year 

2004 Oct 2003–Sep 2004

Fiscal Year 

2005 Oct 2004–Sep 2005

Fiscal Year 

2006 Oct 2005–Sep 2006

Annual COTS Licenses, Yearly Maintenance and New User Licenses (Oracle, 

Informatica, Paper Free, Mecator, Business Objects, MapInfo, FileNet, 

Ventica) ....................................................................................................... 656.0 637.0 668.0

ExFIRS SW Migrations for New RDBMS/OS/COTS (Oracle/Sun/NT). Major migration every other year (even years) ......................................................... 924.0 236.0 970.0

Tier 2 Requirements (New CM tool, additional security, move to Tier 2 infrastructure and web page compliance—508J) ......................................... 231.0 243.0 100.0

ExFIRS Harware Migrations (production, development, and test servers/user 

desktops, laptops and handheld devices/gateway firewalls and routers/

technology upgrades). Major upgrade every other year (odd years) .......... 236.0 892.0 248.0

ExFIRS Service Center Expenses (SA/DBA personnel and training covered by 

SLA—9.9 staff years) ................................................................................. 982.0 1,031.0 1,082.0

Other ExFIRS Expenses (SW upgrades for technolgy advancements, new 

user functionality and IRS modernization initiatives) ................................ 750.0 750.0 500.0

Subtotal .............................................................................................. 3,779.0 3,789.0 3,568.0
234

Question. What benefits does FHWA derive from the system? Does IRS believe 

FHWA receives satisfactory return on investment from the system? Answer. Tax receipts deposited in the Highway Trust Fund Account totaled $35.2 billion in fiscal year 2003, of which $30.2 billion went to the Highway Account and 

$5 billion to the Mass Transit Account. As described above, the ExFIRS Program 

will enhance fuel tax compliance directly impacting the FHWA’s mission. In addition, the FHWA will be able to use data from the system in its own planning process. Just recently the IRS met and provided summary data to FHWA to assist in 

its efforts to develop their model of State revenue sharing. 

Question. Has an independent audit or review ever been performed of the ExFIRS 

development effort? 

Answer. ExFIRS has a requirement to operate at a minimum of Maturity Level 

2 of the SEI CMM. Yearly Process Appraisal Review Methodology (PARM) review 

of the process was completed in February 23, 2004. At Technology Solutions Center 

a CMMI SEI Level 2 rating was verified by independent evaluations (external 

SCAMPI Class A) on February 27, 2004. 

Question. Fuel tax fraud creates a drain on Highway Trust Fund (HTF) revenues, which FHWA estimates costs at least $1 billion annually. Department of Transportation Secretary Mineta has called evasion of Federal motor fuel taxes ‘‘a serious 

and growing problem that requires a serious Federal response.’’ The loss of motor 

fuel taxes is also detrimental to State programs. The impact of these losses is even 

greater coming at a time when we have experienced a reduction in the growth of 

HTF revenues, while demands on highway capacity have reached unprecedented 

levels, and replacement and rehabilitation costs for aging infrastructure are rapidly 

increasing. 

Although fuel excise taxes represent less than 2 percent of total Federal tax revenues, they are a critical funding source for DOT programs. Taxes on gasoline, diesel, 

and other fuels provide about $33 billion each year, or 89 percent of the HTF revenues used to finance highway and transit projects nationwide. Increased tax collections mean increased Federal revenues for funding the Nation’s highways and transit programs. 

In July 2002, FHWA Administrator Peters testified before Congress that the administration proposed to halt fuel tax evasion through ‘‘a vigorous and more collaborative enforcement effort by State and Federal agencies’’ and a significant increase 

in funding over TEA21. The administration proposed providing $202 million for the 

Highway Use Tax Evasion Project, of which $163 million would be transferred to 

the IRS. 

What does IRS currently estimate the losses from fuel tax evasion to be and how 

was this estimate derived? 

Answer. KPMG, not the Federal Highway Administration, estimates drain on the Highway Trust Fund revenues to be the $1 billion. Although it is difficult to estimate evasion because the IRS does not know what is not being reported, the IRS 

identified and is addressing critical areas of excise tax non-compliance. These include the: 

—Continuing misuse of dyed diesel fuel; 

—Smuggling to evade payment of taxes; 

—Cocktailing (increasing the fuel volume by mixing in other products) to illegally 

reduce the effective tax rate; and 

—Diverting aviation jet fuel to highway use to illegally evade motor fuel taxes. 

The IRS continues to discover misuse of dyed diesel fuel for tax evasion purposes 

despite the numerous legislative and regulatory steps Federal and State governments have taken. The 140 fuel compliance officers (FCO) monitor 1,400 terminals, 

all fuel wholesalers, thousands of retail motor fuel outlets, and U.S. border crossings. Additionally, FCOs periodically inspect on-road vehicles on highways throughout the country. From January 1, 2003 through December 15, 2003, FCOs have assessed over 1,400 penalties totaling over $1,400,000 for misuse of dyed diesel fuels. 

A further analysis of these results indicates that 70 percent of the penalties involved the misuse of fuel by taxpayers in the construction and agriculture industries. Both of these industries are subject to broad-based tax exemptions for nonhighway use of motor fuels, thereby, presenting opportunities for abuse. 

Another critical compliance problem is smuggling of motor fuel. This involves the 

illegal introduction of fuel into the United States to evade payment of excise taxes. 

This problem may occur at border crossing points and points of entry for oceangoing vessels. More than 9 million trucks pass through the 55 border crossings between Canada and Mexico into the United States each year. 

The IRS also has found instances of fuel smuggled into the country by people 

using barges that off load from ocean-going vessels. The IRS is involved in two investigations of barges being used to smuggle fuel; however, it does not know the full 
235

extent of activities in this area. These activities are extremely hard to identify due 

to the multitude of locations and means smugglers may use. The Corps of Engineers 

has identified over 600 locations that are not terminals but are known to have the 

ability to off load fuel from barges. In addition, barges may have portable devices 

that become mobile racks, providing the ability to off load fuel at any location. 

Another compliance problem is the use of adulterated fuel through cocktailing. 

This technique increases profits by increasing the volume of diesel fuel with used 

motor oil and other distillates including pollutants, cleaning agents, and unfinished 

refinery products. This form of tax evasion is attractive for two reasons. First, the 

substances used to extend the fuel are often not regulated, so they are not recorded 

in any fuel reporting system. Second, in some cases, the substances are regulated 

as waste materials, providing an unscrupulous individual an opportunity to get paid 

to dispose of the product(s) and then blend them into gasoline and get paid again. 

This tax evasion technique results in an ongoing revenue loss. It may also be dangerous to the public when the taxable fuels are blended with hazardous waste. 

Aviation fuel is the last interchangeable product available within the legal fuel 

distribution system that is not taxed when the fuel leaves a terminal. In any given 

month, hundreds of millions of gallons of aviation fuel flow into and out of registered terminals. This exempt removal at the rack creates incentives and opportunities to divert aviation fuel to highway use. From fuel inspections, the IRS knows 

aviation fuel is being diverted. However, the IRS does not know for certain the 

amount diverted. The IRS is finding aviation fuel in small amounts blended into 

normal diesel in the propulsion tanks of trucks/tractors. Also, the IRS has found 

aviation fuel in larger quantities in retail outlets through its Below The Rack compliance efforts. The IRS has found a blend of 5 to 10 percent in most cases. 

In 2002, KPMG released a report alleging that the possible loss each year to avia- tion fuel diversion may exceed $1 billion. The results from IRS internal efforts do 

not support or disprove an estimate of that size. The IRS initiated an audit program 

to determine if it could identify significant diversion through aviation fuel distributors operating as 637 H Registrants. In most situations, the distributor had the paperwork to support a tax free/reduced tax sale of the fuel. To date, the IRS has not 

identified registrants with massive amounts of fuel for which they cannot account. 

Due to the lapse of time between the sale of the fuel and the audit, the IRS could 

not successfully track down the ultimate users of the fuel to verify that the fuel was, 

in fact, used in a proper fashion. The only way to ensure the fuel is used properly 

is to track the fuel to each end user. The diversion of 1 percent of the aviation fuel 

that leaves the terminals in the United States represents the loss of over 

$65,000,000 per year. Based on IRS’s findings in the fingerprinting test, it believes 

that a 3 percent diversion is a conservative estimate. This amount of diversion 

would cost $195,000,000 per year. 

Dyed Fuel Misuse.—Dyed Fuel used on highways.—The IRS does not have an 

exact figure that it can state as the extent of total non-compliance for the misuse 

of dyed fuel. Based on penalties asserted over the past 3 years, the IRS assesses 

a penalty on an average of 1 percent of the trucks it inspects on the highway and 

6 percent of the end user sites that it inspects. The IRS does not have data on the 

total volume of fuel involved in each of these cases; however, these results indicate 

a continuing non-compliance issue with the proper use of dyed fuel. Based on this 

experience, the IRS believes that at least 1 percent of dyed fuel sold each year is 

diverted, resulting in loss of tax of at least $50,000,000. 

Cocktailing/Illegal Blending.—The Internal Revenue Service has developed a 

‘‘fuel fingerprinting’’ technology to combat fuel tax evasion occurring ‘‘below the 

rack’’—particularly bootlegging, smuggling, and adulterated fuel through 

‘‘cocktailing’’ or blending the product. Fuel fingerprinting is a technique that examines the ‘‘chemical fingerprint’’ of samples taken from retail stations for adulteration 

or for a mismatch with samples taken from the terminal racks that normally supply 

those stations. This technology allows for the detection of untaxed kerosene intended to be used as aviation fuel, ‘‘transmix’’ taken out of pipelines, waste vegetable oils, used dry-cleaning fluids, and other chemicals that may be mixed with diesel fuel and find their way into the tanks of trucks on the road. Fuel fingerprinting 

provides a more efficient and comprehensive method to monitor compliance compared to traditional audit techniques. The IRS has conducted sampling on diesel 

fuel in several parts of the country. Results indicate approximately 8 percent of the 

diesel fuel tested has some form of adulterant. The amount of adulterant found in 

retail outlets has been in the range of 2 percent–25 percent with an average of 8.2 

percent. Using these results, the IRS estimates that there is a minimum of 

$50,000,000 each year in tax loss due to illegal blending of diesel fuel. 

Due to safety issues with handling gasoline, the IRS has not conducted fuel 

fingerprinting tests for gasoline. The IRS has anecdotal information from informants 
236

that illegal blending is much more common for gasoline then diesel. The reason 

given is the huge demand for gasoline and the ease to hide the adulterants among 

the large volume of fuel moving through a location. Using estimates for diesel fuel 

and comparing the sale of gasoline to diesel (3 to 1), the IRS has a minimum estimate of $150,000,000 per year for illegal gasoline blending. 

Although the IRS has evidence of fuel being smuggled into the country, it does 

not have a reasonable basis for an estimate at this time. As mentioned in the discussion of the various schemes used for motor fuel tax non-compliance, the IRS does 

not have exact estimates of the potential revenue losses. All of these schemes are 

outside the law and the information is based on information the IRS has gathered 

through examinations and fuel testing. The IRS believes this is a conservative estimate and, in fact, does not include any estimation for smuggling in these numbers. 

In summary, estimates for the overall loss of revenue are as follows:

Amount 

Misuse of Aviation Fuel ....................................................................................................................................... $195,000,000

Misuse of Dyed Fuel ............................................................................................................................................. 50,000,000

Cocktailing of Diesel ............................................................................................................................................ 50,000,000

Cocktailing of Gasoline ........................................................................................................................................ 150,000,000

Overall Estimate ..................................................................................................................................... 445,000,000

Question. How is IRS working with other Federal agencies and States to leverage 

enforcement resources? Since 2000, how many cases are being jointly investigated 

with other Federal and State law enforcement agencies? 

Answer. The IRS has a long history of working fuel cases with its State counterparts and, when appropriate, with other Federal agencies. With current disclosure 

provisions it is difficult to jointly investigate motor fuel cases with other Federal 

agencies. In the past, the IRS has successfully worked with other Federal agencies 

under the umbrella of the grand jury. Working with State counterparts is most effective when the State has a similar point of taxation, that being at the terminal 

rack. 

The IRS does not have a measurement process for determining how many cases 

have been worked with State or other Federal agencies. These situations have been 

on a case-by-case basis with the documentation in the case file. 

Question. Who is responsible for coordinating the overall Federal and State efforts 

for pursuing all fuel tax evasion-related offenses? 

Answer. The Internal Revenue Service is responsible for Federal efforts to pursue 

fuel tax evasion. It works in a collaborative fashion with State agencies and other 

Federal agencies. In these efforts, the IRS does not direct the resources of the other 

agencies; however, it does share information that it can properly share under the 

existing disclosure provisions. As stated earlier, the ability to share information 

with these partners must conform with the provisions of IRC 6103 for disclosure of 

taxpayer information. 

Question. What is the total Federal ‘‘level of effort’’ in terms of staff and resources, 

being directed at these crimes? 

Answer. The IRS has several programs/activities that support motor fuel tax compliance and other taxes that support the Highway Trust Fund. The Small Business/

Self Employed (SB/SE) Division has approximately 260 revenue agents who are excise tax specialists and approximately 140 fuel compliance officers (FCOS). Historically, IRS’s revenue agents spend 40–50 percent of their direct examination time on 

the taxes that support the Highway Trust Fund. The FCOs spend 100 percent of 

their time enforcing the dyed fuel laws and detecting illegally blended fuel through 

its below the rack (BTR) efforts. In addition to these employees, the IRS has approximately 50 tax examiners that audit claims for excise tax refunds, the majority 

being for motor fuel taxes. Motor fuel excise tax compliance is a priority for Criminal Investigation (CI) and included in its fraud program along with bankruptcy, insurance, healthcare, and other financial frauds. CI resources are applied to this program area based on the degree of criminal activity identified. 

Question. What is the IRS’s budget request for fuel tax enforcement activities for 

fiscal year 2005? Please compare to funding allocated to this area of enforcement 

for the past 5 fiscal years. Does IRS have any plans to increase the number of resources devoted to this area? Should funding for this project increase? 

Answer.
237

COSTS FOR EXCISE AGENTS 1

FTE Salaries Benefits Total 

Fiscal year 2000 ........................................................................... 271 $59,636 $18,832 $21,264,828 

Fiscal year 2001 ........................................................................... 267 61,249 19,342 21,517,797 

Fiscal year 2002 ........................................................................... 285 63,451 20,037 23,794,080 

Fiscal year 2003 ........................................................................... 282 65,421 20,659 24,274,560 

Fiscal year 2004 ........................................................................... 252 68,103 21,506 22,581,468 

Fiscal year 2005 2 ......................................................................... 240 69,465 21,936 21,936,240

1 Based on GS–13 Step 5 RUS. 

2 Projected. 

The above chart reflects the total number of Excise Agents that worked all Excise 

returns. The IRS is currently evaluating the staffing levels for fiscal year 2005 but 

no decisions have been made to date. In its SAFETEA legislation, the administration proposed $54.5 million for highway use tax evasion projects in fiscal year 2005. 

This funding would enable the IRS to increase resources applied to motor fuel tax 

compliance. As ExFIRS becomes a more viable system, the IRS anticipates having 

improved data to determine the appropriate level of future staffing. 

Question. What is IRS’s current fuel tax evasion investigative caseload? How 

many staff does IRS devote to this area? Does the IRS need to devote additional 

revenue agents or criminal investigators to fuel tax evasion fraud? Why or why not? 

Answer. Criminal Investigation currently has fourteen motor fuel cases under investigation. In fiscal year 2003 the IRS devoted nine special agent FTE and three 

non-special agent FTE to excise tax cases. Criminal Investigation does not anticipate a significant increase in resources devoted to motor fuel excise tax evasion 

cases because the legislative changes enacted over the past decade have significantly curtailed opportunities for abuse that previously existed, but CI will commit 

additional resources if local or regional compliance problems arise. 

Question. How does IRS measure the success or failure of its fuel tax evasion efforts? What indictments, recoveries, and convictions has IRS attained as a result of 

their fuel tax evasion efforts? What successes or failures have the States and other 

Federal agencies had in this area? 

Answer. Criminal Investigation has no formal measures to gauge the success of 

its excise tax program. Ultimately, it is the impact of successful prosecutions that 

ultimately determine success or failure. During the period fiscal year 1993 through 

fiscal year 2003, the IRS prosecuted 364 people for participating in schemes to 

evade excise taxes. In aggregate, these prosecutions involved over $500,000,000 in 

tax revenue and involved many prominent members of organized crime. CI reported 

the magnitude of this effort in the excise tax case summaries contained in their annual reports from fiscal year 1993 through fiscal year 2001. These summaries chronicle many prominent cases and the history of motor fuel enforcement efforts over 

the last decade. After fiscal year 1997, motor fuel tax evasion case initiations began 

to decline. Subsequent schemes lacked the complexity and scope previously seen. 

This decline is attributable to the following factors: 

—The cooperative efforts of Federal and State revenue and regulatory agencies; 

—Support from the motor fuel distribution industry and professional associations; 

—Effective criminal prosecutions; 

—Development of improved auditing and compliance tools (particularly fuel tracking systems, fuel dyeing and the on road inspection programs; and, 

—Passage of fundamental legislative changes that reduced the opportunities for 

evasion. 

Question. Does the IRS have a plan for achieving a more vigorous and collaborative Federal and State effort for pursuing fuel tax evasion? If so, please describe 

the plan. Does IRS see any barriers to expanding current efforts to collaborate with 

other agencies on fuel tax fraud-related investigations? 

Answer. The IRS is continuing to work closely with other Federal and State agencies that enforce motor fuel laws. It also works with State environmental agencies 

when notified of misuse of hazardous materials in illegal cocktailing and blending. 

The IRS is participating with nine regional task force groups as part of the joint 

project with FHWA. IRS staff meets periodically with State counterparts to share 

information and conduct joint investigations. The IRS is involved in several ongoing 

cases with multiple States and agency. 

With the expansion of the ExSTARS reporting, several of the holes will be 

plugged in tracking motor fuel products. With the enhanced reporting, the States 

and the IRS will be able to easier identify fuel diversions. The principal roadblock 
238

to collaborating with other Non-revenue State and Federal agencies is the disclosure 

restrictions. 

Question. How do fuel tax evasion-related crimes relate to homeland security? 

How is IRS working with the U.S. Customs and Border Protection agency to combat 

this problem? 

Answer. Motor fuel product is a very volatile liquid and in the hands of the wrong 

individuals could have disastrous results. Criminal Investigation is a member of the 

FBI’s Joint Terrorism Task Forces. These task forces are aware fuel tanker trucks 

could be utilized by terrorists to perpetrate a terrorist attack. Since September 11, 

2001, all allegations involving fuel tanker trucks have been vigorously investigated, 

as have allegations that persons potentially affiliated with terrorist groups may be 

acquiring licenses to operate fuel tankers or transport hazardous materials. 

The IRS believes the ExFIRS/ExSTARS programs have the capability to handle 

enhanced tracking of fuel systems and it supports the legislation that would track 

vessels both for security and tax purposes. The IRS has also developed an acoustical 

device for identifying product that is being transported to ensure that the actual 

product being shipped matches the shipping paperwork. 

BANK SECRECY ACT ENFORCEMENT

Question. Given the limited resources in the IRS budget for enforcement and compliance, what standards does the IRS use to select cases to review for Bank Secrecy 

Act (BSA) compliance? 

Answer. The Internal Revenue Manual (IRM) 4.26.3.2.4, Selection for Assignment 

provides specific guidelines to the Anti-Money Laundering (AML) coordinators about 

case selection. It provides: 

—The AML coordinator should select entities from the nonbank financial institution (NBFI) database or the Form 8300 inventory, using risk-based analysis to 

select those entities with the highest potential for noncompliance for compliance 

examinations or reviews, such as: 

—Entities with a high volume of cash transactions or abnormal cash activity; 

—Entities in local geographic areas with high potential in money laundering; 

—Entities which have a previous history of noncompliance; and 

—Entities which have been cited for poor or inadequate recordkeeping. 

—The AML coordinator should consider available resources as well as balanced 

coverage (geographic area and industry) when selecting NBFIs or Non-financial 

trade or Businesses (NFTB) for compliance examinations or reviews. 

—Input from other operating divisions (e.g. TE/GE) can assist the coordinator in 

assessing risk. 

—Prior to opening the exam or review the names of selected entities are to be 

furnished to Criminal Investigation (CI) for clearance. 

The IRS and the Financial Crimes Enforcement Network (FinCEN) jointly establish the priorities for types of NBFIs to be examined, and the IRS provides these 

priorities to its AML coordinators in an annual program letter. In addition, as part 

of the efforts to improve the effectiveness of the AML program, the IRS provided 

training for its AML coordinators in March 2003 on methods to apply against the 

Currency Banking and Retrieval System (CBRS) to identify cases. Since that time, 

CBRS analysis has been provided to the coordinators on a regular basis to assist 

them in the identification of cases. To further ensure consistency in case selection, 

the IRS plans to centralize the case identification process by October 2004. The IRS 

is also working with its SBSE Research to enhance the case selection criteria. 

Question. Are the standards for determining BSA cases for review uniform in 

every office? Please provide a copy of those uniform standards. 

Answer. The standards for selecting cases for review are detailed in the response 

to the question above. During the AML program reviews conducted by the headquarters office, conformity with these guidelines is reviewed specifically. 

The IRS is currently centralizing case selection. BSA typed inventory varies demographically and changes or moves constantly. The IRS is seeing the shift of currency 

cells away from banks and larger cities. Efforts to centralize inventory selection will 

better help the IRS recognize these trends and quickly shift field resources as needed. 

Question. How many cases were reviewed for BSA compliance? How many possible cases are there? What percentage of total cases are forwarded for prosecution 

or further review? 

Answer. In fiscal year 2003, the IRS closed 3,655 NBFI cases. The IRS also contacted an additional 8,800 businesses to determine if those that had a requirement 

to register had done so. The number of possible Money Service Businesses (MSB) 

is constantly changing, but there are currently more than 88,000 potential NBFIs 
239

on the database. One of the objectives of the program is to identify new businesses 

while removing from the database those that no longer are in business. 

In fiscal year 2003, seven cases were forwarded to the IRS’s Criminal Investigation Division and two cases were referred to FinCEN for penalty consideration. The 

number of cases is less than 1 percent of those examined. 

Question. Does the IRS train its compliance personnel in the IRS’s responsibilities 

under the USA PATRIOT Act? 

Answer. IRS Compliance personnel involved in the AML program receive specific 

training regarding BSA AML Compliance Programs and related proposed regulations. IRS revised its Basic AML Course to reflect the changes resulting from the 

USA PATRIOT Act. As part of this training, personnel are: 

—Instructed on how to access the Office of Foreign Asset Control’s (OFAC) 

website to identify individuals and countries which have been placed on OFAC’s 

Specially Designated Nationals (SDN) list. In addition, information regarding 

the SDN list is placed on the AML Website to insure that examiners are aware 

of any changes to the list. 

—Trained to look for transactions going to OFAC sanctioned countries. If such 

transactions are found, personnel are trained to contact the OFAC’s Compliance 

Hotline and proceed directly to OFAC. 

—Trained to look for unlicensed money transmitters. Two Continuing Professional 

Education (CPE) modules have been developed specifically addressing Informal 

Value Transfer Systems and Section 352 of the USA PATRIOT Act. 

—Trained in audit procedures to detect structuring, using data from actual examples of structured transactions. They are taught to follow the transaction 

through the final clearing in order to identify structured transactions through 

OFAC sanctioned countries. 

Question. What training does each compliance officer receive each year related to 

BSA and the USA PATRIOT Act? 

Answer. This year, the IRS provided CPE modules to IRS’s AML examiners: Suspicious Activity Reports, Structuring, Informal Value Transfer Systems, and Section 

352 of the USA PATRIOT Act. The IRS provides examiners with workshops regarding the BSA during group meetings held at least once a year. The IRS makes AML 

Technical Advisors available to attend these group meetings. 

In addition, information regarding new regulations is forwarded from Headquarters to Territory Managers for immediate dissemination to examiners, and examiners review FinCEN’s SAR Activity Reviews Digests as well as other issued 

guidance. In addition, examiners are required to refer to the AML website on a regular basis for any changes to procedures and/or regulations. 

Question. When the IRS audits a casino, is the auditor versed in the intricacies 

of the Patriot Act? 

Answer. AML examiners, all of whom have received training that deals specifically with the USA PATRIOT Act (for example, the four recent CPE modules: Suspicious Activity Reports, Structuring, Informal Value Transfer Systems, and Section 

352 of the USA PATRIOT ACT), conduct the IRS’s examinations of casinos. In addition, the Casino Course these examiners attend includes changes in the law under 

the Patriot Act, and the IRS makes these changes available to all casino examiners 

on the AML web page. 

Question. Does IRS have any performance measures to determine auditor knowledge of the laws they enforce? 

Answer. The official IRS position descriptions for the AML examiners outline the 

job knowledge required as well as Critical Job Elements. The Critical Job Elements 

on which AML examiners are evaluated include Knowledge and Application of AntiMoney Laundering Law. The IRS is currently developing case review procedures 

that will centralize closed case reviews using full time reviewers as well as provide 

managers with a review document. The attributes in the case review document include the interview conducted, managerial involvement, interpretation and application of the law, fact gathering, penalty determination, and documentation. 

Question. Is there any follow-up with the casinos or money service businesses to 

get feed-back on its audit? 

Answer. The IRS has an effort under way to develop a customer satisfaction survey for the AML Program by the end of fiscal year 2004. 

Question. How many cases were referred by the IRS in fiscal year 2003 for enforcement action? What were the outcomes of the referrals? 

Answer. In fiscal year 2003, seven cases were referred to IRS’s Criminal Investigation (CI) Division; three are currently under active investigation. In addition, 

during the first 6 months of fiscal year 2004, SB/SE referred an additional seven 

cases to CI, five of which are under investigation. As a result of referrals from its 
240

AML program, the IRS also examined and closed 538 cases for income tax violations 

in fiscal year 2003. 

Question. How many cases were referred by the IRS in fiscal year 2003 to FinCEN 

for further review? What were the outcomes of the referrals? 

Answer. In fiscal year 2003, the IRS referred two cases to FinCEN for penalty 

consideration. Both were issued warning letters. The IRS referred two additional 

cases in the first half of fiscal year 2004, and is currently developing another two 

for referral. 

Question. What level of oversight regarding the compliance of casinos and money 

service businesses (MSB’s) does the IRS exercise? Please describe those efforts in 

detail. 

Answer. The IRS has been delegated responsibility for civil examinations for BSA 

compliance. In addition to examinations, the IRS also conducts outreach (in coordination with FinCEN) to ensure businesses are aware of their filing, recordkeeping 

and registration responsibilities. The IRS currently has approximately 350 examiners (including managers) assigned to the Anti-Money Laundering (AML) program. 

They are supported by 16 Area AML coordinators and approximately 8 computer 

audit specialists from LMSB. IRS AML examiners currently are conducting 5,576 

examinations, which reflects 6 percent of the IRS-known potential population. 

In addition to the examination of NBFIs, the AML examiners also conduct reviews 

for compliance with the currency reporting requirements of Sec. 6050I of the Internal Revenue Code. Since Sept. 30, 2000, the IRS has added 48,688 potential NBFI 

entities to the database. As of March 31, 2004 the NBFI database reflected over 

88,000 potential NBFIs. The IRS is also conducting investigations on 690 businesses 

for potential registration requirements. 

From September 30, 2000 through the present, the IRS has closed 13,288 cases 

and conducted 5,940 (fiscal year 2003 and fiscal year 2004) registration examinations. 

Since 2002, the AML Compliance program has transitioned from conducting individual education visits to focusing on examinations. The education and outreach 

now is performed by the Small Business and Self-Employed operating Division’s 

(SB/SE) Taxpayer Education and Communication (TEC) Division. TEC delivers education/outreach to external stakeholders, using leveraged resources to reach a larger 

number of covered businesses. The National TEC AML strategy was designed in 

conjunction with SB/SE Compliance, IRS’s Criminal Investigation Division and 

FinCEN to increase compliance of MSBs, NBFIs and casinos with the BSA. 

Question. What performance measures are in place to measure IRS compliance efforts as they relate to MSB’s and casinos? 

Answer. The current measures for the AML examination program include the 

number of NBFIs identified, the number of examinations conducted and closed, and 

the results of completed examinations. The IRS also now has a database in place 

that provides information on the hours per closed case as well as the cycle time of 

cases. In the course of the BSA examinations conducted, the IRS also identifies potential cases for unreported income under Title 26. On the education/outreach side, 

the TEC organization monitors the number of outreach events they deliver and the 

number of participants at the events. 

Question. The Tax Inspector General for Tax Administration (TIGTA) reports that 

the IRS small business/self employed (SB/SE) division responsible for compliance of 

the BSA for non-bank financial institutions lacks meaningful performance measures, has no useful data to provide oversight of program performance, and does not 

base case selection in risk factors. Similar findings also occurred in a previous audit 

in December of 2000. The IRS has known since at least 2000 that these problems 

were pervasive in the compliance program. In September of 2003, the IRS continues 

to fail in delivering compliance results commensurate with the resources spent. In 

the response on this issue to the committee the IRS has stated that the agency 

‘‘does not characterize this as a problem’’. There are two TIGTA audit reports which 

demonstrate the IRS has failed repeatedly to make meaningful progress in its compliance efforts for BSA. If the IRS and FinCEN do not believe this as a problem, 

what would elevate it to warrant recognition? How can the IRS allow these types 

of lapses to recur? 

Answer. In 2002, the IRS made a commitment to ensure the effective operation 

of the Anti-Money Laundering Program. In particular, the IRS has taken the following steps: 

—Named a national AML program manager in February 2002; 

—Created 32 groups nationwide dedicated to the AML program (added one additional group in 2004); 

—Replaced part-time revenue agents, for whom AML was a collateral duty, with 

full-time, fully trained revenue agents dedicated to AML; 
241

—Minimized the use of lower-graded tax compliance officers, who previously handled many of the AML examinations; 

—Designated a territory manager in each IRS Area for AML program responsibility; 

—Designed a Management Information System to capture the results of BSA examinations; and 

—Secured funding from FinCEN, beginning in fiscal year 2003, to add 70 additional FTEs to the AML compliance program. 

As a result of these improvements, all program indicators (numbers of MSBs identified, outreach contacts, and examinations) are trending up. In the first half of fiscal year 2004, the IRS’s SB/SE Division made more referrals to FinCEN and had 

more referrals accepted by CI than in all of fiscal year 2003. In fiscal year 2003, 

SB/SE also focused on ensuring that MSBs that had a requirement to register did, 

in fact, register. Those efforts resulted in an additional 2500 registrations, which 

represented a 20 percent increase in the number of registered MSBs. 

In a recent review of the AML program, TIGTA acknowledged the IRS’s efforts 

to enhance the program but identified the need for further improvements. Ongoing 

efforts include the following: 

—Centralization of case identification, incorporating leads from the field and CI, 

as well as CBRS analysis for October 2004; 

—Piloting of MSB examinations at the entity’s corporate headquarters level to facilitate the identification of MSB agents with the highest risk of noncompliance; 

—Incorporation of quality performance measures into the embedded quality process in October 2004; 

—Transition of outreach activities from Compliance to TEC within SB/SE to provide broad educational opportunities to external stakeholders; 

—Completion of a template for a Fed/State MOU to provide reciprocal opportunities to leverage resources for examinations, outreach, and training; 

—Partnership with FinCEN to identify locations of potential noncompliance, as 

well as the first joint examination of a major MSB with FinCEN; and 

—MOU with FinCEN to allow IRS full access to SARs (for purposes of BSA examinations only). 

Question. What is the IRS doing to ensure case selection criteria are uniform? 

Please provide a copy to explain how case selection criteria have changed since the 

Tax Inspector General for Tax Administration (TIGTA) audit in 2003. 

Answer. As mentioned previously in questions 1 and 2, the Internal Revenue 

Manual provides guidelines about case selection to the AML coordinator in IRM 

4.26.3.2.4, Selection for Assignment. During AML program reviews conducted by the 

SB/SE headquarters office, conformity with the guidelines is an item specifically reviewed. 

TIGTA identified a concern that there was no consistency in how the IRS selected 

AML cases for examination. To remedy this situation, the IRS increased program 

oversight to ensure the compliance risk case selection tools provided to the field are 

being used to identify cases. The centralization of case identification, incorporating 

leads from the field and Criminal Investigation, as well as CBRS analysis, is scheduled to be in place by October 2004. The centralization of workload identification 

will ensure consistency in risk based case selection. The IRS is including FinCEN 

in this process. Case selection methods are addressed in Area program reviews. In 

addition, SB/SE’s Research organization has undertaken a project to possibly identify other methods for selection. 

Question. The IRS has a poor record regarding regulatory compliance operation 

and management of BSA data according to numerous IG, GAO, and TIGTA reports. 

What is the IRS doing to correct these long-standing problems? What guarantees 

can the IRS provide that will show they will do the job right this time? 

Answer. In recent years, the IRS has shown significant commitment to the effective operation of the Anti-Money Laundering Program, and considers the identification of opportunities for improvement to be an ongoing process. Improvement efforts 

in progress include the centralized review process, the embedded quality initiative, 

improved management information systems and centralized compliance examinations. 

In particular, the IRS has taken the following steps to enhance the effectiveness 

and professionalism of the AML program: 

—Named a national AML program manager in February 2002; 

—Created 32 groups nationwide dedicated to the AML program (added one additional group in 2004); 

—Replaced part-time revenue agents, for whom AML was a collateral duty, with 

full-time, fully trained revenue agents dedicated to AML; 
242

—Minimized the use of lower-graded tax compliance officers, who previously handled many of the AML examinations; 

—Designated a territory manager in each IRS Area for AML program responsibility; 

—Designed a Management Information System to capture the results of BSA examinations; and 

—Secured funding from FinCEN, beginning in fiscal year 2003, to add 70 additional FTEs to the AML compliance program. 

As a result of these improvements, all program indicators (numbers of MSBs identified, outreach contacts, and examinations) are trending up. In the first half of fiscal year 2004, the IRS’s SB/SE Division made more referrals to FinCEN and had 

more referrals accepted by CI than in all of fiscal year 2003. In fiscal year 2003, 

SB/SE also focused on ensuring that MSBs that had a requirement to register did, 

in fact, register. Those efforts resulted in an additional 2500 registrations, which 

represented a 20 percent increase in the number of registered MSBs. 

In a recent review of the AML program, TIGTA acknowledged the IRS’s efforts 

to enhance the program but identified the need for further improvements. Ongoing 

efforts include the following: 

—Centralization of case identification, and incorporating leads from the field and 

CI, as well as CBRS analysis for October 2004; 

—Piloting of MSB examinations at the entity’s corporate headquarters level to facilitate the identification of MSB agents with the highest risk of noncompliance; 

—Incorporation of quality performance measures into the embedded quality process in October 2004; 

—Transition of outreach activities from Compliance to TEC within SB/SE to provide broad educational opportunities to external stakeholders; 

—Completion of a template for a Fed/State MOU to provide reciprocal opportunities to leverage resources for examinations, outreach and training; 

—Partnership with FinCEN to identify locations of potential noncompliance, as 

well as the first joint examination of a major MSB with FinCEN; and 

—MOU with FinCEN to allow IRS full access to SARs (for purposes of BSA examinations only). 

Question. The IRS, in its response to the committee, states that there are standards in place to select cases in all compliance programs. TIGTA states in its 2000 

and 2003 audit that the program still lacks performance standards. The only performance goal that exists for this program is ‘‘delivery of Direct Examination Staff 

Years (DESYs).’’ To accomplish this goal the IRS need only assign sufficient personnel to the program to meet the allocated DESYs. There are no other measures 

for evaluating the program’s performance. Does the IRS consider this performance 

measure sufficient to measure the outputs and outcomes of this program? Are other 

compliance programs held to such a low threshold? 

Answer. In addition to the delivery of DESYs, the AML Program currently measures the number of NBFIs identified, the number of examinations conducted and 

closed, the results of completed examinations, the number of Title 26 information 

items prepared and related income tax examinations completed. The TEC organization monitors the number of outreach visits, seminars, participants, and mailings 

accomplished. Recent improvements to the MIS now provide information on the 

hours per closed case, as well as the cycle time of cases. 

Question. The committee understands that IRS has begun to review its performance measures and is in the process of establishing measurable performance-based 

indicators for BSA programs. What is the status of this effort? Please include in 

your response the new performance measures being used to measure fiscal year 

2004 performance? 

Answer. The current measures for the AML examination program include the 

number of NBFIs identified, the number of examinations conducted and closed, and 

the results of completed examinations. The IRS also now has a database in place 

that provides information on the hours per closed case, as well as the cycle time 

of cases. In the course of the BSA examinations conducted, examiners also identify 

potential cases for unreported income under Title 26. On the education/outreach 

side, the TEC organization monitors the number of outreach events they deliver and 

the number of participants at the events. 

Question. In Treasury’s April 30 responses to the committee, the Department and 

the IRS contend that IRS compliance programs include reviews of examiners work. 

Performance plans for all managers include the requirement to review cases and to 

be involved in case development. Yet the IRS in its response to the TIGTA report 

state ‘‘there continues to be significant risk of undetected noncompliance and inconsistent program delivery. Based on our review of a judgmentally selected sample of 

76 cases from 3 Area Offices, standard case selection criteria are not used, cases 
243

are not properly documented and potential noncompliance information is not available’’. How does the IRS explain the discrepancy between stated requirements and 

failed results? 

Answer. The quote attributed above to the IRS was actually a statement made 

by TIGTA in their Report (Audit No. 200330004). The relevant TIGTA recommendations from that report, and the actions the IRS is taking to implement them, are 

as follows: 

—Develop standard risk-based case selection criteria that would provide minimum 

requirements and parameters for case selection. 

The SB/SE Division Research function is developing a scoring system, or set 

of rules, to prioritize workload by using Currency Banking Retrieval System 

data. Until the scoring system is implemented, the IRS has taken other steps 

to ensure appropriate case selection. The IRS has increased program oversight 

to ensure the compliance risk case selection tools already provided to the field 

are being used to identify cases. In addition, case selection methods are addressed as part of the Area program reviews. The centralization of case identification, incorporating leads from the field and Criminal Investigation, as well 

as CBRS analysis, is scheduled to be in place by October 2004. This centralization will ensure consistency in using risk based case selection for the AML 

cases. 

—Reinforce the importance of case documentation with specific instructions or 

case models and implement a centralized quality review process. 

The IRS has taken a number steps to increase the quality of the cases. In 

July 2003, two technical advisors were added to headquarters staff to provide 

technical assistance to the field. Since their arrival, they have visited several 

areas, to review cases and meet with the examiners and managers to discuss 

their observations. This has been well received by the field personnel, and requests for their participation continue to increase. The first AML Technical Digest, which addresses examination issues, will be published on the AML web 

page in late May 2004. 

The IRS is on target to incorporate quality performance measures for AML 

into the new embedded quality process that will be in place in October 2004. 

Including AML in the embedded quality process will provide a systemic method 

for consistent managerial feedback. In addition, the centralized closed case review process, which will be a part of embedded quality, will provide headquarters with the ability to identify trends and training needs. 

—Coordinate with the FinCEN to secure BSA examiner and RA access to SARs. 

The Commissioner, SB/SE Division, initiated a Memorandum of Understanding with the Director of the FinCEN to permit BSA examiners access to 

SARs for the purpose of MSB compliance checks. That MOU has been signed 

by both the IRS and FinCEN. IRS senior executives are continuing to pursue 

access to SARs for RAs in the regular examination program. 

Question. TIGTA found that ‘‘no standard criteria exist for selecting BSA compliance cases.’’ 

Should the committee be concerned that there are no standards that exist for case 

selection? 

IRS states that AML coordinators use their own criteria. Please provide a complete list of those criteria. 

Given Mr. Everson’s strong statements about the need for more resources, does 

this program not point out that IRS has enormous savings to be realized by using 

its current resources in a smarter and more efficient manner? 

Answer. Through its Internal Revenue Manual (IRM) 4.26.3.2.4, Selection for Assignment, the IRS provides specific guidelines to its AML coordinators about case 

selection. It reads as follows: 

—The AML coordinator should select entities from the nonbank financial institution (NBFI) database or the Form 8300 inventory, using risk-based analysis to 

select those entities with the highest potential for noncompliance for compliance 

examinations or reviews, such as: 

—Entities with a high volume of cash transactions or abnormal cash activity; 

—Entities in local geographic areas with high potential in money laundering; 

—Entities which have a previous history of noncompliance; 

—Entities which have been cited for poor or inadequate recordkeeping; 

—The AML coordinator should consider available resources as well as balanced 

coverage (geographic area and industry) when selecting NBFIs or NFTBs for 

compliance examinations or reviews; 

—Input from other operating divisions (e.g. TE/GE) can assist the coordinator in 

assessing risk; 
244

—Prior to opening the exam or review the names of selected entities are to be 

furnished to Criminal Investigation (CI) for clearance. 

The IRS has increased program oversight to ensure these compliance risk case selection tools provided to the field are being used to identify cases. In addition, the 

IRS and FinCEN jointly establish the priorities for types of NBFIs to be examined, 

and the IRS provides these priorities to its AML coordinators in an annual program 

letter. Further, as part of the efforts to improve the effectiveness of the AML program, the IRS provided training for its AML coordinators in March 2003 on methods 

to apply against the Currency Banking and Retrieval System (CBRS) to identify 

cases. Since that time, CBRS analysis has been provided to the coordinators on a 

regular basis to assist them in the identification of cases. Case selection methods 

also are addressed during Area program reviews. 

To further ensure consistency in case selection, the IRS plans to centralize the 

case identification process by October 2004. This centralization, which will incorporate leads from the field and Criminal Investigation, as well as CBRS analysis, 

will ensure consistency in risk based case selection and allow for improved trend 

analysis. In addition, SB/SE’s Research organization has undertaken an effort to enhance the case selection criteria. 

To improve its utilization of resources, the IRS is piloting the examination of 

Money Service Businesses (MSB) at the entity’s corporate headquarters level. Three 

such examinations are currently underway. Working with the business, IRS will be 

able to identify the MSB’s agents with the highest risk of noncompliance. This is 

a new approach for the program, one that was developed in cooperation with 

FinCEN, and one that will provide better customer service. 

Question. IRS indicates that it is creating a scoring system to prioritize its BSA 

workload. Please provide an update to the committee on the development of this system? 

Answer. SB/SE Research is designing a process that uses the Currency and Banking Retrieval System (CBRS) data to prioritize or select entities for Title 31 and 

Form 8300 examinations based on risk factors. The project is organized into five 

phases, including assessment of current processes used to select workload (Phase 1), 

development of rules that express predictive and evaluative factors of non-compliance with BSA requirements (Phase 2), engineering of formulas to evaluate and 

rank entities for risk of non-compliance based on CBRS data and completion of the 

decision factor set that will be used (Phase 3), suitability testing to ensure the proposed system follows the best practices identified by AML technical advisors (Phase 

4), and assessment of automation and programming needs required to pilot the proposed system (Phase 5). 

To date, much of the data and knowledge acquisition activity has been completed. 

As a by-product of this work, the research team developed a work flow diagram depicting ‘‘best practices’’ of processes, tools, techniques, and decisions in the AML program. Following review by the technical advisors, the IRS plans to make this interim work product will be available to Compliance Policy/AML examiners in July 

2004 for use in the current program. The work that SB/SE Research is doing to develop a risk-based selection process using CBRS data will assist the IRS in applying 

case selection standards uniformly across the country. The proposed system will use 

the same identified scoring factors (with priorities and weights) to rank all entities 

for examination potential. Subsequently, local program managers will be able to filter the ranked list for geographic location, providing a local list that reflects the 

same selection criteria as any other case. A potential side benefit of the proposed 

system will be IRS’s ability to assess whether their resources are appropriately deployed geographically and make adjustments based on where the prioritized workload actually exists. 

Question. TIGTA has identified that IRS examiners have a perception that 

FinCEN does not assess penalties. TIGTA has also identified that FinCEN has a 

negative perception of the IRS case quality and that the cases referred for enforcement actions do not contain sufficient information to assess penalties. What are 

these two organizations doing to overcome these barriers? 

Answer. FinCEN and the IRS are jointly committed to identifying opportunities 

to improve case development and the ability to assess civil penalties when appropriate. As a part of the IRS’s revamped training efforts, FinCEN is participating in 

AML basic training classes to provide guidance on developing cases for penalty referral to FinCEN. For fiscal year 2004 the IRS has committed to taking a more 

proactive approach to getting FinCEN’s input when serious violations have been 

identified, by providing them opportunity for involvement early in the development 

of the penalty case. To support this commitment, the IRS also has developed new 

referral guidelines based on previous well-developed cases, and has included these 

guidelines in the AML Technical Digest. 
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Question. The SB/SE division is responsible for compliance with the BSA. This 

unit spends $43 million for BSA compliance including examinations outreach and 

compliance. Please provide a detailed break out of how the $43 million is spent on 

by activity. Given the numerous reports about the failures of the SB/SE division, 

what is the IRS doing to correct the deficiencies identified? 

Answer. The original estimate of $43 million for BSA compliance included some 

one-time training costs related to BSA, but did not include costs associated with 

Currency Transaction Report (CTR) processing (which is essential to the AML program). Based on a revised estimate, which reflects only annualized costs, SB/SE expects to spend $53.7 million in fiscal year 2004 in support of BSA compliance, including examinations, education and outreach activities, and processing of CTRs. 

The breakdown of these costs for both fiscal year 2003 and fiscal year 2004 is shown 

in the following table:

EXPENDITURES FOR BSA COMPLIANCE 

[In millions of dollars] 

Functional Activity Fiscal Year 2003 

(Actual) 

Fiscal Year 2004 

(Projected) 

Compliance .......................................................................................................................... 33.66 34.97 

Taxpayer Education and Communications ......................................................................... 0.86 1.14

CTR Processing 1 ................................................................................................................. 7.81 17.57

Total for SB/SE ...................................................................................................... 42.33 53.68

1 In fiscal year 2003, IRS’s Modernizing Information Technology Systems spent $8.84 million in support of CTR Processing. In fiscal year 

2004, SB/SE is responsible for the full program. 

As described in the responses to the earlier questions, the IRS has taken, and is 

continuing to take, a series of proactive steps to improve its AML program. To summarize, the IRS has: 

—Revamped the structure and staffing of its AML program by: 

—Naming a national AML program manager in February 2002; 

—Creating 32 groups nationwide dedicated to the AML program (added one additional group in 2004); 

—Replacing part-time revenue agents, for whom AML was a collateral duty, 

with full-time, fully trained revenue agents dedicated to AML; 

—Minimizing the use of lower-graded tax compliance officers, who previously 

handled many of the AML examinations; 

—Designating a territory manager in each IRS Area for AML program responsibility; and 

—Securing funding from FinCEN, beginning in fiscal year 2003, to add 70 additional FTEs to the AML compliance program; 

—Focused increased attention on case selection using current guidelines, while developing a centralized case identification process; 

—Ensured all AML examiners receive appropriate training, including the changes 

resulting form the USA PATRIOT Act; 

—Undertaken a research-driven effort to design and develop a method for 

prioritizing case selection based on CBRS data; 

—Taken steps to improve AML case quality via technical case reviews and included the AML program in the embedded quality measures process to be implemented in October 2004; 

—Transferred AML outreach activities from Compliance to TEC within SB/SE to 

provide broad educational opportunities to external stakeholders; and 

—Increased its coordination with FinCEN, especially in the areas of training, 

workload identification and penalty referrals. 

WORKFORCE AND FACILITY REALIGNMENT

Question. The IRS expects to receive some savings from the closure of the 

Brookhaven Service Center. Are you going to increase the frontline enforcement personnel with these savings? 

Answer. The IRS anticipates savings in fiscal year 2005 of $6 million and 147 

FTE because of e-file efforts, including the closure of the Brookhaven facility. These 

savings, along with $105 million additional savings, will be reapplied as described 

in the IRS’s fiscal year 2005 Congressional Justification. These reinvestments are:
246

[Dollars in millions] 

Reinvestment Millions of Dollars FTE 

Curb Egregious Noncompliance .................................................................................................. $31.4 293 

Select High Risk Cases for Examination .................................................................................... $6.0 ....................

Embedded Quality 1 ..................................................................................................................... $1.6 26 

Consolidation—Case Processing ................................................................................................ $13.7 80 

Consolidation—Insolvency .......................................................................................................... $2.1 15 

Combat Corporate Abusive Tax Schemes ................................................................................... $5.0 34 

Leverage/Enhance Special Agent Productivity ............................................................................ $2.5 28 

Standardize CLMC Training Rooms ............................................................................................ $0.5 ....................

IRS Reorganization Transition .................................................................................................... $5.0 ....................

Servicewide Competitive Sourcing .............................................................................................. $9.1 ....................

MITS Reorganization Transition .................................................................................................. $34.0 236

Total ............................................................................................................................... $110.9 712

1 This initiative, through an Embedded Quality system in Submission Processing (EQSP), will create a new measurement system that will 

identify the cause and impact of errors, apply common measures to every level of the new organization, and enable frontline employees to 

understand how their contributions impact IRS’s performance. An embedded quality system links individual and business performance with 

multiple quality review sources. EQSP will instill complete accountability for quality performance across operations. 

TAX LAW ENFORCEMENT BUDGET PRIORITIES AND RESOURCE ALLOCATION

Question. Given IRS’s inability to increase enforcement in recent years, what will 

be different in fiscal year 2005? 

Answer. The IRS’s enforcement statistics for fiscal year 2003 demonstrate that 

IRS has arrested the enforcement decline that began in the 1990’s and continued 

through the implementation of RRA 98. Audits, criminal investigations, and monies 

collected have all increased. In particular, when compared with fiscal year 2001, audits of taxpayers with incomes over $100,000 increased by over 50 percent by fiscal 

year 2003. 

The administration’s 2005 budget request for the IRS will continue to rebuild its 

enforcement activities. Two-thirds of the new monies requested will be devoted to 

addressing abuses by high-income taxpayers and corporations, and increasing criminal investigations. 

In fiscal year 2005, the IRS is seeking an additional $300 million for enforcement 

activities to focus on the following four objectives in enforcement: 

—Discourage and deter non-compliance, with emphasis on corrosive activity by 

corporations, high-income individuals and other contributors to the tax gap; 

—Ensure that attorneys, accountants and other tax professionals adhere to professional standards and follow the law; 

—Detect and deter domestic and off-shore tax and financial criminal activity; and 

—Discourage and the misuse of tax-exempt and government entities for tax avoidance and other purposes. 

These incremental resources will help IRS to address the tax gap, the difference 

between what is owed and what is paid due to non-filing, underreporting, and underpayment, and secure billions of extra dollars for the Treasury. Once the IRS 

hires and trains enforcement personnel, it estimates the direct return on investment 

will be about 6 to 1 for direct revenue-producing initiatives. Beyond the incremental 

revenues directly associated with the increased audits, investigations and collection 

activity, the increased publicity of these actions will discourage other taxpayers from 

cheating. 

FUTURE STAFFING REQUIREMENTS

Question. What is IRS’s assessment of the IRS’s long term requirements? 

Answer. The vision of the IRS remains to re-center the agency with the proper 

balance of service and enforcement poised to quickly meet technological and demographic changes, and customer expectations. 

The IRS’s goals remain the same—to improve taxpayer service, enhance enforcement through uniform application of the law, and improve the IRS infrastructure 

and modernize technology. The IRS working equation is that service plus enforcement equals compliance. The IRS is maintaining high levels of taxpayer service 

while focusing on corrosive areas of non-compliance. Ensuring fairness will help restore faith in the Nation’s tax administration system. 

Question. Can the IRS assure this committee that the current refocus can put this 

program back on schedule so that it will not go the way of TSM? 
247

Answer. The IRS needs a more versatile team of seasoned executives to provide 

long-term stability to the program. The IRS is complementing the skills of experienced IRS tax executives with outside seasoned technology executives who have experience managing large-scale, complex IT projects. As such, the IRS is hiring two 

Associate Chief Information Officers to join the MITS organization, and an executive 

search firm is conducting searches for five senior executives with a wide range of 

diverse experience in developing and implementing large modernization systems. 

In addition, the IRS used the results from independent studies commissioned during the summer of 2003 to create a BSM Challenges Plan comprised of 40 some action items. Given the strategic importance of the plan, the Commissioner appointed 

an IRS business unit deputy commissioner to oversee the implementation of the 

plan. 

As a first step, the BSM project team developed a crosswalk to ensure that the 

BSM Challenges Plan’s definition of the issues addressed and/or satisfied all of the 

recommendations from the four commissioned studies as well as the recommendations submitted by the IRS Oversight Board, and the Software Engineering Institute 

(SEI) study of CADE. 

While the deputy commissioner made significant progress in implementing the 

plan, the full closure of all actions items was unrealistic within the elapsed timeframe of the 6-month appointment. Concurrently, the CIO created a new direct report position for modernization management and assigned responsibility for implementing the plan to the individual recently hired into this newly created position. 

Under the leadership of the deputy commissioner, the IRS and CSC team brought 

closure to several key actions items, including: clarifying the roles of committees as 

advisory, identifying ‘‘blockers’’ on contracting issues, appointing business leaders to 

each project, establishing a risk-adjusted schedule and new baseline for CADE Releases 1.0 and 1.1, and increasing the frequency of CADE reviews with the business 

owner to twice monthly. The majority of the action items are still works-in-progress, 

some of which will take time to fully complete. Others will span the life of the BSM 

program. 

For example, strengthening systems engineering capabilities by hiring external 

candidates will take time since it involves conducting the searches, interviewing the 

candidates, and negotiating the new hires to come on board. The IRS and CSC developed ground rules for escalating issues, but they will need to be continually enforced throughout the life of the program. The IRS rewrote the charters of the governing committees to reflect their advisory role and clearly articulated their responsibilities, however, it will probably take a year to truly evaluate and measure their 

effectiveness. 

As stated, the IRS has made progress toward closing all the action items, but it 

has much more work to do in critical areas. For example, the IRS needs to religiously follow the proper methodologies and hold people accountable if they do not. 

The IRS must start ‘‘doing things right’’ as opposed to ‘‘doing things fast’’ such as 

exiting milestones prematurely. An ongoing challenge will be balancing the scope 

and pace of projects consistent with capacity, ensuring that the right people are in 

place before launching a project, and setting realistic delivery schedules and cost estimates. The IRS is committed to staying-the-course and delivering on its promise 

to modernize America’s tax systems, but it is important for everyone to acknowledge 

this is a monumental effort. 

The magnitude and evolution of the BSM program dictates that the IRS will always be going through an evolution of assessment and improvements. In that regard, the BSM Challenges Plan is still evolving and the IRS is using certain action 

items to continuously improve the program. 

BSM MANAGEMENT

Question. Is IRS’s schedule for completing the remaining corrective actions identified in the associated BSM Action Plan? 

Answer. Please see response to previous question. 

ACTUARIAL SOFTWARE PROGRAM

Question. What number of life insurance companies or what percentage of the industry does the IRS consider an appropriate amount to examine in order to provide 

the IRS with ‘‘sufficient data to conduct a cost benefit analysis?’’

Answer. The IRS has determined that a sample of four Coordinated Industry life 

insurance audits (based on the criteria as described in the question below) will give 

sufficient data for preliminary results from a cost benefit analysis. The fact that the 

IRS anticipates closing four cases led it to determine that a 5 percent completion 
248

rate would give it preliminary figures so that it could project over the total population. 

Question. What selection criteria is the IRS using to make sure that the initial 

examination results analyzed are an accurate estimation or cross-section of the industry? 

Answer. The IRS based the selection criteria it used on a mix of variables, such 

as the stage of the audit cycle, product mix, and size of taxpayers. These criteria 

allowed the IRS to have a cross-section of the industry. Due to the length of time 

it takes to examine life insurance reserves, the stage of the audit means that the 

IRS needs to examine reserves very early in the audit and not when the audit’s estimated completion date is approaching. Product mix means that the IRS attempted 

to select taxpayers for audit who sold different kinds of policies such as traditional 

life insurance, universal life insurance, variable life insurance, single premium annuities, and etc. Size of the taxpayer means that the IRS is looking to select not 

only the extremely large taxpayers in the Coordinated Industry arena but also the 

ones who have lesser gross receipts and assets in size. 

Question. When does the IRS expect to have sufficient data? 

Answer. The IRS is projecting to have four audits complete by the end of the fiscal 

year that would give sufficient data. The fact that the IRS anticipates closing four 

cases led it to determine that a 5 percent completion rate would give it preliminary 

figures so that it can project over the total population. 

Question. Congress has funded the program for 3 years, yet due to the very late 

start date of the program, although the program has been provided fiscal year 2004 

funding, the program is still using fiscal year 2003 funding. Has the IRS set aside 

the fiscal year 2004 funding provided for the third year of the program? 

Answer. The appropriation language for fiscal year 2003 reads that the IRS will provide up to $4 million from available funds to support the program. As services 

are rendered and invoices received, the IRS is currently paying amounts to the vendor out of fiscal year 2003 funding for the actuarial software license, maintenance, 

actuary salaries, and related travel costs to conduct training sessions. In addition, 

the IRS has available $2 million from fiscal year 2004 funding for IRS employee 

travel and training expenses, testing and the related implementation costs, the purchase of additional memory to upgrade revenue agent computers to 512MB capacity, 

the purchase of additional software which is required for the vendor’s Total Life 

software to work, and the possibility of hiring additional life insurance actuaries to 

assist on examinations. 

Question. What plans does the IRS have for this funding? 

Answer. Please see response to previous question. 

Question. In March 2004, the IRS stated that after software training for 2004 is 

complete, ‘‘this will result in 41 coordinated life insurance examinations having the 

use of the software.’’ How many coordinated life insurance examinations currently 

exist? 

Answer. There currently are approximately 75 Coordinated Industry life insurance examinations, of which 30 are either using the software or are planning to use 

it in the near future. Another class is scheduled for the second week in June where 

more teams will receive training in using the software. The fact that the IRS anticipates closing four cases led it to determine that a 5 percent completion rate would 

give it preliminary figures so that it can project over the total population. 

Question. Should not the software be used on all life insurance examinations? 

Answer. If the results of the cost benefit analysis prove productive and promote 

compliance, the goal would be to use the software on any life insurance examination, as appropriate. The stage of the audit cycle, as mentioned in the second question above, will dictate when it is appropriate to use the software on the balance 

of the Coordinated Industry life insurance cases. 

Question. Given the technical nature of the program, does the IRS have personnel 

with sufficient expertise and knowledge to effectively implement the program? What 

additional personnel, if any, does the IRS believe it needs to make the program fully 

effective? 

Answer. Experience has shown over the last year of training revenue agents and 

computer audit specialists that they would have the expertise to utilize the software 

on audits immediately following training with the assistance of a life insurance actuary. The Large and Mid-Size Business Operating Division has two in-house life 

insurance actuaries with the level of expertise and knowledge to implement the program. Since audit cycles are normally 2 to 3 years in length, on an average, a revenue agent may only use this software once during this time frame, which may result in a high learning curve or the need for additional refresher training for subsequent and additional audit cycles. The IRS believes that it is essential for life insurance actuaries to be involved as the focal point to utilize this software effectively. 
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Depending on the benefit analysis results, the IRS will evaluate the opportunity 

to hire additional life insurance actuaries as funding permits. 

QUESTIONS SUBMITTED BY SENATOR PATTY MURRAY

FAILURE TO COLLECT DELINQUENT TAXES

Question. Based on your collections to date, it appears that IRS is not pursuing 

billions of dollars in uncollected taxes. In recent testimony before the Finance Committee, Treasury Deputy Secretary nominee Samuel Bodman stated that: 

—As of the end of fiscal year 2003, $16.5 billion was in deferred status, meaning 

that these taxpayers have filed a return and owe tax, but have not paid it or 

have only partially paid. 

—The largest delinquent amount in deferred status is more than $50 million. 

—In recent years, accounts in deferred status have decreased slightly but the dollar amounts have increased. 

Mr. Everson, how do you respond to this pathetic record of collecting unpaid 

taxes? 

Answer. The collection results for accounts that are in a deferred status are not 

indicative of the IRS’s overall Collection effort. During fiscal year 2003, the IRS 

issued first notices to about 11.8 million new balance due accounts, as required by 

IRC section 6303. During the same period, the IRS resolved about 7.6 million accounts by full payment, installment agreement, or other means as a result of the 

taxpayer’s response to the first or subsequent notices. The IRS subsequently resolves a significant portion (on average, about 67 percent) of the balance due accounts, which are not resolved in notice status and become Taxpayer Delinquent Accounts (TDAs), through full payment or the initiation of an installment agreement. 

Deferred accounts are placed in a suspended category because of other collection 

priorities and resource limitations and they are first subject to risk and collection 

probability analysis. Cases that have a modest compliance risk, i.e., lesser impact 

on tax administration and subsequent noncompliance, and low probability of collection are deferred, freeing Collection resources to work more in-business trust fund 

cases and cases where there is a likelihood of full payment. However, the IRS is 

refining its Collection models for these cases and evaluating the benefit of filing notices of Federal tax liens on deferred accounts. 

Question. Mr. Everson, your budget documents say that a growing number of 

Americans think it is okay to cheat on their taxes and that ‘‘this trend threatens 

the government’s future revenue stream and basic respect for the law.’’ Why should 

these taxpayers take their IRS debt seriously if the agency never presses for collection? 

Answer. All delinquent accounts receive Collection action. The treatment for a 

particular delinquent account depends on the amount owed and the predicted compliance risk. Taxpayers generally receive at least two notices and if they fail to respond, enforcement action is likely. Each year, the IRS resolves a large percentage 

of its delinquent accounts through full payment or installment agreement. Many 

others are ultimately resolved through refund offsets, abatements, and Offers in 

Compromise. As shown in the following chart, overall enforcement actions on taxpayer delinquent accounts have increased significantly since fiscal year 2000. In fiscal year 2003, the IRS filed 548,683 Notices of Federal Tax Lien and served 

1,680,844 Notices of Levy. Passage of the administration’s proposed Private Collection Agent (PCA) legislation will further improve these results.

Activity 2000 2001 2001 2003

Enforcement activity (actual numbers): 

Number of notices of Federal tax liens filed ...... 287,517 426,166 482,509 548,683

Number of notices of levy served upon third 

parties ............................................................. 219,778 674,080 1,283,742 1,680,844

Number of seizures .............................................. 74 234 296 399

In addition, the IRS has taken a number of steps recently to further address taxpayers’ noncompliance with their filing and payment obligations, including: 

—Case Selection.—The IRS refined its inventory delivery system so that the higher priority cases (in terms of impact on tax administration and subsequent noncompliance as well as potential for collection) are selected for assignment to the 

Collection field function and the Automated Collection System. The IRS continually examines how case selection can be improved. 
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—Employment Taxes.—The failure of employers to make their Federal tax deposits and pay over the withheld trust fund taxes is a serious compliance issue. 

The IRS has developed and is implementing a strategy to improve collection of 

employment taxes. 

—Causes for Underpayment and Non-Filing.—The IRS is working to identify the 

components of its potentially collectible inventory, the main causes of non-compliance, and the contributing market segments. The information obtained is 

being used to address taxpayers through outreach and education, and to determine potential systems and policy changes. One significant component involves 

estimated tax compliance. 

—Taxpayer Education.—The IRS is aggressively reaching out to taxpayers before 

they either intentionally or inadvertently, fail to file or fail to pay the full 

amount of tax due. Stopping noncompliance before it occurs is far preferable 

than having to find it afterwards. The IRS website has been a tremendous success and has been an important resource for taxpayers. It also is an important 

way for the IRS to communicate to taxpayers, including reaching out to those 

taxpayers who may be missing out on important tax benefits when they fail to 

file a return. The IRS is continuing to examine how taxpayer outreach can be 

improved and made more effective. 

Question. A recent report by the Treasury Inspector General for Tax Administration (TIGTA) found that IRS’s existing procedures are ineffective in ensuring even 

that criminals who are convicted in court for tax evasion are paying their civil tax 

liabilities. Why can’t IRS collect from tax cheats? 

Answer. In response to problems identified in the TIGTA audit, the IRS completed 

a review of the process for referring criminal cases for civil disposition that have 

conditions of probation. CI conducted this review in partnership with SB/SE. Furthermore, CI and SB/SE have taken the following steps: 

—The Chief CI and SB/SE Commissioner issued a joint memorandum on April 13, 

2004, to field office personnel stressing the importance of cooperation in handling civil closings for sentenced taxpayers and provided operating procedures 

for processing the civil closings of all sentenced taxpayers. CI and SB/SE are 

revising the Internal Revenue Manual to implement these procedural changes. 

—The Technical Service, Advisory Unit within SB/SE is reviewing assessed tax 

liabilities in these cases to identify cases wherein the conditions of probation 

were not met and will report this information to CI. 

—CI’s Research Unit has identified all cases within their management information system that have outstanding conditions of probation or appear anomalous. 

The Research Unit forwarded the information to the appropriate CI field office 

for review and corrective action, if necessary. Twice a year, the Research Unit 

will submit similar information to the responsible field office(s) for verification 

and correction. 

—The CI Research Unit added additional tracking codes to the management information system to ensure that management only tracks and reviews viable open 

cases. 

—CI revised its Criminal Investigation Closing Report. This report will serve as 

CI’s notice to the SB/SE Territory Manager of Technical Services that the court 

has sentenced a taxpayer and document the tax-related conditions of the sentence. 

—CI is developing a ‘‘Fraud Life Cycle’’ communications model as an educational 

tool to improve its understanding of the interaction among the various CI and 

SB/SE functional processes. This model will help CI and SB/SE develop ways 

to improve the processing of conditions of probation cases. 

—CI front line managers received refresher training on using current systems to 

effectively identify, report, and monitor terms and conditions of probation on tax 

investigations. 

—CI’s Review and Program Evaluation (RPE) Section has incorporated, as part 

of its field office review process, an analysis of the CIMIS information on terms 

and conditions of probation. Senior executives in CI will use RPE reports to ensure that all conditions of probation procedures are effectively implemented in 

each field office. 

—The Program Manager, Technical & Insolvency of SB/SE will include the monitoring of conditions of probation in fiscal year 2005 reviews of Technical Services operations and keep the Director, Payment Compliance informed of adherence to IRM procedures. These procedures require Technical Services to immediately report to CI evasive or uncooperative taxpayers, as well as taxpayers 

who have fully complied with conditions of probation. For other non-compliant 

taxpayers subject to conditions of probation, Technical Services must provide 
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the required reports to CI no later than 6 months before the probation expires. 

CI will advise the Courts of these conditions. 

These steps will improve coordination between CI and SB/SE, clarify areas of responsibility, enhance employees’ understanding of newly implemented procedures, 

and improve the processing of conditions of probation cases. 

Question. Ms. Gardiner, given the fact that the head of IRS-Criminal Investigations disagreed with a number of your recommendations, are you confident that this 

grotesque abuse will be stopped? Mr. Everson, would you care to comment as well? 

Ms. Gardiner, why do you believe that IRS has not cleared up even the simplest 

of cases of uncollected taxes? Do you consider it a possibility that IRS has not done 

so in order to build a case for the use of private collection agencies? 

Answer. The IRS unequivocally states that no collection action has been taken or 

not been taken for the purpose of building a case for the use of private collection 

agencies (PCAs). Under the administration’s proposals, PCAs would supplement, 

and not supplant, IRS collection efforts. PCAs would expand the IRS’s overall capability to address outstanding tax liabilities while also allowing the IRS resources to 

be directed at more complex cases and issues. 

TIGTA will respond separately. 

Question. Ms. Gardiner, why do you believe that IRS has not cleared up even the 

simplest of cases of uncollected taxes? 

Answer. TIGTA will respond separately. 

Question. Do you consider it a possibility that IRS has not done so in order to 

build a case for the use of private collection agencies? 

Answer. TIGTA will respond separately. 

Question. In response to questions posed at the Treasury Deputy Secretary’s nomination hearing, Mr. Bodman said that IRS has implemented several actions to ensure that all deferred accounts receive adequate collection. But as I read it, only one 

of these four actions actually tries to collect from the taxpayer: the annual notices 

that remind taxpayers to pay their obligations. The other three seem to only further 

penalize the already delinquent party. How do these other activities really help in 

the collection of tax debts? Don’t they simply compound the problem? Are these really the best ways to go after tax cheats? 

Answer. The actions described by Dr. Bodman (refund offsets, the Federal Payment Levy Program (FPLP), and reactivation) are the principal methods of collection for deferred accounts; the IRS also uses these techniques as supplemental collection techniques for other types of cases. Since these methods generally employ 

automated processes, they allow the IRS to pursue these accounts at relatively low 

cost. Reactivation of a deferred account may be triggered when the taxpayer incurs 

a new liability, a tax filing delinquency occurs, or the IRS learns of a source of income. Based on the triggering event, the IRS reevaluates the priority of the case 

in terms of compliance risk and potential to collect the delinquency. Typically, if the 

case is deemed collectible, the IRS can expect to collect 64 percent of the debt 

through full payment or an installment agreement. 

As noted in Dr. Bodman’s response, many of the accounts in deferred status represent taxpayers who have filed a tax return showing an amount of tax due, but 

who have failed to pay the tax. Other accounts represent taxpayers who have been 

assessed additional tax by the IRS and have made three or more voluntary payments to satisfy that additional tax, but who have stopped making payments. These 

taxpayers are aware of their outstanding liabilities. The IRS, however, is unable to 

continuously pursue each taxpayer with an outstanding tax liability because of other 

resource and collection priorities. Many taxpayers with outstanding tax liabilities, 

however, would make payment if contacted by telephone and, if necessary, offered 

the ability to make payment of the full amount in installments. The administration’s fiscal year 2005 budget proposes to permit the IRS to use private collection 

agencies (PCAs) to address accounts in deferred status. 

Question. Mr. Everson, a recent IRS Oversight Board report claims that each 

year, ‘‘the IRS must absorb millions of unfunded costs, such as rent increases and 

postage, left uncovered by the administration’s budget request.’’ The Board estimates that in both fiscal year 2004 and fiscal year 2005, there will be at least $100 

million in unfunded expenses. Further, the ‘‘resulting shortfalls mean that the IRS 

is consistently unable to hire the personnel assumed in the administration’s request.’’ In what areas has the IRS cut, in order to pay these unfunded costs? 

Answer. The IRS took reductions across-the-board from all programs to fund pay 

parity, but protected enforcement initiatives. When absorbing the appropriation reduction, the IRS protected enforcement initiatives and related support costs, and 

took the majority of the cut from Information Systems and other support. 

The fiscal year 2005 budget includes a 1.5 percent increase for pay. If Congress 

approves and the President signs the anticipated 3.5 percent increase, the impact 
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of this increase would result in a shortfall of $109 million. Most of the IRS budget 

is composed of labor (71 percent) and most of the remainder is composed of items 

that support staff directly (travel, rent, supplies and equipment). The total percentage of the IRS budget that does not support staff directly is less than 18 percent. 

Any reduction to IRS funding or any absorption of an unfunded mandate like a pay 

raise would, of necessity, have a direct impact on FTE. Because most IRS staffing 

is devoted to taxpayer casework—answering telephones, collecting overdue money, 

or auditing returns—reductions inevitably affect these taxpayer assistance areas, affecting both taxpayer service and enforcement. 

[CLERK’S NOTE.—The report follows:] 

REPORT

BACKGROUND

The National Commission on Restructuring the IRS issued a report in 1997 defining ‘‘A Vision for a New IRS.’’ In 1998, the IRS Restructuring and Reform Act (RRA 

98) codified much of that vision into law. Since the passage of RRA 98, the IRS has 

undergone enormous changes, including the most extensive reorganization of the 

agency in the past 50 years. Prior to the IRS reorganization, all ten IRS Submission 

Processing Centers performed similar functions and processed returns for both the 

Individual Taxpayers (IMF) and Business Taxpayers (BMF). Each center also handled Taxpayer Accounts (correspondence/telephones) and Compliance programs for 

both IMF and BMF. 

Although the ten-center configuration was successful and worked for many years, 

we felt we could improve our business results and better respond to customer needs 

by organizing around our customer segments. We based the initial IMF Consolidation Strategy of our centers around Wage and Investment (W&I), Small Business/

Self Employed (SB/SE), Large and Mid-Size Business (LMSB), and Tax Exempt and 

Government Entities (TE/GE) customer segments. As a result of this reorganization, 

we realigned the ten Processing Campuses into eight W&I (IMF) and two SB/SE 

(BMF) Submission (paper returns) Processing Centers. We completed this realignment of the customer base in 2002. Now, all BMF taxpayers file their paper returns 

at our processing centers located at either Ogden, Utah or Cincinnati, Ohio. All IMF 

taxpayers file their paper returns at one of the W&I centers. 

The RRA 98 also mandated that the IRS improve the Electronic Tax Administration program to reach the goal of 80 percent of individual returns filed electronically 

by 2007. With increased emphasis and success of electronic filing, the volume of 

paper returns has decreased. To effectively administer and manage this change in 

taxpayer behavior, the IRS analyzed ‘‘E-file versus Paper Trends’’ and developed a 

detailed business plan to gradually reduce the number of IMF paper Processing 

Centers. We approved this ‘‘Business Plan,’’ which will take several years to fully 

implement, in 2002. The plan calls for the consolidation of an IMF paper processing 

center every few years, contingent on the public’s continued migration from paper 

to electronically filed returns. 

At the completion of each filing season, we assess both the e-file progress and the 

paper return filing pattern to see if we need to adjust the consolidation timelines 

for the next filing season. Flexibility is a key component in this plan, allowing the 

IRS to plan and react appropriately as paper return volumes fluctuate. Many restructuring changes have already taken place at the Ogden, Utah; Cincinnati, Ohio; 

and Brookhaven, New York campuses. At Memphis, Tennessee; Philadelphia, Pennsylvania; and Andover, Massachusetts, the IRS will consolidate the paper return 

processing function over the next several years. 

However, compliance and tax account work will remain at all the campuses, making them key employment centers. Our timetable for consolidating IMF paper processing at the campuses is as follows: 

—Consolidate the processing of BMF paper returns into two sites (Ogden, Utah 

and Cincinnati, Ohio). We completed this migration in 2002. 

—Discontinue the processing of IMF paper returns at Brookhaven, New York. We 

completed this change in October 2003. 

—Discontinue the processing of IMF paper returns at Memphis, Tennessee by 

June 2005. 

—Discontinue the processing of IMF paper returns at Philadelphia, Pennsylvania 

by June 2007. 

We will determine the specific dates for consolidating of the remaining centers 

based on e-file and paper volume projections for subsequent years. 
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ELECTRONIC FILING

In 1999 the IRS processed 29 million electronically filed returns, and in 2003, 53 

million taxpayers chose to file electronically. We estimate that nearly half of all taxpayers will e-file in 2004. We are encouraged by both the growth of e-file to date 

and the projected growth through 2010. We will continue to strive to reach the RRA 

98 goal, but believe that individual returns filed electronically will not reach 80 percent by 2007; however the IRS’s electronic tax filing program has experienced tremendous gains in customer acceptance. The chart below reflects the progress we 

made in e-file from 1997 through 2003, and our projections for the future look equally promising.

ACTUAL 

[Volume in millions] 

1997 1998 1999 2000 2001 2002 2003 

Total Returns ............................................... 120.7 125.2 126.0 128.4 131.0 131.7 130.1 

Total Paper .................................................. 101.5 100.6 96.7 93.0 90.9 85.0 77.2 

Total Electronic ............................................ 19.2 24.6 29.3 35.4 40.1 46.7 52.9

Percent e-filed ............................................. 15.9 19.6 23.3 27.6 30.6 35.5 40.7

Percent growth Electronic ........................... .............. 28.1 19.1 20.8 13.3 16.5 13.3

Percent decrease Paper ............................... .............. 0.9 3.9 3.8 2.3 6.5 9.2

PROJECTED—2004 AND BEYOND 

[Volume in millions] 

2004 2005 2006 2007 2008 2009 2010

Total Returns ............................................... 130.9 133.3 135.5 137.3 139.0 140.5 141.9 

Total Paper .................................................. 71.1 66.6 62.2 58.1 54.8 51.9 49.5 

Total Electronic ............................................ 59.8 66.7 73.3 79.2 84.2 88.6 92.4

Percent e-filed ............................................. 45.7 50.0 54.1 57.7 60.6 63.1 65.1

Percent growth Electronic ........................... 13.5 11.5 9.9 8.0 6.3 5.2 4.3

Percent decrease Paper ............................... 8.1 6.3 6.6 6.6 5.7 5.3 4.6

PROCESSING PAPER RETURNS

As a result of the increase in e-file volume, the paper return volume has decreased each year since 1998. For example, in 1999 we processed over 97 million 

paper returns, or 77 percent of the total returns processed by the IRS. From 1999 

through 2003, paper return volume has decreased by almost 26 million returns, a 

26 percent reduction. In 2004, we project we will process 71 million paper returns, 

which is 54 percent of the total returns processed. This is an average of over 4 million fewer paper returns each year; a trend that we expect will continue. Based on 

these trends, we analyzed the impact on operations and developed a comprehensive 

business plan by looking at the impact e-file would have on our processing centers 

(Phase I), and then developing a strategy to address the decline in paper return volumes (Phase II). 

PHASE I OF CONSOLIDATION STRATEGY

Due to the actual and projected increases in electronic filing (ELF), we decided 

to assess the current and future impact of e-file on our paper processing sites. In 

2000, we developed a long-term strategy by answering three key questions about the 

future of IMF return processing: 

—How does an increased ELF volume affect the workforce? 

—What is the ideal configuration (end state) of centers when we achieve 80 percent ELF? 

—How will the IRS manage the path toward the end-state configuration? 

We assessed projected volumes of ELF and paper processing capacity at each site, 

multiple transition scenarios, and business objectives to arrive at a consolidation 

strategy. The results of this analysis showed that continuing to operate ten paper 

processing sites was inefficient. Although we analyzed multiple strategies, consolidating one IMF center at a time (as the volume of e-file returns continues to increase) was the most efficient strategy. We shared this strategy with all our internal 

and external stakeholders, then proceeded to implement this ‘‘Modernization/Consolidation of Submission Processing Centers,’’ starting with the consolidation of the 
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Brookhaven IMF Submission Processing operation. As a result, Brookhaven stopped 

processing individual paper returns as of October 2003. 

Our strategy will allow us to improve customer service, increase business performance, and adjust the plan as paper and e-file volumes and patterns dictate. It will 

also permit us to reduce overhead and real estate costs campus by campus. 

PHASE II OF CONSOLIDATION STRATEGY

For the second phase of our analysis, we reviewed each site against factors including business operational alignment, economies of scale, labor market issues, and 

real estate costs. This analysis identified the order of the consolidation of IMF processing centers, starting with the Brookhaven Submission Processing center in October 2003, the Memphis Submission Processing center in October 2005, and the 

Philadelphia Submission Processing Center in October 2007. 

We expect these consolidations to be followed by the Andover Submission Processing center, and so forth, until the IRS reaches its ‘‘end state’’ configuration. 

Again, this plan is contingent on the continued growth in the number of e-filed returns. 

TAXPAYER IMPACT

At the very beginning of our modernization efforts, we recognized the challenge 

we would face in ensuring our customers understood the reason for consolidating 

our operations and the changes they could expect to see. We have tried to minimize 

the impact of these changes by consulting with various groups including the National Treasury Employees Union (NTEU) and Tax Practitioner groups. Working 

with our own Multi-Media operation, we made sure that various tax packages included updated instructions on the location to send returns. We also made presentations at various tax forums around the country. Although this effort has been 

challenging, we have successfully consolidated IMF and BMF customer processing 

sites and the Brookhaven Submission Processing operation. Even though we substantially reduced the number of returns processed at Brookhaven in 2003, we completed one of our most successful filing seasons. We review each consolidation process and build on that foundation as we continue our consolidation efforts. 

WORKFORCE IMPACT

We recognize that one of our greatest assets is the people who help in the daily 

processing of taxpayers’ returns. We also recognize that consolidating paper processing operations will affect our workforce. In anticipation of the consolidation, we 

stopped hiring ‘‘career conditional’’ employees and started hiring ‘‘temporary’’ employees in Memphis, Philadelphia, and Andover. The new hires understand their appointment is temporary. When job reductions occur, we will make every effort to 

minimize the adverse effects on our employees. For example, when we realigned the 

processing of IMF/BMF paper returns into eight IMF centers and two BMF centers, 

we did so without a loss of jobs. In addition, in the Brookhaven and Memphis centers we prepared for staff downsizing by consolidating our Centralized Offer in Compromise (COIC) program in the centers, creating hundreds of job opportunities at 

each location. We also recently announced the proposed consolidation of Case Processing and the Insolvency Program, which will also create hundreds of jobs in Memphis and Philadelphia. 

We are working with NTEU to develop workforce transition plans and to take advantage of every tool we have to help employees through this transition. We have 

held ‘‘Town Hall’’ meetings with the employees at all our campuses and will continue to do so as we schedule specific campuses for consolidation. We will also continue to provide our employees with job placement assistance. Of course, if we must 

involuntarily separate employees from the IRS, we will give them all the benefits 

to which they are entitled under the law. 

CONCLUSION

We began modernizing our paper processing centers in 1998. We conducted an extensive business plan analysis before making consolidation decisions, and we continue to rely on this business plan as we move forward with consolidation. We also 

adjust our plan based on our initial experiences with the streamlining of the service 

centers. This report captures at a high level the analysis, efforts and progress we 

have made in improving our processing operations. We would welcome the opportunity to present this extensive business case to you and your staff at your earliest 

convenience.
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Question. In addition to the new enforcement funding IRS is seeking from Congress, the IRS’s budget justification states the following about its intention to fund 

enforcement from other areas: ‘‘In fiscal year 2005, $111 million will come from current operations to improve enforcement and infrastructure.’’ ‘‘The majority of resources ($61 million) generated from base mining will be diverted to enforcement 

activities. . . .’’ Why is only a little more than half of the money going toward enforcement? For what specific purposes is the other money going and what is meant 

by infrastructure? 

Answer. The IRS is emphasizing enforcement, but it cannot ignore service or the 

infrastructure supporting it. Thus, in order to balance its efforts, the IRS redirected 

some funds to modernizing IRS infrastructure. The IRS budget strategy is designed 

to redirect productivity enhancements from increases in electronic processing and 

modernization of business systems to continue to improve taxpayer service and enforcement. 

Of the $111 million in redirected resources, $61 million will be diverted to enforcement activities. The remaining $50 million will be redirected as follows:

INFRASTRUCTURE EXPENSES 

[In millions of dollars] 

Amount 

Cost of Transitioning Employees1 ........................................................................................................................ 39.0

Continue Competitive Sourcing Studies .............................................................................................................. 9.0

Embedded Quality 2 .............................................................................................................................................. 1.6

Create ADA-Compliant Training Facility .............................................................................................................. 0.5

TOTAL ...................................................................................................................................................... 50.1

1 Includes lump-sum leave, severance and relocation. 

2 This initiative, through an Embedded Quality system in Submission Processing (EQSP), will create a new measurement system that will 

identify the cause and impact of errors, apply common measures to every level of the new organization, and enable frontline employees to 

understand how their contributions impact IRS’s performance. An embedded quality system links individual and business performance with 

multiple quality review sources. EQSP will instill complete accountability for quality performance across operations. 

Infrastructure refers to programs and activities that support enforcement and taxpayer service. These activities align with the IRS’s third strategic goal, ‘‘modernize 

the IRS through its people, processes, and technology.’’ 

Question. As part of its budget request, IRS proposes spending $121.6 million and 

1,167 FTE to ‘‘curb egregious noncompliance’’. Please provide a table citing each instance of egregious noncompliance, along with the associated dollar amount and 

FTE. 

Answer. The ‘‘Curb Egregious Noncompliance’’ (CEN) enforcement initiative addresses the continuing concern over the proliferation of abusive domestic and international tax avoidance transactions and schemes. In addition, requested staffing 

will allow the IRS to address issues associated with certain individual taxpayers 

and those who use structured transactions and flow-through entities to conceal or 

improperly reduce taxable income and avoid payment of taxes owed. This noncompliance represents a real threat to the American system of voluntary compliance. Traditional approaches aimed at maintaining audit coverage and managing 

growing case inventories with a declining resource base have failed to adequately 

address these complex enforcement issues. 

To address these issues, the CEN initiative will allow the IRS to hire and train 

new staff in the Examination, Collection and Document Matching programs during 

fiscal year 2005. 

The following table shows the projected expenditures of FTE and dollars by program.

[Dollars in millions] 

Program FTE Amount 

Field Examinations .................................................................................................................. 492 $66.0 

Field Collection ........................................................................................................................ 332 $29.2 

Automated Underreporter ........................................................................................................ 53 $4.2 

Automated Collection (ACS) .................................................................................................... 125 $10.9 

Correspondence Exams ........................................................................................................... 165 $11.3

Total ........................................................................................................................... 1,167 $121.6 
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Question. Please provide a breakdown by percentage of how proposed enforcement 

resources would be allocated toward the various segments of the taxpayer population within $25,000 increments. 

Answer. In fiscal year 2005, proposed increases for the Tax Law Enforcement account, including annualization and enforcement initiatives, total $393 million. The 

IRS aligns increases in enforcement as follows: 

—Corporations.—$59 million (22 percent) and 562 FTE; 

—High-income taxpayers (>$100,000).—$57 million (21 percent) and 674 FTE; 

—Criminal activity.—$64 million (23 percent) and 299 FTE; 

—Tax-exempt organizations.—$16 million (6 percent) and 180 FTE; and 

—Other contributors to the tax gap.—$76 million (28 percent) and 1,226 FTE. 

The increase also includes $121 million for inflation to maintain current levels. 

IRS REORGANIZATION

Question. Please summarize in detail what has happened to IRS employees who 

were determined to be ‘‘transitional’’, stating from which program area they were 

taken and when, how many reassigned, how many were lost due to attrition, as well 

as how the requested $5 million will remove the remaining employees ‘‘from the 

rolls.’’

Answer. Upon stand-up in September 2000, approximately 5,000 employees did 

not align with the new organizational structure. Over the next 3 years, the IRS 

placed approximately 4,450 employees into permanent positions or they voluntarily 

left the IRS. Approximately 1,000 of these employees left under Voluntary Early Retirement Authority (VERA) or Voluntary Separation Incentive Payment (VSIP). On 

August 9, 2003, the IRS terminated the ‘‘transition’’ designation and declared permanent all employees previously designated as ‘‘transition.’’ At that time, there were 

approximately 550 formerly transition employees. Of this group, the IRS placed approximately 290 employees in permanent positions and 260 remained in non-continuing positions. The IRS expects to offer VERA/VSIP to the employees in the noncontinuing positions to facilitate voluntary separations. 

Question. In early January, IRS officials announced a major organizational restructuring resulting in 2,400 layoffs as well as office consolidations. As part of the 

same announcement, IRS indicated its intention to then fill 2,200 new positions. 

What is the cost of the 2,200 new enforcement positions the IRS intends to add? 

What is the cost savings associated with the layoffs and consolidations? 

Answer. As noted in the January announcement, as a result of our planned consolidation, the IRS expects to perform its Case Processing and Insolvency operations 

while using fewer full-time employees—saving approximately 350 staff years. Similarly, the IRS expects that Support Optimization initiative will allow it to deliver 

its operations support services while saving approximately 750 staff years. The 

Memphis Submissions Processing ramp-down will eliminate approximately 2,200 positions. The January announcement stated the intention to redeploy the personnel 

reductions towards enforcement priorities. 

In determining the approximate numbers of full-time positions that could be redirected to enforcement activities, the IRS assumed a 1-for-1 redeployment of the full 

time positions (i.e., approximately 350 from Case Processing and Insolvency and 750 

from Support Optimization) and a 2-for-1 redeployment for the submissions processing positions (i.e., for every two submission processing positions eliminated the 

IRS could expect approximately one full-time position available for redeployment, or 

approximately 1,100 positions). Thus, the IRS estimated that approximately 2,200 

positions would be available for redeployment to enforcement activities that would 

not be otherwise available without such efficiencies. 

In determining the numbers of employees potentially subject to involuntary separation, the IRS estimated the numbers of employees in positions to be eliminated, 

and reduced that figure to account for the numbers of employees who are expected 

to voluntarily leave through normal attrition, the use of Voluntary Early Retirement 

Authority (VERA) and Voluntary Separation Incentive Payments (VSIP), and those 

employees expected to be placed in other positions with the IRS. For this determination, the IRS did not include employees hired for limited-term appointments, because employees accepted these positions with the understanding that the positions 

would ‘‘sunset’’ in 2005 and because the elimination of these positions does not require the same involuntary separation procedures. 

For the income tax returns processing initiative, the IRS estimates that approximately 2,200 positions will be eliminated. Of this number, approximately 400 are 

term appointments. Therefore, the IRS determined that approximately 1,800 permanent (full-time or seasonal) positions would be eliminated. Based on this figure, the 

IRS anticipates approximately 1,000 employees will be involuntarily separated. For 
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the case processing and insolvency initiatives, the IRS estimates that approximately 

1,400 positions will be eliminated. Of this number, it anticipates that approximately 

1,000 employees will be involuntarily separated (because the case processing and insolvency initiative involves consolidating work, i.e., eliminating positions in field offices while creating positions in the four consolidated campus locations, the net 

number of positions available for redeployment (approximately 350) is less than the 

gross numbers of positions being eliminated (approximately 1,400)). The Support 

Optimization initiative involves eliminating approximately 750 positions, and based 

on that figure, the IRS anticipates approximately 400 employees will be involuntarily separated. Thus, the total number of employees estimated to be subject to involuntary separation is estimated to be 2,400. 

Question. The nationwide case processing and insolvency support workforce would 

be reduced from 1,600 positions to 1,200, a 25 percent reduction. What analysis has 

been done to show that 25 percent fewer employees can perform this work? What 

cost savings does the IRS project from this? All background on how the savings are 

projected should be provided. 

Answer. The IRS has been studying the reengineering of the case processing and 

insolvency operations since 2000. Even after taking into account costs such as severance, hiring, training, salary cost differentials, and infrastructure, the IRS expects 

these initiatives to yield more than $300 million in savings over the next 10 years. 

These savings will allow us to redirect the equivalent of 350–425 full-time employees to front line tax law enforcement. 

The IRS considered alternative approaches, including switching staffing allocations from the area offices to the campuses at a pace driven by natural attrition. 

The IRS rejected this approach because of low return on investment and implementation difficulties. Competitive outsourcing was also considered and rejected because 

case processing and insolvency work is mainly inherently governmental. 

The IRS’s analysis involved baselining the existing case processing and insolvency 

processes currently performed in the areas, identifying best practices, and standardizing the processes to be implemented in the campus from these baselines and best 

practices. The new operational structure builds on existing processes currently being 

performed at IRS campuses, provides economies of scale and standardization, allows 

the creation of a quality review unit, offers staffing flexibility, and creates space 

savings due to shift work. 

The IRS’s analysis of sources such as OMB and best practices used in private industry predicted that a 35 percent reduction in case processing and insolvency costs 

would be possible through consolidation and process standardization. The results 

predicted from external indicators were compared with area and campus case closure efficiencies. Centralized staffing calculations were updated based on area and 

campus efficiency and projected work plans resulting in a more conservative of 25 

percent cost savings projection. 

Question. IRS has stated that no employee would be involuntarily separated before January 2005. When would new employees be hired and what kind of training 

will be provided? How would IRS deal with an inexperienced workforce—reduced by 

25 percent from current levels—that will have no institutional memory? 

Answer. The IRS is currently in negotiations with NTEU regarding the potential 

reduction in force. Until negotiations are finalized, no employee will be involuntarily 

separated. However, the IRS has recently entered into a separate memorandum of 

understanding with NTEU that authorizes a staged hiring at the campus consolidated sites to address excess workload in the area offices created by the natural attrition of staff. This step will allow the organization to begin ramp up by providing 

training and significant experience with the work before any off rolls occur. 

Once this IRS reaches its final agreement with NTEU, full implementation will 

occur with a staged deployment of hiring at the campuses, redirecting work from 

the field, and workforce transition in the non-continuing sites. This approach allows 

campus personnel additional experience with total centralization before off rolls will 

occur in 2005. 

The IRS established a training team made up of subject matter experts from case 

processing, insolvency, and campus employees to revise existing training material, 

write additional training lessons and develop training guidelines and timeframes. 

All campus hires will be given a combination of classroom and on the job training 

as soon as they are hired, which is a significant improvement over current field 

practices in case processing and insolvency. 

Learning curves were projected for centralized case processing and insolvency new 

hires aligned by grade level and skill set. These learning curves provided the 

underpinnings for decisions regarding the timing for early ramp up and staging the 

implementation. Projections for the time needed for training are conservative as 

many of the hires will already have experience from positions and activities cur-
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rently performed on the campus that are similar to those in centralized case processing and insolvency. 

Question. How is it more efficient to move these case processing staff away from 

the collection staff they are supporting to centralized locations? 

Answer. In a centralized situation, a smaller team of employees can focus on one 

function for longer periods of time, and can work more efficiently than the larger 

number of staff in the separate locations. The workload can also be more easily 

managed and scheduled because of the consolidation. Training expenses and other 

costs have been considered, and the resulting savings shows centralization is cost 

effective. 

Many revenue officers and revenue agents currently mail their work to the area 

offices and under the new design the only change for them would be the address 

they mail to. To address lingering concerns of the collection staff there will be a 

FORT (Field Office Resource Team) consisting of revenue officers who will be responsible for assisting tax examiners and field collection personnel in making any 

necessary corrections to reports or closing documents. 

Question. How is it more efficient to centralize insolvency/bankruptcy staff when 

this work is ruled in large part by 50 different State laws? 

Answer. Over 900 Insolvency Specialists and Advisors will remain in the area offices to address the more technical issues. They will no longer be pulled away from 

the technical work to help with clerical and para-professional duties. Therefore, centralization will actually enhance the relationships with the bankruptcy courts, trustees and external stakeholders that have been established over the years and increase customer service. 

The new structure provides economies of scale and standardization, allows the 

creation of a quality review unit, offers staffing flexibility, and creates space savings 

due to shift work. Centralization will also help create an environment suitable for 

electronic processing and transmission of Proofs of Claim. The planned use of an 

electronic knowledge system will provide a national resource for State law information. 

Question. Have you discussed this reorganization with the affected parties? What 

do the revenue officers and agents think the impact of this will be on their efficiency? What do tax practitioner groups think of this? 

Answer. There is a natural concern and uneasiness that accompanies any change. 

Focus interviews and customer surveys were conducted with area directors, revenue 

officers, revenue agents, and other bargaining unit employees in which the case 

processing redesign team received valuable information on issues and ideas to be 

considered for possible centralization. As a result of this feedback, the IRS developed the concept of the Field Office Resource Team (FORT). The FORT, consisting 

of revenue officers, will be available to address the needs of field collection personnel 

in making any necessary corrections to reports or closing documents. 

Insolvency has little contact with revenue officers, revenue agents, or practitioners. A centralized phone number and phone unit will be established to answer 

calls and concerns of trustees, taxpayers as well as any internal customers. 

The Case Processing Team had conversations with some of the large institutional 

practitioner groups and received support for the redesign. 

Question. At the Memphis Service Center, 2,200 current employees would be laid 

off and not replaced. IRS claims that this is aimed at reducing paper processing 

staff in response to increases in electronic filing. IRS has already downsized returns 

processing employees at the Brookhaven, NY Service Center. The House report accompanying the fiscal year 2004 Transportation, Treasury Appropriations bill recommended that IRS refrain from initiating any premature and ill-considered reductions in force until reporting to Congress. What progress has been made on the report to Congress and when will it be submitted? What are the cost savings associated with the reduction in force? 

Answer. The IRS delivered the report to Congress on April 22, 2004. A copy is 

attached. The IRS estimates the cost savings for Memphis to be $12.5 million for 

the period 2004 through 2006 and then an annual cost avoidance of $9.5 million dollars a year starting in 2007. 

Question. GAO has indicated that electronic filing is far short of IRS projections. 

What is the level of electronic filing compared to IRS projections? What level of increase in electronic filing is IRS projecting that will make it plausible to lay off 

2,200 return processing employees within the next year? 

Answer. While the IRS is below projections needed to achieve the goal of 80 percent of individual returns filed electronically by 2007, it is continuing to make 

strong gains. The Consolidation Strategy is based on projections that are keyed to 

the workload shifts necessary to process the reduced paper volumes. In 2004, the 

IRS projected 59.8 million electronic returns would be filed. As of May 14, taxpayers 
259

exceeded the number e-filed returns from the prior year by over 8 million returns 

to reach the 60 million mark. This figure equates to approximately 50 percent of 

all individual returns filed and represents a milestone in e-file progress. The IRS’s 

Consolidation Strategy is on track. 

PROBLEMS WITH IRS BUSINESS SYSTEMS MODERNIZATION (BSM)

Question. In a March 2004 review, GAO found that although IRS has made some 

progress in implementing their recommendations and improving its modernization 

management, certain recommendations have not yet been fully implemented or institutionalized. These weaknesses have contributed, at least in part, to BSM project 

cost and schedule shortfalls. GAO states that, ‘‘Projects continue to incur cost increases and schedule delays for several reasons, including inadequate definition of 

systems requirements, increases in project scope, and cost and schedule estimating 

deficiencies.’’ Mr. Everson, this modernization effort has been plagued with these 

problems from the start. What have you done to ensure that IRS staff is adequately 

prepared to define its systems requirements instead of relying completely on the 

contractors to do so? What steps are you taking to ensure that cost and schedule 

estimates, which have been grossly off-track, will now be more accurate? 

Answer. Recent improvements to the IRS Enterprise Life Cycle (ELC) will ensure 

that the IRS adequately defines system requirements in the future. The recent updates to the ELC include a new milestone (Milestone 4A), that requires a detailed 

definition of a systems’ physical design baseline under strict configuration management (CM) control. This baseline can be used for awarding fixed priced contracts 

for the development, integration, and testing of the system. As a prerequisite to the 

implementation of MS 4A, the ELC now requires redefinition of requirements management, and strict CM control for projects in prior milestones. For example, at 

Milestone (MS) 2, business requirements constitute the functional baseline. The 

functional baseline is then decomposed into logical systems requirements that are 

baselined under CM control at MS 3. Requirements that evolve from milestone 1 

through 4A are verifiable and traceable in both directions and must be compliant 

with the Enterprise Architecture in order for a project to gain approval to move to 

the next stage of development. There will be a major systems engineering review 

at the end of each development phase, conducted by IRS business and technical personnel. 

As the IRS moves forward, constant involvement of the IRS stakeholder organizations is critical. Stakeholder involvement in the definition, approval, and coordination of system requirements will ensure that what the IRS develops is closely traced 

to IRS’s business needs and that ownership is clearly identified and understood. As 

this revised ELC strategy is unveiled, training will be provided to ensure that IRS 

personnel are adequately prepared to achieve success. 

The IRS has been working jointly with MITRE and CSC (the PRIME Contractor) 

to improve cost and schedule estimating capability. The IRS is using the well-recognized Carnegie Mellon Software Engineering Institute’s (SEIs) Requisites for Reliable Estimating Processes as a guide. The requisites provide for development and 

execution of the following key cost and schedule estimating objectives: 

—Maintaining historical data; 

—Structured estimating processes; 

—Mechanisms for extrapolating estimates from successful past projects; 

—Audit trails; and 

—Ensuring integrity in dealing with dictated costs and schedules. 

Both CSC and the IRS have made significant progress towards achieving these 

key objectives. The IRS has implemented procedures for validating contractors’ estimating systems and for reviewing cost and schedule estimates. The procedures provide guidance for evaluating reliability of documentation supporting individual estimates and for tracking compliance with sound estimating practices. Furthermore, 

the procedures also address professional development of personnel with the right 

skill set for developing and evaluating cost and schedule estimates. CSC has established a historical database, calibrated estimating models and developed detailed requirements for documenting and supporting bases of estimates along with related 

guidance and directives. Work is also in progress for continuing refinement and improvement in each of these elements. 

In addition, joint training is being conducted for IRS, CSC and MITRE personnel 

as an integral part of the overall plan to ensure competent deployment of improved 

processes and procedures. The IRS, with MITRE’s assistance, recently completed a 

review of CSC’s estimating system. The IRS is finalizing the results and will issue 

them in a report in the latter part of June. In general, there have been improvements. The report will include a time phased corrective action plan for addressing 
260

deficiencies. To ensure the tools, guidance, processes and procedures are part of a 

mature repeatable process, a concerted effort is underway to fully validate all aspects of the processes and procedures prior to official roll-out within the IRS. This 

pilot program is intended to verify the soundness of the processes and procedures 

and provide lessons learned, before full implementation is effected. 

The IRS is making every effort to hire qualified staff and fully implement its improved tools, guidance, processes, and procedures as soon as possible. However, this 

is taking more time than the IRS would like. This is a pervasive problem on programs of the size and complexity of the modernization initiative. Nonetheless, the 

IRS believes that there will be evidence of increased accuracy by the end of fiscal 

year 2004 and continued improvements over time. 

Finally, all of these efforts are part of a highly visible set of plans geared to identifying, tracking, reporting, and reviewing the critical cost and schedule estimating 

commitments with IRS Executive Management and GAO/TIGTA. 

Question. The modernization of IRS business systems has suffered numerous 

problems and delays and now some IRS staff integral to the process are leaving, 

including the director of BSM. How will this affect the program, what steps are 

being taken to ensure that institutional knowledge of the modernization program remains? 

Answer. In addition to putting a succession management plan in place, the IRS 

needs a more versatile team of seasoned executives to provide long-term stability 

to the program. The IRS is complementing the skills of its experienced tax executives with outside seasoned technology executives who have experience managing 

large-scale, complex IT projects. As such, the IRS is hiring two Associate Chief Information Officers to join the MITS organization, and an executive search firm is 

conducting searches for five senior executives with a wide range of diverse experience in developing and implementing large modernization systems. The new Associate CIOs will assume modernization management responsibilities so that the Associate CIO of business systems modernization can focus primarily on delivering 

projects. 

Question. Until recently, IRS has used its information technology services staff 

with minimal input from its business units. The business units will be the ultimate 

users of this program. What steps has IRS taken to incorporate the business managers into BSM? 

Answer. The Commissioner is holding IRS senior business unit managers accountable for the success of modernization efforts as it relates to defining, developing, and 

controlling business requirements. For example, a senior business unit manager is 

responsible for working closely with the BSM and Modernization and Information 

Technology Services (MITS) executives to ensure that the delivery of the CADE 

project meets all business requirements. 

Question. GAO has concluded that the IRS must institutionalize the management 

processes and controls necessary to resolve the deficiencies identified by the reviews 

and assessments in order to strengthen management of the Business Systems Modernization program. What steps is IRS undertaking to accomplish this? 

Answer. Over the past 2 years, the BSM organization has been working diligently 

toward integrating and institutionalizing the management processes of the BSM 

program. While the IRS has achieved real progress, as recognized by TIGTA and 

GAO, the BSM Challenges Plan has complemented ongoing efforts by providing a 

special focus on significant issues that needed more attention. 

GAO recognized the need for continual growth in the maturity of the BSM management processes and raised concerns in key areas such as configuration management, human capital management, contract management, and cost and schedule estimating. Accordingly, BSMO committed to maturing its management processes and 

established corrective action plans for each area, assigned responsibilities and set 

milestones, and initiated a formal monitoring process for measuring progress in 

each area. 

For example, the IRS has developed configuration management processes and is 

institutionalizing configuration procedures. It established a process for determining 

the type of task order to be awarded and MITS is implementing plans for attracting, 

developing, and retaining requisite human capital resources. Key stakeholders are 

reviewing documented procedures for how to effectively validate the cost and scheduling estimates submitted by the PRIME. 

Question. The IRS Oversight Board stated in a December 2003 report that, as the 

foundation of the modernization project, the Customer Account Data Engine 

(CADE), requires special attention. CADE will replace the existing IRS Master File 

of taxpayer accounts. It is the most costly, complex, largest, and longest-running 

project within the BSM portfolio. IRS has engaged Carnegie Mellon’s Software Engineering Institute (SEI) to review CADE. One of SEI’s findings is that a key compo-
261

nent of CADE, its ‘‘business rules engine’’ which translates tax processing rules into 

computer code, must be defined and modeled in order for CADE to succeed. Is IRS 

following this recommendation and if so, what is the status? If not, why not? 

Answer. The IRS is following the recommendation from Carnegie Mellon’s Software Engineering Institute. The IRS tasked PRIME to do a business rules engine 

performance engineering study that measured and modeled the performance of the 

business rules engine. The IRS also tasked PRIME to evaluate design alternatives 

that lowered risk of implementing business rules. The PRIME has completed performance tests. 

Senior engineers from IRS, PRIME, MITRE, and Sapiens (the business rules vendor) met the week of May 10, to review the test results and assess alternatives that 

will improve the performance of CADE and lower the risk of implementing business 

rules. Design changes will be modeled using the performance data obtained in the 

tests. The final report is due to be completed June 20, 2004. 

Question. In Ms. Gardiner’s formal testimony, she states that oversight groups are 

starting to lose confidence in the ability of your PRIME contractor to meet its commitment in modernizing the IRS’s business systems. This observation is clearly 

based on the deadlines that have already been missed and the cost overruns already 

incurred. Mr. Everson, what is your current assessment of your PRIME contractor’s 

ability to get the job done without further delays and further cost overruns? Are you 

giving any consideration to changing your PRIME contractor on this critically important endeavor? If so, what would be the cost to the taxpayer of changing your 

PRIME contractor at this time? 

Answer. There are no current plans to replace CSC as the PRIME contractor, 

however, Commissioner Everson has made it vividly clear to Mike Laphen, the 

President and Chief Operating Officer of CSC, that CSC needs to significantly improve their performance. In February 2004, he announced his decision to direct the 

upcoming enforcement modernization projects for collection contract support and filing and payment compliance to other contracts. It is the Commissioner’s hope that 

this action, while no doubt unwelcome to CSC, will lead to a sharpened focus and 

discipline, and will in fact enhance the prospects for successful and timely delivery 

of other modernization projects by CSC. 

While CSC has improved their performance somewhat, the IRS carefully assessing CSC’s performance on current projects and the results of CSC’s overall program 

management and integration efforts before awarding any follow-on work for existing 

projects. The IRS needs consistent, high-level performance and service from CSC. 

The IRS has also moved to capped or fixed price contracts for almost all development work to balance the financial risk on modernization projects. 

COMPETITIVE SOURCING

Question. Mr. Everson, you are very familiar with the President’s competitive 

sourcing initiative since you served as Deputy Director for Management at OMB. 

I understand that you plan to spend $9.1 million in unbudgeted funds in fiscal year 

2005. What areas are you planning to contract out? 

Answer. The $9.1 million you cite is the amount the IRS has requested in the fiscal year 2005 budget submission to support the Competitive Sourcing program. The 

IRS plans to use public-private competition to improve operations, but only if it 

makes economic sense. Traditionally, the employee government bid teams have won 

over 50 percent of the public-private competitions. Historically, organizations that 

have successfully used competition to improve operations have achieved an overall 

30 percent reduction in operating costs. These reductions are typically in the support functions and are achieved through such actions as consolidation of existing facilities (releasing commercially leased space), staff reductions, and increased use of 

technology. Similarly, the IRS focus is on support functions. 

Question. What is the status of all the competitive sourcing studies that have been 

undertaken at IRS? Please include year, area, and result. How much money has 

been spent on these competitions? Since the competitions are not budgeted for, 

where has the money come from? 

Answer. It has been difficult to finance the Competitive Sourcing Program since 

the IRS does not know the outcomes in advance, the exact level of savings are yet 

to be determined, and it takes time to realize these savings. The IRS had to internally realign. However, the investments made today in public-private competitions 

show a return on investment usually within 2–3 years (including payment of transition costs—voluntary early retirement, voluntary separation incentive, etc.). At that 

time, the IRS plans to reinvest the savings to fund future competitions and cover 

transition costs. It will take several years to get there. The IRS does request funding in the fiscal year 2005 budget for the Competitive Sourcing program. 
262

Status of IRS Competitive Sourcing Studies 

Architects and Engineers (10 FTE).—Streamline competition resulted in in-house 

award. The in-house team was most efficient. 

No savings achieved. 

Area Distribution Centers (500 FTE in Bloomington, IL; Rancho Cordova, CA; 

Richmond, VA).—The three Area Distribution Centers distribute tax forms, instructions and publications to taxpayers and internal use documents to IRS employees. 

Standard Competition with award decision scheduled for June 28, 2004. 

Expected Saving and Benefits: Consolidation of activities and geographic locations 

resulting in the release of commercial space, revised operational processes and procedures to gain efficiencies, new information system, reduced staff and increased 

managerial span of control. 

Anticipated return on investment (fiscal year 2005–fiscal year 2009): $22 million. 

Building Delegations or Operation and Maintenance (O&M) of Delegated Buildings (100 FTE in Covington, Fresno, Austin, Ogden, Philadelphia, Headquarters).—

O&M are those functions identified in the Building Delegation Agreements between 

the General Services Administration (GSA) and the IRS. These services include responsibilities to operate and maintain building systems (electrical, HVAC, control 

systems, etc.). 

Standard Competition with solicitation release scheduled for June 2004. 

Expected Saving and Benefits: Revised operational processes and procedures to 

gain efficiencies; reduced staff; and increased managerial span of control. 

Anticipated return on investment (fiscal year 2006–fiscal year 2010): $3.9 million. 

Mail Rooms (70 FTE).—Mailroom services functions include all aspects of the delivery of mail from full service delivery to mail stop or desktop to self-service mailrooms where customers pick up their own mail. The IRS made a decision to divide 

the study among headquarters, nationwide ‘‘stand alone sites’’ and campuses. 

The IRS plans to use public-private competition to improve operations. 

Direct Conversion—in progress. 

Fully Implemented—Denver, CO; Detroit, MI; Plantation, FL; Detroit Computing 

Center, MI; Houston (Leland), TX; Laguna Niguel, CA; Oklahoma City, OK; and 

San Francisco, CA. 

Partially Implemented—Washington, DC; New Carrollton, MD. 

Scheduled for Implementation—Cincinnati, OH; Jacksonville, FL (5/17); and 

Nashville, TN. 

Implementation Not Scheduled—Atlanta, GA; Baltimore, MD; Boston, MA; Buffalo, NY; Dallas, TX;; Greensboro, NC; Hartford, CT; Houston (Alliance), TX; Indianapolis, IN; Los Angeles, CA; Milwaukee, WI; New Orleans, LA; Oakland, CA; Philadelphia, PA; Phoenix, AZ; Richmond, VA; Chicago, IL; Springfield, NJ; St. Louis, 

MO; St. Paul, MN. 

Anticipated return on investment (fiscal year 2005–2009): $399,000. 

Campus Operations (Information Technology) (350 FTE in Ogden, UT; Atlanta, 

GA; Brookhaven, NY; Andover, MA; Cincinnati, OH; Fresno, CA; Austin, TX; Memphis TN; Kansas City, MO; Philadelphia, PA).—This functional area provides the Information Systems (IS) computer operations at the ten IRS Campus facilities. The 

positions include computer operators, production controllers, tape librarians, computer specialists, and clerks. 

Standard Competition with award decision scheduled for July 2004. 

Expected Saving and Benefits: Revised operational processes and procedures to 

gain efficiencies; reduced staff; and increased managerial span of control. 

Anticipated return on investment (fiscal year 2005–2009): $12.7 million. 

Logistics Support (formerly Warehouse and Transportation) (160 FTE in Andover, 

MA; Philadelphia, PA; Brookhaven, NY; Atlanta, GA; Covington, KY; Austin, TX; 

Kansas City, MO; Ogden, UT; Fresno, CA; Memphis, TN).—This functional area provides warehousing and transportation, mainly at the 10 campus sites. This activity 

includes positions such as material handlers, warehouseman, motor vehicle operators, laborers, and clerks. 

Standard Competition with Performance Work Statement development underway. 

Expected Saving and Benefits: Revised operational processes and procedures to 

gain efficiencies, release of leased space, reduced staff and increase of managerial 

span of control. 

Anticipated return on investment (fiscal year 2006–2010): $4.8 million. 

Campus Files Activity (1458 FTE in Austin, TX; Andover, MA; Philadelphia, PA; 

Brookhaven, NY; Cincinnati, OH; Memphis, TN; Atlanta, GA; Kansas City, MO; 

Ogden, UT; Fresno, CA).—This functional area receives, controls, shelves and maintains all returns/documents for retention and retirement. They retrieve documents 

as requested by customer organizations. Liaison work is critical with the Federal 
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Records Centers for final retention of documents. The work is routine and does not 

involve making complex determinations or present unique fact patterns. 

Standard Competition with solicitation release scheduled for the fourth quarter of 

2004. 

Expected Saving and Benefits: Revised operational processes and procedures to 

gain efficiencies; reduced staff; and increased managerial span of control. 

Anticipated return on investment (fiscal year 2006–2010): $22 million. 

Learning and Education (617 FTE Service-wide).—This functional area is responsible for determining service-wide and division-level professional training requirements, developing training plans and curriculum, evaluating the effectiveness of 

training, and performing a broad spectrum of program administration. 

Standard Competition with Performance Work Statement development underway. 

Expected Saving and Benefits: Consolidation of activities, revised operational 

processes and procedures to gain efficiencies, implementation of learning content 

management and learning management systems, reduced staff and increased managerial span of control. 

Anticipated return on investment (fiscal year 2006–2010): $25 million. 

Competitive Sourcing Competition Costs

[In millions of dollars] 

Amount1

Fiscal year 2003 .................................................................................................................................................. 5.0

Fiscal year 2004 .................................................................................................................................................. 6.3

1 Travel, training, staffing, expert contractor support (PWS, Most Efficient Organization, Independent Review)—does not reflect transition/ separation costs. 

Note.—Return on investment includes cost of conducting competition and transition/separation costs. The IRS calculated savings calculated through fiscal year 2007. 

Business Case Analysis/Feasibility Studies 

Tax Law Telephone.—This is a preliminary feasibility assessment of having a vendor provide tax law telephone assistance. After the completion of the preliminary 

feasibility assessment, the IRS will make a decision as to whether to go forward 

with the competition. 

Fuel Compliance Activity (140 FTE Service-wide).—This function area monitors 

1,400 terminals, all fuel wholesalers, thousands of retail motor fuel outlets, and U.S. 

border crossings. Additionally, these personnel are charged with conducting periodic 

inspections of on-road vehicles on highways throughout the country. 

IT Support (Service-wide).—This is identification and development of sourcing 

strategy to identify candidate public-private competition activities. 

Question. One of the provisions included in last year’s appropriations bill was a 

prohibition against using fiscal year 2004 funds to contract out any Federal job overseas. To my shock, the President’s budget specifically requests that this provision 

be deleted for fiscal year 2005. Mr. Everson, could you cite for me some instances 

at IRS where you might take work that is currently be conducted by Federal employees and send that work overseas? 

Answer. The IRS has no specific plans to move work overseas. There are added 

complexities and security challenges that make moving work that would involve access to the IRS’s information technology systems and/or sensitive data cost prohibitive. 

However, while the IRS has no specific plans to contract work overseas, it is conceivable that qualified bidders with overseas operations may be responsive to future 

IRS public-private competitions that do not involve access to the IRS’s information 

technology systems and/or taxpayer return information. The IRS will continually 

identify a series of functions that are commercial in nature in accordance with the 

FAIR Act. At that time, a business case is developed that indicates whether or not 

a more efficient method of operation may be available. If so, a competitive sourcing 

initiative is begun under the guidelines of the OMB A–76 Circular. A contractor 

may then bid for that work. It is highly unlikely that a contractor would bid work 

to be performed overseas given the nature of the work the IRS has identified to date 

or anticipates identifying. Under the IRS Competitive Sourcing Program, no initiative has resulted in Federal jobs being outsourced overseas. The IRS adheres primarily to the Federal Acquisition Regulations (FAR) and the A–76 Circular when 

conducting public-private competitions for work performed by Federal employees. 

The FAR currently contains some limitation on issuance of contracts to some overseas locations. 
264

CUSTOMER SERVICE

Question. IRS consistently finds its own accuracy rates higher than TIGTA does 

when measuring taxpayer assistance functions, whether we are talking about tollfree telephone assistance, walk-in service at Taxpayer Assistance Centers, or the 

IRS website. Mr. Everson, how do you explain the discrepancy? Ms. Gardiner, would 

you care to comment? 

Answer. Typically, TIGTA’s reports on accuracy are based on limited judgmental 

sampling conducted during the brief period of their fieldwork on a particular audit. 

The results that they report are not statistically valid. The IRS results for telephone 

accuracy and for irs.gov e-mail assistance are based upon an on-going process that 

is statistically reliable. TIGTA typically acknowledges the limitations of their data 

in their reports with statements such as, ‘‘We selected a judgmental sample of calls 

to monitor between April 21 and May 16, 2003. Our results cannot be compared to 

the statistical results reported by the IRS.’’

The discrepancy between the TIGTA accuracy rates and the Taxpayer Assistance 

Center (TAC) walk-in service accuracy rates is due to the calculation methodology. 

TIGTA and the IRS treat responses to tax law questions differently. In contrast to 

the IRS, TIGTA includes referrals to publications, service denied, and referrals to 

other employees in its accuracy calculation. The IRS disagrees with the assertion 

that a non-response is synonymous with providing an incorrect answer. While it is 

clear that there is some disparity in methodology, it is important to note that neither of these methods of measuring walk-in service accuracy is statistically reliable. 

TIGTA will respond separately. 

Question. As stated in testimony, TIGTA found that IRS employees incorrectly 

prepared 19 of the 23 tax returns prepared during TIGTA audit visits to Taxpayer 

Assistance Centers. What steps has IRS taken to remedy this egregious example of 

inaccuracy and Mr. Everson, do you plan to implement the additional actions that 

TIGTA recommended? 

Answer. The IRS implemented the recommendations made by TIGTA and has 

taken several steps to remedy inaccurate return preparation. The IRS directed all 

TAC employees to adhere to existing screening procedures to ensure taxpayers meet 

the return preparation criteria. In addition, the IRS required all employees to use 

the appropriate worksheets in the return preparation software and the publication 

method guide to assist in determining a taxpayer’s eligibility for deductions and 

credits claimed on the tax return. 

The IRS also implemented a quality review plan to ensure TAC employees adhere 

to these and other return preparation procedures in the Internal Revenue Manual. 

The IRS requires group managers to complete three employee return preparation 

reviews and the quality review staff is required to visit each Area and conduct at 

least two return preparation reviews. 

Question. As stated in testimony, TIGTA found that IRS didn’t respond to several 

of the questions TIGTA submitted anonymously to the website. Do you have statistics about the number of questions that go unanswered? How is this allowed to happen? What is being done to prevent this in the future? 

Answer. During the period from February 22 to March 6, 2002, TIGTA anonymously submitted 90 questions through the website. TIGTA reported that they did 

not receive a response to 14 of these questions. During that period of time, the IRS 

was making system changes that affected its responsiveness. As it transitioned to 

a new server and a new contractor, some messages did not transfer between servers. 

The IRS was able to recover most messages, but unfortunately lost several, including some initiated by TIGTA. 

In an October 2002 report, Reference No. 2003–40–014, TIGTA recommended that 

the IRS improve its control system by sending an e-mail receipt acknowledgement 

to the requestor and develop a system to track each question submitted to ensure 

the IRS provides a response. The IRS concurred with these recommendations and 

modified the program to add both new features in 2003. Both of these enhancements 

are performing as designed. However, taxpayer e-mail limitations, such as address 

problems, discontinued service, mailbox full, and stringent spam filters may continue to block delivery of an IRS response. 

Question. Ms. Gardiner points out that the IRS revised its modernization plan for 

fiscal year 2003 to focus on executable segments that could be accomplished in a 

timely manner. Despite all of the IRS’s assurances to the contrary, all of the projects 

on the newly downsized list still experienced delays and most incurred significant 

cost increases. What are her observations regarding the IRS’s abilities to deliver 

modernization projects on time and on budget for the current fiscal year and next 

year? Why should we believe that the IRS and its contractors will improve its per-
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formance on these projects going forward? Mr. Everson, do you care to comment on 

this matter? 

Answer. The BSM program is—without a doubt—one of the largest, most visible, 

and most sensitive modernization programs ever undertaken in the world. 

When nominated in February 2003, the Commissioner set three priorities for his 

term as Commissioner. First, the IRS must continue to improve service to make it 

easier for taxpayers to understand and comply with tax laws. Second, modernization 

of IRS information technology is also a high priority. The third priority is to 

strengthen the integrity of the American tax system with enhanced enforcement activities. The Commissioner’s first action to address the modernization priority was 

to appoint two new leaders to the modernization effort. 

Commissioner Everson appointed John Dalrymple, a 30-year IRS veteran who has 

spent his career focusing on front-line taxpayer issues, as the Deputy Commissioner 

for Operations Support to own the modernization initiative and drive productivity 

across the IRS. Simultaneously, he appointed the former IRS Chief Financial Officer, W. Todd Grams, to the position of Chief Information Officer to bring stronger 

leadership and discipline to the technology modernization program. 

These executive appointments to the IRS modernization program represent a 

major change in the way the IRS has managed previous modernization projects. 

They were necessary steps to bring more management discipline and increased business unit knowledge and involvement to the modernization program. The following 

is a brief recap of IRS’s progress and struggles over the past year. 

The results have been mixed. The IRS built a strong technical infrastructure, and 

designed and implemented stringent security and control mechanisms into the infrastructure. It also developed a rigorous enterprise life cycle methodology. Over the 

past 2 years, the IRS has been working toward maturing its management processes. 

The IRS has made progress, but a major thrust now focuses on sustaining a solid 

balance of business commitment, accountability, and scope management. Finally, 

the IRS has achieved a great deal of success with the projects delivered to date. 

For the first time ever, corporations and tax exempt organizations have the option 

of filing their annual income tax and information returns electronically using Modernized e-File (MeF). This new electronic filing system significantly reduces the time 

and cost for corporations and tax exempt entities to file their Forms 1120 and 990. 

Simply by using a secure Internet connection to file 1120 and 990 forms, corporations and tax exempt organizations eliminate the need to submit hundreds of pages 

of paper returns. The e-Gov Institute recently chose MeF as a winner of the Government Solutions Center Pioneer Awards. 

The IRS has achieved a great deal of success with the e-Services projects. All eServices Release 1.0 products are fully deployed and available over the Internet, including: registration and online address change access for third parties and IRS employees through secure user portals; Preparer Tax Identification Number (PTIN) online application; interactive Taxpayer Identification Number (TIN) matching; secure 

Electronic Return Originator (ERO) application processing; and access to e-Services 

registration and application processes by Modernized e-File (MeF) participants. 

E-Services Release 2.0 products are also now in production and available for use 

by IRS staff and taxpayers, including: Application for e-Filing (external); Electronic 

Account Resolution (EAR); Electronic TIN Bulk Matching (Bulk Requests); Disclosure Authorization (DA); and infrastructure support for outbound facsimile service. 

In March 2004, James D. Leimbach appeared before the Ways & Means Oversight 

Subcommittee on behalf of the National Association of Enrolled Agents (NAEA), the 

professional society of enrolled agents, to present NAEA’s views regarding e-Services 

delivering electronic services to tax practitioners. NAEA’s overall assessment was 

that the 2003 filing season has run very smoothly—and the NAEA gave the IRS a 

great deal of praise. 

Mr. Leimbach said, ‘‘The difficulty in integrating a 1960’s era mainframe with the 

Internet and doing so in an environment using highly complex encryption is enormous, costly, and worth every effort and every dime spent.’’ He added, ‘‘This new 

capability is truly going to revolutionize the way we conduct future business with 

the IRS. The ultimate beneficiary is the American taxpayer. We are truly amazed 

and thrilled beyond description at this way of doing business with the IRS and we 

would like for you to understand why we feel as we do.’’

Mr. Leimbach cited numerous examples of eliminating time delays of over a week 

and reducing response times from weeks and months to 3 days simply by having 

the ability—24 hours a day, 7 days a week—to submit information directly to the 

IRS using the Internet. 

The IRS delivered several additional applications that are providing tangible benefits to taxpayers and improving the efficiency and effectiveness of tax administration systems such as Where’s My Refund?, Where’s My Advance Child Tax Credit?, 
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Internet EIN, Modernized e-File, HR Connect, etc. The following chart highlights 

the applications the IRS delivered, as well as the measurable business benefits 

being realized.
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BSM DELIVERS REAL BUSINESS VALUE (RESULTS AS OF 6/15/04) 

Project Description Recent Statistics 

Internet Refund Fact of Filing (2002) ........................ Improves customer self-service by providing instant refund status information and instructions for resolving refund problems to taxpayers with 

internet access.

—17.9 million inquiries in 2003; 22 million inquiries to date in 2004 (1/1/

04–6/6/04). 

—32 percent of all real time IRS assistance calls come from IRFoF. —Modest reduction of telecommunications costs (about $250,000). —Every 1,000 IRFoF contacts eliminate 1,500–2,000 refund assistance 

calls. 

Advanced Child Tax Credit (2003) ............................. Modifies the Internet Refund application to provide taxpayers with Advance 

Child Tax Credit refund status on the internet.

—15.5 million inquiries in 2003; 11.9 million inquiries to date in 2004 (10/

1/03–6/13/04). 

—Peak date 1.1 million interaction. 

Customer Communications (2001) ............................. Improves communications infrastructure, including telephone call management, call routing and customer self-service applications. —68,000 calls in one 3-minute period during initial week (coincided with start of Advanced Tax Refund of 2001). 

—50 percent reduction in waiting time for assistor to answer call. —50 percent reduction in abandoned calls. —Number of Spanish calls doubled. —More accurate pre-routing of calls. 

Internet Employee Identification Number (2003) ....... Allows businesses and taxpayers to apply for and receive employer identification numbers over the internet. —1.37 million internet EIN applications received to date (as of 6/5/04). HR Connect (2002) ..................................................... Delivers an enterprise solution to allow IRS employees to access and manage their human resources information online. —75,000 internal users. —Cited by Commissioner Everson as an enabling factor in the redirection of 

approximately 750 staff years to enforcement. 

—Treasury was selected as 2004 ComputerWorld Honors Laureate for HR 

Connect development and implementation. 

e-Services R1 (2003–2004) ........................................ Creates a web portal and value adding e-Services services to promote the 

goal of conducting most of the IRS’s transactions with tax practitioners electronically.

—Over 69,624 PTIN applications (W7P) entered to date, data entry productivity doubled (from 8/15/03–6/10/04). —Over 58,201 e-File applications to the Third-Party-Data-Store (TPDS) entered to date (from 8/15/03–6/10/04). —Approximately 24,939 Registered (and confirmed) User Portal (RUP) to 

date (from 10/1/03–6/10/04). 

Customer Relationship Management Exam (2001) .... Provides standard tax computation software to Large & Mid-Sized Business 

Revenue Agents.

—Deployed to almost 4,000 Revenue Agents. 

Modernized e-File (2004) ............................................ Provides e-filing to large businesses (1120 family) and tax exempt organizations (990 family). —Went live on 2/23/04. —Over 35,090 returns (1120 family) accepted as of 6/13/04. 

—Over 3,287 participating Electronic Return Originators as of 6/13/04. —Winner of Government Solutions ‘‘Best-of-the Best’’ Pioneer Solutions. 
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The bad news, however, is major. Significant cost overruns and repeated schedule 

delays have plagued critical projects, such as the Customer Account Data Engine 

(CADE), the Integrated Financial System (IFS), and the Custodial Accounting 

Project (CAP). CADE replaces the current master files that are the IRS’s repository 

of taxpayer information. IFS will be the IRS’s new core accounting system. CAP provides an integrated link between tax administration (revenue) and internal management (administrative) financial information. 

The IRS has delayed the CADE program four times. It originally planned to deliver the first release of CADE in December 2001. The IRS then rescheduled it for 

August 2003, and later rescheduled it for April 2004. The IRS recently finalized the 

re-planning effort for CADE and set the latest delivery date for September 2004. 

While CADE is farther along than the IRS has ever been in replacing a component 

of the master file, there are still major hurdles to overcome. The CADE delays 

stemmed from infrastructure upgrades, initial poor software quality during the 

startup of systems integration testing combined with the failure to understand the 

complexity of balance and control, and the resolution of operational and performance 

issues that occurred during Phase 3 of the Release 1.0 pilot. 

Like CADE, IFS has been plagued with schedule delays. The IRS originally 

planned to deliver the first release of IFS in October 2003. The IRS then rescheduled it for January 2004. The IRS later rescheduled it for April 2004. The IRS has 

subsequently scheduled Release 1.0 for October 2004. The IRS delayed the first release of IFS because of the need to make technical changes to comply with the enterprise architecture, the inability to resolve key design and integration issues in 

a timely manner, the identification of the health coverage tax credit interface requirement late in the development process, and delays experienced in integration 

testing due to poor application quality and interface testing issues. 

IFS Release 1.0 will cover core accounting functions such as budget preparation, 

general ledger, accounts payable, accounts receivable, financial reporting, and purchasing. Problems continue to seriously jeopardize the scheduled delivery of this 

first release of IFS. The IRS is 2 weeks behind schedule on testing, which puts the 

data conversion schedule at risk. The IRS is negotiating a fixed price contract for 

the October delivery. 

The IRS is also encountering delays on the first release of the Custodial Accounting Project (CAP), which provides an integrated link between tax administration 

(revenue) and internal management (administrative) financial information. The first 

release of CAP will address revenue from individual taxpayers on initial tax payments. Later releases of CAP will address businesses and collections. CAP delays 

resulted from unstable CADE and IFS interface definitions, needing additional testing time due to a much larger than anticipated volume of data anomalies discovered 

during the conversion of data from the current Individual Master File (IMF), and 

the time required resolving system performance issues. 

In addition, though not directly responsible for CAP delays to date, the IRS has 

made some adjustments to the functionality that it needs to have in CAP Release 

1 to support the GAO financial audit as well as internal accounting and management. These adjustments will increase the cost of later sub-releases of CAP Release 

1. The IRS has now completed all testing for CAP Release 1, and is adding changes 

to reflect IMF changes from the start of the 2004 filing season (Release 1.1). The 

IRS plans to start production, which includes the initial load of IMF data, in midAugust. The IRS negotiated a fixed price contract for Release 1 and Release 1.1 in 

May 2004. 

Question. Ms. Gardiner, in her testimony, points out that she found several instances where the Business System Modernization project teams at the IRS were 

cutting corners and not following established testing procedures due to their desire 

to meet overly optimistic project schedules. It seems that the IRS responds to missing its deadlines by cutting corners and thus undermining the likelihood that the 

agency will get what it paid for. What has Ms. Gardiner concluded about the IRS’s 

ability to manage these projects effectively and ethically? Is there any reason to 

hope that the IRS is turning a corner and actually getting value for the taxpayer 

from these modernization projects? Mr. Everson, would you care to comment? 

Answer. The IRS used the results from independent studies commissioned during 

the summer of 2003 to create a BSM Challenges Plan comprised of 40 some action 

items. Given the strategic importance of the plan, The Commissioner appointed an 

IRS business unit deputy commissioner to oversee the implementation of the plan. 

As a first step, the BSM project team developed a crosswalk to ensure that the 

BSM Challenges Plan’s definition of the issues addressed and/or satisfied all of the 

recommendations from the four commissioned studies as well as the recommendations submitted by the IRS Oversight Board, and the Software Engineering Institute 

(SEI) study of CADE. 
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While the deputy commissioner made significant progress in implementing the 

plan, the full closure of all actions items was unrealistic within the elapsed timeframe of the 6-month appointment. Concurrently, the CIO created a new direct report position for modernization management and assigned responsibility for implementing the plan to the individual recently hired into this newly created position. 

Under the leadership of the deputy commissioner, the IRS and CSC team brought 

closure to several key actions items, including: clarifying the roles of committees as 

advisory, identifying ‘‘blockers’’ on contracting issues, appointing business leaders to 

each project, establishing a risk-adjusted schedule and new baseline for CADE Releases 1.0 and 1.1, and increasing the frequency of CADE reviews with the business 

owner to twice monthly. The majority of the action items are still works-in-progress, 

some of which will take time to fully complete. Others will span the life of the BSM 

program. 

For example, strengthening systems engineering capabilities by hiring external 

candidates will take time since it involves conducting the searches, interviewing the 

candidates, and negotiating the new hires to come on board. The IRS and CSC developed ground rules for escalating issues, but they will need to be continually enforced throughout the life of the program. The IRS rewrote the charters of the governing committees to reflect their advisory role and clearly articulated their responsibilities, however, it will probably take a year to truly evaluate and measure their 

effectiveness. 

As stated, the IRS has made progress toward closing all the action items, but it 

has much more work to do in critical areas. For example, the IRS needs to religiously follow the proper methodologies and hold people accountable if they do not. 

The IRS must start ‘‘doing things right’’ as opposed to ‘‘doing things fast’’ such as 

exiting milestones prematurely. An ongoing challenge will be balancing the scope 

and pace of projects consistent with capacity, ensuring that the right people are in 

place before launching a project, and setting realistic delivery schedules and cost estimates. The IRS is committed to staying-the-course and delivering on its promise 

to modernize America’s tax systems, but it is important for everyone to acknowledge 

this is a monumental effort. 

The magnitude and evolution of the BSM program dictates that the IRS will always be going through an evolution of assessment and improvements. In that regard, the BSM Challenges Plan is still evolving and the IRS is using certain action 

items to continuously improve the program. 

QUESTIONS SUBMITTED BY SENATOR RICHARD J. DURBIN

TAX EVASION/IRS COLLECTION

Question. In the days leading up to April 15, newspapers around the country ran 

features on personal and corporate tax evasion and the IRS’s failure to collect many 

of the taxes it is owed. The President proposes a 4.6 percent increase in IRS funding 

for fiscal year 2005, claiming that this will allow the hiring of 5,000 new auditors 

and collectors. While increasing the number of IRS agents and officers is central to 

more effective tax collection, the IRS Oversight Board argues that much of the 4.6 

percent increase will be swallowed by rising salaries and administrative costs. In 

fact, the Oversight Board claims that fiscal year 2005 is the fourth year in a row 

in which the administration has called for IRS staff increases while failing to cover 

pay raises or required expenses. 

In your estimation, how many new auditors and collectors would be hired as a 

result of a 4.6 percent increase in IRS funding in fiscal year 2005, and what would 

be the impact of such an increase on the IRS’s ability to collect some of the estimated $250 billion in owed taxes that go unpaid each year due to tax evasion? 

Answer. The IRS will hire approximately 5,000 new enforcement personnel. These 

new hires will improve voluntary compliance by increasing the number of individual 

and corporate returns examined and directly increasing collections of delinquent 

revenue owed to the government by approximately $3 billion in the first 3 years of 

the initiative, fiscal year 2005 through fiscal year 2007, and additional collections 

of $1.5 billion annually thereafter. This increase in IRS enforcement personnel also 

improves voluntary compliance by deterring would-be tax cheats from engaging in 

illegal behavior. 

TAX ASSISTANCE PROGRAM—ILLINOIS

Question. In the fiscal year 2004 Senate Transportation-Treasury Appropriations 

report, language was included regarding the Tax Assistance Program in Chicago, Illinois. ‘‘The Committee is aware of an innovative financial literacy and tax assist-
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1The PRIME contractor is the Computer Sciences Corporation, which heads an alliance of 

leading technology companies brought together to assist with the IRS’s efforts to modernize its 

computer systems and related information technology. 2The CADE is the foundation for managing taxpayer accounts in the IRS’s modernization 

plan. It will consist of databases and related applications that will replace the IRS’s existing 

Master File processing systems and will include applications for daily posting, settlement, maintenance, refund processing, and issue detection for taxpayer tax account and return data. 

ance project in Chicago, Illinois—Tax Assistance Program—designed to assist low 

income workers and their families with tax education and filing, in cooperation with 

the State of Illinois and the City of Chicago’s Earned Income Tax Credit (EITC) outreach efforts. The Committee encourages the IRS to continue to provide appropriate 

technical and financial assistance for this worthwhile initiative.’’ 

Is the IRS working with the Tax Assistance Program in Chicago, Illinois, and 

what Federal resources are being provided? Will the IRS continue to work with programs like TAP in Chicago in fiscal year 2005? 

Answer. The IRS has partnered with the Tax Assistance Program (TAP) for several years and each year has been increasingly impressed with the achievements 

and the dedication of the staff and volunteers. The IRS is very fortunate to have 

this fine organization as a partner in providing free tax preparation to low income 

taxpayers in the Chicago metro area. The IRS hopes to sustain this relationship in 

fiscal year 2005 and for many years to come. However, outside the Low Income Tax 

Clinic (LITC) Grant Program, the IRS has no legal authority to offer funding to the 

TAP organizations. The TAP currently receives Federal funds available through the 

LITC Grant Program, and the IRS anticipates that the TAP will continue to apply 

for funding through this program in the future. 

QUESTIONS SUBMITTED TO THE TREASURY INSPECTOR GENERAL FOR TAX

ADMINISTRATION

QUESTIONS SUBMITTED BY SENATOR RICHARD C. SHELBY

MODERNIZATION

Question. How much more is needed to complete and modernize the IRS’s outdated systems and processes? 

Answer. We do not know the true total cost needed to complete the Business Systems Modernization (BSM) effort. To date, the Internal Revenue Service (IRS) has 

received $1.6 billion for this effort. The IRS anticipates that the value of the 

PRIME 1 contract will be $8 billion. However, the PRIME contract is not the only 

cost associated with the BSM effort as other contractors, such as Northrop Grumman, International Business Machines, and MITRE Corporation, are involved in the 

BSM effort. In addition, the IRS is incurring substantial internal costs in managing 

the BSM effort. The sum of all PRIME contractor, other modernization contractors, 

and IRS costs for the life of the BSM program is not known. 

Question. Is the fiscal year 2005 budget request consistent with that TIGTA assessment? 

Answer. Yes. We have recommended since September 2002 that the IRS slow the 

pace of the BSM program due to some of the risks that have surfaced. The fiscal 

year 2005 budget request is consistent with our past recommendations. 

Question. When will BSM be completed? 

Answer. The BSM program is currently in its sixth year of a 15-year contract. 

However, the IRS and the PRIME contractor have been experiencing significant 

delays. For example, the Customer Account Data Engine (CADE) 2 project is approximately 30 months behind schedule, and the detailed planning for the business 

taxpayer account portion (Federal tax deposits, corporate entities, partnerships, etc.) 

of the project has not been completed. Unless the IRS and the PRIME contractor 

take actions to make up the lost time and thoroughly plan all projects, it is difficult 

to know how long the BSM effort will last. 

Question. What is the status of IRS’s efforts to resolve the findings and deficiencies identified by the various internal and independent assessments of BSM? 

Answer. To address the results of the recent assessments, the IRS and the PRIME 

contractor have developed a 48-point action plan, known as the ‘‘BSM Challenge 

Plan’’. While the 48 planned corrective actions should help improve the BSM program, it will take time to institutionalize new processes and ensure they are being 

followed. Only at that time will it be possible to determine if the actions have been 

effective. 
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The IRS recently reported that 44 of the 48 action plan items were closed. However, our preliminary analysis shows that additional actions are scheduled for many 

of these closed items. The IRS Chief Information Officer acknowledged that followon actions are required to completely address the various internal and independent 

BSM assessments. 

It should be noted that the various assessments resulted in 21 recommendations 

for improvement in the BSM program, 15 of which are similar to those made in 

Treasury Inspector General for Tax Administration (TIGTA) reports issued during 

the past 3 years. In several instances, the principal recommendations were reported 

multiple times during this period. Since many of the prior TIGTA recommendations 

have resurfaced as part of the recent assessments, we conclude that previous weaknesses have proven difficult to correct. Only time will tell whether actions taken as 

part of the 48-point plan will completely address the root causes identified in the 

various assessments. 

QUESTIONS SUBMITTED BY SENATOR PATTY MURRAY

MODERNIZATION

Question. Ms. Gardiner, your testimony says that IRS plans to request $142 mil- lion—the remainder of the $388 million appropriated last year—for Business Systems Modernization in fiscal year 2004. In your opinion, based on performance to 

date, should the Congress withhold or make conditional the approval of that $142 

million? 

Answer. While we have not been provided with a copy of the revised spending 

plan, our opinion is that the Congress should approve the release of the remaining 

$142 million. In February 2004, the Commissioner testified, ‘‘It’s no secret that our 

projects have consistently run late, delivered less functionality than planned, and 

cost significantly more than targeted.’’ The IRS’s track record is of concern; however, 

the withholding of funds could cause projects to stop, which would result in the loss 

of contractor expertise and would lead to additional costs needed to restart the 

projects. In addition, there has been little time to determine if the actions being 

taken as part of the 48-point plan are leading to improvements. We believe the $142 million in additional funding should be provided, but we 

would recommend to the Appropriations Subcommittee that the BSM program be 

monitored closely to determine if future funding is warranted. The IRS and the 

PRIME contractor have developed a 48-point plan to respond to various internal and 

independent assessments. Once the 48-point plan is implemented, it will take time 

to institutionalize new processes and ensure they are being followed. Only at that 

time will it be possible to determine if the corrective actions have been effective. 

Question. Ms. Gardiner, you point out that the IRS revised its modernization plan 

for fiscal year 2003 to focus on executable segments that could be accomplished in 

a timely manner. Despite all of the IRS’s assurances to the contrary, all of the 

projects on the newly downsized list still experienced delays and most incurred significant cost increases. What are your observations regarding the IRS’s abilities to 

deliver modernization projects on time and on budget for the current fiscal year and 

next year? Why should we believe that the IRS and its contractors will improve its 

performance on these projects going forward? Mr. Everson, do you care to comment 

on this matter? 

Answer. We believe that there are two critical areas that the IRS needs to address 

to be able to deliver modernization projects on time and on budget: requirements 

management and contract management. We have provided recommendations for improvement to the IRS in these areas, and the 48-point plan also addresses these 

areas. In addition, we have additional concerns in the areas of portfolio management, integration management, and staffing. 

Requirements Management 

The PRIME contractor testified that the heart of the problem has been the lack 

of fully defined requirements. While it is inevitable that some requirements changes 

will be needed, e.g., legislative changes, the PRIME contractor testified that it often 

began work without fully understanding requirements, and requirements were still 

being identified during the testing phase. In our opinion, this is the fault of both 

the IRS and the PRIME contractor. The IRS should create detailed requirements 

before moving forward, and a contractor at the maturity level of the PRIME contractor should know not to start work without a full understanding of requirements. 

Requirements instability will continue to lead to increased costs and schedule delays 

if not corrected. This area has been a continuing concern and has been reported in 

several TIGTA reports, beginning in November 2001. 
272

3The Filing and Payment Compliance project will provide support for detecting, scoring, and 

working nonfiler cases (filing compliance) and delinquency cases (payment compliance). 4The CAP will be a single, integrated data repository of taxpayer account information, integrated with the general ledger and accessible for management analysis and reporting. 

Contract Management 

Beginning in February 2001, we have made recommendations to assist the IRS 

in shifting financial risk to the PRIME contractor. Our recommendations have 

ranged from including positive and negative contractor incentives in task orders to 

using firm-fixed price task orders whenever possible. The recent BSM assessments 

also recommended moving toward a firm-fixed price model. When requirements are 

fairly stable, a firm-fixed price task order shifts some of the risk away from the government and to the contractor. If requirements become stable and firm-fixed price 

task orders begin to be issued, this will begin to curb some of the cost overruns that 

have been experienced to date. However, this may not have an effect on the timeliness of delivery. 

Portfolio Management 

Beginning in 2002, both the TIGTA and the General Accounting Office recommended that the IRS slow the pace of the BSM program due to some of the risks 

that have surfaced. The recent internal and independent assessments also make 

this point. While the IRS responded to this concern by scaling back the scope and 

number of projects in fiscal year 2003, we noted the fiscal year 2004 BSM plan includes an additional modernization project (Collection Contract Support—part of the 

Filing and Payment Compliance project).3 Since the IRS and its contractors have 

been unable to deliver the scaled-back portfolio of projects on time and within cost, 

we continue to be concerned that the IRS and its contractors may not have the ability to successfully manage the BSM portfolio. 

Integration Management 

When the BSM effort began, the PRIME contractor was responsible for all modernization projects, with the exception of the Custodial Accounting Project.4 As such, 

one significant role of the PRIME contractor was to ensure integration between all 

modernization projects. This role has become blurred recently with the PRIME contractor not being responsible for the Modernized e-File project. In addition, the Commissioner testified that he had decided to direct upcoming enforcement modernization projects to other contracts. With more modernization work being performed outside of the PRIME contract, the risk increases that modernization projects will not 

work in a fully integrated fashion. 

Staffing 

Recently, the IRS reported to the IRS Oversight Board that it has or will make 

changes in six of eight executive positions within the BSM program in an effort to 

bring more outside experience into the program. While the addition of new executives from outside the organization may bring new ideas and energy to the program, 

we are concerned about the potential disruption that it may cause. As part of our 

annual BSM assessment, we have included the following challenge for the last 3 fiscal years: ‘‘Maintain the continuity of strategic direction with experienced leadership.’’

Question. Ms. Gardiner, in your testimony, you point out that you found several 

instances where the Business System Modernization project teams at the IRS were 

cutting corners and not following established testing procedures due to their desire 

to meet overly optimistic project schedules. It seems that the IRS responds to missing its deadlines by cutting corners and thus undermining the likelihood that the 

agency will get what it paid for. Ms. Gardiner, what have you concluded about the 

IRS’s ability to manage these projects effectively and ethically? Is there any reason 

to hope that the IRS is turning a corner and actually getting value for the taxpayer 

from these modernization projects? Mr. Everson, would you care to comment? 

Answer. Our audits are not designed to examine the ethics of project management 

and, therefore, we cannot answer this portion of the question. The IRS and its contractors have deployed projects that provide value to taxpayers and have built the 

infrastructure needed to support these projects. Some of the BSM projects that have 

delivered value to taxpayers are the Customer Communications, Internet Refund/

Fact of Filing (IRFOF), Internet Employer Identification Number (I-EIN), e-Services, and Modernized e-File (MeF) projects. 

Customer Communications.—This project has improved customer service by increasing the capacity of the toll-free telephone system and providing the ability to 
273

route taxpayers’ calls to the appropriate IRS employees. This project became operational in August 2001. 

IRFOF.—This application (also known as ‘‘Where’s My Refund?’’) offers improved 

customer self-service by providing refund status information via the Internet. The 

pilot version of the ‘‘Where’s My Refund?’’ application was deployed in May 2002. 

The application was upgraded in 2003 and was accessed 17.9 million times that year 

according to the IRS. In 2003, the application was modified to provide taxpayers 

with Advance Child Tax Credit refund status via the Internet. The IRS stated that 

15.5 million Advance Child Tax Credit inquiries were received in 2003. 

I-EIN.—This application allows small businesses and self-employed taxpayers to 

obtain EINs online, eliminating the need to send paperwork to the IRS. This application was deployed in May 2003. The Commissioner recently testified that the application had processed over 450,000 applications as of February 2004. 

e-Services.—Deployed in August 2003, this project allows tax professionals the 

ability to register online, create an electronic account, and apply for a Preparer Tax 

Identification Number to use in place of their Social Security Number for submitting 

returns. The IRS reported in January 2004 that over 16,000 tax professionals had 

applied to use the e-Services application. 

MeF.—This project is developing the modernized, web-based platform for electronically filing approximately 330 IRS forms. The first release of the MeF project 

was deployed in late February 2004 and provided electronic filing for 59 forms, including United States (U.S.) Corporation Income Tax Return (Form 1120), U.S. Income Tax Return for an S Corporation (Form 1120S), Return of Organization Exempt From Income Tax (Form 990), Short Form Return of Organization Exempt 

From Income Tax (Form 990–EZ), U.S. Income Tax Return for Certain Political Organizations (Form 1120–POL), and Application for Extension of Time To File an Exempt Organization Return (Form 8868). The IRS has stated that over 18,520 tax 

returns had been accepted by March 21, 2004. 

Progress is being made. Nonetheless, BSM projects are taking longer and costing 

more to deliver less than originally anticipated. Over the past 2 fiscal years, we 

have cited 4 primary challenges the IRS and its contractors must overcome to be 

successful: (1) implement planned improvements in key management processes and 

commit necessary resources to enable success, (2) manage the increasing complexity 

and risks of the BSM program, (3) maintain the continuity of strategic direction 

with experienced leadership, and (4) ensure PRIME contractor performance and accountability are effectively managed. Based on the results of recent TIGTA audits, 

as well as the assessment findings, we believe these four challenges still need to 

be met to achieve program success. 

While the actions in the 48-point plan mentioned previously should help improve 

the BSM program, it will take time to institutionalize new processes and ensure 

they are being followed. Only at that time will it be possible to determine if the corrective actions have effectively addressed the four major challenges. 

FAILURE TO COLLECT DELINQUENT TAXES

Question. A recent report by the Treasury Inspector General for Tax Administration (TIGTA) found that IRS’s existing procedures are ineffective in ensuring even 

that criminals who are convicted in court for tax evasion are paying their civil tax 

liabilities. Why can’t IRS collect from tax cheats? 

Answer. In response to our recommendations in the subject report, the IRS issued 

an April memorandum to both the Small Business/Self-Employed Division and the 

Criminal Investigation organization containing interim procedures to process cases 

with terms of probation and to monitor compliance with these cases. 

Question. Ms. Gardiner, given the fact that the head of IRS-Criminal Investigations disagreed with a number of your recommendations, are you confident that this 

grotesque abuse will be stopped? 

Answer. The IRS did, in fact, disagree with several of our recommendations. First, 

the IRS disagreed with our recommendation concerning a technical legal matter on 

disclosure of tax information, stating that it believed it already had sufficient instructions on the matter. Our main concern in reporting the issue was to ensure 

that the disclosure rules were interpreted consistently and with the broadest possible application. The disclosure issue itself is tangential to the main problem of inadequate monitoring of, and follow-up on, probation cases. 

The IRS also disagreed with our characterization of the impact of the errors in 

the Criminal Investigation Management Information System. Again, this issue is 

tangential to the main problem and does not affect the IRS’s need for or commitment to improving its processes on monitoring terms of probation. 
274

Finally, although the IRS disagreed with a recommendation to establish certain 

procedures and part of another recommendation to establish periodic systemic reports, it committed to reemphasizing its existing instructions and procedures, which 

it did in the April memorandum referenced above. As we stated in our report, we 

believe that this commitment satisfied the intent of our recommendations. 

As to whether we are confident that this abuse will be stopped, the key will be 

the proper implementation and monitoring of the corrective actions recently taken 

or planned. If done properly, the IRS should be in a much better position to report 

to the courts whenever terms of probation are not met. Of course, collecting delinquent taxes or securing delinquent returns will also be a function of the taxpayer’s 

ability to pay or requirement to file. 

Question. Ms. Gardiner, why do you believe that IRS has not cleared up even the 

simplest of cases of uncollected taxes? 

Answer. The IRS collection process for most cases begins with a series of notices 

mailed to taxpayers, asking them to pay the balance due. If the taxpayers do not 

respond, the cases are assigned either to the Queue (which is a holding area for 

cases waiting further assignment to the Collection Field function (CFf)) or the Automated Collection System (ACS) to be worked by telephone collectors. Generally, 

higher-priority cases are placed in the Queue while lower-priority cases are assigned 

to the ACS. If the ACS cannot resolve the cases, some of them are also assigned 

to the Queue. Cases in the Queue are assigned to Revenue Officers in the CFf according to priorities established by IRS management. In addition, the IRS has recently implemented a risk-based approach that attempts to select those cases with 

the highest probability of being collected. As a result, many lower dollar amount 

cases for individual taxpayer liabilities may not be collected if the taxpayer did not 

respond to the notice or a phone call. 

Overall, the IRS is making some progress in collecting unpaid taxes. As we reported in April 2004, the level of compliance activities and the results obtained in 

many Collection function areas in fiscal year 2003 showed a continuing increase. 

Enforcement actions were higher in fiscal year 2003 than in fiscal year 2002, but 

they have not returned to pre-1998 levels. Enforcement revenue collected increased 

substantially in fiscal year 2003, while the total amount of uncollected liabilities 

and the gap between new delinquent accounts and account closures decreased 

slightly. Finally, the amount owed on accounts in the Queue decreased in fiscal year 

2003, but the number of accounts in inventory increased. 

Question. Do you consider it a possibility that IRS has not done so in order to 

build a case for the use of private collection agencies? 

Answer. The IRS does not have the resources to work every delinquent account 

case. It has established risk-based priority systems in an attempt to use ACS and 

CFf resources as efficiently as possible. We have no evidence that the IRS is intentionally not working these cases to build a case for the use of private collection 

agencies. 

CUSTOMER SERVICE

Question. IRS consistently finds its own accuracy rates higher than TIGTA does 

when measuring taxpayer assistance functions, whether we are talking about tollfree telephone assistance, walk-in service at Taxpayer Assistance Centers, or the 

IRS website. Mr. Everson, how do you explain the discrepancy? Ms. Gardiner, would 

you care to comment? 

Answer. The large number of taxpayers who use Toll-Free Telephone, Taxpayer 

Assistance Centers (TAC), or the IRS’s website, IRS.gov, to get answers to their tax 

law and account questions prohibits us from using statistical sampling techniques 

in our audits to determine the accuracy of IRS answers.

Type of Service 

IRS-Reported 

Customers 

Served 

IRS-Reported

Accuracy

(Percent) 

TIGTA-Reported 

Accuracy

(Percent) 

Taxpayer Assistance Centers ..................................................................... 8,588,850 1 75 69

Referral-Mail .............................................................................................. 279,558 72 74

Toll-Free Accounts ...................................................................................... 27,645,540 89 78

Toll-Free Tax Law ....................................................................................... 5,381,687 83 73

Internet-based IRS website, IRS.gov ......................................................... 119,036 N/A Over 80

1 IRS accuracy rate reported in the Wage and Investment Operating Division Business Performance Report, page 10, dated May 11, 2003. 

Figures for TACs, Referral-Mail, Toll-Free Accounts, and Toll-Free Tax Law reported by the IRS are for fiscal year 2003. Figures for IRS.gov reported by the IRS 

are for the 2002 Filing Season. 
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Toll-Free Telephone Assistance 

The differences in the TIGTA’s and IRS’s accuracy rates are based largely on the 

differences in the sampling methodologies, including the sample sizes. For example, 

during the 2004 Filing Season, we monitored over 350 toll-free tax law calls while 

during the same time period for the same types of tax law questions (referred to 

as applications) the IRS selected for monitoring a statistically valid sample of 1,527 

tax law calls. For fiscal years 2002, 2003, and 2004, we monitored a judgmental 

sample of live taxpayer toll-free tax law calls received by the IRS during the filing 

season, generally considered the months of January through April. Although our 

judgmental sample is not statistically valid, we attempt to ensure it is representative of the population by creating a sampling plan in which the percentage of calls 

monitored by type of tax law question is reflective of the IRS’s planned filing season 

volumes of calls per application. However, we do not always monitor calls on late 

evenings and on the weekends. 

See ‘‘Improvement Is Needed in E-Mail Responses to Complex Tax Questions Submitted Through Toll-Free Telephone Help Lines’’ (Reference Number 2004–40–029, 

dated December 2003); ‘‘Toll-Free Account Assistance to Taxpayers Is Professional 

and Timely, but Improvement Is Needed in the Information Provided’’ (Reference 

Number 2004–40–057, dated February 2004); ‘‘Toll-Free Tax Law Assistance to Taxpayers Is Professional and Timely, but Improvement Is Needed in the Information 

Provided’’ (Reference Number 2003–40–216, dated September 2003). 

Taxpayer Assistance Centers 

The IRS did not measure the accuracy of its answers to tax law questions asked 

in the TACs until fiscal year 2003. For 2003, the IRS used judgmental sampling to 

determine accuracy. In fiscal year 2004, the IRS is attempting to establish a baseline using statistical sampling. 

Though we used judgmental sampling for Calendar Years 2002 and 2003 to determine whether taxpayers were provided correct and prompt answers to their questions, we did ensure all TACs were visited during these 2 years. For Filing Season 

2004, we again used a judgmental sample of TACs, ensuring that we visited at least 

one TAC in each of the IRS’s territory offices. We visited 199 TACs in 2002, 209 

in 2003, and 64 in 2004 (note that these numbers are only TACs visited to ask questions within the scope of TAC employees’ training). 

However, we average 80 questions per month while the IRS’s Field Assistance 

quality reviewers average 420 a month (Wage and Investment Operating Division 

Business Performance Report, page 6, dated May 11, 2003). In addition, the IRS 

does not compute its accuracy rates the same way we compute it. TIGTA results 

present the overall results of auditor visits. Accuracy rates are calculated by dividing the total response for each category (i.e., correct, incorrect, refer to publication, 

etc.) by the total number of questions asked. In contrast, the IRS disagrees with our 

methodology for including referrals to publications and service denied when computing accuracy rates. 

See ‘‘Taxpayer Assistance Center Employees Correctly Answered More Tax Law 

Questions During September and October 2003 Than Compared to One Year Ago’’ 

(Reference Number 2004–40–037, dated January 2004), ‘‘Accuracy Rates Have Increased at Taxpayer Assistance Centers, but Improvement Is Needed to Provide 

Taxpayers Top-Quality Customer Service’’ (Reference Number 2004–40–065, dated 

February 2004), and ‘‘Taxpayer Assistance Center Employees Correctly Answered 

More Tax Law Questions During November and December 2003 Than Compared to 

One Year Ago’’ (Reference Number 2004–40–090, dated April 2004). 

IRS.gov 

The differences in the TIGTA’s and IRS’s accuracy rates are based on the different 

methodologies, including the sample sizes. For the TIGTA fiscal year 2002 audit, 

TIGTA auditors anonymously submitted 90 tax law questions typical of those that 

may be submitted by an individual taxpayer. We rated the answers to those questions we submitted. In contrast, during the 2001 Filing Season, the IRS quality review system selected 995 questions for quality review. 

The IRS has a centralized quality review site that samples email responses for 

accuracy and measures accuracy with a statistically valid sampling plan designed 

by its Statistics of Income function. The sampling plan requires the selection of 

email responses without regard to the type of taxpayer or tax law category, i.e., 

whether the tax law question pertains to individual or business taxpayers. 

See ‘‘Response Accuracy Is Higher for the Internet Program Than Other Options 

Available to Taxpayers Needing Assistance With Tax Law Questions’’ (Reference 

Number 2003–40–014, dated October 2002) and ‘‘Management Advisory Report: The 

Internal Revenue Service Needs a Reliable Measure of the Quality of Electronic Tax 
276

Law Assistance Provided to Small Businesses and Self-Employed Taxpayers’’ (Reference Number 2002–30–120, dated July 2002).

SUBCOMMITTEE RECESS

Senator SHELBY. I appreciate both of you appearing here, and we 

will be meeting and talking from time to time. 

Ms. GARDINER. Thank you very much. 

Senator SHELBY. The hearing is recessed. 

[Whereupon, at 11:27 a.m., Wednesday, April 7, the subcommittee was recessed, to reconvene subject to the call of the Chair.] 
(277)

DEPARTMENTS OF TRANSPORTATION, TREASURY AND GENERAL GOVERNMENT, AND RELATED AGENCIES APPROPRIATIONS FOR 

FISCAL YEAR 2005 

TUESDAY, APRIL 20, 2004 

U.S. SENATE, 

SUBCOMMITTEE OF THE COMMITTEE ON APPROPRIATIONS, 

Washington, DC. 

The subcommittee met at 10 a.m., in room SD–138, Dirksen Senate Office Building, Hon. Richard C. Shelby (chairman) presiding. 

Present: Senators Shelby, Bennett, Stevens, Murray, and Dorgan. 

DEPARTMENT OF THE TREASURY 

OFFICE OF THE SECRETARY

STATEMENT OF HON. JOHN SNOW, SECRETARY 

OPENING STATEMENT OF SENATOR RICHARD C. SHELBY

Senator SHELBY. The subcommittee will come to order. 

I would like to welcome Secretary John Snow to this morning’s 

hearing. I look forward to hearing about your vision for the future 

of the Treasury Department, as well as the challenges you will face 

during the upcoming fiscal year. 

In your first year on the job, you presided, Mr. Secretary, over 

the divestiture of 30,000 Treasury employees pursuant to the 

Homeland Security Act of 2002. You also oversaw the establishment of the new Alcohol and Tobacco Tax and Trade Bureau (TTB). 

Such significant realignment of the Department is no small task, 

and you are to be commended, Mr. Secretary, for the fine job you 

have done in completing this transition. 

Now that the transition is complete, I would like to hear how the 

Department is refocusing its resources on its core missions of economic policymaker, financial manager, revenue collector and the 

leader in tracking terrorist finances. All of these missions are critical to the continued success of the economy. 

There is no economic stimulus that can equal the power of allowing taxpayers to retain more of their hard-earned paychecks and 

thereby spend their money as they best see fit for themselves and 

their families. I can think of no better way to stunt the present economic growth than a sudden increase in taxes. Such an action 

would dry up the additional capital that has flowed into our private 
278

markets and would set the Nation’s economy back on the downward course of recession. 

Even if those who propose to raise taxes during the recovery are 

prevented from doing so, we will still face the specter of numerous 

expiring tax cuts over the coming years. Without a permanent extension of tax cuts, there is no way to provide the certainty and 

stability necessary to sustain our current economic recovery. 

Even as our economy recovers, the threat of terrorism still hangs 

over us. Given its long-standing relationships with financial institutions throughout the world and its existing intelligence gathering 

and law-enforcement infrastructure, the Department is ideally suited to lead the Federal Government in our Nation’s fight against 

terrorist financing. I believe it is time for the Treasury to step up 

to the task. 

Along those lines, I am keenly interested in the proposal to create the Office of Terrorism and Financial Intelligence (TFI). All of 

us share the administration’s goal to thwart financial support for 

terrorists. We will look forward to working with you to establish 

and to fund this office. I believe it is critical that we work together 

to ensure that we get the right structure and the necessary funding 

in place. 

The Banking Committee and the Select Committee on Intelligence combined their efforts to give Treasury a platform to reposition itself as the linchpin in the Nation’s efforts to identify and 

track movements of funds and commodities which would support 

those who seek to destroy our way of life. 

The Intelligence Authorization Act of 2004 included a new Assistant Secretary for Intelligence and Analysis. Treasury committed to 

create an office that would ‘‘enhance the Department’s access to Intelligence Community information and permit a reorganization and 

upgrading of the scope and capacities of Treasury’s intelligence 

functions in light of the Nation’s counter-terrorist and economic 

sanctions programs.’’

In hearings last year in the Banking Committee, we heard from 

various experts who noted a need for the Treasury to recapture enforcement capabilities. Given the unique status of Treasury with 

the financial services industry, I believe only you have the full responsibility, Mr. Secretary, for ensuring the integrity of the financial services industry. I am, therefore, disappointed that your vision for the revitalized role of Treasury has not been as robust as 

I would have liked. I see no plans for reorganization or the growth 

that we anticipated, especially in the enforcement area. 

Your letter dated April 16 merely reiterates the agreements our 

staffs reached in November of 2003. You propose no real increase 

in staff and request no new funding in the budget submission. I expected more, but I trust that you will take this task as a priority. 

No task of this size can be accomplished without your direction, 

Mr. Secretary, and your vision. 

We on this committee and on the Banking Committee stand 

ready to assist. We have prioritized and will continue to prioritize 

our oversight function to ensure that the American people are safe 

and the integrity of our Financial Services Industry is secure. 

Mr. Secretary, I would be remiss if we did not discuss the Department of Treasury’s $11.6 billion budget request for 2005, and 
279

particularly the $10.7 billion request for the Internal Revenue 

Service (IRS). The IRS faces enormous problems, and I am especially concerned about the continuing failures in computer modernization. 

Mr. Secretary, the IRS has spent $2.7 billion on the Business 

System Modernization (BSM) program and has yet to produce any 

real benefit to the taxpayer. In fact, the IRS is running late and 

is over-budget in all of seven core projects related to BSM. I am 

interested in hearing what oversight the Department of Treasury 

is performing to help the IRS put this program on track. Without 

modernization, the IRS will never be able to achieve meaningful 

improvements to taxpayer customer service or compliance. 

Mr. Secretary, I listened with interest to your statements in the 

news on April the 15th about simplifying the Federal tax code. I 

believe that the complexity of the tax code is a large part of the 

problem at the IRS. Our tax code and its regulations total a staggering 54,000 pages: they are too complex, too confusing, and too 

costly to comply with. 

Comprehensive reform of the tax code itself would go a long way 

to reducing tax fraud by making the process simpler and the system fairer for all taxpayers. A less complex tax code would provide 

fewer opportunities for cheaters and reduce the paperwork burden 

for all Americans. I look forward to working with you to reach this 

goal. 

Mr. Secretary, I look forward to hearing your thoughts on the 

economy and also on the Treasury’s budget request. I look forward 

to working with you on other issues that are important for the Nation. 

Senator Murray. 

STATEMENT OF SENATOR PATTY MURRAY

Senator MURRAY. Thank you, Mr. Chairman. 

I want to welcome Secretary Snow to our subcommittee. And this 

morning I want to focus on three issues: terrorist financing, 

outsourcing, and IRS debt collection. 

Let me start with terrorist financing. Our government has certainly stepped up its efforts to stop the flow of money to terrorist 

organizations since September 11. Unfortunately, that is not saying 

much, given the attitudes of some in our government before September 11. 

Richard Clarke, the former counter-terrorism official, documented these attitudes in his recent book ‘‘Against All Enemies.’’ 

Clarke said, ‘‘I wanted to raise the profile of our efforts to combat 

terrorist financing, but found little interest.’’ Clarke said that the 

President’s economic advisor, Larry Lindsay, ‘‘had long argued for 

weakening U.S.’s anti-money-laundering laws’’ and Clarke said 

that former Treasury Secretary Paul O’Neill ‘‘was lukewarm at 

best towards the multilateral efforts to ‘name and shame’ foreign 

laundering havens.’’

Since then, we have taken some important steps, but I am concerned that we may still be ‘‘behind the curve’’ in areas such as enforcement, nontraditional banking, staff and resources, and communication. 
280

Our country and our international partners have put new laws 

on the books, but we must do a better job of enforcing them. We 

cannot allow companies like Riggs Bank to shelter their clients by 

ignoring critical Federal requirements to report large and suspicious cash transactions, especially transactions involving foreign 

nationals and unknown charities. 

Our money-laundering laws must be adhered to and enforced, 

and we must insist that Saudi Arabia and other nations follow 

through on their commitments to shut down suspect charities that 

are financing the recruiting of future terrorists and possibly terrorist attacks as well. 

We also need to stay a step ahead of those who would harm us 

by looking beyond traditional banking. We can expect terrorists to 

act like drug smugglers. As we successfully close down their access 

to cash in one area, they will move to another and we have got to 

stay a step ahead. That means we must close down their operations 

of smuggling gold, cash, and diamonds across borders. We also 

need to get our hands around the ‘‘hawala’’ money transfer system. 

We have got to be able to distinguish between the legitimate transactions of immigrants who are sending money to their families 

back home and dangerous transactions that move cash into the 

hands of terrorists. 

We also need to make sure that new government officials we’ve 

put in place have the resources, the staff, and communication to do 

their jobs effectively. 

Recently we have expanded the portfolios of several Federal 

agencies. We’ve appointed new Under Secretaries, Deputy Under 

Secretaries and Assistant Secretaries. That is a fine start but we 

need to make sure that these offices actually have the staff and resources to succeed and we must avoid the communication problems 

that have plagued the CIA and the FBI. 

Clearly, we have got a lot of work to do to stop the flow of money 

to terrorist organizations and that is one of the topics I will explore 

with the Secretary today. 

I also want to talk about outsourcing. Secretary Snow has been 

outspoken in his belief that moving American jobs offshore serves 

to benefit the American economy in the long run. Mr. Chairman, 

I represent the most trade dependent State in the Nation, and I 

have a strong record of supporting international trade. 

But I do not believe that expanding trade requires hundreds of 

thousands of American families to lose their jobs, their health care, 

and their dignity so that their employers can pursue cheaper labor 

elsewhere. 

One recent survey suggests that we may be on the leading edge 

of an outsourcing tidal wave, especially in areas like information 

technology (IT). According to a recent survey of 182 companies conducted by DiamondCluster International, 86 percent plan to increase the use of offshore IT outsourcing firms in the next 12 

months. That compares to just 32 percent of the companies that responded the same way just 2 years ago. 

Those who defend outsourcing claim that the companies that are 

shipping jobs overseas today will increase their employment here 

in the United States down the road. That is little comfort to some-
281

one who has lost his job, particularly because his old job is not the 

one that will be coming back. 

There is a real mismatch between the skills needed for the jobs 

that are moving overseas and the skills needed for the jobs that 

may be open in the future. For example, an increasing number of 

U.S. engineering jobs have been moved to India. Right now the unemployment rate for engineers in the United States is twice the national average. That is really hurting a lot of families. 

There are fields where we have shortages like nursing, but I do 

not know how many engineers can go to school to become a nurse 

while they still have to feed their families. These mismatches are 

all around. 

The factory worker who is laid off from a manufacturing company cannot turn around tomorrow and take a job at a drug company that looks for pharmacological researchers. 

Simply put, the people who suffer from outsourcing today cannot 

move easily into available jobs. The skills they have today are not 

the ones that will be in demand tomorrow. 

Fortunately, we do know how to help people move from yesterday’s jobs into the jobs that are open today and the jobs that will 

be open tomorrow. The answer is our Nation’s job training system. 

This is the time to invest in that system so it can help all of the 

people who have lost their jobs through no fault of their own. Unfortunately, the administration is moving in the wrong direction. 

In addition to serving as the ranking member on this subcommittee, I also serve as the ranking member of the Employment 

Subcommittee in the Senate. I have analyzed in detail President 

Bush’s proposal to increase job training, and here is the bottom 

line. His proposal does not add $1 to our Federal efforts to train 

our workforce. Not $1. 

In fact, the President’s budget cuts $300 million from existing assistance for workforce training. Even worse, those new cuts for 

2005 come on top of more than $500 million in job training and employment service reductions that have been recommended since 

President Bush took office. In my book, those who defend 

outsourcing should be the biggest advocates of a real increase in 

job training for American workers who end up on the losing end 

of the international trade, and I want to explore that later this 

morning with Secretary Snow as well. 

Finally, Mr. Chairman, I want to discuss my concerns over the 

Secretary’s proposal to allow private contractors to collect unpaid 

tax debts owed to the IRS. This proposal is currently included in 

the FISC/ETI bill that will be debated again on the Senate floor in 

a few days. We all know that the IRS has done a very poor job of 

collecting unpaid tax debts. In fact, to my shock, it has become apparent that the IRS has not even collected unpaid taxes from several individuals who have been convicted in court of tax evasion. 

The Treasury Department should request sufficient funds so that 

IRS agents can collect those unpaid debts. But instead the Department has decided to invite the private sector to do the job. For anyone familiar with the Treasury Department’s record on using contractors, it raises serious red flags about the privacy of individual 

taxpayers. 
282

The Department’s abominable record on ensuring that contractors protect the privacy of our citizens is not speculation. It is fact. 

A little more than a year ago the Treasury Inspector General for 

Tax Administration (TIGTA) did an audit and observed that the 

IRS has no assurance that its contractors completed the required 

background investigations of their employees. 

Just last month, the Treasury Inspector General (IG) completed 

another audit that made it clear that the IRS continues to do a 

very poor job of monitoring the overall trustworthiness of its private contractors. According to the Inspector General, IRS contractors had ‘‘committed numerous security violations that placed IRS 

equipment and taxpayer data at risk.’’

In some cases, contractors blatantly circumvented IRS policies 

and procedures, even when the IRS’s security personnel identified 

inappropriate practices. One disgruntled contractor employee planted a computer time bomb on an IRS system that would have destroyed sensitive taxpayer data. Another contractor connected an 

unsecured computer to the IRS network and cost the agency $1.5 

million in downtime and cleanup costs to eliminate a virus introduced by that contractor. 

The Treasury Department has given all sorts of verbal guarantees that taxpayers will not have their privacy compromised when 

private contractors start collecting tax debts from the public. But 

given the IRS’s abysmal record in monitoring its own contractors, 

I am deeply concerned that these private collection agents will not 

respect the privacy of taxpayers. 

I hope this subcommittee will insist on nothing less than the 

strictest privacy guarantees and assurances before we allow the 

IRS to allow private contractors into the Federal debt collection 

business. 

Thank you very much, Mr. Chairman. 

Senator SHELBY. Senator Bennett. 

STATEMENT OF SENATOR ROBERT F. BENNETT

Senator BENNETT. Thank you, Mr. Chairman. This is the first 

time that I have served on the Treasury and General Government 

portion of this subcommittee. I have been involved in the Transportation portion. So I come to these issues, Secretary Snow, with less 

of a background than I do as the other issues that we have had. 

I listened to Senator Murray talk about the IRS and, of course, 

one of the great frustrations that I have had while I have been in 

the Senate is the inability of the IRS to get on top of the technological revolution and take advantage of the increase in productivity that IT makes available to everybody else. 

We all remember, and I cannot put a year on it out of my memory, but we remember the tremendous investment that the IRS 

made during the 1990s and came up totally empty-handed. I 

worked a little bit with that as Chairman of the Committee on the 

Year 2000 Problem and we were frustrated by the inability of the 

IRS to be as forward in their understanding of IT as some of the 

other departments. 

So, like Senator Murray, I would like to hear from the Secretary 

as to where the IRS is today in trying to get their computers up 
283

to speed and whether progress has been made from the unfortunate performance that existed in the 1990s. 

I have often thought if this were a business, given the amount 

of information that is provided to the IRS electronically, the IRS 

ought to be able to figure the tax return and on the 15th of April 

send the taxpayer either a bill or a check and the taxpayer would 

not have to be involved in figuring out his own taxes at all. 

But unfortunately, we are not at that point and I would hope 

that might be a goal that could be set for some point in the future, 

because with 1099s and W–2s and W–4s and K–1s and so on, all 

in the hands of the IRS to begin with, the computer system ought 

to be good enough that it could produce that sort of result. 

So recognizing that the bulk of, if I read your testimony correctly, 

Mr. Secretary, the bulk of your $11.7 billion request is for the IRS. 

I think that is an area we could profitably spend some time talking 

about. 

I thank the Secretary for his willingness to appear here and look 

forward to his testimony. 

Senator SHELBY. Senator Dorgan. 

STATEMENT OF SENATOR BYRON L. DORGAN

Senator DORGAN. Mr. Chairman, thank you very much. 

I have another Appropriations Subcommittee hearing going on 

next-door, around the corner, so I will be going back and forth. I 

did read the Secretary’s statement last evening and I do want to 

come back and ask some questions about a number of issues including, as he might expect, Cuban travel and the use of the Office 

of Foreign Assets Control (OFAC) to do what they have been doing 

recently. 

I hope the Chairman will give me an opportunity to pursue that 

at some length because I think that is a very important topic. 

Senator SHELBY. We will have a number of rounds. 

Mr. Secretary, we welcome you again to the committee. Your testimony will be made part of the record in its entirety. You proceed 

as you wish. 

STATEMENT OF SECRETARY JOHN SNOW

Secretary SNOW. Thank you very much, Mr. Chairman and Senator Murray, Senator Dorgan, Senator Bennett. 

It is a great privilege to appear before you and have an opportunity to talk about Treasury, its major thrust, how it is functioning in this new post-Homeland Security environment, where so 

many of the former enforcement functions are no longer a part of 

Treasury. Treasury continues to have major responsibilities in the 

financial war on terror, as the Chairman pointed out. 

As Senator Bennett pointed out, Treasury’s budget is largely a 

function of the IRS. It is 90 percent of the total budget. The IRS 

is the biggest single management problem inside the Treasury Department. It is something that I try to spend a good deal of time 

on, now that we have a Deputy Secretary, Sam Bodman, who had 

been the Deputy Secretary at Commerce. In his role as chief operating officer of the Treasury Department, I have asked Sam to give 

particular attention to the IRS. There are a myriad of issues there 
284

that we can talk about, some of which have already been alluded 

to in your questions. 

A word on our budget, and I will be brief. It reflects increases 

in two areas basically. Everything else is either down or funded at 

the prior steady State levels. 

One is IRS enforcement. Here we feel that there is need for more 

attention on enforcement. And the budget proposes adding a number of additional positions in the IRS focusing on the enforcement 

activities. Of the $300 million we are asking for additional enforcement money, two-thirds of it will go to corporations to deal with 

auditing of corporations to get at abusive tax schemes and tax shelters and high income people, and the marketing of tax shelters and 

abusive tax schemes to them. 

The first area of increase is enforcement so that we get effective 

enforcement and better compliance. There seems to have been some 

erosion in that area over the last few years, and I think the IRS 

is doing a better job on respecting taxpayer rights, with taxpayer 

services, with treating taxpayers better, answering the phones better, giving better advice when calls come in. So the customer service side of the IRS has improved. Now we need to make equal improvements in the enforcement side. 

The second broad area of increase, and Mr. Chairman, this goes 

precisely to the issue you raised with me in your opening comments 

and otherwise in our correspondence, is Treasury’s role in the war 

on terror. 

Our role, as we see it, is to lead the financial war on terror, to 

interdict the flows of funds, to be there as a guardian of the financial system of the United States so that the financial system is not 

used to move terrorist funds. And to enlist the finance ministers 

and central banks of the world at large to do the same thing, to 

create a broad coalition, a global coalition, in the financial war on 

terrorism. 

What we know about terrorism is that it knows no borders. So 

if we are going to effectively deal with it, we have to enlist all of 

the world. And I think we have made very good progress on that 

score. 

This weekend, the finance ministers of the world are in Washington for the International Monetary Fund (IMF) and World Bank 

and G–7 meetings. I have called a separate meeting of the finance 

ministers on the issue of global terrorism to make sure we are exchanging best practices and continuing to learn from each other 

and take appropriate actions. 

So the second area where we have asked for a budget increase 

is fighting the financial war on terrorism, and I greatly appreciate, 

Mr. Chairman, your support and the support of other members of 

the committee in setting up the new office in Treasury which will 

be the focal point for our anti-terrorist funding activities. 

The new Under Secretary will be responsible for the functioning 

office and the principal person in the United States Government, 

responsible day to day to think about how our financial system 

could be penetrated by terrorists to move money, with broad authority over the Office of Foreign Assets Control (OFAC) and Financial Crimes Enforcement Network (FinCEN) and the Bank Se-
285

crecy Act and the USA PATRIOT Act, and all those tools that Congress has made available to wage this war on terrorism. 

The Office has a new Assistant Secretary, approved by the Congress last fiscal year, so that Treasury will now have access to its 

own intelligence gathering, an Assistant Secretary for Intelligence. 

I commend the Congress for recognizing that need in Treasury, to 

put a priority on financial intelligence so that this Assistant Secretary can continue to speak to the Federal Bureau of Investigation 

(FBI), speak to the National Security Advisor (NSA), speak to the 

Central Intelligence Agency (CIA), speak to the intergovernmental 

intelligence gatherers about the role of financial intelligence. 

Everything else in the budget is basically static. I hope we will 

be able to satisfy you, Mr. Chairman. I know that it will be a long 

dialogue that we will have on this issue of Treasury playing its appropriate role. 

Deputy Secretary Bodman will be up before the Banking Committee next week to elaborate on these points. 

Finally, a word on the economy. A year ago, when I testified 

here, there were great questions about what course the American 

economy was on. You will recall at that time there was concern 

about the possibility of a double dip recession. There was concern 

about deflation. 

I think it is safe to say we have turned the corner and have the 

economy on a very good path. And clearly the tax cuts that Congress approved last year lie at the very center of the changed circumstances of the American economy, with growth for this quarter 

forecasted to be between 4 percent and 5 percent, with growth in 

the last half of last year, after the tax cuts took effect, of over 6 

percent, with jobs coming back, 308,000 jobs in March and over 

500,000 for the first quarter. 

PREPARED STATEMENT

Corporate spending is up. Exports are up. Retail sales are strong. 

Construction is strong. Housing is strong. The economy is on a 

good strong path and, again, I appreciate the role Congress played 

in making that possible with the Jobs and Growth Bill. 

With that, Mr. Chairman, I thank you again for the chance to 

appear before you and look forward to responding to your questions. 

[The statement follows:]

PREPARED STATEMENT OF JOHN SNOW

Chairman Shelby, Senator Murray, and Members of the committee, I appreciate 

the opportunity to appear before you today to discuss President Bush’s fiscal year 

2005 proposed budget for the Department of the Treasury. 

The President’s request for fiscal year 2005 of $11.7 billion for Treasury provides 

funding we need to support the core missions as identified in our new strategic 

plan—in promoting national prosperity through economic growth and job creation; 

maintaining public trust and confidence in our economic and financial systems; and 

ensuring the Treasury organization has the workforce, technology, and business 

practices to meet the Nation’s needs effectively and efficiently. Two key strategic objectives are to collect Federal tax revenue when due through a fair and uniform application of the law and to disrupt and dismantle the financial infrastructure of terrorists, drug traffickers, and other criminals and isolate their support networks. 

One historic change at Treasury in the past year has been the movement of most 

of the Department’s law enforcement divisions—affecting some 30,000 employees—

to the Department of Homeland Security and the Department of Justice. This 
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change has provided an opportunity for Treasury to refocus on its core missions as 

the Federal Government’s economic policymaker, financial manager, and revenue 

collector. This puts us in a better position to fulfill our critical role in fighting the 

war on terrorist financing. In addition, the Department revised and completed a 

new strategic plan in September 2003. To complement this strategic planning initiative, the Department and many of the bureaus underwent a restructuring of their 

budget activities and programs—discontinuing enforcement programs which no 

longer fit into the Treasury strategic vision and developing new performance goals 

and measures focused on getting value for taxpayers. As a result of these efforts, 

our fiscal year 2005 request reflects significant reengineering and reprogramming 

to ensure efficient and effective use of our resources. 

Mr. Chairman, we provided the Committee with a detailed breakdown and justification for President’s fiscal year 2005 budget request for Treasury. I would like 

to take the opportunity today to point out some highlights of our request and then 

I’d be happy to take whatever questions you may have. 

PROMOTING PROSPEROUS AND STABLE U.S. AND WORLD ECONOMIES

The aim of these strategic goals is to ensure that the United States and world 

economies perform at full economic potential. In order to perform at its full potential, the U.S. economy must increase its rate of growth and create new, high quality 

jobs for all Americans. Additionally, the legal and regulatory framework must support this growth by providing an environment where businesses and individuals can 

grow and prosper without being limited by unnecessary or obsolete rules and regulations. The Treasury Department and three of its bureaus, the Community Development Financial Institutions Fund, the Office of the Comptroller of Currency and the 

Office of Thrift Supervision play diverse roles in the domestic economy. From serving as the President’s principal economic advisor to issuing tax refunds to millions 

of Americans, the Treasury has a significant influence on creating the conditions for 

economic prosperity in the United States. A prosperous world economy serves the 

United States in many ways. It creates markets for U.S. goods and services, and 

it promotes stability and cooperation among nations. For these reasons, the Department of the Treasury will work with other Federal agencies and offices to promote 

international economic growth and raise international standards of living through 

interaction with foreign governments and international financial institutions. Our 

budget requests $158.9 million to support these strategic goals. 

MAINTAINING PUBLIC TRUST AND CONFIDENCE IN OUR ECONOMIC AND FINANCIAL

SYSTEMS

Treasury’s mission of managing the U.S. Government’s finances effectively is the 

bulk of the President’s fiscal year 2005 request for the Department. The budget request of $11 billion—the majority of which is for the Internal Revenue Service—will 

provide funds to ensure that the tax system is fair for all while maintaining high 

quality service to our taxpayers and ensuring compliance with the tax laws. 

In past years, IRS’s focus has been on improving customer service. We believe 

that we have been successful in that effort and are committed to further enhancing 

customer service for the vast majority of American taxpayers who do their best to 

pay their fair share. For those who do not, fundamental fairness requires that our 

enforcement efforts in fiscal year 2005 continue moving us towards a tax system in 

which everyone is complying with the tax laws. Our fiscal year 2005 request, which 

includes a net increase of $300 million, will focus our resources toward enforcement 

initiatives designed to curb abusive tax practices, end the proliferation of abusive 

tax shelters, improve methods of identifying tax fraud, identify and stop promoters 

of illegal tax schemes and scams, and increase the number and effectiveness of audits to ensure compliance with the tax laws. This request will allow the IRS to apply 

resources to areas where non-compliance proliferates: promotions of tax schemes, 

misuse of offshore accounts and trusts to hide income, abusive tax shelters, underreporting of income, and failure to file and pay large amounts of employment taxes. 

The President’s request also provides $285 million to continue our effort in modernizing the Nation’s tax system through investments in technology. During the fall 

of 2003, the IRS performed comprehensive studies to review its modernization efforts. From these studies, the IRS has resized its modernization efforts to allow 

greater management focus and capacity on the most critical projects and initiatives. 

The IRS is also responding to these studies by increasing the business unit ownership of the projects and revising its relationships with the contractor and ensuring 

joint accountability. While the IRS has thus far failed to deliver several important 

projects with which taxpayers are not directly involved, it is important to note they 

have had some notable successes. The IRS has made progress on applications such 
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as improved telephone service and a suite of e-services to tax practitioners. For the 

first time, large businesses and corporations can electronically file. In addition, taxpayers can access refund and Advance Child Tax Credit information from the irs.gov 

website. The IRS’s business systems modernization expenditure plan provides more 

detail on this request. 

In addition, IRS will work to improve customer service by making filing easier; 

providing top quality service to taxpayers needing help with their return or account; 

and providing prompt, professional, improved taxpayer access and helpful treatment 

to taxpayers in cases where additional taxes may be due. 

The provisions of the Trade Act of 2002 (Public Law 107–210) chartered the 

Treasury Department (through the IRS) with establishing and implementing a new 

health coverage tax credit program in 2003. This program provides a refundable tax 

credit to eligible individuals for the cost of qualified health insurance for both the 

individual and qualifying family members. The request provides $35 million to continue implementation and operation of the Health Insurance Tax Credit Program. 

The Alcohol and Tobacco Tax and Trade Bureau (TTB) was created when the 

Homeland Security Act of 2002 divided the Bureau of Alcohol, Tobacco and Firearms 

into two agencies. Our fiscal year 2005 request includes $81.9 million for TTB: $58.3 

million to support the Collect the Revenue function, and $23.5 million to Protect the 

Public, both of which will facilitate their efforts in collecting $14.6 billion in revenue 

from the alcohol and tobacco industries and monitor alcohol beverages in the marketplace to detect contamination and adulterated products. Their focus this coming 

fiscal year is to promote voluntary compliance of existing regulations and to protect 

the consumer through efficient and effective service. 

Key to the U.S. Government’s management of financial systems is the Financial 

Management Service (FMS), whose mission is to provide central payment services 

to Federal program agencies, operate the Federal Government’s collection and deposit systems, provide Government-wide accounting and reporting services, and 

manage the collection of delinquent debt. The fiscal year 2005 request of $231 million for FMS includes legislative proposals to improve and enhance opportunities to 

collect delinquent debt through FMS’ debt collection program. The proposals would: 

eliminate the 10-year limitations period applicable to the offset of Federal non-tax 

payments to collect debt owed to Federal agencies; increase amounts levied from 

vendor payments (from 15 percent to 100 percent) to collect outstanding tax obligations; allow the Secretary of the Treasury to match information about persons owing 

delinquent debt to the Federal Government with information contained in the Department of Health and Human Service’s National Directory of New Hires; and 

allow the offset of Federal tax refunds to collect delinquent State unemployment 

compensation overpayments. 

The Bureau of the Public Debt (BPD) continues its management and improvement 

of Federal borrowing and debt accounting processes. BPD will provide vital support 

to the processing of applications and the operation of systems used for re-enforcing 

its mission of providing quality debt management services to financial institutions, 

individuals, foreign governments, and over 200 government trust funds. 

The activities of the United States Mint and the Bureau of Engraving and Printing (BEP) are vital to the health of our Nation’s economy. These agencies share the 

responsibility for ensuring that sufficient volumes of coin and currency are consistently available to carry out financial transactions in our economy. Treasury, Mint 

and BEP will deliver a study to Congress regarding options to merge and/or streamline operations by consolidating certain functions and sharing costs between the 

Mint and the BEP. 

FIGHTING THE WAR ON TERROR AND SAFEGUARDING OUR FINANCIAL SYSTEMS

Our goals in preserving the integrity of U.S. financial systems include ensuring 

that the U.S. financial system and access to U.S. goods and services are closed to 

individuals, groups and nations that threaten U.S. vital interests, ensuring that 

these systems are kept free and open to legitimate users while excluding those who 

wish to use the system for illegal purposes, and ensuring that the financial systems 

will continue to operate without disruption from either natural disaster or manmade 

attacks. To support such efforts, the President has requested $250.9 million for fiscal year 2005. 

The administration announced the creation of the Office of Terrorism and Financial Intelligence (TFI) within the Department of the Treasury on March 8, 2004. TFI 

will lead Treasury’s efforts to sever the lines of financial support to international 

terrorists and will serve as a critical component of the administration’s overall effort 

to keep America safe from terrorist plots. 
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The TFI, which will include Treasury’s newly established Executive Office for Terrorist Financing and Financial Crime (EOTF/FC), will have policy oversight over the 

Financial Crimes Enforcement Network (FinCEN), the Office of Foreign Assets Control (OFAC), and the Treasury Executive Office for Asset Forfeiture (TEOAF). This 

will create a single lead office in Treasury for fighting the financial war on terror 

and combating financial crime, enforcing economic sanctions against rogue nations, 

and assisting in the ongoing hunt for Iraqi assets. 

The Office of Foreign Assets Control (OFAC) is central to our efforts to disrupt 

financing of terrorist activities. Only days after September 11, 2001, OFAC drafted 

and implemented Executive Order 13224, which invoked Presidential authority contained in the International Emergency Economic Powers Act and froze the assets 

of 29 entities and individuals linked to Osama bin Laden and his al Qaeda network. 

Since then, OFAC research and investigation helped identify between 200 and 300 

additional entities and individuals as Specially Designated Global Terrorists under 

the Order. Since September 2001, OFAC and our allies have frozen over $136 million in terrorist assets and vested $1.9 billion of frozen Iraqi assets. 

The President’s fiscal year 2005 request also includes $64.5 million for the Financial Crimes Enforcement Network (FinCEN) to enhance its ability to fight the war 

on terror and combat financial crimes such as money laundering. Its mission to safeguard the U.S. financial systems from the abuses imposed by criminals and terrorists and to assist law enforcement in the detection, investigation, disruption and 

prosecution of such illicit activity is accomplished through its statutory role as the 

administrator of the Bank Secrecy Act (31 C.F.R.) FinCEN issues and enforces regulations that require a wide gamut of financial institutions to implement anti-money 

laundering programs and report transactions that are indicative of money laundering, terrorist financing and other financial crimes, thus providing a wealth of information to assist law enforcement, both domestic and international, in pursuing 

such crimes. FinCEN also ensures that the information collected under these regulations is made fully accessible to law enforcement and the regulatory community in 

a secure manner and provides both tactical and strategic analysis to a variety of 

customers. In addition, FinCEN is the Financial Intelligence Unit (FIU) for the 

United States and has been central in the development of a consortium of FIU’s 

around the globe that permits fast and effective sharing of financial intelligence on 

an international scale. 

The IRS’s Criminal Investigative Division (IRS-CI) also plays a key role in investigating financial crimes. The request supports the unique skills and expertise of 

IRS-CI agents in investigating tax fraud and financial crimes not only support tax 

compliance, but also benefit the war on terror and our efforts to root out financial 

crimes. 

In addition, the Office of Critical Infrastructure Protection and Compliance Policy 

leads our efforts to safeguard the financial infrastructure. This Office works closely 

with the Department of Homeland Security, other Federal agencies, and the private 

sector to safeguard our infrastructure. That is essential, given that the majority of 

the critical financial infrastructure of the United States is owned and operated by 

the private sector. The financial system is the lifeblood of our economy and this Office leads our efforts to keep it safe. 

ENSURING PROFESSIONALISM, EXCELLENCE, INTEGRITY AND ACCOUNTABILITY IN

MANAGEMENT OF TREASURY

The President has requested $229.6 million for ensuring proper stewardship of the 

Department. Included in this request is $14.2 million for the Department’s Office 

of Inspector General (OIG) and $129.1 million for the Inspector General for Tax Administration (TIGTA). 

The 1988 amendments to the Inspector General Act of 1978 created the OIG to 

conduct audits and investigations relating to Treasury programs and operations; to 

promote economy and efficiency, and detect and prevent fraud and abuse, in such 

programs and operations; and to notify the Secretary and Congress of problems and 

deficiencies in such programs and operations. 

The Internal Revenue Service Restructuring and Reform Act of 1998 created the 

Inspector General for Tax Administration (TIGTA) to oversee operations at the Internal Revenue Service (IRS). TIGTA promotes the public’s confidence in the tax 

system by assisting the IRS in achieving its strategic goals, identifying and addressing its material weaknesses, and implementing the President’s Management Agenda. Further, TIGTA undertakes investigative initiatives to protect the IRS against 

threats to systems and/or employees. 

To maximize efficiencies and effectiveness, the administration has proposed to 

merge the Treasury Inspector General and the Treasury Inspector General for Tax 
289

Administration into a new Inspector General office, called the Inspector General for 

Treasury. The new organization will have all of the same powers and authorities 

as its predecessors have under current law. We will work with the Congress to move 

this legislation forward. 

Also included in this request is an increase of $10.8 million for a host of modernization activities of our systems including IT Governance, E-Government, operational security, and Treasury enterprise architecture. 

FOUNDATION FOR SUCCESS—THE PRESIDENT’S MANAGEMENT AGENDA

As mentioned earlier, following the movement of the law enforcement bureaus to 

the Departments of Homeland Security and Justice, Treasury restructured and refocused its strategic goals and objectives based on the five initiatives of the President’s Management Agenda (PMA). Treasury developed and issued its new Strategic 

Plan, which linked intricately with each of the five initiatives of the PMA. This new 

strategic vision, coupled with the efforts underway in the PMA, provides the mechanism and focus for continuous improvement throughout Treasury and its bureaus. 

In fiscal year 2003, Treasury achieved many significant milestones in implementing the President’s Management Agenda. Specific accomplishments included: 

—In the past 18 months, Treasury has drafted the first-ever Department-wide 

Human Capital Strategic Plan, which addresses the Standards for Success as 

issued by the Office of Personnel Management (OPM) and the Office of Management and Budget (OMB). Treasury incorporated human capital into its strategic 

planning and budget formulation and execution processes, and the plan will 

guide future efforts in areas such as workforce and succession planning, diversity, performance management, and managerial accountability. 

—In competitive sourcing, Treasury completed 3 full competitions, over 20 streamlined competitions, and currently has studies involving approximately 4,500 positions in various phases of completion. 

—In budget and performance integration, Treasury revised the performance reporting requirement to facilitate review and assessment of bureaus’ key performance data. Treasury also restructured some of the bureaus’ budget activities to reflect alignment with the new strategic plan and the full cost of achieving results. 

—Treasury also maintained its government-wide lead in accelerated financial reporting. The Department implemented a 3-day monthly close and successfully 

issued its fiscal year 2003 Performance and Accountability Report on November 

14, 2003, 21⁄2 months ahead of the official deadline. 

Treasury will continue to work closely with OMB and other stakeholders to make 

improvements in implementing the initiatives set forth in the President’s Management Agenda. 

THE PRESIDENT’S SIX-POINT ECONOMIC GROWTH PLAN

At the beginning of my testimony I talked about what the Treasury Department 

does to support our strategic goal of encouraging a prosperous and stable U.S. economy. I would also like to talk about our efforts across the administration to promote 

economic growth as embodied by President’s six-point plan for growth. 

That includes making health care more affordable with costs more predictable. 

We can do this by passing Association Health Plan legislation that would allow 

small businesses to pool together to purchase health coverage for workers at lower 

rates. 

We also need to promote and expand the advantages of using health savings 

accounts... how they can give workers more control over their health insurance 

and costs. 

And we’ve got to reduce frivolous and excessive lawsuits against doctors and hospitals. Baseless lawsuits, driven by lottery-minded attorneys, drive up health insurance costs for workers and businesses. 

The need to reduce the lawsuit burden on our economy stretches beyond the area 

of health care. That’s why President Bush has proposed, and the House has approved, measures that would allow more class action and mass tort lawsuits to be 

moved into Federal court—so that trial lawyers will have a harder time shopping 

for a favorable court. 

These steps are the second key part of the President’s pro-jobs, pro-growth plan. 

Ensuring an affordable, reliable energy supply is a third part. 

We must enact comprehensive national energy legislation to upgrade the Nation’s 

electrical grid, promote energy efficiency, increase domestic energy production, and 

provide enhanced conservation efforts, all while protecting the environment. 
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Again, we need Congressional action: we ask that Congress pass legislation based 

on the President’s energy plan. 

Streamlining regulations and reporting requirements are another critical reform 

element that benefits small businesses, which represent the majority of new job creation: three out of every four net new jobs come from the small-business sector! 

Let’s give them a break wherever we can so they’re free to do what they do best: 

create those jobs. 

Opening new markets for American products is another necessary step toward job 

creation. That’s why President Bush recently signed into law new free trade agreements with Chile and Singapore that will enable U.S. companies to compete on a 

level playing field in these markets for the first time—and he will continue to work 

to open new markets for American products and services. 

Finally, we’ve got to enable families and businesses to plan for the future with 

confidence. 

That means making the President’s tax relief permanent. 

Rate reductions, the increase in the child tax credit and the new incentives for 

small-business investment—these will all expire in a few years. The accelerated rate 

reductions that took effect in 2003 will expire at the end of this year. Expiration 

dates are not acceptable—we want permanent relief. 

The ability of American families and businesses to make financial decisions with 

confidence determines the future of our economy. And without permanent relief, incentives upon which they can count, we risk losing the momentum of the recovery 

and growth that we have experienced in recent months. 

The tax relief is the key stimulus for increased capital formation, entrepreneurship and investment that cause true economic growth. 

CONCLUSION

Mr. Chairman, I look forward to working with you, members of the Committee, 

and your staff to maximize Treasury’s resources in the best interest of the American 

people and our country as we move into fiscal year 2005. I am hopeful that together 

we can work to make this Department a model for management and service to the 

American people. 

Thank you again for the opportunity to present the Department’s budget today. 

I would be pleased to answer your questions.

ECONOMY AND JOBS

Senator SHELBY. Thank you, Secretary Snow. You referenced economic growth. Last month, you stated 308,000 jobs were created. 

That was robust. 

I have been told that up to 50 economists are predicting an average of about 180,000 new jobs a month for the next 6 or 7 months. 

Some months might be smaller and some months larger than others. That is good news. Do you believe that is going to happen? 

Secretary SNOW. Senator, I have seen those estimates. I think 

they are well supported and well reasoned estimates. And yes, very 

definitely, I think this economy will produce lots of jobs in the 

months ahead. 

Senator SHELBY. If we could create 1 million new jobs or so in 

the next 6 or 7 months, it would be good for America and good for 

workers, would it not? 

Secretary SNOW. It would be tremendous. It is what always occurs in a recovery, and the very fact that additional jobs come on 

stream helps the recovery to gain even further momentum. 

Senator SHELBY. Later today, in the Banking Committee, among 

other people, we will have Chairman Greenspan testify, and we 

will talk about the economy and the state of the banking community. 

Are you concerned about inflation at all at this point? 

Secretary SNOW. Mr. Chairman, not at this point I am not. I see 

the economy continuing to operate with lots of headroom to grow 
291

in a non-inflationary way. We still have considerable unused capacity in our factory and manufacturing systems. Real wage rates 

have only begun to move up a little bit. We still have unemployment higher than it should be. 

So we still have lots of unused resources in the economy that can 

be put to better use. And we live in this global economy where competition is ever present and affecting prices in the United States. 

And few executives who you talk to feel they have real pricing 

power. 

No, I think we have a lot of headroom to grow without inflation 

rearing its head. 

Senator SHELBY. Mr. Secretary, how important, in your judgment, is making the tax cuts permanent? 

Secretary SNOW. Mr. Chairman, I think it is absolutely critical. 

I think the evidence is clear that the tax reductions that Congress 

enacted last year have made this strong recovery possible. 

Senator SHELBY. It has put money in people’s pockets, their 

money, has it not? 

Secretary SNOW. That’s what it is about. 

Senator SHELBY. Let them keep the money they have earned. 

Secretary SNOW. And when they keep the money they earn, good 

things happen. They do good things with it. They spend it. And as 

they spend it, then businesses around the country find that they 

need to replenish their inventories. Their shelves are coming down. 

And that leads to demand for their suppliers, and so on and so 

forth. So good things happen when people have more money to 

spend. 

Senator SHELBY. Mr. Secretary, a lot of people have characterized the tax cuts that we pushed through, and I certainly voted for 

every one of them, as tax cuts for the rich. But I do not buy that. 

I believe that it was a tax cut for everybody who works, in a sense, 

and it also eliminated taxes on a great portion of people where they 

pay hardly anything. Is that correct? 

Secretary SNOW. You are absolutely correct, Mr. Chairman. 

TERRORIST FINANCING

Senator SHELBY. I want to discuss terrorist financing. In fiscal 

year 2004, the Congress provided $3.5 million more than the budget request to fund and establish the Executive Office for Terrorist 

Financing and Financial Crimes (EOTF/FC) at Treasury. Would 

you update us on the creation of that office and explain how that 

office will mesh with the Office of Terrorism and Financial Intelligence (TFI) that you are proposing to create? 

Secretary SNOW. Yes, Mr. Chairman, and thank you for the opportunity to do that. 

The Office of Terrorism and Financial Intelligence (TFI) is just 

now being set up. It will be headed by an Assistant Secretary who 

will be responsible for making sure that the Treasury Department 

has access to the intelligence being gathered across this government and across other governments, and has the intelligence it 

needs to carry out its role, its critical role. 

So more priority on financial intelligence. There is lots of intelligence being gathered. We want to see more priority on the financial side. 
292

Senator SHELBY. Is Treasury not central to all of this? 

Secretary SNOW. I think Treasury is right at the center of it. It 

has to be. 

Senator SHELBY. It is your obligation. 

Secretary SNOW. It is our obligation. We have the authorities 

from the Executive Orders of the President, implementing the statutes that you have passed. Treasury has the expertise, knowledge 

of the financial systems of the United States, knowledge of the people in the financial system of the United States, and knowledge of 

the international financial system. 

The office you mentioned will be headed by an Assistant Secretary for terrorist finance and will be responsible for giving broad 

policy direction to OFAC and FinCEN and overseeing the National 

Money Laundering Strategy (NMLS) and overseeing our relationship with the international institutions that are engaged in the 

global war on terrorist finance. 

Senator SHELBY. Will Treasury share with the FBI and CIA and 

others, without impediment, the information that is central to terrorist financing? 

Secretary SNOW. Absolutely. 

Senator SHELBY. Because you notice with the 9/11 Commission 

and others, one of the problems is the lack of sharing information. 

If you do it begrudgingly, it is not timely and it does not work. 

Secretary SNOW. Mr. Chairman, I will pledge that we will share 

the information that we gather. And by having a senior-level Senate confirmed person sitting at the table with the other intelligence 

gathering agencies, we will see that Treasury’s priorities are given 

appropriate attention. 

Senator SHELBY. How will this office interface with the Executive 

Office for Terrorist Financing and Financial Crimes and with the 

Bureaus at Treasury? Are you going to integrate this where we 

have some type of sharing or analysis center? 

Secretary SNOW. Mr. Chairman, the two offices will be headed by 

a new Under Secretary. It was contemplated in the legislation Congress passed last fiscal year, for which I am very grateful. The 

Under Secretary will be the senior official in the United States 

Government on financial terrorism, will coordinate all the activities 

in Treasury, and be our point person. We will now have one person 

I can turn to and hold accountable for all of these activities. We 

have identified a first-rate individual to be the Under Secretary 

whose name I think will be released, or has very recently been released, for confirmation. 

Senator SHELBY. With the new office, how will the Treasury 

function better than before? 

Secretary SNOW. Yes, exactly. We did not have either the Under 

Secretary or the Assistant Secretary for Intelligence. 

Senator SHELBY. Mr. Secretary, we all support resources and 

methods to fight terror financing because it goes to the heart of it. 

I am concerned that the Treasury may have abdicated, in certain 

areas, its statutory responsibility and missions relating to terror financing to other Federal agencies. 

I am also concerned, Mr. Secretary, that in the void, other Federal agencies are establishing or enhancing capabilities that dupli-
293

cate what Treasury should be doing, and could lead to further 

interagency communication problems in the future. 

COORDINATION WITH HOMELAND SECURITY

Besides establishing a new office, what is the Treasury Department doing that the Homeland Security Department does not in 

this regard? 

Secretary SNOW. We coordinate very closely with Homeland Security. I can see why it might appear to be duplication. But in reality, we have different roles to play, different core functions. 

Treasury’s function is to play the lead in all relationships with 

financial institutions. 

Senator SHELBY. The primary responsibility is Treasury’s. 

Secretary SNOW. Primary responsibility is Treasury’s to play the 

lead in the money laundering, in the enforcement of the Bank Secrecy Act, in the bank and financial institutions knowing their customers, and in reaching out to all segments of the financial community. Now it is including jewelers and credit card companies and insurance companies—wherever money could be laundered or moved. 

Senator SHELBY. On the Homeland Security web page, Secretary 

Ridge is quoted as saying ‘‘safeguarding the integrity of America’s 

financial systems is a key part of Homeland Security.’’

It seems to me that that is Treasury’s mission. Are we duplicating this? And if so, what we are what are we going to do about 

it? 

Secretary SNOW. I think what Secretary Ridge has in mind, in 

saying what he said, is to underscore the role they have which is 

protection of a physical sort, physical protection. But Treasury’s 

role is the financial war on terror. 

But if a building is going to be penetrated by a terrorist, a bomb 

is going to be dropped, an explosive device is going to be detonated 

in a banking center, that would be properly their responsibility. 

But if it is penetrating the financial system, if it is the flow of 

money through the system, if it is interdicting those flows, then 

Treasury clearly has the lead. 

Senator SHELBY. Treasury is going to keep that lead, are you 

not? 

Secretary SNOW. Absolutely. 

Senator SHELBY. You are going to fight for your turf, I hope. 

Secretary SNOW. We are going to play the role you have assigned 

us and the President has assigned us. Yes sir, Mr. Chairman. 

Senator SHELBY. Senator Murray. 

OUTSOURCING

Senator MURRAY. Thank you, Mr. Chairman. 

Mr. Secretary, as I mentioned in my opening statement a recent 

private sector survey revealed that 86 percent of the companies 

questioned expect to expand the use of offshore IT outsourcing over 

the next 12 months. When that same question was asked of companies just 2 years ago the number was only 32 percent. 

My home State of Washington has an extraordinary number of 

IT specialists who are now suffering as a result of this downturn 

in the industry. Is the Treasury Department monitoring this situa-
294

tion and the potentially explosive growth of outsourcing in certain 

select industries? 

Secretary SNOW. Senator Murray, I have seen some studies on 

this and try and keep myself apprised to the extent I can in the 

area. 

Unfortunately the data is not all that we would like it to be on 

that score and we get different analyses and different estimates. I 

think the Commerce Department and the Labor Department are in 

a better position to talk technically to what the data shows. 

But what I have seen from the various surveys, Forrester Group 

I think is the one that is doing the study you are referring to, so 

far the effects have been relatively—that is relative to the total 

number of jobs that are being created in the United States economy. And the displacement rates are fairly small. 

Senator MURRAY. What other industries do you think, besides IT, 

might experience this outsourcing? 

Secretary SNOW. Well, I guess we have seen radiology 

outsourcing. I think Massachusetts General Hospital is getting Xrays read overseas. Medical, health care, service industries, I am 

told, and telecommunications. 

Senator MURRAY. What is the Bush Administration doing to try 

and stem the fund of jobs that our country is losing? 

Secretary SNOW. I think the best thing we can do, and of course 

we do not want to see any jobs lost anywhere, is to keep the American economy as vibrant and strong and creative as possible so that 

we are continuously creating as many new jobs, and good new jobs, 

jobs that point to careers, as we possibly can. 

Senator MURRAY. It is fine for economists and policymakers to 

argue back and forth over whether our country gains or benefits 

from outsourcing, but one thing that really is forgotten in this debate a lot is the people and the families that have lost their jobs. 

I recently read about a 40-year-old woman in Seattle whose 

name is Meara Bronstein. She worked at an IT job at a company 

called Watchmart Corporation. She worked there for 2 years. And 

one day she said that her entire department was informed that 

they would be laid off in a month. And worse, they were told they 

had to train their Indian replacements or lose their severance package. 

She is still without work after 10 months and her unemployment 

benefits just ran out. These are her words, let me read them to you. 

She says ‘‘my life has changed drastically over my 10 months of unemployment. I have cashed in my 401(k), can no longer afford 

health insurance and can just barely pay the rest of the bills. I 

have even resorted to selling a number of my things on eBay to get 

money for essentials. I think that my biggest struggles throughout 

this experience are the constant feelings of powerlessness and paralysis. I did everything I could to succeed. I got a good education. 

I paid off big student loans. I worked hard at my job. But now I 

realize that it does not matter what I do to make myself a marketable employee if there are no policies in this country to protect our 

jobs from being sent overseas to someone who will work for 1/16 

of the price. I cannot compete with that. You could say that I woke 

up from the American dream.’’

What you say, Mr. Secretary, to someone like that? 
295

Secretary SNOW. Obviously, Senator, your heart goes out to anybody who finds themselves in those circumstances. Those are 

dreadful circumstances for anybody to find themselves in. 

Two things I think we can say. One is that we live in the most 

dynamic economy in the world. We live in an economy that is continuously changing, an economy in which there is continual regeneration going on, which means displacement is continuously occurring. There are about 40 million new jobs created every year in the 

United States. And there are roughly 40 million people displaced 

from their old jobs. So we have this extraordinarily dynamic economy. 

What I think we need to do, and it is why those tax cuts were 

so important, is continuously focus on making sure aggregate demand is large enough to support employment for everyone. 

OUTSOURCING AND JOB DISPLACEMENT

Senator MURRAY. But if you are an IT person today, you cannot 

become a nurse tomorrow. 

Secretary SNOW. I understand that, Senator. And the second part 

of the answer is we have to make sure, I think we have an obligation in an economy that is changing as fast as this one, because 

remember a lot of people are getting displaced not because of contracting out or foreign competition. They are getting displaced because of domestic competition. 

We have to make sure that opportunities for skills development 

and retraining and education are widely available. 

Senator MURRAY. So you would say investing in those are critical? 

Secretary SNOW. Yes, I do. I think investing and making sure 

people have easy access to low-cost ways to acquire the skills to 

give them the jobs of the future is an obligation we must take on. 

Senator MURRAY. What about bridges like unemployment compensation for people like that? 

Secretary SNOW. Yes, absolutely there is a role for that. 

Senator MURRAY. Mr. Secretary, one of the provisions that were 

included in last year’s appropriations bill was a prohibition against 

using fiscal year 2004 funds to contract out any Federal job overseas. To my shock, the President’s budget specifically requests that 

this provision be deleted from fiscal year 2005. 

Mr. Secretary, could you cite for me some instances at the Treasury Department where you might work that is currently being conducted by Federal employees and send that work overseas? 

Secretary SNOW. Senator, I am not aware of any. 

Senator MURRAY. Then tell me why the President wants us to 

grant him authority to move Federal jobs overseas? 

Secretary SNOW. Senator, I am not familiar with the background 

to that provision. I am sure somebody at OMB or DOD could talk 

about it better. I am just not knowledgeable enough to offer you a 

thoughtful opinion on that. 

Senator MURRAY. But you have no jobs in your department that 

you——

Secretary SNOW. Not that I am aware of and I will check——

Senator MURRAY. So you would not object to us putting that provision in the bill? 
296

Secretary SNOW. Well, there may be reasons beyond the Treasury 

Department. We are only a small part of this government. And 

there may be some compelling rationale in some other department 

for some access to that. But I am not aware of any at Treasury. 

Senator MURRAY. I know a lot of the comments have gone back 

and forth over this issue about whether outsourcing American jobs 

is beneficial to the economy but there is a different question that 

surrounds this issue that I want to take a second to discuss with 

you. And that is the question of whether it is ethical and patriotic 

to send these American jobs overseas. 

Many of the companies that are sending these jobs overseas, for 

the longest time benefited by being American companies. And they 

have benefited from being part of the most vibrant economy in the 

world. They have benefited from our substantial investments by us 

as taxpayers in our national defense, in our tax structure, in innovation and commitment of the American people. 

We can disagree on the issue of whether it is good economics to 

ship the jobs overseas, but I still do want to ask you this today. 

Do you think these companies that have benefited from the American experience for so long and are now shipping American jobs 

overseas are operating in an ethical manner? Is there anything we 

or they owe these American workers? 

Secretary SNOW. Senator, the management of America’s companies have a fiduciary duty to their shareholders. And that fiduciary 

duty, which they must under the law take seriously, and when they 

do not, we get into things like the Enron scandals. They have a fiduciary duty to pursue the best interests of their owners and that 

means staying competitive and producing good products and producing them at low-cost. 

So the first responsibility of management is in an ethical way to 

pursue the best interest of their shareholders. 

Senator MURRAY. Over the best interests of taxpayers that have 

invested in investments that make them profitable today? 

Secretary SNOW. I am not sure there is a conflict there, Senator. 

If American companies do not stay competitive, then they are going 

to have a hard time creating good American jobs and competing effectively, and of course a lot of competition comes from firms that 

are located outside the shores of the United States. If they cannot 

stay competitive with those enterprises, they are going to cede market share to them, cede revenues to them, and ultimately America’s 

ability to create good jobs here with high standard of living will be 

eroded. 

Senator MURRAY. Mr. Chairman, I am not sure I would agree but 

I know my time is up at this point. So I will move on and wait 

until my second round. 

Senator SHELBY. Senator Bennett? 

ACCESS TO OVERSEAS MARKETS

Senator BENNETT. Thank you, Mr. Chairman. 

I do not want to go too deeply into this but I am stimulated by 

Senator Murray’s questions. And my thoughts go to Dell Computer, 

a company that has been attacked for making a number of their 

purchases overseas. And they make a huge amount of sales overseas. 
297

And at least the Dell management says if we were not able to 

buy at a world price the components that we put into Dell Computers, which are assembled in the United States and then shipped 

overseas, we would lose the American jobs that we now have. That 

is, we are indeed contributing to jobs overseas by purchasing overseas. But the people who assemble the Dell Computers, who run 

the company, who do the accounting, all of whom are American 

who work in America, would lose their jobs if we did not have access to the overseas markets, which access is controlled by our ability to purchase at lower prices. 

I do not like the word ‘‘globalization’’ because I think it carries 

connotations with it that have taken on emotional baggage. I think 

the correct description of the world in which we live is a borderless 

economy. And the biggest, meanest, toughest competitors in the 

borderless economy are the Americans. So I do not want to pursue 

policies that would hurt America’s ability to compete in the borderless economy because the net effect of that ultimately will be the 

destruction of more American jobs than those that are currently 

gone overseas. 

TREASURY BUDGET INCREASE

But let us move on to the items that we are discussing here. You 

talk about your budget being essentially static, but the overall increase is 4.5 percent. The President is trying to hold discretionary 

spending at 4 percent. Homeland Security is going up substantially 

more than 4 percent. I am really asking questions that Chairman 

Stevens would be asking. 

But as we look at the overall attempt on the part of the President to deal with the deficit by holding discretionary spending at 

a relatively low level, at the same time funding Homeland Security, 

increase funding for education and some of the other areas where 

he has gone well above the 4 percent. We have got to find less than 

4 percent some other places. 

I guess I am overly sensitive to this because as Chairman of the 

Agriculture Subcommittee, I find mine going negative. I would love 

to stay stable, but I am being pushed on the President’s budget 

$500 million below last year, and last year was $1 billion below the 

year before. 

So as I come to this subcommittee and see you going up a little, 

you say basically static. I would like you to highlight the areas 

where there are increases that take you to that 4.5 percent global 

number going up. 

Secretary SNOW. The principal area where we are going up is 

IRS enforcement. That is over $300 million—it is about 10 percent 

of their enforcement budget increase. And that is to make sure we 

are enforcing the code fairly and effectively in some areas where 

questions have arisen, questions about tax schemes, fraudulent tax 

schemes, abusive tax schemes used by wealthy people, promoted by 

tax promoters to corporations and wealthy people. 

There appears to be, according to statistics we have, a growing 

belief in the public that the code is not being effectively enforced 

and that people can get away with it. That is a serious issue of citizenship, and we cannot let that idea take hold. 

And I think we are leaving a lot of money on the table. 
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RETURN ON INVESTMENT

Senator BENNETT. That was going to be my next question. Have 

you done any studies to see what the return on that investment 

might be? Could we look forward to recovering, by virtue of increased enforcement, enough money—it does not show up in the 

way we do it here on the appropriations—but looking at your level, 

would the Treasury have any possibility of recovering more money 

than the enforcement money coming in? In other words, get a significant return on that investment? 

Secretary SNOW. Senator, I cannot prove it, but I think it is the 

case and I think it is worth trying. 

Senator BENNETT. Are there any studies? 

Secretary SNOW. There are studies that suggest, and these you 

have got all to take with a grain of salt, that there is a so-called 

tax gap of a couple hundred, $250 billion I have seen. We are asking for $300 million more in enforcement. 

Senator BENNETT. Three hundred million dollars, not $300 billion? 

Secretary SNOW. Yes, against a $250 billion tax gap. 

I am alarmed about some of the tax schemes I see out there, and 

unless we can catch them in the bud, are going to erode the revenue line of the Federal Government. There are some really abusive practices out there that we have to get at. The budget here 

provides resources to go after those really abusive tax schemes. 

I have asked the head of the IRS, a very able fellow named Mark Everson, to give me a report on what comes out of the $300 million 

so that when we go to OMB next year, and come before you, we 

are going to have some idea of that, and not just something we pull 

out of thin air. 

I think right now while they do so—they call them ROI analyses, 

return on investment analyses. I think they are good efforts, but 

I would not bet the farm on them. 

IRS INFORMATION TECHNOLOGY INVESTMENT

Senator BENNETT. Okay. And finally, I made reference to this in 

my opening statement. 

What is the status of the entire IT effort in the IRS? The complete collapse that we saw in the 1990s, the effort of the last IRS 

Commissioner under the Clinton Administration—I am trying to 

remember his name. 

Secretary SNOW. Charles Rossotti. 

Senator BENNETT. Rossotti. He was a very impressive fellow, as 

he tried to get his arms around that and deal with that. What 

progress have we made on that in the intervening years? 

Secretary SNOW. I think Commissioner Rossotti brought a tremendous amount of good management to the IRS and helped put 

it on a good path. But it is no secret that the IRS technology modernization has not been a model of success. And it has come in consistently over budget and behind the timelines. It may have been 

because our reach exceeded our grasp. We tried to take on too 

much. 

This year’s budget on the modernization side, the technology 

side, is pared back significantly. It is about $100 million, but fo-
299

cused on more discreet and deliverable outcomes. And it is getting 

intense management from IRS Commissioner Everson, from Deputy Secretary Bodman and from me, because we cannot afford not 

to have these systems proceed the way they were supposed to proceed, because they are the foundation for all of our tax collections. 

I think of this, Senator, in terms of a first-rate credit card company. That first-rate credit card company knows how much you 

owe them. They know when you made your last payment. They 

know what the interest due is. They know how to get a hold of you. 

They have got all of your payment records. That is where we need 

to go. And the efforts that are underway are to put us in a position 

where in the future we will be a counterpart, the IRS, which is a 

scale that is way beyond any credit card company. But it would 

have that capability, closer to the capability you talked about in 

your opening statement. 

Now there has been some real progress made. This year some 50 

million Americans are going to do e-filing. That is made possible 

by these modernization systems. You can now go to IRS.gov, and 

hit ‘‘Where is my refund?’’, and get good information on how to go 

about getting the status of your refund. That is real progress from 

where we have been. 

These e-services, including online tax identification numbers, are 

becoming more readily available. Some significant number of small 

businesses are now able to go online and file their taxes. 

We are a long way from being where we need to be and I think 

the IRS is approaching this in a more realistic way, by taking 

smaller bites at the apple, and making sure that the bites are digestible. 

Senator BENNETT. Thank you. 

Senator SHELBY. Senator Dorgan. 

OFFICE OF FOREIGN ASSETS CONTROL (OFAC)

Senator DORGAN. Mr. Chairman, thank you very much. 

First, Mr. Secretary, I said good things when the President selected you. I like you. I think that you are a good Secretary of the 

Treasury and I remain pleased that I supported your confirmation. 

Secretary SNOW. Thank you, sir. 

Senator DORGAN. Having said that, we disagree on some policy 

issues, as you might well imagine. And I do want to ask you some 

questions about fiscal policy because I was really intrigued by a 

couple of your answers, both to my colleague from Utah. 

And incidentally, with respect to that subject, the question of a 

U.S. firm that moves overseas to sell back into the United States 

is a construct that is slightly different than the one the Senator 

from Utah posed. I would like to ask about that, as well. 

But having said that, I want to ask you a series of questions that 

I asked Secretary O’Neill before he left, and it deals with travel to 

Cuba. 

I am going to tell you something. I am embarrassed at the public 

policy of this country and furious with what is happening at OFAC. 

So I wanted to say nice things before I described to you my concern 

about this. 

Let me hold up a couple of these charts, if I might. Let me hold 

this one up, first. 
300

This woman is Joanie Scott. She traveled to Cuba 41⁄2 years ago 

to distribute free Bibles and help organize a prayer group. Four 

years later she received a fine, just recently, from the U.S. Treasury Department for $10,000. She went to distribute free Bibles in 

Cuba. 

Let me show you another one. This is Joan Sloate. She is 74, a 

grandmother. She is a senior Olympian bicyclist. She went to ride 

her bicycle in Cuba. And OFAC fined her and, in fact, has attempted to take her Social Security payments in satisfaction of the 

debt. So that is Joan Sloate. I have met Joan Sloate, but I do not 

know her well. 

Let me describe another one. This is a group of Olympians and 

they are disabled. And they are out $8,000 in their attempt to travel to Cuba to participate in the team sports—the World Team 

Sports for Disabled Americans was abruptly cancelled despite the 

fact that they had been allowed to do that previously. It was 

abruptly canceled. They are out $8,000. Many of these athletes 

have lost the money they paid on non-refundable flights to Miami. 

This is what is going on in OFAC. And there are more. 

Doctors, incidentally, have just been told by OFAC that they cannot go to Cuba and lecture and train Cuban doctors because the 

physicians in this country who have been doing that, to lecture and 

train Cuban doctors, that is an export of services to Cuba and 

Treasury says they are prohibited from exporting a service such as 

teaching Cuban doctors such things as strokes and comas. 

You were just in Miami. Asa Hutchinson was in Miami December 

10. He gave a big old speech about this. And then you followed him 

in Miami on February 9, gave a big old speech, and both put out 

press releases about how you were cracking down on all of this. 

And my understanding is that you are, at OFAC and also in 

Transportation Security and Homeland Security, you are working 

with Customs agents and OFAC on all direct flights from Cuba 

from Miami, JFK, Los Angeles, hundreds of aircraft, tens of thousands of passengers—I am now quoting you—and the agents are 

being extremely meticulous. 

So apparently the results of that so far, as reported by Homeland 

Security, 215 of 45,000 travelers were suspected of attempting to 

vacation—that is a pretty serious crime. Two hundred eighty alcohol and tobacco violations were uncovered. Actually this was almost exclusively a small amount of cigars. Forty-two narcotic seizures, and these all involved prescription drugs, not heroine for example. And one hazardous material violation, which appears to 

have been carbon dioxide for adding fizz to seltzer water. 

So we are trying to track terrorists in this country and you have 

an organization called OFAC. I used to chair this subcommittee 

and I asked hard questions of Secretary O’Neill. I do not see any 

excuse for one person at OFAC to be doing what they are now 

doing. 

I know you are required to do it because the President and the 

White House and others are sending you to Miami to give speeches 

and ramp up this enforcement. 
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OFAC RESOURCES

But I am going to tell you something. I am going to offer again 

an amendment to strike the money for the people that you have got 

doing this. You know and I know that the issue of travel to Cuba, 

eliminating the travel restriction, would pass easily in both the 

House and the Senate. And trying to slap Fidel Castro around, 

which is probably a pretty good thing to do in my judgment, but 

doing so by injuring the right and the freedom of the American people to travel is an outrage. Fining somebody who is distributing 

free Bibles in Cuba is a shame. 

So Mr. Secretary, what I would like to do, I am sorry you had 

to listen to a lecture about that but it is the only opportunity I 

have. 

I am going to ask you to identify for me, in a submission to this 

subcommittee, the amount of resources that OFAC is now using, 

the number of people, the number of dollars, the amount of time 

to engage in this approach, to chase women who are distributing 

free Bibles in Cuba, to chase retired women who are bicycling in 

Cuba, to try to stop doctors who would teach Cuban doctors about 

stroke and comas and so on. 

And then I will tell you that I will be asking if we can have an 

amendment and have a vote on the amendment about whether that 

is an effective and an appropriate use of resources. 

It would be unfair for me not to allow you to respond, to give the 

standard response to this. But Mr. Secretary, go ahead. 

Secretary SNOW. Thank you, Senator. 

I know how strongly you feel on this issue, from our correspondence. 

What I would say is that in those areas that you elaborated, humanitarian aid, education, travel, medicine, religious efforts, my 

understanding is that licenses are available and the problem is 

that people are going without getting the appropriate licenses. 

Maybe we need to do a better job of simply making clear that people can go if they have the appropriate licenses. 

I hope OFAC, and I am going to check on this when I get back 

to Treasury, is putting appropriate resources into making available 

knowledge of when such travel is appropriate pursuant to the appropriate license. 

[The information follows:]

RESOURCE INFORMATION

OFAC’s Salaries and Expenses for fiscal year 2004 enacted budget is $21.726 million and 138 full time equivalent (FTE) level. Currently, the total amount of funds 

directly attributable to the Cuba sanctions regime is $3.3 million. OFAC has the 

equivalent of 21 FTEs who work on a wide variety of Cuban embargo matters, including travel-related matters. Supervisory personnel are also actively involved in 

the process. 

LICENSING INFORMATION RESOURCES

Treasury’s Office of Foreign Assets Control (OFAC) has taken measures to make 

information available to the public concerning the U.S. policy with respect to travel 

to Cuba. They have published a brochure entitled ‘‘Cuba: What You Need to Know 

About the Embargo,’’ which is available through their fax-on-demand service and on 

their Internet website at www.treas.gov/ofac, that provide information in lay terms. 

This brochure summarizes the most salient features of the sanctions program, including the travel provisions. There is also a separate two-page brochure, in both 
302

English and Spanish, covering just the travel restrictions and licensing provisions. 

There are also approximately 200 travel and carrier service providers authorized to 

engage in transactions with Cuba to make travel arrangements for licensed travelers. OFAC’s Miami office provides training and ongoing guidance to the service 

providers who pass on information about U.S. Government requirements for travel 

to Cuba. 

Last year, OFAC’s Licensing Division issued ‘‘Comprehensive Guidelines for License Applications to Engage in Travel-Related Transactions Involving Cuba’’ which 

is available on OFAC’s website. The Application Guidelines have an introduction 

discussing the policy surrounding travel to Cuba, including statutory restrictions 

limiting travel licensing to 12 categories of activities, information on what is covered 

under each licensable category of travel, and information to applicants of what information should be furnished in the application in order to receive a license. For each 

category of travel, the Application Guidelines provide examples of activities that are 

licensable and not licensable in order to give applicants an idea of what would be 

appropriately within the scope of current U.S. policy with respect to travel to Cuba. 

The Licensing Division also has information in the travel advisory on Cuba that the 

State Department makes available in its travel advisory system where information 

is provided to the public covering most countries of the world.

Senator DORGAN. Mr. Secretary, in fact it is not the case that 

those activities are acceptable and approved by the Treasury Department. I mentioned to you the circumstance of the disabled athletes. They were specifically denied the opportunity to travel, despite the fact that they had been allowed to travel previously. 

I mentioned that the physicians, who have previously gone to 

Cuba to teach and to lecture, are now told that constitutes the delivery of a service to Cuba, which is not legal and therefore will not 

be allowed. 

So my point to you is, while I think most people believe this travel research is being administered reasonably, it is not the case that 

humanitarian activities, educational activities, medical activities 

and others is routinely excepted. 

There is in this administration, both at the State Department 

and in other areas and at OFAC, and it is trumpeted in press releases from your office as well as Asa Hutchinson and Homeland 

Security, that there is this crackdown. 

And the other point of it is that we have apparently people 

checking every passenger on every plane. And I am going to spend 

a little time trying to determine whether we are doing quite as 

much to try to keep terrorists out of the country as we are to try 

to keep a few cigars out of the country. I do not know quite how 

I will get to all of that. 

My only point to you this, I hope you will look into that because 

I think you have an understanding that is different than is actually 

occurring with respect to OFAC. 

But my point is I think this policy is bad policy and things have 

changed dramatically in the crackdown with respect to trying to injure the American people who in many cases—the young woman 

who took Bibles to Cuba did so 41⁄2 years ago. She did not have the 

foggiest idea she needed a license. So she apparently made a mistake, the mistake of taking free Bibles to distribute in Cuba. Now 

she is being slapped with a $10,000 fine. 

Mr. Chairman, I had indicated that I wanted to ask a couple of 

questions about fiscal policy. I will wait for another round, if that 

is appropriate. 
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PUBLIC POLICY ON TAX CODE

Senator SHELBY. Okay, thank you, Senator Dorgan. 

Secretary Snow, let me offer a comment to your exchange with 

Senator Murray a few minutes ago. I think there is a big difference, and I would hope that you would agree with me, about the 

fiduciary duty that an executive of a company owes to the stockholders. We know who owns the companies: the stockholders own 

the companies. Management does not own companies. And they did 

have a duty, I totally agree, to enhance profits to make money. 

That is why they are created, primarily. 

But making public policy is a totally different thing from that responsibility. I think you are dealing with apples and oranges. 

If we have a tax policy that encourages our companies to go overseas, I think that is bad public policy. I understand we have to 

trade. We have got to trade; it is a two-way street. 

I would like to see us make public policy in our tax code that 

would encourage people to invest here rather than overseas, as I 

think do most people. I do not know how you feel about that, but 

that is my own observation. 

Secretary SNOW. Senator, we have incorporated in this year’s 

proposals that we have sent to the Congress, some efforts to deal 

with tax havens, with the interest stripping provisions which create the juice in the transactions that take firms to these tax havens, and so on. So I agree broadly with what you say, that the 

tax code certainly should not encourage that sort of activity. 

COORDINATION WITH HOMELAND SECURITY

Senator SHELBY. I want to touch again on Homeland Security. I 

am looking at a statement sent out by the Department of Homeland Security, by Secretary Ridge. 

Among other things, he said under the SHARE program, which 

is the Systematic Homeland Approach to Reducing Exploitation 

Program, officials from ICE will be joined by the Secret Service to 

jointly conduct semiannual meetings with the executive members of 

the financial and trade communities impacted by money-laundering, identity theft and other financial crimes to share data on 

specific investigative outcomes from investigations into moneylaundering, identity theft, and other financial crimes. 

Now, you are not ceding any of your jurisdiction to Homeland Security by what they do? You are trying to coordinate with them—

is there not a difference here? 

Secretary SNOW. Absolutely, and we coordinate very closely 

through intergovernmental task forces. And I think the roles really 

are well understood. 

Our primacy comes with respect to the national money-laundering strategy. It comes with respect to enforcing the various provisions of the Bank Secrecy Act and the executive order dealing 

with terrorist finance. 

Senator SHELBY. Also, from your statutory authority over the financial institutions. 

Secretary SNOW. And the statutory authority over financial institutions. And that Treasury chairs the President’s Working Group 

on Financial Institutions which is the Federal Reserve and the Se-
304

curities and Exchange Commission (SEC) Chair and the head of 

the Commodities Futures Trading Commission. And where necessary, we will share information with—and desirable—with the 

Department of Homeland Security (DHS). But their role is really 

different. Ours is more the broad policy, implementing those statutes and executive orders, interdicting the flow of money, and making sure that banks know their customers. Making sure that the 

information is being shared, and that we get through our 

databanks at FinCEN, with local, State and other Federal authorities. 

DHS has an important role to play, but it is a different role. 

EARNED INCOME TAX CREDIT (EITC)

Senator SHELBY. Mr. Secretary, I want to discuss the Earned Income Tax Credit (EITC) for just a minute. We have been told by 

the IRS Commissioner last year that there are a lot of erroneous 

and fraudulent EITC claims that are estimated to cost the government between $8 billion and $10 billion annually. 

We all want people who would qualify for this benefit to get it. 

But where you are duplicating the benefits, it seems to me that the 

IRS and Treasury are in dire need of some kind of systems reform 

to be able to check who is doing what. 

You referenced some of the financial institutions. If it were 

American Express or any of these credit card companies, they certainly would cross-reference everything. I cannot imagine them letting happen what is happening with EITC claims. 

Are you interested in more money to go after cheats and fraudulent things? Heck yes, and we want to make sure you do it. But 

you are sitting on tons of money if you would do your job properly. 

Not just you, but others at the Department. And if we are losing $8 billion to $10 billion a year because of 

fraud or fraudulent and erroneous claims, something is wrong, big 

time. And we are talking about billions, not hundreds of millions. 

Secretary SNOW. Senator, there is something wrong here. 

Senator SHELBY. What are you going to do about it? 

Secretary SNOW. We are engaged in some pilot projects right now 

to try to figure out what to do about it, to be honest with you, because we do not have all the answers readily at hand. 

Senator SHELBY. Have you thought about outsourcing this? Private-sector banks that do this every day are getting consultants in 

there. We can not afford to wait 2 years from now for answers and 

have the same rate of fradulent and erroneous claims that you had 

2 years ago. 

Secretary SNOW. I think we can fix this, but this is an extraordinarily complex program where——

Senator SHELBY. But complexity does not mean you cannot run 

it with integrity. 

Secretary SNOW. We can run it and we will. The key to it is getting eligibility criteria well-established so the people who are eligible get the payments. 

Senator SHELBY. Absolutely. 

Secretary SNOW. And those who are not do not. And unfortunately, these error rates are just extraordinary. 

Senator SHELBY. Let us stop a minute. 
305

How are you going to come about with the eligibility criteria that 

you need? 

Secretary SNOW. By getting databases that tell us when two people not living in the same household are claiming the same child. 

And that is happening. 

Senator SHELBY. Looks like a computer or good software system 

could do this for you. That is what we have been told. 

Secretary SNOW. We are doing pilot projects right now to try and 

get at that very problem. A lot of the cost of this program, and it 

is a shame for the eligible participants who were properly getting 

the checks, is we do an extraordinary amount of post-audits and 

burden people who are properly getting the monies with post-audits and are sending checks to a lot of people who do not deserve 

the checks. 

I do not know whether it is fraud as much—there is probably 

some in this. 

Senator SHELBY. But it is wrong. 

Secretary SNOW. It is just wrong. It is errors—mistakes and errors. 

Senator SHELBY. Let us say it is not fraud, but it is erroneous 

and the people mean well. You need the criteria to separate what 

is the real from the apparent, do you not? 

Secretary SNOW. Yes, we do. 

Senator SHELBY. And how are you going to do this? I know I 

heard last year that you had a pilot program. I may have heard 

it the year before. 

But these erroneous payments and so on could have cost the 

Treasury $100 billion. That is not chicken feed. 

Secretary SNOW. You mean over a 10-year period or something? 

Senator SHELBY. Yes, sir. It is nothing to ignore. 

Secretary SNOW. We owe you an answer. We owe the American 

taxpayers an answer on this. 

TAX CODE DEFINITIONS

Senator SHELBY. I think you owe the American taxpayer an answer. 

Secretary SNOW. For certain, we owe the American taxpayers an 

answer. 

One thing is getting a uniform definition of a child. Apparently 

in the code today, one of the complexities is we have six, I am told, 

different definitions of a child. If we could settle on one definition 

of a child. 

Filing status is an issue. What is the filing—is that person really 

the head of the household and the parent or not? When various 

people are claiming the child as their dependent. So getting the 

databases fixed. 

Senator SHELBY. Looks to me like a good software program is 

needed to keep you from paying the EITC benefit here and from 

paying it there for the same child. It looks like you could find that 

the government is allowing someone in Alabama to claim EITC and 

someone else in Illinois or somewhere else for the identical benefit. 

And especially with the enormous amounts of money involved, I do 

not understand why you would not want to eliminate these erroneous and fraudulent payments. 
306

Secretary SNOW. This program does involve tens of millions of 

Americans. 

Senator SHELBY. We understand what it involves. 

Secretary SNOW. Which adds to the complexity. 

Senator SHELBY. But what is right and honest is right and honest, is it not? 

Secretary SNOW. It is, and to make it right and honest, we need 

the systems in it at the front end of the EITC program rather than 

what happens today, which is an awful lot of checking and rechecking and checking and rechecking. 

ADMINISTRATION OF EITC

Senator SHELBY. Mr. Secretary, who administers the EITC program? 

Secretary SNOW. It is administered by the IRS. 

Senator SHELBY. The Internal Revenue Service. The Internal 

Revenue Service is part of Treasury, is that correct? 

Secretary SNOW. Yes, it is. 

Senator SHELBY. So the buck stops here with the Commissioner 

of the Internal Revenue Service. 

Secretary SNOW. That is right. And the Commissioner of the Internal Revenue has pledged to me that this issue is getting his full 

attention, that he is on top of these pilot projects. In fact, he made 

the decision last year to modify the pilot projects and not put into 

place the fixes on the EITC before we had the real results back. 

I think this is as complex as it is is a little baffling, but it involves the fact that there are just so many claimants in an environment that it is so hard to really manage, with definitions of child 

that are not uniform, with poor information about dependents and 

who can claim dependents, poor information about actual parentage. We have got a real data collection and management problem 

here. 

But there are three pilot projects going after the major components of the problem. 

Senator SHELBY. I hope that we hear good news down the road 

to stop all people who are either fraudulent or erroneously filing 

things with the IRS. 

Senator Murray. 

Senator MURRAY. Thank you, Mr. Chairman. 

Let us just not forget that there is another side to the EITC issue 

which is many, many poor taxpayers who do not know they are eligible who we are not giving their payments to. And that is part of 

the error rate that we do not want to lose in this. 

Secretary SNOW. Senator, I agree with you. That is a part of the 

whole problem. 

PRIVATE COLLECTION AGENCIES

Senator SHELBY. We do not want to hurt anybody. 

Senator MURRAY. Mr. Secretary, as I talked about in my opening 

statement, IRS has proposed the use of private debt collectors to 

collect tax debts. And as I said, I am really uneasy about this proposal because of the abysmal record of the IRS in protecting the 

privacy of taxpayers. 
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In fact, when the IRS tried the use of private collection agencies 

in a pilot a couple of years ago, it was just fraught with problems. 

Then, in February of 2003, the IG noted the extraordinarily lax 

record of IRS in administering background checks for IRS contractors, including contractors that have access to sensitive tax data. 

And then just last month the IG found that contractors committed numerous security violations that placed IRS equipment 

and taxpayer data at risk. In some, cases contractors blatantly circumvented IRS policies and procedures, even when security personnel identified inappropriate practices. 

For example, one disgruntled contractor employee planted a computer time bomb on a computer system that would have destroyed 

sensitive taxpayer data. And another contractor employee connected an unsecured computer to the IRS computer network, which 

permitted the introduction of a virus into the IRS computer system 

costing $1.5 million in downtime and cleanup costs. 

Mr. Secretary, given the fact that some of these findings were 

published just last month, why should we believe that the IRS is 

in a position to protect taxpayer information and privacy when 

they hand over the responsibility to collect tax debts to private contractors? 

Secretary SNOW. Senator, I would agree with you that the prior 

experience with the private collection agencies did not go well. It 

was not a success. It was not as well-planned, as well thought out, 

as well structured as it should have been. 

I think we have learned a lot of lessons from that prior experience that will be applied here if Congress authorizes IRS to go forward with the private collection agencies. 

We are acutely aware of the protection of the taxpayer rights, the 

private collection agencies would have no enforcement power. They 

would go through intensive training about their role, which is not 

enforcement but just collection. They would go through intensive 

training on their legal responsibilities to taxpayers, including protection of confidentiality of taxpayer information. 

This is really an effort on the part of the IRS to free up highly 

trained IRS auditors and examiners to do more complex work and 

use the collection agencies for what you might call the low hanging 

fruit. That is, calling people up, notifying them, reminding them 

that they have got an overdue tax bill, but not bringing any enforcement action of any kind. 

The thought here is that a lot of people, if they are notified that 

they have an overdue tax bill and somebody calls them up and 

pays some attention to them, they are compliant and they would 

therefore be prepared to make their appropriate payments. These 

are paid immediately or with some installment plan. 

PROTECTION OF TAXPAYER RIGHTS

Senator MURRAY. Mr. Secretary, I want to see what specific steps 

have been taken and what specific steps will be taken to protect 

privacy and to protect individual taxpayer data before I think this 

committee should move forward in moving in some kind of direction like that. I think that is extremely critical. 

Secretary SNOW. Senator, I agree with you. I think it is absolutely critical that taxpayer rights be protected here and our pro-
308

posal would mandate that the IRS monitor the activities of these 

private collection agencies closely, monitor their performance and 

deal——

Senator MURRAY. Monitoring is after-the-fact. 

Secretary SNOW [continuing]. Appropriately with it. There is the 

prior training. There would be intensive training, and there would 

be continuous monitoring. And then there would be penalties for 

those who hopefully——

Senator MURRAY. If somebody has already planted a computer 

time bomb, monitoring is not going to do anything but show you 

that it has happened. 

Secretary SNOW. Senator, there is a big opportunity here to help 

collect some overdue monies using these resources that will not 

cost the Federal Government anything. And we are very sensitive 

to the issues you are talking about and we will go to great lengths 

to see that, as I say, the confidentiality and the information is protected and that taxpayer rights are fully protected. 

TERRORIST USE OF CHARITY ORGANIZATIONS

Senator MURRAY. I will be following this issue very closely because I am deeply concerned about that, but my time is limited and 

I do want to ask you about funneling cash to terrorist organizations, as I also mentioned in my opening statement. 

As you know, our government has linked some 23 charitable organizations with the al Qaeda network. And it has been a longstanding practice for terrorist organizations around the globe to use 

charitable giving as an avenue for their resources. 

There appear to be some continuing disagreements between our 

government and the governments of the European Union as to 

which charities should be designated as being associated with these 

terrorist organizations. A number of international charities that 

are listed by the United States have not been listed by the European nations. 

Do you believe the nations of Europe attach a significant amount 

of importance and commitment to combat terrorist funding? 

Secretary SNOW. Senator, I think we have made a lot of progress, 

but not enough. I think there needs to be more focus on the issue 

you are talking about here. I do not buy the distinction that some 

countries make between funding for a charity that goes for charitable purposes and funding to a charity that ends up going for terrorist purposes. 

Our policy is that if a charity is getting funding that goes for terrorist purposes, we designate that charity, as we have done on a 

number of occasions where urging other countries who are part of 

this FATF, the Financial Action Task Force, on Terrorist Finance 

to do the same. We have made progress in some places, not total 

progress in others. 

DESIGNATION OF CHARITIES

Senator MURRAY. Which ones have we made progress with and 

which ones do we need to make progress with? 

Secretary SNOW. We have made actually a lot of progress on the 

whole subject. In the last several months, with Saudi Arabia, we 

have named any number of Al-Haramain branch offices around the 
309

world. And I can give you a full listing of all the designations. But 

there are a number of designations of charities now that have occurred. 

In Europe, there is some reluctance to designate a charity in its 

totality. Money is money, and money that goes into a charitable organization is fungible with money that is used for good purposes 

and terrorist purposes. 

[The information follows:]

DESIGNATION INFORMATION

Not all of the charities designated by the United States are linked to al Qaida. 

Those that are have been submitted to the United Nations 1267 Sanctions Committee, where most have now been added to their consolidated list. Several others, 

however, were designated by the United States solely because of their ties to 

Hamas, e.g., the U.S.-based Holy Land Foundation for Relief and Development, the 

Al Aqsa Foundation, and the five mostly-European based charities designated by the 

United States last August. 

To the extent a person or entity is designated by the United Nations because of 

its ties to al Qaida, the Taliban, or Usama bin Ladin, the mechanism within the 

European Union automatically triggers designation by the E.U. Clearinghouse (requiring all member countries to freeze the assets of the designated entity). 

The U.N./Clearinghouse-linked process does not capture the U.S. designations of 

charities that are tied to HAMAS or Hizballah. Designation by the E.U. Clearinghouse without a U.N. designation requires unanimous consent. Absent a Clearinghouse decision, many E.U. countries do not have independent national authority to 

freeze assets, others lack the political will to take unilateral action. 

The European Union’s decision last September to designate Hamas as a terrorist 

group in its entirety represents an important first step towards our position. We 

continue to push them on implementing this decision by designating Hamas charities operating in Europe. As of this date, the European Union has not designated 

any of the Hamas-affiliated charities designated by the United States. 

As a government, we are approaching this issue from many levels. We have made 

clear our position on Hamas, and other such terrorist groups, to our partners 

around the world. We are beginning to see a ‘‘sea change’’ of the European attitude 

on this matter, based in large part on the U.S. efforts to change attitudes and policies. 

Part of these efforts include aggressive education on the requirements of UNSCR 

1373, which requires all member countries to respond with actions to freeze assets 

when presented with credible information from another country that the individual/

entity to be designated has been providing support to terrorists and terrorist organizations. This is also one of the requirements adopted by the Financial Action Task 

Force. Accomplishing this task will require a change in the E.U. Clearinghouse process and/or countries enacting separate authority to designate independent of the European Union and having the political will to use such authority.

Senator MURRAY. But what about Indonesia and Pakistan? 

Secretary SNOW. When I was in Indonesia, we designated JI. I 

will get you a complete list of all these designations, but more need 

to come. 

But it is interesting that Saudi Arabia has taken the steps that 

they have taken. 

Senator MURRAY. Are you satisfied that they are actually enforcing the new restrictions that they have put in place? 

Secretary SNOW. I think they are. Yes, I do. I think they take 

this very seriously. And of course, Al-Haramain is to them what 

the United Way is to us. It is their major charity. So good important progress is being made, but I think the distinction that some 

countries make between the good functions of charities and the terrorist functions of charities is an artificial and false distinction. 

Senator MURRAY. Thank you, Mr. Secretary. And I know my time 

is limited. I need to go to another committee, as well. 
310

I would like to submit my other questions for the record. 

Senator SHELBY. Without objection, it will be ordered. 

Also along those lines, Senator Dorgan has a number of questions, Mr. Secretary, that he would submit for the record. 

Secretary SNOW. I would be happy to respond, Mr. Chairman. 

Senator SHELBY. I also have a number of questions that I will 

submit for the record. You usually are very prompt in answering, 

and we appreciate that. 

Mr. Secretary, what are your thoughts on Chinese currency? We 

have talked about that privately. We have both been to Beijing to 

talk with them about floating their currency, or at least within a 

more realistic band as to its real worth. They are buying a lot of 

the commodities of the world. Commodities have gone up in price. 

Not just steel scrap, of which they are buying a lot, but ore, metals, 

you name it. So they are going to have a problem there. 

Do you have any observations on that? 

Secretary SNOW. Well, I do, Mr. Chairman. I thank you for raising the question and giving me an opportunity to discuss it with 

you and compliment you on the good work you did on your mission 

last fall. 

Senator SHELBY. We think they heard us, but they did not 

change anything, at least then, did they? 

Secretary SNOW. I think the fact that they hear us is important 

and I think what we are saying is being listened to. They have 

committed again to move towards flexibility in the currency. They 

are taking a number of steps to prepare the way to do that, going 

after the bad loans in the banking system, taking steps to widen 

the amount of funds that can be brought in and out of the country, 

relaxing capital controls, putting in place a strong bank regulator, 

allowing non-Chinese firms to buy bad loans and take them off the 

government books which is important as we did back with the 

RTC, with the savings-and-loan crisis, advice we gave them and 

suggested they might want to study our savings-and-loan experience. 

Senator SHELBY. But will that reoccur, though, as long as they 

have state-owned industries and state-owned banks making loans 

to state-owned industries which are not making any money because 

of the political equation? 

Secretary SNOW. Mr. Chairman, that is the root problem, that is 

the root issue. And they understand that and are working to see 

that the capital that goes into the banking system goes to support 

real liable private enterprises and withdrawing more and more 

from the state enterprises. 

I think that is the course they are on because they recognize that 

capital going to the state enterprises is not getting the return for 

the Chinese people that capital going into the private enterprises 

is. And it is perpetuating the problem. 

Now they have an awful lot of people working in those state enterprises, and their dilemma is to create the jobs. 

ADDITIONAL COMMITTEE QUESTIONS

Senator SHELBY. They have got a political problem there. 

Secretary SNOW. They have got a political problem. 
311

We appointed last week Ambassador Speltz, who is our representative to the Asian Development Bank, to be the Treasury’s 

Personal Representative to the Chinese government on these currency and financial market issues. And it was well received by the 

Chinese. 

Treasury has an ongoing, very productive, dialogue with China. 

A technical team is just back from China where we interacted with 

the Chinese on a whole range of financial market issues. 

[The following questions were not asked at the hearing, but were 

submitted to the Department for response subsequent to the hearing:]

QUESTIONS SUBMITTED BY SENATOR RICHARD C. SHELBY

DEPARTMENTAL OFFICES

Question. Please update the committee on the status of hiring for initiatives that 

were funded in Fiscal Year 2004 Transportation-Treasury Appropriations bill. 

Answer. The Executive Office for Terrorist Financing and Financial Crimes hired 

11 of its 14 positions; International Affairs has hired 1 of its 10 positions and made 

offers for the remaining 9 positions. 

Question. In fiscal year 2004, the Departmental Offices received $2.285 million to 

hire 19 positions for the Office of Terrorist Financing and Financial Crimes and 

$2.73 million to hire 10 positions for International Affairs. Please provide a financial 

plan for each of these initiatives and the hiring status of these positions, including 

the types of positions and responsibilities devoted to these new FTEs. 

Answer. The financial plans are shown below:

FINANCIAL PLAN FOR FISCAL YEAR 2004 EXECUTIVE OFFICE FOR TERRORIST FINANCING AND 

FINANCIAL CRIMES 

[In thousands of dollars] 

Budget Object Class Amount Status 

Salaries ........................................... 1,622 The Conference Report limits the office to 14 FTE of which 11 have 

been hired and the remaining 3 will be on board by the end of 

the fiscal year. 

Benefits .......................................... 260

Travel .............................................. 100

Rent, Utilities ................................. 25

Other Services1 ............................... 263

Supplies .......................................... 9

Equipment ...................................... 6

Total .................................. 2,285

1 Includes SEAT Management computer equipment and software as well as security reviews/clearances. 

Type of Positions: 

—Deputy Assistant Secretary (1) 

—Director, Money Laundering and Financial Crimes Policy (1) 

—Senior Policy Analyst (1) 

—Financial Crimes Specialist (3) 

—Senior Advisor (2) 

—Terrorist Financing Specialist (1) 

—Program Analyst (3) 

—Review Analyst and Schedule Coordinator (1) 

—Clerk (1) 

However, it should be noted that the fiscal year 2004 bill provided for 14 positions, not 19.
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FINANCIAL PLAN FOR FISCAL YEAR 2004 INTERNATIONAL AFFAIRS INITIATIVE 

[In thousands of dollars] 

Budget Object Class Amount Status 

Salaries ........................................... 961 The 10 positions are International Economists. Of the 10, 1 position 

has been filled and offers have been made to qualified individuals to fill the other 9. 

Benefits .......................................... 215

Travel .............................................. 200

Rent, Utilities, Misc. ....................... 100

Other Services1 ............................... 1,233

Supplies .......................................... 7

Equipment ...................................... 14

Total .................................. 2,730

1 Includes SEAT Management computer equipment/software, training, translation services, security review/clearances, and other services. 

Question. How many FTE are currently working in the Office of Terrorist Financing? 

Answer. Currently, there are 11 FTEs in the Executive Office for Terrorist Financing and Financial Crimes. 

Question. Please provide the justifications and the methodology for determining 

the business strategy adjustments included in the fiscal year 2005 budgets of the 

Fiscal Bureaus. 

Answer. Treasury encourages its bureaus to review program performance for opportunities to redirect resources from obsolete and low performing programs to those 

which are mandatory or higher priority. 

The fiscal year 2005 budget request reflects these efforts for two of Treasury’s bureaus which identified business strategy adjustments as follows: —The Financial Management Service request includes a reduction of $5.163 million. It is proposed that these costs will be reimbursed through the Debt Collection Program. —The Bureau of Public Debt request includes a $967,000 reduction as a result 

of withdrawal of the Series HH bonds. 

Question. A large portion of the Law Enforcement function was transferred from 

Treasury to Homeland Security and Justice in fiscal year 2003. Please define the 

Department’s current role in the area of Law Enforcement. 

Answer. Treasury still plays an important role in law enforcement—our expertise, 

data, and resources are crucial for following the money and stopping financial 

crimes, including money laundering, terrorist financing, and tax-related fraud. 

Treasury is responsible for administering the Bank Secrecy Act, including many of 

the provisions in the USA PATRIOT Act. It also has the authority to employ Geographic Targeting Orders (31 USC 5326) to attack money laundering systems domestically, and to employ USA PATRIOT Act Section 311 ‘‘special measures’’ for foreign financial threats. A description of Treasury’s Law Enforcement function by office follows: 

—Internal Revenue Service-Criminal Investigation Division (IRS–CI) is a crucial 

player investigation of criminal tax-related offenses and in the areas of money 

laundering and terrorist financing. IRS–CI has demonstrated its expertise by 

identifying, tracing and attacking the laundering of drug and other criminal enterprise proceeds, and assisting in the government’s anti-terrorist financing investigations. 

—Treasury Inspector General for Tax Administration (TIGTA) is responsible for 

oversight of IRS operations and investigation of criminal assaults and threats 

against IRS facilities, personnel, and infrastructure. TIGTA plays an integral 

role in Treasury’s liaison with the FBI Joint Terrorism Task Force and other 

Federal entities that share intelligence relating to threats. 

—Financial Crimes Enforcement Network (FinCEN) is the keeper of Bank Secrecy 

Act data, and serves as an information hub for the law enforcement community, 

working directly with law enforcement to provide support in the field. 

—The Office of Foreign Assets Control (OFAC) works directly with the law enforcement community—such as the former Customs bureau and the FBI—to ensure the application of the criminal law to those violating U.S. sanctions. 

—The Treasury Executive Office of Asset Forfeiture (TEOAF) manages asset forfeiture funds for the Treasury Department and the Department of Homeland 

Security. Treasury uses this responsibility to provide resources to law enforcement for key projects and initiatives that combat crime. 
313

Question. The fiscal year 2005 budget requests $20.3 million to complete the 

Treasury Building and Annex Repair and Restoration project. When is the scheduled completion date? 

Answer. The anticipated final completion date is December 2005. Phases 1 and 

2 have been completed and Phase 3 is on schedule to be completed by August 2004. 

Phase 4 (final phase) has begun and all construction activities are planned for completion by December 2005. This completion date assumes the availability of the $7 

million withheld from the fiscal year 2004 appropriation until further committee approval and full funding of the fiscal year 2005 budget request of $20.3 million. 

Question. Will this be the last year that an appropriation is necessary for this account? 

Answer. Yes, fiscal year 2005 will be the last year that we request funding for 

the TBARR account. However, some critical repairs to the Main Treasury building 

have been deferred or cancelled in order to meet the December 2005 deadline with 

no additional resources. It is anticipated that additional funding will be required in 

future years to complete these critical repairs and other deferred maintenance 

projects in the Main Treasury and Annex buildings. This funding will not be requested under the TBARR account but as on-going maintenance and replacement 

expenses through the Salaries and Expenses, no-year, Repairs and Improvements 

account. 

Question. The fiscal year 2005 budget request includes $1.9 million for the establishment of an Office of Emergency Preparedness. What will be the responsibilities 

of this new office? What office carried out this function in the past? Were there any 

appropriated expenses for this function/office in fiscal year 2004 and prior years? 

Answer. During this current fiscal year, the Department of Treasury recognized 

the importance of a more focused effort to establish and maintain viable and executable plans (in accordance with Presidential Decision Directive (PDD) 67, ‘‘Enduring 

Constitutional Government’’ and Executive Order (EO) 12656, ‘‘Assignment of Emergency Preparedness Responsibilities’’), to ensure the continuity of its essential functions during any conceivable emergency condition—especially conditions denigrating 

or eliminating Treasury’s ability to operate from its downtown locations. More specifically, the Department of Treasury’s Office of Emergency Preparedness (OEP) will 

be responsible for improving the operating capabilities in a number of critical areas 

listed below: 

—Treasury Emergency Management Center Operations; 

—Continuity of Operations (COOP) Planning, Operations, and Alternate Operating Facility; 

—Continuity of Government (COG) Planning, Operations, and Alternate Operating Facility; 

—Emergency Management Policy and Guidance; 

—Treasury Emergency Preparedness Test, Training & Exercise (TT&E) Program; 

—Coordination and Oversight of Treasury Bureau Emergency Management Programs; 

—Treasury Headquarters Evacuation and Shelter-in-Place Planning and Operations. 

The function of National Security Emergency Preparedness was previously in the 

Office of Security and Continuity Planning, in the Office of the Chief Information 

Officer. There were no expenses for this office in fiscal year 2003 and prior; however, we expect to obligate $177,000 in fiscal year 2004. 

Question. A large part of the Treasury request for Departmental Offices is related 

to reimbursing the Secret Service $2.4 million for protective service. Is the USSS 

the only force available to provide this protection? What were the costs related to 

this activity in fiscal year 2004? 

Answer. The USSS provides protection to the Secretary of the Treasury. In fiscal 

year 2004, the United States Secret Service (USSS) and the Department of the 

Treasury signed a Memorandum of Understanding whereby the Department of the 

Treasury would reimburse USSS for only the travel costs incurred protecting the 

Secretary, which were estimated at $1.2 million. Starting in fiscal year 2005, the 

Department of the Treasury will reimburse the USSS for the full cost of protecting 

the Secretary of the Treasury (including personnel compensation and overtime pay), 

currently estimated at $2.5 million. 

Question. How was the amount of $2.4 million derived (please provide detail)? 

With the payment by the Treasury Department of such expense, what is the likelihood that the USSS will begin to charge the Department for other costs associated 

with protection of the White House Complex that Treasury is a part of? 

Answer. On March 4, 2003, the President of the United States issued a memorandum to the Secretary of Homeland Security directing the USSS to continue providing physical protection for the Secretary of the Treasury. The funding estimates 
314

for providing this security were prepared by the USSS and a copy is provided below. 

We do not anticipate other additional costs associated with the protection of the Secretary of the Treasury. In addition to the protection provided by the USSS for the 

Secretary of the Treasury, the USSS also protects the Treasury Headquarters Building located to the east of the White House. Since the USSS is mandated by statute 

to protect the buildings in the White House complex, it has no authority to request 

reimbursement from the Department of the Treasury for protection of that building.

Question. Has the analysis and proposal of this budget request included a cost 

analysis of other Government Building Security operations to determine that this 

is the best and most cost effective alternative for the Department? 

Answer. A cost analysis of other protective services was not performed because 

the Secret Service has traditionally protected the Secretary of the Treasury. 

Question. Does the budget proposal cover all costs that USSS can charge the department in fiscal year 2005? 

Answer. The Department anticipates the fiscal year 2005 cost will reflect increases for salaries, benefits and inflation. The USSS has not notified the Department of any other increases in fiscal year 2005. 

Question. Do other agencies pay the USSS for fulfilling their protective mission? 

Answer. Currently, the Secretaries of Homeland Security and Treasury are the 

only Federal agency heads who receive USSS protection. Since the USSS is part of 

the Department of Homeland Security, it provides physical protection to the Secretary of Homeland Security without reimbursement. Because the USSS is no 

longer a component of the Department of the Treasury, it is reimbursed for the cost 

of physical protection of the Secretary of the Treasury. 

Question. Please provide the total program costs for implementing and running 

HR Connect. With well over $200 million invested, is Treasury getting the value 

promised from this investment? 

Answer. Yes, Treasury is getting the value promised from its investment in HR 

Connect. The web-enabled system, now operational in all but one Treasury bureau, 

has the ability to replace the more than 100 paper-intensive, bureau-unique systems 

that cost more than $23 million annually to maintain. Of the 30 features envisioned 

for the system, 20 have been implemented, 6 are being developed now, and 4 have 

been subsumed by other efforts. In addition, the centralized system has provided 
315

Treasury with enterprise-wide reporting and sophisticated HR management tools. 

Unforeseen benefits have resulted, as well. The system has elevated Treasury’s eGovernment compliance level, and OPM has nominated HR Connect as one of four 

‘‘Best in Breed’’ interoperable common HR solutions. 

Question. Is this system providing savings? If so, please provide the savings 

achieved since the program became operational. 

Answer. Significant savings have been realized with HR Connect. To date, quantitative benefits have been captured in three distinct categories: $7.8 million in productivity savings, $17.9 million in reduction of 222 staff from the HR organization, 

and $2 million annual operational savings through legacy systems retirement. (Productivity savings are attributable to time saved by line organizations, or non-HR 

staff. The HR Connect Program Office (HRCPO) anticipates that the saved time will 

not result in reduction of line staff, but rather in re-direction of staff to other mission critical activities.) In subsequent years, additional savings are anticipated. In 

fiscal year 2005, HRCPO estimates $10.0 million in productivity savings, $33.9 million in staff reductions, and $12.4 million in legacy savings. Additional staff reductions are expected throughout the 15-year program lifecycle, for a total staff reduction and redirection savings of $633.1 million. Legacy savings attributable to HR 

Connect should total $116 million by fiscal year 2012. 

Question. What is the yearly cost to maintain this system? 

Answer. The system requires approximately $20 million annually for operations 

and maintenance, excluding staffing costs. Technology refreshes and system upgrades will be conducted every 3 years for an additional cost of approximately $3 

to $5 million. 

Question. Are all Treasury bureaus connected to this system? 

Answer. Eleven of Treasury’s 12 bureaus have deployed and are operating HR 

Connect, except the Office of Thrift Supervision (OTS), which must convert to HR 

Connect’s required e-Payroll provider, the National Finance Center (NFC), before 

deploying HR Connect. OTS is contemplating a delay in NFC conversion until April 

2005, and deployment of HR Connect will follow shortly thereafter. Additionally, two 

former Treasury bureaus continue to operate HR Connect, despite a divestiture that 

moved them to other agencies. Those bureaus are Alcohol, Tobacco, Firearms, and 

Explosives, now in the Department of Justice, and the United States Secret Service, 

now in the Department of Homeland Security. 

Question. What is the annual cost of each bureau to run this system? 

Answer. During HR Connect’s development and deployment phase, the primary 

source of program funding has been Congressional contributions to the DSCIP fund. 

In fiscal year 2005, the HRCPO requested approximately $17.5 million from Congress to fund the program’s transition year to full operations and maintenance 

mode. Based on current estimates and new program requirements, which include 

the implementation of an ePerformance module to support the SES Pay for Performance initiative, the HRCPO predicts an additional $3 million will be needed in fiscal 

year 2005. Funding for this gap will be requested from the bureaus based on their 

proportionate share as presented in the table below. 

HRCPO is also recommending that, as an enterprise-wide solution, Treasury continue to request Congressional funding for program operations in the out years. If 

the recommendation is approved, the bureaus will not incur operations and maintenance costs for HR Connect in fiscal year 2006. If the recommendation is not approved, then the bureaus will contribute their proportionate share of the annual 

costs as presented below:
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Question. The budget request includes $1 million for a Turkey Financing facility. 

What will this facility provide? 

Answer. The Emergency Wartime Supplemental Act signed by the President on 

April 16, 2003 includes $1 billion in appropriations and authorization for up to $8.5 

billion in loans to Turkey to help protect its economy from shocks from the war in 

Iraq and to maintain economic stability in a key regional ally. Treasury estimates 

that it will cost the Office of International Affairs an additional $1 million to continue to administer the Turkey Financing Facility. 

Question. Is this a one-time item or will it require funding over a number of 

years? 

Answer. The Facility anticipates making disbursements during fiscal year 2005 

and fiscal year 2006, but this depends on when the Turkish government ratifies the 

Financial Agreement. Since disbursements from the Facility could be imminent and 

the work demand is front-loaded, Treasury has already received $1 million from the 

$1 billion appropriated under the Economic Support Fund (ESF) in the fiscal year 

2003 Emergency Wartime Supplemental for Turkey to cover expenses for fiscal year 

2004. 

Question. The Department’s budget includes over $5 million in E-gov initiatives. 

Please describe Treasury’s initiatives. 

Answer. Treasury believes in the importance of E-government initiatives and has 

developed partnerships with industry and other Federal agencies to improve its 

interactions with citizens, businesses, and other Federal, State, and local government entities through the use of the Internet. Treasury is the lead agency for two 

E-government initiatives: Internal Revenue Service Free File and Expanded Electronic Tax Products for Businesses. The budget request for fiscal year 2005 is for 

the following initiatives: 

—Business Gateway.—The Small Business Administration (SBA) is the lead agency. This initiative will create a single business gateway portal to reduce the burden on businesses by making it easy to find, understand, and comply with Federal laws and regulations. Treasury assists the SBA with consolidation and synchronization of Federal paperwork requirements. Small businesses will be able 

to submit all of their information electronically to the Federal Government 

which then can be shared securely across Federal agencies. 

—E-Authentication.—The General Services Administration (GSA) is the lead 

agency. Treasury’s Chief Information Officer (CIO) is the Chairperson for the 

Executive Steering committee. This initiative will minimize the burden on businesses, public, and government when obtaining online services. It is designed 

to provide the trusted and secure infrastructure—gateway, confirming the identity of electronic transaction participants. This initiative will enable Treasury 

to offer enterprise-wide applications with different assurance levels. 

—E-Records Management.—The National Archives and Records Administration 

(NARA) is the lead agency. This initiative will enable Treasury to increase the 

percentage of eligible data archived/preserved electronically. Unified guidance 
317

will provide consistency in implementing E-records management applications. It 

will also improve Treasury’s ability to access/retrieve records. 

—E-Rulemaking.—The Environmental Protection Agency (EPA) is the lead agency. This initiative will enable citizens to search for agency rules from any desktop computer, and to post remarks online. E-Rulemaking will help Treasury and 

other agencies integrate their applications into the government-wide system. 

This will allow for a more citizen centric approach to the regulatory process by 

providing more centralized online access to regulatory material via Regulations.gov. 

—E-Training.—The Office of Personnel Management (OPM) is the lead agency. 

This initiative creates a premier E-training environment that supports development of the Federal workforce through simplified, one-stop access to high quality E-training products and services, advancing the accomplishment of agency 

missions. 

—E-Travel.—The General Services Administration (GSA) is the lead agency. This 

initiative will improve the internal efficiency, administrative performance, and 

regulatory compliance relative to travel. Redundant and stovepipe travel management systems will be eliminated through a buy-once/use many shared services approach. Therefore, capital investment, operations, and maintenance costs 

for travel management services will be minimized. Treasury will use this to 

bring world-class travel management and superior customer service to the Federal travel process. 

—Integrated Acquisition Environment (IAE).—The General Services Administration (GSA) is the lead agency. This initiative will reduce the burden for vendors 

doing business with the Federal Government. Achieve cost savings through consolidated vendor information, procurement data systems, use of common processes and reduce the cycle time of the procurement process. Treasury will benefit from the integration of IAE applications into Intra-governmental Transactions Exchange and the accessibility it will have to vendors. 

The following chart provides a summary of the Department’s contributions for 

these E-government initiatives. Of the $7.5 million shown, $5.5 million will be paid 

from the Department-Wide Systems and Capital Investment Program (DSCIP) and 

the remainder from bureau appropriations. Departmental contributions to the Federal E-government initiatives listed above are in compliance with the President’s 

Management Agenda to eliminate redundant systems, use improved Internet-based 

technology to make it easy for citizens and businesses to interact with the government, save taxpayer dollars, and streamline citizen-to-government communications.

TREASURY CONTRIBUTIONS FOR E-GOVERNMENT INITIATIVES 

Initiative Fiscal Year 2003 

Treasury Actuals 

Fiscal Year 2004 

Treasury Actuals 

Fiscal Year 2005 

President’s Request 

Business Gateway ...................................................................................... $0 $0 $2,500,000 

E-Authentication ........................................................................................ 3,178,572 377,000 393,000

EHRI ........................................................................................................... 0 0 0 

E-Rulemaking ............................................................................................. 100,000 775,000 885,000 

E-Training .................................................................................................. 0 2,630,000 2,200,000

E-Travel ...................................................................................................... 0 0 988,832 

Expanding Electronic Tax Products ........................................................... 0 3,200,000 0 

Grants.gov .................................................................................................. 0 0 0 

Integrated Acquisition Environment .......................................................... 557,205 443,280 394,593 

IRS Free File ............................................................................................... 0 0 0 

E-Records Management ............................................................................. 0 0 100,000

Totals ............................................................................................ 3,835,777 7,425,280 7,461,425 

Question. What benefits are these initiatives providing to the Department? 

Answer. The President’s Management Agenda (PMA) set the stage for Treasury 

to build upon its goal of simplifying and unifying IT efforts to optimize services. 

Treasury’s involvement in these initiatives is based on benefits projected by the 

Managing Partners to each participating agency by providing an enterprise-wide application, elimination duplicative services, management of processes, and timely and 

responsive service to all citizens. The Managing Partners of each initiative can provide specific details on the costs savings to be realized overall by undertaking each 

initiative. 
318

Question. Does any of the funding relate to initiatives outside the Department of 

the Treasury? Answer. The funding request of over $5 million represents Treasury’s contribution 

to these E-government initiatives. Treasury is partnering with these agencies to 

support of the President’s Management Agenda (PMA). As one of the five pillars of 

the PMA, E-government is statutorily supported by the E-government Act, ClingerCohen Act, the Government Paper Elimination Act, and other legislation seeking to 

streamline electronic transactions and placing the Federal Government at citizens’ 

fingertips through the use of digital technologies. 

Question. Please provide an update of the activities of the Office of Critical Infrastructure. 

Answer. The financial infrastructure of the United States is extremely resilient. 

It has been tested time and again by hurricanes, black outs, and terrorist attacks. 

Leaders within government and the private sector are continually enhancing the resilience of this financial infrastructure. Americans and, indeed, the world can have 

confidence that the financial infrastructure of the United States is better prepared 

than ever to handle man-made or natural disruptions. 

In the event of an increase in the threat level, the Department of the Treasury 

communicates regularly with the other Federal financial regulators regarding the 

situation and whether additional actions are necessary. In addition to these communications, Treasury and other Federal and State financial regulators, working in 

close cooperation with the Department of Homeland Security and the private sector, 

have: 

—Identified the payments, custodial, clearing, exchange, banking, trading, and 

other financial institutions that are most critical to our financial infrastructure. 

—Arranged for expert assessments of physical and cyber-vulnerabilities in critical 

financial institutions. 

—Arranged for critical financial institutions to have access to priority telecommunications services—both land-based and wireless—to help their voice and 

data communications get through during times of crisis. 

—Assisted in coordinating the protective response of State and local authorities 

with critical financial institutions. 

—Arranged for additional physical protection of critical financial institutions, consistent with available protective resources and the available threat information. 

—Established systems and procedures that enable the Federal financial regulators to communicate among themselves and with the private sector during 

times of crisis as well as in advance to mitigate risks to the financial infrastructure. 

—Promoted industry measures that maintain crucial financial communications 

among private sector participants. 

—Conducted numerous tests, drills, and exercises to ensure that back up systems 

work and to ensure that financial professionals know what to do in times of either a heightened alert or an actual attack. 

—Worked with the Financial Services Information Sharing and Analysis Center 

(FS–ISAC) to develop a more inclusive next-generation FS–ISAC business 

model that embraces all elements of the financial sector. The Treasury also acquired nearly $2 million in services from the FS–ISAC, which had the added 

benefit of making the next-generation FS–ISAC a reality. This next-generation 

FS–ISAC now delivers integrated physical and cyber alert information to Treasury and to thousands of financial institutions and provides a secure, confidential platform to help financial institutions respond to potential or actual disruptions. 

—Issued updated guidance on business continuity planning, including benchmarks for systemically critical payments and clearing organizations. 

—Enhanced the security of the government’s critical financial functions, including: borrowing money; making payments—including social security payments; 

and raising revenue through the Internal Revenue Service. 

—Documented lessons learned by consumers, financial institutions, and government agencies in fighting the recent, dramatic rise in phishing attacks so that 

other consumers, financial institutions, and agencies could benefit from their experience. 

—Established a plan for working with the telecommunications, energy, information technology, and transportation sectors to address vulnerabilities introduced 

into the financial sector by interdependencies with these other sectors. 

—At the customer level, through the Office of Critical Infrastructure Protection, 

the Treasury leads administration efforts to improve policies and efforts to improve the security of personal financial information, particularly through efforts 

to fight identity theft. The Fair and Accurate Credit Transactions Act of 2003, 
319

and its implementation this year, are examples of how the Treasury has worked 

closely with Congress in this effort. 

In addition to these government activities, the private sector, with encouragement 

from and in cooperation with the Treasury, has taken important actions to protect 

the critical financial infrastructure. For example, the private sector has: 

—Greatly reduced single points of failure in the telecommunications infrastructure that supports the most critical financial institutions by, for example, establishing private, self-healing fiber-optic telecommunications circuits over alternative pathways. 

—Established improved business continuity plans. 

—Developed security guidelines for institutions of different sizes and locations to 

follow in response to changing threat levels. 

—Created new backup facilities at greater distance from their primary operations 

centers. 

—In many cases, geographically dispersed executive and operational leadership. 

Question. Please provide an update to the committee on the Department’s efforts 

to meet its staffing divestiture goals as they relate to the final FTE transfers to the 

Department of Homeland Security. 

Answer. For a complete response, please see the attached report (as required by 

House Report 108–243) that the Department submitted to the Congress on June 3, 

2004. 

[CLERK’S NOTE.—The documents referred to have been retained in Committee 

files.] 

Question. The committee viewed the additional funding of 60 positions in fiscal 

year 2004 as stopgap funding during the transition of deployment of personnel from 

Treasury to the new Homeland Security Department. The Treasury Department’s 

fiscal year 2005 budget proposes permanent funding in the Departmental Offices 

base for the foreseeable future. The committee had requested a report on the status 

of reducing the remaining FTE, which were not reduced by the beginning of fiscal 

year 2004 as planned. What is the status of this important report? 

Answer. The report was submitted to the House and Senate Appropriations committees on June 3, 2004. 

Question. Is the original goal of transferring 226 FTE to Homeland no longer 

valid? 

Answer. For a complete response, please see the attached report (as required by 

Senate Report 108–146) that the Department submitted to the Congress on June 

3, 2004. 

[CLERK’S NOTE.—The documents referred to have been retained in Committee 

files.] 

Question. Has DHS communicated that they can now operate at the lower level 

and will require no further transfers from Treasury? 

Answer. DHS has not communicated the need for additional resources. 

Question. Has Treasury sought any technical assistance in reviewing its secure IT 

systems from any private entity or government agency? What entity or agency? 

What is the status of the review? If the review is concluded, what corrective actions 

were taken? What has Treasury done to address the concerns raised by the IG related to Departmental Offices computer system vulnerabilities? 

Answer. The Department of the Treasury has sought and received technical and 

administrative assistance from private entities. Booz Allen Hamilton, Inc. (BAH) 

and SRA International, Inc. have performed FISMA/Critical Infrastructure Protection (CIP) reviews of the security practices at the Departmental Offices (DO). Based 

on initial reviews, Treasury has already completed, or is in the process of completing, the following: 

—Conducted appropriate IT security training and awareness sessions. 

—Implemented applicable security policies and compliance programs. 

—Established a DO Computer Security Incident Response Center (CSIRC), reporting to Treasury’s CSIRC. 

—Assessing and validating DO system applications inventory and conducting associated risk assessments and Certification and Accreditations (C&As), as necessary. 

Question. Does the Department have a fully operational COOP plan? Does the Department have what it needs to implement and operate their plan? 

Answer. The Department does have a fully operational COOP plan; however, 

there are still improvements required as identified in last year’s GAO audit. In addition, as a result of lessons learned from the most recent FEMA exercise, Forward 

Challenge 2004, Treasury has identified other areas that require attention and improvement. For instance, Treasury still needs more robust communications for inter-
320

operability at the alternate sites to support its essential functions for COOP as stated in the GAO audit and the Federal Preparedness Circular (FPC) 65. 

Question. Please explain the policy, procedures and specific processes that Treasury applies to oversee and manage the Departmental Offices’ resources (both FTE 

and dollars), including the salaries and expenses, DSCIP, and TBARR accounts. 

Answer. DO’s Office of Financial Management prepares monthly reports for all 

appropriations that track both funding balances and FTE utilization. These reports 

are provided to the Assistant Secretary for Management, as well as office officials 

so that they can monitor their spending and make program decisions based on accounting reports. In addition, policies and procedures are in place for internal control purposes. At present, Management staff is reviewing, and updating as needed, 

all Departmental Office Orders and policies. We are also working with our policy 

offices to ensure that key department-wide directives are current. Our goal is to provide clear, transparent documentation and guidance to support optimal performance 

and decentralized oversight where possible—working together with all DO offices to 

maintain and observe proper financial and budgetary controls. 

DSCIP

Question. How much does Treasury currently spend on Information Assurance? 

What IT security and functionality issues will the request in fiscal year 2005 provide that currently do not exist? 

Answer. Treasury supports internal cyber Critical Infrastructure Protection (CIP), 

bureau Federal Information Security Management Act (FISMA) program reviews, 

President’s Management Agenda (PMA), and Public Key Infrastructure (PKI) policy 

management through the Department-wide Systems and Capital Investment programs (DSCIP) account. The $1 million requested for Information Assurance in fiscal year 2005 will build on the work being done in these areas to specifically address 

the assurance of secure internet communications with the Department, preventing 

cyber attacks and protecting against identity theft in key information systems. 

The fiscal year 2005 request provides for an automated Department-wide Patch 

Management and Verification Process. Treasury currently utilizes manual intensive 

processes to address its computer vulnerabilities from a reactive mode. The fiscal 

year 2005 request will be used to support the planning and implementation of this 

network security functionality as well as asset identification, protection and interdependency analysis. 

Question. The fiscal year 2005 budget requests $1 million for Operational Security. How was this program funded in the past? What added functionality will $1 

million provide? Please provide the committee a detailed breakout and a spending 

plan for this request. 

Answer. The fiscal year 2005 funding request of $1 million provides for the implementation of a cohesive and comprehensive Security program for Treasury’s Headquarters offices, including the Office of the Secretary and Policy Offices. Treasury’s 

Headquarters offices have been without a formal IT security program for a number 

of years. This has been described by the Treasury Inspector General as a continuing 

material weakness and must be addressed. 

Efforts to address security training and awareness are a priority. The request of 

$1 million will provide for the following: 

—Issuance of policy and procedures ($100,000) 

—Certification and Accreditation of applicable systems (19 Systems—$300,000) 

—Project management ($100,000) 

—Compliance monitoring ($150,000) 

—Security Engineering and Network Services support ($350,000) 

Question. The budget requests $1 million for Treasury Enterprise Architecture. 

Please provide a detailed justification for this request. 

Answer. The request for $1 million is required to develop, validate, and begin implementation of a Treasury Enterprise Architecture (EA) management system. This 

funding requirement covers three functional areas in moving the Treasury EA to the 

end state ‘‘To Be’’ structure: 

—Enterprise Solutions—$500,000.—Development of the business case and management plans for the implementation of the ‘‘To Be’’ consolidated infrastructure and Enterprise Architecture. It also includes contractor support to work 

with Treasury Bureaus in the identification of three to four enterprise solutions 

where Treasury can gain efficiencies. Currently, Treasury has identified office 

automation, telecommunications, and infrastructure as focus areas for possible 

cost avoidance/savings. Funding provided in this area will allow Treasury to 

‘‘drill down’’ in each of these areas in the development of the EA. 
321

—Reusable Components—$300,000.—Funding is required for contractor support to 

identify and capitalize on opportunities to achieve economies of scale and leverage the collective buying power of the Department. Several Treasury Bureaus 

support the President’s Management Agenda e-Government initiatives; however, managing IT activities from an enterprise level requires refinement and 

streamlining with the Federal e-Government managing partner. Bureaus are 

funding investments that overlap with one or more of the 24 Federal e-Government Initiatives to which the Department is already contributing. This requested funding supports the development of three to four reusable service components business cases and plans for implementation, transition plans, standard 

profiles, and elimination of duplicated e-Government services. 

—Federal EA (FEA) Reference Models—$200,000.—Funding is required for contractor support to develop the OMB FEA reference models. The FEA is constructed through a collection of interrelated ‘‘reference models’’ designed to facilitate agency analysis and the identification of duplicative investments, gaps, 

and opportunities for collaboration within and across the Federal Government. 

The models are the Performance Reference Model (PRM), the Business Reference Model (BRM), the Service Reference Model (SRM) and the Data and Information Reference Model (DRM). Completing these models facilitated the improvement in the Treasury Capital Investment Program. The data from these 

reference models will be incorporated into our portfolio management system. 

Development of these model works to ensure that the budget is allocated per 

Treasury priorities and key initiatives during the IT portfolio management process. 

OFFICE OF TERRORISM AND FINANCIAL INTELLIGENCE

Question. Please provide a detailed breakout of the total numbers of FTEs available to the organization, including all appropriated and non-appropriated funds 

from Departmental Offices, any other Treasury bureau funding, and any funding 

from another Federal agency that supports this office. 

Answer. Complete details of total FTE have not yet been finalized; however, 

Treasury anticipates that the Office of Terrorism and Financial Intelligence will 

oversee a staff of approximately 203 employees. These FTEs are our current estimate; however, the numbers could change once the leadership is in place. With the 

exception of staff detailed from the Financial Crimes Enforcement Network 

(FinCEN), no bureau funding will be used to fund this office, nor will other Federal 

agencies fund this office. This organization will consist primarily of pre-existing offices that include the Executive Office for Terrorist Financing and Financial Crimes 

(EOTF/FC), the Treasury Executive Office of Asset Forfeiture (TEOAF), Office of 

Foreign Assets Control (OFAC), the Financial Crimes Enforcement Network 

(FinCEN) and the Office of Intelligence Support (OIS). The fiscal year 2005 FTE 

breakdown for those offices that will fall under the TFI umbrella is as follows:

Office FTE 

Under Secretary 1 .................................................................................................................................................. 8 

TFI (includes EOTF/FC and OIS) 1 ........................................................................................................................ 58 

TEOAF ................................................................................................................................................................... 17 

OFAC ..................................................................................................................................................................... 120

Subtotal Departmental Offices ............................................................................................................... 203 

FinCEN 2 ................................................................................................................................................................ 292

TOTAL ...................................................................................................................................................... 495

1 Includes funding and FTE request from the Deputy Secretary that is currently under consideration by the Appropriations Committees. 2 FinCEN’s 292 FTE include 1 reimbursable. 

Question. Will the redirection of scarce resources from OFAC and FinCEN affect 

those organizations’ ability to accomplish actual work fighting the war on terrorism? 

Answer. The small number of detailees from OFAC and FinCEN should have a 

minimal effect on those agencies’ ability to accomplish their missions. Indeed, the 

detailing of these officers should yield closer coordination among OIA and OFAC 

and FinCEN, ensuring that the Department focuses on its highest priorities and allows it to move scarce resources across priority targets. 

Question. Deputy Secretary Bodman indicated in his testimony before the Senate 

Banking Committee that the Department will provide up to $2 million from other 

areas to fund this office in fiscal year 2004. Please provide a detailed breakout of 

where these resources will be derived from. 
322

Answer. Since October 2003, many offices have experienced attrition and the dollars saved during the process of filling those positions will be used to start up this 

new office. Offices with the employee turnover that generated the funds are:

Office 

Salary Savings 

Generated from 

Turnover 

Executive Direction Offices .................................................................................................................................. $324,000 

Tax Policy ............................................................................................................................................................. 270,000 

Domestic Finance ................................................................................................................................................. 112,000 

Economic Policy .................................................................................................................................................... 182,000 

International Affairs ............................................................................................................................................. 518,000 

Treasury-Wide Management and Administration ................................................................................................. 575,000

Total ........................................................................................................................................................ 1,981,000

Question. In Treasury’s press release of March 8, the Department announced the 

creation of the Office of Terrorism and Financial Intelligence. How will the Department fund this office? When? 

Answer. Start-up costs in fiscal year 2004 will be derived from salary savings in 

offices that have experienced employee turnover since the beginning of the fiscal 

year and a hiring freeze which has been in place since May. Once approved by the 

committee, funding will be programmed to the office on an as-needed basis, which 

will occur as the new office is staffed. 

Question. The fiscal year 2005 request does not provide funding for this new office. How much will it cost to staff and run this office in fiscal year 2005? 

Answer. The estimated additional cost for staffing and running this new office is approximately $4.6 million. 

Question. What is the vision for this office in 2 years? In 5 years? 

Answer. The establishment of TFI will bring together Treasury’s intelligence, regulatory, law enforcement, sanctions, and policy components, and enhance Treasury’s 

efforts. As well, the new Office of Intelligence and Analysis (OIA) will address one 

of the longstanding issues identified in the Department of the Treasury, which is 

a lack of an integrated intelligence function that supports the Department and is 

linked directly into the Intelligence Community. Two primary functions are provided 

with the addition of OIA. 

The Department of the Treasury needs actionable intelligence that can be used 

to exercise its legal authorities under all or portions of such acts as the International Emergency Economic Powers Act (IEEPA), USA PATRIOT Act, the Bank 

Secrecy Act, the Drug Kingpin Act, and Trading with the Enemy Act. Analytical 

products from the intelligence community are largely intended to inform policymakers rather than taking action. They also tend to be highly classified, whereas 

Treasury often needs to use the lowest classification possible to use such material 

openly to press foreign governments or in evidentiary packages. 

OIA will also provide intelligence support to other senior Treasury officials on a 

wide range of other international economic and political issues of concern to the Department. Subsuming the functions of the current Office of Intelligence Support, 

OIA will continue to review incoming raw and finished intelligence from other agencies, and then select relevant items for senior officials. The intelligence advisors will 

also drive collection by drafting requirements for the intelligence agencies to ensure 

that Treasury’s information needs are met. Moreover, they will continue to serve in 

a liaison capacity with the intelligence community and represent the Department 

in various intelligence-related activities. 

The Treasury Department is following a staged approach in the creation of TFI. 

This will ensure that the office will be able to work towards its short term goals 

while strengthening its capabilities and accomplishing its mission over the long 

term. 

Question. What specifically will this office do that is not already being done by 

the United States Government? 

Answer. The establishment of TFI will bring together Treasury’s intelligence, regulatory, law enforcement, sanctions, and policy components, and enhance Treasury’s 

efforts. As well, the new Office of Intelligence and Analysis (OIA) will address one 

of the longstanding issues identified in the Department of the Treasury, which is 

a lack of an integrated intelligence function that supports the Department and is 

linked directly into the Intelligence Community. Two primary functions are provided 

with the addition of OIA. 

The Department of the Treasury needs actionable intelligence that can be used 

to exercise its legal authorities under all or portions of such acts as the Inter-
323

national Emergency Economic Powers Act (IEEPA), USA PATRIOT Act, Bank Secrecy Act, the Drug Kingpin Act, and Trading with the Enemy Act. Analytical products from the intelligence community are largely intended to inform policymakers 

rather than taking action. They also tend to be highly classified, whereas Treasury 

often needs to use the lowest classification possible to use such material openly to 

press foreign governments or in evidentiary packages. 

OIA will also provide intelligence support to other senior Treasury officials on a 

wide range of other international economic and political issues of concern to the Department. Subsuming the functions of the current Office of Intelligence Support, 

OIA will continue to review incoming raw and finished intelligence from other agencies, and then select relevant items for senior officials. The intelligence advisors will 

also drive collection by drafting requirements for the intelligence agencies to ensure 

that Treasury’s information needs are met. Moreover, they will continue to serve in 

a liaison capacity with the intelligence community and represent the Department 

in various intelligence-related activities. 

The Treasury Department is following a staged approach in the creation of TFI. 

This will ensure that the office will be able to work towards its short term goals 

while strengthening its capabilities and accomplishing its mission over the long 

term. 

Question. What enhanced ability will this office give the Department? 

Answer. The creation of TFI will increase Treasury’s efforts in several ways. The 

combined use of intelligence and financial data is the best way to detect how terrorists are exploiting the financial system and to design methods to stop them. By coordinating Treasury’s intelligence functions and capabilities, TFI will benefit from 

enhanced analytical capabilities, as well as additional expertise and technology. Second, the USA PATRIOT Act gave the Department important new tools to detect and 

prevent the abuse of our financial system by terrorists and other criminals. TFI will 

coordinate Treasury’s aggressive effort to enforce these regulations. Third, we have 

forged a strong international coalition to combat terrorist financing. The ongoing, 

cooperative efforts between the United States and our international partners are at 

unprecedented levels. The unified structure will promote a robust international engagement and allow us to intensify outreach to our counterparts in other countries. 

Finally, having a single office is the best way to ensure accountability and achieve 

results for this essential mission. 

Question. What functionality will this provide the U.S. Government that does not 

currently exist? 

Answer. The establishment of TFI will bring together Treasury’s intelligence, regulatory, law enforcement, sanctions, and policy components, and enhance Treasury’s 

efforts. As well, the new Office of Intelligence and Analysis (OIA) will address one 

of the longstanding issues identified in the Department of the Treasury, which is 

a lack of an integrated intelligence function that supports the Department and is 

linked directly into the Intelligence Community. Two primary functions are provided 

with the addition of OIA. 

The Department of the Treasury needs actionable intelligence that can be used 

to exercise its legal authorities under all or portions of such acts as the International Emergency Economic Powers Act (IEEPA), USA PATRIOT Act, the Bank 

Secrecy Act, the Drug Kingpin Act, and Trading with the Enemy Act. Analytical 

products from the intelligence community are largely intended to inform policymakers rather than taking action. They also tend to be highly classified, whereas 

Treasury often needs to use the lowest classification possible to use such material 

openly to press foreign governments or in evidentiary packages. 

OIA will also provide intelligence support to other senior Treasury officials on a 

wide range of other international economic and political issues of concern to the Department. Subsuming the functions of the current Office of Intelligence Support, 

OIA will continue to review incoming raw and finished intelligence from other agencies, and then select relevant items for senior officials. The intelligence advisors will 

also drive collection by drafting requirements for the intelligence agencies to ensure 

that Treasury’s information needs are met. Moreover, they will continue to serve in 

a liaison capacity with the intelligence community and represent the Department 

in various intelligence-related activities. 

The Treasury Department is following a staged approach in the creation of TFI. 

This will ensure that the office will be able to work towards its short term goals 

while strengthening its capabilities and accomplishing its mission over the long 

term. 

The creation of TFI will increase Treasury’s efforts in several ways. The combined 

use of intelligence and financial data is the best way to detect how terrorists are 

exploiting the financial system and to design methods to stop them. By coordinating 

Treasury’s intelligence functions and capabilities, TFI will benefit from enhanced 
324

analytical capabilities, as well as additional expertise and technology. Second, the 

USA PATRIOT Act gave the Department important new tools to detect and prevent 

the abuse of our financial system by terrorists and other criminals. TFI will coordinate Treasury’s aggressive effort to enforce these regulations. Third, we have forged 

a strong international coalition to combat terrorist financing. The ongoing, cooperative efforts between the United States and our international partners are at unprecedented levels. The unified structure will promote a robust international engagement and allow us to intensify outreach to our counterparts in other countries. Finally, having a single office is the best way to ensure accountability and achieve results for this essential mission. 

Question. Please provide an organizational chart for the proposed office. 

Answer. Please see the attached organizational chart.

Question. Please provide the committee with the number of detailees from OFAC, 

FinCEN and other agencies that are expected to support the new office. 

Answer. To date, the Office of Intelligence Analysis has two employees detailed 

from OFAC, two detailed from FinCEN, and one detailed from CIA. Additional 

detailees have not yet been determined. 

Question. When will the detailees be returned to their parent agencies? 

Answer. They are currently on a 6-month detail. We will review the arrangement 

after the 6-month period is over. They can either renew their detail agreement or 

return to their home agencies. 

Question. Who will have day to day oversight of these employees? 

Answer. Those four officers are supervised by the Deputy Assistant Secretary for 

Intelligence and Analysis. 

Question. How many FTE and budget resources will be realigned from Departmental offices (excluding OFAC)? 

Answer. Approximately 27 FTEs will be realigned from DO in fiscal year 2005. 

Question. What other offices within the Department will be merged into this new 

structure? 

Answer. This structure will include the Executive Office for Terrorist Financing 

and Financial Crimes (EOTF/FC), the Treasury Executive Office of Asset Forfeiture 

(TEOAF), Office of Foreign Assets Control (OFAC), and the Office of Intelligence 

Support (OIS). There is always the possibility that other resources and synergies 

within Treasury can be found to amplify the efforts of TFI. 

Question. If this office is critical, will the Department send up a budget amendment to realign its internal resources to fund this new office? 
325

Answer. The administration does not intend to send up a budget amendment. In 

order to provide our perspective on the appropriate fiscal year 2005 funding levels, 

on June 25, 2004, the Treasury Department submitted a revised funding structure 

reflecting changes made to the DO account that can be viewed as an amendment 

to the Budget Justifications that we submitted to the committee in February 2004. 

Question. How many FTEs, funded or detailed, are proposed to work in this office 

by the end of fiscal year 2004? Please break out the numbers between the responsibilities of the two assistant secretaries. 

Answer. By the end of the fiscal year, the Department hopes to have 191 employees in the new office. The estimated breakdown is as follows:

Office FTE 

Under Secretary .................................................................................................................................................... 6 

TFI (includes EOTFFC and OIS) ............................................................................................................................ 48 

OFAC ..................................................................................................................................................................... 120 

TEOAF ................................................................................................................................................................... 17

Subtotal Departmental Offices ............................................................................................................... 191

FinCEN .................................................................................................................................................................. 292

Total ........................................................................................................................................................ 483

Question. Please provide a detailed explanation of the roles and responsibilities 

of each of the new assistant secretaries. 

Answer. The Office of the Assistant Secretary for Intelligence and Analysis (OIA) 

will be responsible for developing a robust analytical capability on terrorist financing. The office will draft actionable intelligence to support Treasury’s efforts to exercise its legal authorities, including the USA PATRIOT Act, the International Emergency Economic Powers Act (IEEPA), the Drug Kingpin Act, the Bank Secrecy Act, 

and Trading with the Enemy Act. It will provide intelligence support to other senior 

Treasury officials on a wide range of international economic and political issues of 

concern to the Department. The Assistant Secretary for Intelligence and Analysis 

will serve as the Senior Official of the Intelligence Community (SOIC) and represent 

the Department in intelligence community fora, such as the National Foreign Intelligence Board committees and the Community Management Staff. Moreover, the Assistant Secretary will be responsible for managing the Department’s security functions, including information security, personnel security, industrial security, physical security, and counterintelligence. 

The overall purpose of OIA is to ensure that the Treasury Department properly 

exploits the vast pools of financial data already collected by the Department and 

combines that data with the relevant intelligence collected by the intelligence community to create strategic and actionable financial intelligence and analysis to support Treasury’s mission and authorities. For example, this analysis will be used to 

designate individuals under Presidential Executive Orders, target corrupt foreign financial institutions under Section 311 of the USA PATRIOT Act, guide regulatory 

policies and compliance, and direct strategic international engagement to set appropriate standards to safeguard the international financial system. OIA’s priorities include identifying and attacking the financial infrastructure of terrorist groups; identifying and addressing vulnerabilities that may be exploited by terrorists and criminals in domestic and international financial systems; and promoting stronger relationships with our partners in the United States and around the world. A key longterm goal will be to ensure Treasury’s full integration into the intelligence community, and ensure that the Secretary’s economic and financial responsibilities are supported fully by the intelligence community. 

OIA is already responding to Treasury’s urgent short-term needs. A small team 

of analysts has already begun to closely monitor and review current intelligence 

threat reporting. These analysts sit together in secure space in the Main Treasury 

building and ensure that Treasury can track, analyze possible financial angles, and 

then refer their analysis to relevant Treasury and U.S. government components for 

appropriate action. In the near term, the Treasury Department plans to develop its 

analytical capability through OIA in untapped areas, such as strategic targeting of 

terrorist financial networks as well as analyzing trends and patterns and non-traditional targets such as hawalas and couriers. 

The Office of the Assistant Secretary for Terrorist Financing (OTF) builds on the 

functions that have been underway at Treasury over the past year by developing, 

organizing, and implementing U.S. government strategies to combat terrorist financing and financial crime, both internationally and domestically. This office is the pol-
326

icy and outreach apparatus for the Treasury Department on the issues of terrorist 

financing, money laundering, financial crime, and sanctions. The Assistant Secretary is responsible for coordinating with other elements of the U.S. government, 

including law enforcement, and for working with the Federal regulatory agencies, 

both those within the Treasury Department such as the OCC and OTS and those 

outside such as the Federal Reserve, SEC and CFTC to ensure effective supervision 

for BSA and USA PATRIOT Act compliance. 

OTF will be the primary office responsible for formulating Treasury Department 

counter-terrorist financing and anti-money laundering policies and implementing 

Treasury’s related regulatory, sanctions, and enforcement programs and authorities. 

These functions include the administration, implementation, and enforcement of 

Presidential Executive Orders, in particular, those related to the freezing of terrorist 

assets, as well as the administration and safeguarding of the Bank Secrecy Act, as 

expanded by the USA PATRIOT Act. 

In addition, OTF is responsible for integrating FinCEN, OFAC and TEOAF into 

these efforts. FinCEN provides a government-wide, multi-source intelligence and analytical network designed to support money laundering and other financial crime investigations, and it ensures the quality of the information it administers through 

outreach and regulatory action performed in the course of its administration of the 

BSA. OFAC has long administered and enforced economic and trade sanctions based 

on U.S. foreign policy and national security goals against targeted foreign countries, 

foreign terrorists, international narcotics traffickers, and those engaged in activities 

related to the proliferation of weapons of mass destruction. TEOAF provides oversight and management of Treasury’s nationwide forfeiture program and the Treasury Forfeiture Fund. OTF also works in close partnership with IRS–CI to enforce 

terrorist financing, money laundering, and BSA laws. 

OTF leads and coordinates the U.S. representation at international bodies dedicated to fighting terrorist financing and financial crime such as the Financial Action 

Task Force (FATF) and increases our multilateral and bilateral efforts in this field. 

This office creates global solutions to evolving international problems, attack financial crime and safeguard the financial system by advancing international standards, 

conduct assessments, provide technical assistance, and apply protective countermeasures against high-risk foreign jurisdictions and financial institutions. Bilaterally, OTF works with foreign finance ministries—such as the Russian Finance 

Ministry—to craft strategies to jointly attack terrorist financing both globally and 

within specific regions, and with foreign financial intelligence units to establish special channels of information exchange. 

Question. Has the Department detailed FTE or expended funds from the Office 

of Foreign Assets Control? If there is a legal opinion related to this action, please 

provide such to the committee. 

Answer. As noted above, the Department has detailed two officers from OFAC. 

Treasury asked its attorneys to review the draft documentation for establishing the 

non-reimbursable details of two OFAC employees to the Office of Intelligence and 

Analysis in the Departmental Offices for a period of up to 6 months. That documentation explained that the two employees would provide OFAC with relevant financial intelligence, targets and leads that would be the basis for further analytical 

work to be performed by OFAC, and that this work directly furthers OFAC’s mission by permitting the analysts to assist in the coordination of financial intelligence 

research and analysis on a Department-wide basis. On the basis of this information, 

the attorneys expressed no legal objection to the details. No formal legal opinion was 

issued. 

Question. Will all intelligence related to terrorist financing resident in the CIA, 

FBI, and Homeland Security become a part of this office? If not, why not? 

Answer. The Office of Intelligence and Analysis will draw intelligence reporting 

from the CIA, FBI, and DHS to produce its own analytical products in support of 

Treasury’s mission. It is also in daily contact with its interagency counterparts regarding threat reporting and other counterterrorism issues. 

Question. How will the functions of this office differ from the Foreign Terror Asset 

Tracking Group (FTAT–G)? 

Answer. We are in the process of evaluating how OIA and the FTAT–G will interact to ensure no overlap arises. 

Question. How will it differ from the Terror Threat Integration Center (T–TIC)? 

Answer. TTIC has the primary responsibility in the United States for terrorism 

threat analysis and is responsible for the day-to-day terrorism analysis provided to 

the President and senior policymakers. OIA differs from TTIC in that it will focus 

primarily on the financial angle of counterterrorism issues. It will also specifically 

support Treasury’s authorities and its relations with foreign counterparts. 
327

Question. Who will be the lead agency in overseas technical assistance that assists 

countries in learning about how to stop terrorists from using financial systems? 

Answer. The Treasury Department will continue to provide technical assistance 

to countries around the world to help build anti-money laundering and counter-terrorist financing capacity. The State Department leads the coordination of terrorist 

financing-related training efforts with the interagency Terrorist Financing Working 

Group (TFWG). The Treasury Department participates actively in TFWG. 

Question. Regarding intelligence gathering efforts, if the Department is currently 

obtaining intelligence on these issues, how it is being used to accomplish its mission? 

Answer. The Treasury Department uses intelligence for several purposes. Most 

significantly, we use the information to develop the legal basis to impose economic 

sanctions, ranging from a designation to designate a primary money laundering concern under Section 311 of the USA PATRIOT Act to action under E.O. 13224. Intelligence information is used to develop strategic direction, e.g., determining countries 

that are vulnerable to exploitation by terrorists and, therefore, priorities for technical assistance or diplomatic outreach. 

Within the Treasury Department, it can be used to designate a terrorist or narcotrafficker and it may be used to support an action for failure to comply with a designation, e.g., information may be provided to the FBI to support an investigation 

for providing support to a designated party—a criminal violation. It can be used to 

determine a primary money laundering concern or shared with a State or local law 

enforcement agency investigating a drug crime. It may be used by the Office of Critical Infrastructure Protection and Compliance Policy to evaluate a threat to the 

Treasury. Moreover, it may be used by the Office of the Under Secretary for Domestic Finance to identify vulnerabilities within the financial services industry’s critical 

infrastructure that could be exploited. And, as previously discussed, it may be used 

by my senior staff and me as background for bilaterals with our foreign government 

colleagues. 

Question. Is this information coming from the intelligence community and law enforcement? 

Answer. Treasury receives information from the intelligence community and law 

enforcement, but also from our own analysis of information provided directly to 

Treasury under the Bank Secrecy Act, e.g., Suspicious Activity Reports (SARs) filed 

with the Financial Crimes Enforcement Network. 

Question. What intelligence is Treasury providing that the Intelligence Community does not already have access to? 

Answer. Information from the Bank Secrecy Act, such as Suspicious Activity Reports, and OFAC-related information from the banking community is managed by 

Treasury and is available to the intelligence community. The discussion of specific 

information available to the intelligence community is best left for a classified 

forum. 

TERRORIST FINANCING

Question. Is Treasury considered the finance ministry of the U.S. Government? 

Answer. Yes. 

Question. Who has primary jurisdiction over financial intelligence? 

Answer. No one agency has primary jurisdiction over financial intelligence. Different agencies use financial intelligence to support their specific missions. For example, the intelligence and law enforcement agencies use their collection and analysis on terrorist financing to support their operations. While consolidating financial 

intelligence into one agency could enhance accountability for outcomes under the 

statutes that Treasury enforces, other agencies will need the function to support 

their own missions. 

Question. Should Treasury be the home of the financial intelligence units in the 

U.S. Government? 

Answer. The term ‘‘financial intelligence unit’’ is a term-of-art that refers to the 

entity within a government that is responsible for receiving, analyzing, and disseminating information derived from suspicious activity reports and other money laundering-related reports from the financial sector. The Financial Crimes Enforcement 

Network (FinCEN) serves as the financial intelligence unit for the United States. 

FinCEN is an integral part of the Department of the Treasury and substantially 

benefits from Treasury’s unique relationship with the financial community, the law 

enforcement community and the regulatory community. 

Question. Who is the Federal Government’s lead agency in the war on terrorist 

financing? 
328

Answer. There is no one agency that is the lead agency in the war on terrorist 

financing. Each participating agency has a unique mission. The Treasury Department has the lead in safeguarding the integrity of the United States and international financial systems—including from abuse by terrorists and those who support them. 

Treasury has expertise throughout the Department that stretches across the entire anti-money laundering/counter-terrorist financing (AML/CTF) spectrum and allows it to deal with complicated issues associated with the movement of money and 

assets in the United States and international financial system. All of these components give Treasury the necessary broad perspective to create and implement strategies to safeguard the financial system against abuse. 

In its role safeguarding the financial systems both home and abroad, the Treasury 

Department utilizes numerous capabilities: 

Sanctions and Administrative Powers.—Treasury wields a broad range of powerful 

economic sanctions and administrative powers to attack various forms of financial 

crime, including E.O. 13224 and Section 311 of the USA PATRIOT Act. 

Law Enforcement and Law Enforcement Support.—Treasury combats various 

forms of financial crime through the direct law enforcement actions of IRS–CI and 

the law enforcement support provided by FinCEN and Treasury’s regulatory authorities. 

Financial Regulation and Supervision.—FinCEN administers the Bank Secrecy 

Act and issues and enforces AML/CTF regulations. Treasury further maintains close 

contact with the Federal financial supervisors—including the Treasury Department’s Office of the Comptroller of the Currency and Office of Thrift Supervision—

with the goal of ensuring that these regulations are being implemented consistently 

throughout the financial sectors. In addition, OFAC administers and enforces the 

various economic sanctions and restrictions imposed by statute and under the Secretary’s delegated IEEPA authority. 

International Initiatives.—The Treasury Department is part of and has access to 

an extensive international network of Finance Ministries and Finance Ministry-related bodies such as the Financial Action Task Force (FATF) and various FATFStyle Regional Bodies, the International Monetary Fund (IMF), the World Bank, the 

G–7, and various multilateral development banks. In addition, Treasury is the critical facilitator for the international relationship between financial intelligence units 

organized through the Egmont Group. 

Private Sector Outreach.—As a result of our traditional role in safeguarding the 

financial system, Treasury has developed a unique partnership with the private sector. Through outreach programs such as the Bank Secrecy Act Advisory Group 

(BSAAG) and other regulatory and educational seminars and programs, Treasury 

maintains a close relationship with U.S. financial institutions to ensure a smooth 

exchange of information related to money laundering and terrorist financing. Treasury also maintains a close dialogue with the charitable sector to help it address its 

vulnerabilities to terrorist financing. 

The Office of Terrorism and Financial Intelligence (TFI) brings together Treasury’s intelligence, regulatory, law enforcement, sanctions, and policy components, 

and enhances Treasury’s efforts in combating terrorist financing and financial 

crime. TFI will work in coordination with its partners in the interagency community 

to ensure that its efforts complement and augment the important initiatives already 

underway. 

Question. What other agencies or departments are engaged in Treasury-related 

functions in terrorist financing? 

Answer. Treasury works with many agencies on terrorist-financing matters. In 

fact, E.O. 13224 requires Treasury to consult with the Department of Justice, Department of State, and Department of Homeland Security in making designation decisions. Treasury also ensures that our activities are part of a coordinated government approach. To that end, we also work with the Central Intelligence Agency, Department of Defense, and National Security Agency. 

Question. What is the cost and how much duplication is created when other agencies and departments engage in Treasury’s responsibilities? 

Answer. Each agency brings its own expertise, jurisdictions, and capabilities to 

the tasks at large. This expertise is used to the advantage of our overall efforts in 

the war against terrorist financing. As long as there is effective coordination and 

collaboration, we maximize efficiency and minimize cost and duplication. 

Question. If there were a consolidation into one unit, would that allow the different agencies to focus on their core responsibilities and save resources to do more 

against terrorism? 

Answer. Treasury has no reason to believe that other agencies are not currently 

focusing on their core responsibilities. 
329

Question. Why was Treasury removed as the lead of the President’s Coordinating 

Committee on terrorist financing? 

Answer. Reflecting the high importance that the White House places on this issue, 

the National Security Council (NSC) currently chairs the Policy Coordinating Committee (PCC) on Terrorist Financing. Treasury continues to play an important role 

on the PCC. The purpose of the PCC has always been to coordinate the policy direction and actions of the U.S. Government related to terrorist financing. As chair, we 

may have had administrative responsibilities and shared a useful tool in this campaign. As chair, we often found ourselves driving the process by our readiness to 

take one action—forcing discussion on other options that, on many occasions, were 

more appropriate for the government to pursue. As a participant, we continue to 

bring a useful tool to the campaign and, as before, find ourselves fostering discussions through our readiness to act, but being responsive to other methods for accomplishing the ultimate goal—severing the link between a source of money and some 

willing and able to commit an act of terrorism. 

Question. Should Treasury be the lead on all matters related to terror financing? 

Answer. The Treasury Department has the lead in safeguarding the integrity of 

the United States and international financial systems—including from abuse by terrorists and those who support them. 

Treasury has expertise throughout the Department that stretches across the entire anti-money laundering/counter-terrorist financing (AML/CTF) spectrum and allows it to deal with complicated issues associated with the movement of money and 

assets in the United States and international financial system. All of these components give Treasury the necessary broad perspective to create and implement strategies to safeguard the financial system against abuse. 

In its role safeguarding the financial systems both home and abroad, the Treasury 

Department utilizes numerous capabilities: 

Sanctions and Administrative Powers.—Treasury wields a broad range of powerful 

economic sanctions and administrative powers to attack various forms of financial 

crime, including E.O. 13224 and Section 311 of the USA PATRIOT Act. 

Law Enforcement and Law Enforcement Support.—Treasury combats various 

forms of financial crime through the direct law enforcement actions of IRS–CI and 

the law enforcement support provided by FinCEN and Treasury’s regulatory authorities. 

Financial Regulation and Supervision.—FinCEN administers the Bank Secrecy 

Act and issues and enforces AML/CTF regulations. Treasury further maintains close 

contact with the Federal financial supervisors—including the Treasury Department’s Office of the Comptroller of the Currency and Office of Thrift Supervision—

with the goal of ensuring that these regulations are being implemented consistently 

throughout the financial sectors. In addition, OFAC administers and enforces the 

various economic sanctions and restrictions imposed by statute and under the Secretary’s delegated IEEPA authority. 

International Initiatives.—The Treasury Department is part of and has access to 

an extensive international network of Finance Ministries and Finance Ministry-related bodies such as the Financial Action Task Force (FATF) and various FATFStyle Regional Bodies, the International Monetary Fund (IMF), the World Bank, the 

G–7, and various multilateral development banks. In addition, Treasury is the critical facilitator for the international relationship between financial intelligence units 

organized through the Egmont Group. 

Private Sector Outreach.—As a result of our traditional role in safeguarding the 

financial system, Treasury has developed a unique partnership with the private sector. Through outreach programs such as the Bank Secrecy Act Advisory Group 

(BSAAG) and other regulatory and educational seminars and programs, Treasury 

maintains a close relationship with U.S. financial institutions to ensure a smooth 

exchange of information related to money laundering and terrorist financing. Treasury also maintains a close dialogue with the charitable sector to help it address its 

vulnerabilities to terrorist financing. 

The Office of Terrorism and Financial Intelligence (TFI) brings together Treasury’s intelligence, regulatory, law enforcement, sanctions, and policy components, 

and enhances Treasury’s efforts in combating terrorist financing and financial 

crime. TFI will work with its partners in the interagency community to ensure that 

its efforts complement and augment the important initiatives already underway. 

Treasury has a central role to play in the overall fight against terrorist financing 

due to our unique responsibilities and position within the government and with respect to the financial sector. Of course, many agencies have important roles to play 

and have the lead in their specific areas of expertise. The FBI, for example, has the 

lead in terrorist financing investigations. This does not diminish from Treasury’s 

role or responsibilities. 
330

Question. Has Treasury’s role on the PCC for Terrorist Financing changed since 

being replaced as the chair? 

Answer. Treasury continues to play an important role on the PCC. The purpose 

of the PCC has always been to coordinate the policy direction and actions of the U.S. 

government related to terrorist financing. As chair, we may have had administrative 

responsibilities and shared a useful tool in this campaign. As chair, we often found 

ourselves driving the process by our readiness to take one action—forcing discussion 

on other options that, on many occasions, were more appropriate for the government 

to pursue. As a participant, we continue to bring a useful tool to the campaign and, 

as before, find ourselves fostering discussions through our readiness to act, but 

being responsive to other methods for accomplishing the ultimate goal—severing the 

link between a source of money and some willing and able to commit an act of terrorism. 

Question. The Secretary indicated in his testimony before the subcommittee that 

there are clear lines of responsibility between Treasury and Homeland. Please provide a detailed description of the responsibilities of both Departments as they relate 

specifically to terrorist financing. Please include any Memorandum of Understanding or relevant documents for the record. Please also differentiate the role of 

Cornerstone from the Department’s role. 

Answer. The most fundamental responsibility of the Treasury Department is the 

safeguarding of the soundness and integrity of the United States and international 

financial systems. Treasury meets this responsibility through a wide range of programs, ranging from domestic regulatory actions to far-reaching international initiatives through the International Monetary Fund, participation in multilateral groups 

such as the Financial Action Task Force and the World Bank. Each of these programs benefits from the historic, deep and ongoing relationship that Treasury maintains with the U.S. financial community and our support for law enforcement investigative initiatives through financial powers unique to the Department of the Treasury. 

Of course, a vital component of our overall efforts is the protection of the U.S. 

financial system from abuse by terrorist financiers, money launderers and other financial criminals. Central to these efforts are such Treasury components as the Executive Office for Terrorist Financing and Financial Crimes (EOTF/FC), Office of 

Foreign Assets Control (OFAC), Financial Crimes Enforcement Network (FinCEN), 

the Treasury Executive Office of Asset Forfeiture (TEOAF) and the Office of Critical 

Infrastructure Protection and Compliance Policy, and will soon include the newlyestablished Office of Terrorism and Financial Intelligence. Each of these offices 

works closely with the U.S. law enforcement community—including the FBI, DEA, 

IRS–CI, U.S. Secret Service, U.S. Postal Inspection Service, and the Bureau of Immigration and Customs Enforcement (ICE)—to ensure that criminals seeking to use 

and abuse the U.S. financial system are identified and brought to justice. 

FinCEN, as the administrator of the Bank Secrecy Act, ensures that information 

reported under that act is provided to law enforcement agencies such as the Bureau 

of Immigration and Customs Enforcement (ICE). In addition to making the fruits 

of this activity available to law enforcement, FinCEN also uses its analytical resources to mine the data to support existing law enforcement cases on request, as 

well as to proactively identify potential new cases for law enforcement. FinCEN provides guidance to industry to ensure that its regulatory efforts are directed at law 

enforcement concerns, and takes enforcement action as necessary to ensure that its 

regulations are being followed. In addition, FinCEN publishes a number of analytical products to help law enforcement understand the financial system and follow 

the money, and to help the financial industry improve its monitoring and reporting 

of suspicious activity. Finally, in the international context, FinCEN’s relationship 

with its counterpart financial intelligence units provides tremendous information 

where funds are flowing into or out of the United States, and are available for appropriate use by ICE as well as all Federal law enforcement investigating financial 

crimes. A large portion of FinCEN’s budget is devoted to developing and supporting 

its systems and analytical tools to assist and complement the financial investigatory 

effort of programs such as Cornerstone, which Treasury welcomes. We look forward 

to a continued close cooperation with ICE in our efforts to combat financial crimes. 

Question. The Bureau of Immigration and Customs Enforcement (BICE) administers the Systematic Homeland Approach to Reducing Exploitation program 

(SHARE) where BICE will be joined by U.S. Secret Service to jointly conduct semiannual meetings with members of the banking and trade communities impacted by 

money laundering, identity theft and other financial crime. There is no mention of 

Treasury in the DHS press announcement or on the web page. 

Does Treasury participate in these meetings? If so, please provide the materials 

presented in the last meeting to the private sector. 
331

Answer. We understand from DHS that there have been no meetings to date 

under the SHARE auspices. 

Question. Why is BICE taking the lead when it comes to dealing with financial 

institutions? Isn’t this Treasury’s role? What information is DHS providing that 

Treasury doesn’t? 

Answer. The Treasury Department has the lead in protecting the integrity of the 

U.S. financial sector and in dealing with financial institutions. Treasury would welcome efforts by DHS to provide the financial community with information related 

to DHS enforcement issues. For example, the Secret Service plays an important role 

in the investigation of counterfeiting U.S. currency, credit card fraud and identity 

theft. 

Question. Does FinCEN deliver BSA data to BICE? Is it a gross data transfer? 

Does BICE have data mining software that is similar to what FinCEN was created 

to do? If so, what functionality for the financial industry is FinCEN providing? 

Answer. Under a legacy process in place when certain ICE agents were employees 

of the U.S. Customs Service and part of Treasury, FinCEN provided a direct 

download of BSA data into the Treasury Enforcement Communications System 

(TECS), which is now administered by the Department of Homeland Security. We 

are not familiar with ICE’s current data mining tools. 

FinCEN, as administrator of the BSA and as mandated in Section 361 of the USA 

PATRIOT Act, has the responsibility for communicating with the financial industry 

about BSA matters. In meeting this obligation, FinCEN: 

—Participates in numerous conferences and seminars being held throughout the 

year across the country; 

—Participates in compliance training workshops; 

—Chairs and conducts regular meetings with the BSA Advisory Group and its 

subcommittees; 

—Interacts on a daily basis with bank officials throughout the country regarding 

various aspects of BSA compliance; 

—Conducts customer surveys; 

—Produces publications such as the The Suspicious Activity Review, a semiannual publication providing feedback and guidance to financial institutions on 

BSA reporting and anti-money laundering requirements; and 

—Provides interaction with the financial institutions through its Regulatory Help 

Line, which handles more than 5,000 calls a year, and through website postings 

of regulations, guidance, comment letters and other regulatory-related materials. 

Question. This sounds virtually identical to the mission of FinCEN and the Treasury Department. How are the two roles different? 

Answer. The missions are quite distinct. FinCEN is responsible for administering 

the Bank Secrecy Act. In that role, FinCEN is ultimately responsible for the collection, maintenance, analysis and dissemination of information collected under that 

Act. FinCEN has a statutory mandate to provide feedback to the industry. FinCEN 

provides guidance to the financial industry to ensure that its regulatory efforts are 

directed at law enforcement concerns, and takes enforcement action as necessary to 

ensure that its regulations are being followed. In addition, FinCEN publishes a 

number of analytical products to help law enforcement understand the financial system and follow the money, and to help the financial industry improve its monitoring 

and reporting of suspicious activity. Finally, in the international context, FinCEN 

is the United States financial intelligence unit and is responsible for the Egmont 

secure web, providing the Egmont Group, an international collection of financial intelligence entities charged with the collection and analysis of financial information 

to help prevent money laundering and other illicit finance, with the ability to communicate with one another via secure e-mail, posting and assessing information regarding trends, analytical tools, and technological developments. Currently, 76 of 

the 94 countries are connected to the Egmont Secure Web. In this area, FinCEN 

is unique in that it supports all of U.S. law enforcement and assists all international 

Egmont partners. 

Question. What provisions of the National Money Laundering Strategy does 

Treasury enforce? 

Answer. The National Money Laundering Strategy is not an enforcement document, but rather a document setting forth the President’s overarching goals in a variety of areas to identify and combat money laundering, terrorist financing and 

other financial crimes. 

Question. Is this strategy essential to coordinating the government goals to fight 

money laundering? 

Answer. The Department believes that the requirement of drafting a national 

Strategy has been beneficial in that it has required the principal U.S. government 
332

anti-money laundering and anti-terrorist financing regulators and law enforcement 

investigators and prosecutors, as well as the intelligence community to discuss overarching goals and directions, as well as to identify trends and emerging threats. The 

resulting Strategies reflect those interagency discussions. 

Question. Has the administration transmitted a reauthorization proposal to Congress regarding the National Money Laundering Strategy? 

Answer. I am not aware of a formal submission. 

Question. The Secretary also indicated in his testimony that the Treasury Department is the lead agency for interdicting the flows of terrorist financing in the financial system and that Homeland Security is only responsible for the protecting the 

physical structures, but not the financial system itself. 

Is there any written understanding between the Department of Homeland Security and the Department of the Treasury that clearly delineates the roles of the two 

agencies? 

Answer. There are no written procedures delineating respective roles. 

Question. Is there an MOU or other document between Justice and Treasury that 

defines the roles and missions of each Department in terrorist financing? Please provide a copy of any written understandings. 

Answer. I am not aware of an MOU. 

Question. The Memorandum of Understanding between the Justice Department 

and Homeland Security Department that establishes the Federal Bureau of Investigation as the lead in all terrorist financing investigations. What is the role of 

Treasury in investigating terrorist financing investigations? Why is the Department 

excluded from an MOU where Treasury has a major stake in the decisions being 

made? 

Answer. The MOU referenced was necessary to provide clarity of jurisdiction so 

as to ensure proper coordination of law enforcement investigations of terrorist financing. The Treasury Department’s law enforcement and support entities (IRS–

CID, FinCEN, and OFAC) support the FBI-led Joint Terrorism Task Forces (JTTFs) 

on terrorist financing investigations. We see no need for Treasury to have been a 

signatory to an MOU allocating responsibility for domestic operational investigations of terrorist financing between the FBI and ICE. 

Question. Who is the agency primarily responsible for safeguarding the integrity 

of America’s financial systems? 

Answer. The most fundamental responsibility of the Treasury Department is the 

safeguarding of the soundness and integrity of the United States and international 

financial systems. Treasury meets this responsibility through a wide range of programs, ranging from domestic regulatory actions to far-reaching international initiatives through the International Monetary Fund, participation in multilateral groups 

such as the Financial Action Task Force and the World Bank. Each of these programs benefits from the historic, deep and ongoing relationship that Treasury maintains with the U.S. financial community and our support for law enforcement investigative initiatives through financial powers unique to the Department of the Treasury. Although other agencies have primacy in the regulation of specific sectors of 

the U.S. financial system, no other agency has this overarching responsibility. 

Of course, a vital component of our overall efforts is the protection of the U.S. 

financial system from abuse by terrorist financiers, money launderers and other financial criminals. Central to these efforts are such Treasury components as the Executive Office for Terrorist Financing and Financial Crimes (EOTF/FC), Office of 

Foreign Assets Control (OFAC), Financial Crimes Enforcement Network (FinCEN), 

the Treasury Executive Office of Asset Forfeiture (TEOAF) and the Office of Critical 

Infrastructure Protection and Compliance Policy, and will soon include the newlyestablished Office of Terrorism and Financial Intelligence. Each of these offices 

works closely with the U.S. law enforcement community—including the FBI, DEA, 

IRS–CI, U.S. Secret Service, U.S. Postal Inspection Service, and ICE—to ensure 

that criminals seeking to use and abuse the U.S. financial system are identified and 

brought to justice. 

FinCEN, as the administrator of the Bank Secrecy Act, ensures that information 

reported under that act is provided to law enforcement agencies such as the Bureau 

of Immigration and Customs Enforcement. In addition to making the fruits of this 

activity available to law enforcement, FinCEN also uses its analytical resources to 

mine the data to support existing law enforcement cases on request, as well as to 

proactively identify potential new cases for law enforcement. FinCEN provides guidance to industry to ensure that its regulatory efforts are directed at law enforcement 

concerns, and takes enforcement action as necessary to ensure that its regulations 

are being followed. In addition, FinCEN publishes a number of analytical products 

to help law enforcement understand the financial system and follow the money, and 

to help the financial industry improve its monitoring and reporting of suspicious ac-
333

tivity. Finally, in the international context, FinCEN’s relationship with its counterpart financial intelligence units provides tremendous information where funds are 

flowing into or out of the United States, and are available for appropriate use by 

ICE as well as all Federal law enforcement investigating financial crimes. A large 

portion of FinCEN’s budget is devoted to developing and supporting its systems and 

analytical tools to assist and complement the financial investigatory effort of programs such as Cornerstone, which Treasury welcomes. We look forward to a continued close cooperation with ICE in our efforts to combat financial crimes. 

Question. What agency is ultimately responsible for fighting the financial war on 

terrorism? 

Answer. Several agencies work together in fighting the financial war on terrorism. 

The Treasury Department has the lead in safeguarding the integrity of the United 

States and international financial systems—including from abuse by terrorists and 

those who support them. 

Treasury has expertise throughout the Department that stretches across the entire anti-money laundering/counter-terrorist financing (AML/CTF) spectrum and allows it to deal with complicated issues associated with the movement of money and 

assets in the United States and international financial system. All of these components give Treasury the necessary broad perspective to create and implement strategies to safeguard the financial system against abuse. 

In its role safeguarding the financial systems both home and abroad, the Treasury 

Department utilizes numerous capabilities: 

Sanctions and Administrative Powers.—Treasury wields a broad range of powerful 

economic sanctions and administrative powers to attack various forms of financial 

crime, including E.O. 13224 and Section 311 of the USA PATRIOT Act. 

Law Enforcement and Law Enforcement Support.—Treasury combats various 

forms of financial crime through the direct law enforcement actions of IRS–CI and 

the law enforcement support provided by FinCEN and Treasury’s regulatory authorities. 

Financial Regulation and Supervision.—FinCEN administers the Bank Secrecy 

Act and issues and enforces AML/CTF regulations. Treasury further maintains close 

contact with the Federal financial supervisors—including the Treasury Department’s Office of the Comptroller of the Currency and Office of Thrift Supervision—

with the goal of ensuring that these regulations are being implemented consistently 

throughout the financial sectors. In addition, OFAC administers and enforces the 

various economic sanctions and restrictions imposed by statute and under the Secretary’s delegated IEEPA authority. 

International Initiatives.—The Treasury Department is part of and has access to 

an extensive international network of Finance Ministries and Finance Ministry-related bodies such as the Financial Action Task Force (FATF) and various FATFStyle Regional Bodies, the International Monetary Fund (IMF), the World Bank, the 

G–7, and various multilateral development banks. In addition, Treasury is the critical facilitator for the international relationship between financial intelligence units 

organized through the Egmont Group. 

Private Sector Outreach.—As a result of our traditional role in safeguarding the 

financial system, Treasury has developed a unique partnership with the private sector. Through outreach programs such as the Bank Secrecy Act Advisory Group 

(BSAAG) and other regulatory and educational seminars and programs, Treasury 

maintains a close relationship with U.S. financial institutions to ensure a smooth 

exchange of information related to money laundering and terrorist financing. Treasury also maintains a close dialogue with the charitable sector to help it address its 

vulnerabilities to terrorist financing. 

The Office of Terrorism and Financial Intelligence (TFI) brings together Treasury’s intelligence, regulatory, law enforcement, sanctions, and policy components, 

and enhances Treasury’s efforts in combating terrorist financing and financial 

crime. TFI will work in coordination with its partners in the interagency community 

to ensure that its efforts complement and augment the important initiatives already 

underway. 

Treasury has a central role to play in the overall fight against terrorist financing 

due to our unique responsibilities and position within the government and with respect to the financial sector. Of course, many agencies have important roles to play 

and have the lead in their specific areas of expertise. The FBI, for example, has the 

lead in terrorist financing investigations. This does not diminish from Treasury’s 

role or responsibilities. 

Question. Is all information shared with Treasury from the Foreign Terror Asset 

Tracking Group (FTAT–G)? 

Answer. With respect to FTAT–G, the purpose of that entity is to provide a forum 

where the various agencies with what can be described as proprietary information 
334

can work together, each bringing their separate ‘‘databases’’ of information to bear 

on tracking assets. This information is used to develop reports that are used by decision-makers. Treasury has participated in the FTAT–G and, as a result, has had 

an opportunity to review and comment on working drafts and receives copies of all 

the final reports they prepare. 

Question. Does the Terror Threat Integration Center (T–TIC) clear all of its terrorist financing information with the Department? 

Answer. With respect to the TTIC, Treasury will become a party to the MOU authorizing the sharing of appropriate threat information. Treasury components will 

identify what, if any, information it may have covered by the MOU and will share. 

Question. With Treasury being the lead agency on terrorist financing, does all terror financing intelligence and investigations come through the Department? How? 

Does the Treasury Department coordinate these actions? How? 

Answer. All terrorist financing investigations do not come through the Department of the Treasury, nor should they. Just like OFAC designations, criminal investigation and prosecution are tools available to the United States in its war against 

the financing of terror. The Department, through its participation on the PCC, 

shares and receives information needed to make informed decisions concerning 

which anti-terrorist financing tools to apply in given circumstances. 

Question. Does the Department direct the actions or the resources that other 

agencies spend to fight terror financing? 

Answer. Treasury does not have the authority to direct the resources of other 

agencies. 

Question. Does the Department have any input on the resources that Homeland 

spends on Cornerstone, as an example? 

Answer. No. 

Question. According to the testimony of numerous witnesses, there seems to be 

a considerable amount of duplication in the Federal Government on the issue of terror financing. What agency is making the resource decisions in spending by Department on the amounts spent on terror financing? Does Treasury have any input in 

this process? 

Answer. The Office of Management and Budget (OMB) coordinates spending decisions. Treasury, like all agencies, works with OMB on those decisions. 

Question. Should there be an evaluation of the coordination and actions of these 

financial intelligence units? Is any agency doing this? 

Answer. There are existing fora for coordinating the actions of our financial intelligence functions. The National Security Council (NSC) oversees this coordination. 

We continuously work with the NSC and OMB to maximize our efforts developing 

financial intelligence and will continue to do so in the future. Treasury is always 

studying how we can best improve our efforts to meet our responsibilities, both 

within this agency and in cooperation with our sister agencies. 

The term ‘‘financial intelligence unit’’ is a term-of-art that refers to the entity 

within a government that is responsible for receiving, analyzing, and disseminating 

information derived from suspicious activity reports and other money laundering-related reports from the financial sector. The Financial Crimes Enforcement Network 

(FinCEN) serves as the financial intelligence unit for the United States. FinCEN is 

an integral part of the Department of the Treasury and substantially benefits from 

Treasury’s unique relationship with the financial community, the law enforcement 

community and the regulatory community. 

Question. If the resources were provided, could Treasury enforce its responsibilities under the Patriot Act, allowing the other agencies to focus on their core missions? 

Answer. The Treasury Department believes that it is meeting its current USA PATRIOT Act responsibilities, but there is always more we can do. We have no reason 

to believe that other agencies are not focusing on their ‘‘core missions.’’

Question. What resources would be necessary? 

Answer. The Treasury Department believes that it is meeting its current USA PATRIOT Act responsibilities, but there is always more we can do. We have no reason 

to believe that other agencies are not focusing on their ‘‘core missions.’’ 

Question. How will Treasury enforce the provisions of the USA PATRIOT Act it 

is responsible for? 

Answer. Different components of the Department have differing ‘‘enforcement’’ responsibilities under both the BSA and the USA PATRIOT Act. For example, by virtue of a delegation order from the Secretary of the Treasury and an organic statute 

passed as part of the USA PATRIOT Act, FinCEN is charged with the responsibility 

of administering the regulatory regime of the BSA. In this capacity, among other 

things, FinCEN issues regulations and accompanying interpretive guidance; collects, 

analyzes and maintains the reports and information filed by financial institutions 
335

pursuant to BSA regulations; makes those reports and information available to law 

enforcement and regulators; and ensures financial institution compliance with the 

regulations through enforcement actions. The USA PATRIOT Act both refined and 

extended FinCEN’s focus in carrying out these responsibilities. 

Amendments to the BSA by the USA PATRIOT Act sharpened FinCEN’s responsibilities relating to the management of BSA information. For example, FinCEN designed and implemented the Patriot Act Communications System to provide a platform for electronically capturing at least 90 percent of all BSA reports, and built 

information sharing and dissemination systems required under Section 314. 

FinCEN is also undertaking the ‘‘BSA Direct’’ initiative to significantly upgrade 

mandated requirements to ensure that it secures this sensitive information and that 

it audits its use; that it ‘‘networks’’ disparate agencies accessing the information to 

ensure more robust investigation and to ensure that investigations do not overlap; 

and to collect and provide feedback and other information to the entities reporting 

the information—the financial industry—so that reporting can be better and more 

relevant for law enforcement. 

The USA PATRIOT Act also extended FinCEN’s regulatory responsibilities by accelerating expansion of BSA coverage to a broad range of new industries. Generally 

FinCEN’s role involves such things as providing prompt BSA interpretive guidance 

to examiners, policy makers and the financial service industries, and ensuring the 

consistent application of the BSA regulations across industry lines, most notably 

through the rule making process and subsequent guidance. While FinCEN is responsible for ensuring compliance with the BSA regulatory regime, FinCEN does 

not itself examine financial institutions for compliance. Instead, FinCEN taps the 

resources and expertise of other Federal agencies and self-regulatory organizations 

by delegating to these agencies the responsibility for conducting compliance exams. 

FinCEN does have an important role in supporting the examination regime created through these delegations. To enhance this role, FinCEN will create a new program office devoted solely to the BSA examination function. The new structure will 

consolidate all examination support functions and better enable FinCEN to provide 

the necessary support to regulatory agencies conducting BSA compliance exams. As 

an initial priority, FinCEN plans to focus on assisting the IRS in its examination 

function, particularly in light of the new regulations that FinCEN has and will issue 

to bring thousands of additional businesses under the BSA anti-money laundering 

program provision. 

Since coordination among the functional regulators is essential for improving the 

overall compliance process, FinCEN will be working through the Bank Secrecy Act 

Advisory Group to identify, in coordination with the regulatory agencies, ways in 

which we can identify common compliance deficiencies, provide feedback and guidance to examiners, collaborate on a continuing basis on examination procedures, and 

engage in joint examiner training. 

As part of our investigation of the current BSA regulatory system’s ability to enforce industry compliance with provisions of the BSA, FinCEN is pursuing a number 

of initiatives to improve such compliance through enforcement and other actions, including: creating a new Examination Program Office; dedicating analytical resources 

to compliance support and examination targeting; allocating resources to provide interpretive guidance to examiners; reviewing enforcement referral guidelines and reporting requirements to FinCEN; and focusing on compliance by money service businesses. 

FinCEN is also exploring ideas for enhanced coordination among the Federal regulators. These ideas include: identifying common compliance deficiencies; enhancing 

collaboration on examination procedures; and encouraging more joint examiner 

training. Treasury will work closely with FinCEN and the Federal regulators to develop these ideas and others as our investigation into the effectiveness of the current BSA compliance and enforcement system progresses. 

Finally, FinCEN retains the authority to pursue civil enforcement actions against 

financial institutions for egregious non-compliance with the BSA and the implementing regulations. Under the BSA, FinCEN is empowered to assess civil monetary penalties against, or require corrective action by, a financial institution committing negligent or willful violations. 

The IRS also has large BSA and USA PATRIOT Act enforcement responsibilities, 

both civilly and criminally. In addition to its primary jurisdiction, which is set forth 

in Title 26 of the United States Code (Internal Revenue Code), IRS–CI also has investigative jurisdiction involving other financial-related statutes. Beginning in 1970, 

Congress enacted a number of laws that led to greater participation by CI in the 

financial investigative environment. The Currency and Foreign Transactions Reporting Act of 1970 (Bank Secrecy Act); The Comprehensive Crime Control Act of 1984; 

The Anti-Drug Abuse Acts of 1986 and 1988; Crime Control Act of 1990; The An-
336

1Foreign Bank & Financial Account Report (FBAR). 

2 Currency Transaction Report—(CTR) FinCEN Form 104 and FinCEN Form 103 (filed by casinos). 3 Report of Cash Payments Over $10,000 Received in a Trade or Business (IRS and FinCEN 

form 8300). 4Suspicious Activity Reports (SARs)—filed by financial institutions when there is suspicious 

activity, as determined by the financial institution. 

nunzio-Wylie Anti-Money Laundering Act of 1992; The Money Laundering Suppression Act of 1994; The Antiterrorism and Effective Death Penalty Act of 1996; The 

Health Insurance Portability and Accountability Act of 1996; and the USA PATRIOT Act of 2001 all developed and refined the existing anti-money laundering 

and anti-terrorism laws under Titles 31 and 18 of the United States Code. 

Additionally, IRC, Section 6050 I, requires anyone involved in a trade or business, 

except financial institutions, to report currency received for goods or services in excess of $10,000 on a Form 8300. 

The combination of tax, money laundering and Bank Secrecy Act statutes enables 

IRS to identify and investigate tax evasion cases involving legal and illegal income 

sources. Ultimately, this versatility leverages IRS’s ability to be a major contributor 

to many important national law enforcement priorities. 

Responsibility for ensuring compliance with the BSA and USA PATRIOT Act of 

all non-banking and financial institutions not otherwise subject to examination by 

another Federal functional regulator i.e., Money Service Businesses (MSBs), casinos 

and credit unions was delegated to the IRS by the Department of Treasury in December 1992. Under the delegation, IRS is responsible for three elements of compliance—the identification of MSBs, educational outreach to all three types of organizations, and the examination of these entities suspected of noncompliance. The IRS 

performs these compliance functions along with its criminal enforcement role. 

The processing and warehousing of BSA documents into the Currency Banking 

and Retrieval System (CBRS), including FBARs 1, CTRs 2, 8300s 3 and SARs 4, are 

also the responsibility of the IRS. All documents entered into the CBRS (approximately 14 million annually) are made available to other law enforcement and regulatory agencies in addition to IRS. However, the IRS is the largest user of the 

CBRS. 

To meet its obligations under 31 CFR 103.57(b) and Treasury Delegation Order 

15–41 IRS ensures that certain financial institutions (FIs) are in compliance with 

their recordkeeping and reporting requirements under the Bank Secrecy Act. 

This is accomplished by a balanced civil and criminal program that includes: 

—identifying financial institutions (FIs) under IRS jurisdiction, 

—identifying those FIs that are actively involved in or facilitate money laundering 

and seek ways to end this activity, 

—conducting BSA compliance examinations to identify or uncover potential areas 

of noncompliance, money laundering trends, patterns, schemes, and forwarding 

the information for use in enhancing the National Anti-Money Laundering 

Strategy, 

—an aggressive effort to assist FIs for which IRS has jurisdiction in understanding their role in combating money laundering and to voluntarily meet 

their obligations under the BSA, 

—actively participating in coordinated multi-agency anti-money laundering initiatives such as GTOs, HIDTAs, HIFCAs, and SAR Review Teams designed to disrupt and dismantle money laundering organizations, 

—securing information on currency transactions which should have been reported 

or recorded and make available to law enforcement and other interested parties, 

—utilizing and evaluating various currency transaction reports as authorized for 

tax compliance activities. 

IRS’s civil and criminal outreach efforts include State, and national associations 

affiliated with financial services industries. IRS provides keynote speakers, conducts 

seminars and provides educational programs relating to check cashers, bankers, tax 

practitioners, fraud examiners, corporate security personnel and bank security officers. This outreach and our efforts to contact money service businesses is a significant part of our program to identify and educate MSBs regarding their requirements to register their business with both the State and Federal Government. 

IRS has approximately 350 civil examiners assigned to the anti-money laundering 

program. These examiners are currently conducting 5,576 examinations. In addition 

to the examination of non-banking financial institutions (NBFI), civil examiners also 

conduct reviews for compliance with the currency reporting requirements of Section 

6050I of the Internal Revenue Code. As of March 31, 2004, the IRS NBFI database 
337

reflected over 88,000 potential NBFIs. From September 30, 2000 through May 2004, 

IRS has closed 13,288 examinations and conducted 5,940 registration examinations. 

On June 3, 2004, the Comptroller of the Currency testified before the Senate 

Committee on Banking, Housing and Urban Affairs, and detailed the actions OCC 

is taking under both the BSA and USA PATRIOT Act to ensure anti-money laundering compliance. That testimony is available on the Department of the Treasury’s 

web site. 

Question. Would the consolidation of financial intelligence into one Federal agency 

make the government more accountable for outcomes under the statutes that Treasury enforces? 

Answer. Different agencies use financial intelligence to support their specific missions. For example, the intelligence and law enforcement agencies use their collection and analysis on terrorist financing to support their operations. While consolidating financial intelligence into one agency could enhance accountability for outcomes under the statutes that Treasury enforces, other agencies will need the function to support their own missions. 

Question. On the Bureau of Immigration and Customs Enforcement (BICE) 

webpage is the following description of their role in terrorist financing:

‘‘Cornerstone is ICE’s premier financial crime program that seeks to identify 

vulnerabilities in financial systems through which criminals launder their illicit proceeds, bring the criminals to justice, eliminate the vulnerabilities, and develop a 

working partnership with industry representatives to share information and close 

industry-wide security gaps that could be exploited by money launderers and other 

criminal organizations. ‘Safeguarding the integrity of America’s financial systems is 

a key part of homeland security,’ said Secretary Ridge. Criminal organizations are 

seeking new ways to finance their operations, and the Department of Homeland Security is moving aggressively to identify vulnerabilities within U.S. financial systems that could be exploited to those ends.’’

Describe in detail Treasury’s role in the BICE program described above. 

Answer. ICE is a law enforcement bureau within the Department of Homeland 

Security. We regard Operation Cornerstone as primarily a law enforcement investigative initiative of that bureau, and therefore have little involvement. That said, 

Operation Cornerstone does have a private sector outreach component, and Treasury is taking steps to ensure that this aspect of Cornerstone is coordinated with 

overall financial community outreach, a responsibility with which Treasury clearly 

is charged. Treasury’s primary mechanism for such outreach is the Bank Secrecy 

Act Advisory Group (BSAAG), which is chaired by FinCEN. 

Question. Was Cornerstone a coordinated effort with Treasury? What is Treasury’s 

role? 

Answer. As noted above, we regard Operation Cornerstone as primarily a law enforcement investigative initiative of that bureau, and therefore have had little involvement. That said, Operation Cornerstone does have a private sector outreach 

component, and Treasury is taking steps to ensure that this aspect of Cornerstone 

is coordinated with overall financial community outreach, a responsibility with 

which Treasury clearly is charged. Treasury’s primary mechanism for such outreach 

is the Bank Secrecy Act Advisory Group (BSAAG), which is chaired by FinCEN. 

Question. Does Cornerstone share all of their money laundering and terrorist financing information with the Treasury Department? 

Answer. Operational law enforcement matters properly are handled by law enforcement agency or agencies, or joint task forces that are investigating the specific 

activities involved. It would not be appropriate for all information relating to such 

investigative operations to be shared with the Treasury Department. 

That said, DHS, DOJ and Treasury do routinely share new and developing money 

laundering trends and methodologies information to ensure that their enforcement 

and prosecutorial efforts stay abreast of the activities of the criminals. As to terrorist financing information, ICE has merged all of its terrorist financing activities 

into the FBI’s Terrorist Financing Operations Section (TFOS). Additionally, Treasury, through IRS–CI, is an active participant in DOJ’s JTTF, along with ICE and 

other law enforcement agencies. 

Question. How is this different from FinCEN’s mission and also the mission of the 

Office of Critical Infrastructure? Please be specific. 

Answer. FinCEN is responsible for administering the Bank Secrecy Act. In that 

role, FinCEN is ultimately responsible for the collection, maintenance, analysis and 

dissemination of information collected under that Act. FinCEN has a statutory mandate to provide feedback to the industry. FinCEN provides guidance to industry to 

ensure that its regulatory efforts are directed at law enforcement concerns, and 

takes enforcement action as necessary to ensure that its regulations are being fol-
338

5For example, the most important tool in the United States arsenal to attack systemic money 

laundering is the Geographic Targeting Order (31 U.S.C. § 5326) by and through which financial 

industry reporting can be reduced and more finely honed. In the international realm, use of PATRIOT Act Section 311 (31 U.S.C. § 5318A) to target ‘‘primary money laundering jurisdictions, 

accounts, financial institutions and others is a very potent weapon’’. 

lowed. FinCEN’s primary mechanism for private sector outreach is the Bank Secrecy Act Advisory Group. In addition, FinCEN publishes a number of analytical 

products to help law enforcement understand the financial system and follow the 

money, and to help the financial industry improve its monitoring and reporting of 

suspicious activity. Finally, in the international context, FinCEN is the U.S. financial intelligence unit and is responsible for the Egmont secure web, providing the 

Egmont Group, an international collection of financial intelligence entities charged 

with the collection and analysis of financial information to help prevent money laundering and other illicit finance, with the ability to communicate with one another 

via secure e-mail, posting and assessing information regarding trends, analytical 

tools, and technological developments. Currently, 76 of the 94 countries are connected to the Egmont Secure Web. 

The Office of Critical Infrastructure Protection and Compliance Policy works with 

the financial services sector and regulators on behalf of the Department in the area 

of critical infrastructure protection for the financial services sector. The Department 

is the agency of the U.S. government responsible for coordinating the development 

of policies to reduce vulnerabilities and increase resilience for the Nation’s financial 

services sector critical infrastructure. This office develops policy formulations intended to increase the resilience of private sector financial services firms. The office 

also supports the Assistant Secretary for Financial Institutions, who chairs the Financial and Banking Information Infrastructure Committee, a grouping of Federal 

and State financial regulators that focuses on the resilience and integrity of financial sector infrastructure. Moreover, this office supports Treasury policymakers concerning the development of policies regarding information sharing, the protection of 

personal financial information, and remittances. 

Question. This seems to be not only complimentary of the Treasury mission; it 

seems to be the Treasury mission. Why is the Federal Government funding two different agencies in two Executive Branch Departments to do the same job? 

Answer. We view the Cornerstone initiative as complimentary and not as duplicative. The most fundamental responsibility of the Treasury Department is the safeguarding of the soundness and integrity of the U.S. and international financial systems. Treasury meets this responsibility through a wide range of programs, ranging 

from domestic regulatory actions to far-reaching international initiatives through 

the International Monetary Fund, participation in multilateral groups such as the 

Financial Action Task Force and the World Bank. Each of these programs benefits 

from the historic, deep and ongoing relationship that Treasury maintains with the 

U.S. financial community and our support for law enforcement investigative initiatives through financial powers unique to the Department of the Treasury.5

Of course, a vital component of our overall efforts is the protection of the U.S. 

financial system from abuse by terrorist financiers, money launderers and other financial criminals. Central to these efforts are such Treasury components as the Executive Office for Terrorist Financing and Financial Crimes (EOTF/FC), Office of 

Foreign Assets Control (OFAC), Financial Crimes Enforcement Network (FinCEN), 

the Treasury Executive Office of Asset Forfeiture (TEOAF) and the Office of Critical 

Infrastructure Protection and Compliance Policy, and will soon include the newlyestablished Office of Terrorism and Financial Intelligence. Each of these offices 

works closely with the U.S. law enforcement community—including the FBI, DEA, 

IRS–CID, U.S. Secret Service, U.S. Postal Inspection Service, and ICE—to ensure 

that criminals seeking to use and abuse the U.S. financial system are identified and 

brought to justice. 

FinCEN, as the administrator of the Bank Secrecy Act, ensures that information 

reported under that act is provided to law enforcement agencies such as the Bureau 

of Immigration and Customs Enforcement (ICE). In addition to making the fruits 

of this activity available to law enforcement, FinCEN also uses its analytical resources to mine the data to support existing law enforcement cases on request, as 

well as to proactively identify potential new cases for law enforcement. FinCEN provides guidance to industry to ensure that its regulatory efforts are directed at law 

enforcement concerns, and takes enforcement action as necessary to ensure that its 

regulations are being followed. In addition, FinCEN publishes a number of analytical products to help law enforcement understand the financial system and follow 

the money, and to help the financial industry improve its monitoring and reporting 

of suspicious activity. Finally, in the international context, FinCEN’s relationship 
339

with its counterpart financial intelligence units provides tremendous information 

where funds are flowing in to or out of the United States, and are available for appropriate use by ICE as well as all Federal law enforcement investigating financial 

crimes. A large portion of FinCEN’s budget is devoted to developing and supporting 

its systems and analytical tools to assist and complement the financial investigatory 

effort of programs such as Cornerstone, which Treasury welcomes. We look forward 

to a continued close cooperation with ICE in our efforts to combat financial crimes. 

Question. Considering that ICE and FBI have financial intelligence units with 

hundreds of staff devoted to financial intelligence, why should Treasury still be considered as the lead agency? 

Answer. The Treasury Department has the lead in safeguarding the integrity of 

the U.S. and international financial systems—including from abuse by terrorists 

and those who support them. 

Treasury has expertise throughout the Department that stretches across the entire anti-money laundering/counter-terrorist financing (AML/CTF) spectrum and allows it to deal with complicated issues associated with the movement of money and 

assets in the United States and international financial system. All of these components give Treasury the necessary broad perspective to create and implement strategies to safeguard the financial system against abuse. 

In its role safeguarding the financial systems both home and abroad, the Treasury 

Department utilizes numerous capabilities: 

Sanctions and Administrative Powers.—Treasury wields a broad range of powerful 

economic sanctions and administrative powers to attack various forms of financial 

crime, including E.O. 13224 and Section 311 of the USA PATRIOT Act. 

Law Enforcement and Law Enforcement Support.—Treasury combats various 

forms of financial crime through the direct law enforcement actions of IRS–CI and 

the law enforcement support provided by FinCEN and Treasury’s regulatory authorities. 

Financial Regulation and Supervision.—FinCEN administers the Bank Secrecy 

Act and issues and enforces AML/CTF regulations. Treasury further maintains close 

contact with the Federal financial supervisors—including the Treasury Department’s Office of the Comptroller of the Currency and Office of Thrift Supervision—

with the goal of ensuring that these regulations are being implemented consistently 

throughout the financial sectors. In addition, OFAC administers and enforces the 

various economic sanctions and restrictions imposed by statute and under the Secretary’s delegated IEEPA authority. 

International Initiatives.—The Treasury Department is part of and has access to 

an extensive international network of Finance Ministries and Finance Ministry-related bodies such as the Financial Action Task Force (FATF) and various FATFStyle Regional Bodies, the International Monetary Fund (IMF), the World Bank, the 

G–7, and various multilateral banks. In addition, Treasury is the critical facilitator 

for the international relationship between financial intelligence units organized 

through the Egmont Group. 

Private Sector Outreach.—As a result of our traditional role in safeguarding the 

financial system, Treasury has developed a unique partnership with the private sector. Through outreach programs such as the Bank Secrecy Act Advisory Group 

(BSAAG) and other regulatory and educational seminars and programs, Treasury 

maintains a close relationship with U.S. financial institutions to ensure a smooth 

exchange of information related to money laundering and terrorist financing. Treasury also maintains a close dialogue with the charitable sector to help it address its 

vulnerabilities to terrorist financing. 

The Office of Terrorism and Financial Intelligence (TFI) brings together Treasury’s intelligence, regulatory, law enforcement, sanctions, and policy components, 

and enhances Treasury’s efforts in combating terrorist financing and financial 

crime. TFI will work in coordination with its partners in the interagency community 

to ensure that its efforts complement and augment the important initiatives already 

underway. 

Treasury has a central role to play in the overall fight against terrorist financing 

due to our unique responsibilities and position within the government and with respect to the financial sector. Of course, many agencies have important roles to play 

and have the lead in their specific areas of expertise. The FBI, for example, has the 

lead in terrorist financing investigations. This does not diminish from Treasury’s 

role or responsibilities. 

FINCEN

Question. Please provide a detailed description of what BSA Direct will provide 

in functionality to FinCEN. 
340

Answer. The BSA Direct initiative encompasses systems and processes that will 

significantly alter the way Bank Secrecy Act information is provided to law enforcement and the regulators that access the information. It will provide those entities, 

including FinCEN, with state of the art data search tools in a robust user-friendly 

environment. Users will be able to search Bank Secrecy Act information faster and 

better, and will be able to do more with the data than they currently can. Eventually, sophisticated data mining, geographic and other analytic tools will be added 

to the environment, which will add to the value of the Bank Secrecy Act information. Finally, the initiative will help free FinCEN analytic resources to focus on 

more complex and strategic analysis of the financing of terror, money laundering 

and other illicit finance. To better understand the specific functionality this initiative will provide to FinCEN, it is important to understand the way Bank Secrecy 

Act information is currently managed, analyzed and disseminated. 

FinCEN is the delegated administrator of the Bank Secrecy Act, a regulatory statute designed to deter, prevent and address money laundering and illicit finance, including the financing of terrorism. The keystone of the Bank Secrecy Act is a reporting regime under which financial institutions report to the Federal Government certain information—large cash transactions or suspicious activity. Over 13 million 

Bank Secrecy Act reports are filed each year by more than 200,000 U.S. financial 

institutions, providing invaluable information to detect and prevent financial crimes. 

FinCEN is responsible for ensuring that information is collected, securely housed, 

analyzed and shared with law enforcement. Amendments to the Bank Secrecy Act 

by the USA PATRIOT Act sharpened FinCEN’s responsibilities relating to this information. Among other things, FinCEN is responsible for securing this sensitive information and auditing its use; networking with disparate agencies accessing the information to ensure more robust investigation and ensuring that investigations do 

not overlap; and collecting and providing feedback and other information to the entities reporting the information—the financial industry—so that reporting can be better and more relevant for law enforcement. 

Currently, under a legacy process that predates FinCEN, Bank Secrecy Act reports are collected by the Internal Revenue Service’s Detroit Computing Center and 

are housed in an IBM IDMS mainframe environment incorporating 12 hierarchical 

databases. Most persons access the data through a ‘‘gateway’’ connection. While the 

IRS is currently converting the data to a ‘‘DB2’’ relational format, the data on the 

mainframe system in Detroit is not currently kept in a relational database, so 

search capabilities are limited for persons and entities that access Bank Secrecy Act 

information through that system. Because of the limitations of this system, FinCEN 

devotes a significant portion of its analytic resources to data retrieval for many of 

its law enforcement customers. As a result of this system, FinCEN downloads a duplicate copy of the Bank Secrecy Act database every night to other systems and into 

programs that provide relational data mining and analytical capabilities. 

FinCEN is not the only entity that downloads all or part of the Bank Secrecy Act 

data from the Detroit Computing Center. Under legacy arrangements that pre-date 

FinCEN’s current leadership, Suspicious Activity Reports (SARs) filed by depository 

institutions are downloaded directly from the IRS’s Detroit Computing Center to the 

Federal Bureau of Investigation and United States Secret Service. Bank Secrecy Act 

information is also downloaded to the Treasury Enforcement Communications System (TECS), which was maintained by the former U.S. Customs Service and is now 

maintained by the Department of Homeland Security (DHS). Agencies with access 

to TECS (e.g., DHS’s Immigration and Customs Enforcement, DHS’s Customs and 

Border Protection, DOJ’s Bureau of Alcohol, Tobacco, Firearms and Explosives, etc.) 

generally access Bank Secrecy Act information through that system. FinCEN has 

a limited ability to network the use of the data by those who download it since it 

is entirely dependent on manual feedback on the use of the data, which is difficult 

to obtain. Moreover, auditing the use of the data is far more difficult since it depends on manual reviews combined with the tracking system in place at the independent system. Simply put, currently FinCEN cannot fully meet any of its statutory responsibilities relating to the data utilizing the current system and processes 

in place. 

The systems and processes contemplated in the BSA Direct initiative will allow 

FinCEN to not only meet these responsibilities, but will provide law enforcement, 

regulators and FinCEN a modern, user-friendly environment to mine and analyze 

BSA data. The heart of the BSA Direct initiative is a secure data warehouse to consolidate the Bank Secrecy Act information into a single, integrated data set. Users 

will have a flexible and robust query system accessible through an intuitive webbased interface. This system will provide access, including secure web access, to 

Bank Secrecy Act information with capabilities that allow end users to perform ad 

hoc as well as pre-defined queries and reporting. Users will gain easier, faster data 
341

access and enhanced ability to query and analyze Bank Secrecy Act information, 

and FinCEN will have tools to control and audit the use of this sensitive information, network with agencies that are using the data, and provide better feedback to 

the financial industry about the use of the data, which will lead to more relevant 

reporting. 

The full scope and detail of the functionality will be more fully determined as a 

result of the user requirements analyses in the first months of the project. However, 

the following examples identify the types of capabilities that BSA Direct will afford 

FinCEN and its customers that they presently do not have: 

—The automated capability for FinCEN to control and audit the use of all persons 

accessing Bank Secrecy Act information. 

—The capability, through an alert system, for FinCEN to ‘‘network’’ all users of 

Bank Secrecy Act information that ‘‘hit’’ the same data, or appear to be analyzing the same information. 

—The capability to analyze law enforcement’s use of the data to provide meaningful feedback to the financial industry, which will result in better reporting. 

—The capability to develop sophisticated filer profiles for financial industry members to help FinCEN and the regulators target entities for compliance examinations as well as the ability to be notified automatically by the system when 

there is a significant filing anomaly. 

—An intuitive interface to enable users to query data with little or no training, 

and with strong, context-sensitive on-line help. 

—Users will be able to keep and view a list of their prior queries. 

—Managers in organizations will be better able to audit and manage the use of 

the data by their subordinate users. 

—Users will be able to schedule a particular query to re-run on a schedule set 

by the user. 

—Users will be able to customize query output, i.e., define what columns of information are displayed, rearrange the order of the columns, and then save that 

order as a personal default view. 

—Users will have the ability to sort, filter, and aggregate columns of data. 

—Users will be able to run ‘‘batch queries,’’ e.g., social security numbers from all 

bankruptcy filings 6 months ago against all Bank Secrecy Act filings in the last 

year. 

—Users will be able to create customized queries and reports. 

—A geographic mapping tool will provide information to show the geographic significance of Bank Secrecy Act data. 

—Users will have the capability to pre-schedule queries and receive reports on a 

timetable scheduled by users. 

—Users will be able to download results into popular formats, e.g., Word, Excel, 

Analysts Notebook, etc. 

Question. Please provide the cost and schedule, as well as an assessment of the 

technical risk of development, for BSA Direct for fiscal year 2005 and for future fiscal years. 

Answer. The Request for Proposals (RFP) for BSA Direct (full and open competition) was released in February 2004. FinCEN is currently in the final stages of evaluating the proposals received in response to the RFP. Because the BSA Direct RFP 

clearly specifies that the offerors must utilize standards based methodology (SEICMM level 2 or higher) and use open standards, COTS products, and because the 

underlying data warehousing technology is relatively mature, technical risk is minimized. Risk management is a key component of the project management. 

FinCEN has submitted a Cost and Schedule Milestones chart for BSA Direct (as 

submitted to the Office of Management and Budget in December 2003) below. The 

costs in this chart were based upon estimates provided by the Mitre Corporation, 

which FinCEN engaged to help evaluate the project. It is important to note that 

these are only estimates based on Mitre’s study. FinCEN will be pleased to provide 

the committee with a much more accurate cost picture for this project once a contract for the system is awarded.
342

COST AND SCHEDULE GOALS: ORIGINAL BASELINE FOR A PHASE/SEGMENT/MODULE OF PROJECT 

(INVESTMENT) 

Description 

Planned 

Schedule Duration Planned Cost 

(BCWS) Funding Agency 

Start Date End Date Days Hrs. 

1. Program Administration Costs, 

excludes FTE.

09/01/2003 03/13/2004 194 .......... $225,000 FinCEN 

2. Project Management, excludes 

FTE.

04/05/2004 09/30/2005 543 .......... $1,006,000 Department of 

Treasury 

3. BSA Direct Proof of Concept 

(POC) Development.

10/02/2003 03/12/2004 162 .......... $393,000 Treasury 

4. BSA Direct System Development 

and Construction.

04/05/2004 06/10/2005 431 .......... $4,278,000 Treasury 

4.1 Requirements Definition 

and Analysis.

04/05/2004 08/20/2004 137 .......... $531,000 Treasury 

4.2 System Design .................. 06/14/2004 10/29/2004 137 .......... $398,000 Treasury 

4.3 System Design Review ..... 10/18/2004 11/05/2004 18 .......... $40,000 Treasury 

4.4 System Development Environment Setup.07/05/2004 08/13/2004 39 .......... $80,000 Treasury 

4.5. System Development & 

Construction.

09/06/2004 03/18/2005 193 .......... $929,000 Treasury 

4.6 Data Conversion, Transformation, & Migration.06/14/2004 09/30/2004 108 .......... $744,000 Treasury 

4.7. System/Integration/Test 

Environment.

09/27/2004 11/05/2004 30 .......... $80,000 Treasury 

4.8. Usability/Component 

Functional Testing.

01/24/2005 04/15/2005 81 .......... $239,000 Treasury 

4.9. System/Integration/Testing.03/21/2005 06/10/2005 81 .......... $372,000 Treasury 

4.10. Integration with other 

systems.

03/21/2005 06/10/2005 81 .......... $465,000 Treasury 

4.11. Lease costs hardware 

and software.

04/05/2004 06/10/2005 431 .......... $400,000 Treasury 

5. BSA Direct Deployment and Rollout.06/28/2004 09/16/2005 445 .......... $1,675,000 Treasury 

5.1. Deployment and Rollout 

Strategy Planning.

06/28/2004 09/17/2004 81 .......... $239,000 Treasury 

5.2. Acceptance/Production 

Ready Testing.

05/02/2005 07/08/2005 67 .......... $398,000 Treasury 

5.3. Production System Deployment & Rollout.05/02/2005 09/16/2005 137 .......... $531,000 Treasury 

5.4. User Training and Transition.06/06/2005 08/26/2005 81 .......... $372,000 Treasury 

5.5. Lease costs hardware and 

software.

06/02/2005 09/30/2005 120 .......... $135,000 Treasury 

6. BSA Direct Operations and Maintenance.10/01/2005 09/30/2006 364 .......... $2,500,00 FinCEN

PROJECT TOTAL ................... 09/01/2003 09/30/2006 1,125 .......... $10,077,000

Question. If full funding were provided, when will the system be complete? 

Answer. With full funding, the FinCEN basic system contemplated by BSA Direct 

system will be operational and available to users by October 2005. It is anticipated 

that FinCEN will continue to enhance the basic functionality of the system in future 

years. The goal at this point is to get the basic foundation of the system up and 

running as quickly as possible. 

Question. If BSA Direct were fully funded, what functionality would that provide 

FinCEN that it currently does not have? 

Answer. The full scope and detail of the functionality will be more fully determined as a result of the user requirements analyses in the first months of the 

project. However, the following examples identify the types of capabilities that BSA 

Direct will afford FinCEN and its customers that they presently do not have: 

—The automated capability for FinCEN to control and audit the use of all persons 

accessing Bank Secrecy Act information. 
343

—The capability, through an alert system, for FinCEN to ‘‘network’’ all users of 

Bank Secrecy Act information that ‘‘hit’’ the same data, or appear to be analyzing the same information. 

—The capability to analyze law enforcement’s use of the data to provide meaningful feedback to the financial industry, which will result in better reporting. 

—The capability to develop sophisticated filer profiles for financial industry members to help FinCEN and the regulators target entities for compliance examinations as well as the ability to be notified automatically by the system when 

there is a significant filing anomaly. 

—An intuitive interface to enable users to query data with little or no training, 

and with strong, context-sensitive on-line help. 

—Users will be able to keep and view a list of their prior queries. 

—Managers in organizations will be better able to audit and manage the use of 

the data by their subordinate users. 

—Users will be able to schedule a particular query to re-run on a schedule set 

by the user. 

—Users will be able to customize query output, i.e., define what columns of information are displayed, rearrange the order of the columns, and then save that 

order as a personal default view. 

—Users will have the ability to sort, filter, and aggregate columns of data. 

—Users will be able to run ‘‘batch queries,’’ e.g., social security numbers from all 

bankruptcy filings 6 months ago against all Bank Secrecy Act filings in the last 

year. 

—Users will be able to create customized queries and reports. 

—A geographic mapping tool will provide information to show the geographic significance of Bank Secrecy Act data. 

—Users will have the capability to pre-schedule queries and receive reports on a 

timetable scheduled by users. 

—Users will be able to download results into popular formats, e.g., Word, Excel, 

Analysts Notebook, etc. 

Question. Is BSA Direct on schedule? 

Answer. Each of the offerors has committed to deliver BSA Direct by October 14, 

2005, or sooner. This is a 2-week delay from our initial schedule. 

Question. What will it cost to complete the system? 

Answer. FinCEN has submitted a Cost and Schedule Milestones chart for BSA Direct (as submitted to the Office of Management and Budget in December 2003) 

below. The costs in this chart were based upon estimates provided by the Mitre Corporation, which FinCEN engaged to help evaluate the project. It is important to 

note that these are only estimates based on Mitre’s study. FinCEN will be pleased 

to provide the committee with a much more accurate cost picture for this project 

once a contract for the system is awarded.

COST AND SCHEDULE GOALS: ORIGINAL BASELINE FOR A PHASE/SEGMENT/MODULE OF PROJECT 

(INVESTMENT) 

Description 

Planned 

Schedule Duration Planned Cost 

(BCWS) Funding Agency 

Start Date End Date Days Hrs. 

1. Program Administration Costs, 

excludes FTE.

09/01/2003 03/13/2004 194 .......... $225,000 FinCEN 

2. Project Management, excludes 

FTE.

04/05/2004 09/30/2005 543 .......... $1,006,000 Department of 

Treasury 

3. BSA Direct Proof of Concept 

(POC) Development.

10/02/2003 03/12/2004 162 .......... $393,000 Treasury 

4. BSA Direct System Development 

and Construction.

04/05/2004 06/10/2005 431 .......... $4,278,000 Treasury 

4.1 Requirements Definition 

and Analysis.

04/05/2004 08/20/2004 137 .......... $531,000 Treasury 

4.2 System Design .................. 06/14/2004 10/29/2004 137 .......... $398,000 Treasury 

4.3 System Design Review ..... 10/18/2004 11/05/2004 18 .......... $40,000 Treasury 

4.4 System Development Environment Setup.07/05/2004 08/13/2004 39 .......... $80,000 Treasury 

4.5. System Development & 

Construction.

09/06/2004 03/18/2005 193 .......... $929,000 Treasury 

4.6 Data Conversion, Transformation, & Migration.06/14/2004 09/30/2004 108 .......... $744,000 Treasury 
344

COST AND SCHEDULE GOALS: ORIGINAL BASELINE FOR A PHASE/SEGMENT/MODULE OF PROJECT 

(INVESTMENT)—Continued

Description 

Planned 

Schedule Duration Planned Cost 

(BCWS) Funding Agency 

Start Date End Date Days Hrs. 

4.7. System/Integration/Test 

Environment.

09/27/2004 11/05/2004 30 .......... $80,000 Treasury 

4.8. Usability/Component 

Functional Testing.

01/24/2005 04/15/2005 81 .......... $239,000 Treasury 

4.9. System/Integration/Testing.03/21/2005 06/10/2005 81 .......... $372,000 Treasury 

4.10. Integration with other 

systems.

03/21/2005 06/10/2005 81 .......... $465,000 Treasury 

4.11. Lease costs hardware 

and software.

04/05/2004 06/10/2005 431 .......... $400,000 Treasury 

5. BSA Direct Deployment and Rollout.06/28/2004 09/16/2005 445 .......... $1,675,000 Treasury 

5.1. Deployment and Rollout 

Strategy Planning.

06/28/2004 09/17/2004 81 .......... $239,000 Treasury 

5.2. Acceptance/Production 

Ready Testing.

05/02/2005 07/08/2005 67 .......... $398,000 Treasury 

5.3. Production System Deployment & Rollout.05/02/2005 09/16/2005 137 .......... $531,000 Treasury 

5.4. User Training and Transition.06/06/2005 08/26/2005 81 .......... $372,000 Treasury 

5.5. Lease costs hardware and 

software.

06/02/2005 09/30/2005 120 .......... $135,000 Treasury 

6. BSA Direct Operations and Maintenance.10/01/2005 09/30/2006 364 .......... $2,500,00 FinCEN

PROJECT TOTAL ................... 09/01/2003 09/30/2006 1,125 .......... $10,077,000

Question. How is FinCEN providing information to the law enforcement entities 

that it serves? 

Answer. FinCEN provides analytic products—both tactical and strategic—to appropriate law enforcement customers. FinCEN also administers a process under Section 314 of the USA PATRIOT Act that permits law enforcement to submit requests 

to financial institutions for transactional and account information in certain cases. 

A particular institution indicates whether it has such information and that information is provided to law enforcement. FinCEN also maintains some general information for law enforcement on its public web-site and will provide more and better information to law enforcement through BSA Direct. 

FinCEN also provides access to Bank Secrecy Act data. Legacy processes and inadequate data retrieval capabilities currently result in this data being provided to 

Federal, State and local law enforcement in several ways: 

—Through direct case support from a FinCEN analyst. 

—Through ‘‘Platform’’ support, whereby law enforcement agencies may send personnel to FinCEN to use its technical and analytical resources to work their 

agency’s respective cases on an as needed basis. 

—Through ‘‘Gateway,’’ which provides direct, dial-in access to Bank Secrecy Data 

housed at the IRS’s Detroit Computing Center. 

—To certain entities, through wholesale direct downloads of all or part of the 

Bank Secrecy Act data from the Detroit Computing Center. Direct downloads 

are currently provided to: 

—The Federal Bureau of Investigation and United States Secret Service receive 

wholesale downloads of suspicious activity reports filed by depository institutions. 

—A wholesale download of all Bank Secrecy Act information is made into the 

Treasury Enforcement Communications System (TECS). TECS, which was 

previously administered by the former U.S. Customs Service, is now administered by the Department of Homeland Security. Various law enforcement entities have access to TECS. 

Question. Is FinCEN sending law enforcement wholesale data or does it screen requests through its system? 
345

Answer. FinCEN provides wholesale data to the following Federal law enforcement agencies: the Federal Bureau of Investigation and the United States Secret 

Service receive downloads of Suspicious Activity Reports (SARs) filed by depository 

institutions. In addition, a wholesale download of all Bank Secrecy Act information 

is made into the Treasury Enforcement Communication System (TECS) which is 

now administered by the Department of Homeland Security. All other requests are 

thoroughly screened. 

Question. Is FinCEN doing gross data information transfers to the Bureau of Immigration and Customs Enforcement and the Federal Bureau of Investigation without any directed analysis or query from them? 

Answer. Yes. The BSA Direct initiative encompasses systems and processes that 

will significantly alter the way Bank Secrecy Act information is provided to law enforcement and the regulators that access the information. It will provide those entities, including FinCEN, with state of the art data search tools in a robust userfriendly environment. Users will be able to search Bank Secrecy Act information 

faster and better, and will be able to do more with the data than they currently 

can. Eventually, sophisticated data mining, geographic and other analytic tools will 

be added to the environment, which will add to the value of the Bank Secrecy Act 

information. Finally, the initiative will help free FinCEN analytic resources to focus 

on more complex and strategic analysis of the financing of terror, money laundering 

and other illicit finance. To better understand the specific functionality this initiative will provide to FinCEN, it is important to understand the way Bank Secrecy 

Act information is currently managed, analyzed and disseminated. 

FinCEN is the delegated administrator of the Bank Secrecy Act, a regulatory statute designed to deter, prevent and address money laundering and illicit finance, including the financing of terrorism. The keystone of the Bank Secrecy Act is a reporting regime under which financial institutions report to the Federal Government certain information—large cash transactions or suspicious activity. Over 13 million 

Bank Secrecy Act reports are filed each year by more than 200,000 U.S. financial 

institutions, providing invaluable information to detect and prevent financial crimes. 

FinCEN is responsible for ensuring that information is collected, securely housed, 

analyzed and shared with law enforcement. Amendments to the Bank Secrecy Act 

by the USA PATRIOT Act sharpened FinCEN’s responsibilities relating to this information. Among other things, FinCEN is responsible for securing this sensitive information and auditing its use; networking with disparate agencies accessing the information to ensure more robust investigation and ensuring that investigations do 

not overlap; and collecting and providing feedback and other information to the entities reporting the information—the financial industry—so that reporting can be better and more relevant for law enforcement. 

Currently, under a legacy process that predates FinCEN, Bank Secrecy Act reports are collected by the Internal Revenue Service’s Detroit Computing Center and 

are housed in an IBM IDMS mainframe environment incorporating 12 hierarchical 

databases. Most persons access the data through a ‘‘gateway’’ connection. While the 

IRS is currently converting the data to a ‘‘DB2’’ relational format, the data on the 

mainframe system in Detroit is not currently kept in a relational database, so 

search capabilities are limited for persons and entities that access Bank Secrecy Act 

information through that system. Because of the limitations of this system, FinCEN 

devotes a significant portion of its analytic resources to data retrieval for many of 

its law enforcement customers. As a result of this system, FinCEN downloads a duplicate copy of the Bank Secrecy Act database every night to other systems and into 

programs that provide relational data mining and analytical capabilities. 

FinCEN is not the only entity that downloads all or part of the Bank Secrecy Act 

data from the Detroit Computing Center. Under legacy arrangements that pre-date 

FinCEN’s current leadership, Suspicious Activity Reports (SARs) filed by depository 

institutions are downloaded directly from the IRS’s Detroit Computing Center to the 

Federal Bureau of Investigation and United States Secret Service. Bank Secrecy Act 

information is also downloaded to the Treasury Enforcement Communications System (TECS), which was maintained by the former U.S. Customs Service and is now 

maintained by the Department of Homeland Security (DHS). Agencies with access 

to TECS (e.g., DHS’s Immigration and Customs Enforcement, DHS’s Customs and 

Border Protection, DOJ’s Bureau of Alcohol, Tobacco, Firearms and Explosives, etc.) 

generally access Bank Secrecy Act information through that system. FinCEN has 

a limited ability to network the use of the data by those who download it since it 

is entirely dependent on manual feedback on the use of the data, which is difficult 

to obtain. Moreover, auditing the use of the data is far more difficult since it depends on manual reviews combined with the tracking system in place at the independent system. Simply put, currently FinCEN cannot fully meet any of its statu-
346

tory responsibilities relating to the data utilizing the current system and processes 

in place. 

The systems and processes contemplated in the BSA Direct initiative will allow 

FinCEN to not only meet these responsibilities, but will provide law enforcement, 

regulators and FinCEN a modern, user-friendly environment to mine and analyze 

BSA data. The heart of the BSA Direct initiative is a secure data warehouse to consolidate the Bank Secrecy Act information into a single, integrated data set. Users 

will have a flexible and robust query system accessible through an intuitive webbased interface. This system will provide access, including secure web access, to 

Bank Secrecy Act information with capabilities that allow end users to perform ad 

hoc as well as pre-defined queries and reporting. Users will gain easier, faster data 

access and enhanced ability to query and analyze Bank Secrecy Act information, 

and FinCEN will have tools to control and audit the use of this sensitive information, network with agencies that are using the data, and provide better feedback to 

the financial industry about the use of the data, which will lead to more relevant 

reporting. FinCEN provides analytic products—both tactical and strategic—to appropriate law enforcement customers. FinCEN also administers a process under Section 314 of the USA PATRIOT Act that permits law enforcement to submit requests 

to financial institutions for transactional and account information in certain cases. 

A particular institution indicates whether it has such information and that information is provided to law enforcement. FinCEN also maintains some general information for law enforcement on its public web-site and will provide more and better information to law enforcement through BSA Direct. 

FinCEN also provides access to Bank Secrecy Act data. Legacy processes and inadequate data retrieval capabilities currently result in this data being provided to 

Federal, State and local law enforcement in several ways: 

—Through direct case support from a FinCEN analyst. 

—Through ‘‘Platform’’ support, whereby law enforcement agencies may send personnel to FinCEN to use its technical and analytical resources to work their 

agency’s respective cases on an as needed basis. 

—Through ‘‘Gateway,’’ which provides direct, dial-in access to Bank Secrecy Data 

housed at the IRS’s Detroit Computing Center. 

—To certain entities, through wholesale direct downloads of all or part of the 

Bank Secrecy Act data from the Detroit Computing Center. Direct downloads 

are currently provided to: 

—The Federal Bureau of Investigation and United States Secret Service receive 

wholesale downloads of suspicious activity reports filed by depository institutions. 

—A wholesale download of all Bank Secrecy Act information is made into the 

Treasury Enforcement Communications System (TECS). TECS, which was 

previously administered by the former U.S. Customs Service, is now administered by the Department of Homeland Security. Various law enforcement entities have access to TECS. 

Question. Is this how the law requires the system to work? 

Answer. The Bank Secrecy Act, as amended by the USA PATRIOT Act, does not 

specify any particular method or limitation on the delivery of Bank Secrecy Act information. The Bank Secrecy Act requires that the purpose of any request for information must be for an authorized purpose—criminal, tax, regulatory or intelligence 

activities relating to terrorism. Section 361 of the USA PATRIOT Act requires 

FinCEN to maintain a government-wide data access network with access in accordance with applicable legal requirements, and further requires FinCEN to develop 

appropriate standards and guidelines governing who is to be given access, what limits are to be imposed on the use of the information, and how the exercise of constitutional rights is to be protected. 

In accordance with these statutory mandates, FinCEN grants access only for purposes authorized by the Bank Secrecy Act (criminal, tax, regulatory, intelligence activity directed at counter-terrorism) and strictly controls dissemination of the information contained in the reports. FinCEN has met this statutory mandate in the creation of the ‘‘Gateway’’ system by entering into agreements for access and establishing the capability to monitor and audit each query. Currently, FinCEN does not 

have the capability to audit entities that receive wholesale downloads of data, which 

is one reason why FinCEN is placing such a high priority on the development of 

BSA Direct. The BSA Direct initiative encompasses systems and processes that will 

significantly alter the way Bank Secrecy Act information is provided to law enforcement and the regulators that access the information. It will provide those entities, 

including FinCEN, with state of the art data search tools in a robust user-friendly 

environment. Users will be able to search Bank Secrecy Act information faster and 

better, and will be able to do more with the data than they currently can. Eventu-
347

ally, sophisticated data mining, geographic and other analytic tools will be added 

to the environment, which will add to the value of the Bank Secrecy Act information. Finally, the initiative will help free FinCEN analytic resources to focus on 

more complex and strategic analysis of the financing of terror, money laundering 

and other illicit finance. To better understand the specific functionality this initiative will provide to FinCEN, it is important to understand the way Bank Secrecy 

Act information is currently managed, analyzed and disseminated. 

FinCEN is the delegated administrator of the Bank Secrecy Act, a regulatory statute designed to deter, prevent and address money laundering and illicit finance, including the financing of terrorism. The keystone of the Bank Secrecy Act is a reporting regime under which financial institutions report to the Federal Government certain information—large cash transactions or suspicious activity. Over 13 million 

Bank Secrecy Act reports are filed each year by more than 200,000 U.S. financial 

institutions, providing invaluable information to detect and prevent financial crimes. 

FinCEN is responsible for ensuring that information is collected, securely housed, 

analyzed and shared with law enforcement. Amendments to the Bank Secrecy Act 

by the USA PATRIOT Act sharpened FinCEN’s responsibilities relating to this information. Among other things, FinCEN is responsible for securing this sensitive information and auditing its use; networking with disparate agencies accessing the information to ensure more robust investigation and ensuring that investigations do 

not overlap; and collecting and providing feedback and other information to the entities reporting the information—the financial industry—so that reporting can be better and more relevant for law enforcement. 

Currently, under a legacy process that predates FinCEN, Bank Secrecy Act reports are collected by the Internal Revenue Service’s Detroit Computing Center and 

are housed in an IBM IDMS mainframe environment incorporating 12 hierarchical 

databases. Most persons access the data through a ‘‘gateway’’ connection. While the 

IRS is currently converting the data to a ‘‘DB2’’ relational format, the data on the 

mainframe system in Detroit is not currently kept in a relational database, so 

search capabilities are limited for persons and entities that access Bank Secrecy Act 

information through that system. Because of the limitations of this system, FinCEN 

devotes a significant portion of its analytic resources to data retrieval for many of 

its law enforcement customers. As a result of this system, FinCEN downloads a duplicate copy of the Bank Secrecy Act database every night to other systems and into 

programs that provide relational data mining and analytical capabilities. 

FinCEN is not the only entity that downloads all or part of the Bank Secrecy Act 

data from the Detroit Computing Center. Under legacy arrangements that pre-date 

FinCEN’s current leadership, Suspicious Activity Reports (SARs) filed by depository 

institutions are downloaded directly from the IRS’ Detroit Computing Center to the 

Federal Bureau of Investigation and United States Secret Service. Bank Secrecy Act 

information is also downloaded to the Treasury Enforcement Communications System (TECS), which was maintained by the former U.S. Customs Service and is now 

maintained by the Department of Homeland Security (DHS). Agencies with access 

to TECS (e.g., DHS’s Immigration and Customs Enforcement, DHS’s Customs and 

Border Protection, DOJ’s Bureau of Alcohol, Tobacco, Firearms and Explosives, etc.) 

generally access Bank Secrecy Act information through that system. FinCEN has 

a limited ability to network the use of the data by those who download it since it 

is entirely dependent on manual feedback on the use of the data, which is difficult 

to obtain. Moreover, auditing the use of the data is far more difficult since it depends on manual reviews combined with the tracking system in place at the independent system. Simply put, currently FinCEN cannot fully meet any of its statutory responsibilities relating to the data utilizing the current system and processes 

in place. 

The systems and processes contemplated in the BSA Direct initiative will allow 

FinCEN to not only meet these responsibilities, but will provide law enforcement, 

regulators and FinCEN a modern, user-friendly environment to mine and analyze 

BSA data. The heart of the BSA Direct initiative is a secure data warehouse to consolidate the Bank Secrecy Act information into a single, integrated data set. Users 

will have a flexible and robust query system accessible through an intuitive webbased interface. This system will provide access, including secure web access, to 

Bank Secrecy Act information with capabilities that allow end users to perform ad 

hoc as well as pre-defined queries and reporting. Users will gain easier, faster data 

access and enhanced ability to query and analyze Bank Secrecy Act information, 

and FinCEN will have tools to control and audit the use of this sensitive information, network with agencies that are using the data, and provide better feedback to 

the financial industry about the use of the data, which will lead to more relevant 

reporting. 
348

The full scope and detail of the functionality will be more fully determined as a 

result of the user requirements analyses in the first months of the project. However, 

the following examples identify the types of capabilities that BSA Direct will afford 

FinCEN and its customers that they presently do not have: 

—The automated capability for FinCEN to control and audit the use of all persons 

accessing Bank Secrecy Act information. 

—The capability, through an alert system, for FinCEN to ‘‘network’’ all users of 

Bank Secrecy Act information that ‘‘hit’’ the same data, or appear to be analyzing the same information. 

—The capability to analyze law enforcement’s use of the data to provide meaningful feedback to the financial industry, which will result in better reporting. 

—The capability to develop sophisticated filer profiles for financial industry members to help FinCEN and the regulators target entities for compliance examinations as well as the ability to be notified automatically by the system when 

there is a significant filing anomaly. 

—An intuitive interface to enable users to query data with little or no training, 

and with strong, context-sensitive on-line help. 

—Users will be able to keep and view a list of their prior queries. 

—Managers in organizations will be better able to audit and manage the use of 

the data by their subordinate users. 

—Users will be able to schedule a particular query to re-run on a schedule set 

by the user. 

—Users will be able to customize query output, i.e., define what columns of information are displayed, rearrange the order of the columns, and then save that 

order as a personal default view. 

—Users will have the ability to sort, filter, and aggregate columns of data. 

—Users will be able to run ‘‘batch queries,’’ e.g., social security numbers from all 

bankruptcy filings 6 months ago against all Bank Secrecy Act filings in the last 

year. 

—Users will be able to create customized queries and reports. 

—A geographic mapping tool will provide information to show the geographic significance of Bank Secrecy Act data. 

—Users will have the capability to pre-schedule queries and receive reports on a 

timetable scheduled by users. 

—Users will be able to download results into popular formats, e.g., Word, Excel, 

Analysts Notebook, etc. 

Question. How does FinCEN audit information requested if there is no formal request and delivery system? 

Answer. The Bank Secrecy Act, as amended by the USA PATRIOT Act, does not 

specify any particular method or limitation on the delivery of Bank Secrecy Act information. The Bank Secrecy Act requires that the purpose of any request for information must be for an authorized purpose—criminal, tax, regulatory or intelligence 

activities relating to terrorism. Section 361 of the USA PATRIOT Act requires 

FinCEN to maintain a government-wide data access network with access in accordance with applicable legal requirements, and further requires FinCEN to develop 

appropriate standards and guidelines governing who is to be given access, what limits are to be imposed on the use of the information, and how the exercise of constitutional rights is to be protected. 

In accordance with these statutory mandates, FinCEN grants access only for purposes authorized by the Bank Secrecy Act (criminal, tax, regulatory, intelligence activity directed at counter-terrorism) and strictly controls dissemination of the information contained in the reports. FinCEN has met this statutory mandate in the creation of the ‘‘Gateway’’ system by entering into agreements for access and establishing the capability to monitor and audit each query. Currently, FinCEN does not 

have the capability to audit entities that receive wholesale downloads of data, which 

is one reason why FinCEN is placing such a high priority on the development of 

BSA Direct. The BSA Direct initiative encompasses systems and processes that will 

significantly alter the way Bank Secrecy Act information is provided to law enforcement and the regulators that access the information. It will provide those entities, 

including FinCEN, with state of the art data search tools in a robust user-friendly 

environment. Users will be able to search Bank Secrecy Act information faster and 

better, and will be able to do more with the data than they currently can. Eventually, sophisticated data mining, geographic and other analytic tools will be added 

to the environment, which will add to the value of the Bank Secrecy Act information. Finally, the initiative will help free FinCEN analytic resources to focus on 

more complex and strategic analysis of the financing of terror, money laundering 

and other illicit finance. To better understand the specific functionality this initia-
349

tive will provide to FinCEN, it is important to understand the way Bank Secrecy 

Act information is currently managed, analyzed and disseminated. 

FinCEN is the delegated administrator of the Bank Secrecy Act, a regulatory statute designed to deter, prevent and address money laundering and illicit finance, including the financing of terrorism. The keystone of the Bank Secrecy Act is a reporting regime under which financial institutions report to the Federal Government certain information—large cash transactions or suspicious activity. Over 13 million 

Bank Secrecy Act reports are filed each year by more than 200,000 U.S. financial 

institutions, providing invaluable information to detect and prevent financial crimes. 

FinCEN is responsible for ensuring that information is collected, securely housed, 

analyzed and shared with law enforcement. Amendments to the Bank Secrecy Act 

by the USA PATRIOT Act sharpened FinCEN’s responsibilities relating to this information. Among other things, FinCEN is responsible for securing this sensitive information and auditing its use; networking with disparate agencies accessing the information to ensure more robust investigation and ensuring that investigations do 

not overlap; and collecting and providing feedback and other information to the entities reporting the information—the financial industry—so that reporting can be better and more relevant for law enforcement. 

Currently, under a legacy process that predates FinCEN, Bank Secrecy Act reports are collected by the Internal Revenue Service’s Detroit Computing Center and 

are housed in an IBM IDMS mainframe environment incorporating 12 hierarchical 

databases. Most persons access the data through a ‘‘gateway’’ connection. While the 

IRS is currently converting the data to a ‘‘DB2’’ relational format, the data on the 

mainframe system in Detroit is not currently kept in a relational database, so 

search capabilities are limited for persons and entities that access Bank Secrecy Act 

information through that system. Because of the limitations of this system, FinCEN 

devotes a significant portion of its analytic resources to data retrieval for many of 

its law enforcement customers. As a result of this system, FinCEN downloads a duplicate copy of the Bank Secrecy Act database every night to other systems and into 

programs that provide relational data mining and analytical capabilities. 

FinCEN is not the only entity that downloads all or part of the Bank Secrecy Act 

data from the Detroit Computing Center. Under legacy arrangements that pre-date 

FinCEN’s current leadership, Suspicious Activity Reports (SARs) filed by depository 

institutions are downloaded directly from the IRS’s Detroit Computing Center to the 

Federal Bureau of Investigation and United States Secret Service. Bank Secrecy Act 

information is also downloaded to the Treasury Enforcement Communications System (TECS), which was maintained by the former U.S. Customs Service and is now 

maintained by the Department of Homeland Security (DHS). Agencies with access 

to TECS (e.g., DHS’s Immigration and Customs Enforcement, DHS’s Customs and 

Border Protection, DOJ’s Bureau of Alcohol, Tobacco, Firearms and Explosives, etc.) 

generally access Bank Secrecy Act information through that system. FinCEN has 

a limited ability to network the use of the data by those who download it since it 

is entirely dependent on manual feedback on the use of the data, which is difficult 

to obtain. Moreover, auditing the use of the data is far more difficult since it depends on manual reviews combined with the tracking system in place at the independent system. Simply put, currently FinCEN cannot fully meet any of its statutory responsibilities relating to the data utilizing the current system and processes 

in place. 

The systems and processes contemplated in the BSA Direct initiative will allow 

FinCEN to not only meet these responsibilities, but will provide law enforcement, 

regulators and FinCEN a modern, user-friendly environment to mine and analyze 

BSA data. The heart of the BSA Direct initiative is a secure data warehouse to consolidate the Bank Secrecy Act information into a single, integrated data set. Users 

will have a flexible and robust query system accessible through an intuitive webbased interface. This system will provide access, including secure web access, to 

Bank Secrecy Act information with capabilities that allow end users to perform ad 

hoc as well as pre-defined queries and reporting. Users will gain easier, faster data 

access and enhanced ability to query and analyze Bank Secrecy Act information, 

and FinCEN will have tools to control and audit the use of this sensitive information, network with agencies that are using the data, and provide better feedback to 

the financial industry about the use of the data, which will lead to more relevant 

reporting. 

The full scope and detail of the functionality will be more fully determined as a 

result of the user requirements analyses in the first months of the project. However, 

the following examples identify the types of capabilities that BSA Direct will afford 

FinCEN and its customers that they presently do not have: 

—The automated capability for FinCEN to control and audit the use of all persons 

accessing Bank Secrecy Act information. 
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—The capability, through an alert system, for FinCEN to ‘‘network’’ all users of 

Bank Secrecy Act information that ‘‘hit’’ the same data, or appear to be analyzing the same information. 

—The capability to analyze law enforcement’s use of the data to provide meaningful feedback to the financial industry, which will result in better reporting. 

—The capability to develop sophisticated filer profiles for financial industry members to help FinCEN and the regulators target entities for compliance examinations as well as the ability to be notified automatically by the system when 

there is a significant filing anomaly. 

—An intuitive interface to enable users to query data with little or no training, 

and with strong, context-sensitive on-line help. 

—Users will be able to keep and view a list of their prior queries. 

—Managers in organizations will be better able to audit and manage the use of 

the data by their subordinate users. 

—Users will be able to schedule a particular query to re-run on a schedule set 

by the user. 

—Users will be able to customize query output, i.e., define what columns of information are displayed, rearrange the order of the columns, and then save that 

order as a personal default view. 

—Users will have the ability to sort, filter, and aggregate columns of data. 

—Users will be able to run ‘‘batch queries,’’ e.g., social security numbers from all 

bankruptcy filings 6 months ago against all Bank Secrecy Act filings in the last 

year. 

—Users will be able to create customized queries and reports. 

—A geographic mapping tool will provide information to show the geographic significance of Bank Secrecy Act data. 

—Users will have the capability to pre-schedule queries and receive reports on a 

timetable scheduled by users. 

—Users will be able to download results into popular formats, e.g., Word, Excel, 

Analysts Notebook, etc. 

Question. Does this raise privacy concerns? 

Answer. While FinCEN is not providing these few law enforcement entities with 

information to which they are not entitled or couldn’t otherwise receive, the fact remains that FinCEN is very limited in its ability to audit the use or guarantee the 

security of this information. Important privacy interests associated with Bank Secrecy Act information will be better protected once BSA Direct is built and implemented. 

Question. There are currently at least five other financial intelligence units in the 

Federal government outside of Treasury that download Bank Secrecy Act data 

wholesale from FinCEN. If FinCEN is just the delivery system for BSA data, what 

is its role other than to be a library? What analytics are occurring at FinCEN that 

are not occurring at the Bureau of Immigration and Customs Enforcement, the Federal Bureau of Investigation, the Central Intelligence Agency, or the United States 

Secret Service? If everyone has these databases with all the Bank Secrecy Act data, 

what is the value added by FinCEN? 

Answer. While the provision of Bank Secrecy Act information to law enforcement 

is a key aspect to FinCEN’s mission, FinCEN is much more than a library. It has 

been and continues to be a source of unequaled analytic expertise on financial information, particularly information reported under the Bank Secrecy Act. It is recognized throughout the world for its expertise in studying and exploiting financial information. 

Other law enforcement agencies have come to recognize the importance of exploiting financial information—a fact that is at least, in part, attributable to FinCEN’s 

work. From our point of view, the proliferation of financial analytical units in law 

enforcement agencies is a good thing. It means that exploitation of financial information, which is a key element to defining and dismantling criminal and terrorist 

organizations, will continue to grow. It also means that FinCEN will be freer to 

focus its analytic resources on niche areas as well as tactical and strategic analytical 

projects that are more sophisticated. As for the niche areas, FinCEN has unique responsibilities that differentiate it from any other entity working with financial data: 

—Helping Financial Institutions to understand, assess and address the risk of 

money laundering, the financing of terror and other illicit finance.—FinCEN is 

the administrator of the Bank Secrecy Act. It is uniquely positioned, and required by statute, to provide feedback to the financial industry about the use 

of this data. FinCEN will focus on providing information to the financial industry that will enable it to better target those issues and organizations for reporting. This will result in better and more relevant reporting for law enforcement, 
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and will fulfill an important mandate of the USA PATRIOT Act to establish a 

communication channel between the government and private industry. —Leveraging FinCEN’s counterpart financial intelligence units around the 

world.—FinCEN is in the forefront of international efforts to develop new Financial Intelligence Units (FIUs) and enhance the capabilities of existing FIUs. 

FinCEN is also a founding member of the Egmont Group, an informal organization of 84 financial intelligence units around the world that share tactical and 

strategic financial information for the benefit of law enforcement and other competent authorities. Furthermore, the Egmont Group’s Secure Website offers 

member FIUs the ability to rapidly share and broadly disseminate such information. FinCEN will focus analytic effort on supporting those relationships and 

making the financial intelligence units more productive and relevant in addressing what is a global problem. —Focusing FinCEN analytic effort on the Strategic.—FinCEN will also focus much 

of its analytic resources on strategic projects. Strategic studies of new financial 

industry products and trends, methods of illicit finance, and ways to address 

systemic weaknesses that lead to financial crime. FinCEN will also engage more 

in predictive analysis—trying to predict where the next problems will arise in 

the financial system. 

Addressing these three issues does not mean that FinCEN will not participate in 

traditional tactical analysis in support of law enforcement, but as law enforcement 

agencies add analytical units to support their missions, FinCEN will be able to better focus on these important niche areas. 

Question. FinCEN issues regulations under Title 31 related to the Bank Secrecy 

Act and the Patriot Act. Please provide a detailed description of the joint training 

that occurs between FinCEN and the Internal Revenue Service related to the intricacies of those regulations, especially when dealing with the financial community. 

Answer. FinCEN has worked extensively with the IRS SB/SE Taxpayer Education 

and Communication (TEC) organization to conduct joint training of IRS examiners. 

FinCEN has conducted joint training of IRS examiners on various Title 31 and Patriot Act requirements at the last two IRS Examiner training classes, held in Seattle 

and in Indianapolis. FinCEN will be conducting training at an upcoming meeting 

of IRS supervisory level personnel who have Bank Secrecy Act examination responsibility. In addition, FinCEN is working with IRS to revise the IRS IRM Manual 

that guides the conduct of Bank Secrecy Act examinations, and is used as a training 

template for its Bank Secrecy Act examiners as well. 

The cooperation between FinCEN and IRS on Bank Secrecy Act training extends 

to seminars conducted for the financial community as well. FinCEN works with the 

IRS SB/SE TEC to coordinate the content of presentations given by the IRS to provide education and outreach to the financial industries it is delegated to regulate. 

For example, FinCEN and IRS gave presentations to the Money Transmitter Regulators Association (MTRA) conference, an annual forum attended by money transmitters, their service providers, and State regulators in September 2003 on MSB 

registration and Suspicious Activity Report (SARs) requirements and issues. 

Going forward, FinCEN will continue to use tools such as the Anti Money Laundering monthly contact report provided by IRS TEC, which provides information on 

upcoming outreach opportunities, to coordinate and supervise the delivery of education on Title 31 and Patriot Act requirements to the financial community. 

Question. The costs of implementing Bank Secrecy Act are significant to the financial industry. Who is responsible for communicating with the financial industry to 

explain what their data is being used for? 

Answer. FinCEN, as administrator of the Bank Secrecy Act and as mandated in 

Section 361 of the USA PATRIOT Act, is responsible for communicating with the 

financial industry. While this is an important aspect of FinCEN’s mission, it also 

leverages the assets of the Federal functional bank regulators, the Securities Exchange Commission, the Commodity Futures Trading Commission, and the Internal 

Revenue Service to help with this effort. 

Question. Does Treasury meet with the financial community to explain trends or 

the means of exploitation of the financial system? 

Answer. Treasury’s FinCEN interacts extensively with the financial community 

through many different venues such as: 

—Participation in numerous conferences and seminars being held throughout the 

year across the country; 

—Participation in compliance training workshops; 

—Regular meetings with the Bank Secrecy Act Advisory Group and its subcommittees; 

—Daily interaction with bank officials throughout the country regarding various 

aspects of Bank Secrecy Act compliance; 
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—Customer Surveys; 

—Publications such as The Suspicious Activity Review intended to provide feedback and guidance to financial institutions on Bank Secrecy Act reporting and 

anti money laundering requirements; and, 

—Website interaction through posting of regulations, guidance, comment letters 

and other regulatory-related materials. 

Question. Does Treasury investigate recent money laundering arrests to determine 

how criminals are evolving to exploit the U.S. financial system? Does Treasury or 

FinCEN send people to every major money laundering sting to determine how the 

organization was set up and how it exploited the financial system? This information 

could then be given to the financial community to alert it to recent trends. Does this 

activity occur? If not, should it? 

Answer. FinCEN directly communicates with law enforcement on a daily basis to 

obtain current information on money laundering cases. Information received from 

this dialogue helps FinCEN better understand money laundering and terrorist financing. While FinCEN does not have a specific program directed at debriefing 

money laundering sting operations, as a practical matter, it captures much of this 

information through its on-going dialogue with law enforcement. 

Question. How many cases were analyzed in calendar year 2003 and how much 

of that information was passed to the financial community? Has the financial community been surveyed to see if the information was helpful? 

Answer. In fiscal year 2003 (FinCEN statistics are kept by fiscal year), FinCEN 

provided support for approximately 5,000 requests received from law enforcement. 

In the majority of these cases, FinCEN helped retrieve Bank Secrecy Act information. FinCEN’s new leadership has recognized the need to keep better statistics to 

better capture the work that FinCEN is accomplishing. 

FinCEN, independent of providing analytical support to law enforcement, conducts analysis of the Bank Secrecy Act information to identify trends and patterns. 

Some of this information is published semiannually in the Suspicious Activity Review—Trends, Tips & Issues. As mentioned above, this Review is produced based 

on continuing dialogue and close collaboration among our Nation’s financial institutions, law enforcement officials and regulatory agencies in order to provide meaningful information regarding the preparation, use and value of suspicious activity reports filed by financial institutions. Each issue of this publication contains a Feedback Form for the financial industry to complete and return to FinCEN and the 

feedback FinCEN has received has been constructive and generally quite positive. 

To date, FinCEN has not surveyed the financial industry to determine satisfaction 

with FinCEN feedback, although that is something FinCEN’s new leadership is considering establishing as a benchmark. 

Question. FinCEN’s budget declares a 12.7 percent increase for fighting terrorism. 

How is this number obtained? Looking at the administration’s budget submission 

in detail, the real increase is 2.7 percent, or $1.53 million, to fight the war on terror. 

—Mandatory cost increases equal $1.76 million. 

—Program cost annualization for fiscal year 2004 new initiatives equals $1.52 

million. 

—Transfer from the IRS for BSA work that is already done equals $2.5 million. 

Answer. The 12.7 percent increase was calculated by adding the cost of program 

increases ($1.533 million), program annualizations ($1.522 million), cost increases 

($1.716 million), and the transfer from the Internal Revenue Service for the BSA 

Direct System ($2.5 million)—totaling an overall increase of $7.271 million over fiscal year 2004. 

Question. What types of outreach programs does FinCEN have with the financial 

community? 

Answer. FinCEN is in daily contact with the financial industries it helps regulate. 

First, and perhaps most importantly, through the process created pursuant to Section 314(a) of the USA PATRIOT Act, FinCEN now routinely contacts thousands of 

financial institutions to relay important information from law enforcement about individuals and entities that may be relevant to terrorism or significant money laundering investigations. FinCEN plans to expand this process and begin sharing information with the financial community that will enable industry reports to be more 

relevant. Also, FinCEN has encouraged the voluntary sharing of information between certain financial institutions related to possible terrorism or money laundering by implementing regulations under Section 314(b) of the USA PATRIOT Act. 

Since September 2001, FinCEN has maintained a hotline for financial institutions 

to voluntarily report suspected terrorist financing activity. FinCEN then expedites 

this information to appropriate law enforcement agencies. Since inception of this 

hotline, FinCEN has referred more than 850 tips to law enforcement. 
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Treasury’s FinCEN interacts extensively with the financial community through 

many different venues such as: 

—Participation in numerous conferences and seminars being held throughout the 

year across the country; 

—Participation in compliance training workshops; 

—Regular meetings with the Bank Secrecy Act Advisory Group and its subcommittees; 

—Daily interaction with bank officials throughout the country regarding various 

aspects of Bank Secrecy Act compliance; 

—Customer Surveys; 

—Publications such as The Suspicious Activity Review intended to provide feedback and guidance to financial institutions on Bank Secrecy Act reporting and 

anti money laundering requirements; and, 

—Website interaction through posting of regulations, guidance, comment letters 

and other regulatory-related materials. 

Question. Has FinCEN done any surveys or interviews with the financial community to better understand what their needs and concerns are? 

Answer. Yes. For example, when FinCEN adopted its rule requiring money services businesses to register, FinCEN conducted an extensive industry outreach program, including conducting focus groups, sending surveys and holding meetings 

with individual companies, trade associations, State regulators, and law enforcement to discuss implementation of the rule and solicit input on guidance. FinCEN 

also developed reference and guidance products, including posters, ‘‘take-one’’ cards, 

Quick Reference Guides on Bank Secrecy Act and suspicious activity reporting, an 

Anti-Money Laundering Prevention Guide, a suspicious activity reporting training 

video, and an interactive CD–ROM for MSBs. All of these materials are free and 

available to the public through FinCEN’s website at www.msb.gov. 

In another example, FinCEN conducted a survey of financial institutions filing 

Currency Transaction Reports (CTRs) in order to produce a report to Congress in 

2002 as required by the USA PATRIOT Act. That report sought to analyze financial 

institutions’ use of exemptions from the CTR filing requirement. 

MINT/BEP MERGER PROPOSAL

Question. Please provide a detailed accounting of how the study to merge the Mint 

and BEP was funded. 

Answer. The cost, which was funded using Interagency Agreements, was evenly 

split between the Mint and the Bureau of Engraving and Printing. 

Question. How many phases are there to this contract to study a merger? 

Answer. Three phases were identified in the Request for Proposal: 

—1. Develop a business case; 

—2. Facilitate in developing a short and long-term approach; and 

—3. Advise on preparation of report roll-out. 

The first phase was to identify efficiencies and develop the business case to support those efficiencies identified in the study. Under the second phase, the government has exercised its option to have LMI’s continued assistance in the analysis of 

the options. The government also has an option to have LMI assist in preparing the 

report to OMB. 

Question. What accounts were used at the BEP and the Mint to pay for the study? 

Answer. The study was funded through the BEP revolving fund and the Mint 

Public Enterprise Fund. The actual costs were charged to the line items—consulting 

services provided by a non-government entity. Both the Mint and the BEP allocate 

resources to assess changing market conditions and management improvements. 

Question. Does Treasury believe that this is a proper use of the funds in these 

accounts? 

Answer. The Treasury Department continues to look for taxpayer savings and efficiencies in all its bureaus. Due to changing market conditions, review of the Treasury Department’s structure is necessary to best serve the public. By studying the 

structure of the U.S. Mint and Bureau of Engraving and Printing, the Treasury Department ensures effective use of taxpayer resources. 

Question. Please provide the parameters provided to the contractor to conduct the 

study. 

Answer. The Request for Proposal (RFP) outlined the parameters and was provided to IBM, Booz Allen Hamilton, and LMI. The RFP provided to these three bidders is attached.
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Question. What underlying data was used in the study to determine whether a 

merger was cost effective? 

Answer. Documents reviewed as part of the study included: 

—The Treasury 5-year Strategic Plan 

—Budget in Brief 

—BEP and Mint 2005 Budget Documents and Annual Reports 

—BEP Facilities Study—July 1998

—Coin and Currency (Security) GAO Study, July 2003

—1987 Consolidation Study 

These documents were supplemented with additional data such as BEP/Mint historical costs, industry standards, OMB Circular A–94, OPM guidelines and the DOD 

Cost Factor Handbook. 

The study drew guidance from management theory, in both the public and private 

sectors, and from an empirical perspective using best practices in the manufacturing 

industry. 
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Question. Has OMB or Treasury sought comments from the potentially impacted 

agencies? 

Answer. The BEP and the Mint have both been involved in the effort from the 

beginning. They helped draft the scope of work, select the winning contractor, assist 

in the data gathering, and commented freely on each report reiteration. 

OMB has monitored progress on the effort, but will not seek comments until it 

receives the report on July 1, 2004. 

Question. Has the Federal Reserve been asked to comment on the effects of a proposed merger? If not, should Treasury initiate a discussion? 

Answer. Treasury views the Federal Reserve as a key stakeholder. Senior officials 

at the Federal Reserve have been interviewed and their suggestions have been incorporated into the process. The Federal Reserve is also being updated on progress. 

Question. Prior to the merger of any systems or services, would the Department 

intend to seek Congressional approval? Does it require legislation? 

Answer. We will not pursue any of those options without a full consultation with 

Congress and, in fact, Treasury will not call for any merger of any system or function prior to the end of the 108th Congress. 

It is still too early in the process to predict if or when legislation might be necessary. 

Question. When will the first phase of the study be completed? 

Answer. The first phase concluded with LMI’s May 2004 assessment of the financial implications of the options open to Treasury. 

Question. Will there be any merger of any system or functions prior to the end 

of the year? 

Answer. Treasury will not call for any merger of any system or function prior to 

the end of the 108th Congress. 

Question. The purpose of most mergers is to create efficiencies and save taxpayer 

dollars. Previous studies conducted by the GAO and the Treasury IG found that 

only 4–5 percent of the workforces of the two agencies ‘‘overlapped’’. Moreover, the 

study surmised that since the agencies’ production plants are located in 5 different 

locations, there was little likelihood that production lines could be streamlined. 

What has changed recently to nullify the findings of the GAO and the IG reports? 

Answer. The Treasury Department continues to look for taxpayer savings and efficiencies in all its bureaus. Due to changing market conditions, a review of the 

Treasury Department’s structure is necessary to best serve the public. By studying 

the structure of the U.S. Mint and Bureau of Engraving and Printing, the Treasury 

Department ensures effective use of taxpayer resources. 

Question. The committee understands that a rough draft of the merger report was 

supposed to be submitted on April 16 with the final report to be delivered on May 

4. What is the status of this report? Will any actions be taken prior to Congress 

having adequate time to review the report and determine whether the correct measurements were used to justify any possible consolidation? 

Answer. The document produced by LMI was designed to assess the potential for 

taxpayer savings and efficiencies. The April 16 and May 4 dates were the dates initially proposed by Treasury in the Request for Proposal (RFP). These dates were negotiable. LMI’s report was delivered on time and is currently being assessed. The 

initial schedule to deliver this report to OMB on July 1 is still on track. We will 

not pursue any plan without a full consultation with Congress and, in fact, Treasury 

will not call for any merger of any system or function during the 108th Congress. 

Question. The cost of the initial stage of this study was estimated to exceed 

$400,000. Under what authority was this money spent? Was Congress consulted 

prior to spending money on a study that has already undergone two extensive reviews? 

Answer. The United States Mint Public Enterprise Fund (PEF) statute (31 U.S.C. 

§ 5136) provides the authority to spend the Mint’s portion of the expenses. 

Public Law 81–656, which created the Bureau of Engraving and Printing Fund, 

provides for funding without fiscal year limitation for all expenses of operating and 

maintaining the Bureau. This would include studies such as the Mint-BEP study, 

which is focused on ensuring cost effective and efficient operations. 

The study was announced in the President’s Budget, which was sent to the Congress in early February. However, Congress was not specifically consulted prior to 

expending the funds for the study. This study is simply an effort to ensure the 

American people that Treasury is keeping up with changing technologies and market conditions. We will not pursue any of those options without a full consultation 

with Congress and, in fact, Treasury will not call for any merger of any system or 

function during the 108th Congress. 

Question. Will the study consider putting the Mint and BEP under the Federal 

Reserve? 
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Answer. The study has assessed that option. 

Question. What is the future of the penny? What will happen to the Mint’s production once the cost of the penny is more than 1 cent to produce? With the decline 

in coin usage and the accelerating cost of the penny, what plans does the Mint have 

to cut its manufacturing costs? 

Answer. 31 U.S.C. § 5112 requires the minting and issuance of a three-quarterinch diameter 1 cent coin composed of copper and zinc. The United States Mint will 

continue to mint and issue 1 cent coins pursuant to this statutory mandate. The 

United States Mint is committed to keeping production costs as low as possible. 

The United States Mint will produce pennies to fulfill all Federal Reserve Bank 

orders. Current forecasts suggest there will be demand of about 7.3 billion pennies 

in fiscal year 2004 from the Federal Reserve Banks. 

The United States Mint has taken several cost reduction steps. First, the total 

number of employees at the United States Mint has fallen from approximately 2,900 

in fiscal year 2000 to 2,132 today, saving significant personnel costs. The United 

States Mint currently has a rigorous review ongoing, consisting of more than 10 

task forces that are examining opportunities to streamline and reduce costs in an 

effort to enhance overall taxpayer value. Also, the United States Mint is examining 

ways to lower its direct production cost by incorporating additional automation and 

lean manufacturing concepts on the production lines. Finally, the agency is engaged 

in ongoing research to determine the feasibility of less expensive materials that 

could be used for coins without having an effect on their quality and utility. Congressional action would be required before changes could be made to the composition 

of most denominations. 

Question. How many dollar coins remain in the Mint’s vaults? What is the estimated cost of this storage? 

Answer. The United States Mint is currently storing 262.6 million Golden Dollars. 

The United States Mint’s coin inventory is stored in United States Mint facilities 

in Denver and Philadelphia, as well as Federal Reserve Banks in Phoenix, AZ and 

Helena, MT. The Golden Dollar is stored as part of the overall coin inventory at 

these locations at no additional incremental cost to the government. 

Question. How many sites does the Mint occupy in the Washington Metropolitan 

area? Please identify the use, location, amount of square footage, and cost for each 

of these locations. 

Answer. The United States Mint currently occupies two buildings in Washington, 

DC, both of which are used for administrative purposes. The total United States 

Mint occupied square footage in the Washington Metropolitan area is 237,273 

square feet at an annual net cost to the bureau of $8,682,427. 

The first building, 801 9th Street, has a total of 232,000 square feet, of which the 

United States Mint occupies 163,079 square feet and subleases the remaining 

68,921 square feet to the Internal Revenue Service, the Treasury Executive Institute, and the United States Marshals Service. The total annual rent expense of this 

building is $7,790,560. The United States Mint receives $2,314,367 in rent payments from our sublet tenants, for a net total annual rent expense of $5,476,193. 

At the second building, 799 9th Street, the United States Mint rents a total of 

149,647 square feet, occupies 74,194 square feet, and subleases the remaining 

75,453 square feet to the Customs Service and the Bureau of Public Debt. The 

United States Mint does not lease the entire building; the General Services Administration, however, leases out other parts of this building to other Federal agencies. 

The United States Mint’s total annual rent expense for its part of this building is 

$6,486,176. The United States Mint receives $3,279,942 in rent payments from our 

sublet tenants, for a net total annual rent expense of $3,206,234. 

Note.—The United States Mint also rents a small (about 100 square feet) sales 

kiosk within Washington DC’s Union Station at an annual cost of $78,000, operated 

by one or two sales clerks during business hours. 

Question. In 1997, the GAO testified before the Congress on the issue of a BEPMint merger. At that time the GAO was unable to conclude that a merger would 

save as much money as the cost of consolidation. Does Treasury have any new information that would discredit or invalidate the GAO findings? 

Answer. Treasury’s study is still ongoing. The study will incorporate the 1997 

GAO findings and account for changed market conditions. 

Question. Prior estimates of implementation costs for merging the basic functions 

of the Mint-BEP were calculated to exceed $50,000,000 and could plausibly reach 

$100,000,000. When will the merger study be complete? Will it provide detailed cost 

estimates on a basic merger? Would it provide the costs of any proposed merger of 

production lines? Because of the concerns involved in the costs and the futures for 

these two organizations will the Treasury Department fully consult with the Congress prior to consolidation of any functions? 
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Answer. The study will provide detailed cost estimates of the options under consideration. 

We will not pursue any of those options without a full consultation with Congress 

and, in fact, Treasury will not call for any merger of any system or function during 

the 108th Congress. 

ALCOHOL AND TOBACCO TAX AND TRADE BUREAU

Question. The Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF) was 

transferred to the Department of Justice, including IT services that support for the 

newly formed Alcohol and Tobacco Tax and Trade Bureau (TTB) at Treasury. Are 

the IT services for TTB provided by ATF? If so, why are these services still being 

provided by an agency of the Department of Justice? 

Answer. When ATF was split, all IT infrastructures (servers, storage systems, 

desktop computers, laptop computers, network equipment, etc.) remained with ATF. 

It was intended that pending funding costs for moving TTB to Treasury hardware 

and support, ATF would continue to provide IT support. TTB has taken some steps 

toward transition off of ATF support. TTB is currently moving all accounting, procurement, travel, property, and personnel applications to the Treasury Bureau of 

Public Debt (BPD). 

ATF currently provides the IT equipment and services for TTB that directly require an IT infrastructure. TTB has assumed the IT functions that can be performed 

without IT equipment (i.e. IT Security Policy, Capital Planning, and Enterprise Architecture). ATF provides all servers, network equipment and desktop/laptop equipment as well as all office productivity software. ATF provides services that include 

hosting and supporting all of TTB’s custom business applications and office automation applications, TTB’s computer security operations, TTB’s network connectivity 

and client (desktop/laptop/peripheral) equipment support. 

On April 29, 2004, ATF provided formal notification that they will no longer support TTB after fiscal year 2005. 

Question. There is a Memorandum of Understanding (MOU) between TTB and 

ATF. Will the MOU between TTB and ATF be in effect for fiscal year 2005? 

Answer. Yes, although not as many services will be included. For a number of 

non-IT areas, ATF has advised TTB that they intend to discontinue servicing TTB 

in fiscal year 2005 (see answer below). In the IT area, TTB has moved some services 

to BPD, as noted above. 

Question. What are the services provided under the MOU and what is the cost 

attached to the MOU? 

Answer. The current negotiated MOU with ATF for fiscal year 2004 is for $13.7 

million and is comprised of two principal components, the IT services at $9.5 million 

and non-IT administrative support services at $4.2 million. 

The IT services covered under the MOU include the following: 

—Custom Business Application and Office Application hosting and support 

—Network and Phones equipment and support 

—Customer Equipment and Support (desktops/laptops/peripherals) 

—Software Maintenance of Custom Business Applications 

—Configuration Management 

The current non-IT administrative support services covered under the (MOU) are 

as follows: 

—Legal services (assisting with one old EEO case and two Merit Systems Protection Board cases from fiscal year 2003) 

—Peer support 

—Emergency management services*

—Document services*

—Space management*

—Protective programs (finishing existing project)*

—Science and technology (This will continue for years because of shared laboratory facilities.) 

ATF has informed us they will not provide IT services or within most of the nonIT areas noted above with an asterisk (*). 

TTB has elected to move the following administrative support services to Bureau 

of Public Debt’s Administrative Resource Center, a Treasury operation, to provide 

optimal efficiency and effectiveness in the delivery of those services to our program 

operations: 

—Acquisition and material management (BPD for supplemental services) 

—Financial management (BPD for 2005) 

—Personnel services and personnel security (BPD beginning June 2004) 

—Training and professional development (supplemented by BPD). 
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Question. How long do you anticipate ATF charging TTB for services rendered and 

is it necessary for TTB to rely on ATF for these services? 

Answer. As indicated above, ATF will continue services in some areas as we continue to seek means to secure or provide these services independent of ATF; however, we organized our Bureau to provide services to our customers and as such the 

FTE distribution is very streamlined in the area of internal services. We will rely 

on the reimbursable agreement with BPD for several areas of service. In the meantime, we continue to research the most economical and efficient ways to secure these 

services. Our major issue at this time is the IT services that ATF currently provides; 

they have advised us in writing that they will no longer service us after fiscal year 

2005 in that area. 

It is necessary for these services to continue until TTB can transition the functions serviced at ATF to an alternate provider, including time to implement the 

transition after funding is provided. 

Question. TTB has the Tax Audit Division that is responsible for auditing taxpayers for compliance with the Internal Revenue Code and other laws and regulations. What strides has TTB made with the Tax Audit Division? 

Answer. TTB Tax Audit was first established in late fiscal year 2003 as part of 

TTB’s strategic plan to collect the revenue that is rightfully due from the alcohol, 

tobacco, and firearms and ammunitions industries. The division was established to 

provide a systematic approach to safeguard over $14 billion in annual revenue collected by TTB. 

The mission of the Tax Audit Division (TAD) is to promote voluntary compliance 

in the payment of excise taxes that TTB administers and to verify that such payment was made. The TAD also ensures compliance with the laws and regulations 

relating to revenue collection. TTB Tax Audit uses a risk-based approach to target 

non-compliant industry members. TTB’s goal in 2004 is to establish a baseline for 

measuring tax revenue audited in a 5 to 6 year period and the industry compliance 

rate (percentage of taxpayers audited with no material findings, thereby validating 

the amount of tax paid was accurate and rightfully due). Based upon these findings, 

TTB will determine its follow up audit strategy. 

TTB’s accomplishments in fiscal year 2004 as they relate to Tax Audit include: 

—Established 10 field offices covering the U.S. territory. 

—Recruited and hired 70 auditors. The average auditor has 10 years of previous 

audit experience and holds one audit certification such as CPA license. 

—Established a formal industry-training program. Seventy-five percent of the 

workforce has been trained in three or more industries (tobacco, distilled spirits 

plants, beer, wine, manufacture of non-beverage products, and firearms). 

—Implemented an automated audit documentation tool to facilitate a standard 

audit approach and create efficiencies. 

—Developed an audit workplan scheduling 110 taxpayers for review in 2004. 

—As of May 24, 10 audits have been completed and 55 are underway. 

Initial audit findings have resulted in $872,000 in additional revenue due to TTB. 

Question. What is the status regarding flavored malt beverages and beers? 

Answer. TTB has reviewed and analyzed the approximately 16,000 comments to 

Notice No. 4 concerning flavored malt beverages. At this time we are in the closing 

stages of evaluating the comments and we are discussing the comments with the 

Department of the Treasury. 

Question. Has the hiring process been streamlined or improved in the past year? 

Answer. Under the MOU, all human resource recruitment services were provided 

by ATF during fiscal year 2004; however, TTB just negotiated an agreement with 

the Bureau of Public Debt Administrative Resource Center (BPD ARC), to provide 

all TTB’s human resource services for the bureau, including staff recruitment. This 

enhancement begins June 13, 2004. We believe this change in service provider will 

improve the recruitment process and streamline the paperwork, while allowing the 

bureau to attract highly skilled and qualified applicants for our vacancies. 

Question. Will TTB reach its FTE ceiling of 559 this year? 

Answer. TTB will not reach its FTE utilization ceiling of 559 this year. The bureau FTE ceiling of 559 includes 15 positions for Puerto Rico, which is a Reimbursable program, and 544 direct FTE funded positions. As of the most recent pay period, TTB has 509 staff on board, including 13 in Puerto Rico, and TTB will make 

every effort to reach the 559 targeted staffing levels by the end of this fiscal year. 

TTB’s recruitment strategy as outlined with BPD ARC is very aggressive, and TTB 

is hopeful that the targeted staffing level can be reached. Their goal is to have a 

full staffing complement to begin the fiscal year 2005 fiscal year, but FTE utilization 

may only reach 504. 
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QUESTION SUBMITTED BY SENATOR ROBERT F. BENNETT

Question. In 2002 Treasury officials advised the Open World Leadership Center 

on the legislation needed to clarify and obtain authority to invest the Center’s Trust 

Funds (and similarly the Stennis Center and Madison Fellowships) in special par 

value obligations. Such investment is a necessary and desirable protection of appropriated funds provided to OWLC by the Congress as ‘‘no year’’ funding in annual 

appropriations. The OWLC has requested that they be allowed to invest a portion 

of their trust in a special Treasury par value obligation. This request is being reviewed by the Office of the Asst General Counsel for Banking & Finance in Treasury Headquarters. I understand that Treasury is concerned whether, under the 

rules of statutory construction, the new conditions for issuing special obligations to 

the Stennis Center also apply to the OWLC. Please provide an update on the status 

of this request. 

Answer. The Treasury Department has recently advised the Library of Congress 

(which manages the Open World trust fund) that amounts in the Open World trust 

fund may now be invested in par value Treasury specials. 

QUESTIONS SUBMITTED BY SENATOR PATTY MURRAY

NEWLY-CREATED JOBS WILL NOT GO TO THOSE WHO ARE BEING LAID-OFF/JOB TRAINING

Question. As I mentioned in my opening statement, it is fine to point out that 

some of the same companies that are shipping American jobs overseas might also 

create jobs here in the United States in the future. But we also need to recognize 

that the people who are having their jobs sent overseas are not the ones that are 

likely to get the new jobs those companies are creating here at home. 

For many Americans who are trained in one partfield and have supported their 

families on that same job for decades, the decision to move that job overseas represents the beginning of a long period of heartbreak and financial ruin. 

Mr. Secretary, do you agree that the job descriptions and skill requirements of 

the new positions that are likely to be created in the United States in the future 

are not the same as those for the jobs that companies are currently shipping overseas? 

Answer. It’s true that many new jobs in our economy require new skills and education. Those new skills and education are one of the sources of our rising standard 

of living. That is why the President has made improving our Federal job training 

programs a priority. New jobs demanding new skills are always appearing. A quarter of all Americans are working in jobs that weren’t even in the Census Bureau’s 

occupation list in 1967. 

The U.S. labor market is always changing, and is one of the most resilient and 

flexible labor markets in the world. One aspect of that flexibility is the high rate 

of job changes as employers and employees continually adjust to changing business 

needs and personnel requirements. Data from the Bureau of Labor Statistics (BLS) 

Job Opening and Labor Turnover Survey (JOLTS) suggests that there are more 

than 1 million new hires each week. In March 2004, there were 4.5 million new 

hires and about 4.1 million separations, and JOLTS reports that on the last day of 

March, there were about 3.1 million job openings available. The President is committed to ensuring workers have the skills necessary to obtain those jobs. 

Question. I mentioned earlier that the President’s new job training proposal does 

not add $1 to his budget request for job training. In fact under his proposal, the 

amount of money going to community colleges for all job training purposes will actually decline. For the last 3 years, the Bush Administration has requested half a billion dollars in cuts in job training. 

Mr. Secretary, what does the Bush Administration have to offer the manufacturing worker or the software engineer or the call center worker whose job is being 

sent overseas? 

Answer. The President’s goal is to increase job growth in this country while making sure workers have the skills necessary to access those jobs. Over the past 9 

months, 1.4 million new jobs have been created. The tax cuts, which were proposed 

by the President and passed by the Congress in 2001 and 2003, played a vital role 

in creating a strong growth environment. During the last 3 years, the administration’s tax reductions have been successful—first, in keeping the recent economic 

slowdown from worsening substantially in the face of terrorist attacks, corporate 

malfeasance, and wars in Afghanistan and Iraq, and secondly, in promoting a solid 

economic recovery and enhancing job prospects. 
378

Our econometric work suggests that without the tax cuts, more than 2 million 

fewer Americans would have been working by the end of last year and the unemployment rate would have been more than 1 percentage point higher. 

To ensure workers have the skills necessary to obtain these new jobs, the Presi- dent’s Fiscal Year 2005 Budget provides $23 billion for job training and employment 

assistance, including Pell Grants used by students at technical and 2-year post-secondary schools. This funding level is $500 million (2.3 percent) more than in 2004 

and $2.5 billion (12.5 percent more than in 2001). 

Moreover, the President has proposed reforming the major Workforce Investment 

Act grant programs to double the number of workers who receive job training. These 

reforms will maximize the available Federal dollars going to train workers by eliminating unnecessary overhead costs, reducing expenditures on overhead by $300 million. His Jobs for the 21st Century initiative includes a $250 million proposal to 

help America’s community colleges train 100,000 additional workers for industries 

that are creating the most new jobs. Finally, the President has proposed a $50 million Personal Reemployment Accounts pilot program to help unemployed workers who have the hardest time finding 

jobs get back to work. These flexible accounts, which would be in addition to unemployment compensation, would allow certain unemployed workers to purchase the 

training, child care, transportation, or other reemployment services they need to return to work. They would be allowed to keep unused amounts as a ‘‘reemployment 

bonus’’ if they become employed quickly. The administration is pleased that the 

House passed H.R. 444, the Worker Reemployment Accounts Act, on June 3 to authorize this pilot program under the Workforce Investment Act and urges the Senate to act on this important legislation for America’s workers. 

Question. What do you expect these people to do to try and maintain their level 

of income, their health insurance, and their ability to feed their families? 

Answer. Whatever the cause, loss of jobs is taken very seriously by this administration. First and foremost, the administration believes that the best way to help 

workers who are competing in the global marketplace is to keep economic growth 

strong at home, to help make American companies more competitive, and to make 

America the best place in the world to do business. Recent employment gains show 

that our program is working. Employment has increased more than 1.4 million in 

the past 9 months and initial claims for State unemployment insurance benefits 

have fallen 20 percent from a year earlier. 

As with any transition, an evolving economy can produce dislocations for individuals and communities in the short term. The administration is committed to helping 

these workers find good jobs at good wages as quickly as possible. 

Our primary responsibility is to keep the economy growing. Maintaining and increasing economic growth is the key to increasing the number of good jobs in the 

economy, making it easier for people who have lost their jobs to find new and better 

ones. 

The President has proposed several new measures to help prepare Americans for 

the rapidly changing and increasingly global workplace. His Jobs for the 21st Century initiative includes more than $500 million to help prepare U.S. workers to take 

advantage of the better skilled, higher-paying jobs of the future, including $250 million in proposed funding targeted to community colleges to train workers for industries that are creating the most new jobs. 

COMPETITIVE SOURCING

Question. What is the status of all the competitive sourcing studies that have been 

undertaken at IRS? Please include year, area, and result. 

Answer. The following list summarizes the status of IRS Competitive Sourcing 

studies: 

Architects and Engineers (10 FTE) 

Streamline competition resulted in in-house award. No savings were achieved. 

The in-house team was the most efficient. 

Area Distribution Centers (500 FTE in Bloomington, IL; Rancho Cordova, CA; Richmond, VA) 

The three Area Distribution Centers distribute tax forms, instructions and publications to taxpayers and internal use documents to IRS employees. A standard competition with award decision is scheduled for June 28, 2004. 

Expected Saving and Benefits.—Consolidation of activities and geographic locations resulting in the release of commercial space, revised operational processes and 

procedures to gain efficiencies, new information system, reduced staff and increased 

managerial span of control. 
379

Anticipated Return on Investment (fiscal year 2005–fiscal year 2009).—$22 million. 

Building Delegations or Operation and Maintenance (O&M) of Delegated Buildings 

(100 FTE in Covington, Fresno, Austin, Ogden, Philadelphia, and Headquarters) 

O&M are those functions identified in the Building Delegation Agreements between the General Services Administration (GSA) and the IRS. These services include responsibilities to operate and maintain building systems (electrical, HVAC, 

control systems, etc). 

A standard competition with solicitation release is scheduled for June 2004. 

Expected Saving and Benefits.—Revised operational processes and procedures to 

gain efficiencies; reduced staff; and increased managerial span of control. 

Anticipated Return on Investment (fiscal year 2006–fiscal year 2010).—$3.9 million. 

Mail Rooms (70 FTE) 

Mailroom services functions include all aspects of the delivery of mail from full 

service delivery to mail stop or desktop to self-service mailrooms where customers 

pick up their own mail. The IRS made a decision to divide the study among headquarters, nationwide ‘‘stand alone sites’’ and campuses. The IRS plans to use publicprivate competition to improve operations. 

A direct conversion is in progress. 

Fully Implemented.—Denver, CO; Detroit, MI; Plantation, FL; Detroit Computing 

Center, MI; Houston (Leland), TX; Laguna Niguel, CA; Oklahoma City, OK; and 

San Francisco, CA. 

Partially Implemented.—Washington, DC; New Carrollton, MD. 

Scheduled for Implementation.—Cincinnati, OH; Jacksonville, FL (5/17); and 

Nashville, TN. 

Implementation Not Scheduled.—Atlanta, GA; Baltimore, MD; Boston, MA; Buffalo, NY; Dallas, TX; Greensboro, NC; Hartford, CT; Houston (Alliance), TX; Indianapolis, IN; Los Angeles, CA; Milwaukee, WI; New Orleans, LA; Oakland, CA; Philadelphia, PA; Phoenix, AZ; Richmond, VA; Chicago, IL; Springfield, NJ; St. Louis, 

MO; St. Paul, MN. 

Anticipated Return on Investment (fiscal year 2005–fiscal year 2009).—$399,000. 

Campus Operations (Information Technology) (350 FTE in Ogden, UT; Atlanta, GA; 

Brookhaven, NY; Andover, MA; Cincinnati, OH; Fresno, CA; Austin, TX; Memphis TN; Kansas City, MO; Philadelphia, PA) 

This functional area provides the Information Systems (IS) computer operations 

at the ten IRS Campus facilities. The positions include computer operators, production controllers, tape librarians, computer specialists, and clerks. A standard competition with award decision is scheduled for July 2004. 

Expected Saving and Benefits.—Revised operational processes and procedures to 

gain efficiencies; reduced staff; and increased managerial span of control. 

Anticipated Return on Investment (fiscal year 2005–fiscal year 2009).—$12.7 million. 

Logistics Support (formerly Warehouse and Transportation) (160 FTE in Andover, 

MA; Philadelphia, PA; Brookhaven, NY; Atlanta, GA; Covington, KY; Austin, 

TX; Kansas City, MO; Ogden, UT; Fresno, CA; Memphis, TN) 

This functional area provides warehousing and transportation, mainly at the 10 

campus sites. This activity includes positions such as material handlers, warehouseman, motor vehicle operators, laborers, and clerks. A standard competition with Performance Work Statement development is underway. 

Expected Saving and Benefits.—Revised operational processes and procedures to 

gain efficiencies, release of leased space, reduced staff and increase of managerial 

span of control. 

Anticipated Return on Investment (fiscal year 2006–fiscal year 2010).—$4.8 million. 

Campus Files Activity (1,458 FTE in Austin, TX; Andover, MA; Philadelphia, PA; 

Brookhaven, NY; Cincinnati, OH; Memphis, TN; Atlanta, GA; Kansas City, MO; 

Ogden, UT; Fresno, CA) 

This functional area receives, controls, shelves and maintains all returns/documents for retention and retirement. They retrieve documents as requested by customer organizations. Liaison work is critical with the Federal Records Centers for 

final retention of documents. The work is routine and does not involve making complex determinations or present unique fact patterns. A standard competition with 

solicitation release is scheduled for the fourth quarter of 2004. 
380

Expected Saving and Benefits.—Revised operational processes and procedures to 

gain efficiencies; reduced staff; and increased managerial span of control. 

Anticipated Return on Investment (fiscal year 2006–fiscal year 2010).—$22 million. 

Learning and Education (617 FTE Service-wide) 

This functional area is responsible for determining service-wide and division-level 

professional training requirements, developing training plans and curriculum, evaluating the effectiveness of training, and performing a broad spectrum of program administration. 

A standard competition with Performance Work Statement development is underway. 

Expected Saving and Benefits.—Consolidation of activities, revision of operational 

processes and procedures to gain efficiencies, implementation of learning content 

management and learning management systems, reduction of staff and increased 

managerial span of control. 

Anticipated Return on Investment (fiscal year 2006–fiscal year 2010).—$25 million. 

Note.—Return on investment includes cost of conducting competition and transition/separation costs. The IRS calculated savings through fiscal year 2009. 

The following highlights IRS Business Case Analysis/Feasibility Studies: 

Tax Law Telephone 

This is a preliminary feasibility assessment of having a vendor provide tax law 

telephone assistance. After the completion of the preliminary feasibility assessment, 

the IRS will make a decision as to whether to go forward with the competition. 

Fuel Compliance Activity (140 FTE Service-wide) 

This function area monitors 1,400 terminals, all fuel wholesalers, thousands of retail motor fuel outlets, and U.S. border crossings. Additionally, these personnel are 

charged with conducting periodic inspections of on-road vehicles on highways 

throughout the country. 

IT Support (Service-wide) 

This is identification and development of sourcing strategy to identify candidate 

public-private competition activities. 

Question. How much money has been spent on these competitions? Since the competitions are not budgeted for, where has the money come from? 

Answer. Competitive Sourcing Competition Costs (Travel, training, staffing, expert contractor support (PWS, Most Efficient Organization, Independent Review)—

does not reflect transition/separation costs): 

—Fiscal year 2003—$5.0 million; 

—Fiscal year 2004—$6.3 million. 

It has been difficult to finance the Competitive Sourcing Program since the IRS 

does not know the outcomes in advance, the exact level of savings are yet to be determined, and it takes time to realize these savings. The IRS had to internally realign. However, the investments made today in public-private competitions show a 

return on investment usually within 2–3 years (includes payment of transition 

costs—voluntary early retirement, voluntary separation incentive, etc.). At that 

time, the IRS plans to reinvest the savings to fund future competitions and cover 

transition costs. The IRS proposes to fund $9.1 million in the fiscal year 2005 budget for the Competitive Sourcing program by reinvesting resources freed up through 

productivity savings. 

PROGRESS ON STEMMING THE USE OF CHARITIES TO FUNNEL CASH TO TERRORIST

ORGANIZATIONS

Question. Our government has linked some 23 charitable organizations with the 

Al Qaeda network. It has been a longstanding practice for terrorist organizations 

around the globe to use charitable giving as an avenue for illicit resources. There 

appear to be some continuing disagreements between our government and the governments of the European Union as to which charities should be designated as 

being associated with terrorist organizations. A number of international charities 

that are listed by the United States have not been listed by European nations. 

Why can’t the United States and Europe agree over which charities are financing 

terrorism? 

Answer. One of the primary differences between the United States and the European Union (E.U.) on the issue of terrorism and terrorist financing is the fact that 

the European Union has not traditionally treated non-al Qaeda terrorist groups, 

such as Hamas and Hizballah, in the same way that the United States treats them. 

The European Union has an efficient process for designating al Qaeda-related enti-
381

ties that have been designated by the U.N. 1267 Sanctions Committee. Under their 

system, action on an organization or individual by the U.N. 1267 Sanctions Committee is a sufficient legal basis for the European Union to designate that same organization or individual. The European Union’s designation system for non-al Qaeda 

groups (i.e., for groups designated pursuant to U.N. Security Council Resolution 

(UNSCR) 1373), however, suffers from a lack of efficiency and effectiveness. This 

has resulted in delays and gaps in the European Union’s designation on several 

non-al Qaeda-related entities. 

One significant example of this problem is the European Union’s failure to act 

swiftly and effectively with respect to Hamas. It is beyond question that funding to 

Hamas and other terrorist groups must be stopped, and the United States does not 

accept any artificial distinctions that some Europeans have in the past drawn between the so-called ‘‘military’’ and the so-called ‘‘socio-political’’ wings of Hamas or 

other terrorist groups. Hamas leaders themselves have publicly acknowledged this 

distinction is one without a difference. The conclusion is supported by the fungibility 

of funds. Money allocated to the humanitarian works of Hamas charities makes 

available for terrorist activity the Hamas funds that otherwise would have gone to 

those humanitarian purposes. Moreover, the United States believes that the funds 

raised by Hamas-related charities are used to finance the organization and ultimately fuel terrorist activities. For example, it is clear that Hamas uses its humanitarian operations to recruit militants and secure support for their activities among 

local communities and populace. 

To that end, the United States has designated charities that have provided support to Hamas. We have made clear our position on Hamas, and other such terrorist 

groups, to our partners around the world. We are beginning to see a ‘‘sea change’’ 

of the European attitude on this matter, based in large part on the U.S. efforts to 

change attitudes and policies. The European Union’s decision in September 2003 to 

designate Hamas in its entirety as a terrorist group represents an important first. 

Due to inefficiencies within the E.U. designation process, however, this overarching 

designation has not always resulted in the designation of individual European charities that are funding Hamas. We therefore must continue to encourage the European Union to implement their decision by designating Hamas charities operating 

in Europe. Recently there have been encouraging signs from certain E.U. members. 

Last year, the Dutch government froze the assets of the Al Aqsa Foundation, a European charity supporting Hamas. The German government shut down the offices 

of the Al Aqsa Foundation in their country, and the Danish government took actions 

against certain individuals operating Al Aqsa in Denmark. 

The United States will continue to work with our E.U. counterparts, both by urging action and by keeping channels of communication open to share evidence supporting a complete designation of these terrorist groups. 

Question. Have you seen a demonstrable increase in the level of the effort on the 

part of European nations in going after terrorist financing since the Madrid bombings? 

Answer. Yes. The European Union’s attention to the threat of terrorist financing 

has increased since the Madrid bombings. This renewed dedication is articulated in 

the European Union’s Declaration on Combating Terrorism, which was issued on 

March 24, 2004, just 2 weeks after the Madrid bombings and by the accompanying 

appointment of Gijs de Vries to the newly created position of E.U. Counter-Terrorism Coordinator. 

Question. What concrete changes have you seen since the Madrid bombings? 

Answer. As noted above, immediately following the Madrid bombings, the European Union issued a Declaration on Combating Terrorism and appointed Mr. de 

Vries as the counter-terrorism coordinator. Mr. de Vries has articulated an aggressive agenda and has visited the United States to consult with key U.S. counter-terrorism officials. We are hopeful that the establishment of this position will enhance 

E.U. effectiveness in combating terrorist financing. 

Question. In your view, which European nations have done the most in combating 

terrorist financing and which have the longest way to go? 

Answer. The State Department’s recently issued annual report on ‘‘Patterns of 

Global Terrorism 2003’’ includes a country-by-country discussion of actions by European countries in fighting terrorist financing. Treasury concurs with that assessment and refers the committee to that document for more information about country-specific activity. 

Question. After some considerable pressure from Congress and the General Accounting Office, the IRS has finally published guidance to the States on how they 

can help regulate and monitor charitable organizations in this country that may be 

funneling money to terrorists. 
382

Do you believe that the States have done all they can monitor charitable organizations that may be funneling money to terrorists? 

Answer. States have an obligation to ensure the integrity of charities. They are 

the ground-level watchdog of charities and we rely on them to fulfill that function. 

They do not always, however, have the ability to effectively monitor global organizations. That is where the resources of not only the U.S. government, but the capabilities of umbrella organizations within the philanthropic community become critical. 

Question. Do you believe States have the kind of resources that are necessary to 

do this job adequately? 

Answer. I am not in a position to comment on the type or level of resources applied by each State to address the abuse of charities by terrorist financiers. I note, 

however, that we are engaged in a campaign to enhance their resources through cooperation. The first step was an outreach event recently held by the Treasury Department, with the focus being a discussion of the voluntary best practices against 

abuse of charities by terrorist financiers, previously published by Treasury. One of 

the significant results of this meeting was a decision to create an ‘‘advisory group’’ 

on charities. This group will serve as a resource and provide a forum that not only 

includes the States and the U.S. government, but also includes representatives from 

charities (large and small) and watchdog organizations. 

HAS PROGRESS IN SAUDI ARABIA TRIGGERED PROGRESS IN OTHER ARAB NATIONS?

Question. Mr. Secretary, you traveled to Saudi Arabia back in September. Your 

agency has heaped praise on the Saudi government for enacting a significant number of new laws and regulations to prohibit the free flow of money to terrorist organizations in that country. But, as I noted in my opening statement, there is a difference between putting the laws on the books and actually enforcing them. 

Do you believe the Saudis have actually cut off the flow of money in a significant 

way between their suspect charitable organizations and terrorist groups? 

Answer. The Saudi Arabian government has taken decisive steps to curb the flow 

of terrorist money and we are hopeful that there will be further developments. Recognizing the significant role of charitable giving (zakat) in the Kingdom, this is a 

monumental task that not only requires legal and regulatory changes, but also a 

change in mindset among the population. The Saudis, who have now become victims 

of terrorism, appear to be committed to taking decisive action to address this problem. Even so, we continue to work with the Saudi government and other countries 

around the world to do more, faster and more aggressively. 

The most fundamental challenge facing the Kingdom is defusing the radical extremism that facilitates support and recruitment for radical Islamist terrorist organizations like al Qaeda. The Saudi efforts to deal with this issue are important to ensure 

that militant religious extremism does not provide a platform for terrorists from 

which they can justify and launch their terrible actions. 

The Saudi government must fully implement and enforce the comprehensive 

measures it has enacted to ensure charities, hawalas, and their formal financial systems are not abused for terrorist purposes. Recently, Saudi Arabia took concrete 

steps to do just that. On June 2, 2004, the United States and Saudi Arabia jointly 

designated five branches of the Saudi-based charity, the Al Haramain Foundation 

(AHF), and at the same time Saudi Arabia announced its intention to dissolve AHF 

in its entirety and merge its remaining operations and assets into the newly-established Saudi National Commission for Charitable Work Abroad. Saudi Arabia announced that this new entity will be subject to strict financial transparency, will be 

subject to legal oversight and will operate according to clear policies, so as to ensure 

that charitable funds intended to help the needy are not misused. 

Question. Has the improved level of effort on the part of Saudi Arabia elicited 

similar responses by other Islamic nations? 

Answer. We have been working closely with many Islamic nations since the 

events of September 11 and have seen continued progress in their anti-terrorist financing efforts. There has been ongoing work and cooperation on fighting terrorist 

financing since September 11, given the real threat that al Qaeda poses to many 

countries, particularly those in the Middle East. Gulf Countries such as Kuwait and 

the United Arab Emirates (UAE) have been cooperative in responding to decisions 

by the U.N. 1267 Sanctions Committee and have taken important steps to address 

issues like regulation of charities and hawalas. Other countries have been victims 

of terrorism and have taken important steps to address that issue. For example, we 

have worked closely with Algeria, which has a secular government, to support their 

anti-terrorist financing efforts. 

Significant steps that are still needed include further action on cross-border currency transactions, wire transfers, and effective oversight of alternative payment 
383

systems such as hawalas. We are encouraging regional discussions on these issues 

and continue to advance progress on these issues in the Middle East and around 

the world. 

Question. What about the United Arab Emirates (UAE)? 

Answer. The UAE Government has made many positive reforms to their antimoney laundering program. Further, it has cracked down on potential 

vulnerabilities in the financial markets and is cooperating in the international effort 

to prevent money laundering, particularly by terrorists and their supporters. In 

2002, the UAE, in partnership with the United States, blocked the assets of more 

than 150 named terrorist entities, including significant assets in the UAE belonging 

to Al-Barakat. The Central Bank (CB) of the UAE has frozen a total of $3.13 million 

in 18 bank accounts in the UAE between September 11, 2001 and March 2004. 

Additionally, the UAE has recognized the importance and threat of hawala, and 

other alternative remittance systems, and they have made efforts to address the 

particular vulnerabilities from a lack of oversight and regulation of this sector. New 

regulations to improve oversight of the hawala system were implemented in 2002, 

and the CB now supervises 61 hawala brokers, which—like other financial institutions in the UAE—are now required to submit the names and addresses of transferors and beneficiaries involved in transfers to the CB and to complete suspicious 

transaction reports. The new attention on hawala is encouraging more people to use 

regulated exchange houses in the UAE. Traders in Dubai’s Central Souk (Market) 

have stated that hawala exchange rates are now only 3 percent cheaper than formal 

exchange houses, persuading many to use the formal banking network. In May 

2002, the UAE hosted an International Conference on Hawala attended by over 300 

delegates from 58 countries. The conference concluded with the issuance of ‘‘The 

Abu Dhabi Declaration on Hawala,’’ which calls for the establishment of a sound 

mechanism to regulate hawala, including, but not limited to the recommendation 

that countries adopt the 40 Recommendations on money laundering and 8 Special 

Recommendations on terrorist financing of the Financial Action Task Force (FATF). 

In April 2004, they held a second international conference on hawala reaffirming 

their commitment to the regulation of alternative remittance systems. 

UAE has also just established the Anti-Money Laundering and Suspicious Case 

Unit (AMLSCU), located within the Central Bank, which functions as that nation’s 

Financial Intelligence Unit (FIU). In June 2004, they co-hosted the South Asia Conference on Money Laundering with FinCEN, the U.S. FIU, further showing their 

commitment to combating money laundering and terrorist financing—especially on 

a regional basis. 

Question. Have you seen any improved level of cooperation from the UAE? 

Answer. Yes. The UAE Government has made many positive reforms to their antimoney laundering program. Further, it has cracked down on potential 

vulnerabilities in the financial markets and is cooperating in the international effort 

to prevent money laundering, particularly by terrorists and their supporters. In 

2002, the UAE worked in partnership with the United States to block terrorist financing, and froze the assets of more than 150 named terrorist entities, including 

significant assets in the UAE belonging to Al-Barakat. The Central Bank (CB) of 

the UAE has frozen a total of $3.13 million in 18 bank accounts in the UAE between 

September 11, 2001 and March 2004. 

Additionally, the UAE has recognized the importance and threat of hawala, and 

other alternative remittance systems, and they have made efforts to address the 

particular vulnerabilities from a lack of oversight and regulation of this sector. New 

regulations to improve oversight of the hawala system were implemented in 2002, 

and the CB now supervises 61 hawala brokers, which—like other financial institutions in the UAE—are now required to submit the names and addresses of transferors and beneficiaries involved in transfers to the CB and to complete suspicious 

transaction reports. The new attention on hawala is encouraging more people to use 

regulated exchange houses in the UAE. Traders in Dubai’s Central Souk (Market) 

have stated that hawala exchange rates are now only 3 percent cheaper than formal 

exchange houses, persuading many to use the formal banking network. In May 

2002, the UAE hosted an International Conference on Hawala attended by over 300 

delegates from 58 countries. The conference concluded with the issuance of ‘‘The 

Abu Dhabi Declaration on Hawala,’’ which calls for the establishment of a sound 

mechanism to regulate hawala, including, but not limited to the recommendation 

that countries adopt the 40 Recommendations on money laundering and 8 Special 

Recommendations on terrorist financing of the Financial Action Task Force (FATF). 

In April 2004, they held a second international conference on hawala reaffirming 

their commitment to the regulation of alternative remittance systems. 

UAE has also just established the Anti-Money Laundering and Suspicious Case 

Unit (AMLSCU), located within the Central Bank, which functions as that nation’s 
384

Financial Intelligence Unit (FIU). In June 2004, they co-hosted the South Asia Conference on Money Laundering with FinCEN, the U.S. FIU, further showing their 

commitment to combating money laundering and terrorist financing—especially on 

a regional basis. 

WILL TREASURY BAN NON-COOPERATING NATIONS FROM THE BANKING SECTOR?

Question. Mr. Secretary, the Patriot Act gave you a new power to designate certain individual foreign jurisdictions or financial institutions as being ‘‘primary 

money laundering concerns’’ of the United States. To date, you have done this in 

the case of Burma, briefly in the case of the Ukraine, and in the case of the small 

country of Nauru. You can use this power under the Patriot Act to go so far as to 

cut those countries off from the U.S. financial sector. 

Mr. Secretary are you considering expanding the use of this tool in terms of pushing foreign nations to improve their efforts in the area of combating terrorist financing? 

Answer. The Treasury Department is committed to employing the tools given to 

us in Section 311 of the Patriot Act effectively and aggressively. As you note in your 

question, Treasury has already used this authority to designate the jurisdictions of 

Ukraine, Nauru and Burma, and two individual Burmese banks, all based on money 

laundering concerns. Additionally, the Treasury Department has designated the 

Commercial Bank of Syria and its Lebanese subsidiary under Section 311 based on 

a variety of issues, including terrorist financing concerns. In the cases of Ukraine, 

Nauru, and Burma, the designations have proved effect in pushing the foreign governments to improve their anti-money laundering efforts. It is our hope and expectation that the Syrian-related designation will prove effective as well. 

Moving forward, Treasury will continue to safeguard the U.S. financial system by 

identifying and designating appropriate targets under Section 311, including those 

that pose risks related to terrorist financing. 

Question. Which nations would you identify as having the most work to do to 

bring their level of effort up to a level that you would consider acceptable? 

Answer. All countries should be constantly striving to improve their efforts in the 

fight against terrorist financing. Some countries have steps that they should take 

to improve the underlying structure of the counter-terrorist financing legal and regulatory systems. Others have these systems in place and need to focus on effective 

implementation. The State Department’s recently issued annual report on ‘‘Patterns 

of Global Terrorism 2003’’ includes a country-by-country discussion of actions in 

fighting terrorist financing. Treasury concurs with that assessment and refers the 

committee to that document for more information about country-specific activity. 

IS TREASURY REQUESTING ENOUGH FOOT SOLDIERS IN THE WAR ON TERRORIST

FINANCING?

Question. Many critics have observed that your agency’s efforts to combat terrorist 

financing are spread over too many offices with little or no coordination between the 

Office of Foreign Asset Control, the IRS, the Financial Crimes Enforcement Network 

and other parts of the Treasury Department. As such, I commend your decision to 

create the new Office of Terrorism and Financial Intelligence within the Department to coordinate all of these efforts. The leaders of the Senate Finance Committee—both Chairman Grassley and Senator Baucus—have commented in a letter 

to the President that your new initiative seems to be ‘‘heavy on generals and light 

on soldiers.’’ Also, it was recently revealed that, in developing President Bush’s 

budget request for 2005, a request by the IRS to increase the number of criminal 

financial investigators working on terrorist financing by 50 percent was rejected. 

Are you sure that the amount of money that you have requested will supply 

enough resources to boost the number of foot soldiers that can follow up on leads 

and disseminate information to have the maximum impact in combating terrorism? 

Answer. Over the last year, we have made substantial progress in coordinating 

the activities of the Office of Foreign Assets Control (OFAC), the IRS-Criminal Investigation Division (IRS–CI) and the Financial Crimes Enforcement Network 

(FinCEN) through the leadership of Deputy Assistant Secretary Juan Zarate and 

the Executive Office for Terrorist Financing and Financial Crimes (EOTF/FC). With 

the creation of the Office of Terrorism and Financial Intelligence (TFI), we are taking the final step of fully integrating the intelligence functions and resources of the 

Treasury Department into this effort. Initially, we are focusing on ensuring we are 

using what resources we have as effectively as possible. As part of this, we are exploring all options, e.g., exploiting the expertise and resources of existing Treasury 

bureaus and offices, not just for intelligence or law enforcement purposes, but also 

looking at regulatory actions. But before we turn to the solution of adding more peo-
385

ple, we are ensuring we clearly know what is necessary—whether expertise, personnel, technology, or legal authorities. 

Question. How do you respond to the criticism that your new initiative is too top 

heavy and doesn’t provide enough people to follow up on every potential lead? 

Answer. The key to this new structure is the combination of our resources as well 

as the elevation of the status of these efforts within the Treasury Department and 

the U.S. Government. Both elements are essential to making the Office of Terrorism 

and Financial Intelligence (TFI) function well. Thus, we will be creating necessary 

efficiencies both within Treasury and in the U.S. Government to ensure we are 

maximizing our efforts. This is a team effort, not just within Treasury, but within 

the government. As we create this new office, we need expertise and leadership that 

will not only maximize the resources we have within Treasury, but also the resources within the government that contribute to this effort. 

WILL THE BUDGET BOOST ACTUALLY IMPROVE FINANCIAL CRIMES NETWORK

ENFORCEMENT’S (FINCEN’S) PERFORMANCE?

Question. Your Financial Crimes Enforcement Network, or FinCEN, is charged 

with collecting and disseminating information on all questionable financial transactions that are reported by the banking sector. This agency has been subjected to 

a lot of criticism because of outdated technology and the long delays between the 

time questionable transactions are reported and the time they can be accessed by 

law enforcement agencies. Your budget seeks a 13 percent boost in funding for 

FinCEN this year. 

If we approve this request, will we see demonstrable improvement in the amount 

of time it takes from when your agency takes receipt of this information to when 

it is available to the Federal and State agencies that are actually investigating and 

prosecuting these crimes? 

Answer. Yes. Electronic filing from institutions is the best way to ensure faster 

provision of Bank Secrecy Act (BSA) information after it is received. An amount of 

$3.238 million of this budget request is for program costs associated with the various mandates of the USA PATRIOT Act, and one of these mandates is to build a 

system that would permit the electronic filing of Bank Secrecy Act reports. The system built by FinCEN—the Patriot Act Communications System—has been operational since June 2002. Some of this request will be used to enhance this system’s 

reliability and to develop tools that FinCEN believes will result in greater usage by 

industry. 

FinCEN has also requested $1.354 million and two FTEs for program increases 

to expand law enforcement’s access to Bank Secrecy Act information through the online access system known as Gateway. This will broaden electronic access to this 

information among law enforcement. 

Finally, FinCEN’s BSA Direct initiative—a program critical to FinCEN’s ability 

to provide law enforcement access to timely information—will improve law enforcement’s access to the critical Bank Secrecy Act data by integrating the data into a 

consolidated, modern data warehouse. BSA Direct will include sophisticated query 

and reporting tools. Law enforcement and regulatory agencies will gain easier data 

access and enhanced ability to query and analyze the Bank Secrecy Act reports. 

These improvements are expected to lead to increased use of the Bank Secrecy Act 

data and will permit FinCEN to achieve its statutory obligations to control access 

and audit access to this sensitive information, provide FinCEN with the ability to 

network agencies with overlapping investigations, and will help FinCEN provide 

feedback and better communicate with the financial industry. 

Question. The so-called ‘‘hawala’’ network is considered one of the prime ways in 

which terrorist organizations have been able to move money across borders without 

a paper trail. These networks are used for legitimate money transfers from immigrant families to their families back home. A blue ribbon task force on terrorist financing recommended that your Financial Crimes Enforcement Network register 

these operations in this country and require them, like banks, to report suspicious 

financial transactions. 

Has any progress been made toward that goal by your Financial Crimes Enforcement Network? 

Answer. To date, approximately 18,000 money service businesses have registered 

with FinCEN. It is unclear, however, how many of these entities are informal value 

transfer systems such as hawalas, hundi, fei ch’ien and others. Although there is 

a clear requirement for informal value transfer systems to register with FinCEN as 

a money services business, the registration does not distinguish these systems from 

other money service businesses. Failure to register can result in a Federal felony 

conviction. 
386

FinCEN is working closely with the Internal Revenue Service (IRS), the agency 

with delegated responsibility to examine these businesses for Bank Secrecy Act compliance, to look for ways to identify these informal value transfer systems and bring 

them into compliance. FinCEN and the IRS are also focusing outreach and education efforts in communities where these informal systems are popular. Finally, 

FinCEN is working closely with law enforcement to identify those persons and entities that may be operating outside the bounds of the law. 

Question. Should we expect any progress this year? 

Answer. Yes. A central focus of FinCEN’s new leadership is to improve registration and compliance by money service businesses. FinCEN is developing a comprehensive plan aimed at increasing registration and otherwise improving money 

service business compliance with Bank Secrecy Act regulations. Steps that FinCEN 

is already taking include: 

—Obtaining better information on the size and nature of components of the 

money service business industry—including informal value transfer systems—

to better ascertain the scope of education and outreach necessary and focus 

compliance resources on those sectors of the industry that critically need to be 

addressed; 

—Coordinating with State regulators and Trade Associations to identify potential 

registrants and provide education and outreach; 

—Conducting analysis of the Bank Secrecy Act reports for leads on locating 

money service business identified by other financial institutions as unregistered, non-compliant or engaged in suspicious activity. FinCEN will then point 

the IRS or law enforcement to those entities for action. 

—Improving the registration form and regulatory requirements to simplify the 

registration and filing process, reduce filer error and improve quality of the data 

provided by filers. 

TREASURY’S TERRORIST FINANCING INITIATIVE NEEDS DEADLINES AND MILESTONES

Question. Mr. Secretary, a variety of oversight agencies, including the GAO and 

others have criticized your national money laundering strategy and other elements 

of the war on terrorist financing because they tend to lack milestones and deadlines. 

You are now standing up a new office of Terrorism and Financial Intelligence within 

the Treasury Department to improve coordination between all of the agencies within 

your department that work on this important effort. 

Do you think it is reasonable to have the new head of this office submit a comprehensive series of department-wide deadlines and milestones for each of the elements of your war on terrorist financing? 

Answer. Treasury and the Executive Office for Terrorist Financing and Financial 

Crimes already use measures or milestones to help mark and guide our efforts in 

the areas of terrorist financing and financial crime. These have been incorporated 

into Treasury’s comprehensive strategic plan, which is attached. Elements of this 

plan specifically focus on terrorist financing and financial crimes. 

The ultimate goal of our efforts is to detect, deter and disrupt terrorist activity 

by cutting off access to sources of funds and systems. The most valuable way to 

measure our success in this effort is often intelligence information that suggests to 

us the impact we are having on the terrorist organization that we are targeting. 

This information is often anecdotal. Recognizing that we are dealing with a nefarious and clandestine network about which it is hard to obtain hard facts on cash 

flows, we have tried to identify other measures on how to evaluate success. 

Question. How soon do you think you would be in a position to submit this to the 

committee? 

Answer. A copy of Treasury’s strategic plan is attached, and we will continue to 

develop adequate measures to help monitor our efforts. 

[CLERK’S NOTE.—A copy of this document has been retained in Committee files.] 

ARE THERE MORE RIGGS BANKS OUT THERE?

Question. Mr. Secretary, one of the last acts of the Clinton Administration was 

to issue a new money laundering guidance that specifically addressed requirements 

of financial institutions to monitor the financial transactions of senior foreign political figures. A lot of attention has been paid in the press to the possibility that Riggs 

Bank, here in the District of Columbia, knowingly violated those procedures since 

they do so much business with the Foreign Diplomatic Corps. 

How widespread do you believe the problem is? 

Answer. We have no reason to believe that the industry as a whole is not complying with the Bank Secrecy Act (BSA) requirements, although we recognize that 

we may need to improve coordination and enhance regulatory oversight. 
387

Question. Are there other financial institutions besides Riggs Banks that are currently under investigation for failing to monitor the transactions of foreign government officials and foreign diplomats? 

Answer. It would be inappropriate to comment on current investigations. However, at any given time, banks are examined by their functional Federal regulator 

for compliance with the Bank Secrecy Act (BSA). In fact, Federal bank regulators 

have explicit BSA examination cycles for institutions under their supervision. If an 

institution is found not to be in compliance with its requirements under the BSA, 

appropriate measures are taken to ensure full investigation and appropriate resolution of the matter. 

Question. To what extent do you believe that the transactions that were not reported by Riggs Bank or others are in fact directly attributable to terrorist financing? 

Answer. FinCEN is not in a position to confirm or deny the possibility that Riggs 

Bank facilitated terrorist financing. The transactions identified as suspicious were 

referred to law enforcement, as is our standard procedure for all such reporting for 

any financial institution. 

Question. Have we established any direct links between actual terrorist groups 

and some of the transactions that have been discussed in the press? 

Answer. FinCEN has no factual basis for concluding that the transactions not reported by Riggs Bank involved the financing of terrorism, and the transactions identified as suspicious were referred to law enforcement for possible investigation. 

WHAT ACCOMPLISHMENTS ARE HOPED FOR IN NEXT G–8 SUMMIT?

Question. Mr. Secretary, exactly 7 weeks from today, President Bush will host the 

Sea Island G–8 Summit in Georgia. The theme of the summit is ‘‘Freedom, Prosperity and Security’’, and the efforts of the international community in fighting terrorism are on the agenda. 

Can you specify for us what specific accomplishments in the area of combating 

terrorist financing are you hoping to bring about at the next G–8 summit? 

Answer. The G–8 heads of state have provided crucial leadership to the international coalition against terrorist finance, which met in June 2004 at the Sea Island Summit. They have charged the G–7 Finance Ministers with the lead operational role in these efforts, and the Finance Ministers have reported to Heads at 

the end of last year about their accomplishments and their plans for this year, 

which included work on cash couriers, alternative remittance systems, and making 

asset freezing regimes more effective. They have also continued to implement the 

heads’ charge to undertake outreach efforts to countries outside the G–7 by hosting 

meetings with key finance ministers and central bank governors in September 2003 

(Dubai) and April 2004 (Washington, DC). 

IRS STAFFING REDUCTIONS

Question. In January, IRS announced plans to reorganize. 

What is the status of the reorganization? Please list current and proposed reductions by number of employees, type of work performed, center location including 

State, and date of reduction or proposed reduction. 

Answer. In January, the Internal Revenue Service (IRS) announced changes designed to create operational efficiencies that will ultimately allow the IRS to re-direct the savings towards approximately 2,200 new enforcement positions. These 

changes include: Income Tax Returns Processing, Consolidation of Back Office Operations, and Reduction of Agency Overhead. Below are the specific details of each initiative, in turn. 

Income Tax Returns Processing.—The IRS is gaining efficiency from the increase 

in e-filed returns and the drop in the more labor-intensive paper filings. Since 1990, 

the number of returns filed electronically has grown from 4 million to 60 million 

in 2004, reducing the need for employees to enter the data manually. It is expected 

that in 2005 over half of the returns received by IRS will be electronically filed. 

Some time ago, after realizing ten centers would not be needed to process tax returns, IRS developed a plan that would, over time, reduce the number of centers 

processing paper returns. The IRS Brookhaven center stopped processing paper returns in September 2003. In January, the IRS announced the second step in this 

process. The IRS Memphis center will stop processing paper returns in October 

2005. At the Memphis location, about 2,200 employees currently process tax returns. 

Almost 2,000 of these employees are either seasonal employees or employees hired 

under a limited-term appointment. The IRS Philadelphia center is scheduled to stop 

processing paper returns in 2007, and the Andover center will be scheduled after 
388

Philadelphia, depending on experiences with the other locations. IRS has taken 

steps in Philadelphia to limit the impact on career employees. 

Consolidation of Back Office Operations.—For approximately 3 years, the IRS 

studied the reengineering of two administrative case management operations: case 

processing and insolvency operations. Case processing employees are responsible for 

a variety of back-office administrative tasks in support of examination and collection 

casework, such as processing cases, computer research and inventory controls. The 

insolvency organization protects the government’s interests by ensuring that the 

government’s claim in bankruptcy proceedings receives the highest possible priority 

relative to other creditors. 

The case processing initiative involves more than 1,200 employees in over 80 locations. The insolvency initiative involves more than 300 employees in more than 50 

locations. IRS is currently examining the impacts on each State, but will work to 

minimize the impact on employees by providing the maximum opportunities possible 

in affected areas. 

The current structure of these two operations is a vestige of the old IRS structure 

prior to the reorganization mandated by the IRS Reform and Restructuring Act of 

1998. Under this structure, many of the posts of duty have very few employees; indeed, some locations have only one employee performing case processing or insolvency work. As a result, we have minimal ability to respond to peak demand or 

manage workload; and employees have little opportunity to develop specialized 

skills or advance their careers. In addition, this widely dispersed geographic structure results in a variety of non-standard processes and makes quality review difficult. 

The new operational structure builds on existing processes currently being performed at IRS campuses; provides economies of scale and standardization; allows 

the creation of a quality review unit; offers staffing flexibility; and creates space 

savings due to shift work. Specifically, Case Processing operations will be centralized at four campuses (Cincinnati, Memphis, Ogden, and Philadelphia), and a new 

function will be created to support the redesigned organization through help-desk 

support, technical assistance and quality review. Insolvency operations will be realigned across clerical, paraprofessional and professional staff. The clerical and 

paraprofessional staff will be consolidated in Philadelphia. (Approximately 900 Insolvency Specialists and Advisors will remain in field offices.) 

Even after taking into account costs such as severance, hiring, training, salary 

cost differentials, and infrastructure, we expect these initiatives to yield savings in 

excess of $300 million over the next 10 years. These savings will allow us to redirect 

the equivalent of 350 to 425 full-time employees to front line tax law enforcement 

over the next 3 to 5 years. 

Reduction of Agency Overhead.—The IRS has studied human resources and other 

support functions to identify staff efficiencies and determine the proper size of these 

activities. Streamlining and centralization of these functions will generate annual 

savings of approximately 750 staff years, primarily two initiatives in the human resource area: Personnel Field Services and Transaction Processing Centers. The staff 

reductions are expected to occur in late 2005. IRS is in the process of finalizing 

these plans and will announce the details as they are able. 

—Personnel Field Services.—The Personnel Field Services provides internal and 

external staffing support for the IRS business units, and administers over 30 

benefit and work life programs. This initiative will take advantage of new technologies, such as a new automated Personnel system, HR Connect, mandated 

for use throughout Treasury and CareerConnector, as well as improved business 

processes and consolidation to create efficiency gains. Through this initiative, 

we will consolidate the Employment operations organizationally and geographically, producing economies of scale and improved operations, and yielding substantial support resource savings. Employment services will be consolidated in 

locations to support on-site campus operations. 

—Transactional Processing Centers.—Transactional Processing Centers (TPCs) 

process payroll and timekeeping for the IRS. Currently, these operations are located at nine sites, each of which have a timekeeping, payroll, and employee 

inquiry function. As we implement HR Connect, we anticipate a 50 percent decrease in workload at the TPCs. The TPC consolidation is also part of a larger 

process of integrating the staff of the Employee Resource Center (which handles 

all administrative inquiries from Service employees) and the TPCs. Since about 

one-third of the administrative inquiries concern payroll, integration of these 

functions will permit us to answer more inquiries on first contact. 

Question. What is the rationale for these reductions? 

Answer. As noted above, in January, the Internal Revenue Service (IRS) announced changes designed to create operational efficiencies that will ultimately 
389

allow the IRS to re-direct the savings towards approximately 2,200 new enforcement 

positions. These changes include: Income Tax Returns Processing, Consolidation of 

Back Office Operations, and Reduction of Agency Overhead. Below are the specific 

details of each initiative, in turn. 

Income Tax Returns Processing.—The IRS is gaining efficiency from the increase 

in e-filed returns and the drop in the more labor-intensive paper filings. Since 1990, 

the number of returns filed electronically has grown from 4 million to 60 million 

in 2004, reducing the need for employees to enter the data manually. It is expected 

that in 2005 over half of the returns received by IRS will be electronically filed. 

Some time ago, after realizing ten centers would not be needed to process tax returns, IRS developed a plan that would, over time, reduce the number of centers 

processing paper returns. The IRS Brookhaven center stopped processing paper returns in September 2003. In January, the IRS announced the second step in this 

process. The IRS Memphis center will stop processing paper returns in October 

2005. At the Memphis location, about 2,200 employees currently process tax returns. 

Almost 2,000 of these employees are either seasonal employees or employees hired 

under a limited-term appointment. The IRS Philadelphia center is scheduled to stop 

processing paper returns in 2007, and the Andover center will be scheduled after 

Philadelphia, depending on experiences with the other locations. IRS has taken 

steps in Philadelphia to limit the impact on career employees. 

Consolidation of Back Office Operations.—For approximately 3 years, the IRS 

studied the reengineering of two administrative case management operations: case 

processing and insolvency operations. Case processing employees are responsible for 

a variety of back-office administrative tasks in support of examination and collection 

casework, such as processing cases, computer research and inventory controls. The 

insolvency organization protects the government’s interests by ensuring that the 

government’s claim in bankruptcy proceedings receives the highest possible priority 

relative to other creditors. 

The case processing initiative involves more than 1,200 employees in over 80 locations. The insolvency initiative involves more than 300 employees in more than 50 

locations. IRS is currently examining the impacts on each State, but will work to 

minimize the impact on employees by providing the maximum opportunities possible 

in affected areas. 

The current structure of these two operations is a vestige of the old IRS structure 

prior to the reorganization mandated by the IRS Reform and Restructuring Act of 

1998. Under this structure, many of the posts of duty have very few employees; indeed, some locations have only one employee performing case processing or insolvency work. As a result, we have minimal ability to respond to peak demand or 

manage workload; and employees have little opportunity to develop specialized 

skills or advance their careers. In addition, this widely dispersed geographic structure results in a variety of non-standard processes and makes quality review difficult. 

The new operational structure builds on existing processes currently being performed at IRS campuses; provides economies of scale and standardization; allows 

the creation of a quality review unit; offers staffing flexibility; and creates space 

savings due to shift work. Specifically, Case Processing operations will be centralized at four campuses (Cincinnati, Memphis, Ogden, and Philadelphia), and a new 

function will be created to support the redesigned organization through help-desk 

support, technical assistance and quality review. Insolvency operations will be realigned across clerical, paraprofessional and professional staff. The clerical and 

paraprofessional staff will be consolidated in Philadelphia. (Approximately, 900 Insolvency Specialists and Advisors will remain in field offices.) 

Even after taking into account costs such as severance, hiring, training, salary 

cost differentials, and infrastructure, we expect these initiatives to yield savings in 

excess of $300 million over the next 10 years. These savings will allow us to redirect 

the equivalent of 350 to 425 full-time employees to front line tax law enforcement 

over the next 3 to 5 years. 

Reduction of Agency Overhead.—The IRS has studied human resources and other 

support functions to identify staff efficiencies and determine the proper size of these 

activities. Streamlining and centralization of these functions will generate annual 

savings of approximately 750 staff years, primarily two initiatives in the human resource area: Personnel Field Services and Transaction Processing Centers. The staff 

reductions are expected to occur in late 2005. IRS is in the process of finalizing 

these plans and will announce the details as they are able. 

—Personnel Field Services.—The Personnel Field Services provides internal and 

external staffing support for the IRS business units, and administers over 30 

benefit and work life programs. This initiative will take advantage of new technologies, such as a new automated Personnel system, HR Connect, mandated 
390

for use throughout Treasury and CareerConnector, as well as improved business 

processes and consolidation to create efficiency gains. Through this initiative, 

we will consolidate the Employment operations organizationally and geographically, producing economies of scale and improved operations, and yielding substantial support resource savings. Employment services will be consolidated in 

locations to support on-site campus operations. —Transactional Processing Centers.—Transactional Processing Centers (TPCs) 

process payroll and timekeeping for the IRS. Currently, these operations are located at nine sites, each of which have a timekeeping, payroll, and employee 

inquiry function. As we implement HR Connect, we anticipate a 50 percent decrease in workload at the TPCs. The TPC consolidation is also part of a larger 

process of integrating the staff of the Employee Resource Center (which handles 

all administrative inquiries from Service employees) and the TPCs. Since about 

one-third of the administrative inquiries concern payroll, integration of these 

functions will permit us to answer more inquiries on first contact. 

Question. What kind of hires will occur as a result of the reorganization? 

Answer. The savings from the reorganization initiatives will ultimately be re-directed towards approximately 2,200 new enforcement positions. The case processing 

and insolvency initiative will result in the creation of positions in Cincinnati, Memphis, Ogden and Philadelphia. Case processing operations will be centralized at four 

campuses and a new function will be created to support the redesigned organization 

through help-desk support, technical assistance and quality review. Insolvency operations will be realigned across clerical, paraprofessional and professional staff. The 

clerical and paraprofessional staff will be consolidated in Philadelphia. (Approximately 900 Insolvency Specialists and Advisors will remain in field offices.) 

The reduction in agency overhead will fund expected efficiencies of $18 million directed by the administration in the IRS’s fiscal year 2005 budget. 

IRS returns processing savings anticipated in fiscal year 2005 are approximately 

$6 million and 147 FTE. These savings, along with $105 million additional savings 

will be reapplied as follows:

Reinvestment Millions of

Dollars FTE 

Curb Egregious Noncompliance .............................................................................................. 31.4 293 

Select High Risk Cases for Examination ................................................................................ 6.0 ........................

Embedded Quality ................................................................................................................... 1.6 26 

Consolidation—Case Processing ............................................................................................ 13.7 80

Consolidation—Insolvency ...................................................................................................... 2.1 15 

Combat Corporate Abusive Tax Schemes ............................................................................... 5.0 34 

Leverage/Enhance Special Agent Productivity ........................................................................ 2.5 28 

Standardize CLMC Training Rooms ........................................................................................ 0.5 ........................

IRS Reorganization Transition ................................................................................................ 5.0 ........................

Service-wide Competitive Sourcing ........................................................................................ 9.1 ........................

MITS Reorganization Transition .............................................................................................. 34.0 236

Total ........................................................................................................................... 110.9 712

Downstream rent savings will be used to reduce rent deficits, allowing IRS to protect enforcement initiatives. 

IRS ENFORCEMENT INCREASE

Question. Mr. Snow, at our recent hearing with IRS Commissioner Everson, we 

heard about the unbudgeted-for costs at IRS and how funding that was to be used 

for enforcement, instead went to help pay for these unbudgeted costs such as pay, 

postage and rent. 

Can you give us the same commitment that Commissioner Everson did, that every 

dollar that this subcommittee provides for enforcement for this year and next year 

actually be spent on enforcement activities? 

Answer. Yes, if the Congress provides the requested enforcement funds, the committee can count on those funds going toward enforcement. 

The only caveat is, as noted by Commissioner Everson when he testified before 

the committee, is a government-wide rescission or similar device is enacted, we will 

take them across the board and that may affect the total enforcement resource level 

as it will affect all of the other IRS accounts. 

Question. Also, Mr. Secretary, we have been told by IRS that for the past 3 years, 

enforcement has been declining at IRS. Now, IRS is changing its focus and making 

enforcement a top priority. 
391

Why has it taken 3 years for the IRS to stem the reduction in enforcement activities? 

Answer. The decline in enforcement activities was driven by concurrent declines 

in frontline enforcement personnel and implementation of significant process 

changes required to respond to the mandates of the Restructuring and Reform Act 

of 1998. From fiscal year 1996 to fiscal year 2003, the combined FTE for revenue 

agents, revenue officers and criminal investigators declined by 27 percent. During 

this period, IRS placed an increased emphasis on improving taxpayer service, often 

to the detriment of enforcement. Despite this, enforcement outputs increased in 

2003 across all major programs. IRS expects these increases to continue in 2004 

with additional hires and continued roll-out of reengineered processes. The fiscal 

year 2005 budget seeks to further restore IRS to a balanced program emphasizing 

both service and enforcement. 

OFFICE OF FOREIGN ASSETS CONTROL (OFAC)

Question. Recently, OFAC provided supplemental budgetary information to the 

Appropriations Committee outlining six areas of focus relating to Executive Orders, 

followed by two significant efforts on joint task force actions. 

Please provide for the record how many FTEs or employee hours—whichever is 

more applicable—are allocated for the above-mentioned areas. 

Answer.

Executive Order 1 FTE 

President’s Financial War on Terrorism (E.O. 13224) ......................................................................................... 30.443

Charities and Regulatory Strategy/Financial War on Terrorism (E.O. 13224) .................................................... 2.930

Blocking Saddam’s Misappropriated Assets (E.O. 13315) .................................................................................. 5.820

Western Balkans Executive Order (E.O. 13219) .................................................................................................. 1.070

Kingpin Act Program ............................................................................................................................................ 9.095

SDNT—Colombian Cartels Program .................................................................................................................... 2 7.045

Total ........................................................................................................................................................ 56.403

1 These numbers are estimates based on current workload and allocation of resources to meet these needs. As workload demands change, the numbers will fluctuate as well. Numbers in these tables include allocation of resources for program implementation and support. 2 Includes Operation Dynasty and Operation Panama Express. 

Question. What are the remaining FTEs or employee hours allocated to? 

Answer.

Programs 1 FTE 

Afghanistan/Taliban ........................................................................................................................................... 0.69 

Cuba ................................................................................................................................................................... 21.43 

Iran ..................................................................................................................................................................... 13.62 

Iraq ..................................................................................................................................................................... 5.43 

Libya ................................................................................................................................................................... 5.06 

North Korea ........................................................................................................................................................ 0.34 

Sudan ................................................................................................................................................................. 4.1 

Syria ................................................................................................................................................................... 0.75 

Burma ................................................................................................................................................................. 0.021 

Liberia ................................................................................................................................................................ 2.06 

Zimbabwe ........................................................................................................................................................... 0.58 

Haiti .................................................................................................................................................................... 0.045 

Other Programs .................................................................................................................................................. 6.971 

Program Support ................................................................................................................................................ 9.61

Total ...................................................................................................................................................... 70.707 

1 These numbers are estimates based on current workload and allocation of resources to meet these needs. As workload demands change, 

the numbers will fluctuate as well. Numbers in these tables include allocation of resources for program implementation and support. 

Question. Please list for the record, how many FTEs and employee hours are dedicated to administering and enforcing the restrictions on travel to Cuba. 

Answer. Cuba, because of its proximity and distinctive relationship with the 

United States, has a unique and critical sanction program which receives strict attention. OFAC has the equivalent of 21.43 FTEs who administer, oversee and enforce the Cuba program, including the travel embargo and remittance restrictions. 

These FTEs focus on a full range of OFAC services required for the administration 

of the program, including licensing, enforcement, supervision and other important 

aspects of the embargo. Of the 21.43 FTEs, approximately half are devoted to proc-
392

essing travel-related license requests, which include family, educational, humanitarian, religious, professional, journalistic, governmental, and other types of travel. 

Question. How has this differed from FTEs and hours spent during each of the 

past 5 years? 

Answer. Departmental Offices’ financial management reporting system does not 

have the capability of allocating the number of employees dedicated to administering and enforcing the restrictions on travel to Cuba over the past 5 years. The 

financial reporting system reflects the total number of employees, authorized, onboard, and project FTE usage. 

Question. How does the fiscal year 2005 budget request allocate resources for this 

purpose? 

Answer. The fiscal year 2005 budget request allocates resources for this purpose 

based on the current FTE level (21.43 FTEs). It is anticipated that this FTE level 

will remain approximately the same. 

PROPOSED MERGER OF THE U.S. MINT AND THE BUREAU OF ENGRAVING AND PRINTING

Question. Mr. Secretary, in March, the Treasury Department hired a consulting 

company to study ways to merge the U.S. Mint and the Bureau of Engraving and 

Printing (BEP). This is not a new idea and is one that has been studied by GAO 

in 1997, by the National Performance Review in 1995, and by the Treasury Inspector General in 1987. In all cases, the idea of a merger was rejected as impractical 

and potentially costly. Despite these facts, the decision was made to pay for a new 

study at a cost that will exceed $400,000. I have been told that this study will not 

make a recommendation, that it is only a 60-day study that will simply provide options. 

Is this a wise use of taxpayer dollars when the idea has already been rejected on 

three separate occasions? 

Answer. The Treasury Department continues to look for taxpayer savings and efficiencies in all its bureaus. Due to changing market conditions, review of the Treasury Department’s structure is necessary to best serve the public. By studying the 

structure of the U.S. Mint and Bureau of Engraving and Printing, the Treasury Department ensures effective use of taxpayer resources. 

Question. Is this expenditure reflected as a line-item in the Fiscal Year 2005 

President’s Budget? If not, why not? 

Answer. The expenditure is not a line item in the President’s Fiscal Year 2005 

Budget. The U.S. Mint and the Bureau of Engraving and Printing allocate resources 

for efficiency assessments they believe necessary. The specifics of these studies are 

not always known when the budget is formulated. 

Question. Who at the Treasury Department made the decision to hire the consultant? 

Answer. The Secretary directed senior officials at the Bureau of Engraving and 

Printing and the U.S. Mint to work with his staff. These efforts at the Department 

are run out of the Office of the Assistant Secretary for Management. 

Question. Why wasn’t this an open competition? Only three firms were considered 

off the GSA schedule. Who were they and what factors led to the winner’s selection 

over the other two? 

Answer. This was an open competition. The Department complied with the requirements for full and open competition by obtaining three experienced companies 

from the GSA Schedule. IBM, Logistic Management Institute (LMI), and Booz Allen 

Hamilton are prominent and respected firms in this field. 

LMI was selected because the contracting officer determined the firm submitted 

the best proposal based on their: 

—1. Management Approach.—This includes ‘‘Understanding of the Requirement’’ 

and ‘‘Demonstrated Ability to Meet Timeframes with Quality Products’’ 

—2. Experience of Proposed Personnel in Cost Modeling, Government Management 

Improvement Efforts, Redevelopment of Excess Plant Capacity/Office Space, and 

OMB/Congressional Budget Issues

—3. Past Performance.—Includes the proposed individuals and the firm. 

Question. Why is this study being rushed in 60 days in order to provide information for the fiscal year 2006 budget cycle? This is not a new issue. Why is it imperative to cut corners and go to unnecessary expense for this proposal? 

Answer. The study was designed to be completed in approximately 60 days in 

order for Treasury to consider an inclusive approach that assesses the possible impact of changing market conditions. This inclusive approach calls for augmenting 

the business case for BEP/Mint efficiencies within the context of current ‘‘good government’’ initiatives. 
393

While the issue is not new, the environment (impact of E-Commerce on demand 

and 9/11 impact on security) has changed since the prior studies. 

We believe this timeframe was reasonable for the assessment and is a necessary 

expense and integral to implementing our approach for the study. 

Question. Will you provide your assurance, Mr. Secretary, that from this point further, the Treasury Department will not expend any additional funding to implement 

a Mint-BEP merger until such a time that this committee and the Congress provide 

its approval? 

Answer. We will not pursue any of these options without a full consultation with 

Congress and, in fact, Treasury will not call for any merger of any system or function during the 108th Congress. 

QUESTIONS SUBMITTED BY SENATOR ROBERT C. BYRD

Question. Congress included in the Fiscal Year 2004 Consolidated Appropriations 

bill, enacted as Public Law 108–199, on January 23, 2004, language that directs the 

administration to negotiate a solution to the World Trade Organization’s (WTO) ruling against the Continued Dumping and Subsidy Offset Act. When will the United 

States present its negotiating position on this matter to the WTO? 

Answer. In accordance with the Appropriations bill language, the United States 

filed and presented a formal paper in the World Trade Organization (WTO) Negotiating Group on Rules for its meeting the week of April 26, 2004, raising the issue 

of the right of WTO Members to distribute monies collected from antidumping and 

countervailing duties. That paper is publicly available on the WTO website 

(www.wto.org), under the document designation TN/RL/W/153. 

It should be noted that the November 2001 Doha Ministerial Declaration mandate 

for the WTO Rules Group calls for an initial phase of issue identification before any 

negotiations over specific changes. Given this Doha mandate, it has been U.S. practice with respect to all the issues we have raised thus far in the Rules negotiations 

to begin with a submission identifying the issue generally, and we followed this 

practice in our paper with respect to this issue as well. 

Question. In report language accompanying the Fiscal Year 2004 Consolidated Appropriations bill, enacted as Public Law 108–199, Congress directed the administration to report to the Senate Appropriations Committee every 60 days on the 

progress of these negotiations. 

Can you explain why the first report was not provided to the Appropriations Committee 60 days from enactment of the Consolidated Appropriations bill, meaning on 

or about March 23, 2004? Can you confirm that the next report will be provided 60 

days from March 23, 2004? 

Answer. The United States Trade Representative (USTR) is working to schedule 

a briefing with Senate Appropriations Committee staff to report on this issue as 

soon as it can be arranged. 

Question. The Bush Administration currently does not pursue trade remedies 

under the U.S. countervailing duty law against non-market economies like China, 

even though: (1) the United States negotiated subsidy disciplines with China as part 

of its accession to the WTO; (2) the United States has worked to see that China 

participates in the ongoing OECD steel subsidy negotiations; and (3) USTR reports 

that various agricultural industries are experiencing ongoing export subsidies by 

China. Can you tell me whether the administration is reexamining this issue? If 

not, why not? 

Answer. The Department of Commerce has informed us that it does not currently 

apply the countervailing duty (CVD) law to non-market economies (NMEs), a practice upheld in 1984 by the Court of Appeals for the Federal Circuit in Georgetown 

Steel Corp. v. United States. In that case, the Court affirmed Commerce’s view of 

NMEs as devoid of the kinds of market benchmarks necessary to identify a subsidy. 

The Court also relied on Congress’s 1974 effort to address unfairly traded NME exports through the AD law by enacting the factors-of-production methodology. Commerce has re-affirmed Georgetown many times, most recently in the 1997 preamble 

to the post-URAA CVD regulations. Congress enacted substantial amendments to 

the CVD law in 1988 and 1994 without disturbing Commerce’s practice in this area. 

The Commerce Department recognizes that the reasoning underlying the Georgetown decision may not apply to China today to the extent that it did 20 years ago. 

However, applying the CVD law to NMEs would raise complex issues of policy and 

methodology, including implications for antidumping policy and practice. Any such 

shift away from 20 years of trade practice should therefore only be implemented 

after careful consideration and review. 
394

Question. The U.S. Bureau of Customs and Border Protection (CBP) issued a report in March, which revealed that at least $130 million in import duties were uncollected in fiscal year 2004, primarily in cases involving imports from the People’s 

Republic of China. Several weeks ago CBP Commissioner Bonner suggested that an 

interagency task force had been launched specifically to ensure that antidumping 

duties, including those imposed on Chinese imports, are properly assessed and collected by the U.S. government. 

Please advise as to whether U.S. Treasury Department officials are involved in 

this task force and, if they are, provide specific information regarding what they 

plan do to solve this problem. 

Answer. Assessment and collection of duties, including antidumping duties, have 

been delegated to the Department of Homeland Security pursuant to the Homeland 

Security Act. Treasury Department and CBP officials have, nevertheless, discussed 

the issue of how to ensure that antidumping duties are properly assessed and collected. Treasury officials, however, are not involved in the particular work group to 

which you are referring, which involves CBP and Department of Commerce staff. 

CBP has informed us that it currently has in place trade strategies that focus specifically on antidumping/countervailing duty and revenue. Each of these plans has 

a multi-office working group responsible for the development, oversight and evaluation of the plans. These plans have already developed and implemented a number 

of actions that address dumping as a whole and by inclusion, China. These actions 

include identification and clean up of outstanding dumping entries, increased operational oversight of the dumping process, development of improved mechanisms to 

ensure and monitor adequate bonding of dumping entries, and improved communication with the Department of Commerce. 

QUESTIONS SUBMITTED BY SENATOR BYRON L. DORGAN

Question. I’m very concerned about the finding in a recently-released U.S. General 

Accounting Office (GAO) report. The GAO report found that a majority of foreignbased and U.S.-based companies pay absolutely no Federal income taxes each year 

despite doing trillions of dollars of business here. There is compelling evidence that 

many multinational companies are using transfer pricing to shift their U.S.-earned 

profits abroad to tax-haven countries. And the ‘‘arm’s length’’ pricing enforcement 

methodology that has been advocated by the Treasury Department—and applied by 

the IRS—is simply not putting a stop to this blatant tax gimmickry. Repeated attempts by the United States to make the current ‘‘arm’s length’’ system work over 

the past decade have failed. 

At what point will this administration decide that it’s time to finally abandon its 

‘‘arm’s length’’ pricing approach and develop a more effective way to administer and 

enforce our tax laws with respect to firms that operate across national borders? 

Answer. The arm’s length standard provides a clear, consistent principle for dividing the income of a multinational enterprise among the countries where it operates. 

The policy is neutral in its treatment of companies within a multinational group 

versus independent companies and thus does not favor one form of business organization over the other. These positive features have contributed to the broad acceptance of the arm’s length standard as the international standard for determining the 

income of multinational enterprises. 

Another compelling reason to continue with the arm’s length standard is because 

it represents the best way to deal with related party transactions under today’s economic circumstances. The conditions that make formulary apportionment possible at 

the State level do not exist at the international level. Internationally there are neither common accounting standards nor common approaches for measuring income. 

Moreover, there is no umbrella framework or organization comparable to the Federal income tax or the Internal Revenue Service. Unless countries were to adopt a 

common accounting system and some sort of international body were to be established with authority to examine the worldwide financial statements of all multinational companies, it would not be feasible to abandon the internationally-accepted 

arm’s length approach in favor of global formulary apportionment. 

The Treasury Department continues working to improve the administration of the 

arm’s length standard and to build upon the advances made in the last 15 years. 

The Treasury Department is devoting significant resources to ensuring that the 

transfer pricing regulations are up-to-date and reach appropriate results consistent 

with the arm’s length standard. This effort includes appropriate revisions of the applicable regulations as well as an administrative compliance initiative that is being 

directed by the Internal Revenue Service. 
395

Question. The administrative problems associated with the current ‘‘arm’s length’’ 

pricing methodology are well-documented. A number of prominent tax experts share 

my view that U.S. tax avoidance by sophisticated multinational firms has been perpetuated, in large part, by the Treasury Department’s blind allegiance to this antiquated tax enforcement method. 

I think we should replace the ‘‘arm’s length’’ pricing method with an objective, formula-based approach for apportioning the world-wide income of related companies. 

This approach would be similar to the system that States have used successfully for 

decades to allocate the overall income of corporations among the States in which 

they operate. A formulary method avoids many of the problems caused by the overly 

subjective and factually-sensitive nature of intercompany sale pricing under the 

‘‘arm’s length’’ standard. 

What do you believe are the major impediments, if any, to the United States moving to a formula method for apportioning the world-wide income of related companies? If there are impediments, what steps do you think would be needed to overcome them? 

Answer. The United States could not implement a global formulary apportionment 

regime unilaterally. The implementation of a global formulary apportionment regime would require substantial international coordination and consensus on predetermined formulae. Thus, a significant number of steps would need to be taken 

if a global formulary apportionment regime were to be implemented. 

First, significant changes to our longstanding statutory and regulatory rules 

would be required. 

Second, reconsideration of the entire U.S. network of bilateral income tax treaties 

would be necessary. If global formulary apportionment were to be implemented, it 

would be necessary to ensure that U.S. income tax treaties require or permit the 

use of such apportionment to determine the taxable income of multinational enterprises. The U.S. network of bilateral income tax treaties is the means by which we 

reach agreement with our treaty partners on the rules and mechanisms for avoiding 

double taxation and preventing tax evasion. Each bilateral income tax treaty represents a negotiated balance of the two countries’ interests and is necessarily tailored to the two countries’ particular circumstances. Current U.S. income tax treaties contain articles pursuant to which each country applies the arm’s length standard in transfer pricing matters. 

Third, and perhaps most significantly, a consensus regarding the implementation 

and administration of a global formulary apportionment regime would have to be 

reached among all of our major trading partners at a minimum. As a longer term 

matter, a consensus would need to be reached among all countries. Absent such an 

international consensus, there would be double or multiple taxation of the same income (and also the potential for income to escape taxation altogether). The likelihood that American companies would be subjected to double taxation would be very 

high if the United States were to attempt to implement a formulary apportionment 

system without such an international consensus. 

Formulary apportionment would require international consensus on the following 

basic items as a starting point: (1) how to measure the global tax base, including 

a common accounting system; (2) how to define the scope of the worldwide unitary 

business subject to the formulary apportionment; (3) the factors to be used to apportion the tax base; (4) how to measure and weight the apportionment factors; (5) how 

to address the potential for distorting the results under the formula by artificially 

shifting the factors; and (6) how to address the particularly complex questions relating to intangible property. In addition, proper implementation of a global formulary 

apportionment system would require establishment of some sort of international 

body that would have to be vested with the authority to examine the worldwide financial statements of all multinational companies and to which the United States 

(and other countries) would have to cede the ability to define taxable income. 

This summary description of steps that would be required for implementation of 

a global formulary apportionment regime provides some insight into why the arm’s 

length standard has become the international standard for dividing the income of 

a multinational enterprise among the countries where it operates. The arm’s length 

standard provides a clear and consistent principle which is grounded in economics 

and to which all countries can agree. The fact that the arm’s length standard is 

grounded in the underlying economics of the transactions has made it possible to 

develop an international consensus in favor of the arm’s length standard among 

countries with very different economic interests.
396

SUBCOMMITTEE RECESS

Senator SHELBY. Mr. Secretary, appreciate your leadership and 

look forward to continuing to work with you. 

Thanks for your appearance today. 

Secretary SNOW. Thank you, Mr. Chairman. 

Senator SHELBY. This concludes the subcommittee hearing. 

[Whereupon, at 11:40 a.m., Tuesday, April 10, the subcommittee was recessed, to reconvene subject to the call of the Chair.] 
(397)

DEPARTMENTS OF TRANSPORTATION, TREASURY AND GENERAL GOVERNMENT, AND RELATED AGENCIES APPROPRIATIONS FOR 

FISCAL YEAR 2005 

THURSDAY, APRIL 22, 2004

U.S. SENATE, SUBCOMMITTEE OF THE COMMITTEE ON APPROPRIATIONS, Washington, DC. 

The subcommittee met at 10:02 a.m., in room SD–138, Dirksen 

Senate Office Building, Hon. Richard C. Shelby (chairman) presiding. 

Present: Senators Shelby, Stevens, Murray, and Dorgan. 

DEPARTMENT OF TRANSPORTATION 

FEDERAL AVIATION ADMINISTRATION

STATEMENT OF MARION C. BLAKEY, ADMINISTRATOR 

Senator SHELBY. The subcommittee will come to order. Today we 

welcome Ms. Marion Blakey, the Administrator of the Federal 

Aviation Administration, and Mr. Ken Mead, the Inspector General 

of the Department of Transportation. I thank you both for being 

here this morning. I look forward to our discussion. 

Madam Administrator, your agency and the aviation industry are 

to be commended for operating the safest aviation system in the 

world. The 3-year average for fatal commercial accidents is at an 

all-time low. 

Obviously no mission is more important than the Federal Aviation Administration and we should strive to improve upon this impressive safety record. I look forward to hearing from our witnesses 

what additional steps can be taken to improve the safety of our airways. 

The FAA and the aviation industry face other challenges, as well. 

Our current fiscal constraints require us to make choices between 

priorities and programs. We are at a critical juncture in the modernization and operation of our air traffic control system. After almost a decade of vigorously growing budgets, we are faced this year 

with a budget request and a budget environment that would seem 

to indicate that tough choices will have to be made at the FAA. 

Mr. Mead’s written statement points out that FAA has not been 

accustomed to operating within a budget-constrained environment 

and that changing the organizational culture to accept budget constraints will be a challenge. Yet when I look at the FAA budget request I am struck that the choices made in this budget request are 
398

remarkably similar to the choices of the past. The agency’s operations account grows by 5 percent while funding for facilities and 

new air traffic control equipment is squeezed. When other Federal 

agencies are facing 1.5 percent growth, I find it astonishing that 

a request for 5 percent growth is viewed as constrained. 

Madam Administrator, you are to be commended again for your 

commitment to slow the growth rate in the FAA’s operational costs 

and in your efforts at personnel reform. Clearly we have a long way 

to go to bring the FAA’s operational cost growth into line with the 

budget realities that we are likely to face for the next several 

years. While you have all the legal authority to implement virtually 

any reform you can imagine, true personnel reform is elusive and 

remains exceptionally difficult at the FAA. 

PAY PERFORMANCE

Your effort to link pay and performance is a step in the right direction. I note that you have had mixed success in tying pay raises 

to meeting performance goals. It is ironic that the controllers did 

not participate in this linkage between raises and performances 

last year, even though one of the three organizational goals that 

FAA missed was air traffic control operational errors. 

Administrator Blakey, tying pay to performance is appropriate, I 

believe, and overdue. While your action last year was only a step 

on a path toward linking pay and performance, I commend you for 

taking this necessary first step. I look forward to hearing what further steps you plan to make. 

I also want to mention your efforts to restructure air traffic services and research and acquisition offices into a performance-based 

organization called the Air Traffic Organization. If this structure is 

properly implemented, it will instill personal accountability 

throughout the FAA. On the other hand, if the ATO is implemented incorrectly, it will only add another layer of bureaucratic 

structure to an already dysfunctional organization. 

PROBLEMS WITH MODERNIZATION

I believe that we must improve FAA’s workforce productivity if 

we are to achieve any type of meaningful budgetary savings. A 

major contributor to improving productivity should come through 

making the right investments in modernization of the National Airspace System. Yet when I review the facilities and equipment 

budget, I am disappointed that this is where the cuts to the FAA 

budget have been taken. I am concerned that the lion’s share of the 

remaining facilities and equipment funding is poured into the same 

money pits that consumes a disproportionate amount of our capital 

funding, including the Wide Area Augmentation System (WAAS) 

and Advanced Technologies and Oceanic Procedures (ATOP). 

Further, I am increasingly concerned with the En Route Automation Modernization procurement to replace the aging Host system. 

The funding profile for ERAM is unrealistically aggressive; the program structure is unnecessarily complex; and the procurement 

strategy virtually guarantees substantial cost growth, schedule 

slippage, and questionable outcomes. I am interested in hearing 

from the Inspector General, his suggestions for minimizing the risk 

associated with this program. 
399

We may be coming to the realization that the FAA is not capable 

of developing realistic cost estimates and schedules for major acquisition and development programs. We may also need to determine 

what steps to take to protect the taxpayer from what the Inspector 

General characterizes as historical ‘‘cost growth, schedule slips, and 

shortfalls in performance.’’

What concerns me most about the statement is the implication 

that cost growth, schedule slippage, and performance shortfalls are 

expected and seem to have become part of the FAA culture. The 

FAA’s failure to cost-effectively modernize and redesign the National Airspace System is only matched in spending and failure by 

the IRS’s on-going failed attempts to modernize its computer system. 

FLIGHT DELAYS

The Bureau of Transportation Statistics recently published its 

monthly analysis of airline on-time statistics and causes of flight 

delays. The 6-month analysis shows that almost half of flight 

delays are caused by insufficient infrastructure or failures of the 

National Airspace System itself. I believe this data underscores the 

primary issue facing the FAA in this budget request: are we making the right decisions to address constraints in the system, enhance safety, and improve efficiency, or are we failing to question 

our assumptions and merely following the same programs, procurements and pitfalls that the FAA has slavishly adhered to in prior 

budgets? It is an important question to ask and an even more important question to honestly answer. I hope we can get some of 

these answers here today. 

Senator Murray. 

STATEMENT OF SENATOR PATTY MURRAY

Senator MURRAY. Thank you, Mr. Chairman. I am glad you have 

called this meeting this morning to focus specifically on the needs 

and challenges facing the Federal Aviation Administration. 

The President’s budget for fiscal year 2005 proposes to effectively 

freeze overall funding for the Transportation Department at the 

level of $58.7 billion. However, within that proposed freeze are selected increases and corresponding cuts. The largest single cut of 

any agency within the Transportation Department is roughly the 

$400 million that President Bush wants to cut from the FAA’s efforts to modernize our air traffic control system. Frankly, I was dismayed when I learned of the President’s planned retrenchment in 

aviation investment. 

As a long-standing member of this subcommittee, I know well 

that there have been several problems that have beset the FAA’s 

efforts to modernize the equipment that keeps the National Airspace System operating each day. As the Inspector General will tell 

us this morning, certain programs continue to encounter significant 

cost overruns and schedule delays. 

But in my mind, the solution to these problems is not the wholesale disinvestment that is proposed by the President. While a lot 

of attention has been focused on the $400 million cut proposed for 

2005, a little known fact is that President Bush’s multi-year budget 

anticipates even further cuts will be made in the FAA’s procure-
400

ment budget in the future. For 2006, the Bush Administration intends to cut air traffic control modernization by an additional $61 

million. Taken together, under the President’s proposal total funding for air traffic control modernization over the 4-year period covered by the Vision–100 Aviation Authorization Bill that the President just signed a few months ago would be more than $2.3 billion 

less than the level authorized in that bill. 

What is even more perplexing is that the Bush budget proposes 

that modernization funding stay almost $2 billion below the level 

that President Bush himself proposed in his own Aviation Reauthorization Bill. Finally, under the Bush budget, funding for aviation modernization would be almost $1.3 billion lower than the 

level we would achieve if we just froze modernization funding at 

the current level. 

This is truly harsh treatment. It seems no sooner did the President sign the Vision–100 bill than he turned his back on it. His 

wholesale retrenchment will mean that the flying public will have 

to wait even longer to see the woefully outdated Air Traffic Control 

System brought up to modern standards. 

My principal concern with the President’s decision to disinvest in 

aviation is what it means for the future of aviation and America’s 

leadership in aviation. After leading the world in aviation for its 

first 100 years, I have to wonder whether the President is now creating an opportunity for Europeans or others to control the next 

100 years. When you look at many of the modernization projects 

that have been eliminated from the budget to accommodate the 

President’s proposed cuts, many of them were designed to bring the 

cutting edge of technology into our air traffic control system to 

make our aviation system safer and more efficient. 

Just last week I had the opportunity of visiting the Air Traffic 

Management enterprise at the Boeing Company in my home State 

of Washington. They are making great strides in developing plans 

for the next generation, satellite-based air traffic control regime. 

These are the kinds of initiatives in which we must continue to invest if we are to stay ahead of our foreign competitors and lead the 

way in aviation. Leadership means having a plan that addresses 

the future, not just a plan to survive day to day with inadequate 

staff and outdated equipment. 

One case in point is the situation we find ourselves in with our 

air traffic controllers. Today the number of air traffic controllers at 

our 24 en route centers is 747 controllers—10 percent less than the 

level called for under the FAA’s own staffing standard. Some of 

these facilities are currently staffed as much as 30 percent below 

the level called for under the FAA’s staffing standard. 

The Inspector General will testify to us that the FAA is going to 

need to take great care in planning for what is expected to be a 

wave of controller retirements potentially bringing the number of 

available air traffic controllers for these facilities to an even lower 

level. The FAA needs the kind of resources to implement a plan 

that is focused on the future to ensure that as air traffic continues 

to grow there will be a steady stream of fully trained controllers 

to manage our air space so that our system can continue to be the 

safest in the world. 
401

AIRCRAFT MAINTENANCE

Another case in point is the area of aircraft maintenance. The Inspector General will testify that the FAA has real deficiencies in 

its inspection oversight of maintenance activities that were formerly executed by the air carriers themselves but are now commonly contracted out to third parties. On January 8 of last year, 

a US Airways Express plane crashed while taking off at Charlotte, 

North Carolina, resulting in 21 fatalities. The NTSB’s investigation 

of this crash revealed that the cause was partially related to defective maintenance by a third-party contractor. 

We need to have an FAA that is sufficiently focused on the future so that its inspectors are ahead of the industry trends, not 

playing catch-up. 

Mr. Chairman, we have an obligation to keep this agency focused 

on the future, even if the President’s budget wants to focus them 

solely on survival from day-to-day. I hope this subcommittee will 

not allow our Nation to lose its leadership in aviation and undermine the progress we have made in ensuring that our aviation system remains the safest in the world. 

Thank you very much, Mr. Chairman. 

Senator SHELBY. Senator Dorgan. 

STATEMENT OF SENATOR BYRON L. DORGAN

Senator DORGAN. Mr. Chairman, thank you. I am sorry I was delayed. My understanding is that we have not yet had the statement 

by the witnesses; is that correct? 

Senator SHELBY. We have not. This is the opening statements of 

Senators. 

Senator DORGAN. I will be very brief. I do have some questions 

for the FAA Administrator. 

This is obviously a big job. We are threatened in this country 

with the prospect of terrorists that want to kill innocent Americans 

and we know that they have used airplanes to do that. The FAA 

has had a big job even notwithstanding terrorism but add terrorism to the issue and it is significant. 

I think the airline industry has had plenty of struggles in recent 

years and our country and our economy depends on a commercial 

airline network that works and that is safe and provides reliable 

transportation. We have gone through a series of things over many 

years of crowding and delays and passenger issues and then the 

terrorist attacks and the shutdown of that industry, so I think Administrator Blakey has her plate full and I appreciate the work she 

does. 

I do want to say this. I am concerned again about the recommendation in the President’s budget to cut funding for essential 

air services by half, more than half, in fact. I think it is a serious 

mistake. I remain concerned about the prospect of contracting out 

or privatization of certain air traffic control functions, and I will 

talk about that with the Administrator. 

Mr. Mead, thank you for the continuing work you do. You have 

been, I think, very important to the work that we have done on the 

Commerce Committee on many issues and important to the work 
402

in the Appropriations Committee, so thank you very much for 

being here, as well. 

I will then hear the testimony and then ask questions, Mr. 

Chairman. 

PREPARED STATEMENT OF SENATOR RICHARD J. DURBIN

Senator SHELBY. Thank you, Senator Dorgan. Senator Durbin 

has submitted a prepared statement which will also be included in 

the record. 

[The statement follows:]

PREPARED STATEMENT OF SENATOR RICHARD J. DURBIN

Chairman Shelby, Senator Murray, thank you for holding this important hearing 

today on the fiscal year 2005 budget for the Federal Aviation Adminstration (FAA). 

I’d like to begin by welcoming FAA Administrator Marion Blakey and Inspector 

General Ken Mead back to the committee for today’s hearing. I look forward to your 

testimony. 

This morning, I’d like to briefly touch on a few issues of importance to my home 

State of Illinois. 

Administrator Blakey, I want to thank you and the Federal Aviation Administration (FAA) for your continuing support of the Chicago O’Hare modernization project. 

I’m told the City of Chicago and the FAA are working well together and that a 

project office has been opened and a time line established. As you know, this project 

remains a high priority for me and it is vitally important to our national aviation 

system. 

It’s my understanding that the FAA will begin the Environmental Impact Statement (EIS) process in February 2005 and will endeavor to have a signed EIS Record 

of Decision by September 2005. I hope this project will remain on schedule. I encourage both the FAA and the City of Chicago to keep working together to develop 

the roadmap for this project. The positive impact that O’Hare modernization will 

have on the region and the national aviation system is simply too important to 

delay. 

The O’Hare modernization project is the long-term solution to chronic congestion 

and delays at the airport. However, in the interim we need to pursue operational 

changes—better and more efficient technology and procedures as well as flight operations. 

Yesterday, Secretary Mineta announced an additional 2.5 percent voluntary flight 

reduction by both American and United Airlines at Chicago O’Hare during peak 

travel times. This follows a 5 percent voluntary flight reduction in January, designed to help relieve aviation congestion and flight delays at the ‘‘World’s Busiest 

Airport.’’ I was pleased to join you and the Secretary in pushing for a temporary, 

voluntary reduction of flights during the peak hours at O’Hare. 

However, I want to ensure that these flight reductions do not disproportionately 

affect smaller communities, like Downstate Illinois. I look forward to reviewing the 

data on this initiative and working with you and the airlines. 

Finally, I would like to ask you to look into two Chicago Airport System projects 

that were included in the fiscal year 2004 Omnibus Appropriations conference report (Transportation-Treasury title), at my request. First, $4 million for various improvements at Midway Airport related to capacity expansion. And $1.5 million for 

CAT II/III instrumentation for Runways 27L and 27R at O’Hare. It is my understanding that this funding has not yet been released by the FAA. I hope you can 

help resolve any outstanding issues on these projects within the FAA in the near 

future. 

Thank you, Mr. Chairman.

Senator SHELBY. Both of your written statements will be made 

part of the hearing record in their entireties. You may proceed as 

you wish. We will start with you, Ms. Blakey. 

STATEMENT OF MARION C. BLAKEY

Ms. BLAKEY. Thank you, Chairman Shelby. And I do appreciate, 

Senator Murray, all of the leadership that the Senate is exercising 

in this area, and I do want to thank you, Senator Dorgan, for all 
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of your attention to aviation. We have had some good conversations, and it has been very helpful from my standpoint. 

It is a pleasure to appear before you today to represent the men 

and the women of the Federal Aviation Administration. I am also 

proud to be following Secretary Mineta, who I know appeared before you last month. 

Let me take a moment if I could, also, to recognize our Inspector 

General. Ken Mead and his staff have worked very closely with us 

over the last year and we do appreciate their work to help us address a number of difficult issues. We also appreciate their commitment to helping us improve the way we do business. 

Last year I testified before this committee for the first time as 

the Administrator of the FAA. I told you then that I had witnessed 

the best the agency has to offer, operating the best aviation system 

in the world safely and efficiently; major advances in modernization, capacity and, of course, safety. But I also told you that the 

FAA has not achieved its full potential. It had not become the performance-based organization that it could be, that Congress intended it to be, and I said we could do better. 

FLIGHT PLAN

I am happy to say that we are doing better, Mr. Chairman. In 

the past year we have made changes that will fundamentally alter 

the way the agency operates. First, we began tracking goals, programs and spending through our Flight Plan, the agency’s blueprint for action through 2008. For the first time in FAA history, 

our business plan is tied directly to our budget. The Flight Plan is 

making the FAA more businesslike, more performance-driven, more 

customer-centered, and more accountable. 

And for the first time, each FAA organization now has its own 

individual business plan that is linked to the Flight Plan, costed 

out, and built into a performance tracking system that our senior 

management regularly reviews. In fact, we get together, all of us, 

once a month to look at this to see how we are doing—are we hitting our numbers or not? And we post this on the FAA website so 

everyone can see the status of our reviews. 

The chart next to me shows you the kind of information that we 

are making publicly available. It is a very simple, very accessible, 

red, yellow, and green system. It shows how we are doing on things 

like decreasing runway incursions, increasing our airport arrival efficiency rate, and bringing in our critical acquisitions on schedule 

and on budget, as I understand this committee has concern about. 

We list all 30 targets in the Flight Plan and you can see the 

progress we are making on them. For example, if you are on the 

website and you click on that top red bar there, what you are going 

to see is our general aviation accident data. And, as you can see, 

we are currently in danger of missing our target in this area. At 

the same time, we are well on our way to meeting our goal on another one of the bars up there, of reducing the most serious operational errors by 15 percent, thanks to the very hard work of our 

controllers. You can see the details of it again on this kind of chart. 

We are providing this information to anyone who needs it. 
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AIR TRAFFIC ORGANIZATION

Just this past year we launched a new Air Traffic Organization 

to eliminate bureaucratic stovepipes and provide more cost-efficient 

services for our customers. We hired our Chief Operating Officer 

from the private sector. This had been a major goal from a congressional standpoint and certainly one we shared. I would therefore 

like to introduce Russ Chew, our new COO, behind us. Russ is 

really building the tactical engine that is going to help us become 

more bottom-line-focused. 

CHIEF FINANCIAL OFFICER (CFO)

Just weeks ago we hired a new Chief Financial Officer (CFO) 

and I would like to introduce Ramesh Punwani, who is the former 

CFO of Travelocity, TWA, and Pan Am, so we have wonderful experience that we are drawing on. 

Across the agency we are implementing the tools that will allow 

us to operate more like a business. We have cost accounting in two 

of our lines of business and several support organizations. By the 

end of this fiscal year the remaining lines of businesses for the 

FAA will have cost accounting up and running. 

COST ACCOUNTING

Now as an example of cost accounting, I think you will find this 

interesting. The chart next to me shows a breakdown of the FAA’s 

hourly cost of providing en route services to individual aircraft. We 

have not been able to do this before. It is currently $139 per hour. 

With this data, the FAA can now understand the cost of providing 

services and identify better ways to drive those costs down. 

On the other chart we have broken down the cost by facilities, 

again en route services, and while there are very legitimate differences between facilities, you can learn a lot by looking at those 

that are operating at a lower cost per flight hour. So again this illustrates what we are trying to do. 

Mr. Chairman, cost control is a priority, and I assure you we are 

working on reducing the increases in those operating costs that you 

talked about. 

AIR TRAFFIC MOU’S

Now in response to concerns regarding the air traffic control 

memoranda of understanding, we have implemented a strict new 

internal process of reviewing all labor agreements. We are also 

working to improve our performance-based pay systems by 

strengthening our employees’ incentives to perform. 

PAY-FOR-PERFORMANCE

Within the last year we increased the percentage of our employees under pay-for-performance from 35 percent of the workforce to 

75 percent of the workforce. Our sick leave, workers comp, overtime costs, yes, the FAA’s costs are among the highest in government and we are aggressively working to manage those costs. 
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SAFETY

While we are striving to control our costs and operate more like 

a business, safety always remains the FAA’s top priority. I am 

pleased to announce that the Nation’s commercial fatal accident 

rate is at an all-time low—.022 fatal accidents per 100,000 departures. This chart, I think, really tells an amazing story. Admittedly, .022 is a difficult number to comprehend, so what does it 

mean? I thought one of the best examples of this was articulated 

by Dr. Arnold Barnett, who is Professor of Management Science at 

MIT. He puts it this way. Pick a random flight every day. You will 

fly 21,000 years before you are involved with a fatal crash. 

This year we made good progress in bringing new technology on 

line that will improve safety. Just take, for example, required navigation performance or RNP, a revolutionary approach that will 

move the United States from a ground-based navigation system to 

one located within the aircraft itself. Saves time, avoids delays for 

the traveling public, improves safety, and improves the environment. What is not to like? And because the equipment is already 

located on board many of our aircraft, it saves the airlines, the government, and the traveling public money. 

REPAIR STATIONS

In addition to improving safety through modernization, we are 

sharpening our focus on airline maintenance. Again that was a 

focus of Senator Murray’s discussion this morning. We are looking 

very hard at repair stations, both here and abroad. We have enhanced our new oversight programs for stations that perform outsourced maintenance work. In January, in fact, we implemented 

sweeping revisions to repair station rules. It gives us more surveillance authority, tougher standards for contract maintenance, and 

mandates FAA-approved training programs for these workers. 

CAPACITY

Finally let me turn to capacity. Our budget requests $3.9 billion 

to expand capacity and improve mobility within the Nation’s aviation system. As we return to full capacity, we are taking immediate 

and direct steps to avert a repeat of the delay-ridden summer of 

2000. We remember it all too well. We forecast a return to pre9/11 traffic levels by 2006. 

Less than a month ago we convened a Growth Without Gridlock 

Conference that Russ Chew and his team put together that was a 

first-of-its-kind meeting of industry, decision-makers and government to see what we could do. Together, this group agreed to new 

procedures, including express lanes. Those essentially give us a 

way of streamlining our structure in the sky. We also agreed to a 

policy that would impose minor delays at strategic airports occasionally in order to avert massive delays across the Nation. 

So I am confident that these kinds of efforts are going to lay an 

important foundation to greater capacity without diminished efficiency. 
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PREPARED STATEMENT

So in closing, let me just emphasize we are working hard to manage the FAA. We are changing the agency structure, with a major 

shift to customer service and performance-focused organization. 

So with that, thank you, and I look forward to your questions. 

[The statement follows:]

PREPARED STATEMENT OF MARION C. BLAKEY

Mr. Chairman, Senator Murray, and the distinguished members of this committee, thank you for the opportunity to be here this afternoon. I’m pleased to be 

following Secretary Mineta’s appearance before you last month and proud to be here 

representing the men and women of the Federal Aviation Administration, which operates an aviation system that is second to none in safety, complexity, and system 

efficiency. 

Your message to the FAA last year was both clear and direct: The FAA needs to 

operate more like a bottom-line business. We need to pay greater attention to delivering high performance and cost-efficient programs, and we need to show where we 

can save and redirect resources to higher priorities. 

These are very tough economic times for aviation, and we must exercise care and 

caution with the taxpayer’s dollar. In the past year, the FAA has implemented several changes that will streamline our operations, much in the same way a private 

sector corporation would respond to a changing economy. From the way we deploy 

equipment to the way we compensate our employees, we are working to make better 

use of the monies appropriated to us. While we still have a ways to go, in the past 

year, we achieved 75 percent of our performance goals, including on-time arrival, 

exposure to noise, airport daily arrival capacity, and airport arrival efficiency rate. 

The agency also is on track to meet our performance goal of an 80 percent reduction 

in fatal commercial accidents by 2008. The 3-year average for fatal commercial accidents is at an all-time low. 

THE FAA’S FLIGHT PLAN, 2004–2008

Step one for the agency was to put in place a strategy for setting goals and 

achieving them. We call it our ‘‘Flight Plan,’’ modeled after the specific routes a pilot 

follows from takeoff to touchdown. It is the FAA’s business plan—a blueprint for action through 2008. What’s more, for the first time in the history of the FAA, the 

plan is tied directly to our budget. The leadership of the Secretary of Transportation 

has made this possible. Mr. Mineta has provided the Department of Transportation 

and this agency with a strategic direction that has translated into results for the 

taxpayer. 

The Flight Plan commits the FAA to four broad goals: increased safety, greater 

capacity, increased U.S. international leadership, and organizational excellence. The 

plan will make the FAA more business-like, more performance-based, more customer-centered, and more accountable. It is dynamic, adaptable, and cost-driven. 

For the first time, as part of our Flight Plan, each FAA organization now has its 

own individual business plan. Each of these plans is linked to the Flight Plan, 

costed out, and tied to the budget. Our business plan goals have been built into a 

performance-based tracking system that we post to the FAA web site. It lists each 

of the goals, performance targets, who’s responsible, and the status of each. Using 

this data, the senior management team conducts a monthly half-day review of agency performance. This effort represents a first for the FAA and is proving itself to 

be time well spent and money well invested. When associated with other cost and 

performance data, this information lets us see, clearly and precisely, the true cost 

of a program. All the FAA lines of business are also implementing cost accounting 

tools and practices. 

SAFETY

Secretary Mineta has made it clear: there is no effort more important to the Department of Transportation than improving safety, and our budget reflects that commitment. Out of a total request of $13.97 billion, almost two-thirds—about $8.8 billion—is dedicated to improving or maintaining the safety of aviation. The Flight 

Plan lays out an aggressive safety agenda. It supports further progress on reducing 

the commercial and general aviation fatal accident rate and on reducing the numbers of runway incursions, operational errors, and HAZMAT incidents. It also establishes five new safety goals: reducing accidents in Alaska; decreasing cabin injuries 
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from turbulence; preventing commercial space launch accidents; completing implementation of a safety management system; and developing a single, composite safety 

index. The overarching goal is to measure and achieve the lowest possible accident 

rate, while constantly enhancing safety. 

Already this year, we have made headway by bringing new technology online. We 

are implementing a revolutionary new technology: required navigational performance (RNP). Pilots and controllers use ‘‘RNP’’ in areas where terrain can make it 

difficult or impossible to locate traditional navigational aids, such as an instrument 

landing system. In Juneau, Alaska, an unforgiving landscape and brutal weather 

conditions make arrivals difficult. RNP enables Alaska Airlines to make smoother 

arrivals. According to Alaska Airlines, this saves them $3 million per year. I have 

had the privilege of flying an RNP approach into Juneau firsthand. Controllers and 

pilots agree: RNP works. 

From a technological standpoint, RNP combines the precision information from 

satellite, airborne, and ground-based navigational equipment into new procedures 

that enable the pilot to touch down at a precise point on the runway. Its use allows 

for lower minima, enabling pilots to land at airports that would previously have 

been unavailable in bad weather. Much like computer software, there is no RNP to 

hold in your hands, but its benefits are without question. RNP enhances safety. It 

saves time and avoids delays for the traveling public. This will help improve the 

environment. Because the equipment is already onboard the aircraft, additional savings will be realized as well. 

We remain equally committed to reducing the number of accidents overall, not 

just those where fatalities or injuries occur. We successfully installed the Airport 

Movement Area Safety System at 34 airports. ASDE-X is a similar success story. 

Designed to increase airport safety by enhancing controller awareness, this surveillance system detects potential conflicts on runways and taxiways. It depicts aircraft 

and vehicle position with location information overlaid on a color map showing the 

area. The first operational site was commissioned last fall. Almost two dozen will 

be delivered by the end of 2005. Our budget request includes $243 million to continue the Enroute Automation 

Modernization, or ERAM. This is a critical program that replaces obsolete hardware 

and software of the main host computer system that is the backbone of en route 

operations. This level of funding is vital to accomplishing our baseline schedule. I’m 

happy to report that ERAM is progressing well. For example, one of the precursors 

to deploying ERAM just went operational on February 25, more than one month 

ahead of schedule. Another major milestone—the first major software deliverable—

was completed on time in December. However, we do not underestimate the magnitude of this undertaking. But we have the right team, the right approach, and a 

single-minded focus to bring this program in on time and within budget. 

In February, FAA alerted the airlines and aircraft manufacturers to the possibility of an equipment change based on the FAA’s consideration of new regulations, 

whose object would be to reduce fuel tank explosions. Years before, prospects 

seemed dim for a cost-effective solution. Experts said it couldn’t be done, but an 

FAA researcher devised an inexpensive process to prevent fuel tank explosions. The 

process replaces the oxygen inside the empty fuel tank with nitrogen, an inert gas 

that will not explode. Statistics and research show that this, combined with our efforts to remove ignition sources, will pretty much close the book on fuel tank explosions for the U.S. fleet. Boeing already is moving ahead to implement this technology aboard its airliners, although the FAA is several months away from making 

a decision on proposing new regulation. 

We’re also successful in deploying equipment to decrease the effects of bad weather on aviation. Controllers, managers, and airlines use our integrated terminal 

weather system—ITWS—for real-time situational weather information that not only 

reduces weather-induced delays and diversions, but also avoids wind shear. We already have installed this system at Atlanta, Miami, Kansas City, Houston, St. 

Louis, Chicago and Washington, DC. ITWS is currently being rebaselined; we will 

provide you with our fiscal year 2005 plans for deploying additional systems soon. 

In addition, we are sharpening our focus on airline maintenance. The FAA relies 

on almost 3,400 inspectors, 20 percent more than were onboard at the time of the 

ValuJet accident, to ensure airlines meet safety obligations. Over the last few years, 

we trained our inspectors to work smarter in response to industry changes. We continue to emphasize risk assessment and trend analysis to identify lapses. This approach targets our surveillance to where it produces the greatest safety benefit. 

Staying out in front of the cause—prevention—is still the best way to stop an accident. 

We’re focusing on repair stations, both here and abroad. We’re enhancing new 

oversight programs for stations that perform ‘‘outsourced’’ maintenance work. In 
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January, we implemented sweeping revisions to repair station rules. This gives us 

more surveillance authority, tougher standards for contract maintenance, and mandates FAA-approved training programs for workers. 

CAPACITY

While safety is our primary concern, we’re also committed to expanding capacity 

throughout the aviation system—both in the air and on the ground. The budget requests $3.9 billion to expand capacity and improve mobility within the Nation’s 

aviation system. This request supports expansion of capacity on the ground with 

new runways, as well as the continued deployment of new technologies for increasing the efficiency of the existing system. 

We forecast a return to pre-9/11 traffic levels by 2006, and we are taking steps 

to be ready. 2003 was a banner year for new runways—at Houston, Miami, Denver, 

and Orlando—four of our busiest airports. In each case, we reduced congestion problems at the specific location, as well as providing relief to the overall system. We 

are well aware that new runways are important at smaller airports, too. That’s why 

our reauthorization legislation gives small airports more flexibility for capital improvements. 

Our Flight Plan commits us to improving overall capacity at the Nation’s top 35 

airports by 30 percent, over a 10-year period; redesigning the airspace of eight major 

metropolitan areas (New York, Philadelphia, Washington/Baltimore, Boston, San 

Francisco, Chicago, Atlanta, and Los Angeles Basin); addressing environmental 

issues; improving traffic efficiencies; and reducing airline delays. As you know, if 

any of our major airports are suffering from congestion, the whole system can be 

dramatically affected. Airport expansion and enhancements are extremely challenging. But when it comes to finding a solution, nothing can be ruled out—even 

building new airports. 

As we increase capacity, we must ensure environmental responsibility. The budget 

requests $571.6 million to support environmental stewardship for noise mitigation, 

fuel efficiency enhancements, and a comprehensive approach to addressing both 

noise and emissions. 

We continue to have success with the traffic management advisor—a system that 

is designed to optimize the flow of high-altitude aircraft into busy airports. It’s operational at eight sites and has increased the capacity at these airports by as much 

as 5 percent. We plan to install this software at Chicago next year with the expectation that it will increase capacity there by at least 2 percent. 

The Standard Terminal Automation Replacement System (STARS) provides controllers with standardized color displays and supporting processors to display radar 

targets for control of the terminal airspace. It replaces several generations of the 

existing terminal automation systems. STARS’ most significant feature is its open 

architecture, enabling it to expand and adapt to new functional requirements, and 

changing system configurations due to airspace changes and runway modifications. 

Its unique fusion tracking allows it to receive inputs from 16 locations to depict aircraft location more precisely. It also represents a substantive increase in security 

and redundancy over the existing terminal systems. STARS will be the backbone 

for the next generation of safety and capacity tools. STARS is operational at 19 FAA 

TRACON facilities and 13 DOD air traffic control facilities. Our fiscal year 2005 

plan for STARS will be provided to you shortly, as we are currently undergoing a 

baseline review. 

The Flight Plan charts our course to 2008. Beyond that, the Operational Evolution 

Plan, our current 10-year rolling plan, sets out the aviation community’s strategy 

to increase capacity by 31 percent by 2010. 

Looking further into the future, the aviation community needs to develop a shared 

vision for aviation. That’s why we launched a joint planning and development office—called the JPDO. It is formulating a plan for the evolution of aviation between 

now and 2025. The joint planning and development office is housed in the FAA and 

comprised of members from the Department of Transportation (DOT), NASA, the 

White House Office of Science and Technology Policy, and the Departments of Commerce, Defense, and Homeland Security. For the first time, we will put in place a 

unified national plan to meet the aviation needs of U.S. businesses, consumers, and 

the military. 

Aviation is critical to the growth of the U.S. economy. This work will lay an important foundation for the future. For example, some 51 million international visitors come to the United States every year, making a contribution of more than $100 

billion to the economy. Since the tourism and aerospace industries generate about 

10 percent of the U.S. gross domestic product, we’re preparing for both an increasing number of domestic users and the opportunities of an ever-expanding global sky. 
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INTERNATIONAL LEADERSHIP AND GLOBAL HARMONIZATION

The third goal in our Flight Plan is international leadership. The United States 

must lead aviation into the second century of flight, as it did in the first. Today, 

the FAA has operational responsibility for approximately half of the world’s air traffic, certifies nearly three-quarters of the world’s large jet aircraft, and provides assistance on improving aviation systems to more than 100 countries. However, we 

must become even more globally focused to ensure that U.S. citizens can travel safely around the world, while being a catalyst for the smooth flow of safety and capacity enhancing technology around the world. The budget requests $45.2 million to 

support international leadership and global connectivity. 

Several weeks ago, I returned from a trip to Beijing, Hong Kong, and Tokyo. Chinese aviation is thriving. The United States remains China’s largest export market, 

taking over one-third of China’s exports. According to forecasts, China, over the next 

20 years, will buy more transport category aircraft than any other country. By 2020, 

China’s air traffic operations will be second only to our own. In terms of sheer numbers, China will be an important component of the expanding global aviation system. Our goal is to work with Chinese aviation officials to implement a system that 

is safe, efficient, and interoperable with Western technology. The FAA already is 

laying the groundwork to assist China’s aviation system in supporting the 2008 

Olympic games. 

It is clear that the FAA needs to have a central role in advancing the international leadership of the United States in aviation, and not just in Asia. The numbers and the activity point to the need for a globally regulated sky, and we are 

working to shape that destiny. I have had the unique privilege of signing bilateral 

aviation safety agreements with key aviation partners in Asia and Latin America, 

literally within weeks of each other. These agreements are good for all of us—for 

passengers, for government, and for the aviation industry. 

ORGANIZATIONAL EXCELLENCE

The fourth goal is at the heart of the entire plan: to fulfill our mission, the FAA 

must become a world-class organization. The people of the FAA are the key to 

achieving this goal. We are committed to finding and eliminating barriers to equity 

and opportunity. We believe that fairness and diversity fortify our strength. Furthermore, we must give our people the tools and resources they need to overcome 

the challenges we face and to become more accountable and cost efficient. In turn, 

our employee compensation and salary increases should be performance-based, allowing the agency to pay for results and reward success. 

In simple terms, our objectives are: to have stronger FAA leadership, to meet our 

organizational goals, to control costs while delivering quality customer service, and 

to make decisions based on reliable data. The budget requests $428 million for organizational excellence initiatives. 

We can’t be more accountable, cost efficient, and customer service oriented unless 

we continue to change our way of doing business. The FAA launched a new Air 

Traffic Organization (ATO) late last year. Our previous organizational structure followed typical bureaucratic stovepipes that often stymied progress. To overcome this, 

we hired a chief operating officer who comes from the private sector, where success 

is predicated on efficient organizational structures. This group, known as the ATO, 

is taking its first steps toward becoming a bottom-line-focused, results-driven service 

organization. One thing is certain: the air traffic organization is the tactical engine 

that will help us achieve the near-term goals of our Flight Plan and, eventually, 

lead the FAA to a new way of doing business. 

This is a real change in the agency’s operating philosophy. We are organizing 

around what we produce for our customers. We have 10 operating service units that 

will be responsible for not only operations, but also for implementing new technology and capabilities within their own business unit. The ATO is making changes 

across the board. We recently hired a new vice president of safety. This position provides day-to-day focus on safety from within the air traffic organization. We also 

have created an office located outside the new organization to provide independent 

air traffic safety oversight. 

I am very excited about the possibilities that this new organization holds for us 

in streamlining our operations and being more accountable and productive. I will 

keep the committee apprised of its activities and progress. 

Like our counterparts in the private sector, we are determining how best to utilize 

our human capital in the years to come. Our people are our greatest resource, and 

the safety of the NAS, our greatest priority. We have several challenges on the way 

to achieving organizational excellence, one of which is the impending controller retirements. As required by law, we have initiated a rulemaking to consider waiver 
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requests by individual controllers who want to work beyond the current mandatory 

retirement age of 56. This rulemaking has potentially significant personnel, budgetary, and other issues, so although we have accelerated the process, it is not yet 

completed. 

In addition, we are looking for other ways to become more efficient. Specifically, 

we are investigating ways to right-size our facilities. We are working to make our 

training programs more efficient in order to reduce the time it takes to train new 

controllers. Additional steps may need to be taken, and I will keep the committee 

apprised of our actions. 

I’m also pleased to note that FAA employees are, overall, adapting well to the 

changes that are being made in the FAA and aviation, in general. Our latest employee attitude survey shows a 71 percent job satisfaction approval rating. That’s 

an increase of 3 percent. 

My initial impression is that while these survey numbers are moving in the right 

direction, we still have a lot of work to do. As in past surveys, employee ratings 

in several key areas are high, but in other key categories, such as trust in upper 

management, accountability of the organization, and communications, the numbers 

are not where they should be. At this time, each line of business and staff office 

is working to identify action plans that we must undertake to further improve our 

scores in these areas. We are also looking at administering the survey more frequently, as well as capitalizing on the success of the private sector employee survey 

instruments and action planning used by some of our external aviation partners. 

COST CONTROL

One of our major objectives in the Flight Plan is cost control. As you have requested, we are working on reducing our operating costs, which have increased by 

22 percent over the last 5 years. We are taking the following steps to be more cost 

efficient: 

—In response to your concerns regarding the proliferation of memoranda of understandings (MOU’s), last year, we implemented a strict new internal process 

for reviewing all labor agreements. We also renegotiated a number of costly pay 

rules and MOU’s with the National Air Traffic Controllers Association 

(NATCA), as part of the controller’s contract extension. We now conduct an assessment of the budget impact and legal implications of labor side agreements 

before we sign. We also established an automated database for memoranda of 

understanding that will allow us to track and analyze those agreements. 

—We are committed to negotiating pay-for-performance with our unions until 100 

percent of our workforce is under the system, and we are actively working to 

control the growth of our labor costs. Currently, 75 percent of the workforce is 

under a pay-for-performance system. We have a very well compensated work 

force—and deservedly so. They strive every day to achieve the highest level of 

safety and service for the American people. At the same time, we know we cannot sustain the growth in our operating costs, and we are addressing it. We recently negotiated an extension of the NATCA contract that links a portion of 

pay increases to controller performance. Discussions with the Professional Airways Systems Specialists (PASS) are continuing. The NATCA multi-unit, a 

group of administrative employees represented by NATCA independent of air 

traffic controllers, has been at impasse for some time. 

—Although FAA’s Office of Worker’s Compensation Program (OWCP) bill has increased at a rate well below that of the rest of government over the last several 

years, at a cost of $90 million, this program continues to be a major issue for 

us. We have undertaken several initiatives that have begun to reduce costs, and 

we plan to devote additional resources to the program. A major OWCP issue 

facing not only the FAA, but also the entire Federal Government is the right 

of beneficiaries to stay on OWCP rolls well beyond normal retirement age. 

Forty-two percent of former FAA employees on the OWCP rolls are 60 years of 

age or older. Even more significantly, these individuals account for almost 70 

percent of the FAA’s chargeback costs to the Department of Labor (DOL), totaling well over $60 million! 

—The agency’s transition to a new financial management system, DELPHI, remains under way. Bringing the system online has proved to be a challenge. 

Slowly but steadily, the agency is working to reduce the number of outstanding 

vouchers and overdue vendor payments that were delayed during the transition 

to the new system. Importantly, the agency received a clean audit opinion on 

our financial statements for the third consecutive year. 

—We also are working diligently to implement the administration’s call for costeffective business operations. An FAA study of automated flight service stations 
411

is being conducted to compare the cost of performing the function by Federal 

employees to the cost of contracting it out. The study, initiated under the A–

76 program, is designed to ensure that automated flight service stations operate 

in the most cost-effective manner without compromising safety or service. Our 

goal is to get the best deal for the taxpayer, while focusing on the services required for safe and efficient flight. The taxpayer stands to realize substantial 

savings because of reduced annual operating costs, which stand at $502 million 

in fiscal year 2003. The FAA enters the process with an open mind and a commitment to make sure the process is fair. 

—The FAA is consolidating many of our personnel and accounting functions to 

streamline the numbers of offices performing duplicative functions. Much of our 

accounting operation will be centrally located in Oklahoma City. 

—The agency has implemented cost accounting in two lines of business and several support organizations. We will implement cost accounting in the remaining 

lines of business later this year. The Office of the Inspector General has raised 

several concerns with our labor distribution system, CRU-X, and we are refining 

it to account more accurately for the distribution of labor costs. The Inspector 

General raised justifiable concerns about an ‘‘automatic sign off’’ feature in 

CRU-X that would, in essence, punch an individual’s time card without actually 

being certain of when he or she stopped working. The Inspector General also 

raised concerns about the ability for the system to track all types of official 

time—such as breaks or when conducting official union business. 

CONCLUSION

In closing, let me emphasize that we are taking decisive steps to manage the 

agency, its programs, and its expenditures. We are changing the agency’s structure 

with a major shift to a performance-based organization, making hard, tough choices 

with our funding. We are implementing cost accounting. We’re operating more like 

a business. We will continue to work on increasing the capacity of the system as 

it returns to pre-9/11 levels. With that, I thank you for your time and welcome the 

opportunity to discuss these issues in greater detail.

Senator SHELBY. Thank you. 

Mr. Mead. 

OFFICE OF THE INSPECTOR GENERAL

STATEMENT OF KEN MEAD, INSPECTOR GENERAL 

Mr. MEAD. Thank you, Mr. Chairman, Senator. 

I want to point out first that I think the feeling is mutual with 

regard to the IG relationship with the FAA. The management at 

FAA is clearly, unambiguously improving, in my opinion, and the 

rigor of cost control, which is important in these times, is clearly 

evident. 

And as for you, I appreciate the kind words. It almost seems to 

me like yesterday that I can recall testifying before you. I can recall some of the exact questions and observations you made just 2 

weeks after 9/11, first in that extraordinary joint House and Senate 

appropriations hearings and then the Senate Secure Conference facility. It is etched in my mind. 

The CBO has estimated that the deficit is going to be about $477 

billion this year. In 2001, FAA estimated that the trust fund revenues next year would be about $14 billion. That number has come 

down. It is now projected to be about $11 billion. So their budget 

request of $14 billion is about $3 billion more than the trust fund 

is going to bring in. 

As the Administrator has said, a major focus for FAA this coming 

year must be the control of costs. And as you noted, Senator Shelby, in our statement we say that historically FAA is not used to 

living in this type of environment. 
412

I would like to make just a number of points here but the first 

I would like to highlight is that FAA has got to be in a position 

for rebounding air traffic. Domestic traffic levels still fall short of 

the peak experienced in 2000, but there is no question that traffic 

is rebounding. 

PASSENGER ENPLANEMENTS

Some data points as a frame of reference here. In February 2004, 

the number of passenger enplanements is down 12 percent from 

February of 2000. That represents a 5 percent growth over 

enplanements last year. And I think this is an interesting statistic, 

that in 13 of the 31 largest airports, including some of those that 

experienced serious delays in 2000, the number of scheduled flights 

in March 2004 is actually exceeding the number of scheduled 

flights in March of 2000. But at 11 of those 13 airports, the number 

of available seats scheduled is still lagging behind the number offered in March 2000. One reason that the operations in the air traffic control system can be up but the number of passengers still 

down is the huge growth in the use of regional jets. Since this time 

in 2000, the number of regional jet flights has increased by 134 

percent. That is a pretty astonishing figure. 

Airports that bear watching include Chicago O’Hare. As you 

could tell from the papers this morning, the Secretary and the FAA 

took some additional actions yesterday. I would watch Atlanta, and 

the three New York metropolitan airports. At those five airports, 

arrival delays during the first 2 months of 2004 ranged from between 20 and 35 percent of scheduled flights and the delays were 

generally 50 minutes or more, which is not dissimilar from where 

we were in 2000. 

Another watch item I would like to put on your RADAR screen 

is Dulles Airport. The launch of Independence Air by former United 

Airlines regional carrier Atlantic Coastal Airlines will increase Dulles traffic this summer to historically high levels. You can probably 

expect at least a 50 percent increase in traffic there. That is going 

to place additional demands on the air traffic control system, to say 

nothing of the already taxed security checkpoints there. 

SAFETY

Safety. It has already been mentioned that the January 2003 Air 

Midwest crash in Charlotte was the only fatal commercial accident 

in the past 2 years. I do think that record is almost remarkable. 

I can report that FAA has made progress again this year in reducing runway incursions. Those are potential collisions on the 

ground. Actually it is 3 years running that those numbers are 

down, but at 324 this past year, that number is still much too high. 

Operational errors where controllers allow planes to come too 

close together in the air, that remains a significant safety risk. 

They continue to increase—over 1,000 of them in 2003, with an average of about one very serious error every 7 days. So those must 

come down. 

On maintenance, there has been, as Senator Murray pointed out, 

a gravitation of maintenance from in-house to out-sourced. There 

are domestic repair stations and there are foreign repair stations. 

We did issue a report last year on it that contained a series of rec-
413

ommendations. The FAA has agreed with them all and is proceeding to implement them. 

The budget. Operating costs are mostly salaries and at $7.8 billion, those costs are the largest portions of the FAA’s budget. They 

continue to increase but not as markedly as they had been in these 

last several years and I attribute that to Administrator Blakey and 

her team. 

MOU’S

We reported last year that FAA and NATCA had entered into 

sidebar agreements called memoranda of understanding. Sometimes FAA management did not even know about these and they 

had no real inventory of them and there were a number that were 

costly and rather wasteful. 

Just one example. One memorandum of understanding allowed 

controllers that were getting transferred to receive their pay increase by as much as $45,000 before moving and sometimes they 

would get that money a year ahead of time. Well, this past year 

FAA and the controllers union have rescinded or modified a large 

number of those memoranda of understanding. There are a couple 

that I think still need attention but there has been a lot of progress 

this year. 

Getting big reductions in FAA’s operating costs is tough, Mr. 

Chairman, and that is because FAA has a very high salary base 

and much of that salary base is covered by contract. 

CONTROLLER RETIREMENTS

A cost driver this subcommittee needs to be aware of, though, is 

a bubble of pending controller retirements. You have in front of you 

two hand-outs and I would like to focus on the first one. The handout that we provided indicates that FAA’s estimate is that about 

7,000 controllers will leave the agency over the next decade. As you 

can see from the chart, it begins to hit big-time in 2006 and increases steadily from then on up through 2012. 

Now whether FAA is going to have to replace all these controllers on a one-for-one basis is going to depend on a variety of factors 

like the number of facilities and how many people they need at 

each facility and initiatives that FAA undertakes in its hiring and 

training process. 

Well, we just completed an audit of FAA’s process for replacing 

and training controllers. I think it is with FAA for comment and 

we will be issuing it soon. We see some opportunities here. 

First, I do not think FAA has a good handle on where the vacancies are going to occur and when you are talking about hiring people in these numbers, you really have to know where they occur, 

because you have 300 facilities in the system. And there is also a 

need for getting some solid, good estimates of where they are going 

to occur and how many and when. 

When we visited FAA facilities we found that they were all over 

the map in how they were counting. While they all had estimates 

of attrition, they differed. For example, one only counted mandatory retirements. That is when you get to age 56. Another used 

only transfers and excluded retirements and another included all 
414

types of attrition, so they need to calculate their estimates on a 

common basis. 

OJT TRAINING

We also found that there were some huge differences in how FAA 

facilities handle on-the-job training of new controllers. They do not 

keep data on such things as the time and cost required to complete 

OJT and we tried to calculate it at some sample facilities and what 

we found was pretty astonishing. The average time to train a new 

controller is about 3 years but we found in some instances it would 

go up to almost 7 years. 

COST ACCOUNTING

Cost accounting. Administrator Blakey is correct that they have 

made progress at the agency on cost accounting but I am really disappointed with the lack of progress in fielding a labor distribution 

system plan for air traffic control. Until you have that in place, it 

is going to be almost a crap shoot to figure out where you are going 

to need controllers and when. So I am hoping that we see some 

progress this next year on that. 

CAPITAL ACCOUNT

I will go to the capital account that both the chairman and Senator Murray referred to. Last year we did analyze 20 projects and 

found schedule slips of up to 7 years. Fourteen projects experienced 

cost growth of over $4.3 billion. That number is an interesting 

number because it exceeds by more than 100 percent the annual 

appropriation for this account. FAA is aware of this. We have seen 

some very positive signs as the Administrator and her team are focused on addressing problems. FAA has a lot on its plate with the 

existing acquisitions, plus they’re starting some new ones. 

I would like to speak to the half-billion-dollar reduction for a moment. It is not fair to say that the projects that were cut lack merit 

but it is fair to say that the projects that were cut did face some 

fundamental issues, like not having a realistic cost estimate. And 

I do not mean just off by a little bit; I mean by in some cases $100 

million. In other cases there were serious miscalculations about the 

benefits. 

ACQUISITION PROGRAM

There are two things on the overall acquisition program that 

FAA needs to do. The first is too many expensive projects do not 

have reliable cost and schedule estimates, and I am talking about 

huge swings. I know FAA is working on that but until you get 

some reliable cost and schedule baselines you are going to have a 

very difficult time figuring out what the game plan is going to be 

for the future. 

And second, stay away from these long-term cost-plus contracts. 

By long-term I am not talking about just a couple of years. I am 

saying sometimes a decade-long contract where you enter into it 

and you say it is cost-plus, which is where the contractor basically 

can bill the government and it is open-ended. ERAM, as you men-
415

tioned, Senator Shelby, which is the brain for controlling the high 

altitude air traffic, is one such new system. 

AIRPORTS

Airports. I would like to close on a couple of points on airports. 

First is revenue diversion. Revenue diversion is illegal in most 

cases. Congress put in some caveats and grandfather clauses and 

so forth but overall, revenue diversion is illegal and what revenues 

diversion is is that money that is going to the airport, that the airport generates, is not supposed to go to the city or the State, except 

to pay for reimbursement for the services that are provided. We are 

finding too much revenue diversion out there. I think FAA could 

step up its efforts to provide some oversight. 

PREPARED STATEMENT

Second is you have had some big plus-ups in the airport account. 

It has gone from $1.5 billion, I think, to almost $3.5 billion. In addition, you authorized an increase in the passenger facility charge, 

increased that to about $4.50. That is yielding about $2 billion a 

year. Those funds are directed by law toward airport-related 

projects, such as new runways. However, FAA also incurs costs to 

support many airport projects. Well, you are going to have to get 

money from somewhere to provide the nav aids, the air traffic 

equipment, and things of that nature that have to support those capacity enhancements. I see this as a looming issue as to where you 

are going to get the money to pay for those, particularly as FAA’s 

capital account gets squeezed more and more, because that is the 

account where the money has historically come from. 

Thank you, Mr. Chairman. 

[The statement follows:]

PREPARED STATEMENT OF KEN MEAD

We appreciate the opportunity to testify today as the subcommittee begins deliberations on the fiscal year 2005 appropriations for the Federal Aviation Administration (FAA). This year, we are facing an austere budgetary environment, one that 

will likely continue for at least the next several years. The Congressional Budget 

Office estimates that the Federal deficit will be $477 billion this year. 

Within this context, FAA must also be positioned for a rebound in air traffic. Domestic traffic levels still fall short of the peaks experienced in 2000, but there is 

no question that traffic is rebounding. In February 2004, the number of revenue 

passenger enplanements (35.1 million) was down 12 percent from February 2000, 

but this represents a 5 percent growth over enplanements in February 2003 (33.3 

million). 

While systemwide operations in February 2004 were slightly down from February 

2000, the story is very different on an airport-by-airport basis. In 13 of the 31 largest airports, including some of those that experienced serious delays in 2000, the 

number of scheduled flights in March 2004 actually exceeded the number of scheduled flights in March 2000. However, in 11 of those 13 airports the number of available seats scheduled still lagged behind the number of available seats offered in 

March 2000. This is an indication, at least in part, of how network carriers are 

using regional jets in the place of narrow-body jets to connect traffic to the network 

hubs. 

It is unlikely that the situation will reach the level of widespread system failures 

we experienced in the summer of 2000, but it is possible that some airports could 

experience disruptions in service. Airports that bear watching include Chicago 

O’Hare, Atlanta, and the three New York metropolitan airports. At these five airports, arrival delays during the first 2 months of 2004 ranged between 20 and 35 

percent of scheduled flights. 
416

1 Even though air traffic operations are rebounding, Aviation Trust Fund revenues have not 

returned to previous levels partially because of lower enplanements, lower air fares, and more 

point-to-point service operations, all of which affect the amount of tax revenue collected.

The FAA and the Department have been working with the industry to identify 

potential solutions to delays that might occur this summer such as creating highaltitude express lanes and voluntary schedule reductions. At Chicago O’Hare, arrival delays during March 2004 represented a 74 percent increase over delays in the 

same period in 2003 but down from triple digit increases during the period between 

November and January. 

One situation that bears watching, in particular, is the expected service growth 

at Washington’s Dulles airport. In June, when Independence Air is launched by 

former regional carrier Atlantic Coast Airlines as a new low-cost carrier, traffic at 

Dulles will increase significantly. Some estimates put that increase at over 50 percent by this summer. In addition to airside congestion, there are concerns with airport terminal services, including the resources needed to process a significantly increased number of passengers through security checkpoints. 

While air traffic levels continue to show improvement from the sharp declines of 

2001, there still remains a substantial decline in projected Aviation Trust Fund revenues. In 2001, FAA estimated that Trust Fund revenues in 2005 would be about 

$14.5 billion. That estimate has now been reduced to $11.1 billion.1 FAA’s fiscal 

year 2005 budget request of $14 billion exceeds those revenues by nearly $3 billion. 

Clearly, a major focus for FAA this coming year, and for some time to come, must 

be controlling costs. FAA has not been accustomed to operating within this type of 

environment, and changing the organizational culture to reflect that focus will be 

a challenge. This past year, we have seen positive signs of leadership and commitment on the part of Administrator Blakey and her staff to address FAA’s costs. For 

instance, there has been notable progress this past year in reining in FAA’s 

unabated cost growth in its operations account. Progress is also being made toward 

restructuring the Air Traffic Organization into a performance-based organization. 

However, much more remains to be done to bring FAA’s costs under control. Actions 

such as: 

—developing realistic cost and schedule baselines for major acquisitions, 

—avoiding long-term cost-plus contracts, 

—improving contract oversight, 

—implementing a cost accounting and labor distribution system, and 

—identifying ways to increase workforce productivity 

will be key to effectively manage the Agency’s budget, and this will be the focus of 

our testimony today. 

SAFETY

It is important to note that the U.S. aviation industry continues to be the safest 

in the world. The January 2003 Air Midwest crash in Charlotte was the only fatal 

commercial accident in the United States in the past 2 years. This past year, FAA 
417

has made progress in reducing runway incursions (potential collisions on the 

ground), but operational errors (when controllers allow planes to come too close together in the air) continue to increase. In fiscal year 2003, runway incursions decreased 4 percent to 324, while operational errors increased 12 percent to 1,186, 

with an average of 3 operational errors each day and 1 serious error (those rated 

as high risk) every 7 days. 

Additionally, a significant challenge for FAA will be to adjust its safety oversight 

to emerging trends in the aviation industry, such as outsourcing maintenance. 

While major air carriers outsourced 37 percent of their aircraft maintenance in 

1996, the amount spent on outsourced maintenance increased to 47 percent of maintenance costs in 2002. 

OPERATING COSTS

FAA is requesting $7.849 billion for its fiscal year 2005 operating budget, which 

is about $370 million above the fiscal year 2004 enacted amount of $7.479 billion. 

Operating costs represent the largest portion of FAA’s fiscal year 2005 total budget, 

over 56 percent, whereas FAA’s airports and capital accounts represent 25 percent 

and 18 percent, respectively. This past year Administrator Blakey and her staff 

have made notable progress in beginning the process of reining in FAA’s history of 

operating cost growth. 

Last year we reported that FAA and the National Air Traffic Controllers Association (NATCA) had entered into numerous sidebar agreements or Memoranda of Understanding (MOU’s). Many of those MOU’s had significant cost and/or operational 

impacts on the Agency, but we found that FAA had no controls over the process. 

This past year, FAA developed new policies and procedures that, if properly implemented, should significantly improve controls over MOU’s. As part of an agreement to extend the controllers’ collective bargaining agreement for another 2 years, 

FAA and NATCA also rescinded or modified many of the most costly MOU’s. For 

example, FAA and NATCA rescinded an MOU that allowed controllers transferring 

to larger consolidated facilities to begin earning the higher salaries associated with 

their new positions substantially in advance of their transfer or taking on new duties. 

However, one costly MOU that we identified last year was not renegotiated. This 

MOU concerns ‘‘Controller Incentive Pay’’ (CIP), which provides controllers at 110 

locations with an additional cost-of-living adjustment of between 1 and 10 percent, 

which is in addition to Government-wide locality pay. In fiscal year 2003, this additional cost-of-living adjustment cost FAA about $35.6 million. 

FAA also made progress in linking pay and performance—a key tenet of FAA’s 

personnel reform efforts. As part of the 2-year extension of the controllers’ agreement, FAA and NATCA agreed to tie a portion of controllers’ salary increases to 

meeting four national performance metrics, which include goals for reducing operational errors and runway incursions. It is important to note, however, that the performance increase represents a very small percentage of the controllers’ total annual 

pay increase. For each goal reached, controllers will receive a pay increase of 0.2 

percent. However, even if none of the performance goals are met, controllers will 

still receive an average increase of about 4.9 percent this year because of contractual requirements. 

Achieving substantial reductions in operating costs represents a tremendous challenge because salaries and benefits make up approximately 73 percent of FAA’s operating budget. Because FAA’s salary base is relatively fixed, it is unlikely that significant reductions in operating cost growth can be achieved in the near term without substantial improvements in the Agency’s workforce productivity. 

Initiatives such as new air traffic systems, technological improvements, efforts to 

redesign the National Airspace System, and consolidating locations all have the potential to significantly improve productivity. In the past, FAA has embarked on 

similar initiatives on a limited basis but was unable to demonstrate any credible 

gains in productivity partially because FAA did not have systems to accurately capture reliable cost and workforce-related data. 

Accurate cost and workforce data are particularly critical in light of the anticipated wave of controller retirements. FAA currently estimates that about 7,000 controllers could leave the Agency over the next decade. Whether FAA will need to replace all of them on a one-for-one basis depends on many factors, including future 

air traffic levels, new technologies, and initiatives that FAA undertakes in its hiring 

and training process. However, it is clear that as a result of the anticipated increases in attrition, FAA will begin hiring and training controllers at levels the 

Agency has not experienced since the early 1980’s. 
418

A substantial challenge for FAA will be to hire and train new controllers within 

a tightly constrained operating budget. FAA has recently made significant progress 

in this area by renegotiating several pay rules with NATCA that previously allowed 

some newly hired controllers to earn base salaries in excess of $79,000 while in 

training. The renegotiated rules now allow FAA to set newly hired controllers’ salaries at levels that are more commensurate with an entry-level position (from 

$25,000 to $52,000), which should help FAA avoid higher costs as it begins hiring 

and training greater numbers of new controllers. 

We have just completed an audit of this issue and will be issuing a report next 

month. We found that this is an area where management attention is needed to better prepare for the expected increase in retirements. For example, FAA has national 

estimates of expected attrition within the controller workforce, but those estimates 

do not take into account where vacancies will occur. 

While most locations we visited had estimates of attrition over the next 2 years, 

they included different information in developing those estimates. One facility only 

projected mandatory retirements, another projected attrition for transfers but not 

retirements, and another provided estimates on all types of attrition (i.e., retirements, transfers, hardships, resignations, and removals). 

In addition, FAA does not keep national statistics on the controller on-the-job 

training (OJT) process, which is the longest portion of controller training. At the locations we visited, we found that the overall time required for newly hired controllers to become certified averaged 3.1 years, but in some cases it took as long as 7 

years. To effectively manage the OJT process as hiring increases, FAA will need 

data such as the time and costs required to complete OJT, the number of training 

failures, and any delays in the process to benchmark against and improve the time 

and costs associated with OJT. 

The expected increase in controller attrition reinforces the need for FAA to have 

its cost accounting and labor distribution systems in place and operating effectively. 

This past year, FAA has made some progress with its cost accounting system, but 

there has been very little progress in fielding the labor distribution system planned 

for air traffic employees. That system is critical for managing the expected wave of 

controller retirements. FAA is aware of this need and the Chief Operating Officer 

for the Air Traffic Organization has committed to putting both of these systems in 

place. 

MAJOR ACQUISITIONS

FAA modernization projects have historically experienced considerable cost 

growth, schedule slips, and shortfalls in performance. In the current budget environment, cost growth and schedule slippages experienced in the past are no longer affordable or sustainable. Cost and schedule problems with ongoing modernization efforts have serious consequences because they result in postponed benefits, the 

crowding out of other modernization projects, costly interim systems, or a reduction 

in the number of units procured. In the past, the severity of these problems has 

been masked by the size of a modernization account that either grew or stayed constant. 

We note that FAA has made downward adjustments in its fiscal year 2005 request for a number of modernization projects. These projects have merit but they 

face fundamental problems with respect to misjudging technological maturity, unexpected cost growth, or concerns about how to move forward in a cost-effective way. 

—The Local Area Augmentation System (LAAS) is a new precision approach and 

landing system. In December 2002, we reported that expectations for the cost, 

schedule, and performance of the new system needed to be reset because the 

new landing system was not as mature as FAA expected. Category I LAAS was 

planned for 2006, and more demanding Category II/III performance is now a research and development effort with uncertain completion dates. After assessing 

contractor progress, FAA believes that it will take considerably longer, as much 

as 21 months, to complete just the first phase of LAAS. 

—Controller-Pilot Data Link Communications (CPDLC) is a new way for controllers and pilots to share information that is analogous to wireless email. FAA 

is deferring plans for CPDLC because of concerns: (1) about how quickly users 

would equip with new avionics; (2) that the approved program baseline of $167 

million was materially understated and no longer valid; and, (3) about the impact on the operations account, which is already overburdened. 

—Next Generation Air-to-Ground Communications System (NEXCOM) is an effort 

to replace aging analog radios and foster the transition to digital communications. The first segment of NEXCOM (new radios and new ground infrastructure for digital communications) was expected to cost $986 million. However, 
419

the full cost of implementing NEXCOM throughout the National Airspace System was uncertain, but later segments were estimated to cost $3.2 billion. In 

addition, NEXCOM was controversial with airlines because of FAA’s preferred 

technology. While FAA will move forward with replacing older radios, it has 

postponed making decisions about NEXCOM ground system development. 

While we see positive signs that the Administrator and her team are addressing 

fundamental problems with major acquisitions, additional steps are needed. —Developing reliable cost and schedule estimates.—Last year, we reported that 

despite the benefits of acquisition reform granted in 1996, cost growth and 

scheduled slips in modernization efforts are all too common. For example, we 

analyzed 20 major acquisition projects and found that 14 of these projects experienced cost growth of over $4.3 billion (from $6.8 billion to $11.1 billion), which 

represents considerably more than the FAA’s annual appropriation for modernizing the National Airspace System. 

For example, the cost of the Standard Terminal Automation Replacement 

System (STARS), which will supply new controller displays and related computer equipment for FAA’s terminal facilities, has nearly doubled from $940 

million to $1.69 billion. 

FAA has already obligated $1.1 billion through fiscal year 2003 and has installed 20 STARS systems, of which 19 are operational. The Agency is currently 

reviewing its deployment plans. We reported in September 2003 that STARS is 

not the same program that was planned 8 years ago. The program has shifted 

from a commercial off-the-shelf procurement to one that has required more than 

$500 million in development costs. Moreover, because of cost growth and a 

schedule slip to fiscal year 2012, the benefits that supported the initial acquisition are no longer valid. 

The Fiscal Year 2004 Appropriations Conference Report directs our office to 

review and validate the Agency’s revised STARS lifecycle cost estimates. We are 

encouraged that FAA has made recent changes in the STARS program. To control cost growth, FAA has developed a phased approach to STARS that will use 

a fixed price contract and consider contractor performance before moving to the 

next phase. Last Tuesday, FAA approved the first phase limiting STARS to 50 

locations. FAA is also developing a business case to complete its terminal modernization program. When FAA has completed its business case, we will review 

and validate the cost estimates. —Avoiding long-term cost-plus contracts.—Our work on the cost, schedule, and 

performance problems of 20 major FAA acquisitions illustrates why the Agency 

needs to avoid entering into long-term cost-plus contracts before Agency requirements and user needs are fully understood. Cost growth associated with 

additional development work and changing requirements for both STARS and 

the Wide Area Augmentation System was absorbed fully by the government and 

ultimately the taxpayer. 

FAA is now undertaking a large and complex automation effort through a 

long term, cost-plus contract called the En Route Automation Modernization 

(ERAM) program, which FAA estimates will cost about $2 billion between now 

and 2011. FAA expects to spend over $200 million annually on the project beginning in fiscal year 2005. ERAM is designed to replace the Host Computer 

System, the central nervous system for facilities that manage high-altitude traffic. 

One significant exception to programs with major cost overruns with cost-plus 

contracts is the Advanced Technologies and Oceanic Procedures program 

(ATOP), an effort to modernize FAA facilities that manage air traffic over the 

Atlantic and Pacific Oceans. Because FAA has relied on what is largely a fixed 

price contract and kept requirements stable, the costs associated with additional 

software development and correcting software problems discovered during testing, until recently, have been absorbed by the contractor. 

Due to software development problems and pending delays, FAA modified the 

contract and increased its value by $11 million in an effort to maintain the 

Agency’s schedule for deploying the new system to Oakland by the end of June. 

This is a modest adjustment compared to what we have seen with other modernization projects that relied on cost-plus contracts. 

While the $11 million can be accommodated in the current ATOP cost baseline, the critical issue is what happens between now and February 2005. This 

time frame is important because the recent contract modification limits the contractor’s responsibility for paying to fix software problems FAA finds in ATOP 

after February 28, 2005. FAA expects to complete work on the initial version 

of ATOP software (required for Oakland) shortly and plans to test the more advanced version of ATOP software by the end of this year. Given the change in 
420

the contract and tight time frames, it will be critical for FAA to identify all software problems before February 28, 2005. —Improving contract management.—Last year, we reported that FAA’s management of cost-reimbursable contracts was deficient, lacked accountability, and 

did not adequately protect against waste and abuse. Our audits have found that 

FAA officials did not: (1) obtain audits of billions of dollars in expenditures on 

cost-reimbursable contracts; (2) ensure reliable government cost estimates were 

prepared and used in evaluating contracts; and, (3) properly account for billing 

and expenditures to prevent overpayments. For example, our current audit 

work has identified that FAA officials did not obtain audits of 17 cost-reimbursable contracts with a total value of $6.7 billion. 

In January 2004, when we rendered our opinion on the Department’s financial statements, we identified these deficiencies as a material weakness, and 

FAA is implementing a detailed action plan to correct the deficiencies. We are 

working with FAA to ensure that these actions are fully implemented. We do 

want to note that FAA achieved a ‘‘clean’’ opinion on its fiscal year 2003 financial statements. 

AIRPORTS

Finally, funding for the airport improvement programs (AIP) has seen substantial increases over the past several years. FAA’s AIP account has increased from $1.5 

billion in 1996 to $3.5 billion in 2005. This is on top of passenger facility charges 

(PFCs) that airports collect (up to $4.50 per passenger) that FAA estimates will generate over $2 billion in fees in 2004. FAA projections suggest that a similar amount 

will be collected in 2005. 

The increased amounts of AIP funding and PFC collections are directed by law 

toward airport-related projects, such as new runways. However, FAA also incurs 

costs to its other accounts in order to support many of the airport projects. For example, FAA’s Facilities and Equipment (F&E) and Operations accounts bear the 

cost of air traffic related projects, such as new weather or instrument landing systems and the redesign of airspace to support new runways. 

An emerging issue for FAA’s budget is whether or not airport funds should be 

used to support some air traffic control related projects. In its budget request, FAA 

observes that new systems once considered beneficial to FAA air traffic operations 

have evolved to provide significant benefits to airport operators and users. FAA’s 

budget submission identifies several systems that should be considered for AIP 

funding instead of funding from the F&E account. 

Although AIP funds can be used for this purpose, the change would represent a 

shift in the allocation of budgetary resources. FAA estimates that this would impact 

the AIP account in fiscal year 2005 by about $30 million, but this number could 

grow as more capacity projects come on line. Accordingly, FAA needs to identify and 

quantify all the specific systems that will be needed to support new infrastructure 

projects and then identify the funding sources that will be used to pay for them. 

A longstanding problem that we continue to address through our work is diversion 

of airport revenues by airport sponsors or owners. We have been reviewing revenue 

diversions for over 13 years. Between 1991 and 2000, our audits disclosed over $344 

million in diverted revenue. Last year, we reported on revenue diversions at five 

large airports, including one airport whose sponsor, a local government agency, diverted about $40 million to projects not related to the airport. 

Our work shows that FAA’s oversight of revenue diversions is limited. In the past, 

FAA has maintained that it did not have the resources to devote to this issue. We 

recently met with the Associate Administrator for Airports and members of her staff 

to discuss FAA’s specific plans to increase the Agency’s oversight of revenue diversions. We plan to meet next month to review progress and discuss how we can coordinate efforts. These are steps in the right direction; the key now is followthrough. 

AVIATION SAFETY ISSUES

In terms of safety, FAA and U.S. air carriers have maintained a remarkable safety record. The January 2003 Air Midwest crash in Charlotte was the only fatal commercial accident in the past 2 years. However, operational errors pose a significant 

safety risk, with an average of three operational errors per day and one serious 

error (those rated as high risk) every 7 days. In fiscal year 2003, the number of 

operational errors increased 12 percent to 1,186, or 125 more than the number of 

incidents that occurred in fiscal year 2002. Additionally, while runway incursions 

have continued to decline for a second year in a row, there is still an average of 

nearly 1 runway incursion per day and an average of 1 serious runway incursion 
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every 11 days (those incursions that barely avoided or had significant potential for 

a collision).

As shown in the following table, while the total number of runway incursions has 

decreased, during the first 6 months of fiscal year 2004, the most serious runway 

incursions have increased. Also, the total number of operational errors continue to 

increase, even though the most serious, or high severity, operational errors decreased during this same time period.

RUNWAY INCURSIONS AND OPERATIONAL ERRORS—OCTOBER 1, 2003 THROUGH MARCH 31, 

2004 1

Total Incidents Most Serious Incidents 

Fiscal Year 

2003

Fiscal Year 

2004

Percent 

Change 

Fiscal Year 

2003

Fiscal Year 

2004

Percent 

Change 

Runway Incursions ......................................... 165 157 (5) 13 18 38

Operational Errors .......................................... 495 511 3 27 21 (22) 

Fiscal year 2004 information is preliminary as all incidents may not have received a final severity rating. Serious incidents for runway incursions include category A and B incidents. Serious incidents for operational errors include high-severity incidents. 

This past year, we also reported that improvements are needed in FAA’s oversight 

of a growing trend toward air carrier use of outsourced maintenance facilities. While 

major air carriers outsourced 37 percent of their aircraft maintenance expense in 

1996, the amount spent on outsourced maintenance increased to 47 percent of maintenance costs in 2002. Yet, over 90 percent of FAA’s inspections are still focused on 

in-house maintenance, leaving contract repair stations inadequately reviewed. In response to our audit, FAA agreed to develop a new process to identify repair stations 

that air carriers use to perform safety-critical repairs and target inspector resources 

to those facilities. 

ABATING A TREND OF OPERATING COST GROWTH

FAA is requesting $7.849 billion for its fiscal year 2005 operating budget, which 

is about $370 million above the fiscal year 2004 enacted amount of $7.479 billion. 

Operating costs represent the largest portion of FAA’s fiscal year 2005 total budget, 

over 56 percent, whereas FAA’s airports and capital accounts represent 25 percent 

and 18 percent respectively. As shown in the following graph, FAA’s operating costs 

have been increasing substantially over the past 9 years.
422

This past year Administrator Blakey and her staff have made notable progress 

in beginning the process of reining in FAA’s history of operating cost growth. Several areas stand out in particular. —MOU’s.—Last year, we reported that FAA and the National Air Traffic Controllers Association (NATCA) had entered into numerous sidebar agreements or 

Memoranda of Understanding (MOU’s). Many of those MOU’s had significant 

cost and/or operational impacts to the Agency, but we found that FAA had virtually no controls over the process. This past year, FAA developed new policies 

and procedures that, if properly implemented, should significantly improve controls over MOU’s. As part of an agreement to extend the controllers’ collective 

bargaining agreement for another 2 years, FAA and NATCA also rescinded or 

modified many of the most costly MOU’s. For example: 

—FAA and NATCA rescinded an MOU that allowed controllers transferring to 

larger consolidated facilities to begin earning the higher salaries associated 

with their new positions substantially in advance of their transfer or taking 

on new duties. At one location, controllers received their full salary increases 

1 year in advance of their transfer (in some cases going from an annual salary 

of around $55,000 to over $99,000). During that time, they remained in their 

old location, controlling the same airspace, and performing the same duties. 

At three locations alone, we found FAA incurred over $2.2 million in unnecessary one-time costs as a result of this MOU. 

—FAA and NATCA also renegotiated another MOU for a new free flight tool that originally gave each controller two $250 cash awards and a time-off 

award of 24 hours for meeting certain training milestones on the new system. 

The MOU contained no distinction of awards for individual contributions 

other than coming to work and attending training. At six facilities alone, this 

MOU resulted in FAA incurring approximately $1.3 million in individual cash 

awards and 62,500 hours in time off, which is the equivalent of approximately 

30 full-time positions. 

However, one costly MOU that we identified last year was not renegotiated. 

This MOU concerns ‘‘Controller Incentive Pay’’ (CIP), which provides controllers 

at 110 locations with an additional cost-of-living adjustment of between 1 and 

10 percent, in addition to Government-wide locality pay. For example, like all 

other Federal and FAA employees in the Washington Metropolitan area, controllers receive 14.63 percent in Government-wide locality pay (for Calendar 

Year 2004). However, as a result of this MOU: 

—Controllers at Dulles International also receive 4.6 percent in CIP; 

—Controllers at Reagan National also receive 3.3 percent in CIP; 

—Controllers at Andrews Air Force Base also receive 5.9 percent in CIP; and 

—Controllers at Baltimore Washington International also receive 1.7 percent in 

CIP. 

In fiscal year 2003, this additional cost-of-living adjustment cost FAA about 

$35.6 million. 

—Flight Service Stations.—Another area of progress this past year is FAA’s A–

76 study of its flight services functions, which provide general aviation pilots 

with aeronautical information and services such as weather briefings, flight 

planning assistance, and aeronautical notices. In December 2001, we issued a 

report showing that FAA could save approximately $500 million over 7 years 

by consolidating its automated flight service stations in conjunction with deployment of new flight services software. In response, FAA began an A–76 study 
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2 Based on a 4.9 percent average increase, which does not take into account possible additional 

increases for meeting performance goals. 

to determine if flight services should be retained within the government or contracted out. 

FAA has made strides in the process this past year. FAA plans to review proposals from several contractors, as well as the government’s ‘‘More Efficient Organization’’ proposal, within the next several months and believes it will be 

ready to make a final determination by March 2005. A key challenge will be 

completing those actions under what are already tight timeframes. Keeping this 

process on track is important because the potential for cost savings is significant. FAA is requiring a 22 percent cost savings, or about $478 million, over 

5 years as a selection factor for determining if a proposal will be considered. 

—Pay for Performance.—FAA also made progress in linking pay and performance—a key tenet of FAA’s personnel reform efforts. As part of the 2-year extension of the controllers’ agreement, FAA and NATCA agreed to tie a portion of 

controllers’ salary increases to meeting four national performance metrics: (1) 

a reduction in the number of operational errors; (2) a reduction in the number 

of runway incursions; (3) improvements in arrival efficiency rates; and (4) improvements in on-time performance. 

This now means that 78 percent of FAA’s workforce will be on a pay-for-performance plan, up from 36 percent last year at this time. It is important to note, 

however, that in the case of controllers, the performance increase represents a 

very small percentage of their total annual pay increase. For each goal reached, 

controllers will receive a pay increase of 0.2 percent However, even if none of 

the performance goals are met, controllers will still receive an average increase 

of 4.9 percent this year because of contractual requirements. 

Other FAA employees who are on other pay systems will receive different pay 

increases. For example, non-bargaining unit employees on the Agency’s ‘‘core 

compensation plan’’ will receive a 4.5 percent average pay increase. However, 

those employees are still eligible to receive a performance increase, which averages about 0.6 percent, based on an individual’s job performance and not on 

specific goals as in the case of controllers. 

—FAA Review of Overtime and Sick Leave Usage.—In the past, our office received 

several hotline complaints alleging that FAA employees at five large facilities 

were abusing credit hours and manipulating work schedules to increase overtime. When we made FAA aware of the allegations, the Agency took little or 

no action. Recently, however, we met with senior FAA officials who briefed us 

on measures taken to identify and address the allegations at two of the cited 

locations. According to FAA managers, the actions taken during the previous 

fiscal year have resulted in a $4 million reduction in personnel costs and a 19 

percent reduction in overtime costs. These actions appear to be steps in the 

right direction, but it is unclear what measures have been taken at the other 

FAA facilities identified in the hotlines. Accordingly, we are initiating a review 

of the measures planned and taken at each location cited in the hotline complaints and will be issuing a report within the next few months. 

Mr. Chairman, the actions taken by the Administrator and her staff this past year 

are encouraging. However, it is important to keep in mind that achieving significant 

reductions in operating costs represents a tremendous challenge. This is because 

salaries and benefits make up approximately 73 percent of FAA’s operating budget 

or about $5.7 billion in fiscal year 2005. 

FAA’s operating costs are further compounded by the fact that FAA has a very 

high average salary base. For example, last year, the average base salary for all 

FAA employees was over $87,000. We estimate that this year, the average base salary for controllers, FAA’s largest workforce, will be about $111,000,2 which is exclusive of premium pay. Against FAA’s high salary base, pay increases (which are a 

percentage of base pay) result in large dollar increases to FAA’s operating costs. For 

example, FAA’s fiscal year 2005 budget request of $7.8 billion for operations is a 

total increase of about $370 million over fiscal year 2004 appropriations. However, 

FAA estimates that approximately $200 million of the $370 million will be consumed by pay increases alone. 

Because FAA’s salary base is relatively fixed, it is unlikely that significant reductions in operating cost growth can be achieved without substantial improvements 

in the Agency’s workforce productivity. Initiatives such as new air traffic systems, 

technological improvements, efforts to redesign the National Airspace System, and 

consolidating locations all have the potential to significantly improve productivity. 

In the past, FAA has embarked on similar initiatives on a limited basis, but it was 
424

unable to demonstrate any credible gains in productivity partially because FAA did 

not have systems to accurately capture reliable cost and workforce-related data. 

Expected Increases in Controller Attrition.—A significant issue for FAA is the expected increase in controller attrition. Attrition in FAA’s air traffic controller workforce is expected to rise sharply in upcoming years as controllers hired after the 

1981 Professional Air Traffic Controllers Organization controllers’ strike become eligible for retirement. FAA currently estimates that nearly 7,100 controllers could 

leave the Agency over the next 9 years (Fiscal Years 2004–2012). In contrast, FAA 

has only experienced total attrition of about 2,100 controllers over the past 8 years 

(Fiscal Years 1996–2003). 

Whether FAA will need to replace all 7,100 controllers on a one-for-one basis depends on many factors, including future air traffic levels, new technologies, and 

long-term initiatives that FAA undertakes. However, it is clear that as a result of 

the anticipated increases in attrition, FAA will begin hiring and training controllers 

at levels that the Agency has not experienced since the early 1980’s.

We have just completed an audit of FAA’s process for placing and training air 

traffic controllers and will be issuing a report next month. We found that this is 

an area where additional management attention is needed. For example: 

—FAA has national estimates of expected attrition within the controller workforce, but those estimates do not take into account where vacancies will occur. 

It is almost certain that many will be at some of the busiest and most critical 

facilities within the National Airspace System. 

—While most locations we visited had estimates of attrition over the next 2 years, 

they included different information in developing those estimates. One facility 

only projected mandatory retirements, another projected attrition for transfers 

but not retirements, and another provided estimates on all types of attrition 

(i.e., retirements, transfers, hardships, resignations, and removals). 

—In addition, FAA does not currently have a selection process for determining if 

newly hired controllers have the knowledge, skills, and abilities to complete 

training and become certified at the facility level of their assigned location. 

—FAA does not keep national statistics on the controller on-the-job training (OJT) 

process, which is the longest portion of controller training. At the locations we 

visited, we found the overall time required for newly hired controllers to become 

certified averaged 3.1 years but in some cases took as long as 7 years. To effectively manage the OJT process as hiring increases, FAA will need data such as 

the time and costs required to complete OJT, the number of training failures, 

and delays in the process to benchmark against and improve the time and costs 

associated with OJT. 
425

A substantial challenge for FAA will be to hire and train new controllers within 

a tightly constrained operating budget. FAA has recently made significant progress 

in this area by renegotiating several pay rules with NATCA that previously allowed 

some newly hired controllers to earn base salaries in excess of $79,000 while in 

training. The renegotiated rules now allow FAA to set newly hired controllers’ salaries at levels that are more commensurate with an entry-level position (from 

$25,000 to $52,000), which should help FAA avoid higher costs as it begins hiring 

and training greater numbers of new controllers. 

One point worth noting, Mr. Chairman, is that new controllers will generally have 

lower base salaries than the retiring controllers they replace. Over time, this could 

help reduce FAA’s average base salary and, in turn, help reduce FAA’s operating 

cost growth. However, if FAA does not place new controllers where and when they 

are needed, the potential reductions in base salaries will be offset by lower productivity as a result of placing too many or too few controllers at individual facilities. 

To effectively manage the expected increase in controller attrition, FAA needs accurate cost and workforce data, which underscores the urgency of getting the Agency’s cost accounting and labor distribution systems in place and operating effectively. The Chief Operating Officer for the Air Traffic Organization has committed 

to putting both of these systems in place. This past year, FAA has made some 

progress with its cost accounting system, but there has been very little progress in 

fielding the labor distribution system planned for air traffic employees. That system 

is critical for managing the expected wave of controller retirements. 

—Cost Accounting.—In 2003, FAA’s cost accounting system was partially operational in two of FAA’s five lines of business. FAA produced limited cost accounting information for the Air Traffic Services line of business, a major component of the new Air Traffic Organization, and for the Commercial Space 

Transportation line of business. FAA made progress during the year by assigning some overhead costs properly, but much more needs to done. For example, 

FAA is unable to assign about $1.3 billion of costs to individual facilities. Until 

these costs can be assigned, managers will lack the information they need to 

determine the true cost of facility operations. 

—Labor Distribution.—CRU-X is the labor distribution system FAA chose to track 

hours worked by air traffic employees. As designed, CRU-X could have provided 

credible workforce data for addressing concerns about controller staffing, related 

overtime expenditures, and help determine how many controllers are needed 

and where. However, CRU-X has not been deployed as designed because of a 

September 2002 agreement between FAA and NATCA that limited the system’s 

capability to gather data regarding workforce productivity. Specifically, the 

agreement eliminated (1) requirements for controllers to sign in and out of the 

system when arriving or leaving work, and (2) tracking time spent by employees 

performing collateral duties. 

In February 2004, FAA provided NATCA with substantive changes planned 

for the system and began negotiations with the union in March. FAA and 

NATCA need to complete actions to resolve internal control deficiencies with 

CRU-X and implement the system as quickly as possible so the Agency and 

union have objective data to determine how many controllers are needed and 

where. 

BRINGING FISCAL DISCIPLINE AND ACCOUNTABILITY TO FAA MODERNIZATION EFFORTS

FAA is requesting $2.5 billion for the Facilities and Equipment account for fiscal 

year 2005. This represents a reduction of over $350 million from last year’s appropriated level of $2.86 billion and nearly $500 million less than the authorized level. 

Historically, FAA’s modernization projects have experienced considerable cost 

growth, schedule slips, and shortfalls in performance. 

In the current budget environment, cost growth and schedule slippages experienced in the past are no longer affordable or sustainable. As the following chart 

shows, only 56 percent of FAA’s $2.5 billion budget request for Facilities and Equipment is for developing and acquiring air traffic control modernization projects. The 

remaining funds are for salaries, FAA facilities, and mission support.
426

3FAA Needs to Reset Expectations for LAAS Because Considerable Work Is Required Before 

It Can Be Deployed for Operational Use (AV–2003–006, December 16, 2002). 4 CAT I precision approach has a 200 foot ceiling/decision height and visibility of 1⁄2 mile. CAT 

II precision approach has a 100 foot ceiling/decision height and visibility of 1⁄4 mile. CAT III 

precision approach and landing has a decision height and visibility of less than 100 feet down 

to the airport surface. 

Cost and schedule problems with ongoing modernization efforts have serious consequences because they result in postponed benefits (in terms of safety and capacity), the crowding out of other modernization projects, costly interim systems, or a 

reduction in units procured. In the past, the severity of these problems has been 

masked by the size of a modernization budget that either grew or stayed constant. 

Adjustments to FAA Modernization Projects.—FAA has reduced or eliminated 

funding in its fiscal year 2005 request for a number of modernization projects, including, the Local Area Augmentation System, Controller-Pilot Data Link Communications, and the Next Generation Air to Ground Communications System. These 

efforts were longer-term in nature and called for airspace users to purchase and install new avionics. Funding reductions also reflect an emphasis on near-term FAA 

infrastructure projects. 

These projects have merit but they face problems irrespective of funding that 

needed to be addressed with respect to misjudging technological maturity, unexpected cost growth, or concerns about how to move forward. 

—The Local Area Augmentation System (LAAS) is a new precision landing and 

approach system. It was expected to cost $696 million and to be deployed in 

2006, 4 years later than originally planned. FAA is not requesting funds for 

LAAS in fiscal year 2005 and will use funds from fiscal year 2004 to continue 

work on the new system. In December 2002, we reported that expectations with 

respect to cost, schedule, and performance needed to be reset because the new 

landing system was not as mature as FAA expected.3 Category I LAAS was 

planned for 2006 and the more demanding CAT II/III LAAS is now a research 

and development effort with uncertain completion dates.4

Considerably more development work is required for LAAS than FAA expected just a year ago. The key issue is how to ensure the system will work 

as safely as intended. After assessing contractor progress, FAA estimated that 

it could take up to 21 months and an additional $37 million for the contractor 

to recover and complete just the first phase for LAAS. 

—Next Generation Air-to-Ground Communications System (NEXCOM) is an effort 

to replace aging analog radios and foster the transition to digital communications. The first segment of NEXCOM (new radios and new ground infrastructure for digital communications) was expected to cost $986 million. FAA is requesting $31 million for NEXCOM in fiscal year 2005, $54 million less than last 

year’s appropriated level of $85 million. FAA will move forward with replacing 

older radios (the least complex element of the NEXCOM effort) but has postponed making decisions about NEXCOM ground system development and is reevaluating its approach for modernizing the air to ground communications. The 

full cost of implementing NEXCOM throughout the NAS was uncertain but 
427

later segments were estimated to cost $3.2 billion. Also, NEXCOM has been 

controversial with the airlines because of FAA’s preferred technology. 

FAA’s decision to postpone decisions about NEXCOM gives the Agency opportunities to develop a cost-effective approach for meeting the air-to-ground communications needs of the National Airspace System. While FAA replaces older 

radios, the Agency needs to needs to determine how it will: (1) sustain existing 

communications infrastructure; (2) address frequency congestion problems in 

the short term; and, (3) meet the communications needs of FAA and airspace 

users in the most cost-effective way. 

—Controller-Pilot Data Link Communications (CPDLC) is a new way for controllers and pilots to share information that is analogous to wireless email and considered an enabling technology for Free Flight. FAA began using CPDLC at 

Miami Center in October 2002 and planned to deploy the system to other facilities that manage high altitude traffic at a cost of $167 million. FAA deferred 

these plans for expanding CPDLC last year. The Conference report for the fiscal 

year 2004 Appropriations Act directed our office to look into, among other 

things, the circumstances leading to termination of the CPDLC program and 

what control could have been put in place to avoid a program failure of this 

type. 

We found that a number of factors contributed to FAA’s decision, including 

concerns about how quickly users would equip with new avionics and the fact 

the approved program baseline of $167 million was no longer valid. FAA estimates that it would cost $236.5 million for eight locations—an increase of $69 

million for fewer than half the locations initially planned. 

Another factor was the impact on the operations account, which is already overburdened. CPDLC would have added $63 million in cost to the operations 

account for, among other things, controller training and overtime (for just eight 

locations), and $20 million annually for the cost of data link messages. We are 

continuing our work on CPDLC and will report back to this committee later this 

year. 

We see positive signs that the Administrator and her team are addressing 

problems with major acquisitions. However, there should be no mistake that 

FAA’s efforts are in the early stages and a number of fundamental steps are 

needed. They include: 

—Developing reliable cost and schedule estimates, 

—Avoiding long-term cost-plus contracts, and 

—Establishing controls to prevent waste and abuse. 

Developing Reliable Cost and Schedule Estimates.—Last year, we reported that 

despite the benefits of acquisition reform granted in 1996, cost growth and scheduled slips in modernization efforts are all too common. For example, we analyzed 

20 major acquisition projects and found that 14 of these projects experienced cost 

growth of over $4.3 billion (from $6.8 billion to $11.1 billion), which represents considerably more than the FAA’s annual appropriation for modernizing the National 

Airspace System. Also, 13 of the 20 projects accounted for delays ranging from 1 

to 7 years. FAA recognizes these problems and the Agency’s strategic plan—Flight 

Plan 2004–2008—establishes a performance target so that 80 percent of critical acquisitions are both on schedule and within 10 percent of budget. This is an important step. 

A number of key modernization projects that have been delayed still do not have 

reliable cost and schedule baselines. Without better information, FAA cannot effectively plan, manage the modernization portfolio, or determine what is affordable. 

The following table provides information on selected acquisitions that do not have 

reliable cost and schedule baselines.

FOUR KEY PROJECTS NEEDING UPDATED COST AND SCHEDULE BASELINES 

[Dollars in Millions] 

Program 

Estimated Program Costs Percent 

Cost 

Growth 

Implementation Schedule Schedule 

Delay 

Original Current Original Current Years 

Wide Area Augmentation System .............. $892.4 1 $2,922.4 227 1998–2001 ... 2003–TBD 2 ..... 5

Standard Terminal Automation Replacement System.940.2 1.690.2 80 1998–2005 ... 2002–2012 2 .... 7

Airport Surveillance Radar–11 .................. 743.3 1,040.0 39.9 2000–2005 ... 2003–2013 ...... 8

Integrated Terminal Weather System ........ 276.1 283.7 3 2002–2003 ... 2003–2008 ...... 5

1 This includes the cost to acquire geostationary satellites. 

2 Costs and schedules are under review. 
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5FAA Needs to Reevaluate STARS Costs and Consider Other Alternatives, AV–2003–058, 

September 9, 2003. 

Mr. Chairman, I would like to discuss three of these projects. 

—Standard Terminal Automation Replacement System (STARS) will supply new 

controller displays and related computer equipment for FAA’s terminal facilities. FAA’s official STARS acquisition cost estimate has nearly doubled from 

$940 million to $1.69 billion. 

FAA has already obligated $1.1 billion through fiscal year 2003 but has only 

installed 20 systems, of which 19 are operational. The Agency is currently reviewing its deployment plans. We reported in September 2003 that STARS is 

not the same program that was planned 8 years ago. The program has shifted 

from a commercial off-the-shelf procurement to one that has required more than 

$500 million in development costs. Moreover, because of cost growth and a 

schedule slip to fiscal year 2012, the benefits that supported the initial acquisition are no longer valid. 5 Due to STARS delays, FAA deployed Common Automated Radar Terminal System (Common ARTS) hardware and software to 141 

terminal facilities over the past 5 years. 

In our 2003 report, we recommended that FAA select the most cost-effective 

and affordable strategy to complete terminal modernization by augmenting 

STARS deployment with Common ARTS. We estimated that implementing this 

approach would allow FAA to put at least $220 million to better use. To date, 

the Agency has not ruled out keeping some Common ARTS as an alternative 

if STARS proves to be unaffordable or does not perform as expected. 

FAA officials maintain that STARS has important capabilities, such as ‘‘Sensor Fusion,’’ which is designed to merge data from multiple radars on controllers’ displays. However, FAA continues to experience problems with the Sensor 

Fusion software. We have not yet seen sufficient evidence to justify FAA’s conclusion that the capabilities of STARS are far superior to the capabilities of 

Common ARTS, and both systems are certified for use in the National Airspace 

System. 

The fiscal year 2004 Appropriations Conference Report directs our office to review and validate the Agency’s revised STARS lifecycle cost estimates. We are 

encouraged that FAA has made recent changes in the STARS program. To control cost growth, FAA has developed a phased approach to STARS that will use 

a fixed price contract and consider contractor performance before moving to the 

next phase. Last Tuesday, FAA approved the first phase, limiting STARS to 50 

locations. FAA is also developing a business case to complete its terminal modernization program. When FAA has completed its business case, we will review 

and validate the cost estimates. 

—The Wide Area Augmentation System (WAAS) is a new satellite-based navigation system to enhance all phases of flight. The program has a long history of 

uncertainty regarding how much the system will cost, when it will be delivered, 

and what benefits can be obtained. Limited WAAS services became available in 

July 2003, but additional work is needed to expand WAAS coverage through additional ground stations. FAA has obligated over $800 million on WAAS and expects to spend $100 million on the new system in fiscal year 2005. 

WAAS was expected to provide Category I performance to the majority of the 

Nation’s airports but will provide something less when the system is deployed. 

Based on our discussions with FAA, the subcommittee should expect to see a 

reduction in overall WAAS baseline costs in the $300 to $400 million range to 

reflect the fact that Agency will not pursue Category I performance. 

—The Integrated Terminal Weather System (ITWS) provides air traffic managers 

with a 20-minute forecast of weather conditions near airports and can help the 

National Airspace System recover from periods of bad weather. FAA initially 

planned to complete deployment of 38 systems by 2003 at a cost of about $276 

million, but production costs increased significantly from $360,000 to $1 million 

per system. According to FAA officials, the Agency now plans to establish new 

cost and schedule parameters this April, and accelerate an ITWS enhancement 

(the Convective Weather Forecast product) in response to our December 2002 

report. 

Avoiding Long-Term Cost-Plus Contracts.—Our work on the cost, schedule, and 

performance problems of 20 major FAA acquisitions illustrates why the Agency 

needs to avoid entering into long-term cost-plus contracts before Agency requirements and user needs are fully understood. Cost growth associated with additional 

development work and changing requirements for both STARS and WAAS was absorbed fully by the government. In the future, FAA needs to use a more incremental 
429

6STARS and WAAS funding profiles are currently under review by FAA.

7For additional details on ATOP, see Status Report on FAA’s Advanced Technologies and Oceanic Procedures (report number AV–2004–037, March 31, 2004). 

approach to complex long-term efforts until the scope of work and development are 

clearly defined and rely more on fixed price contracts. 

FAA is now undertaking a large and complex automation effort through a long 

term, cost-plus contract called the En Route Automation Modernization (ERAM) 

program, which FAA estimates will cost about $2 billion between now and 2011. 

FAA expects to spend over $240 million annually on the project beginning in fiscal 

year 2005. ERAM is designed to replace the Host Computer System, the central 

nervous system for facilities that manage high altitude traffic. The fiscal year 2004 

Appropriations Conference Report directs our office to look at executability of the 

program and identify program risks, including security. 

The following chart illustrates planned funding for ERAM and as well as funding 

profiles for STARS and WAAS, two projects that have been delayed for years and 

do not have reliable cost estimates.6 Any cost increases with these programs will 

have a cascading effect on other efforts and limit FAA’s flexibility to begin new 

projects. 

ERAM is the largest and most complex automation effort FAA has embarked on 

since the Advanced Automation System. We anticipate completing our first review 

of this complex program this year. At this stage, we see key ERAM program risks 

as: (1) an aggressive schedule; (2) complex software development and integration; 

and, (3) successfully managing a long-term cost-plus contract that is already valued 

at close to $1 billion. As FAA moves closer to the production phases of ERAM, the 

Agency should seek opportunities to use fixed-price contracting mechanisms. 

One significant exception to programs with major cost overruns is the Advanced 

Technologies and Oceanic Procedures program (ATOP), an effort to modernize FAA 

facilities that manage air traffic over the Atlantic and Pacific Oceans. 7 This effort 

has experienced some serious and unexpected software development and testing 

problems. Problems are traceable to the fact that the contractor relied on non-development software that could not meet FAA requirements. 

In June 2001, FAA awarded a $217 million contract for ATOP to provide oceanic 

air traffic systems. Since the contract was awarded, the contractor has experienced 

problems with software development and testing. As a result, the first phase of testing, known as factory acceptance testing, was completed 12 months behind schedule. 

In October 2003, FAA began operational testing to determine whether the new automation system would perform as intended. This testing uncovered further software 

problems that forced FAA to halt testing of ATOP’s air traffic management functions. FAA subsequently resumed and completed that round of testing and begin 

site acceptance testing in April 2004. 
430

FAA has relied on what is largely a fixed price contract and kept requirements 

stable. Consequently, the costs associated with additional software development and 

correcting software problems discovered during testing have been absorbed by the 

contractor—not the government. However, due to the software problems and pending delays, FAA decided to modify the contract in an effort to maintain the schedule 

to install the system in Oakland. The modification will expand the use of cost-plus 

contract elements (including time and materials) and increase the value of the contract by approximately $11 million. 

While this $11 million adjustment is modest and can be accommodated in the current ATOP cost baseline, the critical issue is what happens between now and February 2005. This time frame is important because the recent contract modification 

limits the contractor’s responsibility for paying to fix software problems FAA finds 

in ATOP after February 28, 2005. According to FAA, after work on the initial 

version of ATOP software (required for Oakland) is complete, the Agency will test 

the more advanced version at its Atlantic City Technical Center by the end of this 

year. Given the change in the contract and tight time frames, it will be critical for 

FAA to identify all software problems before February 28, 2005. 

We will continue to monitor progress with ATOP. The Conference report accompanying the Appropriations Bill for fiscal year 2004 directed our office to compare 

FAA’s pursuit of oceanic automation capabilities to the experiences of NAVCanada 

and other oceanic air traffic service providers. We intend to begin work on this later 

this year. 

Improving Contract Management.—Last year, we reported that FAA’s management of cost-reimbursable contracts was deficient, lacked accountability, and did not 

adequately protect against waste and abuse. Our audits have found that FAA officials did not: (1) obtain audits of billions of dollars in expenditures on cost-reimbursable contracts; (2) ensure reliable government cost estimates were prepared and 

used in evaluating contracts; and (3) properly account for billing and expenditures 

to prevent overpayments. 

For example, our current audit work has identified that FAA officials did not obtain audits of 17 cost reimbursable contracts with a total value of $6.7 billion. In 

addition, we reported that FAA officials did not ensure that contractor employees 

were qualified to do the work. For example, a contractor employee charged approximately $255,000 as a senior systems engineer, even though that individual had only 

a Bachelors of Arts Degree in Psychology, and his past work history indicated no 

experience in engineering. 

When we rendered our opinion on the Department’s financial statements we identified these deficiencies as a material weakness, and FAA has developed and begun 

implementation of a detailed action plan to correct the deficiencies. For example, 

FAA has made progress in reducing the backlog of 459 completed contracts by closing out 279 contracts valued at $2.55 billion. In addition, FAA is providing adequate 

funding to perform cost-incurred audits of contract expenditures. Congress provided 

$3 million in fiscal year 2004 funds for this purpose, and FAA is establishing procedures to ensure the funds are applied effectively by focusing on larger contracts. 

FAA is also establishing a centralized control in FAA headquarters to track the 

status of all completed and ongoing cost reimbursable contracts in order to meet 

Congressional direction to audit 100 percent of contracts over $100 million and 15 

percent of contracts less than $100 million. We are working with FAA to ensure that 

these plans are implemented. 

AIRPORT FUNDING ISSUES

Funding for the airport improvement programs (AIP) has seen substantial increases over the past several years. FAA’s AIP account has increased from $1.5 billion in 1996 to $3.5 billion in 2005. This is on top of passenger facility charges 

(PFCs) that airports collect. The maximum amount allowed has increased from 

$3.00 to $4.50 per passenger, and FAA estimates that PFCs will generate over $2 

billion in fees in 2004. FAA projections suggest that a similar amount will be collected in 2005. 

The following chart illustrates funding levels for FAA’s airports, operations, and 

facilities and equipment accounts from fiscal year 1996 through fiscal year 2005. It 

shows that AIP is taking up an increasing share of FAA’s overall budget. For example, in fiscal year 1996 AIP made up 18 percent of FAA’s total budget whereas in 

fiscal year 2005 AIP represents 25 percent of the Agency’s total budget.
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Emerging Issue for AIP.—The increased amounts of AIP funding and PFC collections are directed by law toward airport-related projects, such as new runways. 

However, FAA also incurs costs to its other accounts in order to support many of 

the airport projects. For example, FAA’s Facilities and Equipment (F&E) and Operations accounts bear the cost of air traffic related projects such as new weather or 

instrument landing systems and redesigning airspace in order to support new runways. 

An emerging issue for FAA’s budget is whether or not airport funds should be 

used to support some air traffic control related projects. In its budget request, FAA 

observes that new systems once considered beneficial to FAA air traffic operations 

have evolved to provide significant benefits to airport operators and users. FAA’s 

budget submission identifies several systems that should be considered for AIP 

funding instead of funding from the F&E account. 

Although AIP funds can be used for this purpose, the change would represent a 

shift in the allocation of budgetary resources. FAA estimates that this would affect 

the AIP account in fiscal year 2005 by about $30 million but this number could grow 

as more capacity projects come on line. Accordingly, FAA needs to identify and 

quantify all the specific systems that will be needed to support new infrastructure 

projects and then identify the funding sources that will be used to pay for them. 

Revenue Diversions.—A longstanding problem that we continue to address 

through our work is diversion of airport revenues by airport sponsors or owners and 

a lack of effective FAA oversight. It is a matter of law that all airports receiving 

Federal assistance use airport revenues for the capital or operating costs of an airport. Any other use of airport revenue is considered a ‘‘revenue diversion.’’ Examples 

of common revenue diversions include charges to the airport for property or services 

that were not provided, indirect costs such as promotional activities that were improperly allocated to the airport, and payments of less than fair market value for 

use of airport property. 

We have been reviewing revenue diversions for over 13 years. Between 1991 and 

2000, our audits disclosed over $344 million in diverted revenue. Last year, we reported on revenue diversions at five large airports, including one airport whose 

sponsor, a local government agency, diverted about $40 million to other projects not 

related to the airport. We also just completed an audit at San Francisco International last month which disclosed about $12 million in diverted revenue. Additionally, we have begun reviews regarding potential revenue diversion and contracting 

irregularities at Los Angeles International Airport. 

Our work shows that FAA’s oversight of revenue diversions is limited. In the past, 

FAA has maintained that it did not have the resources to devote to this issue. We 

recently met with the Associate Administrator for Airports and members of her staff 

to discuss FAA’s specific plans to increase the Agency’s oversight of revenue diver-
432

sions. We plan to meet next month to review progress and discuss how we can coordinate efforts. Clearly, these are steps in the right direction, but the key now is 

follow-through. 

BEING POSITIONED FOR A REBOUND IN AIR TRAFFIC

Mr. Chairman, our testimony this morning has focused primarily on cost issues 

within FAA’s budget. However, an important issue for this subcommittee is the fact 

that air traffic levels are beginning to rebound. While domestic traffic levels still fall 

short of the peaks experienced in 2000, there is no question that traffic is rebounding. In February 2004, the number of revenue passenger enplanements (35.1 million) was down 12 percent from February 2000, but this represents a 5 percent 

growth over enplanements in February 2003 (33.3 million). While this is good news 

for the airlines, the increased traffic levels are bringing pressure to bear on our Nation’s airports, air traffic control systems, and the traveling public.

Aircraft operations have also increased significantly since September 2001. In 

February 2004, domestic operations handled by Air Route Traffic Control Centers 

were less than 1 percent below the operations handled in February 2000. The 3.63 

million February 2004 operations represented nearly 11 percent growth over operations handled in February 2003.

While systemwide operations in February 2004 were slightly down from February 

2000, the story is very different on an airport-by-airport basis. In 13 of the 31 largest airports, including some of those that experienced serious delays in 2000, the 

number of scheduled flights in March 2004 actually exceeded the number of scheduled flights in March 2000. For example, at Denver International, the number of 

flights scheduled for March 2004 exceeded March 2000 schedules by 10 percent and 

at Chicago O’Hare, scheduled flights in March exceeded 2000 levels by 9 percent. 

In 11 of the 13 airports where March 2004 scheduled flights exceeded March 2000 

levels, the number of available seats scheduled still lagged behind the number of 
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available seats offered in March 2000. This is an indication, at least in part, of how 

network carriers are using regional jets in the place of narrow-body jets to connect 

traffic to the network hubs. 

For example, in Cincinnati, a major Delta hub, scheduled flights in March 2004 

were 11.5 percent higher than in March 2000, while available seats were down 7.7 

percent. During this same period, regional jets, as a percentage of all aircraft operations in Cincinnati, grew from 53.8 percent to 72.3 percent. Overall, the number 

of flights scheduled to be operated by regional jets in March 2004 was 134 percent 

greater than in March 2000. 

The growth in aircraft operations, especially at some of what have historically 

been our Nation’s busiest airports creates a situation that merits careful monitoring. 

Although systemwide arrival delays in January and February 2004 were still 22 

percent below those experienced in the first 2 months of 2000, the number is up 

33 percent from the same period in 2003. 

In some individual markets, the growth is particularly pronounced. At Chicago 

O’Hare, arrival delays during the month of March 2004 represented a 74 percent 

increase over delays during the same period in 2003, down from the 90 percent increase during the first 2 months of 2004. At Dallas-Fort Worth, arrival delays in 

January and February combined were up 80 percent over the same period in 2003.

The Department and FAA are aware of this growth in delays and the potential 

near-term affects on the quality of air transportation service if the growth goes unchecked. The subcommittee should also follow the situation closely. It is unlikely 

that the situation will reach the level of widespread system failures we experienced 

in the summer of 2000, but it is possible that some airports could experience disruptions in service. The FAA and the Department have been working with the industry 

to identify potential solutions to delay problems that might occur this summer such 

as high-altitude express lanes and voluntary schedule reductions. 

One situation that bears watching, in particular, is the expected service growth 

at Washington’s Dulles Airport. In June, when Independence Air is launched by 

former regional carrier Atlantic Coast Airlines as a new low-fare carrier, traffic at 

Dulles will increase significantly. Executives at Independence Air anticipate operating between 200 and 300 daily departures primarily between Dulles and East 

Coast destinations. 

Assuming that United does not reduce service in any of the markets it had previously served using Atlantic Coast Airlines as a regional partner—and it has made 

no indications that it plans to do so—daily aircraft operations at Dulles could increase by more than 50 percent this summer. In addition to airside congestion, there 

are concerns with airport terminal services, including the resources needed to process a significantly increased number of passengers through security checkpoints. 
434

8This testimony was conducted in accordance with Government Auditing Standards prescribed by the Comptroller General of the United States. The work supporting this testimony 

was based on prior and ongoing audits conducted by the Office of Inspector General. We updated 

material to reflect current conditions or to reflect fiscal year 2005 budget requests as necessary. 

That concludes my statement,8 Mr. Chairman. I would be pleased to address any 

questions you or other members of the subcommittee might have. 

ATTACHMENT 1.—RELATED OFFICE OF INSPECTOR GENERAL REVIEWS 1998–2004

Operations 

Using CRU-X to Capture Official Time Spent on Representational Activities—AV–

2004–033, February 13, 2004

FAA’s Management of Memorandums of Understanding with the National Air 

Traffic Controllers Association—AV–2003–059, September 12, 2003

Safety, Cost and Operational Metrics of the Federal Aviation Administration’s 

Visual Flight Rule Towers—AV–2003–057, September 4, 2003

FAA’s Oversight of Workers’ Compensation Claims in Air Traffic Services—AV–

2003–011, January 17, 2003

FAA’s National Airspace System Implementation Support Contract—AV–2003–

002, November 15, 2002

FAA’s Air Traffic Services’ Policy of Granting Time Off Work to Settle Grievances—CC–2002–048, December 14, 2001

Subcontracting Issues of the Contract Tower Program—AV–2002–068, December 

14, 2001

Automated Flight Service Stations: Significant Benefits Could be Realized by Consolidating AFSS Sites in Conjunction with Deployment of OASIS—AV–2002–064, 

December 7, 2001

Compensation Issues Concerning Air Traffic Managers, Supervisors, and Specialists—AV–2001–064, June 15, 2001

Technical Support Services Contract: Better Management Oversight and Sound 

Business Practices Are Needed—2000–127, September 28, 2000

Contract Towers: Observations on FAA’s Study of Expanding the Program—AV–

2000–079, April 12, 2000

Staffing: Supervisory Reductions will Require Enhancements in FAA’s Controllerin-Charge Policy—AV–1999–020, November 16, 1998

Personnel Reform: Recent Actions Represent Progress but Further Effort is Needed to Achieve Comprehensive Change—AV–1998–214, September 30, 1998

Liaison and Familiarization Training—AV–1998–170, August 3, 1998

Acquisition and Modernization 

FAA’s Advanced Technologies and Oceanic Procedures—AV–2004–037, March 31, 

2004

FAA Needs to Reevaluate STARS Costs and Consider Other Alternatives—AV–

2003–058, September 10, 2003

Status of FAA’s Major Acquisitions—AV–2003–045, June 27, 2003

Integrated Terminal Weather System: Important Decisions Must Be Made on the 

Deployment Strategy—AV–2003–009, December 20, 2002

FAA’s Progress in Developing and Deploying the Local Area Augmentation System—AV–2003–006, December 18, 2002

Follow-up Memo to FAA on STARS Acquisition—CC–2002–087, June 3, 2002

Letter Response to Senator Richard Shelby on FAA’s Advanced Technologies and 

Oceanic Procedures (ATOP)—CC–2001–210, April 12, 2002

Status Report on the Standard Terminal Automation Replacement System—AV–

2001–067, July 3, 2001

Efforts to Develop and Deploy the Standard Terminal Automation Replacement 

System—AV–2001–048, March 30, 2001

Aviation Safety 

Review of Air Carriers’ Use of Aircraft Repair Stations—AV–2003–047, July 8, 

2003

Operational Errors and Runway Incursions—AV–2003–040, April 3, 2003

Air Transportation Oversight System (ATOS)—AV–2002–088, April 8, 2002

Oversight of FAA’s Aircraft Maintenance, Continuing Analysis, and Surveillance 

Systems—AV–2002–066, December 12, 2001

Further Delays in Implementing Occupational Safety and Health Standards for 

Flight Attendants Are Likely—AV–2001–102, September 26, 2001
435

Despite Significant Management Focus, Further Actions Are Needed To Reduce 

Runway Incursions—AV–2001–066, June 26, 2001

Airports 

Revenue Diversions at San Francisco International Airport—SC–2004–038, March 

31, 2004

Oversight of Airport Revenue—AV–2003–030, March 20, 2003

These reports can be reviewed on the OIG website at http://www.oig.dot.gov.

Senator SHELBY. Senator Stevens, do you have an opening statement? 

Senator STEVENS. I apologize for being late. There are too many 

other meetings, but I am happy to see the witnesses here today 

and I will have some questions when the time comes. 

Senator SHELBY. Thank you. 

Senator MURRAY. Mr. Chairman, before you go to questions I just 

want to recognize that our National Teacher of the Year has joined 

us in the audience today, Dennis Griner from Palouse High School 

in Palouse, Washington, and we are proud to see you here today. 

Senator SHELBY. Thank you, Senator Murray. 

SAFETY

Safety is, and I believe must always remain, FAA’s top priority. 

Madam Administrator, I know how serious your commitment to improving aviation safety is. What are your top safety priorities for 

fiscal year 2005? You are doing well, but you want to do better. 

Ms. BLAKEY. You are absolutely right. One of the things that we 

are most committed to is working with our carriers, the airline industry, to develop a safety system approach that means we are all 

looking at risk factors. That we are all looking at the way we 

should manage together that potential risk, and not wait till an accident or incident happens, but really getting in front of it. 

Senator SHELBY. What is your biggest safety concern? 

Ms. BLAKEY. Well, I think right now what we would like to do 

is marry up data and marry up information in a way that we have 

never done before. For example, we have two systems out there 

that are great. One is called Arrival Sequencing Program (ASP), 

which gives pilots, dispatchers, all of those who are operating the 

system a way to voluntarily say something went wrong here. They 

can do it without penalty and that gives us again access to information we would not have from their perspective. You know, a dispatcher who says later on, I probably should not have done that—

a little too close to scud-running; a pilot who says yes, I probably 

did make an error there that is worth taking note. 

We also have a way now, a program called Flight Operational 

Quality Assurance (FOQA), which takes data, routine data off the 

flight data recorder and lets us analyze that and see what the machine is doing, see what is happening. We think we need to marry 

that kind of information together and as an industry and as the 

FAA, really work to make sure that we are inspecting the right 

things, analyzing the right things, making training changes, and 

doing air traffic control procedures better. All of this will help. 

FAA’S OPERATIONS ACCOUNT

Senator SHELBY. The FAA’s operations account has witnessed 

significant increases over the years. Could both of you identify the 
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major cost drivers of the Operations appropriation? First, Ms. 

Blakey. 

PERSONNEL COSTS

Ms. BLAKEY. Mr. Chairman, I think the Inspector General has it 

right. There is no question about the fact that the major cost driver 

is our personnel costs. After all, that is what the FAA is about. It 

is an operating agency and about 80 percent of that operations cost 

goes to personnel. Also there are a lot of contractual obligations 

that limit the flexibility we have in controlling costs. I would also 

say that the way we have gone about modernization has increased 

capacity and added additional personnel requirements. It was not 

done to drive down operations costs. It was done with an eye to increasing capacity in the system, with more nav aids, with more 

technology, which means more things to maintain and more people 

to operate them. All of that has, as we have overlaid better and 

better programs, increased safety, but that takes people and certainly that has driven the costs up, as well. 

MOU’S

Senator SHELBY. Last year it became clear that FAA’s oversight 

of MOU’s was seriously inadequate. The situation has been well 

documented by the Inspector General, Mr. Mead. While MOU’s 

often serve useful purposes, they also have cost implications. In the 

2004 Appropriations Act, Congress required the FAA to establish 

a central database on all MOU’s. Has this been accomplished? And 

what was the total budgetary impact of the MOU’s and what processes of control have been put in place? 

Do you want to answer that first, Mr. Mead? 

Mr. MEAD. Well, we are not at an end state yet. I cannot say exactly what the total budgetary impact is but I would put the figure 

probably that the steps they have taken may have avoided costs 

something on the order of $50 million. They have a much better 

handle on having an inventory of these and they have put the 

brakes on entering into new ones, at least ones where the Administrator would not even know about them. 

I think there are one or two more out there. One that I think 

is particularly interesting is all Federal employees get locality pay 

and the controllers entered into a memorandum of understanding 

with FAA so they get something called controller incentive pay, 

which is on top of that at 110 locations. That one item is running 

FAA something on the neighborhood of $25 to $30 million per year. 

They have a very generous pay package. 

Senator SHELBY. What is your recommendation to get control of 

the process? 

Mr. MEAD. I think FAA is doing the right things and has the 

right things. I think right now I would have no additional recommendations except that they continue doing what they are doing 

on the memoranda of understandings. 

The issue on the growth in the operations account, you can expect it to continue. It will not be as marked as it has been in the 

past but it is still going to continue because you have such a high 

salary base there. If you give a 4 percent or 5 percent pay increase 

on a salary base of, say, somebody who is getting $135,000, that 
437

is a lot more every year compounded than adding 5 percent every 

year on top of a salary base of $75,000 or $80,000. 

Senator SHELBY. It adds up. 

Mr. MEAD. Yes, sir, it does. 

MODERNIZING NAS

Senator SHELBY. The FAA has a poor track record of modernizing 

the National Airspace System. The GAO and Transportation Inspector General have published many reports on projects that are 

late, overbudget, and cannot deliver as promised. Madam Administrator, what are you doing to address this long-standing problem? 

Ms. BLAKEY. Well, I will tell you. As we have analyzed this, I 

think we need to take a very different approach and that is what 

our COO Russ Chew, and the entire group that is managing these 

accounts is committed to. What I think has been a really tremendous mistake in the past is the FAA took the approach that somehow you could predict the cost of systems that were going to be deployed over 10 years going where no one had gone before. It is one 

thing if you are asked to talk about a capital investment where you 

are pulling commercial off-the-shelf technology. You then would 

know how many, and know exactly where systems are going. 

That was not the case with the FAA. We are talking about what 

essentially were research programs, but the FAA committed to figures in the baseline that would go out as many as a dozen years. 

The question of how long it would take to get the fundamental 

technology down, then what it was going to cost in a prototype 

stage to actually build it and deploy it was not addressed. Where 

should it really go? All the while you have changing traffic patterns 

and a whole field operation out there. 

Here is what we are going to do. We are going to call research 

‘‘research’’. We are going to chunk these projects, if you will, into 

much smaller stages where we commit to the initial R&D as much 

as possible under firm, fixed-price contracts. We will try our best 

to hold to that fixed price. We will also do it in stages. We will, 

therefore, be making the financial investments in stages so that we 

do not get in over our head. We can continue to analyze the benefits, and as circumstances change over 10 years, we are able to say 

‘‘wait a minute’’, let us not put all the things in facilities that we 

had planned. We really can fine-tune modernization over time, and 

I think get much better value for taxpayer dollars. 

This is what we are doing with the STARS program, one of our 

major programs that we feel we have to take a very different approach. 

Senator SHELBY. Mr. Mead. 

Mr. MEAD. Yes, I think the most important thing in these contracts where we do not know where we are buying and some of 

these are concepts, to go into a 10-year contract and say the pricing 

mechanism will be just bill me whatever it takes, with no cap—we 

should not be doing that. It should scare this committee. It scares 

me. 

Senator SHELBY. It does scare us. That is why I keep asking this 

line of questioning. 

Mr. MEAD. Every one of the programs that is in trouble falls into 

that pattern where it has been that type of contract. 
438

Senator SHELBY. How are we going to deal with it? You are the 

Inspector General; we are the appropriators. We are working with 

you and the Administrator to make sure this money is spent well 

for the right purpose. 

Mr. MEAD. I think you should insist on more fixed-price contracts 

coming out of FAA. I think you would see some rapid improvements. That single move, I think, would change a lot. And what the 

Administrator says, too, about research and development should be 

called research and development. 

Senator SHELBY. It should be called what it is, should it not? 

Mr. MEAD. We should call it like it is, yes, sir. 

FIXED PRICE

Ms. BLAKEY. Mr. Chairman, let me also add on the firm, fixed 

price, I think the Inspector General and I agree on this in concept. 

What I would say, though, is that we cannot expect a corporate entity of any sort to assume all the risk without dramatically increasing what they are willing to commit to on a firm, fixed price, which 

goes back to let us take it in small stages; let us go where we can 

all see what this is likely to cost. Do not ask them to commit to 

something where they are assuming enormous risk or where they 

are putting in huge costs. 

Senator SHELBY. Well, you have to be specific in what you want. 

Or, if you do not know what you want or what you are trying to 

improve, how can you contract for it, other than learning as you 

go through a cost-plus acquisition. We cannot always afford that. 

I do not believe that is the way to operate the FAA, do you? 

Ms. BLAKEY. I do not, either. And one of the things that we have 

done in some of our capital programs is we have all accepted what 

we and our customers want. It is fine to say we want a system with 

certain capabilities but the question of how do you get the technology to do that—we have not always been realistic about how difficult that was going to be. And frankly, in some of the areas where 

we have cut back on the F&E programs, technology was the problem. 

Mr. MEAD. I have noticed over the years they pretend that they 

know what they are buying and you will have the vendors come in 

and say yes, it is off the shelf; we are going to get it off-the-shelf; 

we know what you want. But then when you look down into the 

details of the contract, it is kind of open-ended; it is cost-plus. That 

is a sure give away nine times out of ten. 

Senator SHELBY. That is suicide for the appropriators, too, because if we do not know what things are going to cost, how do we 

watch the money? 

Senator Murray. 

F&E

Senator MURRAY. Thank you, Mr. Chairman. 

Ms. Blakey, the budget request for the FAA’s Facilities and 

Equipment account is nearly $400 million below last year’s level 

and represents the largest cut in the entire Department of Transportation budget. In fact, when you look at the Bush Administration’s multi-year budget, it says that the funding for air traffic con-
439

trol modernization will be $2 billion lower than the amount authorized in the Vision-100 bill. 

When Secretary Mineta came before our subcommittee a couple 

of weeks ago, he explained those cuts by saying there was a need 

to reevaluate those programs from a priority perspective. Since 

your 2005 budget reduced by more than 50 percent programs that 

were designed to prevent runway incursions and improve air-toground communications, should we assume that those goals are no 

longer a priority for the FAA? 

SAFETY AND CAPACITY

Ms. BLAKEY. No, those goals are absolutely in place. We are 

going to work very hard to make certain that we address our overall safety goals and capacity. I would tell you that this budget supports our safety and capacity goals. It is something that we are 

going to as we move forward to make certain that we support core 

programs that are delivered in those areas. This budget does that. 

It is true we are not in expansive times. Looking at the Aviation 

Trust Fund and looking at other constraints, we are dealing with 

an industry that is not able to equip like we had at one point hoped 

and expected. Things have changed. But the commitments that we 

have made in our capital account go to capitalizing on those programs, which at this point, the research and development is done. 

We are at the implementation stage. We do need to move ahead 

with them. And those programs that really are R&D, they are not 

ready for implementation and the huge costs that go with implementation. That is what we have tried to recognize here. 

Senator MURRAY. Just last week the FAA’s air traffic control infrastructure experienced a power outage in Los Angeles and a computer crash in Kansas. In Los Angeles, they said that it took nearly 

3 hours to get all the communication systems back on line. Eighty 

flights were delayed. Two airplanes violated FAA’s safety standards by flying too close together. And in Kansas, FAA technicians 

in the operations control center and the field were left unable to 

electronically communicate with each other for almost 12 hours. 

Can you assure us that this is not a preview of what we can expect 

to see with the $400 million cut to the air traffic control modernization budget? 

NETWORK OF SYSTEMS

Ms. BLAKEY. You know, the FAA does a remarkably good job at 

keeping on line a huge network of systems. So every now and then 

something occurs and the news media made a good bit out of something that actually was not as severe as the papers characterized 

it in terms of Los Angeles. It does catch people’s attention. 

But I would have to tell you that our ongoing ability to maintain 

and support our existing systems and network is a very high priority, and it is something that you will continue to see reflected in 

our budget. 

Senator MURRAY. Mr. Mead, do you see any linkage between the 

overall funding level for modernization of the ATC system and the 

frequency of system crashes and other ATC outages like I just mentioned? 
440

Mr. MEAD. No, I do not think I do. That is because if you look 

back about 3 or 4 years, these outages were much more frequent. 

We were reading about them almost every week and they were all 

over the country. Actually the trend line shows that they are getting better. But when they happen you wonder why did they happen and how can we get the recovery back as quickly as possible? 

MAINTENANCE WORKFORCE

I would say that the maintenance workforce at FAA and how you 

are going to provide maintenance, I think that is an area that 

bears watching because the way the operations account is structured, much of the growth in it is going to cover the air traffic controllers, not much will go to maintenance technicians. Your salaries 

in that area have a crowd-out influence on other elements of that 

account and the maintenance technicians are one other element of 

the account. 

Ms. BLAKEY. One thing I would say about this, and this really 

is a compliment to the vision of this committee and the Congress 

in general. The investments you have made in modernization have 

paid off in this area. We have seen a very significantly improved 

picture because the equipment is newer and much more reliable. 

It can be handled in many cases by remote maintenance, scheduled 

maintenance, which is obviously much more efficient than having 

to send folks out in the middle of the night on something that is 

a last-minute emergency. That really has made a very big difference, the fact that it is much more reliable, much more situationally situated where we can do it and do it well. So I think that 

we have to realize that the picture has changed. We are very committed to training our maintenance workforce not only for the challenges we have right now, but also to look at specific situations to 

make sure what happened here, what we are going to do to fix it 

to make sure it does not happen the next time. The second thing 

is we need to train people more for the upcoming systems, which 

are much more software-intensive, so that we have people who are 

well situated for the equipment of the future. 

Senator MURRAY. Well, let me ask about maintenance, because 

on March 1 a Federal arbitrator ruled that the FAA has not met 

the minimum staffing levels needed for the agency’s air traffic control maintenance functions based on the agreement that was 

reached in fiscal year 2000 between the FAA and the union that 

represents the airway facilities technicians. The arbitrator ruled 

that the FAA must immediately take action to raise the total number of technical employees to a minimum staffing level of 6,100. 

How was this allowed to happen and when was the last time the 

FAA met that staffing level of 6,100? 

Senator STEVENS. Who made that ruling? 

Senator MURRAY. A Federal arbitrator. 

Ms. BLAKEY. This has been a longstanding difference of view between ourselves and PASS, our union. So we really do see that figure differently. We believe we have been meeting that 6,100. It all 

goes to a question of how you count some of our personnel and centers, and we believe they should be counted in that figure. That 

said, we are looking at the situation now as to whether we should 
441

appeal this or whether we should take steps to increase the numbers there. This is a very recent ruling. 

Senator MURRAY. It was March 1. So can you give us a time line 

of when you expect to move forward on that? 

Ms. BLAKEY. I would be very happy to get back to you. I have 

not consulted with the folks who are actually working that arbitration, so let me find out and I will get back to you. 

[The information follows:]

Timeline to move forward on the March 1 ruling on staffing for air traffic control 

maintenance functions based on the fiscal year 2000 FAA/PASS agreement.—The 

FAA has appealed the arbitration award that interpreted an agreement between 

FAA and PASS on systems maintenance staffing levels. The primary issue in the 

dispute was what specific positions should be counted towards the agreed on staffing 

number. FAA believes that the award is inconsistent with the Federal Service 

Labor-Management Relations Statute that governs labor relations in the Federal 

Government. The appeal acts as a stay of the award until the Federal Labor Relations Authority (FLRA) issues a decision on the appeal. There is no fixed time for 

FLRA to issue a decision. The FAA will comply with whatever decision the FLRA 

issues. In the meantime, the FAA will continue to monitor maintenance staffing levels in accordance with resource constraints and operational needs.

CONTROLLER RETIREMENTS

Senator MURRAY. The issue of controller retirements is not a new 

one. I was dismayed last year when our conference committee was 

required to accept the House’s proposal to reject the FAA’s request 

for 328 more controllers. While the conference report did not provide the requested funding to grow the existing number of controllers, it certainly assumed that there would be money to hire replacements for the usual number of controllers that leave or retire 

over the course of a year. 

Ms. Blakey, as I mentioned in my opening statement, the number of air traffic controllers at our 24 en route centers is 747 controllers or 10 percent below the level called for under the FAA’s 

own staffing standard. That shortfall has worsened by almost 100 

controllers in just the last year. In fact, all but four of the FAA’s 

en route centers are below the staffing standard and some are 

below by as much as 30 percent. Is your agency promptly hiring 

enough controllers to replace the ones that are retiring or leaving 

the system? 

Ms. BLAKEY. The picture on the number of controllers FAA has 

in terms of our staffing needs is complicated. It is important to 

know at the beginning that in point of fact, when you take our controller workforce as a whole, we are well above our staffing standard. Currently I can give you the figures. We have on board 15,428 

controllers. The staffing standard calls for 15,136. The question is 

are they in the right places? We are talking about our centers. It 

is true that only one of our centers—and the way the staffing 

standard operates, it says that you should have a set number within plus or minus 10 percent, so there is a fair latitude there and 

that is because it is hard—they differ a lot—to get it exact. We are 

looking at some of the centers where we believe we need to address 

that. Oakland is one, for example. Oakland, though, is complicated 

because it has historically been hard to staff. It is not where a lot 

of people have wanted to go for a variety of reasons. So some of 

these have issues that are not so much a question of resources; 
442

they are a question of trying to figure out how we bring people in 

who both want to be there and who qualify to be there. Now another indicator, besides these staffing standards, which are sort of 

mathematical formulas, if you will, about how many people we 

need——

Senator MURRAY. So you do not think those are good standards? 

Ms. BLAKEY. They are a standard. Another way to look at it, 

though, is how is your overtime doing? Are you running excessive 

overtime? We are not running excessive overtime in our centers. So 

if you look at that as a measure you say well, they are obviously 

operating fairly well with the existing numbers of people they have 

on board. 

I met with our facility representatives for NATCA about a week 

ago in Redondo Beach with the leadership of all the centers from 

a union standpoint and asked, ‘‘what do you see?’’ And one of the 

things they pointed out was let us take a look at the folks who are 

talking to air traffic, talking to airlines. We have a lot of folks in 

the centers who are doing other kinds of things. So we need to look 

at both right-sizing and duties. How are we doing? But I take your 

point that in some of our centers we should increase the staffing 

and we are working to do that. 

Senator MURRAY. Mr. Mead, do you care to comment on this? 

Mr. MEAD. I think it is fair to say that FAA probably needs to 

start hiring some number of controllers in anticipation of this bubble, so I think you have a point there. At the same time, these 

staffing standards—Congress or FAA directed the National Academy of Sciences some years ago to take a look at the staffing standards and the National Academy of Sciences did not have a lot of 

favorable things to say about the application of these standards 

down to the facility level. 

So when you have a number of 15,000-odd controllers nationally, 

the real issue is where do you need them? Because you have 300 

different places. We do not have one building where we send 15,000 

controllers. That is why I think this is a problem that FAA shares 

with the controllers union. I think FAA needs to take a look at how 

long it is taking for their on-the-job training. I think they have to 

drill down to figure out where they think these vacancies are going 

to occur. 

I think the controllers union, for its part, needs to agree to participate in a labor distribution system so you can tell why do we 

have these disparities between similar facilities with comparable 

traffic levels? How many hours is it reasonable to expect the controllers to spend on scope? So I think it is kind of a community 

problem here and we need to get on with solving it. 

CONTROLLER RETIREMENTS

Ms. BLAKEY. Senator Murray, you had also mentioned the retirement bubble and your disappointment that we had not—and as you 

know, in last year’s budget we asked for additional positions and 

the Congress as a whole said no, do some other things. Congress 

asked us to look at the age 56 retirement requirement, develop 

guidelines for waivers, and look at training. But a big part of the 

push was right-sizing our facilities, not having these significant 
443

shifts between overstaffing and understaffing. So we are trying to 

do that. 

The Inspector General mentioned the retirement bubble. We 

agree that this bubble is coming up. I did bring a chart with me 

that shows the FAA’s predictions of retirements accompanied by 

what actually happened that year. You will see that so far we are 

spot on. I think that the Inspector General is correct in saying we 

would like to have a lot more granularity at each——

Senator MURRAY. Spot on? I am a little worried at where that 

graph is going. 

Ms. BLAKEY. Well, as I say, there is no question about the fact 

that there is a significant retirement wave coming up. That said, 

we believe we are accurately predicting this wave. At this point we 

do think that one of the things we need, at the facility level, is to 

determine a more granular picture of who is retiring and when. 

But it is not easy to do, as you can appreciate. 

Senator MURRAY. What is the training time for those? 

Ms. BLAKEY. It differs. Two-and-a-half, in some cases up to about 

5 years. It should not be running more than 5 years. But you also 

are able to bring in what we call developmental controllers, who 

can be productive and work much earlier than the 21⁄2-year mark. 

That is for a fully certified controller on all the positions at the facility. 

Mr. MEAD. The concern is that as those bars increase and you 

have more people in the system, more controllers that you just 

hire, if I hire a controller today, send him to school, gets out of 

school, that controller is not going to be controlling air traffic, so 

you are going to have a lot of trainees around the system. So the 

granularity point that the Administrator points to about these disparities between facilities cuts this way, too, that that granularity 

has to figure out how many can we afford to have in training because you cannot equally weight a trainee with a full performance 

level controller. 

Senator MURRAY. My time is up, Mr. Chairman. Thank you very 

much. 

Senator SHELBY. Senator Stevens. 

Senator STEVENS. Thank you very much. First let me thank you, 

Administrator, for working with us on the Adak runway. It really 

has been necessary to have a transition there with the State ownership and the operational capability of that area has been enhanced by your willingness to maintain the runway lights during 

the transition period. I do thank you for that. 

LASER RUNWAY LIGHTING

I would like to ask if you would ask your people to give us an 

update on the laser runway lighting proposal that is before you. I 

know it is still in some test phase but I do not know if most people 

understand that we have over 1,000 commercial runways, some 

that you have a function on and mostly State and just local support. But beyond that, we have a whole system of private runways, 

people landing on their homesteads or in terms of float planes, 

landing on lakes. 

We have an enormous landing problem. That laser designation 

for safe use is something that holds great promise to us to cut costs 
444

considerably with regard to those and I would urge you to see what 

we can do to accelerate the application of that. 

[The information follows:]

A demonstration of the use of yellow lasers to highlight hold lines was conducted 

in November 2002 at Ted Stevens Anchorage International Airport. Using eye safe 

lasers, a single holding position line was illuminated for 2 weeks. Tilt switches prevented the laser projectors from projecting above the ground; no direct exposure was 

possible from the ground-based projection system. 

The second (longer term) demonstration is planned for September 2004 in Fairbanks, Alaska. Improved solid-state yellow lasers will be used to illuminate a problem intersection on the Fairbanks Airport where snow and ice cover the painted 

hold line over half the year. The lasers that will be used in the Fairbanks demonstration have been viewed by the FAA Administrator in a demonstration during 

her August 2003 trip to Alaska and have been reviewed by the FAA Radiological 

Officer in September 2003. Further review will include the Society of Automotive 

Engineers G–10T Committee that creates recommendations for limiting the use of 

lasers in airport environments. 

If the second demonstration proves operationally successful, the laser technology 

will need to meet the requirements of FAA regulations and Certification as well as 

FAA airports to ensure proper National Airspace integration and eligibility for Airport Improvement Program funding. Final review of physiological safety will be provided by the FAA Civil Aerospace Medical Institute. Their concurrence is a necessary element in the decision on suitability.

Senator STEVENS. Secondly, though, I want to congratulate the 

two of you, Mr. Mead and Ms. Blakey. I note that there’s a little 

more indication of contemporaneous review and comment in your 

department. I have always believed that the staff of the Inspector 

General has a responsibility for preventing problems, as well as 

critiquing the results of problems, and you sound like you have a 

little bit more communication than you have had in the past and 

we applaud that. I do hope that it continues to develop because this 

is a good problem. 

CAREER STAFFING PROBLEM

I would like to show you sometime the chart for the Library of 

Congress. You think you have problems; this is a problem for the 

whole government and it comes about because of people deciding 

to make a career out of government. As the pay increased and as 

retirement benefits increased, as the health care increased, more 

people are staying in government now than ever before for longer 

periods of time. As a consequence, this is a national problem, not 

just yours. 

It requires some real help, Mr. Mead, from the inspector generals 

to start looking at how we can utilize some of the funds that are 

available. 

And Ms. Blakey, I do believe inspector generals can step out of 

the box a little bit. They do not have the long-term and political 

responsibility that you might have but they have the capability 

with their staffs to try to see around corners and see how collisions 

could be avoided. As I said, I applaud you. It seems like you are 

doing more of that, from the conversations I have heard. 

TRAINING OF NEW CONTROLLERS

I do want to ask you a little bit about this problem of dealing 

with the movement of new people into full controller status. It 

seems to me that that has got to be accelerated. Have you looked 

at that, Mr. Mead? How do you accelerate the time in which a per-
445

son is really qualified to take the position of the well qualified controllers that are going to leave? 

Mr. MEAD. We looked at this. You will remember, Senator Stevens, some years ago FAA’s academy in Oklahoma City used to 

have—they say if you look to your left, look to your right, two of 

you will not be there; you will not pass. And FAA corrected that. 

Senator STEVENS. That is what they said when I went to law 

school. 

Mr. MEAD. Same here. 

Senator STEVENS. They were right. 

Mr. MEAD. I think we need to take a look at that. We are about 

to issue a report. FAA has it and I think you are quite right about 

the extent that we communicate but——

Senator STEVENS. We tried in Alaska to reach down into the university and have the universities start training these people and as 

they came through their college training, they were prepared to 

move in and be ahead of those who might have just walked off the 

street and said I would like to be an air traffic controller. 

I think we have a duty to reach down into the educational process across government and say we want some of these institutions 

to start training people more specifically for the work that they 

may be able to fulfill for the government. If we do not do something, you cannot train them post-college and meet the goals of 

that chart or the Library of Congress or, for that matter, take a 

look at the military departments. They probably have the worst 

one of all right now. 

Mr. MEAD. FAA is using the university system. They used to 

never use it. I do think you are right on target. I do not recall 

whether you were in the room at the time of the statistic I mentioned. It takes an average of 3 years after they get out of school 

before they are at the full performance, fully certified level and we 

found some instances, Senator Stevens, where it took up to 7 years. 

Senator STEVENS. I just read that. It is on page 7 of your report. 

I understand what you are saying but I do not think the solution 

is to critique it as it is happening. I think we have to find a solution in advance of the problem and it has to be—maybe we should 

create—right after World War II we created special schools. We authorized people to form special schools for training of our professions and various jobs for government. Have we got enough capability in the colleges to do this? Have you examined into that? How 

many colleges are willing to participate? 

Mr. MEAD. No, we have not. 

Ms. BLAKEY. We have quite a few and certainly when I was in 

Anchorage I was very impressed by the university’s simulation lab 

they had for air traffic controllers. I thought that was a great 

thing, that they are actually beginning training that is going to certainly feed into our system. 

Senator STEVENS. Have you seen our interdisciplinary training, 

Mr. Mead, in Alaska? Have you seen what we are doing? 

Mr. MEAD. No, I have not. 

Senator STEVENS. We do not have taxis outside of the two or 

three major cities. We do not have buses. We do not have trains, 

only one train. We have fewer highways in the whole State of Alaska, which is one-fifth the size of the United States, than King 
446

County, Washington has. But we depend on airplanes and we are 

using our system as sort of an incubator for new ideas to deal with 

that need. We are always going to be dependent upon airplanes because the Congress in its wisdom withdrew a lot of Alaska this way 

and that way. We cannot have north and south roads. We cannot 

have east-west roads. We are linked to aviation forever. So I would 

urge you to come up. As a matter of fact, I might take you fishing 

if you want to come up. 

Mr. MEAD. I will take you up on that. 

Senator STEVENS. Ms. Blakey is a damn good fisherman. She 

finds occasion to come up at the right time of the year, which is 

a very intelligent use of the taxpayers’ money as far as I am concerned. 

Mr. MEAD. I will take you up on that, sir. 

Senator STEVENS. Well, I congratulate you very much and I appreciate that this is a sea change, even for you. I remember sitting 

here when you were mostly critical. I like the fact that you are now 

mostly analytical—where we are going and what is causing the 

problems as we proceed along this path. That is a good partnership 

you have there, Ms. Blakey. You are part of it, too, and I congratulate you very much. 

Thank you, Mr. Chairman. 

REVIEW OF BUSINESS CASE ANALYSIS

Senator SHELBY. Thank you, Chairman Stevens. 

Madam Administrator, as a major acquisition program experiences cost growth or schedule delays or capability reduction, does 

your agency review and update the business case analysis and how 

often? 

Ms. BLAKEY. We do. We have a variety of mechanisms in which 

we do a close analysis, in fact, of our major acquisition programs. 

I can tell you that——

Senator SHELBY. How do you validate the assumptions and conclusions in these analyses? What method do you use? Is the Inspector General aware of them? 

Ms. BLAKEY. I think he is aware of a lot of them. I will tell you, 

we have relied very significantly on some independent analysis 

that has certainly helped us out. For example, on our baselining of 

our STARS program and what we can expect there, we asked Mitre 

to take a look at all of the cost assumptions, to really go through 

the business case and to provide us with an independent analysis 

because we felt that was important. We are going to be doing more 

of that as time goes on because I think it does help to have someone who is not as connected with these programs and who has 

frankly more financial and economic horsepower to do it. 

But we do have a Joint Resources Council that meets and has 

to approve these. I am told when there is any significant variance 

off of the projected schedule, and the projected cost. We are monitoring that—it depends on what level you are talking about—on a 

weekly to monthly basis and anything that begins to deviate immediately throws up a major red flag. It does not always fix it when 

we see the red flag, but we know at that point we have a problem. 
447

Senator SHELBY. Was the process you are referring to applied 

uniformly to determine whether to continue funding programs with 

major problems—that is, WAAS, STARS, ATOP, and so forth? 

Ms. BLAKEY. I cannot speak historically because, as you know, I 

have been at the FAA——

Senator SHELBY. Could you get back with us on that? 

Ms. BLAKEY. I would be happy to and I certainly will give you 

more detail on exactly how we are applying this for the current 

programs. 

[The information follows:]

Yes. The FAA has incorporated a series of management control processes and 

tools to improve reporting and evaluation of costs, schedule, and technical performance for major acquisition programs. Internal processes used to monitor acquisition 

programs and inform senior management include: 

Monthly reporting by program offices of baseline status and variance using an 

automated desktop tool called Simplified Program Information Reporting and Evaluation (SPIRE). 

Monthly reporting to the Air Traffic Services Board on cost, schedule, requirements stability, and earned value status. 

Quarterly reporting to the Joint Resource Council (JRC) members on the status 

of all baselined programs. 

Administrator notification whenever variances to baseline parameters exceed 10 

percent. 

Semi-annual acquisition reviews to examine programs progress and issues towards completion of acquisition goals including cost, schedule, and performance. 

May be held more or less frequently as needed. 

Public Law 104–264 gave the FAA Administrator the authority to terminate any 

acquisition program that breaches a baseline element by more that 50 percent. If 

the Administrator determines to continue the program, this determination must be 

provided to Congress. Public Law 104–264 also authorized the FAA Administrator 

to consider terminating any acquisition program that breaches it cost, schedule, or 

performance baseline by more than 10 percent.

Mr. MEAD. A problem has developed here and I could use STARS 

as an example. It has been a fiction for some time, probably for 

nearly 3 years running, where the costs of this program were represented to be around $1.69 billion. People inside FAA knew that 

that figure was not realistic for what the program was supposed to 

do and time marched on. A big change from this time last year is 

that FAA is putting a can opener on all these major programs. I 

think STARS was one of the first because that is some decisions 

that need to be made on in the very near future. So it takes a while 

but I can assure you that there is a recognition inside FAA that 

this list of programs, that the baseline estimates need to be revisited and that process is ongoing. I am very encouraged. 

OCEANIC AIR TRAFFIC CONTRACTOR COST

Senator SHELBY. Administrator Blakey, in 2001 the FAA award- ed a fixed-price contract of $218 million to develop a replacement 

system to control oceanic air traffic. As a result of the contract, the 

contractors had to bear software development cost overruns. This 

has been touted as a new approach for managing contracts at the 

FAA. 

I have learned that FAA recently agreed to pay the contractor 

$11 million for work it was already contractually bound to perform 

and FAA agreed that taxpayers would bear all future cost overruns 

after February 2005. How do you justify this $11 million for work 

that the contractor was already obligated to perform? 
448

Ms. BLAKEY. Well, this is exactly the dilemma you get into with 

a fixed-price contract because the contractor in this regard, Lockheed-Martin, had sunk considerable costs for unanticipated problems in terms of software development and technology development. Again you are going where no one has gone, and they bore 

a lot of those costs. It is very critical that we field our oceanic technology in the very near future. In fact, we expect to see our system 

in Oakland go live in June. 

We could not let those schedules just go way out because the contractor was in the red and no longer making money and the schedules were slipping. It is in the taxpayers’ best interest to address 

the issues and the problems. We felt it was equitable to go ahead 

and fund, in this case another $11 million, on the contract to bring 

it in in a timely fashion and get service going. 

There are competing providers out there for oceanic air traffic. 

We believe we are doing an excellent job and have the best system, 

but we need to field that system. 

Mr. MEAD. Mr. Chairman——

Senator SHELBY. Do you agree with that? 

Mr. MEAD. Largely. If it stops at $10 million, that certainly is dwarfed by some of these $900 million increases in these other programs. So if it stops there, I think that is fairly modest and we 

could almost——

Senator SHELBY. It is still a lot of money to us. 

Mr. MEAD. It is. The big date to watch is February 28 because 

after February 28, 2005, FAA has basically agreed to pay for any 

problems that are identified. So they had better make sure they 

identify all the problems before February 28, 2005 or that $11 million figure will go up. 

Senator SHELBY. It could be a huge underwriting mistake. 

Mr. MEAD. That is right. 

LABOR DISTRIBUTION

Senator SHELBY. Regarding labor distribution, CRU-X was supposed to be a system that would allow FAA to accrue credible workforce data about controller staffing, overtime cost, and workload 

issues. Madam Administrator, why has not this system been employed as designed and why was the functionality of it limited? 

Ms. BLAKEY. The system initially was developed in a very collaborative fashion with our workforce and with NATCA. We do believe that the functionality that it has is going to be very useful 

to the FAA. There has been a dispute over the specific detail that 

the system collects in terms of the duties and hours that are being 

spent on them, and we have been in negotiations with NATCA over 

this. We would like to bring those negotiations to an end. We would 

like to fill all of the functionality of the system. We are working 

very hard to do it. This is a matter, though, that is subject to negotiation with our union, and we are working through it at this point. 

Senator SHELBY. Mr. Mead. 

Mr. MEAD. I have a suggestion for you. What the Administrator 

says is correct but these negotiations have dragged on and on and 

on. Senator Murray pointed out how important——

Senator SHELBY. Negotiations generally bring more costs, do they 

not? 
449

Mr. MEAD. Yes, they do. Senator Murray pointed out the controller retirement bubble. This is the part that controllers need to 

help us with because this will give you a sense of where they need 

the people and why you have disparities between facilities that 

handle similarly complex levels of traffic. 

The suggestion I have is that we make any increases in staff to 

be done on the condition that we get a labor distribution system 

in place because that will be a central issue for us for the next 8 

or 9 years. You are going to be facing increases in the controller 

workforce and you are going to want to know where and when they 

are needed and a system like this would help measurably in that 

task. 

ACCOUNTABILITY

Senator SHELBY. Bringing more accountability to FAA is a top 

priority of this committee—it has to be—and we are pleased to see 

that the FAA now has a chief operating officer whom you introduced, Mr. Russ Chew. The transition to a performance-based organization called the Air Traffic Organization, while it is not complete, may also be a step forward if implemented correctly. It has 

to be implemented correctly. What additional steps are you taking 

to bring more accountability to FAA? And how long will it take to 

change the agency’s culture? First you, Ms. Blakey, and then Mr. 

Mead. 

Ms. BLAKEY. Well, I will tell you. I think that culture change is 

a multi-year activity. It will not happen overnight, but I am 

pleased to say that Russ Chew and his team are moving with remarkable speed. They have already worked to flatten our management layers so that we bring headquarters much closer to the field 

and have much fewer people in that interface of our management 

bureaucracy. 

They have also instituted an activity value analysis, which I 

think is going to be remarkably interesting. I look forward to sharing the results with this committee because essentially what we 

are doing is having Booz Allen Hamilton help us go out and analyze what exactly are the services we are producing at the individual levels of the organization and are they important? Are they 

being well done? Do our customers value them? And as a result of 

that, we will be able to determine much better what are the activities that we can do without, what are areas that we should be 

doing more of, and therefore have our resources, both personnel 

and others, devoted to where we are getting the value. So that 

process is ongoing. We expect to have the first results of it by June. 

We will certainly be looking at that as a way to make this work 

more efficiently. 

Senator SHELBY. Mr. Mead. 

Mr. MEAD. I think there are already some early signs that the 

direction is changing in making the ATO a performance-based organization. I think the proof will be in the pudding and it is probably 2 or 3 years down the road. I think at this time next year——

Senator SHELBY. Two or 3 years will be here before we know it, 

though. 

Mr. MEAD. Yes, sir, it will be. 

Senator SHELBY. I know from being on this committee. 
450

Mr. MEAD. I think the big barometers right now are how we handle the workforce issues involving the air traffic controller retirements, STARS, getting our terminal modernization on the right 

track, and this big acquisition they are just starting called ERAM. 

Another big-ticket item, although compared to billion-dollar systems is not that big financially, is that oceanic air traffic control 

system. Some big dates are coming up this year on that in June. 

It is supposed to be in Oakland. That program is already late. I 

think they are paying a lot of attention to it. So it takes a while 

to turn around the ship. I will withhold judgment until I see the 

pudding. 

FLIGHT DELAYS

Senator SHELBY. You know, the summer months are coming on 

us fast here. The air traffic is probably going to rebound as people 

start traveling more; we hope so. What are the top three or four 

actions that you are taking that will help meet the growing demand for air travel and prevent gridlock during the busy summer 

travel season? 

Ms. BLAKEY. Well, certainly we have been looking at the question 

of what we can do very immediately to relieve congestion. The conference I mentioned in March really was a ground-breaking activity 

where we asked everyone to sit down in the same room and say 

now look, for the good of the system, not just a single airport or 

parochial interest of an airline, how can we make the system work 

more efficiently? And we came out with a number of procedural 

changes which we have already begun implementing in the way we 

are looking at the upper level air space and the way we are establishing express lanes. 

The agreement is that if we are experiencing 90 minutes or more 

in taxi-out and hold at airports, we can start flushing those airports and asking others to hold back. Let us get the delay out of 

wherever we have it so that it does not overwhelm, not only the 

passengers in those places that are congested, but also begin to ripple through the entire system. 

Just yesterday Secretary Mineta and I took specific steps to deal 

with O’Hare, which I do not have to tell this subcommittee O’Hare 

has a huge effect on the system. We had realized back in the fall 

that the scheduling at O’Hare was beyond the capacity of the airport. You know, 2 pounds in a 1-pound bag does not work. Therefore, we began in the winter, early part of this year to talk with 

the two airlines which are the primary airlines at O’Hare, American and United, about drawing down their schedule. They drew it 

down 5 percent in the critical hours between 1 p.m. and 8 p.m. We 

tried to see if that was going to be enough during the month of 

March. It proved that it was not enough. We still were experiencing significant delays at O’Hare and again this ripples through 

the whole system. You know, if O’Hare sneezes everybody gets a 

cold. So we then asked again that the airlines look at their schedules and yes, just yesterday the Secretary and I announced an 

agreement that each airline is going to take down their schedule 

further, American and United, another 2.5 percent at O’Hare. 

Now this is not something we like. We certainly would prefer 

that the market work and not have to put any constraints, but 
451

these are voluntary measures. We are very much looking at this to 

make sure that we are doing everything possible to address schedules and delays. 

Senator SHELBY. Mr. Mead. 

Mr. MEAD. We all remember the summer of 2000. Everybody 

talks about the summer of 2000. That is a reference to the worst 

gridlock year. I think we all remember that. Two big things are different, maybe three things are different now. There are more runways out there. 

In the summer of 2000 and the aftermath there was extreme reluctance for the regulatory authorities to put the brakes on airline 

scheduling practices. You remember we had all kinds of examples 

where you had more aircraft leaving at a specific time of day than 

could possibly leave and Chicago O’Hare was one of the poster children for that. I think that the Secretary and the Administrator 

have shown a willingness to tackle that issue. 

Secondly, one of the things that we learned from the summer of 

2000 was the need for the airlines and FAA to talk to each other 

on a daily basis, in the morning, about what things were looking 

like that day from the standpoint of weather or flight patterns, and 

so forth. So that is different. 

Another fact that I think is a little bit scary that we have not 

had a lot of experience with is the regional jet growth, which carry 

less passengers. As traffic rebounds and——

Senator SHELBY. Less traffic and fewer passengers. 

Mr. MEAD. Yes, and I mentioned Dulles. I think we see some 

danger signs at Dulles for this summer. I mean it is a huge growth 

balloon if you believe the airlines about what is going to happen 

and I think right now is the time to start planning for that. 

Senator SHELBY. Senator Murray, thanks for your patience. 

SAFETY

Senator MURRAY. Thank you, Mr. Chairman. 

Mr. Mead, in the area of safety, a continuing concern is the fact 

that the aviation industry is out-sourcing an increasing percentage 

of their aircraft maintenance work. In fact, almost half of their 

maintenance costs were out-sourced in 2002. The US Airways Express crash in Charlotte last year I think is a tragic example of 

what happens when there are performance deficiencies on the part 

of third-party maintenance contractors. 

When your office looked into this issue last year you reported 

that the FAA’s inspection efforts were primarily focused on inhouse maintenance programs. The FAA agreed to develop a program to target inspector resources toward the out-sourced facilities. 

In your view how well is the FAA now targeting those facilities? 

Mr. MEAD. We need to do a follow-up effort. Let me give you a 

good answer to that question. I can tell you what I have been told 

is that they are in the process of implementing our recommendations. For example, the problem you alluded to was where United 

Airlines’ principal inspector would not know much about what was 

going on at the repair stations and there is all this maintenance 

being done at this repair station and the repair station person 

would not know what was going on inside of United Airlines, just 

to use the one airline as an example. 
452

FAA is piloting a process with one airline—I think it is Delta—

where the principal maintenance inspector for Delta is expected to 

be on top of all of their maintenance. That is, I think, the essential 

design of their program. I think FAA is impressed with the results 

of that and wants to consider expanding it to the other carriers. I 

think that is the current status. 

On the foreign repair stations, FAA agreed that they needed to 

step up their oversight there. You will recall that the problem we 

identified there was FAA would certificate the repair station but 

not necessarily know—they would delegate a lot of the oversight responsibility. We have not followed up to check to see how that was 

implemented. Maybe the Administrator is more current than I am 

on that. 

Senator MURRAY. Ms. Blakey. 

Ms. BLAKEY. Well, certainly we have just instituted, in fact, new 

rules, new regulations governing repair stations across the board, 

both foreign and domestic. We have evened out much more so the 

requirements that we are placing on foreign repair stations are 

equivalent to those in the United States except that they must be 

recertificated every 1 to 2 years. So I think at this point from that 

standpoint we are working very hard to make sure that those requirements, for example for FAA-certified training, et cetera, will 

be carried through. 

The second thing is we are adapting our own oversight, just as 

the Inspector General pointed out, and we are working with the 

carriers so that they see the integration of oversight of repair 

work——

Senator MURRAY. Can you give us any specific examples? 

Ms. BLAKEY. I can probably do that better in a written response 

to the committee if you would like, just to give you more detail on 

that. 

Senator MURRAY. All right. 

Ms. BLAKEY. But Mr. Mead is correct. We are very encouraged 

by the fact that the inspectors should look at this as a unit for a 

carrier, not as we look at these repair stations who are doing six 

carriers and over here we are only focusing on what Delta does inhouse. 

Mr. MEAD. I think just a footnote to this, I think the domestic 

situation is easier to fix than the foreign situation. In the foreign 

situation, we found cases where the FAA person that was supposed 

to certificate was presented with materials that were in a foreign 

language that he or she did not understand. So the problems in foreign repair stations and the FAA oversight I think are of a different type and maybe a bit deeper. 

Senator MURRAY. Well, if both of you could follow up with the 

committee in response to that, I would appreciate it. It remains a 

significant concern. 

[The information follows:]

The FAA has taken numerous actions to address changes in repair station oversight. Many of these actions address concerns raised by the OIG in the Air Carriers 

Use of Repair Stations audit published in June 2003. 

In October 2003, FAA formed working groups to respond specifically to the OIG 

report. This working group will: 

—Identify repair stations that perform safety critical repairs for air carriers; 

—Improve databases to capture results of foreign aviation authority inspections; 
453

—Develop new comprehensive repair station oversight organizations and concepts 

to oversee aviation article repairs from start to finish. 

FAA increased the sampling inspections performed by FAA inspectors for inspections performed by foreign aviation authorities on FAA requirements. 

Implemented the final Part 145 rule on Repair Stations (January 2004). 

In collaboration with Duncan Aviation and TIMCO, the FAA is initiating a prototype program to develop new oversight systems and techniques to oversee large, 

complex repair stations. This system will: 

—Standardize FAA oversight of repair stations located in multiple FAA regions; 

—Increase the quality of surveillance by assigning a dedicated team of inspectors 

experienced and knowledgeable in the practices and procedure of the repair station; 

—Increase the quality of surveillance by allowing inspectors to retarget their oversight to areas of risk. 

On going efforts in changing foreign and domestic repair station oversight: 

—Enhance the FAA inspector repair station certification and surveillance course 

and give priority to inspectors assigned oversight responsibilities for repair stations. (Must be done to comply with the requirement of new rule).—June 2004. 

—Develop a repair station prototype program that incorporates a certificate management team structure to enhance oversight of large repair stations or companies that own multiple repair stations and satellite repair stations.—October 

2004. 

—Develop and publish a notice of proposed rulemaking that revises the rating 

system, adds a quality assurance requirement, and further clarifies rule language.—October 2004. 

—Develop the 145 Surveillance and Evaluation Program by revising the Surveillance and Evaluation Assessment Tool to target identified risks and incorporates the system safety approach into repair station oversight.—October 2006. 

The fiscal year 2004 activities are focused on developing new processes and procedures to identify risks and target FAA inspector resources to resolve those risks. 

The completion of these activities and implementation of the new programs will not 

be accomplished until the fiscal year 2007 timeframe.

Senator MURRAY. Ms. Blakey, as you will recall, the only reason 

the conference report on the FAA bill was allowed to pass the Senate and go to the President was because you provided a letter to 

the Senate Commerce Committee promising that you would not 

contract out any additional air traffic control functions to the private sector during fiscal year 2004. This could very well become a 

contentious issue for our bill this year if we do not have a similar 

commitment from you for fiscal year 2005. Are you prepared to 

submit to this subcommittee at this time that the FAA will not be 

contracting out any current air traffic control jobs during 2005? 

Ms. BLAKEY. You know, the letter that you are referring to was 

one that was prompted, as you say, by what, to me, was a surprisingly intense debate over this issue of contracting out, out-sourcing, 

privatization, all sorts of things being batted about. And it did 

prove important to have the debate set aside and be able to get 

what was a very important 4-year reauthorization bill completed. 

I think it is a very different thing, though, if you are suggesting 

that on an annual basis the FAA Administrator should provide a 

guarantee that there would not be any kind of out-sourcing for the 

following year. Historically, since the FAA has been here, that has 

never been done. It has never been necessary, and I do not understand that there is a necessity for it now. And the reason I say that 

is I have already said and I have said repeatedly that on the issue 

of our contract towers that we have no intention of converting further towers any time in the foreseeable future. There are no plans 

on the table. I have no additional A–76 plans for studies right now. 

We do, however, have an important A–76 study under way, which 

this subcommittee is very well aware of, focusing on our flight serv-
454

ice stations. As you know, we have the Inspector General’s report 

and recommendation and that of others. We have looked at the 

question of can this be done by the private sector. And, in point of 

fact, everything points to the fact that this is an important area to 

have looked at from the standpoint of ‘‘Can private or public sector 

accomplish this best?’’

No matter whether our own employees, who are bidding in this 

process, no matter whether they win or whether others win, we 

know that we will have very considerable cost savings to the taxpayers, about a half billion dollars over a 5-year period. We also 

know we will have better service at the end of this. So that is important and we expect to award that contract in fiscal year 2005. 

So I mention those things by way of saying that it would seem 

both unnecessary and an impediment to the kind of flexibility that 

may be important down the road if all of a sudden there becomes 

some annual expectation that guarantees have to be provided. 

SEATAC

Senator MURRAY. I do know what the annual expectation is. I 

can just tell you it will be an issue this year. 

Let me turn to another topic. Ms. Blakey, your testimony does 

mention that last year was what you called a banner year for new 

runways. It will not surprise you when I tell you it was not a banner year for SeaTac International Airport’s third runway project. 

Unfortunately, as you well know, SeaTac is kind of the poster child 

project for the need to streamline the environmental review process 

for new runways. And, as you know, we have been trying to complete construction of the third runway I think it is for my entire 

life but it has only been 16 years. 

The added costs for complying with those environmental rules for 

the construction of that runway, as well as the associated cost of 

delays for a great deal of time now, have grown by almost $200 

million just in the last 4 years. As you can well imagine, this has 

put an incredible amount of pressure on the ability of the airport 

authority to finance the completion of that project. The Port of Seattle, as you know, is currently pursuing an amendment to the airport’s existing Federal commitment to ensure that there is adequate financing to meet all of those new environmental costs. Do 

you believe it is reasonable for us to pursue an additional Federal 

commitment for this project, given the fact that these added costs 

are associated with the need to comply with Federal environmental 

laws? 

Ms. BLAKEY. Although I have not been as long on this project as 

you have, I do share your frustration about it. We see the third 

runway at SeaTac as being a very important part of the national 

aviation system. So successful completion of that runway is a big 

goal for all of us. No question about it. 

What we are doing right now, because I think this is the most 

intelligent thing from our standpoint, is we have hired again an 

independent contractor to look at the financials that SeaTac has 

provided. As you know, they came in only a month or so ago, but 

we are trying to get through this very quickly. It is a very complicated analysis, but we need to understand a variety of the cost 

justification there, as well as things like what will that do for the 
455

cost per enplaned passenger, what will be the impact on the airlines, et cetera? 

What I can definitely tell you is that we are committed to working through that. We will be as supportive of SeaTac as is possible, 

with the understanding that this is an unprecedented request. A 

request of this magnitude and taking up the Federal share to the 

degree this would, it certainly raises policy issues as well as understanding the financial needs. 

Senator MURRAY. Well, I appreciate that very much and want to 

work with you on that. Do you have any sense of the time line that 

we will be getting a response back? 

Ms. BLAKEY. Boy, I would like this get this done by sometime in 

June. I will keep you posted, if I might. 

Senator MURRAY. Thank you very much. 

Ms. BLAKEY. And by the way, congratulations on the commissioning of the tower. I know that is coming up on the 24th and cutting that ribbon will be great. 

[The information follows:]

The FAA timeline to reach a decision on the SeaTac application to increase the 

LOI by $198.1 million follows: 

March 8, 2004.—Application received. 

May 19, 2004.—FAA receives the independent financial analysis from Reed & Associates, LLC. 

May 30, 2004.—Complete agency financial analysis and review of the application. 

Mid-June 2004.—Final agency decision on the application.

Senator MURRAY. Good. One other question, Mr. Chairman, and 

I know we have a vote coming up. 

Ms. Blakey, in my opening statement I talked about how essential it is that the United States maintain its international leadership in aviation for the second century of flight. Part of my dismay 

over the proposal to cut $400 million from your procurement budget is that it will slow down our ability to modernize the current air 

traffic control system. Beyond just replacing the aging equipment 

that your agency is operating on today, we have to be thinking 

about the next generation of air traffic control equipment and begin 

planning for deployment of that system. 

GLOBAL COMMUNICATION, NAVIGATION, AND SURVEILLANCE SYSTEMS

As you know, for the past couple of years, I have secured about 

$45 million for the Global Communication, Navigation and Surveillance Systems program and I am very pleased that the first phase 

of that contract was awarded to the Air Traffic Management division at Boeing. And I really want to commend you for extending 

their contract so they can stay on the job until you have awarded 

the phase two contract portion of that. What can you tell this committee about the accomplishments of that initiative to date? 

Ms. BLAKEY. Well, I think in terms of satellite navigation and 

the way we see our system developing over time, certainly the program has given us important information about how satellite navigation can function, particularly in areas like the Gulf where you 

really do not have radar control and you have therefore big challenges involved. It also points in the direction of what we will do 

from the standpoint of digital communications, what we will do 

from the standpoint of looking at investments internationally be-
456

cause we do see this as being the wave of the future. So we are 

still both analyzing the results and, of course, looking at what is 

proposed for the next stage as a part of a contract extension. I 

think the results so far have certainly been promising. 

Senator MURRAY. Is there any doubt in your mind that the next 

generation of air traffic control will be satellite-based? 

Ms. BLAKEY. No. It certainly will be heavily satellite-based; let 

me put it that way. And we are very much of the view that our 

standing internationally is going to depend on continuing U.S. 

leadership in that regard. 

ADDITIONAL COMMITTEE QUESTIONS

Senator MURRAY. Well, we want to be there. 

Thank you very much, both of you, and thank you, Mr. Chairman. 

[The following questions were not asked at the hearing, but were 

submitted to the Department for response subsequent to the hearing:]

QUESTIONS SUBMITTED TO THE FEDERAL AVIATION ADMINISTRATION

QUESTIONS SUBMITTED BY SENATOR RICHARD C. SHELBY

FAA ACQUISITION POLICY

Question. Earlier in the hearing, I asked if FAA reviews and updates accordingly 

the business case analysis if a major acquisition program experiences cost growth 

or schedule delays, or capacity reductions. How does the FAA validate the assumptions and conclusions in such analyses? 

Answer. Under the FAA’s acquisition policy, the program office is responsible for 

preparing cost, schedule and performance estimates for review when these commitments change. Before approval by the Joint Resources Council, the Office of Operations Planning and Finance is responsible for business case analysis, and reviews 

the revised estimates. The reviews include an audit of the estimates and examination of the underlying ground rules, assumptions and models. Reviewers determine 

differences between revised estimates and previous estimates. The reviewers use 

historical results from similar FAA programs, other government programs, and industry to validate the estimates. In some instances, the reviewing division may develop their own estimates for comparison purposes. Risk assessments are usually 

performed. Together with program office analysts, the reviewers ensure that estimates are adjusted to account for risks, risk mitigation strategies and uncertainties. 

An opinion is made available for consideration during Joint Resources Council deliberations and decisions. 

Question. What process does the FAA use to determine whether to accelerate, 

maintain, decelerate or terminate an ongoing program? 

Answer. FAA acquisition policy requires cost, schedule and performance baselines 

for each major acquisition program at the time of initial program approval by the 

Joint Resources Council. If baselines are breeched, revised baselines are subject to 

review and approval by the Joint Resources Council, revisiting the rationale for continuing the program and the terms under which the program may proceed. The Administrator reviews programs that exceed their baseline by more than 10 percent. 

Under the Air Traffic Organization (ATO), performance is defined in terms of 

service delivery targets and published in the FAA Flight Plan and upcoming ATO 

Business Plan. Decisions to accelerate, maintain, decelerate or terminate an ongoing 

program will be based on its contribution to meeting service delivery targets and 

business objectives, such as targets for reduced operating costs. The ATO reviews 

the costs and benefits of programs to ensure there is an economic return on the capital investment. 

ADVANCED TECHNOLOGIES AND OCEANIC PROCEDURES

Question. When and at what cost can we expect to have fully functional ATOP 

systems replace the obsolete technology in Anchorage, New York, and Oakland Centers? 
457

Answer. The approved acquisition program baseline for the Advanced Technologies and Oceanic Procedures (ATOP) system calls for Build 1 to achieve Initial 

Operational Capability (IOC) at Oakland Center in June 2004 (which occurred on 

June 30), at New York Center in March 2005, and Build 2 IOC at Anchorage Center 

in March 2006, with the final ATOP system IOC in 2008. The FAA is working toward a more aggressive schedule with contract incentives to deliver Build 1 IOC at 

New York Center in December 2004 and Build 2 at Anchorage Center in May 2005. 

Build 1 delivers a fully operational ATOP system with integrated decision making 

tools, enabling ‘‘off-the-glass’’ operations and providing the flexibility needed to entertain more requests for in-flight altitude changes. Build 2 delivers integrated 

radar data processing functionality and the enhanced conflict probe required to reduce aircraft separation from 100 nautical miles to 30 nautical miles. The total Facilities and Equipment cost of the program is $548.2 million. 

STANDARD TERMINAL AUTOMATION REPLACEMENT SYSTEM

Question. It seems as if the Standard Terminal Automated Replacement System 

(STARS) procurement is through the most difficult phase of the procurement cycle 

and your testimony indicates that the anticipated resources for this program will 

decline in the coming years. How do you compare the relative risk remaining in the 

program compared to other major FAA programs such as WAAS, ASR–11, or 

ERAM? 

Answer. The STARS program has completed core baseline development and is 

well into the production, deployment, and sustainment phase. As of May 26, 2004, 

21 STARS sites are fully operational in the National Airspace System, along with 

15 separately funded systems operating at DOD military (Air Force, Army, and 

Navy) installations worldwide. All operational STARS systems have exceeded their 

requirements for system reliability and availability. 

The remaining STARS risks are primarily programmatic and budgetary. The FAA 

Joint Resources Council (JRC) recently approved STARS for full production and deployment to the remaining 31 of its 50 most critical terminal locations as part of 

Phase I of the Terminal Automation Modernization Program. 

When compared to Wide Area Augmentation System (WAAS), Airport Surveillance Radar—Model 11 (ASR–11), and En Route Automation Modernization 

(ERAM), STARS is in the lower risk phase of the standard program life cycle. The 

life cycle starts with high risk during the development phase, decreases through deployment, is at lowest risk during the years of sustainment, and eventually increases during the end of life phase prior to replacement. STARS is deploying full 

production configuration systems and sustaining those systems. ERAM is in the 

higher risk area of development while WAAS and ASR–11 are nearing the end of 

development. 

GLOBAL POSITIONING SYSTEM

Question. It is my understanding that the Department of Defense appears to be 

increasing their requirement for Global Positioning System (GPS) IIF satellites. I 

am told that L5 signal coverage is on the horizon and that GPS accuracy will get 

even better than it already is. Given the difficulty that everyone anticipates for 

WAAS equipage, the accuracy improvement of the GPS system, and the success that 

GPS already enjoys in the general aviation and commercial fleets, I’m wondering 

what benefits we derive from continuing to pour more resources into WAAS when 

most, if not all, of the capability that WAAS offers is likely to be offered by this 

next generation of GPS satellites. Would we be better off focusing on how to leverage GPS in our Required Navigation Performance, or RNP, efforts and by taking 

advantage of the installed base of GPS receivers? 

Answer. The Department of Defense is adding an additional civil frequency called 

L5 to the next generation of GPS satellites. This frequency will provide additional 

capability for all users of GPS and will enhance accuracy. WAAS presently achieves 

an accuracy of 1.5 to 2 meters. 

WAAS receivers for aviation use are currently available by a limited number of 

manufacturers and we expect that over the next year this number will grow significantly. GPS provides significant benefits for pilots, and today many are taking advantage of the capabilities of GPS. However, GPS alone, even with the L5 signal, 

does not meet all the needs for our customers. Specifically, GPS alone does not meet 

aviation safety requirements to virtually never fail to warn pilots of misleading information and to be available all the time. Meeting these requirements improves 

safety while enhancing capacity within the National Airspace System (NAS). For 

this to occur, capability beyond GPS alone is needed, and WAAS meets this need. 

The WAAS will utilize the GPS L1 and L5 frequency to enable pilots to fly precision 
458

approaches to Category I levels. Precision approach utilizing WAAS will be fully 

compatible with the FAA Required Navigation Performance. The WAAS program 

has recently undergone program re-planning to leverage the investment the Department of Defense is making to modernize GPS when it adds the L5 frequency. 

There are three issues regarding the modernization of GPS by adding L5 that 

need to be addressed. The first is the schedule of when L5 will be available. Although the first L5 satellite is scheduled for launch in 2006, it will not begin broadcasting the L5 signal until 2009. In addition, in order to utilize the capability of the 

GPS constellation, many satellites with L5 must be operating. Based on the current 

schedule, it is possible that L5, with acceptable availability of its signal, will not 

be available until 2015 or later. WAAS is providing service to customers now. With 

the additional L5 frequency provided by GPS, WAAS capabilities will improve. The 

second issue is that even when modernization is completed, there may not be a sufficient number of satellites available to provide precision approach capability to all 

users, at all locations in the NAS. Analysis shows that the modernized GPS will still 

need to be augmented to provide service to all users, at all needed locations, at all 

times. The third issue is that current GPS receivers are not capable of receiving and 

processing the L5 signal. New equipment or upgrades to existing equipment will be 

necessary to receive and process the L5 signals. 

FAA is committed to working with our customers to enable RNP capability. 

WAAS allows more aircraft to achieve the most stringent RNP by providing high 

capability RNP-capable receivers at modest costs available to all users. GPS alone 

cannot meet the most stringent RNP capabilities. 

CONTROLLER RETIREMENTS

Question. How the controller workforce changes over the next several years will 

be a critical issue for the FAA. FAA has reduced staffing levels for air traffic controllers from 15,613 in fiscal year 2003 to 15,333 in fiscal years 2004 and 2005. And, 

FAA is not requesting additional controllers in fiscal year 2005. What is your plan 

for addressing the retirement surge? 

Answer. Controller retirements are a critical issue for FAA. We are in the process 

of developing a plan to prepare the agency. We are also developing a plan to address 

controller retirements, as required by Vision-100, which will be submitted to Congress at the end of calendar year 2004. 

CONTROLLERS-IN-CHARGE

Question. What are you doing about the practice of air traffic controllers acting 

as controllers-in-charge and the rising number of operational errors occurring under 

their watch? 

Answer. To date we have not identified any direct correlation between the use of 

air traffic controllers acting as controllers-in-charge (CIC) and the number of operational errors. Following any operational error, the FAA conducts a detailed review 

of the circumstances surrounding the error to identify causal factors. The current 

data indicates that approximately 23 percent of the errors reported for fiscal year 

2004 occurred while CIC’s were on duty in comparison to approximately 21 percent 

during fiscal year 2003. 

The agency is moving forward with plans to bring the supervisory level up to 

1,726 by the end of fiscal year 2004. 

CONTRACT TOWERS

Question. The subcommittee supports the FAA contract tower program as a way 

to provide cost-effective ATC services in a proven and safe manner at over 200 

smaller airports across the country. Without this program, many of these smaller 

communities would lose the significant safety benefits a tower provides. Can you tell 

us the plans to spend the $80.3 million provided by Congress in fiscal year 2004 

for the baseline program and your projections for funding the program in fiscal year 

2005? 

Answer. In fiscal year 2004, the FAA will maintain 219 contract towers and provide funding for 10 new starts. For fiscal year 2005, $79.2 million is included in the 

President’s budget request to run contract towers. 

BALANCING INVESTMENTS

Question. FAA modernization plans have suffered from a number of redirections 

over the past several years. The U.S. aerospace industry continues to make early 

investments in the technologies supporting these plans with returns on these investments delayed or eliminated when the FAA’s plans change. What is the FAA doing 
459

to ensure that future modernization plans are clearly defined, achievable, and supported by the aviation community? 

Answer. Modernization efforts with links to avionics investments are heavily dependent on high levels of equipage to achieve customer benefits. When the benefits 

are overwhelming, such as with domestic reduced vertical separation minima 

(DRVSM), a rule can be made and a date certain for implementation set. When the 

modernization effort depends on voluntary equipage, the economic ability for a predominate portion of the fleet to equip to achieve additional flight efficiencies or 

economies is a major factor in achieving the modernization benefit. Since investments that include voluntary equipage are more uncertain, the FAA continually 

works with the aviation community through its Federal advisory committees (in 

particular, RTCA) to coordinate FAA and community investments, and to identify 

initial applications and target locations for which the benefit is overwhelming and 

the investment clear. 

Question. As the airline industry and the economy recover from the September 11 

terrorist attacks, airspace and airport capacity will once again become a significant 

concern. While it’s reasonable to expect that some of the recent and pending system 

improvements will support the demand for the next couple of years, more significant 

technology insertion will be needed to ensure unconstrained aviation growth for the 

future. Near term spending on key technologies like LAAS, CPDLC, and ADS–B appears insufficient to ensure these technologies will be ready to deploy when they’re 

needed. How are you balancing your investments between near-term, mid-term, and 

long-term modernization initiatives? 

Answer. Balancing near-term, mid-term and long-term modernization initiatives 

is based on providing services that have the greatest value for our customers according to schedules that are mutually compatible. As an example, the Operational Evolution Plan includes modernization investments that produce significant value for 

our customers over the next several years. 

Longer-term investments will provide a higher capacity, flexible infrastructure to 

accommodate new operational concepts that will be needed to meet future traffic 

growth. In many cases, longer-term services may require significant development 

before new concepts and systems can be implemented. 

In today’s business environment, aircraft equipage schedules have been delayed 

or canceled due to the number of cash-limited airlines. Also, practical limits exist 

in the rate and number of major changes that can be accommodated in operational 

facilities. 

Finally, modernization investments need to be balanced against investments 

needed to safely and reliably provide existing services. 

All of these factors are considered in consultation with our customers as our investments are balanced and reflected in the National Airspace System Architecture 

and our Capital Investment Plan. 

HARMONIZATION OF U.S. AND EUROPEAN MODERNIZATION PLANS

Question. The United States has long been regarded as the global leader in aviation. Close cooperation between U.S. industry and the FAA has resulted in the aircraft and ATC technologies that shaped the first century of flight. In recent years, 

Europe has focused their efforts to modernize their aviation infrastructure. Projects 

like Galileo and the Single European Sky are positioning Europe to define the technologies that will shape the next century. What steps are you taking to harmonize 

U.S. and European modernization plans, ensuring U.S. interests are appropriately 

represented in future aviation solutions? 

Answer. FAA continues to engage in bilateral, regional, and multilateral support 

activities to promote the improvement of safety worldwide, including the implementation of U.S. safety technologies, system safety concepts, and air traffic management procedures and practices as the foundation for global aviation safety standards. FAA international leadership is one of the four main goals included in the 

FAA Flight Plan for 2004-2008, and as such, will continue to be a top FAA priority. 

FAA accomplishes this mainly through its participation in, and support of the 

International Civil Aviation Organization (ICAO) and its numerous technical panels, 

regional implementation groups, and higher-level policy meetings. Within these activities, FAA works very diligently to develop and obtain approval of global standards and recommended practices (SARPs), and guidance materials based primarily 

on U.S. systems and solutions to ensure that new globally adopted procedures and 

technologies will not be detrimental to the collective interests of the U.S. civil and 

military government, industry, and user communities. 

Within the global aviation community, the United States and Europe, from the 

service provider perspective, are viewed as the two major air navigation service pro-
460

viders in the world that can ultimately determine the success or ineffectiveness of 

new technology, procedures and air traffic concepts. As such, cooperation between 

the FAA and its European counterparts has been viewed as imperative to the creation of truly seamless air transportation system. The FAA and EUROCONTROL 

have been cooperating for years through a Memorandum of Cooperation (MOC) and 

related technical annex agreements that outline our joint cooperation on air traffic 

management (ATM) research on new technologies and concepts, strategic ATM system analysis, harmonization of ATM enhancement programs and plans, ATM development and operation, and safety management and regulation. Between our respective support to ICAO global programs and our bilateral cooperative projects under 

the stated MOC, the FAA and EUROCONTROL continue to successfully harmonize 

and align related programs, to the extent practicable to ensure interoperability of 

air transportation systems and procedures between the United States, Europe, and 

neighboring airspace. 

Through our ongoing cooperative relationships with the EUROCONTROL and European States, FAA is keeping abreast of the new Single European Sky Initiative 

(SESI) to be able to assess any aspects of the program that may be detrimental to 

United States policies or initiatives. 

One of the most visible areas of U.S. and European cooperation is in satellite 

navigation system implementation. Since the release in 1996 of the United States 

Presidential Decision Directive (PDD) promoting the proliferation and use of the 

U.S. GPS and its civil wide and local area augmentations, the FAA has been encouraging its international counterparts, as individual States and as regional communities, to approve the use of the basic GPS signal for use in certain oceanic, en 

route, and non-precision approach operations. As a result, we have seen the number 

of States approving the operational use of GPS double since 1998. 

For the last couple of years, the FAA has supported the U.S. Department of 

State’s ongoing negotiations with the European Commission (EC) on overall operating principles of the planned European Galileo satellite constellation and its full 

interoperability with the already established and globally accepted U.S. GPS. As a 

result of this U.S. initiative, a joint statement was signed on February 25, 2004 between the EC and the United States stating that both parties were able to reach 

agreement on most of the overall principles of GPS/Galileo cooperation, and both 

parties will continue to work diligently to resolve the few remaining outstanding 

issues which concern primarily some legal and procedural aspects. This cooperation 

should minimize the negative implications to United States GPS interests worldwide (civil government, military, industry, and user community) as a result of the 

potential future implementation of the European Galileo satellite system. 

On a more technical level, FAA has been managing a satellite based augmentation system (SBAS) technical interoperability working group since 1996 with participation by Europe and Japan to collectively ensure that technical interoperability 

issues are solved prior to the operational implementation of the United States 

(WAAS), European (EGNOS), or Japanese (MSAS) systems. FAA is also providing 

support to regional projects in South America and Southeast Asia to implement GPS 

augmentation system prototype capabilities. Successful results from these projects 

will influence the adoption of U.S. GPS and augmentation systems that will ultimately increase international flight safety for the U.S. aviation community. 

GLASS BEADS

Question. On March 6, 2001, the Engineering and Specifications Division, FAA, 

requested the Office of Aviation Research to analyze glass beads ‘‘to determine if 

the new Visibead or Megalux bead are a viable alternative to the 1.9 or 1.5 IOR 

glass beads.’’ (Project Number 2000–589.) The FAA issued a Final Report in early 

2003 that found the Visibead and Megalux bead to be acceptable. Given the cost 

savings associated with the use of these glass beads, why has the FAA waited over 

12 months to certify the use of these glass beads as required for airport managers/

engineers to use Visibead and Megalux beads on airport runways? 

Answer. The referenced study confirmed the acceptability of existing reflective 

glass beads and the newer Visibead and Megalux reflective glass beads, as well as 

newer formulations of water-borne paints. A draft change to the FAA paint specification has been initiated. In the meantime, an airport may ask for FAA approval 

on a project basis. The revised specification will contain generic language that both 

manufacturers of the newer glass beads can meet along with paint application rates 

specific to these newer beads. With the addition of these beads, three reflective 

media options will be available to an airport. In order of increasing initial cost, they 

are: 

1. Type I beads, commonly referred to as ‘‘highway-grade’’ beads. 
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2. Type IV beads, the nomenclature used to refer to the Visibead and Megalux 

beads. 

3. Type III beads, commonly referred as ‘‘airport-grade’’ beads. 

Question. Can you assure the subcommittee that the FAA will certify the use of 

these glass beads on airport runways before the end of the current fiscal year? 

Answer. A new paint specification will be issued prior to the end of the fiscal year. 

It contains generic language that will allow contractors to use Visibead and Megalux 

reflective glass beads. 

RELIABLE COST INFORMATION

Question. There has been much discussion about the transition to the air traffic 

organization and the need to get good, reliable cost information. It is my understanding, however, that this information is not available, and it will take some time 

to do so. How long will it take to get this information? 

Answer. Since the FAA switched to the new Department of Transportation financial system (DELPHI) in November 2003, we have been working on reconciling and 

cleaning up the financial information for all organizations, including the ATO. In 

addition, we have been working to interface this new financial information into our 

Cost Accounting System (CAS). We plan to re-establish the CAS interface and begin 

producing cost reports with the first 8 months of fiscal year 2004 data in August 

2004 and all fiscal year 2004 data in October 2004. We expect to get back to routine 

monthly CAS reporting in November 2004 with fiscal year 2005 data. 

Question. What stands in your way? 

Answer. This fiscal year, the FAA implemented new financial (DELPHI) and procurement (PRISM) systems. These systems were necessary for the FAA to address 

long-standing weaknesses in these areas. Improving these systems is the foundation 

on which we can implement a more business-like approach to running the agency. 

As with any major system changes, there were backlogs and interface problems that 

have taken several months to resolve. One of the interface problems we experienced 

is between DELPHI and the existing Cost Accounting System. 

Our first priority was to ensure that DELPHI provides accurate and timely financial information. DELPHI data must be accurate for cost accounting data to be accurate. We dedicated significant resources to clearing up DELPHI and PRISM backlogs through June 2004. In July 2004, we changed our focus to cleaning up some 

remaining issues with DELPHI data in support of the clean audit effort and to improving financial and acquisition business processes. 

Our second priority is to complete the DELPHI interface that supports the Cost 

Accounting System. We completed testing the interface in March 2004 and will complete the processing of the first 9 months of fiscal year 2004 cost accounting data 

in early September 2004. All fiscal year 2004 cost data will be processed by late October 2004. In fiscal year 2005, we plan to return to monthly processing of the cost 

accounting data. We also continue to improve our labor distribution reporting for 

our Air Traffic Organization. 

QUESTIONS SUBMITTED BY SENATOR SAM BROWNBACK

CENTER WEATHER SERVICE UNITS (CWSU)

Question. I understand you are in the process of modernizing the FAA’s air traffic 

operations and that updating and improving the Center Weather Service Units 

(CWSU) is part of that plan. I see many positive things in this plan that will enhance safety such as improved training, standardization among units, and instituting 24-hour operations. However, some of my constituents who are members of 

the National Weather Service (NWS) Employees Organization are concerned that a 

portion of this plan would no longer require a CWSU meteorologist at each of the 

21 Air Route Traffic Control Centers (ARTCC). Would this plan leave some air traffic controller and management personnel without immediate, on-site meteorologist 

assistance? If so, how would this impact safety? 

Answer. There are several different configurations for restructuring the CWSU 

under consideration. The FAA and the NWS are collaborating to come up with a 

configuration and placement of personnel that will improve safety. Further, we intend to take full advantage of revolutionary improvements in communications technology that have been developed since the CWSUs were first put in place more than 

25 years ago (1978). 

We recognize the concept of ‘‘on-site meteorological assistance’’ as essential for the 

safe, efficient management of air traffic. Frankly, that is why the NTSB has also 

been concerned that weather support be available at TRACON facilities and airport 
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traffic control towers—as well as at the CWSUs—at all times when significant 

weather is forecast. 

Partly in response to these NTSB recommendations, we intend to design a system 

where all FAA field facilities get on-site weather assistance on a 24-hour basis, 7 

days a week. The foundation of modern weather services is electronic and automated, rather than human. We recognize the impossibility of putting a meteorologist into every field facility of the FAA: air route traffic control centers (ARTCC), 

TRACONs, ATCTs and flight watch facilities of the automated flight service stations. 

Thus, I can assure you that the improvements that we are planning for the 

CWSU will not leave air traffic controller and management personnel without immediate, on-site meteorological assistance. As an example, the service they now receive from the on-site meteorologist will improve immediately by 50 percent simply 

by operating 24 hours a day, rather than the present two shifts a day. However, 

this does imply the assistance that all facilities receive (including the ARTCCs) will 

be electronic and automated. This design is not only economical, but will be a great 

improvement in services compared with current level of operations. 

Of course we are planning several sites where human weather support is always 

available 24 hours a day in case human intervention or consulting on critical weather problems is needed. However, their support will cover a regional domain, rather 

than just meeting local needs. This is the most economical use of trained meteorologists. Further, the NWS has proposed to train and reward these forecasters consistent with their larger responsibilities. 

We recognize the employees union of the NWS, the National Weather Service Employees Organization, is concerned about changes. The NWS is a full partner in 

these plans. 

GENERAL AVIATION

Question. General aviation is very important to Kansas, given the presence of airplane manufacturers, avionics manufacturers, and the 6,000 pilots across the State. 

What steps are being taken to ensure that general aviation pilots have access to the 

latest technology? 

Answer. The FAA has worked in partnership with the general aviation (GA) industry to promulgate standards and guidance material to ensure that GA pilots 

have access to the latest technology. 

The FAA recently published Technical Standard Order (TSO) C–145 and C–146 

for WAAS for the Global Positioning System (GPS). This TSO allows avionics companies, such as Garmin and Honeywell, to self-certify WAAS equipment for installation in the GA fleet. 

The FAA’s Wichita Aircraft Certification Office has recently approved several new 

technology projects for use in the GA fleet. Both projects are navigation equipment 

and flight deck weather display applications. 

The FAA has also published guidance material in the form of an Advisory Circular (AC) that considerably simplifies the requirements for GPS equipment installation. Due to the wealth of experience gained by FAA and industry in installing 

GPS equipment, this AC removes many of the burdensome requirements formerly 

associated with a GPS installation. The FAA has worked with avionics companies 

to streamline installation requirements for many GA operators. 

Question. For example, the President’s budget calls for GPS landing systems nationwide—a move that would greatly improve the safety of flying in difficult weather conditions. With precision satellite signals now available, how is the implementation of this system progressing? 

Answer. The FAA commissioned WAAS in 2003. The WAAS system provides 

greatly improved accuracy, integrity and continuity for aircraft during precision approach operations. 

The FAA published TSO C–145 and C–146 as minimum design standards for 

WAAS avionics. The FAA evaluated the potential of the new GPS L5 signals and 

has approved a new WAAS acquisition program baseline that exploits these signals 

to improve the reliability of operations in the presence of interference and severe 

atmospheric conditions. It introduces a new Category I precision approach capability. 

The FAA has also chartered the Required Navigation Performance (RNP) program. The program is a combined effort of Air Traffic, Flight Standards, and Aircraft Certification. The RNP program exploits the navigation capability of present 

aircraft to use precision approaches at many airports. 
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QUESTIONS SUBMITTED BY SENATOR PATTY MURRAY

ADVANCED TECHNOLOGIES AND OCEANIC PROCEDURES

Question. Ms. Blakey, the Inspector General’s status report points out that the 

FAA’s operating cost estimates for Advanced Technologies and Oceanic Procedures 

(ATOP) are almost 3 years old and that there are remaining challenges associated 

with controller and technician training and acceptance of the technology. Do you 

agree with the Inspector General’s assessment of the cost and schedule of the ATOP 

program? 

Answer. The Inspector General’s status report points out that the FAA’s operating 

cost estimates for ATOP are almost 3 years old and that there are remaining challenges associated with controller and technician training and acceptance of the technology. The FAA is currently revalidating its operating cost estimates. Both controllers and maintenance technicians have also been involved in numerous validation 

and testing activities, and have been deeply involved in the development and review 

of the vendor’s training materials. ATOP training is ongoing and to this point has 

received positive feedback from the user community. 

Question. What can you tell us about the comfort level of the controller workforce 

in using this system? 

Answer. Controller and maintenance personnel were members of the ATOP evaluation team prior to contract award and have been heavily involved in the program 

for the last 4 years, from design to on-site operations. The site product teams have 

also been involved in numerous validation and testing activities. 

The ATOP Build 1 system test program successfully used a systematic approach 

to evaluate the ATOP system under a range of simulated and live operational conditions that were representative of those found at the Oceanic facilities. System test 

was conducted through a semi-structured exercise that permitted field participants 

to perform typical and non-typical assessments and evaluations to determine the 

operational suitability of the ATOP system. 

The field believes that the ATOP system is operationally suitable contingent on 

the resolution of the issues documented. All issues are tagged according to their 

specified completion timeframes (e.g., by Site Acceptance Test (SAT), Field Familiarization (FF), First Course Conduct (FCC), and Initial Operating Capability (IOC). 

The ATOP team continues to verify software fixes, conduct regression testing, and 

monitor system changes and the resulting impacts to operational suitability. Any 

issues that may emerge or re-emerge in subsequent testing or validation activities 

will be evaluated for their operational impact. 

Question. As for training, have the training materials been fully developed and 

will you have to expedite the training process to meet the June deployment date 

in Oakland? 

Answer. Training materials have been fully developed for both controllers and 

maintenance technicians. Both groups’ personnel have been deeply involved in the 

development and review of all training materials. The first training course is now 

underway for maintenance technicians and has received positive feedback. ATOP 

went live in Oakland on June 30, 2004. 

REVENUE DIVERSION

Question. The Inspector General’s office has put a spotlight on the issue of airport 

revenue diversion with your recent report on San Francisco International Airport 

and your current review of potential revenue diversion at Los Angeles International 

Airport. Mr. Mead’s testimony suggests that the FAA is not exercising adequate 

oversight in this area. Ms. Blakey, what additional steps is the FAA taking to make 

sure that airport revenues are not being diverted to other activities? 

Answer. Unlawful revenue diversion generally occurs when an airport sponsor, 

usually a city or county, overcharges its airport for services, thereby diverting revenue from airport use. Revenue diversion is more likely to be a problem at larger 

airports and at city- or county-owned airports rather than independent airport authorities. 

FAA has a number of different ways to detect unlawful revenue diversion. First, 

the agency reviews the annual financial reports that all commercial use airports are 

required to file with the FAA as a result of the 1994 FAA Reauthorization Act. Second, we review the findings of audits of airport revenue under the Single Audit Act, 

and have issued new guidance to the field offices to ensure they correctly analyze 

those findings. Third, FAA receives complaints of revenue diversion filed by companies and individuals doing business with an airport. Fourth, when the Office of the 

Inspector General (OIG) reports audit findings of unlawful revenue diversion by an 
464

airport operator, the agency investigates and requires corrective action to resolve 

the findings. 

When we identify a potential unlawful revenue diversion, we contact the airport 

and require an explanation. When we conclude that airport revenue has been improperly used, we require the diverted revenue to be refunded to the airport with 

interest. 

Recently, in coordination with the OIG, we have taken the additional steps of 

identifying airports at higher risk of revenue diversion and focusing spot checks on 

financial transactions at those airports. 

BASELINE REVIEW OF WAAS AND STARS

Question. Ms. Blakey, last year, Chairman Shelby asked you to name the three 

modernization projects that were most important to the future of the aviation system. Two of the programs you named, STARS and WAAS, are being rebaselined. 

When can we expect to see the details of your request for STARS and WAAS? 

Answer. STARS—FAA has modified its strategy for Terminal Automation Modernization into a three-phased approach, starting with the most critical Terminal 

Radar Approach Controls (TRACONs.) This approach breaks large, complex terminal modernization acquisitions into phases that mitigate Government, vendor, 

and deployment costs and risks. This three-phased acquisition approach allows FAA 

to select a ‘‘best value’’ system and pace the automation system replacements and 

upgrades to fit within the FAA’s capital investment program and meet critical National Airspace System requirements. 

Terminal Automation Modernization was re-baselined on April 20, 2004. We have 

just recently provided the details for fiscal year 2005 to the subcommittees. In the 

re-baseline, Terminal Automation is requesting $113.9 million for Facilities and 

Equipment in fiscal year 2005 for Phase 1 of the modernization program. 

The terminal automation baseline, approved by the Joint Resource Council (JRC), 

is for the Full Production and Deployment to the remaining 31 of its 50 most critical 

Terminal locations (Phase 1). In accordance with Congressional direction, the option 

to Phase 1 (Chicago’s Common ARTS IIIE and the two Common ARTS IIEs) will 

only be implemented after the Department of Transportation (DOT) Inspector General (IG) reviews and validates the life cycle costs and performs other relevant analysis. Phases 2 and 3 will be priced and presented separately at JRCs in future 

years. For the follow-on phases, FAA is developing a business case considering 

STARS and all other viable terminal modernization alternatives and will provide 

comparative cost/benefit data to the DOT IG for their review before awarding a contract for Phase 2 or 3. 

Since FAA is the acquisition lead for the joint DOT and DOD STARS program, 

in accordance with Title 31, USC 1535, the Economy Act of 1932, rebaselining the 

FAA portion of the STARS program directly affects deployment of STARS at DOD 

sites within the Continental United States (CONUS) and outside the CONUS. The 

goal of the agreement is to avoid Departmental duplications of independent acquisitions, life cycles, and system-unique training of air traffic controllers and technicians. A joint DOT and DOD platform avoids duplicate civil and military development and sustainment expenditures. 

WAAS was re-baselined on May 3, 2004. We recently provided the details of the 

request for fiscal year 2005 to the subcommittees. In the re-baseline, WAAS is requesting $100.03 million for Facilities and Equipment in fiscal year 2005. 

Question. How, if any, have the plans and capabilities of these two systems 

changed from last year? 

Answer. STARS—The Terminal Automation Modernization plan has changed to 

a multiple-phased approach, starting with the most critical TRACONs. This reflects 

the FAA’s changing processes and philosophies to demonstrate a consistent and continuous business approach. A key element of this approach breaks large, complex 

modernization acquisitions (i.e., STARS) into phases that mitigate Government, vendor, and deployment costs and risks. This three-phased acquisition approach allows 

the FAA to select a ‘‘best value’’ system and will also use mostly fixed-price arrangements as opposed to cost-plus contracts. The FAA Joint Resources Council approved 

STARS for full production and deployment to its 50 most critical terminal locations 

(Phase 1) on April 20, 2004. 

The STARS national baseline continues to evolve to meet National Airspace System requirements. Additional functionalities have been added to incorporate sitespecific local patches, NTSB and Homeland Security enhancements, mirror Common 

ARTS developments, and satisfy DOD requirements for their worldwide operation. 

For all follow on phases and systems (Common ARTS IIIE and STARS), additional 
465

capabilities will be added for in later phases. Each phase will be priced and presented separately at future JRCs. 

WAAS will provide full Category One precision approach capability when it is 

completed. It will do this by using the new capabilities of the GPS satellite constellation when they become available. WAAS is now providing a near Category One 

capability over most of the United States. WAAS will be incrementally improved between now and 2008 to add additional ground hardware and system software to provide this near Category One capability over the entire continental United States and 

Alaska at all times. When the modernized GPS provides sufficient numbers of new 

satellites with the L5 signal capability, WAAS ground receivers and system software 

will be modified to use it. WAAS will then provide full Category One capability. 

THE NEW SEATAC TOWER

Question. Ms. Blakey, as you are aware, we are about to commission a brand new 

air traffic control tower at Seattle-Tacoma International Airport. Certain offices of 

the FAA are now maintaining that your agency located this tower in the wrong location. How was it that the FAA built a brand new air traffic control tower, but put 

it in a less-than-ideal location? 

Answer. The Seattle Air Traffic Control Tower (ATCT) siting study was completed 

in April 1997. The final location and height recommendation was based on meeting 

the FAA’s existing siting criteria standards. These include providing a clear and unobstructed view of all controlled aircraft movement surfaces, adequate depth perception and perspective, and minimum desired look down angle to provide a clear line 

of site to furthest operational areas. In addition, an analysis was performed to understand the impact of applying Terminal Instrument Approach Procedures 

(TERPS) that were current at the time to determine any impacts to the IFR capabilities of the airport. The potential impact created by the height of the new ATCT 

on Runway 16L during periods of poor weather (CAT II/III operations) was raised 

during the siting process. When the TERPS analysis indicated that the decision 

height (DH) for CAT I operations on runway 16L would be raised, a determination 

was made by the FAA that the criteria at the time allowed for CAT II/III operations 

with a CAT I Decision Height in excess of the standard. 

The new ATCT was designed and sited at the preferred location at the lowest optimum height. After construction on the new ATCT was substantially complete (end 

of 2002), the FAA revised its procedures and no longer permitted CAT II/III operations when the landing minimums for CAT I approach have been raised. 

Because the new ATCT was almost complete, we established a cross-organizational working group to determine mitigation strategies. The team has been working 

on developing strategies that will provide the safe operation of the CAT I approach 

procedures while meeting the planned capacity of the airport. These potential strategies include radar-monitored final approach aid, redirecting slower speed category 

aircraft, advanced avionics, policy changes, special procedures and improved radar 

surveillance systems. FAA is currently conducting modeling and analysis to evaluate the feasibility and determine the full impact of implementing the preferred mitigation strategy. The analysis was completed in June 2004. A report of the study’s 

outcomes will be published in August. 

Question. The Port of Seattle is still waiting to hear how the FAA plans to address 

this concern about the location of the tower. Is there any risk that the FAA’s remedy 

for this situation could result in there being a diminished number of takeoffs or 

landings allowed by any types of aircraft at SeaTac International? 

Answer. In August 2003, the FAA Northwest Mountain Regional Management 

Team chartered a cross-organizational regional working group to develop a proposal 

that mitigates the ATCT height, ensures an equivalent level of safety, and meets 

the planned capacity at SeaTac. 

The working group evaluated eleven potential mitigation strategies and ranked 

them with regard to the potential of ensuring an equivalent level of safety, maintaining current and planned capacity at SeaTac, and the feasibility of effecting the 

strategy. The strategies include radar-monitored final approach aid, redirecting 

slower speed category aircraft, advanced avionics, policy changes, special procedures, and improved radar surveillance systems. 

The FAA Flight Technologies and Procedures Division is conducting modeling and 

analysis to evaluate the feasibility and to determine the full impact of implementing 

the mitigation proposals. This analysis is expected to be completed this month, and 

should allow for implementation of a strategy well in advance of the September 

2006 date when Runway 16L is scheduled to become an ‘‘all weather’’ runway. 
466

JOINT PLANNING AND DEVELOPMENT OFFICE

Question. I believe that the subcommittee is now prepared to approve your reprogramming request to launch the Joint Planning and Development Office (JPDO). 

I support this initiative and the interagency efforts that are supposed to be brought 

together by DOD, NASA, the White House and the Departments of Commerce, Defense and Homeland Security. Are you at all concerned that you will not gain the 

level of cooperation from the other Federal agencies that you need in order for the 

JPDO to fulfill its mandate? 

Answer. The subject of our Air Transportation System is no longer solely an FAA 

interest. All six members of the JPDO recognize the need for close cooperation in 

this area. We have formed the JPDO and have representatives and principals, from 

all six members actively engaged in JPDO activities and working to develop the first 

edition of the national plan. This year’s plan will provide the foundation for the following years’ plans. We are also developing an MOU that will further define responsibilities and resources necessary to make the JPDO successful. 

Question. I understand your budget is allocating only $5 million a year to this initiative. Do you think that level of funding will demonstrate a strong enough commitment on the part of the FAA to bring all of the other agencies to the table in a 

meaningful way to develop the next generation of our aviation infrastructure? 

Answer. Basic financial support for the JPDO in fiscal year 2004 came from both 

FAA and NASA. The FAA contribution was $4.4 million and NASA’s was $5.38 million. Other members of the office contributed employees and some contractors. The 

fiscal year 2005 FAA budget will allow the office to hire 3 FTE and expand our work 

to begin limited integration. The office will rely on NASA to support the needed research for the program. Several interested groups, including our own Executive Advisory Committee, have recommended that we rapidly expand our systems integration activity. We are now studying this recommendation. If we decide that it is necessary to move more quickly in the systems integration area, it will cause us to 

modify our request. 

The FAA continues to strongly support the formulation of a national plan for the 

next generation air transportation system. The $5 million is for the support of the 

JPDO office itself. The national plan will encompass significant resources throughout the participating organizations of the Department of Transportation (FAA), Defense, Homeland Security, Commerce, and NASA. 

TERMINATION OF LONG-TERM PROCUREMENT PROJECTS

Question. Ms. Blakey, when you look at the projects that you have shelved because of the need to cut $400 million out of your procurement budget, they appear 

to be those projects that were scheduled for deployment in the more distant future. 

However, they also represent some of the most critical projects necessary for taking 

the technology of our air traffic control system to the next level. For example, your 

agency is pulling the plug on its so-called Data Link Communications System, 

where aircraft sends a stream of data to air traffic controllers so that all that information does not need to be communicated by voice. This subcommittee has made 

significant investments in your Free Flight initiative and, by your agency’s own admission, the full deployment of data link is essential to getting the maximum utility 

out of your Free Flight initiative. Part of the rationale that you have given as to 

why we can set these projects aside is because the financially strapped airlines are 

not yet in a position to equip their aircraft with this most up-to-date equipment. 

Isn’t it true, however, that the FAA has not customarily waited to modernize the 

system until the airlines are ready, willing and enthusiastic about deploying new 

equipment? 

Answer. The FAA has always considered our partners in the airlines when making major investment decisions, particularly those that require reciprocal equipage 

on their part in order to achieve real operational improvements. When there is a 

commitment to equip on their part, the FAA has moved out smartly to invest in 

the ground infrastructure and procedure development side. A case in point is Domestic Reduced Vertical Separation Minimum (DRVSM). Alternatively, when an equipage commitment from the airlines is less firm, the FAA has adopted a rational 

‘‘go slow’’ approach wherein the FAA has developed the technology and fielded it in 

a limited number of locations. In cases where the airlines need to defer investments, 

it is prudent for FAA to do the same. Two cases in point are Controller-Pilot Data 

Link Communications (CPDLC) and the Local Area Augmentation System (LAAS). 

Question. Is not there a real risk that we will dramatically slow the advancements 

that we make in modernizing our air traffic control system if we wait and wait and 

wait until the airlines say that they are ready to make the investment? 
467

Answer. Capital investments that do not achieve improvements in operational efficiency due to airline non-equipage simply increase the FAA’s costs without improving performance. In business terms, there is no return on the investment. Such investments should be eliminated. On the other hand, investments that modernize our 

system, but do not require airline equipage (e.g., ERAM and Terminal Modernization) will continue because they will achieve operational efficiencies and performance. 

RULEMAKING AUTHORITY

Question. Your agency has the authority to require safety improvements to aircraft when you believe that they are beneficial for safety and the most efficient use 

of the air space. Have you given up on using that tool to advance improvements in 

our aviation system? 

Answer. The FAA has rulemaking authority. The FAA ranks each proposed rule 

in terms of its safety effect. The FAA then does a cost-benefit analysis to make sure 

the proposed rule is worth its cost, which is ultimately borne by the flying public. 

A recent example of the FAA’s use of rulemaking authority to require safety improvements to the aircraft is the insulation flammability rule which was issued on 

July 14, 2003, which is designed to reduce the flammability of aircraft insulation 

(and thereby prevent the spread of fire). This rule requires manufacturers of new 

airplanes that enter service after a phase-in period to equip them with insulation 

that passes improved flammability test and requires air carriers, operating under 

Part 121, to use insulation meeting the new flame propagation requirements when 

they replace insulation. 

SECURITY AT THE AUBURN TRACON

Question. In the age of heightened security, it has become even more important 

that we make sure that our air traffic control facilities have sufficient security 

measures in place. It was reported a few weeks ago that the TRACON facility in 

Auburn, Washington that is about to be completed would not be provided security 

guards even though the FAA built a guardhouse at the facility. Ms. Blakey, can you 

explain to us why you decided to forego security at this particular air traffic facility 

in Auburn? 

Answer. FAA considers a number of factors when determining security requirements for its facilities. These include employee population, physical size, and the 

criticality of the facility to the National Airspace System. When developing security 

requirements for an individual facility, these factors plus an evaluation of local area 

risk and geography are used. 

When the Seattle Terminal Radar Approach Control (TRACON) facility was designed and built, guards were required by FAA policy. Since then, FAA has migrated away from using guards at this type of facility. The main reason is our analysis of the security risks to these facilities, as well as the maturing of other aspects 

of FAA’s Facility Security Management Program. In short, FAA determined that 

sufficient safeguards exist at facilities of this type, making a guard force unnecessary. Existing security measures at the Seattle facility include an extensive camera 

system that monitors key areas, and a secure access system for the property and 

building. In addition, the facility meets the security-required setbacks and has security fencing. 

The policy change that removed the requirement for guards was put into effect 

in August 2003. We now reserve guard use at TRACON facilities that are significantly larger than the Seattle TRACON. 

Even though the national policy shifted, with designs completed and construction 

underway, it was prudent to continue with the planned security measures. The 

guardhouse will provide us with future flexibility without incurring additional cost. 

We will provide guard services if the TRACON meets the established criteria for 

such measures in the future. 

QUESTIONS SUBMITTED BY SENATOR HERB KOHL

LORAN

Question. In recent years, this subcommittee has provided nearly $120 million to 

the FAA and the Coast Guard to modernize the LORAN infrastructure through an 

existing Memorandum of Agreement between the agencies and DOT that was last 

updated in 2003. This work continues to be one of my important priorities. Repeated 

technical and economic studies by government, academics, industry and others provide convincing evidence of the need for and benefits of LORAN as a cost-effective 
468

national asset to back up satellite navigation technology. Numerous infrastructure 

safety and efficiency improvement projects have already been completed and many 

other projects necessary to complete the modernization effort are already underway. 

LORAN is United States technology that is among the most widely used radio navigation systems worldwide and, aside from satellite technology, it is the only other 

multi-modal navigation system available to meet our national transportation system 

safety and security objectives. Over the past several years, DOT has promised to 

formulate a policy dealing with the long-term future of LORAN. What is the status 

of such a policy? 

Answer. The FAA, in conjunction with Coast Guard, academic, and industry team 

members, delivered a technical report to DOT on March 31, 2004. This report evaluated whether LORAN could satisfy the current non-precision approach (NPA), harbor entrance approach (HEA), and timing and frequency requirements, and its capability to mitigate the impact of GPS outage on GPS position, navigation, and time 

applications. Similarly, the Volpe National Transportation System Center delivered 

their independent LORAN Benefit/Cost analysis to DOT on the same date. The administration will make a policy decision on LORAN following review of these reports. 

Question. What is the FAA doing to ensure the continuation of a modern and secure LORAN system? 

Answer. The FAA has utilized the funding provided by the subcommittee to significantly modernize the LORAN system infrastructure. Working closely with the 

United States Coast Guard, the three aging tube transmitters have been replaced 

with modern, state-of-the-art solid state transmitters, new timing and frequency 

equipment has been installed, and each LORAN station has been supplied with 

three new cesium clocks. LORAN stations have also installed uninterruptible power 

supplies to preclude even momentary outages during power outages. The FAA has 

also conducted significant research in modern LORAN receiver technology and has 

developed prototypes for aviation and maritime users and for other potential markets. It should be noted that the administration does not support funding for 

LORAN in DOT. Funding for LORAN should be provided to the Coast Guard since 

it is primarily a maritime system. 

FAA POLICY ON AIRSPACE VIOLATIONS

Question. On January 15, a pilot of a small Cherokee airplane took a 4-hour flight 

that took him through the approach path of Philadelphia International Airport, 

buzzed commercial airliners and the Philadelphia Naval Shipyard, and came within 

a quarter-mile of the cooling towers of the Limerick nuclear power plant. When the 

small plane finally landed, the pilot’s blood alcohol level measured 0.15. While the 

pilot could face charges of risking a catastrophe and reckless endangerment, the incident also highlighted an important deficiency in the FAA’s ability to deal with 

such situations. While air traffic controllers and supervisors followed required protocol, it’s clear that the current system is lacking in terms of both prevention and 

enforcement of airspace violations. What is the FAA policy on dealing with airspace 

violations? 

Answer. The FAA’s policy is to administer enforcement action on airspace violations. The FAA takes seriously the willful violation of Federal Aviation regulations. 

The range of enforcement sanctions can include warning letters, fines or certificate 

action, such as revocation. In the case mentioned, the pilot’s license was revoked 

within 7 days of the incident. 

Question. What would the FAA need in order to develop a quicker response system, one that could account for any such airspace violations in the future? 

Answer. Aircraft that are flying in Visual Flight Rules (VFR) mode are required 

to display a beacon code of ‘‘1200,’’ however, aircraft flying outside of controlled airspace (i.e., outside the Philadelphia International Airport Class B), have no requirement for the pilot to talk to air traffic controllers or file a flight plan. This VFR 

mode allows pilots a great deal of freedom in operating their aircraft, while reducing 

the burden on the National Airspace System of identifying and talking to every aircraft. On a clear weather day, VFR aircraft can be counted in the hundreds, especially in large metropolitan areas of the country. It would be an overwhelming burden on air traffic controllers to identify and separate these aircraft from one another. 

When the identity of an aircraft is known and the air traffic controller has the 

ability to talk to that aircraft, the pilot is given instructions to avoid a restricted 

area. When a violation has occurred, the pilot is advised of the error and instructed 

to call the appropriate FAA facility for a briefing and follow-up with the Flight 
469

Standards District Office (FSDO), which can take place immediately or several 

hours after the incident. 

In the January incident, air traffic controllers were able to observe the aircraft’s 

target on the radar scope for a portion of its flight, but never communicated with 

the pilot; many attempts to contact the pilot on ‘‘Guard frequency 121.5’’ were unsuccessful. To prevent situations like this, it would be necessary to change the rules 

for flying in VFR conditions by requiring two-way communications with air traffic 

controllers, discrete beacon code assignment, and mandatory filing of flight plans. 

The NAS is not capable of handling these capabilities at this time. 

Question. Would you agree that we should strengthen Federal law as it applies 

to airspace violations? 

Answer. The FAA does not believe that any changes to Federal law are necessary 

to address airspace violations. The current sanctions that we have available, i.e., 

suspending or revoking pilot certificates and imposing civil penalties, have proven 

to be sufficient. The agency rarely sees reckless violations of the sort committed by 

the pilot in Philadelphia. That pilot’s certificate was revoked on an emergency basis. 

In addition, he was charged with State criminal violations for his conduct. 

QUESTIONS SUBMITTED BY SENATOR RICHARD J. DURBIN

CHICAGO O’HARE INTERNATIONAL AIRPORT

Question. How do you expect to proceed on addressing aviation congestion and 

flight delays at Chicago O’Hare International Airport in addition to the temporary, 

voluntary flight reductions during peak hours? When will data on the flight reductions be available? 

Answer. In Vision-100, Congress gave the FAA a number of new tools to use when 

demand exceeds capacity at an airport. Under Section 422, the FAA can schedule 

delay reduction meetings, under Section 423, we can engage in collaborative decision 

making. 

United Airlines, Inc. (UAL) and American Airlines, Inc. (AAL), agreed to an order 

cutting peak hour operations by 7.5 percent—5 percent in March and 2.5 percent 

starting in June. The Department of Transportation and the FAA deferred convening a schedule-reduction meeting under Section 422, in order to allow the operational limits to take effect and assess the impact on congestion and delay. The orders currently expire on October 31, 2004. 

To augment these reductions, on June 13, 2004, FAA adopted new air traffic procedures for use under certain runway combinations at O’Hare that increases capacity and efficiency, especially for departing flights, by several operations each hour 

when conditions permit. The FAA is currently monitoring the results of the recent 

changes in schedules and procedures. We will analyze the operation under various 

weather conditions over the coming weeks before determining whether additional 

action is required. 

The total daily flight reduction as a result of the 7.5 percent reduction by UAL 

and AAL has been 91 total flights during the most congested hours of 12 noon until 

8 p.m. Many of these flights have been shifted to other hours. These are all shortterm methods, with the long-term goal of addressing congestion by gaining additional capacity at the airport and throughout the National Airspace System. This 

administration is committed to addressing aviation congestion in both the short and 

long term and working with the carriers and local authorities. 

Question. Can you explain the time line, including the EIS, for the O’Hare modernization project? 

Answer. The City of Chicago is proposing a substantial reconfiguration of O’Hare 

International Airport under an initiative called the O’Hare Modernization Program 

(OMP). The city submitted a draft Airport Layout Plan (ALP) depicting the OMP 

proposal to FAA in December 2002 and a Master Plan document in February 2004. 

FAA comments on the ALP were provided to the city in mid-2003. Based on those 

comments, the city presented a revised ALP to FAA in October 2003. The FAA is 

also reviewing the Master Plan and preparing an Environmental Impact Statement 

(EIS) regarding the OMP proposal. Ultimately, the FAA must issue a favorable EIS 

Record of Decision and subsequently approve the ALP before the City of Chicago 

can begin construction. 

The ALP and Master Plan review are ongoing at this time, and the EIS process 

is underway. On April 15, 2004, the FAA issued a letter to the City of Chicago outlining FAA’s projected EIS schedule. The projected schedule reflects availability of 

a Draft EIS in February 2005 and an EIS Record of Decision in September 2005. 
470

The EIS schedule was developed after extensive coordination between the FAA, 

its EIS contractor, and all involved subcontractors. The FAA sees the projected EIS 

schedule as an aggressive but achievable schedule, with significant effort having 

been devoted to streamlining the EIS process while simultaneously assuring the 

thoroughness and integrity of the process. FAA’s efforts in regard to process streamlining include the development of written agreements with other involved government agencies that will yield efficiencies in our collective effort to complete an environmental assessment of the OMP proposal. 

The City of Chicago projects the commissioning of its first new runway approximately 30 months after receipt of FAA approval. Approximately 2 years thereafter, 

the city projects the commissioning of its second new runway as well as the extension of one of O’Hare’s existing runways. In total, the city projects a 10-year time 

frame for full implementation of the OMP. Throughout this period, substantial FAA 

work will be required to support the numerous National Airspace System changes 

necessitated by the OMP. The FAA is currently engaged in planning work associated with these NAS changes so as to be prepared for implementing the changes 

should the OMP be approved. 

CHICAGO MIDWAY AND O’HARE AIRPORTS

Question. I would like to ask you to look into two Chicago Airport System projects 

that were included in the fiscal year 2004 Omnibus Appropriations conference report (Transportation-Treasury title), at my request. First, $4 million for various improvements at Midway Airport related to capacity expansion. And second $1.5 million for CAT II/III instrumentation for Runway 27L and Runway 27R at O’Hare. 

It is my understanding that the FAA has not yet released funding. Please explain 

any outstanding issues within the FAA related to these projects and give me an estimate as to when the funding will be released? Answer. Regarding the $4 million for airport improvements at Midway, the airport originally desired to use the Airport Improvement Program discretionary funds 

to help finance expansion of passenger screening capacity in the terminal. Terminal 

work of this kind cannot be funded with discretionary funding. Working with the 

airport, FAA has identified other projects of high priority for the airport and FAA 

that can be financed with discretionary funds. We are in the process of increasing 

the airport’s existing Letter of Intent by $4 million to include these items. We expect 

to notify Congress of our intention to issue the grant for these funds within 30 calendar days following completion of all environmental documentation. 

The upgrade of Runway 27L and Runway 27R at Chicago O’Hare is an on-going FAA project with $4 million of fiscal year 2003 funding already obligated on the National Construction Contract to do the work. The FAA is currently conducting the 

environmental assessment and engineering design. The ILSs and ALSF–2s have 

been purchased. The $1.5 million in fiscal year 2004 funding completes the estimated $5.5 million project. FAA plans to obligate the remaining funds by October 

2004 to start construction activities. 

QUESTIONS SUBMITTED TO THE OFFICE OF THE INSPECTOR GENERAL

QUESTIONS SUBMITTED BY SENATOR RICHARD C. SHELBY

Question. What do you believe is the most significant safety concern facing FAA? 

Answer. As air traffic operations increase and the demand for air travel rebounds, 

there are two safety indicators to watch—runway incursions (potential collisions on 

the ground) and operational errors (when air traffic controllers allow planes to come 

too close together in the air). Runway incursions and operational errors pose a significant safety risk. We have seen some progress on runway incursions, with the 

number of incidents decreasing in fiscal year 2003 and continuing to decline during 

the first 8 months of fiscal year 2004; however, the most serious runway incursions 

increased. In addition, operational errors increased in fiscal year 2003 with an average of three operational errors each day and one serious error (those rated as high 

risk) every 7 days. Although operational errors decreased marginally during the 

first 8 months of fiscal year 2004, they are still much too high. 

In addition, while FAA and U.S. air carriers have maintained a remarkable safety 

record, a significant emerging issue for FAA will be to adjust its safety oversight 

to changing trends in the aviation industry. For example, in response to recordbreaking monetary losses, major air carriers are making unprecedented changes, 

such as outsourcing more of their aircraft maintenance. While major air carriers 

outsourced 37 percent of their aircraft maintenance expense in 1996, the amount 

spent on outsourced maintenance increased to 50 percent in 2003. 
471

Another trend FAA will need to monitor is the growth of low-cost and regional 

air carriers. While network air carriers have been losing money and restructuring 

their operations, low-cost air carriers have experienced phenomenal growth and 

have increased their market share of passengers from 17 to 22 percent. This trend 

is projected to continue with FAA forecasting that low-cost and regional air carriers 

will account for more than 50 percent of the passenger market share in 2015. 

Question. What progress is the FAA making on addressing the long-standing problems in its procurement process? Has procurement authority that Congress gave the 

FAA improved or hindered the FAA’s ability to deliver capital programs? 

Answer. First, with respect to acquisition reform, Congress gave FAA two powerful tools in 1996 by granting relief from Federal personnel and procurement rules, 

both of which the agency believed were hindering its ability to modernize the National Airspace System. FAA has not taken full advantage of this flexibility. Our 

work shows procurement reform at FAA has produced mixed results. While contracts are awarded faster, there has been little bottom line impact on cost and 

schedule problems with major acquisitions. For example, last year we analyzed 20 

major acquisitions and found that 14 of these projects experienced cost growth of 

over $4.3 billion, which represents considerably more than 1 years’ annual appropriation for modernizing the National Airspace System. 

Administrator Blakey and her team are well aware of the problems with major 

acquisitions, such as entering into long-term cost plus contracts before requirements 

are understood, unreliable cost and schedule baselines, and poor contract management, that have led to significant cost growth and schedule slips. FAA now has a 

chief operating officer and is transitioning to a performance-based organization for 

air traffic, and plans to change how the agency procures new air traffic control 

equipment. The key will be follow-through. 

Question. When and at what cost do you expect the FAA to have fully functional 

ATOP systems replace the obsolete technology in Anchorage, New York, and Oakland Centers? 

Answer. FAA’s schedule calls for completing the installation of the last ATOP facility, Anchorage, in March, 2006. FAA’s cost estimate to develop and field ATOP 

is $548 million (from the Facilities and Equipment Account) with an additional 

$1.06 billion to maintain and operate the system over its useful life (which is paid 

for through the Operations Account). 

ATOP is approaching a key milestone at the end of June 2004—completing site 

testing at Oakland. If FAA can successfully complete site tests, necessary training, 

and satisfy any last minute needs of Oakland users, agency officials believe that the 

program will probably move forward within its cost and schedule goals and deploy 

ATOP as planned to New York (March 2005) and Anchorage (March 2006). However, if Oakland experiences significant delays to the current schedule, or unforeseen defects are uncovered, the entire ATOP program will be vulnerable to additional cost growth and schedule delays. 

Question. It seems as if the STARS procurement is through the most difficult 

phase of the procurement cycle and your testimony indicates that the anticipated 

resources for this program will decline in the coming years. 

How do you compare the relative risk remaining in the program compared to 

other major FAA programs such as WAAS, ASR–11, or ERAM? 

Answer. Unfortunately, STARS is not past the point where procurement no longer 

presents difficult issues, and it is unclear what budgetary resources FAA will need 

to finish terminal modernization. Questions continue to persist about how much 

STARS will cost to complete and what capability it will actually provide. As described below, all four of these programs contain significant risk with respect to 

cost, schedule, and performance. 

FAA has changed its terminal modernization strategy significantly. As a result, 

the cost assumptions that drove STARS are no longer valid. For example, the 

STARS 1996 baseline estimated a cost of $940 million for 172 sites with a completion date of 2005. Due to cost and schedule concerns, FAA recently limited approval 

to 50 sites at a cost of $1.45 billion. However, the total cost and timeframe for completing the entire terminal modernization program remains uncertain. Beyond 50 

sites, FAA estimates STARS funding (assuming a full STARS solution) will peak at 

$270 million in 2008. This funding estimate is only a placeholder until FAA decides 

in 2005 how it will complete terminal modernization and how much it will cost overall. 

WAAS, like STARS, has experienced considerable cost growth and schedule slips 

and was pursued under a cost-plus contract. FAA believes much of the developmental risk is behind WAAS but, unlike STARS, airspace users must equip with 

new avionics to obtain benefits. Now, the risks for WAAS focus on (1) effectively 

managing a contract for obtaining geostationary satellites (to broadcast the WAAS 
472

signal), (2) how quickly airspace users will equip with WAAS avionics, and (3) developing and publishing procedures for pilots to use WAAS approaches to airports. 

Since we testified before the subcommittee, we learned that FAA intends to pursue Category I performance for WAAS in the 2007 timeframe to take advantage of 

the Department of Defense’s plan to modernize the GPS constellation (with a second 

civil frequency). This presents a number of issues that must be resolved. For example, there is a great deal of uncertainty about how quickly the Department of Defense will modernize GPS and what will happen with the Local Area Augmentation 

System (a precision landing system for Category I, II, and III that recently slipped 

back into development). Unresolved issues also focus on concerns about user equipage and procedure development. As a result, consideration should be given to withholding funds for the pursuit of Category I until these issues have been resolved. 

In comparison to STARS, the ASR–11 program faces lower performance and cost 

risks. This is because the ASR–11 needs little additional development work to deploy to its remaining sites. However, the program does face cost risks in two areas. 

Because development was delayed, procurements have been pushed into the future. 

This has caused prior cost estimates to grow. Also, the contract, which is administered by the Department of Defense, will expire before FAA will finish procuring all 

of the needed sites. If the Department of Defense terminates the contract or does 

not extend the production timeframe, FAA will not have a contract in place to complete the program. In either case, new, and probably higher, costs will have to be 

negotiated with Raytheon. 

At this time, it is difficult to compare the relative risks of STARS to the $2.1 billion ERAM effort because it is too early to determine if FAA can manage ERAM 

risks. In contrast to STARS, which has been underway for 8 years, ERAM is just 

getting started, and major design and development issues are not settled. FAA is 

less than 18 months into an ERAM program that will span over 7 years. FAA plans 

to rely on a phased approach to deliver hardware and software with reduced risk. 

Cost control will be essential because ERAM is being purchased through a cost-plus 

contract but the contract (currently worth $1.2 billion) is not fully definitized. We 

plan to issue a report on ERAM this year. 

Question. Do you believe that FAA is prepared to address a potential retirement 

surge of air traffic controllers in 2007? 

Answer. FAA is just beginning to address a likely surge in controller retirements 

over the next several years. In our opinion, there are three key issues the Agency 

needs to focus on in order to effectively address the expected increases in attrition. 

Those are: 

—developing better attrition estimates by location; 

—assessing newly hired controllers’ abilities before they are placed at facilities; 

and 

—determining ways to reduce the time and costs associated with controller onthe-job training while still achieving results. 

FAA has agreed with the recommendations in our June 2004 report and is taking 

steps to address them; the key now will be follow-through. An important milestone 

is December 2004 when FAA plans to release a detailed human capital plan for addressing controller retirements as required under FAA’s Reauthorization—Vision–

100. 

Question. The subcommittee remains concerned over the use of air traffic controllers acting as controllers-in-charge and the rising number of operational errors 

under their watch. Mr. Mead, you testified last year that there is a statistical correlation between operational errors and the controller-in-charge program. 

What conclusions can you draw from the data a year later? 

Answer. Since we testified in 2003, the number of operational errors that occurred 

while a controller-in-charge (CIC) was supervising an area has continued to increase. In fiscal year 2003, operational errors that occurred while a CIC was supervising an area increased 43 percent to 248 from about 174 in fiscal year 2002. Further, during the first 8 months of fiscal year 2004, preliminary data indicates that 

operational errors that occurred while a CIC was supervising an area increased 

slightly to 161 compared to 155 during the same period in fiscal year 2003. In our 

April 2003 report we recommended that FAA conduct detailed evaluations of those 

facilities that have significant increases in operational errors while CICs are on 

duty to determine the cause of the increases. FAA agreed with our recommendation 

and committed to conduct detailed reviews of operational errors to identify causal 

factors. This analysis will include monitoring the impact the expanded CIC program 

has on operational errors. FAA stated that if the CIC actions result in an operational error, steps will be taken to ensure that only qualified controllers are performing CIC duties. We will continue to monitor this important matter. 
473

IS THE FAA’S OCEANIC PROGRAM IN TROUBLE?

Question. Mr. Mead, at the end of March, your office released a status report on 

your agency’s ongoing review of the FAA’s Advanced Technologies and Oceanic Procedures (ATOP) program. Your review uncovered serious software problems with 

ATOP and noted that the FAA may have shifted some of the risk of additional cost 

growth from the contractor to the government. This was one project where the FAA 

seemed to have had costs under control because they had a firm fixed contract. Why in your view, did the FAA add $11 million to this contract if the government 

had the contractor under a firm fixed contract? 

Answer. Facing growing risks that ATOP would not meet its June schedule for starting operations at Oakland Center, FAA decided to add $11 million to the fixedprice contract to meet ATOP’s schedule. This allowed the contractor to focus additional resources to fix software development problems at the government’s expense. 

The contractor had staff working on a later and more advanced software version of 

ATOP even though the first software version was experiencing problems. In essence, 

the modification allowed FAA to shift resources to help get the basic ATOP system 

to Oakland as planned. 

Question. Mr. Mead, are you concerned that the FAA will continue to expose the 

government to higher costs in this program even though this project is under a firm 

fixed contract? 

Answer. Although the increase of $11 million is modest when compared to increases we have seen with other programs, we are concerned FAA has shifted the 

risk of additional cost growth from the contractor to the government. The critical 

issue is what happens with ATOP between now and February 2005. This timeframe 

is important because the recent contract modification limits the contractor’s responsibility for paying to fix software problems FAA finds in ATOP after February 28, 

2005. According to FAA, after work on the initial version of ATOP software (required for Oakland) is completed, the Agency will test the more advanced version 

at its Atlantic City Technical Center by the end of this year. After February 2005, 

FAA must pay to fix software problems that are found. Given the change in the contract and the tight timeframe, it will be critical for FAA to identify all software 

problems before that date. 

Question. Given the problems to date, how confident are you that this program 

will continue to stay on schedule and within budget? 

Answer. FAA built additional time into the ATOP schedule to handle unanticipated problems, but most of this schedule reserve was consumed resolving problems 

discovered during factory acceptance testing (completed in July 2003), which took 

much longer than anticipated. FAA is fast approaching another key program milestone for ATOP that will determine if it will stay on track. If ATOP can successfully 

pass site acceptance tests at Oakland in June 2004, FAA’s ability to stay within 

schedule and budget will be strengthened. 

Question. Mr. Mead, do you have any concerns that the FAA might rush to deploy 

the Oakland system before the FAA workforce is fully prepared to operate and 

maintain the system? 

Answer. While we do not believe that FAA will deploy an air traffic control system 

to Oakland that the workforce could not safely operate and maintain, we are concerned that the ATOP program has become schedule driven. As we saw with 

STARS, as the pressure builds to meet the scheduled milestone, FAA might defer 

needed work just to stay on schedule. For example, FAA said it would install the 

nationally deployable version of STARS at Philadelphia in November 2002, but the 

agency made a number of trade-offs to meet the schedule. FAA estimates now show 

that 2 more years and $59 million are needed to complete the development of a 

STARS system that can be deployed nationally. After FAA deploys ATOP to Oakland, and once the system is fully operational, the agency needs to communicate to 

the Congress and other key stakeholders any trade-offs or deferments made to 

maintain schedule. 

AIRPORT REVENUE DIVERSION

Question. Mr. Mead, your office has put a spotlight on the issue of airport revenue 

diversion with your recent report on San Francisco International Airport and your 

current review of potential revenue diversion at Los Angeles International Airport. 

Your testimony suggests that the FAA is not exercising adequate oversight in this 

area. 

How rampant is the problem of airport revenue diversion? 

Answer. The problem of airport revenue diversion has been extensive. Between 

1991 and 2000, our audits disclosed over $344 million in diverted revenue. The problem, however, has not subsided. Last year, we reported on revenue diversions at five 
474

large airports, including one airport whose sponsor, a local government agency, diverted about $40 million to other projects not related to the airport. We also just 

completed an audit at San Francisco International last month which disclosed about 

$12 million in diverted revenue. 

Our work shows that FAA’s oversight of revenue diversions is limited. In the past, 

FAA has maintained that it did not have the resources to devote to this issue. We 

met with the Associate Administrator for Airports and members of her staff in May 

2004 to discuss FAA’s specific plans to increase the agency’s oversight of revenue 

diversions. FAA is currently working on a plan that is designed to identify airports 

with the highest risk of diverting revenue. We recently provided the agency with 

our methodology for determining whether or not airport revenues have been diverted. We will continue to monitor this issue and work with FAA. 

EXPLANATION FOR INCREASE IN OPERATIONAL ERRORS

Question. Mr. Mead, according to your testimony, in fiscal year 2003 the number 

of operational errors increased 12 percent. 

To what extent do you believe this spike in operational errors is attributable to 

the vacant positions that the FAA has at many of its air traffic control facilities? 

Answer. We have not performed work to determine if there is a correlation between air traffic control staffing and operational errors. However, it is important to 

note that although fairly accurate at the national level, FAA’s staffing standards for 

each field location are not precise. The National Academy of Sciences reviewed 

FAA’s staffing standards in 1997 and found that they cannot be used to provide 

highly accurate estimates of requirements for individual facilities. We have seen, 

however, indications that staffing workload can increase operational errors. Our 

analysis found that as air traffic operations decreased nationwide, operational errors 

decreased. Conversely, as operations increase nationwide, more opportunities existed for operational errors to occur. 

Question. A small part of the pay raise that would be granted to air traffic controllers is dependent on a reduction in operational errors and yet operational errors 

have increased. 

Mr. Mead, what are the reasons that you believe that operational errors have increased, and what is your assessment of FAA’s efforts to reduce them? 

Answer. As we noted in our April 2003 report there are a number of factors that 

contribute to the cause of operational errors and whether FAA is successful at reducing these incidents. Specifically, we found that (1) FAA needed to provide stronger national oversight of regions and facilities that were not making progress in reducing operational errors, (2) FAA procedures did not require training when controllers had multiple operational errors or for controllers who had errors that posed a 

moderate or high safety risk, and (3) FAA’s expanded controller-in-charge program 

may have had a negative impact on operational errors. While FAA has made some 

progress in reducing these incidents during the first 8 months of fiscal year 2004, 

operational errors are still too high with three operational errors occurring each day 

and one severe error every 9 days. 

In response to our report, FAA established a permanent national program manager for quality assurance responsible for the overseeing regional and facility efforts 

to reduce operational errors. Under FAA’s new Air Traffic Organization structure, 

this manager (Director of Safety Evaluations) reports directly to FAA’s Vice-President for Safety. This group plans to conduct 161 air traffic facility safety evaluations 

during fiscal year 2004, including no-notice reviews. 

FAA also revised its training requirement so that controllers with multiple operational errors can be trained. However, FAA did not mandate that controllers who 

make operational errors that posed a moderate or high safety risk receive training. 

Finally, FAA agreed with our recommendation to monitor the impact of the CIC 

Program at the national level. 

IS THERE ADEQUATE SECURITY AT THE AUBURN TRACON?

Question. In this age of heightened security, it has become even more important 

that we make sure that our air traffic control facilities have sufficient security 

measures in place. It was reported a few weeks ago that the TRACON facility in 

Auburn, Washington that is about to be completed will not be provided security 

guards even though the FAA built a guardhouse at the facility. 

Mr. Mead, do you have any views on the overall security of the air traffic control 

facilities? 

Answer. Security is important for all DOT personnel and equipment; this is especially true for critical facilities such as FAA air traffic control facilities. We are 

aware of reports that air traffic controllers moving into the new TRACON in Wash-
475

ington will not have armed security guards, because there will not be a sufficient 

number of employees at the facility to justify security guards based on FAA regulations. The new TRACON contains a guardhouse specifically built so two guards 

could monitor the 16 remote-controlled cameras and other security equipment. We 

plan to begin an audit this fall, which will assess FAA’s Internal Security Program 

and whether FAA is ensuring adequate protection of FAA property, personnel, and 

operations against criminal and terrorist acts.

CONCLUSION OF HEARINGS

Senator SHELBY. I want to thank both of you on behalf of the 

subcommittee for the work you are putting in and we hope you are 

going to continue down that right road that you are going. Thank 

you. 

The subcommittee is recessed. 

[Whereupon, at 11:45 a.m., Thursday, April 22, the hearings 

were concluded, and the subcommittee was recessed, to reconvene 

subject to the call of the Chair.] 

(477)

DEPARTMENTS OF TRANSPORTATION, TREASURY AND GENERAL GOVERNMENT, AND RELATED AGENCIES APPROPRIATIONS FOR 

FISCAL YEAR 2005

U.S. SENATE, 

SUBCOMMITTEE OF THE COMMITTEE ON APPROPRIATIONS, 

Washington, DC. 

MATERIAL SUBMITTED BY AGENCIES NOT APPEARING FOR 

FORMAL HEARINGS 

[CLERK’S NOTE.—The following agencies of the Subcommittee on 

Departments of Transportation, Treasury and General Government, and Related Agencies did not appear before the subcommittee this year. Chairman Shelby requested these agencies to 

submit testimony in support of their fiscal year 2005 budget request. Those statements submitted by the chairman follow:]

SAINT LAWRENCE SEAWAY DEVELOPMENT CORPORATION 

PREPARED STATEMENT OF ALBERT S. JACQUEZ, ADMINISTRATOR

The U.S. Saint Lawrence Seaway Development Corporation (SLSDC or Corporation), a wholly owned government corporation and an operating administration of 

the U.S. Department of Transportation (DOT), is responsible for the operations and 

maintenance of the U.S. portion of the St. Lawrence Seaway between Montreal and 

Lake Erie. This responsibility includes maintaining and operating the two U.S. Seaway locks located in Massena, NY, and vessel traffic control in areas of the St. Lawrence River and Lake Ontario. In addition, the SLSDC performs trade development 

functions designed to enhance Great Lakes St. Lawrence Seaway System utilization. 

Since its opening in 1959, the binational St. Lawrence Seaway has been a vital 

transportation corridor for the international movement of bulk commodities such as 

steel, iron ore, grain, and coal, serving a North American region that makes up one 

quarter of the U.S. population and nearly half of the Canadian population. The binational waterway serves as a deep draft waterborne link between major U.S. and 

Canadian agricultural, manufacturing, and industrial cities, including Chicago, Detroit, Toronto, Cleveland, Duluth, Toledo, Milwaukee, Montreal, and Green Bay, and 

European, South American, and North African markets. 

The SLSDC coordinates its activities with its Canadian counterpart, The St. Lawrence Seaway Management Corporation (SLSMC), particularly with respect to rules 

and regulations, overall day-to-day operations, traffic management, navigation aids, 

safety, environmental programs, security, operating dates, and trade development 

programs. The unique binational nature of the Seaway System requires 24-hour, 

year-round coordination between the two Seaway entities. 

The SLSDC’s principal performance goal is to provide a safe, secure, reliable, and 

efficient U.S. portion of the St. Lawrence Seaway to its commercial users. Since its 

opening in 1959, more than 2.3 billion metric tons of cargo has been transported 

through the combined sections of the St. Lawrence Seaway (Montreal-Lake Ontario 

and Welland Canal) with an estimated value of more than $400 billion. 

The navigation season typically runs from late March to late December. During 

the 2003 navigation season, the availability of the U.S. sectors of the Seaway, including the two U.S. locks maintained and operated by the SLSDC, was 98.9 per-
478

cent; the annual goal is 99 percent. Weather and vessel incidents were the causes 

for all delays in 2003. Of the remaining factors that cause lockage shutdowns, the 

one that the SLSDC has the most control over is the proper functioning of lock 

equipment. During the 2003 navigation season, there were no system delays due to 

malfunctioning lock equipment. 

FISCAL YEAR 2005 BUDGET ESTIMATE

The SLSDC’s fiscal year 2005 budget request provides the agency with the funding necessary to provide a safe, secure, reliable, and efficient waterway system for 

the movement of commercial goods to and from the Great Lakes region of North 

America. 

The SLSDC fiscal year 2005 proposed level of $16,800,000, includes an appropriation request from the Harbor Maintenance Trust Fund of $15,900,000 and an estimated non-appropriated $900,000 in non-Federal revenues. This proposed level will 

allow the agency to fund its 157 Full-Time Equivalent (FTE) staff and continue the 

day-to-day operational and maintenance programs for the U.S. portion of the St. 

Lawrence Seaway between Montreal and Lake Erie. These programs include managing vessel traffic control in areas of the St. Lawrence River and Lake Ontario, 

maintaining and operating the two U.S. Seaway locks, and continuing increased security-related activities that were initiated as a result of the terrorist-related events 

of September 11, 2001. In addition, the SLSDC performs trade development activities designed to enhance Great Lakes St. Lawrence Seaway System awareness and 

utilization. 

The request also directly supports four of the five President’s Management Agenda (PMA) initiatives (budget and performance integration, strategic management of 

human capital, financial performance improvement, and electronic government expansion; the SLSDC is exempt from competitive sourcing as a government corporation), the Department’s strategic goals of Global Connectivity (efficient cargo movement) and Security (transportation system recovery), as well as the SLSDC’s internal strategic goals. These agency goals include: safety, security, and the environment; reliability and availability; trade development; and management accountability. The request, separated by Departmental strategic goals and performance 

measures, includes $15,650,000 in appropriated funds directed at maritime navigation programs and personnel, and $250,000 towards the SLSDC’s security and infrastructure protection activities. 

The SLSDC’s budget request also includes funding for the Seaway Automatic 

Identification System (AIS) and the agency’s financial management system, both of 

which support the PMA. The AIS system, which serves as one of the agency’s ‘‘Expanding E-Government’’ PMA initiatives, utilizes Global Positioning System (GPS) 

to allow the SLSDC to more efficiently manage vessel traffic control and vessel transits at the U.S. Seaway locks. Implemented at the start of the 2003 navigation season, the Seaway became the first inland waterway in the western hemisphere to implement an operational AIS vessel traffic services system. 

The SLSDC’s financial management system supports the President’s ‘‘Improving 

Financial Management’’ initiative and includes nine subsystems that allow Corporation officials to track all financial-related information and meet all independent 

auditor reporting requirements. The SLSDC has received 40 consecutive unqualified 

or ‘‘clean’’ financial audits since its first audit in 1955, a major achievement under 

the PMA initiative of financial performance improvement. The AIS system and the 

financial management system represent $70,000 of the fiscal year 2005 budget estimate. This amount is consistent with the fiscal year 2004 request for operating and 

maintaining these two programs. 

CONCRETE REPLACEMENT PROJECT

The fiscal year 2005 appropriation request is $1.627 million above the fiscal year 

2004 enacted level and is principally attributable to the planned start of a $6 million concrete replacement project at the two U.S. Seaway locks ($1.5 million each 

year in fiscal years 2005–2008). The Eisenhower Lock has a history of concrete problems, caused by the use of natural cement in the mix composition during the construction of the lock. Due to the amount of concrete in need of replacement, the difficulties associated with accessing these areas of deteriorated concrete, and the need 

for in-house maintenance crews to focus on other essential non-concrete lock maintenance projects, it is more efficient and cost effective for outside contractors to complete this project. The SLSDC’s Office of Engineering has researched other solutions 

to the concrete deterioration problem and found that there are no other substances 

as effective as concrete in protecting the structural integrity of the lock chambers. 
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The concrete replacement work to take place in fiscal years 2005–2008 includes 

areas identified by the U.S. Army Corps of Engineers (Corps) in its 1991 lock survey 

and evaluation of the two U.S. Seaway locks (Corps Technical Report ITL–91–4, November 1991). The report concluded, ‘‘It is important for the SLSDC to maintain an 

aggressive maintenance program of replacing deteriorated concrete. In the near future, attention should be given to the repair of deteriorated concrete near the bottom of the lock walls at Eisenhower Lock.’’

Since 1991, the SLSDC has made in-house repairs to the most critical areas identified by the Corps, but further deterioration and harsh winter conditions have 

caused additional damage to the lock walls at Eisenhower Lock and newly-identified 

problems at the Snell Lock have also been targeted for replacement. In addition to 

concrete deteriorating along the lower portions of the lock walls, freeze-thaw damage is significant in the lock walls at high and low pool levels at both locks. As it 

deteriorates, pieces of concrete become dislodged and fall into the lock chambers. 

This poses a risk to people on the decks of commercial vessels and pleasure boats. 

Due to the amount of concrete in need of replacement, the difficulties associated 

with accessing these areas of deteriorated concrete, and the need for in-house maintenance crews to focus on other non-concrete lock maintenance projects, it is more 

efficient and cost effective for outside contractors to complete the project than inhouse personnel. Between 1959 and 2003, the SLSDC expended more than $25 million on concrete 

replacement at the two locks during the off-season winter months, with the majority 

of work taking place at the Eisenhower Lock. Most of the work over that time was 

completed with in-house labor. The last major concrete replacement projects that 

utilized contractors were completed in fiscal years 1986 and 1987, at a total cost 

of $4.3 million. The Seaway is a single-lock system, consisting of 15 individual U.S. 

and Canadian locks; a delay/shutdown to any one of the locks would cause a delay/

shutdown of the entire waterway. Although the SLSDC has never experienced a 

major lock failure, the Canadian Seaway agency suffered a lock failure at the Welland Canal in 1985, which trapped 53 vessels above the Canal for 24 days at a cost 

to the carriers of $24 million. 

ENHANCED SEAWAY INSPECTION PROGRAM

The SLSDC and the U.S. Coast Guard (USCG), in conjunction with Transport 

Canada and the SLSMC, signed a Memorandum of Understanding in March 1997 

to develop a program of coordinated vessel inspection and enforcement activities to 

expedite the safe transit of shipping through the Great Lakes Seaway System. The 

principal goal of the Enhanced Seaway Inspection (ESI) program is to inspect all 

ocean vessels for safety and environmental protection in Montreal, Quebec, before 

they enter U.S. waters. Starting in 2002, security-related risk assessment inspections have been conducted concurrent with the ESI, further improving transit times 

for Seaway users. In 2003, the SLSDC continued this program and met its internal 

performance goal of inspecting 100 percent of all ocean vessels in Montreal (208 

total inspections). 

The ballast water exchange program continues to be an important function of the 

ship inspection program. These inspections are carried out concurrently with the 

ESIs, by Corporation personnel in Montreal. In 2003, 56 ballast water examinations 

were conducted in Montreal on ocean vessels transiting the Seaway. The SLSDC 

performed 31 ballast water examinations for subsequent trip vessels and eight follow-up examinations in Massena. 

Prior to the inception of the ESI program, foreign flag vessels experienced numerous delays at the U.S. locks to accommodate USCG-required safety-related inspections, as well as ballast water management activities. Inspection in Montreal eliminates duplicative inspections, allows for a seamless and efficient transit of the Seaway, and provides a better location for repair resources, if required. This improved 

inspection regime has saved each vessel, on average, 4 hours per transit and ensured that any safety or environmental issues are addressed prior to entering U.S. 

waters. As a result, ocean carriers using the Seaway saved more than $500,000 in 

operating costs during the 2003 season. Seaway customers have responded favorably 

to the ESI program through annual customer surveys. 

CRITICAL INFRASTRUCTURE AND NAVIGATION SECURITY MEASURES

The SLSDC has been proactive in implementing increased security measures following the events of September 11, 2001. Within days of the terrorist attacks, risk 

assessment inspections of all foreign flagged vessels were conducted in Montreal, 

prior to their entry into U.S. waters. This protocol was developed with the full cooperation of the Canadian SLSMC, as well as U.S. and Canadian law enforcement 
480

and Coast Guard personnel. The protocol was further refined in March 2002 when 

the risk assessment inspection was combined with the existing Enhanced Seaway 

Inspection (ESI) program. By combining the two inspections into a single process, 

foreign-flag vessels are not unnecessarily delayed for security screenings, unless the 

initial risk assessment compels an additional examination. During the 2003 navigation season, SLSDC inspectors completed 216 risk assessment inspections in Montreal. 

Security procedures, both maritime and internal, were developed to ensure that 

security was enhanced while minimizing any impacts on the efficiency of Seaway 

operations. In late 2001, SLSDC inspection personnel logged substantially more 

staff hours in carrying out the risk assessment protocol than normally projected. 

However, when the protocol was refined in 2002 and merged with the existing ESI 

program, this impact was ameliorated. 

Another major security milestone for the SLSDC was the expansion of the U.S. 

and Canadian Seaway mandatory Notice of Arrival requirement for all foreign commercial vessels. With the start of the 2002 navigation season, all foreign ships entering the St. Lawrence Seaway are required to give 96-hour advance notification 

of arrival in Montreal, Quebec. Ships failing to give complete notice are prohibited 

from entering the Seaway. 

The notification requirement on the St. Lawrence Seaway is unique because it 

mandates 96 hours notice prior to arrival in Montreal, as opposed to all other U.S. 

waterways which require the notice prior to reaching the first U.S. port of call. This 

modified requirement was needed due to the geography of the key U.S. ports on the 

Great Lakes Seaway System, which are several hundred miles into U.S. waters and, 

in many cases, require transit of all 15 Seaway locks before reaching the port. The 

Seaway’s 96-hour notification requirement provides SLSDC officials, as well as law 

enforcement and intelligence agencies, even more advance notice (approximately 10 

additional hours) to review vessel crew lists and manifests before the vessel enters 

U.S. waters. The SLSDC immediately sends the pre-entry information it receives to 

the USCG, which in turn submits the information to its National Vessel Movement 

Center for screening through various law enforcement databases. 

Other U.S. and Canadian agencies involved in the development of both the risk 

assessment inspection program and 96-hour notification requirement included 

Transport Canada, Citizenship and Immigration Canada, Canadian Navy, Royal Canadian Mounted Police, U.S. Customs, U.S. Immigration and Naturalization Service, 

and the U.S. Consul General’s Office in Montreal. 

In February 2002, the SLSDC contracted for services to assess the physical security for SLSDC infrastructure and workplace assets in Massena. This assessment 

was intended to supplement and enhance an initial security assessment that was 

conducted immediately following September 11. The assessment focused on the two 

U.S. Seaway locks, the Eisenhower Lock Visitors’ Center, and the SLSDC’s marine 

base/maintenance facility. In addition, another contractor conducted a detailed blast 

analysis of the highway tunnel under the Eisenhower Lock. Based on the contractor’s recommendations, the SLSDC has made and continues to make several security enhancements and improvements to the lock infrastructure and other workplace 

assets. It is estimated that the SLSDC will expend more than $2.2 million in otherthan-personnel security enhancements and improvements during fiscal years 2002 

through 2005. 

Significant security-related enhancements and improvements made to date include: 

—Installation of approximately 4,400 feet of additional 8-foot-high, chain-link 

fencing and various slide and swing gates. Gate controllers will not be installed 

until the fiber optic system is installed. 

—Purchase of a Nasatka portable vehicle barrier to shut down or control access, 

as needed, to our facilities, particularly the Eisenhower Lock highway tunnel. 

This vehicle barrier has been deployed during elevated threat level conditions. 

—Construction of approximately 61 concrete ‘‘jersey barriers’’ topped with a 4-foothigh section of chain-link fence to keep vehicles and pedestrians in the Visitors’ 

Center parking lot from approaching too close to the lock structure. These barriers, built at a considerable cost savings with in-house labor, will also be used 

in conjunction with the Nasatka portable vehicle barrier to shut down or control 

vehicular traffic. 

—Completion of several improvements at the Eisenhower Lock Visitors’ Center, 

including (a) fencing of both ends and the lock side of the lower and upper observation decks, (b) closure of some ground level observation area to visitors, (c) 

movement of visitor parking areas further away from the lock chamber, and (d) 

setup of a security checkpoint at the Center entrance with a security guard on 

duty during operating hours. 
481

In fiscal year 2003, the SLSDC contracted with the firm of Edwards and Kelsey 

to conduct an engineering plan for the implementation of other security-related enhancements recommended in the previous assessments. At the end of fiscal year 

2003, the SLSDC finalized plans to install a fiber optic network necessary for the 

electronic-based security enhancements. In fiscal year 2004, the fiber network will 

be installed and the purchase and installation of video cameras and smart card/EZ 

pass systems for access to gates and buildings will be finalized. The SLSDC will 

contract with an ‘‘8-a, small business’’ firm for the installation of the security enhancements. In fiscal year 2005, the SLSDC will continue to aggressively pursue the 

objectives of its security program, which includes greater protection of SLSDC facilities, new and improved measures for employee and visitor entry into facilities, and 

planned contingencies for facilities/infrastructure in the event of a heightened security alert. 

The SLSDC fully participated in the U.S. Department of Transportation’s role in 

the TOPOFF 2 weapons of mass destruction response exercise mandated by the U.S. 

Congress and conducted in May 2003. The agency is currently participating in several preparatory exercises that will culminate in ‘‘Exercise Forward Challenge ’04’’—

the government-wide continuity of operations exercise that is scheduled for May 12–

13, 2004. 

In addition, the SLSDC will continue to work cooperatively with security and intelligence officials at both the Departments of Transportation and Homeland Security to ensure that the St. Lawrence Seaway, and its navigation assets, is protected 

to the maximum extent possible. This relationship was highlighted by the General 

Accounting Office’s Top Fiscal Year 2004 Management Challenges for the Department of Transportation (Establishing and Managing an Ongoing DOT/Department 

of Homeland Security (DHS) Programmatic Relationship). 

The SLSDC has worked closely with DHS and the Transportation Security Administration (TSA) since their inception. In February 2002, the Corporation contacted officials in the TSA Explosives Unit to request its consultation on security 

concerns regarding the Eisenhower Lock highway tunnel. Additionally, SLSDC security and emergency staff have also conducted a series of informational meetings 

with TSA officials from its Office of Maritime and Land Security to educate them 

on those same issues. To date, SLSDC/TSA interactions have proven to be informative, constructive, and useful. 

TRADE DEVELOPMENT INITIATIVES

Since 1985, the SLSDC has performed trade development and promotional activities geared at generating trade to and from North America via the Great Lakes Seaway System. Program-wide activities include hosting overseas trade missions that 

promote the entire Seaway System at maritime and trade-related exhibitions, developing commodity-specific marketing plans, and working directly with ports, carriers, 

terminal operators, labor, and importers/exporters in the development of promotional materials and initiatives. Overseas trade missions, which include U.S. and 

Canadian maritime, government, industry, and labor delegates, have led to the development of new international cargo movements into the System. Since 1985, the 

SLSDC has sponsored 26 trade missions to 56 cities in 37 countries. In October 

2003, the SLSDC led a 23-member delegation of U.S. and Canadian Great Lakes 

executives to Belgium and The Netherlands, two of the Seaway’s largest trading 

partners. 

In addition to overseas trade missions, the SLSDC is working with various Great 

Lakes Seaway System port authorities, the Great Lakes Cruising Coalition, the 

Great Lakes Waterways Management Forum, State and local governments, and 

tourism associations, to attract cruise vessels into the Great Lakes. Also, the SLSDC 

is working on joint trade development initiatives with the Canadian SLSMC to 

maximize the use of waterborne transportation as North American highways become more congested, including the examination of the Seaway System for short sea 

shipping movements and niche container trade as well as exploring partnerships 

with other inter-modal connections in an effort to generate new business for the 

Seaway System. 

In an effort to provide its global customers with a single portal for news and information related to the Great Lakes Seaway System commercial navigation, the 

SLSMC and SLSDC developed and launched a binational Internet web site 

(www.greatlakes-seaway.com) in 2001 that has been extremely well received domestically and internationally from the maritime and trade communities. In 2003, average monthly site page hits grew from 70,000 in 2002 to more than 120,000 hits. The 

site recorded an all-time high in December 2003 with 153,000 page hits, and re-
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ceived more than 1.4 million hits for the year from viewers in more than 110 countries. 

U.S. ARMY CORPS OF ENGINEERS’ GREAT LAKES ST. LAWRENCE SEAWAY STUDY

The Water Resources Development Act of 1999 directed the Corps, in consultation 

with DOT (through the SLSDC), to undertake the Great Lakes St. Lawrence Seaway Study (Study) to examine improvements to the commercial navigation infrastructure of the Great Lakes St. Lawrence Seaway System. Since January 2001, the 

Corps has partnered closely with DOT/SLSDC to carry out the Study’s reconnaissance phase. 

The Corps completed a 2-year reconnaissance study in February 2003 and concluded that more analysis was needed to determine if a Federal interest exists to 

improve the commercial navigation infrastructure on the Great Lakes and Seaway. 

The current scope of the Study is to establish a 50-year baseline for the current infrastructure to analyze the engineering, economic, and environmental consequences 

of maintaining, and not maintaining that infrastructure at its current level of reliability. The Study is primarily a commercial navigation study, but as evidenced by 

the composition of the Steering Committee, it will include environmental considerations. 

On May 1, 2003, the U.S. Department of Transportation and Transport Canada 

signed a Memorandum of Cooperation that established the intent of each agency to 

work together to ensure the future viability of the Great Lakes Seaway System as 

a commercial navigation waterway. Memorializing this intent in the MOC document 

cleared the way for Canada to work together with the Corps and DOT on the Study. 

Currently, all projects related to the revised scope of the Study are underway (engineering, economics, and environmental), along with meetings of the Study Steering Committee. The Steering Committee is made up of the senior level officials from 

Corps, DOT, Transport Canada, SLSDC, Canadian SLSMC, as well as representatives from the U.S. Fish and Wildlife Service and Environment Canada. 

SEAWAY AIS/GPS PROJECT

Since 1992, the SLSDC has worked with the U.S. Department of Transportation’s 

Volpe National Transportation System Center and Canadian partners to design and 

implement state-of-the-art AIS/GPS navigation technology. 

On March 31, 2003, with the start of the navigation season, the U.S. and Canadian Seaway agencies began enforcing mandatory AIS use on commercial vessels entering the waterway in North America to employ this technology as a requirement 

for transit. The AIS/GPS project represents a major step forward in marine navigation technology. In fact, the Seaway is currently the world leader in developing 

shore-side applications for AIS/GPS. 

AIS technology uses data from ship-to-ship, ship-to-shore, and shore-to-ship, 

thereby enabling a constant two-way communication between mariners and the 

three Seaway vessel traffic control centers. Originally developed primarily for safety 

reasons, AIS has become increasingly of interest to maritime security officials in the 

post-9/11 environment as it offers the ability for them to track any vessel carrying 

a transponder with great precision. 

In the near future, permanent installation of AIS equipment will be required onboard commercial vessels in the entire Great Lakes St. Lawrence Seaway System 

from the Lakehead in Duluth, MN, to traffic entering the Gulf of St. Lawrence on 

the Atlantic. Adoption of the technology, which has been approved by the International Maritime Organization, was embraced early on by the Canadian Shipowners Association and the Shipping Federation of Canada, both of which provided 

technical and financial assistance. The Department’s Volpe National Transportation 

Systems Center served as technical contractor for development of the AIS project, 

which began almost a decade ago. AIS will soon be required internationally on commercial vessels and will be mandatory throughout the Great Lakes Seaway System 

by December 2004. 

2003 NAVIGATION SEASON OVERVIEW

The estimated tonnage for the combined sections of the St. Lawrence Seaway in 

2003 was 40.9 million metric tons. This was 500,000 metric tons or 1 percent below 

the 2002 total (a decrease of 1 percent). The decrease can be attributed, in large 

part, to higher global freight rates, weaker U.S. dollar valuation, the continuation 

of grain export reductions (7 percent decrease) due to lower European grain imports, 

and significant reductions to general cargoes, including iron and steel products (38 

percent reduction). The reduction of import steel also had a secondary effect on export grain. It is estimated that approximately 20–30 percent of ocean-going vessels 
483

exporting grain from the Great Lakes Seaway System enter the waterway carrying 

steel. The final weeks of the navigation season did result in high levels of grain 

movements on Canadian lakers as the Canadian Wheat Board began moving more 

grain exports via the St. Lawrence Seaway. In addition to cargo movements, estimated total commercial transits through the St. Lawrence Seaway were on par with 

2002 levels at 3,886 transits. 

Several commodities posted increases in 2003: iron ore (up 10.5 percent to 10.7 

metric tons); coal (up 33 percent to 4.1 million metric tons); petroleum products (up 

2 percent to 1.8 million metric tons); salt (up 17 percent to 2.3 million metric tons); 

stone (up 8 percent to 800,000 metric tons); potash (up 48 percent to 144,000 metric 

tons); ores and concentrates (up 68 percent to 357,000 metric tons); and gypsum (up 

25 percent to 652,000 metric tons). 

CONCLUSION

The SLSDC’s fiscal year 2005 budget request reflects the agency’s ongoing commitment of providing a safe, secure, reliable, and efficient waterway and lock transportation system for the movement of commercial goods to and from the Great 

Lakes region of North America. Maritime commerce on the Great Lakes Seaway 

System is vitally important to the Great Lakes regional economy, annually supports 

more than 150,000 U.S. jobs, $4.3 billion in personal income, $3.4 billion in transportation-related business revenue, and $1.3 billion in Federal, State, and local 

taxes. 

Since 1959, the SLSDC has played a significant role in not only the operations 

and maintenance of the U.S. Seaway assets, but also in the promotion and development of new business for the waterway in concert with its North American stakeholders. As the St. Lawrence Seaway nears its 50th year of operation, the SLSDC 

remains committed to working with its customers and stakeholders to ensure the 

waterway’s reliability and competitiveness for its next 50 years. 

MERIT SYSTEMS PROTECTION BOARD 

PREPARED STATEMENT OF NEIL ANTHONY GORDON MCPHIE, ACTING CHAIRMAN

Chairman Shelby, Ranking Member Murray and members of the subcommittee, 

thank you for the opportunity to submit this statement for the record on the fiscal 

year 2005 appropriations request for the U.S. Merit Systems Protection Board 

(MSPB or ‘‘the Board’’). This year is particularly significant for the Board, as 2004 

marks the agency’s Silver Anniversary. Over the course of the Board’s 25-year history, its Chairmen, Board members and staff have held steadfast and true to the 

agency’s mission: to serve as guardian of Federal merit systems. In those 25 years, 

the Board has issued decisions in over 239,000 cases. The Board has issued over 

80 reports of studies of the Federal merit systems and the degree to which employees are managed free from prohibited personnel practices. In addition, the Board 

has conducted outreach activities on its findings on appeals and studies to promote 

the improved application of merit principles. I am pleased to take this opportunity 

to explain to the subcommittee the basis for the President’s appropriations request 

on behalf of the Board and its importance in enabling the Board to continue to fulfill 

its statutory missions during fiscal year 2005. 

OVERVIEW OF THE REQUEST

The President is requesting $35,303,000 in appropriated funds to support the operations of the Merit Systems Protection Board. This request represents a 

$1,800,000 increase over the fiscal year 2004 appropriations request. This increase 

covers the $1,501,000 in additional expenses resulting from the January 2004 and 

2005 pay raises that were included in the President’s budget. However, because 

Congress approved a higher pay raise for fiscal year 2004 than the President recommended, MSPB needs an additional $375,000 to cover the difference between the 

President’s recommended raise and the amount that was ultimately approved by 

Congress. This request also covers the increase in commercial rent charges for fiscal 

year 2004 ($183,000), the $78,000 necessary to provide for inflationary costs increases in other non-personnel costs and the $38,000 necessary to cover the cost of 

Workers Compensation Programs in fiscal year 2005. 

At the request of the Office of Management and Budget (OMB), the Merit Systems 

Protection Board is not requesting that funds be transferred from the Civil Service 

Retirement and Disability Trust Fund for fiscal year 2005. Instead, at OMB’s request, the funding previously supplied from the Trust Fund for adjudication of Civil 
484

Service Retirement appeals is being requested as part of the regular appropriation 

total of $37,303,000. 

FISCAL YEAR 2003 AND FISCAL YEAR 2004 ACCOMPLISHMENTS WITH FISCAL YEAR 2005

OUTLOOK (BY BUDGET ACTIVITY)

ADJUDICATION

The bulk of the Board’s resources are dedicated to processing our appellate workload; 192 FTE—or 84 percent of the 228 FTE estimated for fiscal year 2004 and fiscal year 2005—will be used for adjudication. During the last several years, we have 

maintained an average processing time of approximately 3 months for appeals and 

other cases processed in our regional and field offices. However, the average case 

processing time at headquarters increased slightly because the Board functioned 

with only one member for approximately 6 weeks in fiscal year 2003. 

We estimate that in each of the next 2 years the administrative judges will process approximately 7,300 appeals and other cases in our regional and field offices, 

and the Board members will adjudicate approximately 1,300 cases at headquarters. 

In fiscal year 2003, the Board decided 8,416 cases: 7,227 in the regional and field 

offices and 1,189 in the headquarters office. The average processing times were 94 

days in the regional and field offices and 295 days for headquarters. Of the Board’s 

final decisions that were appealed to the U.S. Court of Appeals for the Federal Circuit, the Court left 94 percent of the Board’s decisions unchanged. 

This case workload is determined by factors beyond our control, as it results from 

the number of appealable actions taken by Federal agencies, the number of employees who decide to challenge those actions, and from legislative changes that affect 

our jurisdiction. Two such changes are enactment of the Homeland Security Act of 

2002 and the National Defense Reauthorization Act of 2004. Under these statutes, 

the Department of Homeland Security (DHS) and the Department of Defense 

(DOD), respectively, were granted authority to establish their own appeals process. 

The Department of Homeland Security has decided to retain MSPB appeal rights 

for its employees at the regional and headquarters levels. DHS issued proposed regulations establishing an expedited appeals processing system which requires the 

Board to process employee appeals using shorter timeframes at the headquarters 

level. As required by statute, DHS officials consulted with MSPB prior to issuing 

those regulations. 

These expedited procedures might well require an increase in our adjudication 

staff in the headquarters office. Further, while DOD employees’ MSPB appeals 

rights are currently limited by statute to the petition for review (PFR) level, it is 

still possible that DOD will also decide to provide first-level MSPB appeals rights 

for its civilian employees by regulation. If DOD does not provide first-level MSPB 

appeal rights for its employees, we expect the number of PFR’s to increase, as this 

avenue of appeal will present DOD employees with their first opportunity for an 

independent review of the agency’s employment action. This increase in PFR’s will 

likely require additional Board staff to review the PFR’s at MSPB headquarters. 

Notwithstanding the new DHS appeals procedures or the changes to DOD’s appeals procedures, the Board will still hear DOD and DHS appeals under the Whistleblower Protection Act, the Uniformed Services Employment and Reemployment 

Rights Act, and the Veterans Employment Opportunities Act. Thus, the Board is 

seeking the level of funding reflected in its fiscal year 2005 budget request because 

we do not anticipate a decrease in the Board’s caseload or staffing needs. 

It is important to note that even a small increase in workload per administrative 

judge could cause a significant increase in processing times. MSPB needs the requested funds in order to maintain the adjudication staff and to continue technological improvements that will facilitate case processing and avoid escalation of 

costs to the government as a whole. 

Achievement of the Board’s performance goals related to the adjudication of cases 

at headquarters depends on having a quorum of Board members. When the Board 

has a full complement of three members, cases at headquarters are closed by a 

unanimous vote or a majority vote of the Board. When the Board has only two members, there is a quorum, but no majority is possible unless both members agree. If 

the two members cannot agree, the Board’s regulations permit the issuance of a 

‘‘split-vote’’ order, which makes the initial decision under review final but not precedential. When the Board has only one member, as it did for almost 2 months during 

fiscal year 2003, no decisions can be issued. 

I am serving under the recess appointment I received from the President in April 

2003. On December 10, 2003, the President designated me as Vice Chairman of the 

Board. Because the position of Board Chairman was vacant, I became the Board’s 

Acting Chairman pursuant to the Board’s operating statute, 5 U.S.C. § 1203(b). Un-
485

less confirmed, my appointment to the Board will end when Congress adjourns sine 

die at the end of the 108th Congress. The term of the current Board member, Susanne T. Marshall, ended on March 1, 2004. However, Ms. Marshall has exercised 

her option to continue to serve in this position for up to 1 additional year if no successor is named. While the President has recently submitted a nominee to the Senate for confirmation to fill the one remaining vacancy on the Board, this position 

has been vacant since December 2001. The Board has not had its full complement 

of three members since then. 

During fiscal 2003 MSPB implemented an electronic appeals process (e-Appeal) 

that allows appellants to file an initial appeal using the Internet. 

The Board’s new alternative dispute resolution pilot program, called the Mediation Appeals Program (MAP), became fully functional in fiscal year 2003 with the 

completion of mediation training by 15 Board employees. As part of the training, 

these employees completed three to five co-mediations with dispute resolution experts. Fifty percent of the completed co-mediations resulted in settlements of pending appeals. 

MERIT SYSTEMS STUDIES AND OVERSIGHT

The MSPB has the statutory responsibility to conduct studies of the civil service 

and other merit systems in the Executive Branch. Our goal is to support strong and 

viable merit systems that ensure the public’s interest in a high quality, professional 

workforce managed under the merit principles and free from prohibited personnel 

practices. In fiscal year 2005, the MSPB will increase its program of in-depth, timely analysis of major merit and human capital management issues. In fiscal year 

2005 we expect to issue at least six reports and a quarterly newsletter, ‘‘Issues of 

Merit.’’ This function will use approximately 13 FTE, or about 4 percent of the approximately 228 FTE the Board is projected to use in fiscal year 2005. 

The Board makes reports of our studies available to a wide audience, including 

the President, members of Congress, Federal policy officials, managers, employee 

groups, academicians and others with an interest in the merit systems and Federal 

human resources management. Reports address policy issues as well as issues that 

affect the operation and practice of merit in the workplace. In fiscal year 2005, we 

will continue our efforts to work with organizations such as the Federal Executive 

Boards, the Senior Executive Association, and the Federal Managers’ Association. 

The President’s Management Agenda item on Human Capital Management and 

GAO’s rating of human capital management as high risk influence our report topics. 

Alternative systems, such as those authorized by the Homeland Security Act of 2002 

and the National Defense Reauthorization Act of 2004, are covering larger and larger portions of the workforce. Our charter to examine the policies and implementation of traditional and alternative personnel systems and their impact on merit principles and prohibited personnel practices is more important than ever. 

We are working closely with other research groups from the General Accounting 

Office, the Office of Personnel Management, the National Academy of Public Administration, and the Partnership for Public Service to include a sharing of research 

agendas and an expansion of peer reviews of our respective work products. These 

other groups have either a constituency group funding them or are direct agents of 

the administration. Accordingly, their clients’ interests shape the views they express 

on an issue. MSPB is distinct in its statutory mission to provide an independent, 

unbiased perspective. Our clients are the American people and our responsibility to 

them is to protect the public’s interest in a viable, merit-based system. 

In fiscal year 2003, the MSPB released three major studies and three editions of 

the newsletter. The major studies were, The Federal Selection Interview: Unrealized 

Potential, which makes recommendations to improve this important part of the selection process, Help Wanted: A Review of the Federal Vacancy Announcements, 

which makes recommendations to make vacancy announcements more useful in the 

recruitment process, and The Federal Workforce for the 21st Century: Results of the 

Merit Principles Survey 2000, which addresses employees’ concerns before September 11, 2001. We are also planning our largest Merit Principle Survey ever using 

electronic web-based methodology. This electronic survey capability will be a centerpiece of our research agenda. 

MANAGEMENT SUPPORT

The management support function, which uses approximately 26 FTE, or 11 percent of the 228 estimate in fiscal year 2004 and fiscal year 2005, provides the necessary management support for information resources management, human resources management, budget, finance, procurement, equal employment opportunity, 

travel, space and property management. The management support function, which 
486

uses approximately 26 FTE, or 11 percent of the 228 estimate in fiscal year 2004 

and fiscal year 2005, provides the necessary management support for information 

resources management, budget, finance, procurement, equal employment opportunity, travel, space, and property management. 

Fiscal year 2003 was the first year that we were required to have a financial 

audit pursuant to the Accountability of Tax Dollars Act of 2002. We received a clean 

audit opinion. An additional important administrative accomplishment was the development and implementation of the Continuity of Operations Plan. 

The Board determined that a restructuring of its regional and field office configuration was necessary in order to consolidate resources and to allow for the most efficient management of case processing. After evaluating workload shifts, costs, economies of scale, changes in the Federal workforce, and the flexibility needed to adjust 

to civil service reform, Board management determined that it was necessary to close 

two of these offices to enable the Board to further its mission more efficiently and 

effectively. 

Effective March 31, 2004, the Board closed its field offices in Seattle, Washington 

and Boston, Massachusetts. This action affected a total of 12 employees in these two 

offices (four in the Boston office and eight in the Seattle office). The Board received 

authority to grant voluntary early retirement and voluntary separation incentive 

payments to affected employees. The Board will continue to operate five regional offices (Philadelphia, Washington, Atlanta, Chicago, and San Francisco) and three 

field offices (New York, Dallas and Denver). 

The restructuring was accomplished without a reduction in force. Every employee 

in the affected offices was offered a reassignment to an equivalent position within 

the Board. These reassignments were made without loss of pay or grade for the affected employees. Additionally, the Board will pay all required and most optional 

relocation expenses for employees who are reassigned. Eligible employees who declined the reassignment were offered the option of taking voluntary early retirement 

or the voluntary separation incentive payments. Under these arrangements, only 

five employees are separating from the Board; three are retiring and receiving voluntary separation incentive payments, one employee transferred to another Federal 

agency and one employee is serving in a temporary assignment, while seeking other 

employment. 

We believe that the restructuring will have a neutral budgetary impact. The an- nual rent on the Seattle field office is approximately $150,000 and the rent on the 

Boston field office is approximately $100,000 annually. As of April 1, 2004, the 

Board will cease to pay rent on the Seattle office. We are tied to a lease agreement 

that will obligate the Board to pay some amount for the Boston property through 

the end of the lease term, which is February 14, 2005. However, we are currently 

negotiating with the management company in an effort to pay a lesser amount from 

April 1, 2004, through the end of the lease period. We anticipate that any savings 

in rent expenses will be offset by an increase in expenses associated with the additional staff needed to meet the challenges presented by the new Department of 

Homeland Security and Department of Defense appeals systems. 

In fiscal year 2004, the Board implemented a new case management system. This 

system replaces a 13-year-old case management system, whose major components 

had long become obsolete. Two of the features of this new system that will improve 

the overall efficiency of the adjudicatory process include: (1) interfaces between the 

Board’s Case Management System, Document Management System, and Document 

Assembly System to reduce duplicative data entry and to automate the use of data 

from CMS to produce standard case documents; and (2) use of off-the-shelf software 

as the basis of the system, which will allow more frequent upgrading of other software. 

Additionally, in fiscal year 2004, the Board expects to replace all of the agency’s 

personal computers (PC’s) in accordance with our policy of replacing PC’s every 4 

years. As part of that upgrade, we will update word processing and other desktop 

software, and we will investigate the feasibility of installing a wireless network 

within our building. 

Finally, the Board’s information resource management office will continue to enhance information technology security for the Board’s IT systems. These enhancements will follow up on the recommendations of the independent auditor which were 

included in the agency’s fiscal year 2003 Federal Information Security Management 

Act report. 

In fiscal year 2005, we will implement a pilot program to evaluate the cost and 

feasibility of scanning case documents received from the parties. This is another 

phase of the e-Filing initiative which would permit documents that we do not 

produce or receive in electronic form through e-Appeal to be made part of the electronic case file nonetheless. 
487

CONCLUSION

I am honored to serve as Acting Chairman of the Merit Systems Protection Board. 

The Board and its staff continue to work diligently to maintain the reputation for 

efficiency, effectiveness and fairness it has earned over its 25-year history. I have 

enjoyed serving the Board as a member and now as Acting Chairman. I welcome 

the opportunity to lead the organization as it builds upon its legacy of excellence 

for service in the public interest. 

U.S. ACCESS BOARD 

PREPARED STATEMENT OF LAWRENCE W. ROFFEE, EXECUTIVE DIRECTOR

INTRODUCTION

The Access Board is requesting a total budget authority of $5,686,000 for fiscal 

year 2005. The proposed budget is a 5.3 percent increase over the amount appropriated for fiscal year 2004. The Board is not planning new costly initiatives in fiscal year 2005 but will continue with the programs started in fiscal year 2004, and 

has followed the directives issued by the Office of Management and Budget for the 

preparation of the fiscal year 2005 budget. 

GOVERNMENT PERFORMANCE AND RESULTS ACT ANNUAL PERFORMANCE PLAN

Following the Government Performance and Results Act (GPRA), the Board has 

established long-range goals and annual objectives that describe the strategies it 

will implement to achieve the long-range goals. The objectives are described in 

terms that permit future assessment regarding whether the objectives were 

achieved. To satisfy the requirements for an annual performance plan and review, 

this budget justification presents information under each of the Board’s program 

areas regarding the long-range goals, reports on the results of the fiscal year 2003 

activities, reviews the planned fiscal year 2004 activities, and presents the fiscal 

year 2005 objectives. 

The Board was established by section 502 of the Rehabilitation Act and is the only 

Federal agency whose primary mission is accessibility for people with disabilities. 

The Board is responsible for developing guidelines under the Americans with Disabilities Act, the Architectural Barriers Act, and the Telecommunications Act for ensuring that buildings and facilities, transportation vehicles, and telecommunications 

equipment covered by these laws are readily accessible to and usable by people with 

disabilities. The Board is also responsible for developing standards under section 

508 of the Rehabilitation Act for accessible electronic and information technology 

used by Federal agencies, and for providing training under the Assistive Technology 

Act to Federal and State employees on obligations related to section 508 of the Rehabilitation Act. 

In 2002, the Board was given new responsibilities under the Help America Vote 

Act to serve on the Board of Advisors and the Technical Guidelines Development 

Committee that will assist the new Election Assistance Commission in developing 

voluntary guidelines and guidance for voting systems, including accessibility for people with disabilities. 

The Board also enforces the Architectural Barriers Act and provides training and 

technical assistance on each of its guidelines and standards, and on a variety of 

other accessibility issues. Additionally, the Board maintains a small research program that develops technical assistance materials and provides information needed 

for rulemaking. 

The Board has adopted this mission statement to guide its programs: The Board 

is the catalyst for achieving an accessible America. The statement recognizes that 

achieving an accessible America requires bringing together public and private sectors. The Board has established three long-range goals for its programs: 

—Take a leadership role in the development of codes and standards for accessibility; 

—Work in partnership with agencies and others to make the Federal Government 

a model of compliance with accessibility standards; and 

—Be known as the leading source of information about accessibility and disseminate that information to customers in effective ways. 

In developing objectives and strategies for achieving the long-range goals, the 

Board seeks to work together with its stakeholders toward common objectives. The 

Board’s plan is simple: work with its stakeholders to establish consensus-based 

guidelines and standards that are fair, reasonable, and acceptable to all interests; 
488

where the Board has enforcement responsibilities over Federal agencies, assist those 

agencies to achieve full compliance; and involve its stakeholders in developing and 

disseminating materials and manuals that will help them understand and comply 

with our guidelines and standards. 

The Board’s programs will result in accessible buildings and facilities, transportation vehicles, telecommunications equipment, and electronic and information technology across our country and, ultimately, the full economic and social integration 

of people with disabilities into our society. Achieving these results will depend not 

only on the Board’s activities, but also on the level of commitment and action taken 

by other Federal agencies, State and local governments, and businesses who are required to comply with or enforce the various laws that guarantee the civil rights 

of people with disabilities. 

ACCESSIBILITY GUIDELINES AND STANDARDS

The Board will continue to develop and update accessibility guidelines and standards and to work cooperatively with organizations which develop codes and standards affecting accessibility through fiscal year 2005 and beyond. The status of current guidelines and standards efforts is presented below. 

ADA and ABA Accessibility Guidelines 

This rule will revise the accessibility guidelines for the Americans with Disabilities Act (ADA) and the Architectural Barriers Act (ABA), and include new guidelines for accessible housing covered by both of these laws. Through this rulemaking, 

the Board will ensure consistency and coordination in the development of guidelines 

applicable to the public and private sector, as well as the Federal Government. A 

notice of proposed rulemaking (NPRM) was published for public comment in November 1999. The NPRM consisted of separate scoping parts for each law. The ADA 

scoping part was based on the recommendations of the Board’s ADAAG Review Advisory Committee and covers private facilities, such as places of public accommodation and commercial facilities, and State and local government facilities. The ABA 

scoping part applies to Federally financed facilities and is based on the ADA scoping 

part, with a few changes due to differences in the coverage of the two laws. For example, the ABA scoping part covers facilities leased by Federal agencies. The NPRM 

contained a single set of updated technical requirements based on the recommendations of the ADAAG Review Advisory Committee. Both the ADA and ABA scoping 

parts reference these common technical requirements. The comment period for the 

proposed rule closed in May 2000 and over 2,500 comments were received. The 

Board held two public hearings on the proposed rule. The Board also held informational meetings in Washington, DC in October 2000 to hear from industry associations and disability groups on issues regarding automated teller machines, reach 

ranges, and captioning equipment for movie theaters. The Board required further 

information on these issues before deciding how to address them in the final rule. 

In April 2002, the Board placed in the docket for public review a draft of the final 

guidelines to promote harmonization of the Board’s guidelines with the International Code Council (ICC)/American National Standards Institute (ANSI) A117.1 

Standard on Accessible and Usable Buildings and Facilities and the International 

Building Code. The ICC/ANSI A117 Committee and the ICC were in the process of 

revising the private sector codes and standards. This provided another opportunity 

to harmonize the Board’s guidelines with those of the private sector. The Board’s 

final rule will be published in fiscal year 2004. 

Outdoor Developed Areas 

The Board’s Outdoor Developed Areas Regulatory Negotiation Committee presented its report to the Board in September 1999. This committee developed new 

sections for parks, trails, and camping and picnic areas. In October 2001 the Board 

sponsored an information meeting on the final report of the Outdoor Developed 

Areas Regulatory Negotiation Committee. The meeting was attended by about 50 

individuals and was held in Denver, CO during the annual meeting of the National 

Recreation and Park Association. The meeting was informal and provided an opportunity for a dialogue with Board members about the report. 

In September 2003, the Board decided to develop an NPRM on Outdoor Developed 

Areas using only its rulemaking authority under the Architectural Barriers Act. 

Taking this approach will help move this rulemaking forward and allow the Federal 

Government to take the initiative of addressing accessibility in this area before applying requirements to State and local governments or private entities. Future rulemaking under the ADA would be enhanced by the experience of implementing accessibility guidelines at Federal facilities. The Federal Government would gain experience in implementing the guidelines and this experience should prove important be-
489

fore applying them to other entities. A proposed rule will be published for public 

comment in fiscal year 2004. 

Passenger Vessels 

In September 1998, the Board convened a 21-member Passenger Vessel Access 

Advisory Committee to develop accessibility guidelines for cruise ships, ferries, excursion boats, and other vessels covered by the Americans with Disabilities Act. The 

committee presented its report with recommendations to the Board in November 

2000. The Board created an ad hoc committee of Board members to begin developing 

a proposed rule on access to passenger vessels. 

Standard means of boarding passenger vessels and the interaction between vessels and shoreside facilities present unique challenges to accessibility. It is a major 

issue the Board will address in guidelines it is developing for passenger vessels. The 

Board held public meetings in New Orleans (August 2003) and Seattle (September 

2003) to gather information and input on viable access solutions that will allow persons with disabilities independent access onto and off of large vessels such as cruise 

ships, dinner boats, ferries, and gaming boats. Over 150 vessel designers and operators, pier operators, persons with disabilities, and others attended the meetings. A 

notice of availability (or draft rule) is expected to be published in fiscal year 2004. 

Public Rights-of-Way 

In October 1999, the Board created a 32-member Public Rights-of-Way Access Advisory Committee to assist it in developing new guidelines for access to sidewalks, 

street crossings, and related pedestrian facilities. The committee presented its report with recommendations to the Board in January 2001. The committee is continuing to meet to develop recommendations for a technical assistance manual for 

agencies and practitioners to support implementation of the future guidelines. In 

June 2002, the Board released draft guidelines on accessible public rights-of-way for 

public comment. The draft guidelines were made available for public review and 

comment prior to issuing a notice of proposed rulemaking. Written comments were 

accepted until October 28, 2002; we received approximately 1,400 comments—all of 

which are available on our website. 

A public meeting on the draft guidelines was held in Portland, OR on October 8, 

2002. The meeting provided an opportunity for industry groups, persons with disabilities, civil engineers, local governments, and other interested parties to comment 

on the published draft. Over 100 people attended the meeting, and approximately 

40 people provided testimony. Comments focused on the impact of various provisions 

in the guidelines. A proposed rule is expected to be published in fiscal year 2004. 

Fiscal Year 2003 Results—Rulemaking 

In fiscal year 2003, we did not issue any guidelines. 

Fiscal Year 2003 Results—Codes and Standards 

Our long-range goal is to take a leadership role in the development of codes and 

standards for accessibility. The Board works with model code organizations and voluntary consensus standards groups that develop and periodically revise codes and 

standards affecting accessibility. We have voting membership in several codes and 

standards organizations, and monitor or are actively involved in the development 

or revision of dozens of other codes and standards affecting accessibility. 

We believe this goal enhances the Board’s credibility as a knowledgeable source 

of information regarding technical aspects of accessibility. Additionally, by working 

cooperatively with codes and standards-setting bodies, Federal and private codes 

and standards will be more similar, or harmonized, and the Board will be more alert 

to non-Federal influences affecting its constituencies. Harmonization between Federal and private requirements will make it more likely that buildings and facilities 

will be accessible, thus reducing the necessity for complaints and litigation. Some 

highlights of accomplishments in fiscal year 2003 include: 

—The parent of a child with a hearing loss petitioned the Board to include new 

provisions in ADAAG for acoustical accessibility for individuals who are hard 

of hearing because the acoustical environments found in many schools today are 

barriers to communication and therefore to learning for children with hearing 

impairments. Rather than initiating rulemaking, the Board collaborated with 

an existing Acoustical Society of America (ASA)/American National Standards 

Institute (ANSI) Working Group on Classroom Acoustics to develop private sector technical and scoping standards. The standard was recently adopted by 

ANSI. The approved standard, Acoustical Performance Criteria, Design Requirements, and Guidelines for Schools (ANSI S12.60–2002), sets specific criteria for maximum background noise and reverberation. 
490

—Currently, the Board is finalizing revisions to the ADA and ABA accessibility 

guidelines. A key goal of this revision is to make the guidelines more consistent 

with model building codes and industry standards, particularly those issued by 

the ICC/ANSI A117 Committee. The ICC/ANSI A117.1 standard is referenced 

by the International Building Code and various State codes, among others. 

While the Board’s guidelines derive from earlier versions of the ICC/ANSI A117 

standard, significant differences between the documents have remained. From 

the outset of its rulemaking to update the ADA and ABA guidelines, the Board 

has sought to reconcile these differences. The ICC/ANSI A117 Committee is in 

the process of updating the A117.1 standard and is working to harmonize the 

new edition with the Board’s upcoming guidelines. In April 2002, the Board released a draft of the final ADA and ABA guidelines to facilitate this effort. 

Later, the ICC/ANSI A117 Committee completed a series of hearings on 

changes to the standard to make it more consistent with the Board’s draft final 

guidelines. 

Fiscal Year 2004 Plans—Rulemaking 

In fiscal year 2004, we will issue one final guideline and three proposed guidelines: 

—Final rule on revisions to the ADA and ABA accessibility guidelines 

—NPRM on outdoor developed areas 

—Notice of availability (draft rule) on access to passenger vessels 

—NPRM on access to public rights-of-ways 

Fiscal Year 2004 Plans—Codes and Standards 

The Board will be assisting the new Election Assistance Commission in the development of voluntary voting system guidelines under the Help America Vote Act. 

Among other things, the legislation requires the new Election Assistance Commission to develop voluntary voting system guidelines, including accessibility for people 

with disabilities. The voting system guidelines are to be developed with the assistance and input of a Technical Guidelines Development Committee and Board of Advisors. The legislation requires that the Access Board be represented on both 

groups. 

As a result of the September 11, 2001 attacks on the World Trade Center, code 

provisions for emergency egress from tall buildings are being re-examined. There is 

renewed interest in the use of elevators for both occupant egress and fire fighters 

access. Therefore, a workshop on the Use of Elevators in Fires and Other Emergencies will be held on March 2–4, 2004, in Atlanta, GA. This workshop is being 

co-sponsored by the Access Board, the American Society of Mechanical Engineers, 

National Institute of Standards and Technology, International Code Council, National Fire Protection Association, and the International Association of Fire Fighters. 

Fiscal Year 2005 Objectives—Rulemaking 

In fiscal year 2005, we will issue three final guidelines: 

—Final rule on outdoor developed areas 

—NPRM on access to passenger vessels 

—Final rule on access to public rights-of-ways 

Fiscal Year 2005 Objectives—Codes and Standards 

In fiscal year 2005, the Board will continue efforts to harmonize its guidelines 

with model codes and standards, including the ICC/ANSI A117.1 Standard for Accessible and Usable Buildings and Facilities. 

TECHNICAL ASSISTANCE

The Board provides technical assistance to a wide variety of people regarding the 

accessibility guidelines and standards it issues. The Board’s customers include architects, builders, designers, manufacturers, people with disabilities, State and local 

governments, and Federal agencies. The Board’s technical assistance program has 

four components: 

—Responding to customer inquiries. The Board responds to about 13,000 customer 

inquiries each year. We have four toll-free telephone lines for customers to call 

with questions. Customers also e-mail and fax us questions. Many literally are 

sitting at a drawing table with a design problem. They want accurate, reliable, 

and timely advice. Our customers value being able to discuss their questions directly with our accessibility specialists who developed the guidelines and standards. 
491

—Developing and disseminating bulletins, manuals, and other publications. The 

Board maintains about 30 publications on accessibility issues. These range from 

short bulletins responding to frequently asked questions about specific issues 

such as accessible parking, to manuals on the Board’s guidelines and standards. 

We send out about 12,000 publications each year in print and alternate formats. 

—Providing training. The Board conducts about 100 training sessions each year. 

Training usually is provided at conferences and seminars sponsored by other organizations. Training sponsors generally reimburse us for travel expenses. 

—Maintaining the Board’s website. The Board’s website (http://www.accessboard.gov) has become a very effective way to distribute information to the public. Customers can download many of our publications and view our accessibility 

guidelines and standards from our website. We received over 12 million ‘‘hits’’ 

on our website in fiscal year 2003. 

The Board also has established partnerships with other organizations such as the 

American Institute of Architects, the National Association of ADA Coordinators, the 

Disability and Business Technical Assistance Centers, and the Information Technology Technical Assistance and Training Center (ITTATC) to disseminate information about the Board’s programs. The ITTATC, which is funded by the National Institute on Disability and Rehabilitation Research, collaborates with stakeholders to 

improve the awareness and availability of accessible electronic and information 

technology and telecommunication products and services and disseminates information, training, and technical assistance. Many of the Board’s guidelines and publications are available through these organizations’ on-line networks. The Board also 

provides training for these organizations. The Board’s long-range goal is to be 

known as the leading source of information about accessibility and to disseminate 

information to our customers in effective ways. As we revise the guidelines for the 

Americans with Disabilities Act and the Architectural Barriers Act and develop 

guidelines for new areas such as outdoor developed areas, passenger vessels, and 

public rights-of-ways, there will be increased demands for technical assistance from 

existing and new customer groups. There also will be opportunities to use existing 

partnerships and establish new partnerships with customer groups to disseminate 

information about the Board’s guidelines and standards. 

Fiscal Year 2003 Results—Leading Source of Information 

As a result of our expertise in accessibility issues, many government agencies and 

private organizations ask for our assistance in ensuring access at their facilities. 

During fiscal year 2003, we met with staff from the General Services Administration 

(GSA) on the design of a new courthouse annex in Washington, DC and plans for 

a new courthouse in Eugene, OR and we visited an existing courthouse in Upper 

Marlboro, MD with GSA staff. We also reviewed accessibility issues for the planned 

new Department of Transportation headquarters building. 

Many foreign government agencies also ask for our assistance in promoting access 

in their countries. In fiscal year 2003, we met with the Chairman of the Disability 

Rights Commission from the United Kingdom. The Disability Rights Commission 

helps implement the Disability Discrimination Act of 1995. We also met with a researcher from Sweden regarding accessible design and provided information on 

model building codes and met with Japanese researchers regarding Japanese initiatives on ‘‘talking signs’’ and detectable warnings. We also met with an Australian 

company representative to provide feedback on a new pocket Braille writer and with 

staff from the Royal National Institute for the Blind (England) to discuss United 

States and European cooperation on accessibility standards for information technology. We also hosted an architect from Portugal who is in the United States 

through the Fulbright Visiting Scholar Program. Recognizing the international interest in access to information technology, we recently posted translations of the section 508 standards in Spanish and Japanese on our website. 

Each year the Board meets outside of Washington, DC to encourage a more direct 

and open dialogue with members of the public about accessibility and the work of 

the Board. These visits outside the Washington beltway substitute for one of the 

Board’s regular meetings, which are held every other month in the Washington, DC 

area. In September 2003, the Board held a meeting in Seattle, WA. During its stay 

in Seattle, the Board explored accessibility as it pertains to information technology 

and outdoor environments such as parks and trails. In a visit to Microsoft headquarters, the Board was briefed by representatives from Microsoft, Hewlett Packard, 

Cingular Wireless, and NCR Corporation on industry efforts to improve access to 

information technology. Presentations included information on how accessibility is 

mainstreamed into operating systems, other software, hardware and telecommunications products and services. The Board also toured several area parks to learn 
492

more about ways of providing access to campgrounds, picnic areas, trails, and other 

outdoor sites. 

The Board also held public meetings in Seattle and New Orleans to gather information and input on viable access solutions that will allow persons with disabilities 

independent access onto and off of large vessels such as cruise ships, dinner boats, 

ferries, and gaming boats. Over 150 vessel designers and operators, pier operators, 

persons with disabilities, and others attended the meeting. In advance of the meetings, the Board toured vessels and boarding facilities at area ports. 

Digital wireless phones present significant compatibility and interference problems for people who use hearing aids and cochlear implants. The Board assumed 

a lead role in organizing a conference on the subject held in September 2003 at Gallaudet University in Washington, DC. Sponsored by the Interagency Committee on 

Disability Research (ICDR), the ‘‘Summit on Interference to Hearing Technologies 

by Digital Wireless Telephones’’ explored compatibility issues and potential solutions. Digital wireless phones, unlike analog wireless phones, can emit interference 

caused by radio frequency from the antenna and magnetic interference from the battery leads and other electronic components. Noises resulting from such interference, 

which were simulated at the conference, make them virtually unusable by people 

who use hearing technologies. Participants included representatives from the digital 

wireless phone and hearing technologies industries, disability organizations, research centers, and Federal agencies such as the Federal Communications Commission (FCC) and the Food and Drug Administration (FDA). 

In fiscal year 2003, the Board responded to 12,193 customer inquiries; distributed 

1,673 information packets; and conducted 90 training sessions which were attended 

by 8,414 people. An information packet usually contains several publications. Since 

we do not collect data on publications disseminated through partner organizations, 

the actual number of publications disseminated to our customers is greater than our 

current data indicate. Technical assistance, research, and training projects funded 

in fiscal year 2003 include: 

—Recreation Technical Assistance with the Marina Operators Association of 

America. This project will develop technical assistance and training materials 

and conduct training sessions for marina operators on the requirements of the 

new guidelines for marinas and boating facilities. 

—Maintenance and Weatherability of Detectable Warnings with the Transportation Research Board. The Board has contributed to a larger project funded by 

several transportation industry organizations to collect and report on detectable 

warnings testing undertaken by several State departments of transportation. 

The Board will be a member of the project advisory committee. 

—Curb Ramp Directionality Workshop with the Institute of Transportation Engineers. This project will bring together highway engineers, orientation and mobility specialists, and consumers in a 2-day workshop to consider possible 

changes to roadway design that can facilitate wayfinding. 

—Passenger Vessels Coaming Research with the Volpe Transportation Research 

Center. This project will investigate current and possible approaches to shipboard coaming treatments for accessibility. 

We use existing partnerships with organizations and will be establishing new 

partnerships to develop training and technical assistance materials. We have used 

our website to provide copies of the Board’s guidelines and answers to frequently 

asked questions about the guidelines so that more customers can get the information they need. The number of user sessions on our website continues to grow. There 

were approximately 1,423,465 user sessions in fiscal year 2003, nearly 200,000 more 

than the previous year. Due to the increasing use of the Board’s website, we are 

focusing on web-based dissemination of information since this allows a variety of options for speedy distribution at a low cost to the Board. We also published and distributed six issues of Access Currents, a free newsletter the Board issues every 

other month by mail and e-mail. In addition, we responded to press inquiries from: 

—National and syndicated newspapers, magazines and radio and television shows 

such as: Houston Chronicle; Los Angeles Times; and the Washington Post. 

—Government related newspapers and journals including: Government Computer 

News and Federal Computer Week. 

—Disability related newsletters including: Report on Disability Programs and the 

Disability Compliance Bulletin. 

—Trade association periodicals such as: Transit Access Report; Land Development 

Today magazine; Buildings Magazine; States News Service; and the International Council of Cruise Lines newsletter. 

—Local newspapers, television, and radio stations such as: Orange County Register; Nashville City Paper; Daily Times (Merryville, TN); Canyon Current 
493

(Canyon City, CO); El Nuevo Dia (The New Day), a newspaper in Puerto Rico; 

and the Daily Camera (Boulder, CO newspaper). 

We also wrote an article on section 508 for Telecommunications for the Deaf, Inc. 

(TDI) and developed an article on the Board’s section 508 standards for the Information Technology and Disabilities Journal, a new, quarterly electronic journal. 

We added to our growing inventory of technical assistance materials by creating 

new brochures on the Board and the Architectural Barriers Act. We also posted several new documents on the Board’s website, including a research report on play surfaces, a new report on audible pedestrian signal products and their interface with 

traffic signal controllers, and a summary on ADAAG’s detectable warning requirements. We also updated the on-line version of ADAAG including the requirements 

for children’s elements, prisons and courtrooms, play areas, and recreation facilities 

into one integrated document. 

Last September, the Board issued new guidelines that address access to various 

types of recreation facilities covered by the ADA. These guidelines, which supplement the Board’s ADA Accessibility Guidelines, specify access to amusement rides, 

boating facilities, fishing piers and platforms, golf courses, miniature golf courses, 

sports facilities, and swimming pools, wading pools, and spas. The guidelines are 

one of the first of their kind in detailing access to these environments. To help users 

become familiar with the Board’s new recreation facility guidelines, including the 

meaning and intent of specific provisions, we developed seven supplementary guides 

on each of the facility types covered. The guides summarize and explain requirements for each facility type. 

Fiscal Year 2004 Plans—Leading Source of Information 

The upcoming publication of the new ADA and ABA Accessibility Guidelines offers 

a timely opportunity to develop and implement an accessible web-based technical assistance and training strategy to augment current Board publications. Completion 

of the revised and reformatted ADA and ABA Accessibility Guidelines will necessitate a review of the Board’s many technical assistance manuals and publications. 

Many documents will need revision; others may no longer be required, and some 

new publications may be indicated. 

The redesign of our agency graphic identity has provided us with a coordinated 

range of new templates for the layout of reports, bulletins, our internet presence, 

and other print and electronic materials. We developed this new and more appropriate graphic expression, including both logo and text, for our family of print materials. We did this to reflect the Board’s professionalism and to communicate that 

we are the only Federal agency devoted to accessibility in the built environment and 

in communications and electronic technologies. 

Also, in a few years we will be largely finished with our planned rulemaking activities. It is an opportune time to share our accomplishments and insights with the 

rest of the world and encourage them to look at some of the access issues we have 

explored such as access to electronic and information technology, playgrounds, and 

recreation facilities. To do this will require that our documents become available in 

other languages. In fiscal year 2004, we will redesign most of our publications as 

well as our website using the Board’s new graphic identity and will translate the 

ADA and ABA Accessibility Guidelines into other languages. 

Fiscal Year 2005 Objectives—Leading Source of Information 

In fiscal year 2005 and beyond, we will develop training and information materials on our planned final rules on outdoor developed areas, access to passenger vessels, and access to public rights-of-ways. As we publish final rules, we make every 

effort to ensure that training and technical assistance materials will be available 

to organizations and individuals that must apply the new requirements. 

Additionally, we plan to further our outreach activities to foreign government 

agencies who ask for our assistance in promoting access in their countries. In recent 

years we have hosted numerous delegations from other countries who are interested 

in learning more about our experiences with the Americans with Disabilities Act 

and other laws, as well as to discuss general accessibility issues. We plan to share 

our accomplishments and insights with the rest of the world by translating many 

more of our documents and guidelines into other languages and by looking for opportunities to work collaboratively with international entities on accessibility issues. 

With this new material we can more effectively encourage others to look at some 

of the unique access issues we have addressed. 

ARCHITECTURAL BARRIERS ACT COMPLIANCE AND ENFORCEMENT

The Board enforces the Architectural Barriers Act (ABA), which requires that 

most buildings designed, constructed, altered, or leased by the Federal Government 
494

and certain other Federally financed facilities be accessible to people with disabilities. Complaints received by the Board concern post offices, national parks, military 

facilities, veterans hospitals, subway stations, and a variety of other facilities. When 

the Board has jurisdiction and finds that the applicable accessibility standards were 

not followed, we request a corrective action plan and monitor the case until the barrier is removed. Even when the Board does not have jurisdiction or no violation is 

found, we attempt to negotiate voluntary barrier removal. 

The Board’s long-range goal is to work in partnership with Federal agencies and 

others to make the Federal Government a model of compliance with accessibility 

standards. The Board’s experience with resolving complaints is that most violations 

are not intentional. When violations are found, it is usually because the people responsible for designing buildings, reviewing plans, and on-site construction did not 

have a good understanding of the accessibility standards and how to apply them. 

People responsible for building planning and design at headquarters, regional and 

field offices, and local sites must have a working knowledge of the accessibility 

standards if compliance is to be achieved. As Federal agencies are reorganized and 

personnel assignments and responsibilities change, it is important that agencies 

have effective systems for training new people responsible for applying the accessibility standards and for monitoring compliance with the Architectural Barriers Act. 

Training will be even more important when the accessibility guidelines and standards for the Architectural Barriers Act are revised. 

Fiscal Year 2003 Results—ABA Compliance 

In fiscal year 2003, the Board received 140 written complaints. These included 

complaints investigated under the Architectural Barriers Act, and also those concerning facilities not covered by that law but potentially covered by other laws, such 

as the Americans with Disabilities Act and the Rehabilitation Act. Of the 140 complaints, we opened 83 as new Architectural Barriers Act cases. Although the Board 

did not have authority under the Architectural Barriers Act in the other 57 complaints, we responded to the complainants, usually by referring them to the appropriate enforcement agency. In addition, we referred another 37 complainants to 

other agencies for action when our investigations revealed there was no violation 

of the Architectural Barriers Act or we did not have jurisdiction. The Board receives 

many comments from its customers, indicating they are pleased that we make this 

extra effort to ensure that their complaints are addressed. The Board continued its 

high rate of successful complaint resolution in fiscal year 2003. Of those cases closed 

where the Board had jurisdiction and a violation of applicable standards was found, 

100 percent resulted in the successful removal of barriers. Additionally, in those instances where the Board did not have jurisdiction over the facility or no violation 

was found, we negotiated voluntary barrier removal in 21 percent of the cases. 

The Board responds quickly to all new complaints and contacts complainants frequently to update them on the status of their complaints. In fiscal year 2003, the 

Board sent initial letters to complainants acknowledging receipt of their complaint 

or began an investigation of the issues they raised within an average of 4 days. The 

Board’s customers regularly say they are pleased to hear from a Federal agency so 

promptly. It is Board practice to keep complainants informed on a regular basis 

throughout the course of our investigations. In fiscal year 2003, we contacted 116 

complainants to provide updates on the status of their complaints. 

Fiscal Year 2003 Results—Working in Partnership with Agencies 

During fiscal year 2003 we continued ongoing actions under our long-term goal 

of working in partnership with agencies and others to make the Federal Government a model of compliance with accessibility standards. Under our partnership 

with the National Institutes of Health (NIH), we completed a series of training sessions on accessibility requirements under the Americans with Disabilities Act Accessibility Guidelines and the Uniform Federal Accessibility Standards. 

We completed our partnership with the General Services Administration (GSA) 

resulting in its development of a comprehensive desk guide of GSA policies and procedures regarding accessibility for use by GSA personnel to assist in implementing 

its National Accessibility Program. We also continued working in partnership with 

the Smithsonian Institution, Kennedy Center, and Library of Congress to develop 

a resource tool that organizations can use as guidance in evaluating and improving 

their emergency evacuation plans for persons with disabilities. 

Fiscal Year 2004 Plans—ABA Compliance 

In fiscal year 2004, the Board will continue to investigate complaints under the 

Architectural Barriers Act. At the beginning of fiscal year 2004, the Board had 104 

active cases. We expect to receive 145 new complaints in fiscal year 2004. Of this 

total, we estimate that 85 will be opened as new Architectural Barriers Act cases 
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and 60 will be referred to other agencies for enforcement under other laws, such 

as the Americans with Disabilities Act and the Rehabilitation Act. The Board anticipates responding to complaints in an average of 3 or fewer business days and will 

continue to provide periodic updates to complainants on the status of their complaints. We also will evaluate and refine our electronic complaint-filing system and 

the compliance and enforcement information presented on our website. 

Fiscal Year 2004 Plans—Working in Partnership with Agencies 

In fiscal year 2004, we will continue working with agencies to assist in development of ways to assess and improve plans for emergency evacuation of persons with 

disabilities. We will continue efforts to learn about plans or actions being developed 

by the standard-setting agencies with regard to implementation of the new ABA 

standards. 

Fiscal Year 2005 Objectives—ABA Compliance 

In fiscal year 2005, the Board will continue to investigate complaints under the 

Architectural Barriers Act. We estimate that we will have 105 active cases at the 

beginning of fiscal year 2005 and will receive 145 new complaints. We expect to 

open 85 new Architectural Barriers Act cases and refer 60 complaints to other agencies for enforcement under other laws. We will continue to provide good customer 

service. 

Fiscal Year 2005 Objectives—Working in Partnership with Agencies 

Once new ABA standards are issued by the standard-setting agencies, our objective will be to work with the agencies on the development of web-based training or 

other interactive methods to ensure their effective implementation. In addition, we 

will continue our efforts to work with agencies to identify and publicize best practices for ensuring ABA compliance. 

OFFICE OF PERSONNEL MANAGEMENT 

PREPARED STATEMENT OF KAY COLES JAMES, DIRECTOR

Mr. Chairman and members of the subcommittee, I am pleased to have this opportunity to submit for the record a statement discussing the appropriations request 

for the Office of Personnel Management (OPM) for fiscal year 2005 and the relationship between that request and the implementation of the President’s Management 

Agenda and other critical administration initiatives. 

Before reviewing the President’s request for appropriations for OPM, I would like 

to provide some context by outlining briefly the significant strides we have made 

and the tremendous challenges we face. 

Consistent with our objective of shaping a Federal workforce that honors the 

President’s commitment to the taxpayers for citizen-centered, results-oriented, market-based government, we have made the President’s Management Agenda the cornerstone of our corporate management. We are proud to note that the Office of Management and Budget cited us as one of the two most improved agencies, based on 

our rating on the Executive Branch management scorecard. Our employees have 

embraced the agenda and work as a team to identify and solve management problems. Since September of 2002, under the competitive sourcing initiative, OPM employees have aggressively competed and won all 11 competitions undertaken. 

Given the government-wide nature of our responsibilities, we have focused on improving the strategic management of human capital in all agencies in many ways. 

We have analyzed the human capital efforts of agencies and shared our insights and 

guidance by providing agencies with workshops, tools, and information on specific 

human capital topics. 

Perhaps our most groundbreaking achievement was our joint effort with the new 

Department of Homeland Security (DHS) in creating a human resources management (HRM) system that provides the flexibility to manage more than 180,000 employees in a manner consistent with the unique mission requirements of that Department. The pioneering development of such a system through a joint regulatory 

process was unique. The collaborative and inclusive nature of the process involved 

employees, managers, the Department’s largest labor unions, and a broad array of 

stakeholders and experts from the Federal sector and private industry. Currently, 

we are reviewing the many comments submitted in response to the publication of 

draft regulations on February 20, 2004. 

In addition, in conjunction with DHS and other agencies, OPM assisted Federal 

employees with safety planning, both at work and at home. Our efforts involved producing a series of publications to educate Federal workers and their families on 
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dealing with emergency situations and providing training for employees in both security and emergency procedures. Further, we have conducted, for the past 2 years, 

surveys on emergency planning in the agencies and have worked to highlight areas 

of improvement to ensure better safety for employees. 

Beyond DHS, OPM is now working in a total partnership, as prescribed by law, 

for the standup of the new National Security Personnel System at the Department 

of Defense (DOD). OPM and DOD are pursuing a similar process to that used during the DHS process, with joint agency staff teams, meetings with unions and stakeholders, and, ultimately, joint signoff of implementing regulations by Secretary 

Rumsfeld and me. 

In fiscal year 2005, our appropriations request will build on those achievements 

in several ways. First, it will help us to continue to focus on the strategic use of 

human resources flexibilities tailored to each agency’s unique requirements. 

Second, it will enable us to build the capacity to hold agencies accountable for 

using tools effectively, as well as sustaining the core values of Federal service. 

Third, OPM’s budget request includes funding for security and emergency action 

programs to support increased outreach efforts designed to ensure the safety and 

security of the Federal workforce. OPM’s efforts are being conducted in conjunction 

with the DHS and the General Services Administration. 

A significant highlight of our request is the support for OPM to continue our critical work as the managing partner for e-Government projects. For example, our request for $6.615 million will allow us to complete the Federal payroll enterprise architectural model and recommend a technology solution to replace legacy systems 

following the consolidation of payroll providers. We project that this investment will 

help yield over $1 billion in cost savings and avoidance through the project’s life 

cycle. Also, with $3 million in base funding and $3.9 million from our revolving 

fund, we will continue our recruitment one-stop initiative to operate and enhance 

the USAJOBS Federal employment information system, increasing usage and satisfaction for Federal job seekers. Since launching new technology in August of 2003, 

the USAJOBS website has been used by job seekers to log more than 53 million visits; and more than 483,000 new resumes have been created by Americans interested 

in public service careers. Through the USAJOBS website, this initiative is delivering to Federal agencies a greater number of highly-qualified candidates in a more 

efficient and cost-effective manner. 

While the requests for other e-Government initiatives are somewhat smaller, they 

are no less crucial. The $2 million requested for the Enterprise Human Resources 

Integration effort will enhance the capability of agencies to submit timely and accurate data electronically to OPM’s data warehouse. This data warehouse will help improve decision making and policy development through comprehensive, accurate, 

and efficient transfer of data, as well as by allowing improved analytics. Additionally, with our requested $2 million in salaries and expenses funding for e-Clearance, 

we will promote reciprocity of security clearances among agencies. Expanding reciprocity can save money and improve efficiency without adverse consequences to security. 

Our $800,000 request for the e-HRIS initiative will enable us to research, plan, 

and develop a project plan to establish standardized and integrated human resources information systems across the Federal Government, and the $685,000 

sought for e-training will facilitate the transformation of the Go.Learn.gov site to 

a fully reimbursable activity that increases economies of scale and, through shared 

solutions, reduces duplicative investments. 

In addition to the innovative approaches taken in our e-Government initiatives, 

the establishment of the Human Capital Performance Fund is a major step toward 

transforming Federal employment by creating a pay-for-performance culture. This 

Fund is an important tool for use by Federal agencies in rewarding high-performance employees. It points the way toward greater emphasis on employee performance contributions to mission accomplishment, rather than longevity. By requiring 

robust performance management as a criterion for funding, it would also provide an 

incentive for agencies to improve their performance management systems and 

human capital strategies and align them more closely with their missions and goals. 

As you are aware, the establishment of this Fund has not affected the operation 

of the General Schedule pay system itself. Individual employees remain at their existing grades and steps and continue to receive annual across-the-board pay adjustments, locality payments, and periodic within-grade increases. However, if the request for $300 million for the Human Capital Performance Fund is granted, highperforming employees will be rewarded with additional payments that will be treated as basic pay for the purposes of retirement and other benefits and will stay with 

the employees in the future. 
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OPM will administer the Fund to ensure that agency plans for the distribution 

of payments from the fund are predicated strictly on appropriately assessed employee and/or organizational performance. 

Full funding of this request is essential to the progress of meaningful pay reform 

for the benefit of dedicated employees, critically challenged agencies, and taxpayers. 

Of course, beyond the e-Government initiatives and the Human Capital Performance Fund, OPM is requesting funding for the ongoing operation of our transformed 

agency. Our focus will be to build the government’s capacity for human capital flexibility, accountability, and national security. With the funding we have requested for 

our new organizational framework—called Team OPM—we will concentrate on developing strategic human resources flexibilities through approaches tailored to each 

agency’s unique requirements. We will also build the capacity to hold agencies accountable for using tools effectively, as well as sustaining the core values of Federal 

service. Also, as noted earlier, we will devote additional resources to the support of 

government-wide disaster and emergency action working groups. 

Turning to our request for resources to support these priorities, it is important 

to note that the total OPM fiscal year 2005 budget request of slightly more than 

$35 billion, an increase of nearly $1.4 billion, includes appropriations that are 98 

percent mandatory and only 2 percent discretionary. 

OPM’s general fund request for basic operating expenses totals $131.3 million and 

covers 831 full-time equivalent (FTE) employees. This includes $114.9 million in annual funds, $11.4 million in no-year funds for the e-Government projects discussed 

earlier (excluding recruitment one-stop), and $5 million in 2-year funds to coordinate and conduct program evaluation and measurement. 

The annual funds include an increase of slightly more than $3 million and 24 FTE 

to increase the human capital support to agencies, to develop hiring solutions, to 

provide enhanced information technology support, to conduct competitive sourcing 

studies, and to support homeland security and emergency response needs. 

With regard to the transfers from benefits trust funds, OPM is requesting a total 

of nearly $128.5 million to support 1,151 FTE in the administration of the employee 

retirement and insurance programs. This includes more than $100.8 million in annual funds, representing an increase of almost $2.2 million from fiscal year 2004. 

These resources will be devoted to retirement benefits calculation, increased call 

center support during peak season, telephone system upgrades, and contract cost increases. The total also includes more than $27.6 million in no-year funds for the retirement systems modernization effort. 

It is important to note here that a significant portion of the funding for the Office 

of the Inspector General in OPM is derived from trust fund transfers, too. That request will be discussed in greater detail by that office in a separate statement, but 

it should be mentioned that the overall request totals $18.1 million dollars and 140 

FTE. Of that total, $1.6 million would come from general funds, while $16.5 million 

would represent transfers from the trust funds. Of course, we strongly support the 

important work of Inspector General Pat McFarland and his fine staff. OPM maintains an independent relationship with the IG, but on issues of common concern, 

such as the maintenance of employee and retiree confidence in the trust funds and 

the Combined Federal Campaign, the teamwork and professionalism of the IG and 

his staff are outstanding. 

In addition to the 141 FTE financed by reimbursements from other agencies for 

the provision of HRM technical assistance and from OPM programs for the provision 

of agency-wide services, it is also worth noting that OPM provides a variety of services that are financed by payments from other agencies through our revolving fund. 

For ongoing revolving fund programs, the fiscal year 2005 budget includes slightly 

more than an estimated $1 billion in obligations and 2,601 FTE to be financed by 

payments from other agencies for OPM’s services. 

These services include professional development and continuous learning for Federal managers and executives; providing one-stop access to high-quality e-training 

products and services; testing potential military personnel for the Department of 

Defense in those locations where it is cost-effective for OPM to do so; providing employment information and assessment services; automating other agencies’ staffing 

systems; providing examining services when requested by an agency; providing technical assistance and consulting services on all facets of HRM; coordinating the selection and development of Presidential Management Fellows; and, through contracts 

with private companies, conducting suitability and security investigations. 

As always, the OPM budget request includes mandatory appropriations to fund 

the government contributions to the health benefits and life insurance programs for 

Federal annuitants. This is because OPM serves as the ‘‘employing agency’’ for these 

individuals relative to these benefit programs. 
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Given the mandatory nature of these payments, we are requesting a ‘‘such sums 

as may be necessary’’ appropriation for each of these accounts. We estimate that, 

for the 500,000 annuitants under age 65 who elect post-retirement life insurance 

coverage and for whom we are responsible, $35.0 million will be needed, while an 

appropriation of about $8 billion will be required to pay the government’s share of 

the cost of health benefits coverage for the 1.9 million annuitants who participate 

in that program. That represents an increase of $688 million over fiscal year 2004. 

In addition, as mandated by the financing system established in 1969 by Public 

Law 91–93, liabilities resulting from changes (principally pay raises) since that year 

which affect retirement benefits must be amortized over a 30-year period. We are 

requesting a ‘‘such sums as may be necessary’’ payment to the Civil Service Retirement and Disability Fund for that purpose. We estimate the amount needed to be 

$26.4 billion, an increase of $402 million to cover this service cost that is not funded 

by and for active employees under the Civil Service Retirement System. 

Finally, the President’s budget for fiscal year 2005 proposes a pay increase for 

white-collar workers of 1.5 percent, to be distributed between an across-the-board 

raise and locality pay as determined by the President later in the year. In addition, 

funding in the amount of 0.2 percent has been included in agency budgets for use 

in addressing specific recruitment and retention needs. When combined with the 

basic pay adjustment and the $300 million request for the Human Capital Performance Fund, the overall amount available for a pay adjustment amounts to 2.0 percent. 

Once again, we have included in the government-wide general provisions in the 

budget the appropriate legislative language to ensure that blue-collar Federal employees receive pay adjustments up to the amount received by their white-collar colleagues if warranted by local private sector market rates. 

Thank you for the opportunity to discuss OPM’s request for the record. I would 

be pleased to provide any additional information the subcommittee may require. 

PREPARED STATEMENT OF PATRICK E. MCFARLAND, INSPECTOR GENERAL

Mr. Chairman and members of the subcommittee, thank you for providing me 

with this opportunity to discuss the President’s fiscal year 2005 request for appropriations for the Office of the Inspector General (OIG). The total request for the Office of the Inspector General is $18,088,000, which is an increase of $2,257,000 

above the amount appropriated in fiscal year 2004. Of this amount, $1,627,000 is 

from the salaries and expenses/general fund, and $16,461,000 is from the trust 

funds. The additional resources are requested to: 

—Increase criminal investigative oversight of the Office of Personnel Management 

(OPM) administered trust fund programs; 

—Conduct audits of pharmacy benefit managers participating in the Federal Employees Health Benefits Program (FEHBP); 

—Expand the scope of audit for the largest community-rated health maintenance 

carriers; 

—Further develop computer assisted audit tools and techniques to ensure effective audits of the FEHBP; 

—Increase the number of health carrier information systems audits; and 

—Provide pre-award contract audit support. 

The Office of the Inspector General recognizes that oversight of the retirement 

and health and life insurance trust funds administered by OPM is, and will remain, 

its most significant challenge. These trust funds are among the largest held by the 

United States Government. Their assets totaled $650.0 billion in fiscal year 2003, 

their revenue was $78.2 billion, and their annual program and operating expenses 

were $164.1 billion. The amounts of their balances are material to the integrity of 

the government’s financial position. I continue to allocate the vast majority of the 

Office of the Inspector General’s efforts and resources to trust fund oversight, and 

we remain fully committed to trust fund activities. 

OPM makes outlays from the retirement trust funds in the form of payments to 

millions of annuity recipients. The health insurance trust fund provides payments 

to approximately 260 health insurance plans nationwide. In turn, the health insurance carriers pay millions of claims for services filed by their enrollees and health 

care providers. We have shown through our investigations and audits that such 

health insurance payments may be at risk through improper, inaccurate or fraudulent claims. 

We are obligated to Federal employees and annuitants to protect the integrity of 

their earned benefits. Our audit and criminal investigative work reduces losses due 

to fraud and otherwise improper payments and recovers misspent funds whenever 
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possible. We have a special obligation to the Federal agencies and the American taxpayers who provide the majority of the funding. 

The Office of the Inspector General has achieved an impressive record of cost effectiveness. Audits and criminal investigations of the OPM administered trust fund 

programs have resulted in significant financial recoveries to the trust funds and 

commitments by program management to recover additional amounts. Since fiscal 

year 1992, these recoveries and commitments have exceeded $1 billion which is approximately $10 of positive financial impact for each direct program dollar spent. 

In addition, we believe that Office of the Inspector General audits and criminal investigations provide a significant deterrent against future instances of fraud, waste, 

and abuse. 

The Office of the Inspector General’s fiscal year 2005 request includes additional resources totaling $2.25 million. Of this amount, $0.6 million will be used to increase criminal investigative oversight of the Federal Employees Health Benefits 

Program and the Civil Service Retirement/Federal Employees’ Retirement programs. 

These additional criminal investigative resources will be dedicated to speed the 

handling of our current inventory of criminal investigative cases and also increase 

our ability to handle the growing number of referrals we have been receiving because of past success. As a result of this additional oversight, we expect to increase 

the number of arrests, indictments and convictions by approximately 60 percent, as 

well as increase financial recoveries by $5 million for the trust funds from criminal 

investigations. We are particularly concerned with the extent to which health care 

fraud puts the health and safety of current Federal employees, annuitants, their 

survivors, and eligible family members at risk. An additional $0.7 million will be used to conduct audits of pharmacy benefit managers (PBMs). It is estimated that $6 billion will be paid during 2004 in prescription drug premiums by the Office of Personnel Management and Federal employees. This represents approximately 26 percent of total premiums paid for health 

benefits coverage for Federal employees and annuitants. The premiums paid for prescription drug coverage have risen exponentially over the last 10 years. However, 

Federal prescription drug benefits have never been audited because the FEHB Program historically has defined health care providers and suppliers as other than Federal subcontractors. Since health care providers and suppliers, including PBMs were 

not subcontractors, they were not subject to our audits. In light of increasing expenditures on prescriptions and allegations against PBMs, the FEHB Program has 

amended its carrier contracts to define PBMs as Federal subcontractors subject to 

our audits. 

By performing these audits, we will help the FEHBP recover inappropriate costs 

charged to it in previous years, negotiate more favorable contracts, and positively 

affect the future costs and benefits provided to program enrollees. Ultimately, these 

audits will reduce health care costs while improving the quality of health care for 

FEHBP enrollees. 

An additional $0.5 million will be used to expand the scope of audits for the largest community-rated health maintenance organization carriers participating in the 

FEHBP. During fiscal year 2002, $4.9 billion of FEHBP premiums were paid to community-rated carriers. Of this amount, $3.4 billion was paid to 25 carriers most of 

whom use some sort of experience-based rating to set premiums. The additional resources will enable us to expand the audit testing to include reviews of this information to identify overpayments charged to the FEHB Program which will result in 

increased financial recoveries to the Program totaling approximately $5 million. 

An additional $0.3 million will be used to increase the efforts of our office’s information systems audit program. The purpose of this program is twofold: (1) to perform information systems audits of Office of Personnel Management systems, including computer security, and (2) to develop computer-assisted audit tools and techniques (CAAT) such as computer claims analysis applications that our auditors use 

while conducting carrier audits. These new computer-related resources will be used 

primarily to increase the number of information systems audits we conduct on providers participating in the FEHBP. 

Also, we will further our development of a data warehouse of health benefit 

claims. A data warehouse offers the best opportunity for detecting erroneous health 

benefit payment transactions by medical providers, insurance carriers and subscribers by accumulating all benefit claims for all fee-for-service insurance carriers 

in a single data repository. This effort will enhance our current claims reviews by 

enabling the auditors to target certain types of potential claim payment errors on 

a program-wide rather than on a plan-by-plan basis. This will provide a significant 

improvement in our audit efficiency and effectiveness by offering us the opportunity 

to address significant issues one time only, instead of multiple times per year and 

to recover overcharges to the program when appropriate. 
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The data warehouse will provide information enabling our criminal investigative 

staff to react quickly to criminal investigative leads. For example, the OIG investigators will be able to determine the potential program risks associated with an 

identified provider or subscriber fraud allegation, and take appropriate action in a 

matter of hours instead of the days or weeks currently required. 

The remaining $0.1 million increase will be used to obtain technical expertise in 

the field of pre-award contract auditing. We will perform audits of selected bid proposals before OPM enters into large contracts with vendors. 

I would also like to bring to your attention the significant progress we have made 

in implementing Public Law 105–266, the Federal Employees Health Care Protection Act of 1998. Final regulations necessary to implement the financial sanctions 

authorities provided in this legislation were published in the Federal Register in 

March 2004. These financial sanctions, in the form of civil monetary penalties and 

monetary assessments, provide OPM the ability to recover, through administrative 

action, FEHBP funds lost to provider misconduct. In addition, we believe they will 

serve as a deterrent against FEHBP program violations. 

Also, OPM is now using new suspension and debarment regulations that went 

into effect during fiscal year 2003, to process actions. To date over 3,400 debarments 

under the new authorities have been issued. These new authorities are more efficient to administer and are designed specifically to address health care provider integrity concerns within the FEHBP. They have largely supplanted the previous regulations which, although we have used them to issue over 24,000 debarments and 

suspensions since 1993, are relatively inefficient to operate and, since they were dependent on Medicare or other agency debarments, were not tailored directly to the 

health, safety, and integrity issues that are most significant in the FEHBP. 

Thank you for this opportunity to present my resource request for fiscal year 

2005. 

GENERAL SERVICES ADMINISTRATION 

PUBLIC BUILDINGS SERVICE

PREPARED STATEMENT OF F. JOSEPH MORAVEC, COMMISSIONER

As Commissioner of the Public Buildings Service of the U.S. General Services Administration, I am pleased to present a statement for the record regarding our fiscal 

year 2005 budget request. 

There are three primary programs within the Federal Buildings Fund (FBF)—

New Construction, Leasing, and Asset Management. 

NEW CONSTRUCTION

We construct new buildings when our agency customers have a need for specialized space. The majority of our newly constructed buildings are courthouses, border 

stations, laboratories and highly specialized facilities like the U.S. Mission to the 

United Nations and the National Oceanic and Atmospheric Administration, (NOAA) 

Weather Satellite control center. The courthouse construction program has a fewer 

number of projects this year due to the large investment required to construct the 

Los Angeles, CA Courthouse. This project is the No. 1 priority on the Judiciary’s 

5-Year Plan, which reflects priorities approved by the Judicial Conference. 

As part of our performance-based budget, we have committed to completing 85 

percent of our new construction projects on schedule, and within 1 percent of the 

original appropriation by fiscal year 2005. PBS is undertaking many initiatives to 

keep projects on schedule and within budget. Project status is being closely monitored throughout design and construction to alert us to any emerging issues in a 

timely manner. For projects over $25 million, evaluations are scheduled at 15 percent, 60 percent and 100 percent of the design process. In addition, a new performance measurement tool has been developed and implemented. This tool allows comparison of a project’s construction schedule and outlays to standards and reports 

variances for both measures. 

LEASING

GSA has a total leased inventory of over 160 million square feet located in 6,200 

buildings across the United States and its territories. Our leasing program is an important tool for managing our portfolio because when clients’ space requirements 

cannot be met with available Federal space, we lease space from the private sector. 

This program area has been undergoing significant expansion due to the growth of 
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Defense, law enforcement, and security-related agencies. The decision to lease space 

is part of a coherent overall local Portfolio Strategy. Our strategies to keep leasing 

costs at or below market levels include comparing lease offers to comparable industry benchmarks, using market surveys to comparison shop for best prices, using 

published market sources to gain a better understanding of area markets and 

partnering with the private sector for brokerage services. We are very proud that 

our vacant space within our leased inventory is 1.4 percent. The top priority within 

the Leasing Program is implementing the National Broker Contract. Analysis has 

indicated that ‘‘no cost’’ contracts and limited fee-based broker contracts will help 

meet future capacity needs, lower leasing costs and provide a higher level of customer service and satisfaction. GSA has taken the first steps toward implementing 

this important initiative. 

ASSET MANAGEMENT

Repairs and Alterations 

Our inventory of owned buildings contains more than 100 million square feet of 

space where the design and physical condition of the space make it very difficult 

to meet modern day needs. This space typically has inefficient energy systems, lacks 

the flexibility to readily provide state-of-the-art information technology features to 

occupants and—for those buildings constructed during the 1960’s and 1970’s—have 

exterior materials which have outlived their useful lives. To address many of these 

issues we have instituted a portfolio restructuring and reinvestment strategy that 

uses private sector techniques to tier our owned properties, remediate those that 

can still cost-effectively contribute to the overall financial strength of the FBF, and 

reshape other parts of the portfolio to include disposal of some properties. GSA 

measures the percentage of government-owned assets with a Return on Equity 

greater than 6 percent to gauge progress in this area. For each of the past several 

years, we have directed nearly $1 billion toward the reinvestment in the modernization of our inventory, with on-time, on-budget completion a program priority. Within 

government owned space, the vacancy rate is 8.3 percent with 35 percent committed 

to tenants and 25 percent currently under construction or alteration. That makes 

the amount of vacant available space in the owned inventory 5.0 percent. 

Operations 

The most critical initiative affecting the Asset Management program is the 

Human Capital Strategy. The Human Capital Strategy/Workforce Transformation 

project is primarily driven by the following factors: 

—An aging workforce and previous inability to replenish talent lost through attrition; 

—Customer demands for more complete real estate services; and 

—Skills needed to focus PBS business priorities on customer relationships. 

PBS is currently engaged in implementing a comprehensive Human Capital Strategy that will guide the recruiting, training, management and deployment of our 

most important asset in the years ahead. 

For GSA to meet our customers’ expectations and remain cost competitive with 

the private sector, we must maintain below-market operating costs and reduce energy consumption, while simultaneously maintaining a high level of customer satisfaction. Our strategy is to leverage buying power through better planning, using national tools like the Federal Supply Schedule, and holding contractors accountable 

for performance. We must leverage our workforce via user-friendly contracting vehicles, multi-regional operations/maintenance and energy contracts, electronic data 

systems, contractual data sharing, workload visibility, and national vendor alliance 

management and acquisition. Because many operational services are readily available from the private sector, and to obtain the best possible value for the taxpayer, 

we are subjecting many of the activities we currently perform with in-house staff 

to the rigorous analysis required by the A–76 process. 

I am willing to answer any questions you or other members of the subcommittee 

may have on the President’s fiscal year 2005 budget request for the General Services Administration. 

GENERAL SERVICES ADMINISTRATION 

PREPARED STATEMENT OF STEPHEN A. PERRY, ADMINISTRATOR

Mr. Chairman and members of the committee, the General Services Administration (GSA) budget request for fiscal year 2005 reflects our strong commitment to fulfilling our mission, which is: ‘‘to help Federal agencies better serve the public by 
502

offering, at best value, superior workplaces, expert solutions, acquisition services 

and management policies. All areas of GSA, including the Public Buildings Service, 

the Federal Technology Service, the Federal Supply Service, our Office of Governmentwide Policy and our Office of Citizen Services are working together to efficiently and effectively meet the requirements of our Federal agency customers and 

the public. 

Americans demand that the Federal Government show results. Accordingly, President Bush has challenged GSA and all Federal agencies to improve performance 

through the use of good management practices as outlined in the President’s Management Agenda. In striving to achieve improved performance results, Federal agencies often rely upon GSA to provide the property management and acquisition services they need for successful operation. Additionally, each Federal worker relies 

upon GSA’s assistance in creating a productive work environment by providing the 

appropriate facilities, equipment, supplies and services they need. GSA is committed 

to achieving our critically important mission in an efficient and effective manner 

that yields best value for the American taxpayer. 

In the last few years, GSA has strengthened its Performance Management Process to document customer-focused goals, action plans and performance measures to 

enhance our achievement of high performance results and accountability. Our fiscal 

year 2005 budget request will provide the resources needed to achieve these high 

priority goals in support of Federal agencies, including our support of the U.S. Military, Homeland Security, the Judiciary and other law enforcement and security related agencies. 

As you know, GSA offers its core expertise in acquisition services to Federal agencies on a ‘‘non-mandatory’’ basis. Therefore, agencies can decide to devote their own 

resources directly to the acquisition process or they can use GSA to provide this 

service. Where GSA provides the most efficient and effective approach, agencies are 

increasingly deciding to use GSA and thereby reducing the overall cost to the government. Further, this enables the customer agency’s personnel to avoid duplication 

of effort and focus on their core missions. GSA charges fees to cover its costs and 

most of GSA’s resources come from these customer payments. In fact, only a relatively small amount of GSA resources, close to 1 percent of funding, is from direct 

appropriations. 

FISCAL YEAR 2005 BUDGET REQUEST

The total GSA budget for fiscal year 2005 budget is $24.3 billion. This is a 3.0 

percent increase over fiscal year 2004, representing increased business in revolving 

funds (i.e., the General Supply Fund and the Information Technology Fund). Approximately 1 percent, or $218 million, of this amount is for funding GSA’s appropriated activities. 

The volume of services that GSA provides to other Federal agencies has increased 

each year because of our successful efforts to make GSA a more timely and costeffective source for property management and acquisition services. At the same 

time, we have made process improvements and significantly streamlined our organization. Our employment level of 12,508 for fiscal year 2005 is 26 percent below the 

fiscal year 1995 levels. Lower employment levels mean that only 5.0 percent, or $1.2 

billon, of our budget is expended for salaries and benefits and that 95 percent of 

GSA’s funding is spent directly with private sector firms for goods and services procured on behalf of Federal agencies. 

For fiscal year 2005, although our overall net request for budget authority is down $225 million from fiscal year 2004, given the increased income level there is a robust construction and repair and alteration program. In addition, our request also 

funds modest spending increases to support our E-Government component of the 

President’s Management Agenda. The fiscal year 2005 budget does not include a request for an appropriation to the Federal Buildings Fund (FBF). The FBF New 

Obligational Authority request is funded entirely from rent revenue and other income to the Fund. 

Public Buildings Service 

GSA’s Public Buildings Service (PBS) has reinvigorated the process for carrying 

out its responsibility to maximize the value of GSA’s portfolio of government-owned 

buildings. The government-owned facilities under GSA’s stewardship represent a 

real estate portfolio with a replacement value of approximately $34.7 billion. For fiscal year 2005, we are requesting $7.2 billion in New Obligational Authority (NOA) 

to spend available resources in the Federal Buildings Fund. Of this amount, $980 

million is for our Repairs and Alterations program. 

One of GSA’s biggest financial challenges is funding the large backlog of deferred 

maintenance and repair work at its government-owned facilities. To address this 
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challenge, we have taken steps to transform our owned portfolio into one comprised 

of well-maintained, modernized, functional assets with positive cash flows. We have 

determined that in order to better allocate our funds for capital investment, we 

must redeploy our non-performing assets so that those properties that remain in our 

portfolio will provide appropriate workplaces for Federal workers. 

PBS has begun to implement the policy of Executive Order 13327 on Federal Real 

Property Asset Management. GSA already ‘‘promotes the efficient and economical 

use of America’s real property assets.’’ We use asset management principles to allocate the limited resources of the Federal Buildings Fund to address the backlog of 

Repairs and Alterations projects. These asset management principles were applied 

to develop our $980 million Repairs and Alterations program for fiscal year 2005. 

The program includes: 

—$394 million for basic (non-prospectus) Repairs and Alterations 

—$473 million for prospectus Repairs and Alterations 

—$50 million for design 

—$13 million for chlorofluorocarbons program 

—$30 million for energy conservation program 

—$20 million for glass fragmentation retention program 

There is $650 million for Construction and Acquisition of Facilities in GSA’s fiscal 

year 2005 budget request. It includes the following projects: 

—$381 million for construction for U.S. Courthouses in Los Angeles, CA and El 

Paso, TX; and design of a U.S. Courthouse in San Diego, CA 

—$89 million for FDA Consolidation in Montgomery County, MD 

—$14 million for FBI Facility in Los Angeles, CA 

—$2 million for Southeast Federal Center Site Remediation, Washington, DC 

—$53 million to purchase 10 West Jackson Blvd., Chicago, IL 

—$91 million for 12 Border Stations 

—$10 million for non-prospectus construction and acquisition 

—$10 million for repayment to the Judgment Fund 

Government-owned space represents approximately half of our inventory, however, today we are continuing to secure leased space to meet general-purpose office 

and special space needs. For fiscal year 2005 we project adding 2.6 million rentable 

square feet of leased space to our inventory. Under the Federal Buildings Fund operating programs, the $3.7 billion budget for Rental of Space is based on projections 

of known requirements such as (1) leases already in the inventory and the scheduled cost increases associated with these leases and (2) identified expansion and 

cancellation projects. 

The $1.7 billion budget request for Building Operations funds essential building 

services provided by PBS for facilities occupied by our Federal Government customers, including cleaning, maintenance, minor repairs, utilities, space management 

and other building services. 

The following performance measures illustrate some of our successes. 

—Costs for leased space are 7.4 percent below the industry average. 

—Operating costs are 14.8 percent below industry benchmarks. 

—Energy consumption has been reduced by 19 percent from the fiscal year 1985 

baseline. PBS plans to reduce energy consumption by an additional 11 percent 

by the end of fiscal year 2005. 

—PBS has improved the percentage of Repairs and Alterations projects completed 

on time from 75 percent in fiscal year 2001 to 78 percent in fiscal year 2003. 

Electronic Government 

Expanding the scope and level of the Federal electronic government (E-Gov) program is a major focus of the President’s Management Agenda. Through E-Gov initiatives GSA is transforming the way information is disseminated to the American 

people. By leveraging Internet technologies, GSA is building a more citizen-centric 

and results-oriented Federal Government. In support of E-Gov initiatives, our budget request includes $23.4 million in Operating Appropriations for select E-Gov initiatives led by GSA, $5 million for the E-Gov Fund, and $40 million in the General 

Supply Fund for government-wide initiatives. 

To provide much needed resources for E-Gov projects, GSA is proposing a new 

general provision that would amend existing law to permit the Administrator, after 

consulting with the Office of Management and Budget, to retain surplus funds generated by the operation of the General Supply Fund in an amount not to exceed $40 

million in any given fiscal year and use those funds for E-Gov initiatives. These 

funds would be used for government-wide E-Gov projects for purposes authorized 

under the E-Gov Act of 2002 (Section 3604 of Title 44). The fiscal year 2005 budget 

anticipates $40 million in funding from the GSA General Supply Fund. 
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GSA realizes that common solutions shared by agencies are absolutely critical to the effective and secure operations of the government. The $23.4 million requested 

in the fiscal year 2005 budget will be used to provide standardized Federal approaches to electronic government. GSA will provide a leadership role to customer 

agencies by integrating key E-Gov initiatives into the daily business of government. 

For example: 

—USA Services, one of the President’s E-Gov initiatives, is part of GSA’s Office 

of Citizen Services and Communications. USA Services seeks to make government more citizen-centric by providing a front door where citizens can get answers to their questions about the Federal Government by phone, on line, by 

e-mail, or by print publications. At the same time, USA Services seeks to improve citizen customer service government-wide. We are requesting $1.5 million 

to establish government-wide standards in customer service, performance 

benchmarking, and best practices for Federal contact centers responding to citizen inquiries. 

—A component of USA Services is the internet site FirstGov.gov, the official web portal of the U.S. Government. We are requesting $17.3 million, an increase of 

$3.7 million, to maintain and enhance FirstGov.gov by further leveraging Internet technology and by providing a highly secure environment. And by sharing 

the FirstGov technology and infrastructure, we are helping the government reduce costs. In fiscal year 2003, there were 580 Federal web sites using 

FirstGov.gov search services as their primary search engine mechanism, equating to a savings of $21 million from avoiding the need to purchase search engine 

software for each individual web site. 

—GSA is playing a key role in setting standards for identity management and 

electronic authentication. In order for the Federal e-Government initiatives to 

be successful, the Office of Governmentwide Policy is working towards establishing a cross-agency governance structure and process for e-Authentication 

and identity management in order to unify Government systems. GSA is requesting $4.6 million to support this effort, an increase of $0.57 million. 

Another key E-Gov initiative led by GSA is e-Travel. In 2003, the Office of Governmentwide Policy (OGP) and our partner agencies established a standard booking 

engine as well as a consistent travel and voucher system for the Federal Government. As the e-Travel service becomes operational, management of the e-Travel contracts will transfer from the Office of Governmentwide Policy (OGP) to the Federal 

Supply Service (FSS) in fiscal year 2005. FSS will integrate e-Travel with GSA’s 

other travel service offerings. GSA will provide an additional $9.9 million to this EGov project in fiscal year 2005 through the General Supply Fund. 

We believe these and other E-Gov initiatives are critical to becoming a citizencentric government. These projects provide government-wide solutions to meet common needs across agencies, thus eliminating redundancies and duplicate spending. 

APPROPRIATION REQUEST

While only about 1 percent of the total proposed budget is funded through direct 

appropriations, our Operating activities are a vitally important part of GSA’s total 

program. These funds support our Office of Governmentwide Policy function, the Office of Citizen Services and Communications, the E-Gov Fund, the Office of Inspector General, Former Presidents, the Presidential Transition, and various other operating programs. The $218 million requested is $15 million above fiscal year 2004 

levels. Approximately half of this increase, $7.7 million, is for Presidential transition. 

Our request is shown by account in the following table:

THE FISCAL YEAR 2005 BUDGET IN SUMMARY 

[In thousands of dollars] 

Fiscal Year 2003 

Actual 

Fiscal Year 2004 

Current 

Fiscal Year 2005 

Request 

TOTAL OBLIGATIONS

Operating Accounts (Appropriations) ......................................................... $853,133 $206,550 $218,682 

Federal Buildings Fund Direct (Including Appropriations) ........................ 6,546,606 7,100,494 7,313,195 

Reimbursable Programs ............................................................................. 1,245,899 1,014,798 1,155,694 

Real Property Relocation ............................................................................ ........................ 6,050 6,000

General Supply Fund .................................................................................. 4,066,351 4,896,773 5,130,708 

Information Technology Fund ..................................................................... 10,034,941 9,970,687 10,071,313 

Working Capital Fund ................................................................................ 316,914 347,877 357,698 
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THE FISCAL YEAR 2005 BUDGET IN SUMMARY—Continued

[In thousands of dollars] 

Fiscal Year 2003 

Actual 

Fiscal Year 2004 

Current 

Fiscal Year 2005 

Request 

Federal Citizen Information Center Fund (Reimb.) ................................... 2,650 3,901 4,353 

Permanent Appropriations ......................................................................... 15,928 29,493 34,926

Subtotal ........................................................................................ 23,082,422 23,576,623 24,292,569

REQUIRING APPROPRIATIONS ACTION

Operating Appropriations: 

Office of Governmentwide Policy ...................................................... 55,569 59,669 62,100 

Operating Expenses, GSA .................................................................. 81,089 83,971 82,175 

Electronic Government Fund ............................................................. 4,968 2,982 5,000 

Election Reform Payments ................................................................ 650,000 0 0 

Election Reform Reimbursements ..................................................... 14,903 0 0 

Office of Inspector General ............................................................... 37,270 38,938 42,351 

Federal Citizen Information Center ................................................... 13,356 13,917 14,907 

Presidential Transition ...................................................................... 0 0 7,700 

Former Presidents ............................................................................. 3,156 3,373 3,449

Subtotal Budget Authority/Appropriation ..................................... 860,311 202,850 217,682

Federal Buildings Fund New Obligational Authority: 

Construction & Acquisition of Facilities ........................................... 734,868 745,314 650,223 

Repairs and Alterations .................................................................... 985,009 1,002,997 980,222 

Installment Acquisition Payments .................................................... 178,897 169,677 161,442 

Rental of Space ................................................................................ 3,381,265 3,551,032 3,672,315 

Building Operations .......................................................................... 1,546,514 1,608,064 1,709,522

Subtotal FBF New Obligational Authority ..................................... 6,826,553 7,077,084 7,173,724

FBF Net Budget Authority ................................................................. 463,347 254,194 15,447

FBF Appropriations ............................................................................ 375,711 459,669 0

TOTAL, Transportation/Treasury Appropriation Action (BA/NOA) .. 7,673,508 7,266,017 7,376,499

Budget Authority ............................................................................... 1,310,302 443,127 218,222 

Appropriations ................................................................................... 1,222,666 648,602 202,775

Total, VA/HUD Appropriations Action (BA): Federal Citizen Information 

Center (Direct) ....................................................................................... 13,356 13,917 14,907

Mr. Chairman, this concludes my formal statement, and I look forward to continuing to discuss our fiscal year 2005 budget request with you, members of the 

committee and your staff. 

DEPARTMENT OF TRANSPORTATION 

FEDERAL MOTOR CARRIER SAFETY ADMINISTRATION

PREPARED STATEMENT OF ANNETTE M. SANDBERG, ADMINISTRATOR

OVERVIEW: SAFETY, SECURITY, PRODUCTIVITY

People depend on motor carriers for the safe, reliable, and efficient movement of 

the goods they use everyday. The trucking industry comprises almost 650,000 motor 

carriers operating in interstate commerce and some 7.9 million large trucks. Trucks 

account for most of the freight movement in our Nation’s transportation system. Approximately 80 percent (by value) of all domestic commodity movements are carried 

by truck. The trucking industry also employs approximately 9.9 million people in 

jobs related to trucking activity, including several million drivers. People rely on 

motor coaches for safe and secure transportation. Commercial motor coaches traveled 2.4 billion miles in 2001, carrying more than 500 million passengers. Clearly, 
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both the trucking and motor coach industries contribute to competitiveness and a 

robust economy. 

Mobility, as crucial as it is to our economic well-being, presents significant hazards in terms of safety on our highways. Trucks and buses share roadways with 

passenger vehicles and pedestrians. Over the last several years, approximately 

5,000 people have died annually in crashes involving a truck. This is unacceptable. 

Truck transportation of hazardous materials presents even greater potential safety 

consequences. And, there is increasing recognition and appreciation that there can 

be no safety without security. In most cases, there is a close connection between 

safety and security, and strategies designed to mitigate one often impact both. 

FMCSA has defined five strategic goals linking to Department of Transportation 

and national objectives, illustrated in Figure 1 below. Among these, safety is 

FMCSA’s primary mission. At the same time, the agency looks to employ a coordinated strategy that balances the inter-relationships between these missions and 

leverages solutions that achieve the greatest overall public good.

The agency’s $455 million request for fiscal year 2005 will fund programs and activities supporting all five agency strategic goals. Figure 2, below, illustrates the allocation of funds by agency strategic goal in our fiscal year 2005 budget request.
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CMV SAFETY

Safety is the capstone of this agency’s strategic hierarchy. The FMCSA safety vision is to develop and promote, in coordination with other Departmental modes, 

data-driven, analysis-based, and innovative programs to achieve continuous safety 

improvements in the Nation’s highway system, intermodal connections, and motor 

carrier operations. Saving lives and reducing crashes involving trucks and motor 

coaches on our highways is the agency’s primary mission, and our fiscal year 2005 

budget request allocates approximately 86 percent of the agency’s resources to 10 

performance segments in support of this strategic goal. Figures for 2002 show a reduction in truck-related fatalities of 4.2 percent from 2001, despite a projected increase in truck vehicle miles traveled (TVMT). This decrease extends to five consecutive years (1998–2002) the trend of improved commercial motor vehicle safety. 

We may be beginning to realize the results of agency regulation and safety interventions undertaken since the establishment of the agency in 1999, enabling us to pursue with greater confidence our coordinated safety strategy. 

With the encouragement of Secretary Mineta, FHWA Administrator Peters, 

NHTSA Administrator Runge, and I are coming together for safety. Improving highway safety is an administration and national goal. All highway fatalities are unacceptable. If we are to stem the tide of this terrible loss of life on our Nation’s highways we all must play a role, combine our knowledge and expertise, and coordinate 

our program delivery. My colleagues and I share the belief that our programs are 

complementary rather than competing. So, FMCSA will work together with FHWA 

and NHTSA to pool and focus our effort, energy, and resources where they will have 

the greatest impact on safety. Our new CMV safety goal, harmonized with the DOT 

Highway Safety performance goal and FHWA and NHTSA measures, evinces our 

intermodal approach. Encouragingly, FMCSA achieved its fatality rate performance 

target for 2002. 

Enforcement is FMCSA’s primary safety mitigation strategy and the agency’s core 

competency. Appropriately, it is the focus of the greatest share of program resources. FMCSA conducts enforcement operations and provides grants to support 

State enforcement efforts. To the extent possible, we look to increasingly align Federal and State enforcement operations in mutually-reinforcing ways. The effectiveness of enforcement interventions in reducing crashes, fatalities, and injuries is 

borne out by findings of the CR Impact Assessment Model and the Roadside Inspection and Traffic Enforcement Intervention Model. We propose to expand the toolbox 

of enforcement techniques, close loopholes permitting unsafe practices, and improve 

our penalty structure. We look to implement a balanced enforcement model—an approach that balances and capitalizes on prevention (compliance reviews, safety audits), deterrence (inspections, traffic enforcement), and remediation (sanctions and 

penalties) interventions. New entrant safety audits will broaden our enforcement regime. 

Information is a high near-term priority. As a data-driven organization, information is the essential backbone for all major FMCSA operational and support programs and activities. To ensure our maximum operational effectiveness and efficiency, we need to base our decisions on the highest quality data possible and sound 

statistical analysis of that data. A highlight for fiscal year 2005 will be issuing the 

results of the Large Truck Crash Causation Study. Information initiatives are addressed in the respective performance segments and the cross-cutting Information 

Management proposal for fiscal year 2005 is attached as an Appendix. 

States play essential partnership roles in highway safety, providing critical safety 

data and extending regulation and enforcement reach. The Motor Carrier Safety Assistance Program, which provides (MCSAP) grants to State highway safety authorities, is the primary means we have of moving our goal of safety advocacy from focus 

to action. 

HM SAFETY

FMCSA authority extends to enforcing compliance with the Federal Hazardous 

Materials Regulations (FHMRs) to provide adequate protection against the risks to 

life and property inherent in the highway transportation of hazardous materials in 

commerce. The agency’s goal is to reduce serious reportable hazardous materials incidents involving trucks. This links to and supports the DOT hazardous materials 

performance goal. Approximately 5 percent of the agency’s fiscal year 2005 budget 

request is attributed to 3 performance segments contributing to achievement of this 

goal. A priority initiative is the institution of a grant program to extend safety inspection by States of HM carriers crossing the borders. 
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HM SECURITY

Continued emphasis on commercial carrier, driver, vehicle, and cargo security, 

and particularly hazardous materials operations is required, supporting the DOT 

Security strategic goal and administration priorities. Following the successful transfer of the Transportation Security Administration (TSA) to the Department of 

Homeland Security, FMCSA will continue to work in concert with TSA and other 

agencies to establish the protocols ensuring the security of commercial motor vehicle 

transportation. To this end, FMCSA has designated approximately 2 percent of the 

fiscal year 2005 budget request to two performance segments aimed at heightening 

the awareness of hazardous materials carriers to security threats. 

CMV PRODUCTIVITY

The efficient movement of goods is a critical component of a healthy economy. 

FMCSA’s authority extends to ensuring compliance of household goods carriers with 

the Federal Motor Carrier Commercial Regulations (FMCCRs). Judging by complaints received on our hotline, and more recently on the new website we have established for this purpose, closer scrutiny of and attention to the responsibilities of 

carriers and the rights of consumers is needed. Reducing the cycle time for response 

to complaints is a priority. Our fiscal year 2005 budget request includes approximately 1 percent for two performance segments supporting CMV productivity and 

the integrity of goods movement. Our aim is to provide informative and timely responses to all household goods complaints and HHG Congressional inquiries. We 

will track our progress toward accomplishment of this goal by the following two new 

performance metrics: percent of HHG consumer complaints receiving an initial response within 72 hours of the complaint, and percent of HHG Congressional inquiries receiving an initial response within the DOT time limit. 

ORGANIZATIONAL EXCELLENCE

At the core of organizational excellence are our strategies for developing, acquiring, and sustaining the components of capability to perform our safety, security, and 

productivity missions: people, information, and financial resources. The President’s 

Management Agenda (PMA) frames our agency efforts to ensure we put the right 

capability in the right place, at the right time, and at the right cost. Our five Organizational Excellence performance segments align with the PMA initiatives. We aim 

to sharpen our resource effectiveness and have allocated 6 percent of our fiscal year 

2005 budget request in support of these performance-accelerating strategies. 

In addition to the PMA, we are increasingly integrating findings and recommendations of the Government Accounting Office (GAO), DOT Office of the Inspector General (OIG), and the National Transportation Safety Board (NTSB) as integral components of our agency strategy and operational guidance. Our activities 

supporting these recommendations are addressed in our performance budget narrative. As a result of these efforts, we are pleased to have closed numerous recommendations in fiscal year 2002. 

Strategic Management of Human Capital and Competitive Sourcing.—We will 

soon complete our agency-wide competency survey, and the priority objective will be 

the completion of the agency’s Human Capital Plan. The Human Capital Plan will 

provide baseline information about the competencies of our workforce relative to our 

mission and performance targets; projections of potential competency gaps; and 

strategies for preventing those gaps. Competitive Sourcing is one approach in a coordinated strategy for managing human capital effectively and efficiently, along 

with hiring, learning and development, the use of personnel flexibilities, restructuring and reorganization of work, and contracting new work to result in best-value 

service to our customers. 

Budget and Performance Integration and Financial and Procurement Performance.—Our agency’s initial performance budget effort 1 year ago provided the framework for a more performance-based approach to formulation of this year’s request. 

Agency senior leadership met and reviewed cross-cutting performance implications 

in the allocation of program resources in this performance budget request for fiscal 

year 2005. To advance our resource-to-results linkage, we have integrated our grant 

programs into our program logic, the better to track and discern the contribution 

of complementary Federal and State program efforts. We are also piloting FMCSA 

Division Administrator annual State plans to further increase the linkage between 

Federal and State plans, and to strengthen alignment with national goals. Our 

alignment and attribution of resources by performance segment also supports our 

advances in managerial cost accounting. 
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E-Government.—FMCSA is a data-driven and citizen-centered organization. The 

agency looks to increasingly capitalize on information and IT to streamline internal 

processes, and to increase public accessibility to programs and information. Our eGov initiatives include advances in e-grants, business compliance one-stop, e-rulemaking, and others. 

FMCSA ADMINISTRATOR’S IMPERATIVES

My priorities for fiscal year 2004–2005 include: 

—Full implementation of the New Entrant Program as mandated by MCSIA 

—Reauthorization of FMCSA safety programs 

—Improved safety data to inform targeting of enforcement operations 

—Reduction in the backlog of rulemakings 

—Improving the credibility and integrity of the CDL program 

—Improving cycle time for response to household goods complaints. 

BUREAU OF TRANSPORTATION STATISTICS

PREPARED STATEMENT OF RICHARD KOWALEWSKI, DEPUTY DIRECTOR

Mr. Chairman, Ranking Member Murray, members of the subcommittee, thank 

you for the opportunity to discuss the Bureau of Transportation Statistics’ fiscal 

year 2005 budget request. 

The Bureau of Transportation Statistics (BTS) proudly joins other agencies in our 

Federal statistical system to provide the unbiased data that drive planning, projections, and policies at the Federal, State, and local levels. Those decisions in turn 

determine the course of countless business and civic initiatives that support our 

prosperity, quality of life, and well-being as a Nation. In the transportation arena, 

BTS is committed to helping ensure the health and growth of efficient, safe, and 

environmentally sound infrastructure and operations across the various transportation modes. 

The availability and use of BTS data support each of Secretary Mineta’s Strategic 

Goals of safety, mobility, global connectivity, environmental stewardship, security, 

and organizational excellence. While our data are critical for decision making, they 

also provide an important, unbiased report card. The success of government programs cannot be simply proclaimed; it must be objectively measurable by the people 

those programs serve. Thus, BTS plays a critical role at both ends of the policymaking process: we fuel transportation decisions and help provide critical performance benchmarks. Operating under the strict guidelines that apply to any Federal 

statistical agency, and in line with congressional intent in creating BTS, we do our 

work objectively, free of bias toward any one mode of transportation. 

RECENT ACCOMPLISHMENTS

BTS has accomplished much in the past year and has set its sights on doing fewer 

things better in the budget year to come. Our fiscal year 2005 budget request of 

$32.2 million from the Highway Trust Fund reflects critical information needs and 

incorporates decisions we have made internally to further the work that supports 

our mandate. In addition, as authorized in the VISION 100 aviation legislation, we 

propose that $4.045 million in reimbursable funding from the Airport and Airway 

Trust Fund be used to cover direct costs of our air transportation statistics program, 

which produces our most-requested and closely watched data. 

BTS’s air transportation statistics program is relied upon for decisions with farreaching economic implications. Our data on passenger enplanements drive the Federal Aviation Administration’s (FAA) distribution of Airport Improvement Grants, 

and our data on flight delays and their causes help in FAA’s decisions about infrastructure and operational investments, as well as decisions by the airlines and the 

traveling public. We have worked with Alaskan carriers to improve the quality of 

the monthly traffic data that they report to BTS and which the U.S. Postal Service 

uses to decide which carriers are eligible to receive mail contracts for intra-Alaskan 

mail under the Rural Service Improvement Act. We provided airline financial and 

operating information for decisions on post-9/11 grants and loan guarantees to passenger and freight carriers. Our aviation data assist the Transportation Security 

Administration in decisions regarding the allocation and deployment of resources 

across the country, and support the Office of the Secretary in making decisions 

about service to underserved communities and on international routes. 

For more than 11 years, Congress also has turned to BTS for both in-depth and 

quick turn-around answers, briefings, and visual presentations of data. We have 
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analyzed the impact of railroad rationalization in the upper Great Plains, compared 

the costs of highway and rail construction, and assessed the impact of international 

trade on highway demands in our border States. We have prepared maps showing 

structurally deficient and functionally obsolete bridges in each State and congressional district so that members of Congress can be better informed in setting priorities on infrastructure needs. 

As the smallest of the Federal statistical agencies, BTS has always worked hard 

to maximize available resources, matching the right expertise to the job at hand and 

tuning our programs based on customers’ feedback. That feedback has helped us determine the most effective approach in doing fewer things better. 

In 1997, for example, we developed an innovative survey design that allowed us 

to cut the size of the Commodity Flow Survey in half, reducing its budgetary cost 

and burden on respondents, without compromising data quality. Between 2001 and 

2003 we replaced a 30-year-old patchwork mainframe computer system that had 

been running our aviation data programs and replaced it with a modern mid-tier 

computer platform to increase our efficiency and the data’s usability. Our work in 

helping to develop, validate, and verify performance measures for DOT contributed 

toward the high ranking of the Department’s fiscal year 2003 performance report 

by the Mercatus Center of George Mason University—DOT’s performance report 

tied for number one in the Federal Government. 

BTS is working to improve its operations through initiatives of the President’s 

Management Agenda, and to reorganize our lines of business to be simpler, more 

easily managed, and more results-oriented. As envisioned in the Administration’s 

Safe, Accountable, Flexible, and Efficient Transportation Equity Act (SAFETEA) 

legislation and our budget, BTS proposes to sharpen its focus around five core data 

programs and two cross-cutting research programs. The core data programs are 

freight, travel, transportation economics, air transportation, and geographic information systems. The cross-cutting programs assess overall transportation system 

performance and improved statistical methods to address transportation-specific 

problems. 

In the freight and travel areas, this past year saw the release by BTS of the full 

datasets from our two major survey activities, the National Household Travel Survey, collected in 2001–2002 with the Federal Highway Administration (FHWA), and 

the Commodity Flow Survey, collected in 2002 with the Census Bureau. Analysis 

of each of these datasets will play a critical role in driving Federal, State, and local 

transportation planning and investment for the next 5 to 10 years. 

BTS is especially pleased to have unveiled two new economic indices that for the 

first time provide a comprehensive picture of transportation activity, help us to analyze its economic impact, and provide better information on what passengers pay for 

airline service: 

—The monthly Transportation Services Index (TSI) measures outputs in the forhire movement of freight and people and is a new leading economic indicator, 

better clarifying our understanding of transportation’s relationship to the economy. 

—The quarterly Air Travel Price Index (ATPI) illustrates the rate of national and 

local market fluctuations in the price of air travel. The ATPI yields greater understanding of the cause and effect relationship between airline industry market decisions, external market factors, and the affordability of travel. 

These indices provide new insight into interrelationships and potential macro-economic impacts of changes in transportation activity. This, in turn, helps economists 

better anticipate turning points in our Nation’s economy. We are also working, consistent with the late Senator Moynihan’s original vision for BTS, on improving our 

measures of the productivity of the Nation’s transportation sector. 

In fiscal year 2004, BTS also released an innovative product called GeoFreight, 

an intermodal freight planning tool on CD–ROM that graphically displays the geographic relationship between freight movements and infrastructure. Developed jointly with FHWA, the tool was designed to aid the planning of State and local governments and augment their ability to anticipate demands on capacity. 

Our work on improved statistical methods has led to the adoption of a new method to protect the confidentiality of statistical data that responds to customer demands to make more data available while preventing the disclosure of confidential 

data. We also led the development of Information and Dissemination Quality Guidelines for the Department, as required by recent data quality legislation. 

We have also worked at increasing the accessibility of our data. Our Web-based 

data platform, TranStats, has won several awards as an exemplary e-government 

initiative, including the Industry Advisory Council/Federal CIO Council Excellence.Gov Award (Top 5 Winner), the Sun/Computerworld iForce Excellence Award 

for Business Intelligence, and the Computerworld Honors Program Award. Along 
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with our other web-based information services, we serve an estimated 3.7 million 

users per year, allowing users to analyze data on-line and access electronic copies 

of the documents of the National Transportation Library. 

CHALLENGES THAT REMAIN

While BTS has made good progress in many areas of our statistical programs, 

challenges remain that need to be addressed to improve BTS’s performance, such 

as BTS’s freight flow data for imports and exports, geolocation data on the Nation’s 

transportation network, and exposure data for general aviation operations. 

Recently, the Transportation Research Board has called upon BTS to fill gaps in 

our freight data program. The modest budget increase we have requested for fiscal 

year 2005, along with our refocusing of effort on core programs, will allow us to increase sample sixes on our key freight and travel data, improving the quality of 

data available to our users. 

BTS has much to accomplish at a time when our Nation has a new level of interest in and understanding of how the interconnectedness of our transportation system affects global competitiveness and national security. We need to develop a more 

timely and complete understanding of freight flows, as our economy moves increasingly to a just-in-time rhythm. We need a more comprehensive overview of our Nation’s mobility and connectivity by collecting data that link transit trips, passenger 

terminal information, highway usage and capacity, and levels of commercial service. 

We also need improved highway safety exposure data, allowing improved analysis 

of the area where most of our transportation deaths occur. Possession of these data 

would reveal areas of economic opportunity, help us set our course more precisely, 

and help us to better predict the potential transportation impacts of terrorist attacks. 

We look forward to working with the committee to meet the Nation’s needs for 

reliable, accurate transportation data, so that our policymaking can be well-informed and our transportation planning can make accurate assessments of the Nation’s transportation needs. We will continue to seek out innovative data collection 

strategies that provide better data quality at lower cost. 

RESEARCH AND SPECIAL PROGRAMS ADMINISTRATION

PREPARED STATEMENT OF SAMUEL G. BONASSO, DEPUTY ADMINISTRATOR

Chairman Shelby, Ranking Member Murray, and members of the committee, on 

behalf of the Research and Special Programs Administration (RSPA), thank you for 

the opportunity to address the important safety, environmental and other performance goals supported by the President’s fiscal year 2005 funding request for RSPA. 

With the active participation of our State, local, private sector and university partners, RSPA has made significant advances in meeting our performance goals, and 

we are looking forward to working with the members of this committee and with 

the Congress in continuing to reduce deaths, injuries, property damage and economic consequences resulting from hazardous materials, pipeline, and other transportation incidents. Working together, we need to develop and implement the programs and systems America needs to meet the important transportation safety challenges facing the Nation. 

Effective fulfillment of RSPA’s safety responsibilities is critical to both the transportation and economic needs of the Nation. Approximately 28 percent of America’s 

freight ton-miles involve transportation of hazardous materials, regulated by RSPA. 

The safe and secure movement of hazardous materials is fundamental to America’s 

economy and industry, delivering much of the petroleum products and raw materials that fuel American business. Hazardous materials are also fundamental to everyday personal needs—for example, chlorine treats our water, making it safe to 

drink; anhydrous ammonia fertilizes our fields, allowing America to feed our Nation 

and some of the world. The volume of hazardous materials regulated by RSPA is 

substantial: 

—The Office of Pipeline Safety regulates 2.3 million miles of pipeline that move 

63 percent of America’s consumed energy—they are literally the arteries of our 

way of life. On a ton-mile basis, pipelines carry 21 percent of the Nation’s 

freight. 

—The Office of Hazardous Materials Safety regulates over 800,000 daily shipments of hazardous materials—working with all modes of transportation on 

packaging and handling to help assure safe movement through America’s transportation system. Hazardous materials outside of pipelines account for 7 percent 

of the freight ton-miles transported annually in the United States. 
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—The Transportation Safety Institute conducts cutting-edge training in hazardous 

materials safety, as well as safety, security and environmental stewardship 

training in all modes of transportation for State and local first responders, public and private sector engineers, inspectors, and other employees. 

Equally important to the efficient operation of America’s transportation systems 

are RSPA’s emergency transportation and research activities. Through RSPA: 

—The Office of Emergency Transportation manages the DOT Crisis Management 

Center, a 24/7 operations center to track and respond to natural and humancaused transportation incidents; and coordinates continuity of operations and 

emergency transportation planning for all Department of Transportation’s 

(DOT) operating administrations and in direct coordination with all other Federal departments. 

—The Office of Innovation, Research and Education leads DOT’s involvement in 

the President’s Hydrogen Fuel Initiative, coordinating with all DOT administrations, the Department of Energy and other Federal agencies in conducting research and development and standards-setting activities to ensure the safety of 

hydrogen-fueled vehicles and the infrastructure to support them. 

—The Office of Innovation, Research and Education manages 26 University 

Transportation Centers that conduct research in all areas of transportation engineering and management, advancing the state of the practice and preparing 

students to be the transportation systems leaders of tomorrow. 

—The Volpe National Transportation Systems Center provides technical systems 

expertise to all DOT agencies and non-DOT clients in all areas of transportation 

systems, including safety, homeland and national security, mobility, environmental stewardship, systems engineering, navigation, operator performance, 

and economic analysis. 

Implicit in all of these regulatory, technical, research and training activities supporting safety is a significant concern for national and homeland security. Our overall focus on safety supports administration and Congressional goals for improving 

transportation security. All of RSPA’s offices work closely with the Department of 

Homeland Security to ensure that our program activities keep security as an important focus, an integral part of providing safe transportation systems. 

RSPA’s budget is performance-based, keyed to DOT’s six strategic goals, rather 

than to specific ‘‘budget line activities.’’ RSPA strives to deliver the results that Congress expects in all six DOT strategic areas: 

—Safety.—Enhancing public health and safety by working toward elimination of 

transportation-related deaths and injuries. 

—Mobility.—Advancing accessible, efficient intermodal transportation for the 

movement of people and goods. 

—Global Connectivity.—Facilitating a more efficient domestic and global transportation system that enables economic growth and development. 

—Environmental Stewardship.—Promoting transportation solutions that enhance 

communities and protect the natural and built environment. 

—Security.—Balancing homeland and national security transportation requirements with the mobility needs of the Nation for personal travel and commerce. 

—Organizational Excellence.—Advancing the Department’s ability to manage for 

results and achieve the goals of the President’s Management Agenda. 

The President’s total budget request for RSPA in fiscal year 2005 is $137.3 million, an increase of $11.7 million (9.0 percent) over the fiscal year 2004 enacted 

level. Seventy-five percent of the President’s fiscal year 2005 budget request for 

RSPA is dedicated towards achieving results supporting the DOT safety strategic 

goal. Another 16 percent supports the environmental stewardship strategic goal, reducing environmental damage from pipeline incidents, with the remaining 9 percent 

supporting the other goals. The additional resources requested will primarily support efforts to reduce hazardous materials incidents and to advance preparation for 

emergency transportation response. 

RSPA sets performance goals to implement the DOT strategic goals. Some of 

those goals, and the funding requested to achieve them, include: 

—Safety.—RSPA requests $103.3 million, an increase of $7.6 million, to meet our 

three critical safety performance goals: 

—Reduce deaths, injuries, property damage and economic consequences resulting from hazardous materials transportation incidents. 

—Reduce death, injuries, and property damage resulting from pipeline incidents. 

—Promote the safe transport of hydrogen fuels and fuel systems so that alternative fuel vehicles can be developed as a safe alternative to petroleum-fueled 

vehicles. 
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—Mobility/Security.—RSPA requests $5.7 million, an increase of $2.0 million, in 

order to prepare our Nation’s transportation system—in advance—to aid people 

and property harmed by natural and terrorist disasters. —Environmental Stewardship.—RSPA requests $22.5 million, an increase of $1.7 

million, to reduce the amount of oil or other hazardous liquids released from 

pipeline systems. —Organizational Excellence.—RSPA requests $5.9 million, an increase of $0.4 

million, in order to improve our operating efficiencies in all programmatic areas. 

RSPA is achieving results in all of our critical areas, and is committed to continuing improvements in transportation safety. For example: 

—The number of serious hazardous materials incidents in transportation has 

dropped by 18.5 percent since 2000. 

—RSPA’s Office of Pipeline Safety has addressed most of a 12-year backlog of outstanding Congressional mandates and recommendations from oversight agencies. 

—RSPA is ensuring that pipelines are tested and repaired according to higher integrity management standards, and RSPA is working with our Federal partners 

to expedite the repair permits. 

—Hazardous liquid pipeline incidents have decreased by 28 percent and the volume of oil spilled has been significantly reduced. 

—Third party excavation accidents have decreased by 59 percent over the past 10 

years, even while housing starts were on the rise, which brings construction 

risk near pipelines by encroachment on rights-of-way. 

—RSPA’s Transportation Capability Assessment for Readiness (TCAR) scores continue to improve annually. 

—The Transportation Safety Institute trains over 50,000 students annually, graduated its 650,000th student in 2003, and recently acquired university credit for 

various courses. 

—The University Transportation Centers continue to graduate over 1,500 students with advanced degrees annually. 

—RSPA’s Hazardous Materials Emergency Preparedness Grants program, which 

prepares communities to respond to hazardous materials incidents, received a 

‘‘moderately effective’’ score of 83 percent on a Program Assessment Rating Tool 

(PART) analysis conducted for the fiscal year 2005 budget cycle. We are working to remedy implement the recommendations resulting from the PART analysis. 

In conclusion, RSPA’s requested $11.7 million increase will be invested in improving our performance, further reducing death, injuries, property damage and economic consequences resulting from transportation incidents. 

Again, Mr. Chairman, thank you for the opportunity to testify before you today. 

I look forward to responding to any questions you may have. 

DEPARTMENT OF THE TREASURY 

FINANCIAL CRIMES ENFORCEMENT NETWORK

PREPARED STATEMENT OF WILLIAM J. FOX, DIRECTOR

Chairman Shelby, Senator Murray, and members of the committee, thank you for 

the opportunity to submit my statement for the record on the President’s fiscal year 

2005 budget request for the Financial Crimes Enforcement Network. This $7.271 

million request reflects the important role FinCEN plays in the United States government’s efforts to understand, detect, and prevent terrorist financing. 

On December 1, 2003, I became FinCEN’s fourth director. Prior to coming to 

FinCEN, I was working as the principal assistant to the General Counsel of the 

Treasury Department on issues relating to terrorist financing, which were issues 

that occupied a great deal of my time. Coming from the Department, I understood, 

to a large extent, the nature of FinCEN’s responsibilities and what it was doing to 

carry out the obligations imposed by these responsibilities. In these 5 months, I 

have done a great deal of listening and learning from inside and outside of FinCEN. 

I have met extensively with the law enforcement and intelligence communities that 

we serve and the financial industry that we help regulate. I also have met with 

some of my counterparts in foreign governments and communicated with many 

more and I have met with and listened to the staffs of interested committees in the 

Congress—including this subcommittee. 

In this short time, I have found an organization populated with employees with 

diverse and highly specialized talents, who are extremely dedicated to the agency 
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and its mission. I have found an agency that is a good steward of the human and 

capital resources that have been provided by the Congress. However, I have also 

found an agency facing many important challenges—challenges relating to the effective and efficient management of the extremely sensitive data collected under the 

Bank Secrecy Act; challenges relating to its analytic staff and the analytic product 

they produce; challenges relating to the administration of its regulatory programs 

under the Bank Secrecy Act; challenges relating to refocusing its important partnerships with financial intelligence units around the world—the Egmont Group; and, 

challenges relating to the agency’s present organizational structure. 

My statement will address how FinCEN is going to meet these challenges and 

then it will focus on our fiscal year 2005 budget request. 

BACKGROUND

FinCEN’s mission is to help safeguard the financial system of the United States 

from being abused by criminals and terrorists. FinCEN works to accomplish its mission through: (1) administration of the Bank Secrecy Act—a regulatory regime that 

provides for the reporting of highly sensitive financial data that are critical to investigations of financial crime; (2) dissemination of the data reported under the Bank 

Secrecy Act to law enforcement and, under appropriate circumstances, the intelligence community; (3) analysis of information related to illicit finance—both strategic and tactical analysis; and, (4) the education and outreach provided to law enforcement and the financial industry on issues relating to illicit finance. FinCEN 

has many attributes that are key to understanding the agency and how it works 

to achieve its mission: 

—FinCEN is a regulatory agency.—FinCEN has an obligation to administer the 

Bank Secrecy Act, the principal regulatory statute aimed at addressing the 

problems of money laundering and other forms of illicit finance, including terrorist financing. It is responsible for shaping and implementing this regulatory 

regime and, in concert with the functional banking, securities, and commodities 

regulators and the Internal Revenue Service, for ensuring compliance with that 

regime. The agency is also charged with protecting the integrity and confidentiality of the information collected under the Bank Secrecy Act. 

—FinCEN is a financial intelligence agency.—While not a member of the intelligence community, FinCEN, with the help of the Internal Revenue Service, collects, houses, analyzes and disseminates financial information critical to investigations of illicit finance. 

—FinCEN is a law enforcement support agency.—While FinCEN has no criminal 

investigative or arrest authority, much of our effort supports the detection, investigation and successful prosecution of financial crime. 

—FinCEN is a network.—We are not directed to support one agency or a select 

group of agencies. We make our information, products and services available to 

all agencies that have a role in investigating illicit finance. In fact, we network 

these agencies. Our technology tells us when different agencies are searching 

the same data and we put those agencies together—avoiding investigative overlap and permitting the agencies to leverage resources and information. 

Given this important mission, FinCEN fits perfectly in the Department of the 

Treasury; possibly even more so after the Homeland Security reorganization rather 

than before that reorganization. The creation of the Office of Terrorism and Financial Intelligence within Treasury only enhances that fit. FinCEN will be able to help 

‘‘operationalize’’ Treasury’s policy priorities on these important issues and our operational analytic work will complement the analysis that will eventually be done in 

the newly created Office of Financial Intelligence. I believe this coordinated effort 

will lead to a greater emphasis and understanding of money laundering, terrorist 

financing and other forms of illicit finance not only at Treasury, but within the 

United States, and that will make us all safer. FinCEN will also benefit from the 

Department-wide, policy-coordinating role this office will provide. 

FINCEN’S COUNTER-TERRORISM STRATEGY

The single, most important operational priority for FinCEN is counter-terrorism 

support to law enforcement and the intelligence community. To emphasize the importance of this work we have improved and are now implementing a comprehensive 

counter-terrorism strategy that draws from our analytic support to law enforcement, 

our regulatory tools and expertise, and our international networking capabilities. 

We believe the implementation of this strategy will strengthen our focus and ensure 

that FinCEN is more active and aggressive rather than reactive on issues relating 

to terrorism. The strategy has five basic components. 
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Analysis of Terrorist Financing Suspicious Activity Reports 

FinCEN analyzes suspicious activity reports for both tactical and strategic value. 

At the tactical level, we are implementing a program in which every report that indicates a connection to terrorism is immediately reviewed and validated and then 

analyzed with other available information. This information will be packaged and 

referred to the Terrorist Threat Integration Center (TTIC), FBI–TFOS, and other 

relevant law enforcement. Moreover, this information will be stored in a manner 

that facilitates its access and availability for analysis. We have already had success 

with this process resulting in important information being passed along to law enforcement agency. 

At the strategic level, we are also devoting analysts to study Bank Secrecy Act 

data and all other available information to gain an increased understanding of 

methodologies, typologies, geographic patterns of activity and systemic vulnerabilities relating to terrorist financing. These analysts will focus on regional and 

systemic ‘‘hot spots’’ for terrorist financing, studying and analyzing all sources of information. Such focus, which produced the study mandated by the Congress on Informal Value Transfer Systems, can significantly add to the knowledge base of law 

enforcement. For example, we have begun a process to comprehensively study illicit 

trade in diamonds and other precious stones and metals and the links to terrorist 

finance. Although this initiative is currently underway, in order to fully implement 

it, we will need to upgrade analysts’ security clearances and obtain additional equipment appropriate for the handling and processing of national security information. 

USA PATRIOT Act Sections 311 and 314 Implementation 

Some of the new tools afforded us through the USA PATRIOT Act are proving 

to be invaluable in the war against terrorist financing, particularly Section 314 of 

the Act. FinCEN also has initiated a program to provide the analytic, regulatory 

and legal resources needed to support effective implementation of Section 311 by the 

Treasury Department. I have directed my staff to give priority to the pro-active targeting of those financial institutions and jurisdictions that are involved, wittingly 

or unwittingly, in the financing of terror. This prophylactic measure goes to the very 

heart of FinCEN’s mission—to safeguard the financial system of the United States 

from money launderers and the financiers of terror. 

Building on a successful pilot program that we began with the Bureau of Immigration and Customs on a 314(a) money-laundering request, FinCEN is now dedicating several analysts to apply this program to all 314(a) terrorism requests. Specifically, the analysts will run all 314(a) terrorism-related requests against Bank Secrecy Act data concurrent with these requests being sent to financial institutions. 

Based on this initial data review, the law enforcement requester will then be able 

to request a more in-depth analysis if desired. 

International Cooperation and Information Sharing 

FinCEN will increase the exchange of terrorist financing investigative and analytical information with other foreign financial intelligence units around the world. We 

are implementing a program by which FinCEN will automatically request information from relevant financial-intelligence-unit counterparts as part of any terrorism 

related analysis project. As part of this program, we are also upgrading our response to incoming requests for information from financial intelligence units by providing appropriate information and analysis from all sources of information. 

Terrorism Regulatory Outreach 

We will continue our work in improving our ability to provide information to the 

regulated community to better identify potential terrorist financing activity. One 

area of particular focus will be money services businesses. Money services businesses continue to require more attention and resources, and FinCEN will undertake an initiative to educate segments of the industry most vulnerable to terrorist 

abuse. These segments include small businesses that typically offer money remittance services, check cashing, money orders, stored value products and other informal value transfer systems. As we learned from the attacks of September 11, funds 

used to finance terrorist operations can be and have been moved in small amounts 

using, for example, wire transfer, traveler’s check and automated teller machine 

services. I have directed FinCEN’s Office of Regulatory Programs and Office of Strategic Analysis to enhance our outreach program that will include training on how 

terrorists have used and continue to use money services businesses; the reason for 

and importance of the registration requirement for money services businesses; and 

the importance of complying with the reporting requirements of the Bank Secrecy 

Act, especially suspicious activity reporting. We are planning to streamline sus-
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picious activity reporting for small money services businesses with a simplified 

form. 

Analytic Skill Development 

As a general matter, I have directed that FinCEN make training of personnel the 

highest human resource management priority. The top priority of this new program 

will be analytic skill development relating to terrorist financing. We plan to begin 

by seeking reciprocal opportunities for terrorist finance analytic skill development 

within law enforcement, the Egmont Group, the intelligence community and the financial industry. This initiative is intended to build a foundation for continuous improvement of our analytic assets through cross training and diversification; production of joint terrorist financing threat assessments and other reports; understanding 

of intelligence processes; the international context of terrorist financing; and the financial industry perspective. In addition, we will need to support training focused 

on financial forensics, language skills, and geographically targeted studies that 

focus on culture, infrastructure and other unique aspects of a particular region. 

I believe the full implementation of this strategy will materially assist the Department of the Treasury and the United States in addressing the financing of terror. 

Approaching this problem in a systemic way with dedicated resources is, in our 

view, the best way to make this strategy a success. 

FINCEN’S NEAR TERM CHALLENGES

As I mentioned before, FinCEN is facing a number of significant challenges. Because each of these challenges affects FinCEN’s effectiveness, I feel it is important 

to raise these challenges with the subcommittee. 

Security and Dissemination of Bank Secrecy Act Information 

As the administrator of the Bank Secrecy Act, there is no duty I view as more 

critical then the effective collection, management and dissemination of the highly 

sensitive and confidential information collected under that Act. If FinCEN does 

nothing else, it must ensure that such data are properly collected, are secure and 

are appropriately and efficiently disseminated. This is FinCEN’s core responsibility. 

FinCEN must modernize the way it houses and provides access to information collected under the Bank Secrecy Act. Currently, our data are accessed by most of our 

customers through an outmoded mainframe system. This system does not have the 

robust data mining capabilities or analytical tools we should be providing. This has 

led many of our customers to ask for wholesale copies of the data, or direct access 

to the data in a way that will not permit us to perform our responsibilities relating 

to the administration and management of the data. Accordingly, we must create a 

system that provides robust data mining and analytical tools to our customers in 

law enforcement and that preserves our ability to: (1) effectively administer and secure and audit use of the information; (2) network those persons who are querying 

the data to prevent overlapping investigations and encourage efficient use of law enforcement resources; and, (3) develop and provide adequate feedback to the financial 

industries we regulate, which will ensure better reporting. That system is called 

‘‘BSA Direct.’’

When fully implemented, BSA Direct will make available robust, state-of-the-art, 

data mining capabilities and other analytic tools directly to law enforcement. We 

plan to provide all access to these data through BSA Direct, working with our law 

enforcement customers to ensure that their individual systems will be able to extract the maximum value from the Bank Secrecy Act reporting. We will be exploring 

ways to enable these agencies to integrate the Bank Secrecy Act reporting with 

their other systems while maintaining, and even improving our ability to audit and 

network the use of the data and obtain feedback concerning their value. This new 

system will provide us with the capability to discharge our responsibilities relating 

to the administration of these sensitive data: security and access control, networking, and feedback. This system will also significantly enhance our coordination 

and information sharing abilities, as well as our ability to safeguard the privacy of 

the information and monitor BSA compliance. We have already started work on this 

system and its deployment is crucial to FinCEN moving forward and meeting its 

various challenges. We have requested in our fiscal year 2005 budget a transfer of 

$2.5 million from the Internal Revenue Service for this system. 

Enhancing FinCEN’s Analytical Capabilities 

Another challenge FinCEN is facing relates to its analytic capabilities. In my 

view, FinCEN must move away from its current emphasis on data checks and data 

retrieval, and move its analytic resources toward more robust and sophisticated 

analysis. FinCEN had moved to data checks and data retrieval in response to criti-
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cisms about lag time in responding to simple requests for information. Now, as our 

systems improve, our customers will be able to retrieve data themselves, which will 

give FinCEN more time and resources for analysis of data. 

I believe that FinCEN can and must provide value through the application of our 

focused financial analytic expertise to mining information and providing link analyses that follow the money of criminals and terrorists, or identify systemic or geographic weaknesses to uncover its source or the existence of terrorist networks. For 

example, in addition to providing geographic threat analysis for law enforcement, 

FinCEN has been studying systemic trends in money laundering and terrorist financing. We were instrumental in bringing the black market peso exchange system 

to the forefront of policy decisions, and we are focusing on other trends and patterns 

that we now see emerging in the global market. I recently made a trip to Dubai 

to participate in the growing dialogue on the potential use of diamonds and other 

commodities for illicit purposes, including money laundering and terrorist financing. 

We recently developed cases from Bank Secrecy Act data involving foreign gem companies with links to the United States and referred this information to law enforcement authorities. This is part of our focus on and study of what may be another 

iteration of money laundering and terrorist financing—commodity-based systems. 

In my view, while FinCEN still has some of the best financial analytic talent in 

the United States government, the challenges we face require us to further develop 

that talent to enable the full exploitation and integration of all categories of financial information—well beyond Bank Secrecy Act information. I have directed 

FinCEN’s managers to concentrate on training, as well as the hiring of new, diverse 

financial analytic expertise. 

Enhancing FinCEN’s Technology 

As I have mentioned, information sharing is critical to our collective efforts to detect and thwart criminal activity and that is why I believe enhancing our technological capabilities is extremely important. Section 314(a) of the USA PATRIOT Act 

allows law enforcement to query United States financial institutions about suspects, 

businesses and accounts in money laundering and counter terrorism investigations. 

FinCEN facilitates this interaction between the financial industry and law enforcement by electronically sending law enforcement requests to various banks that, in 

turn, check their records and relay the information back to FinCEN to then provide 

to the requestor. This saves law enforcement time and resources. We are currently 

enhancing the Section 314(a) electronic capabilities to allow for the originating request to be made to FinCEN via a secure website. This system is an example of 

how critical technology is to our law enforcement counterparts. 

We must continue to work to enhance the development of the PATRIOT Act Communications System, a system that permits the electronic filing of reports required 

under the Bank Secrecy Act. This system was developed and brought on-line under 

a very tight legislative deadline. FinCEN received the E-GOV award for its work 

on this system. Filing these forms on-line is not only more efficient; it will help 

eliminate some of the data errors and omissions. 

As of April 19, 2004, 1.2 million Bank Secrecy Act forms had been electronically 

filed through this system. We now support nearly 1,100 users, which include 15 of 

the top 25 filers of Bank Secrecy Act information. These top 25 filers accounted for 

approximately 50 percent of all Bank Secrecy Act forms filed in fiscal year 2003. 

While this is all good news, the bad news is that the current number of forms filed 

electronically remains quite small on a percentage basis. The forms being filed 

through the PATRIOT Act Communications System represents only approximately 

5 percent of the universe of all Bank Secrecy Act reports filed. I have directed our 

PATRIOT Act Communications System team to reach out to the financial industry 

and determine what more needs to be done to convince them to file electronically. 

As we learn about what is holding institutions back from filing, I have directed our 

team to work closely with system developers to build the system stability and tools 

necessary to improve the overall percentage of filing. 

FinCEN presently lacks the capacity to detect Bank Secrecy Act form filing anomalies on a proactive, micro level. As I mentioned earlier, BSA Direct will integrate 

Bank Secrecy Act data into a modern data warehouse environment and it will include tools to flag Bank Secrecy Act form filing anomalies for action by FinCEN and/

or referral to appropriate authorities. In the meantime, FinCEN is developing a request to the Detroit Computing Center to provide periodic exception reports on financial institutions whose Bank Secrecy Act form filing-volume varies beyond prescribed parameters during prescribed time frames. While we will not be able to conduct the sophisticated monitoring that will be available with BSA Direct, this interim step should produce an alert in the event of a catastrophic failure to file 
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forms, as was experienced in the Mirage case in which the Mirage Casino in Las 

Vegas failed to file over 14,000 currency transaction reports in an 18-month period. 

Enhancing FinCEN’s Regulatory Programs 

The administration of the regulatory regime under the Bank Secrecy Act is a core 

responsibility for FinCEN. Given the nature of our regulatory regime—a risk-based 

regime—our partnership with the diverse businesses in the financial services industry is the key to our success. I must tell you that it is my perspective that the financial industry is generally a model of good corporate citizenship on these issues. The 

industry’s diligence and commitment to the recordkeeping and reporting requirements of the Bank Secrecy Act is by and large outstanding. The industry’s cooperation with FinCEN in implementing many of the provisions of the USA PATRIOT 

Act has strengthened the foundation of our efforts to safeguard the financial system 

from criminal abuse and terrorist financing. I have met with many of our industry 

partners in the last several months, both old and new, and I have been struck with 

how concerned they are that the information they provide be of value to the fight 

against terrorist financing and other financial crimes. In turn, FinCEN is committed 

to enhancing the guidance they need as they strive to meet the requirements and 

objectives of new regulations. 

The challenge before FinCEN on this issue is simple: we must ensure the remaining regulatory packages required by the USA PATRIOT Act are completed and implemented. Moreover, as we work with our regulatory partners to implement this 

regulatory regime, we must provide constant feedback and guidance. We have asked 

the industry to create anti-money laundering programs that are risk-based—custom 

tailored to each institution based upon the business in which that institution engages and the customers that institution has. We must find ways to help the industry define that risk. Development of secure web-based systems that will foster the 

communication discussed above is a step in the right direction. But we must continue to find new and better ways to reach out to the industry. They understand 

the threat money laundering and illicit finance poses to our financial system and 

they are willing to help. 

Perhaps our most significant challenge lies in ensuring that financial institutions 

are appropriately examined for compliance with the Bank Secrecy Act and its implementing regulations. As you know, we have issued and will continue to issue antimoney laundering program regulations that will bring new categories of businesses 

under this form of Bank Secrecy Act regulation for the first time. 

We have and will continue to rely on the judgment, expertise, and resources of 

the Federal banking, securities and commodities regulators. But the expansion of 

the anti-money laundering regime comes with the additional responsibility and challenges of examining thousands of addresses and businesses for compliance. We have 

relied on the Internal Revenue Service to examine those non-bank institutions. The 

addition of the insurance industry and dealers in precious stones, metals, and jewels, two categories of financial institutions for which we will shortly issue final antimoney laundering program regulations, will themselves stretch the resources of 

agencies responsible for examination. We must find ways to ensure that these regulatory programs are implemented in a fair, consistent and timely manner that is focused on achieving the goals of the Bank Secrecy Act. Although difficult, this is an 

issue that must be resolved. 

Finally, we intend to take even a more active role in working with our regulatory 

partners to ensure the effective examination of financial institutions. We will find 

appropriate ways to enhance our ability to provide prompt, interpretive guidance to 

examiners, obtain consistency in the application of the regulations across industry 

lines, and identify and address compliance issues as they arise. 

Enhancing FinCEN’s International Program 

FinCEN’s international initiatives and programs are driven by a stark reality: finance knows no borders. Next year will mark the tenth anniversary of the founding 

of the Egmont Group—a milestone event that FinCEN will host in Washington, DC 

next June. The Egmont Group is an international collection of ‘‘financial intelligence 

units’’—entities, which, like FinCEN, are charged with the collection and analysis 

of financial information to help prevent money laundering and other illicit finance. 

The Egmont Group has achieved remarkable growth since its inception in 1995. 

Membership has risen from 6 charter members to 84. This membership number will 

rise to 92 this year and is expected to top 100 by the time of the June 2005 Plenary. 

The Egmont Group serves as an international network, fostering improved communication and interaction among financial intelligence units (FIUs) in such areas 

as information sharing and training coordination. The goal of the Group is to provide a forum for FIUs around the world to improve support to their respective gov-
519

ernments in the fight against financial crimes. This support includes expanding and 

systematizing the exchange of financial intelligence information, improving expertise and capabilities of personnel employed by such organizations, and fostering better and more secure communication among FIUs through the application of technology. 

Egmont’s secure web system permits members of the group to communicate with 

one another via secure e-mail, and to post and assess information regarding trends, 

analytical tools, and technological developments. FinCEN, on behalf of the Egmont 

Group, maintains the Egmont Secure Web. Currently, 76 of the 84 members (90 percent) are connected to the secure web site. I am very pleased to announce that 

FinCEN will launch a new and more efficient secure web site for Egmont in June. 

We expect this new site will generate more robust usage, which will enhance international cooperation among Egmont members. 

FinCEN has played a significant role in the growth and health of the Egmont 

Group and it maintains bilateral information sharing agreements with financial intelligence units around the world. However, in my view, this program has not received the priority it should have in recent times. Merely because of the simple 

statement I made earlier—that finance knows no borders—we must step up our 

international engagement with our counterparts around the world. Our plan is to 

do three principal things: 

—Lead the Egmont Group to begin focusing on actual member collaboration. 

Egmont members should be collaborating in a more systemic way to address 

issues relating to terrorist financing, money laundering and other illicit finance 

at both a tactical and strategic level. 

—Enhance the FinCEN analytical product we provide to our global counterparts 

when we receive requests for information. Today, we principally provide the results of a data check. We think we owe our colleagues more in-depth analysis 

of the information we provide. As noted before, we will also be making more 

requests for information and analysis from our partners—particularly when the 

issue involves terrorist financing or money laundering. 

—Foster exchanges of personnel with financial intelligence units around the 

world. We have already begun discussions with certain counterparts about such 

an exchange and we are hopeful we can begin this program soon. The benefits 

of this type of exchange are obvious. It is the best way we can learn together 

how to address a truly global problem. 

FinCEN will also enhance its support for Treasury policy officials’ work in the Financial Action Task Force (FATF) and FATF regional bodies. We will continue our 

work with the State Department in the drafting and editing of the ‘‘International 

Narcotics Control Strategy Report.’’ Finally, we will continue our important efforts 

on financial intelligence unit outreach and training. Presently, we are working with 

the United Arab Emirates on a South Asia FIU Conference for Afghanistan, Bangladesh, India, Maldives, Pakistan and Sri Lanka. 

Additionally, FinCEN has given its support and participation to the ‘‘3∂1’’ Working Group on terrorist financing in the Tri-border Area. The issues of information 

sharing and the bolstering of FIUs in the participating states of Argentina, Brazil 

and Paraguay are critical issues for the U.S. delegation to the ‘‘3∂1’’ Working 

Group led by the Department of State’s Office of Counter-Terrorism. 

FinCEN’s Organizational Structure 

We have been working closely with Treasury on our efforts to more effectively 

marshal our resources at FinCEN. As a result, I recently proposed a realignment 

of FinCEN that reflects my priorities to enhance FinCEN’s analytical component 

and improve its focus and services devoted to outreach, education and technology 

on behalf of both its clients and the financial services community. We have briefed 

your staff on this proposal and, just last week; have received approval from the Department to go forward with this realignment. 

Essentially, the realignment provides the ability to pull out the non-analytical 

functions presently entangled in FinCEN’s analytical unit so that those managers 

and analysts can focus exclusively on analysis. We are also combining all client 

services and systems under a single manager in order to ensure that our technology 

is coordinated and better focused on serving its users. Similarly, I want this organizational structure to highlight the importance of education and training of our law 

enforcement clients and the regulated community. Only by working closely and cooperatively with these groups can FinCEN truly understand what services it must 

provide and what requirements it must meet to assist in the detection, prevention 

and dismantling of terrorist financing. 
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FISCAL YEAR 2005 BUDGET REQUEST

The proposed fiscal year 2005 budget is designed to assist in strengthening our 

role in the United States Government’s efforts to understand, detect, and prevent 

terrorist financing. I also believe it will allow us to begin to meet the challenges 

that I have outlined above. The President’s fiscal year budget request would provide 

$64,502,000 and 291 full-time equivalents for FinCEN. This request includes: —$1.533 million and 4 FTE for program increases to: 

—(1) enhance regulatory support to newly covered industries as required under 

the USA PATRIOT Act ($0.278 million and 2 FTE); 

—(2) enhance access to Bank Secrecy Act information by putting information 

technology aids in place to the Gateway system to increase the current 1,000 

law enforcement users to 3,000 users by fiscal year 2008 ($1.055 million and 

2 FTE); and, 

—(3) procure financial and administrative services which would enable FinCEN 

to consolidate its accounting and financial reporting by using a Treasury franchise service provider, assuring continued submission to TIER and other accounting-related reporting in the Treasury format ($0.200 million and FTE). 

—$2.5 million transfer from the Internal Revenue Service for the Bank Secrecy 

Act (BSA) Direct System. See infra. 

—$3.238 million and 10 FTE for adjustments necessary to maintain current levels 

($1.716 million) and program annualizations for fiscal year 2004 initiatives 

($1.522 and 10 FTE). 

CONCLUSION

The fiscal year 2005 budget request for FinCEN supports the President’s fight 

against terrorism, and continues to build the framework necessary for accomplishing 

our complex mission of protecting the United States financial systems from abuses 

imposed by criminals and terrorists and assisting law enforcement in the detection, 

investigation, disruption and prosecution of such illicit activity through our role as 

the administrator of the Bank Secrecy Act. 

I look forward to continuing to work with you to meet these challenges and enhance our contributions to the war on financial crime and terrorist financing. 

Mr. Chairman, this concludes my statement. 

ALCOHOL AND TOBACCO TAX AND TRADE BUREAU

PREPARED STATEMENT OF ARTHUR J. LIBERTUCCI, ADMINISTRATOR

Mr. Chairman, Senator Murray, and members of the subcommittee, it is my pleasure and honor to have the opportunity to highlight the Alcohol and Tobacco Tax and 

Trade Bureau’s (TTB) accomplishments for the past year and discuss our fiscal year 

2005 budget submission. 

The Alcohol and Tobacco Tax and Trade Bureau was established January 24, 

2003, as a result of the Homeland Security Act of 2002. The Act authorized the 

transfer of all of the firearms, explosives, and arson functions of the Bureau of Alcohol, Tobacco and Firearms (ATF) to the Department of Justice and established TTB 

within the Department of the Treasury. While the agency was given a new name, 

the history of TTB’s regulatory responsibilities dates back to creation of the Department of the Treasury and the first Federal taxes being levied on distilled spirits in 

1791. 

The mission of TTB is to collect alcohol, tobacco, firearms and ammunition excise 

taxes, to ensure that alcohol beverages are labeled, advertised, and marketed in accordance with the law, and to administer the laws and regulations in a manner that 

protects the revenue, protects the consumer, promotes voluntary compliance, and facilitates import and export trade in beverage and industrial alcohols. 

Not since the late 1940’s has there been such a large overhaul and reorganization 

of the government and its agencies. The challenges in standing up a brand new bureau were many, but the men and women on board at the time of the transition 

understood and were ready for the challenging job that lay ahead. When we began, 

we only had about half of our projected FTE on board. Most of fiscal year 2003 and 

part of fiscal year 2004 were dedicated to hiring personnel in all of our offices in 

Washington, DC, and around the country, and finding appropriate office space for 

field personnel. 

Late in 2003 we began the move to our new headquarters location, two blocks 

from the Department. This was accomplished in two phases. A majority of the offices located in Washington, DC, which include Headquarters and Field Operations 
521

staff, moved September 2003. My staff and the Office of Chief Counsel moved April 

2004. Our goal in both moves was to continue with business as usual, carrying out 

our mission, and have as seamless a transition as possible. 

AUTHORITIES

TTB oversees the regulation of alcohol under the Federal Alcohol Administration 

Act (FAA Act) and the Internal Revenue Code of 1986 (IRC). Under the FAA Act, 

TTB regulates the authorized operations, labeling, advertising, and trade practices 

for those engaged in the alcohol beverage industry. This includes trade practice provisions, which regulate such practices as exclusive outlets, tied house arrangements, 

commercial bribery, and consignment sales. These provisions are intended to ensure 

fair dealing within the industry and to protect the consumer by prohibiting sales 

arrangements that result from anti-competitive practices. 

We also administer the IRC provision relative to the qualification and operation 

of distilleries, wineries, breweries, and industrial alcohol producers and users. 

Under this authority, we administer classification and collection of tax on alcohol 

products, and the collection of various occupational taxes from alcohol dealers. 

TTB’s responsibilities under the IRC cover the production, packaging, bottling, labeling, and storage requirements related to alcohol products. 

With respect to tobacco, TTB work involves chapter 52 of the IRC, relating to the 

manufacture, importation, exportation, and distribution of tobacco products. Specifically, we examine applications and issue permits for tobacco manufacturers and importers, and export warehouses, and oversee their operations. TTB classifies a wide 

variety of tobacco products for tax purposes, and collects the tax on such tobacco 

products, as provided under the statute and implementing regulations. Finally, TTB 

also administers the excise tax on firearms and ammunition pursuant to its authority under the IRC. 

MISSION

TTB administers Federal tax laws on alcohol, tobacco, firearms, and ammunition, 

and ensures that the alcohol and tobacco commodities TTB regulates are lawfully 

sold in the United States. In carrying out its mission responsibly, TTB must be sensitive to the industry’s concerns as the government’s customers, by reducing delays 

and regulations that impede business while also providing a tangible benefit to the 

American public. TTB’s history indicates that an appropriate regulatory presence 

provides a deterrent against tax evasion schemes. TTB is committed to carrying out 

its responsibilities in a manner that makes effective and efficient use of the public 

resources entrusted to us. We carry out our mission without imposing inappropriate 

or undue burden on those whom we regulate and from whom we collect taxes. At 

the same time we maintain an aggressive enforcement program that deters violations by industry members and promotes voluntary compliance. 

The split from our predecessor agency has enabled TTB to return to its roots and 

focus on collecting the revenue and protecting the public. In the year since our inception, we have returned to that core mission, and we have proven that despite 

myriad administrative details, we have been able to focus on excise tax collection. 

Allow me to explain some of our highlights of the past year. 

TTB created a Field Operations Directorate that includes the pre-established National Revenue Center in Cincinnati, Ohio, which reconciles returns, reports, and 

claims; screens applications and issues permits; and provides expert technical assistance for industry, the public, and government agencies to ensure fair and proper 

revenue collection. The NRC is currently undergoing a business process reengineering study in order to maximize customer service and efficiency, while allowing TTB to handle an ever-increasing workload with existing staff. 

The Trade Investigations Division (TID), staffed with Investigators, has seven 

field groups located across the country dedicated to ensuring that only qualified applicants are granted permits to engage in the production and distribution of alcohol 

and tobacco products. Field investigations of industry members are conducted to 

help promote voluntary compliance with the laws and regulations enforced by TTB 

and prevent misleading labeling and advertising of alcohol beverages. 

Investigators also respond to credible information suggesting a health-related contamination of an alcohol or tobacco product. In addition, TID conducts trade practice 

and Certificate of Label Approval (COLA) fraud investigations. Some investigations 

over the year have resulted in revocations of permits or in the applicant withdrawing the permit as it is unable to meet the government requirements to operate. 

The work done by Trade Investigations is not only about educating our customers, 

but showing our presence and clearly helping carry out our unique and necessary 

mission. 
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Because of a greater field presence, in fiscal year 2003 we accepted 13 Offers-inCompromise (OIC) for a total of $1.162 million. In fiscal year 2004, we have so far 

accepted 12 OICs for a total of $270,086, and we have an additional 7 cases pending 

for $176,472. As an example, we collected a $35,000 OIC from a company who was 

found to have been receiving and shipping product without proper label approval. 

Investigators also conducted a product integrity investigation into a winery in the 

Southwest and found numerous label, record keeping, and administrative violations. 

We have also participated in counterfeit alcohol and tobacco investigations along the 

border in Texas and New Mexico. 

TTB’s Tax Audit Division and program was first established in late fiscal year 

2003 as part of TTB’s strategic plan to collect the revenue that is rightfully due 

from the alcohol, tobacco, and firearms and ammunitions industries because in the 

past, ATF’s program priorities and investigations were placed primarily on firearms 

and explosives. The division was established to provide a systematic approach to 

safeguard over $14 billion in annual revenue collected by TTB. 

The Tax Audit Division verifies the proper payment of tax and ensures compliance 

with the laws and regulations that protect the revenue and promote voluntary compliance. TTB Tax Audit uses a risk-based approach to target non-compliant industry 

members. A goal in 2004 is to establish a baseline for measuring tax revenue audited in a 5–6 year period and the industry compliance rate (percentage of taxpayers 

audited with no material findings, thereby validating the amount of tax paid was 

accurate and rightfully due). 

TTB’s accomplishments in Tax Audit include establishing 10 audit offices across 

the country and recruiting and hiring 80 audit staff. The average staff person has 

10 years of previous audit experience and holds one audit certification (i.e. Certified 

Public Accountant). TAD also established a formal industry-training program: 75 

percent of the workforce has been trained in three or more industries (Distilled Spirits Plants, Beer, Wine, Manufacture of Non-beverage Products, and Firearms). They 

also implemented an automated audit documentation tool to facilitate a standard 

audit approach and create efficiencies, and developed an audit work plan scheduling 

110 taxpayers for review in 2004. 

I am pleased to report that initial audit findings have identified approximately 

$4.7 million in additional tax revenue due, and to date, these audits have resulted 

in approximately $500,000 in additional revenue collected by TTB. Further, these 

audits have identified an additional $523,000 in revenue due to the governments of 

Puerto Rico and the Virgin Islands for taxes collected on articles (i.e. rum) produced 

in Puerto Rico or the Virgin Islands (also called cover over). 

These divisions work hand in glove with the Risk Management Staff who develop, 

implement, and maintain programs that ensure TTB is collecting all the revenue 

due and protecting the public. Divisions within Headquarters Operations often support the work done by TTB Auditors and Investigators in the field. 

The Regulations and Procedures Division (RPD) drafts new and revised regulations under the Internal Revenue Code and the Federal Alcohol Administration Act. 

They issue rulings, procedures, and informational documents to clarify the law and 

regulations. Most notably, they evaluate important policy issues before TTB and 

write proposed regulations and Treasury Decisions for publication in the Federal 

Register and the Code of Federal Regulations. 

In 2003, much attention was placed on the issuance of limitations set for health 

claims related to consumption of alcoholic beverages. On March 3, 2003, TTB, along 

with the Treasury Department, issued final regulations to prohibit the appearance 

on labels or in advertisements of any health-related statement that is untrue or 

tends to create a misleading impression. The regulations require that specific health 

claims must be truthful, adequately substantiated by scientific or medical evidence, 

disclose the health risks associated with both moderate and heavier levels of alcohol 

consumption, and outline the categories of individuals for whom any alcohol consumption poses risks. The new rules took effect June 2, 2003. 

In addition, in March 2003, TTB and the Treasury Department issued proposed 

regulations that would clarify the status of flavored malt beverages by refining the 

regulatory definitions of ‘‘beer’’ and ‘‘malt beverage.’’ The proposal would limit the 

amount of alcohol added to beer or malt beverages through flavors use. It would also 

require display of alcohol content on flavored malt beverage labels, and would prohibit references to distilled spirits on all malt beverage labels. The proposal garnered a considerable amount of congressional interest and TTB received over 16,000 

comments from the public; the norm is 10–20 comments per Notice of Proposed 

Rulemaking. In the weeks and months following the closure of the comment period, 

staff catalogued and reviewed the comments. A decision will be published once 

Treasury completes the review. 
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This past year brought the opening of the new laboratory facility that TTB’s Scientific Services Division shares with the ATF. This state-of-the-art facility, which 

was dedicated in June 2003, in Ammendale, Maryland, provides chemists and support staff an optimum working environment in which to process samples for its customers. The Laboratory supports TTB by providing expertise in the analytical analyses of distilled spirits, wines, malt beverages, specially denatured alcohol, non beverage alcohol, and tobacco products. TTB has a second lab in Walnut Creek, California, known as the Compliance Monitoring Laboratory that primarily conducts 

tests of alcohol beverages. In this regard, TTB uses a market basket sampling approach as well as other methods to evaluate products on the market and ensure that 

products are properly labeled, do not contain prohibited substances, and that the 

products do not impose a health hazard to consumers. 

An important component of TTB’s external relations are its partnerships in the 

international arena. The International Trade Division (ITD) acts as TTB’s liaison on 

issues related to alcohol beverages, and facilitates the trade of alcohol beverages by 

serving as an advisor to industry members, various U.S. Government agencies and 

embassies. In this capacity TTB is represented at international trade meetings and 

participates in international trade negotiations, primarily working with the Office 

of the United States Trade Representative (USTR). 

Again, through ITD, TTB contributed to the World Wine Trade Group’s (WWTG) 

progress toward a labeling agreement designed to facilitate trade in wine among the 

member countries. The WWTG is an informal group of seven countries who have 

a common interest in exporting wine worldwide. The United States, Canada, Chile, 

Argentina, South Africa, New Zealand and Australia are members of this group. 

Also, in the international trade arena, TTB continues to work with USTR in 

crafting a Memorandum of Understanding (MOU) with Mexico to clarify requirements for U.S. bottlers who receive bulk tequila. The United States has worked 

hard to convince the Mexican government to reconsider their proposal to ban the 

exportation of bulk tequila. Mexico cited failures by other countries in protecting the 

standard of tequila as a reason for suggesting the ban. Such a ban would adversely 

impact the U.S. distilled spirits industry’s ability to profitably continue to sell and 

distribute tequila in the United States and all over the world, and, in turn, cause 

Mexico to inadvertently hurt one of their own most profitable exports. TTB participated in several meetings this year in Mexico, the United States, and Canada and 

played a key role in delaying the implementation of the bulk shipment ban by describing to the Mexican government our past efforts in enforcing the integrity of tequila and by stressing our continued commitment to protect this beverage and demonstrating how the TTB enforcement mechanism makes such a ban unnecessary. 

The MOU seeks to both clarify and prevent undue extraterritorial requirements on 

U.S. bulk tequila. 

One of the largest components of Headquarters Operations is the Advertising, Labeling and Formulation Division. This division carries out TTB’s statutory mandate 

to prevent consumer deception and ensure that alcohol labels provide the consumer 

with adequate information as to the identity and quality of the product. 

In fiscal year 2003, ALFD’s staff of nine label specialists reviewed 101,000 Certificate of Label Approval (COLA) applications and issued nearly 75,200 certificates. 

Four formula specialists reviewed over 1,800 domestic beverage alcohol formulas, 

and approximately 1,500 pre-import applications. 

In May 2003, ALFD launched an electronic filing system for use by industry members and third parties to file applications for COLAs. This new web-based system, 

known as COLAs Online, provides industry members with a streamlined, more expedient and paperless means of obtaining a COLA. COLAs Online allows industry 

members to submit COLA applications via the Internet, as well as provides a way 

for ALFD employees to review the application electronically. Submitted applications 

are electronically approved, returned for correction, or rejected. The system also provides an online capability for industry members to obtain the status of electronically 

filed forms and the Public COLA Registry section of COLAs Online allows the public 

to view approved COLAs, including images of the alcohol labels. We currently receive approximately 15 percent of all COLA applications electronically and we expect that amount to steadily increase with time. 

In addition to these divisions, TTB is supported by a world class cadre of attorneys and Office of Management personnel. Often these are the employees who serve 

as the glue to the functions we perform as a Bureau. Further, a majority of services 

we use are contracted out and managed though a Memorandum of Agreement with 

ATF. This arrangement facilitates TTB becoming a stand-alone Bureau within the 

Department of Treasury. The memorandum will be renegotiated, but TTB continues 

to search for, and has found, many new ways to less expensively outsource required 
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services including moving many management functions to the Bureau of Public 

Debt. 

FISCAL YEAR 2005 APPROPRIATIONS REQUEST

The funding request for fiscal year 2005 is $81.9 million and 544 FTE, a $2.4 million increase over fiscal year 2004. This increase represents adjustments necessary 

to maintain current levels of operations. It supports TTB’s core mission to protect 

the public and collect the revenue. The request is fiscally sound, and I believe that 

we have proven that while we are a small Bureau, we are focused and effective, providing results-driven service to America. 

One of our priorities for fiscal year 2005 is to be completely separate from ATF’s 

Information Technology services. ATF is not a service provider and is part of the 

Department of Justice. At this time, ATF has given written notice that beginning 

in fiscal year 2006, it will no longer service TTB’s information technology needs. 

Also, ATF may not be able to provide administrative and other management services to TTB. We have formulated a plan that will help us cover services internally 

and externally by outsourcing from the public and private sectors. As resources become available, we believe we can judiciously acquire the services needed to run our 

Bureau, although much work needs to be done to complete this task by fiscal year 

2006. 

CONCLUSION

Through the judicious and responsible use of the resources Congress provides, we 

look forward to continuing to provide services that are not only unique in American 

Government, but provide a clear service to America by collecting taxes and protecting the public. It is not only my honor to lead the men and women of this Bureau, but I appreciate your support of this new Bureau and our wholehearted efforts 

to carry out our mission. Thank you. 

U.S. OFFICE OF SPECIAL COUNSEL 

PREPARED STATEMENT OF SCOTT J. BLOCH, SPECIAL COUNSEL

I am pleased to present testimony on behalf of the U.S. Office of Special Counsel 

and our fiscal year 2005 budget request. As the new Special Counsel, I look forward 

to working with the U.S. Senate in my role as independent guardian of the merit 

system of civil service by protecting Federal employees from unfair workplace discrimination or mistreatment, including reprisal for whistleblowing, as well as imposing corrective action to protect those employees and bringing disciplinary action 

against negligent supervisors. 

GOALS

My goals for the agency are twofold: (1) to continue to strengthen the civil service 

merit system by vigorously enforcing the three statutes for which the Office of Special Counsel bears responsibility: the Civil Service Reform Act, the Whistleblower 

Protection Act, and the Hatch Act; (2) to provide an intense, more visible level of 

enforcement of the Uniformed Services in Employment and Re-Employment Rights 

Act (USERRA). 

GUIDING PRINCIPLES FOR ACHIEVING THESE GOALS

The integrity of the civil service merit system depends on the alertness and effectiveness of its watchdogs. The most significant challenge we face into next year is 

to eliminate our pending case backlog and to develop methods to make the agency 

more efficient and effective in its main mission, while at the same time assuring 

complainants a fair review. No Federal employee should have to wait years, in some 

instances, for a valid complaint or situation to be addressed or an offending supervisor disciplined. 

We will accomplish this by asking for great energy and focus of the current staff, 

and by bringing on new talent, skilled at locating issues and understanding problem 

solving, keen on protecting rights and mindful of the need to address cases that lack 

jurisdiction or do not meet the requisite thresholds. In all of this, we will be guided 

by the understanding that this is being done so that we can better service the merit 

system and protect whistleblowers. If we can do all of that, then we can institute 

a mode of operation that prevents us from allowing such a backlog of cases to surface again. 
525

During this challenging time in our Nation, the security of the country depends 

on our armed forces. And our armed forces depend as never before on the vital roles 

played by national guardsmen and reservists. Every reservist and guardsman must 

know that the United States stands fully behind them, and will investigate and 

fight for justice on their behalf regarding their employment and re-employment 

after active service deployments. Without extremely strong enforcement in this area, 

serving in the guard and reserves becomes less attractive, and the entire military 

system currently in use becomes weakened. 

The teeth behind our effectiveness in enforcing each of our mandates lie in our 

ability to litigate in pursuit of justice. To become a more effective enforcer implies 

an increase in meritorious litigation, which I hope to pursue. 

Finally, I know that Congress also shares our desire to protect Federal whistleblowers; however, the protection does not occur if Federal employees do not know 

about the existence and purpose of the Office of Special Counsel. Therefore, a critical function is our extensive outreach and training efforts so that Federal employees know they can call us when they have a complaint or problem within their agency. 

RELEVANT FUNDING FACTORS

For fiscal year 2005, the OSC is requesting $15.449 million, in order to fund approximately 113 full-time employees (FTE) and related non-personnel costs. 

The purpose of this requested increase is to manage and process the agency’s 

steadily increasing workload since fiscal year 2000 of prohibited personnel practice 

complaints, whistleblower disclosures, and Hatch Act matters, and to reduce persistent case processing backlogs—including serious backlogs in the processing of 

whistleblower disclosures. Given the increasing workload of OSC, 113 FTE is a modest request. 

Looking at the data for the past several years, I believe several factors account 

for or contribute to this workload increase. They include: publicity about an increased number of high-profile cases handled by the OSC, including whistleblower 

disclosures, and four Public Servant Awards issued to whistleblowers by the OSC; 

heightened awareness and concern over national security disclosures after the 

events of September 11, 2001; increased public interest in elections since the 2000 

presidential election, and the start of the 2004 campaigns; the OSC’s 2302(c) Certification Program; and significant improvements in OSC’s web site, increasing awareness by government employees and others of the OSC and its functions. 

I will highlight specific areas that I believe warrant an increase in staffing: 

—In April 2004, soon after I became the new Special Counsel, I established a new 

Special Projects Unit (SPU) specifically to examine the organization’s system for 

handling cases, to handle the pending backlogs, and to consider and experiment 

with new methods for increasing the efficiency and effectiveness of all other aspects of the OSC. Several of the most experienced OSC attorneys are now assigned to the unit to help remove the current backlog of cases and to prevent 

such problems in the future. This includes a careful look at the agency’s web 

site and methods of electronic filing. 

—Given the increasing numbers of complaints and cases in all units of the agency, 

increased levels of labor and staff costs are required to ensure no backlogs will 

build up again. 

—Regarding prohibited personnel practice complaints, increased staff costs are 

also required for higher compliance with the 240-day prosecution deadline currently required by statute. 

—I am confident of our ability to fulfill our stated goal of providing a more visible 

level of enforcement of USERRA, even in (and especially in) the midst of one 

of the largest-ever demobilizations of reservists from overseas in the coming 

year. In conjunction with other Federal entities, we will aggressively prosecute 

USERRA claims. But this may require a higher number of staff focused in the 

USERRA area. 

—Public awareness of the OSC’s Disclosure Unit (DU) has grown in recent years 

and the greater awareness of national security issues, following the terrorist attacks of September 11, 2001, and subsequent events, have also caused a record 

number of whistleblower disclosure filings with the OSC. During fiscal year 

2002–2003, for example, the DU received 535 or more disclosures each year—

compared with 380 disclosures in fiscal year 2001 and an average of 360 in the 

preceding 4 fiscal years. Many of the disclosures filed after fiscal year 2001 

have dealt with national security issues (some involving complex and sensitive 

classified material) that have required the work of more than one DU staff attorney. 
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As of September 30, 2003, the total number of cases pending in the DU was 

a record 690 (up drastically from 556 at the end of fiscal year 2002, and 287 

at the end of fiscal year 2001). A significant number of these cases were more 

than a year old, including matters designated after initial review as the highest 

priority disclosure—an allegation of a substantial and specific danger to public 

health and safety likely to merit referral to the head of the agency involved for 

investigation. The OSC is requesting additional FTE allocation to DU backlog 

reduction efforts (i.e., to provide timelier resolutions of whistleblower disclosures filed with the OSC). 

By law, the OSC has 15 days to review a disclosure and to determine whether 

there is a substantial likelihood that the information provided discloses any violation of law, rule, or regulation; gross mismanagement; gross waste of funds; 

abuse of authority; or a substantial and specific danger to public health or safety. Given the increasing numbers and complexity of disclosures in recent years, 

as well as the time required to contact whistleblowers, examine information 

submitted, perform necessary analysis, and draft required correspondence, this 

timetable has, in reality, proven to be unattainable in most cases. This has resulted in a persistent backlog. 

While the OSC is fully committed to directing whatever resources are required to immediately process and refer critical national security disclosures, 

additional resources (not only in staff but in facilities and other resources needed to properly handle such critical matters) are needed. 

The Disclosure Unit backlog has become an issue of understandable concern 

to Congress. It has also been a pressing concern to the OSC, which has implemented several measures in recent years in efforts to improve upon its timeliness in processing whistleblower disclosures. For example, the DU has implemented a priority system for matters received; those priorities are tracked using 

the agency’s automated case tracking system; additional employees have been 

detailed to DU work; and, as funds have permitted, a limited number of additional staff has been allocated to the unit. 

—In response to recent calls for the OSC to attack the problem more aggressively, 

the OSC has begun the process of applying more intensive and focused strategic 

workforce planning to that problem, as part of a comprehensive strategy to address all areas of backlog in the agency. No strategy can succeed, however, 

without adequate funding to support additional staff and associated resources. 

The OSC’s fiscal year 2005 budget request will provide funding for the additional staff needed to more adequately comply with the 15-day time limit for 

DU decisions, and to make progress toward the goal of reducing the Unit’s backlog. 

—The increased amount of litigation necessary to strongly enforce adherence to 

the statutes also has a cost in terms of employee resources. 

—Next, in this busy election year, we expect our Hatch Act complaints and cases 

to increase as they always do during the national election cycle. The unit has 

received a significant increase in the number of complaints alleging Federal, 

State, and local Hatch Act violations, and a steadily growing number of requests for advisory opinions on the Act. Between fiscal year 2001–2003, the 

Hatch Act Unit received an average of 198 complaints per year, compared to 

84 complaints on average in each of the previous 3 fiscal years. Likewise, there 

has been a significant increase in the number of alleged Hatch Act violations 

referred for field investigation—i.e., 35 in fiscal year 2003, compared to 8 in fiscal year 2002, and 10 in fiscal year 2001. 

Hatch Act enforcement spawned lengthy and resource-intensive MSPB litigation activity by OSC in fiscal year 2003. 

The OSC’s fiscal year 2005 budget request will provide funding for the staff 

resources needed to handle increasing numbers of Hatch Act complaints, opinions, and enforcement efforts, including litigation. 

—As mentioned, outreach within the Federal workforce is critical to the mission 

of OSC. Success in outreach obviously generates a greater numbers of complaints, whistleblower disclosures, allegations and requests for assistance than 

in previous years. I believe our excellent professional staff will rise to the occasion, but the agency needs an increase in FTEs and an increased travel budget 

to keep up with those demands. 

—Higher labor funding is also required to better address Freedom of Information 

Act (FOIA) processing, investigations, and enforcement. 

—The OSC’s fiscal year 2004 funding was intended to pay for the cost of 113 FTE, 

but the agency has incurred several unfunded mandates: increased benefit costs 

(transit subsidy increases), new requirements for financial statements and audits, significant increase in costs under an interagency agreement for receipt of 
527

administrative services, and unanticipated real estate taxes for its D.C. office. 

Salaries and benefits make up approximately 83 percent of OSC’s operating expenses for fiscal year 2004, so the agency has little ability to reprogram funds 

when salaries and benefits for authorized FTE exceed appropriations. While 

these types of costs may be easily absorbed by most agencies’ budgets that 

dwarf OSC’s, these types of expenses can easily swamp a relatively tiny agency 

like ours, materially having an impact on achieving goals and even core missions. 

—To be successful in meeting our goals of vigorously enforcing the statutes for 

which we are responsible, with the least possible headcount, we are moving to 

further automate several steps within our processes, which also bears costs in 

equipment and development resources. 

PROGRESS MADE

As noted earlier with respect to prohibited personnel practice complaints, the 

OSC’s ongoing and intensive efforts to improve upon its responsiveness began to 

yield results in fiscal year 2003. The agency processed 85 percent of those complaints within the 240-day timetable established by Congress. The OSC intends to 

build on these results, and achieve close to 100 percent success in this regard—all 

the while avoiding any backlogs. 

SUMMARY

The largest part of the requested increase in the fiscal year 2005 budget, therefore, is for the full cost of the fiscal year 2004 FTE increase. The capacity to fund 

113 FTEs is needed to properly manage OSC’s statutory responsibilities and to reduce, if not eliminate, processing delays. 

Our office exists to ensure good government. When people behave in ways that 

do not promote good government, or jeopardize safety and health in the Nation, we 

must take corrective and disciplinary action. We exist to promote good, efficient, fair 

government, and integrity for the Nation among the Federal workforce. The fiscal 

year 2005 budget request will enable OSC to reach its mission to promote good government in an expeditious way. 

Thank you for your interest in the Office of Special Counsel. 

FEDERAL ELECTION COMMISSION 

PREPARED STATEMENT OF ELLEN L. WEINTRAUB, VICE CHAIR

Mr. Chairman, Ranking Member Murray, and members of the committee, it is my 

privilege to present the Federal Election Commission’s (FEC’s) fiscal year 2005 appropriation request. To begin, on behalf of the agency, I thank you for last year’s 

appropriation. Your bipartisan support of the FEC budget has enabled us to continue to implement the Bipartisan Campaign Reform Act of 2002 (BCRA), which 

amended the Federal Election Campaign Act of 1971. 

Our fiscal year 2005 appropriation request is for $52,159,000, an increase of 

$2,016,596 or 4.02 percent, and for 391 FTE, the same as our fiscal year 2004 FTE 

level. This year, as last year, the FEC is seeking only a modest increase over the 

fiscal year 2004 budget of $50,142,404 (less the government-wide across-the-board 

0.59 percent rescission) and 391 FTE. I am pleased to report this request conforms 

to the President’s fiscal year 2005 budget request for the FEC. 

Additionally, last year Congress appropriated $800,000 (less the 0.59 percent rescission) to the Commission for the operations of the Office of Election Administration (OEA), with the understanding that any remaining funds and other assets of 

the OEA would be transferred, pursuant to section 801 of Public Law 107–252, to 

the Election Assistance Commission (EAC) once the EAC was constituted. We are 

pleased to report, effective April 1, 2004, the OEA and all of its assets (including 

$500,527 in unobligated funds, property and records), personnel and liabilities, were 

transferred to the EAC. 

The fiscal year 2005 request represents a continuation of fiscal year 2004 funding 

levels, adjusted for inflation, and salary and benefit increases ($1,744,700—a 4.85 

percent increase). As such, it represents a Current Services request for fiscal year 

2005, with no additional funds or staff for new programs or initiatives by the FEC 

and represents an overall increase of only 1.92 percent for non-personnel costs. 

These minimal increases are detailed in our fiscal year 2005 Budget Justification. 

In its annual review of legislative recommendations, the Commission has submitted 12 recommendations for legislative action. Four of those were unanimously 
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endorsed as priority recommendations; the remaining 8 as non-priority. The 4 priority recommendations, in brief, are that Congress: (1) allow as a permissible use 

of Federal campaign funds donations to State and local candidates and for any other 

lawful purpose that does not violate subsection (b) of section 439a; (2) increase the 

amount that authorized committees may give to authorized committees of other candidates; (3) modify terminology of ‘‘reason to believe’’ finding; and (4) require mandatory electronic filing of Senate reports. The remaining 8 recommendations, while 

placed in the non-priority category are, nonetheless, supported unanimously by the 

Commission as substantive or technical in nature. We are confident these legislative 

changes will result in efficiencies, not only for the FEC, but also for the regulated 

community. 

Over the past few years, the FEC has achieved major successes, including meeting 

statutory and court deadlines for the BCRA implementation and legal challenges to 

the BCRA, as well as the expansion of the compliance program. These successes are 

the result of FEC efforts and support from our Congressional oversight committees. 

In addition, two programs have received accolades from the regulated community—

the Administrative Fine Program and Alternative Dispute Resolution (ADR) Program. With the addition of these two programs, we have been able to successfully 

streamline the enforcement process. 

I now will provide a brief overview of the FEC’s three core program areas and 

relate those areas to the agency’s fiscal year 2005 budget request. 

DISCLOSURE PROGRAM

The FEC’s disclosure program includes not only the review and placement of information on the public record, but also educational outreach, including campaign 

finance workshops and seminars, a toll-free line for consumer requests, and automatic fax transmission of our publications 24 hours a day, 7 days a week. FEC 

meeting agendas and related documents also are available on our web site. Our disclosure program accounts for over a third of the agency’s staffing (137 FTE), distributed among the Public Records Office, Information Technology Division, Reports 

Analysis Division, Press Office, Information Office and those sections of the Office 

of General Counsel that formulate proposed regulations and draft responses to advisory opinion requests. 

Improvements in productivity, aided by IT enhancements, generally have enabled 

the FEC to keep pace with the large increases in Federal campaign finance activity 

during recent election cycles, activity which has nearly doubled in the last 12 years. 

Total disbursements for a non-Presidential election cycle have increased from $1.1 

billion in 1986, to $3.8 billion for the 2000 presidential and 3.1 billion for the 2002 

congressional cycle—a 282 percent increase. We anticipate $4 billion in total disbursements for Federal campaigns in the 2004 cycle, from about 8,000 committees 

filing over 90,000 reports and generating 3 million itemized transactions. The 2006 

cycle, a congressional cycle, should be slightly lower in volume than the 2004 presidential cycle. Every election cycle since 1992 has seen a new record in total spending in Federal elections for Congressional and Presidential elections. With your 

help, we are building an impressive communications system capable of handling our 

Information Technology (IT) needs well into the future. This system offers the capability of instantly updating our database and expanding the types of information collected. As you are aware, however, this system is expensive. The average annual 

cost is about $1 million to maintain the electronic filing system. 

With the passage of mandatory electronic filing, we are beginning to see the benefits of timeliness and work process improvements such a sophisticated system affords. Since the institution of electronic filing, median time to process all documents 

has improved from 10 to 11 days to 5 to 6 days. 

COMPLIANCE PROGRAM

Obtaining voluntary compliance is the foundation of the FEC’s strategic and performance plans, and is at the core of our mission statement. A credible enforcement 

program, however, is necessary to provide sufficient incentive to the regulated community to achieve this voluntary compliance. In fiscal year 2005, we anticipate assigning 189 FTE to the compliance function, including enforcement, supervisory and 

support staff from OGC, Information Technology and the Audit Division. In the 

audit track of the compliance program, we are pleased to report sufficient resources 

have been provided to allow the Commission to initiate 40 to 45 audits ‘‘for cause’’ 

for the 2004 election cycle, as opposed to 25 in the 1998 cycle. Details on the compliance program are contained in the fiscal year 2005 Budget Justification. 

The first major overhaul of the FEC’s enforcement program occurred in May 1993. 

Faced with a large number of complex cases the Commission developed the Enforce-
529

ment Priority System (EPS), to prioritize cases for substantive enforcement action. 

This system is designed to provide a consistent and impartial ranking of cases based 

on the relative seriousness of the alleged violations, and gives us a tool to match 

the seriousness of a particular case to the resources available to undertake the investigation. We use the EPS in conjunction with the case management system, 

which enables the Commission to measure performance with regard to the substantive resolution of cases by issue and to measure timeliness of enforcement actions. Under EPS, the Commission has activated more cases, closed more cases with 

substantive action, and resolved some cases that would otherwise have been dismissed. 

The EPS has enabled the Commission to focus limited enforcement resources on 

the more important enforcement actions and to close low-rated and stale cases. The 

increased level of civil penalties assessed by the Commission following implementation of the EPS has demonstrated the benefits of pursuing more substantive cases. 

In 1991, there were 262 cases closed with civil penalties totaling $534,000; in 1995, 

there were 229 cases closed with $1,967,000 in civil penalties. By fiscal year 2003, 

there were 377 cases closed with civil penalties and fines totaling $2,774,603. 

Before 2000, the FEC’s enforcement program was administered entirely by the Office of General Counsel. Two new components of the Commission’s enforcement efforts—the Administrative Fine Program and the ADR program—are administered 

by the Staff Director. The goal of the ADR Program is to resolve matters quickly 

and effectively through bilateral negotiations. Both the ADR and Administrative 

Fine programs are designed to expand the FEC enforcement presence and resolve 

certain types of cases without resorting to the more lengthy traditional enforcement 

process. The Commission has met its compliance goals. Today, the Commission focuses its legal resources on the more complex enforcement matters, while using administrative processes to handle less complex matters. For example, from fiscal year 

1995 through fiscal year 2000, the FEC closed an average of 197 cases each fiscal 

year. In fiscal year 2001, with the addition of the Administrative Fine and ADR programs, the FEC closed 518 cases, a 163 percent increase over the fiscal year 1995–

2000 annual average of 197 cases. In fiscal year 2002, the FEC closed 229 cases, 

including enforcement, ADR and administrative fine cases. The total in fiscal year 

2003 was 535 closed cases. We are confident the figure for fiscal year 2004 will be 

higher. 

PUBLIC FUNDING PROGRAM

The Commission also administers the program providing a public subsidy to Presidential election campaigns. During fiscal year 2005, approximately 64 FTE from 

the Audit Division, Office of General Counsel, and Information Technology Division, 

will be directly involved in this program, which will entail audits of the seven candidates receiving matching funds for the 2004 election. In addition, two general election candidate committees will be audited, as will two host committees and two convention committees, for a total of 13 Presidential audits in fiscal year 2004 and 

2005. This program began certifying eligible primary candidates for matching funds 

and processing submissions for funding awards on January 2, 2004. 

On a related matter, we believe it is appropriate to bring to your attention the 

potential shortfall in the Presidential Public Funding Program. There was a brief 

shortfall with the February primary matching payments for the 2004 Presidential 

election, which was restored with the February deposits to the Fund. This is the 

only anticipated shortfall for the 2004 cycle. We did not experience a major shortfall 

for the 2004 Presidential election because several major candidates decided not to 

take Federal matching funds for the 2004 primaries; however, this may change in 

future elections. The Treasury Department maintains the matching fund account 

which is comprised of money derived from a taxpayer check-off system. Shortfalls 

in 1996 and 2000 occurred for several reasons. First, the eligibility requirements for 

receiving matching funds have not been adjusted for inflation since 1974, thus allowing more candidates to qualify for matching funds. Second, the ‘‘front-loading’’ 

of the primary and caucus nominating process which puts a premium on ‘‘early’’ 

fundraising for Presidential candidates, resulted in a high volume of funds being 

raised in 1995 and 1999 that were eligible for matching payments in January of 

1996 and 2000. Absent legislative action, the Public Funding Program faces potential shortfalls because of declining participation in the check-off program, and the 

failure to index contributions to inflation while the pay-outs are indexed. 

The foregoing summarizes the FEC’s fiscal year 2005 budget request. For a more 

detailed review of this request, I would urge members of the committee to consult 

our more detailed Budget Justification, which includes charts delineating how our 

budget request would be allocated and how it compares to previous years. It also 
530

demonstrates how the FEC has developed and used strategic and performance planning. 

Again, I thank you, Mr. Chairman and the committee, for your continued support 

and the opportunity to present our fiscal year 2005 budget request. 

OFFICE OF NATIONAL DRUG CONTROL POLICY 

PREPARED STATEMENT OF JOHN P. WALTERS, DIRECTOR

I am pleased to set forth the fiscal year 2005 budget request for the Office of National Drug Control Policy (ONDCP). I want to thank the subcommittee for its 

strong bipartisan commitment to our shared national goal of reducing drug use in 

America, especially among our youth. This subcommittee provides critical funding 

to support ONDCP’s programmatic, policy, and budget development functions. 

Your support of ONDCP’s $510.959 million budget request permits ONDCP to 

continue fulfilling our dual mission of serving as the President’s primary Executive 

Branch support for counter-drug policy and program oversight and simultaneously 

managing our own programmatic responsibilities. We continue to work to achieve 

results of our stated goals and we are meeting those goals. For example, in February 2002, President Bush unveiled his goal of reducing youth drug use by 10 percent in 2 years in the National Drug Control Strategy. That goal has been exceeded. 

The 2003 Monitoring the Future Study confirms that current use (past 30 days) of 

any illicit drug between 2001 and 2003 among students declined by 11 percent. 

Similar declines were seen for past year use (11 percent) and lifetime use (9 percent). 

ONDCP takes seriously its primary statutory responsibility to develop national 

drug control policy and a supporting budget, to coordinate and oversee the implementation of that policy and budget, and evaluate drug control programs to ensure 

that our efforts are coordinated and focused on obtaining measurable results. In addition to our policy role, ONDCP is responsible for managing and evaluating four 

key programs: The National Youth Anti-Drug Media Campaign, the Drug-Free Communities Support Program, the High Intensity Drug Trafficking Areas Program 

(HIDTA) Program, and the Counterdrug Technology Assessment Center (CTAC). 

ONDCP is requesting $510.959 million in budget authority for fiscal year 2005. 

The fiscal year 2004 enacted level is $522.247 million. The budget request reflects 

four program accounts: Salaries and Expenses; the Counterdrug Technology Assessment Center (CTAC); Other Federal Drug Control Programs; and the High Intensity 

Drug Trafficking Areas (HIDTA) program. 

A. Salaries and Expenses: $27.609 million 

In fiscal year 2005, ONDCP is requesting $27.609 million for Salaries and Expenses to support a full complement of 125 Full-Time Equivalents (FTEs) and a pay 

raise. The request reflects a decrease of $222,321 below the fiscal year 2004 enacted 

amount. This request is essential if ONDCP is to carry out its policy, budget, and 

programmatic responsibilities in a manner consistent with achieving measurable results. This includes: 

Operational Request: $26.259 million 

Will provide compensation and benefits for all authorized FTEs including a full 

complement of Executive Level (EX) positions; contract services; rental payments to 

the General Services Administration; travel and transportation; communications 

and utilities; printing and reproduction; supplies, materials and equipment. 

Includes resources to support 125 FTEs, an increase of 5 FTEs over the fiscal year 

2004 enacted level. This FTE increase is requested to offset the loss of many of the 

30 military detailee positions the Department of Defense has supported at ONDCP 

since 1996. Increasing the staff level to 125 FTEs will enable ONDCP to assess and 

respond to the drug threat facing the Nation. ONDCP will be able to monitor agency 

implementation of the National Drug Control Strategy programs and improve interagency coordination. ONDCP will be able to evaluate programs and identify those 

that work. Additionally, ONDCP will be able to provide policy guidance and oversight to the Counterdrug Technology Assessment Center (CTAC), High Intensity 

Drug Trafficking Area (HIDTA) Program, and Other Federal Drug Control Programs. 

Provides for two new initiatives: High Speed TS Communication Line Costs and 

Communication Line Costs for DOD Intel-Link computers on-site. ONDCP will need 

to assume these costs because of budget realignments within the DOD Counterdrug 

budget. 
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Policy Research Request: $1.350 million 

This request will continue and expand ONDCP’s policy research program, an increase of $7,965 over the fiscal year 2004 enacted amount. ONDCP conducts research to develop and assess drug policy, identify and detail changing trends in the 

supply of and demand for illegal drugs, monitor trends in drug use and identify 

emerging drug problems, assess program effectiveness, and improve the sources of 

data and information about the drug situation. The requested funding will support 

a wide range of new and continuing policy research projects. 

B. Counterdrug Technology Assessment Center (CTAC): $40 million 

In fiscal year 2005, ONDCP is requesting $40 million to support the Counterdrug 

Technology Assessment Center (CTAC). The fiscal year 2004 enacted level is 

$41.752 million. The aggregate request includes funding for two distinct components: Research and Development Program ($18 million) and the Technology Transfer Program ($22 million). 

Technology Research and Development: $18 million 

Demand Reduction R&D Program: $12 million.—CTAC’s Demand Reduction Initiatives, in conjunction with the National Institute on Drug Abuse (NIDA), will continue to improve upon existing technology available for substance abuse, dependence, and addiction research. CTAC has established a ‘‘niche’’ in developing and installing advanced neuroimaging instrumentation at drug abuse research facilities 

operating under grants from NIDA. The Demand Reduction Technology Review 

Committee (DRTRC) has been established in conjunction with NIDA to address and 

prioritize research initiatives with which CTAC can assist in the future. 

Supply Reduction R&D Program: $6 million.—This funding will provide for developing technology for use by Federal, State, and local law enforcement agencies in 

reducing the supply of illegal drugs by developing technologies that satisfy identified 

law enforcement requirements for increased investigative capability. Once tested 

and evaluated, developed technologies become available either through the Technology Transfer Program or through independent purchase. Sponsored R&D items 

in fiscal year 2004 include a panoramic 360-degree video surveillance camera, a 

Project 25 digital audio body-wire, and a Title III telephone intercept expansion capability. 

Technology Transfer Program (TTP): $22 million 

The Technology Transfer Program (TTP) relies on technical and operational performance testbed evaluations and outreach to industry to acquire additional items 

for law enforcement. The TTP makes available state-of-the-art, affordable, easily integrated, and maintainable tools to enhance the capabilities of State and local law 

enforcement agencies for counterdrug missions. TTP is not a grant program; rather, 

it provides drug crime fighting information technology and analytical tools, communications interoperability, tracking and surveillance, and drug detection devices 

from a catalog of items proven to be operationally effective by Federal, State, and 

local law enforcement. Hands-on training and maintenance support are provided to 

all recipients, and TTP maintains extensive records of State and local applications 

and jurisdiction statistics on every aspect of the program including the status of deliveries, departments receiving equipment, and training records. 

C. Other Federal Drug Control Programs: $235 million 

In fiscal year 2005, ONDCP is requesting $235 million for the Other Federal Drug 

Control Programs. The fiscal year 2004 enacted level is $227.649 million. This account provides funds to a diverse group of ongoing programs: the National Youth 

Anti-Drug Media Campaign, the Drug-Free Communities Support Program, World 

Anti-Doping Agency (WADA) Membership Dues, the U.S. Anti-Doping Agency, 

Counterdrug Intelligence Executive Secretariat, National Drug Court Institute, and 

Performance Measures Development. 

The National Youth Anti-Drug Media Campaign: $145 million 

In fiscal year 2005, ONDCP is requesting $145 million for the National Youth 

Anti-Drug Media Campaign. The fiscal year 2004 enacted level is $144.145 million. 

The Media Campaign uses multi-media advertising and public communications 

strategies aimed at youth and parents to promote anti-drug attitudes and behavior. 

The Campaign is a comprehensive national effort that integrates paid advertising 

at national and local levels with Web sites, clearinghouses, media events, outreach 

to the entertainment industry, and strategic partnerships that enable messages to 

resonate in ways that generate awareness and ultimately change beliefs and intentions toward drug use by teens. 
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Recently, ONDCP released results from the Monitoring the Future (MTF) Survey, 

which revealed that current use of illicit drugs among 8th, 10th, and 12th graders 

was down a statistically significant 11 percent from 2001. This reduction surpassed 

the President’s ambitious goal of reducing youth drug use by 10 percent in 2 years. 

Moreover, MTF revealed that exposure to anti-drug advertising had an effect on improving youth anti-drug attitudes and intentions. 

While these results are promising, each day 4,800 kids try marijuana for the first 

time and more adolescents continue to enter treatment for marijuana dependence 

than for all other drugs combined, demonstrating the need for continued funding. 

Therefore, this request continues funding for ONDCP’s Media Campaign, an integrated effort that combines paid and donated advertising with public communications outreach. 

In January 2004, the Media Campaign launched a new effort to urge friends and 

parents of teenagers to take early action against drug use. This new effort targets 

those closest to the user—friends and parents—and encourages them to intervene 

at an early stage. Giving friends and parents of teens the skills necessary to recognize symptoms of drug use and underage drinking, and to take action to stop it, can 

make a difference in the futures of young people at an important crossroads in their 

lives, before they need addiction treatment and before they encounter life-altering 

or deadly consequences. 

The Drug-Free Communities Support Program: $80 million 

In fiscal year 2005, ONDCP is requesting $80 million for the Drug-Free Communities Support Program (DFCSP). The fiscal year 2004 enacted level is $69.587 million. The DFCSP provides a competitive process to award matching Federal grants 

of up to $100,000 per year directly to local community anti-drug coalitions for the 

purpose of supporting local efforts to prevent or reduce drug use among youth. The 

program currently supports over 600 community coalitions in all 50 States, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. Together, these community anti-drug coalitions serve a national network of local citizens, community leaders, and key professionals working daily to help keep young people free of the wellknown dangers of drug use, including the underage use of alcohol and tobacco. Approximately 30 of the DFCSP grants have been awarded to communities where 

American Indian or Alaskan Native youth are the majority of young people served. 

Approximately 40 percent of DFCSP grants go to communities in small towns and 

rural areas. 

Of the total amount of $80 million that ONDCP is requesting for this program 

in fiscal year 2005, $74.2 million will be awarded in grants to as many as 750 community anti-drug coalitions. An additional amount of $1 million is requested to continue support for the National Community Anti-Drug Coalition Institute to provide 

much-needed training and technical assistance to the growing number of coalitions 

around the country. An amount of $4.8 million is requested to support all other 

costs associated with grants management, program evaluation, and program administration. 

World Anti-Doping Agency Membership Dues: $1 million 

In fiscal year 2005, ONDCP is requesting $1 million for World Anti-Doping Agency (WADA) Membership Dues. The fiscal year 2004 enacted level is $0.795 million. 

The dues assessment is formula driven and accounts for the increase from fiscal 

year 2004. WADA receives its funding in equal amounts from the International 

Olympic Committee and world governments. Governments are divided into six geographic regions. The United States, along with Canada, Central America, the Caribbean, and South America, are part of the Americas region. The Americas region is 

required to contribute 29 percent of the governments’ funding. As of fiscal year 

2004, the regions dues are based upon the relative contribution levels to the Organization of American States. 

Created in 2001, WADA is a partnership among world governments, intergovernmental organizations, the Olympic movement, athletes, and other entities concerned 

about the consequences of doping and drug use in sport. WADA’s mission is to promote healthy, doping free sport at the international level. WADA’s doping-control 

program is key to upholding the fundamental rights of athletes to participate in 

doping-free sport through an effective detection and deterrence program, promoting 

consistency and ensuring an independent, quality-controlled process seeking equity 

for all athletes in all sports in all countries. In addition to drug testing, WADA’s 

budget funds education and prevention programs for athletes at all age and levels 

(with a particular emphasis on youth) and research related to drug use in sport. 
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United States Anti-Doping Agency: $1.5 million 

ONDCP is requesting $1.5 million to support the United States Anti-Doping Agency (USADA). The fiscal year 2004 enacted level is $7.158 million. Since fiscal 

year 2002, funding to support USADA has been passed directly from ONDCP to 

USADA. USADA is a non-profit entity under the leadership of an independent board 

of directors. USADA began operations October 1, 2000, with full authority for drug 

testing, education, research, and adjudication for U.S. Olympic, Pan Am Games, and 

Paralympic athletes. Congress and the President have subsequently recognized 

USADA as the official anti-doping agency for the above-stated purposes (Public Law 

107–67). Since its inception, USADA has received worldwide acclaim for its effective 

and innovative testing and education initiatives. The $1.5 million request would support USADA’s ongoing drug testing regime 

that includes management, sample collection, and testing procedures. The fiscal 

year 2005 request considers the adjudication costs as the result of increased testing 

and the implementation of blood testing, which is more costly (and accurate) than 

urine drug testing. The request would also fund drug-related research, educational 

programs aimed at school-aged athletes and coaches, efforts to inform athletes of the 

rules governing the use of performance enhancing substances, and the ethics of 

doping and its harmful health effects. The public awareness efforts will be particularly important since the World Anti-Doping Agency adopted a new universal Code 

in March 2003 that will govern U.S. amateur athletes. 

Counterdrug Intelligence Executive Secretariat: $4.5 million 

In fiscal year 2005, ONDCP is requesting $4.5 million for the administration and 

operations of the Counter-drug Intelligence Executive Secretariat (CDX). The fiscal 

year 2004 enacted level is $2.982 million. The CDX staff was established to coordinate the implementation of the General Counterdrug Intelligence Plan (GCIP) established in February 2000 and revalidated in May 2002. Fiscal year 2005 funding 

of CDX will ensure that the action items established by GCIP, as well as additional 

projects requested by the interagency Counterdrug Intelligence Coordination Group, 

can be accomplished. 

National Drug Court Institute: $1 million 

In fiscal year 2005, ONDCP is requesting $1 million for the National Drug Court Institute (NDCI). The fiscal year 2004 enacted level is $0.994 million. Due to the 

fact that nearly 50 percent of the Nation’s drug courts have only been in operation 

for the last 4 years, the Institute’s education, research, and scholarship programs 

request these funds to continue the expansion of its discipline-specific and topic-specific drug court training programs for practitioners; to convene regional evaluation 

trainings in order to provide a forum for practitioners and researchers to enhance 

drug court evaluation techniques; to continue to publish and disseminate monographs on important and timely drug court issues; to continue to publish and disseminate the National Drug Court Institute Review; and to continue to publish and 

disseminate best practices fact sheets for drug court practitioners. 

Performance Measures Development: $2 million 

In fiscal year 2005, ONDCP is requesting $2 million for Performance Measures Development. The fiscal year 2004 enacted level is $1.988 million. ONDCP will use 

the requested funding to develop and implement data sources to monitor illegal drug 

use and supply for national policy-makers. Projects funded with these resources will 

include efforts to work with selected programs to develop and/or improve needed 

data sources. In recent years, ONDCP has worked with the National Institute of 

Justice to redesign and expand the Drug Use Forecasting program into the Arrestee 

Drug Abuse Monitoring program. ONDCP has also worked with the DEA to improve 

the methodology of the Heroin Signature Program and the Domestic Monitoring 

Program. The requested funding will continue this collaborative interagency effort 

to develop and implement programmatic performance measures. 

D. High Intensity Drug Trafficking Areas (HIDTA): $208.35 million 

In fiscal year 2005, ONDCP is requesting $208.35 million for the operations of the High Intensity Drug Trafficking Area program ($206.3 million for grants and Federal transfers and $2.050 million auditing for services and associated activities, including development and implementation of a data collection system to measure program performance). The fiscal year 2004 enacted level is $225.015 million. Each 

HIDTA has an Executive Committee (EXCOM) that serves as the governing body 

for the individual HIDTA. The EXCOM consists of an equal number of representatives from local/State and Federal agencies. The EXCOM is responsible for the development and implementation of the HIDTA Strategy and the attendant initiatives 

and budgets, as well as for the fiscal operations of the HIDTA. 
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The HIDTA mission includes coordination efforts to reduce the production, manufacturing, distribution, transportation, and chronic use of illegal drugs, as well as 

the attendant money laundering of drug proceeds. In addition, HIDTAs assess regional drug threats, develop strategies to address the threats, integrate initiatives, 

and provide Federal resources to implement initiatives. These resources are allocated to link local, State, and Federal drug enforcement efforts and to optimize the 

investigative return on limited fiscal and personnel resources. Properly targeted, 

HIDTAs offer greater efficiency in countering illegal drug trade in local areas by facilitating cooperative investigations, intelligence sharing (coordinated at HIDTA Investigative Support Centers), and joint operations against drug-trafficking organizations. 

Since fiscal year 2002, in addition to recurring HIDTA funding, ONDCP has provided additional funds to HIDTAs that have developed and conducted investigations 

against major drug trafficking organizations with connections to the Consolidated 

Priority Organization Target (CPOT) list. (The CPOT list, developed in 2001 by key 

Federal law enforcement entities, with input from the Intelligence Community and 

other Federal agencies, is comprised of the drug trafficking organizations generally 

agreed to represent the most significant drug threat to the United States. The list, 

which is maintained by the Justice Department, is updated periodically and is not 

public.) In fiscal year 2004, ONDCP has proposed to make approximately $16 million available to generate and advance investigations of domestic targets with a 

nexus to or affiliation with major drug trafficking organizations on the CPOT list. 

ONDCP hopes that continued discretionary funding will be available for HIDTAs 

through the CPOT Initiative in fiscal year 2005. 

At present, 406 United States counties (about 13 percent of the total) in 43 States, 

Puerto Rico, the United States Virgin Islands, and the District of Colombia are designated as part of 28 HIDTAs. Since January 1990, counties in the following 28 

areas have been designated as HIDTAs: Houston, Los Angeles, South Florida, New 

York, and the Southwest Border, which includes partnerships in South Texas, West 

Texas, New Mexico, Arizona, and Southern California (in 1990); Washington/Baltimore, and Puerto Rico/U.S. Virgin Islands (in 1994); Atlanta, Chicago, Philadelphia/

Camden (in 1995); Gulf Coast (Alabama, Louisiana, and Mississippi), Lake County, 

Indiana, the Midwest (Iowa, Kansas, Missouri, Nebraska, North Dakota, and South 

Dakota), Northwest (Washington), Rocky Mountain (Colorado, Montana, Utah, and 

Wyoming) (in 1996); Northern California (San Francisco Bay Area) and Southeast 

Michigan (in 1997); Appalachia (Kentucky, Tennessee, and West Virginia), Central 

Florida, Milwaukee, and North Texas (Northern Texas and Oklahoma) (in 1998); 

and Central Valley California, Hawaii, New England (Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont), Ohio, and Oregon (in 1999); 

Northern Florida and Nevada (in 2001). The HIDTAs nationwide contribute significantly to the removal of drug traffickers and the trafficking organizations that drive 

the illegal drug market and also to the elimination of tons of illegal drugs that flow 

each year through high intensity drug trafficking areas to other American communities. 

CONCLUSION

Thank you for the opportunity to provide this formal statement for the record. I 

will be happy to address any questions you may have and I look forward to working 

with this subcommittee as we work to meet the goal of reducing drug use in America, especially among our youth. 

SURFACE TRANSPORTATION BOARD 

PREPARED STATEMENT OF ROGER NOBER, CHAIRMAN

Chairman Shelby and members of the subcommittee, I am Roger Nober, Chairman of the Surface Transportation Board (Board). I thank you for the opportunity 

to submit this statement setting forth the Board’s budget request for fiscal year 

2005. 

BACKGROUND ON THE BOARD

The Board is a three-member, bipartisan, decisionally independent adjudicatory 

body organizationally housed within the Department of Transportation (DOT) with 

jurisdiction over certain surface transportation economic regulatory matters. 

The rail oversight of the Board encompasses rate reasonableness, car service and 

interchange, mergers, line acquisitions, line constructions, and abandonments. The 
535

jurisdiction of the Board also includes certain oversight of the intercity bus industry 

and pipeline carriers; and rate regulation involving noncontiguous domestic water 

transportation, household goods carriers, and collectively determined motor carrier 

rates. The Board is statutorily empowered, through its exemption authority, to promote deregulation administratively. 

The Board’s Section of Environmental Analysis performs environmental reviews 

on the Board’s construction, abandonment, and merger matters as required by the 

National Environmental Protection Act. These reviews have become more complex 

and require significant resources. 

THE BOARD’S FISCAL YEAR 2005 BUDGET REQUEST

In fiscal year 2005, the Board requests budget resources totaling $21,283,000. 

This budget request mirrors the Board’s fiscal year 2004 budgetary authority approved by Congress, adjusted for the fiscal year 2005 pay raise and some program 

increases. In this budget request, the Board also seeks resources and authority to 

operate at 150 FTEs, or five more FTEs than the current level. 

The Board would use the additional funds to address two primary costs. First, the 

additional resources are requested to cover salary and employee benefit costs associated with the fiscal year 2004 and fiscal year 2005 pay increase. Unlike many agencies, there is little room at the Board’s current budget level to absorb a pay increase 

without the additional resources, because fixed costs, including salary and rent, 

comprise about 95 percent of the agency’s expenses. Absorbing even a small amount 

of the pay increase impairs the Board’s ability to perform its statutory mission. 

Second, the Board would use most of the additional resources to implement initiatives to expedite resolution of rail rate disputes between railroads and their largest 

customers and to offer a meaningful forum for the railroads’ smaller customers. In 

fiscal year 2003, the Board adopted new rules to streamline the rail rate process, 

and it now provides for mediation and for technical conferences among the parties 

and Board staff that have produced agreements on numerous discovery and technical issues, thereby resolving matters that in the past would have taken months 

to litigate before the Board. Nevertheless, the press of large rate cases will continue, 

and we also expect parties will file small rate cases once new procedures for such 

cases are in place. Therefore, one of the additional FTEs would be to implement the 

congressional desire that the agency have an Administrative Law Judge, who would 

assist in fostering agreements among the parties in various agency proceedings and 

would expedite the resolution of small rate matters. Additional FTEs would provide 

the Board with another 3-person rate team for fiscal year 2005 to continue to resolve rate cases within their statutory deadlines. 

The requested authorization for 150 FTEs also will provide the Board with the 

discretion to hire staff to replace tenured, retirement-eligible staff prior to their anticipated retirement date. Several retirements can be expected in the near future, 

and having the flexibility to hire qualified people when they are available is particularly important for a high-rated agency that must hire economic and technical expertise when they are available in the labor market. 

Consistent with appropriation acts for past fiscal years, the Board requests a provision allowing user fee collections to be credited to the appropriation as offsetting 

collections and used for necessary and authorized expenses, to the extent that they 

are collected. The overall budget request reflects the workload that is expected and 

the statutory and regulatory deadlines associated with the resolution of the cases 

filed. 

RECENT DEVELOPMENTS THAT IMPACT THE BOARD’S BUDGET REQUEST—YUCCA

MOUNTAIN

Under the Interstate Commerce Act, the Board must authorize the construction 

of new rail lines that are part of the national rail system. Since the Board submitted 

its budget request for fiscal year 2005, it has been named a cooperating agency in 

the environmental review associated with building a rail line to the repository at 

Yucca Mountain, in Nye County, Nevada. The Department of Energy (DOE) has 

been working for years on a program to use Yucca Mountain as a repository for 

spent nuclear fuel and high-level radioactive waste that would be transported there 

from throughout the United States. 

On April 2, 2004, DOE announced that its preferred mode to transport the radioactive materials from throughout the United States to Yucca Mountain was ‘‘mostly 

rail,’’ and it selected as its preferred corridor for a new rail line to Yucca Mountain 

one beginning near Caliente, Nevada. Then on April 8, 2004, DOE announced its 

intent to prepare an Environmental Impact Statement (EIS), as required by the National Environmental Policy Act, for construction and operation of this rail line. 
536

On May 5, 2004, DOE formally requested that the Board, along with the Bureau 

of Land Management and the Air Force, become a cooperating agency on the environmental review of the Caliente Corridor leading to the Yucca Mountain facility. 

DOE made this request due to the Board’s statutory authority to review rail construction projects and its expertise in doing so. 

Our responsibilities as a cooperating agency have already begun. The Board’s Section of Environmental Analysis attended the opening meetings to determine the 

scope of the environmental review for this project. Three meetings were held in Nevada over 3 days the week of May 3rd in Armagosa Valley, Goldfield, and Caliente. 

A meeting was also held the week of May 10th in Reno, and another is scheduled 

for May 17 in Las Vegas. Additional meetings are planned for this month and there 

will be numerous meetings this year and throughout the EIS process, which the 

DOE expects to last at least 2 years. 

DOE has not yet determined whether it will structure the line in a way that 

would trigger Board review. While the Board receives many applications to build 

new rail lines that are subject to the Board’s jurisdiction, not every rail line construction project requires Board approval. The Board has jurisdiction over and must 

approve the construction of any common carrier rail line—a rail line on which the 

railroad must provide service to any shipper who requests it. However, the Board 

does not license the construction of a private rail line—a line over service is not 

available to the general public. 

When the Board receives an application to build and operate a new rail line, it 

conducts the required environmental review of these projects and, unless the project 

is not in the public convenience and necessity, licenses the project. In the typical 

case, the Board is the lead agency for any necessary environmental review. 

In conducting the environmental review, the Board is usually able to accept certain services that are paid for by the project proponent. For example, to complete 

the environmental review of a rail construction project, the applicant selects a thirdparty contractor from the Board’s list of pre-approved contractors and retains it. Although the contractor works at the direction of the Board’s Section of Environmental Analysis, the project proponent pays the contractor. The Board is not reimbursed for its staff time or travel. 

In discharging our duties as a cooperating agency, the Board will require a third 

party contractor who will assist the Board by attending meetings regarding the EIS, 

evaluating the environmental concerns, and providing the specialized, technical expertise concerning issues affecting the rail line construction that would supplement 

the work of the Board’s Section of Environmental Analysis. The Board is working 

with DOE for DOE to reimburse the Board for the costs associated with this contractor. 

However, it would be difficult for the Board to accept any offer for DOE to pay 

for Board staff and travel since, as discussed, in the future DOE may seek Board 

approval for this line. 

Since DOE may become an applicant before the Board, the Board does not want 

to risk compromising its independence in considering the merits of a DOE application by accepting financial support from DOE for additional salary and travel costs. 

The Board’s review of such a proposal must be independent. Otherwise, if the Board 

issued a license, that issuance could be subject to challenge in court on grounds that 

the agency’s independence was jeopardized by its acceptance of reimbursements beyond those reimbursements that are ordinarily permissible in any rail construction 

case. A successful challenge could be costly to the taxpayers and delay the project. 

The Yucca Mountain EIS process will require the resources for two full-time staff 

and travel costs for the biweekly participation meetings. The Board’s participation 

in the Yucca Mountain EIS will require 25 percent of the Board’s current environmental staff, which would adversely affect the Board’s ability to conduct the environmental reviews required for abandonment and rail line construction cases currently pending before the Board and those that may be in the pipeline awaiting formal filing. In order to fully participate, the Board would need an additional 2 FTEs 

and $250,000 above what it has requested for fiscal year 2005. 

OVERALL GOALS OF THE BOARD

In the performance of its functions, the objective of the Board is to ensure that, 

where regulatory oversight is necessary, it is exercised efficiently and effectively, integrating market forces, where possible, into the overall regulatory model. In particular, the Board seeks to resolve matters brought before it fairly and expeditiously. 

Through use of its regulatory exemption authority, streamlining of its decisional 

process and the regulations applicable thereto, and consistent application of legal 

and equitable principles, the Board seeks to facilitate commerce by providing an ef-
537

1 Ex Parte No. 638, Procedures to Expedite Resolution of Rail Rate Challenges to be Considered Under the Stand-Alone Cost Methodology. 2 Ex Parte No. 646, Rail Rate Challenges in Small Cases. 

fective forum for efficient dispute resolution and facilitation of appropriate business 

transactions. The Board continues to strive to develop, through rulemakings and 

case disposition, new and better ways to analyze unique and complex problems, to 

reach fully justified decisions more quickly, and to reduce the costs associated with 

regulatory oversight. 

To be more responsive to the surface transportation community by fostering governmental efficiency, innovation in dispute resolution, private-sector solutions to 

problems, and competition in the provision of transportation services, the Board 

will: 

—Continue to strive for a more streamlined process for the expeditious handling 

of rail rate reasonableness and other complaint cases, in an effort to provide additional regulatory predictability to shippers and carriers; 

—Continue to process diligently cases before the Board and to ensure that appropriate market-based transactions in the public interest are facilitated; 

—Continue to develop new opportunities for the various sectors of the transportation community to work cooperatively with the Board and with one another 

to find creative solutions to persistent industry and/or regulatory problems involving carriers, shippers, employees, and local communities; and 

—Continue to work to ensure the provision of rail service that is responsive to 

the needs of customers. 

FISCAL YEAR 2004 AND 2005 ACTIVITIES OF THE BOARD

Building upon the Board’s success in fiscal year 2003—including issuing 890 decisions in fiscal year 2003, developing regulations to expedite the resolution of large 

rate cases,1 investigating ways to improve the process for small rate cases,2 and informally resolving disputes between railroads and between railroads and their customers—the Board will continue to look for ways to streamline or otherwise improve 

applicable regulations and the regulatory process and to promote private-sector resolution of problems. In this regard, the Board will entertain any proposed exemptions from regulation that might be appropriate and resolve as expeditiously as possible petitions for rulemaking filed by parties. The Board will also continue to look 

independently for ways to shorten and streamline its procedures for bringing and 

prosecuting both large and small rate cases, and to make the environmental review 

process for new rail line construction cases more streamlined as well. And it will 

continue to use its processes to encourage private-sector dispute resolution. 

As noted, the Board is requesting resources for 5 additional staff positions in fiscal year 2005. In particular, the Board would use those resources to establish a new 

rate team, to hire an administrative law judge, and to add additional staff to its 

office that handles consumer complaints. Although the Board has attempted to use 

retirements within the agency to begin to realign its resources for its future needs, 

it cannot complete that realignment through retirements alone. 

The Board is seeking staff resources for three rate team personnel, who will help 

move the rate docket forward. The workload involving rail rates and services is expected to increase in fiscal year 2004 and remain stable through fiscal year 2005, 

particularly given the likely continuing expiration of long-term coal transportation 

contracts. Currently, the Board has 5 coal rate complaint cases at various States 

of adjudication and 5 petitions to reopen and reconsider in former coal rate complaint cases, for a total of 10 rate cases under review. These proceedings will require 

significant staff attention and additional resources, given the complex nature of the 

cases, the numerous steps such as motions and discovery resolution, and the tight 

9-month statutory timeframes for completion once the record is closed. Indeed, the 

bulge in rate cases is already producing a strain on our resources, which have historically been geared to handle two rate cases at a time. (It is for this reason that 

we are requesting additional resources from Congress for one additional 3-person 

rate team for fiscal year 2005.) Additionally, the Board will continue to handle rail 

cases involving questions of whether certain rail activity cannot be regulated at the 

State or local level because such regulation is preempted by Federal law. 

In July and August, 2003, the Senate Committee on Commerce, Science and 

Transportation considered and reported S. 1389, The Surface Transportation Board 

Reauthorization Act of 2003. S. 1389 is a bill to reauthorize the Surface Transportation Board for 5 years, beginning in fiscal year 2004. Section 4 of S. 1389 addressed the small rate case issue, and directed the Board to modify its small rate 

case procedures to address many of their identified problems within 180 days. Sub-
538

section 4©) of that bill specifically directed that, when revising its small rate case 

procedures, the Board ‘‘may provide for an initial determination of such [small] rate 

challenges by an administrative law judge, with an opportunity for appeal of such 

determination by the full Board[.]’’ At a subsequent hearing on rail regulatory matters held in October 2003, several Senate Commerce Committee members again 

noted the benefits of the Board having an Administrative Law Judge to consider 

small rate cases in the first instance, oversee discovery, and issue preliminary decisions in matter of months compared to years with large rate cases. The Administrative Law Judge would decide the cases under a clear standard with cases being appealable to the full Board and ultimately to the courts. 

The final additional staff position would provide the Board expertise on passenger 

rail service and would coordinate and resolve scheduling and operational issues between freight railroads and between those railroads and their customers. The 

Board’s Rail Consumer Assistance Program is an informal mechanism for resolving 

disputes that has proven very effective, but additional resources will help it address 

the increasing number of inquires that result from it becoming more widely known. 

With respect to rail carrier consolidations, we are not aware of any major rail 

mergers in the immediate future. Therefore, the workload in this category is expected to remain somewhat stable through fiscal year 2005 because this category 

includes a broad array of control transactions among larger railroads and smaller 

railroads. Of course, it is impossible to know whether a major merger may be proposed during fiscal years 2004 or 2005. As noted, the Board continues to resolve 

issues related to past Class I rail mergers. Also, the Board will continue to handle 

other rail consolidations involving smaller railroads that are filed with it. 

Concerning other rail restructuring matters, rail abandonment decisions are expected to remain somewhat constant through fiscal year 2005. While the number 

of rail abandonments has remained at this level for the past number of years, the 

increased complexity of abandonment filings continues to require more than one decision in certain cases. The Board continues to see a high volume of ‘‘post abandonment’’ activity relating to trail use, as proponents avail themselves of the National 

Trails System Act, and also relating to offers of financial assistance to continue 

freight rail service. 

With the notable exception of the Yucca Mountain rail line construction project, 

the Board projects that its line construction docket will remain constant through fiscal year 2005. We emphasize that demands on the Board to conduct environmental 

reviews for such transactions continue to grow, and that such activities require a 

significant number of resources to complete. 

Other line transaction activity is expected to increase slightly through fiscal year 

2005 as more carriers continue to sell unprofitable or marginally profitable lines as 

an alternative to service abandonment, particularly in light of the recent economic 

downturn. In the past few years, the Board has seen a number of line acquisitions 

by both small carriers and noncarriers as rail carriers restructure their rail systems. 

SUMMARY

The Board’s budget request would ensure the resources needed for the Board to 

continue to implement its responsibilities expeditiously and effectively as Congress 

intends. I would be happy to answer any other questions that the Committee may 

have about the Board’s fiscal year 2005 budget request. 

ATTACHMENT NO. 1

SALARIES AND EXPENSES 

[Dollars in thousands] 

Fiscal Year 

2003 Actual 

Fiscal Year 

2004 Estimate 

Fiscal Year 

2005 Request 

Difference 

From 

Permanent Positions ..................................................................... 145 145 150 5 

Full-time Equivalents ................................................................... 137 145 150 5

Personnel Compensation and Benefits ........................................ $15,268 $16,025 $17,703 $1,678 

Travel ............................................................................................ $41 $80 $87 $7 

Other Costs ................................................................................... $3,998 $3,416 $3,493 $77

TOTAL BUDGET RESOURCES ............................................ $19,307 $19,521 $21,283 $1,762
539

CHANGES IN RESOURCES

For personnel compensation and benefits, $17,703,000 is requested to support the 

Board’s permanent positions. Included in this request is $144,000 to fund the annual cost of the January 2004 pay raise and $221,000 for the January 2005 pay 

raise. The request also includes $50,000 for lump-sum leave payments to retiring 

employees. 

A travel budget of $87,000 is requested primarily for on-site visits to railroads to 

finalize audits and review public accountants’ workpapers, to physically inspect proposed rail abandonment and construction sites, and to verify environmental data 

provided by parties to proceedings, conduct operational reviews, meet with shippers 

regarding rail service issues and compliance, defend the Board’s decisions in courts 

across the country, and generally provide presentations, upon request, on issues 

within the Board’s jurisdiction. Due to the increased number of environmental reviews associated with new rail construction cases and attendance at field hearings 

on high-profiled cases, staff travel has increased and is expected to remain at the 

increased level through fiscal year 2005. 

Funding to cover other costs is requested at $3,493,000. Included in this number 

are rental payments to the General Services Administration (GSA) and payments 

for employee training, telephone service, postage, information technology systems 

support and equipment, miscellaneous services and supplies, and reimbursable services acquired from other Federal agencies. The increase in other costs is mainly associated with the projected increase in rental payments to GSA and an increased 

level of security for all Federal agencies. The Board has increased its level of physical security in light of recommendations by GSA and the Department of Homeland 

Security and has implemented a Business Continuity Plan along with sheltering-inplace procedures to provide for the physical security of its employees and the continuity planning and continuance of its statutory mission. 

ATTACHMENT NO. 2

FISCAL YEAR 2005 CONGRESSIONAL BUDGET JUSTIFICATION WORKLOAD SUMMARY 1

Workload Category 

Actual Fiscal 

Year 2003 Board 

Decisions and 

Court-related 

Work 

Estimated 2 Fiscal Year 2004 

Board Decisions 

and Court-related Work 

Estimated 3 Fiscal Year 2005 

Board Decisions 

and Court-related Work 

Rail Carrier Control Cases ......................................................................... 52 55 55 

Rail Rates and Service .............................................................................. 70 86 86 

Rail Abandonments and Constructions ..................................................... 512 501 501 

Other Line Transactions ............................................................................. 186 204 204 

Other Rail Activities ................................................................................... 33 51 47 

Non-Rail Activities ..................................................................................... 39 51 53

Total .............................................................................................. 890 948 946

1 At this time, the Board believes that the number of Board decisions and court-related work is the best measure of workload at the 

Board. Certain activities performed at the Board that provide direct and indirect support for rulemakings and decisions in specific cases are 

not reflected in these workload numbers. Such activities not reflected include: enforcement activities; rail audits and rail carrier reporting 

oversight; administration of the rail waybill sample and development of the Uniform Rail Costing System; and case-related correspondence 

and informal public assistance. 2 Estimated workloads for fiscal year 2004 and 2005 are based on historical information regarding actual filings and best estimates of 

probable future filings by parties. Because the Board is principally an adjudicatory body, it does not directly control the level or timing of actual case filings. 3 Ex Parte No. 638, Procedures to Expedite Resolution of Rail Rate Challenges to be Considered Under the Stand-Alone Cost Methodology. 

OFFICE OF GOVERNMENT ETHICS 

PREPARED STATEMENT OF MARILYN GLYNN, ACTING DIRECTOR

Thank you for the opportunity to submit a statement in support of the request 

of the U.S. Office of Government Ethics (OGE) for fiscal year 2005 resources of 

$11,238,000 and 80 FTEs. This request represents an increase of $500,000, primarily to meet expected increases in personnel costs. 

The Office of Government Ethics is responsible for overseeing the ethics program 

of the executive branch, a program designed to help prevent conflicts of interest and 

promote integrity in Government. OGE sets the requirements of the program, develops executive branch-wide policies, serves as a resource/consultant to agency ethics 

officials and monitors agency programs to help ensure that the agencies are carrying 
540

out their responsibilities effectively. OGE also plays a significant role in the review 

and certification of the financial disclosure forms of nominees to positions requiring 

Senate confirmation. The day-to-day activities of the program are the responsibility 

of each executive branch agency. These activities include initial collection and review of financial disclosure forms; providing advice and training to agency employees on the criminal conflict of interest laws and the executive branch standards of 

conduct; and investigation and administrative enforcement of the standards of conduct. 

The ethics program that is directed by OGE is part of the basic infrastructure 

that supports good governance within the Federal executive branch. The resources 

expended by OGE to help promote integrity and prevent conflicts of interest are 

small in comparison to the resources expended by investigators and prosecutors who 

enforce ethics and conflict of interest rules and laws. Moreover, our preventive efforts help guard against the loss of resources through inadvertent or deliberate misuse. We believe the resources we have requested are those necessary to adequately 

support a strong ethics program. 

FISCAL YEAR 2005

We would like to highlight some of the major programs anticipated for fiscal year 

2005. 

During any fiscal year in which a Presidential election occurs, OGE anticipates 

a large influx of Presidential appointees, regardless of the outcome of an election. 

OGE’s role in clearing Presidential nominees is designed to help them understand 

the application of the conflict of interest requirements to their Government service 

and to secure their agreement to taking the necessary steps to resolve potential conflicts of interest. Our goal is to review nominee statements in a timely manner to 

avoid any unnecessary delay in the nomination/confirmation process. OGE’s resources are shifted from other programs during this period to handle the increased 

workload in our financial disclosure review systems. Once an individual is appointed, OGE follows through to see that any agreements made by an appointee to 

address potential conflicts of interest are carried out. In addition, during this period, 

OGE will continue to conduct a second level review of over 1,000 annual and termination financial disclosure statements filed by Presidential appointees each year. 

As a part of the change that typically occurs after a Presidential election, OGE 

also will provide ethics training through OPM, and the White House if requested, 

to incoming Presidential appointees, new noncareer SES and Schedule C appointees, 

and White House staff. Additionally, we expect to help agencies provide accurate 

post-employment advice to employees who are leaving the government. 

In the education and training area, OGE will develop instructor and participant 

guides to be used by departments and agencies to deliver their annual ethics training, as well as training evaluation instruments to measure what employees learned 

from various instructor-led and web-based training courses. In training ethics officials, OGE will develop and conduct additional instructor-led ethics training courses 

for ethics practitioners, trainers, counselors, financial disclosure reviewers, and enforcement officials in headquarters and the regions. 

To reach ethics officials outside the Washington area, OGE plans to offer regional 

symposia for approximately 240 ethics practitioners in the field. OGE maintains an 

e-mail list service to communicate with 2,000 practitioners and enforcement personnel world-wide. OGE also will host the 15th Annual National Government Ethics 

Conference for approximately 700 ethics practitioners in September 2005. 

The Office has added an employee survey to its evaluations of individual agency 

ethics programs. Begun on a more limited basis this fiscal year, these surveys will 

be carried out throughout fiscal year 2005 in approximately one-third of the 35 Federal agencies evaluated. The information gathered through the surveys helps provide OGE with a better basis on which to judge the effectiveness of the individual 

agency programs under review and the overall executive branch ethics program. 

OGE desk officers will maintain their day-to-day communications with agencies 

assigned to them. This continuing liaison between OGE and agency ethics staffs enables OGE to respond to the needs of the agencies in a timely and accurate manner. 

In addition, this interaction provides OGE with an early warning that an agency 

ethics program is deficient or has problems that require specialized attention. 

OGE will continue to provide international technical assistance at the request of 

the Departments of State and Justice. In fiscal year 2005, OGE plans to participate 

in Global Forum IV, the Follow-up Mechanism for the Inter-American Convention 

Against Corruption and the evaluation mechanisms of the Council of Europe’s 

Group of States Against Corruption. The United States will also be reviewed under 

the latter two mechanisms during fiscal year 2005. 
541

These are just some of the programs and activities envisioned for fiscal year 2005. 

We are pleased with the past success of the executive branch ethics program and 

look forward to the challenge of maintaining and enhancing the quality of the program. 

(543)

NONDEPARTMENTAL WITNESSES 

[CLERK’S NOTE.—The following testimonies were received by the 

Subcommittee on Transportation, Treasury and General Government, and Related Agencies for inclusion in the record. The submitted materials relate to the fiscal year 2005 budget request. 

The subcommittee requested that public witnesses provide written testimony because, given the Senate schedule and the number 

of subcommittee hearings with Department witnesses, there was 

not enough time to schedule hearings for nondepartmental witnesses.]

PREPARED STATEMENT OF THE INTERNATIONAL LORAN ASSOCIATION

On behalf of the International Loran Association (ILA), I am writing in conjunction with your work on the fiscal year 2005 Department of Transportation, Treasury 

and Related Agencies Appropriations bill. I respectfully request that this submission 

be made part of your hearing record in conjunction with the subcommittee’s work. The ILA is asking the committee to support $25 million in funding from the fiscal 

year 2005 Federal Aviation Administration (FAA) budget—the same level as requested last year—as the next increment necessary to continue modernization and 

enhancement of Loran. 

In recent years, the committee has provided about $120 million to modernize and 

upgrade Loran because it is a multimodal navigation system with demonstrated 

cost/benefits important for our national transportation safety and security objectives. In fact, at this juncture, it would cost about $100 million to decommission the 

system, approximately the same amount that will be required to complete the modernization. However, the most compelling reason to continue providing resources to 

complete this work is because Loran is the only multimodal system we have in the 

United States that can support the global positioning satellite (GPS) system in all 

modes of transportation, as well as in timing applications affecting the majority of 

our population. 

In previous years, our submissions for the hearing record have documented numerous security, economic and technical issues as to why the operation of our national infrastructure and the safety of our citizens should not be placed at risk by 

depending solely on GPS for vast transportation, timing and navigation needs. The 

Volpe Center’s ‘‘Vulnerability Assessment of the Transportation Infrastructure Relying on the Global Positioning System’’ in 2001 framed those issues regarding overdependence on a single system, and an ever-growing body of evidence continues to 

be amassed to validate the continuation of Loran as the most complementary and 

cost effective system available to support GPS and eliminate national vulnerabilities. Indeed, ongoing studies have verified that not only is Loran the only other 

multimodal system we have, but also that Loran is the most complementary and 

most cost effective system we have. 

As you and other committee members are aware, the FAA, the U.S. Coast Guard 

(USCG), academic and industry experts have conducted an active Loran evaluation 

program spanning several years and a final report on that evaluation program is 

to be submitted to the U.S. Department of Transportation (DOT) on March 31, 2004. 

There are two major aspects to the report: one is the technical evaluation to ensure 

a modern or enhanced Loran system can meet the performance requirements of the 

FAA and USCG; and the other is a Loran benefit-cost study completed by the Volpe 

Center in 2003. It is fair to say that the technical evaluation section will be very 

positive, particularly because virtually all of the contributing studies have been continuously presented at numerous professional conferences and other technical fora. 

In addition, previous DOT-sponsored economic studies on Loran have been uniformly positive, and given the identified need for a national GPS backup, it is virtually assured that the economic section of the Loran evaluation study will be very 

favorable as well. 
544

Other recent government documents also indicate there is widespread acknowledgement that Loran is indeed the best system the country can utilize to backup 

and support GPS. 

For example, in April 2003, a Memorandum of Agreement (MOA) regarding the 

recapitalization, modernization, and operation of Loran was finalized and approved 

by the FAA, USCG, and DOT. This interagency MOA states: ‘‘The parties recognize 

the multi-modal nature of the Loran navigation system and the necessity of managing Loran as a national asset in a multi-modal manner. The purpose of this agreement is to set forth terms by which the parties will provide service in order to provide a multi-modal backup to the Global Positioning System (GPS) based services’’. 

In referencing the Volpe Study on GPS vulnerabilities cited above, the MOA states: 

‘‘both the FAA and USCG acknowledged that GPS is indeed vulnerable to intentional and unintentional interference and that backup systems are required for both 

the National Airspace System (NAS) and the Marine Transportation System 

(MTS)... The FAA and USCG also recognize that Congress, aviation, maritime, 

and other users regard Loran-C as a national asset that must be preserved as a part 

of the nation’s critical infrastructure’’. 

In January 2004, the DOT released a report for Secretary Mineta entitled: ‘‘Radionavigation Systems: A Capabilities Investment Strategy,’’ which also contained some 

important findings, even though much of the report’s information was approximately 1 year old. First, it once again clearly identified Loran as the only 

multimodal backup to GPS and the best theoretical backup to GPS. Second, although the Loran report is less than 1 month away, it includes a recommendation 

to ‘‘Complete the evaluation of enhanced Loran to validate the expectation that it 

will provide the performance to support aviation Non-Precision Approach (NPA) and 

maritime Harbor Entrance and Approach (HEA) operations. If enhanced Loran 

meets the aviation NPA and maritime HEA performance criteria, and is cost effective across multiple modes, the Federal Government should operate Loran as an element of the long-term radionavigation system mix’’. In addition, the report looks forward and identifies Loran as a backup for the new aviation Automatic Dependent 

Surveillance—Broadcast (ADS–B) system and the new marine Automatic Identification System (AIS), both of which will be widely used in the future. Finally, the report suggests exploration of the collocation of GPS augmentation and Loran facilities, which would not only maximize their synergies but also optimize cost savings 

to the Nation. 

From an international perspective, there is also recognition regarding the need 

and benefits of Loran. Ultimately, that realization will provide a major economic opportunity for U.S. technology because of equipment standardization and market 

globalization, similar to what has occurred with GPS. For example, in August 2003 

the European Maritime Radionavigation Forum published a study entitled: ‘‘GNSS 

Vulnerabilities & Mitigation Measures: A Study for the European Maritime Radionavigation Forum,’’ and among its conclusions were: ‘‘There is a significant risk of 

losing GNSS for limited periods and in limited areas... The consequences of losing GNSS will become greater as reliance on it increases... Loran could provide 

an effective backup in Europe, at a capital cost estimated at 50m’’. 

In addition, the ILA was invited to participate in a meeting in Japan last fall, 

where representatives from Japan, China, Korea, Russia, and the United States 

were asked to address the question of GPS vulnerabilities and how to solve the 

problem. Virtually the entire conference focused on one system: Loran. 

In summary, recognition of the various safety, security, economic, and political 

benefits that Loran can provide to the Nation has continued to grow rapidly, based 

on solid scientific and economic studies by our government, academia, industry, and 

other governments. A positive Loran report will be delivered to the DOT on March 

31, 2004, and the DOT has committed to making a long-overdue Loran policy decision. It is now a certainty that Loran provides the Nation with the ability to mitigate GPS vulnerabilities in multimodal transportation and timing applications that 

play key roles in the continuing operations of the national infrastructure, and that 

the technology does so at a remarkably low cost. 

Loran’s future, and its ability to complement GPS, depends on the continuation 

of the modernization program, which is already well underway. As previously documented, that modernization program will reduce Loran’s operations and maintenance costs from approximately $27 million a year to approximately $15 million annually, and enable multimodal support at a fraction of the cost other single mode 

system require. Moreover, the enhanced Loran system that will evolve from the 

modernization program will provide better performance than the single mode systems, and provide a national roadmap to future GPS-based systems that can incorporate Loran as a backup, such as ADS–B and AIS. 
545

As you and all committee members well understand, GPS has recognized 

vulnerabilities that could potentially affect the safety of tens of millions of Americans and the security of our critical national infrastructure. In combination with a 

modernized Loran system, GPS and Loran can together form the basis of a national 

infrastructure that is extremely robust, now and well into our future. 

For these reasons, we urge the committee to support fiscal year 2005 funding in the FAA budget of no less than $25 million to continue a Loran modernization program that will help assure our Nation’s transportation safety and infrastructure security objectives are achieved in a most cost-effective manner for government providers, private users, and taxpayers. 

PREPARED STATEMENT OF BERNARD H. BERNE, M.D., PH.D. 

OPPOSITION TO BUDGET REQUEST FOR APPROPRIATION TO FEDERAL BUILDINGS FUND

FOR FOOD AND DRUG ADMINISTRATION CONSOLIDATION, MONTGOMERY COUNTY, MARYLAND

I am a resident of Arlington, Virginia. I serve the Food and Drug Administration 

(FDA) as a Medical Officer and as a reviewer medical device approval applications. 

I am submitting this statement as a private individual. 

I ask your subcommittee to deny the administration’s request to provide $88,710,000 to the General Services Administration’s (GSA’s) Federal Buildings 

Fund for the construction of a FDA Consolidation in Montgomery County, Maryland. 

This request appears on page 961 of the President’s Budget for fiscal year 2005. 

The General Services Administration (GSA) is now designing and constructing 

this facility. GSA would use the additional funds to continue this wasteful project 

in suburban White Oak, Maryland. Please deny these funds for the following reasons: 

Economic Considerations 

FDA will need to pay rent to GSA if it occupies this facility. The rents would likely be higher than rents that GSA and FDA pay to private property owners, since 

GSA would not need to enter into competitive bidding processes. 

Congressional authorizing committees need to evaluate the current costs of the 

consolidation and compare them to the costs of maintaining FDA’s current facilities. 

No Congressional committee has done this during the past 15 years. 

Lack of Need for Relocating FDA to White Oak Facility 

All or nearly all of FDA’s offices that would move to White Oak are presently located in satisfactory leased facilities. Some, such as my own, are now in excellent 

buildings. There is no clear need or economic reason to relocate these offices to 

White Oak or to consolidate any part of FDA at this location. 

White Oak is an unsatisfactory location for FDA’s headquarters consolidation. The 

project would promote urban sprawl. 

FDA’s White Oak facility would occupy 125 acres next to a golf course in a suburban residential neighborhood in Montgomery County, Maryland. The FDA site is 

outside of the Capital Beltway on a largely forested 750-acre property surrounded 

by heavily congested roads and highways. The site is 3 miles from the nearest Metro 

station, and has only infrequent bus service. 

An FDA consolidation at White Oak would bring 6,000 FDA employees to this 

Washington area suburb. Most would need to commute for much longer times and 

distances than they presently do. White Oak is more than 20 miles from most 

present FDA facilities. 

I and thousands of other FDA employees presently commute to work by Metro, 

as our workplaces are near Metro stations. This will be impossible at White Oak. 

FDA employees driving to White Oak will add traffic congestion and air pollution 

to the Washington Metropolitan Area. This is especially unfortunate because the 

Washington Metropolitan Area already has the second worst traffic congestion of all 

urban areas in the United States. The Federal Government will need to subsidize 

many improvements to roads and public transit to accommodate the many FDA employees and associated businesses that would relocate from better locations to this 

distant suburb. 

FDA employee surveys have revealed widespread opposition to this relocation. 

Three years ago, a survey of those employees who would relocate first to White Oak 

showed that 70 percent opposed the move. Many stated that the relocation would 

impair FDA’s ability to regulate drugs and medical devices. 

It is clear that the location of the facility will have long-lasting adverse effects 

on FDA’s ability to recruit and retain qualified employees. Further, many more FDA 
546

employees will telecommute than presently do. They will rarely work at the new facility. This will greatly diminish FDA’s efficiency and will contradict a major goal 

of the FDA consolidation at White Oak. 

The Washington Metropolitan area has a number of better sites at which FDA 

can consolidate. Some of these, such as the Southeast Federal Center in the District 

of Columbia, are near other Federal facilities and Metrorail stations. 

Legal Issues 

On February 23, 2001, I and a number of other FDA employees joined the Sierra 

Club and the Forest Conservation Council in a law suit that is intended to stop the 

White Oak project. For a number of reasons, FDA’s occupancy of any buildings at 

White Oak would be illegal. The U.S. District Court for the District of Columbia is 

presently considering this suit. 

The White Oak facility would house the Office of the Commissioner of Food and 

Drugs, as well as most other FDA headquarters offices. This would violate 4 U.S.C 

§ 72, which states:

‘‘All offices attached to the seat of government shall be exercised in the District 

of Columbia, and not elsewhere, except as otherwise expressly provided in law.’’

4 U.S.C.§ 72 is derived from the 1790 Act that established the District of Columbia 

as the Nation’s capital. The first Congress enacted this law, which President George 

Washington signed. 

There is no law that expressly provides that FDA’s headquarters offices shall be 

exercised outside of the District of Columbia. 

The FDA Revitalization Act (Public Law 101–635; 21 U.S.C. § 369b), authorizes 

the Secretary of HHS to enter into contracts to acquire property and to construct 

and operate a consolidated FDA headquarters facility. This Act does not provide the 

location of the consolidated facility. 

I ask Congress not to appropriate funds to support an illegal activity. The 1790 

Act had the worthy purpose of ensuring that all central offices of the Federal Government would consolidate in the Federal capital District, and not elsewhere. The 

consolidated FDA facility would be one such office that is ‘‘attached to the seat of 

government’’. 

Article 1, Section 8, of the Constitution gives Congress exclusive jurisdiction over 

the District of Columbia. Your committee should take no action to support the location of FDA’s headquarters at a location that is outside of the District. Any such 

action would tend to vitiate this section of the Constitution, which 4 U.S.C. § 72 

is intended to support. 

Executive Order 12072, Aug. 16, 1978, (40 U.S.C. §490 note) states in Section 1–

1, Subsection 101:

‘‘Federal facilities and Federal use of space in urban areas shall serve to strengthen the nation’s cities and to make them attractive places to live and work. Such 

Federal space shall conserve existing urban resources and encourage the development and redevelopment of cities.’’

White Oak is not in or near any city. An FDA consolidation at White Oak (which 

is in an ‘‘urban area’’, the Washington Metropolitan Area) would not strengthen any 

cities. The FDA facility would not encourage the development or redevelopment of 

any cities. 

Executive Order 12072, Section 1–1, Subsection 101, contains the word ‘‘shall’’ in 

several locations. FDA therefore can not legally locate its headquarters in suburban 

White Oak. 

Executive Order 12072 and several Federal statutes require that heads of Federal 

agencies consult with local city officials to obtain their recommendations for and objections to all proposed new Federal facilities. Neither GSA nor FDA officials ever 

consulted with officials of the District of Columbia or of the City of Rockville in 

Montgomery County, Maryland, concerning the White Oak facility. 

This lack of consultation violated Executive Order 12072 and several laws. It prevented District and Rockville officials from recommending alternative sites for the 

consolidated facility within their own jurisdictions and from objecting to the selection of the White Oak site. 

The Public Buildings Act of 1959, as amended, requires that the Committee on 

Environment and Public Works of the U.S. Senate approve prospectuses that describe the location and maximum costs of any large buildings that GSA may wish 

to construct before Congress can appropriate funds to design and construct such 

buildings. That Committee has never approved a prospectus that describes FDA’s 

White Oak facility. 
547

Paragraph 7 of Senate Rule XVI requires that committee reports on general appropriations bills identify each provision ‘‘which proposes an item of appropriation 

which is not made to carry out the provisions of an existing law, a treaty stipulation, or an act or resolution previously passed by the Senate during that session.’’ 

If your committee proposes any appropriation of funds for an FDA consolidation, 

your Committee Report needs to identify this appropriation as being one that is not 

made to carry out the provisions of any existing law, treaty, or act or resolution that 

the Senate has previously passed during this session. 

The Treasury and General Government Appropriations Act, 2000 (Public Law 

101–58), the Consolidated Appropriations Act, 2001 (Public Law 106–544), the 

Treasury and General Government Appropriations Act, 2002 (Public Law 107–67), 

the Consolidated Appropriations Resolution, 2003 (Public Law 108–7), and the Consolidated Appropriations Act, 2004 (Public Law 108–199) appropriated funds to GSA 

that could support FDA’s consolidation in Montgomery County, Maryland. However, 

all of these Acts contain provisions that state:

‘‘Provided further, That funds available to the General Services Administration 

shall not be available for expenses of any construction, repair, alteration, or acquisition project for which a prospectus, if required by the Public Buildings Act of 1959, 

as amended, has not been approved, except that necessary funds may be expended 

for each project for required expenses for the development of a proposed prospectus.’’

The Public Buildings Act of 1959, as amended, requires a prospectus that describes FDA’s White Oak facility because the project’s cost exceeds $1,500,000. No 

prospectus that described this facility had been approved before Public Law 101–

58, Public Law 106–544, Public Law 107–67, and Public Law 108–199 were enacted 

into law. Therefore, GSA may only legally use the funds appropriated in these Acts 

for ‘‘required expenses for the development of a proposed prospectus’’. GSA cannot 

legally use the funds to design and construct any buildings. 

The report of the Committee on Appropriations of the House of Representatives 

(House Report 107–152, July 23, 2001), which accompanied the bill (H.R. 2590) that 

became Public Law 107–67, states on p. 65 under the heading: ‘‘General Services 

Administration’’ ‘‘Federal Buildings Fund’’ ‘‘Construction and Acquisition’’ ‘‘Recommendation’’ the following: ‘‘All construction projects funded in this bill are subject 

to authorization by the Committee on Transportation and Infrastructure’’. 

FDA’s White Oak project was one of the construction projects funded under Public 

Law 107–67 (H.R. 2590). Despite this, GSA is presently designing and starting to 

construct the FDA consolidation without an approved prospectus and without receiving authorization by the Committee on Transportation and Infrastructure. GSA’s actions are contrary to the House Appropriations Committee’s statement in House Report 107–152, and, further, are illegal. 

Some GSA officials claim that the FDA Revitalization Act (Public Law 101–635) 

authorizes appropriations to GSA without the need for prospectus approvals. This 

claim is incorrect. Public Law 101–635, which amended the Federal Food, Drug and 

Cosmetic Act, authorized appropriations that permit the Secretary of HHS to enter 

into contracts to construct and operate a consolidated FDA facility. 

Public Law 101–635 specifically limits the role of the Administrator of General 

Services in the FDA consolidation to consultation with the Secretary of HHS. Public 

Law 101–635 does not authorize any appropriations that can permit GSA to conduct 

any such activities, nor does it authorize any appropriations to GSA’s Federal Buildings Fund. Clearly, GSA will use any new funds illegally, just as it is using the previously appropriated funds. 

The National Environmental Policy Act (NEPA) of 1969 requires that Federal 

agencies compare in an Environmental Impact Statement (EIS) alternative locations 

for any large new Federal facility. However, the EIS for the White Oak FDA facility 

did not make any such comparisons. 

The EIS only compared the environmental impacts of an FDA consolidation at 

White Oak with the ‘‘no action’’ alternative. Following this legally inadequate comparison, GSA and FDA officials selected White Oak as the location for the facility. 

GSA and FDA officials therefore violated NEPA when they selected the White 

Oak site. Congress should not appropriate funds to support this illegal selection. 

A Federal court may prevent FDA from consolidating its facilities at White Oak 

for one or more of the above reasons. Congress should not provide funds for FDA 

to occupy the White Oak facility until the Federal courts decide whether the project 

can proceed. 

I therefore ask that your subcommittee not provide the requested $88,710,000 to 

GSA in this legislation. Thank you. 
548

PREPARED STATEMENT OF THE AMERICAN PASSENGER RAIL COALITION

Chairman Shelby and Members of the Subcommittee on Transportation, Treasury 

and General Government, thank you for the opportunity to provide testimony on fiscal year 2005 funding for Amtrak, the Nation’s intercity passenger railroad. My 

name is Harriet Parcells and I am Executive Director of the American Passenger 

Rail Coalition (APRC), a national association of railroad equipment suppliers and 

rail businesses. 

For fiscal year 2005, Amtrak has requested $1.79 billion. Of this total, nearly $800 million is for capital investments to continue the work taking place under the 

leadership of Amtrak President David Gunn to bring Amtrak into a state of good 

repair. Amtrak’s request for operations is $570 million, $11 million less than Amtrak requested in fiscal year 2004 and an indication that Mr. Gunn’s efforts to improve efficiency, reduce costs and implement management reforms at Amtrak are 

yielding positive results. APRC supports Amtrak’s budget request and asks the subcommittee to fund Amtrak at $1.79 billion. While we recognize that funding constraints face the subcommittee, APRC believes that funding Amtrak much below 

$1.79 billion would jeopardize the substantial progress taking place at Amtrak. The 

administration’s fiscal year 2005 budget of $900 million for Amtrak is nearly 50 percent below Amtrak’s budget request and $318 million or 26 percent below Amtrak’s 

current appropriation of $1.218 billion. Funding Amtrak at $900 million would provide virtually no funding to continue the important capital investments identified 

in Amtrak’s Five Year Strategic Capital Plan and that Amtrak has been undertaking since 2003. Amtrak President David Gunn has stated that funding at $900 

million would lead to a shutdown of the national system. APRC also supports strong 

funding for the rail safety and research and development programs at the Federal 

Railroad Administration. 

AMTRAK RIDERSHIP IS STRONG ON TRAINS NATIONWIDE

Amtrak is a valued means of transportation used by million of Americans annually. For travel in metropolitan corridors, Amtrak provides a cost-effective, efficient 

alternative to congested highways and airports. For residents of rural communities, 

Amtrak trains are often the only convenient, affordable, all-weather public transportation available. In fiscal year 2003, 24 million passengers rode Amtrak trains, the 

highest level in Amtrak’s history. Ridership gains occurred on routes across the system. Each month from June-December 2003, gains in rail ridership ranged from 7–

12 percent over levels for the same period in 2002. Amtrak ticket revenues also rose 

each month from June-December 2003. Thanksgiving ridership was Amtrak’s highest ever for this holiday—Amtrak carried approximately 595,000 passengers over 

the 7 days from Tuesday, November 25-Monday, December 1. Ridership on Amtrak’s 

long-distance trains was particularly strong, with increases of 14 percent or more 

over last year. 

Some policymakers question the need for long-distance trains, yet the strong 

growth in ridership on these trains underscores the important mobility and economic benefits they provide, especially for America’s small cities and rural communities (see table 1).

TABLE 1.—AMTRAK MONTHLY RIDERSHIP GROWTH JUNE-DECEMBER FISCAL YEAR 2003 

COMPARED TO FISCAL YEAR 2002

[Amount in percent] 

Month Systemwide Total Long-distance 

Trains 

June ......................................................................................................................................... ∂6.8 ∂13.6

July .......................................................................................................................................... ∂7.1 ∂9.4

August ..................................................................................................................................... ∂7.3 ∂14.1

September ............................................................................................................................... ∂11.4 ∂22.2

October .................................................................................................................................... ∂10.7 ∂30.9

November ................................................................................................................................. ∂11.7 ∂32.0

December ................................................................................................................................. ........................ ∂16.3

Source: Amtrak and NARP News (Jan. 2004 issue). 

California’s Pacific Surfliner trains, operating between San Diego and Los Angeles 

and Santa Barbara, continue to experience record-breaking ridership. Two million 

passengers rode these trains in fiscal year 2003, a 25 percent increase over fiscal 

year 2002. Ridership on other major rail corridors in the State—the San Joaquin 

service and the Capitol Corridor—also had strong ridership growth. Ridership on 
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the Texas Eagle rose 20 percent in fiscal year 2003 over 2002 levels. In the Midwest, eight trains that serve the region experienced a 16 percent rise in ridership 

from May-December 2003 compared to 2002. In the Northeast, Acela Regional trains 

carried more passengers than any other Amtrak service in the Nation—nearly 6 

million riders—up 3.7 percent over last year. The Pennsylvanian train ridership 

surged 64 percent, benefitting from a routing change that terminated the train in 

Pittsburgh rather than Chicago. 

Ridership Gains Continue in Fiscal Year 2004.—Gains in Amtrak ridership continued in first 4 months of fiscal year 2004 (Oct. 2003-Jan. 2004). Northeast Corridor ridership was up over 6 percent; ridership on long-distance trains was up 

nearly 20 percent. 

AMTRAK’S ABILITY TO CONTINUE CAPITAL INVESTMENTS IS CRUCIAL

Amtrak President David Gunn and the Amtrak Board of Directors began implementing a program of capital investments in fiscal year 2003 that, if sustained over 

the next several years, will bring the national Amtrak system into a state of good 

repair. These capital investments are essential to improving the reliability, safety 

and efficiency of the national Amtrak system. Amtrak’s accomplishments to date in 

making capital improvements are significant. In fiscal year 2003, 147,600 concrete 

ties were installed in the Northeast Corridor, replacing old wood ties. Twenty-two 

miles of continuous welded track were installed and track bed was improved. These 

investments will provide a smoother ride for travelers and reduce track maintenance costs. Track improvements to a third track have increased capacity and enabled speeds to rise from 60 to 110 mph. Thirty-three miles of signal cables were 

replaced, 37 miles of electric catenary hardware renewed and 22 bridges retimbered. 

Substantial improvements were and continue to be made to rolling stock. Twentyone wrecked Amfleet and Superliner railcars were rebuilt and 23 food service cars 

were remanufactured and restored to service on routes around the country. One 

hundred and three railcars and locomotives went through heavy overhauls or were 

remanufactured. APRC urges Congress to provide Amtrak with sufficient funding in 

fiscal year 2005 to enable the railroad to continue these essential capital investments. 

RAIL CAPITAL INVESTMENTS PRODUCE U.S. JOBS AND OTHER BENEFITS

The U.S. rail manufacturing and supply industry contributes to the health of the U.S. economy, with over $20 billion in annual sales (approximately $7 billion to U.S. 

intercity, commuter and transit passenger railroads) and over 150,000 workers employed. Capital investments made by Amtrak support jobs for Americans in factories 

and businesses in States across the country. Investments in transportation infrastructure are vital to the efficient movement of people and goods and a robust, competitive economy. Every billion dollars invested in transportation infrastructure 

projects creates approximately 42,000 jobs. 

In the Pacific Northwest, investments in new rail infrastructure and equipment 

by Washington, Oregon and public and private partners to improve the quality and 

speed of rail service in the Pacific Northwest High Speed Rail Corridor resulted in 

a tripling in intercity passenger rail ridership over levels 10 years ago. With further 

investments, the region anticipates rail ridership to grow to 2.2 million by the year 

2018. The Midwest Regional Rail Initiative, a plan to link cities and communities 

throughout the Midwest with improved passenger rail service, is projected to stimulate substantial public and private investment and create 2,300 permanent new rail 

service jobs, 6,300 construction jobs (over 10 years) and 18,200 indirect jobs. Public 

investments to bring the Acela high-speed rail service to the Northeast Corridor 

generated economic benefits for States and businesses around the country. Contracts were signed with over 70 suppliers in more than 20 States. 

AIR-RAIL INTERMODAL CONNECTIONS PROVIDE MANY BENEFITS

Intermodal transportation hubs that provide an easy transfer for travelers between modes—from airplanes to intercity passenger trains or intercity trains to 

local transit systems—enhance the efficiency of the overall transportation system 

and provide many benefits to travelers. While progress in developing intermodal 

connections has been made since enactment of the ‘‘Intermodal Surface Transportation Efficiency Act of 1991’’, much work remains in this area. Only a few U.S. airports, such as Newark Airport in New Jersey and Burbank Airport in California, 

provide an easy transfer between Amtrak trains and airplanes. At Newark Airport, 

Continental Airlines and Amtrak have created a code-sharing arrangement, the only 

one in the Nation, which covers rail travel for Continental passengers between Newark Airport and six cities on the Northeast Corridor. A study comparing travel by 
550

several different modes (Amtrak, NJ Transit or by car) to Newark Airport from 

nearby cities (Newark, NYC, Philadelphia, Trenton) found that considerable time 

can be saved when rail transportation is used. An added benefit is that adverse 

weather and road conditions which cause great time increases for auto travel generally don’t impact rail. At Maryland’s BWI Airport, travelers can easily connect between trains and airplanes by a bus service that operates between the airport and 

Amtrak’s BWI train station. This service works well and is used by many travelers. 

In Pennsylvania, part of the plan for the new Harrisburg International Airport terminal is a $10 million train station, which will connect to the new airport terminal 

by a glass-enclosed moving sidewalk. A larger number of U.S. airports have convenient rail transit connections to the airport: Atlanta’s Hartsfield Airport; Chicago’s 

Midway and O’Hare Airports; St. Louis Lambert Field Airport; Washington DC’s 

Reagan National Airport and others. These types of intermodal connections are commonplace throughout Europe and other parts of the world where airports have become true multi-modal transportation centers. U.S. transportation policy and funding should continue to encourage development of intermodal centers and easy connections between modes to boost the efficiency of the U.S. transportation system and 

ease travel for passengers. 

RAIL INFRASTRUCTURE BONDS TO COMPLEMENT APPROPRIATED FUNDS FOR RAIL

The need for funding to improve railroad infrastructure greatly exceeds what is 

available through annual Federal appropriations. States lack adequate funding to 

make these investments alone. An innovative Federal-State partnership is needed. 

Several bills have been introduced in the Senate and the House of Representatives 

that would fund investments in rail infrastructure through tax-credit bonds or private activity bonds. In the Senate, two comprehensive rail authorization bills have 

been introduced. The American Rail Equity Act of 2003 (AREA) or S. 1505 was introduced by Senator Kay Bailey Hutchison and cosponsors. S. 1505 establishes a 

non-profit Rail Infrastructure Finance Corporation (RIFCO) that is authorized to 

issue $48 billion in tax-credit bonds for rail infrastructure investments over 6 years. 

It also authorizes $12 billion for Amtrak over 6 years. A second bill, the American 

Railroad Revitalization, Investment and Enhancement Act of the 21st Century (ARRIVE 21) or S. 1961 was introduced by Senator Ernest Hollings and cosponsors and 

creates a non-profit public-private partnership, the Rail Investment Finance Corporation (RIFCO), that is authorized to issue $30 billion in tax-credit bonds over 6 

years. S. 1961 also reauthorizes Amtrak at $1.5 billion per year for 6 years. In the 

House, the Transportation and Infrastructure Committee approved RIDE–21 (HR 

2950) which authorizes $59 billion in rail infrastructure improvements and establishes authority for States or State compacts to issue $12 billion in tax-credit bonds 

and $12 billion in private activity bonds over 10 years for investments for highspeed rail infrastructure. APRC strongly supports enactment of legislation that 

would establish a non-profit corporation authorized to issue bonds for investments 

in rail infrastructure. The bonds would help address the large unmet need for investments in rail infrastructure to improve passenger and freight rail service and 

capacity and would complement rail funding available through the annual appropriations process. 

Chairman Shelby and members of the subcommittee, thank you for the opportunity to provide testimony on the needs of our Nation’s passenger rail system. 

PREPARED STATEMENT OF THE COALITION OF NORTHEASTERN GOVERNORS (CONEG) 

As the subcommittee begins the fiscal year 2005 transportation appropriations 

process, the Coalition of Northeastern Governors (CONEG) is pleased to share with 

the subcommittee testimony on the fiscal year 2005 Transportation and Treasury 

Appropriations bill. The CONEG Governors commend the subcommittee for its past 

support of funding for the Nation’s highway, transit, and rail systems. Although we 

recognize the extensive demands being made upon Federal resources in the coming 

year, we urge the subcommittee to continue the important Federal partnership role 

that is vital to strengthening the multi-modal transportation system. This system 

is a critical underpinning to the productivity of the Nation’s economy and the security and well-being of its communities. 

First, the Governors urge the subcommittee to fund the combined highway, transit and safety programs at levels that will continue the progress in recent years to 

improve the condition and safety of the Nation’s highways, bridges and transit systems. These improvements, documented in the U.S. Department of Transportation’s 

2002 Conditions and Performance Report to Congress, were made possible by the 

substantial level of investments made by the Federal-State partnership in highway, 
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bridge and transit infrastructure under the Transportation Equity Act for the 21st 

Century (TEA21). Continued and substantial investment in these infrastructure improvements—in both urban and rural areas—is necessary if the Nation’s surface 

transportation system is to safely and efficiently move people and the substantial 

growth in freight movement that is projected in the coming decade. According to the 

Conditions and Performance Report, a combined Federal highway and transit program of $53 billion annually is needed simply to maintain our Nation’s highways 

and transit systems in the current conditions. 

Within the transit program, the Governors strongly urge the subcommittee to provide funding levels that at least maintain the basic program structure and address 

the solvency of the mass transit account. Further, the Governors urge the subcommittee to continue the traditional 80/20 Federal-State match for the New Start 

Program and the Bus and Bus Facilities Discretionary Grant Program. These programs have been instrumental in ensuring that needed funds are invested to improve and extend transit services in both our urban and rural communities. Second, the Governors strongly urge the subcommittee to provide at least $1.8 billion in fiscal year 2005 for intercity passenger rail. Intercity passenger rail is a vital 

part of the Nation’s transportation system, particularly in the Northeast and MidAtlantic region, where it provides essential mobility, enhances capacity of other 

modes, and provides much needed redundancy to the Nation’s transportation system. In recent years, the Congress has imposed discipline on the management of 

Amtrak operations, with the result being greater financial accountability and oversight of the Federal Government’s investment in intercity passenger rail. While the 

Congress, administration and States continue to work cooperatively to determine 

the future of intercity passenger rail and Amtrak in the Nation’s transportation system, a funding level of $1.8 billion in fiscal year 2005 will help provide a period of 

stability for intercity passenger and commuter rail operations. This funding level is 

critically needed to maintain services and begin a program of essential investments 

in equipment and infrastructure to bring the system back to a state of good repair 

for reliable service. The United States Department of Transportation Inspector General has noted that over $1 billion in capital funds is needed annually just to sustain the current intercity passenger rail system, regardless of who operates that system. The States are already major investors in the current intercity passenger rail 

system, with the Northeast and Mid-Atlantic States having invested over $4 billion 

in intercity passenger rail operations and infrastructure since 1991. 

Third, the Governors urge the subcommittee to continue funding for investments 

in Intelligent Transportation Systems (ITS) that can maintain and enhance the capabilities and security of the Nation’s transportation system. ITS helps States and 

communities along the densely populated Atlantic Coast region improve the safe 

and reliable operations on highway and transit systems on a daily basis. The 

Northeast’s rural areas and communities also benefit significantly from ITS investments. The region’s ITS systems, including those provided by TRANSCOM and the 

I–95 Corridor Coalition, have demonstrated their critical role, both in the emergency 

management and recovery phases, when security demands put added pressure on 

the region’s transportation networks. 

Fourth, safety on the Nation’s highways, transit and rail systems remains a priority of the Governors. The safety of the aging rail tunnels along the Northeast Corridor is a particular concern, and we urge the subcommittee to fund life safety improvements for the Amtrak-owned Baltimore and New York tunnels. The Governors 

also support maximum funding for the Section 130 Highway-Rail Crossing Program. 

As part of the Federal-State partnership to correct hazardous conditions on the Nation’s highways, investments in highway-rail crossings can reduce injuries and 

death from accidents even as they allow higher train speeds and increased reliability. 

Fifth, the Governors urge the subcommittee to provide sufficient funding for border crossing and gateway infrastructure projects. A strong program—one that invests in transportation projects addressing both security and transportation needs—

can contribute to safer, more efficient and secure flows of people and goods across 

international borders and through gateways. 

Sixth, the Governors also support the President’s funding request of $20 million 

for the Surface Transportation Board. The Board is essential for oversight and effective implementation of decisions affecting the ongoing process of railroad consolidations that will affect local and regional economies across the Nation. 

Finally, the Governors support continued Federal investment in transportation research and development programs, particularly the Federal Railroad’s Next Generation High Speed Rail program. This program enhances safety and helps stimulate 

the development of new technologies, which will benefit improved intercity rail service across the Nation. 
552

The CONEG Governors thank you, Ranking Member Patty Murray, and the entire subcommittee for the opportunity to share these priorities and appreciate your 

consideration of these requests. 

PREPARED STATEMENT OF THE NATIONAL TREASURY EMPLOYEES UNION

NTEU represents 150,000 Federal employees in 29 Federal agencies and departments, including the men and women who work at the Internal Revenue Service. 

I appreciate the opportunity to provide the subcommittee with comments on the IRS 

budget for fiscal year 2005. 

There are several items in the administration’s IRS budget that NTEU believes 

would be detrimental to the IRS’ mission. The two most egregious items include the 

administration’s proposal to contract out tax collection to private tax collection agencies, and an inadequate budget request that will prevent the IRS from continuing 

to improve its customer service record while bolstering enforcement efforts. 

PRIVATE TAX COLLECTION

The Treasury Department’s fiscal year 2005 budget proposal to allow the IRS to 

use private collection agencies to collect Federal income taxes is risky, costly, and 

unnecessary. NTEU strongly opposes this plan. This proposal would risk exposing 

sensitive taxpayer information, would subject taxpayers to the abusive tactics of private debt collectors, and would cost U.S. citizens much more money than if IRS employees did the job. 

IRS employees are the most reliable, cost-effective means for collecting Federal income taxes. IRS employees can collect outstanding debt more cheaply than private 

contractors. With an appropriation of $296 million for compliance, the IRS could collect an additional $9.47 billion in revenue per year. That’s a $31 return per dollar 

spent, compared to only $3 revenue per dollar spent for private collection agencies. 

Furthermore, there is the potential for abusive treatment from private debt collectors. There is a very real risk of exposing sensitive taxpayer information to those 

who might misuse it. In this era of identity theft, I do not believe the Federal Government should engage in practices that could needlessly expose confidential taxpayer information. 

A February 2003 Treasury Inspector General for Taxpayer Administration 

(TIGTA) report faulted the IRS for failing to conduct background checks on more 

than 2,100 private contract employees working in offices in Maryland who had access to sensitive information. In 1996 and 1997 tax years, Congress authorized a 

pilot program to test private tax collection. The 1996 program resulted in such egregious abuses by private debt collectors that the 1997 program was cancelled. According to an IRS Internal Audit Report (Ref. No. 080805, 12/19/97), the private debt 

collectors under contract to the Federal Government committed hundreds of violations of the Fair Debt Collection Practices Act—including calling a taxpayer at 4:19 

a.m. 

There is widespread opposition to privatization of tax collection. Several taxpayer 

advocacy groups: the Tax Executives Institute; the National Association of Enrolled 

Agents; Citizens for Tax Justice; Consumer Federation of America; Consumers 

Union; National Consumer Law Center; National Consumers League; and large segments of the taxpaying public oppose the privatization of collection duties. Specifically, Global Strategy Group, Inc. conducted a poll last year that found 66 percent 

of respondents disapprove of allowing the Internal Revenue Service (IRS) to hire private debt collection companies. When details of the IRS’s plan were provided, the 

number in opposition rose to 79 percent. The results of this poll strongly indicate 

that Americans across all political, geographic and income lines oppose this proposal. 

While the IRS is liable for damages caused by an IRS employee’s misuse of sensitive taxpayer information, taxpayers would not have proper redress with the Federal Government for misuse of their confidential information by contractors. Instead, 

taxpayers would be left to seek damages against the private collection agency. It is 

plain and simple. This plan to privatize tax collection at the IRS will hurt U.S. taxpayers and will hurt IRS workers. 

Having cited these failed attempts for private tax collection, I would urge the subcommittee to prohibit any appropriation funds from being used for contracting out 

tax collection services to recover U.S. debt. 
553

RIFS

While NTEU agrees with IRS’ goal of enhancing tax compliance and enforcement, 

we don’t agree with the approach of eliminating front-line employees in order to pay 

for additional compliance efforts. As the number of tax returns continues to grow, 

the number of IRS employees continues to shrink. As the IRS Oversight Board 

pointed out in its 2003 Annual Report, the IRS workload has increased by 16 percent while at the same time the number of full time equivalent employees has decreased by 16 percent from 1999 to 2002. This is caused by a number of circumstances, including an increasingly complex tax code and an increasing number 

of tax returns—paper as well as electronic returns. This has led to a serious decline 

in the size of the IRS workforce as a way to cope with increasing budgetary demands. 

NTEU strongly encourages the subcommittee to increase the IRS budget by 10 

percent over fiscal year 2004, as recently recommended by the IRS Oversight Board 

in its fiscal year 2005 Budget/Special Report (March 2004). The administration expects the IRS to do more with fewer resources and this is simply an unrealistic demand placed on the IRS workforce. If Congress wants more out of the IRS, then 

they are going to have to pay for it. The IRS Oversight Board makes a compelling 

case for increasing the IRS budget because it will ultimately mean an increase in 

Treasury revenues. 

I would encourage Congress to work with the administration to anticipate costly 

events—such as pay increases or costly changes to the tax code—and budget accordingly. This did not happen last year. For instance, NTEU encouraged the IRS to 

make a supplemental funding request for administering last summer’s child tax 

credit refunds to taxpayers. To our dismay, the request was not made and IRS was 

forced to do more work without any additional resources. This places a great burden 

on an IRS workforce that is expected to provide business results while improving 

customer service. This is unrealistic and unfair. Improving customer service, enhancing tax return processing and increasing tax compliance will only occur if Congress and the administration support increased funding for staffing, advanced technology and equipment, and better training. 

The IRS is using the excuse of bolstering compliance to justify a recently announced reduction in force (RIF) of roughly 1,600 IRS Case Processing and Insolvency support employees in 92 locations across the country—only to turn around 

and hire 1,000 new employees to do the same work in four consolidated IRS Service 

Center sites. NTEU opposes the RIF and urges the IRS to keep its employees in 

the field, serving the local taxpayers. NTEU urges Congress to appropriate the 

needed funding to keep these employees in the field. 

Presumably, IRS intends to save money and increase efficiency with this move, 

but there is no evidence of cost savings and IRS’ business case assumptions are 

faulty. IRS has failed to provide information on the cost of hiring and training new 

employees when the current employees already know how to do the job. 

In responding to the announcement of the RIFs, former IRS commissioner Donald 

Alexander was recently quoted as saying, ‘‘Centralization is not always more efficient, especially when it moves support people away from those they are supporting.’’

As one of the rationales for the current centralization, the IRS indicates that Case 

Processing had not been reorganized since the 1970’s. However, several attempts 

have been made to centralize Case Processing over the years, but have failed and 

this function has remained in the field. In fact, Case Processing functions were located in Service Centers until the IRS reorganized 25 years ago to locate these functions closer to the employees who perform collection and exam work. Reorganizing 

for the sake of reorganization is a waste of time and money, neither of which the 

IRS can afford to squander. 

Case processing support employees assist Revenue Agents and Revenue Officers 

in resolving issues related to overdue taxes. One of the more important duties performed includes releasing liens on property once overdue taxes are paid so that a 

taxpayer can secure a loan and calculate interest penalty abatements. 

Insolvency employees are responsible for monitoring tax compliance throughout 

the life of the bankruptcy, including trust fund taxes and pyramiding of business 

taxes. Insolvency employees must adhere to strict deadlines in order to avoid violations of the automatic stay and possible sanctions. Failure to take timely and appropriate actions could result in the IRS being sued for damages and/or attorney fees. 

Centralizing Insolvency work means that the new employees will need to know the 

local rules and standing orders of the various bankruptcy courts that take precedence under the Bankruptcy Code. It is unreasonable to expect employees to be able 
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to follow the rules of dozens of different States and courts, likely resulting in delays 

and errors and a greater cost to the IRS. 

The IRS has failed to provide information on how local taxpayers will be affected 

by its plan. Despite a lack of information from the IRS on the affect on taxpayers, 

NTEU believes that this RIF will indeed affect taxpayers nationwide. 

Federal-State disclosure agreements—and the statutes that govern these agreements—differ by State. Centralizing the Insolvency work will mean that employees 

in the centralized sites will need to be responsible for knowing and adhering to all 

50 variations. It will take longer for cases to close if they have to be shipped to a 

centralized site and this could hurt the taxpayer who is waiting for her case to be 

closed. 

Currently, if a taxpayer has a question about the process, she can find one of the 

Case Processing employees locally and get her question answered. If these jobs are 

shipped out of State, it will be much more difficult for the taxpayer to get her question answered, or for the cases to be resolved in a timely and complete manner. 

Finally, this removes accountability at the local level. If a member of Congress 

is contacted by a taxpayer constituent with an IRS case processing problem, that 

member will be directed to some out of State Service Center where the new employee has no comprehension of the region, much less the local personnel involved 

in closing a case, or the member of Congress making the inquiry. 

NTEU agrees with the IRS that there is a great need to bolster enforcement efforts, but this RIF does not guarantee new or enhanced enforcement positions. Once 

again, this is a waste of time and money for the IRS. This is unfair to the current 

employees who are trained and successfully performing the Case Processing and Insolvency work; this is unfair to the taxpayers who rely on the services provided by 

their local Case Processing workers. 

IRS also has plans for a RIF of approximately 2,200 employees at the Memphis 

Submission Processing Center. NTEU strongly disagrees with the IRS’ decision to 

conduct this RIF. The IRS claims that it is taking this action because there has 

been an increase in electronic filing of tax returns, and it no longer needs employees 

to process paper returns. However, according to the General Accounting Office 

(GAO–02–205), the IRS has fallen far short of meeting its electronic filing goals. IRS 

is using unrealistic, optimistic assumptions to project the increase in electronic tax 

return filing and then using these assumptions to justify the RIF. 

I commend the House of Representatives Appropriators who recognize the risks 

of reducing IRS staffing of manual submission processing. In House Committee Report 108–243, they have asked IRS to report back prior to ‘‘initiating any premature 

and ill considered reductions in force . . .’’ (see H. Rept. 108–243, IRS MANUAL 

SUBMISSIONS PROCESSING). 

NTEU recognizes that electronic filing will eventually become a reality of IRS’ 

modernization efforts. But we strongly believe that any resulting reorganizations 

should occur when there is a genuine need for a shift to an e-filing workforce and 

every effort should be made to avoid a RIF by retraining and placement of current 

employees. 

These examples of reducing the IRS workforce demonstrates the need for Congress to commit to funding the IRS at adequate levels so the IRS is not made to 

choose between bolstering enforcement and providing the superior service our taxpayers expect and deserve. I hope the subcommittee will give serious consideration 

to the Oversight Board’s recommendation and increase the IRS fiscal year 2005 

budget by 10 percent over fiscal year 2004. 

PAY PARITY

The administration has proposed a completely inadequate 1.5 percent raise for civilian Federal workers in 2005, and a 3.5 percent pay raise for members of the military. NTEU supports the higher raise for all employees and I applaud the Senate’s 

budget resolution calling for civilian-military pay parity in 2005. 

This vote—and in particular, the bipartisan nature of the vote—not only sends an 

important message to Federal employees that they are valued and respected but it 

is another important step in the government’s continuing efforts to recruit and retain the high-quality employees the public wants and expects in Federal agencies. 

The Senate budget resolution is in step with a recently approved House resolution, which supports the concept of pay parity between Federal civilian and uniformed military employees. By a vote of 299–126, the members of the House went 

on record in support of equal pay raises for both groups of public employees in 2005. 

The House vote reflected the importance of pay parity and signaled that members 

of Congress understand the need for fair pay in the competition with private sector 

employers for the most talented workers. 
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The vote by the full Senate on the pay issue preceded the rejection earlier this 

year of language supporting civilian-military pay parity by the House Budget Committee in its 2005 budget resolution. 

Congressional action on Federal pay reflects the role that civilian employees play 

not only serving the public in their specific agencies, but in the continuing fight 

against terrorism. They work in a variety of capacities that impact national security, including such roles as helping secure the country’s borders, protecting the food 

supply, and much more. Again, I commend those Senators who voted for the pay 

parity resolution and urge the appropriators to fund civilian pay on par with military pay at a 3.5 percent increase for fiscal year 2005. 

CONTRACTING OUT

Finally, after a bipartisan compromise was reached on the fiscal year 2004 Omnibus Appropriations bill, the White House insisted that the conference committee 

strip language that would have provided a level playing field for Federal employees 

whose jobs are made available for private competition. 

One bipartisan provision that was stripped from the bill would have required con- tractors to show significant cost savings (the lesser of 10 percent or $10 million) over 

the in-house competitor in order to be awarded a competition. Instead, agencies will 

now only have to take cost savings into consideration during public-private competitions since the requirement was removed from the bill language. This allows the 

agencies to outsource the work regardless of whether or not it saves the Federal taxpayers money—or costs the taxpayers more money. 

Another provision that was stripped from the Omnibus bill would have provided 

the Federal employees an independent and impartial venue to appeal an agency’s 

contract award decision. Stripping this provision sends a clear message to Federal 

employees that the administration wants private contractors to retain their unfair 

advantage in public-private competitions. 

The administration further weakened the Omnibus bill by limiting the guarantee 

that all Federal employees would have the opportunity to submit their own best 

bids. The altered bill language limits the right of employees to come up with their 

own cost-saving bid to those employees in only the agencies funded by the Transportation-Treasury bill. This means, for competitions in most agencies, contractors will 

still be able to submit their best bids while Federal employees will not be allowed 

to offer their best bid. 

NTEU strongly encourages the appropriator to include legislative language that 

will level the playing field for Federal employees who are expected to compete 

against private contractors. It is simply unfair to give private contractors an unfair 

advantage in public-private competitions when Federal employees can do the same 

job with better and less costly results. 

CONCLUSION

On behalf of the dedicated Federal employees NTEU represents, I am proud to 

submit these views for the hearing record. I encourage the committee to make a 

strong investment in the Federal workforce by appropriating the 10 percent increase 

as requested by the IRS Oversight Board; preventing private tax collection; prohibiting the IRS from moving forward with the unnecessary RIFs; providing pay parity 

for Federal workers; and giving the Federal workers a level playing field when competing for their jobs with private contractors. 

Without a doubt, the frontline employees are committed to working with management and Congress to increase efficiency and customer satisfaction. NTEU is committed to striking a balance between taxpayer satisfaction, business results and employee satisfaction. I encourage Congress to join us in this commitment. 

PREPARED STATEMENT OF THE AIR TRAFFIC CONTROL ASSOCIATION, INC. 

INTRODUCTION—AVIATION AT THE CROSSROADS

The Federal Aviation Administration is at a crossroads—and the future of U.S. 

aviation hangs in the balance. 

The administration has delivered to Congress a proposed fiscal year 2005 budget 

that cuts $393 million (14 percent) from FAA’s capital investment account, and provides less than current services funding for ATC system operations and maintenance. Funding for RE&D, already down to $117 million last year, is reduced another $2 million. 

The FAA and the new Air Traffic Organization (ATO) are attempting to respond 

to this new funding reality in the only way possible. The organization is getting 
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leaner. The mantra is managing to the reduced level of resources, rather than responding to demand with increased service. Every modernization initiative must be 

justified by an immediate and measurable payback. Projects that deliver economies 

and efficiencies for the air traffic service provider will be favored over those that 

offer new, improved, and/or long-term customer benefits. And under the administration’s proposal, long term investment in promising concepts and technologies is not 

receiving the ‘‘mission drive focus’’ required for what FAA is predicting to be an 

overall increase in passenger traffic of 4.3 percent per year (5.2 percent increase 

internationally) over the next 10 years. The ATO already has deferred to future 

years the digital programming and data link elements of NEXCOM, not waiting for 

future funding decisions by Congress. FAA was a leading, global proponent of this 

technology and yet we are deferring a solution that only a few short years ago was 

deemed vital to address the imminent dearth of available radio frequencies. 

On the other hand, Homeland Security requirements and the War on Terrorism 

are placing new burdens and requirements on an already stressed air transportation 

system. If past is prologue, the current downturn in passenger traffic is temporary 

and aviation demand will come roaring back. Most airports already are reporting 

passenger traffic increases, and many are again experiencing congestion and delay. 

Earlier this year, under DOT order two hub carriers American and United agreed 

to a 5 percent reduction in flight schedules in order to cut down on delays that 

reached the highest level ever recorded. Because these cuts did not improve delays 

enough, DOT last week ordered the airlines to reduce flights another 2.5 percent. 

This is not a long-term solution to meeting passenger and airline demand for more 

capacity at one of the world’s busiest airports, much less a panacea for the entire 

aviation system. 

The path U.S. aviation has been placed on with this proposed budget is clear: we 

will limp into the future with an air transportation system that is inefficient, at capacity, and unprepared for a tripling of demand in the future. The weight of increasing airline operations due to the greater usage of smaller regional jets, and the increasing burdens on aviation from the Department of Homeland Security will paralyze the aviation system. 

If instead we dare to envision a safe, secure, efficient, and capable air transportation system in the future, we must be bold in our approach, and we must act now. 

We cannot allow terrorists to scare us out of the skies. We must not so constrain 

ourselves that in seeking safety that we harness mobility. The answer is to be found 

in technology, investment, vigilance, and perseverance in the face of uncertainty—

the very attributes that have carried aviation so far in its first century. 

THE CHANGED FACE OF U.S. AVIATION

The Nation has come to view aviation in a new light over the past 3 years. No 

longer is air transportation predominantly about travel and tourism. Aircraft have 

been used as weapons against civilians, and we must do everything reasonably possible to prevent it from happening again. The Departments of Defense and Homeland Security rely on civil aviation facilities and agencies to perform their mission. 

Aviation is much more critical and important for United States and world commerce 

today. America’s vision of a global economy is based on the ability of aviation to 

serve as the bridge connecting nations, cultures and people. This vision—that is inclusive of, but transcends security—must be the guiding force in developing a fresh 

perspective, and new principles to guide Federal air traffic control investment policy 

and planning. 

—We demand more of the air transportation system than ever before.—The Nation’s aviation infrastructure must meet National Defense and Homeland Security needs while continuing to function as the economic engine that drives the 

National economy. Many of the requirements, or safety procedures dictated by 

the added requirements are new, for example upgraded surveillance systems; 

data collection, transmission, and sharing capabilities; reliable high speed communications networks; and extensive plans, procedures, and facilities for Homeland Security and National Defense. This means developing and implementing 

new and improved air traffic systems that deliver operating benefits for users 

and efficiencies for FAA while strengthening security. It also means building an 

air transportation system for the future that allows passengers and shippers to 

go anywhere, any time, and hassle free. All of this is a tall order. But for the 

safety and security of the public, and the viability of the National economy, we 

must not deliver less. 

—Regular, robust investment in aviation infrastructure is a National imperative.—

The threat of terrorism has become an unfortunate fact of life in the world 

today. Continual vigilance and preparedness are a necessity. For aviation this 
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1 Cutting funding for FAA F&E by 14 percent in fiscal year 2005 as the administration proposes could have an unintended, fiscally disastrous consequence of invoking application of an 

enforcement provision in authorization law that prohibits funding for FAA Operations if Airport 

Grants and F&E appropriations are less than the authorized amount. Clearly, the administration’s proposal is out of step with congressional intent that air transportation system modernization and improvement be a National Priority. 

means regular investment in developing and implementing equipment and technologies that can help counter ever changing, and increasingly sophisticated 

dangers. Timely, continuous investment in the public air transportation infrastructure is no less important for civil aviation. FAA expects air traffic demand 

to grow steadily over the next 10 years, with tower operations to increase 28 

percent, instrument operations to increase 29 percent, and air route traffic control center operations to increase 34 percent. We will not meet the requirements 

of this capacity increase sufficiently under the administration’s current budget 

approach. 

MEETING THE CHALLENGE

The Nation’s air transportation system simply cannot fulfill National Defense and 

Homeland Security requirements, and accommodate ever increasing civil aviation 

demand on a diet of continually diminishing resources. Even with the improvements 

and efficiencies anticipated from implementation of the new Air Traffic Organization, the administration’s funding proposal for fiscal year 2005 is unrealistic. FAA’s 

mission is growing, demand is growing, and the only thing shrinking is the budget 

to fund new technology and equipment to handle this growth. ATCA therefore urges 

Congress to act upon the following: —FAA’s Facilities and Equipment account must be funded at the authorized 

level.—ATCA urges the Congress to appropriate, at minimum, the full, author- ized amount of $2.993 billion for FAA Facilities and Equipment (F&E) in fiscal 

year 2005.1 FAA must equip the aviation system for the War on Terrorism and 

still continue fielding needed air traffic system improvements. And just as important, FAA must begin to lay the groundwork for a capable future air transportation system. FAA already is behind the power curve installing the modernized systems that deliver on the promise of its Operational Evolution Plan—systems that are the necessary foundation for improved functionality, safety and 

efficiency. Promising projects and technologies such as controller pilot data link 

communications (CPDLC), Next Generation Communications System 

(NEXCOM), and the System Wide Information Management system (SWIM) are 

being deferred. Others, like the User Request Evaluation Tool (URET), the FAA 

Telecommunications Infrastructure (FTI), ADS–B programs (Safe Flight 21), 

and Terminal Doppler Weather Radar (TDWR) product improvements could be 

completed and continue delivering cost and efficiency benefits to FAA and users 

sooner if additional funding were applied. All of these projects are necessary, 

and will have to be completed eventually. Interrupting these efforts over and 

over again only increases the ultimate cost, and postpones benefits. The ATO 

also must have the resources to continue a vigorous NAS System Architecture 

and systems integration activity. Because the new organization is structured according to lines of business, an overarching planning function is necessary to 

assure that requirements 5 to 10 years hence are anticipated and provided for, 

and that new elements being delivered into the system interface correctly and 

work together. Otherwise, equipment must continually be redesigned and retrofitted at great expense. —Aviation capabilities and resources of related agencies must be protected and leveraged.—NASA’s Aeronautics research capability has become essential to FAA’s mission, and must be funded adequately. DOD’s $69 billion research and 

development activity must be consistently mined for concepts and core technologies transferable to the civil sector. Synergy and cooperation between Federal and civil research organizations in the United States, and those of friendly 

governments around the world should be investigated, enabled, and encouraged. 

The world is a different place today than yesterday. The United States should 

not be seen as ‘‘going it alone.’’ The ATC organizations around the world have 

many ideas, programs, and procedures that merit consideration and coordination in order to ensure everyone’s stated goal of global interoperability. —The Federal Government must prepare for large funding requirements associated 

with core future technologies.—There is universal agreement that some core capabilities are essential to meeting future Homeland Security/National Defense 

requirements, and to accommodate air transportation demand we know is coming. The first of these key technologies is an aviation system-wide information 
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network, through which all stakeholders, including the DOD, DHS, and law enforcement, can derive whatever data and information needed for the National 

Defense, security, and safe, efficient aircraft operations. The second is a capable, reliable data communications system connecting aircraft to the air traffic 

control system. The third is a sophisticated toolset enabling collaborative decision making among participants in the ATM system. All of these technologies 

are crucial for Defense and Homeland security missions. All will enhance aviation safety and security. And all can be used to increase operating efficiency, 

and overall system efficiency and capacity. But a clear direction to proceed with 

development and implementation, and a healthy flow of resources must be applied now, if these technologies are to be available to meet current and future 

demand. 

—A Federal Government-wide, aviation community-supported air transportation 

system future planning activity must be supported and adequately resourced.—

Secretary of Transportation Mineta is leading an interagency effort (including 

NASA, and the Departments of Defense and Homeland Security) to design the 

Next Generation Air Transportation System. This activity will be carried out 

through a Joint Planning and Development Office (JPDO), with the advice of 

the FAA Research and Advisory Committee. Secretary Mineta’s initiative 

should be supported, with the expectation that it will be well managed, adequately resourced, and that it will yield a product that can be the basis of community consensus and capable of being implemented. It is recommended that 

this effort be coordinated with other future design activities around the world, 

with the object of assuring global compatibility of ATM systems and a seamless 

future operating environment. The future system plan should contain a realistic 

roadmap for transforming current thinking and technology into the future air 

transportation system, with recommendations for policies and programs to facilitate the transition to a new system and equipment for all aircraft operators. 

ATCA urges the entire aviation community to support the activities of the 

JPDO. 

—The Nation’s aviation research and development capability must be recreated 

and empowered.—Congress is urged to authorize and appropriate $500 million 

per year for the foreseeable future to establish and resource a bold, aggressive, 

well-managed Federal aviation research and development activity. Critical National Defense and Homeland Security needs require that FAA and NASA continually be on the forefront in developing and implementing cutting-edge surveillance, communications, and information technologies. There is simply no 

question that break-through concepts and technologies will be essential if we 

are to safely and efficiently accommodate a tripling of civil air traffic by the 

year 2020. Developments of this nature take 10 to 15 years or more to bring 

to fruition, so major investments in R&D capabilities—labs, equipment, people—must be made today. 

CONCLUSION

Global aviation is facing challenges of historic proportions. Terrorism is a constant 

threat. Depressed demand as a result of 9/11 and economic recession have left governments and aviation enterprises financially debilitated, and reluctant or unable 

to make investments in infrastructure and capital equipment. The U.S. aviation system has survived and is now growing at a pace last seen pre-9/11, yet investment 

in the future is being cut. An increased investment in FAA Airport Improvement 

Program funding cannot be viewed as a complete solution to addressing future capacity when the users and passengers are measuring our system on a curb-to-curb 

basis. 

The success of the Nation’s air transportation system depends on achieving a collective commitment to secure a reliable, robust funding stream for air transportation 

system modernization, the determination and focus to complete projects already underway, and a forward looking vision. The aviation system requires total commitment and full funding in order to meet tomorrow’s demand, and this is a commitment we must make today in order to be successful. 

Again, we cannot allow the terrorists to scare us out of the skies or to divert our 

financial resources away from building the safest and most efficient air traffic control system to meet growing demand. Safety and security are inextricably linked, 

and overcrowded skies and airports cannot be the result of terrorist threats, or they 

have won and most assuredly we have lost. 

We must not so constrain ourselves that in seeking safety we harness mobility. 

The answer is to be found in technology, investment, vigilance, and perseverance 
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in the face of uncertainty—the very attributes that have carried aviation so far in 

its first century. 

PREPARED STATEMENT OF THE CALIFORNIA GOVERNMENT AND PRIVATE SECTOR

COALITION FOR OPERATION CLEAN AIR

Mr. Chairman and members of the subcommittee, on behalf of the California Government and Private Sector Coalition for Operation Clean Air’s (OCA) Sustainable 

Incentive Program, we are pleased to submit this statement for the record in support of our fiscal year 2005 funding request of $31,000,000 for OCA as part of a Federal match for the $180 million already contributed by California State and local 

agencies and the private sector for incentive programs. This request consists of 

$31,000,000 from the Department of Transportation (DOT) for alternative fuel vehicle funding. 

California’s great San Joaquin Valley is in crisis. Home to over 3.3 million people, 

its 25,000 square miles now has the unhealthiest air in the country. Even Los Angeles, long known as the smog capital of the Nation, can boast better air quality by 

certain standards. While peak concentrations of air pollutants are still greater in 

Los Angeles, for the past 4 years, the San Joaquin Valley has exceeded Los Angeles 

in violations of the ozone 8-hour Federal health standard. 

A combination of geography, topography, meteorology, tremendous population 

growth, urban sprawl and a NAFTA corridor of two major highways with over 5 million diesel truck miles per day, have collided to produce an air basin in which over 

300,000 people, nearly 10 percent of the population, suffer from chronic breathing 

disorders. In Fresno County, at the heart of the San Joaquin Valley, more than 16 

percent of all children suffer from asthma, a rate substantially higher than any 

other place in California. The extreme summertime heat creates smog even though 

smog-forming gases are less than half the amount in the Los Angeles basin. There 

is no prevailing wind to flush the natural geologic bathtub and, as a result, pollutants and particulates stagnate, accumulate and create unhealthy air. 

Degradation of human health is not the only consequence of poor quality air. In 

December 2003, the San Joaquin Valley Air Pollution Control District Board decided 

to become the first Air District in the Nation to voluntarily declare itself an ‘‘extreme’’ non-attainment area. This designation, if approved by USEPA, will defer 

until 2010 the date for attainment of Federal standards of air quality, but comes 

at a cost of imposing permitting on thousands of more businesses and even further 

discouraging business expansion or relocation. More Valley’s businesses will be required to obtain permits and comply with increasingly burdensome regulations imposed by Federal and State law and the Air Pollution Control District, resulting in 

added cost in compliance, reporting and record keeping. At the same time, the area 

is burdened by chronic unemployment rates of nearly 20 percent. Encouraging business expansion in or relocation to the San Joaquin Valley to combat unemployment 

will be extremely difficult in the face of such regulatory burdens. 

The San Joaquin Valley is home to the most productive agricultural land in the 

world. Over 350 crops are produced commercially on 28,000 farms encompassing 

more than 5 million irrigated acres. While the agricultural industry has made great 

strides at considerable expense to replace old diesel engines and manage fugitive 

dust and other emissions, farming does contribute to the problem. However, it is a 

$14 billion industry that forms the backbone of the Valley’s economy, and its vitality 

is crucial. 

Industry alone is not the source of the Valley’s poor air quality. Population growth 

rates exceeding those in the rest of the State and most of the Nation, in an area 

without effective mass transit, where cheap land has led to a landscape of suburbia 

and sprawl, results in excessive over-reliance on the automobile. Trucking has increased dramatically with the increase in population, and Federal free trade policies. Other factors such as fireplace burning in the winter, open field agricultural 

burning because of lack of sufficient alternatives, and wild fires resulting from lack 

of controlled burning in the nearby foothills and mountains all contribute to the 

problem. 

Despite the challenges listed above, much progress has been made. The State has 

spent nearly $80 million on improvement and compliance programs. Local government and private industry have spent over $100 million on technology and compliance. As specific examples, over one half of the diesel operated irrigation pumps 

used by agriculture have been replaced with cleaner engines. The City of Tulare has 

converted its entire fleet of vehicles to natural gas as have several other private 

fleet operators. A $45 million Federally financed comprehensive study of ozone and 
560

particulate matter is nearing completion. As a result, the number of 1-hour EPA 

health standard exceedences has been reduced by 40 percent since 1989. 

But much more needs to be done. The District estimates that daily emissions 

must be reduced by 300 tons to achieve attainment. There is no single or short-term 

quick fix. The entire Valley (an area the size of the State of Connecticut) is part 

of the problem and the entire Valley will need to be part of the solution. 

The Department of Transportation is an important partner in achieving air quality improvement. The Federal Clean Air Act requires that transportation plans be 

consistent with State Implementation Plans. Mobile sources are the single largest 

contributor to the San Joaquin Valley’s air pollution problem. Depending upon the 

season, mobile sources contribute up to 60 percent of the emission inventory in the 

Valley. Heavy-duty vehicles make up half of these emissions. 

California and the San Joaquin Valley bear the emissions burden associated with 

the significant volume of goods that flow into and out of the country through vehicular traffic. It is estimated that 6 million truck-miles a day are traveled in the Valley. The emissions associated with these activities are projected to grow significantly 

with port expansions and upcoming changes associated with the implementation of 

the North American Free Trade Agreement (NAFTA) that will allow, for the first 

time, foreign trucks with less rigorous emission controls to travel through the San 

Joaquin Valley. 

Finally, heavy-duty mobile source emissions reductions are some of the most costeffective emission reduction programs currently available. The cost-effectiveness of 

emission reductions achieved through clean heavy-duty projects that are requested 

through the Department of Transportation is approximately $13,650/ton of emission 

reduced. In many cases this is one-half of the cost associated with similar emission 

reductions achieved through the regulation of industrial sources of pollution. If our 

request is fully funded, it will provide up to 11,000 tones of emissions reductions 

over the 12 year life of the projects. 

Operation Clean Air is a coalition of business, government, health care, and environmental groups throughout the eight county San Joaquin Valley Air Pollution 

Control District. Its goal is to clean the Valley’s air and increase its economic prosperity. The coalition seeks to catalogue efforts that have produced positive effects 

and identify those strategies that could produce even greater effects if supported by 

sufficient resources. At the heart of its efforts will be an array of sustainable, voluntary practices and activities that can and will be undertaken by all of the residents of the San Joaquin Valley, both public and private, to improve air quality. 

This unique public-private partnership has invested considerable resources in this 

project to date, and will continue to do so, but Federal funding is both imperative 

and justified to help address what is essentially an unfunded Federal mandate. 

For fiscal year 2004, our Coalition is seeking funding of $31,000,000 from the Department of Transportation (DOT) for alternative fuel vehicles throughout the San 

Joaquin Valley Air Basin. We are also seeking funding for alternative fuels infrastructure through other avenues, which will allow accelerated introduction of alternatively fueled vehicles in municipal fleets, public school fleets, and private fleets. 

The widespread use of lower-emitting motor vehicles will provide significant improvement to air quality in the San Joaquin Valley while furthering the goals of the 

Department of Transportation to reduce emissions from public fleets. Development 

of alternative fuel infrastructure will augment the low-emission vehicle program by 

providing much needed compressed natural gas (CNG) and liquefied natural gas 

(CNG) fueling facilities. 

Thank you very much your consideration of our requests. 

PREPARED STATEMENT OF THE CALIFORNIA INDUSTRY AND GOVERNMENT CENTRAL

CALIFORNIA OZONE STUDY (CCOS) COALITION

Mr. Chairman and members of the subcommittee, on behalf of the California Industry and Government Central California Ozone Study (CCOS) Coalition, we are 

pleased to submit this statement for the record in support of our fiscal year 2005 

funding request of $500,000 from the Department of Transportation (DOT) for 

CCOS as part of a Federal match for the $9.4 million already contributed by California State and local agencies and the private sector. We greatly appreciate your 

past support for this study ($250,000 in fiscal year 2004) as it is necessary in order 

for the State of California to address the very significant challenges it faces as it 

seeks to comply with air pollution requirements of the Federal Clean Air Act. 

Most of central California does not attain Federal health-based standards for 

ozone and particulate matter. The San Joaquin Valley has recently requested redesignation to extreme and is committed to updating their 1-hour ozone State Imple-
561

mentation Plan (SIP) in 2004, based on new technical data. In addition, the San 

Joaquin Valley, Sacramento Valley, and San Francisco Bay Area exceed the new 

Federal 8-hour ozone standard. SIPs for the 8-hour standard will be due in the 2007 

timeframe—and must include an evaluation of the impact of transported air pollution on downwind areas such as the Mountain Counties. Photochemical air quality 

modeling will be necessary to prepare SIPs that are approvable by the U.S. Environmental Protection Agency. 

The Central California Ozone Study (CCOS) is designed to enable central California to meet Clean Air Act requirements for ozone SIPs as well as advance fundamental science for use nationwide. The CCOS field measurement program was conducted during the summer of 2000 in conjunction with the California Regional PM10/

PM2.5 Air Quality Study (CRPAQS), a major study of the origin, nature, and extent 

of excessive levels of fine particles in central California. This enabled leveraging of 

the efforts of the particulate matter study in that some equipment and personnel 

served dual functions to reduce the net cost. From a technical standpoint, carrying 

out both studies concurrently was a unique opportunity to address the integration 

of particulate matter and ozone control efforts. CCOS was also cost-effective since 

it builds on other successful efforts including the 1990 San Joaquin Valley Ozone 

Study. 

CCOS includes an ozone field study, data analysis, modeling performance evaluations, and a retrospective look at previous SIP modeling. The CCOS study area extends over central and most of northern California. The goal of the CCOS is to better understand the nature of the ozone problem across the region, providing a strong 

scientific foundation for preparing the next round of State and Federal attainment 

plans. The study includes five main components: 

—Designing the field study; 

—Conducting an intensive field monitoring study from June 1 to September 30, 

2000; 

—Developing an emission inventory to support modeling; 

—Developing and evaluating a photochemical model for the region; and 

—Evaluating emission control strategies for upcoming ozone attainment plans. 

The CCOS is directed by Policy and Technical Committees consisting of representatives from Federal, State, and local governments, as well as private industry. 

These committees, which managed the San Joaquin Valley Ozone Study and are 

currently managing the California Regional PM10/PM2.5 Air Quality Study, are landmark examples of collaborative environmental management. The proven methods 

and established teamwork provide a solid foundation for CCOS. The sponsors of 

CCOS, representing State, local government, and industry, have contributed approximately $9.4 million for the field study. The Federal Government has contributed $4,874,000 to support some data analysis and modeling. In addition, CCOS 

sponsors are providing $2 million of in-kind support. The Policy Committee is seeking Federal co-funding of an additional $2.5 million to complete the remaining data 

analysis and modeling. California is an ideal natural laboratory for studies that address these issues, given the scale and diversity of the various ground surfaces in 

the region (crops, woodlands, forests, urban and suburban areas). 

There is a national need to address national data gaps and California should not 

bear the entire cost of addressing these gaps. National data gaps include issues relating to the integration of particulate matter and ozone control strategies. In addition, new national ambient air quality standards will require air quality assessments for time periods of greater duration, and the impact of weekend travel activities on air quality will play a part in the ability to simulate air quality for longer 

durations. That is why, concurrent with the CCOS air quality field study, a 

$600,000 traffic activity study was conducted for the purpose of gathering detailed, 

hourly travel activity patterns during the field study. It is also why the CCOS allocated an additional $250,000 to develop a link-based digital map of roadways 

throughout the domain (using state-of-science Geographic Information System, or 

GIS, software) that included the activity patterns from the traffic study on specific 

roadway segments. However, due to the scarcity of weekend data in the transportation community and travel demand models, these projects were not able to address the spatial change in travel patterns during a weekend. In addition to the 

weekend activity issue, developing mobile source emissions inputs for longer-term 

air quality modeling studies will require more efficient mobile source emissions 

processing, including better use of GIS software and technology. 

For fiscal year 2005, our Coalition is seeking funding of $500,000 from DOT 

through highway research funds. The CCOS would use the $500,000 requested for 

fiscal year 2005, in conjunction with other funding, to study and integrate travel activity patterns into modeling inputs. The CCOS would also use a fiscal year 2005 

earmark to develop more efficient mobile source emissions processing tools and im-
562

prove the consistency and linkages between travel demand models used in the 

transportation community and emissions factor models used for conformity purposes 

in the air quality community. DOT is a key stakeholder because Federal law requires that transportation plans be in conformity with SIPs. The motor vehicle emission budgets established in SIPs must be met and be consistent with the emissions 

in transportation plans. Billions of dollars in Federal transportation funds are at 

risk if conformity is not demonstrated for new transportation plans. As a result, 

transportation and air agencies must be collaborative partners on SIPs and transportation plans. These plans are linked because motor vehicle emissions are a dominant element of SIPs in California as well as nationwide. Determining the emission 

and air quality impacts of motor vehicles is a major part of the CCOS effort. 

Thank you very much for your consideration of our request. 

PREPARED STATEMENT OF EASTER SEALS

Chairman Shelby, Ranking Member Murray and members of the subcommittee, 

Easter Seals appreciates this opportunity to share the successes and needs of Easter 

Seals Project ACTION. 

PROJECT ACTION OVERVIEW

The Transportation appropriations process initiated Project ACTION in 1988 by 

providing funding to the Federal Transit Administration to undertake this effort 

with Easter Seals. We are indeed grateful for that initiative and the ongoing strong 

support of this subcommittee in subsequent years. 

Following its initial round of appropriations, Congress authorized assistance to 

Project ACTION in 1990 with the passage of ISTEA and reauthorized the project 

in 1997 as part of TEA21. The strong interest and support of all members of Congress has been greatly appreciated by Easter Seals as it has pursued project ACTION’s goals and objectives. 

Since the project’s inception, Easter Seals has administered the project through 

a cooperative agreement with the Federal Transit Administration. Through steadfast appropriations support, Easter Seals Project ACTION has become the Nation’s 

leading resource on accessible public transportation for people with disabilities. The 

current project authorization level is $3 million, and Easter Seals is pleased to request the appropriation of that sum for fiscal 2005. 

The strength of Easter Seals Project ACTION is its continued effectiveness in 

meeting the congressional mandate to work with both the transit and disability 

communities to create solutions that improve access to transportation for people 

with disabilities of all ages and to assist transit providers in complying with transportation provisions in the Americans with Disabilities Act (ADA). 

The activities of the project are guided by input from a 19 member national steering committee that includes representatives from transportation and disability organizations. Easter Seals Project ACTION has worked effectively with the Department 

of Transportation under four Presidents, and numerous Department of Transportation (DOT) Secretaries and Federal Transit Administration (FTA) Administrators. 

Today, Project ACTION is working closely with Secretary Mineta and FTA Administrator Dorn and their teams. Secretary Mineta, who worked on the original authorization of Project ACTION, has worked closely with us since taking over DOT. 

Easter Seals Project ACTION was also heavily featured in the President’s New 

Freedom Initiative Progress Report released in 2004. This demonstrates how closely 

the administration is working with Project ACTION to reach our shared goal of a 

safe, accessible, reliable, efficient and affordable transportation for and by citizens 

with disabilities at the local, State, regional and national levels throughout the 

United States. 

SUPPORT FOR EASTER SEALS PROJECT ACTION

Easter Seals Project ACTION’s successes are diverse and the value of the Project 

to both the transit and disability communities can be well documented. For instance, Barry Barker, Executive Director of the Transit Authority of River City 

(Louisville, KY) states that, ‘‘Easter Seals Project ACTION’s support has enhanced 

our ability to maximize the quality of service we provide to all of our customers. 

The project helps us provide our customers with the mobility necessary to fully participate in the community.’’

Maureen McCloskey, National Advocacy Director of the Paralyzed Veterans of 

America states that, ‘‘The forum that Easter Seals Project ACTION has provided 
563

has created a dynamic dialogue between the disability and transit communities that 

has resulted in increased access to transportation for people with disabilities.’’

EASTER SEALS PROJECT ACTION WORKING AT THE COMMUNITY LEVEL

Among the programs pursued by the project in the recent period have been efforts 

aimed at increasing community capacity to meet the transportation needs of people 

with disabilities. For instance, in 2001, Easter Seals Project ACTION initiated the 

first Mobility Planning Services (MPS) Institute. The latest Institute took place in 

November of 2003 and approximately 25 communities took part in the 2-day event. 

This was the second group of communities to go through the MPS training. The first 

group of 20 communities remains active and working with Project ACTION to continue their work at the community level. To participate in the Institute, each community had to identify a leadership team to attend the training. The leadership 

team had to consist of representatives from transit providers, disability service providers and disability advocacy organizations. This team approach will assure that 

all stakeholders are involved in implementing MPS. The greatest success so far of 

the MPS concept has been that it provides the disability community and the transportation industry an opportunity to develop tools for working together where in the 

past there had often been a lack of communication and in some cases even animosity. By implementing MPS, communities do a better job of meeting the transportation needs of people with disabilities and therefore better meet the transportation 

needs of all residents. Communities that participate in MPS receive ongoing indepth technical assistance from Project ACTION staff ranging from access to Project 

ACTION materials to on-site training and facilitation by Project ACTION staff. 

EASTER SEALS PROJECT ACTION WORKING AT THE STATE LEVEL

Project ACTION is partnering with the FTA on several initiatives designed to increase the capacity of States to support accessible transportation for people with disabilities. 

The first initiative is a series of regional dialogues being held throughout the 

country. These dialogues built on the success of 2002’s successful National Dialogue 

on Accessible Transportation. The goal of these events was to bring people with disabilities and transit providers together at the regional level to foster communication 

that will hopefully lead to jointly developed solutions to unique barriers to accessible 

transportation identified together in each region. 

Project ACTION is also working with FTA to support the success of the multi 

Federal Department ‘‘United We Ride’’ initiative. Project ACTION helped facilitate 

a national meeting in March of Governor appointed representatives from State Departments of Labor, Transportation, Education and Health and Human Services. 

Forty-six States and territories participated in this forum that was one of five elements of an FTA effort to bring together Federal and State agencies to help identify, 

plan and alleviate barriers to human service transportation coordination. Project 

ACTION is assisted in the dissemination of the FTA developed Framework for Action planning process guide to help States and communities build and operate coordinated transportation systems and has already begun to provide technical assistance on its use throughout the country. 

EASTER SEALS PROJECT ACTION WORKING AT THE NATIONAL LEVEL

Easter Seals Project ACTION actively works with both the disability and transit 

communities to determine existing needs for products and training. Easter Seals 

Project ACTION also convenes special topic meetings to address concerns and identify strategies on issues identified by various stakeholders. This year’s special topic 

meetings will focus on the development of a ‘‘One System for All’’, concept that 

emerged from the Project’s National Dialogue conducted last Summer. The meeting 

will involve a small group of disability and transit advocates to further develop the 

concept and also begin to address the design and provision of technical assistance 

and other resources necessary to advance the availability of seamless community 

transportation systems for people with and without disabilities. Another special 

topic meeting will bring together travel trainers to develop a curriculum for the further training of these specialists that enhance the participation of people with disabilities using fixed route transportation. Convening special topic meetings enable 

Easter Seals Project ACTION the flexibility to address emerging issues as they 

arise. 

Some of the materials that Easter Seals Project ACTION has developed during 

the past year include: 
564

—A collection of ‘‘success stories’’ that share, in the own words of people with disabilities, stories about their successful use of transportation and the positive difference it made in their lives; 

—New resources and guidance on good practices for conducting physical functional assessments for determining paratransit eligibility; 

—A collection of innovative practices in operating paratransit; 

—A redesigned resource called ‘‘You Can Ride,’’ a reference guide on how to use 

public transportation for people who can’t read; and, 

—All resource materials available from Easter Seals Project ACTION activities 

are available free of charge through the Project ACTION catalog. 

As mentioned, Project ACTION staff also are involved in continuously providing 

technical assistance to transit providers, nonprofit human service organizations, 

people with disabilities, and the general public. The forms of technical assistance 

provided are provided based on the determination of what would be the most helpful 

in the situation being addressed. Assistance from Project ACTION ranges from the 

delivery of basic information in the form of brochures from our national clearinghouse to telephone, e-mail, participation in the training program and on single or 

ongoing on-site work. 

CONTINUING NEED FOR EASTER SEALS PROJECT ACTION

Access to transportation is a vital issue for people with disabilities. For many people with disabilities, a lack of accessible, affordable pubic transportation is the primary barrier to employment, education and participation in community life. In his 

New Freedom Initiative, President Bush recognized the importance of accessible 

transportation for people with disabilities, and has proposed an increase in Federal 

support for promoting innovative and alternative transportation solutions for people 

with disabilities. As these proposals are implemented, it will become increasingly 

important that the resources and skills, relationships and knowledge that Easter 

Seals Project ACTION has fostered remain strong. Should the appropriations process support this New Freedom Initiative, Project ACTION is committed to working 

with DOT on implementation. 

There is a growing need for outreach by Project ACTION to specific populations. 

While Project ACTION has historically worked with rural communities to help address their transportation issues, the lack of access for rural residents with disabilities is still unacceptable. Easter Seals national headquarters and Project ACTION 

are working together to coordinate efforts to better serve rural residents with disabilities in a variety of service areas including transportation. Further, as the population ages, there is also a need to provide develop and provide additional specific 

resources and assistance to transit providers and older passengers. Since most people will experience some level of disability as they age and require accessible transportation, Project ACTION’s resources will again be invaluable as transit providers 

struggle to meet the needs of this new wave of riders. 

FISCAL 2005 REQUEST

In order to continue the outstanding work of Easter Seals Project ACTION, Easter 

Seals national headquarters respectfully requests that $3 million be allocated in fiscal 2005 to the Department of Transportation for project activities. 

Mr. Chairman, thank you for the opportunity to present this testimony to the subcommittee. Your efforts have improved the accessibility of transportation for persons 

with disabilities and the ability of the transportation community to provide good 

service to all Americans. Easter Seals Project ACTION looks forward to continuing 

to work with you toward the pursuit of these objectives. 

PREPARED STATEMENT OF THE AMERICAN PUBLIC TRANSPORTATION ASSOCIATION

Mr. Chairman and members of the subcommittee, on behalf of the American Public Transportation Association (APTA), thank you for the opportunity to provide 

written testimony on the need for investment in Federal Transit Administration 

(FTA) programs under the Transportation, Treasury and General Government Appropriations bill for fiscal year 2005. 

ABOUT APTA

APTA’s 1,500 public and private member organizations serve the public by providing safe, efficient, and economical public transportation service, and by working 

to ensure that those services and products support national economic, energy, environmental, and community goals. 
565

APTA member organizations include public transit systems and commuter railroads; design, construction and finance firms; product and service providers; academic institutions; and State associations and departments of transportation. More 

than 90 percent of the people who use public transportation in the United States 

and Canada are served by APTA member systems. 

OVERVIEW

Mr. Chairman, the fiscal year 2005 Transportation, Treasury and General Government appropriations bill provides an opportunity to advance key national goals 

through increased Federal investment in the Nation’s surface transportation infrastructure, including public transportation. A study conducted by Wirthlin Worldwide 

in February 2004, found that most Americans (80 percent) see quality of life benefits 

from increased investment in public transportation, and 76 percent of those surveyed support public funding for the expansion and improvement of public transportation. Clearly, Americans support Federal policies that create good, high-paying 

jobs, especially U.S. jobs that cannot be exported. Investment in our national public 

transportation and highway systems creates jobs—47,500 per $1 billion of Federal 

investment. This investment does more than create jobs, it helps improve the economy by reducing congestion, promoting energy conservation, and providing transportation options to workers and tens of millions of other Americans. 

As a Nation, we need to maintain and improve the transportation system that has 

served this country so well. Congress has made a substantial investment in public 

transit systems around the country, and those systems serve tens of millions of customers each day; but much needs to be done to maintain and increase the return 

on that investment. With ridership at record levels, the American Association of 

State Highway and Transportation Officials (AASHTO) estimates that an annual 

capital investment of more than $44 billion is needed to adequately maintain, improve and expand public transportation across America. 

Demand for surface transportation options—including modern, safe, and efficient 

public transportation service—is at an all-time high. New transit service is being 

added in areas around the country, including Houston, Minneapolis, Phoenix, and 

Charlotte. More and more communities are voting for new and expanded transit 

service every year. Demand for transit options is a product of growing frustration 

with increased congestion that negatively affects our quality of life by wasting time 

and money, and a desire for mobility options. The Wirthlin Worldwide poll also demonstrates that voters support public transportation regardless of whether they live 

in urban, suburban, small urban or rural communities, and that they are more likely to vote for Congressional candidates who support such investment. 

Similarly, as the population ages, older Americans will need more and better transit service. As driving becomes less of an option for many older Americans, they as 

well as persons with disabilities are seeking good public transportation options so 

that they can continue to fully participate in society. Yet many older Americans and 

people with disabilities live in areas where public transportation services are limited 

or non-existent, despite the fact that access to good transit service can mean the 

difference between living independently and moving into assisted living. Nearly twothirds of residents in urban, small urban and rural communities have few if any 

transportation options—41 percent have no access to transit, another 25 percent live 

in areas with below-average transit services. Clearly, our Nation’s small-town and 

rural areas have real and growing transportation needs. 

FISCAL YEAR 2005 TRANSIT INVESTMENT

APTA believes it is crucial to provide significant investment in the Nation’s transit and highway infrastructure in the fiscal year 2005 appropriations process. That 

investment advances key national goals by producing jobs, providing more mobility 

options to all Americans, improving the environment and reducing dependence on 

foreign oil, and by providing a solid return on the investment. 

APTA’s recommendations for reauthorization of the Transportation Equity Act for 

the 21st Century (TEA21) propose to grow the transit Federal transit program to 

$14 billion by fiscal year 2009. The Senate has passed a TEA21 reauthorization bill 

that would authorize $8.65 billion for transit in fiscal year 2005, and we urge the 

subcommittee to invest no less than that amount for the Federal transit program 

in fiscal year 2005. 

Mr. Chairman, in that regard we thank you for your outstanding leadership as 

chairman of the Senate Banking Committee in crafting the transit portion of that 

legislation, which addresses critical public transportation investment needs. 
566

PUBLIC TRANSPORTATION INVESTMENT CREATES JOBS AND GROWS THE ECONOMY

Americans are growing increasingly concerned about jobs. An Associated Press 

poll taken March 19–21 showed that 35 percent of Americans view economic conditions as the most important factor on which they will vote. A Washington Post poll 

taken April 15–18 shows that the economy and jobs are the most important issues 

that 26 percent of voters want to hear about in the upcoming election, more than 

any other topic. Polls by Newsweek and Harris this year have produced similar results for the last several months. Jobs are the No. 1 concern of Americans. 

Policy makers know that increased investment in our Nation’s transit and highway transportation infrastructure will help the economy and will produce jobs. The 

Department of Transportation has demonstrated that for every $1 billion in Federal 

highway and transit investment, 47,500 jobs are created or sustained. This view is 

shared by Senate Environment and Public Works Committee Chairman James 

Inhofe (R-OK), who stated upon passage of SAFETEA that the bill ‘‘will create nearly 2.8 million job opportunities for the American people.’’ He went on to call TEA21 

reauthorization the ‘‘biggest job creation bill of this Congress.’’

The jobs that investment in public transportation can create are high-paying, stable, and cannot be exported. The jobs created are not just those needed to operate 

new and expanded transit service, which are significant; but also in the private 

manufacturing sector, which supports and supplies the public transportation industry. For instance, transit buses are built in, among other places, Anniston, Alabama; 

Wichita, Kansas; Brownsville, Texas; Lamar, Colorado; St. Cloud, Minnesota; Hayward, California; Imlay City, Michigan; Pembina, North Dakota; and Oriskany, New 

York. Engines for those buses may be built in Detroit or Columbus, Indiana. Spending on transit also benefits hundreds of other private sector companies around the 

United States that build rail cars, fareboxes, vehicle parts and equipment or provide 

software, engineering, and construction services for the transit industry. According 

to a Cambridge Systematics Inc. study, for every $10 spent on transit capital 

projects, $30 in business sales is generated. Every $10 invested in transit operations 

results in $32 in private business sales. 

Mr. Chairman, public transportation serves another important economic purpose: 

alleviating highway congestion. According to the Texas Transportation Institute’s 

‘‘2003 Urban Mobility Report’’, congestion costs $69.5 billion annually—more than 

3.6 billion hours of delay and 5.7 billion gallons of excess fuel consumed. The report 

says without public transportation, there would be 1 billion more hours (30 percent) 

more delay. The average driver is losing more than 11⁄2 weeks of work (62 hours) 

each year sitting in gridlock. The average cost of congestion per peak road traveler 

is $1,160 a year. All of that congestion holds up more than 64 percent of the Nation’s freight that moves by truck on highways, which represents annual value to 

the economy of more than $5 trillion. As the Free Congress Foundation’s Paul 

Weyrich and Bill Lind demonstrate in their study, ‘‘How Transit Benefits People 

Who Do Not Ride It’’, public transportation, by alleviating congestion, brings real 

benefits not just to those who use it, but also to those who do not use it. 

But public transportation does not just improve the economy by taking cars off 

the road—it provides transportation options to low-income workers who cannot afford to drive to work. According to the Surface Transportation Policy Project, the 

proportion of household expenditures devoted to transportation has grown from 14 

percent in 1960 to almost 20 percent today. A recently published Bureau of Transportation Statistics Issue Brief found that Americans who commute by car or truck 

spent about $1,280 per year in 1999, while those who were able to use public transportation to get to and from work spent just $765 per year. Clearly public transportation provides real and needed savings for the many entry-level workers coming 

into the workforce who are so critical for the Nation’s economy. 

PUBLIC TRANSPORTATION IS IN DEMAND

Last November voters in several communities, including Denver, Houston, Grand 

Rapids and Kansas City, approved by large margins new local taxes to provide new 

and expanded public transportation services. These were just a few of efforts across 

the country to increase funding for transportation infrastructure, and follows successful actions in other cities over the past 5 years to expand transit service, including Phoenix, Charlotte, Dallas and Minneapolis. 

That these referenda have been approved should come as no surprise. Polls have 

consistently shown that the American public not only supports increased public 

transportation services but also supports providing the resources to pay for it. As 

mentioned earlier, the recent Wirthlin Worldwide study showed that 80 percent of 

Americans surveyed see quality of life benefits from increased investment in public 

transportation; 76 percent support public funding for the expansion and improve-
567

ment of public transportation; two-thirds support pro-public transportation Congressional candidates; and a majority (52 percent to 41 percent) of Americans believe 

transportation investment is preferable to tax cuts to stimulate the economy. These 

findings hold true across areas of all sizes—urban, suburban, small town and rural. 

A poll taken in spring 2003 by APTA and the American Automobile Association 

(AAA) showed that 95 percent of those surveyed said traffic congestion, including 

commutes to and from work, had grown worse over the last 3 years, with 92 percent 

believing it was either very important (71 percent) or somewhat important (21 percent) for their community to have both good roads and viable alternatives to driving. 

The Wirthlin Worldwide poll demonstrates that support for public transportation 

has increased dramatically not only in our biggest cities, but in smaller urban communities and rural areas as well, where 40 percent of America’s rural residents 

have no access to public transportation, and another 28 percent have substandard 

access. It is estimated that rural America has 30 million non-drivers, including senior citizens, the disabled and low-income families, all of whom need transportation 

options. According to a survey of APTA members, bus trips in areas with populations less than 100,000 increased from 323 million to 426 million in a recent 5-

year span. 

While demand for new and expanded service is increasing, the resources required 

to simply maintain the present level of service are immense. A 2002 AASHTO report estimates that $44 billion is needed annually to meet current transit capital 

needs for new projects and improvements to existing systems as well to expand the 

availability of transit service to more Americans. 

PUBLIC TRANSPORTATION PROVIDES MOBILITY OPTIONS

Public transportation provides mobility options to persons who choose not to, or 

cannot, drive because of age or a disability. For many in this population, public 

transportation may be the only option to living a fully independent and productive 

life. For many Americans, public transportation can be the difference between staying in their own homes or moving into an assisted living community. 

According to the AARP’s Beyond 50.03: A Report to the Nation on Independent 

Living and Disability, released in August 2003, as people move from their 70’s into 

their 80’s, the percentage of licensed drivers falls to 50 percent from just over 90 

percent. With the baby-boom generation approaching retirement age, this means the 

population of elderly Americans who do not have a driver’s license will soon grow 

significantly. 

Persons with disabilities face similar mobility problems. Many cannot drive or afford vehicles that are fitted to their needs. Public transportation can provide them 

the options they need to stay active and independent. However, according to AARP’s 

report, 32 percent of people with disabilities over 65 report that inadequate transportation is a problem. The report states further that while public transportation 

is more economically efficient in areas with high population density, many older 

Americans with disabilities live ‘‘outside of central cities in communities where public transportation is found least often.’’ This is becoming a growing problem, and it 

is clear that we need to begin to address the important transportation needs in 

these areas. 

PUBLIC TRANSPORTATION PROVIDES GOOD VALUE

Unlike other modal transportation projects funded through the Department of 

Transportation, major capital transit projects funded by the FTA are subject to a 

rigorous Federal review process. A comprehensive alternatives analysis process is 

undergone, with various transportation alternatives weighed and considered. The 

overall review process typically involves 5 or more years of planning, environmental 

studies and technical analysis. The projects must be included both in State and local 

transportation programs and plans. To qualify for project approval and a full funding grant agreement, project sponsors must demonstrate not only financial capacity 

to construct the project but also to maintain and operate the service once put in 

place. Much of the process turns on ridership and project cost estimates. In that regard, we are pleased to note that ridership and project cost and benefit estimates 

for recent new start and bus rapid transit projects have been very accurate, and we 

will continue to work with the FTA and our members to make sure that forecasting 

is as accurate as possible. The result of this rigorous process is that the completed 

transit projects provide real value and an excellent return on the dollar, often in 

areas not typically recognized: increased value and income for property owners; expanded markets, rising productivity and increased revenues for business and commercial owners/occupants; and enhanced tax revenues for local governments—from 

rising land values, expanded development and an upsurge in business transactions. 
568

While we support this rigorous review process and the excellent projects that result 

from it, we remain concerned that it does not apply to other transportation projects 

under the jurisdiction of the Department of Transportation. We think it would be 

good public policy to have all major Federally funded transportation projects subject 

to similar Federal review processes. 

PRESIDENT’S BUDGET PROPOSAL

The President’s fiscal year 2005 budget proposal proposes to freeze funding for 

Federal transit programs at the fiscal year 2004 level of $7.266 billion. In its proposal for a 6-year authorization bill, which was submitted to Congress 9 months earlier, the administration had proposed to fund Federal transit programs at $7.369 

billion in fiscal year 2005, $103 million more than the amount for transit in the fiscal year 2005 budget proposal. 

Mr. Chairman, now is not the time to shortchange investment in public transportation! While the administration continues to advocate for policies that will support 

a healthy economy and produce more jobs, its budget proposal for transit does not 

adequately address the need to improve our Nation’s transit systems, and create 

jobs in the process. We again emphasize the 47,500 jobs created by every $1 billion 

invested in the public transportation infrastructure or the $30 million in private 

business sales that are generated for every $10 million invested in transit. 

Mr. Chairman, we strongly believe that growth of the Federal investment in public transportation can help advance many of the Nation’s key goals, and that freezing Federal funding for transit simply defers the growing backlog of unmet transit 

capital needs. We urge the subcommittee to fund the Federal transit program in fiscal year 2005 at no less than $8.65 billion, the amount provided in SAFETEA (S. 

1072), the Senate-passed TEA21 reauthorization bill. 

CONCLUSION

Public transportation should and can play a key role in meeting the goals of the 

administration and Congress in providing jobs and economic development, energy 

independence, and mobility options for millions of American. Mr. Chairman, we look 

forward to working with the subcommittee as it takes up the fiscal year 2005 appropriations bills, and urge you to invest in surface transportation programs at the 

highest levels possible. 

PREPARED STATEMENT OF THE NATIONAL ASSOCIATION OF RAILROAD PASSENGERS

Thank you for the opportunity to submit this statement. We support the Amtrak 

request for $1.798 billion. We also support efforts to make the Federal Government 

a true funding partner with States to permit development of high speed rail corridors, for which many States already have well-advanced plans. Finally, we strongly favor Federal support for the CREATE/Chicago Project to modernize Chicago’s 

railroad infrastructure, and we support continuing efforts to bring to fruition a 

North Station/South Station Rail Link in Boston. 

$900 MILLION IS A SHUTDOWN BUDGET FOR AMTRAK

Secretary of Transportation Norman Y. Mineta has made clear his agreement that 

$900 million would be a shutdown budget. At his interest-group budget briefing on 

February 2, I asked him about a seeming disconnect between the administration’s 

budget recommendation and Amtrak President & CEO David L. Gunn’s statement 

last fall that $900 million is a shutdown budget that ‘‘won’t work.’’ Mineta responded, ‘‘Gunn is right on the numbers’’ but we are sending a message about the 

importance of our reforms. The following table illustrates the problem with $900 

million:

[In millions of dollars] 

Amount 

Operating .......................................................................................................................................................................... 570 

Debt Service ..................................................................................................................................................................... 262 

Environmental .................................................................................................................................................................. 22
569

[In millions of dollars] 

Amount 

Total .................................................................................................................................................................... 854

NOTE.—Amtrak has taken on no new commercial debt since David Gunn’s May, 2002, arrival, and has no plans to. The cost of debt service peaks in Fiscal 2005 and declines thereafter. Most of the environmental portion of Amtrak’s capital budget involves work that Amtrak is 

legally obligated to undertake, so could not be set aside in favor of fleet or infrastructure work that otherwise would be considered more vital 

to the system’s continued, viable operation. 

Gunn in February said Amtrak has ‘‘a strategy of moving resources from emergency repairs to programmed maintenance.’’ This obviously makes for more reliable 

service, while maximizing revenues (fewer en-route problems means satisfied customers) and reducing maintenance costs. However, much of the programmed maintenance is considered capital, so a maintenance budget at or close to zero forces either an immediate shutdown or an immediate downward spiral in service quality. 

But this means the system would collapse on zero capital, and 2,000 employees would be let go. That’s essentially what the administration’s $900 million would require. 

PASSENGER RAIL SECURITY

We agree that rail security has been underfunded and join with those noting the 

huge gap between Federal spending on aviation security and on railroad security—

$11 billion versus $115 million, according to one representative at today’s House 

subcommittee hearing. We understand that the Bush Administration’s Transportation Security Administration request for fiscal year 2005 is $5.3 billion, of which 

all but $147 million is for air security. 

The most obvious needs in rail security relate to infrastructure—especially 

bridges, tunnels, stations and yards—and training for front-line personnel. 

Infrastructure.—Issues in the Northeast Corridor are well-known. At major stations nationwide, items for consideration include: an increased police presence with 

K–9 units, video surveillance at key points of entry and exit, vapor detectors, coordinated plans for first responders in case of an event. 

Attention must also be paid, as Amtrak notes, to ‘‘non-public locations, such as 

loading docks, adjacent yards and buildings.’’

Consider this recent news item regarding a major commuter railroad:

‘‘Train yards in New Haven and Bridgeport have major security problems 2 

months after Federal Homeland Security chief Tom Ridge asked rail operators to 

be on a heightened state of alert following the Spain train bombings that killed 191 

people, WTNH–TV reported Thursday. A reporter and cameraman walked into the 

New Haven rail facility at 3 a.m. on a recent day and found no security or police 

guarding the Metro-North trains that carry nearly 40,000 Connecticut commuters 

into New York each weekday. 

‘‘No one stopped the news team, which was able to walk around the rail yard for 

about two hours, the station reported. The reporter, Alan Cohn, climbed aboard one 

of the engines . . . The television station found a similar lack of security at the 

Bridgeport rail yard . . . It’s the job of Metro-North and Metropolitan Transit Authority police to patrol [these] rail yards. Metro-North President Peter Cannito 

promised that changes would be made.’’

This report raises the obvious question: how secure are other rail yards? 

There is also a Federal interest in the security level of the Nation’s vast, privately-owned railroad system which is important both to Amtrak’s national network 

and to freight transportation. For example, loss of major Mississippi River bridges, 

especially south of Memphis where the number of crossings is small, could wreak 

havoc with freight commerce. 

Personnel.—Our understanding is that Israel, the U.K., and Germany are nations 

where training front line staff has actually deterred bombers and saved lives. This 

has been a sensitive issue in the United States. Their approach needs to be studied 

to see what aspects of this work could usefully be transferred. This does not mean 

‘‘pre-boarding’’ interviews; that is not feasible for reasons discussed below. But Amtrak’s on-board employees in many cases have several hours or more of intermittent 

contact with passengers and thus the possibility—with the right training—of identifying potential wrongdoers. 

What is not realistic.—Many Americans begin their thinking about rail passenger 

security by citing baggage (and shoe!) X-ray procedures they experience at airports 

but obviously not at train stations. Amtrak (and most commuter railroads) have two 

extremes: places like New York’s Pennsylvania Station where passenger volumes 

and proximity to commuter trains would make anything approaching airline-style 
570

security both impractical and largely ineffective. Conversely, many small stations 

have such small passenger volumes as to make any security equipment seem wasteful. As Mesa Airlines CEO Jonathan Ornstein recently noted (in a March 9 Washington Post report about holes in security at small airports), ‘‘When there are more 

TSA people than passengers, you have to ask yourself, does that make sense?’’

We note with approval that TSA seems to agree. For example, TSA Undersecretary Asa Hutchinson said that the device that sniffs for explosives and is in a 

month-long test at New Carrollton, Maryland, is not permanent but simply to gain 

knowledge for TSA ‘‘so that in the event there is a specific threat or a specific need, 

we have the knowledge, the capability to put inspections in place in a particular 

threat environment.’’

THE PUBLIC WANTS THE RAIL CHOICE

Amtrak’s ridership reports starting around May show strong increases—a further 

sign both that Gunn is succeeding in stabilizing the railroad, and that people want 

the service. For the first 5 months of fiscal year 2005 (October-February), ridership 

increases on the long-distance trains ranged from 6 percent to 34 percent, with only 

two routes below 10 percent. Short-distance route changes ranged from ¥3 percent 

to ∂22 percent, with 7 of 16 routes showing double-digit percentage increases. (Actually, the New York-Pittsburgh route was up 104 percent but this is not exactly 

an apples-to-apples comparison.) Two routes showed slight declines. 

In March, systemwide ridership was up 3.2 percent and revenues were up 5.8 percent versus 1 year ago. 

THE NATIONAL NETWORK

We reiterate our strong belief that funding Amtrak’s national network is a Federal responsibility, and that implementation of any ‘‘reform’’ which requires a multiplicity of States to provide operating grants is tantamount to shutting down the system. The suggestion—heard more than once from Secretary Mineta—that a train 

could run ‘‘closed door’’ through non-paying States is not workable because, almost 

without exception, revenues lost from skipping any State would far exceed the negligible cost savings. The Empire Builder in crossing the thin northern tip of Idaho 

might conceivably skip Sandpoint, Idaho, with minimal damage but it’s hard to 

think of any other benign example. 

Similarly, we do not believe a ‘‘route closing commission’’ could shed any significant new light. The system is already so skeletal that deletion of any surviving 

route would mean wholesale elimination of service to major cities and States. Indeed, as we have testified previously, we favor an expansion of the network. 

Amtrak’s Sunset Limited is often cited by Amtrak’s critics as wasteful because it 

would be cheaper to fly passengers from Orlando to Los Angeles. However, relatively few passengers travel that entire distance. Other city-pairs the route serves 

do not have direct flights, or affordable flights, or in some cases any flights. In addition, some passengers are physically unable to fly. And elimination of the Sunset 

Ltd. would create a domino effect as the loss of connecting passengers and ability 

to share facility costs with the Sunset would unravel the economics of the Texas 

Eagle, City of New Orleans, and Crescent. 

The large subsidy-per-passenger figures sometimes cited for given Amtrak longdistance routes include ‘‘fully allocated’’ costs. These are misleading because they 

often are interpreted to mean that discontinuance of a given route would reduce 

Amtrak’s operating grant requirement by the product of the number of passengers 

times the fully allocated loss per passenger. Using the Silver Star fiscal year 2002 

figures at page 471 of the House subcommittee’s April 10, 2003, hearing record, the 

math would be $189 times 252,240. 

The product does not represent an avoidable cost, since many allocated costs will 

not disappear but simply get re-allocated to surviving routes. Obvious example: a 

share of the Amtrak president’s salary. Also, a high proportion of long-distance-train 

passengers make connections with other trains, so discontinuing one train negatively impacts revenues on other trains. 

This helps explain why ‘‘FRA-defined train contribution’’ figures were developed, 

by Federal Railroad Administration working with Amtrak when they were implementing the agreements under which DOT approves funds before Amtrak gets 

them. In the case of the Silver Star, the FRA defined contribution is actually positive: $12 per passenger or 2 cents per passenger-mile. (Measures stated in terms 

of passenger-mile are normally used in intercity travel statistics because they take 

into account the dramatic variations in trip lengths.) 

Thank you for considering our views. Please let us know if we can provide further 

information that would be helpful to the committee’s work.
571

1Public Law No. 108–176 (H. Res. 2115) (December 12, 2003). 

2Public Law No. 108–176 (H. Res. 2115) (December 12, 2003). 

PREPARED STATEMENT OF SIGNATURE FLIGHT SUPPORT

THE EFFECTS OF CLOSING DCA TO GENERAL AVIATION

Ronald Reagan Washington National Airport was closed to general aviation 

(‘‘GA’’) on September 11, 2001 and has not reopened since. It is the only airport in 

the country that has been shut down to general aviation. Following the September 

11 attacks, the FAA also closed the three small general aviation airports within 15 

miles of Washington: Potomac Airfield, Washington Executive Airport and College 

Park Airport (‘‘DC–3 airports’’). Although the DC–3 airports have been allowed to 

re-open, they are subject to unique tight restrictions and cannot land any incoming 

traffic. No other airports in the country are subject to comparable restrictions. 

General aviation businesses that were operating at Reagan National and the 

smaller DC–3 airports have suffered substantial losses as a result of these closures 

and restrictions, which is entirely the result of government edicts. The use of their 

property has been ‘‘taken’’ by the Federal Government. They should be compensated 

for these losses. 

Prior to 9/11, as the sole provider of ground support services for general aviation 

at Reagan National, Signature Flight Support handled an average of 175 flights per 

day, and employed 55 aviation service professionals. Two employees now handle approximately 20 flights per month. During the last 6 months, virtually all of these 

flights have been government officials. The flights primarily are aircraft belonging 

to the Bureau of Immigration and Customs Enforcement, the Drug Enforcement 

Agency, the FBI, NASA, and miscellaneous dignitaries. 

Although Signature’s rent has been abated by the Metropolitan Washington Airports Authority, Signature has suffered substantial losses to revenues and workforce. In the 21⁄2 years since closure, Signature Flight Support alone has lost after 

tax profits, offset by modest gains at our Washington Dulles and Baltimore facilities, in excess of $10 million. 

COMPENSATION IS NEEDED AND APPROPRIATE

The Fifth Amendment to the Constitution provides that no ‘‘private property shall 

be taken for public use without just compensation.’’ The closure to general aviation 

and its effect on Signature is legally known as a regulatory taking. The general 

aviation shutdown has left Signature with a facility and a business that cannot possibly be used for any other purpose. Given this situation, the Federal Government 

should compensate Signature and other similarly affected business for the losses 

that have resulted. Compensation should be paid for the lost profits and actual 

losses incurred since the closure of Reagan National to general aviation. 

Congress immediately recognized the need for compensation in the wake of 9/11, when it passed the 2001 Emergency Supplemental, which included $40 million to 

the Metropolitan Washington Airports Authority to compensate its concessionaires 

for the temporary closure and reduced commercial flight schedule at Reagan National immediately after 9/11. However, this fund compensated businesses only for 

the period immediately following 9/11; no funds were made available to businesses 

that continued to suffer substantial losses at Washington area airports. These losses 

were uniquely suffered at these airports. This failure can and should be addressed 

this year. Funding for these losses has now been fully authorized. 

Last year, Congress recognized the importance of compensating businesses for the 

significant losses suffered post 9/11 as a result of the closure of general aviation. 

The FAA reauthorization bill, The Vision 100—Century of Aviation Reauthorization, 

provides for the reimbursement of losses incurred by general aviation entities. The 

bill was enacted last December. 

The compensation provision specifically states, ‘‘the Secretary of Transportation 

may make grants to reimburse . . . general aviation entities for the security costs 

incurred and revenue foregone as a result of the restrictions imposed by the Federal 

Government following the terrorist attacks on the United States that occurred on 

September 11, 2001.1 Item 1 is ‘‘general aviation entities that operate at Ronald 

Reagan Washington National Airport.’’ 2 The statute authorizes that $100,000,000 to 

be appropriated for reimbursements to carry out the section. This year, Congress 

should follow through by making this authorization a reality, particularly for the 

highest priority category, which is the only category where general aviation has 

been totally banned since 9/11. 

A provision should be included in the Fiscal 2005 Transportation Appropriations 

legislation that compensates those businesses that have suffered losses as a result 
572

of the termination of general aviation activity at Reagan National Airport. This provision should provide for a minimum of $10 million, the approximate amount lost 

by Signature Flight Support since the closure of Reagan National on 9/11. 
(i)

LIST OF WITNESSES, COMMUNICATIONS, AND 

PREPARED STATEMENTS 

Page 

Air Traffic Control Association, Inc., Prepared Statement of the ........................ 555

American: 

Passenger Rail Coalition, Prepared Statement of the ................................... 548 

Public Transportation Association, Prepared Statement of the ................... 564

Bennett, Senator Robert F., U.S. Senator from Utah: 

Questions Submitted by............................................................................... 106, 377 

Statements of.................................................................................................... 7, 282

Berne, Bernard H., M.D., Ph.D., Prepared Statement of ..................................... 545

Blakey, Marion C., Administrator, Federal Aviation Administration, Department of Transportation ........................................................................................ 397 

Prepared Statement of ..................................................................................... 406 

Statement of ...................................................................................................... 402

Bloch, Scott J., Special Counsel, U.S. Office of Special Counsel, Prepared 

Statement of ......................................................................................................... 524

Bonasso, Samuel G., Deputy Administrator, Research and Special Programs 

Administration, Department of Transportation, Prepared Statement of ........ 511

Brownback, Senator Sam, U.S. Senator from Kansas, Questions Submitted 

by ........................................................................................................................... 461

Byrd, Senator Robert C., U.S. Senator from West Virginia, Questions Submitted by .......................................................................................................... 151, 393

California: 

Government and Private Sector Coalition for Operation Clean Air, Prepared Statement of the ................................................................................. 559 

Industry and Government Central California Ozone Study (CCOS) Coalition, Prepared Statement of the .................................................................. 560

Coalition of Northeastern Governors (CONEG), Prepared Statement of the ..... 550

Dorgan, Senator Byron L., U.S. Senator from North Dakota: 

Questions Submitted by............................................................................... 111, 394 

Statements of................................................................................................ 283, 401

Durbin, Senator Richard J., U.S. Senator from Illinois: 

Prepared Statement of ..................................................................................... 402 

Questions Submitted by...................................................................... 110, 269, 469

Easter Seals, Prepared Statement of ..................................................................... 562

Everson, Mark O., Commissioner, Internal Revenue Service, Department of 

the Treasury ......................................................................................................... 155 

Prepared Statement of ..................................................................................... 163 

Statement of ...................................................................................................... 161

Federal Aviation Administration, Questions Submitted to the ........................... 456

Fox, William J., Director, Financial Crimes Enforcement Network, Department of the Treasury, Prepared Statement of ................................................... 513

Gardiner, Pamela J., Acting Treasury Inspector General for Tax Administration, Department of the Treasury ....................................................................... 155 

Prepared Statement of ..................................................................................... 174 

Statement of ...................................................................................................... 172

Glynn, Marilyn, Acting Director, Office of Government Ethics, Prepared 

Statement of ......................................................................................................... 539
Page

ii

Internal Revenue Service: 

Oversight Board, Prepared Statement of the ................................................. 203 

Questions Submitted to the ............................................................................. 210

International Loran Association, Prepared Statement of the .............................. 543

Jacquez, Albert S., Administrator, Saint Lawrence Seaway Development Corporation, Prepared Statement of ......................................................................... 477

James, Kay Coles, Director, Office of Personnel Management, Prepared Statement of .................................................................................................................. 495

Kohl, Senator Herb, U.S. Senator from Wisconsin, Questions Submitted by .... 467

Kowalewski, Richard, Deputy Director, Bureau of Transportation Statistics, 

Department of Transportation, Prepared Statement of .................................... 509

Libertucci, Arthur J., Administrator, Alcohol and Tobacco Tax and Trade 

Bureau, Department of the Treasury, Prepared Statement of ......................... 520

McFarland, Patrick E., Inspector General, Office of Personnel Management, 

Prepared Statement of ......................................................................................... 498

McPhie, Neil Anthony Gordon, Acting Chairman, Merit Systems Protection 

Board, Prepared Statement of ............................................................................. 483

Mead, Ken, Inspector General, Office of the Inspector General, Department 

of Transportation: 

Prepared Statement of ..................................................................................... 415 

Statement of ...................................................................................................... 411

Mineta, Hon. Norman Y., Secretary, Office of the Secretary, Department 

of Transportation ................................................................................................. 1 

Prepared Statement of ..................................................................................... 9 

Statement of ...................................................................................................... 7

Moravec, F. Joseph, Commissioner, Public Buildings Service, General Services 

Administration, Prepared Statement of ............................................................. 500

Murray, Senator Patty, U.S. Senator from Washington: 

Prepared Statements of .......................................................................... 5, 120, 159 

Questions Submitted by.................................................... 148, 249, 271, 377, 463 

Statements of.................................................................................. 3, 119, 279, 399

National: 

Association of Railroad Passengers, Prepared Statement of the .................. 568 

Treasury Employees Union, Prepared Statement of the ............................... 552

Nober, Roger, Chairman, Surface Transportation Board, Prepared Statement 

of ............................................................................................................................ 534

Office of the Inspector General, Department of Transportation, Questions 

Submitted to the .................................................................................................. 470

Perry, Stephen A., Administrator, General Services Administration, Prepared 

Statement of ......................................................................................................... 501

Potter, John, Postmaster General and CEO, United States Postal Service ....... 115 

Prepared Statement of ..................................................................................... 123 

Statement of ...................................................................................................... 121

Reid, Senator Harry, U.S. Senator from Nevada: 

Prepared Statement of ..................................................................................... 159 

Statement of ...................................................................................................... 158

Roffee, Lawrence W., Executive Director, U.S. Access Board, Prepared Statement of .................................................................................................................. 487

Sandberg, Annette M., Administrator, Federal Motor Carrier Safety Administration, Department of Transportation, Prepared Statement of ...................... 505

Shelby, Senator Richard C., U.S. Senator from Alabama: 

Opening Statements of ........................................................................... 1, 115, 277 

Prepared Statement of ..................................................................................... 118 

Questions Submitted by.................................... 32, 142, 210, 270, 311, 456, 470

Signature Flight Support, Prepared Statement of ................................................ 571

Snow, Hon. John, Secretary, Office of the Secretary, Department of the Treasury ......................................................................................................................... 277

Prepared Statement of ..................................................................................... 285 

Statement of ...................................................................................................... 283
Page

iii

Stevens, Senator Ted, U.S. Senator from Alaska: 

Prepared Statement of ..................................................................................... 133 

Statements of.................................................................................................. 29, 133

Treasury Inspector General for Tax Administration, Questions Submitted 

to the ..................................................................................................................... 270

Walters, John P., Director, Office of National Drug Control Policy, Prepared 

Statement of ......................................................................................................... 530

Weintraub, Ellen L., Vice Chair, Federal Election Commission, Prepared 

Statement of ......................................................................................................... 527

(v)

SUBJECT INDEX 

DEPARTMENT OF THE TREASURY 

INTERNAL REVENUE SERVICE

Page 

Accuracy of Tax Return Preparation ...................................................................... 180

Actuarial Software Program ................................................................................... 247

Additional Committee Questions ............................................................................ 210

Addressing: 

Fraud at All Income Levels ............................................................................. 187 

Non-compliance ................................................................................................. 162

Background .............................................................................................................. 252

Bank Secrecy Act Enforcement .............................................................................. 238

Board Cites Complexity as Fundamental Flaw .................................................... 207

Business Systems Modernization (BSM).................................................. 157, 166, 195 

At the IRS ......................................................................................................... 171 

Cost Overruns ................................................................................................... 198 

Management ................................................................................................. 199, 247

Commitment to Enforcement Funding .................................................................. 192

Competitive Sourcing .............................................................................................. 261

Corporate Tax Shelters ........................................................................................... 181

Customer: 

Account Data Engine (CADE) ......................................................................... 200 

Cost Overrun (From the Original Estimate) ........................................... 201 

Service.................................................................................................. 178, 264, 274

Days of ‘‘Outmanned and Outgunned’’ IRS Must End ......................................... 204

Delinquent Tax Inventory ....................................................................................... 193

Earned Income Tax Credit ...................................................................................... 185 

Certification Pilot ............................................................................................. 186

Effective Enforcement ............................................................................................. 169

Electronic Filing ....................................................................................................... 253

Enforcement Priorities ............................................................................................ 182

Failure To Collect Delinquent Taxes ................................................................. 249, 273

Fuel Tax Evasion................................................................................................. 188, 229

Future Staffing Requirements ................................................................................ 246

Health Insurance Tax Credit Administration ....................................................... 166

Improving: 

Accuracy of Return Preparation ...................................................................... 180 

Service ............................................................................................................... 167

Information Systems ............................................................................................... 166

IRS: 

Actions in Regard to the PRIME ..................................................................... 202 

Enforcement: 

Activities .................................................................................................... 162 

Funding ...................................................................................................... 156 

Priorities .................................................................................................... 183 

Must Stay the Course on Customer Service ................................................... 204 

Reorganization .................................................................................................. 256 

Service and Staffing Levels ............................................................................. 190 

Staffing .............................................................................................................. 183

Modernization...................................................................................................... 270, 271 

Critical to Tax Administration ........................................................................ 206

Performance of the Contractor ............................................................................... 203
Page

vi

Phase: 

I of Consolidation Strategy .............................................................................. 253 

II of Consolidation Strategy ............................................................................. 254

President’s Fiscal Year 2005 Budget Seeks Increase in Enforcement ................ 163

Problems with IRS Business Systems Modernization (BSM) .............................. 259

Processing: 

Assistance, and Management .......................................................................... 164 

Paper Returns ................................................................................................... 253

Program Performance .............................................................................................. 167

Questions Submitted to the: 

Internal Revenue Service ................................................................................. 210 

Treasury Inspector General for Tax Administration ..................................... 270

Report ....................................................................................................................... 252

Resources: 

For Tax Administration ................................................................................... 192 

Necessary to Complete Modernization ............................................................ 197

Return on Enforcement Investment ....................................................................... 191

Systems Modernization ........................................................................................... 175

Tax: 

Assistance Program—Illinois ........................................................................... 269 

Cheating: Alarming Trends ............................................................................. 205 

Evasion/IRS Collection ..................................................................................... 269 

Gap .................................................................................................................... 187 

Law: 

Accuracy ..................................................................................................... 194 

Enforcement ............................................................................................... 164 

Budget Priorities and Resource Allocation ...................................... 246 

Funding ............................................................................................... 190

Taxpayer Impact ...................................................................................................... 254

The: 

Administration’s Fiscal Year 2005 Budget Request ...................................... 206 

IRS Oversight Board Budget Recommendation ............................................. 203

2004 Filing Season .................................................................................................. 171

Workforce: 

And Facility Realignment ................................................................................ 245 

Impact ................................................................................................................ 254 

Realignment.................................................................................................. 189, 193

OFFICE OF THE SECRETARY

Access to Overseas Markets .................................................................................... 296

Additional Committee Questions ............................................................................ 310

Administration of EITC ........................................................................................... 306

Alcohol and Tobacco Tax and Trade Bureau ......................................................... 375

Are There More Riggs Banks Out There? ............................................................. 386

Competitive Sourcing .............................................................................................. 378

Coordination with Homeland Security .............................................................. 293, 303

Departmental Offices ............................................................................................... 311

Designation: 

Information ....................................................................................................... 309 

Of Charities ....................................................................................................... 308

DSCIP ....................................................................................................................... 320

Earned Income Tax Credit (EITC) ......................................................................... 304

Economy and Jobs ................................................................................................... 290

Ensuring Professionalism, Excellence, Integrity and Accountability in Management of Treasury ............................................................................................ 288

Fighting the War on Terror and Safeguarding our Financial Systems .............. 287

FinCEN ..................................................................................................................... 339

Foundation for Success—The President’s Management Agenda ......................... 289

Has Progress in Saudi Arabia Triggered Progress in Other Arab Nations? ...... 382

IRS: 

Enforcement Increase ....................................................................................... 390 

Information Technology Investment ............................................................... 298 

Staffing Reductions .......................................................................................... 387

Is Treasury Requesting Enough Foot Soldiers in the War on Terrorist Financing? ........................................................................................................................ 384

Licensing Information Resources ........................................................................... 301

Maintaining Public Trust and Confidence in our Economic and Financial 

Systems ................................................................................................................. 286
Page

vii

Mint/BEP Merger Proposal ..................................................................................... 353

Newly-Created Jobs Will Not Go To Those Who Are Being Laid-Off/Job Training .......................................................................................................................... 377

Office of: 

Foreign Assets Control (OFAC) .................................................................. 299, 391 

Resources ................................................................................................... 301 

Terrorism and Financial Intelligence ............................................................. 321

Outsourcing .............................................................................................................. 293 

And Job Displacement ...................................................................................... 295

Private Collection Agencies ..................................................................................... 306

Progress on Stemming the Use of Charities to Funnel Cash to Terrorist 

Organizations ....................................................................................................... 380

Promoting Prosperous and Stable U.S. and World Economies ............................ 286

Proposed Merger of the U.S. Mint and the Bureau of Engraving and

Printing ................................................................................................................. 392

Protection of Taxpayer Rights ................................................................................ 307

Public Policy on Tax Code ....................................................................................... 303

Resource Information .............................................................................................. 301

Return on Investment ............................................................................................. 298

Tax Code Definitions ............................................................................................... 305

Terrorist: 

Financing ...................................................................................................... 291, 327 

Use of Charity Organizations .......................................................................... 308

The President’s Six-Point Economic Growth Plan ................................................ 289

Treasury Budget Increase ....................................................................................... 297

Treasury’s Terrorist Financing Initiative Needs Deadlines and Milestones ...... 386

What Accomplishments Are Hoped For in Next G–8 Summit? ........................... 387

Will: 

The Budget Boost Actually Improve Financial Crimes Network Enforcement’s (FinCEN’s) Performance? ................................................................. 385 

Treasury Ban Non-Cooperating Nations From the Banking Sector? ........... 384

DEPARTMENT OF TRANSPORTATION 

FEDERAL AVIATION ADMINISTRATION

Additional Committee Questions ............................................................................ 456

Advanced Technologies and Oceanic Procedures.............................................. 456, 463

Air Traffic: 

MOU’s ................................................................................................................ 404 

Organization ..................................................................................................... 404

Aircraft Maintenance .............................................................................................. 401

Balancing Investments ............................................................................................ 458

Baseline Review of WAAS and STARS .................................................................. 464

Capacity ............................................................................................................... 405, 408

Center Weather Service Units (CWSU) ................................................................. 461

Chicago: 

Midway and O’Hare Airports .......................................................................... 470 

O’Hare International Airport ........................................................................... 469

Chief Financial Officer (CFO) ................................................................................. 404

Contract Towers ....................................................................................................... 458

Controller Retirements ............................................................................................ 458

Controllers-in-charge ............................................................................................... 458

Cost: 

Accounting ......................................................................................................... 404 

Control ............................................................................................................... 410

FAA: 

Acquisition Policy ............................................................................................. 456 

Policy on Airspace Violations .......................................................................... 468

Flight: 

Delays ................................................................................................................ 399 

Plan .................................................................................................................... 403

General Aviation ...................................................................................................... 462

Glass Beads .............................................................................................................. 460

Global Positioning System ...................................................................................... 457

Harmonization of U.S. and European Modernization Plans ................................ 459

International Leadership and Global Harmonization .......................................... 409

Joint Planning and Development Office ................................................................ 466
Page

viii

LORAN ..................................................................................................................... 467

Organizational Excellence ....................................................................................... 409

Pay Performance ...................................................................................................... 398

Pay-for-performance ................................................................................................ 404

Problems with Modernization ................................................................................. 398

Reliable Cost Information ....................................................................................... 461

Repair Stations ........................................................................................................ 405

Revenue Diversion ................................................................................................... 463

Rulemaking Authority ............................................................................................. 467

Safety.................................................................................................................... 405, 406

Security at the Auburn Tracon ............................................................................... 467

Standard Terminal Automation Replacement System ......................................... 457

Termination of Long-term Procurement Projects .................................................. 466

The: 

FAA’s Flight Plan, 2004–2008 ......................................................................... 406 

New SeaTac Tower ........................................................................................... 465

OFFICE OF THE INSPECTOR GENERAL

Abating a Trend of Operating Cost Growth .......................................................... 421

Accountability .......................................................................................................... 449

Acquisition Program ................................................................................................ 414

Additional Committee Questions ............................................................................ 456

Airport: 

Funding Issues .................................................................................................. 430 

Revenue Diversion ............................................................................................ 473

Airports ................................................................................................................ 415, 420

Aviation Safety Issues ............................................................................................. 420

Being Positioned for a Rebound in Air Traffic ...................................................... 432

Bringing Fiscal Discipline and Accountability to FAA Modernization Efforts ... 425

Capital Account ........................................................................................................ 414

Career Staffing Problem .......................................................................................... 444

Controller Retirements .............................................................................. 413, 441, 442

Cost Accounting ....................................................................................................... 414

Explanation for Increase in Operational Errors ................................................... 474

F&E ........................................................................................................................... 438

FAA’s Operations Account ...................................................................................... 435

Fixed Price ............................................................................................................... 438

Flight Delays ............................................................................................................ 450

Global Communication, Navigation, and Surveillance Systems .......................... 455

Is: 

The FAA’s Oceanic Program in Trouble? ........................................................ 473 

There Adequate Security at the Auburn TRACON? ...................................... 474

Labor Distribution ................................................................................................... 448

Laser Runway Lighting ........................................................................................... 443

Maintenance Workforce ........................................................................................... 440

Major Acquisitions ................................................................................................... 418

Modernizing NAS ..................................................................................................... 437

MOU’s................................................................................................................... 413, 436

Network of Systems ................................................................................................. 439

Oceanic Air Traffic Contractor Cost ....................................................................... 447

OJT Training ............................................................................................................ 414

Operating Costs ....................................................................................................... 417

Passenger Enplanements ........................................................................................ 412

Personnel Costs ........................................................................................................ 436

Review of Business Case Analysis ......................................................................... 446

Safety.................................................................................................. 412, 416, 435, 451 

And Capacity ..................................................................................................... 439

SeaTac ...................................................................................................................... 454

Training of New Controllers ................................................................................... 444

OFFICE OF THE SECRETARY

Accessibility for All America Program ................................................................... 72

Additional Committee Questions ............................................................................ 32

Air Traffic Control: 

Maintenance Staffing Levels ........................................................................... 27 

Training ............................................................................................................. 112
Page

ix

Airline Stabilization Act .......................................................................................... 105

Amtrak ................................................................................................... 23, 25, 110, 112

At the: 

Contractor’s Facility ......................................................................................... 22 

Fleet Anchorage ................................................................................................ 21

Attorneys in DOT .................................................................................................... 70

Authorization of DOT Programs and Fees ............................................................ 104

Aviation: 

Data Systems .................................................................................................... 68 

Delays ................................................................................................................ 110

Board of Contract Appeals...................................................................................... 53, 73

Charges to the Modes by OST ................................................................................ 48

CIO Charges to the Modes ...................................................................................... 90

Commercial Driver’s License Program ................................................................... 23

Common Access Architecture .................................................................................. 77

Competitive Sourcing .............................................................................................. 92

Contracting Out: 

FAA Functions .................................................................................................. 19 

Federal Jobs ...................................................................................................... 26

Critical IT Systems .................................................................................................. 89

Decision of the Federal Arbitrator ......................................................................... 27

Delphi ....................................................................................................................... 88, 91

Details to the Office of the Secretary ..................................................................... 47

Disadvantaged Business Enterprise ...................................................................... 90

DOT: 

Investment Review Board ................................................................................ 81 

Rent ................................................................................................................... 103

During Tow Preparations & Tow Evolutions ........................................................ 22

E-Government .......................................................................................................... 85

Electronic: 

Business Practices ............................................................................................ 93 

Grants ................................................................................................................ 92 

Rulemaking ....................................................................................................... 93

Employee Training and Development .................................................................... 69

Enterprise Architecture ........................................................................................... 79

Environmental Reviews for Alaskan Highway Projects ....................................... 29

Essential Air Service ............................................................................................... 67 

Cost-sharing ...................................................................................................... 111 

Funding ............................................................................................................. 111

Federal: 

Personnel Payroll System ................................................................................ 74 

Transit Administration: 

Administrative Expenses.......................................................................... 12, 32 

Reorganization ........................................................................................... 32

Full Funding Grant: 

Agreement Commitment Authority ................................................................ 38 

Agreements ....................................................................................................... 20

Funding: 

For: 

Air Traffic: 

Control Modernization ....................................................................... 16 

Controllers .......................................................................................... 12 

FAA Capital Programs .............................................................................. 22 

Railroads and Amtrak ............................................................................... 8 

Surface Transportation ............................................................................. 8 

The Federal Aviation Administration ...................................................... 9 

Levels for OST Offices ...................................................................................... 47

Highway: 

Funding ............................................................................................................. 19 

Safety ................................................................................................................. 18

Human Resources Information System ................................................................. 94

Immediate Office of the: 

Deputy Secretary .............................................................................................. 50 

Secretary ........................................................................................................... 49

Impaired Driving ..................................................................................................... 14

Intelligent Transportation Systems Advisory Committee .................................... 39
Page

x

IT: 

Capital Planning ............................................................................................... 82 

Consolidation .................................................................................................... 84 

Modernization ................................................................................................... 86 

Procurement ...................................................................................................... 87 

Security ............................................................................................................. 76, 83

Leveraged Lease Transactions ................................................................................ 111

Maritime Guaranteed Loans (Title XI) .................................................................. 40

Minority Business Outreach ................................................................................... 99

Motor: 

Carrier: 

Compliance Reviews .................................................................................. 38 

Safety: 

Audits .................................................................................................. 38 

Compliance Reviews .......................................................................... 24 

Fuel Tax Evasion ............................................................................................. 13, 33

NATCA: Pay for Performance ................................................................................. 32

Need for Full Complement of Technicians ............................................................ 27

New DOT Headquarters Building .......................................................................... 101

Office of: 

Civil Rights ....................................................................................................... 95 

Intelligence and Security................................................................................. 54, 73 

Public Affairs .................................................................................................... 61 

Small and Disadvantaged Business Utilization ............................................. 53 

The: 

Assistant: 

General Counsel for Aviation Enforcement and Proceedings ......... 69 

Secretary for: 

Administration............................................................................ 60, 95 

Aviation and International Affairs ............................................ 74 

Budget and Programs ................................................................. 59 

Governmental Affairs ................................................................. 57 

Chief Information Officer ......................................................................... 56, 75 

Executive Secretariat ................................................................................ 51 

General Counsel ........................................................................................ 58 

Under Secretary for Transportation Policy ............................................. 52

OST: 

Safety Performance Goals ................................................................................ 63 

Staffing .............................................................................................................. 45 

Travel Costs ...................................................................................................... 47

Overflight Fees ......................................................................................................... 65

Oversight of: 

Highway Construction Projects ....................................................................... 15 

Mega-projects .................................................................................................... 37

Presidential and Political Appointees .................................................................... 40

Programmatic Priorities .......................................................................................... 22

Proposals to: 

Consolidate OST Budget Activities ................................................................. 48 

Reorganize: 

Modal Offices ............................................................................................. 48 

OST Offices ................................................................................................ 48

SAFETEA Funding Levels ...................................................................................... 17

Safety Belt Laws ...................................................................................................... 15

Section 508 Compliance .......................................................................................... 83

Ship Disposal ........................................................................................................... 21, 39

Short Sea Shipping .................................................................................................. 31

State Support for Passenger Rail Service .............................................................. 13

TCI Response Center ............................................................................................... 88

Third Runway at SeaTac International Airport ................................................... 28

Transportation: 

Of Diagnostic and Infectious Medical Specimens .......................................... 106 

Planning, Research and Development ............................................................ 63

Workforce Recruitment ........................................................................................... 91

Working Capital Fund ............................................................................................. 103
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xi

UNITED STATES POSTAL SERVICE 

Additional Committee Questions ............................................................................ 142

Appropriations Request ........................................................................................... 129

Biohazard Detection Systems ................................................................................. 130

Civil Service Retirement System ....................................................................... 135, 138

Competition: E-Commerce ...................................................................................... 134

Consolidation of Rural Post Offices and Closure of Small Post Office ................ 148

Consumer Access ..................................................................................................... 138

Cost Reductions ................................................................................................... 128, 143

Delivery Growth ....................................................................................................... 140

Detecting Biohazards in the Mail ........................................................................... 142

E-commerce Initiatives ............................................................................................ 144

Emergency Preparedness ........................................................................................ 125 

Expenses ............................................................................................................ 147

Facility Issues .......................................................................................................... 136

Financial Transparency .......................................................................................... 139

Performance Goals ................................................................................................... 127

Post Office Consolidation ........................................................................................ 131

Postal: 

Facility Construction ........................................................................................ 148 

Reform/Regulatory Board Issues ..................................................................... 149

Postmaster Vacancies .............................................................................................. 151

Public-Private Partnership ..................................................................................... 146

Retail Stores Revenue ............................................................................................. 146

Revenue: 

Forecast ............................................................................................................. 145 

Foregone ............................................................................................................ 135 

Reimbursement .......................................................................................... 150

Sponsorships ............................................................................................................ 140

Universal Service ..................................................................................................... 141

Vertical Improved Mail ........................................................................................... 131

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