FINANCIAL SERVICES AND GENERAL 

GOVERNMENT APPROPRIATIONS FOR 2012 

HEARINGS 

BEFORE A 

SUBCOMMITTEE OF THE 

COMMITTEE ON APPROPRIATIONS 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

SUBCOMMITTEE ON FINANCIAL SERVICES AND GENERAL GOVERNMENT 

APPROPRIATIONS 

JO ANN EMERSON, Missouri, Chair 

RODNEY ALEXANDER, Louisiana 

JO BONNER, Alabama 

MARIO DIAZ-BALART, Florida 

TOM GRAVES, Georgia 

KEVIN YODER, Kansas 

STEVE WOMACK, Arkansas 

JOSE ́ E. SERRANO, New York 

BARBARA LEE, California 

PETER J. VISCLOSKY, Indiana 

ED PASTOR, Arizona 

NOTE: Under Committee Rules, Mr. Rogers, as Chairman of the Full Committee, and Mr. Dicks, as Ranking 

Minority Member of the Full Committee, are authorized to sit as Members of all Subcommittees. 

JOHN MARTENS, WINNIE CHANG, KELLY SHEA, and ARIANA SARAR, 

Subcommittee Staff 

PART 7 

Page 

Federal Communications Commission ........................................................ 1 

Securities and Exchange Commission ......................................................... 105 

Securities and Exchange Commission—Inspector General .................... 177 

General Services Administration .................................................................. 233 

Internal Revenue Service ................................................................................ 313 

Treasury Inspector General for Tax Administration ............................... 375 

Department of the Treasury ........................................................................... 475 

( 

Printed for the use of the Committee on Appropriations 


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Part 7 


pwalker on DSK5TPTVN1PROD with HEARING
FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2012 


pwalker on DSK5TPTVN1PROD with HEARING

pwalker on DSK5TPTVN1PROD with HEARING
FINANCIAL SERVICES AND GENERAL 

GOVERNMENT APPROPRIATIONS FOR 2012 

HEARINGS 

BEFORE A 

SUBCOMMITTEE OF THE 

COMMITTEE ON APPROPRIATIONS 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

SUBCOMMITTEE ON FINANCIAL SERVICES AND GENERAL GOVERNMENT 

APPROPRIATIONS 

JO ANN EMERSON, Missouri, Chair 

RODNEY ALEXANDER, Louisiana 

JO BONNER, Alabama 

MARIO DIAZ-BALART, Florida 

TOM GRAVES, Georgia 

KEVIN YODER, Kansas 

STEVE WOMACK, Arkansas 

JOSE ́ E. SERRANO, New York 

BARBARA LEE, California 

PETER J. VISCLOSKY, Indiana 

ED PASTOR, Arizona 

NOTE: Under Committee Rules, Mr. Rogers, as Chairman of the Full Committee, and Mr. Dicks, as Ranking 

Minority Member of the Full Committee, are authorized to sit as Members of all Subcommittees. 

JOHN MARTENS, WINNIE CHANG, KELLY SHEA, and ARIANA SARAR, 

Subcommittee Staff 

PART 7 

Page 

Federal Communications Commission ........................................................ 1 

Securities and Exchange Commission ......................................................... 105 

Securities and Exchange Commission—Inspector General .................... 177 

General Services Administration .................................................................. 233 

Internal Revenue Service ................................................................................ 313 

Treasury Inspector General for Tax Administration ............................... 375 

Department of the Treasury ........................................................................... 475 

( 

U.S. GOVERNMENT PRINTING OFFICE 

66–999 WASHINGTON : 2011 


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COMMITTEE ON APPROPRIATIONS 

HAROLD ROGERS, Kentucky, Chairman 

C. W. BILL YOUNG, Florida 1

JERRY LEWIS, California 1

FRANK R. WOLF, Virginia 

JACK KINGSTON, Georgia 

RODNEY P. FRELINGHUYSEN, New Jersey 

TOM LATHAM, Iowa 

ROBERT B. ADERHOLT, Alabama 

JO ANN EMERSON, Missouri 

KAY GRANGER, Texas 

MICHAEL K. SIMPSON, Idaho 

JOHN ABNEY CULBERSON, Texas 

ANDER CRENSHAW, Florida 

DENNY REHBERG, Montana 

JOHN R. CARTER, Texas 

RODNEY ALEXANDER, Louisiana 

KEN CALVERT, California 

JO BONNER, Alabama 

STEVEN C. LATOURETTE, Ohio 

TOM COLE, Oklahoma 

JEFF FLAKE, Arizona 

MARIO DIAZ-BALART, Florida 

CHARLES W. DENT, Pennsylvania 

STEVE AUSTRIA, Ohio 

CYNTHIA M. LUMMIS, Wyoming 

TOM GRAVES, Georgia 

KEVIN YODER, Kansas 

STEVE WOMACK, Arkansas 

ALAN NUNNELEE, Mississippi 

————— 

1 Chairman Emeritus 

NORMAN D. DICKS, Washington 

MARCY KAPTUR, Ohio 

PETER J. VISCLOSKY, Indiana 

NITA M. LOWEY, New York 

JOSE ́ E. SERRANO, New York 

ROSA L. DELAURO, Connecticut 

JAMES P. MORAN, Virginia 

JOHN W. OLVER, Massachusetts 

ED PASTOR, Arizona 

DAVID E. PRICE, North Carolina 

MAURICE D. HINCHEY, New York 

LUCILLE ROYBAL-ALLARD, California 

SAM FARR, California 

JESSE L. JACKSON, JR., Illinois 

CHAKA FATTAH, Pennsylvania 

STEVEN R. ROTHMAN, New Jersey 

SANFORD D. BISHOP, JR., Georgia 

BARBARA LEE, California 

ADAM B. SCHIFF, California 

MICHAEL M. HONDA, California 

BETTY MCCOLLUM, Minnesota 

WILLIAM B. INGLEE, Clerk and Staff Director 

(II)


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(1) 

FINANCIAL SERVICES AND GENERAL 

GOVERNMENT APPROPRIATIONS FOR 2012 

WEDNESDAY, MARCH 30, 2011. 

FEDERAL COMMUNICATIONS COMMISSION 

WITNESS 

JULIUS GENACHOWSKI, CHAIRMAN, FEDERAL COMMUNICATIONS 

COMMISSION 

Mrs. EMERSON. The hearing will come to order. Thank you so 

much, Chairman Genachowski, for being here. I really do want to 

thank you for being here today and talking about the fiscal year 

2012 Budget Request for the Federal Communications Commission. 

Your agency plays quite an important role in this country’s telecommunications, television, radio, internet, and cable industries. 

And probably almost every American citizen, business, or even noncitizens, are touched by something that you regulate. 

The changes that we are seeing in the industry, just with the 

blink of an eye, something is new. When did we get our iPads, Joe? 

We got them last fall, and suddenly we need a new one. Technology 

keeps changing, and it is important for us, and certainly important 

for you, to be able to strike a balance between regulating all of 

these industries, but at the same time, not hindering competition 

or innovation. Among all of the jobs in the government, I think 

yours is probably one of the most challenging, with many business 

technology and consumer groups watching every single move you 

make, along with Congress, as well. 

While the FCC is funded by fees, congressional oversight over 

your budget is an important check on agency activities, and our 

committee is committed to fiscal responsibility and oversight of the 

agencies under our jurisdiction. The American people have tightened their belts, and it is important that the government do the 

same thing. 

We in Congress consistently hear from our constituents about the 

cost of government regulations, whether it is health care, greenhouse gases, financial institutions, or the telecommunications industry. The administration’s new regulatory proposals are providing great uncertainty for businesses, and in particular, small 

businesses. The regulations, in many respects, are hurting the 

economy, and I have to say that I personally have very strong concerns with the FCC’s Net Neutrality Rule, and I am sure you are 

prepared to get into discussion on that. 

You passed this rule even though you knew it would be opposed 

by a majority of members of Congress, and it was quite obvious 

that this played out in consideration of H.R. 1, when the House 


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overwhelmingly rejected your proposed rules. I do not think the 

issue is going to go away any time soon, and I hope that, because 

of the controversy that it has created, that you would be willing to 

work a little more closely with the Congress on these types of proposed regulations. Once again, thank you so much for being here. 

I look forward to your testimony. I would now like to recognize my 

friend and colleague, Joe Serrano. 

Mr. SERRANO. Thank you so much. And I also want to welcome 

the Chairman to this hearing. The Commission’s request for Fiscal 

Year 2012 is $354 million in new budget authority, and I look forward to discussing the request with you during our questions. 

High-speed internet access is critical to helping people find and 

participate in education and employment opportunities. I am 

pleased to see that, in the request, the FCC is moving forward with 

your broadband plan to increase access across the country. One 

way to increase access is to improve wireless service, and I am encouraged by your continuing efforts to open up more spectrum for 

broadband services. Doing so will help to encourage innovation and 

improve competition among broadband services. 

As you move forward with all of your plans, I would urge you to 

remember one of my main concerns; that the people in the territories are not forgotten, and that they are treated equally. In addition, as we embrace these technologies, it is important that we do 

not destroy existing successful programs. PEG channels are one 

such program. Arising from a previous technological leap to cable 

television, we should make sure that they continue to thrive as 

telecommunication systems continue to change. 

Finally, you provide an important check to make sure that consumer interests are being served, and that there is a level playing 

field in telecommunications. And I look forward to hearing more 

from you about your important work, and I welcome you again. 

Mrs. EMERSON. Thank you, Mr. Serrano. 

Mr. SERRANO. Thank you. 

Mrs. EMERSON. And thanks to our colleagues Mr. Diaz-Balart 

and Mr. Graves for being here today. Please go ahead, Mr. 

Genachowski. 

Mr. GENACHOWSKI. Thank you, I will be brief. I have submitted 

a longer statement for the record, and I will do an edited version 

here, if that is okay. First of all, thank you, Chairwoman Emerson, 

Congressman Serrano, for the opportunity to be here before the 

subcommittee. Thank you, Congressman Graves and Congressman 

Diaz-Balart, for joining. 

A year ago this month, a unanimous FCC approved a joint bipartisan statement of principles which said, ‘‘Broadband service can be 

an indispensable engine for unleashing innovation and investment, 

spurring job creation and economic growth, and ensuring our country’s global competitiveness.’’ That statement continued, ‘‘Working 

to make sure that America has world-leading high-speed 

broadband networks, both wired and wireless, lies at the very core 

of the FCC’s mission in the 21st century.’’ I was pleased to give 

that bipartisan statement. And, since issuing that statement, the 

FCC has been focused on harnessing the power of broadband and 

communications technology to drive our economy, improve U.S. 


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competitiveness, benefit consumers, and unleash innovation, including in areas like education, health, IT, and public safety. 

The benefits of broadband increase every day. Consider small 

businesses. Like no technology since electricity, high-speed internet 

helps new businesses start and small businesses grow by expanding their reach to new markets and lowering their cost through 

cloud-based services. Challenges to seizing the opportunities of 

broadband increase every day too, as do the costs of exclusion from 

our digital economy as job postings and other essential information 

move online. 

About 25 million Americans simply cannot get broadband where 

they live. And about 100 million, one-third of our population, does 

not sign up. That is an adoption rate of about 67 percent in the 

U.S., which compares to 90 percent in Korea or Singapore. 

In recent weeks, several expert reports have been issued that 

confirm concerns raised by earlier studies; for too long, the U.S. 

has been losing ground to our global competitors, and leadership in 

information and communications technology is critical for us to 

stay on top. 

In this context, we submit our fiscal year 2012 budget. As in the 

past, the budget we have prepared is derived entirely from fees the 

FCC collects and auction proceeds. The budget will allow the FCC, 

which currently has its smallest staff in 10 years, to continue our 

efforts to boost our economy and ensure that more Americans can 

be full participants in our 21st century economy. 

Our budget will support vital new initiatives to improve public 

safety and help first responders communicate with each other and 

protect lives. The FCC’s proposed budget will allow the agency to 

pursue its core goals of fostering investment, unleashing innovation, promoting competition, and protecting and empowering consumers. 

The budget is consistent with our agency’s commitment to fiscal 

responsibility, and deriving the most benefit for consumers and our 

economy from public resources. For example, the budget will help 

us unleash Spectrum, the invisible infrastructure that sustains our 

wireless communication, so that U.S. companies lead the world in 

mobile innovation. It will help us drive more efficient use of this 

scarce public resource, and free up spectrum for auctions. In the 

last two decades, the FCC has raised $52 billion for tax payers 

through such auctions. Our voluntary incentive auction proposal, a 

market-based proposal, can raise significant money in the $20 to 

$30 billion range. The budget will help us transform and modernize 

the universal service funds, so that it focuses on broadband deployment and adoption, not old telephone service. USF and inter-carrier compensation reforms will eliminate waste, improve efficiency, 

require greater accountability, and connect millions of Americans 

to our digital economy. 

The budget will help us drive forward our broadband acceleration 

initiative, which is cutting red tape and removing barriers to 

broadband build out, lowering the costs of and encouraging the 

massive private investment we need in our communications infrastructure. The proposed budget will help us improve public safety 

communications in the United States by ensuring interoperability 

of first responder broadband communications, by moving toward 


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next generation 9–1–1, so that people can send, and first responders can receive, text messages, photos, and videos from mobile 

phones, and by aiding in vital efforts to protect against cyberthreats and other illegal activities. 

The proposed budget will help improve the operations and efficiency of the FCC, reducing burdens on business and the public. 

For example, the budget will allow us to complete work consolidating multiple out-of-date licensing systems into one modern and 

upgradable system, which will save over $35 million for tax payers, 

and provide more efficient licensing services to the private sector, 

including small businesses. 

Finally, the budget will ensure that we can continue our efforts 

to combat waste, fraud, and abuse, including by providing necessary funding to the agency’s Office of Inspector General. These 

cost-saving enhancements are being built on significant progress 

we have already made from reforming, for example, the video-relay 

service, which will save tax payers $250 million annually, to reducing contracting costs of the agency by over $2 million a year. The 

Commission’s commitment to reforming the agency into a model of 

excellence was recognized when the Office of Personnel Management named the FCC the most improved agency in the Federal 

Government. I look forward to working with this committee on initiatives to harness information and communications technology to 

get our economy moving and to expand opportunity for all Americans. Thank you for the time, and I look forward to your questions. 

[The information follows:] 


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Mrs. EMERSON. Thank you so much, Chairman Genachowski. 

And again, I apologize for trying to take your opening statement 

time. While your appropriation is offset by fees, we really do have 

to look at all agencies in our bill to find ways for them to become 

more efficient, no matter what their funding source is. So can you 

give me three specific examples of the impact on your operations 

if we were to go back to fiscal year 2008 levels? 

Mr. GENACHOWSKI. Sure. One is it would interfere with our ability to unleash spectrum for auctions. We need the engineers and 

the data work to do that. That is one important example. A second 

is it would interfere with our ability to transform the Universal 

Service Fund and inter-carrier compensation. This is a complicated 

endeavor. It will save money; it will make the programs more efficient and deliver better broadband to more Americans. But we 

need the resources in order to be able to do that work. It would 

interfere with the operations of our Inspector General’s Office. The 

headcount increase in the budget is all an IG request, which I support, to make sure that they can continue their efforts to root out 

waste, fraud, and abuse. Through their efforts, along with our Enforcement Bureau, we have identified fraud in one program that 

has saved over $250 million annually. And finally, just one last 

point, it would interfere with our ongoing efforts to improve the internal technology at the FCC, which will save money. I mentioned 

the consolidated licensing system, we are also consolidating data 

centers. These are things that, when I was in the private sector, 

every company did, and you had to do to save money. So in each 

of these areas I feel strongly that these are real investments that 

will have a measurable positive return for the American people and 

the American economy. 

Mrs. EMERSON. But you do not have any existing sources that 

could be reprioritized within the agency, as it exists today, to do 

some of this work? 

Mr. GENACHOWSKI. The work that we have done in preparing the 

budget took that into account. We brought in, as our Managing Director who oversees the budget process, someone who had spent 14 

years doing budgets and running P&Ls in the private sector. And 

my directive to him was, we are going to root out waste and fraud 

at this agency and run it as efficiently as a private company would. 

And so, we have been able to find significant savings, and I have 

great confidence that we are doing as best we can to apply private 

sector budgeting principles to what we are doing. And the budget 

has been tight, and we are doing a lot with the money that we 

have. 

Mrs. EMERSON. In spite of the 15.9 million increase that you 

have asked for? 

Mr. GENACHOWSKI. Yes, so one example was the headcount for 

the Inspector General’s Office. They have a series of temporary employees whose contracts will be up. These are employees who have 

helped root out fraud and literally made sure that we can save 

$250 million in the VRS program. If we cannot fund them, they 

will go. We will lose their expertise and their ability to root out 

waste, fraud, and abuse. 


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Mrs. EMERSON. You have asked for 19 people in the IG’s Office at a cost of $3.2 million. That is pretty hefty amount for salaries, 

is it not? 

Mr. GENACHOWSKI. Well that figure reflects not only salaries, but 

the work that they do to do their investigations. And so there is 

underlying work, whether it is data-oriented work, expert work 

that they need to do their work and as the investigator of waste, 

fraud, and abuse, they are very sensitive to making sure that their 

budget is as tight as possible. 

Mrs. EMERSON. Okay. So you really felt, or at least agree with 

the Inspector General, that they are too short-staffed to do their 

jobs? 

Mr. GENACHOWSKI. I do. And again, the request here is not to increase headcount over what it is. For historical reasons, they have 

had a team of, I believe the number is 17 or 19, I cannot remember 

exactly, that has been working on these issues. They have been on 

a term-contract. We can find out the history of why that is so. 

Mrs. EMERSON. Why they could not just simply stay on the contract. 

Mr. GENACHOWSKI. Either way, the money is being spent for 

them. 

Mrs. EMERSON. With the exception of all the benefits that attach 

to a permanent employee versus a temporary employee. 

Mr. GENACHOWSKI. That may be. These are professionals who I 

think it would be in our interest to keep in government doing exactly what they are doing. At what point do they say, if we are not 

wanted here to do this job as a full-time employee, maybe we will 

go find something else to do. I presume we could replace them. I 

do not think we could replace the institutional memory and knowledge that they have accumulated in the investigations that they 

have done, which have been very successful. 

Mrs. EMERSON. Okay. We will talk a little bit more about this. 

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Mrs. EMERSON. Thanks. Mr. Serrano. 

Mr. SERRANO. Thank you. Thank you so much. Mr. Chairman, 

PEG channels are a valuable part of our communities, providing 

them with local information and learning opportunities for people 

and the communities they serve. The channels were originally created along with cable service. However, now that we are moving to 

a new technology, the channels are in danger of being left out. In 

January 2009 the Alliance for Community Media filed a petition 

concerning unfair treatment of PEG channels. It has now been 

more than two years since this petition was filed. Can you tell me 

why it has taken so long for there to be a ruling, and when we can 

expect one? 

Mr. GENACHOWSKI. Well, a couple of points, if I may. One is, I 

share your recognition that PEG channels play an important role 

in the landscape, providing a type of programming that you would 

not get in other places. And also they face challenges of the sort 

that you described, chiefly around cable companies or other multichannel video providers upgrading from analog to digital, and 

doing that in a way that makes it hard for PEG channels to come 

along. The good news that I am happy to report is that, in the year 

since we talked about this at the last appropriations hearing, about 

half of the complaints that PEG operators have filed have been resolved in a way that has been successful from the point of view of 

the PEG operators. Keep in mind that there is a lot of state and 

local involvement here, because the number and many of the requirements around PEG channels are done at the local level during 

the franchising process. And our abilities at the national level are 

somewhat constrained. There are some open issues, though, as you 

mentioned. And we look forward to continuing to work with you to 

make sure that PEG is treated fairly in this evolving world. 

Mr. SERRANO. Do you remember, when we discussed this last 

time, there was not just the issue of this desire not to have PEG 

channels run anymore, but it was also those that were around in 

some areas were just being treated in a way where it was very difficult for them to exist. I remember the testimony we had about, 

in some cases, the PEG channels went from an easy place you 

could find them to Channel 900, and then there was a dropdown 

menu different from the rest of the channels, where you had to go 

find them. So, it really became an adventure to try to find them, 

which was, we think, just a way to try not to have them function. 

So, I hope as you resolve some of these issues and the complaints 

that you also look at the general treatment because, they were 

there at the beginning. 

Here is what is interesting about that. I remember when cable 

first came to the Bronx, and I say I remember because, as you 

know, New York had a reputation of having great stations and nobody thought cable was necessary. So we got it after most of the 

nation got cable. It was very weird. But I remember that that was 

very much a part of the agreement. We will have all of this, then 

there will be public access and there will be PEG channels, and so 

on. Now, people seem to forget this earlier agreement, so I hope 

that you stay on top of this, because this is very important. 

Mr. GENACHOWSKI. Understood. And I am hopeful that the positive resolutions over the last year can provide a baseline and a set 


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of practices that will make it easier to resolve the ones that are 

still outstanding. 

Mr. SERRANO. Right. Now, Mr. Chairman, we always talk here 

about, we have in the last couple of years, about the digital divide, 

which continues to be a problem in this country. But there is a digital divide in terms of the small business community. They do have 

not access to the services necessary, and, in some cases, have not 

used technology properly. So, our question is, What are the major 

impediments to faster implementation of IT among small businesses? What are you encountering? What are we doing to help 

them? At the expense of getting some people on this panel angry 

at me, what is government doing to help them move along? What 

is in the future for small businesses? 

Mr. GENACHOWSKI. I think this is a very important topic and 

sometimes in all the discussion about broadband adoption or 

broadband goals, it can be very focused on individual consumers. 

That is very, very important, but the opportunities of small businesses online are just enormous. You can expand your businesses 

to other markets, increase your customers, increase your revenue. 

You can move to lower cost services, by using your services online 

or in the cloud. More revenue, lower services, more profit, more 

jobs. 

The obstacles that we have seen in our work on this are somewhat similar to the obstacles that we see in our consumer research. 

A lack of appreciation of the relevance of online benefits. In some 

cases, digital literacy, just not knowing how to do it. In some cases, 

affordability. In some cases, trust. Here are some of the things that 

we are trying to do. We have teamed up with the Small Business 

Administration to make sure, as they have boots on the ground in 

communities all over the country helping small businesses, that 

those people are able to help with new technologies and new opportunities. That has been a successful program so far with their initiative called SCORE. We are also taking steps to make sure that 

small businesses have access to more choices in the marketplace 

for broadband access. 

Finally, we are addressing some of the trust issues that small 

businesses have. I have talked to small business owners who say, 

Yes, it seems like a good idea, but I am really worried about putting my sensitive data online or in the cloud. A reasonable worry, 

but there are steps to take. In the next month, we expect to do a 

forum on this, where we will present best practices for small businesses, steps that they can take to increase the security of their information online. Some of these things we all know; do not click on 

a link in an e-mail from someone you do not know. It would help 

to increase the level of understanding in small businesses and we 

think that we can help on that education campaign, and that will 

help increase small business adoption. 

Mr. SERRANO. All right. Thank you. Madam Chair, in view of the 

fact that we may vote soon, I will stop now. 

Mrs. EMERSON. Thank you very much, Mr. Serrano. Mr. Graves. 

Mr. GRAVES. Thank you, Mr. Chairman, for being here. First, I 

want to thank you for your work. I know that you have a big task 

ahead and, as I ask everyone that comes before our subcommittees, 

I would love for your cooperation in providing us with some options 


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in how you can achieve the objectives of your commission with 10 

percent less resources, 20 percent, and 25 percent. 

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Mr. GRAVES. I will be submitting a letter for the record as well 

and your office should receive that. I hope we can get your assistance in that and we can work together as a partner in that way. 

If not, I imagine that this committee, as the Chairwoman has already brought up, will be looking to make some of those decisions 

for you. We would rather have your help in that, so I hope you can 

help us. I want to go back to November, when the FCC opened an 

investigation on privacy, the invasion of privacy of Americans, and 

just ask what is the status of that investigation into Google and 

the harvesting of personal data? 

Mr. GENACHOWSKI. You are referring to a specific investigation, 

which I cannot comment on. In general, I would say that any uses 

of spectrum or communications facilities that are in our jurisdiction 

are things that we would take seriously. 

Mr. GRAVES. So when do you expect that will be concluded? 

Mr. GENACHOWSKI. Again, I cannot comment on a specific investigation. It is in front of our Enforcement Bureau. So, with apologies, I can only comment generally, but not in a specific investigation. 

Mr. GRAVES. Okay, so really no idea when that will be concluded, 

even though there is by Google’s own admission that data was collected, could be 62 million American e-mail addresses and personal 

data, but no idea when something may occur. 

Mr. GENACHOWSKI. Nothing that I can say about an ongoing investigation. 

Mr. GRAVES. Would you consider their admission that data has 

been collected? Do you consider that eavesdropping on innocent 

Americans? 

Mr. GENACHOWSKI. Again, it would not be right for me to comment on a specific investigation. In general, the FCC has had privacy rules in place for some time. They protect consumers when 

they make phone calls over wires, they protect consumers when 

they make mobile calls. They protect consumers when they are 

using various kinds of telecommunications facilities. We consider 

the privacy rules in our governing statute and in our rules to be 

very important. People have an expectation of privacy. 

Mr. GRAVES. So, do you consider it eavesdropping? 

Mr. GENACHOWSKI. Again, I will not comment on a specific investigation, but if there are any violations of our rules, we would take 

them very seriously. 

Mr. GRAVES. But would you consider anybody who harvests data 

from unknowing, innocent Americans identity theft, if it is personal 

data? 

Mr. GENACHOWSKI. There are many instances in this country of 

violations of privacy, misuse of communications facilities. We have 

other areas where we have investigated privacy violations. We take 

those very seriously. I understand what you are asking. I apologize 

that I cannot answer, but I just cannot talk about a specific investigation. 

Mr. GRAVES. So you are not certain if it is eavesdropping, not 

certain if it is an invasion of privacy or identity theft. Do you agree 

with the FCC’s Enforcement Bureau, Michele Ellison, who said 

that it is a breach of privacy? Do you agree with that? 


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Mr. GENACHOWSKI. I do not remember her quote exactly, but I 

remember at the time agreeing with what she said. If I could see 

the full quote, I am sure I would agree with the full quote. 

Mr. GRAVES. Right. She referred to it as a breach of privacy and 

it seems that this has been ongoing for awhile, because, prior to 

November, it was actually in May in which it was reported to the 

FTC. Is that right? They might have closed their case on that, but 

then you opened up one. So it has been going on awhile, three 

years of data has been harvested. I think the American people expect some action on that and I would hope that you would move 

swiftly. Because I can only imagine, and I would love for your response on this, if the government drove around taking pictures of 

homes, and at the same time was harvesting data over 

unencrypted Wi-Fis. How would the American people react to that? 

Mr. GENACHOWSKI. They would react badly, as they should. 

Americans should and do react badly to any invasions of privacy 

or violations of the rules that exist in privacy. 

Mr. GRAVES. So they should expect the same with anyone else, 

whether it was me or a large corporation, or the federal government themselves? 

Mr. GENACHOWSKI. I cannot disagree with that. 

Mr. GRAVES. All right. Thank you. 

Mrs. EMERSON. Ms. Lee. 

Ms. LEE. Thank you very much. Good afternoon, Mr. Chairman. 

I apologize for being late. We had several meetings going on at the 

same time, and hearings. So, if my question is redundant, I apologize. First, I just want to say how important the FCC is to communities of color and underserved communities. So much of what we 

have been trying to do is close this digital divide and I would just 

like to get your sense of how that is going, if we are heading in 

the right direction. Secondly, in terms of any dramatic cuts to your 

budget, I would like to know how that would impact the work of 

the FCC. Thirdly, with regard, I am glad that you have reinstituted collecting data on the involvement of minority and 

women participation in the media and broadcast industry, because 

we have to be able to rely on data to make intelligent decisions 

about public policy. 

Along those lines, the Comcast-NBC merger, I know that is done, 

but in terms of the memos of understanding and all of the oversight responsibility, some of us thought the deal really was not 

what it should be, given the lack of minority participation in this. 

How, moving forward, will the FCC make sure that whatever those 

memos were, that they are complied with, for the full participation 

in minority and women-owned businesses? 

Mr. GENACHOWSKI. Thank you Congresswoman. In general, you 

identify a set of issues that have been historically bipartisan issues 

at the FCC, the goal of providing new entry to minority communities and others who are at risk of being left behind, the ability 

to participate in these technologies, these opportunities. In the area 

that is fastest growing and has the greatest opportunity, which is 

broadband and mobile-related opportunities, we are seeing two 

things. One is, there are across-the-board issues where, as a country, we are not where we should be. I mentioned some statistics 

earlier. Our adoption rate in the U.S. for broadband is about 67 


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percent, which compares to about 90 percent for Singapore and 

South Korea. But in certain communities, that number is even 

lower: minority communities, the elderly, rural communities, lowincome. 

Meanwhile, the costs of digital exclusion are rising. Five years 

ago, if you were looking for a job and you did not have internet access, it was okay. You would find the classifieds in the newspaper 

and you would call up. You would at least be in the running. 

Today, if you do not have access to the Internet, you cannot even 

find the job, because the classifieds have moved online. And if you 

do not have basic digital skills, you are probably not eligible for the 

job. I do hear from business owners around the country who say, 

Actually, we do have some jobs open, but we need people who have 

digital skills, and they cannot use the Internet and they cannot use 

Excel and they cannot use Microsoft Word. So these are very big 

problems. There’s no single silver bullet. 

Here are the kinds of initiatives we are working on. One, we are 

looking at reforming our Lifeline Link-Up program in a sensible 

way. This is the program that for many years has helped with 

adoption of telephone service. So, as part of our overall USF reform 

effort, bringing that program into the 21st century is an opportunity and a challenge, but it is one we are taking on. Second, we 

have been running activities to bring together entrepreneurs from 

diverse communities with capital. We call them speed-dating sessions, but they have been successful in overcoming barriers and 

getting the private market to work better for entrepreneurs. As I 

mentioned earlier, we are working with the Small Business Administration, so that their outreach to small businesses across the 

country includes education about the opportunities of the Internet 

for small and diverse businesses. So, these are just some of the 

areas we are working on. If I could mention one other example, on 

adoption, we are working on public-private partnerships. This is 

one of the areas where there is as much an opportunity for a winwin as you can find anywhere else. 

Any new subscriber for an Internet service provider is a win for 

that person who had previously been excluded, and also a win for 

the company because they get another subscriber. There are some 

innovative programs going on in the country that are focused on 

low-income Americans, communities that would otherwise be left 

behind. One of the things we are trying to do is work with companies to see if those, call them pilot programs, those pilot public-private partnerships, can be expanded and have more of a positive effect across the country. 

Ms. LEE. Comcast-NBC merger. 

Mr. GENACHOWSKI. I think with respect to any merger that has 

conditions, we have an obligation to make sure that the conditions, 

that the commitments made to the agency are honored, and we will 

have a process to make sure that that is so. 

Ms. LEE. Finally, the budget cuts. 

Mr. GENACHOWSKI. Budget cuts I will answer briefly, because the 

chairwoman asked the same question. Our ability to free up spectrum, generate auction revenue, would be hurt. Our ability to investigate waste, fraud, and abuse with our inspector general’s office 

would be hurt. Our ability to transform the Universal Service Fund 


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and take an inefficient program and make it an effective program 

would be hurt. We provide various services for consumers such as 

call centers, that would be hurt. We are in the middle of projects 

to upgrade our infrastructure in a way that would save money, consolidated licensing, consolidating data centers. Stopping those 

would have, as would these other things, a negative return on investment. This is an important area to me. I spent the last 10 

years in the private sector. The head of our managing director’s office, who is in charge of this, spent the last 14 years in the private 

sector. We both tried to drive here a private-sector mentality of 

making sure that we are getting the most bang for the buck in everything that we do; that we are taking costs out and delivering 

a greater return for the public. 

Ms. LEE. Thank you. Thank you, Madam Chair. 

Mrs. EMERSON. Thank you, Ms. Lee. Our vice chairman, Mr. 

Diaz-Balart. 

Mr. DIAZ-BALART. Thank you Madam Chairwoman. How are you, 

sir, Mr. Chairman? 

Mr. GENACHOWSKI. I am good, thank you. 

Mr. DIAZ-BALART. Let me ask you, in the history of mankind, can 

you think of anything where there has been more innovation, so 

much innovation that has connected more people, that has employed more people, that has led to more inventions and innovations and spin-offs and launched more businesses and had more of 

an impact in such a short time? In the history of mankind, can tell 

me a couple of those that have done more than the Internet? 

Mr. GENACHOWSKI. I do not know that any has. It is an extraordinary boon to innovation, investment, job creation. 

Mr. DIAZ-BALART. It truly is. It is one of those things that we are 

living in this incredible time and yet it looks like the answer to 

that is more government intervention and regulation. I guess government, who is not known as the innovator, the job creator, the 

efficient animal, is not doing enough. I guess the FCC now believes 

that government would have done better, could have done better, 

or regulation that government will come up with is better. I want 

to go back to your statement on page two. 

Mr. GENACHOWSKI. I would be happy to answer that, if you 

would like. 

Mr. DIAZ-BALART. I think you already answered the issue about 

the fact that the Internet has clearly been among the most innovative things in the history of the planet, probably the most innovative, and yet it is clear that the FCC now wants to intervene there 

further. But let me just go back to your statement. You talk about 

how, even as the communications industry has grown, telecommunications is a critical and growing part of our economy. Yet, 

as the communications industry has grown in size and complexity, 

the FCC has remained relatively small and focused. You talk about 

how after the turn of the 21st century, even after the explosive 

growth in telecommunication services, the FCC is at a 10-year low 

in FTE. So, have you ever thought that maybe part of the reasons 

for that explosive growth is precisely because the FCC has not been 

meddling in every single decision? Have you ever thought, is that 

a possibility, that there is a correlation between this explosive 

growth? This innovation that you have just stated has no preceVerDate Mar 15 2010 05:43 Jul 07, 2011 Jkt 099011 PO 00000 Frm 00033 Fmt 6633 Sfmt 6602 E:\HR\OC\A999P2.XXX A999P2

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dent. Could there be some relationship with not too much government regulation and that explosive growth? 

Mr. GENACHOWSKI. Two quick reactions. One is, with respect to 

preserving the freedom and openness of the Internet, and I could 

not agree more strongly with you that that is a central driver of 

innovation and our global competitiveness, on a bipartisan basis for 

the last five years, it has been thought at the FCC that basic rules 

of the road that give the broadband economy certainty and predictability would allow that to continue. That is what we did at the 

FCC, bringing in constituents and stakeholders from across the 

spectrum, internet-service providers, as well as early-stage businesses. There are many areas where we are working very actively 

to reduce regulations, reduce burdens on businesses. For example, 

opening up uses of spectrum, bringing market forces into uses of 

spectrum. There are areas where the FCC has responsibility for 

public resources, where it takes work and effort to make sure that 

those resources are being used for innovation and economic growth, 

like spectrum. So I would very much enjoy the chance to work with 

you on bringing market-driven policies to spectrum. I think there 

is some enormous opportunities for bipartisan efforts to unleash 

even more innovation in our mobile space. 

Mr. DIAZ-BALART. Am I correct that the Net Neutrality vote was 

a split vote? 

Mr. GENACHOWSKI. It was a split vote at this FCC. Yes. 

Mr. DIAZ-BALART. At the FCC, because there was obviously 

many, even in your board, that had those concerns about, frankly, 

over-regulating, and that you might have just the opposite effect. 

Sometimes government is in search of a problem. They have a solution for a problem that they later invent, and it seems that this 

may be one of those areas, but what you are potentially putting at 

risk again. And we agree with this, is the most innovative, the 

most dramatic, the most open, the most wealth creating animal 

maybe in the history of mankind. And yet, it seems that now, you 

know, a small group of people in the FCC people that they may 

know better than this incredible, dramatic thing. 

It is frankly a little frightening because now I hear rumors that 

the FCC may also be looking at wireless. And then, we will talk 

a little bit about that. But let me just ask you, do you have a cell 

phone? 

Mr. GENACHOWSKI. I do. 

Mr. DIAZ-BALART. All right. I do too and I actually have two of 

them, because we are all weird in this place. Right? I am pretty 

sure that your first cell phone, like mine, that was in the second 

generation of that brick. The first one was too expensive. I am assuming that your first cell phone just made calls. 

Mr. GENACHOWSKI. True. 

Mr. DIAZ-BALART. I am also assuming that you either have a 

BlackBerry or a Smartphone today that you can get phone calls, 

that you can get video, you can do SMS, MMS, Twitter, everything 

else. These are all new technologies that did not exist 10 years ago. 

Is it not because of the private sector innovation? Or is it government that comes up with all of these wonderful ideas and then tells 

the private sector, This is what you have to do and this is how you 

have to pursue it. I mean, which one is it? 


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Mr. GENACHOWSKI. It is absolutely private sector. It is one of the 

reasons I am pushing so hard for a tool to use more spectrum auctions, two-sided auctions to bring more market forces into allocation of spectrum, free up spectrum for auction, billions for the 

Treasury, and even more innovation. And I was very, very supportive of the historically very important move that was made 

about 15, 20 years ago from spectrum lotteries and comparative 

hearings to auctions. 

Now the FCC has to run the auctions and it has to do a lot of 

work to identify spectrum to auction. A last quick point that I 

would make is I completely agree with you about the devices, the 

Smartphones that we each have, use about 22 more times spectrum 

than the old feature phones. The tablets that many of us have use 

122 times more spectrum. We are facing a spectrum crunch in the 

country, and I very much look forward to working on a bipartisan 

basis to come up with market-based solutions to solve them. 

Mr. DIAZ-BALART. And we need to, just again it does not seem 

like it has been a very bipartisan effort within the FCC. 

Mr. GENACHOWSKI. Over 95 percent of the FCC’s decisions are 

unanimous or bipartisan. 

Mr. DIAZ-BALART. Right, not net neutrality. And again, that one 

seems to be a solution trying to find a problem. And I think we all 

agree that clearly there has been innovation. In 1997, the average 

cell phone bill was $98.63. In 2010, it was $47.21. In 1995 there 

were 340,000 cell phone subscribers in the United States and now 

there are 300 million subscribers. And again, these are private sector innovations. 

And here is my concern, Mr. Chairman. We all know that there 

is a need for some regulation. There is no doubt about it. But there 

seems to be this attitude, now, within the FCC, with your FCC, 

that it is almost like addicted to government; addicted to power. 

That now the federal government knows how to regulate the internet, the most innovative thing in the history of mankind because, 

I guess it has maybe been too innovative? It is crazy because it is 

too innovative? But the reality is that there a lot of us who are 

really concerned including almost half of your FCC board, with net 

neutrality, that is frankly, highly concerned that you are basically 

now meddling into something that has been an incredible advance. 

One of the most historic advances in the history of humanity as far 

as quickly. And because the federal government, the FCC, frankly 

knows best. 

Mr. GENACHOWSKI. If I may, the driving force behind what we 

have done is preservation of the incredible freedom and openness 

of the internet and the role that plays in driving innovation and 

job creation. And it is why we sought out to and were able to build 

very broad-based support for the sensible balance that we ended up 

with, from early stage and late stage technology companies, to the 

cable industry, major ISPs. 

Mr. DIAZ-BALART. On that thought, though; you were talking 

about preservations of that. Well, wait a second. How is it possible 

then, to create it? You have to preserve it, I guess. But how was 

it created and preserved before you decided that government was 

going to be know-all, do-all. In other words, how did it become so 


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big? What is it that you have to preserve? How would it be there 

if it was not for the federal government to take care of it originally? 

You are preserving something that was already created without 

your involvement, without the need of the federal government to do 

it, without taxpayer funding. So how was it created, without you 

being there originally to take care of it? 

Mr. GENACHOWSKI. Putting aside for a moment the origins of the 

internet its own story of the healthy relationship between the government and the private sector; what the FCC started realizing 

about 5 years ago, on a bipartisan basis, is that there were threats 

to freedom emerging and that sensible, high-level balanced rules 

would preserve freedom, and competition, and innovation on the 

internet. Not everyone agrees and I respect different points of view. 

But that was the goal. It has been supported on a bipartisan basis 

but the resolution that we came up with was not satisfactory to 

many of the people who were arguing for the stronger measures. 

There were many people who thought we did not go far enough. 

But fundamentally, it brought together different segments of our 

broadband economy, added certainty and predictability to the marketplace, because I want to see our broadband economy not fighting 

with each other. I want to see them competing with each other. But 

I do not want to see them having, you know, non-productive policy 

fights. I want to see that energy go and compete with the rest of 

the world, where we are in danger of falling behind unless we really take advantage of the wonderful entrepreneurial assets that we 

have in the United States and tackle some of the strategic issues 

that we face as a country. 

Mr. DIAZ-BALART. Madam Chair, I do not know if I have much 

time as I have a few more questions, but maybe for the second 

round. 

Mrs. EMERSON. Yes. for the second round, please, and we will let 

Mr. Bonner go and then what we are going to do, just so everyone 

knows, when we start the next vote, at about a minute and a half, 

we will take about a 10 minute recess and then we will be right 

back because we will have two more votes. Okay. 

Mr. DIAZ-BALART. Sure. 

Mrs. EMERSON. Thanks. Mr. Bonner. 

Mr. BONNER. Thank you, Madam Chair. Mr. Chair. I do not 

know if you received, or if you are aware even, that I wrote you 

a letter last week and I would not hold you accountable to being 

aware of that, but I have a copy of it that I will give you. But I 

want to just say briefly, it addresses the Commission’s proposed 

spectrum policy. I am sure I am not the only member of Congress 

who has written about this. 

During the national transition from analog to digital television, 

both the American consumer and broadcasters made significant investment in digital equipment. In the FCC’s efforts to re-allocate 

spectrum for broadband development and deployment, what steps 

is the Commission taking to guarantee the public’s ability to continue to receive high-quality over their digital television programming and to protect television broadcasters’ ability to deliver vital 

local news programming to their viewers? 

Mr. GENACHOWSKI. The challenge we are seeking to address is 

the one we were talking a little bit about before. It is the gap creVerDate Mar 15 2010 05:43 Jul 07, 2011 Jkt 099011 PO 00000 Frm 00036 Fmt 6633 Sfmt 6602 E:\HR\OC\A999P2.XXX A999P2

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ated by all of the new, exciting devices on spectrum creating tremendous demand for more. Spectrum supply is essentially flat. And 

we need to solve this gap for a couple of reasons. 

One is, consumers are going to be incredibly frustrated as they 

use their Smartphones and their tablets, and they know what 

dropped calls feel like; they are going to hate dropped internet connections. They are going to hate having bad connections. And that 

will, I fear, frustrate and slow down the incredible economic opportunities that come from the mobile revolution. 

And that is agreed to by many industries that are involved in 

this, the wireless industry, the consumer electronics industry, the 

technology industry, et cetera. And they specifically support the 

tool that we have suggested and that has been supported on a bipartisan basis, for the FCC to have the tool to conduct incentive 

auctions. Simply, an auction of the sort we are familiar with, but 

where the supply of the spectrum would come from licensees who 

voluntarily contribute their spectrum in exchange for a portion of 

the proceeds. 

It is a way to bring market incentives, market forces into allocation of spectrum. In that process, if it were applied to broadcasting, 

our expectation is that the vast majority of broadcasters would continue to broadcast exactly as they are, because any digita1 to digital transitions are very different in kind from the analog to digital 

transition. And we are committed to addressing the kinds of issues 

that you are mentioning and I look forward to working with you 

on that, and finding a solution that helps drive our economy and 

frees up spectrum to raise money for the Treasury. 

Mr. BONNER. I look forward to it as well. I note in your discussion, in your written testimony, about the FCC’s investment in 

cyber-security and homeland security efforts. Given that we already have a Department of Homeland Security and the Cyber 

Command within the Department of Defense, not to mention cyber 

security spending in other federal agencies, like Treasury, Health 

and Human Services, Agriculture, and Transportation, to name 

just a few, which is estimated to reach $55 billion a year by 2015. 

Do you think it is fair to say the FCC’s entrance into this field is 

an example of mission creep? 

Mr. GENACHOWSKI. I do not, sir. With respect to public safety 

spectrum, the FCC has had responsibilities in these areas for years 

and years, and whether it was with respect to the older phones 

that firefighters and police officers used around the country or our 

efforts to upgrade that to a mobile broadband public safety network, and also move to next generation 911. These are activities 

that the FCC has been recognized as having very important responsibilities for decades. With respect to cyber security, the FCC 

is the agency of the government that interacts with the commercial 

companies that carry internet traffic, and so it has been recognized 

in all of the inter-agency cyber security efforts that as a result, the 

FCC has an important role to play in cyber security and connecting 

with the other agencies that are focusing on other parts of the 

problem. 

So I appreciate the question, and I can understand why you 

would ask it, but there is, I think, a proper history. Just last night, 

I was at a dinner where the FCC was honored for its work on 9– 


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1–1 and specifically for helping to move to next generation 9–1–1. 

As I mentioned in my statement, I think it is close to a crime that 

people today cannot text to 9–1–1. You cannot take a photo on your 

smartphone of a crime and zap it to 9–1–1, and we are working 

very hard with the first responder community, with Congress, and 

with others to make progress. And for many years, the FCC has 

been involved in improving 9–1–1. 

Mr. BONNER. Well, as a quick follow-up, though, I mean, is there 

any area of jurisdiction at the FCC that you think is redundant 

with some other federal agency or department that we do not need? 

I think there is a real disconnect in Washington with the rest of 

America. It is hard for people who only visit this city to come to 

the tourist attractions or perhaps to come see their members of 

Congress. I think, sometimes, they have a real reason to believe 

that we are totally in the land of disbelief. When you are talking 

about the kind of debt that we have got, the kind of deficit that 

we have got, that is why I am asking about redundancy in programs when other agencies are doing similar things. I think it is 

a fair question at this difficult time. 

Mr. GENACHOWSKI. I agree it is a fair question, and when I arrived at the FCC we asked that question internally. What are we 

doing that is redundant, where can we save money? 

Mr. BONNER. And what did you find? 

Mr. GENACHOWSKI. Well, one of the things that we found was 

that we had multiple licensing systems that kind of grew up historically that were inconsistent, that took longer for employees internally to use, and that were incredibly frustrating to the private 

sector that relied on them, and we embarked on a mission to consolidate our licensing services. We also found that the rules at the 

FCC were such that people in different parts of the agency were 

discouraged from working together, across bureaus and silos, even 

though almost every issue we face involves both wired and wireless. We removed those barriers, and I think we have become a 

more efficient organization in part because of it. I mentioned we 

have identified other areas of cost-saving, and I do not think you 

were in the room at the time, but I come from ten years in the private sector. I hired a managing director who came from 14 years 

in the private sector managing budgets, managing P&L, and while 

I am sure there is always room for improvement, we have been focused on bringing private sector best practices into budgeting and 

operations at the FCC. 

Mr. BONNER. I think we are going to get another vote called. Let 

me try to get a couple questions, and if you cannot answer them 

at this time, maybe you can get it to us on the record. How many 

employees do you have working at the FCC today versus 10 years 

ago? 

[The information follows:] 

FTE COMPARISON LEVELS

Mr. BONNER. How many employees do you have working at the FCC versus ten 

years ago? 

Mr. GENACHOWSKI. The requested FTE level for FY 2012 is 1,794, which is 198 

FTEs lower than the FY 2002 level of 1,992 FTEs. 


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Mr. BONNER. What is the budget request today versus ten years 

ago? 

[The information follows:] 

BUDGET COMPARISON LEVELS

Mr. BONNER. What is the budget request today versus ten years ago? 

Mr. GENACHOWSKI. The requested budget for FY 2012 is $354.2M which is 

$109.1M above the FY 2002 level of $245.1M. 

Mr. BONNER. A lot of times when we are budgeting out for 50 

years or 100 years, that is beyond most people’s ability to comprehend. So let us look backward and see where you are today in 

terms of number of employees, and budgets. Now I do not want you 

to actually hire anyone new to do this, but assuming you have got 

someone in your capable staff who could do it, I would love to know 

how many words of new regulation have come under your leadership with FCC during the last two years and have been published 

in the federal register. 

[The information follows:] 


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Mr. BONNER. You talked about small business and you mentioned that you have a private sector background. I live in Alabama. I do not live up here. I just work up here. Most of the small 

businesses that I have talked to, whether they are in the industry 

or not, are begging for relief from regulation. We need regulation. 

I am not saying you do not need it, but I am just telling you it 

would be interesting to know how many new words of burden, regulation, expense, that this government is imposing on them and 

their ability to compete in a global marketplace. And again, if you 

can answer those now, that is great. If not, we would love them for 

the record. 

Mr. GENACHOWSKI. I am not sure I can tell you the words, but 

we will get back to you on that. And we will also send you the list 

of regulations that we have found that we can repeal because they 

did not serve a purpose anymore. Early in my tenure, we set up 

FCC reform task force to do a sweep and identify unnecessary regulations and repeal them. I believe they identified 20. And we are 

in the process of doing that. And so I would be happy to put that 

together for you. In terms of the number of FTE’s, I think we are 

at a lower number of FTE’s now than we were 10 years ago and 

approximately 1,775 now, and I cannot remember exactly the number 10 years ago, but we will get that for you. And you had a third 

question? 

Mr. BONNER. Just how the budget has grown or shrunk over the 

last 10 years. 

Mr. GENACHOWSKI. We will get that for you. I do not remember 

what the budget level was ten years ago, but we would be happy 

to get that for you. 

Mr. BONNER. Great. Thank you. Madam Chair. 

Mrs. EMERSON. Okay. Let’s just go ahead and vote, because we 

do not have enough time to really go through another question. We 

will go vote and take a 10-minute break and we should be back 

hopefully by five past two. Thanks. 

[Recess.] 

Mrs. EMERSON. Okay. We are going to start again. I am going 

to allow Mr. Serrano to ask his next round of questions since Mr. 

Yoder is not quite ready yet. 

Mr. SERRANO. Rather than go through all the prefacing comments on this, this whole thing with the FCC granting conditional 

approval for a company called LightSquared to build a terrestrial 

wireless broadband, now, the concern is that what they are building will interfere with GPS. And GPS, I do not know how long ago, 

to follow up a bit on Mr. Diaz-Balart’s line of questioning today, 

GPS stopped being a fun, innovative thing and became very much 

a necessity for so many people, and so many law enforcement agencies, and so on. 

So the concern is that this will interfere with that service. And 

that is a big no-no. What can you tell us about that, and what precautions are you taking to make sure that that does not happen? 

And what is it exactly that they are going to do? 

Mr. GENACHOWSKI. Protecting safety, making sure that there is 

no interference with GPS, that harms safety is very central to what 

we are doing. Let me take a step back. An important part of our 

job is finding ways to unleash spectrum, make more spectrum 


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available for new uses, for innovation, for job creation, for investment. And, in this case, this particular company has a proposal to 

build an innovative network, to invest literally billions of dollars, 

create hundreds of thousands of jobs, and provide mobile 

broadband services. 

Now as it is very common in the history of the FCC that when 

a new service proposes to launch, that interference issues are 

raised with existing services. And this is something the FCC has 

done for years. It has fantastic engineers that work with the engineers from the various parties, and others, to resolve interference 

disputes. There is an interference dispute right now about whether 

this new service would interfere with GPS. 

Mr. SERRANO. And this new service would be used for what? 

Mr. GENACHOWSKI. It is called LightSquared, they are providing 

mobile broadband services for consumers and businesses. 

Mr. SERRANO. So no different than what we have now, just more? 

Mr. GENACHOWSKI. Exactly. This is what we were talking about 

before, we are running out of spectrum, and in this case, it is proposing to use some spectrum and it is not worth getting into the 

details; but the short answer is, yes, it would be more and we need 

more. 

The GPS industry has raised interference issues, as I said. We 

are running the kind of process that we have run many times in 

the past to study the facts, to study the engineering, and to make 

sure that anything that we ultimately approve addresses interference issues that were raised. And obviously we are not going to 

do anything that would create safety issues with GPS. 

Mr. SERRANO. Just one last question. Existing broadband services do not seem to be a problem for GPS. Why do the supporters 

of GPS services’ technology feel that this particular one would be 

a problem? What is different about this delivery of service that is 

different from what we have now? 

Mr. GENACHOWSKI. It is a good question. Part of the answer is 

where on the spectrum chart this new service would be provided. 

And, again, this is something that is very common at the FCC, 

when any band of spectrum that is being used for a particular service in a way that it has not before, it raises new issues. 

And there are people who have been doing this at the FCC for 

decades: resolving interference disputes between parties. They are 

very, very good, they have tremendous credibility and respect, and 

they have earned it, because their track record over the years of 

making engineering-based, fact-based determinations about interference disputes is exactly what you would want the FCC to do to 

make sure that we are getting the balance right between driving 

investment, driving job creation, driving innovation and new services, while also protecting against interference to existing services, 

particularly interference that may cause harm and threaten safety, 

which we will not allow. 

Mr. SERRANO. Okay. I have one more question. Ten years and we 

are still talking, in many ways, and rightfully so, about 9/11. But 

one of the issues of 9/11 and that whole period of time was the inability of first responders to communicate with each other. And a 

lot has been said, a lot has been done. And you folks proposed some 

dramatic changes which some folks are opposing. Where is that 


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whole issue? How much different are we now, heaven forbid we 

should ever be in that situation again? 

I was, unlike most members of Congress, I was in New York on 

9/11, and in fact I always comment on the fact that we spoke about 

everything the terrorists did on that day. And one of the things 

that was never really written about is that there was an election 

going on which was suspended, or postponed, at 11 a.m. in the 

morning. So not only did they bring all that harm, and they attacked symbols of who we are, Wall Street, and the Pentagon, and 

they were trying to attack the legislative body, or the White House. 

But also the fact that they interfered with the electoral process, if 

you want to carry it that far. It was a wide effect. 

And I remember that, at that moment, and for quite a while, 

there was no way to communicate by phone or anything else. If we 

were having that problem and we know first responders were having similar, or even more difficult, problems? Where are we now, 

10 years later? 

Mr. GENACHOWSKI. Not where we should be. The most important 

thing that we recommended on this was we absolutely need to get 

a mobile broadband public safety network built for our first responders that would be interoperable. And it is an unfortunate reality, even in these times of a budget crunch; it will cost money to 

do this. And as a society, we have to find an answer because the 

private sector will not, on its own, build a mobile broadband public 

safety network for police officers and firefighters. 

One of the things that I think is a positive in the voluntary incentive auction idea that many are looking at, is that it would generate, the estimates are between $20 and $30 billion in new revenue for the Treasury, which would be more than enough to finally 

take care of funding a mobile broadband public safety network. 

The other important issue is moving forward on standards for 

interoperability, so that when the network is built it is not just 

built, but different services in different regions can talk to each 

other. We are moving forward on making sure that we have interoperability standards. In fact, over the last year, we granted some 

waivers that allowed first responders in a handful of communities 

to move forward, where they have the resources, to start building. 

We have conditioned that on having interoperability standards and 

our Public Safety and Homeland Security Bureau is working hard 

on that process. We have a proceeding now to develop those standards. 

Mr. SERRANO. Thank you so much. Thank you. 

Mrs. EMERSON. Thank you, Mr. Serrano. Mr. Yoder. 

Mr. YODER. Thank you, Madam Chair. Sir, I appreciate you coming today and giving testimony, and certainly there are a lot of 

issues. I did want to follow up on the questions that Mr. Serrano 

was asking, particularly related to LightSquared’s use of the GPS 

spectrum. I noted your answers, and I also noted some of the conversation that is out there right now. Clearly there are hundreds 

of millions of GPS users in this country. It is a very significant 

usage of consumable goods. A lot of people rely on these. And all 

these devices were deployed in reliance on the FCC’s rules prohibiting a terrestrial-only network in the band adjacent to GPS. That 


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is where you now have authorized LightSquared to deploy such a 

network. Do you agree with that statement, first of all? 

Mr. GENACHOWSKI. Generally, yes. But in addition to that, the 

companies that provide GPS also have to comply with certain 

standards with respect to their emissions and their ability to hear 

signals. 

Mr. YODER. But there was a reliance on the fact that it would 

not be a terrestrial-only network in a band adjacent to GPS? 

Mr. GENACHOWSKI. I do not think that is right. 

Mr. YODER. Okay, that is what I want to know. Do you agree 

with that statement? 

Mr. GENACHOWSKI. No. I do not think that is right. There are interference issues here that have to be resolved, but I do not think 

that reliance statement is correct. 

[The information follows:] 

LIGHTSQUARED RELIANCE ISSUE

Mr. GENACHOWSKI: To clarify for the record, when the International Bureau released the MSV ATC Order in 2004, there was no promise, implied or otherwise 

that would have provided interested parties with this sort of assurance, especially 

since the Commission routinely provides licensees with the flexibility to deploy technologies they believe best serve market demand. Also, LightSquared does not propose to provide terrestrial-only service. 

Mr. YODER. Okay. I want to talk a little bit about the process 

that you are using in relation to this issue, and so the committee 

can understand the decision making process that you go through, 

the standards you are going to use. And I know that you made 

clear in the comments to Mr. Serrano, that certainly you would not 

want to jeopardize GPS. That is not a goal. You would want to 

make sure that GPS has its full range of functionality. But the 

Commander of the U.S. Space Command testified to the House 

Armed Services Committee about two weeks ago, you may have 

seen this, that, ‘‘We believe from what we have seen thus far, that 

virtually every GPS receiver out there would be affected’’. This is 

a serious claim, clearly. Why did you go forward with even a conditional grant of LightSquared’s application given the gravity of 

these concerns from the Department of Defense, which runs the national GPS system? 

Mr. GENACHOWSKI. Well, to make a couple of things clear; the 

waiver that was granted was conditioned on resolution of the GPS 

interference issues, and there is also information that suggests that 

the interference issues can be resolved. Why bother at all? The answer is massive private investment, jobs, and new innovative services. So the company that is pursuing this venture expects to invest 

billions of dollars, create hundreds of thousands of new jobs, literally, and provide new services in the marketplace. I think it 

would have been completely unacceptable to say, Well, we are not 

going to look at it. We are not even going to study the interference 

issues. 

And so what we decided to do is to say look, We understand the 

plan for providing these services. We understand how it could lead 

to massive private investment and job creation. We are going to 

treat this as we have many other interference disputes that the 

FCC has had for years. Like some of the other issues we face, you 


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get people with very strong feelings on both sides that are absolutely sure that they are right. And I am proud of the career staff 

at the FCC that has the very hard job of getting into the engineering, doing the field tests, doing the work, and on behalf of the 

American people, getting the balance right to protect public safety 

and make sure that Spectrum is used to drive private investment 

and create jobs. 

Mr. YODER. And so the idea is you give a conditional grant so you 

can see what the effect will be. Is that correct? 

Mr. GENACHOWSKI. Yes. It allows us to move to the next stage. 

It allows the company to move to the next stage. It allows us to 

move to the next stage, which we have, of running a process to resolve the interference issues. 

Mr. YODER. Okay. And so, what I understand is that the Department of Defense, Homeland Security, Transportation, Interior, 

have each individually raised concerns about the proposal. And 

clearly, the comments from the U.S. Space Command to the House 

Armed Services Committee that they believe, from what they have 

seen so far, virtually every GPS receiver out there would be affected. From what you have seen so far, are they wrong? And if 

they are wrong, how so? And if they are correct, what are we doing 

to fix this problem? 

Mr. GENACHOWSKI. My experience in this area, having watched 

some of these interference disputes work themselves out over time, 

is to create a space where the expert engineers at the FCC can run 

a fact-based process with participation from everyone who has a 

concern, pro or negative, and to let that process try to produce a 

result. So I would not want to pre-judge it. I think that would be 

wrong. We are prepared to do whatever is right to make sure we 

get the balance right to drive investment, jobs, and our economy, 

and absolutely make sure that we are protecting public safety. 

Mr. YODER. And so what is the standard you use in making that 

decision? Is it a clear and convincing standard? Do you get to a 

point where the U.S. Space Command, Department of Defense, 

Homeland Security, other GPS providers are saying, Please do not 

do this, and you say, After receiving all the input, I think it is 

okay. And then we have an ongoing dispute, and there are clearly 

challenges then on the investment side for those who are producing 

the GPS products. 

[The information follows:] 

LIGHTSQUARED STANDARD OF REVIEW

Mr. GENACHOWSKI. To clarify for the record, the standard we would normally 

apply to this situation is whether the new service would create ‘‘harmful interference’’ which is defined in Section 2.1 of the rules as ‘‘Interference which endangers the functioning of a radionavigation service or of other safety services or seriously degrades, obstructs, or rapidly interrupts a radiocommunication service operating in accordance with the ITURadio Regulations.’’ 

Mr. GENACHOWSKI. Well, I hope we will not get to that point. We 

are running a process that is inviting the inclusion of all the different agencies and private sector players that have an interest. 

We are asking only one thing of everyone, which is, Let’s work together to look at the evidence and see if we cannot find a commonsense resolution. 


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So I am hopeful that that process will work well. We have had 

conversations with people in the GPS industry who agree that a 

process is necessary, and who I understand are supportive of the 

kind of process that we are running. And the evidence will determine the outcome. 

Mr. YODER. And this process is open, everyone has an opportunity to have input, it is open to the public. Do we have access 

to everything that is going on along this process? 

Mr. GENACHOWSKI. The process is consistent with the kinds of 

processes the FCC has run in the past. I would be happy to get you 

more detail on exactly how this process works. 

Mr. YODER. Well, I know that the NTIA provided a letter to the 

FCC describing the concerns that Federal users have regarding 

LightSquared’s proposal. Are there other communications or meetings that have occurred between NTIA and the FCC? 

Mr. GENACHOWSKI. Well, the NTIA and the FCC meet frequently 

to discuss this. I am sure there have been some discussions in getting ready for running a process on addressing the interference 

issues. 

Mr. YODER. Well, I just hope to impress upon you today that 

there are a tremendous amount of concerns about what is happening here. And some of those concerns are being expressed to 

members of Congress, who want to make sure that you aware that 

these concerns are out there, and that this is a very high-stakes 

situation, where a lot of investment has occurred in GPS, and hundreds of millions of devices, millions of users in the United States. 

And so if there are these concerns out there from many of these 

folks, who we take very credibly, including many of our Departments and agencies, we want to make sure that you, sir, understand the gravity of that. And I want to make sure I do my part 

impressing upon you that the concerns are out there. 

Mr. GENACHOWSKI. Well, you absolutely have, and I appreciate 

that. And I look forward to working together. I know we all share 

an interest both in making sure that there are no safety risks with 

respect to GPS, and also making sure that we are driving new 

businesses, that government is getting out of the way of new businesses that have the opportunity to lead to billions of dollars in private investment and hundreds of thousands of new jobs. 

Mr. YODER. Well those are great goals, and let’s hope it works 

out that way. 

Mr. GENACHOWSKI. Terrific. I look forward to working with you. 

Mr. YODER. I yield back to Madam Chair. 

Mrs. EMERSON. Thank you, Mr. Yoder. You mentioned earlier, 

you raised the issue of 9–1–1 texting. Why can we not text 9–1– 

1? 

Mr. GENACHOWSKI. Because as a very broadly general matter, 

our 9–1–1 call centers are not set up to receive the texts. And I visited a couple of 9–1–1 call centers. They are incredible operations, 

I mean there are heroes who work at these places every day. And 

with respect to landline 9–1–1 calls, it works well. The call comes 

in, it goes up on the computer, they know exactly where you are, 

and within seconds they can dispatch someone to where you are. 

With mobile calls it does not work quite as well, though progress 

has been made. And I hope you will forgive a little bit of a digresVerDate Mar 15 2010 05:43 Jul 07, 2011 Jkt 099011 PO 00000 Frm 00048 Fmt 6633 Sfmt 6602 E:\HR\OC\A999P2.XXX A999P2

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sion, but I think this issue is very important; about more than half, 

I think about 65 percent of 9–1–1 calls now come from mobile devices. But the location accuracy that the 9–1–1 dispatchers get 

from mobile is not as good. And in some cases it is quite bad. So 

in cities with tall buildings, or in very rural areas, the information 

may be of very little use to the dispatcher. So one line of our work 

involves working with first responders and industry to try to improve the location accuracy of mobile 9–1–1. And we are making 

progress on that, there is more to do. With respect to what we call 

next generation technologies, like texting, like sending photos, like 

sending videos, as a general rule the call centers are just not set 

up for it at all. The system will not receive a text. Many of them 

are non-IP based systems. So that is the reason. They are just not 

set up for it. They want to be. There are funding issues. I hate to 

say it, but there are. But I do think we need to work together on 

a bi-partisan basis to find a way, also with the states and local governments, because that is where a lot of the funding comes from. 

But as I said, two or three years ago, if you had said to someone, 

You cannot text 9–1–1, they would have said, Who cares? But 

texting, sending videos, have become so quickly so central to part 

of our daily activities, that it is no longer an acceptable answer to 

say, We do not have a plan for this. Even at the Virginia Tech tragedy a couple of years ago, there were students who did not know 

any better and tried to text 9–1–1. They did not go anywhere, there 

was no one to get those texts. 

Mrs. EMERSON. So what is the solution? 

Mr. GENACHOWSKI. Well, some of it involves funding, as I said, 

and one of the things that we are trying to be helpful with is, as 

a resource to Congress and others, working with the industry and 

first responders, to price out what it would cost. A second issue is 

having standards. This is an area where a smart standard process 

can potentially accelerate the move of a lot of local 9–1–1 centers 

to an IP-based system and also lower the costs. Because the more 

that this equipment is up to scale, the faster it will be rolled out 

and the less it will cost. So we are working on that; we have a terrific person leading this up, Admiral Jamie Barnett who runs our 

Public Safety and Homeland Security Bureau. I look forward to following up with you on this because I think it is a very important 

issue. 

Mrs. EMERSON. And I would appreciate that; I would like to very, 

very much. 

[The information follows:] 

E911 TEXTING CAPABILITIES

Mr. GENACHOWSKI. With respect to your question about why Public Safety Answering Points—PSAPs—do not currently receive text messages, I wanted to clarify 

the two reasons for the record. First, circuit-switched 911 networks and selective 

routers use old technology that is designed solely to support voice telephone service 

and, like residential wired telephone service, are not configured to receive text messages. 

Second, the texting methods that most consumers use today were not developed 

with 911 in mind, which affects their usefulness in emergency situations. For example, consumers using existing texting technology may not be able to transmit in real 

time, convey location information, or establish reliable 2-way communications between a particular call taker at the PSAP and the caller. 

Since PSAPs will need to upgrade their technology to be able to receive texts, 

states and localities also will have a critical role in the transition to next generation 


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911–NG911. Stakeholders, including the FCC, industry and the 911 community, are 

working hard on potential solutions to make texting to 911 possible. There has already been one small text-to-911 trial in Black Hawk County, Iowa, and we anticipate that there will be additional trials in other locations later this year. 

As part of a Notice of Inquiry issued by the Commission on December 21, 2010, 

we are seeking to gain a better understanding of how to bridge the gap between 

the capabilities of newer, IP-based networks and devices and today’s 911 system. We 

also are asking for input on how to further PSAPs’ transition to IP-based communications capabilities and NG911 for emergency communications. We will keep this 

subcommittee apprised of our work in this area. 

Mr. GENACHOWSKI. Can I mention one other concern that has 

been raised just to note, something that we could look at together? 

We have heard complaints from first responders that in some 

states funds that have been designated as 9–1–1 funds on consumers’ phone bills are not getting spent for that purpose. And I 

am not saying that that is an FCC issue; I am relaying a concern 

that I have heard from first responders who are trying to upgrade 

their 9–1–1 systems. 

Mrs. EMERSON. I would agree with that; I am hearing the same 

thing from mine, and it is a little more complicated than it seems 

on the surface, but nonetheless it is one issue that has to get solved 

sooner rather than later. Let me ask you a little bit about the Universal Service Fund and your National Broadband Plan. I would 

like to know where you are with it, why don’t you just answer that 

one first? 

Mr. GENACHOWSKI. Well, we issued a National Broadband Plan 

last year that identified the opportunities of accelerating deployment and adoption of broadband, opportunities for our economy, for 

job creation, investment, for making progress on education, health 

IT, et cetera, and it had some big ticket items in there which I can 

discuss. One is transforming the Universal Service Fund, another 

is unleashing spectrum in the incentive auctions. A third is removing barriers to broadband adoption. A fourth is improving 

broadband adoption. I would say a couple of things. One, a year 

and a half ago at this time, very few people were talking about 

broadband. And it was much more, I think in some other countries, 

thought of as an important economic issue than it was here and I 

am pleased that more and more people are understanding the opportunities of broadband, and it is creating more of a desire to 

tackle the challenges. 

With respect to spectrum, the challenge grows every day. There 

is an article in the papers today about how smart phone sales are 

going to be even faster next year than people thought. Again, 

Smartphones use more than 20 times as much spectrum, they put 

20 times more demand on spectrum than old feature phones. I wish 

we had a warehouse of spectrum just lying around at the FCC that 

we can auction off, but we do not. So taking seriously the incentive 

auction proposal, which has had bipartisan support, and brings 

market incentives to the allocation of spectrum; it is a tool that the 

FCC does not have that is very important and we would be happy 

to work with you on that option. Transforming the Universal Service Fund, it does not make sense to have a fund that supports only 

universal telephone service. It has to support broadband. We are 

moving in that direction, we are doing it together with the reform 

of Intercarrier Compensation because it is a whole complex system 

that has to be done together. 


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I am proud that just last week, thanks to the work of our staff, 

all five commissioners on a unanimous basis did something that 

was unprecedented; we issued a joint blog. And the blog said to the 

community of people who are concerned about this, We are serious 

about USF reform. We are serious about moving forward. We are 

serious about doing it quickly, and we want all stakeholders to participate in our process in a way that really rolls up the sleeves and 

helps solve problems, as opposed to blocking reform. I can keep 

going, but I think on a whole series of areas, we are making very 

significant progress. There is always a lot of work to do, and the 

rest of the world is not standing still when it comes to broadband 

deployment and adoption. 

Mrs. EMERSON. You know, it was interesting and perhaps kind 

of strange at the same time that the ARRA bill was passed, and 

in it you were asked to put together your National Broadband Plan 

simultaneous to lots of monies being given out through NTIA or 

RUS to build out the infrastructure. It was kind of putting the cart 

before the horse because I would have thought you would have a 

plan and then deploy various tools to make it work, but nonetheless. 

Mr. GENACHOWSKI. If I could reserve my right to disagree with 

that. 

Mrs. EMERSON. Well, coming from a rural area, I have to have 

every single type of phone, AT&T, Verizon, Century. I need really 

every single service there is to be able to get service in my district, 

and then there are still just dead spaces. 

Mr. GENACHOWSKI. I do think that is why it made sense to start 

moving forward where we knew there was need even as we developed a plan to tackle some of the larger things like spectrum reform, like universal service. And so given a fast-moving globally 

competitive landscape, starting to make the first investments and 

taking care of the low-hanging fruit that everyone agreed made 

sense, I do appreciate your point of view, but I think it made sense 

and it will help the country make progress. 

Mrs. EMERSON. Well, hopefully we will begin to make progress 

because I think everybody agrees, particularly in rural areas where 

we do so much telehealth and where it is really helpful as people 

want to become their own entrepreneurs and work for themselves. 

When you still have dial-up service on your computer that is pretty 

pathetic and there is no way you can compete or do things fast 

enough. One other quick question: there are a number of grant programs that come under the Universal Service Fund, and I know 

that regulators do not typically monitor grants, so how do you really ensure then that those funds are being used properly? 

Mr. GENACHOWSKI. Well, we do monitor. Most of them are distributed by an intermediary organization called USAC, Universal 

Service Administrative Company. And we do oversight over USAC 

and we have been very aggressive, and we have ramped up our efforts over the last year to audit what they are doing, to make sure 

that money is being spent wisely. We have found issues and moved 

to correct them, so I think oversight of every dollar that is being 

spent is incredibly important and if I could come back to the budget, it is one of the things that our IGs office helps us do. They help 


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us do oversight on programs like VRS, where we saved $250 million, and they play an important role. 

Mrs. EMERSON. So does the FCC determine the eligibility for 

those grants or does USAC determine the eligibility? 

Mr. GENACHOWSKI. We set the rules, the parameters, and they 

are the operational entity. 

Mrs. EMERSON. Okay. I know Mr. Diaz-Balart has some other 

questions, and we also have simultaneously a briefing on Libya by 

the Secretary of State and others, and I know people are anxious 

to get to that. Go ahead, Mario. 

Mr. DIAZ-BALART. Thank you, Madam Chairwoman. First Mr. 

Chairman, we were speaking between votes, and I appreciate your 

willingness to continue to talk and to work out some of these issues 

that are very complex, but obviously very important. So I want to 

thank you for that attitude, I really do. 

My understanding is that next week, the FCC is set to vote on 

a data roaming order. Now, this order can be seen as, in effect, for 

the FCC to over regulate the wireless industry. I want to make 

sure I understood you, because I am obviously concerned with—we 

keep talking about innovation and everything else, and that was 

done through the private sector. I just want to make sure that we 

are not over-regulating. And I also want to make sure that the 

FCC is not over-exceeding its statutory boundaries. Clearly if that 

is the case, what authority is being used in order to do so? I think 

it is pretty clear that Congress did not give statutory authority to 

impose a common carrier regulations like data roaming or wireless 

broadband data, et cetera, et cetera. So I just wanted to see what 

is going on next week at the FCC with this order and what are you 

looking at, and put my mind at ease, if you would. 

Mr. GENACHOWSKI. I would be happy to. About five or six years 

ago on a bipartisan basis, the FCC adopted voice roaming rules. 

And that meant that a consumer who got essentially any old-fashioned phone that just did voice could know that it would have national service. And it meant that competitors in the marketplace, 

particularly rural companies that were providing mobile service, 

would know that they could offer their customers a national voice 

service. It has worked very well. At the time, people attacked it as 

an overreach and they said it would deter investment, et cetera. As 

it played out in practice, it helped provide better consumer services, more investment, more competition, and no complaints at the 

FCC. The industry said, We are just going to get the deals done. 

So what we are looking at now as the world has changed along 

the lines that you talked about before, from old voice phones to 

data phones, is something very similar. Updating the rules to apply 

to data roaming so that a consumer, when they get a smart phone, 

can know that they will be able to roam anywhere, to make sure 

that competitive providers like rural carriers have the ability to 

offer competitive service, and we have heard very loudly from the 

rural carriers that this is a very big issue for them. And we are 

doing it in a way that we think will, as before, promote investment, 

promote competition, promote consumer benefits. 

On the legal authority, we are being very careful. Obviously it is 

very important that we act within our authority. Title III of the 

Communications Act provides ample authority to adopt rules like 


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this. You are correct that there is a provision that says we cannot 

do common carriage, and we have been very careful to make sure 

that these common carriage rules, and in a whole series of ways, 

the rules that we have proposed and are discussing at the commission are not common carriage. They will, I hope, lead to companies 

in the private sector doing deals. We have heard many complaints 

from rural carriers and others, as the commission did before voice 

roaming, that the deals just were not getting done, and not for good 

reason. 

Mr. DIAZ-BALART. I want to make sure that the FCC is not looking at trying to circumvent the old thing about depending on what 

your definition of ‘‘is’’ is? I want to make sure that the FCC is not 

looking at ways to circumvent the lack of Congressional authority. 

In other words, it is pretty clear what that is, and I just want to 

make sure that what you are not looking at doing is looking at 

ways to, All right, let’s still do it but figure out how legally we can 

justify it. Because Congressional authority is pretty clear. 

Mr. GENACHOWSKI. And we have been considering the options 

here. There were some options on the table, including options that 

were requested by rural carriers, that we looked at and said, Those 

are potentially inconsistent with the statute. The approach that we 

have proposed we think is well within the statute. 

Mr. DIAZ-BALART. Is the purpose to allow smaller companies to 

use the infrastructure of some of the larger networks that are already there, that they invested the private sector with their 

money? Is that what you are looking at? 

Mr. GENACHOWSKI. Well, the purpose is really the same as voice 

roaming. Roaming has become an essential feature of a competitive 

marketplace that gives consumers the option of something we know 

that they want. So essentially, this has been something that has 

been a success. It has served businesses, investment, and consumers well. As we move from a voice to a data world, replicating 

that in a cautious, smart way that has fidelity to the statute is 

what we have proposed, and I think it will have a positive effect 

on the marketplace. 

Mr. DIAZ-BALART. So is that yes? Is the purpose, then, to allow 

some companies to use the investments of other companies, the infrastructure investments of others, in order to do that? Is that the 

purpose? 

Mr. GENACHOWSKI. It is not how I would characterize the purpose. We think that this will, as with voice roaming, increase overall investment. What we have heard from many rural carriers and 

other competitive carriers is that there is a lot of investment sitting 

on the sidelines, because unless they have a degree of confidence 

that they can get roaming deals nationally, they do not want to 

start investing and building out a network. They know they cannot 

offer a business where someone says, You mean I cannot use this 

phone if I am outside of the area? So we think that this will unleash investment. The experience for voice roaming is that companies much prefer to have their own networks than to roam on others, because it is over time much less expensive. Voice roaming and 

data roaming is expensive for the company that has to get it, and 

once they have a service up and running and they have the capital 

available, it is in their interest to build out their own networks. 


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This was something of the theory when the voice roaming rules 

were adopted several years ago, but that theory has now been proven out in practice, and the voice roaming rules have had a very 

positive net effect on investment, and competition, and on providing better consumer services. 

Mr. DIAZ-BALART. And again, I just want to make sure that I am 

understanding your answer. So you are telling me that that is not 

going to be the case, that the FCC’s not looking at telling those 

who already have investment in infrastructure that they are going 

to have to allow others to use that infrastructure, correct? If you 

can just get to that specific part. 

Mr. GENACHOWSKI. Yes. It is not how I would put it. The rules 

that have been proposed, and I am limited in what I can say because we are still discussing this at the Commission, but you would 

have a framework where carriers with national networks would 

have to offer roaming agreements on commercially reasonable 

terms. 

Mr. DIAZ-BALART. Who sets that commercially reasonable term? 

Mr. GENACHOWSKI. The private parties will set them, and I think 

as with voice roaming, we expect it to work well in the private sector and for the FCC not to have to be brought in. 

Mr. DIAZ-BALART. And if there is no agreement between the two 

private sector or the multiple private sector parties to a price, then 

what happens? Does the FCC step in then? 

Mr. GENACHOWSKI. We expect that there will be agreements. 

Mr. DIAZ-BALART. But if there is not? 

Mr. GENACHOWSKI. As with voice roaming, there is a process to 

come to the Commission, and complaints will be resolved. 

Mr. DIAZ-BALART. Again, and I keep getting back to this because 

what I think I am hearing is basically that yes, that basically if 

they do not have an agreement, then you will basically force them 

to have an agreement. Correct? 

Mr. GENACHOWSKI. No. Well, what the remedies would be would 

depend on the circumstances involved. But again, I think the core 

point is that we have experience with a very successful program 

that has worked for companies throughout the ecosystem and consumers, and we have a very good basis of evidence to believe that 

this would work again, promote investment, innovation, competition, help consumers. 

Mr. DIAZ-BALART. And that model is to allow those that do not 

have the infrastructure to use the infrastructure of others. Is that 

what you are doing? 

Mr. GENACHOWSKI. It is to make sure that companies that have 

national infrastructure offer roaming deals on commercially reasonable terms. 

Mr. DIAZ-BALART. And I understand that, but if there is no 

agreement on that, does then government step in and decide what 

a commercial viable rate is? 

Mr. GENACHOWSKI. No. 

Mr. DIAZ-BALART. Does the Federal government push on making 

sure? Is there a penalty if they do not reach an agreement? 

Mr. GENACHOWSKI. Well, some of these issues, we are still talking about, deliberating at the Commission exactly how it would 

work, and so I do not want to speak for the other commissioners. 


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My own view, as with voice roaming, once there is the basic framework that says that companies are expected to do commercially 

reasonable deals, there will be deals. The companies who are seeking these deals do not want to have to file complaints. They do not 

have the capital to file complaints. And I think we will see a successful policy that promotes investment, promotes competition, promotes consumers in this as we have in the past, assuming the 

Commission adopts this next week. 

Mr. DIAZ-BALART. All right, so that is happening next week. 

Again, I am concerned, as one who believes that free markets, 

frankly, have created a pretty good thing here in the United States, 

we have a pretty good gig going here, the wealthiest nation in the 

history of humanity; it has been because of this free market enterprise system that we have. 

Mr. GENACHOWSKI. Well, I agree, and the companies that are 

coming to us are companies that are trying to compete in the free 

markets. They are rural telephone companies from all over the 

country, and I would also point out that this approach has bipartisan support. It always has, it still does, and the spirit of it is to 

be extremely light-touch, and to promote a free-flowing market in 

which deals are getting done along the lines that we have planned 

out. 

Mr. DIAZ-BALART. And I want to stay in touch with you, and obviously we will keep an eye on how that is moving, because obviously I think there are some of us that have great concerns about 

government being too heavy-handed on a lot of these issues. We already talked about net neutrality, and Madam Chairman, if I may 

just very briefly talk a little bit about this issue with LightSquared. 

Is that the right term? 

Mr. GENACHOWSKI. Correct. 

Mr. DIAZ-BALART. And the possibility that it may affect GPS. Obviously if it affects GPS, I will never be able to get out of the Rayburn Building. So let me just put that on the table first. I guess 

there is a comment period. Is that the case? My understanding is 

that there is usually 45 days, when people were talking here about 

the waiver. I guess that it is because the waiver is about 45 days, 

right? So I think 7 days. Is that correct? Is that not correct? 

Mr. GENACHOWSKI. You are at a level that I do not recall. 

Mr. DIAZ-BALART. Okay. 

Mr. GENACHOWSKI. I apologize. 

[The information follows:] 

LIGHTSQUARED COMMENT PERIOD

Mr. GENACHOWSKI. I appreciate the opportunity to clarify for the record the comment period issue related to LightSquared’s conditional waiver and provide additional information on this matter. In November 2010, LightSquared applied to the 

FCC to modify its Ancillary Terrestrial Component—‘‘ATC’’ authority. Its existing 

authority allowed terrestrial services to dual-mode handsets using LTE technology. 

The request was designed to permit LightSquared to offer wholesale terrestrial service to single-mode handsets—it neither requested nor was granted any alterations 

to its allowed transmission power, number of cell towers deployed, or any other 

changes. 

On November 19th, the International Bureau issued a Public Notice requesting 

comments, which ultimately were due on December 2, 2010, with replies due on December 9, 2010. On January 26, 2011 the FCC’s International Bureau issued an 

Order and Authorization granting LightSquared conditional approval for its customers to offer terrestrial only devices to consumers. The waiver was granted with 


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specific conditions including the formation of a working group to resolve the concerns raised, but more importantly noted that a final waiver grant was conditioned 

on the resolution of the interference issues. 

Some of the commenters in the proceeding raised the timing issue and claimed 

that they were precluded from fully participating in the proceeding. When the International Bureau issued its Order, the Bureau specifically addressed this concern 

and noted that the decision was consistent with timing for similar procedures and 

in accordance with our rules. As the Bureau noted, those entities that raised timing 

concerns also fully participated in the proceeding and filed substantive comments 

on the issues raised in the petition. 

Mr. DIAZ-BALART. Here is one of the things that you heard today 

is that there clearly have been a number of federal agencies: DOT, 

DOD, DOT, NHS, NASA, FAA, NTIA, and others who have expressed some written concerns, I understand. And by the way, I 

commend you the way you talk about how we clearly want to make 

sure that we have investment, and that we have competition, and 

that we have innovation. So that is good. But you rarely get those 

agencies having objections. I just want to make sure that we are 

very careful that if the waivers have been granted; it is, to my understanding, that there are test results due on January 15, 2011. 

And does the waiver or whatever is happening now, has the FCC 

allowed LightSquared to build out its infrastructure prior to the 

test results of January 15? 

Mr. GENACHOWSKI. My understanding is that the infrastructure 

that they would be building out now will relate to the interference 

testing. It is interesting to put these issues together, because what 

we are being asked to do is interfere with the private operation of 

the market and deals that could, theoretically, be negotiated to resolve interference issues without government involvement. Now, 

that is not the way the process has worked and I think we are 

playing an appropriate role here, as we do in other areas, to make 

sure that there is a framework that protects against important 

issues. And we are going to be very careful in making sure that 

there is a framework that protects health and safety. 

Mr. DIAZ-BALART. No, and there is no doubt. And you are always 

going to have the naysayers whenever there is new competition. 

And that is why I said a little while ago I am glad that you talked 

about that. We have got to make sure that we can, whenever possible, allow for innovation and competition. But when you are dealing with DOD and NASA; I know you are aware of it and I just 

wanted to make sure that we are not doing something that will 

jeopardize. Because that is, in essence, the purpose of your organization. 

Mr. GENACHOWSKI. Absolutely. Yes, sir and we take it very seriously. 

Mr. DIAZ-BALART. Not to regulate things that are working, not to 

regulate things that are being innovative, not to regulate things 

where there is competition; i.e., Internet, which I, for some reason, 

insist you all are being very aggressive in regulating that part, but 

to make sure that there is no damage if that would be the case. 

And I am not saying that is the case with LightSquared. I mean, 

hopefully it is not, but I just want to make sure. I think that you 

and I do not disagree, and that there is a case for your organization. I think the cases that deal with those issues when they are 

legitimate concerns: to see if they are legitimate. I do not think 

that your role should be to intervene and regulate, when in fact, 


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something is not broken; i.e., as you and I agreed at the beginning 

of our conversation, probably the most dramatic case of innovation, 

job creation, wealth creation, opening societies, that has taken 

place in the history of mankind: that is the Internet. 

I am a little concerned that for some reason you are emphasizing 

that in such a strong manner; I think you may be stepping a little 

bit too heavily there. But we will continue to have the conversation 

and we will continue to work together. And I appreciate the opportunity to do that with you and I look forward to it. 

Mr. GENACHOWSKI. Thank you. 

Mr. DIAZ-BALART. Thank you, Madam Chairwoman. 

Mrs. EMERSON. Thank you, Mr. Diaz-Balart. Chairman 

Genachowski, thank you so much for being here. I have some questions I would like to submit for the record; so does Mr. Serrano. 

And any others will also be submitted for the record. And if you 

can respond to us within 30 days, I would be very grateful. Thanks 

again for being here. 

Mr. GENACHOWSKI. Thank you. 

[The information follows:] 


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(105) 

TUESDAY, MARCH 15, 2011. 

SECURITIES AND EXCHANGE COMMISSION 

WITNESS 

MARY L. SCHAPIRO, CHAIRMAN, SECURITIES AND EXCHANGE COMMISSION 

Mrs. EMERSON. The hearing will come to order. I would like to 

welcome our witness, Chairwoman Schapiro, and I thank you so 

much for being here today and for the testimony you will be giving 

related to the Securities and Exchange Commission. The SEC has 

a complicated mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation, 

while at the same time not over-regulating our markets and hindering economic recovery. 

As you know, this committee is committed to reducing non-security discretionary spending to fiscal year 2008 levels, and so far we 

have had a strong hearing schedule and I intend to continue this 

theme of strong oversight throughout the rest of the year. While 

the SEC is funded by fees, Congressional oversight over your budget is an important check on agency activities. Since 2001 in the 

wake of Enron, this committee has increased the SEC’s budget by 

over 160 percent. Few if any other agencies have received such a 

large increase. In fiscal year 2001, the SEC’s budget was $423 million; today it is $1.1 billion. The fiscal year 2012 request proposes 

a significant increase, including a 20 percent increase in staff. 

Before we decide to provide the SEC with even more resources, 

several concerns need to be addressed such as the SEC’s internal 

financial reporting, leasing practices, and the ability to ensure investors that another Madoff or Stanford Ponzi scheme will be 

caught and brought to justice before investors are severely affected. 

Capital formation and investment are critical parts of our economy 

and we must be sure that this agency is protecting investors while 

at the same time not precluding investment. This committee must 

be vigilant in our oversight of agencies like the SEC that play a 

critical role in the U.S. economy. Chairman Schapiro, you have a 

very, very challenging job and we do appreciate all the hard work 

you and your staff do and look forward to your testimony. I would 

now like to recognize my friend, Ranking Member Joe Serrano. 

Mr. SERRANO. Thank you. Thank you, Madam Chair. And I also 

would like to welcome you to today’s hearings. You have been involved in reforming the internal operations of the SEC and I look 

forward to learning more about your efforts during this hearing 

about that reform. You have been given many new responsibilities 

under the recently passed Dodd-Frank Act. These new responsibilities are vital to protect consumers and shareholders and to ensure 

that past abuses are not repeated. Unfortunately, you now have to 


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implement your many new mandates without the necessary resources. I look forward to discussing this problem with you in 

greater detail today. 

We are also aware of your need to increase staffing, make significant information technology investments so that you can better fulfill your extensive new responsibilities. These are real needs that 

we need to work with you on addressing in a timely way. We are 

all in agreement that we need a strong SEC to protect us from investment scandals and another meltdown of the securities markets. 

We cannot afford to repeat our past mistakes, but now need a robust and well-run SEC so that we can apply past lessons to future 

challenges. During today’s hearings, I hope to learn more about 

your reform efforts at the SEC and about the progress you are 

making. 

In closing, let me just make a comment. I know that the Chairwoman spoke about the fact that there is a great desire to cut back 

to 2008 levels. And certainly we on this side understand that that 

is going to happen in one way or another, maybe not to the extent 

that we have seen expressed so far, but there will be serious cuts 

across the federal government. It would seem to me that this is a 

dangerous place to cut if we are not going to provide proper oversight. I have been in public office 37 years. I cannot tell you, except 

for once, did I ever hear a state or federal agency come before me 

and say, We do not need money. We have enough. That was the 

SEC some years ago before you that actually came to us and said, 

No, no, that is fine, Mr. Serrano. We do not need any money. 

Translation, We do not want any oversight. And that is what happened. 

And so on one hand, I understand the need to cut. On the other 

hand, I fear that this is a place not to cut. One last point. I realize 

that there are a lot of people out there who do not like Obamacare, 

and by the way, I was the first one who said, Let us call it 

Obamacare because at the end of the day, there will be Social Security, Medicare, and Obamacare, and the other side would have 

given him his legacy. And so I am proud to call it Obamacare. I 

understand that that is an issue. But there is also a move afoot not 

to fund Dodd-Frank. And so we have this law that everybody 

agreed had to be passed in order to deal with this meltdown and 

all the schemes and all the scandals, and now we are not going to 

fund it and that would be a tragedy. So I hope that in the desire 

to cut, we come to some conclusion that there are some things we 

need to fund and fund properly. And I welcome you today. And I 

thank you, Madam Chair. 

Mrs. EMERSON. Thanks, Mr. Serrano. I now recognize Chairman 

Schapiro for her opening. If you would try to keep your remarks 

to about five minutes, we will have more time for questions. 

Thanks so much. 

Ms. SCHAPIRO. Chairwoman Emerson, Ranking Member Serrano, 

thank you for the opportunity to testify in support of the President’s fiscal year 2012 budget request for the United States Securities and Exchange Commission. The $1.4 billion that the President 

is requesting will allow us to adequately staff the agency to fulfill 

our core mission of protecting investors, expand our information 

technology system so we can realize operational efficiencies, better 


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keep pace with increasingly sophisticated financial market participants, and carry out our new responsibilities over hedge funds, derivatives, and credit rating agencies. 

As you know, we have worked tirelessly to make the SEC a more 

vigilant, agile, and responsive agency over the past two years, and 

we continue moving forward on multiple fronts designed to enhance 

our effectiveness and ensure robust oversight of the financial markets. 

In addition, we have embarked on a vigorous rule-making agenda, addressing critical issues including equity market structure, 

money market fund resiliency, asset-backed securities, consolidated 

audit trail, and municipal securities disclosure. I believe we have 

made a great number of necessary changes and accomplished a 

great deal, but this year we find ourselves at a critical juncture. 

That is because Congress has challenged us not only to continue 

our reform efforts and to carry out our core responsibilities, but 

also to fulfill the significant new responsibilities under the DoddFrank Act. 

As you know, separate and apart from that legislation, the SEC 

is responsible for essential financial market activities such as pursuing securities fraud, reviewing public company disclosures, inspecting the activities of investment advisers and investment companies and broker-dealers, and ensuring fair and efficient markets. 

And because of the new legislation we are taking on considerable 

new responsibilities. For oversight of the over-the-counter derivatives market and hedge fund advisers, registration of municipal advisers and security-based swap market participants; enhanced supervision of credit rating agencies, heightened regulation of assetbacked securities, and the creation of a new whistleblower program. 

Over the past decade, the SEC has faced significant challenges 

maintaining staffing levels sufficient to carry out its existing mission. For instance, from 2005 to 2007 the SEC experienced three 

years of frozen or reduced budgets forcing a 10 percent reduction 

in the agency’s staff. Similarly the agency’s investment in new or 

enhanced IT systems declined approximately 50 percent between 

2005 and 2009. 

At the same time, the size and complexity of the securities markets were growing at a rapid pace. Indeed, during the past decade, 

trading volume more than doubled, listed equity market volume 

alone now averages approximately 8.5 billion shares a day. The 

number of investment advisers grew by 50 percent and the assets 

they managed increased to $38 trillion. Today the SEC has responsibility for approximately 35,000 entities, including direct oversight 

of more than 11,000 investment advisers, 7,000 mutual funds, and 

5,000 broker-dealers with more than 160,000 branch offices. 

We also review the disclosures and financial statements of approximately 10,000 reporting companies. And we oversee transfer 

agents, national securities exchanges, clearing agencies, and credit 

rating agencies. Indeed, we oversee some financial firms that regularly spend many times more just on their technology operations 

than the SEC’s entire budget. 


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A budget of $1.4 billion would allow us to hire the experts and 

acquire the technology we need to effectively carry out our core responsibilities and to begin implementation of Dodd-Frank. Of the 2012 requested amount, we estimated that $123 million 

will be allocated to begin implementing the provisions of the new 

law. This funding request also will support information technology 

investments of $78 million, including vital new technology initiatives ranging from data management and integration, to internal 

accounting and financial reporting. It will permit the agency to develop risk-analysis tools to help us triage and analyze tips, complaints, and referrals. And it will permit us to complete a digital 

forensics lab that enforcement staff will use to recreate data of 

computer hard drives and cell phones capturing evidence of sophisticated frauds. 

Finally, it is important to note that the SEC’s fiscal year 2012 

funding request will be fully offset by matching collections of fees 

on securities transactions. Beginning with fiscal year 2012, the 

SEC is required to adjust fee rates so the amount collected will 

match the total amount appropriated for the agency by Congress. 

Because of this mechanism, SEC funding will be deficit neutral. 

I thank the subcommittee for your support and I look forward to 

working with you to improve the agency’s performance of its core 

mission, to implement our new responsibilities, and to continue 

protecting investors. And, I am, of course, happy to answer any 

questions. 

[The statement of Ms. Schapiro follows:] 


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Mrs. EMERSON. Thank you so much Chairman Schapiro. I am 

going to try to keep my questions to five minutes just because we 

seem to have a lot of folks here today. 

Our party is really trying to get a grip on spending and is very 

committed to reducing spending. While the SEC’s appropriation is 

offset by collections, we still need to look at all agencies in our efforts to reduce funding for ineffective programs and the like, no 

matter what their funding source is. 

So could you explain to all of us on the subcommittee here, number one, how would a reduction of the SEC’s appropriation to fiscal 

year 2008 levels affect the SEC? Do you believe that tax payer dollars are effectively being spent at the SEC? And what recommendations can you offer for more efficient and effective use of tax payer 

funds within your organization? 

Ms. SCHAPIRO. Sure. With respect to returning to 2008 levels, that year we had a $906 million appropriation. So it is about a 

$241 million funding gap. The way we would go about that would 

be to take the maximum non-compensation cuts that we can, including travel, expert witnesses, and information technology. Although, I have to say that I am not really in favor of cutting information technology to the bone. I think it is really critical for us to 

be successful in what we do. But then it would require that we 

likely have significant furlough or RIFS, or potentially office closings. 

The way we view it is after accounting for our normal attrition, 

going back to 2008 levels in 2012, assuming we do not go back this 

year, which would have, somewhat, more drastic consequences. 

About 740 FTE would have to be reduced. So in terms of a RIF, 

that would be something like a 1,000 positions. And if it were to 

be done through furloughs something like 50 days for the entire 

agency to be furloughed. It would have a dramatic impact on our 

ability to pursue our enforcement cases, to continue even our internal reform efforts, but also to survey the markets during this particularly volatile time, given our very complex market structure. 

We would reduce even further the number of examinations that 

we are doing of regulated entities now. We are only examining nine 

percent of the investment advisers; I would expect to see that cut 

very dramatically. 

So it would have serious consequences, I believe, for our core programs, putting aside Dodd-Frank, for which of course, we would 

have virtually nothing for the implementation of. 

Mrs. EMERSON. So what can you recommend? I know that you 

are doing your best to put efficiencies into practice. Are there other 

measures that you can take? Forget about the money piece of it, 

but are there other measures you can take with the budget that 

you have today to get done all of the responsibilities that you have 

been entrusted with. 

Ms. SCHAPIRO. There are things. We can go through an initiative, 

and in fact we will because it is part of the Boston Consulting 

Group report that was just issued last week, to rethink our priorities and, perhaps, reprioritize in some areas. But we are already 

making some hard choices. We would be making very hard choices. 

And we would be stopping doing things I think are really critical 

to investor protection and their confidence in the integrity of our 


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market. So if we have investment advisers with $38 trillion of assets under management and we are only inspecting nine percent of 

them, know we would have many fewer inspected and we would 

have significantly more assets that are at risk. 

But we can reprioritize in some areas; some things we cannot. 

Congress has decreed that we do certain things, and of course, we 

must try to do those. But even within reprioritization, we would be 

leaving some very, very big gaps in the regulation of the financial 

markets at a time when, I think, investors really question the integrity of financial intermediaries and even the integrity of our 

market structure after events like May 6. 

We can also continue to try to leverage more. One of my themes 

since I came on board two years ago has been to try to leverage 

private sector efforts. For example, in order to verify that the assets that an investment adviser says that they have in custody are, 

in fact there, we did a rule that says that investment advisers who 

custody with an affiliated broker-dealer have to get a surprise 

audit by a registered accounting firm. And that is a way for us to 

leverage third-parties to try to do more and take a little bit off our 

shoulders. The whistle-blower program: it is about leveraging 

third-parties to bring us high-value information so that we may be 

able to bring securities fraud cases and stop ongoing frauds. 

Mrs. EMERSON. You mentioned gaps. What gaps do you expect 

would not be filled? 

Ms. SCHAPIRO. Well I think if we were to go back to 2008 levels 

and potentially lose 1,000 positions from our staff of 3,800, we 

would have to give up significant examination responsibilities. Our 

two largest divisions are examination and enforcement; between 

them about 2,000 people. We cannot bring all the cases now that 

are out there. But we are bringing about 700 cases a year; that 

would be significantly reduced. Our ability to examine broker-dealers, credit rating agencies, investment advisers, mutual funds, 

where the vast majority of Americans have their personal savings. 

Our ability to monitor the exchanges and keep up with new phenomena, like high-frequency trading, would be severely impacted. 

Mrs. EMERSON. Thank you. Mr. Serrano. 

Mr. SERRANO. Thank you, Madam Chair. I will also try to keep 

it to as close to five minutes as possible, because we do have a lot 

of folks here that should participate. Again, Ms. Schapiro, the big 

issue here, to me, is whether or not Congress will fund DoddFrank. So, my question to you is, assuming for a second that some 

folks get their way and we do not, we cripple the effects of DoddFrank. Is the law still strong enough to take effect, to keep us from 

not falling into the same situation we fell into last time? In this 

country, we have a unique way of having some folks either rewrite 

history or forget. It will not be long, I assure you, before people will 

forget what caused this mess a few years ago. And so, no one will 

be asking any questions. If we cripple Dodd-Frank, if we do not 

fund it, is the law on the books strong enough to have an impact, 

or will we run the risk again of not supervising, not analyzing, and 

therefore having the same kinds of schemes and situations again. 

Ms. SCHAPIRO. Under our existing capability, we will get lots of 

the rules written for Dodd-Frank. We will not make the deadlines, 

for sure, on many of them. But for over-the-counter derivatives, for 


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example, which is the largest area of concern, we will get the rules 

written. But I really believe and I think we can look back on history and see evidence of this, an inability to inspect for compliance 

with the rules and to enforce the rules, ultimately means that no 

matter how strong the law is, no matter how strong the rules are, 

we will have non-compliance, because there is no penalty for noncompliance. Compliance has costs associated with it. Some firms 

will continue to do a good job and be compliant and I think some 

clearly will not, if there is no mechanism for enforcing compliance. 

When we look at programs like the Consolidated Supervised Entities Program that was started by the agency in the mid–2000s 

and disbanded by my predecessor, which was a voluntary program 

for regulation of the largest investment banks. One of the flaws in 

it, and there were many, was that it was a voluntary program. It 

was not really a good means for the SEC to enforce compliance, 

with the requirements of that program. As we know now, all of 

those investment banks are either gone or they have been converted to bank holding companies under supervision of the Federal 

Reserve. So, I think history tells us that it is important that we 

have the capability to follow up on compliance and enforcement. 

Mr. SERRANO. What is really interesting about this, and this is 

a total personal statement, is that we do have in this country right 

now two groups who are disagreeing with each other on cuts and 

how to handle these cuts. But interestingly enough, from what I 

have seen, on the side of those who want cutting, their constituents 

do not want another meltdown on Wall Street. And on the side of 

those who may cut with caution, also do not want a meltdown. So, 

if there is one issue that most groups agree on, it is that we cannot 

have that kind of lack of supervision again and lack of oversight. 

So let me just ask you one last question. A lot is said about 

bringing the levels down, back to 2008. But I think we need to 

know, that from 2005 to 2007 frozen or reduced budgets cut a number of employees and the SEC is just now approaching the levels 

for 2005. Given all that has happened between 2005 and today in 

the financial world, how did a reduced workforce affect the SEC 

over the past several years? I am talking now about that period 

when we were reducing rather than increasing. 

Ms. SCHAPIRO. Of course, I was not at the agency at that time, 

but I think that is when you saw the agency go from examining, 

for example, with respect to investment advisers, a significant portion of the population, down to very low numbers, in the single digits of the investment adviser population. We saw dramatic cutbacks 

in technology spending, which I think has been one of the things 

that has most surprised me in the time that I have been at the 

agency. I was at the agency from 1988–1994, under President 

Reagan and then President Bush, and served as a commissioner. 

When I came back, in 2009, I was really shocked to see that the 

quality of the technology had hardly improved in that period of 

time. I think, given the size of our markets, the complexity and 

their global reach, the agency being unable to do a lot of its work 

through the use of technology and analytics is very crippling and 

leaves us in a position to not be able to do the kind of job that the 

American people have a right to expect from us. So, I would say 

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duced and the capability to keep up with these very complex financial institutions was definitely hurt. 

Mr. SERRANO. Thank you. 

Mrs. EMERSON. Mr. Diaz-Balart. 

Mr. DIAZ-BALART. Thank you Madam Chairwoman. How are you 

doing? The SEC’s Proposal for Municipal Advisors appears to cast 

a really wide net as to who has to register. In addition to the appointed members of [inaudible] boards, et cetera. It looks the SEC 

believes that the requirement applies to traditional bank products, 

including deposits and loans. So if all those bank employees and 

appointed officials have to register, I am not sure how the SEC expects to monitor and examine all those activities and how it would 

not distract from your other critical mandates. 

Two questions on that, do you really think it is the best use of 

Commission resources to try to regulate bank activities that are already regulated by the bank regulators who are more familiar with 

those banks, and their activities, and how they do business, number one. And number two is, would not it just lead to banks being 

subjected to yet another layer, another set of regulators with the 

SEC imposing a regulatory scheme, a regime that is completely different than the one they are already subjected to under banking 

regulations already in existence? 

Ms. SCHAPIRO. Congressman, let me agree with you that we do 

not have the luxury or the resources or the desire to duplicate what 

other regulators are doing. And that I think also goes back to the 

leverage point. Where can we rely on our fellow regulators to pick 

up the slack? I will say on the muni adviser rule that we have gotten lots of comment, and the rule proposal is out for comment right 

now, and that we have cast the net in defining municipal adviser 

a little bit broadly. The statutory language is quite broad, but we 

are taking very seriously the comment letters, particularly with respect to the difference between appointed members of a public pension fund or a municipal hospital versus elected members and employees, and why was there a distinction made? And I appreciate 

that issue very much, and I think more was read into what we said 

than we intended in that regard, but we are looking very carefully 

at whether we may have cast the net too widely and taking the 

comments very, very seriously. 

Mr. DIAZ-BALART. I appreciate that, and I am glad to hear that 

you are still looking at that because I think it does lead to a lot 

of concerns. 

Ms. SCHAPIRO. Oh, absolutely, hundreds of comment letters yes, 

and from real people with real concerns because they volunteer 

their time on a school board. 

Mr. DIAZ-BALART. Well, it is also—well, it might even hinder 

your ability to do what you have to do, your core mission. So, anyways, I am glad you are looking at that. The 500 shareholder registration threshold, which I guess I just learned after a little bit of 

research, I guess under 1934 act has not been updated since the 

1960s and for obviously a substantial number of community banks, 

it is either a restraint or it really hurts their ability to loan. And 

it is tough on them for raising capital, et cetera. Either way, it acts 

as a restriction on lending and I think particularly for community 

banks, in particular it could hurt the economic recovery, so when 


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does the SEC expect to act to raise the threshold and will the SEC 

also act to raise a level of shareholders at which registered community banks can actually deregister? 

Ms. SCHAPIRO. The second issue I would like to get back to you 

on, I do not know the answer. We have been looking at the 500 

shareholder limit because it has obviously become very current in 

the last couple of months with the increasing trading activity of unregistered shares and it has been brought very much to light. I 

have asked the staff to come back to me with a recommendation 

with respect to the 500 shareholder limit. 

You are right it has been in law since the 1960s, the goal was, 

of course, to make sure that when a company had a certain number 

shareholders and a certain amount of following, it was providing 

public disclosure and information for all of those shareholders 

about the finances of the company so investors could make reasonable, well-informed decisions. It may be that this is one of those 

areas where it is due for our looking at it again. It is in the statute. 

Although how we interpret the 500 shareholder limit is in our rules 

so we have some flexibility with respect to that and we are looking 

at that. I would be happy to come back to you as we get closer. 

Mr. DIAZ-BALART. Please. And if I may Madam Chairwoman, one 

last question, and you have heard this one before. The issue of the 

Stanford Ponzi Scheme, there are a lot of victims, and many in 

Florida, South Florida, that are eagerly awaiting an SEC decision 

on their SIPC eligibility so that they can potentially recoup some 

of their lost funds. And as you know in Florida where we have a 

lot of retirees it has been a huge issue. So, would you make the 

16-month-old request for that determination a priority? 

Ms. SCHAPIRO. Congressman it is a priority. We have been working with the Stanford Victim’s Group and in fact, have not made 

a final decision because they asked us to keep the record open to 

provide us with additional information. I understand that late in 

January of this year we received significant new information from 

them, we are reviewing it right now and we will make it a priority. 

Mr. DIAZ-BALART. So you will be taking into account the recently 

released Stanford Group Forensic Accounting Reports which show 

that Stanford funds were stolen and not used to purchase securities. So you will have that? 

Ms. SCHAPIRO. We will take everything into account and speaking personally, I would love to find a way for this to work out well 

for the victims. But the law is our constraint and SIPC has quite 

different perspectives as well. 

Mr. DIAZ-BALART. Madam Chairwoman I have a number of other 

questions but I will submit those for the record. Thank you very 

much. 

Mrs. EMERSON. Thank you Mr. Diaz-Balart. Ms Lee. 

Ms. LEE. Thank you Madam Chair, good morning. First let me 

just say your leadership in strengthening the SEC has really been 

vital in maintaining strong and fair markets and in stabilizing the 

overall economy following the financial crises. And quite frankly, I 

think that $1.4 billion really is not quite enough to ensure that the 

SEC has the resources and skills and technology that you need to 

complete your mission given the size, the massive size, and the 

constantly increasing complexity of our markets. So let me ask you 


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a couple of questions as it relates first of all, to fines and fees that 

you have levied. Can you give us a sense of how much in fines and 

fees were levied by the SEC? 

Ms. SCHAPIRO. Sure. If we use 2010 as a benchmark, we had 

penalties ordered of just over $1 billion. That money goes to the 

Treasury, although some of that is actually returned to investors, 

but the bulk of that goes to the Treasury. We also assessed fees 

of $1.5 billion in 2010, all of which goes to the Treasury, so about 

$2.5 billion in fines and fees, an additional $1.8 in disgorgement 

does not go to the Treasury but goes back to harmed investors, was 

distributed in 2010. So, I think we are bargain. 

Ms. LEE. So the taxpayer, definitely, we are getting our money’s 

worth in terms of return on investment in the SEC. 

Ms. SCHAPIRO. I believe so. I know, as hard as we have worked 

over the last two years, with our new leadership team, we have 

more to do, there are efficiencies to find. We have a tiger team that 

is constantly going through and looking for pools of money that can 

be reallocated or used more effectively. But in terms of fees and 

fines, the SEC pays a very significant amount of money. 

Ms. LEE. And I suspect, I do not know but if your budget were 

cut, the assessment and the levying and the fines and fees probably 

would be reduced. 

Ms. SCHAPIRO. If we do fewer enforcement cases, there will be 

fewer fines, and under the 2012 provisions, our fees are automatically adjusted to meet out appropriated amount. 

Ms. LEE. Let me ask you as it relates to the Dodd-Frank requirement of the SEC to set up and Office of Minority and Women Inclusion to be responsible for all agency matters relating to minority 

owned businesses, diversity in management, employment and business activities. Can you give us an update on that and how closely 

are you working with the SBA and all other Department of Commerce to adopt the best possible practices and policies to implement and maximize the impact of this office? 

Ms. SCHAPIRO. Congresswoman we have posted the position for 

the head of that office. We did a nationwide posting. We have gotten 250 resumes. We are in the process of waiting for the re-programming authorization in order to actually set the office up, and 

in the meantime we have the functions, not all of them, but largely 

being done by existing staff. Once re-programming has been decided, we will go ahead and hire the head of that office. I would 

like that person to be involved in setting up our processes and procedures, and then depending upon budgetary resources, we will either hire additional people or we will move people from other parts 

of the agency into the function. 

Ms. LEE. Could you keep the subcommittee updated on the status? It is something that some of us are very interested. 

Ms. SCHAPIRO. Absolutely, I would be happy to. 

Ms. LEE. Thank you, and finally let me just ask you, in terms 

of some of the regulatory controls under Dodd-Frank as it relates 

to executive compensation; what impact have these new reforms 

been on executive pay and have companies changed their way of 

paying employees in terms of the connections between pay and performance across the financial services sector? 


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Ms. SCHAPIRO. Well there are a couple of different threads under 

Dodd-Frank. We just proposed rules, we and the FDIC, but we 

need to wait for the other financial regulators to join us on executive compensation clawback and deferral of compensation at the 

largest financial institutions, so those rules are not in effect yet. 

We have also done rules at the SEC that require enhanced disclosure with respect to executive compensation. Those pre-dated 

Dodd-Frank and went into effect last year and I think we saw generally better, more clear disclosure about compensation philosophy, 

so forth. And then the major Dodd-Frank piece of this is the Say 

on Pay Proposals which we will start to see play out over this 

proxy season, which is really just going to begin in the next month 

or so. So we have not yet seen how Say on Pay is impacting compensation programs yet. 

Ms. LEE. Yes, disclosure is one aspect of it which is fine. Again 

I am not sure if Dodd-Frank requires some actual regulation. 

Ms. SCHAPIRO. It requires that companies give their shareholders 

the opportunity to have an advisory vote on compensation and 

those are rules that are out now. And it requires that for the largest financial institutions, that all of the financial regulators jointly 

propose rules that would ensure that companies do not exacerbate 

or engage in excessive risk-taking through compensation programs 

that reward, essentially, risk-taking. We and the FDIC have done 

those rules for comment; the other regulators are following along. 

Ms. LEE. Madam Chair, let me just make one point for the 

record. I have legislation that I think would be a heck of a lot 

stronger in this environment, I know it will not pass but, I do not 

believe that taxpayers should pay for executive compensation pay 

over a 25 to 1 ratio. No more than 25 times what the average employee, or the lowest employee makes, to get a tax deduction from 

the federal government. And I do not think the public realizes that 

they do get tax deductions, these companies, by paying these employees this money. 

Ms. SCHAPIRO. And that is the third piece of Dodd-Frank, you 

have reminded me. There is a requirement; we have not done these 

rules yet. They are very complex to write. It requires that companies calculate a pay ratio for median employee total compensation 

versus the CEO’s total compensation. And by all that, included 

with every filing that the company does, and so we are working on 

those rules. As I say, there is complexity in the way the statute is 

written that we are trying to work through to do those rules. 

Ms. LEE. Thank you very much, Madam Chair. 

Mrs. EMERSON. You are welcome. Mr. Graves. 

Mr. GRAVES. Thank you, Madam Chair. Thanks for joining us 

this morning, and there seems to be some discussion about the 

Dodd-Frank legislation, and I guess I want to talk about that a little bit as well. I know there is a fine line between consumer protection and personal responsibility, and that is certainly a difficult 

challenge for you. And as we just think about the Dodd-Frank law, 

and oftentimes I guess I will say government overreaches, it does 

want to jump in there and provide too much protection or save the 

taxpayer from decisions that they are making; and Dodd-Frank, in 

my opinion, and I think in many others, is one of those overreaching pieces of legislation. And as we think about, I know there 


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are a lot of rules and things that have to be implemented from the 

commission, can you help us understand how long that might take 

to fully implement it? 

And partly because we know with uncertainty even in what we 

are doing here as policymakers, there is uncertainty in the marketplace, and it is holding up investment and cash is on the sideline. 

So maybe you could help us understand how long you think it will 

take to fully implement it. And then, in your opinion, when it is 

fully implemented, what impact does that have on the financial 

markets and maybe folks not investing where they may have previously. 

Ms. SCHAPIRO. I am happy to. As you know, Congressman, there 

are lots of statutory deadlines in Dodd-Frank that require us to go 

very quickly. I think in part, this is motivated by a desire to have 

certainty about what the regulatory framework would look like, 

particularly around areas like over the counter derivatives where 

there was no regulation at all; hedge funds to a lesser extent and 

so forth. So we have been working very hard to try to meet the 

statutory deadlines where we can, but where we have found the 

statutory deadline runs headlong into our ability to really do a 

good job in proposing a rule and really having sufficient consultation with industry and market participants and investors, we have 

taken the time to do that because we think that is really important; more important to get it right than to get it fast. We appreciate the need for the certainty that the ultimate regulatory regime, particularly for derivatives, will create for industry as institutions and individuals determine if they want to run a swap data 

repository; do they want to have a swaps execution facility; do they 

want to be clearing agencies; do they want to participate in this 

market as it is regulated? 

We have done lots of consultations, as I said, we have gotten 

thousands of comment letters, and we have tried to propose our 

rules in a sequence that makes sense for industry in order to comment on them. We are also going to ask the industry how much 

time, once rules are finalized, do they need to implement them. 

What kind of technology do you need to build to be a major swap 

participant and be connected to the markets that are clearing and 

trading? And then try to build in reasonable amounts of time for 

people to get ready and to make the rules effective in a sequence 

also that makes sense. 

So I cannot predict for you how long that will take. Most of these 

rules have to be done by July 21 of this year; many of them will 

be, but not all of them. And then we will have the implementation 

periods that will largely be driven by the practical realities of the 

industry being ready. And so I would imagine it could take some 

significant time beyond there. 

But they will have legal certainty once the rules are done about 

what is the world going to look like; do we want to be in this world, 

do we not? How do we structure our business to work in this? 

Mr. GRAVES. So it could be the next 12, 24 months of uncertainty, quite frankly, I guess. 

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cause there is some statutory certainty, also, specificity about a 

number of these things as well. 

Mr. GRAVES. Then what is your sense of money staying on the 

sidelines as a result of the new rules and regulations? You mentioned it is going to take a significant amount of investment in 

order to comply, potentially, by somebody who is in the marketplace with investment in new technology. 

Ms. SCHAPIRO. You know, I do not have a number for you, certainly, from our meetings, we meet with lots and lots of industry 

participants. There is interest in being engaged in this market, and 

so I think there may well be some less spending right now until 

it is clear what the rules will require, what the technology will require in terms of reporting, for example. I think that once there is 

clarity, people will be in this marketplace, and they will want to 

participate in it. 

What I see causing more money, frankly, to stay on the sidelines 

are events like May 6, which scared people when we had that dramatic 500 point drop in the Dow in a matter of minutes; it really 

frightened people. The money is coming back now, but from that 

period until very recently, we had net outflows from equity mutual 

funds virtually every week. So retail investors were nervous, but 

even institutional investors were nervous about the frailty and the 

fragility of our market structure after that period. And then, of 

course, world events are causing a great deal of uncertainty. 

Mr. GRAVES. Madam Chair, can I ask one more question? 

Mrs. EMERSON. Certainly. 

Mr. GRAVES. I would like to just get your opinion. Knowing 

where the debt is, the government, what we have as debt, and the 

tremendous load that that is, it is my understanding that when investors are investing in U.S. treasuries or notes, the bonds and 

such, that is taking money outside of the private sector. And right 

now, with $14 trillion of debt, the majority of that, what 65 percent 

of that or more, being the public debt, or what we would define as 

public debt, what impact is that having on the marketplace when 

we as a federal government are demanding so much in dollars to 

be invested in us? And there is only a finite amount no matter how 

fast they want to print it, there is still a limited amount. And yet 

it is not in the private sector being invested in new buildings or 

employees or products. 

Ms. SCHAPIRO. Well, the stock market has been reasonably 

healthy; I should not probably say that and jinx things. And I 

think that suggests that the markets are available for equity capital raising, we have not had a lot of IPOs yet, although that is 

picking up again. I think it is a better question for an economist 

than for me, but I think the way the SEC enters into that equation 

is to do our best to ensure that investors have the information they 

need so they can make the rational choice between a treasury security and a share of common stock and feel comfortable that they 

know everything there is to know about that company. They will 

take their risks, prices will go up, prices will go down, but they 

have all the information that they need, and the market structure 

will facilitate their selling that stock after they bought it and they 

want to get out of it at a reasonable price; at a price that is reasonably related to the market. 


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So to me, that is how I view our role in this. It is not so much 

to mediate between the competitive forces for where investors put 

their precious capital, but making sure that if it is in the equity 

markets, it is a stable marketplace and people have the information. 

Mr. GRAVES. And I appreciate that you cannot really give an 

opinion. I know you are right about the various markets there. I 

guess I am of the opinion, and I am sure many in this Congress 

are, that we would rather be in the private sector in the common 

stock and preferred stock and such. 

Ms. SCHAPIRO. I believe in our equity market. One reason I believe the SEC is such an important piece of the economic framework is our equity markets are absolutely critical to the future of 

our economy. If companies cannot raise money and investors are 

not confident about putting in their money, we will not create jobs, 

we will not grow. 

Mr. GRAVES. Great, thank you, Commissioner. 

Mrs. EMERSON. Thank you. I am going to go off Dodd-Frank for 

a little bit and just get back to some budget issues because we really do need to cover those. There is one thing that I want to follow 

up with you on: the request for increased personnel related to 

Dodd-Frank. You have asked for a 20 percent staff increase, and 

given the short amount of time that we have, you know, for the 

rest of this fiscal year, and trying to figure out how we are going 

to fund the government until September 30, this seems impossible. 

But given that, and looking at fiscal year 2012: do you have the 

capacity to actually hire that many people? 

Ms. SCHAPIRO. I believe we do. Actually we have strengthened 

our human resources function and Congress has given us some expanded hiring authorities that allow us to move more quickly than 

we have historically. We need to actually move aggressively utilize 

those. And we have, although I understand OPM has some disagreements with how aggressively we can utilize them. I do think 

it is a big number. There is no question. The total would be 780 

new positions, 584 FTE, so it is not a small number. But I think 

they are spread out over many different divisions and departments 

which gives us, also, the capability to have hiring managers in a 

position to get that number of people on board. 

I will also say that we have wonderful opportunities to hire right 

now. We have not been hiring except very selectively during this 

continuing resolution to fill very specific positions. But when we do 

go out we are able to get people with tremendous backgrounds in 

algorithmic trading or hedge funds or credit rating agency expertise. It has been really incredible to me to see the kind of talent 

we can bring on and have, again, very selectively during the CR. 

So I think we can do it. We also have a new chief operating officer 

who is very committed to the improvements of our systems and our 

capability to move people through the system. 

Mrs. EMERSON. You mentioned Boston Consulting and the report 

that they did. Going back to the staffing question, it summarized 

that you currently have 19 offices reporting directly to you and if 

we increase that with Dodd-Frank, it will be 24. Now I have 

worked in the private sector and I have had a lot of people report 

to me, but I have never had that many people. That would be, for 


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me, personally, a very tough juggling act. So I just want to ask if 

that, for you, is the most efficient way to operate. And perhaps it 

might be worth looking at having a deputy or two to help run all 

those people. So please talk about that a little bit. 

Ms. SCHAPIRO. Sure. I mean look, it is a big number. There is 

no question about it. Now, some of them are very small offices. The 

Office of the Chief Accountant is quite small, the Office of International Affairs is quite small. We have the five major divisions 

and the Examination Office which are very large. But it is a lot 

and I will say that it would be wonderful to have a little more flexibility than Dodd-Frank gave us with respect to the four new offices 

that will report to me, to perhaps have them report somewhat differently. Most all those functions that are contained in those offices 

are already being done elsewhere in the agency and reporting to 

different people. It would just bring them under me. And frankly, 

the intent was a good one. It was so they would have high level 

of visibility and support but, in fact, because it does give me a very 

large span of control they may not actually get more visibility and 

more support as a result. 

But we are working through all the Boston Consulting group recommendations and looking at where we can do some rationalizing 

of offices. So for example, we are going to put under the chief operating officer all the functions of the executive director’s office. So 

those will not report to me separately, they will report to the chief 

operating officer. And there are some other opportunities, I think, 

to streamline this a little bit. 

Mrs. EMERSON. I mean, you have a big job and you do need sleep 

occasionally. Efficiencies work. I know sometimes it is hard to do 

that and of course if Congress then requires people to report to you 

as opposed to you actually designing the most effective way to run 

your organization, I can imagine that can be difficult. I think we 

all should know better than to tell you precisely how to do something as long as you achieve the goals that are set out. With that, 

I am going to let Mr. Serrano ask questions. 

Mr. SERRANO. I was interested that you had people report to you 

but not that many. Now we report to 700,000. 

Mrs. EMERSON. Well there is that so I guess I probably had about 

25 people doing really different things. So technically they could 

have all reported to me at one time. But it was just easier to split 

it up with three people, so only three people had to direct report 

because I could not have managed. I was a lot younger then and 

I actually could not multi-task much better than I can now. 

Mr. SERRANO. Without a blackberry. Here is a concern, you spoke 

about IT and it almost sounded like you were willing to cut it but 

not to the bare bone. Maybe I did not hear you correctly, my concern there is that Wall Street firms and their lawyers are well prepared in that department and they certainly can outgun the SEC 

any time they wish even without some cuts. So what did you mean 

to tell us and how far are you willing to go? 

Ms. SCHAPIRO. I only meant that if we have to go back to 2008 

levels we will have to make tradeoffs between our personnel costs 

and our IT costs. Over 70 percent of our budget is personnel and 

IT costs. So in order to go back to 2008 levels, those are the two 

levers we have to pull to make really big differences and find that 


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$240 million in savings. I meant only to say that we have not made 

choices yet about how we would calibrate furloughs or RIFF’s 

versus IT cuts, but I would not want to take IT down to nothing, 

even under those circumstances because it is just way too important for us to be able to do our job. We do regulate firms that sometimes spend as much as $2 billion a year, $3 billion a year on their 

telecom and information technology costs compared to our relatively modest spending. 

Mr. SERRANO. Something like the Cardinals and the Yankees. 

You guys invest on pitching, we invest on hitting. 

Mrs. EMERSON. Well none of our pitchers are quite available at 

the rate we are going now. 

Mr. SERRANO. There are injuries, as the SEC can tell you. So on 

that issue, you have to understand that we never miss one hearing 

opportunity to mention baseball. 

Ms. SCHAPIRO. I know that. 

Mr. SERRANO. It is what keeps us sane. But Boston beat the Yankees, yes I am depressed. So we talk about IT and yes we need to 

support it and so on, but give us specifics. How will increased information technology help the SEC perform oversight of the complex 

markets that we have? 

Ms. SCHAPIRO. Sure, I am happy to do that. There are the systems that help us to do our jobs better internally. Case tracking 

systems and the capacity for our economists and our people who do 

market surveillance to have the analytics to review trading information and look for trends and patterns that are problematic. 

There are systems like the new TCR system, which I know this 

committee talked with our inspector general about, which helps us 

to bring in all of the tips and complaints and referrals that we receive in the agency, centralize them into one repository and allow 

everybody who is working on a particular matter to search that 

data to find what might be relevant to the case that they are working or the matter they are working on. And then to actually risk 

rank those tips and make sure the most important ones are being 

worked on first. 

And then there are systems like EDGAR which is how public 

companies get all their filing information to the SEC and the public 

accesses that data to understand what companies are saying in 

their 10–Ks and their 10–Qs. And we use that data to do our surveillance of public company disclosure. And there are systems like 

SEC.gov, which gets 18.5 million visitors a day. It has not been upgraded since it was launched in 1996, I believe. Yet it is a really 

critical tool for the public to access the SEC and the information 

that we have in the form of investor alerts, rulemakings, pronouncements, speeches, interpretations, everything that we are 

doing, and so that is a system where we really need to do a lot of 

work. And then we have systems that are critical to the integrity 

of the SEC’s operations and the Chairwoman mentioned this earlier, our financial capabilities. We had in our audit two material 

weaknesses in our controls over financial reporting, largely because 

of a lack of investment in our internal financial management technology over many, many years. It is completely unacceptable for 

the SEC to be in that position. We have made a decision to 

outsource that function to a federal shared service provider, the 


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Department of Transportation, but it will cost us money. It will 

cost us $13 million in 2012 to complete that migration to the Department of Transportation, but hopefully we will clear our internal weaknesses and have clean audit reports going forward. 

So, there are lots of different systems, whether it is Edgar Modernization for the corporate filings, SEC.gov, our case management 

and data management, internal systems or our financial reporting 

systems; they all help us do our job much better. And, of course, 

under Dodd-Frank, we are now going to have to register swap market participants, and municipal advisers and others and we need 

to build out the technology to do that. 

Mr. SERRANO. Let me ask you a question. During the height of 

the crisis, there were a lot of folks unemployed on Wall Street and 

not necessarily the bigger shots but some middle management 

folks. Did any of those folks come over to the SEC? And if so, was 

it similar to when you see Fox or CNN say, And we have this issue 

we are dealing with today and we have an expert here who was 

once involved on the wrong side of the issue and he will tell us how 

to do it or not do it. I mean, I am not a lawyer so I do not know 

if I am getting into any difficulties here or getting you into any difficulties. Did any folks come over? 

Ms. SCHAPIRO. Oh, absolutely. About 50 percent of our workforce 

has prior experience in the securities markets, and we have been 

the beneficiary of Wall Street’s lean times, quite honestly. During 

the last two years in particular where we were in a position to do 

hiring, we were able to bring in people with great expertise and 

talent, and one of the criticisms of the SEC has been that we are 

too far from Wall Street and we have not kept up. These people 

help us keep up. 

Mr. SERRANO. Thank you. 

Mrs. EMERSON. What really makes me nervous is all the flash 

trading, the algorithmic trading et cetera. Obviously you do not 

have a computer system that can monitor that. I do not know that 

you can monitor it anyway because it is too split second, but how 

much would it cost to upgrade your system to even be able to track 

this? 

Ms. SCHAPIRO. You know, we cannot and we probably should not 

be able to track this. But somebody has to be able to track this, 

so what we have done is we have proposed a consolidated audit 

trail that would require all of the markets, that are already 

surveiling their piece of the pie separately, to come to us with a 

plan and I hope we will finalize this rule in the next couple of 

months. Come to us with a national market system plan that 

would create a consolidated audit trail that would in fact give us 

an order by order, microsecond by microsecond audit trail for every 

transaction in the securities markets and ultimately we would like 

to be able to expand it to include the derivatives markets as well. 

After May 6, it took us four months to be able to reconstruct the 

market trading so we could reassure people that what had happened in our markets on that date, that it was not a cyber attack, 

it was not just a mistake, it was what it turned out to be in our 

report. And so this consolidated audit trail system will actually 

have to be paid for by the industry and the SEC will have complete 

access to the information. Now we will need tools with which to use 


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that data, and to be able to look for improper trading, to be able 

to reconstruct trading after a serious market event, but we have 

actually pushed to the private sector in a sense, the responsibility 

of self regulatory organizations, the responsibility to actually build 

the data repository and build the system that will have a genuine 

audit trail for the first time in the U.S. equity markets. 

Mrs. EMERSON. I am glad to hear that. 

Mr. SERRANO. I did not catch or understand why you said that 

you probably should not be involved? 

Ms. SCHAPIRO. Well we have to be involved, and we will set all 

the requirements and we will be deeply involved in what this looks 

like because it has to satisfy our standards for what market surveillance would look like. I meant only in the sense that in a time 

when there is not a lot of funding around if we can leverage third 

parties, leverage self regulatory organizations I believe that is a 

better approach for us. They will also have talent, expertise, and 

capability to oversee the extraordinary detail that will go into the 

building of a consolidated audit trail system. And of course it has 

to link all of their markets, so I think there is a logic to having 

the industry do this, but under very close oversight of the SEC. 

Mr. SERRANO. Thank you. 

Mrs. EMERSON. Since they already have the machines doing it 

anyway. Time for Mr. Graves. 

Mr. GRAVES. That is fine. You know, it seems like on every subcommittee, each agency comes before us and they all have great 

presentations, and yours has been fantastic as well and I appreciate that, and each time though it is asking for additional resources and because there are critical missions I know you are trying to accomplish and I think we all know the resources are limited 

and so we are looking for the efficient and effective ways to govern 

right now and I guess that is code words for less spending and 

being responsible to the tax payers. And I know, Chairwoman 

asked you about the 2008 levels, and that is a serious discussion 

I think we are all having right now. And so when it is brought up 

I know you do not take it lightly in any way, and I know it would 

not be devastating according to the words you used. 

Has the commission gone through an analysis of how it might be 

able to reach those levels in a comprehensive way, and not so just, 

you know, off the top of the head so much but as a agency they 

are comprehensively looked at and seen how they might do it? Or 

with any recommendations as to what we might do as a Congress 

to repeal authorizations or something that may no longer be necessary that you see as still burdensome, that we have overcome 

that error or whatever it might but just sort of a comprehensive approach to how we might reach 2008. 

Ms. SCHAPIRO. Well as you can imagine, we have been doing lots 

of contingency planning over the last few months, but we have not 

sat down and said if we have to lose 1,000 positions from the SEC 

we will definitively choose not to do the following five things and 

the positions associated with those. What we have done is we have 

asked all of our division directors to prioritize those functions that 

are absolutely most critical and there are some we think we could 

stop doing and nobody would really notice. Or we could push again, 

to self regulatory organizations or to other third parties. 


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But I cannot tell you that we have made the granular decisions 

yet, as well as how it would impact our technology investment 

going forward as well. Because for us, we do not do a lot of contracting, we do not do a lot of programs that can be shut down in 

the way that many Cabinet agencies do for example. For us it is 

going to always be a tradeoff between people and technology. There 

are efficiencies still to be gained at the SEC, I absolutely believe 

that and we are working hard to do that. But I do not believe there 

is a lot of money being spent on non productive functions. We will 

make very, very hard choices that I think have the potential to impact investor confidence in whether our markets are sufficiently 

regulated. 

Mr. GRAVES. And I think we as a committee would really like to 

work with you on that. You know, unfortunately, we will be put in 

the position to make some of those decisions for you if we are not 

given some of those recommendations as well, because regardless 

of any input we get from the various agencies the resources are 

still limited and there is only so much that we can apply toward 

your purpose and mission. So I would certainly encourage you to 

work with us and look for those opportunities in which maybe you 

are performing a task that is no longer necessary, that is still 

something that is going on and is required to be funded because 

law says you must carry out that task. But maybe you do not see 

that its purpose is necessary. 

Ms. SCHAPIRO. And there are some of those. I mean, just to give 

you a quick example, under Dodd-Frank, we are required to examine every credit rating agency once a year. That is without regard 

to the risk that they might be presenting to the financial system, 

or to investors, or to companies. And our view would be it would 

be better for us to do our risk analytics and decide, yes, this one 

needs to be examined every year, but this one, maybe every three 

years, is good enough. So there are some small examples, I do not 

think they are huge, but there are some small examples where the 

constraints of the law might be loosened in a way that would give 

us more flexibility to deploy our resources. 

Mr. GRAVES. Right. Well, thank you. Thank you, Chairman. 

Mrs. EMERSON. I want to bring up an issue that I know is not 

pleasant. But it has to do with rent, and leasing, and inefficiencies 

that might exist within the SEC’s office that performs leasing for 

you all. Obviously, I am referring to the Constitution Center lease, 

and the fact that, as a result of us passing Dodd-Frank, and the 

anticipation that funds would be forthcoming, I assume, you all 

went out and leased 900,000 square feet of space at Constitution 

Center. And yet it was not filled. And then there were other facilities that were not as well. And so, talk to us a little bit about how 

you are revamping this whole process, because there is nothing 

that is more frustrating to us than to know that there are 300 

workstations somewhere, with all the equipment, and no people, 

and no budget to pay for it. 

Ms. SCHAPIRO. Well, that is not the case right now. There are not 

300 workstations with no people. But, as you know, Dodd-Frank 

authorized doubling of the SEC’s budget over five years, and gave 

us very, very significant new responsibilities. And we have to have 

people to do those responsibilities. We also have to plan for our 


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space needs in advance because the time it takes to fit out a building, and particularly to install technology and telecomm, is not 

something we can turn on a dime to do. 

We did lease the space when it became clear that we might not 

have a budget; we very quickly released 600,000 square feet to selffunded agencies, FHFA and the OCC. So I think we have done the 

very responsible thing there. We still have the 300,000 square feet, 

and we are, obviously, assessing our needs, and when we have clarity around the budget going forward, we will do what we need to 

do to continue to shed that space if that is what is required. But 

we moved aggressively because we had huge responsibilities coming, and an expectation from the authorization. 

Mrs. EMERSON. Do you go through GSA for leases? 

Ms. SCHAPIRO. Currently we do not. And I should say more 

broadly to your question, as you know, the Inspector General is 

looking at our leasing functions, and I am looking forward to his 

recommendations for improving that area. And again, I would mention, we have a new chief operating officer, who is experienced, not 

just in technology; he came from Capital One, but also with respect 

to issues like this. And I think we will be able to implement the 

IG’s recommendations and move forward. 

Mrs. EMERSON. Do you know how much one square foot costs at 

Constitution Center? 

Ms. SCHAPIRO. I do not know off the top of my head; I would be 

happy to provide that information to you. 

Mrs. EMERSON. I would appreciate it, because prices all over D.C. 

are crazy. But I had a meeting with somebody who happens to be 

in office management, or development, I do not know what you call 

it, but they own the buildings and they rent them out. And he told 

me that the average is somewhere in the $58 range, but it can go 

up to $94 if you are in a prime location. So I am just curious, and 

if you all would get back to me on that. 

Ms. SCHAPIRO. More than happy to do that. 

Mrs. EMERSON. I would appreciate it. And I understand, on the 

one hand, the need to anticipate. On the other hand, perhaps you 

had more faith in us than we had in ourselves for getting things 

done in a quick fashion. 

On the issue of financial reporting, the GAO report issued in November of 2010 said, in essence, that since 2004 you all had continually struggled with issuing clean financial statements. I know you 

addressed that, just for a moment before; and so given the fact that 

you do sophisticated monitoring of financial markets, it is a little 

embarrassing. 

Ms. SCHAPIRO. It is more than a little embarrassing. It is not the 

right result for the SEC, and I actually announced it to a very 

large conference of auditors and accountants, that this was the result of our annual audit, because I think it is very important that 

we own up to it, and own up to the fact that over many years there 

was no investment in our financial management systems. They 

grew with lots of workarounds, and bolted on systems, that overtime, just became unsustainable. 

So the decision we have made, and I really believe it is the right 

decision, because this is not going to be a core area of focus for us, 

is to outsource this to a federal shared service provider. We will 


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use Department of Transportation; that the GAO uses as well. And 

we made the decision, we have a new CFO, and a new Chief Information Officer as well, and we collectively made the decision that 

rather than take on the risks of trying to build a new system ourselves, and deploy that, that we should go with something that is 

basically tried and true. And I think it is the right decision. 

Mrs. EMERSON. So, how does the financial part of that work? The 

Department of Transportation charges you for that service, and it 

is a kind of interchange between agencies? 

Ms. SCHAPIRO. Yes. My understanding is that it will cost us about $5 million a year, annually, after we have made the switch 

over to DOT, which should happen by April of next year; so within 

the next year. The costs are $13 million in 2012 and $12 million 

in 2013, so it is not an inexpensive undertaking. But at the end of 

the day we will have a financial management system that works 

and remediates our internal weaknesses. I fear we could spend a 

lot of money to try to recreate the wheel, and maybe at the end 

of the day, not have a system that is tried and true. 

Mrs. EMERSON. And could cost you easily that much. 

Ms. SCHAPIRO. Exactly. 

Mrs. EMERSON. Okay. I think that, you know, sometimes it is 

why we invent the wheel, if you will. 

Ms. SCHAPIRO. Right. Exactly. To me it was the responsible thing 

to do, for the taxpayers. 

Mrs. EMERSON. Yes, I mean, so DOT actually has the system and 

then you would just replicate it. 

Ms. SCHAPIRO. They run the systems for multiple agencies. 

Mrs. EMERSON. Oh, I see. Okay. 

Ms. SCHAPIRO. They do it for GAO, they do it for CFTC; they 

have been designated by OMB as the service provider to other 

agencies, of financial management systems. 

Mrs. EMERSON. Okay. Thank you. Mr. Serrano. 

Mr. SERRANO. I will submit the rest for the record. Part of what 

the SEC provides to the financial markets is confidence that a powerful watchdog is providing the proper amount of oversight to the 

market. With the proposed H.R.–1 Bill, and this series of two to 

three week continuing resolutions, is the SEC able to provide that 

level of confidence in such an uncertain legislative climate? 

Ms. SCHAPIRO. I think that, you know, H.R.–1, while certainly 

not having as dramatic an impact as going back to 2008, would still 

impact the agency’s ability to fulfill even its core functions. Operating as we are now, on the CR, we are not hiring, even though 

there are good people available for us to hire. We have cut back 

our investments in technology; we have spread them out over more 

years. We have cut back our examiners’ ability to travel. And, you 

know, importantly, we are really, feeling the impact on our capability to engage, for example, with industry, or with foreign regulators, at a time when Dodd-Frank coordination is so critical with 

foreign regulators. We cannot spend the money to send people back 

and forth to Europe and to Asia, to really be working on coordinated rule sets. 

So, I think if we were to go back to the numbers in H.R.–1 we 

would see, obviously, even more tightening of the belt: fewer enforcement cases, fewer examinations, less travel, and less techVerDate Mar 15 2010 05:43 Jul 07, 2011 Jkt 099011 PO 00000 Frm 00136 Fmt 6601 Sfmt 6602 E:\HR\OC\A999P2.XXX A999P2

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nology investment. We are impacted now, that would clearly impact us more. 

Mr. SERRANO. When we had the Inspector General here, the Inspector General remarked during his testimony that the SEC is in 

a much better position now than it was when he became Inspector 

General in 2007. So you are to be commended for that turnaround. 

What are your next goals for the agency, except in addition to staying alive? 

Ms. SCHAPIRO. Staying alive is good. You know, we have an entirely new leadership team across the entire agency. And they are 

incredibly talented people. They are working collaboratively together and we have to continue to instill in our culture that investors come first and collaboration, cooperation with our colleagues 

internally, and in other agencies, and continue to make that part 

of our DNA. We have to always continue to be willing to remember 

the lessons of the past. We talk about Madoff a lot at the SEC, because we need to remember that the agency’s failures cause tremendous harm. We need to continue to embrace those lessons of 

the past failures. 

And so my goal is that we become more agile, that we continue 

to recruit different kinds of skill sets and different kinds of talent 

to the agency, so that we are better able to connect the dots and 

understand what is going on on Wall Street, and throughout the 

financial markets that might impact investors. We could prevent 

more harm, which would be a wonderful legacy, and not just redress the harms after they have been exposed. So we have a lot of 

work ahead of us, a lot to do, but we have an incredibly engaged 

senior leadership team now. And I am pretty optimistic that we are 

going to continue to make real strides. 

Mr. SERRANO. I should leave it there, for my part, but let me ask 

you a question: Do we know everything that we should know about 

the people, the groups, that were harmed by Madoff? It even 

reached the baseball team in New York. Where does it end? 

Ms. SCHAPIRO. I think there is quite a lot of information out 

there as a result of the efforts by the SIPC trustee, and of course 

the SEC and the Justice Department have brought multiple cases 

in this regard. So I think it has been pretty transparent. 

Mr. SERRANO. All right. Thank you so much. 

Mrs. EMERSON. I have a bunch more questions and I know Mr. 

Womack wants to get back here. Oh, he is not going to make it, 

after all? Okay, well I know he will have some questions to submit 

for the record. Will you just go over, for Mr. Serrano and I, and for 

the record here, talk a little bit about all of the rule-making that 

you have to do as a result of Dodd-Frank. Explain, a little bit, 

those rules that you have to coordinate with the Commodity Futures Trading Commission, and how that whole process will work. 

Because I know that there is some frustration on the part of colleagues that the SEC is taking too long to do the rule-making, or 

implement the rules, but, quite frankly, I believe in your philosophy that you have got to get it right and that is more important 

than hurrying. 

Just explain, because the complexity of it is enormous, as is the 

impact if you get it wrong, which I think would have a very negative impact on the market. 


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Ms. SCHAPIRO. Sure. Well, we have some rules that we are doing 

jointly with the CFTC. But all the rules in the over the counter derivative space are at least in close consultation and collaboration. 

And I think both of us believe that, to the extent market participants are going to be both in their world of OTC derivatives and 

our world of OTC derivatives, we need to make the rules as synchronous as possible and as consistent as possible, because we do 

not want institutions to incur unreasonable costs trying to comply 

with two sets of regulatory requirements. So we have worked very, 

very closely together. We have coordinated very, very closely. Many 

of the rules we have proposed are essentially the same. 

But there are a bit in number where we have taken a different 

approach than the CFTC, in part based on the nature of the small 

piece of the OTC derivatives market we have responsibility for, the 

securities base swap market is different, for example, than the interest rate swap market, which is enormous and very liquid. 

And some of the differences really come from the fact that we 

just have different historical statutes and philosophies about 

things. 

We have gone out for comment on more than a dozen rules. We 

have reopened some comment periods, in fact, where we have gotten interesting comment letters, or there are other approaches. We 

have sought cross comments in our rule proposals. So if we have 

proposed something, we have asked. Did you think the CFTC has 

done it better? Yes, no, why? What would you do differently? 

And we have had many, many meetings, and we in fact held four 

round tables together where we brought industry in to talk through 

the different rule sets. As we come to final proposals we will need, 

I think, to work very hard to try to get these rules to be the same 

as much as we possibly can. And that is the challenge that is before us right now. And, then we need to also phase them in in the 

same way so that industry is meeting one set of deadlines, not two 

different sets of deadlines. 

Mrs. EMERSON. Are there some things that we in Congress need 

to do to help clarify some of the requests or requirements that we 

imposed, I mean, within the rule-making process. Obviously, you 

are the expert at what you do, we are not necessarily the experts 

at what you do; and therefore, something that sounds like a good 

idea might not, in reality, be workable. Are there things that we 

can help you with this? 

Ms. SCHAPIRO. I was going to say, we are getting a record number of comment letters from members of Congress, at least in my 

experience, over the last couple of months, explaining what was intended, or what was meant by particular provisions in Dodd-Frank; 

and that is actually extremely helpful to us. But I think we are trying to work things through the rule-making process as best we can. 

Where there are issues, or where we think there really is a necessity, potentially, for change, and I can think of one in the OTC 

derivatives area. There is a requirement that foreign regulators 

have to indemnify a swap data repository for information that it receives. Most foreign regulators cannot indemnify; we certainly 

could not indemnify a foreign swap data repository if we needed information from them. And we are going to see if we can work this 

through, somehow, through exemptive and other actions, but if not, 


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we may well come back and say, this is a provision that will make 

it very hard for us to work collegially with foreign regulators. And 

it may also put them in the position of forcing us through the same 

hoop in getting information that we might need from their repositories, so that is just an example where we may well come back. 

Mrs. EMERSON. Speaking of foreign regulators, I mean, obviously, 

so much of what you do, is at a global level and the global marketplace needs to more or less be on the same page. Are you finding 

good cooperation with your counterparts? 

Ms. SCHAPIRO. There is great cooperation, I would say. Of everybody, I would say the United States is leading in the derivatives 

space, less so in compensation and some other areas. But it is very, 

very important for us to stay very closely tied to what foreign regulators are doing, because we do not want to create artificial opportunities for regulatory arbitrage, or see industries move from one 

jurisdiction to another simply because one regulator is far ahead of 

the others. 

To date, the G20 countries are talking about the same kinds of 

rules and the same kinds of protections built into their regulatory 

system for derivatives as we are, so we remain very confident at 

this point, but we will be watching closely. And, as well, that will 

go to the implementation periods. 

Mrs. EMERSON. Mr. Serrano. I may just ask a couple more. 

Mr. SERRANO. Ask as many as you want. 

Mrs. EMERSON. I know, I know, but I do not want to keep everybody, especially if Mr. Womack is not coming back. I do have a very 

short question, and then I am going to ask something else that is 

just something that is more annoying than anything else, perhaps, 

and it has to do with the Facebook private sales. Only because that 

would have been one stock that would have been fun to buy one 

share for my grandchildren, just because it would be a fun thing 

to do. 

And I know that a lot of Americans were upset that Goldman 

chose not to allow American investors to buy stock in Facebook’s 

stock offerings. Some have argued that regulations have forced the 

capital formation process offshore. In this case, Goldman actually 

marketed sale of shares to savvy, large scale investors, not smaller, 

less sophisticated investors like me. And so, while they were able 

to collect fees at Goldman, American investors were not able to invest in an American company. I mean, how do you all balance protecting investors while at the same time not depriving them of opportunities to invest? 

Ms. SCHAPIRO. Well you know, the basic requirement is that securities have to be registered to be sold publicly, and there needs 

to be financial reporting, unless there is an exemption from that 

requirement. And Goldman proceeded, I believe, on the basis that 

this would be a private offering to large players without a general 

solicitation. And then when the media frenzy erupted, their concern 

was they might not be able to satisfy the requirement that this was 

not a general solicitation. 

So in light of that, I have asked the staff to come back to me 

with some recommendations on whether we need to look at the requirements of our exemptions. When these exemptions were written, nobody thought about media frenzy being the sort of thing that 


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would tip the balance into whether you were engaged in a general 

solicitation or a truly private offering. And so we are looking at this 

issue very closely. We recognize the frustration that people felt. On 

the other hand, we do have to balance it with the need for people 

to have current, reliable financial information if they are going to 

buy shares of companies. 

Mrs. EMERSON. And I do agree. It is just that it was frustrating. 

Ms. SCHAPIRO. Understood. 

Mrs. EMERSON. Let me just ask you about municipal securities. 

Primarily because I know that you have been, we all have been, 

looking into the issue of the safety and transparency of the muni 

bond market, and that you conducted a number of field hearings 

on the issue last year. So, if you could answer these few questions. 

First, how does the SEC propose to balance the importance of this 

financial instrument for cities and States with the importance of 

protecting investors? And while you do not have direct authority to 

require financial disclosures before municipal securities are issued, 

how does the SEC monitor these securities currently? 

It is worrisome, given all of the stress we are seeing today in 

States and in cities, with regard to pensions and financial obligations. So it does concern me that we may be potentially selling 

these bonds with the possibility that a town or a city might go 

bankrupt. I realize that traditionally nobody thought that that 

would happen, but, as I said, with pensions not fully funded, this 

becomes a little problematic. So I would just like to hear your 

thoughts on that. 

Ms. SCHAPIRO. Well, as you point out, we do not have the ability 

to tell municipal issuers what they have to disclose or when they 

have to disclose it. We do get a reasonable amount of disclosure out 

by putting burdens on the broker-dealers who are going to sell the 

municipal securities to make certain information available. We 

have actually increased that in my two years at the SEC to require 

that even more information be made available. But we are reaching 

the limits of the authority that we were exercising over brokerdealers to do that. 

So, as you point out, we started a series of field hearings last 

year under Commissioner Walter’s leadership, to try to bring 

issuers, investors, commentators, academics, everybody together, 

around the country, to talk about the issues with respect to the 

municipal securities market, and what could the SEC do that 

would get the balance right and protect investors in this, frankly, 

$3 trillion market, which is really, largely an individual investorheld market. And we had to suspend those because we didn’t have 

the travel budget, but I am hoping that we will pick those up again 

later this year. And we did get a couple of them in, and they have 

been enormously valuable. And we have also been inviting people 

to Washington to come and talk with us about it. 

We have also done a lot in enforcement. We created a specialized 

group in our enforcement reorganization to focus on municipal 

issues. That group brought the first case against the State of New 

Jersey for inadequate disclosure. And they have a number of investigations going on around the country. One of the things we have 

seen from our enforcement actions is that it is having the effect on 

other state and municipal issuers to go back and look at the quality 


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of their disclosure, the timeliness of their disclosure, the accuracy, 

the fullsomeness, to see if they can make improvements. And that 

is a great result from an enforcement case. We didn’t levy a fine 

or anything, we didn’t want to burden the taxpayers of New Jersey, 

but we wanted to make the point that you have to be truthful and 

you have to be honest in the disclosure that you do. 

My view would be that we get through the bulk of Dodd-Frank. 

We’d like to come back to Congress and talk about whether there 

should be some more direct authority at the SEC with respect to 

the content of disclosure by municipal insurers. And the way we 

monitor it is largely through the MSRB, which is a self-regulatory 

organization that we leverage that runs the database for municipal 

disclosure. 

Mrs. EMERSON. This will be my last question, and then I’ll submit the rest of mine for the record. Because you referred to credit 

ratings agencies and perhaps the need to keep your hands off 

them, per-se, that is not how you said it, but that was the gist I 

got. But on the other hand, many people have said that part of the 

whole financial meltdown was due to the fact that the credit ratings agencies, or companies, were too invested with some of their 

clients, and not vigilant enough, if you will. And so, I am curious 

why they have not, in the past, been subject to the same expert liability standards that accountants and lawyers who make statements on security prospects would have been subject to. 

Ms. SCHAPIRO. My point earlier was not that we should not be 

regulating them. I believe we should and that we have new tools 

under Dodd-Frank. Just that the statutory requirement that we 

analyze, examining every single one of them every year might be 

a little bit inflexible. 

Mrs. EMERSON. OK, I misunderstood. Thank you. 

Ms. SCHAPIRO. But the provision 436G in Dodd-Frank that would 

repeal the statutory provision that shielded them from expert liability is one we are wrestling with right now, because we do not 

want it to create issues, particularly for the asset backed securities 

market. I do not really know the historical reasons why credit ratings agencies did not consent and face expert liability. I would be 

happy to get back to you on that. I am just not recalling. 

Mrs. EMERSON. Perhaps we should ask the authorizing committee to give us the answers to that, or look into that. I would appreciate that. That is certainly problematic to some extent. 

Ms. SCHAPIRO. Well, the issue we face now is that they are refusing to consent, so that the ratings cannot be included in the registration statement, and that makes it very difficult to sell the securities in the public market. And so, we are trying to get the balance right. But we are going to move forward on that provision. 

Mrs. EMERSON. Thank you, I think it is pretty necessary to do 

that. Joe, do you have any closing comments? 

Mr. SERRANO. Yes. Please do not cut them. I know. That is a 

Congressional decision. 

Mrs. EMERSON. Over my pay grade. 

Mr. SERRANO. Just, my closing comments is that I really believe 

that they need every opportunity, the Commission does, to carry 

out its function, and put in place Dodd-Frank, and in the process 


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we will all be better for it. If not, then we just wasted a lot of years 

and didn’t learn anything from the last meltdown. 

Mrs. EMERSON. Mr. Yoder is here, and so, let’s filibuster a couple 

of minutes and talk about baseball teams so he can get organized 

to ask his one question. So, is St. Louis ahead of the Yankees in 

the standings? 

Mr. SERRANO. I didn’t even know St. Louis was still in the 

league. 

Mrs. EMERSON. Oh, Joe. Well, listen, are you going to opening 

day? 

Mr. SERRANO. No. 

Mrs. EMERSON. I am going to try to. Let me just let Mr. Yoder 

go ahead, and thanks for getting here. 

Mr. YODER. Thank you, Madam Chair, and I actually was distracted by your conversation, because I actually wanted to join you 

in that conversation. 

Mrs. EMERSON. Because he is a Royals fan. 

Mr. YODER. A long-suffering Royals fan. 

Mr. SERRANO. But you gave up David DeJesus, right? 

Mr. YODER. We are a farm team for a lot of the other national 

teams. 

Mrs. EMERSON. Let me just say that you really do have a great 

farm team, though, I think. I mean, they are terrific. They are terrific. But it just seems like they are better than the division. 

Mr. YODER. That is true. That is true. Last time we won our division, I believe was in 1994, when the strike ended the season early. 

Mr. SERRANO. If I am not mistaken, you guys had the first baseball academy, right? 

Mr. YODER. I’ll take credit for that. I am not sure. 

Mr. SERRANO. A thousand years ago. And you know who went 

there? Bill Richardson. 

Mrs. EMERSON. Really? How come he never played on the Congressional baseball team? 

Mr. SERRANO. He did. He was a great hitter. Could not run. 

Mr. YODER. Thank you, Madam Chair. Ms. Schapiro, I appreciate 

you being here today, and I apologize for coming in here towards 

the end, but I did have a couple of questions for you. One is for 

very specific and it is related to complex minerals. 

Ms. SCHAPIRO. Conflict. 

Mr. YODER. I am sorry, conflict minerals. Pardon me. And I have 

had some concern raised, and I am apologizing if this has already 

been discussed, by a company in my district related to what they 

believe is a very difficult and onerous provision that would require 

them to have to understand the history of a mineral that has gone 

through so many different entities, that they feel it would be impossible for them to use it at the very trail-end. And the question 

they have that they wanted me to ask you is related to a potential 

de minimis provision. Could you maybe discuss that a little bit? 

And I might have a follow-up question. 

Ms. SCHAPIRO. Sure. We have a proposal out for comment right 

now on conflict minerals, and this relates to certain enumerated 

minerals in the statute that come from the Democratic Republic of 

the Congo, or the surrounding area. Our rule proposal is out, which 

would set forth the requirements for companies that use these parVerDate Mar 15 2010 05:43 Jul 07, 2011 Jkt 099011 PO 00000 Frm 00142 Fmt 6601 Sfmt 6602 E:\HR\OC\A999P2.XXX A999P2

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ticular minerals in their products to do due diligence about the 

source of the minerals, and provide a due diligence report if they 

are not conflict-free, or they cannot determine whether or not they 

are, and have an audit of that report. I do not believe, and I would 

like to get back to you on this specifically, that the statute has a 

de minimis exception in it, and I do not honestly recall whether we 

made any proposal or asked for any comment with regard to a de 

minimis exception, but my recollection is that it is not contained 

in the statute. 

Mr. YODER. Well, I appreciate that. I just want to share with you 

some concern from American companies that are having to compete 

globally. And we all share the same interests here in creating jobs 

in the United States, and I know you do as well, and I just want 

to make sure you are aware that there are some companies that 

use a very, very small amount of these minerals, a very de minimis 

amount, and that it would be extremely arduous and difficult for 

them, and a high cost would make them less competitive and affect 

their ability to create jobs and get the economy back on track. 

Ms. SCHAPIRO. And you should know that we have met with 

many companies to talk because these are all important minerals. 

It includes gold, coltan, and a number of others that are really critical to the manufacture of electronics, as well as jewelry and other 

things. So, we have met with many companies, and we have gathered very broadly their input, and we will take it very seriously. 

And I would be happy to come back to you with further thoughts 

on that. 

Mr. YODER. Would you, please? And particularly with electronics, 

where you might be using a minuscule amount, but the effort that 

it would take to understand that whole process, I think, is overly 

burdensome for some of these companies. 

And then I just had a couple general questions that small businesses ask me all the time, related to the fees they pay to the federal government and various agencies, and I wonder if you would 

comment on the status of all the different fees that businesses are 

paying to the SEC. And are there ways in which we can alleviate 

some of those to help the pressure on business owners? And then 

the other question would be related to just general regulations and 

the President’s call for each agency to go through and review, and 

modify, and change regulations such that they are not burdensome 

and onerous. And we talked about one, the conflict minerals one. 

What is your agency doing specifically in that regard? 

Ms. SCHAPIRO. The executive order does not actually apply to the 

independent agencies like the SEC. But that said, we have said 

that while we do much of what is already sought in the executive 

order: the cost-benefit analysis, trying to make accommodations for 

smaller businesses where we can with delayed implementation periods, or delayed compliance dates, and so forth, or exemptions. We 

are very active, and have been, over the last couple of years, looking at that, as well. But we have said that we want to go back. We 

are about to form a small business advisory committee. I have 

asked our commission to approve our doing that and going back 

and looking at rules that have been on the books for a long time 

to see whether there is small business relief that the SEC can 

make possible. So, for example, on regulation A offerings one of the 


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ideas on the table is raising the limit, so more money can be raised 

with fewer requirements. We actually have come up with many 

ideas that we hope to address with our advisory committee once it 

has been put into place. So, while the executive order does not 

apply to us, we are trying to act as though it does because we think 

it is just a good practice. 

With respect to fees paid to the SEC by small companies, there 

are of course some fees related to securities registration, when you 

go public or your offer stock, but I am not aware of other fees. 

Again, I would be happy to supplement the record with that. But 

unlike other agencies, we do not have a lot of programs that I 

think would generate fee payments to the SEC. 

Mr. YODER. Do you generate your resources, then, from tax dollars, or are you entirely fee-based? 

Ms. SCHAPIRO. Well, we are fully appropriated by Congress, obviously, since we are all sitting here, but the SEC’s budget is covered 

by a transaction fee that is paid by the self-regulatory organizations to the SEC, and that is generally, I believe, passed on, ultimately, to customers. It is a fee on every stock trade, as opposed 

to a fee directly on businesses. And it is two cents per $1,000. 

Mr. YODER. And I have not had a chance to review your comments, but what is the SEC doing in terms of reducing expenditures, and trying to find ways to become more efficient in this economy in which resources are obviously very scarce? 

Ms. SCHAPIRO. Well, living under a continuing resolution, after 

two years of growth, we have had to significantly cut back on a 

number of activities, and try to reprioritize as best we can with the 

dollars that we have. We have a team under the leadership of our 

chief operating officer that has been going through and looking for 

all the places we are spending money less efficiently or less effectively than we think we could, trying to redeploy those resources 

to higher and better uses throughout the agency. We are also trying to leverage the efforts of third parties where we can, whether 

that is accounting firms, or whistle-blowers, or self-regulatory organizations. 

Mr. YODER. Do you have examples on where you have made reductions? 

Ms. SCHAPIRO. Sure. 

Mr. YODER. Anything you want to highlight for the committee? 

Ms. SCHAPIRO. This year we zeroed-out bonuses. We cut travel by 

10 percent. We have delayed our technology spending by a significant amount. I would be happy to provide the actual dollar numbers, but we have reduced our security guards; we have reduced 

our overtime pay; we have reduced the use of expert witnesses 

even in our own enforcement cases, and consultants; we have eliminated the summer intern program; we have eliminated the student 

loan repayment program. A number of efforts we have taken. 

Mr. YODER. Okay. Well, I appreciate that. I hope you continue 

to go down that road. And certainly, I want to follow-up with you 

again on that conflict minerals issue. 

Ms. SCHAPIRO. I am sorry. I said we eliminated the summer intern program. I think that is targeted. I do not know that we have 

actually done that, so let me get back to you. 


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Mr. YODER. Well, keep doing what you can do to reduce spending 

and keep costs low for business owners, and certainly, as well, on 

the regulatory side. As you take comment, it is my hope that you 

will keep an eye towards helping our innovators and entrepreneurs 

in the country be as successful as possible, and that our regulations 

are such that they do not create onerous burdens that make our 

U.S. companies less competitive in the global marketplace. So 

thank you for your comments. Madam Chair, I yield back. Thank 

you for the time. 

Mrs. EMERSON. Thanks, Mr. Yoder. Chairman Schapiro, I really 

want to thank you for being here today, and thank you for undertaking the enormous job that you have that is probably quite intimidating to most people. And you do a very good job at it. And 

I know that you have had many, many messes to clean up, and you 

are going about doing it in the right way. And I also appreciate the 

fact that you are making efficiencies in some things, and I also understand the great need for you to be funded to the maximum extent possible in other areas, because of the nature of the work that 

you do. 

I may challenge my good friend, Mr. Serrano, on your statement 

that, I believe you said that the financial crisis was in fact perhaps 

mostly caused by lack of regulation and oversight. I think there 

were many, many things involved that led to it, and that was not 

necessarily the primary thing, but I feel good that the Chairman 

has undertaken a good review of the many burdens that they have 

to oversee and to regulate. It is tough, and it is a big burden, on 

the one hand. We will do our very best to ensure that you have the 

tools necessary to do your job, because our markets are absolutely 

critical, and I do not want you all to short-thrift that IT system, 

particularly because technology changes so rapidly. So we will keep 

our fingers crossed and do the best we can. Thank you so much for 

being here. 

Ms. SCHAPIRO. Thank you so much. 

Mr. SERRANO. Thank you. 

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(177) 

THURSDAY, FEBRUARY 10, 2011. 

SECURITIES AND EXCHANGE COMMISSION 

WITNESS 

H. DAVID KOTZ, INSPECTOR GENERAL, SECURITIES AND EXCHANGE 

COMMISSION 

CHAIRWOMAN EMERSON’S OPENING STATEMENT

Mrs. EMERSON. Okay, we’ll go ahead and get started. I want to 

thank you very much, Inspector General Kotz, for coming today. 

This is the first hearing for the Financial Services and General 

Government Subcommittee of the 112th Congress. I’m really very 

honored to have been selected to be chairwoman of this important 

Subcommittee. The Subcommittee has many new members this 

year on both sides of the aisle. Mr. Diaz-Balart from Florida is 

here, and I guess the others will be coming along because we probably have several committee meetings that are scheduled simultaneously, as usual. 

We’re going to follow the five-minute rule for questions, except 

for Ranking Member Serrano who can take as much time as he 

wants as long as he’s not talking about the Yankees. We just have 

this running argument about the St. Louis Cardinals and the New 

York Yankees and—— 

Mr. SERRANO. I just want to know that the—— 

Mrs. EMERSON [continuing]. I guess we’re going to get the Florida teams involved here too. 

Mr. SERRANO. I just want to know if the Republican cuts will affect Pujols’ contract. [Laughter.] 

Mrs. EMERSON. I certainly hope not. I’m a little worried about 

the Pujol’s contract, but I’m assured that it’s all going to work out, 

Joe, so keep your fingers crossed. Although you all can afford him 

and I’m not sure that we can, but we’re going to have to make do. 

For everybody else, we’ll go on the five-minute rule although, 

quite frankly, I’m not going to cut off anybody in mid-sentence. 

We’ll also recognize members in order of seniority based on who’s 

present at the beginning of the hearing, going back and forth between the parties. For latecomers, you’ll be recognized in the order 

that you arrive. 

Joe, you did a great job in the last Congress of being very understanding of all of the concerns that my side of the aisle had and 

obviously we will do the same of yours. We know that we’re going 

to disagree on many issues, but I also believe it’s very important 

for us to hear each other and really understand where everybody’s 

coming from. 

We have a very difficult challenge in front of us. The federal government’s debt is almost $14 trillion and we have to begin living 

within our means. The Appropriations Committee has been tasked 


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with reducing spending to the fiscal year 2008 level and this will 

require a 17 percent reduction in spending from fiscal year 2010 for 

this Subcommittee. It’s not going to be easy. It’s going to require 

incredibly tough choices, but I’m committed to holding as many 

hearings as we possibly can about the operations of agencies under 

our jurisdiction to find ways to make reductions to low priority, ineffective, and duplicative programs. 

The budget request for fiscal year 2012 will be submitted next 

week, but we wanted to get to work so we are beginning this hearing season by meeting some inspectors general. Quite frankly, we 

can learn an awful lot from you all, and I am very pleased that 

you’re here today. Part of the reason is that, all inspectors general 

are a great check on our government agencies and the fact that 

you’re able to find efficiencies within agencies is quite critical. 

We’re looking to you all, especially this year, to really help us identify ways to reduce spending, and particularly spending which we 

would consider wasteful. 

Our Subcommittee has jurisdiction over a diverse group of agencies, many of which have a profound impact on Americans’ lives 

and the financial stability of our economy. The SEC in particular 

has the unique task of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation, 

while at the same time not over-regulating our markets and hindering economic recovery. Since 2001, Congress has provided the 

SEC with additional regulatory tools and has more than doubled 

the SEC’s annual appropriation. That is a very short time period 

in which the SEC’s budget has been doubled. It’s difficult to understand how the SEC was not better positioned to deal with the economic turmoil of the last few years, and how the SEC allowed the 

Madoff and Stanford Ponzi schemes to continue for many years 

when they had complaints registered about these two entities over 

a decade before the individuals were charged. 

In addition, the SEC has been cited by GAO for inaccuracies in 

its financial reporting almost every year since it began producing 

audited financial statements in 2004. This is especially troubling as 

certainly the SEC would not tolerate a company with possible material inaccuracies in their financial statements for seven years. 

This past year, the SEC has also been cited by you, Mr. Kotz, for 

lacking clear leasing practice guidelines as well as waste and inefficiencies in their procurement and contracting costs. I really am encouraged that your office is looking into these issues and working 

with the SEC to correct the problems in a timely manner. 

Both the IGs and Congress should be watchdogs for taxpayer 

money. We should be actively looking for improvements and efficiencies in order to ensure that taxpayer money is being effectively 

utilized. I look forward to our Subcommittee members’ contributions and I’d like to remind members again of the five-minute rule 

for questions. Now let me recognize my good friend from New York, 

Mr. Serrano, for any opening statements you’d like to make. 

MR. SERRANO’S OPENING STATEMENT

Mr. SERRANO. Thank you, Chairwoman Emerson, and congratulations. As I said to Chairman Wolf yesterday in the Commerce, 

Justice Subcommittee, to tell you that I’m glad to see your side in 


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the majority would be a lie. But to tell you that if I had choices 

of who—which Republicans should head Subcommittees, I felt that 

way about Mr. Wolf and I certainly feel that way about you, that 

you’re the best person to lead this Subcommittee when I’m not 

leading it. 

And the relationship we have—which, you know, the public, it’s 

sad in a way, doesn’t understand, doesn’t understand that we as 

Members of Congress have relationships that go beyond the political stances we have to take. And what I always tell people back 

in my district when they tell me, ‘‘Well, that person from that 

place,’’ I say, ‘‘You know, whether it’s in front on an American Legion Hall, whether it’s in front—during a parade for veterans, 

whether it’s at the Puerto Rican parade in New York,—we all get 

here the same way, by begging somebody to vote for us and then 

getting insulted right after they vote for us.’’ [Laughter.] 

Mr. SERRANO. So we understand that. And I want to thank you 

for your support in the past for the kind of work that we’ve done. 

And I look forward to working with you again. Now, I read this 

morning that unfortunately you broke your arm and you can’t do 

a lot of things for yourself, so I’m volunteering to, within House 

rules, to vote for you on the House floor. 

If you can’t put the card in, I know how to vote ‘‘no’’ all the time 

now. I’m learning to do that—— 

Mrs. EMERSON. I thought you might be offering to wash my hair 

and save me some money every day. 

Mr. SERRANO. My people will call your people. [Laughter.] 

It has been a pleasure to work with you on this Subcommittee 

for so long. Although our roles are now switched, I’m hopeful that 

we can continue to work in a bipartisan fashion on the many important issues under this Subcommittee’s jurisdiction. I’d also like 

to take a moment to join with Chairwoman Emerson in welcoming 

new members from both sides of the aisle to this Subcommittee. 

There are a lot of important decisions to be made over the next 

couple of years and I believe that this Subcommittee has a significant role to play. I would like to join Chairwoman Emerson also 

in welcoming the Inspector General to the hearing in Financial 

Services today. You have an important role in conducting oversight 

of the Securities and Exchange Commission. I’m looking forward to 

hearing your testimony today and learning more about your work 

and ongoing investigations. 

With the passage of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act, the SEC has a critical role to play in the 

successful implementation. The new powers given to the Commission are vital in preventing another financial meltdown. We must 

make sure that the SEC receives the robust funding that it needs 

in order to undertake these new responsibilities. I know that as Inspector General, you will be monitoring this important implementation. So again, thank you, Chairwoman Emerson, and welcome to 

you. 

And I must say, Madam Chair, that it’s ironic in a way that we 

are facing the cuts we are because you remember how much you 

and I fought to make sure that whatever came out of Dodd-Frank 

would be in this Subcommittee. There was talk whether—what 

committee it would go to. So now we have this implementation in 


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our Subcommittee and we have to make sure that it survives. And 

lastly, just in sort of saying goodbye officially to my chairmanship 

and welcoming yours, I hope that it survives, and I hope that as 

we work through these very important and serious cuts, that we 

keep three things in mind. One, that we created a lot of programs 

that help the consumer. And if you notice in the bills that you and 

I passed in the last four years, or tried to pass, all the bills speak 

in the prefacing comments about consumerism. Whether it’s the 

product safety commission or whether it’s investors—that the SEC 

has to protect consumers. 

Secondly, and very personal to me, we were very fair to the territories, to Puerto Rico, to Guam, Samoa, and all those American 

citizens who live in territories. And I hope that that continues. 

And lastly, for me again very personal, but for this committee 

and I know for you too, we did a lot of good things, a lot of good 

things in bringing dignity and giving the respect that the people 

that live in the District of Columbia deserve. I know that there are 

some folks who would like to bring back old issues, social issues 

that deal only with the District of Columbia. I hope that’s not the 

case. I hope we realize that all American citizens should be treated 

equally, and while there are some constitutional requirements on 

our part in dealing with the District, that we don’t have to make 

that hurtful or mean in our approach. And I know that’s not who 

you are, and I know that your only pain in life, as you continue 

to think the Cardinals will win a World Series sometime soon— 

which is not going to happen—but other than that, I welcome your 

chairmanship and I stand ready to support you. 

Mrs. EMERSON. Thank you so much, Joe, and perhaps we should 

make a bet on the World Series after the hearing is over. Thank 

you for your very kind comments and very thoughtful comments. 

Let me take a moment to welcome Ms. Lee from California, Mr. 

Womack from Arkansas, and Mr. Alexander from Louisiana; and I 

already acknowledged Mr. Diaz-Balart from Florida. I thank you 

all so much for being here. And Mr. Bonner from Alabama, thank 

you. Inspector General Kotz I’d appreciate it if you keep your statement to five minutes so we can maximize the opportunities to ask 

questions. Thank you so much. 

INSPECTOR GENERAL KOTZ’ TESTIMONY

Mr. KOTZ. Thank you for the opportunity to testify before this 

Subcommittee with respect to the Securities and Exchange Commission. In my testimony, I am representing the Office of the Inspector General, and the views that I express are those of my office 

and do not necessarily reflect the views of the Commission or any 

Commissioners. I’d like to begin my remarks by briefly discussing 

the role of my office and the oversight efforts we have undertaken 

during the past few years. 

The Office of Inspector General is an independent office within 

the SEC that conducts audits of programs and operations of the 

Commission, and investigations into allegations of misconduct by 

agency staff or contractors. The OIG does not make policy decisions 

for the SEC, or substantive determinations regarding the commission’s program, functions, or budgetary process. Rather, the OIG’s 

mission is to promote the integrity, efficiency, and effectiveness of 


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the programs and operations of the SEC, and to report its findings 

and recommendations to the agency and to Congress. 

Since my appointment as Inspector General of the SEC in December 2007, our investigations unit has conducted numerous, 

comprehensive investigations into significant failures of the SEC in 

accomplishing its regulatory mission, as well as investigations into 

allegations of violations of statues, rules, and regulations, and 

other misconduct by commission employees and contractors. In August 2009, we issued a 457-page report of investigation analyzing 

the reasons why the SEC failed to uncover Bernard Madoff’s $50 

billion Ponzi scheme. This report was issued after a nine-month investigation in which we conducted 140 interviews and reviewed approximately 3.7 million e-mails. 

In March 2010, we issued a thorough and comprehensive report 

of investigation regarding the history of the SEC’s examinations 

and investigations of Robert Allen Stanford’s alleged $8 billion 

Ponzi scheme. 

More recently, we issued reports on the circumstances surrounding the SEC’s proposed settlements with Bank of America, 

and allegations of improper coordination between the SEC and 

other governmental entities concerning the SEC’s enforcement action against Goldman Sachs. 

The office’s audit unit has also issued numerous reports involving matters critical to SEC programs and operations in the investing public. These have included, just to name a few, an examination of the commission’s oversight of Bear Stearns and the factors 

that led to its collapse, a review of the SEC bounty program for 

whistle-blowers, and an analysis of the SEC’s oversight of creditrating agencies and an audit of the SEC’s real property and leasing 

procurement process. 

In addition, following the investigative report related to the 

Madoff Ponzi scheme, we performed three comprehensive reviews 

providing the SEC with 69 specific and concrete recommendations 

to improve the operations of both its enforcement and examination 

functions. Over the past three years, many of our efforts have been 

directed at identifying waste or misuse of government funds by the 

SEC. The two largest areas in which we have found significant 

waste and inefficiencies have been in procurement and contracting, 

and costs relating to real property leasing and office moves. In the 

procurement and contracting area, we’ve identified numerous deficiencies in the management and oversight of the SEC’s contracts: 

A lack of written internal policies and procedures for administering 

contracts, a failure to maintain accurate records and data regarding contracts, and improprieties in the selection of vendors and the 

awarding of contracts. These failures led to the cancellation of contracts and the expenditure of funds to re-procure required services. 

In addition, numerous OIG investigations, audits, and reviews 

have revealed excessive costs and inefficiencies in the SEC’s leasing of real property and the relocation of staff offices. We found situations in which the SEC made excessive payments that could 

have been avoided if appropriate policies and procedures had existed and been followed. We also found that SEC management approved a project to reconfigure internal office space at a significant 

monetary cost, without performing any cost-benefit analysis of the 


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project prior to its undertaking. In the instances that I’ve described 

in which our office found wasteful expenditures and inefficiencies, 

we have provided SEC management with detailed descriptions of 

our findings, as well as concrete and specific recommendations to 

alleviate the problems and concerns we identified. We have also followed up to ensure that these recommendations have been agreed 

to and are fully implemented. We’ve also made recommendations 

designed to increase the SEC’s oversight capability and its internal 

controls. 

In certain instances, it has been and will be necessary for the 

SEC to incur additional expenses to implement our recommendations. For example, after our investigative report found the SEC 

failed to respond appropriately to credible tips and complaints 

about Bernard Madoff’s operations by conducting competent exams 

and investigations, we recommended numerous reforms to the 

SEC’s Tips and Complaint system. The SEC has instituted a new 

Tip, Complaint, and Referral system in order to ensure that complaints received are acted upon in a timely and appropriate manner, at a total estimated cost of $21 million. 

I believe that the SEC’s mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital 

information is more important than ever. At the same time, the 

SEC has a responsibility to utilize government funds in an efficient 

and effective manner. The Office of the Inspector General intends 

to remain vigilant to ensure that scarce government resources are 

utilized wisely and cost-effectively, and instances of waste and 

abuse are eliminated. Thank you. 

[The information follows:] 


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Mrs. EMERSON. Thank you Mr. Kotz. I’ll start the questions, but 

let me just ask you—I’ve got four quick ones that I want to ask, 

and then I’ll turn it over to Mr. Serrano—when you say that you’re 

recommending an expenditure of $21 million to update the Tips 

and Complaints Department, what does that entail? 

Mr. KOTZ. Well we didn’t recommend that particular expenditure. What we said was The Tip, Complaint, and Referral system 

at the SEC doesn’t work. You know, Harry Markopolos and others 

came forward with tips about Bernie Madoff, the tips were not reviewed appropriately, competent exams and investigations weren’t 

done. And so the SEC put in a new system, a computerized system 

that involves ensuring that all different offices within the SEC are 

advised of the tips, that there’s appropriate triage of the tips, that 

they’re followed up appropriately. And so the SEC decided to put 

in a new system, in response to our recommendation, and they informed me that the system cost $21 million. 

Mrs. EMERSON. So $21 million includes the computer system 

itself and the people to run the system? 

Mr. KOTZ. I believe it’s all-inclusive, yes. I believe the total cost 

of putting the system in and having the appropriate manpower— 

You know, one of the issues is, obviously the SEC gets a tremendous number of complaints. 

Mrs. EMERSON. Right. 

Mr. KOTZ. They have to weed through the complaints to make 

sure that they don’t miss any that are significant. So they need significant manpower to be able to do that. So I believe, and this is 

what I’ve been advised, is that that’s the total cost. 

Mrs. EMERSON. So, you make the recommendation, they go ahead 

and follow through and put in place a better system, and then do 

you come back to see that in fact, yes, this new system they’ve put 

in place would in fact work, should another situation like Madoff 

or Stanford happens? 

Mr. KOTZ. Right, yeah. Certainly. I mean, we initially make sure 

that they actually put in a system, that the system in finalized and 

up and running. But yes, I believe that our office needs to go back 

once all the improvements have been put in, particularly with respect to Madoff and Stanford, and test it to ensure that it works. 

I mean, we don’t want systems put in that sound good on paper 

but don’t actually make a difference. So we will go back and look 

into these systems and make sure that they will actually put the 

SEC in a better position to catch frauds that have occurred. 

Mrs. EMERSON. So in fact, this system, is it complete? 

Mr. KOTZ. I think it’s nearly complete. 

Mrs. EMERSON. Okay. I would appreciate it if you would come 

back to us and let us know what your review shows. 

Mr. KOTZ. Sure. I mean, we have to give, obviously, a significant 

time for the system to be up and running in order to review it, but 

yeah. Absolutely. We definitely intend to look back on all these improvements, because again, you can put new policies in, you can 

put new systems in. We have to make sure that it makes a difference. 

Mrs. EMERSON. Indeed. Especially for $21 million, which you 

know, in the whole scheme of things may not sound like a lot of 


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money but in fact, you add $21 million up a few times and then 

you’re talking about real money. 

Mr. KOTZ. Twenty-one million dollars for me is a lot of money. 

Mrs. EMERSON. Believe me, for me it’s a lot of money, too. That 

speaks to the whole issue of really taking seriously our commitment to reduce spending. While the SEC’s appropriation is offset 

by collections, we still need to look at all agencies in an effort to 

reduce funding for ineffective programs, no matter what their funding sources are. My concern is that we have doubled the SEC’s 

budget over the last nine years, and yet at the same time we’ve 

had Madoff, we’ve had Stanford, we’ve had numerous other issues. 

There is skepticism among my colleagues that the SEC can effectively do its job, in spite of what you say that they followed through 

on some of your recommendations. Can you tell us, I’m going to ask 

these four questions in order—— 

Mr. KOTZ. Great. 

Mrs. EMERSON. Number one: how would a reduction of the SEC’s 

appropriation to fiscal year 2008 levels affect the SEC? Do you believe, based on all of the internal investigations that you’ve done, 

that taxpayer dollars are being used effectively or spent effectively? 

What can you do or what are you doing proactively to identify inefficiencies within the SEC budget itself? What recommendations 

might you offer for more efficient and effective use of taxpayer 

money for the SEC? 

Mr. KOTZ. Okay, sure. In terms of reduction and appropriations 

to fiscal year 2008, obviously I can’t speak for the entire SEC; I’ve 

not done a full analysis of how the budget would affect the SEC 

as a whole. Certainly, they tell me that if we went back to 2008 

levels, it would require a significant reduction in force, possibly 

over 600 people. And I think I would have some concerns about the 

SEC losing 600 people in terms of being able to do the work they 

did. You know, in terms of efficiencies, one of the things we do is 

look for areas where there are inefficiencies. And so I certainly 

can’t say that every penny spent is being spent in an efficient way. 

In fact, we’ve identified areas in which it’s been inefficient, as I indicated. In the procurement area we’ve identified inefficiencies; 

we’ve identified inefficiencies in leasing area, and proactively, what 

we do is we look carefully at the areas where historically there 

have been problems. And so we’ll go back, I mean we have offices 

and divisions who say ‘‘Why are you auditing us again?’’ and we 

say ‘‘We’re auditing you again because we had a lot of problems the 

last time we audited you.’’ And so we are very aggressive and very 

vigilant in looking into the programs that have historically had 

problems. We do what we can to ensure that there are efficiencies. 

Look, the SEC’s made a lot of mistakes, we’ve chronicled many 

of those mistakes, you know, in painstaking fashion, particularly 

with Madoff and Stanford and others. But I believe that the SEC 

is on the road to making improvements. I believe the SEC understands the importance of fixing the problems that they have, and 

I believe that they are working to do that. Our job is to ensure that 

it’s reality, that it’s not just a paper record. So I mean I don’t know 

that I’m in a position, particularly, to make recommendations in 

terms of overall SEC. But you know our office is very aggressive 

and vigilant in looking at the SEC carefully. And anywhere we find 


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any waste or inefficiencies, we point them out and we’re very aggressive about ensuring that the SEC responds to our recommendations and does the appropriate thing. And I can tell you that Chairman Shapiro has been very good about assisting in that process. 

If I ever have a situation where I feel an office or division isn’t 

being responsive enough, and we require a lot of responsiveness to 

our recommendations and we take them very seriously, her office 

is very helpful in ensuring that things are done the right way. 

Mrs. EMERSON. I appreciate hearing that. One quick follow-up. 

You’ve been told that if the SEC was to go back to 2008 funding 

levels, that it would result in a loss of 600 people. The question is 

are the people who are currently working within the SEC doing the 

right jobs? Hypothetically, if you lose 600 people, are there other 

people within the organization itself who perhaps should be doing 

something differently than they are today? Do you all look at that 

sort of thing? 

Mr. KOTZ. From time to time in a particular office. We wouldn’t 

do sort of a global view of that. You know, I don’t know, I can’t 

speak sort of for the SEC overall. Certainly, where we feel that 

people are not working hard, or they’re engaging in inappropriate 

conduct, we’ll recommend they be terminated. We have done that 

many times in my three years at the SEC, and many people have 

been terminated as a result of our investigations. So you know, certainly the ones we’re aware of, we take action. Could I tell you that 

there is no one there who couldn’t be in a different job? I couldn’t. 

Mrs. EMERSON. Some of the people who were involved in the 

Madoff scheme are still working there, is that not correct? 

Mr. KOTZ. Many of the people who were involved in the Madoff 

scheme are gone. Some are still working there, but there is disciplinary action going on with respect to many of the folks who were 

involved in the Madoff matter. 

Mrs. EMERSON. Okay, thanks. Mr. Serrano. 

Mr. SERRANO. Thank you. Just a follow-up. I don’t want to spend 

too much time on this, but you say that you’re probably not 

equipped to, or prepared to tell us how cuts would hurt the agency—because that’s the inner workings of the agencies. But you do 

know waste when you see it. 

Mr. KOTZ. Right. 

Mr. SERRANO. So, if you see waste, don’t you also see when the 

budget gets too low to perform their duties? Doesn’t that play—— 

Mr. KOTZ. Yeah, I mean, I would say so. I mean, as I said, I 

think that significant cuts or furloughs, 600 or more people, I think 

would have an impact. I don’t think that there are 600 people in 

the SEC who are not providing value, and so I would say that that 

would have an impact on the SEC’s operations. As I said in my oral 

testimony, many of our recommendations require that people do 

additional things. So I’m in a position where I’m recommending 

that action be taken to redress something. You know, I don’t want 

there to be a situation where they say, ‘‘We’d like to redress it but 

we can’t because we have budget cuts,’’ or ‘‘We can’t because we 

don’t have the people anymore to do it,’’ or ‘‘We don’t have the 

funds to put in a system,’’ so that is certainly a concern. 

Mr. SERRANO. We would hope that the SEC has changed since 

the financial crisis started and the Ponzi schemes were discovered, 


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and I believe they’ve changed, but for the record just say we hope 

they’ve changed. Question is, How has your office changed because 

of what’s happened? How have you had to adjust? Have you had 

to look at things differently? Have you had to allocate your staff 

differently? When do you go after an investigation, you know, how 

do you determine which one to go after? 

Mr. KOTZ. Yeah, well I think we’ve become even more vigilant 

and frankly more skeptical of things that happen. And so, you 

know, whenever there’s a request, we look at it. We look at all of 

them. I mean, we certainly don’t want to be caught in a situation 

where there’s a complaint that comes in that we haven’t reviewed 

carefully, so we review all the complaints. And you know, we have 

had more people added to our staff, we have a very small staff as 

it is. We have 18 full-time employees at the moment. We did the 

Madoff investigation with four investigators. And so there have 

been need—we’ve gotten a lot more complaints in since the Madoff 

and Stanford scandals, and so we’ve had to address them. But 

frankly, I’m certainly very skeptical and suspicious, and if I see a 

complaint that comes in that alleges that something was missed, 

then we look at it very carefully to see if it was missed. Because 

there was a track record where important matters were missed, 

and so we have to look at them. I feel that I have to stay on my 

toes; I have to be very vigilant. We investigate everything thoroughly, and sometimes it turns out that the SEC did nothing 

wrong, but we have to take everything very seriously. 

Mr. SERRANO. Are you at liberty to tell us without, obviously, 

getting specific or giving us information we don’t need to know in 

public, where the complaints come from? I mean, who gives you 

these tips to follow in addition to whatever you uncover yourself? 

Mr. KOTZ. We have some tips from inside, inside the SEC, employees coming forward in making claims, but the majority of the 

tips come from the outside, from investors, from folks who are either under investigation by the SEC or somehow affected by what 

the SEC does, and so I think that’s the lion’s share of them, is folks 

from the outside, investors who come in and say, ‘‘This was done 

wrong.’’ 

Mr. SERRANO. Thank you. Getting back to the Dodd-Frank legislation which created more responsibilities and oversight responsibilities for the SEC, again, talking about staffing, do you feel, or 

do you have information that can tell us, whether in fact the SEC 

is equipped, staff-wise, now to handle these new responsibilities? 

Mr. KOTZ. Again—— 

Mr. SERRANO. And by the way, I understand that friendly or unfriendly agency; all agencies always want more staff. 

Mr. KOTZ. Right. 

Mr. SERRANO. I only remember once, and it was an issue that I 

kept bringing up, and it was the SEC. In the prior administration, 

they were the only agency that came before us, and said that ‘‘We 

don’t need any more money.’’ That should have been a sign that 

something was wrong, because every agency wants more staff—— 

Mr. KOTZ. Right. 

Mr. SERRANO. They didn’t want anymore, and obviously it was 

a problem, because they needed more. So do you think they’re 

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ward, because, you know, there are some folks who would like no 

oversight of Wall Street. 

Mr. KOTZ. Right, I mean I know that there are a lot of responsibilities associated with Dodd-Frank. Our office even has one relatively small responsibility, but we have a responsibility involving 

an OIG employee suggestion program. And I do think that at the 

moment what the SEC is doing is they’re using other folks who 

were working on other matters to handle Dodd-Frank matters, because I don’t think that they’ve been able to do any significant hiring for Dodd-Frank, so, you know, while I haven’t done an analysis, 

per se, of the effect of Dodd-Frank on the SEC, I would certainly 

venture to say that it would be difficult to implement many of 

those responsibilities if there were cuts, and if they didn’t have sufficient funds to do it. 

Mr. SERRANO. One last question. The President’s budget proposal 

for the SEC. Did you feel that, for what you may know about the 

President’s budget proposal, that there are areas that are vulnerable at the SEC under that budget? 

Mr. KOTZ. Yeah, I mean that, I have not really analyzed, you 

know, the particular budget proposals; I’m not really involved in 

that process, you know, so I don’t know that I could really give an 

educated opinion on what the impact would be. But I do know that 

there are new responsibilities, I do know that there are many times 

where our office will recommend things that require additional 

funds. I can tell you that, you know, we will certainly be very 

watchful to ensure that if additional money comes to the SEC, that 

it’s used wisely and efficiently. But I’m not sure I could give an 

educated opinion on, you know, one particular budget versus another. 

Mr. SERRANO. Thank you. 

Mrs. EMERSON. Thanks, Mr. Serrano. Mr. Womack. 

Mr. WOMACK. Thank you, Mr. Inspector General, thank you, 

Madam Chairman. I appreciate the testimony today. I’ve only got 

a couple of questions. Having spent 30 years in uniform, having 

been the subject of a number of Inspector General visits in my various military units, I recognize very quickly that troops, as it were, 

in this case the SEC, typically work on the things that they know 

the Inspector General is going to check, and so I have a couple of 

questions, reference your oral testimony about particularly the 

TCR, and the fact that, if I heard you correctly, the recommendation or the investment was about $21 million. 

And I want to know—I want to be confident that we haven’t created a $21 million paper tiger. Because on one hand, in your testimony you talk about the tips, and what later turned out to be credible evidence of problems, Madoff, Stanford, et cetera, were not followed up on, not taken seriously, something happened, there was 

a disconnect somewhere, and you are confident that the implementation of the TCR is going to fix those problems. What systems do 

you have in place from your office to check, to ensure, that those 

are happening, i.e., have we performed any test cases, have we engaged the system that is in place to ensure that there is a tracking 

program established to ensure that information that comes into the 

system is triaged and accurately determined to be credible or not 

credible? 


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Mr. KOTZ. Well I’m certainly hopeful that the system works, I 

don’t know that I’m entirely confident, as you are, that the new 

system will work, and I couldn’t—— 

Mr. WOMACK. I didn’t say I was confident. I want to be confident. 

Mr. KOTZ [continuing]. As you were saying, I’m not sure I’m that 

confident either. I agree, certainly, with what you’re saying, sometimes it’s easy to put in a computer system, to make IT changes 

as a way to solve all problems. And you know, I’ve seen many 

times, both as Inspector General of the SEC and another job as Inspector General, that sometimes the easiest solution is to say, ‘‘Oh, 

we’ll just put a new computerized system in, that’ll solve all the 

problems.’’ And it sometimes is a paper tiger, and it doesn’t necessarily work. So, as I indicated, once the system is put in fully, 

begins to work, there is sufficient time to be able to audit it, we 

will go back in and test it, because we need to ensure that there 

has been real change, not just a system put into place in which the 

individuals involved will do the same thing that they did before, 

which was not follow up appropriately. So I agree, and we will absolutely look carefully at this system, it’s a significant expense, to 

ensure that it provides real change and isn’t just a paper tiger. 

Mr. WOMACK. Do you have a certain timeframe, a certain date 

circled on the calendar, when you, as the Inspector General, have 

to be confident and certain that the systems that you have recommended are fully implemented, are working, because I think you 

said in your oral testimony that you think that the systems are 

pretty well operational. 

Mr. KOTZ. Six months after it’s fully implemented is the time period that we usually look at in order to conduct some kind of test 

or audit. You have to give it enough time to ensure that there’s 

something to look at. But at the same time, you don’t want to give 

it too much time, because if it’s not working you want to get to it. 

So as a rule of thumb, we look at six months from the time it’s 

fully implemented. 

Mr. WOMACK. Thank you very much. 

Mrs. EMERSON. Let me ask a follow-up to his question, I probably 

shouldn’t do this because it’s Ms. Lee’s turn, but: if we put a new 

computer system in place that’s going to cost $21 million, and we’re 

hopeful that it’s going to work, how would that, then, have caught 

the fact that the Fort Worth SEC employee shoved all the Stanford 

stuff aside for so many years? How does the computer system supersede any person like that? 

Mr. KOTZ. Right. What happened in the Fort Worth situation 

was there were examiners in the Fort Worth office who believed 

that Allen Stanford was running a Ponzi scheme. They were trying 

to get the enforcement part of the Fort Worth office to take action, 

and the Enforcement Division would not take action over a series 

of years, and the examiners watched the alleged Ponzi scheme 

grow and grow over time, and couldn’t get action. One of the new 

improvements in the system is to allow the examiners to have access to other folks, so the information the examiners put into the 

system then goes not just to the folks in the Enforcement Division 

in Fort Worth who were unwilling to go forward at that time, but 

to folks in Washington, folks other places where if somebody else 

looked at it, I think it’s reasonable to believe that if others, other 


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than the folks who were in place in Enforcement in Fort Worth, 

had read those exam reports, and had been aware of the significant 

findings, that they would have forced action to be taken. 

Mrs. EMERSON. Okay, I appreciate that clarification. Ms. Lee? 

Ms. LEE. Thank you very much, thank you for your testimony 

and your service during these very challenging times. We congratulate Chairwoman Emerson again, and I want to associate myself 

with the remarks of our Ranking Member and, I mean our minority member, I said a Ranking Minority Member, and I want to just, 

say to you we look forward to our continuing work together. This 

has been a Subcommittee that has been very bipartisan in our 

work, and of course our goal is to make sure that the mission of 

the SEC and the other agencies are really serving the people of this 

country, so, congratulations again. And also, to you Mr. Kotz, let 

me just thank you for the thorough investigations that you have 

conducted, and say that I think that has restored some confidence 

in the SEC’s enforcement mechanisms. And I want to make sure, 

though, that the budgets that we look at allow you to continue with 

our efforts, and would be very reluctant to support any budget cuts; 

of course I know we’re going to have to deal with that. But I think 

the SEC really is on the right track now. And so, thank you very 

much. 

I know out of the Dodd-Frank Bill. The Congressional Black Caucus members on the Financial Services Committee made sure that 

each of our agencies had the Office of Minority Inclusion as part 

of their new mission. Could you kind of tell me, or do you know 

where that is, in terms of the SEC now? 

Also, in addition to that, I always want to know what the diversity numbers look like in all of these agencies as it relates to professional staff, as well as the types of—if you contract out any of 

your services, the contracts’ amount, and to whom. I mean, do you 

contract with small and disadvantaged businesses, if so, how 

much? And what are you doing to ensure that the recruitment and 

training of the SEC goes into historically black colleges and universities to ensure a diverse staff? 

Mr. KOTZ. Okay. We have not done an overview, per se, of the 

new office with respect to Dodd-Frank. I am aware of the office, I 

couldn’t tell you right now what the status is because that isn’t 

something that we’ve looked at. A lot of these new offices under 

Dodd-Frank are in the process of being implemented so it would be 

premature for us to look at. You know, certainly I can speak with 

respect to my office. 

My office takes diversity matters very, very seriously. We have 

a very high percentage of employees in our office from minorities, 

and women as well. When we do contract out, our office we generally contract out with smaller entities, we have, you know, generally smaller projects as well. So it isn’t an analysis that I have 

done overall in the SEC, and I think that others, the Chairman 

and others, could speak to that. I am aware that this new office 

was placed in under Dodd-Frank, I am aware that there is an effort to staff it up, but I couldn’t tell you the exact stats. 

Ms. LEE. Okay, well I guess, would your office, then, if it’s possible to get sort of a report or breakdown of your staffing patterns 


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and the contracting patterns, you know, the type of businesses by 

ethnicity, gender, you know the standard reporting. 

Mr. KOTZ. Sure. 

Ms. LEE. I’d like to see that. 

Mr. KOTZ. Sure, absolutely I can get that to you. 

Ms. LEE. Okay. And also let me just ask you in the implementation, who will be responsible for making sure, I mean, will yourself 

as IG be responsible for making sure that the implementation of 

the Office of Minority Inclusion is what it should be, and that it 

adheres to the law and the requirements, and who would oversee 

that? 

Mr. KOTZ That’s absolutely under our purview, you know, where 

the SEC has a requirement, we compare what they’re doing to 

what the law requires, and if we find that there is not sufficient 

regard to the regulations and the separate requirements, then that 

would be an audit function. And so, you know, that is an office that 

certainly, again, once it’s put in place and the SEC comes forward 

and says ‘‘We’ve done what we were supposed to do,’’ that would 

be the subject of an audit for us to ensure that it’s actually happening appropriately. And if it doesn’t, we would report back to you 

that it’s not. 

Ms. LEE. Would we have to ask you to report back? I mean, 

should I ask you this question next year, or, how should we—— 

Mr. KOTZ. No, no, no. No, no. No, no. No, I mean, you know, 

again, the only proviso being we have to make sure that the SEC 

has an opportunity to staff it appropriately—— 

Ms. LEE. Right, I understand that. 

Mr. KOTZ. But no, you wouldn’t have to ask, it would be in our 

semi-annual report that we would send to Congress. 

Ms. LEE. Okay, Okay. Thank you very much, thank you Madame 

Chairwoman. 

Mrs. EMERSON. Thank you so much, Ms. Lee. Mr. Diaz-Balart? 

Mr. DIAZ-BALART. Thank you very much, Madame Chairwoman. 

A couple questions, and fully, frankly, kind of piggybacking on 

what you mentioned, you asked. Jo Ann mentioned that the SEC’s 

budget had doubled since, I guess since the Enron incident. And 

yet, we still had these Ponzi schemes that were, again, that had 

been tipped on, but no action had taken place. In the case, for example, of the Stanford Ponzi scheme, between 1997 and 2005, supposedly it grew from 250 million to 1.5 billion, and the lack of action on behalf of the investors by the SEC, as noted in your report, 

frankly cost a number of my constituents their entire life savings, 

because, again, I do have constituents that were affected by that. 

So, since your report, a number of changes have taken place, and 

you mentioned some of them. Enforcement practices, policies, whatever. But my question is, how much confidence can we actually 

have that it’s been taken care of, and that something like this 

would be caught in the future, that another Stanford Ponzi scheme 

would be found, and what other things does the SEC need to do? 

I’m going to just ask you two real quick questions, that is one. 

Mr. KOTZ. Right. 

Mr. DIAZ-BALART. Level of confidence that you have, or that we 

should have, on that. And the other one, again piggybacking on the 

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lion dollars. When they go out and get this new system, do they 

first consult with the private sector as to what systems are already 

available for—I understand it’s a unique kind of area, but there 

may be others that do things that are similar in the private sector 

that already have systems, do they have to recreate the system or 

were they able to look at something that already existed and kind 

of adopt it? That would be my other question, and thank you Madame Chairwoman. 

Mr. KOTZ. Okay. Sure, as to the level of confidence, you know, 

you cannot guarantee that the next one won’t be missed. I mean, 

I can tell you, I have a level of confidence with respect to the specific issues that were both in the Madoff and the Stanford situations. In other words, the mistakes, the failures that were made by 

the SEC and those particular issues that we have put forward recommendations to fix those; And with the recommendations being 

implemented, I believe those same circumstances would not occur. 

Now of course, you have to ensure that there isn’t some other situation, because obviously you can’t just deal with the particular situations. So I mean, we have to stay vigilant, we have to stay skeptical. I believe, personally, that the SEC is in a much better position than it was when I first started as Inspector General, when 

these scandals took place. But we need to ensure that we continue 

to review and look at them carefully to make sure that there isn’t 

something else happening that we would potentially miss. 

You know, with respect to this particular system, I wasn’t involved, per se, in putting together that system. I will tell you that 

one of the recommendations we made arising out of Madoff, was 

more discussion with the private sector. In the Madoff case, folks 

in the private sector, there was sort of a whispering campaign, people knew there was something funny with Madoff’s returns. I think 

a lot of people didn’t think it was a Ponzi scheme, I think a lot of 

people thought it was some sort of insider trading or whatever. 

But people thought there was something suspicious about it, and 

yet that information was not really brought to the attention of the 

folks in the government, and I don’t think the government folks 

had the same suspicions. So, there’s a wealth of information out 

there in the private sector, and that information needs to be provided to folks in the government, because they have a better, sometimes a better finger on the pulse of what’s going on. 

One of the things we recommended rising out of Madoff was for 

there to be more communication, more information brought, more 

incentives for folks in the private sector to bring forward that case. 

When we talked to folks who had suspicions about Madoff, we said, 

‘‘How come you didn’t bring it to the SEC’s attention?’’ And they 

said, you know, ‘‘What good would it do us? What does it do for me? 

Why should I? Now I might get sued.’’ You know, ‘‘My name will 

be involved in something, I may get sued. So there’s no benefit for 

me, there’s only a negative; why would I do that?’’ 

And so I think that the SEC needs to create incentives to get 

that information in, to learn about it. These folks agreed that they 

would give seminars to SEC folks about how, you know, how operations particularly work. And so I think that that’s something 

that’s an excellent idea, and I encourage the SEC to do that. 

Mrs. EMERSON. Mr. Serrano. Your turn. 


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Mr. SERRANO. That quickly? 

Mrs. EMERSON. Well, unless you want me to go to Mr. Bonner 

first. 

Mr. SERRANO. You can, Mr. Bonner. 

Who under my chairmanship got the best attendance award, do 

you remember that? 

Mrs. EMERSON. He did? 

Mr. BONNER. I hope to live up to that standard, now that I am 

back on the Subcommittee. Thank you, Madame Chair. Mr. Kotz, 

you have had an impressive career. 

Mr. KOTZ. Thank you. 

Mr. BONNER. Working with the Peace Corps—— 

Mr. KOTZ. Right. 

Mr. BONNER [continuing]. USAID, and now the SEC, so you probably have a better vantage point than some people do because 

you’ve had the chance to see three different government agencies, 

with different roles and responsibilities. But especially as the Inspector General, you’ve had a chance, in this instance, to see up 

close perhaps some things that worked well in other agencies that 

you were in that may—that those ideas could be brought over to 

the SEC. 

I have a few questions that I’d like to get your comments on. And 

never to try to correct the Chairwoman, but by my math, the budget of the SEC has actually tripled, almost, over the last decade. It 

was $377 million in 2000, and by the President’s budget request 

last year, that was 2010, was 1.1 billion, so—— 

Mrs. EMERSON. You are correct. I believe I said their budget has 

more than doubled. 

Mr. BONNER. But, regardless, it’s a sizable increase. 

Mr. KOTZ. Right. 

Mr. BONNER. And so, while I’ve acknowledged you’ve had a lot 

of very important roles in government. Put yourself in our shoes 

and help me, as a guy from Mobile, Alabama, go back home when 

I do a town hall meeting, and explain to my constituents, some of 

whom, like Congressman Diaz-Balart, have lost in the Stanford 

scheme especially, this is an agency that has had its budget doubled or tripled over the last decade, depending on when you start 

the calendar. And yet, we have been—it’s the agency that was 

asleep at the wheel for some of the biggest failures that had direct 

responsibility. How could I explain to my constituents, we need to 

give them more money, which is what the Commissioner is actually 

asking for, every Commissioner is, as Mr. Serrano said, would like 

more—we need to give them more money, and yet they’ve had a triple increase over the last decade, and they were asleep at the 

wheel during three of the biggest, with, if you count Bear Stearns 

and Lehman, four of the biggest issues that we’ve dealt with since 

the Commission was created. How would I explain that to my constituents? 

Mr. KOTZ. I understand, certainly, I’m a taxpayer, too. 

Mr. BONNER. I know you are. 

Mr. KOTZ. And, you know, the amount of money we’re talking 

about is over a billion dollars, incredible amounts of money. The 

only thing I would say is that the SEC has to take action against, 

sometimes, very powerful, very rich, very well-funded interests. 


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You know, Bernard Madoff had a tremendous amount of sums 

available to him to fight the SEC. So I’m not sure I could give you 

a specific thing to explain to a taxpayer, even like myself, why 

more money would be given to an agency that missed so many 

things. At the same time, I think it’s worth noting that in order 

to keep up with the fraudsters, in order to ensure that there is 

compliance, the amount of money that those folks spend dwarfs 

anything the SEC could get, whether under the previous budget or 

under these budgets. You know it’s a very difficult mission, I think, 

the SEC has, in order to stay ahead of what’s going on in certain 

places in the private sector, and they need sort of the tools to be 

able to deal with the Madoffs and the Stanfords. And I don’t think 

it’s only a matter of money. And let me say this, the idea that they 

would solve the problem of Madoff by putting in a $21 million system, that’s not going solve it; it’s not just about more money to 

solve all problems. I think there needs to be, and you know, we’re 

ensuring that there are significant changes in how about they go 

about doing their work, not just sort of, write a check, and now you 

have a new system and everything’s fine. But I think it is important to realize what they’re up against, and they are up against 

some very heavily-funded entities. 

Mr. BONNER. Let’s go back to a comment you made earlier in response to a previous question, because I want to understand this. 

At the Fort Worth office, there were employees of the Securities 

and Exchange Commission who were suspicious, but they were not 

able to get anyone else in that office to be interested in it, and they 

didn’t have any other avenue; there was a firewall where they 

couldn’t call someone in another office, perhaps in Washington or 

New York, and say, ‘‘Hey, we’ve got a problem here, no one is answering the phone, the building’s on fire, but we can’t get anyone 

to respond to us.’’ 

Mr. KOTZ. Yeah, I mean, they didn’t utilize it. They certainly 

could have, and we asked them how come they didn’t. You know, 

sometimes you don’t want to go over people’s heads, sometimes 

there’s an effect if you do that. I mean, certainly there was a director of enforcement in Washington that could’ve been gone to. I 

think the new system tries to make it easier for that to happen so 

it isn’t dependent on a particular individual. I mean, maybe that 

is a failure even of the individuals who were suspicious, and found 

evidence of the Ponzi scheme, that they should have pushed it even 

further and gone above their heads to the head of the Enforcement 

Division, and then to the Chairman, and then to Congress, if they 

needed to, to ensure that something was being done. 

Mr. BONNER. The new tips and complaints system is $21 million. 

The New York Times article on February 2, it actually cites that, 

in one of your reports, that you identify that there was more than 

$15 million in office space leased in Manhattan. I don’t think that’s 

in my friends’ district. I think the gentleman is from the Bronx, is 

that correct? 

I wanted to make sure I drew that distinction. But $15 million 

for space in Manhattan, where no SEC employees worked for five 

years? 

Mr. KOTZ. Yeah, yeah that’s outrageous. 


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Mr. BONNER. What are some other examples that you might 

share with us? Because, again, we’re in a pickle. We’re trying to 

dig out of a fourteen and a half trillion dollar hole that we’re in. 

Mr. KOTZ. Right. 

Mr. BONNER. And the last thing any member of this committee, 

Democrat, Republican, left coast, west coast, south coast, wants to 

do is to cripple an agency that has a very vital role, but, boy, that’s 

a lot of money that someone lit a match to. 

Mr. KOTZ. Right. No, there are other examples, particularly in 

the office and leasing area. We looked at a case involving the San 

Francisco lease where the SEC sort of delayed in making a decision 

on what action to take, ended up paying a holdover rate that was 

significantly higher than market rate. There was a situation not 

too long ago where the agency decided to conduct a re-stacking, 

move 1,700 employees to different places in the office so they would 

be more efficient and more productive. We did a survey, that folks 

in the SEC said mostly they communicate by e-mail and phone 

anyway, so they don’t necessarily think that moving them to a different spot is going to make any difference. They believed it was 

a waste of money. We found there was no cost-benefit analysis 

done to ensure that it was appropriate before it was done. You 

know, we were very harsh in our report on that. There have been 

some areas in procurement and contracting where contracts have 

been mismanaged, where the invoices haven’t been carefully scrutinized to ensure that the government’s not getting ripped off. Sometimes you have situations where you have an initial contract come 

in at a relatively low rate, and so that entity gets the bid, but then 

there are so many modifications that go forward that it ends up 

being much higher than originally. So, you know, look, we have 

found instances where there is waste, and where there is, we have 

been very strong in recommending that action be taken. 

Mr. BONNER. Just one final question. How many people do you 

have in the IG’s office, and how many people are there at the SEC, 

although I should know that, I apologize I don’t. 

Mr. KOTZ. Yes. There’s I guess a little under 4,000 FTEs at the 

SEC. We have 18 full-time employees right now in our office, 

there’s another few that we are hiring—in the process of hiring. So 

we have a relatively small office. And frankly, many folks have 

said, ‘‘Why don’t you have more people?’’ But I feel like, if our office 

isn’t efficient, then, you know, there’s no office that should be efficient. The office of the Inspector General has to be efficient, and 

if we can do what we need to do with 18 people, then we don’t need 

40 people. 

Mr. BONNER. That’s a good philosophy. Thank you, Madam 

Chair. 

Mrs. EMERSON. You’re welcome. Mr. Serrano. 

Mr. SERRANO. Thank you. In your testimony, you stated additional funding will be requested to ensure that the SEC has sufficient resources to implement many of the recommendations that 

have arisen, and will arise out of the audits, reviews, and investigations. With that stated, are we playing with fire to even contemplate cuts to the SEC? We don’t want to be sitting here a few 

years from now talking about the next Madoff scheme, knowing 


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that we didn’t give the agency the tools to prevent another such 

scandal. 

Mr. KOTZ. Yeah, I do think that is a concern. And there are 

times, you know, our reports come in, we do investigations, we do 

audits, we make recommendations. And there are times where, in 

a budget situation the agency will come back and say, ‘‘We’d like 

to do it but we simply can’t.’’ You know, in that situation there’s 

not much we can do. I mean, the agency gets to decide where they 

want to allocate their resources. And so there are times where that 

is the response. Sometimes we come back and say, ‘‘We want you 

to do it anyway, find the money for it.’’ 

But it is a concern, because in order to fix things, sometimes they 

require change in policies, change in people, but sometimes they 

also require additional resources if something is not staffed up 

enough. For example, in the Madoff situation, in one of the complaints that they were working on, they were analyzing the complaint, and they decided to take those resources and put it somewhere else because there was another issue that was even more 

pressing. And so the individuals who were working on the Madoff 

exam stopped, started working on something else. 

And so, you know, if we come back with a recommendation and 

say, ‘‘You need to ensure you have sufficient people working on 

this,’’ and they say, ‘‘we don’t have the money to do it,’’ it sometimes can be a concern. 

Mr. SERRANO. Right. By the way, Madame Chair, just as an 

aside to Mr. Bonner, nobody being in that place is an issue, in 

Manhattan. Fifteen million dollars of rent, that’s cheap in Manhattan. 

The issue is why nobody’s there, not how much. That’s, in Manhattan, you all know that’s very cheap. How much can you tell us 

about the Constitution Center, the 900,000 square feet that were 

leased—and then the CR comes along and implementation. Now 

first of all, your understanding is that this space was to meet the 

new responsibilities of the SEC in general or specifically with 

Dodd-Frank? 

Mr. KOTZ. I think it was both. We are conducting, currently, an 

ongoing investigation of all those issues—— 

Mr. SERRANO. Right, and I know you can’t comment fully, but, 

whatever you can tell us—— 

Mr. KOTZ. I mean, and we’re going back actually prior to the decision to go forward with the Constitution Center lease. We’re 

going back to prior decisions that were made or not about space. 

We’re looking at the entirety of the SEC’s space decisions over 

time. What we believe happened in that case was the SEC believed 

that it was going to get certain funding; it needed people to house, 

and so went forward and made the decision to lease that space, 

which was 900,000 square feet and, you know, a very large amount 

of space. 

What we’re looking at is, you know, was there a sufficient analysis done? Were there studies? You know, when you expend government funds, you have to ensure that it’s done appropriately. 

There are processes that have to be put into place. There are studies that are be done—has to be a reasoned, you know, and thorough decision. Sometimes decisions are made, sometimes they’re 


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the right decisions, sometimes they’re the wrong decisions. We look 

to make sure that it was reasoned decision, and so we’re going 

back—I took testimony on that earlier in the week. We’re working 

very hard to ask the SEC, ‘‘What was your thinking? Why did you 

make that decision? What analysis did you do to support that decision? Could you have gotten a better deal somewhere else?’’ 

And so we’re looking at it very carefully, and we hope to have 

a full report of it within a short timeframe. 

Mr. SERRANO. Thank you. We await that. Let me ask you on one 

of my favorite subjects again. What kind of involvement does the 

SEC have, direct physical involvement, with the territories? I 

mean, are there field offices, if you will, in the territories? What 

is the exchange? And also, you know, one of America’s best kept 

secrets is in addition to territories, we also have associated republics, like Palau and Micronesia, and so on. Is there any involvement 

with that? And I’m not including Hawaii; I know there’s some comment about—Hawaii is a State. 

Mr. KOTZ. You know, I can’t say we have looked at that particular issue. Maybe that is something that—— 

Mr. SERRANO. That was a personal Democrat-Republican joke, 

you know, that Hawaii’s a State. 

Mr. KOTZ. As I said, we haven’t looked at that particular issue; 

maybe that is something we need to look at, you know, so I don’t 

know that I could tell you exactly, you know, I’m certain that there 

is some coverage. I don’t believe that there’s necessarily a field office—— 

Mr. SERRANO. Right. 

Mr. KOTZ. But, you know, that is something that maybe we need 

to look at too—— 

Mr. SERRANO. Because I know that people in the territories, just 

like all Americans, get up in the morning. And there are some folks 

in those places, just like some folks in the States, that invest in the 

market and I’m sure there are some folks who are maybe trying 

to figure out ways to be cute in the market right now. 

Mr. KOTZ. And, absolutely. 

Mr. SERRANO. And so, how do we keep tabs on that, and how do 

we protect the investors in those areas? Or do they all deal through 

New York, or Miami, or—— 

Mr. KOTZ. Yeah, I mean, I think that’s something that we should 

be looking at to ensure that there are appropriate procedures in 

place so that you can get feedback, and you get information from 

folks out there. 

Mr. SERRANO. All right. 

Mr. KOTZ. I appreciate that. 

Mr. SERRANO. I would appreciate that too. Thank you. 

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Mrs. EMERSON. Thanks, Mr. Serrano. Let me ask you another 

couple questions about this Constitution issue because it’s just 

shocking to me. I realize that since you’re still investigating it, 

there are some things that you can’t say, but it’s my understanding 

that the SEC has been able to release 600,000 square feet of that 

space, and are keeping 300,000 square feet as a hedge against another lease that’s coming due in October. 300,000 square feet of 

space is a lot, and it’s not cheap, I know. Just by having it sit there 

until October, to me, doesn’t sound very efficient. 

Mr. KOTZ. Right. 

Mrs. EMERSON. Have you all actually made concrete recommendations to the folks at SEC on their leasing practices? Or 

are you waiting to do that until the investigation is complete? 

Mr. KOTZ. We looked at leasing issues, sort of on an audit side 

before, made some recommendations with respect to that. We will 

wait until we finish our investigation to make recommendations 

with respect to the 300,000. I’m not sure that at the end of our report, we will recommend that they hold on to any part of Constitution Center. 

And I’m also not sure that there are finalized decisions on that, 

yet. I know that the SEC has been making efforts to try to get rid 

of some of that space. I don’t know that, necessarily, they have 

made a final decision—— 

Mrs. EMERSON. I see. 

Mr. KOTZ [continuing]. To hold onto 300,000. It may very well be 

that we recommend that they don’t hold onto any of it, and it may 

very well be that do that on their own anyway. There is a facility 

out in Virginia; there was some talk about moving the folks from 

Virginia out to Constitution Center, but I think we have to look at 

the costs of that, whether that’s effective and efficient or not. 

You know, there are sort of things on both sides. Washington, 

D.C. is more expensive than Virginia, but if you have folks in Virginia, you have this shuttle service that goes [inaudible] so the 

question is, how much lost time is there on the shuttle? How much 

does the shuttle cost? I mean, all those things need to be looked 

at carefully. We need to ensure that the SEC is making, you know, 

good, thorough decisions on all these matters, and I think certainly, 

given that we’re in the middle of this investigation; the SEC is 

looking carefully at all its different options before going forward 

with anything with respect to those leases. 

Mrs. EMERSON. I know, having worked in the private sector for 

many years here in Washington, D.C., and knowing how much a 

square foot of office space is, this is alarming to me. 

Mr. KOTZ. It is an incredible amount. 

Mrs. EMERSON. And that was 14 years ago. 

Mr. KOTZ. Yeah, well we’re asking the question, ‘‘How on earth 

could you have thought that you would need 900,000 square feet 

of space? I mean, you know, in the budget climate we’re in, how 

is it possible for you to think that?’’ And so, you know, we’re going 

to get the answers. You know, we haven’t made any determinations; we’re still in the middle of the investigation, maybe there are 

good answers. But you know, we’re going to go forward, and we’ll 

report back what we found. 


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Mrs. EMERSON. I appreciate that. Speaking of leases, though, do 

you have any other concerns outside of Constitution Place or Constitution Center at this time? 

Mr. KOTZ. You know, but we’ve looked at a couple of areas, we’ve 

found some concerns, we found that there weren’t policies in place 

that are appropriate. We have to make sure that the people involved have the expertise that’s necessary. Right now, we’re looking at Constitutional Center. Again, we’re looking at numerous 

spacing decisions in Washington, D.C. We know that there is new 

space that they’re looking at in other cities; we may be looking at 

them eventually. 

You know, we feel this is an area that is of concern, and so we 

have to look at all aspects of it. If there’s, you know—if it’s the 

same people making the decisions, then wherever they’re making 

the decisions, we have to look carefully at those decisions. 

Mrs. EMERSON. Okay, so there are 11 regional SEC offices. I understand the need to have one in New York, perhaps even Boston, 

and maybe one on the West Coast. Is it efficient to have all of the 

SEC offices spread out around the country? It may well be, and 

perhaps you can make me feel more comfortable about that. 

Mr. KOTZ. Yeah, I mean, I don’t know that we’ve analyzed that 

point, but that again may be one that we need to look at. There 

is certainly, as time goes on, you know, the ability to communicate 

without being in the same place, you know, one of the—we have 

the suggestion program that is going on, and one of the suggestions 

was to have fewer people, for example, in New York City. Let them 

be out in Long Island or New Jersey where it’s cheaper. Do you 

really need everybody to be in Manhattan? You know, one—two 

buildings, certainly not, maybe not even one building. And so 

maybe there are ways. Again, I don’t know that we’ve done enough 

work. 

You know, we look very carefully when we conduct our audits; 

we’re very thorough before we come up with the recommendation. 

But I do think it is worth looking at in today’s age, whether there 

can be inefficiencies that way. 

Mrs. EMERSON. It just seems, to me, that we do so much with 

tele-health and everything else today. Some of these spots just 

doesn’t seem particularly necessary, but then maybe you can convince me otherwise, if in fact, those people are needed and the office space is cheaper than it is in DC. 

Mr. KOTZ. Right. 

Mrs. EMERSON. I would be curious to know if that’s something 

that could be looked at. 

Mr. BONNER. Madam Chair. 

Mrs. EMERSON. Yes, sir. 

Mr. BONNER. While we’re talking about it, I am confident that 

there’s rental space available in Mobile, Alabama for much cheaper 

than Manhattan—— 

[Laughter.] 

Mrs. EMERSON. I’ve got a great big factory in Dexter, Missouri 

that’d be happy to take them—— 

Mr. BONNER. Just wanted to put that on the record. 

Mr. SERRANO. Let the record show that I try to build you a courthouse, but—— 


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Mr. BONNER. And I’m proud to fill it right here. 

Mr. SERRANO. Okay. 

Mr. BONNER. Thank you. 

Mrs. EMERSON. Ms. Lee. 

Ms. LEE. Thank you very much. Let me just follow up with that 

by asking you what the dollar amount is in terms of the markets 

that you supervise, and investigate, and have to look out for? 

Mr. KOTZ. Yeah, I don’t know that I know a total dollar amount 

of the markets. I mean, I do know that, you know, one of the things 

the SEC looked at is in terms of sort of information technology 

budgets. You know, and I know that many of the additional funds 

that the SEC was seeking to get was in the area of information 

technology. And I understand that, you know, that the amount of 

money spent by large companies on information technology is, you 

know, many, many, many times more than the SEC’s budget with 

respect to those areas. I’m not sure I could give you a total figure, 

but certainly as I indicated before, there are individuals with tremendous resources. I mean, Bernard Madoff was running a $50 billion Ponzi scheme. And so they have access to tremendous resources which can be used to sort of fight the SEC in going forward, and committing fraud, and other misconduct. 

Ms. LEE. You must know about how much of the $50 billion, for 

example, you know, in, that—bottom line is, you have responsibility for that $50 billion. 

Mr. KOTZ. Right. Right, absolutely. 

Ms. LEE. Okay. So, how much? $100 billion? $200 billion? How 

much do you think that the SEC has responsibility to oversee or 

to be responsible for? 

Mr. KOTZ. I would think it would be certainly over a trillion dollars, in terms of all the funds out there, but I’m not sure that I 

could give you a specific number. 

Ms. LEE. That’s over a trillion. Okay, so, and what’s the full 

staff—how many people total in the SEC? 

Mr. KOTZ. A little less than 4,000, I think, full-time employees. 

Ms. LEE. 4,000. Less than 4,000. And you have how many, again? 

Mr. KOTZ. 18 full-time employees right now, and we have—we’re 

hiring four more. 

Ms. LEE. Twenty-two—— 

Mr. KOTZ. Twenty-two. 

Ms. LEE. For maybe over a trillion dollars, maybe. Certainly 

$500 billion. Somewhere close to that. 

Mr. KOTZ. The SEC has a very important, very difficult mission—— 

Ms. LEE. Yeah, but with 22 people to kind of watch over, that 

seems to be very few. I mean, I would think you’d need three times 

that amount to protect us and the American people from these 

fraudulent scam artists. 

Mr. KOTZ. Right. Certainly. 

Ms. LEE. You know? So, the—Chairman Rogers, I think that the 

13 percent budget cut has been proposed, and I know I heard your 

answer earlier about you really haven’t evaluated these. But what 

would it do to your office? Just your office? 

Mr. KOTZ. Well, so, again, we have 18 full-time employees; we’re 

trying to hire four more. They’re important positions. If something 


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like that were to go through, it very well may stop us from being 

able to hire those four people. I mean, you know, we have five investigators and six auditors. We do a lot of work with that, but, 

you know, we had somebody who recently left us, took a higher 

paying job. There’s no way we could compete financially with the 

job this person got. 

We want to replace the position; it’s an important position to replace, so there’s certainly the possibility that if the budget cut is 

severe, that we won’t be able to replace that person. And you know 

it would have an impact on our operations going forward. You 

know, we are lean and we are efficient, but we do need the bodies 

to be able to perform the work. 

Our complaints have gone up over time and we need to be able 

to assess them all. 

Ms. LEE. And you have to protect investors, right? 

Mr. KOTZ. Yes, absolutely. And that’s certainly the mission of the 

SEC. 

Ms. LEE. You’ve got at least $500 billion you’ve got to protect 

with 22 people. 

Mr. KOTZ. Right. 

Ms. LEE. Maybe 18. Sure, Okay. Thank you very much. 

Mrs. EMERSON. Mr. Diaz-Balart. 

Mr. DIAZ-BALART. Thank you, Madam Chairwoman. You mentioned a little while ago, in the back-and-forth, you know, money 

is not always the answer, obviously. And going back to some of the 

roles of the SEC—could part of the problem be that the SEC’s faculty has been given too many issues to look at, too many things on 

its plate and that—to the point where they can’t do any of them 

well because they’re spread so thin? I mean, could that not also be 

an issue? 

Mr. KOTZ. I think it’s certainly a possibility. And one of the 

things that we try to focus on is that if the SEC is going to take 

on something, it needs to be able to do it well. And you know, one 

of the things we saw in the Madoff situation was, you know, the 

SEC would do these exams or investigations, and they would not 

do thorough ones. And so it would actually send the wrong message. 

I mean, we had—I talked to somebody in the private sector who 

was suspicious about Bernard Madoff. He said, ‘‘Well I knew it 

wasn’t a Ponzi scheme.’’ I said, ‘‘How did you know it wasn’t a 

Ponzi scheme?’’ He said, ‘‘Because I knew that there was a complaint to the SEC that Bernie Madoff was running a Ponzi scheme. 

And so, if there was a Ponzi scheme, the SEC would have caught 

it. So I knew it’s not that.’’ 

Well in fact, the SEC did not do a competent job in that. And 

in fact, both Bernard Madoff and Allen Stanford would use when 

they spoke to folks who would be skeptical about investing, they 

would say, ‘‘The SEC was just here. You know, they gave me a 

clean bill of health.’’ And so, sometimes it is a concern when you 

conduct an investigation, and you don’t necessarily staff it fully. 

You don’t do it appropriately; you’re almost better off not doing it. 

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Frank—but I do think that that is something to be cautioned 

about. 

Mr. DIAZ-BALART. I think what you’re saying there is that some 

people get so dependent and so reliant on government that frankly, 

other things that would naturally take place, don’t take place, because oh, it’s you know, government, in this case the SEC, is going 

to take care of it. It’s all fine; they’re going to take care of it, so 

therefore, individuals don’t do their part that they would otherwise 

do. Is that basically what you’re saying? 

Mr. KOTZ. Yeah, but I think that perhaps that the natural skepticism of Madoff, you know, the fact that he was having these continuous returns over time was lessened because they figured the 

government was watching. 

Mr. DIAZ-BALART. Going kind of on the same point, and I know 

it may be an oversimplification, but you know, you would think 

that there are sometimes things that would trigger people to like, 

take notes. I know that if, you know, you use your ATM in the gas 

station twice, you know, like if I fill up my car and my wife’s car 

and all of a sudden get a call or an e-mail saying, you know, ‘‘Is 

that really you? Is there fraud there?’’ 

Mr. KOTZ. Right. 

Mr. DIAZ-BALART. And that’s, you know, whether it’s a $100 

transaction, which is like three gallons of gas now, or whether it’s, 

you know, $4 on a—or I should say $10 for a cup of coffee in certain places, you know, you’ll get that. And obviously they have systems to do that. And, going back to the $21 million expense that 

they’re going through, is that—again, you would think, and from, 

you know, your report, there were some of those triggers that just 

weren’t acted on, but somehow, the credit card companies, and I 

know it’s kind of a different, but yet related situation. They have 

triggers and they have—and they act on them. And, you know, why 

can’t—the question that I get a lot, is why can’t the federal government do what, frankly, every single credit card company does? 

Mr. KOTZ. Right, well—— 

Mr. DIAZ-BALART. In that sense. 

Mr. KOTZ. Yeah. No, I agree. I mean, the Federal government 

has to be held to the same standard, you know, the credit card 

company doesn’t do its job, somebody else takes over. And so the 

federal government has to be held to that same standard, and simply putting it into a system is not enough. They have to ensure 

that the triggers are appropriately looked at. You know, they have 

to make sure that they have the right skill set of individuals being 

involved. One of the issues that we looked at in the Madoff case, 

was, you know, there was some very intelligent lawyers came out 

of very, very impressive law schools, but didn’t know enough about 

trading to be able to analyze these carefully. 

Perhaps you got in somebody who had worked, you know, on the 

trading floor for many years. That person might have been in a 

better situation to identify these issues, rather than somebody who 

was, you know, a smart person. And so, the SEC needs to do more, 

clearly, than just put in a new system that costs $21 million. But, 

we are working on those issues as well and trying to recommend 

that they put together the right skill sets. 


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Mr. DIAZ-BALART. Well, I appreciate that, and if I may, Madam 

Chairman, just on the same point, because it seems that obviously 

one of the obvious things that I’ve learned is that sometimes it’s 

not how much money is spent but how that money is spent. And, 

so—and it’s going back to the fact that if there’s one area where, 

I think, taxpayers cannot be told that it’s because there wasn’t 

enough money, it’s frankly the SEC because of that tripling of the 

budget. 

So, I just want to make sure that, because it’s so easy to just— 

and you haven’t done that, on the contrary. But, for some of us to 

say, ‘‘You know, we just need to spend more money, spend more 

money,’’ well here’s the case where a ton more money has been 

spent and yet, you’ve been able to find areas where that money was 

not well spent—— 

Mr. KOTZ. Right. 

Mr. DIAZ-BALART [continuing]. Was not certainly focused on the 

right area. Obviously, one of the things that we need to do is obviously listen to you more often. A lot of times, we get the reports 

and we just don’t act on them as well. So, anyway, thank you. 

Mr. KOTZ. Thank you. 

Mrs. EMERSON. Thank you, Mr. Diaz-Balart. Mr. Womack. 

Mr. WOMACK. Just a couple of follow-up questions. And, forgive 

me if I show my rookie nature to this panel and to perhaps, the 

subject matter that we’re talking about here. But when recommendations go out of your office, when the Office of the Inspector General makes recommendations to the SEC for improvements 

to the systems that are designed to protect American investors, 

what are the consequences for the failure of the SEC to act on 

those recommendations to your satisfaction? 

Mr. KOTZ. Well, that information is essentially reported to Congress. And so, in our semi-annual reports to Congress, we chronicle 

the recommendations that we made and how many recommendations are open. And you know, if necessary, we will come forward 

to a committee like this, and say, you know, in addition to providing the semi-annual report, because I know you both get lots of 

semi-annual reports, to maybe highlight the fact that there’s a concern that recommendations are not being implemented. 

You know, we are very strict in our implementation. We require, 

initially, a corrective action plan to ensure that it’s started. Then 

we require documentation to ensure that it’s finished, and then 

only then do we agree to close it. And we report where it’s not 

closed. So, you know, I certainly believe it’s my obligation to bring 

to your attention, if that is the case, where we are—we’re recommending many, many different actions, and they’re not being 

taken, and there’s no good reason provided why they are not being 

taken. So, I—my job is to bring that to your attention and to see 

how you all and others can help us assist in that process. 

Mr. WOMACK. Another question is more in the area of the competency issue at the SEC level. There’s an argument out there that 

it’s got too many lawyers and not enough subject matter experts in 

the areas where their jurisdiction falls. Comment on that. I’d like 

to know, do we have the right people in the seats there that have 

the proper expertise to be able to see what a good part of the American public has been able to see from a distance. 


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Mr. KOTZ. Yeah, I think that was an issue that we found in some 

of our investigations. As I said, concerns that folks do not have the 

experience to understand the issues, even though they may be lawyers, they may be smart, they may be hard working. I mean, many 

of the folks who worked on the Madoff matter actually worked very 

hard, worked very long hours, but missed sort of very obvious 

things. 

I know that the new director of Enforcement has looked to set 

up these sort of specialized groups to ensure that there are folks 

who have specific, specialized experience, that one can go to. When 

the Ponzi scheme investigation was done in the SEC, from Harry 

Markopolos’s complaint, the individuals who worked on that investigation had very little, if any experience in conducting Ponzi 

schemes. 

They didn’t know how to conduct a Ponzi scheme. They were 

very smart, they were very hard working, they tried very hard, but 

they didn’t know how to conduct a Ponzi scheme investigation. And 

so, I believe that they’re putting in place, sort of specialized groups, 

so you have a resource to go to. 

But I think part of that may very well be, in addition, hiring 

other folks. Now there was a time where it was difficult for the 

SEC to recruit, say, Wall Street folks, because they were making 

a lot more money, there were big bonuses, there was no way they 

were going to come work for the SEC. 

You know, with the economic times, that—I don’t think that 

that’s an excuse anymore, frankly. Because the times are tough on 

Wall Street, at least they have been. And perhaps there’s more of 

an opportunity to get those people. And so, I absolutely agree that 

we need—the SEC needs to get in the people who understand how 

the fraudsters work, not just people who are very smart, and are 

trying hard and hard working. 

Mr. WOMACK. I would agree with that. The gentleman from Florida was talking about triggers just a minute ago, and at the risk 

of sounding like a broken record in part of my earlier line of questioning—and I will use metaphorically the TSA, although I’m not 

necessarily endorsing the activities of the TSA. 

But, when they developed a system to find, say, a gun in a bag 

that might be put on a conveyor belt, the best way to test whether 

the effectiveness of that system was to basically put a gun in a bag 

and put it on the platform and let it go through to see if it does 

its job. And my strong recommendation, my strongest recommendation is for any of the processes, the $21 billion TCR or whatever 

system that has been recommended and it is in place, that we put 

the gun in the bag and check the system. And that’s the only way 

that you can restore consumer confidence, investor confidence that 

we have in place fail-safe systems that are designed to protect, and 

in fact, do protect the investor. 

Mr. KOTZ. Yeah, and that’s an excellent idea. I’m not going to say 

specifically that I’m going to do that, because the SEC’s probably 

listening—but, in order to test the system, you have—that’s an absolutely excellent idea, you know. In other words, to see specifically 

if a complaint comes in, what happens to it? 

Mr. WOMACK. And I just want to follow up with what the gentleman from Alabama said. I believe there are market rates in ArVerDate Mar 15 2010 05:43 Jul 07, 2011 Jkt 099011 PO 00000 Frm 00218 Fmt 6601 Sfmt 6602 E:\HR\OC\A999P2.XXX A999P2

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kansas that are even more competitive than Mobile, Alabama and 

certainly, much more competitive than Manhattan. 

Mrs. EMERSON. You notice, he didn’t say Missouri. 

Mr. SERRANO. Madame Chair, it’s a good thing I don’t represent 

Manhattan. I may be offended by that. 

Mrs. EMERSON. Yes, but you represent Yankee Stadium, Joe, 

which is quite lovely real estate. 

Mr. SERRANO. Yes. The salaries there are quite high. 

Mrs. EMERSON. And the ticket prices are outrageous. 

Mr. WOMACK. I will take exception to the gentleman from New 

York. He’s complaining about Cardinal baseball, and let it be a 

matter of the record here, that Madame Chairwoman is joined by 

a die hard St. Louis Cardinal baseball fan. 

Mr. DIAZ-BALART. Those are fighting words. 

Mr. SERRANO. I like the Cardinals. 

Mrs. EMERSON. Just not as much as the Yankees. All right, so 

playing off of everything that my colleagues have talked about with 

regard to staffing, and I actually really like Mr. Womack’s idea 

about testing the systems at the SEC. I think that’s a great idea. 

Right now, there are 23 offices that currently report directly to 

the chairman of the SEC, and I think Dodd-Frank will add even 

more offices that—if you look at the functions of the office on the 

charts—seem to mirror, to some extent, existing offices already 

within the SEC. 

We know, as we’ve just been discussing for quite some time, that 

there was poor coordination between the offices within the SEC. 

So, have you all actually considered doing an internal review of the 

entire SEC structure, not just focused on Madoff or Stanford? 

Mr. KOTZ. Yeah, I think that’s a good idea. I mean, you know, 

perhaps, particularly as you say, with respect to Dodd-Frank, once 

the SEC puts in all those offices, we need to ensure that those offices are not doing the same thing that another office is doing. So 

I think at that point in time is probably a good time to look at an 

overview and to ensure that both, there is communication between 

offices, but also that there isn’t duplication of effort. 

Mrs. EMERSON. Well, I know that there is, if I remember correctly, something within Dodd-Frank with regard to whistleblowers, but yet there already is a function within the SEC that 

does that. I think perhaps four of the five offices that Dodd-Frank 

recommends putting in place mirror something in the title. So it 

seems to me that, if those existing offices can be refashioned, and 

the people have the right skill sets, that it’s absolutely wasteful to 

set up all new offices that mirror the same thing that the other offices are supposed to be doing already. 

Mr. KOTZ. Right. No absolutely, absolutely. That’s something 

that we have to be very careful about. I think anytime you have 

legislation, new legislation, particularly as comprehensive as DoddFrank is, you have to ensure that it gets acclimated into your own 

environment in an efficient way, and not just sort of added on. I 

mean, a lot of those situations—there’s statutory requirement that 

somebody report to the chairman, and I think that’s why there are 

many, you know, situations where the offices report to the chairman’s office. But we have to make sure that they’re all doing different things, and are not duplicating efforts. 


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Mrs. EMERSON. Well, and 23 direct reports is really a lot for any 

organization. 

Mr. KOTZ. Yeah. 

Mrs. EMERSON. I want to flip over to a totally different subject, 

which is fascinating and scary at the same time. High-frequency, 

or algorithmic trading—and specifically, I want to refer back to 

May of last year when the Flash Crash occurred. I think by some 

accounts, computer-aided high-frequency trading now counts for 70 

percent of total trading volume, and so there is much more influence by the algorithms rather than actual traders. 

Do you think that the SEC is currently able to keep up with 

these new ways of trading? Is this something that you all are looking into? 

Mr. KOTZ. Yeah—there have been some complaints that came in 

about what happened in May. We have begun to look at it. I mean, 

the SEC actually has done a lot of its own analysis on how it happened, why it happened, came out with a report. So we haven’t sort 

of duplicated their process in that way, but I think that is something that does need to be looked at in the future. I mean, I think 

things are getting more complicated, more difficult, and we have to 

ensure that the SEC’s able to keep up. 

Mrs. EMERSON. So, within their report, do they talk about how 

they could better detect those kinds of issues in the market? 

Mr. KOTZ. I haven’t thoroughly analyzed the report, but I believe 

that that is part of it. I believe they looked at, you know, what happened, why it occurred, and what we can do in the future to move 

forward appropriately. 

Mrs. EMERSON. Okay, because it’s a fascinating issue, but it’s 

also somewhat intimidating and hard to track. 

Mr. KOTZ. Right. 

Mrs. EMERSON. It begs the question as to whether or not there 

are obsolete regulations that might need to get thrown out, and 

perhaps Congress should look at this whole issue, because of the 

manipulation that can occur. 

Mr. KOTZ. Right, right. No, absolutely. That’s a real concern. 

Mrs. EMERSON. All right, thank you. Mr. Serrano? 

Mr. SERRANO. I just want to first of all ask unanimous consent 

to submit some questions for the record. 

Mrs. EMERSON. Without objection and we will all, I believe, have 

questions to submit for the record. I forgot to say that earlier, so 

thank you. 

Mr. SERRANO. Okay. And just one follow-up question on the issue 

of the territories. So you said that you were not aware, which I understand because I’m not aware myself either. I was not asking a 

question that I knew an answer to. So you will look at it, and you 

will report to the Committee? 

Mr. KOTZ. Yes, absolutely. 

Mr. SERRANO. Okay. 

Mr. KOTZ. Absolutely. 

Mr. SERRANO. Because I’d like to know what our relationship is 

with the SEC, and how they deal with that, and just what’s going 

on out there. 

Mr. KOTZ. Okay. No, absolutely. 


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Mr. SERRANO. Which, by the way, it’s a general pattern throughout the federal government that in so many cases, the territories 

are sort of an afterthought. 

It’s true in funding. If you look at the way we fund, we fund 

using a formula for the 50 States and then you have to bargain to 

get the territories, you know, a certain amount of money and it’s 

never based on population like in the other States and so on. So 

I’d like to have a better understanding of that. 

Mr. KOTZ. Okay. Good, good. Thank you. 

Mr. SERRANO. Thank you. Any timeline on that, I don’t want to 

give you more work to do. 

Mr. KOTZ. Well, no. I’d be happy to get back, you know, in a 

short timeframe. Just initially what’s done, if there’s a more thorough analysis—— 

Mr. SERRANO. Okay. 

Mr. KOTZ [continuing]. That’s required, I’ll go forward. But I can 

get back in a few weeks just generally what’s happening. 

Mr. SERRANO. That’s great, that’s great. Thank you. I have no 

further questions. 

Mrs. EMERSON. Thanks, Mr. Serrano. Mr. Diaz-Balart, more 

questions? 

Mr. DIAZ-BALART. None. 

Mrs. EMERSON. Mr. Womack? 

Mr. WOMACK. None. 

Mrs. EMERSON. Ms. Lee? 

Ms. LEE. One more. Let me ask, now the FDIC is responsible for 

the oversight of—as it relates to the new rules governing credit 

cards? Is it the FDIC? 

Mr. KOTZ. I’m not sure, sorry. 

Ms. LEE. Okay. But whichever agency it is, you know, we’ll talk 

to them about this, but, you know, the credit card companies now 

have found new ways to scam the system. 

Mr. KOTZ. Right. 

Ms. LEE. So I’m wondering now as it relates to Dodd-Frank, 

how—well, I do know. The traders in some of the financial institutions are really busy now developing ways to game the system. 

Mr. KOTZ. Right. 

Ms. LEE. Now, given that, what’s your staffing like to try to anticipate these new games that are being put together? 

Mr. KOTZ. Yeah, I mean—— 

Ms. LEE. So you can do this on the front end and how do you 

recognize what they are? Because let me tell you—the credit card 

companies and the new scams that they’re running are just as serious as the ones before. 

Mr. KOTZ. Right. 

Ms. LEE. And consumers are really paying the price now. 

Mr. KOTZ. Right. No, I mean, it’s very difficult I think to stay 

ahead of the curve with respect to those kinds of things, with respect to fraud. And I think the SEC needs to not just react sort 

of when they get a complaint. They put this new system in, they 

react to complaints. They also need to be proactive. And I know 

that’s something that the Enforcement Division is looking at. I 

know that that’s a priority for them. But I absolutely agree that 


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they need to sort of look for the next fraud before it happens, anticipate it, and set up systems to deal with it. 

Ms. LEE. Well, what’s the staffing that’s required for that and 

how do you anticipate, knowing that this is taking place right now, 

how do you do that within the current staffing patterns? And 

again, I think you should have a 50 percent increase myself to really protect consumers and investors from what has taken place 

given the magnitude of your job. And so how are you going to do 

this? 

Mr. KOTZ. Yeah, you know, I think it’s difficult. I think you need 

the bodies who are focused only on sort of the new risk areas, the 

proactive measures and not have them, you know, if they’re sort of 

dealing only with complaints that are brought in regarding past 

issues, they don’t have the time and resources to be able to look 

at those things. So I think that where you have significant budget 

cuts, I think that that’s a concern. 

Ms. LEE. And I hope this committee will really look at that very 

carefully because I can see a new wave of fraud, new games that 

are being played and put together right now that we don’t even 

know what they are. And you’re going to have to look at what the 

dynamics are and what they look like and then be able to prevent 

them from taking place. 

Mr. KOTZ. Right, right. Absolutely. 

Mrs. EMERSON. Thank you so much. I want to thank all my colleagues. Mr. Kotz, thank you so very much for being here today. 

We really appreciate your direct answers and we look forward to 

working with you. 

Mr. KOTZ. Thank you very much. 

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(233) 

TUESDAY, APRIL 5, 2011. 

GENERAL SERVICES ADMINISTRATION 

WITNESS 

MARTHA N. JOHNSON, ADMINISTRATOR, GENERAL SERVICES ADMINISTRATION 

Mrs. EMERSON. The hearing is going to come to order. I would 

like to welcome my colleague and friend, Mr. Serrano and Mr. 

Womack as well, and particularly we want to welcome you, Administrator Johnson. Thank you very much for being here today. I also 

want to mention for our colleagues that we have several of the GSA 

regional administrators here. Thank you all very much. I know 

that you are the ones who have the up close and personal face time 

with our offices and you all do a great job. We really appreciate you 

being here and I hope that the time that you spend in D.C. is productive. Certainly it is a crazy time and I suppose it is possibly an 

interesting time for you all to be here. 

GSA directly provides or has contract vehicles for a wide range 

of services for federal agencies. Some of these services are easy to 

understand such as buying supplies, finding and leasing office 

space or constructing and maintaining courthouses. Other services 

are less well-known, such as managing a public key infrastructure, 

conveying or auctioning excess lighthouses, or providing information to the public through new media tools and technology. When 

done well, these services are invisible and unappreciated. When 

done poorly, these services are ugly reminders of waste and inefficiency. 

For fiscal year 2012, the GSA requests $9.8 billion in budget authority and obligational authority, of which $9.5 billion is for the 

Federal Buildings Fund. The remaining $332 million in funds are 

for, among other things, an Office of Inspector General, the management of GSA, and notably, $38 million for an initiative to 

streamline acquisition management. 

The Federal government’s gross debt currently exceeds $14 trillion and is expected to reach $26 trillion in 2021. The government 

will never be entirely debt-free, but I am committed to reducing the 

rate at which we incur debt. 

As such, this committee’s goal is to reduce spending under this 

subcommittee’s jurisdiction to fiscal year 2008 levels. GSA will undoubtedly be a part of meeting that goal through reductions in its 

own budget, through innovations to reduce the expenses of all federal agencies and I know that you are working towards that goal, 

as far as trying to use innovation to provide efficiency. We are 

thankful for that, once again and thank you for being here, and 

welcome, Administrator Johnson. I do appreciate your service and 


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look forward to your testimony. But now let me recognize my 

friend, Mr. Serrano, for any opening statements he has to make. 

Mr. SERRANO. Thank you Madam Chair, and you will notice, I 

will not make any comments about the St. Louis Cardinals at all. 

Mrs. EMERSON. I know. I am ashamed of how poorly they are 

doing, what can I tell you? 

Mr. SERRANO. I am a Yankee fan, so it is fine with me. Actually, 

I feel bad. 

Mrs. EMERSON. Well, I am sure it is. Do you feel badly? 

Mr. SERRANO. I do. I only feel good when the Red Sox lose. 

Mrs. EMERSON. Well, at the moment of two against one, but since 

your team is winning and ours is losing. 

Mr. WOMACK. I am not saying a thing. 

Mr. SERRANO. Okay, Colonel. Thank you, Madam Chair. I, too, 

would like to welcome GSA Administrator Martha Johnson. The 

General Services Administration plays a primary role in procuring 

goods and services, as well as managing facilities for other parts 

of the federal government. Because of this, the GSA has the responsibility of minimizing property costs, as well as the cost of 

goods and services for their clients, the other agencies of the federal government. 

As we go forward in a tight budget climate, it is important to 

know that agencies like the GSA are doing their utmost to ensure 

that the federal government is operating as efficiently as possible. 

I am also interested in learning more about the contractor performance database, which, according to press reports, is expected to go 

live on April 15th. This database will provide lawmakers and the 

public with important information about the reliability and past 

performance of the federal government contractors. 

I think I speak for everyone here when I say that the Federal 

government should not be using contractors who cannot get the job 

done on time, on budget, and in line with their bids. This database 

will help ensure greater public accountability for those contractors 

who fail to meet these goals. Lastly, we are now just a few days 

away, it seems, from a possible government shutdown. Because the 

GSA operates as the landlord for so many federal buildings, a possible shutdown at the GSA would potentially have a much broader 

impact on the many federal buildings that house other agencies. 

Administrator Johnson, as you answer questions today, I think 

it would be helpful to learn more about the effects of a government 

shutdown on GSA’s operations, and what plans the GSA has in 

place, should a shutdown occur. Once again I welcome you, and I 

thank you for being here. Thank you, Madam Chair. 

Mrs. EMERSON. Thank you so much, Mr. Serrano. Administrator 

Johnson, if you could keep your opening remarks to five minutes 

or so, that way we will have more time for questions. We welcome 

you, and thanks for being here. 

Ms. JOHNSON. Thank you very much, Madam Chair, Ranking 

Member Serrano, and distinguished members of the subcommittee. 

Thank you for inviting me to appear before you today to discuss 

GSA’s Fiscal Year 2012 Budget Request. 

Our Fiscal Year 2012 Budget continues efforts that we started 

last year to transform GSA into an innovative change agent for the 

government. GSA is a strategic partner for federal agencies that 


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helps them make efficient and effective use of resources, collaborate with and engage with the public, and make government more 

nimble, agile, responsive, and adaptive. 

GSA is building a government that works better by changing the 

way we acquire, manage, and dispose of our assets, and by accelerating open government through new transparency tools and practices. We believe that open government is good government, and we 

have requested limited funding increases that will enable us to engage citizens even further, in so doing, receive better feedback 

about vital federal programs. We are also requesting targeted investments in federal buildings and land ports of entry to modernize 

the nation’s infrastructure, create jobs, and grow trade and commerce. 

GSA’s Fiscal Year 2012 Budget priorities align with our goal of 

supporting a government that works better through a three-part 

strategy of supporting innovation, building customer intimacy, and 

creating operational excellence. The two primary drivers of this 

strategy are first, our focus on achieving a zero environmental footprint and second, our dedication to fostering an open and transparent government. 

The Zero Environmental Footprint goal, or ZEF, is GSA’s commitment to eliminate our impact on the natural environment, and 

use our example and our government-wide influence and positioning to reduce the environmental impact of all federal agencies. 

ZEF focuses GSA’s efforts and resources to concentrate on reducing 

our consumption of energy, water, and other resources, eliminating 

pollution and reducing inefficiencies from all of our operations. As 

numerous examples from the private sector demonstrate, pursuing 

sustainability across our enterprise will help us stretch our budget 

dollars further and develop best value to the taxpayer and our 

agency customers. 

GSA is also building expertise, technology, and processes for 

open government, and is putting transparency, participation, and 

collaboration at the center of government operations. We are publishing unprecedented amounts of government data and information online and through mobile applications to communicate government performance and services to citizens. 

GSA is helping the government be more responsive by expanding 

citizen participation through shared information, crowd-sourcing 

tools and techniques, virtual workplaces, and collaborative protocols. Our efforts in open government have provided federal agencies 

with the tools and expertise to make a more visible and accessible 

government that is better able to encourage and engage the talent 

and contributions of our citizens, industry, academia, and our own 

civil servants. 

To conclude, your approval of GSA’s Budget Request for Fiscal 

Year 2012 is a vital step towards helping GSA deliver a more effective and efficient government. Our request advances the administration’s goal of winning the future through strategic investments 

in innovation and infrastructure, while cutting waste and excess. 

I look forward to continuing this discussion on the Budget Request 

with you and the members of the subcommittee. 

[The information follows:] 


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Mrs. EMERSON. Thank you so much, Administrator Johnson. I 

am going to go ahead and start. We have been joined by Mr. DiazBalart and Mr. Bonner. And so I will try to keep my questions to 

five minutes as well. 

The Bowles-Simpson Fiscal Commission proposed governmentwide reduction in travel, printing, and vehicles. Can you share with 

us, how much does GSA currently spend on these activities for 

itself and what you are doing to help other federal agencies save 

resources in these areas? 

Ms. JOHNSON. The actual numbers of what we spend I will have 

to provide for the record. 

[The information follows:] 

TRAVEL, PRINTING, MOTOR VEHICLE EXPENDITURES

What does GSA currently spend on travel, printing, and motor vehicles? 

GSA response: GSA obligated $69 million for travel, printing, and motor vehicles 

in FY 2010. Of that amount, approximately $50 million was for travel, $13 million 

was for printing and reproduction, and $6 million was obligated to operate the GSAinternal motor vehicle fleet. 

Ms. JOHNSON. We are attacking travel with great vigor. Our own projections are to cut our own travel $11 million this year, and to 

reduce that through a number of techniques. 

First of all, we are working much more with a mobile workforce 

notion, which, I think, gives us much more flexibility and technology, so people can communicate across the country without picking up and going there. Second, we are installing some good telepresence, videoconferencing capability, which I think will get people to stay off airplanes. One of the things is you really want to 

have a good capability, so that your instinct is to get on the video 

conference, rather than get on an airplane. A change in behavior 

is part of this as well. 

So, through our FAS, acquisition service, we are creating important tools so that people who do travel have better options and better prices. So, as usual, we are working on more efficient travel, 

when it is necessary. 

In printing, I think we are right at the cusp of moving from really a paper-dominated government to an electronic-dominated government. And we are right in the center of that. We are reducing 

the publications we offer by quite a good number, although I am 

going to have to supply that to you. We are also, through our online capability, publishing data and making much more available 

to the public that way. And I think that is encouraging all of us, 

again, to shift behaviors to move online. So, through all of these 

shifts in travel and moving more towards technology, I think we 

are on the glide path towards much more efficiencies. 

[The information follows:] 

PRINTING OPERATIONS

The Administrator committed to provide the number of print publications that 

GSA is eliminating or reducing. 

GSA Response: GSA print operations are managed by the Office of Citizen Services and Innovative Technologies (OCSIT). OCSIT promotes and manages the distribution of Federal print publications to the public; however, actual printing and 

print distribution is primarily accomplished through the Government Printing Office 

distribution facility in Pueblo, CO. OCSIT supports print distribution by creating a 

variety of direct marketing materials and a quarterly Consumer Information CataVerDate Mar 15 2010 05:43 Jul 07, 2011 Jkt 099011 PO 00000 Frm 00256 Fmt 6601 Sfmt 6621 E:\HR\OC\A999P2.XXX A999P2

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log. OCSIT also publishes the annual Consumer Action Handbook (CAH) and its’ 

Spanish equivalent, the Guia del Consumidor, to provide consumers with critical information on purchases, problems, and complaints. 

In FY 2010, GSA promoted and distributed more than 22.9 million publications 

to the public through the GPO distribution facility in Pueblo, CO. Ninety-eight percent of these publications were prepared for other Federal agencies, to meet specific 

requirements and pass on critical information to citizens. GSA printed and distributed an additional 9.7 million publications through quarterly distributions of GSA’s 

Consumer Information Catalog. GSA plans to reduce the number of Catalogs it produces and distributes by more than 30 percent in FY 2011 by moving from quarterly 

to semiannual distribution. This transition will reduce GSA printed documents by 

3 million pieces. 

GSA is working with customer Federal agencies to find ways to reduce print publications, but has not set specific targets for reducing their print publications. GSA 

has had recent successes in making Federal publications available through online 

document sharing tools. GSA currently offers 100 agency publications each on 

Scribd, a free online document sharing tool, and Google Books and the GPO Bookstore website. Publications on Scribd received 40,000 page views in FY 2010 and, 

in the first ten days that agency publications were posted on Google books, GSA received 2,000 orders for printed publications and 500 on-line views. GSA plans to 

make 500 publications available electronically through Google, Scribd and other 

partnerships by the end of FY 2011, and expects this will allow Federal agencies 

to eliminate or reduce print publications in the future. 

Mrs. EMERSON. Okay. I will appreciate you getting that information back to us. On page nine of your testimony, you mentioned 

FSS Size Solution for Domestic Shipping and Parcel Delivery Services and the work that you all are doing to reduce costs. Given the 

fact that we also have jurisdiction over the U.S. Postal Service, and 

it is in such dire need of either new funds or trying to reduce its 

expenditures since it is way in the red, do you work with them and 

is this part of what you all are doing to try to save costs? 

Ms. JOHNSON. The parcel service, direct parcel service, is one of 

our many cooperative buying programs that we are sort of facilitating. We are moving away from, clearly, our old mandate of being 

the sole supplier of these things, to organizing the agencies into 

kind of a cooperative buying process. We are doing it for office supplies, for wireless service, for print services, eventually for software, in a more concentrated way, and domestic parcel delivery. 

The process is to go out and to ask industry, the post office, who 

can come in with the best bids and then to orchestrate the agencies 

to agree to a certain volume of purchasing. So, in that process they 

are among the competitors, if you will, for our consideration. 

Mrs. EMERSON. So the Postal Service will be competing with 

UPS, with FedEx, or whomever as part of this, because it just 

seems to me that we should be encouraging them to be able to increase volume so that they are not in such dire financial straits. 

Ms. JOHNSON. That is a good point, and I can learn more about 

how we consider them, and what sort of conversations we had with 

them. 

Mrs. EMERSON. Would you? I would appreciate it because when 

you have got an agency, or an entity of the government that is almost $3 billion in the hole, you have got to try to figure out: Okay, 

are there things that we can do. And obviously a federal partnership, since it is a public-private entity anyway, anything that we 

can do to help them, as long as they can meet the same price 

threshold. 

Ms. JOHNSON. Exactly. Offer the same value, which is what we 

can then be the arbitrators for. 


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[The information follows:] 

USPS SERVICES

How did GSA consider the US Postal Service in the Express Ground and Domestic 

Delivery Service FSSI BPA, and did GSA have any conversations with the USPS 

when developing, competing, or awarding the BPA? 

GSA response: GSA had several conversations with the US Postal Service (USPS) 

when developing the Express and Ground Domestic Delivery Services (ExGDDS) 

FSSI BPA, and worked with all potential offerors, including the USPS, to ensure 

they were well-positioned to participate in the solicitation. 

Early in the ExGDDS procurement, GSA determined that using the GSA Schedules program was the best way to fulfill the goals and objectives of the FSSI. GSA 

worked with USPS to help them become a Schedule provider for the first time. 

GSA conducted extensive market awareness discussions with USPS, as well as 

the other interested suppliers, during the solicitation development and market research phase. GSA used that industry feedback to develop a solicitation that was 

keenly competed among GSA Schedule participants. 

Ultimately, GSA selected United Parcel Service (UPS) as the source that provided 

the best value to the government based on price and other technical evaluation factors. The evaluation criteria used for the procurement were technical approach, past 

experience/past performance, corporate qualifications, and pricing. 

Mrs. EMERSON. Okay. Well, then let’s have a further conversation about that if we could. Mr. Serrano. 

Mr. SERRANO. Thank you. Let’s talk about one of our favorite 

bills, H.R. 1. What is the impact on your agency? The bill proposes 

no funding for construction or acquisition of facilities, a cut of $676 

million from fiscal year 2011 requests, and very little funding for 

repairs and alterations, a cut of $423 million. So, what would be 

the impact? If it were enacted what would it do to the impact on 

federal buildings, current projects, and construction jobs? 

Ms. JOHNSON. Our building’s projects are in sort of a number of 

tranches. We work with the judiciary and we have a couple of those 

projects, we have a number of construction projects under way. We 

also do a great deal of land ports of entry right now. Federal office 

buildings; everything from federal centers to negotiating office 

space and work environments, and the whole portfolio will be impacted. And it is difficult to know how the priorities work out until 

you actually know how much you are dealing with overall. The repair-alteration piece to it is of huge concern because our inventory 

is a huge valued asset, and any degradation of that just puts us 

that farther behind. So, while we try to be very good stewards 

about using the resources that we have available, holding to that 

line will reduce our ability to continue the repairs and alterations 

that we want to do, and schedules we want to keep. 

Mr. SERRANO. Now what would happen to projects that are near 

completion? For example, buildings that are almost ready for occupation but would not receive the final installment of construction 

costs? 

Ms. JOHNSON. We are going to have to manage it at the portfolio. 

If the funds are limited, we will need to look at each of the projects 

we have and determine where we will suffer the least, if we were 

to slow down, or extend the schedules, or do any kind of change 

of program. So it is really a comparison problem. Clearly, the priority is to start with the safety and security of the workers. So if 

the work that we are doing has to do with that, we need to get that 

taken care of. But then it is a trade-off; if you have a whole bunch 

of money and you have got one project that is nearing completion 


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or four that are at another stage, you just have to make all of those 

trade-offs. And we do this all the time. This is the nature of portfolio management. 

Mr. SERRANO. Right. If there’s something that both parties agree 

on, and I venture to say this out loud, it’s that the economy will 

show that it is doing better when more jobs are added to the economy. The majority party also believes that, through very dramatic 

cuts and new jobs, you would turn the economy around. Some of 

us believe that some of those cuts can, in fact, make us lose jobs 

that already exist. Is there any way of knowing the impact on jobs, 

how many jobs you would lose if these cuts went through? 

Ms. JOHNSON. I could explore that and provide that for the 

record. I think we could make some estimates around that. 

Mr. SERRANO. I appreciate that. I am going to ask you about the 

potential shutdown. No, first let me ask you, a project that is very 

much a part of this committee, over the last few years. What would 

be the impact, again, I know that you cannot really outline exactly 

what would happen if H.R. 1 becomes law, but what would be the 

impact on the St. Elizabeths campus in Southeast DC for the Department of Homeland Security? That has been a project that has 

been mentioned quite a bit. 

Ms. JOHNSON. Quite a bit; it kind of dominates our thinking in 

many ways. It is the largest building project we are engaged in 

right now. It has a number of phases of work. Essentially, if we 

had a smaller budget we would have to slow down the overall 

project. Right now, we are engaged in working through the Coast 

Guard’s headquarters, and we would work very hard to try to stay 

on schedule and be as creative as possible to do that. But I think 

we are going to be needing to adjust on all fronts, if we are compromised on our budget. 

Mr. SERRANO. I have one last question, Madam Chair. I know we 

have other members. Again, related to H.R. 1; the impact of a potential shutdown of the government. As the government’s landlord, 

what happens to GSA operations if very few of your tenants are 

able to work after this Friday? 

Ms. JOHNSON. We clearly are responsible for a major asset for 

the government, and need to be sure that it is secure, and where 

there is necessary work going on we need to be supportive of that. 

If there are hospitals that need to stay open, or other kinds of facilities, and we are engaged in them, although we do not do hospitals, we would be supporting the work of whichever division is 

still engaged. And I suspect it would be quite minimal. But our facilities play a part in supporting those vital missions and I do not 

think we should be the link in the chain that would be compromising that. 

Mr. SERRANO. Okay, but there is a plan in place? 

Ms. JOHNSON. We have a regular plan, ours was renewed a couple years ago. It is sort of a routine thing, what to do, because we 

are so vital to everyone in the government, and so, yes, we have 

a plan in place. 

Mr. SERRANO. Right. Thank you, Madam Chair. 

Mrs. EMERSON. Thank you, Mr. Serrano. Mr. Womack. 

Mr. WOMACK. Madam Administrator, help me out with something here. Government-wide policy, if my numbers are correct, in 


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2008, it was $52 million and some change, and then in 2010, it was 

nearly $60 million, and your 2012 request is $105 million. I did 

some quick math on that. If I am right, that is about one and three 

quarters times the 2010 amount. Help me out with government 

policy. Why such an exponential increase in the request, there? 

Ms. JOHNSON. The bulk of that is responding to the pleas and 

cries from across government to be sure that our acquisition workforce is trained and as professional as possible. And the acquisition 

workforce over the last couple of decades has not had the attention 

it needs. It is a complex job. It has had a huge amount of turnover. 

And we are all sensitive to the fact that, as it gets more complex, 

we need to be sure that those people, our contracting officers, and 

the people part of the procurement process are really well trained. 

So the bulk of that is leaning in the direction of the acquisition 

workforce. 

There is a piece for cyber security, a large portion for the Integrated Acquisition Environment, some policies around that, and a 

couple of other minor things. But that is the piece that is most special and dear to my heart. 

Mr. WOMACK. But to nearly double the budget? 

Ms. JOHNSON. Well, there are a couple other pieces to it, but that 

is a chunk of it, yes. 

Mr. WOMACK. Wow. There has been a lot of discussion at the federal level about the amount of property we own. My understanding 

is that there are 1.2 million different pieces of perperty, if my numbers are correct. It is my understanding that a number of properties have been designated as excess or underutilized. How many 

of these have been designated as excess? 

Ms. JOHNSON. This is where I begin to sound like a dictionary; 

there are differences between excess, surplus, and underutilized. 

There is a database that indicates there are some 14,000 pieces of 

properties that are identified as individual pieces that are excess, 

I believe, is the word. We have 170 that we are currently working 

on disposing and those are ones that are working through the rather elaborate process to be sure that no one else can use them. 

Mr. WOMACK. Is that 170 of the 14,000? 

Ms. JOHNSON. Yes. But the 14,000 are subsets of other properties. For example, flagpoles and fences are separately designated 

if you are talking about a whole base. And so you have dozens of 

properties in one cluster, which, if it came to us as a disposal, it 

would be the whole collection. So it is not apples and oranges, and 

that is where we get everybody a little bit confused. 

Mrs. EMERSON. How many buildings would be involved in the 

14,000? 

Ms. JOHNSON. Buildings in the 14,000; that gets to, is a shed a 

building? I would have to supply you that designation. There are 

properties, there are radio towers, there are fences, there are flagpoles, so it is a real collection. 

[The information follows:] 

FEDERAL PROPERTY

How many of the 14,000 Federal real property assets identified as underutilized 

or vacant are buildings (instead of flagpoles, fences, etc.)? 

GSA response: The Administration has identified 12,217 excess properties in the 

United States. Of that amount, 9,070 are buildings. The remaining 3,147 properties 


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include undeveloped land, airfields, utility systems, roads and bridges, and a variety 

of structures other than buildings. 

Mrs. EMERSON. Excuse me for interrupting both of you. So one 

flagpole would be one of the 14,000? 

Ms. JOHNSON. Yes, it could be. 

Mrs. EMERSON. But it is not necessarily? 

Ms. JOHNSON. It could be that is specifically denoted. 

Mrs. EMERSON. Would a gate be a thing, too? 

Ms. JOHNSON. It could be. 

Mrs. EMERSON. Could you get us a list of the 14,000? 

Ms. JOHNSON. We have all of that. Now, let me explain that that 

is a database that is developed by each agency posting what it considers to be in that category. So this is something we collect, and 

we can share it, it is not something we share generally, because of 

security reasons. So we will share it. 

[The information follows:] 

LIST OF UNDERUTILIZED VACANT PROPERTIES

The Administrator committed to providing the Committee with a list of all 14,000 

underutilized or vacant properties. (Rep. Emerson, transcript lines 420–425, page 

21) 

GSA response: A separate file is attached, listing 12,217 excess properties, including the likely disposition outcome of the properties. This file is also available online at link: http://www.whitehouse.gov/issues/fiscal/excess-property-map. 

Mr. WOMACK. Do we have too many buildings? 

Ms. JOHNSON. We have 170 we need to be moving on, so yes, I 

think we are always in a position of needing to adjust our inventory. Whether it is down or up is really a question of the individual, localized needs. For example, during the census process, we 

do not want to own census offices, but we need to go out and lease 

fairly small entities around the country to house that. So it ebbs 

and flows, if you will. And on any given day we always have properties that we need to be disposing of, and we always have needs 

that we need to be fulfilling. We do spend a tremendous amount 

of effort on trying to be sure that federal workers are housed first 

in owned property, if at all possible, and keep the consolidation and 

the adjustment moving, but of course that is always a matter of 

funding, because consolidating is not free. 

Mr. WOMACK. My mother-in-law was into arts and crafts. She 

never sold a piece. So when I visited her home, and I love her dearly, it is all still there. And the way we acquire property, and hold 

onto property, and have 14,000 pieces, and in our pipeline only 170 

to move right now, kind of reminds me of an organization that 

might hoard property. That seems to me to be a terribly inefficient 

way to run government, particularly when a government like this 

government is borrowing 40 cents on the dollar for everything it 

spends. So I am concerned about the amount of inventory that we 

have, and with each piece of that inventory, if it is not being appropriately used, there is a lot of care and well-being, and a lot of 

other factors that go into its management, and so I would challenge 

you to continue to press on that issue. 

Finally, this question; GSA has a set of requirements for new 

construction and renovation to be certified as U.S. Green Building 

Council’s LEED designation. I understand that the LEED standard 

is internationally recognized, but I am also aware that there are 


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other green building rating systems. And so, my question for you 

is; would it cost less to implement and allow for examination of the 

full life-cycle of building materials if we developed through some 

other process? Why do we only recognize one standard? 

Ms. JOHNSON. The Energy Independence and Security Act asked 

us to lean toward one standard, to designate one that we would 

use, and asked us on a regular basis to review and see if that was 

the best one. We have, therefore, chosen LEED, and that has become quite a well-known standard, and I think there is a real value 

in that. At the same time, you never want to get sleepy and sit on 

one standard or one norm without really testing and seeing what 

other options you have. We have also been looking at another 

standard. Green Globe, I believe, is what it is called. And we have 

been looking at that a little bit in some of our regions, and in preparation for the sort of formal review, we have been gathering data. 

I completely sympathize with the situation of standards emerging right now in the sustainability and green world. We are really 

at a time when we are learning a lot, and they are changing, and 

we need to be very adept at taking in the new information and 

science that is coming along to tell us which standards are helping 

us the best. So while LEED is a predominant one now, we are 

keeping our ear to the ground. And we also work in conjunction 

with the Energy Department. Be sure we are not just willy-nilly 

moving around on consumer standards. We want to be sure we are 

really grounding it in something. So we are in good partnership 

with them about it. 

Mr. WOMACK. I would caution the organization about putting all 

of your eggs in one basket, particularly when this is an emerging 

area of society today. There are others out there that can do similar things in a much more cost-efficient way. And I yield back now. 

Mrs. EMERSON. Thank you so much, Mr. Womack. Ms. Lee. 

Ms. LEE. Thank you very much. Good morning. Let me just say 

a couple of things. First off, thank you so much for being here, I 

know your agency, you are faced with many, many challenges right 

now. And also, I know and recognize that we all understand the 

need to consolidate and streamline the operations, and also procurement activities for the entire federal government. The concern 

in the streamlining and consolidation is that we may be shutting 

out small business opportunities. First of all, in my last life, I was 

an 8(a) contractor. And getting on that GSA schedule was horrendous, first of all. It is almost impossible. But secondly, once on it, 

it never led to any opportunities at all. And so, I want to find out 

exactly what is taking place now to help small businesses, especially 8(a) businesses, small and disadvantaged businesses, minority and women-owned businesses, weed through this process, because certainly, a hundred years ago it was very difficult. I am 

hearing it is still extremely difficult. Secondly, let me just ask you 

about this lumping of subcontracts together. In the effort to consolidate, lumping these subcontracts, oftentimes preclude smaller businesses, minority and women-owned businesses, from those opportunities. So how do you allow for the full participation in this whole 

notion of consolidation? And if you have any data on how you are 

doing with regard to 8(a) contracting, I would like to see that. 

[The information follows:] 


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8(a) CONTRACTING

Please provide data on GSA 8(a) contracting. 

GSA response: In FY 2010, GSA conducted almost 7,500 8(a) contract actions with 

a face value of over $841 million. 

Ms. JOHNSON. Well, the top line with regard to small business, 

I am actually very proud of what we are doing with small business, 

because I do agree with you. Working with the federal government 

is a big challenge, especially for small businesses. There is a whole 

industry, that has grown up, of consultants that will milk a small 

business. 

Ms. LEE. Rip a small business off. 

Ms. JOHNSON. Right. And we certainly are not happy with being 

in a position where we are creating that kind of a niche. We have 

an Office of Small Business Utilization, which works closely with 

the SBA, and also helps us, as GSA, with our purchasing so we are, 

I think, making some good tracks and this is the kind of thing 

where you want to get to the place where it is hand-over-hand, so 

that you are repeating your performance every year. About 29 percent of our contracting goes to small businesses; it was $2.3 billion 

in 2010. I am delighted that $1 billion of that was to small disadvantaged businesses, which means I think we have done some 

tremendous outreach. And I can provide you more statistics about 

that performance and that story. 

[The information follows:] 

SMALL, DISADVANTAGED BUSINESS CONTRACTS

The Administrator committed to providing more statistics on GSA contracting 

with small and small, disadvantaged businesses. 

GSA response: GSA awarded over $9 billion in contracts in FY 2010, and almost 

$3.15 billion, or 34.8 percent, was awarded to small and small, disadvantaged businesses. GSA FY 2010 small business awards greatly exceeded the agency target of 

27 percent. 

Through March 2011, GSA had awarded over $500 million to small businesses, 

or nearly 30 percent of year-to-date obligations of $1.8 billion. 

Contract data comes from the Federal Procurement Data System (FPDS). 

Ms. JOHNSON. Your comments ring absolutely true. I am quite 

concerned about small business getting approved to work with the 

government and then not having any business, getting the fishing 

license, but no river with any fish in it. And I think we need to 

be honest and straight up with small businesses about the potential markets, and help them understand. We do have mentoring 

programs, and we are working hard at doing more and more training. The mentoring program that we began last year has really 

given us a good model for helping work with small businesses and 

giving them a possibility to work their strategy out. I worry about 

small businesses that find the government in their business plan 

to be the dominant partner, because I think that makes them very 

vulnerable to the swings in government spending and budgets. So 

it is important to counsel small businesses so they will be viable 

and they will be successful. So, a number of different pieces to this, 

and I can certainly give you more. 

Ms. LEE. I appreciate that, but I do know that the big boys have 

contracts with the government; they negotiate the extensions, they 

rely on the federal government for their major contracts and perpetuity. But when it comes to small businesses, and small minority 


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and women-owned businesses, we are told, you have got to break 

loose at some point. I mean that is the whole goal of the 8(a) program, which is fine, to become independent and break off from the 

federal government. There is a double-standard for the small businesses and then for the big businesses because they certainly continue to get these big contracts. 

Ms. JOHNSON. One of the things that we want to do, and is a big 

push on the part off the SBA, as well, is to be sure we understand 

what this picture is, because one of the difficulties in our measurement system is that we can measure prime contractors, but understanding the click throughs, and they can be two, and three, and 

four, and how much small business we are reaching, and how that 

happens, and what kind of business they are getting. That is a big 

challenge there, in trying to get that data and have it be proper. 

And that is what we are surveying our shoulders against. 

Ms. LEE. That is really historical. I mean, really a hard one to 

crack. And finally, let me just ask, the consolidation of these smaller contracts; that is inconsistent with the goal of trying to ensure 

full participation for small and disadvantaged businesses, because 

they certainly cannot compete with the big companies on consolidation. 

Ms. JOHNSON. I need to give you a more detailed brief on that 

later for the record. Again, it goes to really understanding what is 

going on at that next level. How much inappropriate bundling is 

going on? How much appropriate bundling is going on, where you 

can get some efficiency and build some partnerships? So it is a fairly complex issue, and let me supply you a more thoughtful brief on 

it. 

Ms. LEE. Thank you very much, thank you Madam Chair. 

Mrs. EMERSON. Mr. Diaz-Balart. 

Mr. DIAZ-BALART. Thank you very much, Madam Chairwoman. 

Madam Administrator, good to see you. Let me first also apologize 

right now because I am going to have to step out right after these 

questions because there is another hearing, as you know, so I 

apologize to you as well. The GAO placed GSA a thousand years 

ago, I think it was 2003 in the real property management. And it 

is real property management and it is high-risk category. Is it still 

there? Are you still in that high-risk? 

Ms. JOHNSON. I believe we have been released from that. 

Mr. DIAZ-BALART. You have been? So there are parts that have 

been released. Are there parts that are not released? Okay. That 

is good to hear, because it has been there for a million years. 

Ms. JOHNSON. I met with the head of the GAO about this, and 

he indicated that we were moving forward and making good 

progress. 

Mr. DIAZ-BALART. Good. And obviously, going back to what Mr. 

Womack was talking about, there is some question as to, excess 

property, under-utilized, inefficiently utilized property. The flipside of that is when you get rid of it. Do you get rid of it when the 

market is really, really bad, in which case the taxpayer gets hit, 

as well? But having said that is there at least a plan for those if, 

in fact, part of the reason why we still have a lot of space that we 

are not disposing of, is there at least a plan? Is there a threshold 

that you say, when the market reaches this level, if we get this 


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much money, we will get rid of these properties. Is there a plan for 

that? Because I understand that, I guess in 2009, GSA disposal of 

800,000 square-feet, generating $1.8 million, which is good, but 

supposedly there are 54 million square-feet of under-performing 

and non-performing assets. So again, I understand the issue with 

the market. How do you deal with that, is there a plan to make 

sure that when the price reaches a certain level, you already have 

the facilities ready to go, et cetera? 

Ms. JOHNSON. We do not do the analysis quite that way. Obviously, real estate is a very localized issue. So some markets can be 

quite robust and others can be in a quite different position. So our 

analysis and our profit is dictated by law, and it has to do with an 

agency coming to us and declaring a property ready for disposal. 

So they need to come to us, and frankly, there is expense involved 

in disposing of properties, and in tight budget times, that is a difficult proposition. When they do come to us, we need to be sure 

that no one else in the government needs it, that we go through 

all of the routine of: do the homeless need it, or does local government need it? And only then do we begin to enter into a point of 

negotiating on the open market. So even if we were able to figure 

out the market in advance of all of those clearances, it really is at 

that point that we focus on trying to get the best deal. 

I agree with you, I am not interested in fire sales. That does not 

serve the taxpayer. I am also very interested in moving property 

that we need to move. I think this has been a long-standing problem, almost intractable in some people’s minds since President 

Nixon probably. It is something we work at, and I think our approach to it is to be sure that we are going through the process of 

seeing the entire opportunity for a piece of property, that is kind 

of our role. And then helping work through all of the remediation, 

or whatever needs to be done to that property to make it sellable 

and command a good price. 

Mr. DIAZ-BALART. But are there more aggressive efforts? And you 

mentioned that some of those are not you, it is from the agencies, 

or others who may actually be the operatives. Because in the meantime, as Mr. Womack mentioned, we are still paying for the operating costs. We are still paying for maintenance, et cetera, so it is 

a double-whammy. So how aggressive can you be? 

Ms. JOHNSON. I think there are a couple of ways of going about 

this. One is, we have committed to developing strategic plans with 

agencies, because they do not have strategic real estate plans and 

they have huge amounts of property and we need to help them, 

with our expertise around that. There is also a concerted effort by 

the administration to engage in property disposal. And we will be, 

we hope, working very closely, and providing our expertise, and our 

staff, and support, and data, to that effort. It is a fairly ambitious 

goal and it is meant to do just this, to drive it. We still are in a 

situation of honoring the various legal constraints, which are absolutely appropriate in terms of the taxpayers value, to be sure that 

it is available for homeless, state, and local, et cetera, historic education. But I think that the administration is quite aggressive on 

this one. And we are happy to be playing along as a good partner 

in this. 


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Mr. DIAZ-BALART. Good. And if I may, finally, Madam Chairwoman, an issue that I know is as frustrating to you as anybody 

else. Obviously, renting is not a good use of taxpayers money. For 

long-term, the DOT building here is one of the examples that is always used. But the fact that DOT is there, we are renting, we are 

going to be paying for that many times over, as opposed to if we 

would have just purchased it, built it. But it is an issue of scoring. 

And it is not your issue, it is not something you control, the way 

OMB and CBO scores it. Is that something that you are dealing 

with? Because this is, again, a good market to either purchase or 

build right now, and we could save a ton of money for the taxpayers, but you have got the scoring issue. Are you pursuing that? 

Is that an issue that the White House and you are jumping on 

OMB and CBO? Or is that something that we are just not dealing 

with at this time? 

Ms. JOHNSON. We are always eager to find the best deals that 

we can. The lease portion of our portfolio just tipped over the 50 

percent mark, which I think is even more accelerated. Everybody 

is concerned about this. The scoring rules and the ability to enter 

into public-private partnerships do create some constraints for us. 

I think that they are based in some real serious understanding by 

the administration of risks that we need to be careful about, and 

at the same time, there are long-term costs associated with lowrisk profiles. So it is always better to figure out a way in which we 

can own inventory, but collecting the necessary resources to build 

is a pretty formidable project. And at the same time, we still need 

to have some flexibility, so the whole leasing and renting structures offer us that. It is complex. We want to be on the side of saying we would like to have an owned inventory that is well maintained, receiving rents, and we would like to be as aggressive about 

that as possible, understanding the proportionality with leasing for 

agility. 

Mr. DIAZ-BALART. Thank you. Thank you, Madam Chair. 

Mr. SERRANO. Madam Chair. 

Mrs. EMERSON. Mr. Serrano. 

Mr. SERRANO. I just, if I may, with respect to you, Mr. Bonner. 

What Mr. Diaz-Balart brings up is an issue I brought up when I 

was chairing this Committee. It is really a serious issue, one we 

should really concentrate on. I know folks somewhere deal with 

these numbers, and they tell us it does not work this way. But for 

us to be leasing makes no sense whatsoever. We should own. It 

turns out that even when we lease we end up having to take care 

of the property anyway. If your relationship is like mine with my 

landlord, it is a big deal. 

Mrs. EMERSON. If you will yield just for a second. One thing that 

you said in your testimony, I think it was on page 14, you are requesting a new obligational authority for $5.3 billion of rental 

space to provide 201 million rental square feet of lease space makes 

me very uncomfortable. I will come back to this during my questioning. I think we all tend to agree. 

Mr. SERRANO. Yeah. I am really nervous about that. The fact 

that government leasing tipped over 51 percent, you said, and that 

should not be. I just sent out a tweet saying we are here with the 


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biggest landlord and now you are telling me you are the biggest 

renter. 

Mrs. EMERSON. You had better, you are going to have to re-tweet 

your tweet. 

Mr. Bonner. 

Mr. BONNER. Madam Administrator, can you give us an update 

on the Federal courthouses that are on the GSA list for construction? And I say this in full disclosure, that when Mr. Serrano was 

Chair and Mrs. Emerson was the Ranking Member, this Committee had worked to help put a new Federal courthouse in Mobile, 

Alabama on their list. And I have thanked the Chairman; it is the 

Jose Serrano Federal Courthouse in Mobile, Alabama. 

But I want to make sure that I understand your testimony. It 

looks like you have got funding of $199 million for a Federal building and courthouse in Hawaii. Is that the only new project you 

have got in the budget? 

Ms. JOHNSON. Yes, as you can see, our budget is dominated by 

St. Elizabeths, and some FBI, and some remediation projects. And 

with regard to courthouses, we have one repair and alteration 

project for the Federal building in Los Angeles which does include 

bankruptcy courts. But the only full construction project that we 

are putting in the budget this year is the one in Hawaii. 

[The information follows:] 

CONSTRUCTION PROJECTS—FY 2012 BUDGET

GSA, in the FY 2012 President’s Budget, is requesting $198,650,000 for a repairs 

and alterations project at the Prince Jonah Kuhio Kalanianaole (PJKK) Federal 

Building and Courthouse in Honolulu, Hawaii. This is not a new construction 

project. 

GSA proposes the second of a two-phase modernization project for the PJKK Federal Building and Courthouse located at 300 Ala Moana Blvd., Honolulu. The PJKK 

Federal complex was constructed in 1977 and consists of a nine-story Federal Building connected by an enclosed bridge to a five-story courthouse. The complex houses 

approximately 70 agencies in 862,269 gross square feet (GSF) and serves as the 

main Federal center in the Hawaii and Southern Pacific areas. 

Phase I was funded under the American Recovery and Reinvestment Act of 2009. 

Phase I includes design services for the entire two-phased project (each phase was 

designed as independent projects) and multiple construction components including: 

repair/replacement of HVAC, fire and life safety, plumbing, and electrical systems 

in the courthouse; renovation of the courthouse and Federal Building second floor 

including public lobbies, common area corridors, and restrooms. 

Phase II construction components include: additional repair/replacement HVAC, 

electrical, communication, fire protection, plumbing, and conveyance systems; sealing the building envelope and replacing the windows with energy efficient, blast protective glazing; realignment of the building layout to allow for the expansion and 

consolidation of multiple tenant agencies’ space; conversion of portions of occupied 

and vacant space into mechanical rooms and an atrium for day lighting and air return; improvements to the interior tenant space; plaza repairs; and site security improvements. 

Phase II Design ($13,500 thousand) was funded by the American Recovery and 

Reinvestment Act of 2009. This request is for Phase II Construction ($185,050 thousand) and Management and Inspection ($13,600 thousand). The estimated total 

project cost for Phase I and Phase II is $319,650 thousand. 

Ms. JOHNSON. Now, obviously the list from the courts is long and 

they have put their priorities forward, and we do our best to work 

with that in the constraints we operate in. 

Mr. BONNER. Well, my question is based, really, from an informational standpoint. We have had a healthy, robust debate over the 

last few years about what role Congress should play in directing 


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agencies with earmarks. And earmarks are a bad name in much 

of America. If you could tell us, and the people back home throughout the country, how GSA determines that project A has greater 

value than project B, and especially if we are restricted in terms 

of self-restriction, but we are restricted nonetheless, in terms of the 

advice and encouragement we can give you. How do you make 

those decisions? 

Ms. JOHNSON. First of all, with respect to courthouses, we work 

very closely with the administrative office of the courts. And they 

have a priority list that they have to work on months themselves, 

which truly helps us. You really do not want to be the mediator of 

all your customers and their particular petitions. But working 

within that, then we need to make the trade-offs in our budget between the judiciary, and then, of course, the other significant and 

important projects in the rest of the federal portfolio, notably, now, 

as I have said, the Department of Homeland Security, the land 

ports of entry, the FBI, a number of security-related repairs and 

alterations. And that is also crowding the agenda, if you will. 

So we do this in part by trying to understand where an invested 

dollar will receive the most value. Where is the need the greatest; 

where are there other solutions? And, of course, we look across our 

portfolio in many of these cases and try to find out how we can be 

working within the portfolio we have. 

I do think the security issues, and those are some of the demands by the court, they really are in need of being assured that 

they are working in a safe environment. Those make buildings 

rather distinguished, unique, and that means we end up, I think, 

investing, perhaps more. 

We are trying to work with the courts more and more, using 

steady conversation, and other techniques for being sure that they 

are secure and safe. And there are other ways that we can go about 

this as well, within a tight budget. 

Mr. BONNER. So the project would have been on the court’s list 

for years to get to this point? 

Ms. JOHNSON. It could be, yes. I would be happy to supply you 

with the encyclopedia on that. But no, I would be happy to give you 

the listing of the courthouse projects. 

[The information follows:] 

COURTHOUSE PROJECT PLAN

The Prince Jonah Kuhio Kalanianaole (PJKK) Federal Building and Courthouse 

in Honolulu, Hawaii that is in the FY 2012 President’s Budget is a repairs and alterations project, not a new construction project. 

The Courthouse Project Plan, as approved by the Executive Committee on behalf 

of the Judicial Conference of the United States, includes only new construction 

projects. With that said, the PJKK Federal Building and Courthouse repairs and alterations project would not be listed on the Courthouse Project Plan. 

Mr. BONNER. I know years ago, when the courthouse in Mobile 

was of interest, a courthouse in Little Rock all of a sudden jumped 

to the forefront, and it just so happened that we had a President 

from Arkansas, and the fact that we have got a courthouse in Hawaii, I just wanted to make sure that it has been on the list as a 

priority for a long time. 


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Ms. JOHNSON. Yes, it has been. And we are in the process of 

doing a fair amount of construction of other courthouses. So each 

year is just a snapshot. 

Mr. BONNER. The other thing that would be of interest to me 

would be, how much of your request for new funding is going to be 

centered in Washington, DC, versus how much is going to be centered elsewhere, even if you count Homeland Security as a part of 

that, I am sure that is going to weigh it heavily. 

Ms. JOHNSON. I do not have the numbers. I can do the percentages, but our projects are St. Elizabeths, the request for 2012, the 

State Department Headquarters, and the Interior Department; and 

work on those three buildings. The rest is around the country, 

ranging from the land ports of entry on the northern and southern 

borders, data centers for the FBI in Virginia, upgrades to the Los 

Angeles federal building. And so it is dispersed around the country. 

I can get you those exact percentages. 

[The information follows:] 


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Mr. BONNER. Okay. And then, lastly, could you, and I apologize, 

this may be in your testimony, I just did not see it at the top, the 

Chairman of the Full Committee brought to our attention, a few 

days ago, in another hearing, that the discretionary amount of 

spending, including the stimulus, we have an increase of 84 percent over the last couple of years; again, including the stimulus. 

How much of the stimulus, if any, did GSA occupy? And how does 

your budget request compare with five years ago and 10 years ago? 

[The information follows:] 

BUDGET REQUEST HISTORY

How does your budget request compare with 5 years ago and 10 years ago? 

GSA response: The FY 2012 President’s Budget requests $617 million in net budget authority for GSA. GSA net budget authority was $759 million in FY 2006 and 

$457 million in FY 2001. 

Ms. JOHNSON. You mean the Recovery Act Stimulus Bill? 

Mr. BONNER. Yes. 

Ms. JOHNSON. The Recovery Act gave us about $5.5 billion, divided across investment in our fleet and preponderance in our 

building. It was a tremendous boost. It did a number of things. It 

really rejuvenated a great deal of our inventory, it greened it, it 

made it much more efficient, across the board. We have been able 

to upgrade buildings and start other buildings. We had a long list 

of projects that were ready to go. 

In fact, what was really interesting about it was that, as we 

worked down the list, the market was such that we were able to 

get much more competitive bids and the dollar went farther. So we 

were able to work down our list quite a bit. 

So 18,000 jobs is what the tally is so far for that stimulus work, 

and we are really shovels in the ground now. A lot of that is in 

major construction, now, so we are going to be continuing to see 

some real stimulus as a result of it. 

I have heard all kinds of numbers about the sort of backlog that 

we were working with before that, in the range up to 20 billion, 

in terms of what we needed to do to revitalize the inventory. And 

it is like a car, if you do not do preventative maintenance it just 

begins to hiccup. And I think our buildings have been long in the 

tooth, and needed that. So we were able to do upgrades, and we 

were able to do the sustainability investments that have made 

them much more efficient, operationally, so I can get you the actual 

10 years ago, 5 year ago numbers. 

Mr. BONNER. It would be interesting. Mr. Serrano, again, made 

a point with his questioning about H.R. 1. And while H.R. 1 passed 

the House, it did not pass the Senate, and so therefore, in some 

ways, it is still a number that is in flux, if you will, as negotiations 

go forward this week in terms of whether we can avoid a government shutdown. 

Senator Kyl and I have long believed that Washington is disconnected from real America because we talk about trillions or billions, and most families cannot really put their arms around that 

amount of money. And yet, Senator Kyl came up with an analogy 

on H.R. 1 that you would be looking at a budget of $10,000, not 

billions or trillions, but if you had a $10,000 budget, you would be 

looking to try to cut $28 out of that. 


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I think if most American families were given the opportunity, 

they could find $28 in savings of a $10,000 budget. That is the 

equivalency of the amount of money we are talking about. And yet, 

when we get into it, whether it is $61 billion, or $100 billion, or 

however you look at it, it seems like an impossible task to cut that 

much money. 

So as the largest landlord, and as someone who has responsibilities the GSA does, and we all benefit from that with our district 

offices, and depend on the professionalism of your staff, it would be 

helpful for us to make sure that we understand that everyone is 

looking to try to find ways to save money at a time where we are 

not going to get out of this hole this year, or next year, or probably 

in the next couple decades. And that is the thing that a lot of people have not focused on: The hole is so deep it is going to be a long 

time getting out of it. But everyone, including GSA, is going to 

have to do their part. Thank you, Madam Chair. 

Mrs. EMERSON. Thank you, Mr. Bonner. I have got a lot of questions; I do not even know where to begin. Let me just go back to 

the courthouse issue for process purposes only. So you all have the 

Hawaii courthouse on your request list. And Mr. Bonner said his 

Mobile, Alabama courthouse was ahead of the Hawaii courthouse. 

Yet all of the funds have not been appropriated yet for it, so why 

would you not just want to finish up the one, before we get started 

on another? 

Mr. SERRANO. Can I interject something, Madam Chair? 

Mrs. EMERSON. Yes, sir. 

Mr. SERRANO. You and I take very seriously, and I think it is important to say this: Notwithstanding what you hear these days, 

every member of Congress, if they could have a brand new courthouse in their district, would have it. But in addition to that there 

are areas where it is very much needed. When I was Chair, and 

I realize that being Chair is totally different from being Ranking 

Member, we took seriously the need for Mobile, Alabama courthouse. And I am surprised that it would have disappeared from the 

list, and a new one would appear. Granted that the Chairman of 

Appropriations and the Senator is from Hawaii; and granted that 

the President was born in Hawaii; notice how I got that in? 

Mrs. EMERSON. We all know that, Joe. 

Mr. SERRANO. Right. Okay. So I can understand. If I was President, Puerto Rico and the Bronx would be in good shape. But I 

take this very seriously. I do not know why his courthouse disappeared from the list, and I am concerned. And I think we should 

know, and I think we make serious points when we say this, because we took very seriously, we just did not hand down a courthouse here and there to make people happy. This was done in a 

very studious way. 

Mrs. EMERSON. It is a problem; how does that happen? And if 

Mr. Bonner was not sitting here I would still ask the same question, because I cannot figure out how that process works. 

Ms. JOHNSON. Let me give you a little bit, and then I will probably need to give you some more afterwards. But first of all, the 

Hawaii courthouse is not a new construction; it is a rehab, so that 

puts it on a slightly different list. It is a competing bid for, not for 


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new construction money, but repairs and alterations; if I have got 

that right. So those are two different buckets. 

I can explain what I understand to be the process, which is, you 

get a tranche of money, and you are trying to move down the list 

and if something is so big that it does not fit in, you need to move 

to the next one so the priorities and the money are two moving 

lists. 

Mrs. EMERSON. Right, I understand that. 

Ms. JOHNSON. And I will provide you more detail on the particulars of the Mobile, Alabama case. 

[The information follows:] 

MOBILE, AL COURTHOUSE PROJECT

The Administrator committed to provide more detail on why GSA is not asking 

for additional funds for the new Courthouse project in Mobile, AL. 

GSA response: The initial design for the new U.S. Courthouse in Mobile, AL was 

completed in December 2004. Since then, design requirements have changed because of reduced space needs from courtroom sharing, other tenant changes, increased focus on energy performance, and the need to better mitigate potential 

threats from severe coastal storms. As a result, GSA now needs to redesign the 

courthouse before proceeding with construction. GSA is planning to start the redesign and proceed to the completion of concept stage. Once the concept stage is completed, GSA will have a better cost estimate and in the future will request the necessary funds for construction. 

Mrs. EMERSON. In all the stove piping, it just seems to me that 

there just needed to be another round of funds provided for this 

courthouse, and then there would be enough and you could get it 

done. But to drag it out makes it cost more; we all know that, yet 

perhaps not if it was being done this year because you would still 

get a lot of bids. The construction industry is still in very dire 

straits. So that would be an opportunity to do that. I just worry 

about how that whole thing works. 

Mr. BONNER. Well, Madam Chair, if I might add that I appreciate you raising it, and I appreciated the Ranking Member’s comments as well. I really was hesitant to even bring it up, quite 

frankly, because we are in a very vulnerable position. If it looks 

like we are advocating and directing you to do something, then we 

get in a lot of hot water in newspaper editorials, and back home. 

We are in a very awkward position, though, and that is why I was 

asking the question. Just to understand the process of how one 

goes to the top of the list. I know there are different pools of 

money, and different buckets, if you will, but I appreciate the Chair 

and the Ranking Member. 

Mrs. EMERSON. Well, and it was not just to benefit you, it was 

really to understand the process, just because of when Hawaii 

popped up on there, I am thinking, wait a minute, we just did this 

other one, but we have not got it all figured out yet, and so for our 

clarification. 

Mr. SERRANO. And I want to clarify that, also. This is not about 

telling you what to do. It is about the Committee had made a decision, that decision was well-received by everyone, and then, all of 

a sudden, it drops out of the list. So I would like to know, just in 

terms of what I did in the past. What success did I have? Why 

would it go off the list? 

Mrs. EMERSON. Exactly. 

Ms. JOHNSON. Yes, I think the process should be transparent. 


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Mrs. EMERSON. Yes, and we could have another meeting on that 

sometime, post this hearing; that would be great. 

Mr. BONNER. Madam Chair, one more thing. 

Mrs. EMERSON. Yes, sir. 

Mr. BONNER. The seats in the courthouse in Mobile are going to 

be coming from the old Yankee Stadium. I do not know if that 

means anything or not to the former Chairman. 

Mrs. EMERSON. They are not going to be very comfortable, then. 

Mr. SERRANO. I cannot afford one; they are selling for $750 

apiece. 

Mrs. EMERSON. They are not worth it. Well, they are, for historic 

purposes. For historic purposes, they are. 

The old St. Louis seats, when we got our new stadium there, are 

very uncomfortable, I just want you to know. 

Mr. SERRANO. When was the last time somebody in St. Louis sat 

in a seat and celebrated a World Series Victory? 

Mrs. EMERSON. Thank you, in 2006. 

So, let me come back to property disposal. Thank you, Mr. Bon- ner. Of the $15 billion in estimated savings that we were talking 

about in the civilian property BRAC, is the three billion from when 

the President issued the memorandum directing agencies to 

produce no less than three billion in cost savings by the end of fiscal year 2012, from assets, sale, proceeds, et cetera, is this three 

billion part of your $15 billion? 

Ms. JOHNSON. Yes, well, the $15 billion is not all ours. I mean, 

GSA is only one piece. 

Mrs. EMERSON. Right, okay. 

Ms. JOHNSON. Yes. That is all additive. 

Mrs. EMERSON. That is an easy question, yes or no. Perfect. 

Thank you. Let me ask you about independent leasing, in particular some issues we have had with the Securities and Exchange 

Commission, and the fact that they have leased hundreds of thousands of square feet in anticipation of something that has not yet 

been stood up, if you will. And the incredible cost, waste of money 

that was. 

But we have got the SEC, we have the Federal Deposit Insurance Corporation, FDIC, and other financial regulatory agencies 

who do have independent leasing authority, so they do not have to 

go through you. 

Would there be any benefit from those agencies requesting a proposal from you all before soliciting a lease of their own, if only to, 

number one, depend on the expertise that you all have developed, 

but, number two, to serve as a point of reference? 

And since lease negotiation and management is not really the 

primary mission of those agencies, how does independent leasing 

authority ensure the safety and soundness of the financial market? 

Ms. JOHNSON. Let me begin by saying that we are quite proud 

of our expertise, and we are more than willing to offer it to any 

agency that is requesting it. We do look at the whole federal government as our customer, and they certainly have the right to exercise their independent leasing authority. 

We feel, frankly, the business case that we need to make to agencies, particularly when it comes to office buildings, that we can 

probably get the best deals and be smooth about doing it and that 


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agencies insist on using their own leasing authority speaks something to their feelings that they know their mission more and want 

to move in that direction. We can be even more aggressive with 

agencies, being sure that they know our value. 

Mrs. EMERSON. I would think that it would just make sense; having worked in the private sector and, at least, been a part of a senior staff that was involved in negotiation, I was not directly doing 

it. I mean, it was laborious, and nitpicky, and certainly, we were 

fortunate to have someone working for us, because none of us had 

the expertise to be doing this. 

Ms. JOHNSON. Well, it does require huge expertise. And sometimes people lose sight of that, and do not appreciate that, and see 

that as more bureaucratic than actually just the curlicues you need 

to go through. But I think it is that balance between their really 

wanting to be on top of what they have, and what they control, and 

what their mission is, and their delivery, and understanding that 

they have a lot of services they can avail themselves of. 

Mrs. EMERSON. Yes, and it might be helpful for you to give us 

some recommendations. 

Ms. JOHNSON. Showcase what we could do for them. 

Mrs. EMERSON. Yes, that would be helpful. And perhaps it would 

be helpful for you to be a little bit more aggressive on that front. 

Ms. JOHNSON. Well, that is really a top priority for me, to be 

sure, that we are out with customers. I talk about customer intimacy, and it is true. We need to visit people, know that they know 

what we can do. 

Mrs. EMERSON. All right. And it helps you as an agency prove 

your worth, if you will. Let me just ask something really quick here 

because this is something I am not quite sure I understand. It was 

brought to my attention and it was one part of GSA I was not familiar with previously. And that has to do with the services that 

you give to other agencies with regard to financial advice. I think 

there are six little agencies for whom you provide that advice. 

What kind of education or professional credentials do GSA’s financial advisers have? Are they chartered financial analysts, or Series 

7 license holders, or risk managers? I am just a little curious about 

this. 

Ms. JOHNSON. There are a handful of agencies for whom we provide financial administrative services. And it is truly a mechanical 

service of being sure that they are recording what interest they are 

getting and receiving it. It is not financial advice, so we do not provide that kind of training. This is not about going to a financial adviser the way I would as an individual. I think those organizations 

are usually limited in government securities anyway, so there is a 

fairly tight range, and so we are completely and only a gearshift 

mechanism so that they do not have to do the administration. That 

is what we offer. It is not advice. It is not advice. 

Mrs. EMERSON. It is not advice whatsoever. Okay. Is that something that you want to continue doing? 

Ms. JOHNSON. Well, we offer a lot of administrative services to 

agencies. And there are many small agencies that need all kinds 

of things. And I think it again positions GSA to sort of have to do 

everything for everybody. I am happy to do that, and I think it continues to demonstrate our value. When it is completely administraVerDate Mar 15 2010 05:43 Jul 07, 2011 Jkt 099011 PO 00000 Frm 00275 Fmt 6601 Sfmt 6602 E:\HR\OC\A999P2.XXX A999P2

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tive like that, it is not a burden to us, but it would be to them. 

It is well within our capacity. 

Mrs. EMERSON. How many people do you have in that office? 

Ms. JOHNSON. Oh, I do not even know. I will find out. 

Mrs. EMERSON. I am just curious, because there is no way in 

your budget that I could figure that out. 

Ms. JOHNSON. I think it must be part of our financial services. 

Mrs. EMERSON. Okay. I appreciate that. I have a few more questions, but go ahead, Mr. Serrano. 

[The information follows:] 

FINANCIAL ADVISORY SERVICES

How many people are in the office that provides financial advisory services? 

GSA response: GSA provides a full range of accounting and financial services for 

52 small Federal agencies and commissions. GSA services include: Accounts Payable, Accounts Receivable, Payroll, Travel Payments, Travel Relocation Audits and 

Payments, Collection of Debts, Billing, and Preparation of Daily Cash Deposits. In 

conjunction with these services, GSA also provides standard general ledger reconciliation, payment processing, systems analysis, training, and financial reporting. 

GSA services include trust fund accounting. When requested by customer agencies, GSA will also request that Treasury withdraw earned interest and deposit it 

in spending accounts. GSA transmits requests on a regular schedule that is determined by Treasury and the customer agency. GSA does not make decisions about 

what investments to make or when to make them. GSA provides this service for six 

customer Federal agencies: the Barry Goldwater Scholarship Foundation, Christopher Columbus Fellowship Foundation, Japan-United States Friendship Commission, Morris K. Udall Foundation, US Institute for Environmental Conflict Resolution, and the Eisenhower Exchange Fellowship. 

GSA provides accounting and financial services to all agencies and commissions 

with 23 accountants and accounting technicians. GSA accountants require a bachelor’s degree in accounting. GSA accounting technicians require specialized experience in accounting or bookkeeping but do not have an educational requirement. 

Mr. SERRANO. Thank you. You could not tell me a job loss figure. 

So I want to give you a number based on some information I have 

gotten. I have been told that the effect of H.R. 1 would amount to 

about 16,000 jobs lost through the economy through your agency. 

Is that wrong? Is it near the number? 

Ms. JOHNSON. That sounds high to me. 

Mr. SERRANO. Well, what sounds right to you then? 

Ms. JOHNSON. Well, 16,000 jobs, that is, we have created 18,000 

jobs with our Recovery Act money, which is in the billions. So it 

just does not quite sound proportional. But I certainly will record 

that and double check. 

Mr. SERRANO. Well, I would like you to double check it and 

maybe, at a later time, tell us how many, because whenever people 

come before us and we discuss the impact of the cuts that are taking place, and this H.R.1, while Mr. Obama said it was just a number that was floating out there, it does not get better every day. 

That number actually gets worse every day in terms of cuts. So I 

would really appreciate if you could, at one time soon, maybe before this hearing ends, but I do not think that will happen, just 

give me a sense of how many jobs you are going to lose. Every 

other agency that comes before us tells us that they are going to 

lose jobs. Are you going to leave here today telling me you are the 

only agency that is not going to lose jobs? 

Ms. JOHNSON. I am sorry, were you asking about the number of 

GSA employees that would lose jobs? 

Mr. SERRANO. Private sector construction jobs. 


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Ms. JOHNSON. Oh, yeah, that is what I thought you meant. 

Mr. SERRANO. But you do not know? 

Ms. JOHNSON. Not right off the top of my head. 

Mr. SERRANO. Okay, will you find that for us? Could you give us 

an estimate? Something we hear a lot about on this subcommittee 

is cost overruns and poor performance by contractors. Often these 

are the reasons cited when big IT contracts fail. What is GSA doing 

to provide more transparency and accountability on the part of contractors, and how will the upcoming contractor performance database help agencies make more informed choices about awarding 

contracts? 

Ms. JOHNSON. This is an important project. Its nickname is 

FAPIIS, F-A-P-I-I-S, and it is about taking the database that we 

have for internal uses to monitor contractors and what kind of 

record they have of performance. And to now turn it into a publicfacing database. Clearly, you do not just turn a switch and have 

the public looking at your internal contracting database directly, so 

it is something that we have been working on. It will be released 

in April. And there are a couple of things: I think it is very important for the public to be able to see, and have much more of a 

transparent view of our contracting. And in fact, one of the things 

that I needed to elaborate on earlier with Mr. Womack’s question, 

is that the Office of Government-Wide Policy is embarking on it, 

and some of the budget money that we are requesting is for the integrated acquisition environment, which is to put all the contracting data in a place that is together and easy to get to and connects with the same tag number, so that people can track through 

the numbers stated. So, first of all, we need to be more transparent 

altogether, and this FAPIIS database is part of that effort to allow 

people to see into the database. But for the most part, we have an 

Inspector General capacity, we have contract managers, and I must 

say that our contractors are honest and have integrity, and are 

solid performing. It is important to them to know we have an eye 

on them, but I want to be careful not to disparage the tremendous 

work of the construction industry management and the whole surrounding contracting database that the contractors are setting up 

with the government. 

Mr. SERRANO. Okay. Now, we touched on this subject before, but 

I just want to take you there again on this whole issue of leasing 

versus construction. What factors does GSA take into account in 

deciding whether a particular facility should be matched with the 

right federal construction, ultimately, because I think you heard 

from all of us, and we are concerned that you are now 51 percent 

leasing. We should own the property instead. It is the American 

Dream and it affects federal government, too. 

Ms. JOHNSON. There are, of course, many considerations, and 

these are probably no surprise to you. For agility reasons, there are 

agencies that, at times, need short-term space. The census is the 

great example of that. They are not ones for which we would think 

about having permanent facilities. On the other end, we have the 

judiciary, which we know is going to be around for hundreds of 

years. 

And so, we do want to be sure that wherever possible we are 

building for them and securing that kind of facility. And then there 


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is a retaining level. So the trade-offs are the need for flexibility, the 

amount of people that need to be in and out, and oftentimes this 

is in conjunction with a built space, like with the Department of 

Homeland Security. We have a number of people in a number of 

lease spaces. We are trying to consolidate them into an owned 

space, and so they are temporary quarters. In many cases in cities 

where there are lots of available office space, and office space does 

not have special security, it does not need all the kinds of things 

that some federal missions require, then it is strictly a financial 

trade-off, what makes the most sense. And then the fundamental 

issue is getting the money ahead of time and altogether to be able 

to build the building and to be able to put the case forward, and 

go through that whole process. So sometimes there is just plain 

agility in terms of delivering space to people. 

Mr. SERRANO. Let me ask you something further on this. At 

every agency and every corporation and any group, there are always decisions being made through a lot of in-house lobbying, as 

we have it here in Congress, about budget funding. And we have 

stated, we believe in consolidating, we believe in cutting waste, but 

cutting for the sake of cutting, just to reach a bottom line does not 

make any sense. On this issue, inside GSA, is there a leasing lobby 

versus a construction lobby? I mean, people who are giggling in the 

background here, are they broken into two different groups? 

Ms. JOHNSON. Not in my office. Not in my office. 

Mr. SERRANO. Because I am trying to figure out how these things 

are decided. Because we obviously went too much into leasing in 

the opinion of this committee, and so how did that happen? Was 

it just a coincidence? Were some decisions made and no one paid 

attention to where that was going, and it did not matter? Or was 

there a group inside saying, leasing is the way to go? 

Ms. JOHNSON. No. There is not an inside lobby. These are a matter of business decisions constrained by the amount of appropriations and the schedule we have. I do want to tell you one story, 

because I want you to understand that I believe in this deeply, that 

we should be in federal space wherever possible, and that we need 

to be inventive and innovative about how to get there, because the 

workspace is changing. We are no longer in a world where everybody needs their ten square-feet of office cube. We are more able 

to work virtually; we are more able to work in a number of different places. So GSA is committing in the renovation of its headquarters, which typically houses about 2,000 people. As we go 

through the renovations, and we are dispersed into some swing 

space, and when we return to that building, we are taking all of 

GSA in the D.C. area into that building so that we can house 6,000 

people, and we can give up all the leases. We want to demonstrate 

that it is possible not to just consolidate by squeezing, but to maximize the use of our space because work is changing. And it is a real 

Judo, this is a whole new way of working, and I think this, of 

course, is an opportunity to use our property much more wisely, 

and in our case, get out the number of leases. So I am trying to 

set that example, too. I just want you to know my heart is in this. 

There is no leasing lobby. 


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Mr. SERRANO. Okay, thank you. Madam Chair, the Cardinals 

Park, is that leased from the city, or is that owned by the Cardinals? 

Mrs. EMERSON. I guess it is owned by the taxpayers, Mr. 

Serrano, because we had to pass a bond issue to pay for part of it. 

Mr. SERRANO. They will pay it back. Thank you. 

Mrs. EMERSON. Not affordable, but yes. Yet they are all sold, so 

what can I tell you? Ms. Lee. 

Ms. LEE. Thanks very much. Let me ask you a couple things 

about how the rental rates are determined for, say, the federal 

building. Many of us choose to have our Congressional offices, in 

the Federal Building, or in the GSA building. However, the rents 

seem to be a bit exorbitant compared to what the rents are in commercial space. I have resisted moving into commercial space, because I like being in the Federal Building. But every time this 

comes up, I have to look at this very closely, because I do not know 

how you all determine whether you go up, or down, or base your 

rates on fair market fluctuations, in-rates, rental-rates in the region, and city. How is that determined? 

Ms. JOHNSON. I am going to summarize, and then I need to get 

you more information, because it is not a simple question, if you 

will, and there is a lot of process underneath it. 

[The information follows:] 

GSA RENTAL RATES

How is rent determined in Federal buildings? 

GSA response: By law, GSA rental rates must approximate commercial charges 

for comparable space and services. GSA calculates rental charges for Federallyowned space based on independent appraisals, and rental rates for leased space are 

based on actual lease costs, plus a fee. 

GSA calculates rental charges for Federally-owned space based on the appraised 

value of the building. Rental rates are established for five-year periods, and include 

a ‘‘shell rate’’, which remains constant during the five-year period, and a ‘‘base year 

operating rent’’, which increases each year. GSA appraises space at least every five 

years; however, GSA may appraise space more frequently, to reflect changing market conditions, new tenants, varying schedules in the occupancy agreement expirations, or for backfill of vacant space. 

Rent for leased space is a pass-through of the underlying lease contract, plus the 

cost of any building services not performed through the lease and a lease fee. Both 

the operating costs and the real estate taxes that GSA pays to the lessor are passed 

through to the tenant agency. 

Ms. JOHNSON. Federal buildings where we have 5,000, 10,000 

employees, and how we charge rent to those agencies is based on 

a number of factors. It is obviously about the cost of the building 

itself. But when we own a building, and we are not paying a mortgage and interest on it; it is sort of an interesting business case 

calculus. 

When we are putting people in the leased space, those rates are 

directly paid to the lessor, and so those are also market, those are 

what we have been able to negotiate, and hopefully as good and as 

competitive as possible. So it depends on whether you are in leased 

or owned space, and then how that owned structure is managed 

through the building fund, in order to build the building fund and 

cope with the business case where the building is already paid for 

and we are not trying to rebuild it, but we do need to keep an eye 

on building out further inventory across the federal government. So 


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it is an integrated set of issues when it is a Federal building, when 

it is an owned building. 

Ms. LEE. Leased. 

Ms. JOHNSON. Leased buildings are market set, we are on the 

market, and we are leasing space on the market. They are negotiating with us, we get a deal. 

Ms. LEE. Okay. I think then, just for the ninth Congressional 

District, I believe we are federal, it is owned by the Feds. 

Ms. JOHNSON. Okay. 

Ms. LEE. I think we own it, the Federal government. 

Ms. JOHNSON. Okay. 

Ms. LEE. And we are paying you the money. 

Ms. JOHNSON. Yes, those rents are not as easily traceable to an 

individual negotiation in market and there are a lot of pieces to it. 

There are a lot of pieces to it. 

Ms. LEE. Okay. Yeah, I would like to, at some point, see it. 

Ms. JOHNSON. Like the Marshals Service. 

Ms. LEE. Yeah. 

Ms. JOHNSON. And the security, and all of that. 

Ms. LEE. Security, I mean, I know all that. 

Ms. JOHNSON. They are huge expenses. 

Ms. LEE. I also know there is other space where the security 

would be almost comparable, and other kinds of services that are 

lower. But, again, I would just like to kind of understand a little 

bit better. 

Ms. JOHNSON. Of course. Of course. 

Ms. LEE. Thank you. 

Mrs. EMERSON. I might say we have the same sort of issue with 

which we are dealing right now, so I understand that. I want to 

talk about a new subject. No more leasing. Well, actually, I take 

that back. No more building leases. But you talk, in your testimony 

here, about, you say GSA also plans to pilot plug-in hybrid electric 

motor vehicles in the federal fleet, but lacks statutory authority to 

purchase them. So, why do you not talk to us a little bit about this, 

it is of great interest to me, given the fact that we do now, actually, 

have companies in the United States who produce, not that they 

are getting ready to produce, but they do produce electric trucks, 

electric cars, and why is it not possible for you to purchase these? 

Ms. JOHNSON. It is not that we cannot purchase them, it is that 

the pricing level is arbitrarily low. 

Mrs. EMERSON. So why do you not explain this? 

Ms. JOHNSON. So what we need to do and what we are asking 

for is a rising of the statutory price limitation on what we can 

spend on vehicles. We have over 450 types and models of vehicles. 

So there is a lot of complexity to the fleet. We buy our fleet, for 

the most part, and then lease them to agencies. So an agency 

would lease a car, a truck, or runaround from us. So we are seeking to buy electric vehicles. Now, we are also exploring the possibility of leasing them to see if that is a better business case. Electric plug-ins are a new item on the market. OEMs, at this point 

in our conversations, are not interested in a leasing conversation. 

And I personally think it is part of the fact that it is a new product, 

and they want to negotiate and then have them just move on 

through the cycle. They do not want to reclaim them, for the most 


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part, there might be other instances. But we are looking at whether we should be buying them or leasing them, but the price limitation is keeping us from buying them. 

Mrs. EMERSON. Okay, so say there was, the price limitation was 

lifted, given the new technology, you would be able to consider leasing them. I understand there is the whole issue of how do you determine the residuals on an electric vehicle versus how it works on 

a regular, traditional car or truck, whether it is gas or diesel. But 

the wear and tear is much less on an electric vehicle, at least as 

far as the pieces inside go. Not that there are too many, you just 

need to pop new batteries in there, and put new tires on, and 

maybe change a hose or two. So what precisely do you need? You 

say you need to have the price limit lifted. And then, do you have 

to have special legislation enabling you to do a lease versus the 

purchase? 

Ms. JOHNSON. No. 

Mrs. EMERSON. Okay. 

Ms. JOHNSON. What we have to do is figure out if the OEMs will 

do a deal like that, and figure out if it is the better business option. 

Mrs. EMERSON. Okay. 

Ms. JOHNSON. So we are going to be looking at that, and when 

you are doing that pilot, and there are sort of distortions to a business case, that we would then obviously redo it, if we went into any 

kind of volume purchasing. 

Mrs. EMERSON. Okay. 

Ms. JOHNSON. Or leasing. 

Mrs. EMERSON. Because I would think that, based on projecting 

out, the higher cost at the front end saves you money at the back 

end, especially with the price of fuel right now, whether it is gas 

or diesel. I mean, it is getting a little bit out of hand. 

Ms. JOHNSON. Well, we are delighted that our fleet is as efficient 

as it is, and we are saving a tremendous amount on fuel because 

we have so many alternative fuel vehicles. Two thirds of the fleet 

purchases are in that direction. And that is why we want to experiment with the hybrids. See how they function in altitudes, see how 

they function in muggy climate, in cold climate, all that. 

Mrs. EMERSON. Sure, sure. 

Ms. JOHNSON. And we certainly want to get the best value we 

can, and right now it would be about a hundred, but I think we 

could command a deal. But we have got to figure out what that is. 

Mrs. EMERSON. And, but you have to have the statutory authority? 

Ms. JOHNSON. For the pricing, yes, we are a little bit caught 

there. 

Mrs. EMERSON. What is the upper limit? 

Ms. JOHNSON. I do not know. I do not remember. 

Mrs. EMERSON. I do not know what it is. 

Ms. JOHNSON. Do you know? 

Mrs. EMERSON. Okay. No, that would be, I would be interested. 

Ms. JOHNSON. I would be happy to keep you up on that. 

Mrs. EMERSON. If you can get some more information on that. It 

could, in the long run, end up saving an awful lot of money. 

[The information follows:] 


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GSA MOTOR VEHICLE PRICING

What is the amount of the Statutory Price Limitation on motor vehicles? 

GSA response: The statutory price limitation, established by section 702 of Division C of Public Law 111–117, limits the price a Federal agency may pay for a new 

motor vehicle to no more than $13,197 for a passenger vehicle (excluding buses, ambulances, law enforcement, and undercover surveillance vehicles) and excluding station wagons, which have a maximum price of $13,631. Law enforcement vehicles 

may exceed the statutory cap by $3,700 and special heavy-duty vehicles may exceed 

the cap by $4,000. 

Section 1575 of the FY 2011 Appropriations Act (P. L. 112–10) created an exception to the Statutory Price Limitation for any vehicle that is a commercial item and 

which operates on emerging motor vehicle technology, including but not limited to 

electric, plug-in hybrid electric, and hydrogen fuel cell vehicles. However, unless extended, this exception will expire on September 30, 2011. 

Ms. JOHNSON. Yes. 

Mrs. EMERSON. In an urban or metro environment. Those electric 

vehicles cannot pay for themselves in a rural area, like where I 

live. But certainly where Joe lives, you would be able to save a lot 

of money, I believe. 

Mr. SERRANO. Some folks in my district, in the Hunts Point 

Produce Market, it is important to the northeast and beginning to 

move in that direction. You are right, the problem is the initial 

cost. It is not like buying a Chevy. 

Mrs. EMERSON. Right, it is interesting, there is a company in 

Missouri, in Kansas City, I live diagonally across the state from 

there. But a company that got some Recovery Act monies, and instead of building the factory there, they had the factory and they 

used it to encourage the private sector to purchase these vehicles, 

and gave them a discount. And so now Frito Lay, for example, has 

every single one of its medium box trucks all electric now. 

Mr. SERRANO. That was a great program, the Recovery Act. 

Mrs. EMERSON. Well, I am not saying that it was, I am just saying that this was an innovative use of stimulus funds. 

Mr. SERRANO. I could not help myself. 

Mrs. EMERSON. I know you could not, I know you could not. But 

I will say this about you guys got a new stadium in New York and 

we got a new one in St. Louis, but it still costs $175 to get a ticket 

to go to a Yankees game. It is ridiculous. 

Mr. SERRANO. That is in the bleachers. 

Mrs. EMERSON. Bleachers. Yeah, that is pretty high up there. 

Mr. SERRANO. Yeah. 

Mrs. EMERSON. One-hundred and seventy-five dollars. I know, 

because, but, needless to say, it is not something a normal family 

could do. Anyway, let me ask you about the Federal Food Donation 

Act, which is kind of near and dear to my heart. The final regulations were incorporated into the Federal Acquisition Rules in 2009. 

Do you all monitor how many times the food donation clause is exercised by other agencies? 

Ms. JOHNSON. I am not sure we do, but I will double check. I do 

know that we are monitoring, when we are letting another concession, whether or not they are giving us a business plan that would 

show some sort of sensitivity to donate. 

Mrs. EMERSON. Okay. So how do you work with the vendor community to encourage the donation of the food that otherwise gets 

trucked in a landfill or what have you? 


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Ms. JOHNSON. Well, a couple of different ways. Because there are 

no cost contracts it is more by example than by people being eager 

and interested. But I think that is where, by requesting a business 

plan that incorporates that, we are signaling it is important to us. 

And therefore, we are going to be paying attention to that as we 

let the contracts. And I think that is a good place to have some leverage. 

I will also say that there is a lot of interest on the part of the 

federal workers, and the administration is very keen on wellness. 

So there is this whole notion of, let us look at the cafeterias and 

get some better food and better processes for environmental sensitivity to them. 

Mrs. EMERSON. Well, I am just curious because I had been talking, a couple years ago, to the Commander of Fort Leonard Wood 

which is an Army post in Missouri, again not my district, but with 

regard to the Federal Food Donation Act. They have so many catering opportunities there and otherwise the food just goes to waste. 

So they have actually taken it upon themselves to go into some 

kind of memo of understanding with a couple of our food banks in 

that particular part of the state, and it is working really well. It 

just seems so sad, and particularly with so many people hurting 

during the economy we need to take advantage of every opportunity to save good food, and not waste it. 

Ms. JOHNSON. I agree, and I think it is through our model in our 

profile on this that people can see it is important to us. 

Mrs. EMERSON. Yes, and thank you. I just hope you all will keep 

promoting this because it is very important. 

Okay, I have one last question then I have several for the record 

that I would like to ask you all to try to reply within 30 days. I 

hope that is not pushing it too much. 

The Dodd-Frank Act created numerous new offices and among 

those are the Consumer Financial Protection Bureau, the Office of 

Financial Research and the Federal Insurance Office. Have these 

offices, to the best of your knowledge, do you know if those offices 

have approached GSA for assistance with leasing space or contracting for administrative services such as personnel or accounting? 

Ms. JOHNSON. Yes, we have been, from the front, trying to be 

supportive and helpful in getting them up and going, and I believe 

we are moving forward on some leasing work with them. And we 

have also been advising them about technology and how to think 

about setting up an office in these days. There are so many more 

ways of doing it in thinking about cloud computing, and the technology available, so we have been doing a fair amount of discussion 

with them about possibilities. 

Mrs. EMERSON It is interesting because we have parts of all 

these other existing regulatory agencies that are going to move into 

that Consumer Financial Protection Bureau, and so it is going to 

have some kind of an impact, I should think, on space requirements of the existing agencies. So I do not know how you juggle 

everybody, but have you been approached by the other agencies, 

not by the Consumer Financial Protection Bureau, but the agencies 

that have large chunks of personnel who would be moving into 

that? 


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Ms. JOHNSON. I am not briefed on that. I will get that to you. 

Mrs. EMERSON. Okay. 

[The information follows:] 

CONSUMER FINANCIAL PROTECTION BOARD SPACE NEEDS

Has GSA been approached by agencies other than the Consumer Financial Protection Board (CFPB) who will be required to transfer large numbers of personnel to 

the CFPB for assistance with space or other administrative services? 

GSA response: The Treasury Department has requested that GSA obtain space for 

the Consumer Financial Protection Bureau (CFPB). GSA is not aware of any contacts from any other agencies for space needs resulting from the establishment of 

the CFPB. 

Ms. JOHNSON. But I certainly know we have been working with 

the Consumer Financial Protection agency specifically. 

Mrs. EMERSON. All right. Because part of the Comptroller of the 

Currency goes there. 

Ms. JOHNSON. It would normally be part of our regular routine 

to support agencies as they are freeing up space and identifying 

that and continuing to move people around. 

Mrs. EMERSON. Right, but since they are moving large chunks of 

people it seems that you would now have extra space available, and 

I do not know if it is an owned building or a leased building. So 

any more information that you would be able to provide, I would 

be grateful. 

Ms. JOHNSON. I would be happy to. 

Mrs. EMERSON. All right thanks. Mr. Serrano. 

Mr. SERRANO. Thank you. I have just one more question, but I 

do have a bill that gives tax breaks for businesses in areas that do 

not meet the clean air standards to purchase electric vehicles. 

Mrs. EMERSON. Well, let me take a look at that. 

Mr. SERRANO. See how we do business, it is amazing. Thank you 

for bringing us together. 

Ms. JOHNSON. My pleasure. 

Mr. SERRANO. One last question. The budget request contains $34 million for electronic government projects. We heard from 

Commissioner Steven Kempf about GSA’s efforts in this area, along 

with GAO, and OMB. H.R. 1 cuts this request to $2 million which 

would ensure the projects like the IT-dashboard stop operating. 

What is the impact of H.R. 1 on these projects and how does GSA 

anticipate that these projects will eventually return money to the 

American taxpayer? What is the rate of return on these projects? 

Ms. JOHNSON. These projects are near and dear to my heart and 

they are in jeopardy with the current budget situation. The open 

government, the publishing of data, the USAspending.gov on some 

of the other dashboards, and so on, are, I think, incredibly critical 

new tools for the American public to know what is happening with 

their government. And the public is getting accustomed to this; we 

have millions of people coming to USA.gov. In the course of a year 

it jumped 30 percent in one year so it is beginning to be viral, how 

many people are depending upon understanding their government 

online. So I am quite concerned that our dashboards and our public 

facing services are in jeopardy. 

I do not have an exact ROI, I do not know how you would calculate an ROI for the value of open government, but I can speculate that the confidence that people will have in the government 


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will only increase if they can see what is happening. And they will 

provide us the feedback and the raised hands when they see things 

funny in the data and they can raise questions. It just makes us 

so much more interactive and it gives us the power of the citizenry 

to help us to view what is going on. The ROI for that I do not know 

how to put it in dollars and cents to give you some understanding 

of the expenditures. 

Mr. SERRANO. Right. 

Ms. JOHNSON. But for relatively little money to be that transparent is huge. 

Mr. SERRANO. Yeah, we appreciate that transparency is important. There seems to be a contradiction here and again, that is 

where the budget cuts get in the way. A lot of folks of this country 

on both sides of the political spectrum are saying we need to know 

more about what government is doing and how it is doing it. And 

yet you see committee meetings, and committee hearings, and in 

all honesty not the Chairwoman, but other people on this committee say we got to cut that. Why do you need that website? For 

instance we had this website for the Consumer Product Safety 

Commission where you could put up a complaint and the private 

industry would come on and say, No that is not true, or that never 

existed, or that report is not true. We think that is good, but some 

people do not want that information out there so it is very confusing. I want to thank you for your testimony for my part, but remind you of three things. One, I still think we are going to lose jobs 

to the private sector; I wish you could get back and tell us. I realize 

that federal agencies now find themselves in a little difficulty with 

a Republican House and, I think, a Democratic Senate. 

Mrs. EMERSON. Most Republicans would vote Democratic. 

Mr. SERRANO. Right. Sarcasm is not my strength; I do not know 

about the Senate. You do not have to comment on this, but I know 

that people are kind of balancing their comments but I think Republicans and Democrats want to know if 16,000 jobs would be lost 

or 10,000 jobs or 5,000 jobs; that helps both sides. 

Secondly, I hope that you can begin to show us that owning is 

better than leasing. And lastly, and very carefully because we do 

not tell you folks what to do, but I am interested to find out why 

the Mobile Alabama courthouse dropped out of sight. I am all for 

Hawaii. Thank you so much. 

Mrs. EMERSON. Thank you, Administrator Johnson for being here 

today and I look forward to following up on several items. I understand we all are trying to live in a climate where we are using 

every dollar as wisely as possible, and I appreciate the work that 

you all are doing to become more efficient and less unwieldy, if you 

will. 

Anyway, please always know that you can call upon us, and I 

certainly will look forward to you getting back to us on several 

items not the least of which is, not only to answer our questions 

that we submit, but also on things that we can be helpful with regardless of the subject matter. 

Ms. JOHNSON. Did you have questions for the record? 

Mrs. EMERSON. We do have questions for the record so they will 

be given to you, and then if you could get back to us in 30 days. 

Mr. SERRANO. I have questions for the record. 


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Mrs. EMERSON. And Mr. Serrano has questions for the record. 

My guess is that my other colleagues will also have questions for 

the record. 

Mr. SERRANO. Mine will be in Spanish, try that. 

Mrs. EMERSON. And, anyway, we also appreciate the fact that 

your regional administrators are here, and I can certainly say that 

our regional administrator from Kansas City is very well liked by 

our office and has gotten off to a very good start. 

Mr. SERRANO. Can I ask a quick question? Is the New York region still New York, New Jersey, Puerto Rico, and the Virgin Islands? That has to be one of the greatest, shall we say, political decisions made in the 1950s. 

Mrs. EMERSON. So, Mr. Serrano wants to know if you will take 

them on a field trip when you go. 

Mr. SERRANO. I mean, if you look at the map right? I mean we 

are all for it in New York we think it had to do with a certain community in growing numbers in the 1940s and 1950s. But when that 

decision was made people said, It makes sense to us, in New York. 

But does it make sense in the rest of the world? New York, New 

Jersey, Puerto Rico, Virgin Islands, I love it. 

Ms. JOHNSON. Well, you are very fortunate. 

Mr. SERRANO. I am sure Florida wanted it. 

Mrs. EMERSON. Anyway, thank you again, very much. 

[The information follows:] 


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(313) 

TUESDAY, MARCH 1, 2011. 

INTERNAL REVENUE SERVICE 

WITNESS 

DOUGLAS H. SHULMAN, COMMISSIONER, INTERNAL REVENUE 

SERVICE 

Mrs. EMERSON. The hearing will come to order. 

Thank you so much, Joe, for being here today, and I want to 

thank Commissioner Douglas Shulman of the Internal Revenue 

Service. I would like to also say, and I guess we will have other 

Members come in, but consider yourself lucky. It is just us today, 

a nice intimate setting. But we are going to have to adjourn this 

hearing before floor debate begins on the continuing resolution at 

noon because we are not supposed to conflict with it. 

Last month we had two very productive hearings with agency inspector generals, but this is our first agency budget hearing. So you 

are number one, and so we really appreciate so much you being 

here today. 

As my colleagues have heard me say before, and when H.R. 1 

was considered on the floor, the Federal Government’s $14 trillion 

debt compels the Appropriations Committee to reduce Federal 

spending to fiscal year 2008 levels. This will require a 17 percent 

reduction in spending from fiscal year 2010 for this subcommittee, 

and I am committed to holding as many hearings as possible and 

learning as much as we can so that we can make informed and the 

most judicious recommendations and reductions possible. 

When I think of the IRS, I guess when everyone thinks of the 

IRS, I am both deeply appreciative of the work that you all do, but 

I am also very concerned. The 24-hour/7-day work that you do 

around the clock to assist taxpayers comply with their obligations 

and the work that you all do to pursue tax cheats who undermine 

our voluntary system is very good. You have really improved and 

I am very pleased with that. I know you are proud of the work that 

your staff has done. 

On the other hand, I am concerned quite a lot about the growing 

number of social programs being implemented through the Tax 

Code. These programs significantly increase the IRS’ expenses and 

reach into the private lives of Americans. For example, the fiscal 

year 2012 budget includes nearly half a billion dollars to implement the health care law. Say what you will about the health care 

law, but half a billion dollars is a lot of taxpayer money; and future 

requests for more funding are forthcoming, I have no doubt. 

So, once again, I want to thank you so much, Commissioner 

Shulman, for being here. I appreciate the good work that you are 

doing, and I look forward to your testimony. 


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With that, let me ask my brother and cochair here Mr. Serrano 

for his comments. 

Mr. SERRANO. Well, thank you. And this wouldn’t be a proper 

hearing if I didn’t say something about the Cardinals. 

Mrs. EMERSON. Okay. I am ready. 

Mr. SERRANO. People will be paying a lot of taxes in the next 10 

years. 

Mrs. EMERSON. I don’t know, what do you think about the idea 

of a 10-year contract, though? When you are 31 years old, that is 

a bit much. 

Mr. SERRANO. You should only get a 10-year contract when you 

are in Congress. 

I would also like to welcome Commissioner Shulman to today’s 

hearing. He has testified before us several times before, and I look 

forward to hearing what he has to say about both the fiscal year 

2012 budget request for the IRS and the impact on the IRS of the 

numerous remaining funding issues for fiscal year 2011. 

At the outset I must note that we are in a very strange situation 

here today. We are here to review the proposed 2012 budget request without having finished the fiscal year 2011 appropriations 

process. Moreover, there is a stark contrast between the levels included in the House Republican CR for 2011 and the President’s 

fiscal year 2012 budget. 

The President’s budget robustly funds the IRS for fiscal year 

2012 for what I believe are good reasons: The IRS collects the vast 

majority of revenue that allows our government, the Department of 

Defense, and the Department of Education to operate. It helps to 

ensure that our Tax Code, which everyone agrees is extremely complicated, is administered in a fair manner, and it helps to prosecute 

those who seek to cheat the United States Government. Unfortunately, we must compare this robust request with the funding level 

provided in the House-passed continuing resolution. That resolution cuts IRS funding by approximately $600 million from last fiscal year. 

While I appreciate the sincerity of the belief among my friends 

on the other side of the aisle in their desire to reduce spending, I 

think such cuts to the IRS budget are very misplaced. It makes little to no sense to impose harsh budget reductions on the very agency that raises the vast majority of revenue. Should the Housepassed funding level actually become law, I think the end result 

will be fewer taxes collected from tax cheats, fewer services for taxpayers, an increase in the tax gap, and ultimately an increase in 

our deficit over the next year. 

Finally, I would be remiss if I did not discuss the other possibility should the House and Senate not come to an agreement on 

a continuing resolution. It should not be news to anyone here that 

we are now 3 days away from a possible government shutdown. 

Even with the potential of a 2-week continuing resolution, we are 

likely to be in the same place in the near future. Any shutdown 

would have a serious impact on the numerous services and activities that Federal agencies normally engage in. 

Should such an event come to pass, I am interested to find out 

what services the IRS will have to shutter and what the impact 


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will be on tax enforcement, tax returns processing, and taxpayer 

refunds. 

Mr. Shulman, I put a lot before your plate, but we have worked 

together for a few years now, and I know of your commitment and 

your talent and your ability. So we stand ready to listen to your 

testimony. 

Mrs. EMERSON. Thank you, Joe. 

I would like to recognize you, Commissioner Shulman, for 5 minutes. If you can keep it at that, and then we will have lots of questions for you. Thanks. 

Mr. SHULMAN. Thank you, Chairwoman Emerson, Ranking Member Serrano, Ms. Lee, for having me before the Subcommittee to 

talk about the budget environment and the 2012 Budget Submission by the President in particular. 

The 2012 budget was crafted during a time of fiscal austerity and 

belt tightening. What that means to me and this Agency, and in 

our dialogue with OMB, is finding savings where we can, and then 

investing in strategic priorities that will help the tax system improve. 

Against this backdrop I think the budget makes clear that the 

IRS is vital to the functioning of the government and keeping our 

Nation and our economy strong. In 2010, we collected $2.3 trillion 

in revenue. For every dollar the IRS spends, about $200 comes in 

to the Federal Government. We processed 140 million returns and 

put $312 billion of refunds into the economy. 

I think it is in recognition of this critical role that we play that 

the 2012 budget has judicious investments in our core programs, 

as well as funding for new provisions in the Tax Code. 

The budget also tries to keep the balance between service and 

enforcement, and makes sure we administer the law in a fair way. 

I will also note the budget has the necessary funding to finish 

our core taxpayer account database, our centerpiece of our modernization program, for this upcoming 2012 filing season. If we finish this core database and get funding for it, it will mean faster 

processing of all returns, expedited refunds for 140 million individual taxpayers, and enhanced data security. 

I want to emphasize that, because of our unique revenue-raising 

functions, the investments in our budget more than pay for themselves and directly contribute to deficit reduction. 

I also want to point out that this budget, like last year’s budget 

and the budget before that, includes significant efficiency savings. 

So even though we are asking for a net increase, in this budget we 

have $190 million of targeted efficiency savings. In this current environment, I challenged our leadership and everyone at the IRS to 

find savings where they can, recognizing the situation we are in. 

Let me briefly turn, before I conclude, to a related matter, which 

is H.R. 1, the continuing resolution to fund the government. Under 

the House version, the total fiscal year 2011 funding would be $603 

million below the 2010 enacted level. I would be remiss in my responsibilities as IRS Commissioner if I didn’t spell out the effects 

that such a large reduction would have on our ability to carry out 

our mission, to the fiscal health of the Nation, and the integrity of 

the tax system. 


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If H.R. 1 were enacted, the IRS would need to make substantial, 

immediate cuts to its enforcement programs. We estimate that an 

action of this magnitude would reduce direct enforcement revenue 

this year by about $4 billion. In other words, a dramatic reduction 

in IRS funding would actually increase the deficit by about seven 

times the magnitude of the proposed reduction. Moreover, such a 

conspicuous drop in enforcement activities could have an impact on 

longer-term voluntary compliance. 

We would also be forced to dramatically reduce the resources to 

taxpayer services, leading to millions of unanswered telephone 

calls, delayed processing of correspondence, and potentially delayed 

processing of refunds. 

With that said, I want to be clear that I recognize the challenging environment that we are in. I appreciate that this Committee has to make difficult choices on behalf of the American people. And so, I look forward to a constructive dialogue over the coming weeks and months, and I very much appreciate the continued 

support that this committee has shown the IRS. 

So that concludes my testimony. I think I kept it under 5 minutes. 

[The prepared statement follows:] 


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AFFORDABLE CARE ACT

Mrs. EMERSON. You did great. Thank you very much. And I appreciate the fact that you have broken down for every dollar spent, 

this is how much you bring in. That is helpful for all of us to know. 

My first set of questions is going to be about the health care law. 

This is the first request that the IRS has made to Congress for it. 

You say in your written testimony, that some of the provisions of 

the bill went into effect immediately upon enactment, such as the 

small business health care tax credit, the qualifying therapeutic 

discovery credit and expanded adoption credit. Consequently, you 

all must have already spent some funds on health care in both fiscal years 2010 and 2011. So can you tell me how much you all have 

already spent, and how many employees worked on health care in 

fiscal years 2010 and 2011, and what source of funding you used 

for that first question? 

And then, second—well, anyway, why don’t you go ahead and answer that. 

Mr. SHULMAN. Sure. As you mentioned, there were a number of 

immediately effective provisions: a tax on tanning services, a credit 

for small businesses to help them ensure that their employees have 

health care, $1 billion in tax credits for therapeutic discovery 

grants to help innovation in health care, and a branded pharmaceutical manufacturers annual fee. There is also the need, because 

we have until 2014 for full implementation to build a lot of infrastructure, as reflected in our 2012 budget. We need to immediately 

start planning, looking at our core systems, trying to figure out 

things like how we reconcile the concept of household income, 

which will be the trigger for credits, et cetera. 

So we did begin immediate implementation. During 2010 and 2011, up to this time, we have planned about $60 million, and the 

funds came from the authorizing legislation. There were funds in 

that. The exact number of people I would have to get back to you 

on. I don’t have that number. 

[The ACA personnel information follows:] 

ACA PERSONNEL

During Fiscal Years 2010 and 2011, the IRS has spent approximately $60 million 

in Affordable Care Act implementation costs. The Department of Health and Human 

Services (HHS) allocated these funds to the IRS out of the funds provided in the 

authorizing legislation (PL 111–148). As of February 28, 2011, the IRS hired 428 

additional personnel (cumulative for FY 2010 and 2011) to implement the tax law 

provisions of the ACA. In addition to people specifically hired for ACA implementation, existing program staff have spent time managing the implementation of various tax law provisions in the ACA. 

Mrs. EMERSON. Okay. Was there any money transferred, say, 

from HHS or—— 

Mr. SHULMAN. There were funds in the authorizing legislation 

for implementation. 

Mrs. EMERSON. So are there any HHS funds included in part of 

the 2012 budget? 

Mr. SHULMAN. No. The 2012 budget submission is all IRS. 

Mrs. EMERSON. You referred to H.R. 1 in your testimony, and 

you outlined all of the negative ramifications should it ever become 

law. Let me ask you, because of the prohibitions that would not 

allow the IRS to expend any funds to implement the new health 


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care law, what other budgetary resources then would you have to 

implement and enforce health care, and do you know how much 

more HHS could actually transfer? 

AFFORDABLE CARE ACT FUNDING

Mr. SHULMAN. Well, I think you are referring to some language, 

which has been brought to my attention, forbidding us from spending money in that bill for implementation. 

Mrs. EMERSON. Correct. 

Mr. SHULMAN. First, I would note I think the President has been 

pretty strong about his commitment to this law, and so that prohibition obviously would have to be passed by both Chambers of Congress and signed by the President. So we haven’t really done contingency planning around that, at this point. 

I should just state it up front, I have been very clear that we 

should run as a nonpartisan, nonpolitical agency. We don’t write 

the laws, we implement the laws on the books. If we weren’t allowed to spend funds on, or if we weren’t given funds for health 

reform, I think of it the same way that I think about not getting 

funds for any other law that is passed, and we have to make a set 

of difficult trade-offs. We really haven’t done that kind of contingency planning. 

Mrs. EMERSON. This will be the last set of questions I ask, and 

then I will turn it over to Mr. Serrano. 

Requesting $473 million and over 1,200 new employees for the 

health care implementation is a fairly significant increase. I note 

you have broken it down in the submitted testimony very nicely 

and very specifically. But this is before the individual mandate 

even goes into effect in 2014, and, I believe, the last provision of 

the health care law doesn’t go into effect until 2018. Have you all 

done the calculation yet to determine exactly how much funding 

and how many FTEs you are going to need to fully implement 

health care probably through 2020? 

Mr. SHULMAN. I don’t have those numbers. What I would point 

out is 82 percent of the money we ask for is technology and infrastructure. 2012, 2013, leading up to 2014, is going to be a big 

ramp-up, where we have to take our core technology, make it work 

for the implementation of the ACA. I mentioned the household income. We need to make sure we have the right interfaces with the 

State exchanges to put out $400 billion of refundable credits in real 

time, and that the eligibility requirements can work; we must set 

up the systems for this new concept of reconciliation of those credits at the time people file their returns. 

And so I would anticipate that some of the biggest budget numbers you will see will be in 2012, 2013, 2014, as we get up and get 

operational, and then there won’t be as big investments in technology and infrastructure going forward, because that will be in 

place. 

We also have to go into our core tax systems to make sure all 

this works. Then we have to do back-end testing of those systems 

to make sure that there aren’t any problems. 

Mrs. EMERSON. So the answer, though, is you really haven’t 

planned much beyond 2014? 


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Mr. SHULMAN. We haven’t done the kind of specific planning that 

would allow us to talk about numbers. 

Mrs. EMERSON. Do you know when you may get to that point? 

AFFORDABLE CARE ACT IMPLEMENTATION

Mr. SHULMAN. CBO put out a 10-year estimate of administrative 

costs with the bill. If you look at this number, our costs per year 

are not far off from taking the total and dividing it by 10. And so 

we will go through detailed planning each year. Some of it will depend on how things evolve. The President yesterday just talked 

about State flexibility, what States decide to opt in, opt out as we 

put out guidance. So we are going through it. 

I will note there is funding in here for the 1099 provision, which 

seems to have universal support of repeal. We would pull that 

funding out if that were repealed. So I think there is a variety of 

moving pieces. 

Mrs. EMERSON. Once you get into the individual mandate piece 

in 2014, do you envision having to hire a few thousand enforcement 

folks? 

Mr. SHULMAN. Not for the individual mandate. I mean, the individual coverage requirement, as it is called in the bill, is actually 

a relatively small dollar amount. There are prohibitions in the bill 

around using levies, seizures, those kinds of things. We would not 

have any live agents ever talk to someone about that. And so I 

think most of the money for the individual responsibility requirement is going to be for technology, so we set up the proper billing 

systems, not for hiring lots of people to go out and check on folks. 

Mrs. EMERSON. Okay. We will probably talk more about this. 

Mr. Serrano. 

Mr. SERRANO. Thank you very much. 

It was not my intention to speak about health care at all, but let 

me make one comment. I don’t envy the situation that so many 

agency heads are finding themselves in, because I think what you 

are going to see—and I say this not to be nice, but I don’t think 

you are going to see it from Jo Ann Emerson, but I think you are 

going to see it from some folks who are elected and not elected— 

which is to sort of try to find a way to intimidate agency heads into 

not fully implementing on time the health care law or laws they 

don’t like. You do that by using the bully pulpit both if you are 

elected, and if you are not elected, but have a radio or TV show, 

you can do that, too, sort of rile the people up to say, don’t do it. 

For me, it is very simple. And maybe it is because I am not a 

lawyer. I am not putting lawyers down. But it is the law of the 

land, and until further notice, it has to be obeyed, and it has to be 

implemented, and it has to be paid for. And if we don’t pay for it— 

I don’t want those wars to be going on, but we keep paying for it. 

But that is what we live with. 

EARNED INCOME TAX CREDIT

Anyway, let me move on to one of my favorite subjects, EITC. 

You have done a great job in advertising to people that are eligible 

and to use it, and I have participated in many activities in my district. 


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The question is, what more can be done both by the IRS and others to ensure that all taxpayers who qualify for the EITC are, in 

fact, claiming it and receiving it? I believe that may who are eligible are still not using it, not taking advantage of it. 

And lastly, again, here is an example of some laws that people 

go after. It would seem at times that the EITC is the biggest tax 

issue in the Nation the way it is enforced or how the recipients of 

it are attacked. And so what can we do to make more people take 

part in it; and, secondly, perhaps to alleviate some of the concerns 

other people have about the program? 

Mr. SHULMAN. The EITC is a large refundable tax credit which 

has a set of characteristics. One is it helps lift a lot of people out 

of poverty. Over twenty-five million people got it last year. Fifty 

billion dollars was paid out. But when there is a large refundable 

tax credit, it also becomes a target for people who would perpetrate 

fraud. And so we run a program that tries to address both ends of 

that spectrum. 

To your question around outreach, we hold EITC awareness 

days. We try to educate practitioners. And when I say ‘‘we hold,’’ 

we hold thousands of them. We invite Members of Congress. We do 

a lot to promote it. If we think someone is eligible, and they are 

not claiming it, we will send a letter to them. There is an automatic letter that goes out, and we work with lots of different 

groups to advertise it. 

I am quite proud of the rate—for a program trying to lift people 

out of poverty, it has a 75 to 80 percent participation rate. So it 

is a very high participation rate. 

On the other end of the spectrum, there is more fraud and error 

in it than I would like, and so we have an aggressive set of proposals around reducing fraud and error. In this President’s budget, 

we have proposed to increase the penalty by five times for preparers, tax preparers, who don’t do proper due diligence to make 

sure people meet the eligibility requirements. We run very serious 

audit programs, and we block a lot of fraud coming in. We block 

or retrieve about $4 billion annually in error and fraud; and I 

would note, some of this is error, that people—you know, tough economic times. They take money out of their 401(k), they don’t pay 

taxes on it, they claim the EITC. They didn’t know the law. We 

make an adjustment in just the EITC. So all the numbers aren’t 

fraud. 

We also are working with OMB right now to run some experiments with some State data to see if that can be used to decrease 

fraud. And the list goes on. We have a preparer oversight project, 

and 66 percent of EITC claims come from preparers. We try to get 

this balance right by doing extensive outreach, making sure people 

know that they can get the credit, but we are also very focused on 

making sure the payments go to the right people, and that we combat any fraud. I think both ends of the spectrum are important. 

Mr. SERRANO. I recall at one time that something like 17 percent 

of the taxpayers were EITC recipients, if you will, and yet 44 percent of the audits have been conducted on them. Are those numbers still the same? Because at that time I claimed that that was 

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cent against 17 percent of the taxpaying population or tax-filing 

population seems to be unfair. What has happened there? 

Mr. SHULMAN. The number I carry in my head is 36 percent of 

audits have some—— 

Mr. SERRANO. I am not going to argue over that. 

Mr. SHULMAN. Tangential, Appropriations Committee-speak. The 

number had some relation to EITC taxpayers. And, again, it is a 

difficult balance. We are trying to get it right. So, your average taxpayer has less chance of being audited than an EITC taxpayer because, as I talked to you, it is a big refundable credit. As I said, 

as you go up the income scale, if you have over $200,000 in income, 

you have a higher chance of being audited than an EITC taxpayer. 

And if you have over $1 million of income, you have got four times 

as much chance of being audited. 

So there is more auditing of the EITC than your average tax- payer below $200,000, but because it is a large refundable credit, 

and we are trying to get this balance right. 

VOLUNTARY DISCLOSURE PROGRAM

Mr. SERRANO. Your testimony highlights the success of the voluntary disclosure program for which 15,000 voluntary disclosures 

were received. What is the IRS’s evaluation of the performance of 

the voluntary disclosure program, and what are the lessons 

learned? In addition to resources, what else does the IRS need to 

ensure the success of the international tax enforcement initiative? 

Mr. SHULMAN. As you know, as members of the Committee know, 

I made international tax evasion one of my priorities when I came 

into the Agency. We had an unprecedented agreement with the 

Swiss Government, for the first time in American history, to get 

thousands of accounts turned over from Switzerland, really putting 

a dent in bank secrecy. We have a variety of other activities. And 

as we ramped up the jeopardy of people getting caught, we ran a 

voluntary disclosure program which said, ‘‘come in, pay your back 

taxes, pay your interest on the back taxes, pay a very substantial 

penalty—in this case 20 percent of your account balance—on top of 

all this, but you can avoid going to jail.’’ 

Frankly, when I started this, I thought maybe 1,000 people 

would come in. We usually get about 100 people a year through 

voluntary disclosure. As you mentioned, we had 15,000 come in. 

Since it closed, we have had another 3,000 or 4,000 come in. We 

just announced another Voluntary Disclosure program. 

And before I get to lessons learned, we are using that information to data mine and then go after other tax cheats, because we 

see patterns of banks, promoters, advisers who facilitate this. And 

you have seen some of that start to percolate through the press, so 

we have now taken that data, and are branching out our investigations to both other banks and other parts of the globe, and we are 

going to keep the pressure up. 

I think lessons learned are, one, you need to be staffed for this. 

Like I said, we were planning on about 1,000; we got 15,000, so we 

had to get ramped up for this. 

Two, the technique of ramping up pressure and then allowing for 

people who want to come in and get right is important. I have always said it is great, we have gotten well over 20,000 people back 


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in the tax system. And they have had to pay the price. But what 

is more important for our tax system is the next 20,000 or the next 

100,000 people don’t even think about doing this and are honest, 

tax-paying citizens for the years to come. 

And so I think the real lessons are around how to use your enforcement tool to build long-term compliance in the system. Because that is the most efficient thing we do. There is a huge ripple 

effect when we find bad actors, bring them in, demonstrate the consequences. And the key is to prevent that action in the future. 

DEBT COLLECTION FLEXIBILITY

Mr. SERRANO. I have one more question this round. The whole 

issue of collecting debt during an economic recession, now, we know 

that the people who have haven’t paid the taxes or who owe taxes 

no question should pay them, and you should collect them. But the 

taxpayer advocate feels that there is insufficient guidance available 

to the tax-collection employees in terms of how best to go about 

doing it so it doesn’t—while collecting taxes, it does not create 

undue hardships on people who may have lost their jobs during 

this recession. 

What can you tell me? What is happening to both do what your 

agency is charged with doing, and at the same time taking into 

consideration that these are not normal times? 

Mr. SHULMAN. Similar to what I talked about before. I don’t see 

conflict between collecting the revenue, but making sure we understand the individual circumstances of each taxpayer. I have a 

theme that I use with our employees, which is everybody should 

walk a mile in a taxpayer’s shoes, and you should really think 

about each person that comes in. What are their circumstances? 

How do we best deal with them as the Federal Government in a 

way that is fair, in a way that is efficient, in a way that has them 

leave feeling that we are competent, respectful, and all of those 

things? 

And so what we have tried to do is require people who can pay 

need to pay. But the law allows for a set of flexibilities around people who are struggling, people who aren’t in a position to pay, people whose circumstances have changed. And over the last several 

years we have gotten funding to make sure that we have increased 

collection coverage, and this funding started before the recession 

started. 

But I put in place a number of measures, trying to walk in taxpayers’ shoes. In 2009, we gave our people more discretion around 

not taking collection actions because somebody missed a payment. 

We allow people to get liens removed from houses if they were trying to refinance or sell, recognizing that the housing prices are one 

of the big things dragging the economy down. Last year we held 

1,000 open houses for small businesses and individuals around the 

country. We brought in appeals officers, collection folks, customer 

service people, the Taxpayer Advocate Service, and tried to work 

out issues and come to resolutions with them. 

FRESH START INITIATIVE

Just last week I announced what I call our ‘‘Fresh Start’’ initiative, where I increased the threshold from which we will file liens, 


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recognizing inflation. So we will be filing fewer liens going forward. 

We gave taxpayers the ability—and it was one of the things that 

the Taxpayer Advocate pointed out—that if they call and request 

a lien to be withdrawn, we will withdraw it, which erases it from 

their permanent record. Right now we release it, but a lot of taxpayers have said that a withdrawal actually helps them get on 

with their life better, get financing, those kinds of things. So once 

your tax debt is paid, we are fine with that. It is a little extra expense for us, but we have agreed to do that to try to help taxpayers. We have said taxpayers who enter direct deposit arrangement with us—there is very little default with electronic deposit for 

an installment agreement—we will withdraw liens. So we won’t file 

a lien or we withdraw a lien if you take that extra step of hooking 

up electronically with us. 

And we have dramatically expanded our Offer in Compromise 

program, which is a program that says if there is no prospect of 

collecting tax now with your current assets and income, and you 

don’t have prospects for income, we can settle your debt for less. 

We have loosened the criteria on that to allow more people to come 

in, get clean, get a fresh start, and move on. 

And so I am always trying to balance. If you owe taxes and you 

can pay taxes, you need to pay taxes. But if you are in a circumstance where you really can’t pay, and there is not a prospect 

of payment, we need to find ways to work with you, again, to keep 

you in the system for the long term, and to make sure people have 

faith in the tax system. 

Mr. SERRANO. Thank you. 

Mrs. EMERSON. Ms. Lee. 

Ms. LEE. Thank you very much, Madam Chair. 

EFFECT OF BUDGET CUTS

Let me ask you a couple of things. One is following up on my colleague’s question with regard to the earned income tax credit. In 

terms of the budget cuts that are being proposed, how will that impact low-income wage earners, the working poor, and the EITC program? Or will it? 

Mr. SHULMAN. I think it will probably impact both ends of the 

spectrum. Clearly we will have to make cuts in our outreach programs if the kinds of cuts being talked about are severe, and so we 

won’t be able to do as much work with partners, and we won’t be 

able to do as much communication and outreach. We are going to 

have to look at things like mailings and figure out are we sending 

out those automatic mailings or other automatic mailings. We already put a freeze on non-case-related travel at the Agency, and 

that freeze will have to get more severe, without any exceptions, 

and so we will limit people traveling out to do those outreach 

events. So I think on the outreach side, it will have an effect. 

It also will have a direct effect on compliance. 36 percent of our 

audits involve EITC cases, so I think you would see fraud and error 

go up in that, and other programs. So I think you would see change 

on both ends, both the compliance side, to make sure only people 

who deserve it or who are qualified get it, as well as on the outreach side. 


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EARNED INCOME TAX CREDIT OUTREACH

Ms. LEE. I do a lot of these events in my district also to encourage EITC-eligible individuals to apply, and we in no way reach the 

numbers of people who are eligible, and so we are trying to reach 

more people who qualify. And it sounds like we will reach less people now if these budget cuts take into effect or go into effect as proposed. Or can you figure out a way to increase the recipients, the 

eligible people filing with less money? I mean, is there a way to do 

that? Because we want to make sure everyone files who is eligible 

for EITC. 

Mr. SHULMAN. As I said in my opening comments, if the budget 

as proposed right now in the House were passed, we would have 

to make a set of difficult trade-offs. So I can’t tell you we have gone 

to the level of detail around EITC-specific outreach, how it would 

affect eligible taxpayers or even compliance. But I would tell you 

it is a big enough program that both ends of the spectrum would 

be affected. 

DIVERSITY OF THE INTERNAL REVENUE SERVICE WORKFORCE

Ms. LEE. Let me ask the next question. As it relates to the diversity of the IRS in terms of people of color and women in your workforce, do you have any data that shows how you are doing, as well 

as with regard to minority contracting, whatever types of contracts 

you all let? Are you part of the 8(a) program, and how are you 

doing on that? 

Mr. SHULMAN. Yes on both fronts, on 8(a) and diversity in the 

workforce. You know, I am a believer in a strong diversity office 

with a set of requirements. For an agency like us, who interacts 

with every taxpayer in the Nation, if we are going to be good at 

service, and, frankly, good at compliance, we need to reflect the 

population. We must really engage, walking in the taxpayers’ 

shoes. 

So, I really emphasize that diversity in the Agency is more than 

just a legal requirement. We need to meet legal requirements, but 

it is a strategic imperative for the Agency. I think in everything 

from diversity of race and gender, diversity of hiring people with 

disabilities, we stack up quite well against other Federal agencies. 

For targeted disabilities, we have the highest percentage of hitting 

the targets, and I am quite proud of that record. I spend a lot of 

personal time on this issue. Our Director of Diversity reports directly to me, and I am quite proud of where the Agency is in that 

regard. 

As far as 8(a) targets, I can get those to you. What I can tell you 

is we hit most of them. The ones we don’t, we have specific plans 

to hit, and we have been getting better as an agency. And, again, 

I spend personal time on this. 

Ms. LEE. So you have a Diversity Officer. Do you have the data 

or the reports that we could access or send them to us? 

Mr. SHULMAN. Absolutely. 

Ms. LEE. Thank you. 

[The information follows:] 


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Mrs. EMERSON. Mr. Diaz-Balart. 

Mr. DIAZ-BALART. Thank you, Madam Chair. 

Thank you, Commissioner. Good to see you. 

Let me first thank Ranking Member Serrano for his statement 

about making sure that there is no intimidation. We also realize 

that we have a mandate or oversight which we take very seriously 

and he takes very seriously, and I know that if there were attempts 

of intimidation, we would all, including Mr. Serrano, would be as 

vocal as when he was, for example, when the President called the 

Director of the CBO to the White House. So I know that, and I 

thank him for bringing that up, because I know that we would all 

be as vocal at least as we all were when the President called the 

CBO Director to the White House. And as the ranking member 

said, clearly that is not the intention of this chairwoman. 

INDIVIDUAL MANDATE

I wasn’t going to ask about the individual mandate, but I was 

kind of hit by a couple of statements. You mentioned before that 

because if the continuing resolution were passed as is, that you 

would have—less people would, in essence, means less enforcement, less revenue, correct? In essence. You mentioned about how 

the continuing resolution would affect your ability, and you would 

actually lose revenue. 

Mr. SHULMAN. That is correct. 

Mr. DIAZ-BALART. Because you would have less enforcement people? 

Mr. SHULMAN. I think it would be for a variety of circumstances. 

Mr. DIAZ-BALART. Yet correct me if I am wrong, but when the 

chairwoman asked you how many people you are going to be hiring 

for the individual mandate, you said not a lot of people, mostly 

technology. Is that also correct? Because if that is the case, then 

why don’t you—if you can enforce with not a lot of people, with just 

technology, and you are saving money with that. And then why 

does it hurt you if you have less people from the CR? Which one 

is it? Why don’t you then replicate what you are going to do with 

the individual mandates in other areas, which is you don’t need a 

lot of people; you are asking money for technology anyway. Which 

one of the two is it? I am kind of confused. 

Mr. SHULMAN. One of my favorite statistics in the world of tax 

is that the Tax Code is four times as long as War and Peace. 

We obviously have a huge Tax Code with lots of different provisions, and I think each provision of the Tax Code has different 

characteristics and different needs as far as how we, as the tax administration arm, implement them. And so we could go line by line 

through the Code and think through what are the characteristics 

of it? What are the requirements put on us? What is the lead time 

against implementing that? How do they interact with other pieces 

of the Code? Each one would have a little bit of a different answer. 

And so while I recognize that the individual coverage requirement 

is a provision in the law that gets a lot of attention, I think taking 

comments about that and generalizing them to the whole Tax Code 

is not really apples to apples. 


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RESEARCH

Mr. DIAZ-BALART. I understand that, Commissioner. You have 

spent a ton of money on research. Have you looked at where you 

can replicate what you want to do with the individual mandate, 

which, according to what you said, is not going to take a lot of people, to where could you replicate that to other parts of the Tax 

Code? Or are you telling me that there are no other parts of the 

Tax Code where you can replicate that with less people in order to 

not lose revenue? 

Mr. SHULMAN. I look at that a bit in reverse. When a new provision is put in the Code, like the individual coverage requirement 

or another one, we look at our core programs and say, ‘‘which of 

our core programs are most suited to that kind of requirement, and 

how would we do that?’’ 

We have a very big program called our Automated Under Reporter Program, which is basically a document-matching program 

that has a 22-to-1 return on investment. One of our bedrock principles is we don’t send letters to you if we can’t answer the phone 

call when you call and say, ‘‘what is this letter about?’’ And so the 

Automated Under Reporter Program is our basic W-2 matching 

program, which is something very similar to what the individual 

coverage responsibility would have. You say what your income is, 

we get a W-2. It automatically, if it doesn’t match, sends out a bill 

to you. 

The vast majority of things get resolved through mail and correspondence. Depending on dollar amounts, sometimes somebody 

would show up and do face-to-face audits or do correspondence audits, and sometimes they wouldn’t. 

The individual responsibility requirement actually starts at a 

very low dollar amount. I think it is $95; it ramps up to $695; it 

is 2.5% of annual household income when fully phased in. What I 

was expressing to the Chairwoman is those aren’t the cases that 

get a lot of face-to-face interaction with the IRS. 

And so we are building on lessons learned to try to automate as 

much as we can. We have lots of document matching. And this one 

would be pretty simple: you have coverage, or you don’t. There is 

indication you have coverage or you don’t, and you get a letter. You 

think about it like a billing system. 

TAX LAW COMPLEXITY

Mr. DIAZ-BALART. In a C–SPAN interview, you admitted that you 

use a tax preparer for your returns, which makes sense to me. I 

understand, and I do the same thing. You stated that ‘‘I find the 

Tax Code complex. I use a preparer,’’ which makes sense. I obviously agree with that. Now, it would seem to me that the health 

care bill would only seem to compound the complexity of the Tax 

Code. 

So how confident are you in your understanding of the health 

care law and the vast new responsibilities and the powers it is giving to the IRS because of that complexity? 

Mr. SHULMAN. I am quite confident that we have got a whole set 

of lawyers that have looked closely at the bill. We are very familiar 

with the immediately effective provisions. There are a variety of 


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ones. There is lots of planning to go. So I think this Agency is incredibly confident at understanding the tax law. 

INFORMATION SECURITY

Mr. DIAZ-BALART. There has been a lot of concern, and understandably so, about the new oversight powers of the IRS, given the 

health care law which would really give unprecedented access to 

U.S. citizens’ information. And so what assurance can you give the 

American people and give us that that information would be kept 

secure? Now, that is not an issue with your agency, per se. We 

have seen the Wikileaks. So what sort of assurances could we 

have? 

Mr. SHULMAN. I think there has been some inaccurate commentary about the access that we will have to health information. 

I am very clear that as part of this law, the Affordable Care Act, 

our role is to administer the tax provisions, not to get involved with 

health care, per se; that you can think of us as the bank, where 

the money flows to put out credits, to collect money, to interface 

with insurance companies and get them payment. 

The only information we will have is fact of coverage, not health 

records, not medical treatment, not information about people’s 

health situation. We will have your classic tax information about 

income. And then the only other piece of information we will have 

is fact of coverage: Do you have coverage, or don’t you? 

Regarding how we safeguard that and other things, we spend a 

lot of money—in our requests every year, we ask for some more— 

around data security. Some of the money in this health care request is around our data security office and our safeguards office 

to make sure we not only safeguard the data that is within our 

four walls, but we go out and do aggressive oversight of the data, 

the tax data, that we share with anyone else around this law. 

I tell everybody, within my first 2 hours on the job, I got sworn 

in, had a couple of other things happen, and then the person who 

talks about data security and taxpayer privacy came and gave me 

an hour briefing. I mean, this agency takes taxpayer privacy and 

data security very seriously. But it is tax data, and the only new 

data we will get because of the health care law—there will be a variety of other tax-specific things and financial data at which we are 

quite adept—will be fact of coverage. We are not getting involved 

in health care decisions, health care choices, data about people’s 

health. 

Mr. DIAZ-BALART. Madam Chairwoman, if I may, just another 

question. Really it is a two-part question. 

Mrs. EMERSON. Certainly. 

RESEARCH

Mr. DIAZ-BALART. The IRS spends a vast amount of money on research, I believe, I was told. And I am curious as to if you are doing 

research and how much you are focusing on the—kind of 

piggybacking on the previous conversation we just had about the 

individual mandate, about using technology less, are you doing research into where you can do more of that, if there areas that are 

applicable that you can do more of that? And really the bulk of my 

question is are you also doing research, and what kind of research, 


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to prepare for fundamental tax reform? I mean, for years, I guess 

for generations, we have been talking about fundamental tax reform. Are you doing any research on that as to what that would 

mean, how that can be done, et cetera? 

Mr. SHULMAN. We have a very robust research operation. We run 

the statistics of income data operation, which is used across the 

government and by lots of researchers. It is data about income in 

the United States, and it is used for a variety of non-tax-related 

research. Then we have our National Research Program (NRP), 

which really looks at compliance, what are trends of compliance. It 

is a very interesting and complicated study about what leads to 

noncompliance: what is accidental? What is because the Code is so 

complex? What is advertent? How do you stop people who are purposely doing that? A lot of our planning is informed by that research. I am a big believer in being forward-leaning, being innovative, seeing around corners, trying to position the Agency long 

term. 

Kind of sadly, we have gotten quite adept at quickly implementing tax law changes at the last minute. I think—and you look 

at fundamental tax reform—I think the President and lots of leaders in Congress, both parties, both Chambers, talk about the need 

for simplification. You know, we are big cheerleaders for that. The 

simpler it is, the easier it is for us to engage with the American 

people. So we do a variety of planning around that as well. 

Mr. DIAZ-BALART. Thank you. 

Mrs. EMERSON. Thank you. 

REFUNDABLE TAX CREDITS

How many people do you think, or do you know specifically, work 

on refundable tax credit issues or any kind of tax credit, whether 

it is the earned income, education tax credits, or child-related tax 

credits? How many people are currently, even approximately, in 

the IRS are doing that right now? 

Mr. SHULMAN. We have a dedicated refundable credit office who 

spends a lot of time doing outreach, looking at it, et cetera, and I 

would have to get back to you on the exact numbers in there. 

Part of the budget request includes funding for a Refundable 

Credit Compliance Office, recognizing that we need to keep making 

sure that we get the right algorithms, et cetera, and we are tightening around that. 

A lot of the rest of the credits are very hard to break down because they flow through. It is all part of your tax return. As I mentioned before, your income, the deductions you take, some of them 

are stand-alone refundable credits at the end of the return, what 

are called below-the-line items; some of them are above the line 

and flow through. 

We really are organized more around individual taxpayers, business taxpayers. We have a Large Business Division, a Small Business Division, an Individual Division, and a Tax Exempt Division. 

And then our process flows for both service and compliance are 

more towards the type of taxpayer, to deal with all of their tax, 

their income, their deductions, and their credits. We don’t really 

have it broken down that way. 


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Mrs. EMERSON. But yet when you made your request for the refundable credit compliance office, you very specifically asked for, 

$473 million. No, that is for all health care. $213 million and 453 

FTEs, just to implement the refundable health care premiums assistance tax, right? 

Mr. SHULMAN. I was actually referring to something different. We requested, I believe, in the $20 million range for an office that 

would loop in EITC and some of the refundable education credits, 

as well as this. As refundable credits become something that there 

is more of, and because they are refundable, we want to make sure 

there is not fraud. That is really about research, compliance, filters, 

technology to stop. 

The other thing we are talking about, the infrastructure for refundable credits, is really complicated. To give you the best example, right now every taxpayer focuses on AGI, adjustable gross income. There is no concept of household income. So we actually have 

to take our database of all taxpayers and figure out how to link 

households together, which is the eligibility requirement of this 

new refundable credit. And so that request is not for the Office, per 

se; that request is just to get the basic infrastructure up and running. The bigger numbers in this budget request are really technology and infrastructure. 

Mrs. EMERSON. For the refundable credit compliance office, that is specific to health care, you have asked for $213 million and 453 

full-time employees. Then for this new office to administer all the 

other refundable tax credit programs, you have asked for $31 million and 314 FTEs. So it is kind of weird that you have got $213 

million and 453 FTEs, and then $31 million and 314 FTEs in the 

new office. 

I am just a little bit confused how it is all going to work together. 

And are there not people already working on the refundable tax 

credit, the EITC? 

I will say that I have so many of my own constituents who are 

eligible for EITC. Joe, you may be interested to know, just kind of 

an aside, I actually did an event with the IRS free tax file service 

at a lot of my community hearing organizations over the break. At 

three different locations, we teleconferenced or videoconferenced 

the event because so many people and organizations, who help 

them, want to understand if they qualify for EITC. In my district, 

we have a large amount of people who are potentially eligible for 

EITC. 

But I guess my concern is if you already have existing staff working on refundable tax credits, can you not just use the same infrastructure? Expand it, if you need to for purposes of this health 

care-related refundable tax credit; can you not just do that? Or is 

it going to be a whole new, separate—or does it need to be separate? 

Mr. SHULMAN. So, let me try to explain. I probably didn’t explain 

it as well as I could. 

The refundable credits office that we are trying to stand up—— 

Mrs. EMERSON. That is the $31 million one? 

Mr. SHULMAN. Yes. That came not as a result of health care; it 

came as a result of me, as Commissioner, saying that we had 

spread refundable credits through the Agency. We definitely will 


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pull people in through outreach, but we didn’t have a dedicated office, we didn’t have dedicated research, we didn’t have dedicated 

filters, and people who—what they worried about was fraud and 

abuse in refundable credits going out. We will definitely pull some 

people in, but we didn’t necessarily have—we had a lot more outreach folks spread around. The other people were spread through 

our compliance functions. They will eventually be assigned to study 

the $400 billion in refundable credits enacted as part of the Affordable Care Act, to think about compliance trends, et cetera. But that 

is not necessarily the direct effect. You know, this Refundable 

Credits office wasn’t created as a result of the Affordable Care Act 

(ACA). It is a subset of the initiative to deliver credits accurately, 

which includes the funding to implement the new credits from the 

ACA. 

The refundable credit budget request for the Affordable Care Act, 

which is—the line item is: Ensure accurate delivery of the tax credits. There is a small business tax credit that is in place that we 

need to make sure we have some coverage around, so we are getting it to the right people and not getting it to the wrong people. 

That credit is a pretty small chunk of that request. The large number you are pointing at, and I would ask our staffs to reconcile 

numbers, but I am looking at $227 million which includes some additional downstream ACA implementation costs. And so you had 

said—— 

Mrs. EMERSON. $213 million dollars, and with the 453 FTE. 

AFFORDABLE CARE ACT CREDITS

Mr. SHULMAN. Okay. That number. That is what I was describing to you, or I tried to describe to you before. That is the funding 

to implement the $400 billion in refundable credits that are in the 

ACA that will go out over 10 years through up to 50 State exchanges, maybe less, as the President talked about depending on 

qualification. 

When people show up at the exchange, they are going to figure 

out whether they are eligible or not right there at the exchange. 

So we need to build technology to interface with them. First, we 

need to build the household income database. Then we need to get 

in real time, and, as Mr. Diaz-Balart talked about, we need to do 

it in a way that is secure, that has the appropriate safeguards. We 

need to determine eligibility. We then are going to need to work to 

have monthly payments going to insurance companies, and so we 

need interfaces with all the different insurance companies in the 

country. Then we are going to have to work out protocols with the 

exchanges around change in circumstances: how we change that, 

how we verify that through our systems. And then that refundable 

credit is actually an advanced payment in—take 2014—on your 

2014 income. So you will, in 2013, figure out what health coverage 

you will have for the year based on 2012 or 2013 income. This will 

happen throughout the year, and then there will be a reconciliation 

in our systems on the back end to figure out what you actually 

owe. 

That $200-plus million is to do the planning, do the interface 

work, start to build that system that is going to have all those different complex interchanges with insurance companies, with emVerDate Mar 15 2010 05:43 Jul 07, 2011 Jkt 099011 PO 00000 Frm 00349 Fmt 6601 Sfmt 6602 E:\HR\OC\A999P2.XXX A999P2

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ployers sending in some money, with the exchanges. So that is actually a technology infrastructure build. It is separate from this 

data analytics group that is doing pure compliance around refundable credits. 

[The Refundable Credit information follows:] 

REFUNDABLE CREDIT INFORMATION

The IRS budget has several figures related to credit compliance. The figures dis- cussed include the 453 FTE and $213.5 million budgeted for ensuring compliance 

with the ACA credit. The bulk of this investment is to expand the IT infrastructure 

to properly administer the new premium credit to subsidize the cost of health insurance for Americans who do not have access to affordable care. This amount is a subset of the $473.4 million and 1269 FTE requested for implementing all the provisions of the Affordable Care Act (PL 111–148) for which the IRS is responsible. 

The FY 2012 budget request also requests 314 FTE and $30 million to establish 

a Refundable Credits Compliance Office. This office will develop a comprehensive 

and integrated compliance strategy for administering refundable credits and rapidly 

address refund schemes through pre- and post-refund enforcement. Establishing an 

office dedicated to refundable credit work allows the IRS to address non-compliance 

and fraud trends that emerge from existing and future refundable credits. 

The IRS also maintains an Electronic Tax Administration and Refundable Credits 

Office (ETARC). The current staff dedicated to Refundable Credits has a staff of 43 

and provides oversight and strategic direction across twenty-two service-wide program areas across the IRS. These figures only represent dollars and FTE dedicated 

to refundable credit work. They do not capture the employees who may spend part 

of their time reviewing and auditing claims for credits, developing forms and instructions for claiming the credits, and programming the necessary systems to deliver the credits, which is a much larger figure. Since the credits are claimed at the 

time of filing, much of the work is part of the IRS’s normal work stream, and not 

separately captured. 

Mrs. EMERSON. So will all 453 full-time employees that you need 

to at least set up this whole new system—actually will you need 

all of those people throughout the entire 10 years as you just said? 

Mr. SHULMAN. Not necessarily. Our personnel needs will likely 

decrease as we ‘‘stand up’’, which is why we will use a lot of contractors in addition to IRS personnel, so we will contract some 

build. This will be program offices, project managers, coders, certain folks. The average number I use from my private sector experience is that the drop-down cost of technology is anywhere from 

20 to 30 percent of development cost. So you have your development cost. Then you have got your operating costs and infrastructure. 

I don’t know how much of this will be in production for the long 

term, but this set of people we need to do the ramp-up won’t be 

the same set of people we need to run the operating environment 

long term. 

AFFORDABLE CARE ACT RECONCILIATION

Mrs. EMERSON. I can’t remember if the language was specific 

enough in the health care law, even though I actually read it a couple of times, with regard to the reconciliation at the end of the 

year. I mean, suddenly Joe is going to get a bill here, just hypothetically, for $453 that he is going to end up owing? Have you figured that part out yet? I am just curious. 

Mr. SHULMAN. I am very focused on this reconciliation because 

it is actually a new concept in the tax system, paying this back. 

And Congress has and is talking about certain caps on it, and those 

caps have been expanding. Bottom line is you are going to get 


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money, and then you may owe a chunk back. And if you go over 

the cliff, the chunk could be relatively substantial. And so we are 

needing to set up systems around that. 

Mrs. EMERSON. And it seems to me that the complexity only gets 

exacerbated by the fact that your income status could possibly 

change dramatically, either to the positive or the negative, depending. And then is the onus then on me, the individual, to let you all 

know that suddenly I got this gigantic bonus, and I have a huge 

raise, and suddenly I don’t qualify for this? I mean, whose responsibility will it be to tell you? Or will it just come at the reconciliation at the end of the year? 

Mr. SHULMAN. As I understand, it is a two-step. And so I don’t 

know all the plans because it is the exchange’s responsibility to 

know shift of income, and we will have some interface with that. 

But I think the first step is when there is a change in income, 

alerting the exchange and adjusting. But regardless what happens 

there, it will be on your tax form what your final income is, what 

tax credits you got, and if there is a delta, there will be an assessment on that. 

Mrs. EMERSON. It is going to prove quite interesting, to say the 

least. 

SIMPLE RETURNS

I will shift gears. We have talked several times about the President’s campaign pledge to have the IRS perform tax preparation or 

simple returns. As you know, there still is, and probably more so 

now, significant bipartisan opposition to this concept, at least in 

the House. I know we have talked often about it, and you have told 

me that there are no plans to move forward or spend taxpayer 

funds to create this program. But I keep hearing, every so often, 

that the IRS is going to do this. And it is not from conspiracy theorist e-mails. I just hear it around. I also know that this concept 

comes not from you, but rather from those who are perhaps above 

you in the chain of command. 

I just want to make sure, is it still your position that the IRS 

is not moving ahead on implementing simple returns? 

Mr. SHULMAN. Yes. I get to decide what the IRS does and doesn’t 

do, and we are not working on simple returns. So I will tell you 

that. 

Mrs. EMERSON. Not even as a pilot? 

Mr. SHULMAN. We don’t have a pilot program. What I always say 

is, whether you like it or not—compared to places I came from before, which built stock exchanges and did complex surveillance— 

the money we spend in technology investment money is very small. 

And so even though for 2011 and 2012 we have asked for an increase, as a percentage of total budget those are still incredibly 

small, especially if you look at other big financial institutions who 

move the kind of money we move. We would have a long way to 

go, even if we wanted to do it, to get our core database done, get 

the technology done, get the security done, and put all these pieces 

together. And so it is not something that is in our planning pipeline. 

Mrs. EMERSON. I appreciate it. 

Joe. 


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Mr. SERRANO. Thank you. 

So you think some people will stop now saying that he is going 

to do it? Besides, it is not an e-mail; it is on radio. Anyway, and 

I am going to get a bill at the end of the year, you said? 

Mrs. EMERSON. Hypothetically, yes. 

Mr. SERRANO. I hope not. 

Mrs. EMERSON. Well, I guess you would have to be in the New 

York exchange, so you won’t qualify for any refundable tax credits. 

Mr. SERRANO. Okay. 

EFFECTS OF BUDGET CUTS AND RETIREMENTS ON THE WORKFORCE

Commissioner, we know that there could be, unfortunately, some 

very serious cuts coming to every Federal agency, reduction in 

workforce. But we also know that, according to the Treasury IG for 

Tax Administration, that they predict that 30 percent of all IRS 

managers and 47 percent of IRS executives are eligible to retire. 

So how does one play into the other? And what preparations are 

you making for the fact that you have this many people that are 

eligible for retirement? How do they play into each other, I meant 

do you absorb then some of those cuts through some of the people 

you hire, or do you cover those and start at the bottom where you 

would have entry-level people coming in through the system? 

Mr. SHULMAN. In general around this retirement issue and 30 

percent of people being eligible, I have been very focused on workplace issues. I believe, as a leader of a large institution, if you get 

people to show up every day engaged with the right skill sets, you 

promote and create career paths for your good performers and you 

weed out poor performers. If you take care of those sets of issues, 

you can execute strategy. If you don’t take care of those sets of 

issues, you can have the best strategy in the world, and you will 

never execute it. 

So I created this Workforce of Tomorrow Task Force. We had a 

whole program around it. The Agency, over the last 2 years, was 

the most improved in the Best Places to Work in Government survey, which surveys all Federal agencies. It is something on which 

I and my senior leadership team spent a lot of time and are quite 

proud of. 

I think this retirement wave creates challenges and opportunities. I think the challenge is really good subject matter experts who 

know the tax system, who know their specific area, are going to 

leave. It also creates career opportunities for younger people, some 

fresh blood to come and keep innovating as an Agency. 

We have been working department by department to make sure 

there is good succession planning, that we challenged our more mature workforce to take it upon themselves to mentor the next generation. And so I view this as it is—a fact. We have got in front 

of it early, so it is not a crisis. It is one of these things—you deal 

with the facts on the table and you manage it. And I think we are 

pretty far in front of it. 

I think regarding cuts and layoffs, the first move would be to 

allow—we wouldn’t replace attrition. I can talk about being in a 

2010 CR, given that there was inflation increasing the cost of contractors, increasing the cost of real estate, et cetera, we are having 

to tighten our belt right now. So we have an exception-only attriVerDate Mar 15 2010 05:43 Jul 07, 2011 Jkt 099011 PO 00000 Frm 00352 Fmt 6601 Sfmt 6602 E:\HR\OC\A999P2.XXX A999P2

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tion freeze, where people are coming to me or my deputies if they 

want to replace attrition right now. So attrition is your first move, 

and we will have some people retire. But if the cuts in magnitude 

we are talking about materialize, we would also need to do RIFs 

or furloughs. I mean, attrition would not take care of meeting those 

kinds of cuts. 

Mr. SERRANO. So you can deal with it as it is now through attrition, but any more dramatic cuts then would create a problem; is 

what you are saying? 

Mr. SHULMAN. I mean, it is a sliding scale. 

Mr. SERRANO. I don’t want to get you in trouble. 

Mr. SHULMAN. No. What I was going to say is you said ‘‘any more 

dramatic cuts.’’ So cuts of the magnitude that the House is talking 

about, we would definitely have to do that. There is a scale. 

Mr. SERRANO. We are going to get more dramatic cuts. It is no 

government; just the legislative body. And even that is in question. 

INFORMATION SECURITY

Let me ask you about the issue of identity and the security behind that. I know you spoke about the health care bill and the law 

and how that plays into it, so that you would have some information, but not all information. There is always an ongoing issue of 

how much the IRS knows about you and how much should it know. 

So what are we doing to deal with this fact and trying to make 

sure that the IRS is where it should be, an agency that has certain 

information, but not harmful information? 

Mr. SHULMAN. I guess the first thing I would say is the information that we have is the information that Congress prescribes in 

the laws it passes. So Congress tells us what the tax law is, and 

we collect the information as appropriate. So—— 

Mr. SERRANO. You wouldn’t be the first agency to have more information than Congress told them to get. I am old enough to go 

back to the 1960s on those issues. 

Mr. SHULMAN. And the second is, as I mentioned earlier, one of 

the fundamental tenets of tax administration is data privacy, taxpayer privacy. It drives some Members of Congress crazy, frankly. 

I get calls and letters asking for information on taxpayers and 

what we did with them. The law prohibits it. It is a felony to share 

that information. We, every year, educate our people on that. Every 

year we fire people who breach or look at information. 

Everyone in the agency knows that we take security of data and 

taxpayer data very, very, very seriously. And so we have awareness 

training. When I first got here, and every couple of years after 

that, we did what we called Code Red, where we stood everybody 

down for 2 hours to talk about what information do I have access 

to? What is in technology? What is on desks? What is on e-mail? 

What can we do to tighten it up? It starts with employee awareness. And we have robust technology and computer security, both 

on our perimeter, as well as internally, around who has access controls. 

I made a commitment, and have been working with our Inspector 

General to make sure we have detailed logs of technology, and on 

any new technology we put in the appropriate logs, so we can do 

oversight of who accesses what technology. It is a big, complicated 


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task, and I would never tell you we are done. This is just going to 

be ongoing. And the advent of technology, the kind of information 

we have, I think it is a challenge for everyone. But there is a culture in the Agency that is very locked down and very serious about 

data security and about privacy. 

Mr. SERRANO. Thank you. 

EFFECTS OF GOVERNMENT SHUTDOWN

One other question. We don’t want to mention this word too 

much, but there is a possibility somewhere along the line of a government shutdown. And if it happens during a certain part of the 

season, and you have seasons more than anyone else, people worry, 

well, what does that mean? What does that mean for tax collection? 

What does it mean for tax refunds? And that is a huge issue, because we are not only talking with a shutdown about the fact that 

people won’t be paid or people will not be working. Or I remember 

in the last shutdown, one of the bills that hadn’t been passed was 

the Interior appropriations bill, and the last thing I expected was 

important to a lot of people were people coming to our office here 

in Washington and saying, how come the monuments are closed? 

Or, I can’t go to this particular park. It may not sound important 

to a lot of folks in terms of the whole picture, but if you planned 

a trip to Washington and found the monuments not open, you want 

to know why. And they had no idea what is going on. 

But a tax refund is a very serious issue in addition to tax collection. Do you know at all how it would affect you? 

Mr. SHULMAN. Let me start where I think where you started, 

which is the President has been clear that he is optimistic that 

Members of both parties and both Chambers will avoid a shutdown, because that is not going to be good for anyone. 

Mr. SERRANO. By the way, for the record, because I don’t want 

anyone to think that we are being partisan here all the time, we 

are very little, Jo Ann and I, but I think that 95 percent of Members of Congress of both parties know that this is a dangerous 

thing, and they don’t want to go that way at all. 

Mr. SHULMAN. So I start by saying I think I am equally optimistic, and think people recognize a government shutdown is not 

in the interest of the American people. 

Second, the date matters to the tax system and to the definition 

of essential functions of government. And so we are still looking at 

this, we are still working with OMB. Our general guidance would 

be to follow the plan we have had in place since the 1980s. In 1995, 

we deposited money but didn’t process refunds. I think that is what 

you could expect in something that was short term and close to 

now. But as we get closer and closer to April, I think this is dynamic, and we are still having discussions and still looking at the 

issue. 

Mr. SERRANO. Thank you. 

Mrs. EMERSON. Mr. Diaz-Balart. 

Mr. DIAZ-BALART. Thank you, Madam Chair. 

MULTILINGUAL INITIATIVES

Actually, I have a basic question as a new one here. And I am 

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vately, particularly when we have one of the country’s foremost 

leaders on Hispanic access and empowerment issues, and that is 

Mr. Serrano. I apologize to you, sir. This is a very basic question, 

and I could have asked you, or I could have asked you, but I might 

as well take that. 

In south Florida, the IRS has a job in making sure that you have 

people that speak different languages there. And, by the way, you 

have some wonderful people who are always accessible, and they 

will meet with anybody who has an issue, and they will do so in 

the language of the people who—you know, we have those large 

communities. 

My question really is in other parts of the country, and in particular parts that are—you know, when you look at the census now, 

the growth of the Hispanic community in places where, frankly, a 

lot of people didn’t know they were there. But I guess you are 

ahead of the census because you deal with this every single year. 

What are your challenges in dealing with language minorities? Do 

you have an issue finding people? Again, I know that in south Florida you do a really good job there, but in other parts of the country, 

particularly those that are relatively new as far as either Hispanic 

or minority populations, how do you do there? How are you doing? 

What sort of programs do you pursue to do that? 

I ask that, and I know it is a relatively simple question particularly in front of—a lot of people think that Mr. Serrano and I have 

great differences, and we do. But there is no doubt that not only 

I, but everybody in the country recognizes him as one of the great 

leaders of the Hispanic community. 

Mr. SERRANO. Thank you. And I really appreciate those words. 

South Carolina was my biggest surprise in Hispanic growth. 

What was yours? 

Mr. DIAZ-BALART. Frankly, everywhere. I mean—— 

Mr. SERRANO. Now I know why. 

Mr. DIAZ-BALART. There are some areas that, frankly, even 

though numberwise are not huge, but there are areas where you 

wouldn’t expect it at all, and that is really where I was more impressed. And so the point the ranking member was making is the 

fact that those are the places where it has got to be more difficult 

because you don’t have the synergy of those communities anyway. 

So with that, I kind of posed that question. 

Mr. SHULMAN. It is a great question. I start with the basic 

premise that we are the one government agency—and I remind our 

people of this all the time—that interacts with most adult Americans every year. And we really do have an obligation to meet people where they are coming from, right? And so we, I think—I can’t 

compare it to others, but I have been told—have one of the best, 

if not the best, in government multilingual sets of facilities, programs, and outreach, everything from Spanish speakers to Vietnamese speakers to Chinese speakers, Creole. The list goes on. 

I think it would be fair to say that areas of the country—take 

Spanish speakers as an example. Areas of the country where there 

are large Spanish-speaking populations, where it is a large percent 

of the population, we probably, in our in-person sites, staff very 

well. I am sure there are areas of the country where we are not 

as well staffed if the numbers aren’t as great, because we have to 


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figure out the cost-benefit of this. But then we always have 

backups. And so we have a big phone operation that answers 35, 

40, up to 50 million calls a year. So if somebody walks in, we make 

sure we have multilingual literature, all of our outreach materials. 

We have a Spanish Web site. And then we have the ability to connect somebody over the phone to work through their issue or to 

connect them to an office. 

And so we take it pretty seriously. And I would point out, this 

year you might have seen we have an iPhone app for ‘‘Where’s My 

Refund?’’ for the younger generation. And so we really do think 

that as we evolve, we need to figure out how to deal with every taxpayer based on how they walk in or how they want to deal with 

us, and we are going to be focused on the whole service agenda of 

the IRS. 

Mr. DIAZ-BALART. Thank you. 

Mr. SERRANO. Can I comment on that a second? And I want to 

be careful about this. Mr. Diaz-Balart and I are strong supporters, 

as are all members of the Hispanic Caucus, of the use of the 

English language as our language in this country. But there is the 

fact that there are a lot of people who are older who may have deficiencies in the language. And so this is a service that is very important, and it is to our benefit. We are going to pick up the tax dollars in the long run. 

I say that because I know that part of what is happening in Congress now is that a lot—some Members are looking at Web sites 

that use a language other than English, and they have been targeted to be done away with, and I think that may be in the long 

run foolish. 

As far as the IRS goes, if I make an attempt at a joke, which 

sometimes I do very badly, it is tough enough dealing with the IRS 

in English. Try having it as a second language and dealing with 

the IRS. It can be difficult. So I encourage you and I congratulate 

you at the same time on this approach because I agree with Mr. 

Diaz-Balart; it has been a great service, you do it well, and you 

should continue to do it. Thank you. 

Mrs. EMERSON. Mr. Womack. 

Mr. WOMACK. Thank you, Madam Chair. 

And I enjoyed the dialogue between my colleagues that have tremendous minority populations and deal with that. Let the record 

reflect, though, that the greater Third District of northwest Arkansas has indeed its own growing share of minority population. And 

particularly the issues that you espoused about the language barriers, we are experiencing those same things. So I am interested in 

the ongoing efforts of your agency and other Federal agencies in 

what we are doing to, shall we say, provide for some assimilationrelated activity in that ethnicity. 

SIMPLIFICATION OF THE TAX CODE

A couple of very basic questions. Really, how would simplifying 

the Tax Code, making things a little easier for those of us—as was 

already mentioned, dealing with the IRS in plain English is somewhat difficult at times, but if we were able to simplify forms and 

close loopholes, what overall effect would that have on your need 


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to squeeze more resources out of the taxpayers so that you can 

prosecute your duties, both on the enforcement and service? 

Mr. SHULMAN. We were talking a little bit earlier about simplification of the Code, and I shared with some of your colleagues 

one of my favorite statistics is that the Tax Code is four times as 

long as War and Peace. And so, clearly, the more complexity there 

is, the more confusion there is amongst taxpayers, the more we 

have to answer questions, the more we get into correspondence 

with people around honest mistakes that they make. 

I talked about international before. I would say where there is 

complexity, there is always more room for noncompliance and evasion. I came from the capital markets regulation before this job, 

and the international area is a great area where you start getting 

things complex. It is where people who want to push the envelope 

can push the envelope. 

So the simpler the Tax Code, the more people clearly understand 

it, the easier the interactions are with us, and the more compliance 

I think there generally would be. 

Mr. WOMACK. I understand before my arrival that the chairwoman and my colleague from Florida talked a little bit about enforcement staffing and spending. It has been argued, somewhat 

convincingly, that an increase in enforcement spending and staffing 

has little, if any, effect on enforcement revenues. The larger question is what is the correlation between enforcement spending and 

staffing and enforcement revenues? 

RELATIONSHIP BETWEEN STAFFING AND ENFORCEMENT REVENUE

Mr. SHULMAN. You know, our job is to administer the tax laws, 

ensure compliance, which has a service element. And while the 

Congressional folks, the staff who scores things, doesn’t put a score 

on service, I, in my mind, put a score on service. When you answer 

a phone call, answer a question, you get the proper amount of tax 

filing. When you get technology that allows you to electronically 

file, people send it in. There aren’t transcription errors, and you 

don’t have issues. 

So if you look at our overall budget, you can look at the numbers 

in a variety of ways. You can say that we affect indirectly all the 

money that comes in. For every dollar spent on the IRS, about $200 

flows in to the Federal Government, which I think is a number 

that is worth thinking about. 

[The information follows:] 


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I think for direct enforcement, for every dollar spent broadly on IRS enforcement, last year we brought in $57 billion from direct actions: audit adjustments, collection actions, cases in court, et 

cetera. And then we broke it down by program very specifically, 

and I would be happy to get you those numbers. Some of our enforcement programs have a 3 to 1 return, and these are returns 

that GAO and OMB have agreed on. They have looked retroactively 

back 10 years, about activity and revenue that comes in around 

them. The 200 to 1 and whether or not answering a phone call 

brings in money, people will argue about that. Nobody argues 

about these direct revenue effects. On what we call our Automated 

Under Reporter, which is our W–2 matching—where you didn’t 

have the right amount of income reported, you file something, the 

W–2 gets sent out to you, it reports it to us—and that is about a 

22 to 1 return. 

DIMINISHING RETURNS

Mr. WOMACK. Finally, along that same line, I know our entire 

Congress, both sides of the aisle, are honed in on the concept of diminishing returns. At some point in time, when does more money 

thrown at any issue cease to produce the desired results? And so 

I guess I would leave you with the challenge, and I am sure you 

do in your capacity, to ensure that we don’t ever exceed that point 

of diminishing returns. 

Thank you very much for your testimony. 

BUSINESS SYSTEMS MODERNIZATION

Mrs. EMERSON. Let’s talk a little bit about something that I 

know is near and dear to your heart, and that is the business system modernization. For our colleagues who are new to this subcommittee, and because of the critical importance of the whole 

BSM and the ability for you to venture IT modernization, the cornerstone of this is this CADE–2. I probably need to actually come 

down and see your operation firsthand, at least this piece. You are 

going to deploy the CADE–2 in less than a year probably, right? 

So describe to me how the current CADE is different from CADE– 

2, first of all. 

Mr. SHULMAN. Sure. First, we would love to have you come, as 

I told you privately, and would love to have any Member of the 

Committee come to meet the public servants at the IRS. 

So I think the best way to describe it is when I started this position 3 years ago, I came in and there was a plan to, year by year, 

add 5 to 10 million taxpayers into the core database, and at the 

same time update all of our different downstream systems. So, take 

the system that is pulled up before our phone operators, and plug 

that into the database incrementally; the system that feeds into 

our collection operation, and plug that into the database; our financial systems, and plug that into the database. So it was, the way 

I would describe it, incrementally getting to a big bang that did 

both the database and all the technology applications that people 

use. And the end—I kept saying, ‘‘when is the end date’’ and I got 

dates like 2020, 2021, 2022. 

I came from overseeing big technology. I put some stock exchanges on line and other things, and I had a couple of basic beliefs 


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about technology. One is you need to have very clear value-added 

deliverables in a short enough time frame that you could have a 

team focused, rally around it, plan, work through problems, and deliver. And my time frame is 2 years, 3 years maximum, not 10 

years, because there is always going to be turnover of leadership 

people, teams, et cetera. 

Second of all, my belief is that the leader of the organization, not 

the technology people—I love them, I call them geeks—but it is not 

the technology people who are going to be accountable at the end 

of the day to the U.S. Congress and the American people to have 

wise spending. It is the leader of the organization. So I basically 

said, I want a plan to deliver value in the time I am here that really gets our modernization over a hump. 

And so we went back to the plan because I said I am not going 

to go to Congress and talk about 2020. We came up with a plan 

that said the data is key. In this day and age, it is all about the 

data. So if we can have a core taxpayer database done by the 2012 

filing season that has integrity and the information you need for 

your service, for your enforcement, you get off of what is called the 

‘‘batch cycle,’’ which runs every week or 2 weeks, and have the data 

run real time. We could achieve everything that we started and 

said we wanted to achieve in 1988, when modernization, this concept of IRS modernization, began, which was faster refunds for everyone, integrity of the data in a way that knocked down material 

weaknesses. No 2-week lag in the data between our database and 

what a taxpayer actually sent in. Because it used to be you called 

and said, ‘‘I sent you the check.’’ And I said, ‘‘well, the data doesn’t 

show that.’’ And then you would have these cycles of—our people 

called it the death spiral, where we are writing, they are writing 

back at the same time, and you can’t catch up. And so this would 

achieve all of this. 

And so, in short, the thing that was called CADE, and we called 

this CADE–2, originally was incrementally adding to the database 

over time while building the systems in. We basically cut and said 

we will get the database done, and we will have our core service 

technology, which is our phone support, linked into the database 

when we go live. But we are not going to have this kind of field 

of dreams at the end of the day. We are going to have deliverables 

that get us over the goal lines that deliver real value. 

Mrs. EMERSON. So by the time everything is put in place, at least 

for the foreseeable future, because technology then changes too 

quickly, but let’s just say this is all done by 2012, will that enable 

you all to have fewer people then within the organization? Does the 

completion of the business systems modernization mean more efficiency, fewer people? Or does it just mean more efficiency, the 

same number of people, that you can foresee? 

Mr. SHULMAN. So I alluded to my view that we are like the big 

financial operations. We have 140 million individual customers, 

tens of millions of businesses, every year another act, a very complex Code, $2.3 trillion running through it. And there is no other 

financial institution of that magnitude in the country with those 

exact characteristics and numbers. Big banks, big brokerage firms, 

all which I seem to be inside of, they have 10 to 20 percent capital 

investment a year in technology. We went up from 11⁄2 percent. We 


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are running at 11⁄2 percent because we are running under a 2010 

CR, and 2012 our request gets us up to 3 percent. So when I went 

and talked to some of my colleagues in the Administration, I said, 

I understand these are big numbers, but from where I come from, 

and objectively, we have been incredibly underfunded. And so this 

gets you to a place that is not even that respectable from a privatesector comparison. 

What I would say is we need to continue—and I have been very 

clear about this—being more about data analysis, information 

matching, and less about feet on the street as the tax system goes 

forward for the next 5, 10, 15 years. And this just starts to build 

the infrastructure. 

So I wouldn’t tell you that once we get this thing done, that the 

IRS isn’t going to have to significantly invest in technology. 

Mrs. EMERSON. I appreciate that. 

Let me say I have got some questions that I would like to submit 

for the record. 

Mr. SERRANO. I have some, too. 

Mrs. EMERSON. And I am sure my other colleagues do, too. 

HISTORIC PRESERVATION CREDITS

Mrs. EMERSON. And I just want to mention one thing before we 

finish up. My office has heard several complaints about the administration of the Federal Historic Tax Credit or the Preservation Tax 

Incentive program. And I just wondered if you all could look into 

that for me and get back sometime in the near future? I would 

really appreciate it. 

Mr. SHULMAN. Absolutely. 

[The historic easement information follows:] 

HISTORIC PRESERVATION EASEMENT

You noted you have heard complaints about the administration of historic easement donations. The IRS recognizes that donations of conservation easements play 

an important role in preserving historic property. When taxpayers meet statutory 

requirements and the easement is properly valued, taxpayers can claim a deduction 

for the charitable contribution on their tax returns. 

A historic preservation easement, commonly referred to as a facade easement, is 

a contribution of a partial interest in real property. The deduction may be permitted 

if the contribution is: 1) of a qualified real property interest, 2) to a qualified organization, 3) exclusively for conservation purposes. The taxpayer must adequately substantiate the deduction with a qualified appraisal and other documents. 

Mrs. EMERSON. With that, then, we will conclude. Thank you 

very much for coming, and we will look forward to getting the answers to our questions, hopefully within 2 weeks. Okay? 

Mr. SHULMAN. Thank you very much. 

[The information follows:] 


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(375) 

FRIDAY, APRIL 15, 2011. 

TREASURY INSPECTOR GENERAL FOR TAX 

ADMINISTRATION 

WITNESS 

HON. J. RUSSELL GEORGE, TREASURY INSPECTOR GENERAL FOR TAX 

ADMINISTRATION 

Mrs. EMERSON. Thank you so much, Inspector General, for being 

with us today. We really are grateful to you. Hopefully, my colleagues will come in and out. We have got these votes going on, so 

once an hour, we will have to race downstairs to do a vote and then 

come right back up. Since we are here in the Capitol, we will try 

our best to keep the hearing going. I am hoping that my other colleagues will get here sooner rather than later. 

TIGTA was originally scheduled as our first hearing for the 

112th Congress back in February, but with all the continuing resolutions that we were working on, we have had to delay until today. 

So thanks for your forbearance, we are very, very grateful. It seems 

rather fitting that not only would we be celebrating Jackie Robinson, but we would also be delaying this hearing until April 15th, 

tax day. It is not many people’s favorite time of the year. Certainly, 

not for those of us who have to pay taxes. 

Anyway, as we all know, we have a very difficult challenge in 

front of us with the debt at almost $14 trillion. It is really important that we build a foundation for living within our means. The 

Appropriations Committee, and certainly our subcommittee, has 

been tasked to make tough decisions ahead. And in so doing, I feel 

very strongly that you have to be very strategic in the reductions 

that you make. Therefore, we have to learn as much as we can 

about the agencies under jurisdiction in order to make these decisions. 

Inspector General George, you have a daunting task of overseeing the IRS, which is an enormous organization that touches the 

lives of most Americans and with 100,000 employees and a budget 

of more than $12 billion, you have your hands full. If this subcommittee is going to reduce spending for the fiscal year and try 

to get back to 2008 levels, we are going to have to identify some 

savings in the IRS budget. 

I want to do our best not to reduce service that the IRS provides 

taxpayers preparing their tax returns, nor do I want to jeopardize 

anything that would help us detect tax fraud so that we can get 

as much revenue in as possible. Hopefully, you will help us wade 

through some of these questions. 

I welcome you back, Inspector General George, and so appreciate 

your being here, and look forward to your testimony. And now to 

my friend, Mr. Serrano. 


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Mr. SERRANO. Thank you, Madam Chair. 

And I, too, join you in welcoming the Treasury Inspector General 

for Tax Administration on April 15th, which is a great day, J. Russell George, before the subcommittee today. 

Inspector General George, you have an important job in helping 

ensure that the IRS is running our Nation’s tax system in an effective and efficient manner. I am interested in learning more about 

your views of the current challenges that the IRS faces in both the 

fair administration of our tax laws and in the management challenges that the IRS itself faces with an aging workforce. 

Additionally, I should have mentioned that we are in the process 

of finishing the fiscal year 2011 budget process. In fact, did the 

President sign it yet? 

Mrs. EMERSON. I don’t think so. 

Mr. SERRANO. Soon. 

The final bill, as you know, flat funds the IRS at the fiscal year 

2010 level. I am interested to hear your views on the impact this 

will have on IRS efforts to close the tax gap and whether there are 

areas of vulnerability as a result of the funding level. We look forward to your testimony. And I am sorry you are a Mets fan, but 

that’s not the right thing to say to me. 

Mrs. EMERSON. At least he is from New York, gosh. 

Mr. SERRANO. There is a big difference. 

Mrs. EMERSON. I bet the tickets for the—— 

Mr. SERRANO. I am only kidding. 

Mrs. EMERSON. The Mets have a new stadium, a newish stadium. How much does it cost for Mets tickets? 

Mr. GEORGE. I have yet to visit it so I don’t know the answer to 

that, Madam Chairwoman. 

Mr. SERRANO. We cannot afford it, trust me. 

Mrs. EMERSON. I know. Both my son and husband are West 

Point grads, and we went up to the West Point-Notre Dame football game at Yankee Stadium because it was kind of a fun thing 

to do, and those tickets were $175. I had actually gotten six because we were taking some friends, and I had no idea. I looked at 

the Visa charge, I mean, I figured they were probably $75, $80 

which was still a lot for a football game, that we lost particularly. 

But nonetheless, Mr. Serrano tells me that the tickets are really 

about $475 for a decent seat. 

Mr. SERRANO. $1,250 for a front row seat. 

Mrs. EMERSON. Do they serve you food and drink or something 

for that $1,250? 

Mr. SERRANO. They don’t even guarantee you they are going to 

win. I don’t know. 

Mrs. EMERSON. We can have lots of fun at this hearing, but we 

really do need to try to get down to business and kind of going back 

to the whole issue of the country’s debt. And I think all economists—I started getting carried away. We would like to hear from 

you. 

Mr. GEORGE. If you would like to, I mean it is very brief. 

Mrs. EMERSON. Absolutely, please go ahead and do that. 

Mrs. EMERSON. We start getting carried away, and then I forget 

so I apologize. I apologize. 

Mr. SERRANO. Baseball gets in the way. 


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Mr. GEORGE. Well, listen, hey, Tom Seaver. 

Mr. SERRANO. The Franchise. 

Mr. GEORGE. There you go, 1969 Mets and all that. 

Chairwoman Emerson, Ranking Member Serrano, Members of 

the Subcommittee, thank you for the opportunity to appear today 

to testify on the issues confronting the Internal Revenue Service 

and helping hold it accountable as it administers the Nation’s tax 

laws. 

I represent the office of Treasury Inspector General for Tax Administration, commonly referred to as TIGTA. An organization consisting of approximately 800 men and women spread across the 

country, all of whom are dedicated to the mission of protecting the 

integrity of our Nation’s system of tax administration. We do this 

by conducting independent audits, investigations, and reviews of 

IRS programs and operations. 

We are a very unique Office of Inspector General in that our mission, which dates back over 50 years, includes the mandate to protect the Service from both external as well as internal threats to 

its personnel and operations. In the current threat environment in 

which the Nation finds itself, this responsibility takes on an even 

more important role. 

Now as I indicated earlier to you, Madam Chairwoman, I am not 

a stranger to the longstanding challenges confronting the IRS. I 

served as staff director to Mr. Steve Horn, Government Management Subcommittee and then under—again, Steve Horn, who had 

a particular interest in the performance problems confronting the 

Internal Revenue Service, and it is unfortunate to say that some 

16 years later, some of the very same problems persist. As you indicated before, the IRS has a budget of over $12 billion 

with 100,000 employees, and it is one of the largest and most important components of the Federal Government. Each year, it collects over $2 trillion, and returns to the taxpayers approximately 

$400 billion in refunds. It is responsible for administering a very 

complex and lengthy tax code, which contains many new and sometimes temporary provisions. For the most part, the IRS administers 

these provisions in an effective manner. However, as I will note in 

a moment, it falls short in its administration of other areas. 

Since 1999, my organization has identified cost savings and recommended efficiencies that, if adopted, would bring additional revenue into our Nation’s treasury. As an aside, we estimate those 

savings and cost findings of additional revenue at over $223 billion. 

I am statutorily required to identify the most serious management and performance challenges confronting the Internal Revenue 

Service pursuant to the Reports Consolidation Act of 2000. The 

issues identified in that report range from security of IRS employees and infrastructure, and the modernization of its information 

technology systems, to human capital, taxpayer rights, and erroneous and improper payments and credits. In the latter category, 

we released in February a report on the Earned Income Tax Credit. 

That report reveals, among a number of things, that the IRS failed 

to comply with the requirement that it provide quantifiable targets 

to reduce improper Earned Income Tax Credit payments. Out of a 

$50 billion appropriation for that program, the IRS itself estimates 

that 23 to 28 percent of these credits, the EITC, are wrongfully 


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paid each year totaling $11 billion to $13 billion. That amount 

equates to the entire operating budget of the IRS. 

Another example of a refundable credit that is not being implemented effectively is the Additional Child Tax Credit. In 2009, we 

reported a significant increase in the Credit by filers who are unable to obtain Social Security numbers. However, they filed for the 

Credit and received it. For tax year 2000, these individuals received $62 million—— 

Mrs. EMERSON. Excuse me, will you just say that last sentence 

again? 

Mr. GEORGE. Certainly. In 2009, we reported a significant increase in the number of Additional Child Tax Credit filers who 

were unable to obtain Social Security numbers. 

Mrs. EMERSON. So the credits—excuse me for interrupting you, 

but I want to pursue this very quick. So they filed for the child tax 

credit but provided no Social Security number, and they still got 

it? 

Mr. GEORGE. That is correct, this is correct. 

Mrs. EMERSON. We will pursue that in a little bit. Thank you. 

Mr. GEORGE. Now, for tax year 2000, these individuals received $62 million. For tax year 2007, the amount of the applicants for 

this Credit that was received increased to an astounding $1.8 billion. This is something, notwithstanding the fact that my auditors 

identified this as a problem and a possible approach to contain it, 

the IRS has failed to act. 

Now as you both noted, and welcome Mr. Bonner, since today is 

traditionally the deadline to file taxes, and as you know, because 

of the holiday in the District of Columbia, it is extended until the 

18th, I will close my oral comments with an assessment of the current filing season. We will be issuing our interim report on the filing season officially next week, but it will show that as of March 

4th, the IRS received just over 60 million returns. Of those, 53.9 

or 89 percent were electronically filed, and nearly 6 million to 7 

million or 11 percent were filed on paper, a decrease of over 30 percent from this time last year. That is a good news story. 

Mrs. EMERSON. A decrease in the paper? 

Mr. GEORGE. Correct, that is correct. As you well know, electronically filed costs the IRS much less to process than those which are 

filed by paper. 

In addition, nearly 52.6 million refunds totaling approximately $161 billion has been issued as of March 4th. Our report found that 

overall the IRS is doing a better job of intercepting and preventing 

fraud this year. I am sure you may want to delve into this later, 

we recently issued reports about prisoners receiving tax refunds 

they were not entitled amongst a host of other people. Since those 

reports were issued, the IRS has changed its procedures and is 

doing a much better job. We still have found that there are some 

improper credits still being paid, and they still have some issues 

as they relate to customer service that need to be addressed. 

And I just want to close in my opening statement by saying 

Members of the Subcommittee, our Nation, notwithstanding the 

items that we will discuss today, which are we are here to focus 

on the problems that need to be addressed, we nonetheless have 

the best system of tax administration in the world. And it is my 


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challenge and my organization’s challenge to help the IRS identify 

ways to ensure that that remains the case. We commit to do our 

level best to achieve that goal. That concludes my opening statement, Madam Chairwoman. 

[The information follows:] 


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Mrs. EMERSON. Thank you so much, Mr. George. 

And thanks for being here, Jo. 

I am going to go out of order now because I want to pursue this 

child tax credit and ask, how is it possible that you can file for a 

tax credit and not provide a Social Security number? I mean, I am 

just curious. It sounds like not having to have any income and getting $200,000 mortgage when you make $35,000 a year. How is 

that possible? 

Mr. GEORGE. By a multitude of actions and/or inactions. One, 

Congress was silent on this issue. Unlike the EITC, when years 

ago we identified similar problems, Congress passed legislation 

that mandated that anyone who applied for EITC had to supply a 

Social Security number. Then the IRS’s contention is that for the 

Additional Child Tax Credit, the law is silent on that issue and 

that it does not necessarily need to deny these credits. 

As you know, with a refundable credit, it is very difficult for the 

IRS to anticipate problems. In effect, they have to wait until people 

apply for it, receive the credit, the refund, and then in a very inefficient way, doing a cost-benefit analysis, go after money that has already gone out of the door. 

We recommended that the IRS receive what is known as math 

error authority, which would give them the ability when they identify problems before the money has gone out the door, that they 

can in effect change the taxpayer’s tax form and prevent it from 

going outside, from being submitted. Because once it is submitted 

or returned to the taxpayer, it becomes, in their argument, cost 

prohibitive to go after it; it is cost-benefit analysis. Do you go after 

a $500 tax refund when it would cost $1,000 in manpower and 

what have you? 

Mrs. EMERSON. So we would have to probably fix that legislatively? 

Mr. GEORGE. Yes, that would require legislative action. And we 

have made recommendations to that effect. 

Mrs. EMERSON. When you submit the report to the commissioner, 

is the traditional process that the commissioner then gets together 

with you to discuss all of these items and ways to work on them, 

or how does the process work when you submit your findings? 

Mr. GEORGE. That is a great question. First of all, what we do 

is, in advance of any final report, we give the IRS an opportunity 

to comment on it, to make sure, in all candor, we are not misstating things and, if we have, to have a discussion with them regarding that. The Department—and this has been the case since I 

have been the Treasury Inspector General, and I served under 

three Secretaries now—the Secretaries have delegated substantive 

tax policies to the Office of the Assistant Secretary for Tax Policy. 

And so I am truly, both by the directive as well as by the Inspector 

General Act, I am prohibited from engaging in substantive tax policy. I can comment on it, but I really can’t create it. That is for 

Congress and that is for the Administration. 

Mrs. EMERSON. Right. 

Mr. GEORGE. So that Commissioner and my staff, we will discuss 

issues, findings, especially ones they disagree with, but we don’t in 

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gress or to the Administration, unless that is a formal part of the 

recommendation in the report. 

Mrs. EMERSON. If some of the recommendations that you all 

made are not agreed to, then do you re-pursue those? 

Mr. GEORGE. Yes, that is a great question. The Department actually has a process in place where every recommendation that we 

make and every audit report is put into a data bank. And that data 

bank is something that is available to the department heads, to the 

Commissioner and to ourselves. And so, periodically, we issue over 

120 audit reports a year, if not more, and hundreds of recommendations. So we have a certain process for doing so in terms 

of revisiting them. So we do revisit them, but we can’t do it every 

month or every 6 months, just because of resources and other priorities. 

But the bottom line is something along the lines as important as 

this, we certainly would bring to the attention, and I have to both 

the Secretary and to the Deputy Secretary. 

Mrs. EMERSON. Let me talk about the EITC, because I have 

many, many people in my congressional district who are fortunate 

enough to take advantage of this, and it is their safety net, if you 

will, in many cases. 

But can you go over just a little bit in further detail the issue 

of the erroneous payments and the fact that the IRS doesn’t seem 

to have a quantifiable means by which to make corrections? 

Mr. GEORGE. Yes, if you have a very detailed response to that. 

Just speaking off the cuff, Madam Chairwoman, as you know, the 

Earned Income Tax Credit is a refundable Federal income credit 

for low- to moderate-income working families and individuals. To 

qualify, taxpayers must have earned income from employment, self 

employment or another source and meet certain rules. In addition, 

they must either meet the additional rules for workers without a 

qualifying child or have a child that meets all the qualifying child 

rules. 

The IRS reported 24 million taxpayers received $55 billion in 

Earned Income Tax Credits for tax year 2009. GAO has listed the 

EITC programs having the second highest dollar amount of improper payments of all Federal programs. 

Now there was an Executive order issued by President Obama in 

November 2009, which said reducing improper payments was supposed to increase the pressure on Federal agencies to hold departments more accountable for reducing improper payments. And as 

it relates to the IRS, the IRS is required to provide TIGTA with 

a report on four action items: the methodology for computing the 

error rate, and they have done that; the reduction target and plans 

for meeting improper payment reduction targets, and they have not 

done that; plans to ensure program access and participation by eligible beneficiaries, and they have not done that; and a quarterly 

reporting requirement. Now the problem as it relates to that, and 

this is something that is not within the jurisdiction of this committee, it is Title 26 Section 6103 of the Internal Revenue Code or 

the tax code prohibits the IRS, myself, the Secretary from revealing 

taxpayer information under penalty of both jail time as well as a 

fine. So there are just certain privacy restrictions on what type of 


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information they can report. So that may be the reason why that 

quarterly report has not yet been submitted to us. 

We have observed that the IRS has made little progress in reducing EITC improper payments since being required to report these 

estimates to Congress. The IRS continues to report, again, the figure of 23 to 28 percent of improperly paid each year, and we believe that the IRS is not in all honesty responding to the President’s Executive order in an effective manner. 

The IRS has contended, and rightfully so, that the some of the 

changes that they are initiating as it relates to paid preparers will 

be helpful in helping to reduce the number of erroneous EITC payments. 

Part of the problem, Madam Chairwoman, is the tax code, tax 

forms are difficult. I am an attorney, and there are times when I 

have to call an accountant and/or the IRS to figure out how do I 

respond to a particular question on the tax form, let alone somebody who has not yet had that type of training. So we agree to pay 

tax preparers, especially once the IRS initiates this program, to 

register them, to test them, and to ensure that they have the credibility and the training as the first line of defense in the IRS and 

our efforts to help administer an effective and fair tax system. 

Mrs. EMERSON. But realistically, how many folks who are qualified for the EITC can afford a paid tax preparer? 

Mr. GEORGE. Great question, I don’t know the direct answer to 

that. But I can tell you and I am sure you are aware of, there is 

the free file program. There are a number of new ways that the 

IRS and others have worked together to help people comply with 

their tax obligation. 

This is a point, and I am glad you opened up this area of discussion, I believe, Madam Chairwoman, that it is the obligation of the 

Internal Revenue Service to make it as simple as possible for people to comply with their tax obligations. And it is my contention, 

although I don’t have any empirical evidence to follow it up, but 

it is my gut that says, you make it easy for people to comply, they 

will. Obviously, there are bad apples out there and people who just 

will do the wrong thing one way or the other. But if it is simple 

to comply, believe me—and I don’t advocate this, because, one, it 

is a policy issue—but if the government, like some countries, were 

to—and actually some States—were to fill out the forms for you 

and in effect you just confirm their numbers and sign and send a 

check or just validate the refund, you would have a much higher 

compliance rate. 

Mrs. EMERSON. I know that is somewhat controversial in some 

areas, but the Free File is a program that I embrace wholeheartedly, as a matter of fact I actually did a seminar, Webinar if 

you will, with some of my community organizations throughout my 

district so that they could get more people to use the Free File and/ 

or help some of their customers and/or clients do that. I know that 

makes a big difference. About the online services, it is one thing to pay $29.95 or whatever it is these days, but to hire an accountant is, you know, rather 

expensive. But the Free File does work, and obviously for those 

folks within this income range, that is available. And those are all 

good programs. So I appreciate that. In the interest of time, so we 


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all have an opportunity to ask questions, I am going to go to Mr. 

Serrano. 

I called on you to ask questions. 

Mr. SERRANO. I was trying to figure something out here. 

Just to follow up on this issue of folks without Social Security 

numbers. Now my understanding is that you can have a business 

in this country and pay taxes without being here with proper documentation. I would suggest the IRS doesn’t care who it gets money 

from is the bad joke. Now is that also related to the possibility of 

people applying for the tax credit without a Social Security number? Because as you know, the flip side of that is that America’s 

worst kept secret is the number of undocumented, or some would 

call them illegals, who are working with shall we say an improper 

Social Security card, paying into Social Security, but will never ask 

for a penny from the fund because they can’t come out in public 

to do that. And so in a very bizarre and strange way, they are paying for the rest of us in so many ways. So how can that be related? 

Mr. GEORGE. That is a very important point that you raise, sir. 

I would only quibble with the word improper number for organizations the way you pose it in your question. Because the Internal 

Revenue Service has established what they call an individual taxpayer identification number, which is not a Social Security number; 

it is a number literally made up by the IRS to give individuals in 

that particular—individuals and entities—it could also be an individual who has a tax obligation because they have business transactions in the United States and yet who don’t qualify for a Social 

Security number and so nonetheless would like to comply and 

should comply with their tax obligation. But that number, the 

ITIN—— 

Mr. SERRANO. When I was referring to improper—and then there 

is another group that does have a Social Security card, but it has 

been said for years, I have no proof of this, that those cards were 

gotten improperly—initially. 

Mr. GEORGE. Well, if I may, because I think it is a slightly different issue, there are very limited number of circumstances in 

which a Social Security number can be issued for the purpose of 

paying taxes but not for the purpose—not to say, though, that you 

are a U.S. citizen and not to say that you are entitled to any benefits under Social Security. One of my colleagues here can really 

delve into that more deeply if necessary. 

You are exactly right, there are a number of undocumented 

aliens or I am not sure what term you prefer nowadays, but the 

bottom line is, who do believe if they comply with their tax obligation, it may in the long run help them if they decide to apply for 

legal status in the country. 

But the bottom line is the law, especially as it relates to the Additional Child Tax Credit, does not allow these people to benefit 

from that credit. 

Mr. SERRANO. From the credit. 

Mr. GEORGE. But it is nonetheless accepting the ITIN in that 

way, and they shouldn’t be doing so. 

Mr. SERRANO. Okay. The other thing was, just again, it is another aside, that on the EITC, some years ago, we discovered that 

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dits were on this particular group at one point. I was making the 

point at that time that, okay, I understand that IRS has to audit 

who it has to audit, but auditing EITC at 37 percent and not auditing some higher income folks at the same percentage may not be 

getting a good bang for the buck. 

Mr. GEORGE. Sir, again, that predated me. But you were right in 

terms of my understanding as to how it was done historically, but 

that has definitely changed under the current Commissioner 

Shulman and under Everson, I believe, it started, and that now the 

focus is more so on high-end earners. And in all honesty, to get the 

biggest bang for the buck is to go after those people who earn the 

most money. And they have changed processes, both of in terms of 

domestic taxpayers but even much more important, international, 

foreign tax—corporations and individuals, in terms of dollars that 

they are hiding or keeping overseas and not declaring on their U.S. 

tax forms. 

Mr. SERRANO. Let me ask you a question about your budget. You 

have a unique perspective in your role as Inspector General For 

Tax Administration. In addition to receiving a fine education in 

New York City public schools, the Chancellor will love this, you 

served on the Committee on Government Reform and Oversight 

and on the Government Management, Information Technology Subcommittee. You have conducted exactly the type of hearing that we 

are holding this morning, including oversight of Inspector Generals 

across the government. In addition, you have been in your current 

position for almost 7 years. 

What can you tell us about the responsibilities of your office? You 

have a staff of roughly 827 FTEs and you make important decisions about how to deploy that staff to conduct oversight of the 

IRS. How do you make those decisions? 

Mr. GEORGE. A wonderful question. And thank you for the plug 

on the New York City public school system, because it gave me 

great opportunities. The bottom line is we have to be, unfortunately, a very reactive organization, Congressman. It depends on 

the day of the week. The largest component of TIGTA, and we are 

approximately the fourth largest Inspector General in the Federal 

Government, is again to protect the administration of our Nation’s 

tax system. And this is, as I indicated in my opening statement, 

something of longstanding responsibility. We were initially called 

the Inspection Service set up over 50 years ago. We were the Internal Affairs Division of the Internal Revenue Service, and it was 

with the Restructuring and Reform Act of 1998 that we stood up 

officially as an Inspector General. 

The role of an Inspector General—to root out waste, fraud, and 

abuse—is very different than the role of the protector of the system 

of tax administration. So more than half of my staff literally consists of Special Agents spread all over the country, who when 

threats are made against the system of tax administration writ 

large, namely tax, IRS employees or other people who are engaged 

in the system of tax administration, they literally rush out to the 

scene in any part of the country and world and either effect arrests 

or conduct investigations. 

The irony is that we have the responsibility if a threat is made 

against a criminal investigation employee of the Internal Revenue 


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Service, it is my agents who, at 2 o’clock in the morning, rush to 

the scene and provide whatever assistance is needed. Case in point, 

when that person flew an airplane into a building in Austin, Texas, 

and murdered Vernon Hunter, an innocent IRS employee who was 

just doing his job, and just by the grace of God, his plane hit a support beam as opposed to going just 3 feet lower and would have 

gone into the atrium, and there would have been massive casualties had that happened. So that is just one example of where my 

Special Agents go after that type of matter. I could go on and on, 

sir. 

But as it relates to audits, in every aspect of the system of tax 

administration, if someone makes an allegation that a tax employee of the IRS is soliciting a bribe, we will send out people and 

we will use whatever means necessary, legally of course, but to 

find, root out, identify that person, to prove or disprove the allegation and to then refer it to the appropriate prosecutorial entity. 

And vice versa, if a taxpayer solicits a bribe from an IRS employee, 

and believe me, that happens a lot, fortunately—and again, I can’t 

say completely that every IRS employee will report that, but I am 

extraordinarily proud of the number of IRS employees who do come 

to us and say, this taxpayer offered me $10,000 to reduce their 

$100,000 tax obligation. And so we literally, whether it is using 

some of the investigative technologies that we have, hopefully investigate those and again pass them along to prosecutors. 

Mr. SERRANO. Thank you. 

Madam Chair, I will stop here so our colleagues may ask questions. 

Mrs. EMERSON. Thank you. 

Mr. Bonner. 

Mr. BONNER. Mr. George, welcome. 

Mr. GEORGE. Thank you, sir. 

Mr. BONNER. I was conflicted about whether I would be able to 

make this meeting until my wife told me last night how much more 

we owe in taxes. So I thought I would take advantage of this opportunity. I don’t blame you. 

Mr. GEORGE. I don’t set the rates. 

Mr. BONNER. I came with three questions, and I am going to try 

to get to them, but your response to the chair and to the ranking 

member has actually now raised a few additional questions. 

You said, I don’t think you would get any disagreement from 

anyone here, certainly not from this member, that our tax forms 

are too difficult and that even with that great education from New 

York City public schools and Howard University and Harvard Law 

School, that you, too, have had to seek professional help to fill out 

your forms. 

Has the IRS ever done a survey of their employees—how many 

employees are there, 110,000? 

Mr. GEORGE. Roughly, roughly. Depends, during the filing season, it goes up slightly more than during nonfiling season. 

Mr. BONNER. Have they ever done a survey to find out how many 

of the employees of the Internal Revenue Service have to seek help 

either from a professional accountant, Turbo Tax, H&R Block, 

someone like that? 

Mr. GEORGE. Not to my knowledge. 


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Mr. BONNER. That would be really interesting. I don’t know if 

that would fall in your jurisdiction or if we need to bring that to 

the commissioner. But I think it would be fascinating to know. 

Mrs. EMERSON. If you will yield for a minute, perhaps that would 

be something that we could just encourage in report language in 

our bill. It wouldn’t cost any money because you can do it on e-mail 

with the fancy new computer system there that exists now. 

Mr. BONNER. Well, it is just a suggestion, and I would certainly 

welcome the chair’s help in making that happen. 

The other comment you make, which I certainly agree with, is 

that it is your opinion that the IRS should have an obligation to 

make filing and paying your taxes as simple as possible. In your 

position, what grade would you give service in terms of doing just 

that? 

Mr. GEORGE. That is a very, very—and you put me on the spot 

because Mr. Steve Horn, as you may recall, used to issue report 

cards on the status of Federal agencies as it related to Y2K and 

financial management issues. 

Mr. BONNER. I will give you a chance to think about it because 

I didn’t mean to put you on the spot, but I want to tell you why 

I ask that question. We all have the privilege of serving on this 

committee, and as such, we serve on different subcommittees. And 

earlier this week, we had an opportunity in the Defense Subcommittee to meet with Dr. Ashton Carter, who is the head of procurement for the Department of Defense, a very smart man like 

yourself, someone who could be doing so much more in the private 

sector, but you dedicated your life and certainly this chapter of 

your life to serving your country in this role. And so we thank you 

and we thank people like Dr. Carter as well. 

When asked by one of our colleagues how many people worked 

in procurement at the Department of Defense, he said approximately about 140,000. So actually more people work in that than 

work at the Internal Revenue Service. So one of our colleagues 

said, well—and the example was when we were talking about Defense is that sometimes it takes 7 or 10 or 12 years just to get what 

should be a pretty simple system underway and funded and then 

into service. How many of those 140,000 people are really good at 

what they do? And his answer was not enough. 

So I don’t say this to put a black mark on any of the 110,000- 

plus men and women who are dedicated and who are doing their 

work. But to your point that I agree with, it should be the obligation of the Service to make it as simple as possible to comply with 

the laws that this Congress passes and previous Congresses. I 

would just like to know if you would care to give a letter grade? 

Mr. GEORGE. I would, I would. And again, it is risky to do this, 

but in all fairness to the IRS, they get a B in terms of giving decent 

and accurate information to taxpayers. And that wasn’t always the 

case. It really did take the hearings in the late 1990s to help bring 

some sanity in some areas. A lot of—I know many of my colleagues 

who were around back then—and Mrs. Emerson and Mr. Serrano, 

you may have been two of them—some of the claims made against 

the IRS were exaggerated, as proven later on. But nonetheless, certain changes were implemented, including the standing up of 

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retaries of the Treasury and the American people have a more efficient and effective system of tax administration. 

Former Commissioner Mark Everson used to say that compliance 

equals enforcement plus customer service. And so there was that 

balance between making sure that people got telephone calls answered in a prompt fashion, who went to taxpayer assistance centers and got accurate information and then—— 

Mr. BONNER. Accurate and consistent. 

Mr. GEORGE. And consistent, that is exactly right, because as you 

are suggesting, when we first started doing examinations, we found 

we would send people undercover to taxpayer assistance centers, 

and literally, the accuracy rate of the tax return was zero percent. 

Not a single tax return was correctly filled out by people who were 

IRS employees paid to do this. And our most recent examination, 

again, it was a very limited sample, a much smaller number, because there are hundreds of taxpayer assistance centers, the accuracy rate was 100 percent. 

Mr. BONNER. That is great. 

Mr. GEORGE. They made very good progress in that regard. Is 

there perfection? No, you are right. They call one number one time 

and get a different answer than they may get the next time. That 

is still a possibility. Human nature; people make mistakes. But I 

would give them a B. 

Mr. BONNER. Well, I am going to submit two of the questions for 

the record. But I want to get the last question in that really is 

something that has been a pet peeve of mine for years. I was a 

staffer up here for 18 years. I have only been elected in the House 

for 9 years. I don’t know that I will ever be a good Congressman; 

I was a great staffer, if I say so myself. 

Mr. SERRANO. You are a great Congressman. 

Mr. BONNER. You are very nice. Thank you. 

Mrs. EMERSON. Yes, you are. 

Mr. SERRANO. Is it shrimp time—— 

Mr. BONNER. Two, weeks, 2 weeks. 

Liberal groups, conservative groups, this crosses the spectrum: 

Senior citizens throughout our country get letters just like this, 

dear senior citizen, send us your money, so we can go to Washington and keep Congress from destroying Social Security, destroying Medicare, destroying whatever it is. And it struck a raw nerve 

for me when a 92-year-old lady in my district who is suffering from 

dementia and who actually has relatives in a colleague’s district 

who notified me about this, that she drained every penny of her 

savings. 

And Mr. George, I don’t know about Mr. Womack or Mr. Serrano 

or Mrs. Emerson, I have never seen any of these people in the 18 

years I was on staff and the 9 years I have been in Congress who 

have actually come in to my office and say we are here to keep you 

from destroying Social Security or Medicare. 

Now I ask this because the Internal Revenue Service, as I understand it, has oversight responsibilities for these 501(c)(4) groups. If 

that is true, how well is the Service performing in their oversight? 

I know we have the First Amendment. We celebrate the First 

Amendment. We are a better Nation because of the First Amendment. 


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But it is just unconscionable to have companies, groups that are 

able to use the current deduction system to fund themselves to go 

out and become a plague on the senior citizens of our great country. And with that, I will yield to your answer and thank the chair 

for the opportunity to ask some questions. 

Mr. GEORGE. A very important question, Congressman. Initially, 

I thought where you were going with this are these tax schemes 

being perpetrated by many people from foreign lands and even people domestically, who say you have won a lottery, all you have do 

is pay the tax and we will send you a check for a million dollars, 

and you would be surprised how many people fall prey to that. 

Mr. BONNER. We have a number in our district as well. That was 

a different question. 

Mr. GEORGE. But as it relates to this, when you say oversight of 

501(c)(4)s, we actually did conduct, at the request of Congress, two 

reviews, and because of privacy and tax restrictions, I can’t say 

which groups we looked at, but they were prominent, and you can 

probably guess which ones they were. What we were only able to 

do, sir, is to look at the processes within the Internal Revenue 

Service for overseeing complaints against these types of people, 

groups, rather, and how the IRS handled those things. Because 

again, the 6103 would put me in jail if I were to reveal particular 

tax groups, individuals and/or organizations, and at this stage, I 

don’t want to lose my job. 

But what I can do is, one, commit that we will share the report 

with the committee as well as with you in response. I don’t know— 

it won’t answer your question spot on, but it will give you a better 

sense of what the IRS has and has not done. Actually, they are getting two reports, and they are both issued within the last year, 

year and a half. 

Mr. BONNER. Thank you. 

Mrs. EMERSON. Thank you. And I will tell you one of the things 

I do, because this just annoys me to death and scares me because 

I have so many seniors who do, in fact, do that, but every time that 

we do any kind of mailing, any time we answer any kind of letter, 

most every time, to seniors, I put a little thing in if somebody is 

asking you to pay $10 to help save your Medicare and Social Security, do not send, do not, throw it away and don’t send any money 

in. In many cases, especially with high gas prices, that $10 can 

make it, give you enough gas to go back and forth at least to the 

grocery store. 

With that, Mr. Womack. 

Mr. WOMACK. Thank you, Madam Chairwoman and Mr. Inspector General. There is not an ad on television that upsets me any 

more than an ad that comes on and says, if you want to have some 

help in gaming this country by saving on your debt obligation to 

the United States of America, it is that ad. We have all seen them. 

I think you touched on this a little earlier. Help me out; how does 

that work? 

Mr. GEORGE. The IRS has a formal program which is entitled Offers and Compromise, which any citizen, with or without the help 

of a third party, has a right to go and petition the IRS for, in effect, 

an agreement if they are having problems paying their tax obligations. 


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Congressman, you hit the nail on the head. Over 2 years ago, 

and one of my colleagues directly behind me will attest that I requested that we take a look at some of these things and find out, 

Tax Masters and Roni Deutch and all these others, when they were 

making these claims, we will reduce $50,000 obligation to $5,000, 

were they telling the truth or not? And once again, we have a report, happy to share with you, I don’t recall all the conclusions, but 

at the same time, I do know that under the State Attorney Brown, 

before becoming Governor of California, he filed suit against Roni 

Deutch making allegations of criminal wrongdoing and these types 

of solicitations. I believe it is ongoing, so I don’t know what the 

final result is of that, but that is something that is still on our 

radar. 

In some instances, there have been proven allegations that people are getting ripped off, for lack of a better word, but that is 

something that I am also very concerned about. But again, the bottom line is the IRS does have a legitimate program which does, in 

effect, allow that. And I think, my understanding is and I may ask 

him to come up and address this, that in the limited cases that we 

looked at, the allegations that were actually made in the TV ad 

were accurate. 

Is that the case? So, yes. I was just told by staff that it was valid 

what this particular business was claiming in terms of how they 

handled a particular case. But that may be just one out of thousands as opposed to every single client receiving that type of benefit. 

Mr. WOMACK. I understand the need to have some negotiated 

process on potentially doubtful and uncollectible accounts. But depicted in these ads, and I know a lot of it is just style and verbiage, 

but depicted in these ads are people who obviously have lifestyle 

levels that are suggested to be through the ad greater than the average American. And there is no more of an outrage—and I think 

I speak on behalf of most Americans when I say for those who, like 

me, pay my taxes and probably could do a little better for ourselves 

if we looked here and there for better deductions and this sort of 

thing, it is just, to me, not really worth the effort all that much. 

But on behalf of taxpayers across America who pay their taxes and 

pay them on time, there is no more outrage that I feel, perhaps except for those who are willingly selling their homes because they 

are under water—or letting their houses go into foreclosure because they are under water, even though they never missed a payment and still could make those mortgage payments, but we will 

save that for another discussion. 

I want to go back to the EITC for just a moment, because I come 

from an area in northwest Arkansas that has been impacted by illegal immigration, and I would like to know if there are accurate 

numbers out there that have impacted our Federal Treasury of people who are not entitled to the EITC but nonetheless are collecting 

that credit. 

Mr. GEORGE. The short answer is, yes, there are. I am going to 

turn to my staff. Do we have numbers? Number of illegal aliens receiving the EITC? 

Mr. MCKENNEY. Yes, our primary concern is the EITC—the 

EITC is about 2 million. 


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Mr. WOMACK. Two million. 

Mrs. EMERSON. Excuse me, can you just identify yourself please 

for the court reporter? 

Mr. MCKENNEY. Michael McKenney, Assistant Inspector General 

for Audit. 

Mrs. EMERSON. Thank you so much. 

Mr. WOMACK. We will submit for the record, I would like a little 

bit more detail on what we know and what we don’t know, so that 

I can intelligently answer those questions with constituents of mine 

who pay attention to these sorts of things, and I think we all 

should pay attention. 

We have got people gaming the system across the spectrum of 

the Tax Code, but in particular with EITC, we have a lot of gamers 

out there? 

Mr. GEORGE. We do. Again, Mr. Womack, I don’t know if you 

were here when I was introducing myself. I, too, served on the Hill 

as a staffer over 16 years ago. When we first looked at this issue, 

it was then estimated that the annual improper payment rate was 

in the $20 billion a year range. And so subsequently, through, 

again, oversight hearings that Congress held and later action by 

the administrations—— 

Mr. WOMACK. That was about what year? 

Mr. GEORGE. That was 1995, 1996 timeframe. So it is now rough- ly $11 billion to $13 billion a year. Still an outrageous amount of 

money, but obviously, the trend seems to be in the right direction. 

Again, that is just EITC. 

As my colleague alluded to a moment ago, there is an additional 

tax credit on the Additional Child Tax Credit, which has similarly 

been very large numbers of improper payments and that literally 

the Congress, because of inaction of Treasury, IRS, state that they 

are not in a position to address it. That is something that could be 

fixed by Congress, and that is something we discuss in detail in my 

written testimony. 

Again, I have to again, sir, I don’t think you were here, I have 

limitations on the substance of tax policy that I can advocate in my 

role as the Inspector General, and it is the Assistant Secretary for 

Tax Policy that the Secretary has delegated that responsibility to. 

But he, too, Michael Mundaca, is aware of that issue. 

Mr. WOMACK. Thank you. We would like to see some more detail 

on the reporting. 

Madam Chairwoman, our country is a great country with a terrific system in place, albeit with its flaws and its complicated tax 

codes, but there is, I will say again, no more outrage that I could 

have than to have people who game our system and take advantage of things to which they are not entitled that over time adds 

up to billions and billions and billions of dollars at a time when our 

country is faced with the financial distress that we face. 

With that, I yield back. 

Mrs. EMERSON. Well, thanks. 

And I totally agree with you, particularly when we can actually 

touch and feel where this fraud is being perpetrated, and that is 

very, very frustrating. Because what it does is hurt the people who 

actually need to take advantage of these types of tax credits, where 

it helps them be able to put food on the table or even maybe even 


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save a little bit for school supplies and stuff. It is very, very frustrating. There are some things that we might have the opportunity 

to do, and we will engage you on those. 

Mr. SERRANO. I would like to comment on this because every so 

often, we are going to find issues where both sides, Democrats and 

Republicans, can agree on. 

There is another side to this that has to be looked at. In my district, in the Bronx for instance, around tax time, a lot of places we 

know by name open up storefront operations to do taxes. They have 

the whole issue of basically we think—can I prove it? I guess I am 

within the bar of the House, but we suspect in some cases, they 

are telling folks to fill out this and fill out this and go for this and 

you can get that. And the person is either a person with less education about these matters and goes along with it, or in some cases, 

it might be undocumented folks, who are afraid of their shadow, 

who want to pay taxes, because you are right, they know, one, it 

is the right thing to do; two, it could help years from now. Whenever we talk about any kind of immigration reform, the first thing 

we say is pay your taxes, learn English and so on. So a lot of that 

is going on. 

Then you have the other addition, which is these folks will advertise that on the day they fill out your form, they will give you a 

check—a loan, not a check, a loan for the return. These folks think 

they are getting a check from the IRS. They are not. They are getting a discounted amount because this person is making a loan. It 

may be one of the few issues you will find, actually many, but one 

of the glaring ones we will find where conservatives have a reason 

to be angry and liberals also have a reason to be angry, and we 

can work on it. 

Mrs. EMERSON. We found some new opportunities to hopefully 

save money. 

Mr. George, did you have something you wanted to say while everybody else was making small talk? 

Mr. GEORGE. As it relates to Mr. Serrano’s comment, it is, again, 

the commissioner’s thinking that by registering and in some way 

validating these paid tax preparers, we may be able to root out the 

less scrupulous ones and to bring in people who will help avoid 

that situation. 

Mr. SERRANO. I don’t know if this happens in your district, but 

in my district, it is amazing, they dress up like mascots. They hire 

local folks who dress up in these outfits to stand and give out and 

say, down the block, we will get your taxes done. 

Mrs. EMERSON. I live in a rural area. It is not done quite the 

same, but we do have—— 

Mr. SERRANO. They stand by the highway and wave? 

Mrs. EMERSON. With the signs ‘‘free taxes’’ or ‘‘discounted taxes.’’ 

One of the things that the IRS has helped us do that I find positive is that we have all these volunteers that go to our senior centers and nutrition centers to help seniors, free, fill out the forms. 

And they have got the computers there. That is a terrific system 

that has helped multiple numbers of people. However, then you get 

the ones who have no more business than I do in trying to fill out 

people’s taxes. 


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Mr. GEORGE. If I may, Madam Chairwoman, as I indicated, we 

went to these private organizations—the tax centers—and had 100 

percent accuracy rate. Some of the VITA programs, they have had 

some problems in terms of accuracy in terms of filling out taxpayer 

forms. That is something I would suggest this committee—as we 

are going to be a little more aggressive have on. 

Mrs. EMERSON. Well, I appreciate that because I visited two of 

those centers in my district, and I guess—and I had IRS folks there 

with them. I am not sure how many hours of training each of these 

individuals has had to have. 

Mr. GEORGE. The groups are the ones that support that. 

Mrs. EMERSON. Just keep our eye on this one, too, okay. 

Mr. GEORGE. Lastly, to Mr. Serrano’s point, with the First-Time 

Home Buyer Credit, it was the same situation. You had people literally telling people hey, come into my office, pay me X amount of 

money, I will fill out the tax forms for you and help you with a refundable credit. Until our audits identified many of the problems 

associated with that, namely 4-year-old, people who hadn’t actually 

purchased homes or people who had purchased homes prior to the 

implementation of the legislation, these unscrupulous tax preparers 

and taxpayers were getting away with it. 

Mrs. EMERSON. This is a very good discussion. I think it is really 

helpful. I want to move to a different subject, if that would be all 

right, just because apparently we are going to have soon three 

votes, and if we could try to get finished with the real questions 

that we want to ask so you don’t have to wait around. I hate to 

have you do that, Mr. George, because a 10-minute sequence of 

votes ends up taking an hour because people chitchat and don’t 

vote. 

On Monday, I was down at IRS headquarters with the Commissioner and his staff discussing the new IRS taxpayer account database. There is no doubt that this really has—there is an opportunity to immeasurably improve the IRS customer service and tax 

return processing. I know my children, who file their tax returns 

want those tax refunds back immediately. It is certainly much better since they do it electronically. 

But I want to know how much confidence you have in the IRS 

to meet its goal of launching the database by next January so it 

can support the 2012 filing season. And then, after 50 years of 

working with a database that gets updated on a weekly basis, IRS 

employees are going to have to use a database that is updated on 

a daily basis. Are employees prepared to have their schedules totally disrupted in order to maintain this huge investment that we 

all have made? 

Mr. GEORGE. The short answer is, I have been told by my staff 

who have actually conducted the audits on the ground that the IRS 

is making very good progress in anticipating the implementation of 

the customer account data engine version 2, CADE 2. CADE 1, as 

you know, is still a work in progress. But it is still the master file, 

what the IRS has been relying upon for over 50 years, that is what 

the IRS employees have to rely upon. I have to admit my view and 

my response is somewhat clouded, I think is the word, by their experience with the tax system modernization effort that you may recall started in the mid 1990s. They spent $2.5 billion on a system 


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that was behind schedule, didn’t produce what was promised, and 

ultimately just completely thrown away. And so $2.5 billion were 

wasted. As my former boss, Mr. Horn said back then to Commissioner Rosatti, after $100 million, couldn’t you realize this wasn’t 

working? Why do you have to wait until it gets—I am told it is actually closer to $3 billion that was completely wasted. 

So I am from the Show-me State on this one. So I really have 

to see it to believe it. But I have been told that they have learned 

from the past mistakes. And I am reasonably optimistic that they 

will be able to achieve a lot of what they promised. Now will it be 

done on time? I have no idea. I can’t predict the future. But I do 

know that they have made changes that are somewhat disappointing because at one point their goal was to have a system 

similar to what you do when you encounter your credit card companies, you call in and you can just input your credit card number, 

or, in this case, your Social Security number or whatever it would 

be, and then how much money have I paid into the system, how 

much money do I owe, when do I owe it, so on and so forth. 

I think it was being called MyIRS. And it was supposed to be 

this really high tech or avant garde type of situation. And they 

have abandoned that. Not necessarily their fault. The resources 

that they received were cut back and so they have to make choices 

between what to provide and what not to provide, given the limited 

resources that they have. And then added obligations that I am 

sure you will talk about in a moment. 

Mrs. EMERSON. I am certainly hopeful that it does work. One of 

the questions I asked them was: well, if you aren’t here in 2 years 

or 3 years when it is completed, how can you ensure that this gigantic investment we have made will actually be carried forward, 

to which, of course, nobody can answer that question because you 

can’t see into the future. But this does worry me, given the fact 

that I think the entire government has done a horrible job across 

the board on IT modernization and we just haven’t kept up. Unfortunately, it does require an investment. It needs to be done much 

quicker than—and we dole out moneys a little bit at a time. By the 

time you have finished it, it is already obsolete. 

Anyway, hopefully we can get it underway. So I guess the original estimate was that this whole modernization was going to take 

about 15 years and it was going to cost about $8 billion. So we are 

in the 12th year and how much money have we spent on this altogether? 

Mr. GEORGE. They are below the budget. So $3.25 instead of $8. 

Mrs. EMERSON. I know the Commissioner suggested that if we 

were able to give them about $111, $112 million over the next 2 

years, they thought that would do the trick to get it completed. Do 

you all have any sense of whether or not that is a real number? 

Am I putting you—will you identify yourself. 

Mr. DUNCAN. Alan Duncan, Assistant Inspector General for Security and Information Technology. We have been looking at this 

project for quite some time. Every year, we issue a business system 

modernization assessment. And in looking at that, CADE 2 is really in a three-phase installation plan. The first phase of CADE 2 

will be implemented, as they have planned, in January of 2012. 

There are two additional phases for that project. So that may be 


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the money that you are talking about to finish the existing database to get us an authoritative database that will have all individual taxpayers accounts. 

Mrs. EMERSON. Rather than using the tapes that they currently 

use, like the old-fashioned way. Everything would be on one database. 

Mr. DUNCAN. That is correct. That is on schedule. We have been 

reviewing this very extensively. We have four audits currently in 

process, including your reference there to the daily processing, 

which is not just a technology issue, it is also an individual employee issue because they have to be ready to go from a very extensive process that they have to do before they know what your account looks like to every day it will updated, which is with what 

we should be expecting as a taxpayer. I think they are on track to 

do that and to have that first phase in place for the filing season 

next year. 

Mrs. EMERSON. So, if, in fact, you have phase 1 completed—and 

I didn’t really go into all of the details about phases 2 and 3, only 

hoping they could get phase 1 finished on time. 

Mr. GEORGE. Yes. 

Mrs. EMERSON. And somewhat close to budget. How long are the 

additional phases to take? 

Mr. DUNCAN. We are looking at 2014 for the full implementation 

and the elimination of the redundant systems that are currently 

processing. This would then give us the opportunity—and the 2012 

is important because it sets the baseline upon which then we will 

be able to go forward. They must meet that. 

Mrs. EMERSON. So it is much easier to do once you get phase 1. 

Mr. DUNCAN. If they can get 2012, I believe they will have a very 

good opportunity to then complete the other two phases in the 

budget that they have set forward. 

Mrs. EMERSON. As an IT expert, which I assume you are since 

you are in charge of this, do you—well, we all know that some people get promoted into positions because somebody at the lower 

doesn’t want them. Been there, done that in the private sector. 

Is this a good system? 

Mr. DUNCAN. We believe the change that they made 2 years ago 

to redesign for the Commissioner to endorse this particular approach, which is a major change in the way they have been doing 

business system modernization, is a correct approach. And I did do 

a lot of work on the commercial sector before coming here. This 

type of an approach is the type of approach, as we move into the 

Web environment and the portal environment, which will allow all 

of our taxpayers to really be able to get the type of information, the 

processing that they require. We believe that they are on the right 

track at the moment. They need to follow through. And you already 

touched on it—the executives to stay in place. We have had a serious concern. If you continue to change executives at the top level 

and they bring in their own ideas and their own approach, then we 

may have a problem as we go forward. 

Mrs. EMERSON. Would you design a system like this yourself? 

Mr. DUNCAN. Yes, I would. This would be the approach that I 

would take. 


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Mrs. EMERSON. I know that you—and then I am going to turn 

it over to Mr. Serrano. Mr. Alexander just came in—you and GAO 

both have found a little bit of security weaknesses. 

Mr. DUNCAN. Yes, ma’am. 

Mrs. EMERSON. Have those been addressed? 

Mr. DUNCAN. They have a material weakness that has been reported in the security arena. We believe, again, that this project 

that they are called CADE 2 will help to address—not saying it will 

resolve it—but help to address some of the major issues that have 

been reported in the past on security. 

Mrs. EMERSON. I think perhaps we will have that discussion in 

a private session. 

Mr. Serrano. 

Mr. GEORGE. Madam Chairwoman, as you indicated at the outset 

of this questioning, with the rapid transition in technology, again, 

something that looks good now, 2 years ago may be antiquated. I 

just want to make sure I made that point. 

Mrs. EMERSON. I know. It scares me to death. 

Mr. GEORGE. I just wanted to make sure I made that point. 

Mr. SERRANO. Yesterday, we voted on the budget that keeps the 

IRS at fiscal year 2010 levels. Given the cuts in the IRS budget, 

where do you feel the budget is most vulnerable? What accounts 

worry you the most as far as these cuts go? 

Mr. GEORGE. Great question. It hasn’t come up yet, but of course 

with the Affordable Care Act having passed, and is law, and the 

key role that the Internal Revenue Service is going to play in this 

implementation, unless additional resources are provided to the 

IRS, they are going to have to take away from either the enforcement side of the house or the customer service side of the house 

in order to meet some of the obligations they have under the ACA. 

It is almost a zero sum game, Congressman, because, again, unless the IRS gets much more resources, they have such a massive 

responsibility, that is namely the tax revenue entity of the most 

powerful Nation in the world, they are just going to have to make 

some tough choices, and most likely the sacrifices will be on the 

customer side of the house. 

Mr. SERRANO. So you may be on your way to answering the second question, which is how does the IRS even begin to close a tax 

gap with fewer resources than it has currently? I am just saying 

that they have to make a decision since health reform is the law. 

Mr. GEORGE. It is not only health reform, it is really any new requirement change to the Tax Code, which, unfortunately, many 

times comes so late in the year, too, that it requires the IRS—it 

is almost like the Army. They will get it done. It may not be pretty, 

but they can get the job done. And that is the case—that is been 

the case for the AMT and a few of the other tax provisions. 

I carry around a card with me everywhere I go. And this is very 

telling. And it is just a few seconds. Let me read this, if I may. 

Third party reporting. And this is really IRS information-based information. There is such a high correlation between tax compliance 

and third-party information reporting and withholding. The IRS estimates individuals whose wages are subject to withholding report 

99 percent of their wages for tax purposes. Self-employed individuals who operate nonfarm businesses are estimated to report only 


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68 percent of their income for tax purposes. But the most telling 

figure, self-employed individuals operating businesses on a cashonly basis are estimated to report only 19 percent of their income. 

And what I am suggesting is I know Congress recently took ac- tion as it related to the 1099 and the $650 business transaction figure. But these numbers are telling. When you have someone else 

reporting how much money you earn, you are most likely going to 

be honest with the IRS as relates to money you earn. Obviously, 

the reverse being the case. 

A way to address that tax gap is more third-party information 

reporting. That is a way. And so how to make it as least burdensome on taxpayers, that is the challenge that Members of Congress 

have before them. 

Mr. SERRANO. It is interesting you say what you just said because part of what we hear a lot these days, and I say this with 

all due respect, is we have got to reduce the size of government, 

we have got to have less government, and let American small business take care of the economy. I guess what you are saying is yes, 

and then make sure they pay taxes. That would help the economy. 

Ms. EMERSON. And I will just give you a perfect example. My 

husband is an attorney. He is a partner in a small law firm in Missouri. He is very good about paying his quarterly taxes, but they 

don’t have withholding. For the clerical help, yes. But for the partners, they just get a big old check and it is up to you to go ahead 

and be responsible and pay your taxes. But I can see how easily 

it would be for some people who chose not to pay their fair share, 

even in spite of the fact that those schedule K–1’s that the businesses have to file anyway as a business tax return basically indicates how much the firm has made. But you would have to have 

somebody rat on you, almost, to necessarily put that at the top of 

your list for investigations. 

Mr. GEORGE. Again, it makes common sense why people will say, 

If you pay me cash, I will give you a lower figure for the item that 

you are buying. 

Mrs. EMERSON. Although, when you go to the hospital and you 

work a deal with them that you don’t pay it through the insurance 

company, they will, in fact, give you a big discount. 

Mr. SERRANO. Am I supposed to be hearing all this? 

Mrs. EMERSON. No, no, no. Any hospital administrator will tell 

that of. 

Mr. SERRANO. I am looking at Mr. Womack. And I have got great 

respect for him and his background both as a mayor and a colonel. 

A mayor and a colonel. Not a major. How do we treat our men and 

women in uniform? I remember when I was in the Army 1,000 

years ago for a very underwhelming small career, I used to get 

these letters from New York State when I was stationed somewhere, saying, ‘‘You didn’t pay.’’ I said, ‘‘No one told me.’’ It was 

ahead of time and so on. And no one seemed to know where men 

and women in uniform were supposed to be paying taxes or not. 

No one told us. 

What happens with that now? 

Mr. GEORGE. When I first became the Inspector General, we had 

a review of that very situation where the servicemen and women 

were not being informed of their right not to have to submit tax 


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returns on a particular date. And I don’t recall the exact, because 

the laws have changed and that was literally 7 years ago, 6 years 

ago. But we issued a report and the IRS did take action in that 

regard. 

Mr. MCKENNEY. They are better on following up on that. They 

have an indicator on servicemembers’ accounts so that they know 

that they are military. They have obviously their combat zone pay 

is exempt and they have extensions of time to file. So we think 

they are doing better at putting the indicator and making sure 

their—— 

Mr. SERRANO. The worst thing in the world—and now I am going 

to sound not like a liberal—liberals don’t get credit for saying anything nice about the military. The worst thing in the world is to 

be serving your country and then to have a tax issue because somebody didn’t tell you what you are supposed to do or not to do. 

If you are in a combat zone, that pay is exempt. 

Mr. GEORGE. Correct. 

Mr. SERRANO. Is it up to every State to determine whether they 

will—— 

Mr. MCKENNEY. I couldn’t tell you. I assume most States follow 

the Federal. But I am not certain of that. 

Mr. SERRANO. Do you know, Mr. Womack? 

Mr. WOMACK. Not specific to that question, although I think— 

correct me if I am wrong; these guys will know more than I do— 

I think the amount of pay is exempt up to and including the pay 

equal to a Sergeant Major in the Army. I think there is a difference 

for higher-ranking personnel. It has been a while since I have 

looked at the income levels of the various servicemembers, but I 

think somewhere at the senior captain level, captain level, and 

above, not all of that pay—— 

Mrs. EMERSON. I would agree, with a son who is a captain in the 

Army, that when he was in Iraq—he made captain in Iraq, so he 

started—it started costing him a little bit more. 

Mr. SERRANO. I don’t think anyone who is in a battle zone should 

pay a penny of tax. How is that? That is my statement for the day. 

One last question, given these cuts, how will your office respond? 

Are there vulnerable areas of IRS that will receive more attention 

from your investigators? 

Mr. GEORGE. As I indicated in response to an earlier question, 

Mr. Serrano, it really will depend on circumstances. If there are 

threats that are issued because of anti-tax protestors that would 

require us to have people in, whether it is New Hampshire or—— 

Mr. SERRANO. Anti-tax protestors? 

Mr. GEORGE. Believe it or not. But there is no question that some 

hot-button issues as is relates to business systems modernization 

as it relates to a lot of the refundable tax credits, and then, again, 

the American—the Health Care Act, those are things that we 

would want to bring—highlight our focus on to make sure that they 

are implemented effectively. 

We have found, again, that it is much more beneficial for the IRS 

and for the American taxpayer for us to identify problems before 

they really manifest themselves or before the money goes out the 

door, because it then becomes so much more difficult and costly for 


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the IRS to try to recover that, and in many instances, they just 

give up. 

Mr. SERRANO. Well, I thank you. 

Madam Chair, I have a few questions I will submit for the 

record. I thank you for your service. I think that we all, whether 

inspector generals or direct IRS employees, should make it easier 

for the taxpayer to file and pay their taxes. It should not be something where people feel threatened or intimidated. And so anything 

we can do in that direction helps. 

Lastly, I don’t think even a major tax break will help the Mets 

this year. I don’t think there is anything you can do for them. 

Mr. GEORGE. Thank you for your service. I will leave it at that. 

Mrs. EMERSON. Mr. Alexander from Louisiana would like to ask 

a question. 

Mr. ALEXANDER. Not ask a question, but would you read the little card to us again? 

Mr. GEORGE. Yes. And I will just skip right to the relevant questions. IRS estimates individuals whose wages are subject to withholding report 99 percent of their wages for tax purposes. Self-employed individuals who operate nonfarm businesses are estimated 

to report only 68 percent of their tax for tax purposes. And self-employed individuals operating businesses on a cash-only basis are estimated to report just 19 percent of their income. 

This is IRS information. 

Mr. ALEXANDER. Do we have a guesstimate at what those numbers would be, the number of self-employed out there and what the 

magnitude of that lack of income to the government would be? 

Mr. GEORGE. Well, again, the official numbers that the Internal Revenue Service issues, and these are as of 2001, are $345 billion 

each year not paid to IRS on time and in full. We believe that is 

a lowball estimate. It does not—we believe it does not include in 

its totality the number of international entities that—money to the 

U.S. Treasury. Our guesstimate is it is closer to $500 billion a year 

that should be paid that is not paid. But there are even some that 

think the figure is much higher than that. 

The IRS is doing—it is called the National Research Project—and 

the IRS is currently in the process of updating that, looking at subchapter S corporations and whether or not—what the compliance 

rate is with those. As you know, many businesses, small businesses 

especially, and some large ones, incorporate under subchapter S, 

which affects how much money they can claim that the owner and/ 

or the business has actually earned. 

Mr. ALEXANDER. I am just interested in why would you say selfemployed non-farmers? Would the farmers be subjected to something different from other self-employed? 

Mr. GEORGE. I will defer to my colleagues on that one. 

That is just the way the IRS has captured the information. 

Mr. ALEXANDER. Okay. Thank you. 

Mrs. EMERSON. Thank you so much, Mr. Alexander. 

I have some questions I would like to submit for the record, one 

including—I heard some complaints about how the IRS administers 

the Federal Historic Preservation Tax Incentive program. Hopefully, you can get back to us on that. If any of my other colleagues—we will submit all the questions for the record. 


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Thank you so much for being here. It is really a privilege to have 

you. Your experience on both sides, I think, makes you an exceptional person for this position. You have insights that others do 

not. I am grateful for your service and that of all of your staff. 

Thank you all for the work that you do. 

Mr. GEORGE. Madam Chairman, it is really the work of the people all over the country who work with me. It has been an honor. 

They are talented. 

Mrs. EMERSON. Well, we would be nothing without our staff, too. 

We don’t give them enough credit. Quite frankly, we may get the 

glory, but they are really the people who do the work. Some of us 

actually really work, too. But our staff—— 

Mr. SERRANO. Be careful how you say that. 

Mrs. EMERSON. We couldn’t do it without our staff. We are all 

a team and it is very important. 

I just appreciate you all looking out for taxpayer money and for 

doing that tough job. Thanks so much. 

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(475) 

WEDNESDAY, MARCH 16, 2011. 

DEPARTMENT OF THE TREASURY 

WITNESS 

HON. TIMOTHY GEITHNER, SECRETARY OF THE TREASURY 

Mrs. EMERSON. The hearing will come to order. 

Thanks to all of the subcommittee members for being here. And, 

Secretary Geithner, thank you so very, very much. As we speak, 

numeral doctoral theses about your tenure at the New York Federal Reserve Bank and the Department of the Treasury are being 

written. Both TARP and Dodd-Frank have made an indelible mark 

on financial markets, government policy, and U.S. history. 

In January, the Special Inspector General for TARP concluded 

that while TARP prevented the failure of one of the world’s largest 

banks, it also insulated risk takers from the consequences of failure, and thereby encouraged future high risk taking behavior. 

Whether Dodd-Frank can successfully address the moral hazard introduced by TARP remains to be seen. 

For fiscal year 2012, the Treasury Department requests $14 billion of which $13.3 billion is for the Internal Revenue Service. The 

remaining $754 million is for, among other things, the offices of 

three inspectors general, the Community Development Financial 

Institutions Fund (CDFI), the routine cash and debt operations of 

the Federal Government, and various policy offices that oversee 

counterterrorism, anti money laundering, financial regulatory reform, housing finance reform, and small business initiatives. 

The decisions made by these policy offices have an effect on 

American lives and businesses disproportionate to the level of appropriated funds that they receive. As such, the committee will review their funding levels and activities with great care and in great 

deal. 

The Federal government’s gross debt currently exceeds $14 trillion, and the administration’s budget will lead to debt in excess of 

$26 trillion or 107 percent of GDP in 2021. In light of these estimates, the administration’s lack of leadership to steer us towards 

a sustainable spending trajectory is disappointing. Inaction is unacceptable; and as such, this committee is going to do what it can 

within its jurisdiction to significantly reduce spending. 

Once again, many, many thanks for being here, Secretary 

Geithner, and I look forward to your testimony. Now I recognize 

my colleague in arms, Mr. Serrano, for any opening statements he 

would like to make. 

Mr. SERRANO. Thank you, Madam Chair. 

I would also like to welcome the Secretary of the Treasury, Timothy Geithner, to this hearing of the Financial Services and General Government Subcommittee. 


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For 2012, the Treasury Department is requesting authority to spend a little over $14 billion, an increase of $562 million or 4.2 

percent above 2010. As you know, I have been a long time supporter of strong funding for the Community Development Financial 

Institutions Fund. The CDFI fund has played an important role in 

increasing economic opportunity and community development in 

our most disadvantaged communities. I am also pleased that in 

your budget request, you are trying to find innovative ways to help 

our small businesses and to increase their ability to access credit. 

Small businesses play a crucial part in job creation; and, thus, 

our continued economic recovery. With the passage of the DoddFrank Act, you were given many new responsibilities designed to 

help stabilize our financial system and prevent a repeat of the economic crisis. I am interested to learn more about how you are moving forward in carrying out these new mandates. I also want to 

make sure that you have included sufficient resources in your proposed budget to allow you to successfully implement these new requirements. 

The Treasury Department also has an important role to play in 

stabilizing our housing market. We need to make sure that affordable housing options continue to remain available, and that our 

consumers are better protected from risky financing packages. I 

know that you are very involved in trying to find solutions to improve the health of our Nation’s housing financial system, and I am 

hoping to discuss these important efforts with you today. 

I would also note that you are seeking to fund the IRS in fiscal 

year 2012 in a very strong way. Taxpayer services and enforcements are a vital part of our effort to reduce the tax gap and stop 

those who seek to cheat the United States Government. Unfortunately, H.R. 1, the Republican continuing resolution, would cut 

more than $600 million for IRS operations. 

IRS Commissioner Shulman was here just a couple of weeks ago 

and told us that this cut would mean that the United States would 

lose more than $4 billion in revenue from delinquent taxpayers. 

Cutting IRS funding in this manner makes little sense to me since 

the IRS provides the very funding that the rest of our government 

uses to operate. The Treasury Department has an important role 

to play in helping to address the concerns of everyday Americans 

in the areas of tax assistance, small business credit, mortgage relief, and the creation of economic opportunity. 

I look forward, Mr. Secretary, to discussing your important work 

in all of these areas. I thank you before we begin for your service 

to our country. 

Thank you. 

Mrs. EMERSON. Thank you, Mr. Serrano. 

I would now like to recognize Secretary Geithner. If you can keep 

your statement to 5 minutes, that will give us more time for questions. 

Secretary GEITHNER. Thank you, Chairwoman Emerson, Ranking 

Member Serrano, and members of the committee. Thank you for 

coming here today. I just want to say at the beginning that I very 

much respect the process of oversight you are engaged in. I think 

it is a great thing for our country that you subject all of the actions 

of the executive branch to rigorous oversight and review. That is 


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what you should be doing, and it is my privilege to participate in 

that process. I think this is my 51st testimony today during the 

time as Secretary. I know it is a necessary part of what we are 

doing, particularly at a time when we are involved in so many difficult, complicated problems. 

Our core priority in the Treasury budget is to help strengthen 

the recovery and help put more Americans back to work. We are 

undertaking a variety of initiatives to support those objectives. Let 

me just list a few. 

We are providing help for small businesses through tax incentives, through the small business lending fund, the States’ small 

business credit initiatives through the new market tax credit and 

the CDFI program. All of these share one feature in common as a 

strategy. They are designed to provide substantial leverage for any 

dollar of taxpayers’ money we put at risk to leverage private resources alongside the taxpayers’ money. So we are working with 

the market to help catalyze private investment. 

Second, we are continuing our efforts to help repair and reform 

the financial system, not just the housing markets, housing finance 

market, but the broader financial system. And we are working to 

shape and design a broad reform of the corporate tax system that 

would lower the rate, broaden the base of revenue neutral tax reform, that would help improve incentives for business investments 

in the United States. 

Of course, alongside these efforts, we play a critical role in helping advance U.S. security interests, and our national security interests abroad. Our budget request includes funding for implementing 

our targeted economic and financial sanctions programs against 

foreign threats to the United States, and I know these are very important to many of you on this committee. 

In this year’s request, as in the past, the overwhelming bulk of 

the resources we are asking Congress to appropriate are designed 

to support or directed to support the talented public servants who 

are charged with Treasury’s important economic and financial responsibilities. Salaries and operating costs make up 96 percent of 

our budget. We are a little unusual in that context relative to other 

agencies. The rest of the budget is mostly for investments in technology that those public servants need to do their jobs. 

Now in our request, we have asked for just above $14 billion for 

the Treasury; $13.3 billion, the overwhelming majority is for the 

Internal Revenue Service. Now, I just want to emphasize that we 

are very committed and very successful in finding ways to save resources and improve efficiency in the basic Treasury programs. In 

the last three budget requests, we identified more than a billion 

dollars in savings and offsets. 

In this budget, we have identified another $1 billion in savings, 

of which there is about $336 million in direct cost savings and efficiencies. The balance of that, the roughly $630 million in offsets, 

is through assets seized as a result of violations of U.S. sanctions. 

These savings help us finance what we think are targeted, valuable, investments that have a very high return. Let me mention a 

few. Investments in customer service and enforcement programs at 

the Internal Revenue Service generate revenue at many times the 

cost to the taxpayer. Every dollar invested in the IRS yields roughVerDate Mar 15 2010 05:43 Jul 07, 2011 Jkt 099011 PO 00000 Frm 00477 Fmt 6601 Sfmt 6601 E:\HR\OC\A999P2.XXX A999P2

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ly $5, and that is a pretty conservative estimate, in additional revenue from non-compliant taxpayers. 

Our judgment is that the modest targeted investments in this 

budget that we are proposing for the IRS are expected to produce 

more than $1.3 billion in additional revenue once fully implemented in 2014. 

We are also working to improve efficiency by moving to a more 

paperless transaction system, from automated debt financing to 

greater electronic filing of taxes. Overall, these paperless transaction initiatives with the public are expected to produce more than 

$500 million in cost savings and efficiencies over the next 5 years. 

So we have designed our request to save as much as we can 

while preserving critical functions and programs. In our judgment, 

any substantial cuts to the IRS budget would hurt both our ability 

to collect enough revenue to meet our obligations and hurt our ability to serve taxpayers more quickly and efficiently. Cuts to our remaining programs would weaken our ability to support reforms 

that are very important to the economic recovery and the ongoing 

challenge of repairing our financial system. 

Finally, cuts to the CDFI Fund would substantially damage our 

ability to attract private investment to communities hurt most 

deeply by the crisis, which are still suffering because of the broader 

damage caused by the crisis. 

Now, I want to end by noting, as Madam Chair you did, that it 

is important to recognize the strategy that we embrace to address 

the financial crisis has been much more successful and at a much 

lower cost than we initially anticipated. Let me just give you a few 

facts on that. 

On relatively conservative estimates about the future of the economy, over the next 10 years, we think the total costs of the taxpayer support to Fannie and Freddie will fall by about $61 billion, 

or 45 percent from the initial estimates. Since the August 2009 

midsession review, the projected cost of TARP has declined by $293 

billion, or 86 percent. Today I can say that based on the expected 

additional repayments we expect from several financial institutions, taxpayers will have recovered more than 99 percent of the 

funds disbursed for the TARP’s bank programs. 

In fact, outside of housing, the programs designed to help give 

Americans the chance to stay in their home, outside those programs, the TARP programs in banks, automobile companies, even 

in AIG on balance will show a significant positive return for the 

American taxpayer. 

Now these savings, these hundreds of billion dollars in lower expected cost of TARP means we are returning hundreds of billions 

of budget authority unused and that creates greater room for us to 

meet our future challenges and reduce our deficits. 

You are right, Madam Chair, to point out that when governments act to put out a financial fire, by definition, they create the 

risk of adding to moral hazard in the future. And the big test we 

face is the broader reforms in Dodd-Frank will be effective in helping limit that risk. I can tell you that I am very confident that 

those reforms will, if we are able to put them in place, allow us to 

substantially reduce the risk of future crises, and substantially reduce the risk of moral hazard that exists in any financial system. 


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One final word in closing. I have the privilege of working with 

a remarkably talented team of career professional service individuals at the Treasury, working very hard in the face of, I think, 

some of the most challenging economic and financial problems we 

have seen in generations. They have played a vital role in helping 

bring this economy back to growth, help restore financial stability, 

and I think we owe them a debt of gratitude and some recognition 

for their hard work and their commitment to public service. I want 

to say again how much it has been a privilege to me. Once a career 

civil servant in the Treasury, to have a chance to work with them 

again. 

Thank you. I am happy to answer your questions. 

[The information follows:] 


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Mrs. EMERSON. Thank you, Mr. Secretary. We, too, would like to 

thank all those who work with you. They make lots of sacrifices. 

I am going to try to keep my questions to 5 minutes just so we 

have an opportunity to have as many questions as possible. 

Shortly after the passage of Dodd-Frank, Mr. Secretary, you said 

that the Act would ensure that the risks undertaken by banks 

would not ‘‘threaten the health of the economy as a whole.’’ But you 

also told Special Inspector General for TARP that it wasn’t possible 

to create effective and objective criteria for evaluating systemic 

risk, but rather ‘‘you just don’t know what is systemic risk and 

what is not until you know the nature of the shock.’’ 

In the absence of objective criteria for evaluating systemic risk, 

is systemic risk something you just know it when you see it? If so, 

how can the government and private businesses identify and remedy Too Big to Fail? 

Secretary GEITHNER. An excellent question, and very important 

question. Let me try to give you my own personal view on how to 

think about this. 

The most effective things you can do to reduce moral hazard risk 

in the system are really these two: One is to make sure that you 

have the authority to force financial institutions to hold more capital against the risks they run in their businesses. That is essential 

to reduce the risk of failure by large institutions. In general, our 

view has been we want to make sure that the largest institutions, 

the one whose mistakes can cause the most collateral damage, are 

held to a high standard in terms of risk management and higher 

capital. But that is not enough. 

Even if you do that, to effectively reduce moral hazard risk, you 

have to have a system which allows you to allow institutions to fail. 

In fact, what this law does is prevent the executive branch or the 

Federal Reserve from coming in and intervening to help an insolvent institution survive, to live for another day. 

What the law does is force us to, in effect, to unwind an institution whose failure has brought it to the edge of collapse, but unwind it in a way that we reduce the risk of loss to the taxpayer 

and reduce the risk of collateral damage. Those are the two most 

important things to do about moral hazard, and the law gives us 

the authority to do that. We did not have that authority before. 

Now, you began with a very important question which is how do 

you judge what is systemic, what type of institutions might pose 

systemic risk to the system as a whole. I just want to make it clear 

that you cannot make that judgment with confidence without 

knowledge of the circumstances you are in at the time. 

I will just give you an example. Bear Stearns, the first significant 

institution to really fail in this crisis, come to the edge of failure 

in this crisis, was not a very large institution. Why was it so consequential? Why was its failure so threatening to the system? It 

was, in part, because of the nature of institution, its business and 

how connected it was to other institutions. And it was, in part, because we were at that stage where the U.S. economy was heading 

into a very damaging recession. In an environment where there is 

much more risk of recession, much more risk of broader financial 

collapse, and even institutions that themselves don’t look particularly large in that context, could cause a lot of collateral damage 


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and could accelerate a run. That is why I made the observation you 

quoted at the beginning in that you cannot know in advance of a 

crisis what particular types of risks might threaten a collapse of 

the system as a whole. 

Mrs. EMERSON. A quick follow-up to that, if you knew that the 

nature of a shock was a scare from a municipal bond default, for 

example, how would Dodd-Frank protect the financial system or 

the economy in that situation? 

Secretary GEITHNER. Again, the most important thing to do, to 

reduce the risk of future crises, is to make sure that the institutions at the center of the payment system, the ones that are central 

to the capacity of businesses to borrow and fund themselves, central to the housing finance system, to make sure those institutions 

hold much more capital against risk than they were required to 

hold before the crisis. 

You need to make sure that you can impose those types of requirements on leverage, on capital, on institutions that look like 

banks and are performing banking functions even if they aren’t in 

a legal sense banks. So, for example, in our crisis before DoddFrank, in our system we had regulations for capital over banks, but 

there was an entire parallel financial system composed of investment banks, finance companies, you could say GE, Fannie and 

Freddie, that were larger in the aggregate than the banking system 

as a whole, but no effective capital regulation to limit leverage. So 

what Dodd-Frank allows us to do for the first time is not just have 

more conservative, better designed capital standards for what we 

call banks traditionally, but make sure that we could extend those 

to institutions that are effectively doing the same thing and play 

that critical role in the payment system, in the financial system 

that causes the risk of broader collateral damage if they make mistakes. 

Mrs. EMERSON. Of course, then you could say those municipalities don’t often have to when you are doing bonds actually put their 

assets out on the table. And with the crises that we see happening 

in so many States with pension funds and the like, there is here 

another risk that I think needs to be taken into consideration. 

Secretary GEITHNER. I think you are right to point out that ultimately the overall risk to an economy, to the financial system as 

a whole depends a lot on things like whether the fiscal foundation 

of the government, State and Federal level, is on a sustainable 

path. Absolutely. That affects the overall environment. 

But I just want to emphasize one point again that no one will 

know with confidence in advance of a crisis what particular type 

of shock, mistake, source of risk, could cause a lot of damage. And 

since you can’t know and fully anticipate that, we need to make 

sure that the system just runs with thicker cushions, thicker shock 

absorbers in terms of capital, again because you can’t predict with 

confidence where they are going to come from. 

Mrs. EMERSON. Mr. Serrano? Okay, I will go to Mr. Rogers, our 

big chairman. 

Mr. SERRANO. I would rather you go, Mr. Chairman. I am not 

trying to be nice to you for any other reason than friendship because we don’t have earmarks anymore. 

Mr. ROGERS. Thank you. 


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Mrs. EMERSON. Please, Mr. Chairman, if you would like to make 

some opening remarks, please do. 

Mr. ROGERS. Thank you, Madam Chair, for the courtesy, and my 

dear friend from the Bronx. 

Welcome, Mr. Secretary. It is good to see you again. 

Including stimulus funding, we have increased spending by 84 

percent in the last 2 years. The deficit this year is $1.65 trillion 

or so. That over $14 trillion. We are in a deep hole. You agree with 

that. And we are borrowing 42 cents on the dollar we spend which 

troubles all of us. I was a little bit surprised the other day to see 

a Chinese government official quoted to the effect that they would 

have to reexamine their willingness to loan money—any more 

money to a country that might not be able to repay it. Did you happen to see that remark? 

Secretary GEITHNER. I don’t think I saw that particular remark. 

I wouldn’t be particularly concerned about any remark that I hear 

from any foreign official about the United States because no one is 

going to care more about the basic challenge of restoring fiscal sustainability than the people in this room and the people who hold 

my job. We care about our fiscal position and how we dig out this 

deep hole because of how important it is to Americans, to sustain 

confidence of American investors, not just foreign investors, and in 

our capacity as a country to go back to living within our means. 

Mr. ROGERS. Given the amount of money that we borrow from 

China, those remarks troubled me not only because of the fiscal 

question involved, but really the sovereignty of the country. I 

mean, if we get into some spat with China, for example, over Taiwan or whatever, I am worried that they would be able to use the 

leverage that they have because of the mortgage that we have 

given them, to affect our policy. The public is on to this. I think 

they said last November cut spending, discipline your spending. 

The Chairman of the Joint Chiefs has told us of the importance 

of this to the Nation’s security. The Chairman of the Federal Reserve says it is terribly important; and you, yourself, of course, 

have said so. 

And yet we get the President’s 2012 budget and it is long on 

rhetoric but it is lean on spending cuts. We are dealing only with 

14, 15 percent of the budget which is discretionary appropriated 

spending, half of which is military or DOD. If we zeroed out all appropriations for the whole year, as we did last year, because we 

didn’t pass a single bill, if we zeroed out all of the appropriations 

bills, we would still be deeply in the red. 

Now there is talk about tackling the entitlements where 65 percent or so of the money is. What do you think? 

Secretary GEITHNER. Let me just say that it is absolutely imperative that we find a bipartisan solution that will lock in the types 

of changes in policies that will bring down our long-term deficits 

dramatically over the next several years. It is critically important 

we do that. If we don’t do that, then we will face the risk of broader 

erosion of confidence in ways that might hurt the sustainability of 

this expansion. So I welcome very much the importance you’ve 

brought to that issue, and I think you are right to highlight it 

today. 


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Now, that will require not just demonstrating that we are able 

to find a way to reduce spending in the discretionary part of the 

budget, that is necessary but not sufficient. Alongside those 

changes, and we are hopeful we can come to a bipartisan solution 

on how to make sure we demonstrate the necessary restraints in 

spending, we will have to go beyond that if we are going to bring 

down the long-term deficits. 

In the budget you referred to, we proposed a detailed set of policies, revenues, entitlements, and discretionary spending that would 

reduce our deficit from 10 percent of GDP to roughly 3 percent of 

GDP over the next 5 years. 3 percent of GDP is the point at which 

you achieve primary balance, meaning revenues equal expenditures 

minus interest. And that is an important threshold because when 

you achieve that, then you stop the debt from growing as a share 

of the economy. If we are able to work together to develop constraints on Congress to live within that deficit reduction target, 

then our overall debt burden would stabilize as a share of the economy in roughly the range of 70 percent of GDP. Between 70 and 

80 percent of GDP. Now that is high, higher than we would be 

comfortable with, but it is an acceptable range. Now, even if we 

achieve that, that is not sufficient because even if we stop there, 

because of the rate of growth in health care costs, even with the 

Affordable Care Act, our long-term deficits will start to grow again 

over the succeeding decades, so that has to be viewed as just a 

down payment. 

But again, I would not underestimate the value to broader investor confidence and to confidence of the American people and the capacity of this town to work in putting in place multiyear constraints which would achieve that level of deficit reduction over 

time. You are very right, Mr. Chairman, to highlight the fact that 

you can’t do that by focusing only on the discretionary part of the 

budget, certainly not on the nondefense discretionary part of the 

budget. 

Mr. ROGERS. You know both, the White House and Members of 

the majority party in the House now, both groups have said almost 

the same thing, that we have to tackle the entitlements. It is as 

if, though, each is waiting on the other to take the first step and 

perhaps engender an attack. How can we get over that? 

Secretary GEITHNER. Well, I think you are right to point that out. 

But I just would observe in the Affordable Care Act, in the judgment of the Congressional Budget Office, which is the nonpartisan, 

neutral scorekeeper we all rely on, they show unreasonably conservative assumptions that the Affordable Care Act, if left in place, 

reduces the deficit by $140 billion roughly over the next 10 years 

and another trillion over the next decade beyond that. 

So in our judgment, we have already put in place the largest reform that affects the rate of growth of health care costs, the biggest 

part of our long-term deficits than we have done in generations. Of 

course, we recognize that is not enough. But we feel that is a pretty 

good foundation on which to build. Now I agree with you, and I 

know the President does, to do this, to do a broader, comprehensive 

multiyear deficit reduction program, we have to do it together. We 

can’t legislate this just with Democrats or Republicans. We have to 

do it together, and it is going to require us to come together. 


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We laid out a proposal. I know there are some on your side who 

want to go deeper in deficit reduction even in the near term, and 

I know that Chairman Ryan will have a chance in the next couple 

of weeks or so to lay out a 10-year budget resolution, in some sense 

giving the view of the House leadership, what an alternative strategy is to the one we laid out. 

Our view is we have a moment, and I will take the optimistic 

side of this, there is a lot of support now on both sides of the aisle, 

both houses of Congress, to try to find something on a bipartisan 

basis that will make a very substantial contribution to reducing the 

deficit. We would like to find a way to do that on common ground. 

Of course, it is going to be important to us, as I assume it will be 

to you, to make sure that we do that in a way that doesn’t hurt 

the economy. 

One of the reasons why you have to do this on a multi-year basis 

is because if you pull it all forward, then you will do a lot of damage to the recovery. You can’t do it by making that gradual path, 

something we try to do in 1 or 2 years. It has to be gradually 

phased in over time. Otherwise, you hurt growth, hurt revenues, 

and future deficits rise, even apart from the effect that we have on 

things that we believe are important to our capacity to grow in the 

future, like education or incentives for innovation and incentives 

for investment and things like that. 

Mr. ROGERS. Well, as you say, we have both heard Republicans 

and Democrats say virtually the same thing, that we have to do 

this. And we are all worried about who gets blamed for taking the 

first step. 

Secretary GEITHNER. I think it is fair to say that we are all going 

to be blamed. 

Mr. ROGERS. Let me suggest, why don’t we meet at the top of the 

Empire State Building on June 3 at 12:03 and see who jumps off. 

Secretary GEITHNER. I agree with you, there is no way to solve 

this problem which is not going to leave everybody somewhat unhappy, and everybody unhappy with us. But that is our obligation 

in some sense. That is what governing is about. And if we don’t act, 

if we don’t do something together, we will face the risk that we will 

see a broader erosion of confidence that could really hurt. 

Mr. ROGERS. Is the Erskine Bowles-Simpson Commission suggestions a starting point or an ending point? 

Secretary GEITHNER. I think what they did was a remarkably important accomplishment. They put a lot of good ideas on the table, 

and a lot of innovative ways to solve some problems that we have 

had a hard time thinking about in the past. So I think that that 

report, combined with—there is another report by what we call the 

Rivlin-Domenici Commission that has a lot of ideas that I think 

any group would want to draw from to find something that we can 

get the votes for. 

That is our challenge. Our challenge is to find something that we 

can get the votes for. I hope we can take advantage of this moment 

where there is so much commitment on both sides to try to do 

something; and again, not just to reduce spending on that 12 percent of the budget, but reduce deficits, lock in deficits long term as 

well. 


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Mr. ROGERS. Mr. Serrano, can you see the Bronx from the Empire State Building? 

Mr. SERRANO. I was going to comment that if June 3 is a Sunday, I can’t join you in the jump. That is the Puerto Rican Day parade. I won’t be able to join you for the jump. 

Mrs. EMERSON. Mr. Serrano, go ahead. 

Secretary GEITHNER. Usually we use the boat analogy. If we are 

going to step into the boat, we have to step in all together. 

Mr. SERRANO. That is for the Interior Committee. 

Mr. Secretary and Madam Chair, a lot of people would be disappointed if I didn’t ask this question first, knowing me. And out 

of respect for my friend, Mr. Diaz-Balart, I will ask this question 

first. 

Mr. Secretary, I was pleased to hear the President announce a 

policy change concerning the Cuban embargo. A policy change in 

the final rule from OFAC indicated a commitment to allowing 

much freer travel and trade between the United States and Cuba. 

It has now been 2 months since the initial announcement, and we 

have not seen the final guidelines setting out how people will apply 

to travel. 

Two quick questions: When can we expect to see these final 

guidelines? Are there particular problems hindering the release of 

these guidelines? Do you expect that the final guidelines will reflect 

the openness indicated in the President’s original announcement 

and allow regular hassle-free travel for those authorized to do so? 

Secretary GEITHNER. Yes, we will meet the policy objectives set 

out in the President’s announcement. In terms of timing, I will only 

say ‘‘soon.’’ There is no date in soon, but my expectation is relatively soon. I have not yet heard of any particular problem that 

we face in finalizing the guidelines. I will consult with my colleagues and see how things are going. 

Mr. SERRANO. I would appreciate finding out what the problem 

is other than 10,000 phone calls coming in perhaps telling you not 

to do it once the President decided to do it. 

Secretary GEITHNER. As you know, we take the obligation to 

make sure that we not just meet the test of the policy, but the constraints of the law very carefully. We are very careful in refining 

these things. Again, my expectation is we will move forward reasonably quickly. 

Mr. SERRANO. Mr. Secretary, you have proposed two initiatives 

from the CDFI fund that were proposed last year but not acted 

upon: $50 million for the Bank on U.S.A. initiative to promote affordable financial services and credit to those without bank accounts; and $25 million to increase availability of healthy, affordable foods in underserved urban and rural communities. Can you 

give us details on how these programs will be run and how they 

differ from existing programs at Treasury and other agencies? 

Secretary GEITHNER. I will be happy to do that in writing in 

more detail. But let me respond briefly now. The Bank on U.S.A. 

initiative that you referred to is very important. I think anybody 

who looks at what happened in the United States over the last 10 

years to the financial system, you can see why this is so important. 

One reason why so many Americans were vulnerable to predation, abuse, and fraud by financial institutions was because they 


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operated outside the banking system without even the protections 

which existed with respect to people who had relationships with 

banks. I think it makes a lot of sense not just encouraging more 

responsible saving behavior, more responsible use of credit, it is 

more efficient, often less expensive to deal with banks, but we are 

better able to make sure that those individuals enjoy the protections that come with consumer protection in that area. 

So that is a very important and the kind of initiative that has 

a very high return in terms of reducing future costs. 

Now, in terms of the healthy foods initiative, this is a program 

that uses the combined instruments of new market tax credit and 

CDFI fund proposals to try to make sure that in parts of the country where there are no supermarkets, no access to affordable, reasonably nutritious healthy food options, that we are making sure 

that some of those resources go to help catalyze private investment 

in those communities. 

Again, for those of you new to these programs, these are programs that at their core rely on the strategy of trying to leverage 

private capital to catalyze and attract private investment to communities where investors are often reluctant to go without that additional support. 

Mr. SERRANO. Briefly, Madam Chair, on the Healthy Food Financing Initiative, I think it is important to note that more than 

23.5 million people, including 6.5 million children, live in low income metro areas that are more than a mile from a supermarket, 

and 2.3 million people in low income rural communities live more 

than 10 miles from a grocery store. We are not just talking about 

access to healthy food, but we are also talking about access to food, 

period. As I understand it, entities like farmers’ markets and 

bodegas will be considered partners in bringing food to underserved 

communities, as appropriate. Can you comment on the proposed 

implementation of this initiative? How are you working with other 

agencies to accomplish the Healthy Food Financing Initiative? 

Secretary GEITHNER. This is something that we are doing in close 

cooperation with USDA, and others, and I will be happy to give 

your staff a more detailed report on how things are going. Again, 

and you said it very well, the basic idea is in communities where 

investors have been reluctant to come and establish what most 

Americans would view as like a normal part of a neighborhood, to 

try to make sure that those investments come on terms that have 

a very good record. These programs have a very good record for the 

taxpayer. We think that they justify your support. 

Mr. SERRANO. Madam Chair, in closing, let me just say that I 

never cease to be amazed at the fact at these hearings we learn so 

much about each other. Chairman Rogers and I always comment 

on the fact that we represent two of the poorest districts in the Nation, and they are totally different from each other. I thought our 

situation in the Bronx and other urban areas was tough. I had no 

idea that some folks don’t have a grocery store anywhere near 10 

miles from where they live. These are issues that this great Nation 

should address, and address now once and forever. 

Mrs. EMERSON. You need to come down to rural Missouri where 

I live where people live 50 miles, in many cases, from a grocery 

store. 


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With that, I will take it to Mr. Womack from Arkansas. 

Mr. WOMACK. Thank you, Madam Chairwoman. Thank you, Mr. 

Secretary, for your appearance here today. I look forward to your 

visit to the great State of Arkansas in a little over a week. We will 

roll out the red carpet for you and make you feel welcome and 

show you the great things we are doing in that region of our country. 

Secretary GEITHNER. No red carpets. 

Mr. WOMACK. No red carpets, okay. We will save on that. 

It didn’t take long for Madam Chairwoman in her opening to talk 

about TARP. That is the subject of my first question. It is a controversial topic, and I am not here to judge necessarily. History will 

judge that program. But you have articulated that it has presented 

about a 99 percent payback I suppose, and if you take the housing 

out of it, it operates in the black. We understand the numbers that 

you have articulated here today. 

What is left for TARP to do? There are still a number of people 

involved in TARP. We spoke with someone earlier this week, and 

it came to our attention there are new contracts and extensions of 

already existing contracts. Why are there still a significant number 

of people working TARP? 

Secretary GEITHNER. That is a very good question. I am glad you 

raised it. We still have a very substantial investment outstanding 

in—most of these are now common equity, but not just common equity in, for example, GM, Chrysler, AIG. We want to make sure 

that we get the highest return for the taxpayer in those investments. These are very complicated transactions to deal with. So 

part of the resources still remaining are designed to make sure 

that we can manage our remaining investments down carefully at 

the highest possible return to the taxpayer. There are a bunch of 

programs which have a slightly longer fuse in terms of the investment profile, and we want to maximize return. We are still trying 

to make sure that we can reach as many homeowners as we can 

through the housing programs. 

As long as we have a dollar of taxpayer money outstanding and 

at risk, we want to make sure that we keep in place a core group 

of people who can manage that risk carefully. So even though on 

the overall numbers we are way ahead of any reasonable expectation in terms of getting the money back for the American taxpayer 

and getting ourselves out of those companies, we still have enough 

of a residual investment left to justify the need for a staff of people 

over time. 

Now the numbers we have at Treasury today I am quite confident will be the peak in terms of staffing. In fact, we have been 

discussing a little bit what is a reasonable pace in which to start 

to wind that down. I can give you more details on that if you would 

like. Of course, we want to make sure that we are keeping talented 

people there as long as we need them. So we have to manage those 

things carefully. But those resources are coming down, and they 

are very modest. 

Mr. WOMACK. We all understand the concept of diminishing returns. As I drill down on this subject, I want us to be careful of, 

while there may be funds outstanding, there are staff allocations 

dedicated to getting as you say the best rate of return. But at what 


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point in time do we achieve a state where we are in diminishing 

returns? 

Secretary GEITHNER. Again, an excellent question. That is something we take very seriously. Let me explain a little bit again why 

with the overall amounts coming down dramatically, the complexity of the challenge still does not diminish quite as much as 

that. Again, we are a very large country, very large financial system. Even though we have gotten most of the money back, we still 

have resources outstanding in a lot of programs and in a lot of individual institutions. 

We want to be very careful to make sure that we are doing as 

good a job as we can for the taxpayer. But the people managing 

this program have done a remarkably effective job; a clean audit 

on a complicated program, and we want to make sure that we hold 

to the highest possible standards. 

But we are not going to be in these institutions a day longer than 

we need to be. Again, I believe we will be able to start to gradually 

wind down the resources we have in these programs as quickly as 

we can. 

Now, I should point out that this is not really the best measure 

of the complexity of the challenge, but if you look at what the oversight bodies have asked for in terms of resources, if you look at 

SIGTARP’s proposed budget, for example, you can see from the 

people doing oversight, in their budget requests, they still see a 

very substantial oversight need, and that is another measure of the 

complexity of the challenge. 

Mr. WOMACK. Fannie and Freddie. What is the government’s role 

in the mortgage industry? 

Secretary GEITHNER. Today, because the crisis caused this huge, 

the private market to recede completely from writing new mortgages, Fannie and Freddie, the FHA, USDA and VA are about 90 

percent of the market for new mortgages today, and that is untenable for the long term, of course. 

Our basic strategy is to gradually wind down the government’s 

role, wind down Fannie and Freddie completely, and gradually 

have the government recede and have private capital come in and 

replace the government’s role. And we will do that through a carefully designed program of lowering conforming limits, raising guarantee fees, and toughening underwriting standards so that the private market can come back in again. For that to be possible, we 

need to make sure that these financial reforms, for example, capital requirements, underwriting standards, servicing standards, 

risk retention, disclosure requirements and securities markets, 

those all are laid out and put in place so that the investors have 

clarity about what the rules of the game are in the future. Those 

are sort of two conditions you need to meet to get private capital 

to come back in again. 

Mr. WOMACK. What is the overall impact of doing away with 

GSEs? 

Secretary GEITHNER. If you tried to turn off the lights tomorrow, 

you would have catastrophic damage. Taxpayers would lose billions 

and millions of dollars, more than we expect to have to absorb, and 

you would have a huge increase in the cost of borrowing for homeowners; the risk of substantial further reduction in house prices, 


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and that would be dramatically damaging. I don’t think there is 

any credible argument that would be a responsible path for us to 

take. 

We do think, though, that over a gradual period of time, perhaps 

5 to 7 years, we can have the private sector come back in and take 

over that market and return to a market in which they are a dominant provider of mortgage finance. 

Mr. WOMACK. My last question is on corporate tax reform; where 

are we going? 

Secretary GEITHNER. It depends a little bit on what we find up 

here in terms of receptivity. But I have been consulting very broadly with your colleagues on the tax writing committees in this body 

and in the Senate, and with the business community, of course, 

and we think that we have a reasonable chance of getting people 

to come together on a comprehensive reform that would lower the 

corporate tax rate quite substantially. 

Mr. WOMACK. Do you have a number? 

Secretary GEITHNER. Not yet. It would broaden the base, do so 

in a revenue-neutral way, and leave us in a position where we have 

a more competitive tax structure, better able to help support investment, and incent investment in the United States. 

I think we have a chance to do this. Some people say you can’t 

do this unless you do individual. I don’t agree with that. I think 

there is a chance you can do it without doing individual. And some 

people think it is something we should wait on. I think it is worth 

taking a run at. Again, we are not going to be able to solve all of 

the problems facing the country. We are going to disagree on a lot 

of things. The country is still very divided on some basic things 

governments do. It is good for us to find some things we can try 

to do together to help the economy. I think corporate tax reform is 

one of those. 

Mr. WOMACK. Thank you, Mr. Secretary. I yield back. 

Mrs. EMERSON. Ms. Lee. 

Ms. LEE. Good afternoon, Mr. Secretary. It is no secret that I 

want to talk to you also, like other officials about earmarks, from 

the administration. I know that is not a popular word around 

Washington, D.C.; but back in my district and in some of our communities throughout the country, congressionally-directed funding, 

earmarks, provide jobs and services where these gross disparities 

exist. The reality is that communities who are in most need of help, 

whether they face high rates of poverty or lack of economic opportunity, are also the least well equipped to apply and compete for 

Federal grant opportunities. We also know that earmarks are 3 

percent or less than 3 percent of our budget. So in terms of deficit 

reduction, which we all want to see take place and know has to 

happen, this is a drop in the bucket. 

Now, it is not because these programs don’t do great things, but 

it is because the knowledge and expertise required to navigate the 

grant-making process is expensive to hire or to develop, and most 

of these programs spend every dollar they have in helping others 

creating jobs and providing services. Also, they leverage millions of 

dollars. One earmark of $250,000 to a nonprofit to create jobs and 

to provide services where these gaps exist can and do leverage millions of dollars in private sector funding and in foundation funding. 


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I know that these are programs in communities that the President 

supports and wants to reach out in helping. These are communities 

that I know the President and your administration and you want 

to provide a pathway out of poverty into prosperity. So let me ask 

you, in terms of this decision to support a total or to lead a total 

ban on earmarks, did anyone at Treasury do an analysis of the economic impact of eliminating earmarks and what it is going to do 

in terms of the loss of jobs and the loss of services in many of our 

districts around the country? 

Secretary GEITHNER. We at Treasury have not done such an 

analysis. But we do have a substantial number of programs in the 

President’s budget that he has proposed, and many of those are the 

ones which we have referred to that are before you today, which 

go directly at the type of problem you are trying to solve. The programs that we are responsible for, at the Treasury, including not 

just our housing programs, but the CDFI fund, new markets tax 

credit, and a range of small business credit programs, those programs are designed to do exactly what you are concerned about, 

which is to make sure in communities that are hardest hit by the 

recession, that are at greater risk of taking a much longer time to 

come out of this, get private investment in there more quickly to 

help mitigate those problems. We very much share that objective. 

And I think we have a comprehensive set of programs in the President’s budget that would help advance those objectives. 

Ms. LEE. Mr. Secretary, you have targeted CDFI for some cuts, 

as well as some of these other programs. 

Secretary GEITHNER. We absolutely are in a period where we 

have limited resources. We have to recognize that. So we are proposing savings in a variety of areas. But the request we have for 

CDFI is a very strong funding request. It would leave us somewhere between, if I am not mistaken, two and three times the 

funding level at the end of 2008. H.R. 1 would cut it to half the 

level. We are proposing in the 2012 budget what I would regard as 

a very strong funding level for CDFI. Maybe not as much as you 

would like. 

Ms. LEE. But given the lack of earmarks and the ban on earmarks and cutting CDFI, as well as some other cuts, I think that 

is going to make matters worse. 

Secretary GEITHNER. It may. It is a good question. Again, my impression is if you look at, and let’s take these types of programs 

that are designed to target low income communities with tax incentives, guarantees, credit programs, things like that. My sense is, if 

you look at the combined size of the programs, as proposed in the 

President’s budget, we have, even after the Recovery Act expires, 

very, very substantial funding levels relative to certainly where we 

were in 2008, which is appropriate because I think the returns are 

very high in those programs. 

Ms. LEE. Mr. Secretary, with regard to the programs, and I know 

again that you and your President, this administration gets it and 

understands that these communities need jobs and the support. 

What is happening and will continue to happen is that the organizations and the nonprofits that congressionally-directed earmarks 

are addressed toward, they are going out of business. They can’t 

compete. They don’t have lobbyists, Mr. Secretary, and they can’t 


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do these grant applications. They can’t do these competitive packages. I mean, this is hard stuff to do. They do the work with seed 

money or a little bit of funds from the Federal Government as a 

foundation. 

They are able to maximize the Federal tax dollars that go into 

these areas. I don’t know how you are going to backfill this and 

make sure that jobs aren’t lost and services aren’t cut. 

Secretary GEITHNER. I understand that concern, and I think it is 

definitely a reasonable concern. But let me try it from another perspective. And you know the President’s view on this. But think 

about it this way. We are living in a period where we have 

unsustainably high deficits, limited resources. It is going to be very 

hard for us to get these deficits down to a sustainable level over 

time. It is going to require cutting things that many people believe 

in and have a huge record of success over time. 

In some ways our ability to convince the American people that 

investments in these programs are necessary and important, does 

depend in part on our willingness, our ability to demonstrate that 

by doing earmark reform, we can demonstrate more confidence to 

the American people that the decisions we are making about where 

these resources should be spent meet the highest test first. 

Ms. LEE. Mr. Secretary, this is less than 3 percent of, first of all, 

of the budget. Secondly, if you look at a 400,000, 300,000 earmark, 

you are talking about $3 million, perhaps. 

Secretary GEITHNER. I completely agree with you about that. And 

I think even Chairman Rogers says this. You are not going to balance our budget on the backs of discretionary spending. It is just 

not going to happen. But I was making a slightly different point 

which is that if we are going to be able to demonstrate to the 

American people at a time of 10 percent of GDP deficits, these programs we think are so important to justify their support, then we 

have to be able to demonstrate we are willing to reform how we 

make these decisions over time, because they will be more confident that these are decisions that we made on the basis of what 

is in the interest of the country as a whole. That is one of the rationales for earmark reform. 

But you are right to point out that in many of these, we are talking about very small pieces of the budget, very good records of return, very strong cases for doing it. We are not going to have reasonable recovery in the United States across the country as a 

whole, until we get the unemployment rate down. Even though unemployment is at roughly 9 percent nationally, that dramatically 

understates the level of employment in many, many parts of the 

country. 

Part of our success in restoring confidence in this country is to 

demonstrate that across the country in communities most affected 

with high poverty and high unemployment, that we are going to 

make as much progress there as we are across the Nation as a 

whole. 

Ms. LEE. Thank you, Madam Chair. Thank you, Mr. Secretary. 

Mrs. EMERSON. Mr. Alexander. 

Mr. ALEXANDER. Thank you. 

Mr. Secretary, many of my community banks have expressed a 

concern over the recent proposed Fed regulation for the interVerDate Mar 15 2010 05:43 Jul 07, 2011 Jkt 099011 PO 00000 Frm 00497 Fmt 6601 Sfmt 6602 E:\HR\OC\A999P2.XXX A999P2

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change fees that would cut into their profits and into their capital. 

Should there be a concern over the effect this might have on the 

credit available to small businesses? 

Secretary GEITHNER. Congressman, that is a very important 

question. I have heard that concern from lots of different people. 

This was a requirement of law that was imposed on the Fed. The 

Fed tried to design a rule that complies with the law. They have 

had a lot of feedback advice on how best to reduce the risk you 

have referred to. And I don’t have a sense yet about whether they 

feel that they have the scope within the law to help mitigate that 

risk. 

Mr. ALEXANDER. So you don’t know if there was ever a study 

made by anyone, then, to gauge the potential effect of this law? 

Secretary GEITHNER. I know there were a lot of congressional 

hearings around this whole issue before this amendment passed. 

But the law establishes an obligation on the Fed, and the Fed is 

trying to figure out how to comply with that obligation and how to 

do so in a way that minimizes the impacts to which you referred. 

I don’t know how much flexibility they have. 

Mr. ALEXANDER. I appreciate your honesty there. There is a lot 

of talk about a potential vote in the future for raising the debt ceiling. What happens if that doesn’t pass? 

Secretary GEITHNER. Congress has to do it. There is no alternative. It would be catastrophic for the United States for us to default on our obligations as a country. It would be catastrophic in 

terms of the effect on growth and borrowing costs for all businesses 

and families. I laid this all out in a lot of detail in a letter early 

in the year in response to a request from the Congress. I would be 

happy to walk through that again. But there is no alternative. 

I very much welcome the statements made by leadership on both 

sides of the aisle, both Houses, recognizing that we are the United 

States of America. We meet our obligations, and it would be unthinkable for this country not to make sure that we have the continued capacity to meet our obligations. 

Mr. ALEXANDER. Do you think the financial crisis now taking 

place in Japan will have an effect on that? Will that mean that 

we—— 

Secretary GEITHNER. On our recovery here? 

Mr. ALEXANDER. Yes. 

Secretary GEITHNER. Oh, I think that is a hard judgment to 

make a decision. I think our focus now is, as it should be, on trying 

to do as much as we can to help them mitigate the humanitarian 

cost of the catastrophe. Of course, we will offer them every assistance we can and help make sure, again, that they can—that the 

restructuring effort itself is handled as carefully as possible. 

Mr. ALEXANDER. I have got one other question. The Treasury Department has—one of the duties under the law is to certify and 

oversee payments from the Judgment Fund, a law passed in 1956 

by Congress to make payments for judgments rendered against the 

Federal Government. The Judgment Fund is one of the main 

sources of funds to use to pay litigation costs of settlements against 

the government. Can you provide us with a record of an explanation of the Judgment Fund and how it is funded and maintained 

at some point? 


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Secretary GEITHNER. I would be happy to do that. 

[CLERK’S NOTE.—The Department of Treasury is either incapable 

or unwilling to answer this inquiry and provided no response.] 

Mr. ALEXANDER. And it seemed to me like if you look at Article 

I, Section 9 of the Constitution, it provides that a regular statement and an account of receipts of all public money shall be published from time to time. It is what seems like the Constitution 

prohibits the current management of this Judgment Fund since we 

don’t know for sure what goes on in that Judgment Fund, it is not 

transparent. 

Secretary GEITHNER. Well, again, I would be happy to make sure 

I understand your concern in more detail and be as responsive as 

we can. 

Mr. ALEXANDER. Thank you. 

Mrs. EMERSON. Thank you, Mr. Alexander. 

Mr. Diaz-Balart. 

Mr. DIAZ-BALART. Thank you very much, Madam Chairwoman. 

Mr. Secretary, it is good to see you again. You said that I think 

you have been through 51 of these hearings. 

Secretary GEITHNER. This is my 51st, I think. 

Mr. DIAZ-BALART. I have been with you on a couple of them, and 

rest assured, you are getting better and better at it. 

Secretary GEITHNER. I think only in a small fraction of them actually. 

Mr. DIAZ-BALART. That is exactly right, that is exactly right. 

A couple issues, and first I wasn’t going to talk about it, but 

since it was brought up by Mr. Serrano, there is no secret that he 

and I have serious differences on the issues of Cuba. By the way, 

those disagreements are always respectful and debated with the 

great respect, as should happen in a democracy. But what is clear, 

and what is more important than whether he and I may have differences, is what Congress has stated than what the law is. And 

you said it, and the President has stated it, that obviously tourism 

is not permissible, it is unlawful. 

You were very kind and when you stated in a previous subcommittee hearing, a different subcommittee of appropriations, 

that if I— I am paraphrasing it, but we talked about if I saw a violation, a possible violation, of law, to bring it to your attention, and 

that you would obviously enforce the law. And so I obviously don’t 

have to hold you to your word because I know that you are a man 

that will hold yourself to your word, and I just want to thank you 

for that courtesy. 

I have some serious concerns regarding some proposed regulations against the IRS, which I guess somebody talked to you about 

it, that would require U.S. bank deposit interest paid to any nonU.S. resident to be reported annually to the IRS. Now, according 

to the IRS, the IRS says that it is solely for the benefit of the foreign governments where those people come from. 

Now, you know, I represent south Florida. Obviously there are 

a lot of reasons why I think we could be concerned about that, 

about capital risk, the potential of what that would do to our 

banks. But more specifically and more directly let me use the case, 

for example—and we could use others, Venezuela. We all know the 

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ment has nationalized a number of companies; they have closed 

down the press; they have closed down television stations, 

Globalvision; they have arrested judges for being judges, and then 

they have mock juries and mock trials for those judges that they 

don’t like. So I don’t have to tell you about the issues in Venezuela. 

So my concern is imagine if now and in south Florida where we 

have thousands of others, but also Venezuela, nationals who are 

business people, jurists, journalists, whatever, who have homes and 

bank accounts, if that information goes back to Mr. Chavez, what 

nefarious purposes could that be used for to hold against them, to 

blackmail them, to confiscate. So that is obviously a concern that 

not only I have, but I think all the banks in the region have that 

concern. If you have any comments or suggestions on that, obviously those rules are now being promulgated. 

Secretary GEITHNER. As you said, this is about preventing tax 

evasion and preventing money laundering. We believe we have a 

very strong set of protections to protect the confidentiality of any 

such information. I would be happy to ask my staff to review those 

with your colleagues so that you can judge those for yourself. We 

think we found a reasonable balance. What we are trying to do is 

to make sure that we—and this is our obligation under the law, 

too—that we are taking every step we can to reduce the risk of 

broader tax evasion or money laundering for reasons that I know 

you respect. We would be happy to explain why we think those protections are adequate and listen to any concerns you have with 

them. 

Mr. DIAZ-BALART. And again, Mr. Secretary, I appreciate that, 

because obviously you do understand the concern of those banks 

and, frankly, more so the individuals who are highly concerned, 

and these could be issues, I hate to put it in these terms of life or 

death, for some of these individuals if we don’t get it right. And so 

we just need to make sure we get it right. 

Very briefly you mentioned that in many instances the President 

said as well that we are on an unsustainable path. And I am a simple-minded guy, I just want to make sure. You have gotten so good 

at these hearings, I want to make sure I understand what you are 

saying. 

Is it possible to solve our problem without reforming entitlements? 

Secretary GEITHNER. No. We have two types of fiscal problems. 

We have a big problem, a deep big hole to dig out of, over the next 

5 to 10 years. And beyond that we have a very different, much 

more severe long-term fiscal problem. We have to solve both those 

problems. 

The long-term problem is driven by the rate of growth in health 

care costs and, to a much smaller extent, by a very modest gap in 

Social Security. The 5- to 10-year problem is a huge problem, and 

it is not driven by entitlement costs; it is driven by just too large 

a gap between commitments and resources and the rest of our 

budget. That is why in the proposed budget to the President we lay 

out a path to bring those deficits down very dramatically over the 

next 3 to 5 years, down to level where we stop the debt growing 

as a share of the economy. That is the minimum necessary thing 


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to try to do. And you will find, of course, that that is a very hard 

thing to do. That is necessary, but not sufficient. 

Mr. DIAZ-BALART. It is not sufficient because, as you just stated 

then, again it starts shooting right back up. 

Secretary GEITHNER. It starts shooting right back up. 

Mr. DIAZ-BALART. So we can either, to use the President’s analogy, kick the can down the road, or we can look at, you know, 

where we have to go. And again, I think you have answered, but 

I just want to make sure I understand. You can’t do that without 

looking at it and—— 

Secretary GEITHNER. You have to do both those things. And 

again, it is very important to—it is better to do it sooner rather 

than later, because you need to give people time to adjust, businesses and individuals, to adjust the big changes in policies over 

time. You need to be able to phase them in gradually over time, 

like we did, for example, with the commission on Social Security 

that President Reagan initiated some time ago. 

So there is a lot of value in trying to reach consensus on these 

kind of things ahead of the point where they start to escalate dramatically. 

Mr. DIAZ-BALART. Thank you, sir. 

Thank you, Madam Chairman. 

Mrs. EMERSON. It would be nice to be able to get bipartisan 

agreement on this so that one side doesn’t beat up the other, 

wouldn’t it? 

Secretary GEITHNER. Well, we can’t do it without bipartisan 

agreement. And as I said before, we can be confident that whatever 

we agree on is going to be unpopular with people on both sides of 

the aisle. 

Mrs. EMERSON. Indeed. 

Mr. Bonner. 

Mr. BONNER. Thank you, Madam Chair, Mr. Secretary. 

I would like to go back to the big chairman first, with a statement he made, because I want to make sure I understand that. 

Could you repeat, Mr. Chairman, the amount of money, the increase in spending that we have seen over the last 2 years? 

Mr. ROGERS. The last 2 years spending has increased by 84 percent. 

Mr. BONNER. Mr. Secretary, do you disagree with that number? 

Secretary GEITHNER. Oh, I mean, there is—no, it is black and 

white. There is no doubt we have, as the chairman said, a deep 

hole, completely unsustainable fiscal position. Our deficits are 

roughly 10 percent of GDP, the highest level in generations. The 

deficit is, of course, the product of lots of things. They are the product of the choices made the last decade on taxes and spending, including entitlements. They are the choices made in terms of how 

we dealt with two wars. They are the product of the recession, and 

they are the product of the short-term emergency cost of fixing the 

crisis. And they are the products of some other things that are in 

the budget, too. But those are the most important drivers of the 

near-term deficits. 

Mr. ROGERS. Would the gentleman yield? 

Mr. BONNER. I would be happy to. 


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Mr. ROGERS. The 84 percent is an increase in discretionary 

spending. It doesn’t take into account the increases in the entitlement spending programs. But just in the 33 percent of the budget 

that is discretionary spending, we have increased it by 84 percent 

in 2 years. 

Mr. BONNER. Well, I know there are a lot of things in the past 

that have contributed to it. Certainly you can’t increase spending 

84 percent just over 2 years and that contribute to all of the problems that we are facing. But I guess the logical question that our 

constituents in Alabama, Kentucky, New York, wherever, might 

have is can we spend ourselves out of this hole? 

Secretary GEITHNER. Absolutely not. But in some ways the harder question is how we reduce spending and reduce deficits without 

killing the economy. 

Mr. BONNER. Well, and that raises a good point. Senator Kyl— 

and House Members are not prone to quote Senators unless we are 

running for the Senate, and I am not—Senator Kyl this weekend 

brought an analogy. You know, Washington, I think—maybe you 

disagree—I think this city is so disconnected from real America because we talk about billions and trillions. Most of us don’t even 

know millionaires in our communities; we certainly don’t know 

many billionaires. And so Senator Kyl put it in perspective that a 

family that is dealing with a budget, $10,000, 40 percent of that 

borrowed money, and yet the amount of money that we are trying 

to cut through H.R. 1, that we have gotten very little support from 

our Senate colleagues on the other side, although the Republican 

plan got more votes than the Democrat plan did, but if you cut— 

to give the analogy that most people can relate to, that would be 

a $28 cut out of a $10,000 budget. That is something most people 

in Camden, Alabama, where I grew up, can appreciate better than 

the fact that last month we recorded a $223 billion deficit for 1 

month. 

So you agree, you can’t spend yourself out of this, and yet I believe as just one Member that the President and the administration 

has been very timid to embrace even the President’s own—he was 

the one who appointed the commission, and yet we have seen very 

little vocal support for the tough choices that are going to have to 

be made. Chairman Rogers mentioned that in his questioning. I am 

just curious from your perspective because you have a very important seat at the table as the Secretary of the Treasury. 

Secretary GEITHNER. Well, the President believes, and I believe, 

and we both believe this very strongly, that we need to take advantage of this opportunity to find a bipartisan consensus on ways to 

lock in changes in policies that would bring our deficits down over 

time. As you said, and the chairman said, you can’t do that by focusing only on what we call nondefense discretionary. And you 

don’t want to do that, because if you only allow nondefense 2 percent of the budget to carry all of the burden for deficit reduction, 

then you will end up, as some people say, eating our future. 

You know, a family living within its means is not going to cut 

tuition payments for its kids before it cuts spending on things that 

are really a luxury. 

So we have to make those choices together, but I think you are 

right to emphasize that you have to—for us to do this sensibly over 


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term, it has to be a multiyear plan, it has got to be broader, it has 

got to involve policies beyond that very small slice of budget. I completely agree with that. 

Mr. BONNER. Just one last question. I want to go to follow up. 

Mr. Womack started this in terms of Fannie and Freddie and the 

GSEs. In the report that the Treasury Department issued on February 11th, as I understand it, you lay out three options for reforming the GSEs. But with respect to the second option, how is the 

backstop different from the implicit guarantee exploited by Wall 

Street in this recent crisis? And is this middle option, which the 

report appears to position as the most acceptable mandate response 

between the two extremes, how is it different from the status quo? 

Secretary GEITHNER. Well, it is not positioned as the more attractive option. I wouldn’t actually view it that way. Each of those 

three options we try to frame neutrally, and they each have merits 

and disadvantages. I will try to explain what the difference is both 

from the status quo and from the other options. 

In the current system, private shareholders in these two public 

companies were able to benefit from an implicit guarantee. The 

government did not charge for that guarantee. It was not compensated for that guarantee. Taxpayers who end up holding the 

bag for what I said was ultimately tens and tens of billions of dollars for losses, that is a completely unacceptable way to run a financial system, and none of it should be—will not be supported in 

the future. 

Now, what we proposed among the options we considered was an 

option where alongside what the Federal Housing Administration 

would do in providing support for affordability to low- and moderate-income Americans, which I think there is broad support for, 

as a complement to that—and that is a guarantee, but the government charges for that guarantee, and there is a bunch of tough 

conditions on that guarantee. But you would complement that by 

something you would deploy only in an emergency to make sure 

that housing finance didn’t dry up completely in a crisis. And that 

is a very important thing to do, because if you don’t do that, then 

the risk is that even a modest recession would turn into deep recession because people would not be able to borrow to finance a house, 

house prices would decline, costs of borrowing would go up, and 

you would have a lot more damage as a whole. 

So in that type of model, which is just a backstop in emergencies, 

the government would charge for the guarantee. It would only be 

available to ensure there would be financing and financing 

wouldn’t dry up completely. So it is a very different system than 

the system we have with the GSEs. 

Even that, though, would be challenging to design. All these options are very complicated to design in part because of the risk that 

we allow political factors to color the judgment about how to price 

the guarantee, how to set the eligibility criteria. And so you need 

to take the politics out of it to have any chance of getting it right. 

Mr. BONNER. Madam Chair, I said that was my last question. 

The only thing I would ask the Secretary in closing, do you think 

that the economy has recovered to the point where—I mean, new 

housing starts were down last month, what, 30 percent? Something 

like that. It flashed up on the TV today as I was meeting with AlaVerDate Mar 15 2010 05:43 Jul 07, 2011 Jkt 099011 PO 00000 Frm 00503 Fmt 6601 Sfmt 6602 E:\HR\OC\A999P2.XXX A999P2

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bama Home Builders. Do you think that people in rural America 

can go out and borrow money to buy a house or start home construction? 

Secretary GEITHNER. Well, two slightly different issues, and you 

are right to say housing is still weak, and construction is very 

weak. Housing starts are very weak in part because there are too 

many houses out there relative to demand. It is going to take several more years to heal the damage caused by this crisis. 

If you look at the cost, the ability to borrow to finance a house 

now, under the limits set by Fannie and Freddie and FHA, mortgage finance is very attractive now; in fact, much lower than it 

was, has been, over the last several years. That is a good thing. 

It is a little different for a builder, and in commercial real estate 

it is still very hard and very tough financing out there still. Just 

all again, just the echos and the aftershocks of the initial crisis, 

and that is going to take some time to heal. That is one reason why 

you want to make sure we move very carefully in reforming the 

housing finance market, because if we are going to get the market, 

the private market, to come in and replace the government’s role, 

we need to move cautiously. 

Mr. BONNER. Thank you, Madam Chair. 

Mrs. EMERSON. Thank you. 

Mr. Yoder. 

Mr. YODER. Thank you, Madam Chair. 

Mr. Secretary, thanks for the opportunity to be here today. I 

know you have done a lot of these, it sounds like, so I will try to 

ask you a few questions here that maybe haven’t been fully been 

vetted. 

I want to follow up where the previous speaker, the previous 

Congressman, the gentleman was asking. I want to ask you a more 

philosophical question. I am one of the new Members in Congress 

from Kansas, and what I have noticed in this city and across the 

country is that there is really a great divide in philosophy on what 

we should be doing right now in terms of spending, regulations, 

taxation, debt. And I kind of want to get a feel for where you are 

philosophically on these issues so I can understand sort of how you 

approach issues within the Treasury, and how your comments are 

related to questions before the panel. 

On one side I think you have the argument that what the economy needed was greater regulation; that there was too unregulated, that we needed new consumer finance protection bureaus, we 

needed greater regulation in markets, we needed greater government involvement in free commerce in this country, and that that 

was one of the things that was causing economic stagnation. 

You also have on that argument the idea that greater spending 

in Washington creates jobs, that cutting spending in Washington is 

a job killer, that borrowing more money and raising taxes can be 

a creation of jobs in Washington. And then clearly on the other 

side, you have the belief that government borrowing and spending 

is a net loser, that free enterprise and free markets are what built 

this country, and that we need to do everything we can to restore 

those principles and push rather for greater regulations, push for 

greater free trade, greater opportunities for folks to contract with 

one another. 


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I will tell you back in the district what I hear from almost every 

small business and bank in the community is that they feel government breathing down their necks at every turn, whether it is the 

health care bill, whether it is it Dodd-Frank, or whether it is new 

EPA regulations, whether it is a whole host of things that are so 

destabilizing and so unpredictable for the bottom line for these 

businesses that they are telling me, we have capital, we are not 

going to create jobs, because we are waiting to figure out what the 

government is doing to us. I hear that from my community bankers, I hear that from small businesses, I hear that from entrepreneurs. 

And so I guess I would like to get an idea of do you agree with 

the sentiments of those entrepreneurs, small business owners, community bankers; do you think it is a fair assessment on their part? 

Do you think that the course of action in this city of greater regulation, spending and taxation is the proper way? And I know you 

made a statement before that the cuts that this Congress has 

looked at in H.R. 1 would be a job killer. Do you still believe that 

cutting government spending and putting more cash back in the 

hands of individuals and small business owners is a job killer? 

Secretary GEITHNER. Okay, a thoughtful question, but let me just 

try to give you a sense of what I feel about these basic fundamental 

questions about strategy. 

The most important thing we can do for the economy is to create 

better incentives for businesses to invest and to hire, and as we do 

that—and that is a complicated thing to do. It requires, again, 

making sure that tax policy creates better incentives for investment. It requires that businesses can hire people with the skills 

they need to be able to be competitive in this world. That is why 

education is so important. It requires investments by the government in basic things like research and development and science. 

Those things are fundamental to the capacity of any community to 

grow, any business to function and thrive in this competitive world. 

Infrastructure is hugely important to the basic competitiveness of 

the American economy. Those are core government functions that 

we have not been as good at as a country. We need to get better 

at that. 

Part of it requires expanding opportunities for trade and exports, 

and that is why you are going to see before you an agreement not 

just with Korea, but if we get the change that we need with some 

other important trade agreements, we think those things would be 

very productive and very consequential. 

Now, you referred to a couple of other things which I think I 

should respond to. In terms of the financial sector, you know, this 

is a crisis fundamentally caused in part by basic failures in financial oversight. And we all had an obligation to fix those problems. 

Now, community banks were not the source of that problem, and 

community banks are largely insulated from the broader forms of 

Dodd-Frank. Those are targeted except for interchange, which your 

chairman referred to. Community banks were left largely outside 

of the scope of those changes and regulations. Those were directed, 

as they should have been, to the large institutions and the major 

markets at the center of the crisis, and all businesses were victimized by those failures. It wasn’t just individuals and communities 


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where predation and fraud were rife, but businesses were the victim of the basic failures in the financing. It is why businesses 

stopped hiring, why financial markets seized up, why the economy 

was shrinking at the annual rate of 6 percent of GDP a year at the 

end of 2008. 

So getting the financial system better, more stable, and more efficient, better to be able to provide capital is a central function of 

government. And it is absolutely the case that parts of our financial system had too much regulation, but parts had too little. And 

fixing that is really important to the broader task of trying to make 

sure that businesses were able to grow again, expand again in that 

context. 

Now, of course, that to wait for this all to work, you have to 

bring the deficits down over time, and they have to kind of come 

down dramatically. If we don’t do that, then you will risk higher 

interest rates, and you will make it harder for businesses to grow 

and expand. It is so important for all of us to recognize we have 

to do that. And you can’t do it simply by doing the necessary reductions in spending and discretionary. We believe there are savings 

there we can do in support, but you are not going to be able to 

bring the deficits down over time without taking a broader 

multiyear approach, and that is going to be very important to confidence. 

So to summarize, I don’t know you, you don’t know me. I doubt 

we disagree quite as much as your question suggested. And you 

can measure our intention and our values on these things by looking at the things we proposed. Again, if you look at our proposals 

in education, in tax incentives for business investment, in innovation in basic research and development, and infrastructure and 

trade, we think we have good ideas, but if we have broad support 

across the political spectrum in the past, it would make a big difference in terms of strength and recovery. 

Mr. YODER. To follow up on the last question I had as part of the 

philosophical section here, do you believe that cutting government 

spending in any manner, such as the manner in which we have cut 

discretionary spending, and returning that money back to small 

business owners and individuals is a net job killer? 

Secretary GEITHNER. Are you asking me about H.R. 1 specifically? I think if you cut that deeply in the way you are cutting in 

H.R. 1, it would be very damaging to the economy, near term and 

long term. Again, you need to look broadly, as I am sure you will, 

at what the government is doing. And you want to look at where 

those savings are used. And so you want to look at not just where 

you can cut, but where you need to protect investments and where 

you use those savings to make sure that we are like educating children with better skill sets. 

Mr. YODER. Let me be a little more specific on the question here. 

I guess my question goes to the issue of jobs. This is a philosophical 

question, depends which you go here, but we hear folks in this 

town say that when you are cutting spending in Washington, you 

are killing jobs. 

Secretary GEITHNER. No, I don’t think that is necessarily the 

case. It depends on what you are cutting. There are absolutely 

things you have to cut, should cut. We can’t afford a lot of—— 


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Mr. YODER. I am not talking about the deficit. 

Secretary GEITHNER. No, no, no the spending. 

Mr. YODER. When we reduce spending and reduce the amount of 

Federal employees that we have in this city, the argument is, well, 

then we have eliminated jobs, and we have hurt the economy. I 

guess I question you as to whether reducing those Federal jobs in 

a way in which we are reducing Federal expenditures and returning more money to small business owners and entrepreneurs, individuals isn’t a net job benefit. 

Secretary GEITHNER. Well, again, I think it depends on what you 

cut. You are absolutely right that there are some programs that 

you cut would not be—hurt the economy, even if they temporarily 

reduce jobs. But again, it depends, what are you going to use the 

savings for? If the savings go to finance tax cuts for the richest 

Americans, you are not helping job creation. If you achieve those 

savings, but we are still living with very large deficits, then you 

are not helping the economy as a whole. You could be hurting the 

economy. It depends what you are doing to the overall path of—— 

Mr. YODER. Let us get into taxes, if we could, Mr. Secretary. You 

discussed in your statement that the budget that has been proposed by the administration would reduce the deficit from 10 percent of GDP to 3 percent of GDP over 5 years. 

Secretary GEITHNER. Yeah. I can’t remember if we do it in the 

4th year or the 5th year, but over roughly that period of time. 

Mr. YODER. What percentage of that reduction is related to tax 

increases? 

Secretary GEITHNER. A pretty modest proportion is related to 

taxes. But you are right, we do in the deficit—in the budget propose to allow the tax cuts that apply to the top 2 percent of Americans to expire on schedule a year and a half from now, 2 years 

from now, and we also propose to limit in a very modest way tax 

expenditures for those richest same 2 percent of Americans. So, for 

example, we propose to limit the tax deductibility, the deductions, 

for those top 2 percent of Americans. Those are the principal tax 

reforms recommended, and we think they are sensible. We don’t 

think we can afford those taxes. And if we don’t allow those reforms to go into place, then you will be left with higher deficits. 

That is why, again, I know there are people on your side who think 

we didn’t go deep enough in the budget. 

I will make an observation. I don’t think you will be able to find 

a way to get the deficit lower as a share of GDP in that time frame 

without doing anything in terms of tax reform. I think it is infeasible to do it without killing the economy. 

Mr. YODER. I think you will find broad-based support for tax reform certainly as strong or stronger on the other side of the aisle. 

I guess I would ask, then, if you believe that we should increase 

taxes on the upper 2 percent. What do you feel the proper tax rate 

is for this country, specifically related to the upper 2 percent? It 

assumes your philosophy being that when we can take money to 

the richest 2 percent, and we can send it to the Federal Government and create programs, that is a benefit for society. 

Secretary GEITHNER. No, I wouldn’t say it that way. I would say 

that we can’t afford them. We don’t say this with any enthusiasm; 

it is just more in sorrow and in reality. You should not ask me to 


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go out there and borrow a bunch more money, a trillion dollars 

over 10 years, to make those tax cuts—leave those taxes in place. 

That would be irresponsible for the country, can’t afford it. What 

we are proposing to do is to allow those taxes changes to take effect 

and use those to reduce the deficit. 

Mr. YODER. Why is that the magic number, though? Why not increase taxes beyond that? It is seems sort of political, I guess. I 

know you look at these things from a very serious economic analysis here, and I want to, I guess, understand why this is just letting the 2 percent increase—what has the economic theory behind 

just that specific provision? Why is it not higher than that? Why 

does it not expand another 2 percent? 

Secretary GEITHNER. Here is the philosophy of how we do it. We 

want to have the lowest taxes possible consistent with our obligation to run a sustainable fiscal position and fund core critical functions of government. 

You say why those rates? The Bush taxes were designed to be 

temporary, to expire, and we think that the economy can withstand 

them reverting to the level they prevailed in the late 1990s, where 

we had, frankly, the best record of economic performance in terms 

of private investment, job growth, income growth, productivity improvement that we have seen in a long period of time. So looking 

back over history we think that this economy thrived at a time 

when the tax rates for the top 2 percent were at that level. 

Mr. YODER. That was for all rates. You want to go—— 

Secretary GEITHNER. No, we are proposing only to go back to 

the—— 

Mr. YODER. I understand, sir, but you were talking about the 

1990s in which all rates were at a higher rate. 

Secretary GEITHNER. They were a higher rate. 

Mr. YODER. And this gets back to a philosophical question. There 

are some in this town who believe that these higher tax rates and 

greater spending in Washington ultimately is better for jobs and 

better for the economy, and there are others who believe that the 

tax reductions in the early 2000s led to economic gain. And it is 

just this question of whether we think ultimately higher taxes create greater economic gain, or we think lower taxes create—— 

Secretary GEITHNER. I guess I would say if you describe both 

sides that way, they are both wrong, both substantially wrong. Of 

course, you want to make sure the commitments we make as a 

country are ones we can finance and afford, but you can’t have everything, and you cannot sustain those tax rates with deficits this 

large. And you cannot achieve a reasonably responsible fiscal position without those types of tax reforms. Maybe you can, but I think 

it would be hard to do that. 

Mr. YODER. Thank you, Madam Chair. You have been generous 

with the time. I yield back. 

Mrs. EMERSON. Mr. Secretary, we have one vote, and I don’t believe there will be more shenanigans. We hope not. But if you 

would be so kind as to allow us to recess for 10 minutes, and we 

will run over and vote, and we will be right back. Thanks. 

[Recess.] 

Mrs. EMERSON. Okay. We will go ahead and resume our questioning. 


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Mr. Serrano. 

Mr. SERRANO. I will be ready in 5 seconds. 

Mr. Secretary, you are familiar with H.R. 1, and I don’t mean 

Mickey Mantle’s first home run or 900th. 

Mrs. EMERSON. Yes, okay. As long as you make it straight 

that—— 

Mr. SERRANO. Mickey Mantle is your favorite? 

Mr. WOMACK. The gentleman knows that I am a Cardinal fan. 

Mrs. EMERSON. Yes, it is 2 to 1. And we have an Oakland fan, 

so 2 to 1 to 1. 

Mr. WOMACK. My treat sometime, Mr. Serrano. 

Mr. SERRANO. We have already heard from Commissioner 

Shulman of the IRS this hearing season, but I think a couple of 

points bear repeating. As I am sure you know, H.R. 1, the proposal 

to complete the 2011 appropriations process, contains severe cuts 

to the IRS. But I know Chairman Emerson and her staff did their 

best to avoid layoffs and furloughs. The IRS took the bulk of the 

cuts. 

I think a cut to the IRS budget is completely contradictory to everything that we are doing. How do we begin to solve a budget 

crunch by reducing resources to the agency that collects our tax 

revenue? What are the long-term ramifications, from your perspective, of reducing the ability of the IRS to accurately and efficiently 

collect tax revenue? 

Secretary GEITHNER. Well, I think they are very stark and compelling. If you reduce resources for enforcement and customer service, then two things happen. We collect less revenue. It means our 

future deficits are higher. It means to reduce deficits, you have to 

either raise more taxes on other people or cut other spending to 

make up for that. But the other effect you have is equally damaging. You reduce the capacity of the IRS to make sure that people 

who have the privilege of being Americans pay their fair share of 

taxes. So in some ways, if you reduce resources for enforcement 

and customer service, you make Americans less confident that the 

system is fair to them, too. So both of those effects are very damaging. 

Mr. SERRANO. Now, Commissioner Shulman told us at the March 

1st hearing that—he stated a $603 million cut to the IRS proposed 

in H.R. 1 would mean $4 billion less in revenue for the United 

States Treasury. The lost revenue is seven times larger than the 

supposed savings. Do you agree with that assessment? 

Secretary GEITHNER. I do. I trust his judgment on that. He got 

a very good record of trying to make sure that we are satisfying 

the obligations Congress gives us with the lowest costs in terms of 

enforcement and customer services resources. But again, a dollar of 

enforcement resources raises roughly $5 in revenue, it more than 

pays for itself. And if you don’t do that, you are going to have higher deficits. 

Mr. SERRANO. Yeah. I am going to bring up the word nobody 

wants to mention around here: shutdown. No one wants to see a 

shutdown of the Federal government. However, we must accept 

that this is a possibility and plan accordingly. What has your agency done to prepare for a potential shutdown? 


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Secretary GEITHNER. Well, across the executive branch, at the 

President’s direction, agencies have been looking carefully at what 

the law requires, what the law permits, how to make sure that we 

plan for that eventuality. But, Congressman, we are all working to 

avoid that. I think we should be able to avoid that. It would not 

be good for the economy now to put us through that kind of reduction in critical government services. 

Mr. SERRANO. But across the government you say plans are 

being put in place. And I don’t know if we are late into the season, 

but there was talk about refunds, tax refunds, being in jeopardy. 

Is that a possibility? 

Secretary GEITHNER. Again, I don’t think I should at this point, 

Congressman, walk through the precise implications of a shutdown. 

It depends a lot on the legal judgment about what is possible and 

what is not possible in that context. But I think it is very important that we all try to work to avoid that, because, it is not good 

for us to put an economy still emerging from crisis through the 

trauma that would come from loss of critical government services. 

That would be one example that could be implicated. But I don’t 

want to go into those details now. And again, we are doing what 

you expect us to do which is to work to avoid it. But, of course, we 

all always look at these kind of contingencies. 

Mr. SERRANO. Madam Chair, I know that the time is running 

short, and I know we have other Members, so I will stop here for 

now. 

Mrs. EMERSON. Thank you so much, Mr. Serrano. 

Let me ask you a really quick question, Mr. Secretary. Could 

other factors such as business cycles affect receipts more than the 

size of the IRS’s budget, for example? 

Secretary GEITHNER. No. I think in this context anybody—well, 

not anybody. I believe it is fair to say that Republicans and Democrats who have looked at this question over time would say that 

enforcement and customer service resources have a substantial effect on revenue. Of course, lots of things affect overall revenue, how 

strong the economy is, but you know one thing for sure. If you cut 

it, your deficits will be higher, other things being equal. You don’t 

make—— 

Mrs. EMERSON. The other things being equal key, because—— 

Secretary GEITHNER. No, but you won’t make the economy 

stronger by cutting enforcement resources. That will have no effect 

on that. Now, of course, the economy will be stronger long term if 

you get our fiscal position resources and—but you are not going to 

do that by cutting enforcement resources from the IRS. 

Mrs. EMERSON. Well, I mean, this is why I think business cycles 

might impact, because when we—at two different times, in 2008 

and 2009 and then, I believe, 2001-ish, receipts were down in spite 

of the fact that the IRS budget was up. 

Secretary GEITHNER. Yes. But I think it is fair to say the right 

way to think about this is that for a given economy and a given 

tax policy, Congress sets the tax rates for the country. You will collect more revenue in a more fair way if you have adequate enforcement resources with the IRS. If you cut those, you will have less 

revenue, and it will be less fair. And that is why it is worth doing. 


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I know you have been very supportive of this in the past. Of 

course, we all have to make tough choices in this context, and we 

are trying to, as I said in my testimony—trying to find areas where 

we can save, so where we are making investments, we think of 

higher return, we are funding those investments to the extent we 

can with savings efficiencies. 

Mrs. EMERSON. Appreciate that. 

Mr. Womack. 

Excuse me, let us keep to 5 minutes, okay, on this round of questions if you all don’t mind. Thanks. 

Mr. WOMACK. I should be able to yield back time, because I only 

have a couple of follow-up questions. 

One, when you look at the glide path of our debt, the size of our 

debt, and the glide path of what that debt means in the outyears, 

I am concerned about the numbers that our side crunches and, I 

am sure, your side crunches, and the relative interest rates that 

figure into the projections. And my understanding is those are 

factored in, I don’t know, 4 to 5 percent levels, somewhere in that 

neighborhood. 

What happens in a period of high inflation? Suppose for a moment we went into that, and interest rates spiked to more astronomical levels? And you can pick a number. What does that do to 

the mandatory piece of our spending pie as obviously it gets elevated exponentially? 

Secretary GEITHNER. Well, you are right to say that lots of things 

affect that overall burden, interest burden, over time, how fast we 

grow, what happens to interest rates. But the biggest factor really 

is just the rate of growth in health care spending. With an economy 

aging and people able to live longer, that is the biggest overwhelming factor. 

Now, we have an independent Federal Reserve, and their job is 

to keep inflation low and stable over time, and they have got a very 

good record of doing that in the last three decades, and I am very 

confident they can do that. But even if they do, that is not going 

to save the Congress and the executive branch from the obligation 

of trying to put in place reforms that will reduce those long-term 

deficits. 

Mr. WOMACK. And then related to the debt ceiling, it has already 

been talked about in the previous line of questioning, you have indicated that the path that you hope to have us on is down to about 

3 percent, a 3 percent factor of GDP. 

Secretary GEITHNER. At least. 

Mr. WOMACK. At least 3 percent. And you call that relative balance. 

Secretary GEITHNER. Primary balance. 

Mr. WOMACK. I understand the concept there. And through normal growth we can begin to trim our debt. I fully get that. 

I don’t want to put words in your mouth, but because we have 

to continue to go back statutorily and raise this level of debt every 

time that we start bumping up against it, is that a call for a more 

indexed debt ceiling? 

Secretary GEITHNER. Well, that is really a question for you and 

your colleagues. We are the only country in the world that I am 


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aware of, or any serious country, that requires its elected representatives to periodically go back and raise the limit. 

Remember the limit, we are only allowed to borrow to finance 

things Congress has obligated us to finance. Congress sets the obligations for the country; we just raise the money to finance it. And 

we are the only place in the world I know that has a separate obligation on Members of Congress to come back periodically and raise 

it. 

I don’t know why you want to live with that. It is tough enough 

making some of the other choices you have to live with. As you 

know, it is not proven to be of any value in forcing choices Congress hasn’t been able to force on itself through other means, because fundamentally we will never default on our obligations. No 

Congress will ever let us default. It provides no leverage in that 

context, and it has had no value in bringing discipline to fiscal 

choices of the contribution of the past. 

So my own sense is that it is not a particularly useful tool relative to political costs it imposes on each of you. That is why many 

of your colleagues in the past have tried to find ways to reform that 

obligation. 

The important thing is for Congress to agree on multiyear commitments that lock in improvements in the deficit over time in 

ways that don’t kill the economy, and that is the important thing 

to do. 

Mr. WOMACK. My colleague here in his line of questioning talked 

a little bit about the Dodd-Frank Act and the community bank side 

of the house. We all agree that community banks are very important to local communities, in particular rural Arkansas, rural Missouri and other areas. Is it possible we threw the baby out with the 

bathwater in Dodd-Frank with regard to community banks? 

Secretary GEITHNER. No, no risk of that. In fact, again, we were 

very, very careful, completely committed to make sure that the reforms in this bill were targeted on the parts of the system that 

were broken. We were very successful in doing that. 

Now, there are things like interchange with people worried about 

that in that context, but if you look at all the basic dimensions of 

the bill in terms of what changed, we appropriately followed a simple principle, which is let us focus on the things that were broken 

and on the institution that caused the problem, not on the ones 

that were mostly caught up. 

Now, of course, community banks were not innocent completely. 

A lot of them got way too exposed to commercial real estate. They 

are trying to dig their way out of that. They have to reduce lending 

to their business customers because of that. And we can help them 

get through that a little bit. But I think Dodd-Frank has a pretty 

good balance; not perfect, but pretty good. 

Mrs. EMERSON. Thank you. 

Mr. WOMACK. I am going to stop there. I just want to say one 

thing, Madam Chairwoman. I was digging through my unlimited 

funds here, and I found this $1 bill, it is all I have, with the Secretary’s name on it. But I know because his name is on it that he 

cares deeply about what is happening in America and our fiscal 

health. And I appreciate his testimony here today, and I have enjoyed the conversation that we have had today. 


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Mrs. EMERSON. I am sure the Secretary would be happy to sign 

that for you. 

Mr. WOMACK. I don’t know if that is a violation of Federal law 

or not. I certainly—— 

Mr. SERRANO. I think it is against the law. 

Mrs. EMERSON. Actually I will say that I found at a colleague’s 

home this past week that Secretary Snow had actually signed a 

dollar bill for he and his wife so—in honor of their marriage. 

Ms. Lee. 

Ms. LEE. Thank you very much. 

Okay. Going back to the point you were making about earmarks 

in terms of making the point that the public wants us to reduce 

spending and reduce deficits. I agree. But I also believe that the 

public understands that while everyone must share in the pain, 

not—it is given, all things being equal; given all people, given all 

districts, given entire countries in terms of middle-income individuals having the kind of wherewithal to sustain some of these cuts. 

So I don’t believe all things are equal. 

And given that, the 3 percent in terms of the earmark, the 3 percent reduction to me doesn’t seem fair. It doesn’t seem fair because 

once again it is hitting the most vulnerable communities the hardest, communities that need jobs and need services, which unfortunately our government nor State governments provide. And so 

while the public wants us to do this, reduce the deficit, reduce 

spending, I am sure the public does not want us to wreak havoc, 

mind you, and I don’t think the President wants that to happen on 

these communities that need this type of support. 

Secondly, I believe that, and I think that many concur, that the 

deficit is caused by three factors, the Bush tax cuts for the wealthy, 

two wars that did not need to be fought, and the recession was, of 

course, caused in large part by Wall Street. 

Secretary GEITHNER. Part D and Medicaid contributed. 

Ms. LEE. Yes. Part D and Medicaid. The prescription drug deal. 

So given that, that seems to be where we should go to find revenue. That seems how you begin to dig us out of this hole and reduce the deficit. When we talk about going back to 2008 domestic 

discretionary spending, cutting back, some agree, some disagree, 

but if we do that we should go to defense. Why not? Again, $700- 

some billion. And I think most experts who study this, most economists and most military experts, will identify 100-, 150 billion in 

defense that could be cut without jeopardizing our national security. 

And so what I can’t quite figure out is why would we talk about 

reducing or develop economic policy and strategies to reduce the 

deficit on the backs of those who can least afford these kinds of 

hits? 

Secretary GEITHNER. I don’t think we should do that. And that 

is why the President proposed in his budget a very substantial, 

very ambitious deficit-reduction program with a balanced approach 

that preserves critical investments in things that matter, not just 

the most needy Americans, but also to things that are very important to our capacity to grow in the future. 

You know, the hard thing to do is not to figure out a way to cut 

spending or reduce deficits. The hard thing is to find a way to do 


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it in a way that does not hurt the capacity of the country to grow, 

to expand opportunity, and it is done so in a way that is just as 

fair, fair across the country. That is the challenge, that is the political challenge in this context. That is why, again, in the President’s 

budget we proposed a balanced approach, multiyear package of 

phased-in reductions in spending in areas where we can afford to 

cut spending, but while preserving in some cases increasing investments in things that this government has not done well enough 

and has to do better in the future if we are going to grow and prosper in the future. 

Ms. LEE. What are the numbers in terms of health care reform 

how that would hit our Treasury? If, in fact, we repealed health 

care reform, of course, we are going to create a larger hole. What 

are those numbers? Do you have that? 

Secretary GEITHNER. Apart from what it does to coverage and incentives to use health care more wisely, reduce cost growth, what 

it does is it reduces the 10-year deficit by $143 billion, the Affordable Care Act reforms, and it reduces the deficit over the next decade by a trillion dollars. And most health care estimates look at 

those estimates and feel that CBO is reasonably conservative in 

giving us credit, giving the government credit, for the savings that 

are ahead. 

Now, of course, for those savings to be realized, Congress we 

have to hold to them, not walk them back over time, leave them 

in place and let them work. So if you repeal, your deficits will be 

higher by 150-, a quarter billion dollars the next 10 years, then 

higher by a trillion in the next decade. 

Ms. LEE. Thank you very much, Madam Chairman. 

Mrs. EMERSON. Thank you so much, Ms. Lee. 

Mr. Yoder. No more questions? 

All right. Mr. Serrano. 

Mr. SERRANO. Thank you. 

In my final round, I think, I just want to help us set the record 

straight. It seems to me, Mr. Secretary, that there is some confusion about TARP with new Members and some returning Members 

of Congress. So let us set the record straight, and you tell me if 

I am wrong. 

As recently as yesterday on the floor of the House, my friends on 

the other side were accusing the Democrats of dreaming up TARP. 

Let us be clear. TARP came about under the Bush administration, 

and it was the Bush administration that told us that the entire 

American economy would collapse if we didn’t vote for it. TARP is 

a program that you inherited, not one that this administration created. Am I correct? 

Secretary GEITHNER. That is absolutely correct. 

Mr. SERRANO. Now that we have that clear, let us talk about the 

real cost of TARP. Beyond anyone’s wildest expectations, the cost 

of TARP, as analyzed by the nonpartisan Congressional Budget Office, keeps declining. We are finding that the investment that we 

made in certain industries actually paid off. Can you tell us what 

the original estimate was for the cost of TARP and what we expect 

the program to actually cost now? 

Secretary GEITHNER. At its peak it was $350 billion. That was 

without the risk that we might have to come back to Congress and 


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ask for more authority. And relative to that initial estimate, as I 

said, outside of housing we are going to earn money for the taxpayer. I think CBO’s latest estimate is total costs are—I can’t remember what the exact number is, something closer to $20 billion, 

but I think that is probably a little high. 

Mr. SERRANO. Not every program within the TARP has been successful, though. The HAMP program, your signature program for 

foreclose mitigation, has produced far fewer mortgage modifications 

than anticipated or hoped. In fact, the House voted to defund the 

program just last week, claiming that it is better to give up on solving the foreclosure crisis than to try to fix the program. 

What are your plans for reforming the HAMP program? How can 

you make it more useful for homeowners who are struggling? 

Secretary GEITHNER. Very good question. And let me just say 

that we are all disappointed and frustrated by the speed at which 

we reach people through this basic program, but—and again, I 

would say that the servicers and banks are not doing nearly 

enough to make sure they can determine whether people are eligible for these programs and make sure they get the benefits of these 

programs as quickly as they need to, and they need to do a much 

better job of that. 

Appalling performance by servicers generally still not nearly 

good enough. But this program has reached 600,000 Americans 

with permanent modifications and lowered their monthly payments 

by an average of $500 a month. That is a very substantial amount 

of money, and the reforms put in place have helped set an industry 

standard that led to more than 2 million additional modifications 

outside this program. Again, a very substantial improvement in reducing the rate of avoidable foreclosures. 

And we have a number of programs in place that are designed 

to help make sure we reach more people as quickly as we can. But 

by law, by the constraints of law, this is a voluntary program, and 

we do not have the capacity to compel banks, to force banks to deliver these reductions. We can push them to do what we are doing, 

encourage them to do it with incentives. And, you know, we publish 

detailed metrics every month to show how banks are doing on 

meeting the basic customer service obligations in this program. 

They are getting better, but not nearly good enough yet. 

Mr. SERRANO. Go ahead, one more, or are we short? 

Mrs. EMERSON. Two minutes left. 

Mr. SERRANO. I did have a quick question about the Bank Secrecy Act. 

Mrs. EMERSON. Go ahead. 

Mr. SERRANO. In the 2012 budget issue, February 18th, the 

Treasury Department proposes to eliminate all State and local direct access to the Bank Secrecy Act, BSA, portal maintained by the 

Financial Crimes Enforcement Network. You are familiar with that 

issue. So the question is, is the degradation of the capacity of 

States and cities to combat terror, fraud, corruption and crime justified by a proposed savings of a little over $1 million? Did the 

Treasury Department conduct any study of the secondary cost of 

this proposal in terms of increased inefficiencies, loss of revenue, 

or the cost of the likely increase of uncaptured fraud that will reVerDate Mar 15 2010 05:43 Jul 07, 2011 Jkt 099011 PO 00000 Frm 00515 Fmt 6601 Sfmt 6602 E:\HR\OC\A999P2.XXX A999P2

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sult from this proposal? If so, what were the results of this study; 

if not, why not? 

Secretary GEITHNER. Excellent question. Of course we looked at 

this very carefully before proposing it. And again, we are trying to 

find savings everywhere we can justify them. But I did not believe 

this proposed reform would have any material effect in the capacity 

of State and local authorities to carry out those basic obligations. 

But we would be happy to give your staff a little more information 

on what went into that judgment. 

Again, this is just another example of how we can’t do everything. We have to make some hard choices. We have to reduce 

some things that have a—where we think we can better use the 

money. But in this case we think the reforms are justified, and we 

don’t think they affect the capacity of State and local governments 

to carry out that responsibility. 

And I want emphasize something your colleague said, which is, 

again, we want to be very careful that where we are saving resources, we are not hurting the most vulnerable or taking away 

from programs that have, again, a demonstrated very good record 

over time in using taxpayers’ money, supporting private investment. 

Mr. SERRANO. Well, in closing let me just say you should take a 

look at that, Mr. Secretary, because I can tell you one city where 

they feel they will be hampered in their ability to do what they 

need to do. Thank you. 

Mrs. EMERSON. Thanks, Mr. Serrano. 

Bless you. 

In response to the question that Mr. Serrano asked you about 

HAMP, and it reminded me of this e-mail that I just got from a 

friend of mine who is a banker, a community banker in one of my 

counties. And I am actually going to read you what he said, because this is somewhat problematic. But basically, just to pick and 

choose, in theory the program, HAMP, seemed like a viable option 

to help borrowers stay in their homes in times of financial difficulties, but the cumbersome process of getting a borrower qualified for 

the program made it almost impossible to help those who are in 

most need in general. The servicers are required to solicit those 

borrowers and provide them with information regarding the HAMP 

options available. The borrower then must complete and return the 

forms required in order for the servicers to proceed. The borrower’s 

information is then input into the HAMP Web site and transmitted 

electronically to Fannie Mae, who handles the applications for 

Treasury Department. 

Navigating the loan input Website was nearly impossible, the 

users guide alone being 64 pages. Issues with calls to the support 

line when assistance was needed included long wait times and conflicting answers from the staff members once the call was answered. The incentive offered to participate did not seem to interest 

any of our borrowers—blah, blah, blah. So I tell you this primarily 

because it needs to be streamlined and made more efficient. 

Secretary GEITHNER. I am really glad you raised this, but let me 

explain to you why we are in this position. Any time we put taxpayer resources on the table—in this case it is to encourage banks 

to put some of their own money on the table to modify a loan for 


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a homeowner who is better off staying in their house—we have to 

be very careful that those resources go to people who are eligible 

for the program, and that requires making sure we can defend to 

you and your colleagues up here that we have good protections 

against fraud and people can prove income in this context. 

And as you know we have a crisis where part of the crisis was 

the country was filled with examples people were given loans without having to prove income, without having to document assets, capacity to pay. And part of our challenge in designing this program 

in applying was to make sure that again where we are qualifying 

people for a program and putting taxpayers money on the table 

that we could demonstrate to you and your colleagues up here that 

we are being exceedingly careful. 

Now, that does slow down the pace of conformance, and banks 

do complain about it, but look how well the banks are doing at 

qualifying and even loan programs. Ask people how they feel about 

the basic quality of service of banks for loan programs, and you will 

find people with still terrible examples of lost documentation, long 

waits, inability to find a live person to help them navigate that 

complicated process. But I agree with you it is still hard and complicated, but where it is hard and complicated is because we are 

trying to be careful custodians of the taxpayers’ resources. 

Mrs. EMERSON. I do understand that, but 64 pages of user guide 

seems a little excessive, and it begs the question then, if we are 

going to talk about banks just for a moment, and it frustrates probably all of us across the board that the Office of the Comptroller 

of the currency doesn’t come under the Appropriations Committee, 

in spite of the fact they are authorized to charge whatever they 

want in order to run their own operation, and yet we have the 

FTC, the FCC, SEC, and I could go on and on and on, who are 

funded through fees and we actually do have some jurisdictions. 

But given the importance of the OCC and its performance over 

the past several years, do you think there is any justification at all 

for allowing bank regulators to be outside of the congressional oversight? 

Secretary GEITHNER. That is a dangerous question for me to answer in a subcommittee of the Appropriations Committee. 

Mrs. EMERSON. This is not just we want our hands on it. It is 

a serious question because the regulators did not do their jobs in 

many cases, obviously. We all know that. 

Secretary GEITHNER. We had a system to which a really appalling extent we allowed institutions to choose who their regulator 

was. They could choose who their regulator was based on how soft 

or permissive the regulation was, and in some ways what was more 

expensive in terms of fees and that kind of thing. That is a crazy 

way to run a country’s financial system. 

What happened was people just flipped their charters to take advantage of lower costs and lower standards, and that was disastrous for us. And it is just an untenable way to run a country in 

this context. 

Now, part of that is how we fund our supervisors, and it is very 

important for the country that we have a funding mechanism that 

allows them to attract and retain quality people and to maintain 

an adequate supervisor resource base. And so my own view in this 


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case, and I know it is a little bit controversial in a body like this, 

is I would try to retain as much independence as possible so you 

can make sure that they can attract and retain qualified people. 

And I would eliminate as much as I can the capacity for arbitrage 

across different regulators. To some extent, we have done that in 

Dodd-Frank. But funding is part of that. 

Mrs. EMERSON. I have ethical issues with fee-based regulators 

anyway because generally speaking, the people who end up being 

the top regulator come from the industry which they are entrusted 

to regulate. 

Secretary GEITHNER. I am against that, too. I think in general, 

particularly for a regulator, they have unimpeachable credentials 

not just for toughness, but for independence, and it is a very important thing that we instill in the system. 

Mrs. EMERSON. Indeed. I have numerous questions to submit for 

the record that we would like to ask you to respond to within 10 

days, if possible. 

Let me ask one quick question, and then we will close it down 

because I know you have to leave. This is about the Consumer Financial Protection Bureau (CFPB). 

What happens to the CFPB if there is no director confirmed by 

the Senate by that time in which it is supposed to be stood up? 

Secretary GEITHNER. At a date we call a transfer date, a date I 

set but the statute defines that authority, a bunch of authority 

from existing bank regulators transfers to the CFPB, but not all of 

the authority under the law. Some of the authority does not happen until there is a confirmed director in place. 

So the short answer to your questions is that the CFPB would 

not be able to operate with the full authority established in the 

law, part of it, but not all of it. The consequence of that would be 

that you leave the financial system left with a huge amount of uncertainty about who is in charge, and a lot of duplicative, overlapping function in this area. And you leave the system, I think, to 

some extent, to a significant degree, without the ability to make 

sure, for example, that small community banks don’t face a lot of 

competition from people that are not required to adhere to the 

basic standards for consumer protection we try to apply to banks 

as a whole. 

So it would be—of course, it would substantially impair the capacity of this bureau to do what the law requires, which is establish and enforce sensible standards for consumer protection across 

the system. Again, in this crisis, what happened was you had 

banks subject to consumer protection, not always perfect, a lot of 

mistakes in that, too. But the more appalling failure was you allowed a bunch of institutions to compete with banks that were not 

subject to consumer protection. 

So you don’t want to put community banks or any banks in a situation where they see their business just move to people who are 

not subject to that fair regulation. So that level playing field obligation is a critical objective, critical rationale for the establishment 

of this bureau, and you lose that objective, lose that advantage the 

longer you leave this entity in limbo. 


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Mrs. EMERSON. I appreciate that, and I don’t believe there is 

anyone who believes that non-bank banks shouldn’t be treated the 

same as banks when they are doing more or less the same thing. 

Thank you very much for being here. Thank you for staying over 

time. We appreciate it. This hearing is adjourned. 

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