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FINANCIAL SERVICES AND GENERAL GOVERNMENT 

APPROPRIATIONS FOR FISCAL YEAR 2013 

HEARINGS 

BEFORE A

SUBCOMMITTEE OF THE 

COMMITTEE ON APPROPRIATIONS 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

ON

H.R. 6020/S. 3301 

AN ACT MAKING APPROPRIATIONS FOR FINANCIAL SERVICES AND 

GENERAL GOVERNMENT FOR THE FISCAL YEAR ENDING SEPTEMBER 

30, 2013, AND FOR OTHER PURPOSES 

Commodity Futures Trading Commission 

Department of the Treasury 

Federal Communications Commission 

General Services Administration 

Printed for the use of the Committee on Appropriations 

( 

Available via the World Wide Web: http://www.gpo.gov/fdsys/browse/ 

committee.action?chamber=senate&committee=appropriations 
(II) 

COMMITTEE ON APPROPRIATIONS 

DANIEL K. INOUYE, Hawaii, Chairman 

PATRICK J. LEAHY, Vermont 

TOM HARKIN, Iowa 

BARBARA A. MIKULSKI, Maryland 

HERB KOHL, Wisconsin 

PATTY MURRAY, Washington 

DIANNE FEINSTEIN, California 

RICHARD J. DURBIN, Illinois 

TIM JOHNSON, South Dakota 

MARY L. LANDRIEU, Louisiana 

JACK REED, Rhode Island 

FRANK R. LAUTENBERG, New Jersey 

BEN NELSON, Nebraska 

MARK PRYOR, Arkansas 

JON TESTER, Montana 

SHERROD BROWN, Ohio 

THAD COCHRAN, Mississippi, Ranking 

MITCH MCCONNELL, Kentucky 

RICHARD C. SHELBY, Alabama 

KAY BAILEY HUTCHISON, Texas 

LAMAR ALEXANDER, Tennessee 

SUSAN COLLINS, Maine 

LISA MURKOWSKI, Alaska 

LINDSEY GRAHAM, South Carolina 

MARK KIRK, Illinois 

DANIEL COATS, Indiana 

ROY BLUNT, Missouri 

JERRY MORAN, Kansas 

JOHN HOEVEN, North Dakota 

RON JOHNSON, Wisconsin 

CHARLES J. HOUY, Staff Director 

BRUCE EVANS, Minority Staff Director 

SUBCOMMITTEE ON FINANCIAL SERVICES AND GENERAL GOVERNMENT

RICHARD J. DURBIN, Illinois, Chairman 

FRANK R. LAUTENBERG, New Jersey 

BEN NELSON, Nebraska 

DANIEL K. INOUYE, Hawaii (ex officio) 

JERRY MORAN, Kansas 

MARK KIRK, Illinois 

THAD COCHRAN, Mississippi (ex officio) 

Professional Staff 

MARIANNE UPTON

DIANA GOURLAY HAMILTON

MELISSA ZIMMERMAN

DALE CABANISS (Minority) 

ELLEN BEARES (Minority) 

Administrative Support 

NORA MARTIN

LASHAWNDA SMITH (Minority) 
(III) 

C O N T E N T S 

WEDNESDAY, MARCH 21, 2012 

Page 

Commodity Futures Trading Commission ............................................................. 1 

WEDNESDAY, MARCH 28, 2012 

Department of the Treasury: Office of the Secretary ........................................... 33 

WEDNESDAY, APRIL 18, 2012 

General Services Adminstration ............................................................................. 65 

Material Submitted Subsequent to the Hearing ................................................... 113 

WEDNESDAY, MAY 9, 2012 

Federal Communications Commission ................................................................... 115 

(1) 

FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 

YEAR 2013 

WEDNESDAY, MARCH 21, 2012 

U.S. SENATE, 

SUBCOMMITTEE OF THE COMMITTEE ON APPROPRIATIONS, 

Washington, DC. 

The subcommittee met at 2:54 p.m., in room SD–138, Dirksen 

Senate Office Building, Hon. Richard J. Durbin (chairman) presiding. 

Present: Senators Durbin, Lautenberg, and Moran. 

COMMODITY FUTURES TRADING COMMISSION 

STATEMENT OF HON. GARY GENSLER, CHAIRMAN 

OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

Senator DURBIN. Good afternoon. I am pleased to convene this 

kick-off hearing of the Senate Appropriations Subcommittee on Financial Services and General Government. 

Let me extend my apology to my colleagues first, the chairman, 

and those in attendance. This is an historic day in the United 

States Senate. Senator Barbara A. Mikulski surpasses the length 

of service in the Senate of any woman before her. 

And tributes are being given on the floor, and I joined in those. 

It took a little longer than I thought it might, and I hope you understand, this doesn’t happen often. But we are honored to serve 

with her and joined on the floor on a bipartisan basis to say so. So 

that’s the reason I’m late. 

Today, we’re going to be focusing on the resource needs of Commodity Futures Trading Commission (CFTC). I welcome Senator 

Jerry Moran, my distinguished Ranking Member, Senator Lautenberg, and those others who may join us. 

Honorable Gary Gensler, Chairman of the CFTC, is joining us 

today. I’ve asked him to share how his agency is investing the $205 

million in resources this fiscal year, and the challenges he faces in 

years to come. 

PREPARED STATEMENT

I’m going to ask consent that my opening statement be made 

part of the record, and I’m going to turn at this point to Senator 

Moran, and see if he has an opening statement. 

[The statement follows:] 
2 

PREPARED STATEMENT OF SENATOR RICHARD J. DURBIN

Good afternoon. I am pleased to convene this kick-off hearing as we evaluate the 

fiscal year 2013 funding requests of the agencies within the jurisdiction of the appropriations Subcommittee on Financial Services and General Government. Today, 

we will be focusing on the resource needs of the Commodity Futures Trading Commission (CFTC). 

I welcome my distinguished ranking member, Senator Jerry Moran, and other colleagues who have joined me on the dais today, and others who may arrive during 

the course of these proceedings. 

Joining us today is the Honorable Gary Gensler, Chairman of the CFTC. I have 

invited him to share how the agency is investing the $205 million in resources provided in fiscal year 2012 and the challenges CFTC faces in handling its tremendously expanded responsibilities under tight budgetary circumstances. Chairman 

Gensler will also explain the details and rationale for CFTC’s $308 million funding 

request for fiscal year 2013. 

CFTC occupies a pivotal position at the forefront of stimulating and sustaining 

economic growth and prosperity in our country—while protecting the marketplace 

from fraud and manipulation. 

CFTC carries out market surveillance, compliance, and enforcement programs in 

the futures arena. CFTC detects, deters, and punishes abusive trading activity and 

manipulation of commodity prices, which could have negative impacts on consumers 

and the economy. 

Futures market users (farmers, ranchers, and producers), financial investors, and 

the U.S. economy rely on vigilant oversight by CFTC in today’s rapid-paced, evolving, and often volatile global marketplace. 

Adding to the challenge of CFTC’s mission is a significantly transformed, 

globalized, round-the-clock, and highly diversified marketplace. Rapid, electronic, algorithmic trading platforms are replacing the traditional open-outcry trading floors. 

And with the enactment of Dodd-Frank Act financial regulatory reform nearly 2 

years ago, CFTC’s mission was substantially expanded to embrace oversight of the 

swaps marketplace—the vast ‘‘once-in-the-shadows’’ world of over-the-counter (OTC) 

derivatives. 

To grasp the vast scope of CFTC’s oversight responsibilities, it is useful to consider that the long-regulated U.S. futures marketplace historically policed by CFTC 

has a notional value of approximately $37 trillion. That’s enormous, by anyone’s calculation. 

But it pales in comparison to the more complex and unregulated OTC swaps marketplace now coming under CFTC’s purview—with a notional value estimated at 

$300 trillion—eight times the notional amount of the regulated futures markets. 

I am pleased that over the past several years, even with reduced allocations, this 

subcommittee has been able to substantially boost the funding approved for CFTC 

to help address pressing resource needs. 

In terms of resources in recent years, funding for CFTC has increased from 

$97.981 million in 2007 to the $205.3 million enacted level for fiscal year 2012. That 

growth represents a 110 percent hike in funding over 5 years. Despite the funding 

boosts, I acknowledge that this year has been particularly challenging for the CFTC, 

given the demands and timetable of Dodd-Frank Act implementation. 

Looking ahead, for fiscal year 2013, the President seeks funding of $308 million, 

an increase of nearly $103 million, or a 50 percent hike, more than the current year 

funding. This increase will support 1,015 full-time equivalents (FTE), an additional 

305 FTE, or a 43 percent increase in staffing, compared to the 710 current FTE 

level. 

I commend CFTC’s initiative to organize and present its budgetary justification 

materials for fiscal year 2013 by mission activity. This helpful display provides a 

clearer window into how additional resources that may be made available will build 

upon foundational baselines of current spending by function. It also allows for a better assessment of how the performance of various activities conducted by CFTC— 

from exams to product and rules reviews, from economic analysis to registrations— 

may be enhanced with the infusion of additional budget authority. 

Oversight of agencies and programs through the appropriations process, including 

public hearings like this, are an opportunity for an annual check-up and review of 

operations and spending. 

I look forward to hearing more about what CFTC has accomplished since our 

hearing last May, what resource gaps remain to be filled so CFTC may be a more 

robust and responsive regulator, and how we can help CFTC better perform its mission amid growing deficits and spending cut sentiments. 
3 

And before turning to Senator Moran for his remarks, I would ask that the record 

reflect that, like other cyclical rites of spring—pitchers and catchers reporting, the 

March Madness basketball tournament, and the scent of cherry blossoms in the 

air—we are again experiencing escalating gasoline prices. Yes, gas prices are rising. In Illinois, prices are more than $4.40 per gallon in 

some areas. It’s the same story every year: right before the summer, gas prices skyrocket. However, this year, high gas prices may harm our economic recovery as families needing to spend more of their incomes on gas have less to spend on other necessities. 

I support the President’s energy policy to reduce our reliance on foreign sources 

of energy, including oil. But what can we do to ensure excessive speculation is not 

contributing to the high cost of gas in the short-term? 

In October 2011, CFTC adopted a rule on position limits for 28 commodities including oil that will go into effect 60 days after CFTC and the Securities and Exchange Commission define the term ‘‘swap’’—an action CFTC expects to take in 

April—and after 1 year of data collection which should be completed in August. 

However, August is near the end of summer, so I will appreciate hearing about 

other actions CFTC can take in its oversight role of the oil futures market to ensure 

that excessive speculation is not harming families at the gas pump. 

STATEMENT OF SENATOR JERRY MORAN

Senator MORAN. Mr. Chairman, I very much appreciate you conducting this hearing. I look forward to the Chairman’s testimony, 

and I’ll submit mine for purposes of speeding up the process, I’ll 

submit my opening statement for the record. 

[The statement follows:] 

PREPARED STATEMENT OF SENATOR JERRY MORAN

Chairman Durbin, thank you for calling this hearing to consider the fiscal year 

2013 budget request for the Commodity Futures Trading Commission (CFTC). Welcome Chairman Gensler. 

As we review the budget submission for CFTC, I look forward to hearing the details of your request, your plan to carry out your core mission, and your efforts to 

implement the Dodd-Frank Act. 

Chairman Gensler, as you have said, derivative markets and effective oversight 

of those markets matter to corporations, farmers, homeowners, and small businesses. We all benefit from effective oversight that promotes fair and orderly derivative markets. 

However, to create the rules of the road necessary to the efficiency of such markets and to assist the businesses that are dependent upon them, we must also have 

an orderly and transparent process which outlines how they should work. While the 

financial crisis highlighted the need for better regulation of our financial markets, 

we must ensure that the significant cost and complexity of regulations you and 

other regulators are crafting, don’t have the unintended effect of hampering the 

ability of market participants to hedge risk in a cost-effective manner and ultimately drive capital and jobs away from the United States to overseas markets. 

We continue to hear concerns about the inadequacy of the cost-benefit analysis 

in proposed and final rulemakings. The cost-benefit and application of rules must 

be carefully considered. Speed should not be valued over deliberation. 

Given the significant impact these rules will have across the financial industry 

and our economy, the rules must be justified and workable. Lack of sound cost-benefit analysis may also result in legal challenge which will lead to further uncertainty. 

The need for transparency and accountability in our financial markets also extends to those who regulate them. There is still a need for more clarity in the sequencing of the rules. Without a clearly understood roadmap for implementation, 

rather than a random mosaic of rules, it will be more difficult for us to be on path 

to a fair and orderly marketplace and difficult to establish appropriation priorities. 

This call for a roadmap is intended to foster transparency and broaden understanding. For any new regulatory framework to be effective, everyone involved must 

have a clear appreciation of their roles and responsibilities in the new system and 

how these changes will evolve in a logical sequence. 

The credibility of any regulatory framework is also critical to ensuring its success. 

I continue to be concerned by the lack of answers from government regulators and 

from MF Global about how the shortfall in customer funds occurred and when Kan-
4 

sas farmers and ranchers will be able to recover all of their money. There is a crisis 

of confidence now and I will continue to do what I can to ensure that the bankruptcy process moves as fairly and expeditiously as possible so that Kansans receive 

both answers and their money. 

Chairman Gensler, I understand that CFTC is faced with significant challenges 

in carrying out its core mission and implementing the Dodd-Frank Act. Innovations 

in the financial services arena present regulators with increasingly complex markets 

to regulate. Technological solutions will continue to be necessary to drive cost savings and keep up with trading platforms and systems that operate at a recordbreaking pace. 

However, at a time when our national debt stands at more than $15 trillion, we 

cannot afford to ignore our country’s fiscal reality by failing to make difficult decisions to address our debt and deficit problem. We cannot continue to address our 

problems by instituting new taxes, increasing spending, and increasing our already 

record debt. 

As Members of Congress, and particularly as members of the Senate Appropriations Committee, we have a responsibility to work to get our fiscal house in order. 

This requires us to balance important needs and priorities across the Government— 

from investing in critical medical research that not only saves lives but also helps 

create thousands of jobs and drives economic growth—to protecting investors, who 

turn to markets to help secure their retirements, pay for homes, and send their children to college. 

In accordance with the Budget Control Act signed into law last year, these priorities must be considered in the context of statutory caps on discretionary spending. 

In this environment, all Federal agencies must redouble efforts to achieve cost 

savings, work more efficiently, and make careful and prudent decisions based on 

demonstrated need as to how to best allocate scarce resources. 

Staffing must be managed to prevent growth to unsustainable levels. Agencies 

must make decisions on resource allocations based on CFTC’s mission responsibilities, but also grounded in budget reality. Simply increasing funding does not ensure 

that an agency can successfully achieve its mission and frankly is not a realistic option given current fiscal constraints. 

Mr. Chairman, thank you again for calling this hearing. I look forward to working 

with you as we consider the fiscal year 2013 budget request of CFTC and other 

agencies within this subcommittee’s jurisdiction. 

Senator DURBIN. Thank you, Senator Moran. Senator Lautenberg, I understand you would like to make a few remarks. 

STATEMENT OF SENATOR FRANK R. LAUTENBERG

Senator LAUTENBERG. Thank you, I will submit my statement for 

the record. 

[The statement follows:] 

PREPARED STATEMENT OF SENATOR FRANK R. LAUTENBERG

Mr. Chairman, each week brings another reminder that our country is slowly— 

but steadily—recovering from the worst economic downturn since the Great Depression. 

Letting Wall Street regulate itself helped trigger this crisis, sending millions of 

Americans to the unemployment line and causing their retirement accounts to 

shrink. 

Under President Obama’s leadership, we’re rebuilding the economy from the 

ground up—laying a foundation that will make our country stronger and better prepared for the future. 

A cornerstone of this effort is the Wall Street reform law, which includes critical 

safeguards to protect the economy from another meltdown. 

This new law reins in the recklessness of the big banks and creates a watchdog 

to look out for consumers and make sure financial institutions follow the rules. 

In addition, these reforms ensure that ordinary investors get the information they 

need to make sound decisions. The law also brings the derivatives market out of 

the shadows and into the sunlight. 

Unfortunately, big Wall Street banks have again persuaded some in the Congress 

that the financial industry can regulate itself. 

And now they are trying to stop Wall Street reform by gutting funding for the 

new law. 
5 

Make no mistake: without these new reforms and the funding to carry them out, 

Wall Street will return to its reckless ways, which will threaten our economic recovery and undermine our ability to create jobs. 

As a former CEO, I understand the need for a strong financial sector. 

But our top priority must be making sure our economy is never again threatened 

by the risky bets of Wall Street gamblers. 

So I look forward to hearing from Chairman Gensler about how we can make sure 

the reform law works the way it was designed and protects the American economy 

and the American people. 

Senator DURBIN. Thank you, Senator Lautenberg. Chairman 

Gensler, please proceed with your testimony. 

SUMMARY STATEMENT OF GARY GENSLER

Mr. GENSLER. Thank you, Chairman Durbin, Ranking Member 

Moran, and Senator Lautenberg. 

I’m honored to be at this hearing today that my distinguished 

Senator—Barbara A. Mikulski—is the chairman of. She’s my Senator from Maryland and she’s a terrific Senator. 

I thank you for letting me chat about CFTC’s funding for 2013. 

CFTC is a good investment of taxpayer dollars because it supports 

the farmers, ranchers, producers, and commercial companies in 

each of your States that rely on the futures and swaps markets to 

lock in a price and lower their risk. 

Senator Lautenberg asked as we were just about to convene, 

what is a derivative? It’s basically that. It allows a commercial 

company to lock in a price so they can focus on something else. It 

used to be the locking in of the price of corn and wheat many, 

many years ago, but now it’s much more complex, and it’s locking 

in the interest rate. 

And as these commercial end-users in the real economy, the nonfinancial side, provide 94 percent of the private sector jobs, it’s all 

that more important that these markets work for them. 

The futures and swaps markets are where commercial end-users 

meet financial firms and speculators. But the producers and merchants that rely on these products generally make up a small slice 

of the market. 

In the oil markets, for instance, they only make up 15 to 20 percent of the market. In the corn and wheat markets, it’s closer to 

30 percent of the market. But the other part of the market, the 70 

to 85 percent of the market, are financial actors and speculators in 

the market. 

Same is true in the swaps market, except even more exaggerated. In the swaps market, worldwide statistics hold that about 10 

percent of the market is with what we call end-users and the other 

90 percent is financial actors and the like. 

CFTC’s role is to ensure that these markets are transparent and 

competitive and work for all market participants, but most importantly, it’s about making sure it works for that 10, 15, or 30 percent which are the producers and merchants and the folks that are 

investing in our economy. 

These markets are important to another group of your constituents, the Americans who rely on pension funds and mutual funds, 

and community banks, and insurance companies. Why is this? Because of all of those use swaps and futures to hedge a risk or en-
6 

hance an investment return in that mutual fund or pension fund, 

and the like. 

So it’s crucial that CFTC is well-funded to ensure that Wall 

Street doesn’t have an information advantage over the farmers, 

ranchers, and producers and other companies in your communities. 

I think it’s also crucial that we’re well-funded to lower the risk 

that Wall Street’s problems will travel to your States and become 

your constituents’ problems as we unfortunately clearly saw in 

2008. 

I also think it’s important that CFTC is well-funded though we’re 

not a price-setting agency, and I find I’m saying that more often 

recently. Rising energy prices, once again, remind us of why it’s 

crucial that there’s an effective cop on the beat to protect against 

fraud, manipulation, and other abuses. 

Let me just put our funding request in context. We currently oversee a $37 trillion futures market. And, yet, our staff is just 

about 10 percent larger than we were in the 1990s. The Congress 

has asked us to now also oversee a $300 trillion swaps marketplace, or eight times the size of our futures market. 

And, if I can use an analogy of the National Football League 

(NFL), imagine if the NFL were expanded eight times. And there 

were not the number of games that we have today, but 100 games 

every weekend. 

I could have used basketball, Senator Moran, but there are only 

three referees in basketball, so bear with me with a football analogy. If the seven referees all of a sudden didn’t have to just referee 

one football game, but they had to cover eight football games, you 

can imagine what would happen on the field of play. 

The referees on the field do more than just call penalties and 

watch out for violations, they really protect the players, promote 

fair competition, and ultimately ensure the integrity of the game. 

That’s very similar to what CFTC is about, in a sense. We’re not 

requesting eight times the referees, but just to put some startling 

numbers in front of you. The clearinghouses, trading platforms, 

and data platforms that we currently oversee, total about 32. One 

of them, the Kansas City Board of Trade, we’ve talked about in the 

past. 

That total, we estimate, will grow to about 100, or three-fold. We 

currently oversee about 130 to 140 futures commission merchants. 

And something called retail foreign exchange dealers, we envision 

that they’ll be somewhat in that vicinity, swap dealers, that will 

come in. 

So, we’re doubling the number of intermediaries. We’re probably 

tripling the number of trading platforms, and the like. 

So our request of $308 million, a 50 percent increase, represents 

about 56 percent for technology increase, and 43 percent for staff. 

So we’re trying to make the balancing right. And, I know this $103 

million increase might seem bold, but I believe it’s really not so 

bold in comparison to the 8 million jobs that were lost as a result 

of the financial crisis. 

And, if I could use the football analogy one more time, if the football games were expanded eight-fold, leaving just one referee per 

game, and in some cases, no referees, and if it was basketball, then 

five of the games wouldn’t have anybody, imagine the mayhem on 
7 

the field, the resulting injuries to the players, and the loss of confidence in the game itself. 

PREPARED STATEMENT

So, in 2012, CFTC will finish implementing the Dodd-Frank Act 

rules. The fiscal year 2013 request not about implementing the 

rules or not, it’s about trying to avert another financial crisis. It’s 

about helping producers, merchants, farmers, and commercial companies in your States to use these futures and swaps so they can 

grow their businesses, hire people and invest in our country. 

I thank you. 

[The statement follows:] 

PREPARED STATEMENT OF GARY GENSLER

Good afternoon Chairman Durbin, Ranking Member Moran, and members of the 

subcommittee. Thank you for inviting me to today’s hearing on the Commodity Futures Trading Commission’s (CFTC) fiscal year 2013 budget request. 

It is critical that the derivatives markets—both futures and swaps—work for 

hedgers, farmers, ranchers, producers, and commercial companies in the real economy. Futures and swaps markets allow them to lock in a price and focus on what 

they do best—servicing customers, producing products, and investing in our country’s future. As it’s the hedgers in the real economy—the nonfinancial side—that 

provide 94 percent of private sector jobs, it’s all the more important that these markets work for America’s job providers. 

The derivatives markets that CFTC oversees are where hedgers across the country meet financial firms, and others—generally called speculators. Over time, the 

makeup of these markets has shifted dramatically. Financial firms and speculators 

now make up the vast majority of these markets. For instance, producers, merchants, processors, and other end-users make up approximately 15 percent of the 

crude oil futures market. Swap dealers, managed money accounts, and other financial actors make up the remaining 85 percent. In Chicago Board of Trade wheat contracts, end-users make up 9 percent of the long and 29 percent of the short positions, meaning that more than 70 percent of this market consists of financial interests. 

CFTC is not a price-setting agency. Our critical mission is to ensure that derivatives markets are transparent and free of fraud, manipulation, and other abuses. 

Our mission is particularly important considering hedgers—America’s job creators— 

use these markets to lock in a price and make their investments. Given the dominance of financial actors and speculators in these markets, it’s that much more crucial that CFTC is well funded so that we can ensure these markets work for hedgers. The need for adequate funding is highlighted by rising gas prices at the pump. 

In 2008, the financial system and the financial regulatory system failed America. 

The unregulated swaps market helped concentrate risk in the financial system that 

spilled over to the real economy, leading to 8 million jobs lost, millions of families 

losing their homes, and thousands of small businesses closing their doors. In 2010, 

the Congress and the President came together to pass the historic Dodd-Frank Wall 

Street Reform and Consumer Protection Act (Dodd-Frank Act). Beyond swaps market reform, the Congress benefited commercial hedgers by closing gaps in the 

CFTC’s oversight, including the so-called ‘‘Enron Loophole’’ and ‘‘London Loophole’’, 

as well as strengthening the agency’s anti-manipulation authorities. But effectively 

overseeing these markets depends on adequate funding for the agency’s expanded 

mission. 

At its fiscal year 2012 staffing level of 710 full-time equivalents (FTEs), the agency is but 10 percent larger than our peak in the 1990s. But since then the futures 

market has grown to approximately $37 trillion notional, and the Congress added 

oversight of the $300 trillion swaps market, which is far more complex than the futures market. This growth is highlighted on pages 148–149 of CFTC’s budget submission. 

It is as if all of a sudden the National Football League (NFL) expanded eight 

times to play more than 100 games in a weekend. I think we’d all agree that the 

same number of referees could not monitor all those games. And referees on the 

field do more than call penalties and watch for violations of the rules. They also 

protect the players, promote fair competition, and ultimately ensure the integrity of 

the game. 
8 

Thus, just as in my NFL analogy, CFTC needs more referees. CFTC is requesting 

significantly more resources to oversee a much expanded field of play. The request 

is for an appropriation of $308 million and 1,015 FTEs. CFTC’s budget request 

strikes a balance between important investments in technology and human capital, 

both of which are essential to carrying out the agency’s mandate. This approximately 50 percent increase in funding includes a 56 percent increase in IT services, 

but only a 43 percent increase in staff. 

Though these percentages might seem striking, let me use the football analogy— 

we’re being asked to oversee the swaps markets, which is eight times the size of 

the futures markets. And we need more referees to protect the players, promote fair 

competition, and ultimately ensure the integrity of the markets. 

CFTC is dedicated to using taxpayer dollars efficiently—nearly one-fourth of our 

overall budget request—$70 million—is for outside information technology (IT) services. When the CFTC’s dedicated IT staff is included, we’re requesting $96.2 million 

for IT, or nearly one-third of the overall budget. 

But it still takes human beings to watch for market manipulation and abuses that 

affect hedgers, farmers, ranchers, producers and commercial companies, as well as 

the public buying gas at the pump. 

In the context of a constrained budget environment and the agency’s dramatically 

expanded mission, CFTC took three significant steps in the past year to prepare for 

implementation of financial reform. First, we developed a new strategic plan for fiscal years 2011–2015. This plan raises the bar on the agency’s performance measures 

to more accurately evaluate our progress. But the agency’s performance is affected 

by the challenges of limited resources. CFTC’s first performance report said the 

agency was only able to meet 57 percent of its performance targets. For example, 

CFTC examined fewer derivatives clearing organizations (DCOs) than called for in 

the strategic plan. In addition, fewer staff members were available to review new 

contracts for susceptibility to market manipulation, resulting in a backlog in such 

reviews. 

Second, CFTC put in place an organizational restructuring that went into effect 

in October 2011, which aligned the agency with our expanded mission. It created 

the Division of Swap Dealer and Intermediary Oversight and the Office of Data and 

Technology, as well as reorganized a number of other divisions. And third, the agency began presenting its budget request by the agency’s mission activities, a change 

from our presentation approach in years past, which was by agency divisions. It offers the Congress and the public a much clearer picture of what CFTC does for the 

American people. In the chart attached to this testimony, you can see each of our 

missions and the associated funding request. 

In my remaining testimony, I will review the five areas that make up more than 

90 percent of our requested budgeted staff increase: 

—registrations; 

—examinations; 

—surveillance and data; 

—enforcement; and 

—economics and legal analysis. 

REGISTRATION AND PRODUCT REVIEWS

A significant task before us in fiscal year 2013 will be the registration of an unprecedented number of new market participants, as well as reviews of new products 

for both the clearing mandate and the trading mandate. 

We want to consider registration applications in a thoughtful and timely manner, 

be efficient in reviewing submissions, and be responsive to market participant inquiries, but this will require sufficient funding. We are seeking $36.8 million and 

142 FTEs for these two mission areas, an increase of $18.2 million and 70 FTEs. 

The more than 200 entities that may seek CFTC registration within the next year 

is a dramatic increase over any registration effort the agency has overseen in the 

past. CFTC needs staff to facilitate the registration of the following market participants: 

Clearinghouses.—Entities that lower risk to the public by guaranteeing the 

obligations of both parties in a transaction. We are working with four new entities seeking to register as DCOs and have inquiries from others. These entities 

will join the 16 we currently oversee. 

Designated Contract Markets.—U.S. trading platforms that list futures and 

options and likely will start listing swaps. CFTC currently oversees 16 Designated Contract Markets (DCMs), and by 2013, staff expects another 5 to seek 

registration. 
9 

Foreign Board of Trade.—Regulated trading platforms in other countries that 

are generally equivalent to DCMs. Since the Foreign Board of Trade (FBOTs) 

rule became effective in February, two have filed formal applications to be registered with CFTC. 

Another 20 FBOTs currently operate under staff no-action letters. By 2013, 

staff expects a total of 28 FBOTs to seek registration with CFTC. 

Swap Data Repositories.—Recordkeeping facilities created by the Dodd-Frank 

Act to bring transparency to the swaps market. Four have already filed with 

CFTC, and by 2013, an additional two Swap Data Repositories (SDRs) are expected to seek registration. 

Swap Dealers.—Under the Dodd-Frank Act, CFTC is working to comprehensively regulate swap dealers to lower their risk to the economy. A rule finalized 

in January requires them to register with the National Futures Association 

(NFA). For planning purposes, CFTC staff currently estimates somewhere between 100 and 150 swap dealers may request registration with the NFA, and 

we’ll be overseeing their registration and related questions. 

Swap Execution Facilities.—The new trading platform for swaps. 

CFTC staff estimates that 20–30 entities may request to become SEFs. 

While we will have a system for provisional registration in place, market participants will want the certainty of final registration. CFTC also is taking on a new 

resource-intensive responsibility of reviewing which swaps will be subject to the 

clearing mandate. Full funding for the agency means that we will be best prepared 

to review the dramatic increase in requested registrations and to review swaps for 

the clearing mandate. A partial increase in funding means market participants will 

see a backlog in registrations, responses to their inquiries, and product review because we won’t have personnel sufficient to review their submissions in a timely and 

complete manner. Flat funding will mean market participants will wait even longer. 

There will be significant backlogs for participants seeking to register with CFTC, 

as well as for review of swaps for mandatory clearing. 

Examinations 

Another critical mission for fiscal year 2013 will be more regular and more indepth examinations of the major market participants CFTC oversees. Examinations 

are CFTC’s tool to check for compliance with laws that protect the public. The agency is seeking $35 million and 161 FTEs for examinations, an increase of $19 million 

and 72 FTEs. CFTC is asking for nearly double our resources for this mission because the number of entities we examine is expected to more than double. 

This is an area where the agency fell short of our goals in the 2011 performance 

report. 

CFTC directly reviews clearinghouses and trading platforms and will review 

SDRs. But while the agency reviews them directly, we don’t have the resources to 

have full-time staff on site, unlike other regulatory agencies that do have on-theground staff at the significant firms they oversee. CFTC also doesn’t do annual reviews. Clearinghouses, for instance, currently are examined on a 3-year cycle. For 

intermediaries such as futures commission merchants (FCMs) and swap dealers, the 

CFTC’s funding situation requires us to rely on what are known as self-regulatory 

organizations (SROs) to be the primary examiners. Given our lack of resources, 

we’re only able to double check the SRO’s work on a limited number of FCMs each 

year, and the agency can spend little time onsite at the firms. 

On top of the current lack of staff for examinations, our responsibilities in 2013 

will expand to include reviews of many new market participants. For instance, there 

are currently 123 FCMs, and staff estimates a similar number of swap dealers will 

ultimately register. More frequent and in-depth examinations are necessary to assure the public that firms have adequate capital, as well as systems and procedures 

in place to protect customer money. The number of clearinghouses, trading platforms, and data platforms is expected to triple. Reviews of these entities are critical 

to ensuring the financial soundness of clearinghouses, and ensuring transparency 

and competition in the trading markets. 

Fully funding the increase for examinations means CFTC can move toward annual reviews of all significant clearinghouses and trading platforms and adequate 

reviews of other market participants. A partial increase for examinations means cutting back our monitoring plans for new market participants and more in-depth risk 

reviews. Flat funding means we will continue lacking the ability to assure the public 

that CFTC’s registrants are financially sound and in compliance with regulatory 

protections. 
10 

Surveillance and Data 

Effective market surveillance is dependent on CFTC’s ability to acquire and analyze extremely large volumes of data to identify trends and events that warrant further investigation. CFTC is seeking $65.6 million and 205 FTEs for surveillance, data acquisition, and analytics, an increase of $22.2 million and 65 FTEs. Of the $65.6 million request, 55 percent would be directed toward information technology. 

The Dodd-Frank swaps market transparency rules mean a major increase in the 

amount of incoming data for CFTC to aggregate and analyze. The agency is taking 

on the challenge of establishing connections with SDRs and aggregating the newly 

available swaps data with futures market data. This will require high-performance 

hardware and software and the development of analytical alerts. But it also requires 

the corresponding personnel to manage this technology effectively for surveillance 

and enforcement. 

In fiscal year 2013, CFTC also anticipates receiving ownership and control information for trading accounts. This means CFTC will have data to better detect intraday position limit violations and analyze high-frequency trading. CFTC also will be 

monitoring for compliance with rules on aggregate position limits for both futures 

and swaps in energy and other physical commodities. 

A full increase for surveillance means CFTC will have the ability to analyze futures and swaps data to protect market participants and the public. A partial increase would limit the agency’s investments in analysis-based surveillance tools. 

And flat funding will limit our capacity to effectively utilize and aggregate the new 

data we are beginning to receive. 

Enforcement 

CFTC’s enforcement arm protects market participants and other members of the 

public from fraud, manipulation, and other abusive practices in the futures and 

swaps markets. 

Our efforts range from pursuing Ponzi schemers who defraud individuals across 

the country out of life savings; to abuses that threaten customer funds; to false reporting of prices; to schemes to manipulate prices, including of goods, such as oil, 

gas and agricultural products. CFTC has opened more than 900 investigations in 

the past 2 fiscal years, with a record number of new investigations in fiscal year 

2011. CFTC is seeking $60.4 million and 225 FTEs for enforcement, an increase of 

$16.1 million and 50 FTEs. 

In 2002, we had 154 people devoted to enforcement, and that number has grown 

just slightly to our current staff of 170. This staff has been called upon to enforce 

laws and rules that are new to our arsenal. The Dodd-Frank Act mandate closed 

a significant gap in the agency’s enforcement authorities by extending the enforcement reach to swaps and prohibiting the reckless use of manipulative or deceptive 

schemes. In addition, CFTC will be overseeing a host of new market participants. 

A full increase for enforcement means more investigations and cases that the 

agency can pursue to protect the public. A less than full increase means that CFTC 

will be faced with difficult choices. We could maintain the current volume and types 

of cases, but we would have to shift resources from futures cases to swaps cases or 

not cover all of the swaps market. Flat funding means not only that CFTC’s enforcement volume likely would shrink, but parts of the markets would be left with little 

enforcement oversight. 

Economics and Legal Analysis 

For fiscal year 2013, CFTC is seeking $27.8 million and 88 FTEs to invest in robust economic analysis teams and Commission-wide legal analysis, an increase of 

$6.8 million and 24 FTEs. CFTC’s economists support all of the Commission’s divisions, including surveillance and complex enforcement cases. They are currently 

working with Dodd-Frank Act rule teams to carefully consider the costs and benefits 

of each rule. In 2013, CFTC’s economists will be integral in developing tools to analyze automated surveillance data and determining whether new products are eligible for clearing. The economists also will be assessing the effect of position limits 

on futures and swaps markets. Flat funding or a partial increase means a strained 

ability to analyze the market and detect problems that could be negative for the 

economy. 

CFTC’s legal analysis requirements will increase in 2013 as a result of new market participant registrations, as well as new product reviews and the clearing mandate. 

A less than whole funding increase means a more limited ability to give market 

participants timely responses to their questions and timely processing of their applications. Flat funding means CFTC’s legal analysis team will be spread extremely 
11 

thin, aggravating the delays in responding to market participants and processing 

applications and straining the support of enforcement efforts. 

CONCLUSION

Market participants depend on the credibility and transparency of well-regulated 

U.S. futures and swaps markets. Without sufficient funding for CFTC, their businesses—and the Nation—cannot be assured that the agency can adequately oversee 

these markets. 

Funding this requested budget increase for CFTC is about ensuring hedgers in 

the real economy, the farmers, ranchers, producers, commercial companies, and 

other end-users that use derivatives markets, can lock in a price and lower their 

risk. 

We’ve been asked to oversee the swaps market, which is eight times the size of 

the futures market. Just as if the current number of NFL referees were called upon 

to monitor more than 100 games in a weekend, we need the resources to protect 

the players, promote fair competition and ultimately ensure the integrity of the 

markets for the American people. 
12 

SUMMARY OF REQUESTED INCREASES OF $102.7 MILLION BY ACTIVITY 

[Dollars in thousands] 

Fiscal year 2012 base Fiscal year 2013 request Fiscal year 2013 increase Percentage 

of 

increase Amount Full-time equivalents Amount Full-time equivalents Amount Full-time equivalents 

Registration and registration compliance ................................................................................... $11,073 34 $19,188 63 $8,115 29 8 Reviews of products and rules of operation ............................................................................... 7,540 38 17,585 79 10,045 41 10 Data acquisition, analytics, and surveillance ............................................................................. 43,399 140 65,614 205 22,215 65 22 Examinations ................................................................................................................................ 15,937 89 34,907 161 18,970 72 18 Enforcement ................................................................................................................................. 44,293 175 60,394 225 16,101 50 16 Commission-wide economic and legal analysis .......................................................................... 20,947 64 27,787 88 6,840 24 7 Commission-wide international policy coordination .................................................................... 3,553 10 5,023 16 1,470 6 1 Commission-wide data infrastructure ......................................................................................... 31,214 41 48,449 52 17,235 11 17 Commission-wide management and administrative support ..................................................... 26,204 114 27,674 120 1,470 6 1 Inspector General ......................................................................................................................... 1,134 5 1,379 6 245 1 ................

Total, all CFTC activities ................................................................................................ 205,294 710 308,000 1,015 102,706 305 100 
13 

FIGURE 1. $102.7 million budget increase by activity. 

Senator DURBIN. Thank you, Chairman Gensler. 

Because they waited patiently for me, I’m going to yield the 

opening round of questions to my colleague, Senator Lautenberg. 

And, then, turn to Senator Moran. 

BUSINESS CONDUCT RULES

Senator LAUTENBERG. Thanks, Mr. Chairman. Thank you, Mr. 

Gensler. 

The growth in your responsibility commensurate with the growth 

in the industry, of course, is quite a change over the years. And a 

lack of regulation in derivatives helped cause the financial crisis 

that we underwent. 

CFTC requesting a significant budget increase, which some oppose. Is it fair to say that if the Congress fails to provide this funding increase, derivatives will remain largely unregulated? 

Mr. GENSLER. I think, Senator, we will be successful in implementing the rules that you all have asked us to do, but I do think, 

just as in my basketball or football analogy if I stretch it, there 

wouldn’t be folks to oversee the markets. 

So it would be regulation by rule—we wouldn’t be able to really 

do what’s necessary to answer people’s questions, to have effective 

cops on the beat, and, very importantly, I think, protect the American public. 

Senator LAUTENBERG. An op-ed piece written recently by a departing Goldman Sachs employee got a lot of attention, and it suggested that the firm may not always deal with its clients in good 

faith. 

The Wall Street Reform Law introduced new business conduct 

standards for swap dealers like Goldman Sachs. What’s CFTC 

doing to enforce these standards and ensure fair dealing? 

Mr. GENSLER. Well, I’m pleased to say that we were able to finalize the rules in sales practices and business conduct just this past 
14 

January. I think that as you noted, the financial industry is often 

a counterparty, is often on the other side of the table, from the 

commercial companies in your States. 

And so that’s why it’s so important, I think, not only to finalize 

the rule, but then also to have the funding so that we can respond 

to inquiries, whistleblowers, and actually ensure that those sales 

practices are met. 

POSITION LIMITS

Senator LAUTENBERG. There is obviously a real good, big vote of 

thanks, in terms of the President’s request for a budget for your 

department. 

And when we see what is involved, position limits, help ensure 

that unscrupulous traders can’t manipulate, or will not be able to 

manipulate, oil and gas prices. 

CFTC completed its work on position limits for energy derivatives last year, but they’re not yet in effect, correct? 

Mr. GENSLER. That’s correct. 

Senator LAUTENBERG. Gas prices continue to rise. Why are these 

limits still not in place? 

Mr. GENSLER. We were able to finalize our rule writing on position limits last October, but there were two additional pieces that 

needed to be done. 

One was that although the Congress laid out a pretty detailed 

definition of ‘‘swap’’, the Congress mandated that we work with the 

Securities and Exchange Commission (SEC) to ‘‘further define the 

word ‘swap’.’’ 

We wanted to, I think, and the Congress wanted to, make sure 

that we didn’t inadvertently bring people in who were using the 

cash markets—transactions called ‘‘forwards’’. I’ve had a lot of conversations with Senator Moran about this. 

I think we’ll finalize that rule this spring. We need to finalize 

that, and then spot-month limits will go into effect. Second, we also 

needed some additional data. The way we finalized the rule in October was to provide that we needed to get at least one-more year’s 

data to put in place the second part of the limits. 

USER FEES

Senator LAUTENBERG. There’s strong funding for the CFTC oversight is essential to preventing another financial meltdown. But 

the industry should have to pay its fair share. 

CFTC is the only financial regulator that does not offset a portion of its costs through industry user fees. Would collecting user 

fees instead of depending exclusively on taxpayer funding be consistent with CFTC’s ability to accomplish its mission? 

Mr. GENSLER. Senator, I look forward to working with the Congress in any way you think is most appropriate to help ensure the 

public has a well-funded CFTC. 

I know that President Obama has suggested, I think other Presidents in the past of both parties have suggested, possibly having 

fees. My view is whatever the Congress wants to do I would work 

with the authorizers and the appropriators to ensure full funding 

of the CFTC. 
15 

Senator LAUTENBERG. Thank you, Mr. Gensler. Senator Moran, 

your turn. And it’s not just because you’re the remaining member. 

It’s that we recognize the quality of information. 

CORE PRINCIPLES

Senator MORAN. You are so kind, Senator. Thank you. 

Mr. Chairman, let’s talk about a couple of issues that we seem 

to talk about regularly. I want to talk about position limits and 

core principles. 

In regard to core principles, what I often hear from the futures 

industry is that they are overwhelmed by the volume, frequency, 

and speed at which CFTC is issuing new regulations. And, regardless, of your efforts to entertain meetings and round tables, there’s 

a sense out there that while you’re willing to sit down, you’re not 

quite as welling to listen. 

Most observers, I think, would reach the conclusion that during 

the difficulties our country experienced in 2008, regulated exchanges functioned well, in large part, due to the core-principle regime. 

Instead of seizing on the strengths of the core-principle regime, 

CFTC under your leadership has systematically converted the coreprinciple regime to one of a prescriptive rule-based regime. 

Why, Mr. Chairman, after the core principles served so well during the financial crisis are you still pursuing these rigid regulations 

that effectively dismantle core principles? 

Mr. GENSLER. I, Senator, actually think that what we’re doing is 

building upon what has worked well, as I think we both see in the 

futures world, and extending it to this swaps world. 

Core principles are there for designated contract markets like the 

Kansas City Board of Trade. It’s also there for the clearinghouses. 

In the clearinghouse context, we thought it’s really critical that 

they do have robust risk management. 

We finalized those rules last October, and we thought guidance, 

frankly, would not be enough because of the significant amount of 

risk being moved into, particularly, in the swaps area. 

We have not yet finalized the ones on the exchanges, and we’re 

still taking, even though officially our comment period closed a long 

time ago, we’re still taking very much our time on this, taking 

more input on this. 

And I would hope we could actually have additional meetings. If 

there are things in that area that you particularly want us to focus 

on, I’d like to know about that. 

Because what we’re trying to do there is really just make sure 

that it’s extended to swaps, and that we’re embodying in the final 

rules for designated contract markets, the best practices that the 

designated contract markets currently use in the futures market. 

IMPLEMENTATION

Senator MORAN. We may have to have those conversations. And 

you’ve been kind to make that offer in the past, and I welcome that 

opportunity again. 

It strikes me that we may be about to engage in the same back 

and forth that we had a year ago. But the implementation for dis-
16 

cretionary rulemaking has grown since we talked a year ago. What 

I would call a haphazard nature of rulemaking. 

Since your last appearance before the subcommittee, one of your 

rulemakings has been challenged in court. Published remarks by 

the judge in that court case indicated that it’s highly likely that the 

rule implementing position limits will be struck down. 

What will your response be should that rule be rejected by the 

courts? Are you and CFTC staff planning for that possibility? 

Mr. GENSLER. In terms of implementation phasing, I think that 

we very much took your advice and guidance last year. Around 

spring, we actually put out for public response and comment 13 

concepts around implementation phasing. 

Senator MORAN. So I’m now responsible for the mosaic. 

Mr. GENSLER. No. I think your advice was about seeking public 

input on implementation phasing. 

Senator MORAN. Okay. 

Mr. GENSLER. The word ‘‘mosaic’’ was something I’ve used. And 

I will try not to use it again. 

We got a 60-day public comment period and 2 full days of round 

tables: they were very beneficial. We’ve not finalized our rules in 

the 1 year since the passage of the Dodd-Frank Act. Here we’re almost 2 years out, and we’ve not finalized. 

We’re not trying to do this against a clock—I know when I first 

said that, people didn’t believe me—but here we are almost 2 

years, and we’re maybe halfway through the final rules. We’ve got 

a lot still to do, and we’re still not trying to do this against a clock. 

We’re trying to do it in a balanced way. 

And in terms of phasing, we’ve even put out some specific rules 

for comment in the fall, in September, about the phasing of the 

clearing mandate and the trading mandate and the like. And that 

has been very beneficial to get that public input. We then phase 

in each of our individual rules. Sometimes we give a year to get 

something in place, 6 months and the like. 

POSITION LIMITS

On position limits more specifically, Senator, the first thing I 

would do is turn to our attorneys and probably personally read 

whatever opinion comes out of the judge to see what they’ve said. 

It’s part of our democratic process that anything that we do, 

somebody could move into a court. I believe that what we did in 

October, in finalizing the position limits rules, was consistent with 

the congressional mandate, the strong mandate that we move forward and implement position limits, not only for futures, but also 

for swaps. 

But, of course, if a judge has a different view on that, then we’ll 

take a very close look at what he says. 

Senator MORAN. When do you expect that decision? 

Mr. GENSLER. Well, right now, I think we’re just awaiting, the 

litigants had a preliminary injunctive motion, and we’re waiting to 

see what the judge says on that. 

I’m told, I’m not a lawyer, but I’m told that’s generally, a relatively short process. So near term what I’m told that we’d hear 

from is just on that preliminary injunctive motion. 
17 

Senator MORAN. Have you had discussions about what if the rule 

is struck down? What does CFTC do next? I mean, you indicated 

you are going to read the decision by the court, but are you planning at this point if there is an adverse decision, what CFTC 

should do? 

Mr. GENSLER. I don’t have a plan yet because it would depend 

on wholly on what does the judge says. 

We think, and I will say this personally too, we’ve followed the 

clear congressional direction on these limits. And what the limits 

are really it’s to ensure that there’s not concentration. We’re not a 

price-setting agency. Some folks have maybe suggested otherwise. 

We’re really an agency to ensure that the markets are transparent, open and competitive, and that these exchanges work well, 

that the clearinghouses are safe. 

Through the position limits, it’s about ensuring that no one speculator has a sort of large footprint in that marketplace. They’ve 

been in place in the agricultural markets since the 1940s. Actually, 

working with the exchanges, they were in place in the energy markets in the 1980s and 1990s. 

And I think the Congress really suggested that we sort of bring 

them back, but also extend them to the swaps marketplace. The 

reason we said we needed a delay is to get more information. So 

even in a swaps marketplace, we need that 1 year of data to use 

a percentage of the market formula that had existed when limits 

applied only to futures. 

I think we first used this percentage of the market formula about 

1980 or so. But, of course, if a judge says that he thinks we should 

do something different, we’d have to look obviously at what they 

said, and whether to appeal that and so forth. 

Senator MORAN. Thank you, Mr. Chairman. 

MARKET IMPACT ON PRICES

Senator DURBIN. Thank you very much, Senator Moran. 

Chairman Gensler, in your opening remarks you said, and I 

quote, ‘‘CFTC is not a price-setting agency, but rising fuel prices 

make it clear why we need to have cops on the beat.’’ 

I’m trying to reconcile, if I wrote that down properly. I’m trying 

to reconcile that statement. You seem to suggest at the outset that 

what you do has no impact on price, but then go on to say, but because prices are going up, we have to do a better job. 

Mr. GENSLER. Well, I think, Mr. Chairman, I thank you for that 

question. Because what we do as an agency, whether prices are low 

or high, is ensure the American public that those prices are arrived 

at where buyers and sellers meet in a transparent marketplace, 

free of fraud and manipulation. 

Position limits assure that no one has sort of a large footprint, 

no speculator, has too large a concentration. I think, in times when 

the public is asking this question, it reminds us why we have to, 

I believe, have a well-funded agency to ensure that these markets 

are free of fraud and manipulation and they’re as transparent as 

possible. 

And that buyers and sellers come into that marketplace on a fair 

field of play. 
18 

Senator DURBIN. So, let me try to get down to some basics here 

so I can understand from a layman’s point of view how I would explain this to people. 

Let’s assume for a moment we’re talking about a futures market 

relative to plywood, which I think at one point was on the Chicago 

Board of Trade. And let’s assume there are ten people interested 

who understand that they are talking about the future price of plywood and may have to take delivery of what they are buying. 

I would assume that market would be less active, all things 

being equal, than a market with 100 people interested in the same 

issue. Is that a fair conclusion? 

Mr. GENSLER. I think so. 

Senator DURBIN. Now, let’s take it to the next step. Let’s assume 

it’s not 100 people interested in the future price of plywood, but a 

thousand. And of those 1,000, 900 have no interest in plywood. 

They’d just as soon be dealing with apples at the Pip’s next door. 

They don’t want to ever take delivery. They’re never really interested in reaching that point in the transaction. Does that change 

the trade, the volatility of trading, perhaps, the price of plywood? 

Mr. GENSLER. There’s been a lot of studies and surveys on the 

role of speculation in these markets. I’m taking that to be the 900 

that aren’t taking delivery, and we actually reviewed them in this 

position limit rule last October. There were about 50 studies that 

were commenters sent in. 

I suspect you’d probably not be surprised, about one-half of them 

said that the role of speculators had an influence on some of the 

things you said, price, and volatility. About half said, no. 

I mean, and so you have the St. Louis Federal Reserve, and you 

have some very esteemed economists on one side saying, yes. And 

you have some other surveys and studies on the other side, suggesting, no. 

So, we’ve summarized all that, and all five of the commissioners, 

you know, have the benefit of a very good chief economist in the 

office that has helped us with this. 

Senator DURBIN. So, if there is a split opinion as to whether or 

not the number of trades, the number of traders, the interest in 

taking possession has any impact on price, let me ask you what the 

empirical evidence is. 

If you’re dealing with a commodity that really, and there are 

some, doesn’t engage people as much as some other commodity, 

what is the nature of that market compared to the more active 

market in the next, no longer Pip’s probably, but in the next trading theater? 

Mr. GENSLER. Well, I think that there are two features. If the 

less-active market doesn’t have a lot of fundamental research 

around and a lot of transparency around it, that market actually 

sometimes can be more easily manipulated, if there aren’t people 

coming in and out. 

But, the second feature, I think to the core of your question, is 

if the market as many of our markets are now 80 to 85 percent financial actors and speculators, and, you know, a smaller percent 

are the producers and merchants, I think that’s part of the reason 

why we want a well-funded CFTC because the nature of the market is so heavily toward the financial actors and so heavily toward 
19 

the speculators, that it’s that much more critical that we’re watching over these markets to prevent manipulation. 

And, second, that we do use position limits that no one speculator has such a large position that they start to be sort of the 

trend setter. They start and others sort of follow that lead in a 

pack. 

Senator DURBIN. I have some more questions, but I’m going to 

yield to my colleague. 

LEGAL SEGREGATION WITH OPERATIONAL COMINGLING (LSOC)

Senator MORAN. Mr. Chairman, thank you. 

Mr. Chairman, it’s my understanding that CFTC recently held a 

roundtable meeting to discuss the possibility of subjecting futures 

to a LSOC model. This sort of regulation, I think, at least appears 

to me, is discretionary as the Dodd-Frank Act only requires that 

you apply the LSOC model to cleared swaps. 

Given that the LSOC for swaps will not come on-line until November of this year, will you comment—I’m sorry—will you commit 

to this subcommittee that you will hold off on pursuing the LSOC 

model for the futures market until the cost-benefit analysis for the 

LSOC for swaps has been fully evaluated over the course of the 

next few years? 

Mr. GENSLER. I want to say we’re in complete agreement. It is 

discretionary. It is something that came up actually in January as 

we were completing the new segregation for cleared swaps that a 

number of my fellow commissioners said, this is different than 

what we’re doing for the futures world and have for some time. 

And so I committed to my fellow commissioners, let’s have a 

round table, and let the public tell us. And I think it was very beneficial. 

It was also at this round table that people commented on greater 

enhancements to customer protection and different models. Staff’s 

evaluating the comments and to the extent that staff puts forward 

a proposal whether it’s this legal segregation for futures or other 

recommendations, all five of the Commissioners are weighing in. 

We have a pretty active and busy agenda this spring and summer on the Dodd-Frank Act initiatives. So it might be disappointing for some that want LSOC for futures early. 

I think it’s just inevitable, if nothing else, for capacity reasons, 

that it will wait. And I think you’re right, Senator, that because 

we’re doing legal segregation for the swaps markets by November 

8, we’ll learn a lot from that as well. 

Senator MORAN. So I think what you’re telling me is we would 

not expect the LSOC for swaps to occur, if it does at all, until after 

the LSOC for futures? 

Mr. GENSLER. I think that’s just absolutely correct because we 

have a very significant agenda that the Congress has mandated for 

us. 

We have enhancements to customer protection that I think are 

getting some very good input from the futures industry and from 

the exchanges. If there is a true consensus, on LSOC for futures, 

there is not that consensus at this stage. 

Senator MORAN. Thank you for clarifying my misstatement, and 

I appreciate that sentiment, because one of the conversations that 
20 

you and I’ve had on an ongoing basis is my belief that you ought 

to focus on the things required by the Dodd-Frank Act that are 

mandatory as compared to the discretionary opportunities that the 

Dodd-Frank Act has given CFTC and prioritize. 

And I think your answer to my question suggests that in this 

case, that’s what you’re doing. 

Mr. GENSLER. Yes. I think, generally, that’s the case. There are 

some things that are discretionary that we’re taking up, I hope, 

soon to put out a proposed rule on getting more data about who 

owns accounts. 

This is because of all this high-frequency trading, and so forth. 

I mean, so there are probably, I’m going to say, three or four 

things, I don’t have the right count in my head, that we do anticipate in 2012 to do to enhance our oversight of the markets given 

high-frequency trading. That’s actually maybe three. 

And then there may be some things that come out of really 

thoughtful presentations from the futures industry and others on 

how to better enhance customer protection around segregated 

funds. And I think that’s a critical part of our 2012 agenda. 

AGRICULTURAL SWAPS

Senator MORAN. Mr. Chairman, let me raise a recent decision by 

CFTC to prevent clearing houses from self-certifying agricultural 

swaps for clearing. 

As I understand it, rule 35 requires CFTC to treat agricultural 

swaps as they would all other swaps for purposes of self-certification. 

Can you explain why you’ve chosen, it appears to circumvent rule 

35, and treat agricultural swaps differently than other forms of 

swaps? 

Mr. GENSLER. The Congress gave us authority in the Dodd-Frank 

Act to treat agricultural swaps differently. Then, we went through 

a lot of public comment to say we would treat them the same. 

That’s where we ended up sometime last year after I think three 

public notices. 

I don’t know that we’re treating them any differently, but one 

challenge for the whole swaps marketplace, not just agricultural 

swaps, is that we haven’t completed our rules. It may well be that 

what you’re referring to is that we haven’t finalized some of the 

general clearing rules. 

Senator MORAN. So, this process dealing with agricultural swaps 

and nonagricultural swaps, did it slow down the process of finalizing the rule? 

Mr. GENSLER. We implemented 29 Dodd-Frank Act rules. We 

have about 20 to go, roughly. So, you know, maybe we’ll finish this 

sometime this summer or fall, but again, it’s not against a clock. 

In the terms of agricultural swaps, they’re to be treated identical 

to all the other swaps. There’s a little bit of a legacy issue in that 

before the Dodd-Frank Act, agricultural swaps could not be cleared 

unless we did something called a—I think it’s called a 4D order, 

but I apologize if I have the wrong letters. 

And so, it’s a little bit of this legacy issue of, I think, somebody 

has filed a petition in the last month or two, and there’s a question, 

do they use this 4D order or do they use this new self-certification. 
21 

And I was briefed on it in the last day or two in anticipation of 

this hearing, but I might have just exhausted my knowledge on it. 

Senator MORAN. Let me try one more time, not because you’ve 

exhausted your knowledge, but because I’ve been inarticulate in 

asking the question. 

I think what I’m interested in knowing is the timeline of the ability to implement self-certification for agricultural swaps. 

Mr. GENSLER. I know that it would most definitely come if we finalized a handful of new rules sometime this spring or summer. 

The other issue that I was briefed on in the last day was, is there 

some way to shorten the time? 

And all I know is that our staff’s looking at that to see if there’s 

a way to do it. 

Senator MORAN. Thank you for working your way through that 

question. 

Mr. GENSLER. Okay. 

SPECULATION AND PRICING

Senator DURBIN. Chairman Gensler, I’d like to address, as we 

started talking about at the outset, the connection between speculation and pricing. 

And you said that the jury is split on that based on what you 

have read. I would say that for at least 20 of my colleagues, they 

have come down on the side that speculation is linked to higher 

prices. 

And these colleagues sent you a letter, on March 5 of this year, 

calling on you to enact strong position limits to eliminate excessive 

oil speculation. I won’t read the whole letter. You’ve received it. 

For the record, I’ll put it in the record here. 

[The information follows:] 

LETTER FROM THE CONGRESS OF THE UNITED STATES

MARCH 5, 2012. 

Hon. GARY GENSLER, Chairman, 

Commodity Futures Trading Commission, Washington, DC. 

Hon. MARK WETJEN, Commissioner, 

Commodity Futures Trading Commission, Washington, DC. 

Hon. SCOTT WALLA, Commissioner, 

Commodity Futures Trading Commission, Washington, DC. 

Hon. BART CHILTON, Commissioner, 

Commodity Futures Trading Commission, Washington, DC. 

Hon. JILL SOMMERS, Commissioner, 

Commodity Futures Trading Commission, Washington, DC. 

DEAR CHAIRMAN GENSLER, AND COMMISSIONERS CHILTON, WETJEN, SOMMERS, AND

O’MALIA: We are writing to urge you to immediately enact strong position limits to 

eliminate excessive oil speculation as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. As you know, the Dodd-Frank Act mandated that your agency promulgate and enforce such limits no later than January 

17, 2011. We are disappointed that, more than a year later, the Commission has 

not fulfilled this important regulatory duty. 

Congress determined that speculative position limits are an effective and critically 

important tool to address excessive speculation in America’s oil and gasoline markets. It is one of your primary duties—indeed, perhaps your most important—to ensure that the prices Americans pay for gasoline and heating oil are fair, and that 

the markets in which prices are discovered operate free from fraud, abuse, and manipulation. 

There has been a major debate over the last several years as to whether spikes 

in oil prices are caused entirely by the fundamentals of supply and demand or 
22 

whether excessive speculation in the oil futures market is playing a major role. It 

is clear to us that debate has ended. Exxon Mobil, Goldman Sachs, the Saudi Arabian government, the American Trucking Association, Delta Airlines, the Petroleum 

Marketers Association of America, and even a report last year from the St. Louis 

Federal Reserve have all indicated that excessive oil speculation significantly increases oil and gasoline prices. According to a February 27, 2012 article in Forbes, 

excessive oil speculation ‘‘translates out into a premium for gasoline at the pump 

of $.56 a gallon’’ based on a recent report from Goldman Sachs. 

The facts bear this out. According to the Energy Information Administration, the 

supply of oil and gasoline is higher today than it was 3 years ago, when the national 

average price for a gallon of gasoline was just $1.90. And, while the national average price of gasoline is now over $3.70 a gallon, the demand for oil in the U.S. is 

at its lowest level since April of 1997. Nor is the global supply of oil at issue. According to the International Energy Agency, in the last quarter of 2011 the world oil 

supply rose by 1.3 million barrels per day while demand only increased by 0.7 million barrels per day. Yet, during this same period, the price of Texas light sweet 

crude rose by over 12 percent. Meanwhile, oil speculators now control over 80 percent of the energy futures market, a figure that has more than doubled over the 

past decade. 

As the cost for American people to fill their gas tanks continues to skyrocket, the 

CFTC continues to drag its feet on imposing strict speculation limits to eliminate, 

prevent, or diminish excessive oil speculation as required by the Dodd-Frank Act. 

Although the CFTC has adopted initial position limits, they are not strong enough 

and not yet in force owing to industry opposition, delays in swaps oversight and 

data collection. This is simply unacceptable and must change. 

We urge you to take immediate action to impose strong and meaningful position 

limits, and to utilize all authorities available to you to make sure that the price of 

oil and gasoline reflects the fundamentals of supply and demand. This could entail 

promulgation of rules only with regard to the currently regulated exchange markets. 

Swaps rules should also be implemented immediately, but even so, waiting for 

swaps rules to trigger all position limits is simply not adequate to protect consumers. We urge you to develop alternative methods of moving forward and to do 

so as swiftly and expeditiously as possible. 

We have a responsibility to ensure that the price of oil is no longer allowed to 

be driven up by the same Wall Street speculators who caused the devastating recession that working families are now experiencing. That means that the CFTC must 

do what the law mandates and end excessive oil speculation once and for all. 

Thank you for your attention to this important matter. We look forward to receiving your response. 

Sincerely, 

Daniel K. Akaka; Mark Begich; Richard Blumenthal; Barbara Boxer; 

Sherrod Brown; Benjamin L. Cardin; Robert P. Casey, Jr.; Al 

Franken; John F. Kerry; Amy Klobuchar; Patrick J. Leahy; Carl 

Levin; Joe Manchin, III; Robert Menendez; Jeff Merkley; Barbara A. 

Mikulski; Bill Nelson; Mark L. Pryor; Jack Reed; John D. Rockefeller, 

IV; Bernard Sanders; Tom Udall; Jim Webb; Sheldon Whitehouse; 

Ron Wyden. 

Gary L. Ackerman; Tammy Baldwin; Timothy H. Bishop; Suzanne 

Bonamici; Leonard L. Boswell; Bruce L. Braley; David N. Cicilline; 

Gerald E. ‘‘Gerry’’ Connolly; John Conyers, Jr.; Peter A. DeFazio; 

Rosa L. DeLauro; Lloyd Doggett; Joe Donnelly; Anna G. Eshoo; Bob 

Filner; Marcia L. Fudge. 

Rau ́l M. Grijalva; Brian Higgins; Maurice D. Hinchey; Mazie K. Hirono; 

Michael M. Honda; Henry C. ‘‘Hank’’ Johnson, Jr.; Marcy Kaptur; 

Dale E. Kildee; Dennis J. Kucinich; Barabara Lee; Sander M. Levin; 

John Lewis; Zoe Lofgren; Jim McDermott. 

Michael H. Michaud; Eleanor Holmes Norton; John W. Olver; Bill Pascrell, Jr.; Chellie Pingree; Mike Quigley; Nick J. Rahall, II; Lucille 

Roybal-Allard; Bobby L. Rush; Tim Ryan; Janice D. Schakowsky; 

Louise McIntosh Slaughter; Jackie Speier; Fortney Pete Stark; John 

F. Tierney; Paul Tonko; Peter Welch. 

Senator DURBIN. Based on statements made from financial interest experts in the field and so forth, the belief is that speculation 

has driven up the price of a gallon of gasoline in America as much 

as 56 cents a gallon. That’s what I believe Goldman Sachs reported 

in one of their recent reports, February 27 of this year. 
23 

So there’s a bill that’s also been filed; are you familiar with it? 

A bill that was filed today in the Senate? 

Mr. GENSLER. As I was coming to this, I was briefed on it, but 

just briefed on it, just in the last 2 hours. 

Senator DURBIN. Well, I have not seen it myself, so I can’t tell 

you exactly what’s in the bill. 

But I do believe that it calls on you to use your emergency powers to establish these position limits when it comes to trading in 

terms of oil futures. And I’d like to ask you a few questions about 

that. 

EMERGENCY AUTHORITY

First, would you tell me what you believe to be your authority 

under those emergency powers, or CFTC’s authority I should say, 

when it comes to making that kind of a decision? 

Mr. GENSLER. I think with only roughly 15 percent of the positions in the oil market or natural gas futures markets being the 

producers, merchants, and end users, and 80 to 85 percent being 

financial actors and speculators, it’s kind of unarguable that financial actors and speculators aren’t affecting prices. They are. 

Studies are split on whether at any given time it’s higher or 

lower and things like that. That’s what they split on. But I think 

it’s hard to say that 80 to 85 percent of the market don’t influence 

price. They do. And they’re part of it. 

In terms of the emergency authorities, as I understand it, we’ve 

used it a handful of times, maybe four times, in the 1970s and 

early 1980s. There was even a court case at the time that I have 

not yet read the case, but I need to read it, where somebody challenged our use of it at the time. 

It is about disruption of the forces of supply and demand in a 

particular marketplace, and the statute specifically refers to things 

about governmental actions or foreign governmental actions. So it 

was used, for instance, at that time, during the grain embargo. 

Senator DURBIN. I’d like to interrupt you for just a second. This 

isn’t a test on the final, so I want to make sure that we share the 

language. 

The law defines emergency as market manipulation, an act of the 

U.S. or foreign government affecting a commodity, or any major 

market disturbance which prevents the market from accurately reflecting the forces of supply and demand for a commodity. 

Proceed. I’m not correcting you. I just wanted to enter that into 

the record. 

Mr. GENSLER. No, you’re helping me. You’re helping me. As I recall it that fits the four times we brought emergency actions. 

There was a supply disruption in the one case because of the 

grain embargo related to the Soviet invasion of Afghanistan. There 

were one or two other instances where a crop—potatoes—literally 

were, had a problem, and so there was a situation in your example 

where you couldn’t deliver the plywood. 

Back to your plywood example. The plywood couldn’t be delivered. In that case, it was potatoes, that couldn’t be delivered. 

It’s those types of circumstances. I’ve asked our general counsel, 

because I know this is a very important matter to many members 

of this body, to brief us at CFTC level, to brief us all on the legisla-
24 

tive history and the legal, what really is the contour of the limits 

of that emergency authority. 

Senator DURBIN. So, is that authority given to you as chairman, 

or to CFTC? 

Mr. GENSLER. To the Commission, Sir. 

Senator DURBIN. And so any designation or use of the emergency 

authority would require CFTC action, right? 

Mr. GENSLER. That’s correct. 

Senator DURBIN. A majority vote by CFTC? 

Mr. GENSLER. That’s correct. 

Senator DURBIN. All right. And, to your knowledge, does the Congress have any authority to order you to exercise that emergency 

power? 

Mr. GENSLER. Not as I understand the statute, but, of course, 

you could change our laws. 

EMERGENCY ACTIONS

Senator DURBIN. I guess the obvious question that follows once 

we understand the process under the law and the history of the 

law is whether or not you and the commissioners believe that we 

are facing 1 of the 3 options that would lead to emergency action. 

And let’s just suggest that, I guess, market manipulation, could 

be discussed, or more likely, any major market disturbance which 

prevents the market from accurately reflecting the forces of supply 

and demand for a commodity. 

So, are those things, those elements, 2 of the 3 in the law, have 

they been spelled out as it relates to gasoline prices or oil futures, 

to your satisfaction, at this point? 

What I’m asking is, whether or not there’s been an analysis done 

by your CFTC staff as to whether or not the current gasoline pricing and the oil price future trading would put you in a circumstance where you could logically consider one of these options 

for emergency authority, exercise of emergency authority? 

Mr. GENSLER. I’ve actually asked for some advice as to what that 

provision means, how we’ve used it, what that court case in 1979 

said about it, so that we can be best informed as to how narrow 

or broad that authority is. 

As I understand it, we have used it in a very narrow sense when 

there was actual manipulation. 

We’ve brought 30-plus manipulation cases in the history of our 

agency, and we’ve only gone and won in court once. I mean, our 

manipulation authority was very narrow, and now the Dodd-Frank 

Act has broadened it. 

But those previous emergency actions were pre-targeted narrow 

provisions, but I’ve asked our general counsel’s office working with 

others at the agency to best inform the five commissioners on that 

provision of the statute. 

Senator DURBIN. I’m asking two questions, and I want to make 

sure that they’re clear each. 

The first, I think you’ve answered. That you have asked the appropriate legal authorities, people with background on the history 

of the agency, to talk about your authority under the law, and how 

it has been exercised in the past. 
25 

What I’m asking more specifically is whether or not you have 

asked whether or not the current situation with our rising gasoline 

prices and the speculation in the area of oil futures would apply 

to any of these three possible reasons to exercise your authority? 

Mr. GENSLER. And I think I can best answer the first, but I’m 

limited in answering the second because I’m trying to understand 

the contours from our general counsel and our hardworking, dedicated folks at CFTC, how wide or narrow that is, the first before 

trying to answer the second. 

But, I will say, historically, it’s been used only in a very targeted 

way. 

Senator DURBIN. So, have you at least started the factual inquiry 

about possible market disruption related to gasoline prices? 

SURVEILLANCE TO DETECT EMERGENCIES

Mr. GENSLER. We meet as a Commission in a closed-door meeting every Friday, and we have for 30-plus years, and we put it in 

the Federal Register, people know we do this, to do surveillance on 

markets, from the grain markets to the interest rate markets to 

the energy markets. 

And we have about 50 to 55 people in a surveillance unit that 

bring information to us in these closed-door sessions every Friday. 

The energy markets come up, as you would think, as a regular 

basis, as the grains do and the financials. 

The staff is always tasked to come and bring to us matters, if 

they see issues, in these marketplaces. I mean I’m trying to—— 

Senator DURBIN. I understand the nature of your answer. I think 

you are carefully avoiding saying whether there’s been any specific 

factual inquiry on anything until you have satisfied the first question. 

Don’t let me put words in your mouth, stop me at any point here. 

First question, about your authority, historic precedence, before 

you go to the next question, which will be raised by this bill and 

by the letter from the Senators, as to whether or not your authority 

can or should be exercised when it comes to gasoline prices. 

SURVEILLANCE MEETINGS

Mr. GENSLER. But I want to assure you and the American public, 

our staff, even though it’s, I believe, underfunded, our staff every 

day and every week is bringing to the Commission concerns if they 

think they see manipulation in these markets, if they think they 

see something about position limit violations and the like. 

We’re not waiting for anybody to say what the limits of emergency authority are. I mean, our agency, again, not a pricing agency, it is to ensure transparent markets, free of fraud and manipulation, and the people are following the rules of the road. 

Senator DURBIN. Now, I’m going to ask a question. I already 

know the answer. 

Can you tell me if your staff has produced any information for 

CFTC to consider at these weekly meetings relative to rising gasoline prices and the impact of speculation on oil futures? 

Mr. GENSLER. We look at the statistics on a pretty regular basis. 

We actually publish to the market every Friday the size and scope 
26 

of the nonproducer merchant side, the speculative side, of the markets. 

So we’re looking at that, in the natural gas markets, in the heating oil markets, the oil markets, on a very regular basis. 

Senator DURBIN. Are these Commission meetings public? 

Mr. GENSLER. They’re closed-door meetings under the Sunshine 

Act, but we publish, we put in the Federal Register every week, 

that we have these Friday meetings. 

Senator DURBIN. You announce the meetings are taking place? 

Mr. GENSLER. Yes. Oh, absolutely. 

Senator DURBIN. But not the substance of your discussions? 

Mr. GENSLER. That’s correct, because we’re talking about confidential information that the Congress has actually directed us 

under Commodity Exchange Act section 8 not to disclose material, 

about individuals and their transactions. 

POSITION LIMITS

Senator DURBIN. I’ve gone way over my time. I’m going to yield 

back to Senator Moran for another round of questions, if he has 

them. 

But the last thing I want to say is, CFTC has adopted a rule to 

implement position limits on 28 commodities including oil contracts 

as soon as the joint rule between CFTC and SEC defining swap is 

adopted, the rule-implementing position limits will go into effect? 

Mr. GENSLER. For the spot month limits, that is correct. 

Senator DURBIN. And, can you give me any indication of how 

soon that will occur? 

Mr. GENSLER. We stand ready at CFTC to move forward whenever the SEC gives us the full document. 

Senator DURBIN. Well, since we fund SEC, we’ll tell them, at 

least, I’ll tell them, to hurry along. I’m not sure if my colleague 

agrees with that position. 

But I want to do it right. And I understand their work has been 

challenged in court, as yours has been, and most other agencies 

have faced. I want them to do it right, but I want them to do it 

in a timely way. 

Senator Moran. 

SPECULATION

Senator MORAN. Chairman, again, thank you. 

Chairman Gensler, this conversation about speculation in the oil 

market, you indicate that about 85 percent of the crude oil futures 

market is made up of speculators. 

Mr. GENSLER. Well, financial actors and speculators. 

Senator MORAN. And the difference between financial actors and 

speculators? 

Mr. GENSLER. Well, people, colloquially, use the word, but some 

swap dealers are part of that 85 percent, and they are helping others hedge. They have producers and merchants on the other side. 

So the 80 to 85 percent are swap dealers, hedge funds, money 

managers, even pension funds sometimes are investing. And hedgers and speculators meet in a marketplace, but some financial actors would prefer not to be called speculators. 
27 

Senator MORAN. And I think your testimony was an indication 

that with that magnitude of speculation, there is a consequence to 

the price, either up or down, that’s what you were indicating in the 

studies is what the consequence is, but there is a consequence to 

that level of speculation? 

Mr. GENSLER. Well, I think that every participant in a marketplace can influence a price. Again, we’re not a price-setting agency, 

but it’s critical I think that we have an agency that brings a bright 

sunshine to that market, that it’s transparent, free of fraud and 

manipulation. 

We use the position limits to help limit any one sort of speculative party’s footprint in the market place. 

Senator MORAN. I just would indicate that when we use the word 

‘‘speculation’’, it seems to have developed a negative connotation. 

Mr. GENSLER. Not to me. 

Senator MORAN. And you did differentiate between different, 

within that 85 percent, there’s different actors. 

Mr. GENSLER. That’s correct. 

Senator MORAN. And I think there’s always a suggestion out 

there in today’s media world, that speculation is something that 

causes bad things to happen. 

But you just indicated that’s not your belief. In fact, speculation, 

what benefits arise from those who speculate in markets, in the oil 

market. 

GENESIS OF THE MARKET

Mr. GENSLER. I’d be glad to answer that. 

I think that going back to the genesis of this market, and it happened in Senator Durbin’s State, in Chicago, in the 1860s, when a 

wheat farmer or somebody growing corn, they needed to lock in a 

price at harvest time. 

And they wanted to lock in that price so they could focus on what 

they really did well, and tilling the field, and so forth. And so they 

needed somebody on the other side, and the party on the other side 

is what we call a speculator. 

So there’s the hedger, the natural hedger, meeting the speculator 

in the marketplace, probably since Roman times. In the 1920s, the 

Congress said we need to regulate so that it’s transparent. 

And so we were founded inside the Department of Agriculture, 

and then by the 1970s, we became a Commission and you know the 

history. 

But it’s still a marketplace where hedgers and speculators meet. 

That the natural hedgers need to meet somebody on the other side. 

But what’s critical is that we have clear rules of the road against 

manipulation. 

I believe that the position limit authority is that no one speculator sort of has this big footprint, and that we have great transparency in the marketplace. 

Senator MORAN. Speculation is useful to the economy including 

in establishing a market for oil and gasoline. And I guess the point 

you make is that you want to be careful about the magnitude of 

any one individual’s position within that market. 

Mr. GENSLER. That’s right. That’s right. 
28 

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

need to go to the Department of Homeland Security Appropriations 

Subcommittee hearing. 

FUNDING NEEDED FOR NEW RESPONSIBILITIES

Senator DURBIN. Thank you very much, Senator Moran. You’ve 

been very patient. I thank you for that. 

I want to kind of move into another area here and probably make 

a statement and ask you a question along the way. 

Your current-year appropriation is in the range of $205 million. 

Mr. GENSLER. Yes. 

Senator DURBIN. The President had requested close to $300 million, I believe, for this current fiscal year. 

Mr. GENSLER. Right. Correct, $308 million. 

Senator DURBIN. And so what you were given is dramatically less 

than the President’s budget and less than what the Senate had 

suggested. 

And my feeling is that your agency, based on your testimony and 

the clear evidence we have, needs more resources to deal with the 

challenges that you are facing and that we’ve given you by law, 

passed by the Congress, signed by the President. 

It isn’t as if you’re dreaming up new assignments. We’re sending 

them your way in volume as we move you from the well-known 

marketplaces like Chicago, which I’m very proud to represent, to 

a new world of swaps and over-the-counter (OTC) trading, that is 

dramatically larger in volume. 

For the record, what is the difference if we can speculate, I guess 

we can do that here, if we can speculate, the difference in size between that regulated marketplace that we can see on the street in 

Chicago and what is going on over the counter? 

What’s the difference in size? 

Mr. GENSLER. It’s about eight times the size in terms of the aggregate dollar amounts. There’s $300 trillion notional in swaps, 

which is $20 for every $1 of goods and services produced by America. 

Senator DURBIN. That is an indication of new assignments coming your way, to deal with that market, and to try to have appropriate oversight. 

And so when the President asks for more resources, it’s because 

you have a new and large responsibility coming. 

Mr. GENSLER. That’s right. 

Senator DURBIN. Now, I have said to my friends in the industry, 

the Chicago Mercantile Exchange (CME), and others, that I have 

felt their position since I have been a Congressman and Senator, 

has been very clear and concise. 

They believe that their strength in the marketplace is the fact 

that they do follow the rule of law. They are subject to oversight. 

There is transparency, and it is rare, I wouldn’t say never, but it 

is rare that an embarrassing situation arises. 

And that marketplace becomes a magnet for people all around 

the world because of those features. And that all depends on appropriate regulation from my point of view. And I think from theirs 

too. I don’t want to put words in their mouth. 
29 

Now, there are people who argue that if the Congress does not 

give you the resources to do your job, appropriate regulation of not 

only the existing marketplace, but new market responsibilities like 

OTC, that the alternative should be a user fee, a transaction tax, 

mirroring the example of SEC, which generates its annual budget 

through fees collected. 

And now is linked up more closely to the collection to the actual 

budget that they have to spend. And I, for one, have had misgivings about that because I question what will that do to the competitiveness of the American marketplace or CME, for example, 

against other countries with marketplaces that don’t charge the 

same user fee or transaction tax. 

Does it create a competitive disadvantage for the United States 

in what has become a global industry? For the record, would you 

like to tell me your position or your belief about this issue? 

Mr. GENSLER. My position is I would like to work with the Congress on whatever helps get the funding, and so, I don’t have a 

philosophic bias on this. 

I believe that just as in the securities field, the transaction volume is so significant that it would end up being a very small fee 

if the Congress wanted to move forward on it. 

Senator DURBIN. Well, let me take a step beyond where conversations have been in the past, and ask you, if you included the OTC 

market in this user fee, transaction tax, whatever you want to 

characterize it, what you’ve said to me is that it is dramatically 

larger than the marketplaces that we’re aware of, the exchanges 

we’re aware of. 

And that, do you include that in, when you say it would be a 

very small fee? 

Mr. GENSLER. Oh, absolutely. I think that if the Congress were 

to work on this, that it would be appropriate, it would be spread 

across the swaps marketplace if it included futures. 

In this $300 trillion swaps marketplace that we’re supposed to oversee, we have a $300 million budget, so just the arithmetic, 

that’s $1 of budget request, $1 of budget for every $1 million in the 

swaps market, just to give a sense of the scaling. 

Senator DURBIN. What I’ve said to my colleagues on both sides 

of the Rotunda is that if we do not adequately finance your agency 

to keep up with the responsibilities that have been sent your way, 

and the dramatic increase in the volume of trading in the traditional markets, that there will be growing pressure for some other 

funding source. 

And I hope that we rise to the occasion. I hope that we find the 

financing and appropriations to meet the President’s request in the 

next fiscal year. 

FEAR OF GROWTH

The last question is this: There is always a fear, I’ve served on 

the appropriation committees in the House and the Senate that 

we’re giving an agency too much money too fast. And that the net 

result of it will be waste and bad decisions. 

To take your budget of $200 million and increase it by 50 percent 

in a 12-month period of time is a pretty daunting assignment. Now, 

you’ve said, most of it will go to technology, and I’ll let you say for 
30 

the record, how much of that is scheduled, that you can see, it’s 

going to happen. 

We are just moving along a path we had already created to create the technology that we need. But 40-percent-plus will be in new 

hires, and that too, is a challenge, to come up with the talent you 

need in your agency. I have visited your office in Chicago. I have 

met with your people. 

You have some extraordinarily talented people. The folks who 

would like to get on the floor and kick around Federal employees 

ought to sit down for 5-minutes with your staffers in Chicago and 

tell me that they can even comprehend what they do for a living, 

let alone dismiss it as wasteful bureaucracy. 

So tell me about increasing your budget by 50 percent in 1 year, 

and whether this can be spent in a way that a year later you could 

come before us and say we saw it coming. We’re ready, and will 

spend it well. 

Mr. GENSLER. I thank you for those comments, and I’ll pass them 

on to the staff, particularly in Chicago. 

I’m very proud of what they’ve been able to do. I think we can, 

but just as you worked with us last year, I think you had been conscious of that and I think it’s called 2-year money, as a term of art 

is not incorrect, but I think that we could work with you. 

And, you know, how to ensure that we just didn’t waste any taxpayer dollars. I mean, we’re not going to put money to work if we 

can’t hire the right people. So to hire 300 people in a year is a significant endeavor. 

The sooner we would know it, obviously, the better, if we end up 

in a process where this is after October and then continuing resolutions, then we have to be realistic that it would probably be best 

that it’s put off into 2013 and 2014. 

But I think the sooner we’d know it, we would work with you to 

make sure we would never waste any taxpayer money 

Senator DURBIN. Thank you, and thanks for your patience. I 

apologize again for being late, and I know we’ll continue to work 

with you as we prepare the appropriations bills. 

We have a deeming resolution that has been filed this week in 

the Senate by Senator Conrad of the Senate Budget Committee 

which reflects the statutory bipartisan agreement on spending levels. 

There is some difference of opinion between the House and the 

Senate now as to whether that is going to be the guiding rule or 

some other effort will be intervening, but I think the Senate is likely to proceed based on this bipartisan law signed by the President. 

And I’m hoping that we can move on it on a timely basis to meet 

your last observation. The later in the process you are given notice, 

the less time you have to make it work right. 

And for your agency, for all those regulated by it, and for the taxpayers of this country, we ought to do our best to avoid that problem. Thank you very much for being here. 

Mr. GENSLER. Thank you, Mr. Chairman. 
31 

SUBCOMMITTEE RECESS

Senator DURBIN. I’m going to have the subcommittee stand recessed. You may get some written questions. It’s infrequent, but if 

you do, and could reply in a timely way, I’d appreciate it. 

Mr. GENSLER. Thank you. 

Senator DURBIN. Thanks. 

[Whereupon, at 3:53 p.m., Wednesday, March 21, the hearing 

was concluded, and the subcommittee recessed, to reconvene subject to the call of the Chair.] 

(33) 

FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 

YEAR 2013 

WEDNESDAY, MARCH 28, 2012 

U.S. SENATE, 

SUBCOMMITTEE OF THE COMMITTEE ON APPROPRIATIONS, 

Washington, DC. 

The subcommittee met at 2:30 p.m., in room SD–138, Dirksen 

Senate Office Building, Hon. Richard J. Durbin (chairman) presiding. 

Present: Senators Durbin, Lautenberg, and Moran. 

DEPARTMENT OF THE TREASURY 

OFFICE OF THE SECRETARY

STATEMENT OF HON. TIMOTHY F. GEITHNER, SECRETARY 

OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

Senator DURBIN. Good afternoon. I am pleased to convene this 

hearing of the Appropriations Subcommittee on Financial Services 

and General Government. Senator Moran is at the Supreme 

Court—I do not know why—but will be back momentarily, and I 

will give him a chance if he would like an opening statement at 

that time. 

Welcome to Treasury Secretary Timothy F. Geithner. Glad to 

have you here. We are going to discuss your Department’s critical 

work in support of economic recovery—particularly programs and 

policies dealing with the foreclosure crisis. And I am going to raise 

issues about what I consider to be a looming debt crisis involving 

student loans and where that will take us. 

The Department of the Treasury, as you know, plays a key role 

in promoting economic stability and prosperity, developing policies 

and strategies to promote not just recovery, but sustainable 

growth. Now, one of the largest barriers to economic recovery, we 

have discussed many times, is our struggling housing market. 

Under the Home Affordable Modification Program, the Treasury 

Department provides financial incentives for lenders to prevent 

foreclosures through principle reduction. 

Our economy, I am afraid, will not make a full recovery until we address the $700 billion worth of underwater mortgages held by 

more than 11 million homeowners. I believe that around 20 percent 

of homeowners are affected. There are 3.3 million homeowners currently facing foreclosure. 
34 

There are a number of approaches that can help families save 

homes, but many economists, banks, administration officials, and 

attorneys general from both political parties believe that principle 

reduction has to be one of the tools we use. Reducing principle 

often makes sense for both the homeowner and the lender, not to 

mention the communities which are being littered with foreclosed 

and abandoned property. That is why the recent bipartisan settlement between the five major lenders and a coalition of attorneys 

general of both parties includes $10 billion in principle reduction 

for underwater homeowners. I think we have to do everything we 

can to stop this foreclosure problem from getting worse as a means 

of simple justice, as well as making certain that economy recovery 

continues. 

Here is the issue I am going to raise with you. Of the 11 million 

underwater mortgages, 3 million are being held by Fannie Mae and 

Freddie Mac. To date, the Department of the Treasury has provided $170 billion in taxpayers’ dollars to keep Fannie Mae and 

Freddie Mac afloat. I want to explore today what more your Department can do to help these homeowners, especially through 

carefully tailored principle reduction. 

The second issue is the student loan crisis. And I had a hearing 

last week that really focused on what is happening. As you are undoubtedly aware, total outstanding student loan debt exceeded $1 

trillion last year. There is now more student loan debt than credit 

card debt in America. The credit rating agency, Standard & Poor’s, 

warned us that ‘‘Student loan debt has ballooned and may turn 

into a bubble.’’ 

The hearing I held last week brought several things to light, including the impact of high-interest loans on young people, and 

many times on their parents. I want to discuss the impact of this 

growing student loan debt, the numbers that are associated with 

it, and what it means for our future. 

It was interesting to me that the 32-year-old woman who testi- fied before us has started off with $79,000 in student loan debt 5 

years ago. It is now up to $98,000. The private loan that she has 

incurred, which is in the range of $40,000, will ultimately cost her 

more than $111,000, if paid off over the term. And it has completely changed her life. She cannot borrow another penny to go to 

a real school. She wasted her money on a for-profit school. And she 

is about to lose her home. 

I think these things are connected unfortunately, and the student loan debt, if it does not cost young couples their homes, may 

impede them from ever having one. That will have a long-term impact on economic growth. 

Now, the money for your Department, which I am sure is first 

and foremost on your mind: the request from the administration is 

$14.072 billion for fiscal year 2013. It is a $909 billion or 6.9-percent increase more than current levels. And the majority is needed 

for the Internal Revenue Service, which constitutes more than onehalf of the discretionary funding in our jurisdiction. 

I am pleased to see your budget request continue to prioritize the 

Community Development Financial Institution Fund (CDFI). And if 

you would like to say a word about that, we will give you a chance. 

Last year this subcommittee held an in-depth hearing on how 
35 

CDFIs have leveraged small amounts of Federal funds to develop 

affordable housing, retail, small business lending, and the like. I 

have seen the impact on some neighborhoods in Illinois, and I 

would like to know if you share my positive impression. I hope you 

do. 

And I am going to give Senator Moran a chance to speak when 

he arrives, but at this time I would like to turn the floor over to 

a busy man, our Treasury Secretary Tim Geithner. Welcome. 

SUMMARY STATEMENT OF TIMOTHY F. GEITHNER

Secretary GEITHNER. Mr. Chairman, nice to see you. Thanks for 

having me here, and thanks for all your support and your colleagues’ support for Treasury over these years. 

PREPARED STATEMENT

You know, if you would like, since we are here alone, I would be 

happy to just leave my opening statement for the record and get 

to the conversation, whatever is best for you. 

Senator DURBIN. Okay. 

[The statement follows:] 

PREPARED STATEMENT OF TIMOTHY F. GEITHNER

INTRODUCTION

Let me start with the broader challenges facing the national economy. 

Our economy is gradually getting stronger. Over the last 21⁄2 years, the economy 

has grown at an average annual rate of 2.5 percent. Businesses have added nearly 

4 million jobs over the last 2 years, including 429,000 manufacturing jobs. 

While the economy is regaining strength, we still face significant economic challenges. Unemployment is still far too high, the housing market remains weak, and 

the overall effects of the financial crisis remain an obstacle to growth. The strength 

of our recovery will depend in part on events beyond our shores, as we saw last year 

when United States growth was buffeted by headwinds from Europe. 

The harm caused by the crisis came on top of a set of deep, pre-existing economic 

challenges, including a long period of stagnation in the median wage, diminished 

confidence in the ability of children to exceed the economic achievements of their 

parents, a substantial ongoing shift in the risk and cost of healthcare and retirement security away from employers and onto workers, poverty rates much higher 

than in any economy with comparable wealth, and the dramatic erosion in our fiscal 

position between 2001 and 2008. 

The President has laid out a strategy to address these challenges. His strategy 

entails a carefully designed set of investments and reforms to improve opportunity 

for middle-class Americans and strengthen our capacity to grow by improving access 

to education and job training, promoting innovation in our manufacturing sector, 

and investing in infrastructure. 

These critical investments are combined with a balanced plan for restoring fiscal 

sustainability. The President’s budget reduces projected deficits by a total of more 

than $4 trillion over the next 10 years by adding more than $3 trillion in deficit 

reduction to the approximately $1 trillion in savings already enacted through the 

discretionary caps included in the Budget Control Act. These savings are sufficient 

to stabilize our debt as a share of the economy by 2015 and begin placing our debt 

on a downward path as a share of Gross Domestic Product. 

Treasury plays a vital role in helping to shape and implement the President’s economic policies, driving reform of the financial system, encouraging lending to small 

businesses, working to reform the tax system, promoting economic prosperity, and 

monitoring risk in the financial system. 

Treasury is working hard with the Department of Housing and Urban Development and with the Federal Housing Finance Agency to repair the housing market. 

We have active programs to modify mortgages for distressed homeowners so that 

people can stay in their homes, help States in the hardest hit areas provide both 

loan principal reduction and payment forbearance for the unemployed, transition va-
36 

cant homes to the rental market and make it easier for homeowners who are underwater to refinance their loans. 

As the President has made clear, more can be done to help, and we urge the Congress to consider the President’s plan to help homeowners refinance their mortgages 

to take advantage of lower rates. 

Treasury is also working with other agencies, in particular the Department of 

Education, on a range of ways to help make college more affordable, such as the 

President’s proposal to make permanent the American Opportunity Tax Credit. The 

administration is also moving forward with its ‘‘Pay As You Earn’’ proposal to help 

reduce debt burdens, and the President has called on the Congress to stop the interest rate on Stafford loans from doubling in July. 

In addition to our core policy functions, the Congress has given Treasury a very 

broad mission, with responsibilities that touch many aspects of the lives of Americans. 

Treasury is responsible for raising the resources necessary to fund critical government functions, from national defense to protecting national parks. The Department 

disbursed more than $2.4 trillion in Social Security benefits, veteran’s pensions, and 

other benefit payments to more than 100 million Americans last year. Treasury delivered tax credits to drive investment in clean-energy production and to help families finance college education. We design and enforce the financial sanctions necessary to prevent the spread of nuclear weapons and the financing of terrorism. Our 

Internal Revenue Service (IRS) collected the $2.4 trillion in taxes necessary to fund 

core Government operations. We run the factories that produce every American dollar and coin. 

Treasury’s fiscal year 2013 budget proposal supports the President’s strategy 

through key priorities that will strengthen economic growth and make the Government more efficient while delivering essential services at lower costs to the taxpayer. The proposal also reflects Treasury’s contributions to protect our national security interests and prevent illicit use of the financial system. 

Unlike most Federal agencies, Treasury’s annually appropriated budget is about 

people more than programs. Salaries and operating costs make up 96 percent of our 

budget, and most of the rest of our budget is for investments in technology they require to function. 

IMPROVING EFFICIENCY, REDUCING TAXPAYER COSTS, AND REFORMING GOVERNMENT

The Treasury budget request reflects our commitment to deliver core services 

more efficiently and at the lowest cost to the taxpayer. Our request includes efficiencies, program reductions, and other measures that will produce savings of $286 

million in fiscal year 2013 and additional cost reductions in the years ahead. 

Key proposals include the consolidation of the Bureau of the Public Debt and the 

Financial Management Service. This consolidation will save $36 million over 5 

years, starting with fiscal year 2014, through management, administrative, and support service efficiencies. 

As you know, these bureaus provide the financial infrastructure for the Federal 

Government. Both bureaus have successful track records working together on joint 

initiatives, including a recent information technology consolidation, which is projected to save $129 million over 5 years. I am confident that they will build on this 

success by consolidating and improving the delivery of their core services. 

The budget also proposes legislation to provide Treasury with the ability to 

change the composition of coins to utilize more cost-effective materials. Currently, 

the costs of making the penny and the nickel are more than twice the face value 

of each of those coins. In addition to this proposal, Treasury is implementing measures to improve the efficiency of coin and currency production, including improved 

manufacturing practices and administrative cost reductions, which will save more 

than $75 million in fiscal year 2013. 

These savings build on a number of steps that the Department has taken during 

the last 3 years to improve efficiency and reduce taxpayer costs. 

Last December, we announced that we were suspending the production of Presidential dollar coins for circulation. At that time, there were 1.4 billion surplus $1 

coins sitting unused in Federal Reserve vaults. These surplus coins will now be 

drawn down over time. Taking this simple step will save taxpayers $50 million per 

year in production and storage costs. 

We are also continuing to achieve results in our ongoing paperless initiative, 

which will yield more than $500 million in savings over 5 years. These efforts not 

only improve our internal management but provide modernized services to meet the 

public demand for more electronic services. In response, we have changed the way 
37 

we provide services and are achieving savings while providing taxpayers the services they deserve. 

To give you an example of this, 6 years ago, just more than one-half of individual 

taxpayers filed their returns online. We have worked proactively to increase electronic filing, and today, 77 percent of taxpayers choose to file online. In 2013, it is 

our goal to get 80 percent of taxpayers to file online, achieving an additional $8.1 

million in savings on top of the $63.9 million we have saved since 2009. 

The fiscal year 2013 budget for Treasury’s operating bureaus is 2.7 percent below 

fiscal year 2012 and 6.8 percent below our fiscal year 2010 enacted budget, excluding the IRS. The request for the IRS includes investments in enforcement activities 

that will contribute significantly to improving voluntary compliance with the tax 

code and closing the tax gap. For each additional $1 we propose to spend on compliance activities we bring in more than $4 in additional revenue. The enforcement investments in our request will bring in an additional $1.5 billion in annual revenue 

once fully implemented. 

ECONOMIC GROWTH AND JOB CREATION

We are also supporting small business growth through our Small Business Lending Fund (SBLF) and State Small Business Credit Initiative (SSBCI). Last year, we 

provided more than $4 billion to 332 community banks through the SBLF. Participating institutions estimate that they will increase their small business lending by 

$9 billion within 2 years of receiving the investments. By the end of this fiscal year, 

we will have provided approximately $1.5 billion to State programs that support 

small business lending and investment through SSBCI. States expect these investments to spur at least $15 billion in new small business financing. 

Our $221 million request for the Community Development Financial Institutions 

Fund (CDFI Fund) is focused on key community development priorities designed to 

improve services in underserved communities, including access to healthy food and 

financial services. Of the total request, up to $25 million is for the administration’s 

Healthy Food Financing initiative, which will support increased availability of affordable, healthy food alternatives in these communities. 

The CDFI Fund’s core program for financial and technical assistance provides 

monetary awards to CDFIs, which in turn provide loans, investments, financial 

services, and technical assistance to underserved populations and low-income communities. In 2010, CDFIs were awarded $105 million in grants under the CDFI program, which should contribute to $589 million in community development activity 

and the creation or preservation of approximately 10,000 jobs. 

PROTECT OUR NATIONAL SECURITY INTERESTS AND PREVENT ILLICIT USE OF THE

FINANCIAL SYSTEM

Finally, Treasury’s financial intelligence and enforcement activities play a significant role in protecting our financial system from threats to our national security. 

Our funding request for the Office of Terrorism and Financial Intelligence is maintained at $100 million and reflects our continued efforts to combat rogue nations, 

terrorist facilitators, money laundering, and other threats to our financial systems 

and our Nation’s security. 

The work that this office conducts is far reaching and of critical importance to national security. The sanctions the administration imposed on Libya were a critical 

factor in removing the Gaddafi regime, and they continue to add pressure to the regimes in Iran, Syria, and North Korea. 

CONCLUSION

Treasury benefits from a talented and dedicated group of public servants. Their 

work affects the lives of all Americans. They have played a critical role in pulling 

our economy out of crisis and setting the Nation on a path to recovery. 

Our Treasury team helps to protect America’s economic interests and national security—so seniors can get their Social Security benefits, families can borrow money 

to buy a home or send a child to college, and businesses can grow and create jobs. 

They have worked hard to continue to make Treasury a leaner, more efficient organization that effectively delivers essential services to the American people. 

I appreciate the support of this subcommittee over the past several years in helping to make sure we have the resources to carry out these important responsibilities. 
38 

FEDERAL HOUSING FINANCE AGENCY’S LACK OF PRINCIPLE REDUCTION

POLICY

Senator DURBIN. So, let us start talking about this situation involving Mr. DeMarco’s Federal Housing Finance Agency (FHFA). 

Here is how I understand it, and I would like to hear your take 

on it. I have heard him defend his position against principle reduction saying, that is not my job. My job is to oversee Fannie Mae 

and Freddie Mac as to their solvency. And I am not promoting any 

type of housing project or any type of recovery project when it 

comes to mortgage foreclosure. I just look at the bottom line. How 

is it going to affect Fannie Mae and Freddie Mac? That is perhaps 

as brutally honest. I do not know if it is true, but that is how he 

sees it. 

You are in a position where you are providing $170 billion in assistance to the government-sponsored enterprises (GSEs) through 

preferred stock purchase agreements. The administration has made 

it clear that principle reduction is an important component in stopping foreclosures and economic recovery. Now, reconcile these 

things. 

Secretary GEITHNER. Excellent question, and I am glad you are 

drawing attention to it. 

The law the Congress passed that put the GSEs into conservatorship and gave the FHFA more authority, gave them in some ways 

two mandates. One was to promote policies that help the overall 

housing market, but as important as that, and this is the critical 

constraint, they need to make sure they are operating in the interest of the taxpayer, looking to working to minimize losses, maximize returns to the taxpayer as a whole. They are doing a lot of 

different things to help people to modify mortgages with payment 

reductions and to help homeowners refinance, even homeowners 

that are deeply under water. 

But in the area of principle reduction, as you have heard Mr. 

DeMarco testify, they adopt a program they call principle forbearance, and they have been very reluctant to reduce principle. There 

is a very strong economic case for investors, any investor, whether 

it is the Government, or a bank, or a private investor, to reduce 

principle in some circumstances because that might increase overall recovery to the investor and the taxpayers. And where that is 

true in the private market, it is equally true for Fannie Mae and 

Freddie Mac. 

And so, we have been encouraging Fannie Mae and Freddie Mac 

to take another look at the math, at the economics of it, the finance, because we think there is a strong case in some circumstances to add principle reduction as part of their strategies to 

help maximize return to the taxpayer. 

Now, what Mr. DeMarco has said is that they are taking another 

look at their numbers, looking at our economic case. We are in the 

process of working through that with him, and I hope he is going 

to be in a position to indicate what he plans to do in the next several weeks. 

But you are right to emphasize this as an important part of a 

credible national strategy, that they have been reluctant to move, 

even though they have done a lot of things that have been very, 
39 

very helpful. The art in this to try to make the financial case that 

for homeowners that are deeply under water, and you and your 

spouse loses a job, there are some cases in which principle reduction is not just good for the homeowner and the community, but it 

is good for the taxpayer too. 

Senator DURBIN. So, am I right to say that 30 percent of these 

mortgages, roughly, through Fannie Mae and Freddie Mac would 

be at least subject to this principle reduction? 

Secretary GEITHNER. I do not think it is that high, but I have to 

look at the numbers and see. You know, Fannie Mae and Freddie 

Mac, contrary to what is popular perception in some quarters in 

Washington, were actually more conservative than the private markets and their underwriting standards, and required larger down 

payments in areas. So, in fact, the overall quality of the loans they 

made and the record of delinquencies performance is better than 

the overall market. I do not know what the exact numbers are in 

terms of how many people are under water, worst case. But, again, 

the economic case is there. There is a set of homeowners who are 

deeply under water and experience a hardship where it is better 

for the taxpayers to reduce principle. And our job is to try to encourage them to recognize that. 

Senator DURBIN. So, let me just pursue this along a similar question, a little different line. It is the stated policy of the administration that principle reduction is one of the key elements in reducing 

foreclosures, stabilizing the real estate market, and perhaps reaching a point where we know what the value of real estate is, which 

I think is one of the still largely unanswered and central questions 

to our economic situation. And now you have the power through 

the Treasury Department to fund the group that oversees Fannie 

Mae and Freddie Mac, which is basically saying we do not buy 

that. We do not buy principle reduction. Do you need to be told by 

me or the Congress to close the carrot drawer and open the stick 

drawer? How do we get Fannie Mae and Freddie Mac to run the 

same play as the rest of the economy? 

Secretary GEITHNER. I have asked that question of my staff 

many times and of my predecessor because the law that gave them 

this authority was passed in the fall 2008, before I took office as 

the Secretary. And the Congress, in considering how much authority to give the administrator at that point, decided to keep it completely independent of the Secretary of the Treasury and the administration. I have no power to compel, even though you are right 

to remind people that in a sense those institutions exist only because we are providing the kind of support in terms of capital they 

need to be able to borrow at affordable rates and to continue to 

play the role they are playing in the housing market. 

I wish it were different, but the Congress considered this and decided at that point to—and they did it—I understand why they did 

it, to leave that entity, which had been subject to a lot of political 

pressure and political influence in the past, to leave it completely 

independent of any influence by the administration. 

Senator DURBIN. Do you have anything to say about what they 

do with the senior preferred stock purchase money that you send 

their way? 
40 

Secretary GEITHNER. Well, let me say they were limited to the 

power of our persuasive abilities. 

Senator DURBIN. Carrots. 

Secretary GEITHNER. Of course, if the Congress were to change 

it, change that balance of authority, I would welcome that. But I 

think that, again, we are working very closely together, and we 

think there is a very strong economic case in this context, and we 

think that should govern. 

Senator DURBIN. You know more about this business than I will 

ever know. Give me the Fannie Mae and Freddie Mac argument 

from their point of view against principle reduction. 

Secretary GEITHNER. Well, I think Fannie Mae and Freddie Mac 

themselves are actually pretty supportive of this. FHFA has been 

a little more conservative over time because their argument would 

be this: they would say that, look, we have to make sure we are 

maximizing returns to the taxpayer. If there is a chance that over 

time if we forbear on principle but do not forgive it, we could get 

a higher return to the taxpayer, we are obligated to pursue that 

path. That is the argument they would make. 

But ours is a simple choice. We think there is a set of cases 

where it is clearly in the interest of the taxpayer for them to do 

principle reduction up front. It is not an overwhelming number, but 

where it makes sense to do it, we should do it. That is what we 

are trying to convince them. 

Senator DURBIN. I am going to turn to my colleagues with one 

last question. Can you think of an example where foreclosure 

would be in the best interest of Fannie Mae and Freddie Mac? 

Secretary GEITHNER. Well, I hate to say it this way, because as 

you pointed out, and you have said this many times, across the 

country there are thousands and thousands and thousands of people who are completely innocent victims of the fact that they either 

lost their job or they saw their house price decline precipitously, or 

they face another hardship and could not afford to stay in their 

home. And in that context, the first best solution is for the bank 

or Fannie Mae and Freddie Mac to work with the homeowner to 

restructure their payment obligations so it is within the ability of 

the homeowner to pay so they are given a little more time to find 

another job to get back on their feet. 

But not everyone will be able to do that. So, there are some cases 

where the best case for the homeowner is for them to be able to 

leave their house and go and find some affordable option, even if 

they have to rent. 

But, again, the obligation of all of us should be to do everything 

we can to make sure where people have the chance to stay in their 

home, and when that is clearly better for the Government in some 

context, not just for the community, we want to give them that 

chance. 

But there is one dimension of this that I would like to come back 

to, if we can, after your colleagues have a chance to do a—— 

Senator DURBIN. Sure. Okay. I will let Senator Moran. 

Senator MORAN. I would yield to Mr. Lautenberg. 

Senator DURBIN. Senator Lautenberg, would you like to proceed? 
41 

STATEMENT OF SENATOR FRANK R. LAUTENBERG

Senator LAUTENBERG. I apologize for being late. And perhaps, 

Mr. Secretary, welcome you. And I do not want to be repetitive, but 

I may run into that as a consequence of not having heard your full 

presentation. 

PREPARED STATEMENT

One of the things that we see here, and especially in the private 

sector—I ask unanimous consent that my full statement be included in the record. 

Senator DURBIN. Without objection. 

[The information follows:] 

PREPARED STATEMENT OF SENATOR FRANK R. LAUTENBERG

Mr. Chairman, we have stepped safely back from the edge of financial crisis, and 

our economy is steadily recovering. But some effects of the crisis remain. More than 

11 million homeowners owe more than their homes are worth. A path forward for 

these homeowners is essential for the health of our housing market and our economy. Unless there is some relief, 9 million homeowners could face foreclosure and 

eventual liquidation. While the impact on our economy would be severe, the human 

cost would be unthinkable. None of us can afford foreclosures at this scale—not 

homeowners, not investors, not taxpayers. The path forward is clear. Writing down 

some of the principal owed by underwater homeowners will help stem the tide of 

foreclosures and revive the housing sector, which has long been a drag on our national recovery. Principal forgiveness for responsible homeowners will give hope to 

those families, and reason for optimism for our economy as a whole. 

We must also be attentive to emerging risks to our financial system, and growing 

levels of student loan debt are raising alarms. I am concerned about reports that 

students are being swindled into borrowing more than they can afford. This sounds 

similar to the predatory mortgage lending practices that preceded the financial crisis. Like mortgages in the years before the crisis, student loans are difficult to understand and difficult to value. And Americans are taking out student loans—including private student loans—at a rapid pace. Many borrowers don’t realize that 

private student loans lack the borrower protections of Federal student loans. Christopher Bryski—a constituent of mine who studied at Rutgers University—passed 

away in 2006. His Federal student loans were discharged by law when he passed, 

but his private loans were not. Six years later, Christopher’s dad is still sending 

monthly payments to his deceased son’s bank. Student loans should be designed to 

protect borrowers, not just enrich banks. If we learned anything from the recent crisis, it’s that financial products designed to generate profits for banks at the expense 

of consumers pose serious risk to the economy as a whole. 

I look forward to hearing from Secretary Geithner about what we can do to reduce 

risks and restore our economy back to full health. 

MORTGAGE PRINCIPLE REDUCTION

Senator LAUTENBERG. But I am concerned about the students, 

and I know that you have been discussing the homeowner foreclosures, and I have a question there about—and I think I heard 

you say it. A few of us or none of us can afford foreclosures at this 

scale, not homeowners, not investors, not taxpayers. And I will 

have an opportunity to ask you questions about that. 

But writing down some of the principle owed by underwater 

homeowners will help stem the tide of foreclosures, and revive the 

housing sector, which has long been drag on our national recovery. 

Principle forgiveness for responsible homeowners will give hope to 

these families and reason for optimism for our economy as a whole. 

And we have also got to be attentive to emerging risk to the financial system, growing levels of student loans. 
42 

1The logistic regression described in this paper was performed by Fannie Mae in its role as 

program administrator under Treasury’s Making Home Affordable Program. The data points, 

figures and tables reflected herein were sourced from Fannie Mae as program administrator. 2Fannie Mae and Freddie Mac do not participate in the PRA program. 

STUDENT LOANS

I want to look at that, please, for a moment. And I am concerned 

about reports that students are being swindled into borrowing 

more than they can afford. And it sounds similar to the predatory 

mortgage lending practices that preceded the financial crisis. 

Like mortgages in the years before the crisis, students are difficult to understand and difficult to value, and Americans taking 

out student loan, including private student loans, are running into 

difficulties at a rapid pace. 

Many borrowers do not realize that private student loans lack 

the borrower protections of Federal student loans. And a case of a 

young man named Christopher Bryski, a constituent of mine who 

was studying at Rutgers University, who passed away very young 

in 2006, his Federal student loans were discharged by law when he 

passed. But his private loans were not. Six years later, Christopher’s dad is still sending monthly payments to his deceased 

son’s bank. And student loans should not—should be designed to 

protect borrowers, not just in rich banks. 

So, if we learned anything from the recent crisis, it is that financial products designed to generate profits or banks at the expense 

of consumers pose serious risks to the economy as a whole. 

So, I want to talk about that, and if I can use the remainder of 

my moments, Mr. Chairman, I would appreciate it. 

FEDERAL HOUSING FINANCE AGENCY’S LACK OF PRINCIPLE REDUCTION

POLICY

Opponents of principle forgiveness for struggling homeowners 

have argued that lowering the amount owed on underwater mortgage costs would cost taxpayers too much. We already heard that. 

However, analysis by the FHFA suggests that forgiveness would 

save taxpayer money. 

And forgive me if this is repetitious, but what has your analysis 

of the Treasury’s principle forgiveness program revealed about the 

benefits of principle forgiveness for taxpayers and homeowners? 

[The information follows:] 

THE EFFECT OF THE PRINCIPAL REDUCTION ALTERNATIVE ON REDEFAULT RATES IN

THE HOME AFFORDABLE MODIFICATION PROGRAM: EARLY RESULTS 1

EXECUTIVE SUMMARY

Since the inception of the Making Home Affordable Program, more than 1 million 

homeowners have had their mortgages permanently modified through the Home Affordable Modification Program (HAMP). As of May 2012, more than 63,000 homeowners have received permanent modifications with loan principal reduction under 

HAMP Principal Reduction Alternative (PRA).2 This document presents an analysis 

of the performance of HAMP modifications with and without PRA. To date, this 

analysis has shown the following results: 

—Payment reduction is an important driver of HAMP modification performance. 

—HAMP modification redefault rates also fall as the loan’s after modification 

mark-to-market loan-to-value, or MTMLTV, ratio decreases (i.e., as the size of 

the loan’s current principal balance relative to the home’s value decreases). 

—HAMP PRA participating servicers tend to use the principal reduction feature 

on loans that have relatively riskier credit characteristics than the overall 
43 

HAMP population—borrowers with much lower credit scores and that are more 

seriously delinquent at time of modification. 

—A logistic regression controls for these riskier characteristics. The regression 

shows that for a given payment reduction, homeowners who received a HAMP 

modification with principal reduction perform better than homeowners who receive a HAMP modification without principal reduction. 

EARLY EFFECTS OF HOME AFFORDABLE MODIFICATION PROGRAM PRINCIPAL REDUCTION

ALTERNATIVE ON REDEFAULT RATES

In June 2010, the Department of the Treasury announced the HAMP Principal 

Reduction Alternative program. HAMP PRA provides financial incentives to investors for reducing principal owed by homeowners whose homes are worth significantly less than the remaining balance owed on the mortgage. As of May 2012, 

homeowners have been granted more than 63,000 HAMP PRA permanent modifications. 

HAMP data show that the amount of the monthly payment reduction affects the 

performance of HAMP modifications. Twenty-four months after converting to a permanent modification, there is a 28-percentage-point difference in the redefault rate 

between loans that received a 20 percent or less monthly payment reduction and 

loans that received more than a 50-percent monthly payment reduction. Figure 1 

shows the redefault curves by the percent of monthly payment reduction. 

FIGURE 1. 60∂ Day Delinquency Rate by Payment Reduction 

The redefault rate of HAMP modifications also decreases as the after-modification 

MTMLTV ratio decreases. At 24 months, loans with less than or equal to 80-percent 

MTMLTV redefault at a rate that is 12-percentage points lower than loans with 

more than 170-percent MTMLTV. Figure 2 shows the redefault curves by MTMLTV. 

The gap in the redefault rate between loans with higher and lower postmodification 

MTMLTVs increases as the loans age. This gap is smaller for the redefault rate 

after 6 months than for the redefault rate after 24 months. 

FIGURE 2. 60∂ Day Delinquency Rate by After Mod MTMLTV 

To date, participating servicers have selected loans with riskier credit characteristics to receive the principal reduction feature under HAMP PRA—loans that are 
44 

more seriously delinquent at the time of modification and borrowers with lower 

overall credit scores than all HAMP modifications. 

If one were to look only at the early redefault performance of HAMP PRA versus 

all HAMP modifications without controlling for these riskier characteristics, it 

would appear that loans modified with the principal reduction feature under HAMP 

PRA are performing slightly worse than overall HAMP modifications, as shown in 

Table 2. 

TABLE 2.—HAMP MODIFICATION PERFORMANCE AFTER 6 MONTHS WITHOUT CONTROLLING FOR 

RISK CHARACTERISTICS 1

All modifications Modifications with PRA forgiveness 

Number of permanent modifications Percentage of 90∂ days 

delinquent at 6 months 

Number of permanent 

modifications 

Percentage of 90∂ days 

delinquent at 6 months 

800,613 ....................................... 5.80 30,345 6.30 

1 Sample shown includes all HAMP loans that were modified at least 6 months before March 2012. 

SOURCE.—Making Home Affordable Program System of Record—data through March 2012 

The standard approach in statistical analysis for disentangling the impacts of different factors influencing an outcome is called regression analysis. In this case, a 

logistic regression controls for risk characteristics, which allows a better comparison 

of the performance of HAMP modifications with and without the principal reduction 

feature. These loan characteristics include MTMLTV, origination loan-to-value ratio, 

percentage monthly payment change, credit score at modification, age of the loan, 

delinquency of the loan at time of modification, investor type, vintage of the modification, unpaid principal balance of the loan at time of modification (including all 

past due amounts), delinquency number of months in trial, whether the loan received principal reduction, whether the modification was done under the HAMP 

PRA program or received principal reduction under traditional HAMP, whether the 

loan received principal forbearance, geography, servicer, and home price forecast following the modification. 

This analysis indicates that for loans with similar characteristics, there is a measurable improvement in performance when the HAMP modification includes principal 

reduction. 

This result is consistent with an assumption of the HAMP net present value 

(NPV) default model that a homeowner who receives a modification with principal 

reduction will perform similarly to a homeowner at the same post-modification 

MTMLTV who receives a modification without principal reduction. 

Some have wondered if principal forbearance has a similar effect on modification 

performance as principal reduction. These results indicate that a homeowner receiving a HAMP modification with principal forbearance performs slightly better than 

a homeowner who receives a HAMP modification without forbearance as well as 

without principal reduction. This improvement, though, is smaller than the improvement seen for a HAMP modification with principal reduction. 

The regression analysis allows us to separate the impact of the principal reduction 

from other characteristics that influence default. For illustrative purposes, we constructed a hypothetical homeowner with a premodification MTMLTV of 165 percent 

and a 10-percent chance of redefault (90∂ days delinquent) within 6 months without a payment reduction. We then consider the redefault rate after 6 months implied by the same regression model for three different modifications, each of which 

provides a 30-percent payment reduction. The three different modifications provide 

the 30-percent payment reduction in the following ways, via: 

—Rate reduction and term extension to achieve a 30-percent payment reduction, 

an example of a standard HAMP modification: The model shows that the homeowner would have a 4.6-percent chance of redefault. 

—Forbearance (no rate or term adjustment) to achieve a 30-percent payment reduction: The model shows that the homeowner would have a 4.4-percent chance 

of redefault. 

—Principal reduction (no rate, term, or forbearance adjustments), to achieve a 30- 

percent payment reduction and an after-modification MTMLTV of 115 percent: 

The model shows that the homeowner would have a 3.5-percent chance of redefault. 

Table 3 illustrates these results for our hypothetical borrower with an MTMLTV 

of 165 percent. 
45 

TABLE 3.—ESTIMATED DEFAULT OUTCOMES BY MODIFICATION STRUCTURE FOR HYPOTHETICAL 

BORROWER WITH 10 PERCENT INITIAL DEFAULT PROBABILITY 

Modification structure 

Probability of 

advancing to 

90-day 

delinquency 

within 6 

months 

(percentage) 

No modification .......................................................................................................................................... 10 

Rate reduction and term extension to achieve a 30-percent payment reduction (no change in 

MTMLTV) ................................................................................................................................................. 4.6 

Forbearance to achieve a 30-percent payment reduction (no change in MTMLTV) ............................... 4.4 

Principal reduction to achieve a 30-percent payment reduction and MTMLTV of 115 percent ............. 3.5 

NOTE.—These early redefault rates are just a fraction of expected redefault probabilities over the loan’s lifetime, and so the absolute differences in probabilities that we see here would be expected to increase over time. 

CONCLUSION

While it is still early, data show that there is a measurable improvement in borrower performance when the HAMP modification includes principal reduction. The 

outcome of the regression test is consistent with the assumption in the HAMP NPV 

default model that a homeowner who receives a modification with principal reduction to a certain MTMLTV will perform similarly to a homeowner getting a modification at that MTMLTV without principal reduction. In summary, the table above 

demonstrates that principal reduction leads to a 20-percent reduction in redefault 

probabilities as compared to a modification utilizing forbearance, and principal reduction leads to a 24-percent reduction in redefault probabilities as compared to a 

modification that receives payment reduction, but neither forgiveness nor forbearance. 

Secretary GEITHNER. Well, if you look at the economics of it and 

the finance, we believe that there is a very strong case for some 

homeowners who are deeply under water, experiencing hardship, 

there is a very strong case to provide principle reduction up front 

instead of other forms of payment reduction. And we are trying to 

make that case to FHFA. 

Now, you know, what you do with these cases, you look at a 

range of options, and you try to figure out what is the best option 

for both the borrower and the family and the home at the least cost 

to the taxpayer. And in some cases, it may be a payment reduction 

that substantially reduces the level of your monthly obligations for 

a long period of time. In some cases it may be principle reduction. 

What we are trying to do is to work through the case with FHFA 

and convince them that it is in the interest of the taxpayer and 

consistent with conservatorship for them to adopt the type of program we put in place for their book of mortgages. And they are 

working with us on this. They have been a little hesitant, a little 

more conservative so far. But they are reasonable people, and they 

are amenable to argument, and we think the facts are very compelling. 

Senator LAUTENBERG. You will be able to have another—— 

Senator DURBIN. Yes. We will have a second round for sure. 

Senator Moran. 

STATEMENT OF SENATOR JERRY MORAN

Senator MORAN. Mr. Chairman, thank you. Mr. Secretary, thank 

you very much. Thank you for calling and giving me the opportunity to visit with you. I am sorry I was not able to do that. 
46 

I continue to hear concerns about a lack of coordination among 

the Stability Council members on various Dodd-Frank Act 

rulemakings, especially those related to the derivative titles. 

DERIVATIVE MARKET REFORMS

As the chairperson of the Financial Stability Oversight Council, 

do you have confidence that you will be able to encourage the harmonization of derivative market reforms at a time at which it appears that you are unable to encourage or facilitate consensus between the Securities and Exchange Commission (SEC) and the 

Commodity Futures Trading Commission (CFTC)? 

Secretary GEITHNER. Well, you were right to point out that we 

have a very complicated system in the United States, and by preserving a lot of different people with authority over the pieces of 

the system, it makes it a little harder to coordinate, and frankly, 

makes the process more complex. The additional challenge is these 

are global markets. 

And so, it is very important to us that we get the world to move 

with us. What we do not want to do is raise the standards of the 

United States, have the world decide not to raise its standards and 

have markets just ship outside of the United States. 

So, we have got two dimensions of complexity. One is we want 

to get the U.S. agencies in the same place on the sensible terms, 

and we want to get the world in the same place. 

Now, the Congress in its wisdom did not give the Secretary of 

the Treasury the authority to write these rules, and I do not have 

the authority to force convergence on these agencies. But we are 

working very closely with them to try to make the case that we are 

not going to be able to get the world in a sensible place unless U.S. 

entities are aligned. And where the SEC and the CFTC, under 

their independent jurisdiction, have the discretion to be fully 

aligned, we think that makes a lot of sense. 

I am actually pretty confident that the broad framework of oversight and derivatives is going to get landed in a sensible place, both 

here and globally. I am much more confident than I was 1 year or 

18 months ago. There are still a lot of concerns out there about 

some of the details, and you know in our system we go out for public comment on each of these rules, and everyone has a chance to 

assess the implications in their context. That gives the regulators 

a chance to adapt. 

So, we are on it. We are focused on it. We care a lot about making sure these rules land in a sensible place. And, you know, we 

have got some ways to go, but we are going to keep working on it. 

Senator MORAN. Generically, Mr. Secretary, not necessarily your 

comments, but when a person says the Congress in its wisdom 

failed to do something, is that said just factually or with disrespect? 

Secretary GEITHNER. No, that was extraordinary deference and 

respect. 

Senator MORAN. All right, thank you. 

Secretary GEITHNER. And to be fair, we did not seek authority to 

write the rules and derivatives. We thought they should be left 

with the SEC and the CFTC. And the SEC and the CFTC, not surprisingly, agreed. 
47 

Senator DURBIN. Let the record show that the witness is not 

under oath. Proceed. 

Senator MORAN. He is not what? 

Senator DURBIN. Under oath. 

ENTREPRENEURSHIP OPPORTUNITIES

Senator MORAN. Under oath. Mr. Secretary, at the end of January, President Obama sent to the Congress his Startup American 

legislative agenda, and three items that are currently on the way 

to his desk, the so-called Jobs Act. And I am supportive of that development. In my view, there remains to be a lot of work done in 

regard to innovation and startups, creating an entrepreneurship 

environment. I got interested in this topic because, in my view, the 

Congress and the administration has failed to do much of anything 

about the deficits. And while I am not walking away from the 

spending and revenue sides of the deficit issue, another way—an 

additional way to deal with our growing deficit is to grow the economy. 

And so, I started looking at entrepreneurship opportunities, trying to create that circumstance in the United States in which somebody who has an idea and goes to work in their backyard, their garage, their basement, has a greater opportunity of succeeding than 

they otherwise would have. 

Senator Warner and I introduced legislation called the Startup 

Act that would make permanent zero capital gains for investments 

in small businesses. The President signed a temporary version of 

that provision that expires at the end of 2010—it went into effect 

in 2010 and has since expired. And I am interested in knowing 

your view, your opinion, as to the impact of this exemption in 2011, 

what additional investment we might expect if it was reinstated as 

either suggested by the President or in our legislation. 

Secretary GEITHNER. Well, we are with you on this completely, 

and we think it should be extended and made permanent. And we 

think it would have a powerful incentive in encouraging investment in startups, and that is a good thing. 

I do not have with me today an estimate of the magnitude of the 

impact, but I would be happy to see if there is anything with 

enough integrity we could share with you. We would be happy to 

do that. 

Senator MORAN. I would welcome your input. Thank you very 

much. 

Thank you, Mr. Chairman. 

[The information follows:] 

The administration supports a 100-percent exclusion from income for long-term 

capital gains on qualified small business stock from capital gains tax, and we proposed in our fiscal year 2013 budget to make this favorable tax treatment permanent. While we are not aware of any studies on the economic impact of this particular provision, largely due to the required 5-year holding period, it is no doubt 

an important incentive to encourage and reward investment in new and growing 

businesses, such as many startup companies. 

Secretary GEITHNER. Just because you raised it, I think that 

there are other things in the tax law, too, that would be helpful in 

this context. And just for you to consider as you think about this 

legislation going forward, we think there is a very strong case to 
48 

reinstate expensing, full expensing, for a temporary period of time, 

too. That creates an incentive for people to invest, good for the 

economy, good to grow the economy now. We have also suggested 

various ways to encourage through the tax code small businesses 

to add to payroll, hire more people, add hours, when we are trying 

to get more people back to work. I think those things will work by 

incorporating a grain of permanent capital gains inclusion for investment in small businesses. There is a lot of merit to those 

things. 

ACCELERATED DEPRECIATION

Senator MORAN. Mr. Secretary, I am glad you added those 

points, and I share that view. I would add that it would be helpful 

in regard to one of those particular accelerated depreciation issues 

is general aviation. And the President has a habit of talking about 

general aviation aircraft and corporate jets. And the provision that 

we are always talking about that is being criticized is accelerated 

depreciation. And it is certainly an important one to the manufacturing base in Kansas and across the country. 

But I know just as a rural member of, well, of the Congress, 

somebody who represents a very rural State, if we are going to 

have small businesses, manufacturers located in small towns, we 

ought to have a viable general aviation industry that encourages 

those businesses to be able to fly to places to connect with the rest 

of the world so that we are not all centered around airports. And 

I just would ask you to encourage the President to reduce the rhetoric about accelerated depreciation when it comes to general aviation aircraft. 

Secretary GEITHNER. I think our proposal, Senator, is to put 

them on the same footing, to level the playing field, with other people who make aircraft. But I get your point, and I understand your 

concern. 

Senator MORAN. Thank you very much. 

STUDENT LOAN CRISIS

Senator DURBIN. Mr. Secretary, I mentioned student loans earlier, and I want to draw some parallels. There are interesting parallels between mortgages and American student loan debt. There is $1.4 trillion in mortgage debt in this country held by 

about 52.5 million mortgage holders, and 11 million, or about 20 

percent of them, are under water. We are talking about what we 

do for principal reduction, to deal with the reality of foreclosure, 

and the impact it has on their lives, and our communities, and the 

future of the housing market. 

Now, look at the parallel universe. Student loan debt totals $1 

trillion—not $1.4 trillion, but $1 trillion. The number of students 

is 37 million; and 15 million, or 39 percent of them, are actually 

paying on their debt. That is 39 percent. The remainder, 61 percent, or 22 million, are not paying on their debt. Some are in 

school, but many of them are in a position where for a variety of 

reasons, they cannot pay on their debt. 

One of your charges is to look ahead at the impact of certain financial decisions that are being made on the future of our economy. And when I look at what the foreclosure side on the mortgage 
49 

market is doing to our economy overall, I then try to jump ahead 

a few years and anticipate the impact of this student loan debt on 

our economy. 

Now, there is a significant difference. The most significant difference is that the mortgage debt is dischargeable in bankruptcy; 

the student loan debt is not. I ask people at the Federal agency, 

well, what do you think of this, that we have so much student debt 

out there owned by our Government, and so much it is not being 

paid, and defaults, and the like. 

And their answer was a little smug. They said, we will get our 

money. Someday we will get our money. It may be a Social Security 

check, but we will get it. That is a grim prospect for someone 22 

years old, and their mom, and signing up for a student loan to 

think that is the outcome of this decision. 

Tell me what you think in terms of whether or not this should 

be a matter of concern. Are we dealing with a potential bubble as 

some analysts have said? And what do you think we should do 

about it? 

Secretary GEITHNER. A very important question, and my compliments to you for drawing attention to it. 

Let me just say a few general things, and we do share your concern, particularly about the unique challenges in the private student loan market. 

In the Government student loan market, as you know, there are 

a lot of various forms of flexibility to make sure you can adjust payment to income over time, many other ones, too, and that is very 

important. In the private market, those protections do not exist, 

and we would like to work with you on how best to think about 

solving that problem. I know Secretary Duncan is thinking a lot 

about this. 

As you know, the Consumer Financial Protection Bureau (CFPB), 

has responsibility and some authority to look at practices in these 

areas, and they are responsible now for taking a look at whether 

you are seeing behavior by lenders that would magnify the risks 

in this context. We think it is very important that—and the President has been very focused on this, to try to make sure we are 

holding all providers of postsecondary education—community, private, public—to higher standards for the quality of the education 

they provide to the country because, as you pointed out, many people are going to very expensive schools where they have not been 

able to earn a return that justifies the expense. And we are working very hard to make it more affordable for people to go to college 

with the Congress’ support, a range of tax incentives, and other options. 

But even with what CFPB is doing, even with these efforts to 

deal with some of the special challenges posed by these private universities and for-profit universities across the country, and even 

with steps the Congress has supported to make it affordable to go 

to college, we have a problem we do not how to deal with yet in 

the private student loan business. So, we would like to work with 

you on your specific proposal. There is definitely some merit in it. 

We want to do it carefully, but for all the reasons you said. 

It is important to recognize that the average earnings for somebody who goes to college are much higher than somebody who just 
50 

graduates with a high school diploma. There is a very good case for 

society as a whole and for the individuals to be able to borrow 

money, and afford, a community college or a 4-year college program. But you want to make sure you are doing that in the most 

financially sensible way for you, and with the protections you deserve in that basic context. 

A lot of those protections exist in the Federal student loan market, and we have got some work to do to bring those to the private 

market. 

Senator DURBIN. Let me add one other element I should have 

added, and the difference if we contrast mortgage loans and student loans. The bubble in the mortgage market was brought on by 

overpricing real estate. And as a result of people losing their 

homes, being unable to pay, real estate prices came down dramatically. The President raised this point in his State of the Union Address about the cost of higher education. It seems like there is no 

ceiling. It is just on its way up forever. And I am not sure if the 

bubble bursts and more and more students cannot make their payments, whether the message will be driven home to a lot of these 

institutions. 

Some of the tuition charges at schools, including some I attended, I think have reached an outrageous level, and I do not 

think that they are sensible anymore in terms of the debt that a 

student has to incur. But they need to be. We have to create incentives for them to price a product that is worthy of the investment 

that many young students and their families are making. 

It turns out that when it comes to the private loan side of it, 

more and more of these schools, even with the fact that you cannot 

discharge the loan in bankruptcy, are insisting that the parents 

sign on, too. And many parents who thought they were headed for 

retirement with a college-educated child end up continuing to work 

because of student debt that cannot be paid at the end of the day. 

Secretary GEITHNER. It is also true that many people used to 

have the ability to borrow against their house to cover the cost of 

college for their kids, which was a very financially attractive way 

to pay for higher education. But, of course, that opportunity no 

longer exists for many people because of how much home prices 

have fallen. 

Senator DURBIN. I am much larger than the average canary, but 

I hope that this testimony today will start some people thinking 

about what this student loan debt is going to mean to us in the 

longer term. And I am not sure which way to turn at this point. 

Senator MORAN. Mr. Lautenberg is fine. 

Senator DURBIN. Senator Lautenberg. 

Senator LAUTENBERG. Thanks very much. Unscrupulous mortgage brokers’ practices have led Americans to buy homes that they 

clearly could not afford, and today we see some for-profit colleges 

are pushing students to run up debt they can never repay. What, 

if anything, can the administration do to make sure that for-profit 

colleges do not put our economy at risk like the mortgage brokers 

did? 

Secretary GEITHNER. Well, excellent question. The President and 

Secretary Arne Duncan have in place a range of policies designed 

to address just this question. So, in addition to what the CFPB, we 
51 

hope, will do in improving the quality of disclosure and providing 

information about borrowing choices for its students, in addition to 

what we can do through the tax system and elsewhere to help 

make college more affordable, the President and the Secretary of 

Education are working hard to try to reduce the rate of growth and 

costs. 

You are both right to highlight this. You want individuals to 

know when they are thinking about how they pay for college or 

community college, about the difference between the protections 

you get with a Federal student loan and a private loan. So, you 

want them to go in eyes open. You do not want them to have unrealistic expectations about what they are going to be able to earn 

after college, not justified by the quality of the education they get. 

Those things are very important. And, again, you are right to bring 

attention to it. 

I spent some time talking to the President and Secretary Duncan 

before our hearings; I knew you were going to raise it. I know that 

they are very focused on your specific suggestions and would like 

to work with you on it. 

Senator LAUTENBERG. Well, is it possible that private student 

loans could have some of the same borrowing protections as Federal loans? 

Secretary GEITHNER. Well, that would really be a matter for consideration by the Congress and the CFPB. That is something we 

have to look at. I know the chairman has proposed or is considering 

some specific legislation that would allow private student loans to 

be discharged in bankruptcy with a full set of protections. That 

would be one approach, and we will look at all sensible ideas in 

this area. 

Senator LAUTENBERG. Right now, budget cuts would slash Pell 

Grants, 10 million students, by at least $1,000. What might be the 

impact of cutting Pell grants for student loans? 

Secretary GEITHNER. Well, again, if the U.S. Government were at 

this time, with all the concerns we have about the basic competitive position of the American economy, and the need to equip 

Americans with the skills they need to get jobs to significantly reduce the assistance it provides students going to college, that would 

be a bad thing for the country. And it is one reason why it is important for us to recognize that even though we recognize our deficits are unsustainable, and even though we recognize we are going 

to have to bring them down over time, to understand where we cut 

and how we do it is as important as doing it itself. 

And so, here we put in place tax reform and fiscal reforms to 

help reduce those deficits in the future, we have to be preserving 

room—and we can afford to do this as a country—preserving room 

to make it easier, not harder, for kids to go to college. 

Senator LAUTENBERG. Going back some years, I was a beneficiary 

of the GI bill, and was able to get a pretty good education at Columbia Business School. And I helped co-found a company that now 

employs more than 40,000 people and presents the employee statistics every month, ADP. And we built the greatest generation, so 

called. I was one of the builders, but I do not know whether I carried my share of the 8 million people who got a GI bill education. 
52 

And not to avail ourselves out of what can come out of a broadscaled educational program that encourages people, does not discourage them, does not put them under unrealistic burdens, and 

put our society further in debt, understand that watering those 

flowers produce—it is not only a beautiful scent, but a beautiful 

view. 

Thanks very much. 

Secretary GEITHNER. I agree. Could I just say, Mr. Chairman, 

that I, too, borrowed to finance my college and graduate school education, and I was able to repay those loans on a civil service salary, 

which was a very fortunate thing for me. I think as a country, if 

anything, we are under investing in an investment that would have 

very high returns for the country as a whole, and the GI bill is the 

best example. 

Again, it’s a good thing to remember as we think about how we 

find a bipartisan agreement on ways to reduce those long-term 

deficits, because we need to be doing that in a way that preserves 

room for these kinds of investments. 

VOLCKER RULE

Senator MORAN. Mr. Secretary, I am going to ask you to advise 

one of my bankers in their efforts to comply with the record keeping requirements of the Volcker Rule. 

The way I understand the situation is a bank without any proprietary trading ambitions, either before or after the financial crisis, 

would now have an affirmative obligation to prove the negative. In 

other words, although they never had a proprietary trading operation, the Dodd-Frank Act now forces them to develop an expensive 

compliance system to prove that fact to the Government. 

Has the Treasury Department made any efforts to quantify the 

costs of that compliance, and how would you suggest a banker do 

that? 

Secretary GEITHNER. I have heard that concern, and that is one 

of the many comments and concerns expressed by the private market in response to the rule proposed by the regulators. Again, this 

is a rule proposed by a group of independent regulators. I know 

they are taking a look at that concern among many. 

I think the question they face is, can they find a way—and I am 

very confident they can—can they find a way to achieve the objectives of the law, which is to limit proprietary trading by the largest 

banks in the country, but still preserve exceptions the Congress designed for market making and hedging, and make sure that complying with that does not put an undue burden on the rest of the 

system. I am very confident they can do that, but they have got 

some work to do. And it is important to me, not just to your banker, that they get this right. 

Senator MORAN. Thank you. I appreciate that confidence that it 

can be accomplished. And it is that reminder that this premise 

about too big to fail, one of the things we have to be very cautious 

of is that because of regulatory burdens, we do not force financial 

institutions to become bigger and bigger to cover the costs of the 

regulatory burden created by the Dodd-Frank Act and other legislative rulemaking. 
53 

SMALL BUSINESS LENDING FUND

Let me ask another one dealing with a similar topic, your written 

testimony references support for community banks from the Small 

Business Lending Fund (SBLF). But I am concerned about a lack 

of an exit plan for those several hundred banks that received TARP 

money from the Capital Purchase Program, that were not eligible 

or were otherwise prevented from participating in the SBLF. Do 

you have a strategy to recover those taxpayer dollars and to allow 

community banks to exit the program? 

Secretary GEITHNER. Excellent question, and we are very focused 

on this. I should point out that we have already recovered more 

than $10 billion of the total amount invested by the Government 

in the banking system in the crisis. The expected return on those 

investments for banks is going to be north of $20 billion. 

But you are right, we still have a series of quite small investments left in a number of community banks across the country. 

And we are working with those institutions and their regulators to 

encourage them to repay and make it possible for them to repay. 

Not everybody is going to be able to do it. There will be some banks 

that cannot do it. But we are trying to figure out a way to encourage those firms to replace those investments by the taxpayer with 

private investments as quickly as possible. And they generally 

want to do it, too. They are very eager to return those investments. 

Senator MORAN. Mr. Secretary, thank you. Mr. Chairman, thank 

you. 

FINANCIAL CRIMES ENFORCEMENT NETWORK INFORMATION

TECHNOLOGY MODERNIZATION

Senator DURBIN. Mr. Secretary, in your Financial Crimes Enforcement Network (FinCEN), there has been a lot of work for a 

long time to upgrade the technology. Tell us where you are. 

Secretary GEITHNER. Well, we have got some work ahead of us. 

And, as you have said, this has been a challenge for many arms 

of government. We have a stronger management team in place in 

working how to design and execute this modernization. We have 

drawn on resources outside FinCEN to help reinforce it. I would be 

happy to give the subcommittee more details on how things are 

going. But I think they are doing okay. 

OFFICE OF FOREIGN ASSETS CONTROL SANCTIONS AGAINST IRAN, 

SUDAN, BELARUS, AND SYRIA

Senator DURBIN. There is another aspect of your agency. Most 

people might think about it instantly, the Office of Foreign Assets 

Control (OFAC), and it oversees economic sanctions against targeted foreign countries and regimes, terrorists, and other threats to 

America. 

So, I would like to ask you, is work being done relative to the 

situation in Sudan by your Department? 

Secretary GEITHNER. Absolutely, and I thank you for drawing attention to this part of the Treasury. 

This part of the Treasury is responsible for designing and executing these financial sanctions we have in place with many countries around the world. And in Sudan, we have in place the most 
54 

powerful sanctions available to us. They are very comprehensive, 

and I think they have been a pretty powerful incentive to reinforce 

the broader objectives of the State Department and the President 

in Sudan. 

OFAC’s work goes well beyond Sudan, and, of course, a big part 

of their work today surrounds Iran where we are making tremendous progress in bringing more pressure on Iran from countries 

around the world. 

Could I just take this moment to convey my best wishes to Senator Kirk, who I know has been such a champion of a tougher approach in Iran. I want him to know as he recovers that we are 

making extraordinary progress using the authority he has helped 

give us at the Treasury working with countries around the world 

to bring more pressure to bear on Iran. We are having, we think, 

a big impact economically on them. 

Senator DURBIN. I will make sure he gets that message. 

One of the witnesses before the Foreign Relations Committee 

last, when we asked about Sudan and what we could do, said that 

there are at least three Sudanese leaders who have been found 

guilty of war crimes before the International Criminal Court: President Bashir, Defense Minister Hussein, and Government Minister 

Harun. And they asked whether we could and whether we are 

tracking their financial assets. 

Secretary GEITHNER. Well, I would be happy to take a look at 

that more specifically and talk to my colleagues about it. The sanctions we have in place cover the government as a whole, but, of 

course I welcome that suggestion and I’m happy to consult with my 

colleagues. We will get back to your staff on whether we think that 

makes sense. 

Senator DURBIN. I would like to ask you at the same time to consider the situation in Belarus with Viktor Lukashenko, the last dictator in Europe, as well as the Syrian dictator, Bashar al-Assad. 

If you would like to say another word or two about the situation 

in Iran. The President has told us and others, Secretary Clinton 

and others, that the sanctions regime is making an impact. Can 

you give us any testimony today about what you think the impact 

has been on the Iranian economy? 

Secretary GEITHNER. Yes. All evidence suggests, and you can see 

it in what has happened to their exchange rate, the rate of inflation, and the difficulty they are having, frankly, trading with the 

rest of the world and selling their oil, that it is having very substantial economic effects. 

You have seen 10 countries in Europe and Japan announce that 

they are going to substantially reduce imports of oil from Iran. The 

Europeans are going to cut them off completely. Countries around 

the world are in the process of taking additional steps to reduce 

their imports of oil. But beyond that, these financial sanctions are 

making it very difficult for countries to do business with Iran, very 

difficult for Iran to get paid for the oil they do ship, and to get paid 

for other things. And that is absolutely having an effect on the 

economy as a whole. 

Now, we do not know, of course, what effect that is going to have 

on their nuclear ambitions. Of course, our ultimate objective is to 

convince Iran that they should join the consensus of the inter-
55 

national community to renounce those ambitions. We think these 

sanctions are necessary, and we hope will be an effective path to 

achieve that. 

I want to say in the Belarus context—happy to report in more 

detail—but we have put sanctions in place in Belarus on a number 

of senior government officials, including Lukashenko and others. 

Senator DURBIN. Thank you. 

Senator Moran. 

Senator MORAN. Mr. Chairman, you started me down another 

line of questioning, and one of the areas—I think both of the areas 

we agree upon. I just would encourage the Treasury Department 

to fully implement, to enforce the sanctions as authorized by the 

Congress in regard to Iran, and I would encourage you to do that. 

SALE OF AGRICULTURAL GOODS TO CUBA

On the topic of Cuba, one that the chairman and I have dealt 

with in the past, the administration has made—the Obama administration has made changes in our relationship, bilateral relationship with Cuba in regard to travel and regard to money being sent 

to Cuba. But you have not done anything in regard to the sale of 

agriculture commodities, food, and medicine. 

And going back to the year 2001, the Congress passed legislation 

that authorized the sale for cash up front of those items. We had 

regulations developed by the Treasury Department that were in 

place for a number of years. The Bush administration Treasury Department changed those regulations, made it more difficult for 

those cash sales to occur in really two ways: third-party financing 

and the definition of when the shipment arrived or left the United 

States, the determining factor of when the cash had to be paid. 

Prior to those regulatory changes, it had to be paid when the ship 

landed in Havana. The Treasury Department changed the rules 

and said it had to be paid before the ship left the United States, 

making the United States’ sales significantly less competitive. 

And other countries’ exports to Cuba have increased, for example, to Brazil. Ours following those Treasury regulation changes 

were reduced, diminished. And as—this goes back to my days in 

the House of Representatives, Representative Peterson and I wrote 

the administration asking, if you are going to do those other two 

things, why do you refuse to take the steps necessary to deal with 

the agricultural sales—it is not even trade—agricultural sales for 

cash up front, and return us at least to the days that pre-existed 

the change by the previous Treasury administration. 

I would be happy to know your response, but mostly I want to 

ask you to encourage the administration to do that, and to work 

with us as we try to craft legislation if you will not. 

Secretary GEITHNER. I will be happy to work with you on it. And, 

as you know, there are Members of the Congress who have a somewhat different view than you on this, and they have occasionally 

tightened—— 

Senator MORAN. I have met them. 

Secretary GEITHNER [continuing]. The things you are trying to 

loosen. And we have to be guided by what they put into law. 

Senator MORAN. But the same thing could be true—be said for 

the other two aspects of trade in regard to the money being sent 
56 

and the opportunity to travel to Cuba. And it just seems odd this 

is the one that there seems to be—there is an unwillingness for the 

administration to make the changes. 

Secretary GEITHNER. Again, happy to listen to your concerns on 

this and to work with you on it. We try to hew closely to the line 

that Constitution draws, and when you change the law, then we 

move. But we are happy to talk to you. 

Senator MORAN. I think we have had this conversation before. 

Your happiness to talk to me has been demonstrated previously, 

but the rules remain the same. 

TAXPAYER SUPPORT OF FREDDIE MAC AND FANNIE MAE

The only—I think, Mr. Chairman, the only other question I 

would ask is, this is a question that Senator Kirk asked me to ask 

in regard to taxpayers being made whole in their investments and 

the rescue of Freddie Mac and Fannie Mae. And I think the point 

he wanted me to raise with you is that in the Senate Banking 

Committee, February of this year, Secretary Donovan estimated 

that the taxpayer exposure to the bad loans of Fannie Mae and 

Freddie Mac could exceed $1 trillion. Do you agree with that assessment? 

Secretary GEITHNER. No, and I do not think it is likely he said 

it that way. Let me tell you how we look at this. 

FHFA does a regular periodic assessment of what future losses 

might be even in the event we face another recession or another 

crisis, those are put in the public domain, and they periodically revisit those. 

But I will tell you what they show. What they show is that all 

the losses they face going forward now are really the legacy problem of the choices they made during the financial boom. And today, 

because of the changes put in place since the crisis under the legislation the Congress passed, they have much more conservative underwriting standards and much more conservative lending practices. 

Most independent economists assessing their book of business 

would say that the new business they are doing today, which is 

still very important—the housing market—is done on much more 

conservative financial terms and looks relatively profitable. And 

over time, those profits are helping reduce the losses we inherited. 

But what FHFA does, and which is appropriate, is to periodically 

publish estimates of what those losses might be in the future to the 

taxpayer under even a significantly worse economic scenario. But 

the estimates out there, including the ones made by CBO, are nothing close to $1 trillion. 

We will lose some money, but I think the current estimates are 

more in the range of $100 billion. And even those losses look like 

they are going to be largely offset by the Government’s return on 

the range of other things that we did as part of the financial rescue 

done by the Federal Reserve and the Federal Deposit Insurance 

Corporation (FDIC) and the Treasury. 

ADDITIONAL COMMITTEE QUESTIONS

But, you know, we got some ways to go, and really at the very 

early stage of putting in place reforms that will make the housing 
57 

finance system work better in the future. We are pretty far advanced on the broader financial reforms, but not very far along on 

the reforms to the housing finance system. 

Senator MORAN. Mr. Secretary, thank you. 

Senator DURBIN. Mr. Secretary, thank you for your time and 

your valuable testimony. 

Secretary GEITHNER. Thank you. 

[The following questions were not asked at the hearing, but were 

submitted to the Department for response subsequent to the hearing:] 

QUESTIONS SUBMITTED BY SENATOR RICHARD J. DURBIN

Question. What is the Department of the Treasury doing in its role as manager 

of the Senior Preferred Stock Purchase Agreements—through which the Government-sponsored enterprises (GSEs) have received about $170 billion in taxpayer assistance—to ensure the GSEs are engaging in behavior such as principal reduction 

that, as Secretary Geithner has stated, when appropriately used would ‘‘limit the 

futures losses of the GSEs’’? 

Answer. The Federal Housing Finance Agency (FHFA), as Conservator of Fannie 

Mae and Freddie Mac, is responsible for the oversight and management of the activities at Fannie Mae and Freddie Mac. 

As part of the Senior Preferred Stock Purchase Agreements, Treasury has certain 

protections on its investment, which include approval rights over any asset sales not 

at fair value. 

Treasury assisted the FHFA in its analysis of the effects of principal reduction 

when made in connection with a Home Affordable Modification Program (HAMP) 

loan modification. In July 2012, after months of deliberation, FHFA announced it 

would not allow Fannie Mae and Freddie Mac to provide borrowers with principal 

reduction in connection with a modification. Treasury is ready to consult with the 

FHFA if they wish to continue a further analysis of principal reduction. 

DOMESTIC FINANCE—HOUSING

Question. Who at Treasury is in charge of managing and overseeing the Senior 

Preferred Stock Purchase Agreements? 

Answer. The Under Secretary of the Treasury for Domestic Finance is responsible 

for the management and oversight of the preferred stock investments under Senior 

Preferred Stock Purchase Agreements. 

Question. How many Treasury employees work on a daily basis to oversee the financial assistance provided to FHFA? 

Answer. Treasury takes very seriously its responsibility to oversee the financial 

support it provides under the Senior Preferred Stock Purchase Agreements. Employees of a number of Treasury offices, including the Office of Financial Markets, the 

Office of Financial Institutions, the Office of the Fiscal Assistant Secretary, and the 

Office of the General Counsel, provide support to the Under Secretary for Domestic 

Finance for the management and oversight of the financial support provided under 

the Senior Preferred Stock Purchase Agreements. 

Question. What information, if any, is Treasury receiving from the GSEs to ensure 

that the billions in financial assistance they have received under the Purchase 

Agreements isn’t being misused? 

Answer. The respective management and Boards of Directors of Fannie Mae and 

Freddie Mac are responsible for the proper use of the financial support they each 

received under the Senior Preferred Stock Purchase Agreements. FHFA, as Conservator of Fannie Mae and Freddie Mac, is responsible for the oversight and management of the activities at Fannie Mae and Freddie Mac. Both Fannie Mae and 

Freddie Mac submit annual risk management plans to Treasury which provides information about the enterprise risk management at both firms. 

Question. What is Treasury doing to ensure FHFA completes its principal reduction analysis in a timely manner and that FHFA does not indefinitely delay its results? 

Answer. In 2012, Treasury assisted the FHFA in its analysis of the effects of targeted principal reduction on underwater mortgages owned or guaranteed by Fannie 

Mae and Freddie Mac in connection with payment-reducing loan modifications 

under HAMP. Treasury believes that principal reduction should be assessed as part 

of a payment-reducing modification, and the overall economic result compared to a 
58 

modification without principal reduction. This approach ensures that principal reduction is implemented where it produces the best result from an economic standpoint. FHFA, as Conservator of Fannie Mae and Freddie Mac, is responsible for the 

oversight and management of the activities at Fannie Mae and Freddie Mac. In July 

2012, FHFA announced it had concluded its analysis and it would not allow Fannie 

Mae and Freddie Mac to provide borrowers with principal reduction in connection 

with a modification. Treasury is ready to consult with the FHFA if they wish to continue a further analysis of principal reduction. 

Question. Has Treasury done its own analysis about the benefits of the GSEs participating in principal reduction? Who at Treasury would be responsible for completing this analysis? 

Answer. Treasury assisted FHFA in its analysis of the effects of principal reduction when made in connection with a HAMP loan modification. The assistance was 

provided by Treasury staff within the Office of Domestic Finance and the Office of 

Economic Policy. 

Question. Does Treasury have access to the necessary information, including the 

books of the GSEs, to conduct its own analysis about the benefits of the GSEs participating in principal reduction? 

Answer. Treasury assisted the FHFA in its analysis of the effects of principal reduction when made in connection with a loan modification, however Treasury does 

not have access to the detailed data of the GSEs to conduct our own analysis. Treasury is ready to consult with the FHFA if they wish to continue a further analysis 

of principal reduction. 

Question. Isn’t it true that the GSEs could target principal reduction to those 

homeowners for which it makes the most business sense, which would address most 

of the concerns critics and those with philosophical objections have with principal 

reduction? 

Answer. Treasury believes that principal reduction should be assessed as part of 

a payment-reducing modification, and used in those cases where it produces a better 

overall economic result when compared to a modification without principal reduction. This targeted approach ensures that principal reduction is implemented where 

it produces the best result from an economic standpoint. The application of principal 

reduction to an underwater loan can, in many cases, help reduce a struggling borrower’s monthly payment to a level where the borrower can sustain this lower, 

modified monthly payment and is less likely to default going forward. Currently, of 

all of the eligible underwater non-GSE loans receiving a HAMP modification in December 2012, for example, Treasury has reported that 71 percent included some 

principal reduction. 

As noted, FHFA announced in July 2012 it had concluded its analysis and it 

would not allow the GSEs to provide borrowers with principal reduction in connection with a modification. Treasury is ready to consult with the FHFA if they wish 

to continue a further analysis of principal reduction. 

Question. How does Treasury interpret FHFA’s conservatorship mandate? 

Answer. FHFA placed each of the GSEs into conservatorship on September 6, 

2008. At that time, FHFA set out the purpose and goals of conservatorship as follows: 

‘‘The purpose of appointing the Conservator is to preserve and conserve the Company’s assets and property and to put the Company in a sound and solvent condition. The goals of the conservatorship are to help restore confidence in the Company, enhance its capacity to fulfill its mission, and mitigate the systemic risk that 

has contributed directly to the instability in the current market.’’ 

Question. Does anything in FHFA’s conservatorship mandate prohibit Acting Director DeMarco from allowing the GSEs to engage in activity such as principal reduction that even private investors are using to reduce losses? 

Answer. FHFA is an independent Federal regulator and as such, it would not be 

appropriate for Treasury to comment on FHFA’s mandate. 

Question. Has FHFA shared their resource concerns with Treasury about implementing principal reduction as indicated in FHFA’s January 20 letter to Representative Cummings? Has Treasury offered to help address resource issues? 

Answer. In January 2012, Treasury announced that it was willing to pay principal 

reduction investor incentives to servicers participating in HAMP who were modifying underwater GSE loans, if the FHFA permitted the GSEs to participate in the 

HAMP Principal Reduction Alternative program (HAMP–PRA). After that announcement, Treasury engaged with FHFA regarding their concerns with resources 

needed to implement principal reduction and offered to pay additional administrative costs required to implement HAMP–PRA. As noted, FHFA decided in July 2012 

not to allow GSEs to provide borrowers with principal reduction in connection with 
59 

a modification. Treasury is ready to consult with the FHFA if they wish to continue 

a further analysis of principal reduction. 

Question. What is Treasury doing to ensure that the tax consequences of principal 

reduction do not outweigh the benefits of principal reductions? 

Answer. Treasury worked closely with Congress to ensure that the Mortgage Debt 

Relief Act of 2007 was extended through December 31, 2013. The Mortgage Debt 

Relief Act of 2007 generally allows taxpayers to exclude income from the discharge 

of qualified mortgage debt on their principal residence. Principal residence mortgage 

debt reduced through mortgage restructuring, as well as mortgage debt forgiven in 

connection with a foreclosure, can qualify for the relief. 

In addition, Treasury worked closely with the Internal Revenue Service on recent 

IRS guidance (Revenue Procedure 2013–16) addressing principal reduction. Under 

this guidance issued on January 24, 2013, principal reduction is excluded from 

homeowners’ income to the extent the holders of the loan receive Government-paid 

incentives. Homeowners may elect whether to treat any principal reduction from 

non-Government sources as income in the year of the permanent modification or as 

the principal is reduced on the loan. Additionally, the guidance permits homeowners 

to amend returns filed in previous years. As a result of this guidance, homeowners’ 

compliance with their tax obligations should be improved and homeowners’ access 

to existing exclusions from taxable income should be simplified. 

DOMESTIC FINANCE—FINANCIAL INSTITUTIONS/FEDERAL INSURANCE OFFICE

Question. Treasury’s Federal Insurance Office (FIO) has a significant workload, 

particularly in international forums like the International Association of Insurance 

Supervisors (IAIS). FIO’s work at the international level, in conjunction with state 

insurance supervisors, is important to the competitive standing of U.S. insurers and 

will help ensure that the United States gets the best outcome in reviews of international insurance standards. Please provide a progress report on the work that 

FIO is undertaking, including what the Department is doing to stand up and provide resources to this office and how many staff are expected to be in place by the 

end of each of fiscal year 2012 and fiscal year 2013. 

Answer. By virtue of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Department of the Treasury’s FIO is authorized to coordinate and develop Federal policy on prudential aspects of international insurance matters, including representing the United States at the International Association of Insurance 

Supervisors (IAIS). FIO became a full member of the IAIS in October 2011. FIO became a member of the IAIS Executive Committee in February 2012, and the FIO 

Director was selected to chair the IAIS Technical Committee in October 2012. FIO 

also represents the United States on the IAIS Financial Stability Committee, the 

Macro-Prudential Surveillance Working Group, and numerous subcommittees. 

In January 2012, FIO initiated an insurance dialogue project (Project) with State 

regulators and European Union (EU) insurance officials in order to identify those 

subject regulatory matters appropriate for improved convergence and compatibility 

between the EU and the United States. The Project will conclude in 2018. 

FIO has participated in the Insurance and Private Pensions Committee of the Organization for Economic Cooperation and Development (OECD). In this capacity, 

FIO supports the leadership of the U.S. Department of Commerce. 

FIO has developed numerous bilateral relationships with insurance supervisors 

from around the world. For example, FIO participated in the U.S.-China Strategic 

and Economic Dialogue and the U.S.-China Joint Economic Committee. FIO also 

participated in the 2012 NAFTA Financial Regulatory Dialogue, and has initiated 

a joint semiannual insurance supervisory discussion with the lead insurance supervisors of Canada and Mexico, in addition to State regulators. 

In addition to its authorities relating to international insurance matters, the Director of FIO also serves on the Financial Stability Oversight Council. FIO has been 

actively engaged in the work of the Council, and expects to increase its engagement 

as staff resources increase. FIO has also been preparing a number of studies and 

reports that will be issued in 2013. 

As of February 20, 2013, FIO has 11 full-time employees and is building to a staff 

of 15 employees. The Treasury Department supports FIO with the additional support resources needed to fulfill its statutory authority. 

TERRORISM AND FINANCIAL INTELLIGENCE—FINANCIAL CRIMES ENFORCEMENT

NETWORK

Question. The Financial Crimes Enforcement Network (FinCEN) collects Suspicious Activity Reports from financial institutions. Patterns in the data allow 

FinCEN to identify criminal ‘‘hot spots’’ that can be addressed through enforcement 
60 

1See February 8, 2012 Letter from House Oversight Committee to FHFA Director DeMarco, 

which reads, in part, ‘‘according to the latest report you provided from December 

2011 . . . implementing principal reduction programs for borrowers who are Net Present Value 

(NPV) positive would reduce overall losses by $28.3 billion, while principal forbearance programs 

for these borrowers would reduce overall losses by $27.9 billion compared to the cost of taking 

no action.’’ 2See, for example, ‘‘A Bailout by Another Name’’, New York Times, March 24, 2012. 

and coordination among law enforcement entities. In fiscal year 2010, FinCEN 

began a second attempt to upgrade the IT system that hosts this data. 

When will the final product be available, and how will it improve financial intelligence efforts? 

Answer. The Bank Secrecy Act (BSA) Information Technology (IT) Modernization 

Program is a 4-year program, which began in fiscal year 2010, that has delivered 

multiple products that fundamentally improve FinCEN’s information technology infrastructure, applications, and ability to provide support to users from hundreds of 

Federal, State, and local law enforcement, regulatory, and intelligence agencies. The 

Program has continuously and successfully delivered products on time and within 

budget, meeting the rapid incremental milestones established by the Office of Management and Budget (OMB). 

Question. What improvements have FinCEN and the Department made to the 

planning and implementation process that will avoid problems that plagued the previous failed upgrade? 

Answer. The BSA IT Modernization Program has continuously and successfully 

delivered products on time and within budget, meeting the rapid incremental milestones established by OMB. Treasury’s Office of the Inspector General (OIG) has 

produced two reports on the program and in the most recent of those, OIG had no 

recommendations. 

Question. How have FinCEN and Treasury involved the wide variety of stakeholders in the planning for this IT overhaul—including banks, Federal law enforcement, State and local law enforcement, and other Federal intelligence agencies? 

Answer. Throughout the modernization effort, FinCEN has consulted with a Data 

Management Council (DMC), which is comprised of representatives from more than 

a dozen Federal law enforcement and regulatory organizations. In addition, FinCEN 

collaborated with the Bank Secrecy Act Advisory Group, which includes both public 

and private sector participants, to obtain feedback on various aspects of the program. 

QUESTIONS SUBMITTED BY SENATOR FRANK R. LAUTENBERG

DOMESTIC FINANCE—HOUSING

Question. Opponents of principal forgiveness for struggling homeowners have argued that lowering the amount owed on underwater mortgages would cost taxpayers 

too much. 

However, analysis by the Federal Housing Finance Agency suggests that forgiveness would save taxpayers money.1 What has your analysis of Treasury’s principal 

forgiveness program revealed about the benefits of principal forgiveness for taxpayers and homeowners? 

Answer. Treasury supports using principal reduction on a targeted basis where 

it makes economic sense to do so. When used in combination with a payment-reducing loan modification such as a Home Affordable Modification Program (HAMP) 

modification, principal reduction can be an effective way to help underwater borrowers avoid foreclosure and help housing markets to recover. The application of 

principal reduction to an underwater loan can, in many cases, help reduce a struggling borrower’s monthly payment to a level where the borrower can sustain this 

lower, modified monthly payment and is less likely to default going forward. Currently, of all of the eligible underwater non-Government-sponsored enterprises 

(GSEs) loans receiving a HAMP modification in 2012, nearly three-quarters included 

some principal reduction. 

DOMESTIC FINANCE—HOUSING

Question. Some have suggested that principal forgiveness on Fannie Mae and 

Freddie Mac mortgages would enrich banks that hold second liens.2

But principal forgiveness is essential for struggling homeowners and for restoring 

the health of our housing market. How can the Congress help homeowners while 

preventing a windfall for banks? 
61 

The concern that principal reduction could offer a benefit to large financial institutions that hold subordinate second liens is addressed HAMP through the associated Second Lien Modification Program (2MP). Servicers participating in 2MP are 

contractually obligated to proportionately modify each eligible second lien that is 

matched to a first lien HAMP modification. In the case of any first lien that has 

principal reduced in connection with a HAMP modification, the participating 

servicer is required, at a minimum, to reduce a proportional amount of principal on 

the associated second lien. Most major servicers are participants in 2MP (including 

the five largest mortgage servicers), so instead of providing a windfall to the banks, 

if Fannie Mae and Freddie Mac’s (the GSEs) allowed principal reduction in connection with HAMP modifications on GSEs loans, it would compel the largest banks 

to help homeowners even further by writing down more second liens through 2MP. 

Prior to the launch of 2MP, it was often difficult to even determine the owner of 

a second lien on a property subject to a first lien modification. Treasury facilitated 

the creation of a nationwide system to match first and second liens, thereby facilitating and ensuring that second liens are modified when there is a first lien modification, whether or not the modification involves principal reduction. 

ECONOMIC POLICY

Question. In 2006, Christopher Bryski, a constituent of mine, passed away after 

not regaining consciousness from an injury he suffered 2 years prior. His Federal 

student loans were discharged by law when he passed, but his private loans were 

not, so his father is still paying them off. Do you believe that private student loans 

should have the same borrower protections as Federal loans? 

Answer. Treasury defers to the Consumer Financial Protection Bureau (CFPB) on 

the issue of private student loans. CFPB issued a report in July 2012 that discussed 

borrower protections for private student loans. 

QUESTIONS SUBMITTED BY SENATOR MARK KIRK

DOMESTIC FINANCE—HOUSING

Question. In your response to a question during the March 28 hearing, you indicated that you were not familiar with the statements made by Department of Housing and Urban Development Secretary Shaun Donovan during a hearing before the 

Senate Banking Committee on February 28. Secretary Donovan replied to questions 

from Senator Johanns as follows: 

‘‘Senator JOHANNS. Let me ask you about that, because I think you’re making my 

point. How much today would the taxpayers be on the hook for when it comes to 

Fannie and Freddie? Everything, right? 

‘‘Secretary DONOVAN. There—there is no question that taxpayers are at risk for 

those loans being made. What I would also say, though, is all the evidence that we 

have is that the new loans being made are safe, good loans; that the exposure that 

taxpayers have is to the legacy loans that were made before they went into conservatorship. 

‘‘Senator JOHANNS. How much—— 

‘‘Secretary DONOVAN. This is where the confidence issue is important. The singlemost important thing we can do to protect taxpayers is ensure that those old loans, 

which we can’t make go away, perform in a way that improves their value, rather 

than continue as their value decline. In that sense, improving the housing market 

more broadly, keeping confidence in the securities that are issued by Fannie and 

Freddie, is critical going forward. 

‘‘Senator JOHANNS. How much are those legacy loans? If you’re the average taxpayer out there, and you’re tuned into this hearing, and you want to know how 

much you’re on the hook for, how much is that? 

‘‘Secretary DONOVAN. I’m sorry, Senator. I don’t have a number in front of me. 

Perhaps—I know that FHFA will be testifying on the next panel. I’m sure that they 

would have more specific details. But it’s obviously substantial, in the over-trilliondollar range.’’ 

Your specific response during the March 28 hearing was: 

‘‘The FHFA does a regular periodic assessment of what future losses might be, 

even in the event if we face another recession or another crisis. And those are put 

in the public domain and they periodically revisit those. But I’ll tell you what they 

show. What they show is that all the losses they face going forward now are really 

the legacy problem of the choices they made during the financial boom. And today, 

because of the changes put in place since the crisis under the legislation Congress 
62 

passed, they have much more conservative underwriting standards and much more 

conservative lending practices. And most independent economists assessing their 

book of business would say that the new businesses they’re doing today, which is 

still important to the housing market, is done on much more conservative financial 

terms and looks relatively profitable. And over time, those profits are helping reduce 

the losses we inherited. But what FHFA does—and this is appropriate—is to periodically publish estimates of what those losses might be in the future to the taxpayer under even much—even, you know, a significantly worse economic scenario. 

And—but the estimates out there, including ones made by CBO are nothing close 

to $1 trillion.’’ 

To clarify the precise level of exposure, please provide Treasury’s estimate of the 

value of outstanding mortgage loans that carry a direct or indirect Federal guarantee, broken down by ‘‘legacy loans’’ and ‘‘loans since 2010’’, accompanied with an 

estimate of taxpayer exposure to loss. Also respond as to whether you view debt forgiveness as part of a plan to minimize the taxpayers’ long-term loss exposure. 

Answer. The majority of losses at the GSEs stem from loans guaranteed prior to 

2009. FHFA has conducted stress tests in order to project potential GSE losses and 

draws from Treasury over a 3-year forward-looking window. However, it is important to note that these are modeled projections and can change over time as inputs 

and assumptions change. 

In the ‘‘Projections of the Enterprises Financial Performance’’, FHFA reported on 

October 26, 2012, FHFA projected results for the period of 2013–2015. These results 

estimated that the cumulative amount of draws from Treasury less the dividends 

paid to Treasury for FHFA baseline scenario since conservatorship and through 

2015 was $53 billion for Fannie Mae and $23 billion for Freddie Mac. Under a stress 

scenario, FHFA projected these amounts to be $94 billion for Fannie Mae and $38 

billion for Freddie Mac. 

The administration uses these projections as the starting point for its budget estimate of the cost of Treasury support for Fannie Mae and Freddie Mac and will provide updated estimates in the fiscal year 2014 budget. In the administration’s fiscal 

year 2013 mid session review, net payments of senior preferred liquidity payments 

minus dividends were projected to be $12 billion through the budget window of 

2009–2022. The lower figure reflects FHFA’s projected stronger results and dividend 

payments to Treasury in the 2015–2022 period. 

Treasury supports using principal reduction on a targeted basis where it makes 

economic sense to do so. When principal reduction is used in combination with a 

payment-reducing loan modification such as a HAMP modification, it can be an effective way to help underwater borrowers avoid foreclosure and help housing markets to recover. 

Question. The debt limit increase approved as part of the Budget Control Act of 

2011 is expected to accommodate the Treasury’s borrowing needs until the end of 

this year. Following the Student Aid and Fiscal Responsibility Act of 2009, student 

debt issuances by the Federal Government have widely expanded to displace loans 

no longer made through the subsidized student loan market, adding new demands 

for Treasury funding. 

What is the numerical change in dollars to debt subject to the limit caused by 

this expansion in Government-issued student debt? How many days did student 

loan debt accelerate the need for a debt limit increase in 2011? 

Currently, the Government is recovering 85 percent of every student loan dollar 

that goes into default status. 

Are default rates greater than expected, and how is that affecting Treasury’s ability to project its cash flow needs? 

Answer. Student loans are a critical part of the administration’s goal to increase 

access to higher education. Treasury plays an important role in financing direct 

loans and supporting delinquent debt collection across the Government. Borrowing 

related to student loans and grants increased our overall borrowing needs in fiscal 

year 2011 by approximately $155 billion, which was one of the factors that contributed to the need for a debt limit increase in 2011. Treasury has been working with 

the Office of Management and Budget and the Department of Education to analyze 

the data relating to student lending in order to accurately ascertain the lending program’s impact on cash flows. This is an important issue that Treasury will continue 

to analyze and monitor closely. 

INTERNATIONAL AFFAIRS

Question. A recent Federal Reserve paper concludes that Chinese foreign official 

flows into the United States and acquisition of United States Treasuries has had 

significant effects on Treasury yield, reducing interest rates. 
63 

Should we be encouraging foreign holdings of Federal debt, rather than criticizing 

them? 

What are the risks related to foreign holdings of Federal debt that might offset 

our interest savings? 

Answer. The market for Treasury securities is the deepest and most liquid fixed 

income market in the world. As a result, Treasury securities have a diverse investor 

based—domestic and international, small and large. We view this as a source of confidence in our market and an indication of the status Treasury instruments occupy 

in global fixed income markets. More broadly, the United States has a longstanding 

open investment policy, which has been beneficial to our growth and employment. 

TERRORISM AND FINANCIAL INTELLIGENCE—TERRORIST FINANCING AND FINANCIAL

CRIMES/OFFICE OF FOREIGN ASSETS CONTROL SANCTIONS

Question. On February 27, 2012, the Treasury Department issued a fact sheet entitled ‘‘Treasury Amends Iranian Financial Sanctions Regulations to Implement the 

National Defense Authorization Act’’ in which you wrote, ‘‘Beginning on February 

29, 2012, privately-owned foreign financial institutions that knowingly conduct or 

facilitate any significant financial transaction with the CBI other than for the purchase of petroleum or petroleum products from Iran face U.S. sanctions, consistent 

with subsection 1245(d) of the NDAA.’’ Nearly 1 month later, no sanctions have 

been imposed pursuant to subsection 1245(d) of the fiscal year 2012 National Defense Authorization Act (NDAA) (commonly known as the ‘‘Menendez-Kirk’’ amendment). As you know, unlike other sanctions law, the imposition of sanctions under 

‘‘Menendez-Kirk’’ is not contingent on a Presidential determination. Simply put, 

under U.S. law, sanctions must be imposed when sanctionable activity is found. 

Why is the administration not complying with the ‘‘Menendez-Kirk’’ amendment 

when it comes to the imposition of sanctions with regard to nonoil transactions conducted with the Central Bank of Iran? 

Answer. The Treasury Department is aggressively implementing the ‘‘MenendezKirk’’ amendment, along with the full range of sanctions that we administer against 

Iran, to disrupt the Government of Iran’s incoming revenue streams and its access 

to its existing revenues. As a key part of these efforts, we will continue to target 

both oil and nonoil dealings with the Central Bank of Iran under all appropriate 

authorities. 

Question. Are you willing to report to us in writing that since February 29, 2012, 

the Treasury Department has found no evidence of activity sanctionable under subsection 1245(d) of the fiscal year 2012 NDAA? 

Answer. The Treasury Department is aggressively implementing the ‘‘MenendezKirk’’ amendment, along with the full range of sanctions that we administer against 

Iran, to disrupt the Government of Iran’s incoming revenue streams and its access 

to its existing revenues. As a key part of these efforts, we will continue to target 

both oil and nonoil dealings with the Central Bank of Iran under all appropriate 

authorities. Treasury will continue to work closely with the Congress as we implement the range of United States sanctions against Iran. 

Question. Are you willing to report to us in writing that since February 29, 2012, 

the Treasury Department has seen no intelligence indicating foreign financial institutions have conducted nonoil transactions with the Central Bank of Iran? 

Answer. Treasury is fully committed to targeting any foreign financial institutions 

engaged in sanctionable dealings with the Central Bank of Iran. However, it is longstanding Treasury policy not to comment on possible investigations. 

Question. My staff has repeatedly asked the Treasury Department to brief in classified session on current intelligence relating to these issues. Why is the Department unwilling to meet with members of the Senate or their staff to discuss the administration’s failure to comply with subsection 1245(d) of the fiscal year 2012 

NDAA? 

Answer. The Treasury Department is unaware of any outstanding briefing requests, but has been and remains willing to provide classified briefings as appropriate to the Congress. 

Question. Has the Treasury Department observed any financial transactions with 

Central Bank of Iran since February 29, 2012, or designated Iranian banks since 

July 1, 2010, that were deemed nonsignificant and for which sanctions under Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 or the 

‘‘Menendez-Kirk’’ amendment were not imposed? If so, on what basis were the determinations made that the transactions were not significant? What foreign financial 

institutions were responsible for processing these transactions? 

Answer. Treasury is fully committed to a robust implementation of the range of 

Iran sanctions that we administer to maximize their impact on the Government of 
64 

Iran. However, it is longstanding Treasury policy not to comment on possible investigations. 

SUBCOMMITTEE RECESS

Senator DURBIN. The subcommittee will stand recessed. 

[Whereupon, at 3:23 p.m., March 28, the hearing was concluded, 

and the subcommittee recessed, to reconvene subject to the call of 

the Chair.] 
(65) 

FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 

YEAR 2013 

WEDNESDAY, APRIL 18, 2012 

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

The subcommittee met at 2:33 p.m., in room SD–138, Dirksen 

Senate Office Building, Hon. Richard J. Durbin (chairman) presiding. 

Present: Senators Durbin and Moran. 

GENERAL SERVICES ADMINISTRATION 

STATEMENT OF DANIEL M. TANGHERLINI, ACTING ADMINISTRATOR 

OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

Senator DURBIN. Good afternoon. Today, we convene the hearing 

of the Appropriations Subcommittee on Financial Services and 

General Government, to discuss the report of the Inspector General 

of the General Services Administration (GSA), as well as budget 

issues facing the GSA. 

I welcome my colleague, Senator Jerry Moran of Kansas, the 

ranking member. I also welcome the Acting Administrator, Daniel 

M. Tangherlini. Did I pronounce that right, Dan? Thank you. And 

GSA Inspector General Brian D. Miller. 

Earlier this year, I made decisions about which of the many 

agencies under our jurisdiction—and we have quite a few of them— 

would actually appear for a formal public hearing for the fiscal 

year 2013 funding needs. GSA was 1 of the 4 that I designated, 

and we started preparing for this hearing some time ago. 

The inspector general’s recent release of disturbing findings disclosing serious mismanagement deficiencies related to an internal 

conference have added a new dimension to this hearing. Today, 

we’ll attempt to gain a clear understanding of what transpired and 

what is being done to change it. 

I was outraged and embarrassed to learn about the spending 

that occurred as a result of that conference, and I’m eager to hear 

how GSA will ensure that it never happens again. 

We’ll also examine GSA’s ability to fulfill its program obligations 

and the future space needs of Federal agencies during a time of 

debt reduction. 

Recently, the Office of Inspector General of GSA issued a management-deficiency report detailing an array of highly troubling 
66 

findings resulting from the investigation into a 4-day internal staff 

conference held in October 2010. The report describes how a host 

of Federal contracting rules were skirted, ignored, or violated in 

the planning and execution of this event. 

Issuance of the report on April 2 sparked the immediate resignation of the GSA Administrator and two other key agency officials 

and the imposition of other personnel decisions for five other highlevel regional management staff. 

It also has generated a flurry of attention here in the Congress. 

I think we’re the fourth of four hearings in 4 days on this issue. 

Some of the more appalling lapses are not necessarily the activities that have caught a lot of media attention, some of the sensational events, such as renting a clown costume or a session featuring a mentalist. 

What’s baffling to me is that there were apparently numerous examples of excessive spending and improper adherence to contracting rules, brazen finagling of event sessions to justify food and 

other expenditures, multiple occurrences of advance long-distance 

travel to the site and appalling lack of adherence to longstanding 

Federal law about holding Federal events in lodging facilities that 

meet fire-safety specifications. 

It’s also mind-boggling that somewhere along the way during the 

year of planning for this conference that someone didn’t say, ‘‘Wait 

a minute. Isn’t this going overboard?’’ 

What is most regrettable is that incidents such as this tarnish 

the public perception of the workings of the entire Federal Government, the services delivered by an otherwise dedicated workforce 

and the stewardship of precious Federal funds, taxpayers’ dollars. 

In fact, the investigation began because the Deputy Administrator of the GSA asked the inspector general to examine the matter as soon as two employees mentioned to her activities that 

sounded improper. I expect action to be taken swiftly to ensure 

that all rules are explicitly followed in the future. 

This all contributes to my dismay as to how all of this was allowed to happen. And I look forward to hearing from the Acting 

Administrator and the inspector general about the situation that 

led up to these findings and corrective actions. 

While this fiasco in the western regions of the Public Buildings 

Service (PBS) deserves attention it’s been receiving, and corrective 

measures, as I’ve mentioned, there are other issues relating to the 

GSA of importance as well. Those include the ability of GSA to fulfill its statutory responsibility and to meet the needs of Federal 

agencies across the board that depend on good management. 

Most GSA annual spending comes from a large revolving fund, 

the Federal Buildings Fund (FBF), which finances real property 

management of the U.S. Government. Through this account, GSA 

operates, maintains, and repairs federally owned and leased buildings and constructs Federal buildings, courthouses, and border stations. It is financed largely through proceeds from rental payments 

from other agencies. 

Prior to fiscal year 2010, typically between 10 and 20 major construction and repair projects were requested by the President and 

funded. Most of the balance is used for rent payments to private 

landlords and building operations. 
67 

Once debt-reduction efforts hit in fiscal year 2010, those accounts 

were dramatically reduced in order to stay within the subcommittee funding allocation. 

As GSA examines where it can spend less, certain bills, such as 

rent and utility charges, must be paid, and those have continued 

to increase. 

The FBF has two contractually obligated bills which continue to 

increase substantially. The biggest and fastest growing is the rental of space account and, to a lesser degree, the building operations 

account. 

When GSA does not receive full funding for these accounts to 

meet its contraction obligations, it is legally liable for default. Reductions within the FBF also impact other Federal agencies. 

I’m going to put the rest of my remarks in the record, but I’m 

going to be asking questions along the lines of what has been the 

impact of these budget and appropriations decisions on ongoing 

building projects that have been stopped or delayed. Will it cost us 

more when we resume? Are we actually saving any money by putting off the completion of some of these construction projects? 

PREPARED STATEMENT

In addition to the requested increases this year, the fiscal year 

2013 request reduces spending by $16.2 million, 20-percent less 

than the fiscal year 2010 levels for certain administrative expenses 

and to keep consulting and advisory contract spending levels on 

GSA operations at $32.8 million (or 15 percent) less than fiscal 

year 2010 levels. 

[The statement follows:] 

PREPARED STATEMENT OF SENATOR RICHARD J. DURBIN

Good afternoon. Today, we convene this hearing of the Appropriations Subcommittee on Financial Services and General Government to discuss the report of 

the Inspector General (IG) of the General Services Administration (GSA) as well as 

budget issues of the GSA. 

I welcome Senator Jerry Moran, the ranking member, and other colleagues who 

have joined me on the dais today. I also welcome GSA Acting Administrator Daniel 

M. Tangherlini and GSA IG Brian D. Miller to the hearing. 

Earlier this year, I made decisions about which of the many agencies under the 

jurisdiction of this subcommittee should appear for a formal public hearing relating 

to their fiscal year 2013 funding needs. GSA was 1 of the 4 I designated, and my 

staff have been preparing for this hearing for a few months. The IG’s recent release 

of disturbing findings disclosing serious management deficiencies relating to an internal conference have added a new dimension to our discussion. 

Today, we’ll attempt to gain a clear understanding of what transpired with regard 

to the conference held a year-and-a-half ago by the western regions of the Public 

Buildings Service (PBS). 

I was outraged to learn about the spending that occurred as a result of that conference and I am eager to hear how GSA will ensure that it never happens again. 

We’ll also examine GSA’s ability to fulfill its program obligations and the future 

space needs of Federal agencies during a time of debt reduction. 

GENERAL SERVICES ADMINISTRATION INSPECTOR GENERAL REPORT ON THE WESTERN

REGIONS CONFERENCE

Recently, the GSA IG issued a management deficiency report detailing an array 

of highly troubling findings as a result of an investigation into a 4-day internal staff 

conference held in October 2010. The report describes how a host of Federal contracting rules were skirted in the planning and execution of this event. 

Issuance of this report on April 2 sparked the immediate resignations of the GSA 

Administrator and two other key agency officials, and the imposition of other per-
68 

sonnel decisions for five other high-level regional management staff. It also has generated a flurry of attention here in the Congress with at least four hearings this 

week alone and others perhaps in the offing. 

Some of the more appalling lapses are not necessarily the activities that are garnering some of the sensationalized media attention such as the rental of a clown 

costume for a skit or a session featuring a mentalist. What is baffling to me is that 

there were apparently: 

—numerous examples of excessive spending and improper adherence to contracting rules; 

—brazen finagling of event sessions to justify the provision of food; 

—multiple occurrences of advance long-distance travel to the site; and 

—an appalling lack of adherence to long-standing Federal law about holding Federal events in lodging facilities that meet fire-safety specifications. 

It is also mind-boggling that somewhere along the way during the year of planning for this conference someone didn’t say, ‘‘Wait. Stop. This is out-of-line. This 

does not look right.’’ 

What is most regrettable is that incidents such as this tarnish the public perception of the workings of the entire Federal Government, the services delivered by its 

dedicated workforce, and the stewardship of precious Federal funds. In fact, the investigation began because the Deputy Administrator of the GSA asked the IG to examine the matter as soon as two employees mentioned to her activities that sounded 

improper. I expect actions will be taken swiftly to ensure that all rules are explicitly 

followed in the future and that proper oversight mechanisms are established. 

This all contributes to my dismay as to how all of this was allowed to happen, 

and I look forward to hearing from Acting Administrator Tangherlini and IG Miller 

today about the situation that led to the management deficiency findings and the 

forecast for corrective actions. 

While this fiasco in the western regions of the PBS deserves the attention it has 

been receiving, along with corrective measures to address it, there are other issues 

that deserve our attention as well. And those include GSA’s ability to fulfill its program obligations and the future space needs of Federal agencies during a time of 

debt reduction. 

THE FEDERAL BUILDINGS FUND

Most GSA annual spending comes from a large revolving fund—the Federal Buildings Fund (FBF)—which finances real property management for the Federal Government. Through this account, GSA operates, maintains, and repairs federally 

owned and leased buildings and constructs Federal buildings, courthouses, and border stations. It is financed largely through proceeds from rental payments from 

other agencies (using appropriated funds). 

Prior to fiscal year 2010, typically, between 10 and 20 major construction and repair projects were requested in the President’s budget and funded. Most of the balance is used for rent payments to private landlords and building operations. Once 

debt reduction efforts hit in fiscal year 2010, those accounts were drastically reduced in order to stay within the subcommittee’s funding allocation, which couldn’t 

provide for all the priority needs. 

As GSA examines where it can spend less, certain bills, such as rent and utility 

charges, must be paid and those have continued to increase. 

WE MUST PAY THE OBLIGATORY BILLS

The FBF has two contractually obligated bills which continue to increase substantially. The biggest and fastest growing is the rental of space account (the leasing 

of privately owned buildings) and, to a lesser degree, the building operations account (the cleaning, utilities, and maintenance expenses of leased and Governmentowned space). When GSA does not receive full funding for these accounts to meet 

its contractual obligations, GSA is legally liable for default. 

Reductions within the FBF also impact other Federal agencies. 

EFFECTS OF LITTLE CONSTRUCTION AND OF NO MAJOR REPAIRS TO BUILDINGS

The construction and repair accounts have been drastically reduced, significantly 

impacting Federal agencies’ abilities to operate efficiently. 

The near-elimination of construction projects also makes these projects more expensive by delaying them. It will have the effect of requiring more leasing of Federal 

buildings, which is more expensive over the long-term than federally owned space. 

A good example of this is the Department of Homeland Security (DHS) St. Elizabeths headquarters consolidation project, which has slowed to a crawl, prompting 
69 

fears that not all Department elements will move and costing the Government more 

than planned as DHS agencies stay in leased space. 

The complete elimination of major repair projects for the past 2 years has put 

some current projects on hold, such as the Daniel Patrick Moynihan U.S. Courthouse in New York, which is a top priority of the Federal judiciary. This Courthouse 

is one of the buildings housing the Southern District of New York—the busiest and 

largest Federal court in the country. Also, this has meant no funding for the requested main Interior Department building (currently under refurbishment, including hazardous material abatement) or the requested final phase of the State Department building (Truman Building). 

The American Recovery and Reinvestment Act allowed GSA to begin to reduce the 

backlog of $8.4 billion in buildings needing repairs or alterations by $1.4 billion, 

while creating more than 60,000 jobs in the process. Now, that backlog is growing 

again and how long that will continue is anyone’s guess. 

I recognize that all agencies need to do their part to address our current economic 

situation, but we need to do it in a way that makes sense; not this drastic approach 

that leaves our agencies in substandard facilities or ill-equipped to carry out their 

missions efficiently, often costing the Government more money in the long run. 

Now, we turn to GSA’s fiscal year 2013 budget request. 

FISCAL YEAR 2013 BUDGET REQUEST

The fiscal year 2013 request for GSA’s appropriated accounts is a net increase of 

$33 million from the fiscal year 2012 enacted level, the majority of which ($21 million) is for modernization, upgrades, and continued operation of a Governmentwide 

information system. This new system will improve contract and grant award management and reporting. 

In addition to the requests increases, the fiscal year 2013 request reduces spending $16.2 million, 20-percent less than fiscal year 2010 levels, for certain administrative expenses and keep consulting and advisory contract spending levels on GSA 

operations, at $32.8 million (or 15 percent) less than fiscal year 2010 levels. 

I now turn to my Ranking Member, Senator Moran, for any remarks that he 

would like to make. 

Senator DURBIN. I’m now going to turn the floor over to my ranking member and friend, Senator Moran, for any remarks he’d like 

to make. 

STATEMENT OF SENATOR JERRY MORAN

Senator MORAN. Chairman Durbin, thank you very much for conducting this hearing. As members of the Senate Appropriations 

Committee, our oversight of spending by Federal agencies, in my 

view, is our most-critical responsibility. 

I was appalled, as you said you were, to read the accounts of the 

inappropriate actions of some GSA employees outlined in the inspector general’s report of abuses connected to a regional conference held in 2010. 

I have since learned that this was not an isolated incident of 

abuse of taxpayer dollars and that other questionable expenditures 

have come to light as a result of the inspector general’s investigation. 

I would also add that it reminds me of the value of inspector generals and the investigations that they conduct on behalf of seeing 

that the right is wrong, that wrong is altered. 

This conduct on the part of these few Federal employees is an 

unacceptable abuse of the American taxpayers’ trust. It is unconscionable that, at a time when our national debt stands at more 

than $15 trillion, individuals within the Federal Government completely ignore our country’s fiscal reality and behave in ways that 

reflect an attitude that the funding of their particular agency belongs to them rather than to the American taxpayer. 
70 

This is the kind of behavior that exacerbates opposition to Federal spending, even where that spending is legitimate. It is also important to note that every dollar misspent by GSA was funding 

that could have been used to fund other critical Federal programs. 

If Americans lack faith in the Federal Government as a responsible steward of taxpayer dollars, why would they ever support decisions related to Federal spending? 

I welcome this opportunity to ask our witnesses today for answers to how this type of conduct could happen. How can an agency 

responsible for providing guidance to the rest of the Federal Government on correct use of taxpayer dollars tolerate a lack of accountability? 

Those responsible should be held accountable. An agency culture 

which allowed such behavior to flourish must be altered. 

I hope that this is just not the tip of the iceberg. Billions in taxpayer dollars have been spent on Government conferences. We 

must have safeguards in place to ensure that this conduct, this 

spending pattern never happens again at GSA or any other Federal 

agency. 

I welcome the opportunity to work with my colleagues to determine whether legislative action is necessary to institute more stringent safeguards to ensure appropriate spending on legitimate Government functions, transparency and accountability. 

All Federal agencies have a duty to act as careful stewards of the 

taxpayer dollar, and those who disregard that duty should and will 

be held accountable. 

Senator MORAN. Thank you, Mr. Chairman. 

Senator DURBIN. Thank you, Senator Moran. 

Mr. Tangherlini, the floor is yours. 

SUMMARY STATEMENT OF DANIEL M. TANGHERLINI

Mr. TANGHERLINI. Thank you, Chairman Durbin, and thank you, 

Ranking Member Moran and members of the subcommittee. 

My name is Daniel M. Tangherlini and I’m the Acting Administrator of GSA. 

I appreciate the opportunity to come before the subcommittee 

today to discuss the GSA inspector general’s report as well as the 

GSA fiscal year 2013 budget request. 

First and foremost, I want to state that the waste and abuse outlined in the inspector general’s report is an outrage and completely 

antithetical to the goals of this administration. 

The report details violations of travel rules, acquisition rules, 

and good conduct. But, just as importantly, those responsible violated rules of common sense, the spirit of public service and the 

trust that the American taxpayers have placed in all of us. 

I speak for the overwhelming majority of GSA staff when I say 

that we are as shocked, appalled, and deeply disappointed by these 

indefensible actions as you are. 

We’ve taken strong action against those officials who are responsible and will continue to do so where appropriate. I intend to uphold the highest ethical standards at this agency, including referring any criminal activity to appropriate law enforcement officials 

and taking any action that is necessary and appropriate. 
71 

If we find any irregularities, I will immediately engage GSA’s Inspector General, Brian D. Miller, and, as indicated in the joint letter that the inspector general and I sent to all GSA staff, we expect 

an employee who sees waste, fraud, or abuse to report it. We want 

to build a partnership with the inspector general, while respecting 

their independence, that will ensure that nothing like this will ever 

happen again. 

There’ll be no tolerance for employees who violate or in any way 

disregard these rules. I believe this is critical, not only because we 

owe it to the American taxpayers, but also because we owe it to the 

many GSA employees who work hard, who follow the rules and deserve to be proud of the agency that they serve. 

We have also taken steps to improve internal controls and oversight to ensure this never happens again. Already, I have cancelled 

all future Western Regions Conferences (WRC). I have also cancelled 35 previously planned conferences, saving nearly $1 million 

in taxpayer expenses. 

I’ve suspended the Hats Off stores and have already demanded 

reimbursement from Mr. Bob Peck, Mr. Robert Sheppard, and Mr. 

Jeff Neely for private, in-room parties. 

I’ve cancelled most travel through the end of the fiscal year GSAwide, and I am centralizing budget authority and have already centralized procurement oversight for regional offices to make them 

more directly accountable. 

I look forward to working in partnership with this subcommittee 

to ensure that there’s full accountability for these activities, so that 

we can begin to restore the trust of the American people. 

I hope that in so doing GSA can refocus on its core mission, saving taxpayers money by efficiently procuring supplies, services, and 

real estate and effectively disposing of unneeded property. 

We believe that there has seldom been a time of greater need for 

these services and the savings they bring to the Government and 

the taxpayer. 

There’s a powerful value proposition to a single agency dedicated 

to this work, especially in these austere fiscal times. We need to 

ensure we get back to basics and conduct this work better than 

ever. And at GSA our commitment is to service, to duty, and to our 

Nation and not to conferences, awards, or parties. 

The unacceptable, inappropriate, and possibly illegal activities at 

the WRC stand in direct contradiction to the express goals of this 

agency and the administration. And I’m committed to ensuring 

that we take whatever steps are necessary to hold responsible parties accountable and to make sure that this never happens again. 

We need to refocus this agency and get back to the basics, 

streamlining the administrative work of the Federal Government to 

save taxpayers money. The goal is supported by the GSA fiscal 

year 2013 budget request. This will help to deliver a more effective 

and efficient Government. 

PREPARED STATEMENT

To conclude, I look forward to working with this subcommittee 

moving forward, and I welcome the opportunity to take any questions. 

Senator DURBIN. Thank you. 
72 

[The statement follows:] 

PREPARED STATEMENT OF DANIEL M. TANGHERLINI

Chairman Durbin, Ranking Member Moran, and distinguished members of the 

subcommittee: My name is Daniel M. Tangherlini, and I am the Acting Administrator of the General Services Administration (GSA). Thank you for inviting me to 

appear before you today to discuss the GSA Inspector General’s (IG) report as well 

as the GSA fiscal year 2013 budget request. 

First and foremost, I want to state my agreement with the President that the 

waste and abuse outlined in the IG report is an outrage and completely antithetical 

to the goals and directives of this administration. We have taken strong action 

against those officials who are responsible and will continue to do so where appropriate. We are taking steps to improve internal controls and oversight to ensure this 

never happens again. I look forward to working in partnership with this subcommittee to ensure there is full accountability for these activities so that we can 

begin to restore the trust of the American people. 

At the same time I am committed to renewing GSA’s focus on its core mission: 

saving taxpayers’ money by efficiently procuring supplies, services, and real estate, 

and effectively disposing of unneeded Government property. There is a powerful 

value proposition to a single agency dedicated to this work, especially in these fiscal 

times, and we need to ensure we get back to basics and conduct this work better 

than ever. 

PROMOTING EFFICIENCY AND REDUCING COSTS

The shocking activities and violations outlined in the IG report run counter to 

every goal of this administration. The administration makes cutting costs and improving the efficiency of the Federal Government a top priority. On June 13, 2011, 

the President issued Executive Order 13576, ‘‘Delivering an Efficient, Effective, and 

Accountable Government’’. This Executive order emphasized the importance of 

eliminating waste and improving efficiency, establishing the Government Accountability and Transparency Board to enhance transparency of Federal spending and 

advance efforts to detect and remediate fraud, waste, and abuse. 

The President further established the goals of this administration in Executive 

Order 13589, ‘‘Promoting Efficient Spending’’, which set clear reduction targets for 

travel, employee information technology (IT) devices, printing, executive fleets, promotional items, and other areas. The President’s fiscal year 2013 budget request for 

GSA would achieve $49 million in savings under this Executive order, including 

$9.7 million in travel. 

HOLDING OFFICIALS RESPONSIBLE

It is important that those responsible for the abuses outlined in the IG’s report 

be held accountable. We are taking aggressive action to address this issue and to 

ensure that such egregious actions will never occur again. We have taken a series 

of personnel actions, including the removal of two senior political appointees. We 

have also placed 10 career employees on administrative leave, including 5 senior officials. 

I intend to uphold the highest ethical standards at this agency and take any action that is necessary and appropriate. If we find any irregularities, I will immediately engage the IG. As I indicated in my joint letter with GSA’s IG, I intend to 

set a standard that complacency will not be tolerated, and waste, fraud, or abuse 

must be reported. 

I believe this commitment is critical, not only because we owe it to the American 

taxpayers, but also because we owe it to the many GSA employees who conform to 

the highest ethical standards and deserve to be proud of the agency for which they 

work. 

TAKING ACTION

I have taken a number of steps since I began my tenure on April 3, 2012, to ensure this never happens again. GSA has consolidated conference oversight in the 

new Office of Administrative Services, which is now responsible for: 

—Oversight of contracting for conference space, related activities, and amenities; 

—Review and approval of proposed conferences for relation to GSA mission; 

—Review and approval of any awards ceremonies where food is provided by the 

Federal Government; 

—Review and approval of conference budgets as well as changes to those budgets; 
73 

1 A conference is ‘‘a symposium, seminar, workshop, or other organized or formal meeting lasting portions of 1 or more days where people assemble to exchange information and views or explore or clarify a defined subject, problem or area of knowledge.’’ 

—Oversight and coordination with GSA conference/event planners and contracting 

officers on conference planning; 

—Review of travel and accommodations related to conference planning and execution; 

—Handling of procurement for all internal GSA conferences; and 

—Development of mandatory annual training for all employees regarding conference planning and attendance. 

Additionally, we have cancelled the 2012 Western Regions Conference (WRC) as 

well as a number of other conferences that only or primarily involved internal staff. 

To date, I have cancelled 35 conferences,1 saving taxpayers $995,686. As we put in 

place greater controls and oversight, we are reviewing each event to make sure that 

any travel is justified by a mission requirement. 

We have also begun review of employee relocations at Government expense, and 

will require all future relocations to be approved centrally by both the Chief People 

Officer and the Chief Financial Officer. 

To strengthen internal controls, we are bringing in all Public Buildings Service 

regional budgets under the direct authority of GSA’s Chief Financial Officer. The 

autonomy of regional budget allocations is, in part, what led to this gross misuse 

of taxpayer funds on both the regional conference and the employee rewards program known as ‘‘Hats Off’’. The additional approvals and centralized oversight are 

intended to mitigate the risk of these problems. 

In response to concerns over spending on employee rewards programs, I have 

eliminated the ‘‘Hats Off’’ store that was operating in the Pacific Rim region, as well 

as all similar GSA programs. 

I am moving aggressively to recapture wasted taxpayer funds. As a first step, on 

April 13, I directed that letters be sent to Bob Peck, Jeff Neely, and Robert Shepard 

demanding reimbursement for private, in-room receptions at the WRC. I will pursue 

other fund recovery opportunities. 

I am engaged in a top-to-bottom review of this agency. I will continue to pursue 

every initiative necessary to ensure this never happens again and to restore the 

trust of American taxpayers. 

FISCAL YEAR 2013 BUDGET REQUEST

The GSA fiscal year 2013 budget proposal aligns with our value proposition: GSA 

helps agencies deliver more for their missions. 

Across a range of program areas including the move to cloud email, developing 

one-stop shop IT security protocols through Federal Risk and Authorization Management Program (FedRAMP), leveraging the bulk cooperative buying power of the 

Government with Federal Strategic Sourcing opportunities, and using the latest in 

real estate portfolio planning, GSA brings expertise and efficiency to the table in 

service of our customers and the taxpayer. 

COST SAVINGS AT THE GENERAL SERVICES ADMINISTRATION

In accordance with Executive Order 13589, ‘‘Promoting Efficient Spending’’, our 

fiscal year 2013 budget would achieve $49 million in savings, including $9.7 million 

in travel. In addition, GSA will maintain consulting and advisory contract spending 

at $32.8 million less than fiscal year 2010 levels. 

TARGETED INVESTMENTS IN CRITICAL INFRASTRUCTURE

Federal Buildings Fund 

Our fiscal year 2013 budget requests $8.6 billion in New Obligational Authority 

(NOA) for the FBF associated with $9.7 billion in estimated fiscal year 2013 revenue. This request includes a capital investment program of $551 million. GSA is 

not requesting an appropriation to the FBF, and would fund the fiscal year 2013 

new obligation authority request from balances in the FBF. This year we are requesting a very limited amount of funding to support exigent need and high return 

on investment capital projects. Over the longer term, we will need to work with the 

Congress to ensure adequate investment in the capital program to ensure the Federal buildings portfolio does not deteriorate, and we complete critical construction 

projects already initiated such as the Department of Homeland Security consolidation at St. Elizabeths. 
74 

Our request for $56 million in NOA for new construction and acquisition would 

allow GSA to acquire, through existing purchase options, two buildings under lease 

to the Federal Government in Martinsburg, West Virginia, and Riverdale, Maryland. The Government has the option to purchase both buildings at a set price prior 

to the lease expirations. Both facilities are fully utilized by the Federal Government, 

specifically the Internal Revenue Service in Martinsburg, West Virginia and USDA 

in Riverdale, Maryland—and both locations have been identified as a long-term Federal need. The execution of these purchase options would eliminate costly lease obligations and result in millions of dollars in out-year cost avoidance to the Government. 

GSA requests NOA of $495 million for repairs and alterations to Federal buildings. Our proposed repairs and alteration program includes: 

—Exigent needs projects in 20 Federal buildings to repair critical building and 

safety systems including elevators; fire and life safety, electrical, and heating 

and ventilation systems; and repairing structural deficiencies ($123 million); —Nonprospectus repairs and alterations projects ($341 million); 

—Energy and water retrofit and conservation measures ($15 million); and 

—Consolidation activities to alter interior space in the Daniel Patrick Moynihan 

Courthouse, New York, New York, and Peachtree Summit Federal Building, Atlanta, Georgia, to consolidate various agencies from lease space into federally 

owned space ($16 million). 

Like the lease purchase options outlined above, consolidation of Federal activities 

from leased to owned space will result in millions of dollars in annual cost avoidance. 

In addition to our capital program, GSA requests NOA for our operating program, 

in the amount of: 

—$5.5 billion for the Rental of Space program, which will provide for 199 million 

rentable square feet of leased space; 

—$2.4 billion for the Building Operations program; and 

—$120 million for the Installment Acquisition Payments program. 

We intend to assure PBS dollars will be spent on cost-effective projects and services that advance our customer’s missions. We will not fund projects or services that 

have questionable returns or excessive overhead expenses. 

General Services Administration Operating Appropriations 

The GSA fiscal year 2013 budget requests $272 million for our operating appropriations that provide for the Office of Governmentwide Policy, the governmentwide 

programs of the Operating Expenses account, the GSA IG, the Electronic Government Fund, the pensions and office staffs of former Presidents, the Federal Citizen 

Services Fund, and, if needed, Presidential transition. 

Our budget requests an additional $23 million more than the fiscal year 2012 

level for the Governmentwide policy appropriation, including $21 million for the continued modernization of the Integrated Acquisition Environment (IAE) investment 

in the Systems for Awards Management (SAM) project and $2 million for Information Sharing and Identity Management (ISIM). GSA is the program manager for the 

IAE, an Electronic Government (EGov) program. On behalf of all Federal agencies, 

GSA is managing 10 outdated, separate systems which will be consolidated into a 

single, integrated platform to support Federal acquisition, grants, and loans management. The first phase of the ongoing consolidation effort will launch May 2012. 

For fiscal year 2013, GSA is requesting SAM investment funding to further consolidate and simplify the disparate systems. Further consolidation will improve Governmentwide reporting on how Federal tax dollars are spent, reduce redundancy and 

the burden on all businesses—in particular on small businesses who do work for the 

Federal Government, significantly improve data quality as well as the exchange of 

information across the acquisition, financial, grants, and loan communities. 

The ISIM program is providing the civilian agencies with standards for the Federal information-sharing environment. ISIM will establish capabilities for sharing 

information—grant, financial, acquisition, and other data—within and across Federal departments using secure, common standards. This investment is critical to 

allow Federal agencies to share and rapidly access secure information that supports 

mission delivery. GSA will develop common data standards or attributes in collaboration with agencies that complement our responsibilities for the Federal Identity 

and Access Management program and ensure security, privacy, and interoperability 

best practices. 

We have requested an increase of $4.3 million for the Electronic Government 

Fund to improve citizen engagement with the Government through innovative technologies and to improve delivery of Government services to the public. The additional funding will support expanded efforts to improve Government service by pro-
75 

viding other agencies with technology and expertise to improve their interactions 

with the public. GSA will continue to build governmentwide capability to engage 

citizens in dialogues and challenges to solve complex issues directly impacting the 

public. 

In accordance with the Presidential Transition Act of 1963, as amended, GSA requests $8.9 million for an orderly transfer of Executive power in connection with the 

expiration of the term of office of the President and the Inauguration of a new President. This funding is required only in the event of a change in administration. GSA requests an additional $1 million for the IG. The request also includes $0.3 million for the fiscal year 2013 Federal pay raise and $0.1 million for benefits and 

contract support for former Presidents. 

The proposed fiscal year 2013 increases are offset by net administrative cost re- ductions of $2.1 million in operating expenses and $2.3 million in the Federal Citizen Services Fund. 

SUMMARY STATEMENT

The unacceptable and inappropriate activities at the WRC stand in direct contradiction to the express goals of this agency and the administration, and I am committed to ensuring that we take whatever steps are necessary to hold those responsible accountable and to make sure that this never happens again. At the same 

time, I believe that the need for a high-quality GSA is more acute today than in 

any time in its history. We need to refocus this agency and get back to the basics: 

streamlining the administrative work of the Federal Government to save taxpayers 

money. 

With that said, this goal is directly supported by the GSA fiscal year 2013 budget 

request as it will help to deliver a more effective and efficient Government. 

CLOSING STATEMENT

Mr. Chairman, this concludes my formal statement. I look forward to continuing 

this discussion on the GSA IG report and our fiscal year 2013 budget request with 

you and the members of the subcommittee. 

Senator DURBIN. Inspector General Miller, the floor is yours. 

STATEMENT OF BRIAN D. MILLER, INSPECTOR GENERAL 

Mr. MILLER. Good afternoon, Chairman Durbin, Ranking Member Moran. Thank you for inviting me here to testify about our report. 

While my report details what went wrong at GSA in connection 

with the WRC, I want to take a moment to focus on what went 

right. 

The system worked. The excesses of the conference were reported 

to my office by a high-ranking political appointee, and our investigation ensued. Not one person prevented us from conducting that 

investigation or obstructed what turns out to be a lengthy investigation. 

As each layer of evidence was peeled back, we discovered that 

there was more to look into. So our investigation continued independently. 

While some have suggested that the investigation took too long 

to produce the final report, anyone familiar with law enforcement 

investigations understands that when you turn over one stone you 

often find more stones that need to be turned over as well. 

Most people also understand the need to be careful and certain 

before making public allegations such as those contained in the report, because careers and reputations are on the line, and my office 

does not take that lightly. 

Moreover, the then GSA Administrator ultimately had control 

over the date on which this report was released because it was the 

Administrator’s response to the final report that triggered its public release. 
76 

Finally, the system has been strengthened by the release of the 

report and by the public attention it has received in the media and 

from both chambers of the Congress. 

While not one of the many career employees and political appointees who were involved in the WRC came forward and reported 

the waste, fraud, and abuse that occurred there, perhaps for fear 

of reprisal, GSA’s honest and hard-working employees now have 

been empowered to bring issues to our attention and they are doing 

so. We have more work than ever. 

And I’d like to take this opportunity to thank the numerous dedicated professionals from throughout the Office of Inspector General 

that worked so many long hours to ensure that the report was accurate and fair and drew no conclusions beyond those fully supported by the evidence. They do great work. 

PREPARED STATEMENT

And I would like to thank all the special agents, forensic auditors, and lawyers that worked on it. 

Thank you. I ask that you make my written statement and the 

report part of the record. Thank you. 

Senator DURBIN. Without objection. 

[The statement follows:] 

PREPARED STATEMENT OF BRIAN D. MILLER

Chairman Durbin, Ranking Member Moran, and members of the subcommittee, 

I thank you for inviting me to testify here today. As you know, on April 2, 2012, 

the General Services Administration Office of Inspector General (GSA OIG) published a report regarding GSA mismanagement of its Western Regions Conference 

(WRC) in the fall of 2010. 

It may be very difficult to find among all the bad news and repugnant conduct, 

but there is at least a glimmer of good news. The oversight system worked. My office aggressively investigated, audited, interviewed witnesses, and issued a report. 

No one stopped us from writing the report and making it public. Based on the final 

report, swift action has been taken, hearings have been scheduled, and the whole 

ugly event now lay bare for all to see. Justice Brandeis said that sunlight is said 

to be the best of disinfectants. 

Almost every Federal agency has an inspector general, someone watching and reporting fraud, waste, and abuse of taxpayer dollars. The Congress recently strengthened offices of inspectors general so that we can better perform our oversight work. 

We are often the last resort for protecting taxpayer dollars—unfortunately catching 

the fraud, waste, and abuse after the money is spent. More needs to be done to establish early warning systems. This is why Acting Administrator Daniel M. 

Tangherlini and I recently reminded GSA employees to alert us as soon as they see 

anything wrong. The WRC could only occur in an environment where the best lack 

all conviction while the worst skirt the rules. 

Benjamin Franklin warned us at our Nation’s founding: ‘‘There is no kind of dishonesty into which otherwise good people more easily and frequently fall than that 

of defrauding the Government.’’ Those tempted to engage in fraud, waste, and abuse 

need to know they will be caught. The ultimate deterrence against fraud, waste, and 

abuse is criminal prosecution. We frequently partner with the Department of Justice 

in civil and criminal cases. 

The GSA OIG has about 300 employees to oversee an agency of more than 12,000 

employees, who are responsible for almost $50 billion in civilian contracts, most 

Federal buildings, and the Federal automotive fleet. Despite the ratio of OIG personnel to GSA personnel, our office has achieved more than $6.5 billion in savings 

to the taxpayer since 2005. In 2008, GAO found that the GSA OIG had an average 

return of $19 per $1 budgeted (GAO Report 09–88, 2008). 

Our special agents, forensic auditors, and lawyers deserve the recognition for this 

report. But our office and other offices of inspectors general produce great work like 

this day after day. My own office has issued numerous audit reports relating to 

GSA’s construction and renovation contracts under the American Recovery and Re-
77 

investment Act. We discovered and investigated 11 Federal property managers and 

contractors taking bribes and kickbacks. All 11 are now convicted. Criminals selling 

counterfeit IT products were caught and convicted, and are now serving time in Federal prison, because of the work of our office and other law enforcement agencies. 

Federal contractors have paid back hundreds of millions of dollars, because of our 

audits. Most recently, Oracle paid $199.5 million to settle False Claims Act allegations. 

The core mission of GSA is to provide low-cost goods and services. When GSA 

wastes its own money, how can other agencies trust it to handle the taxpayer dollars given to them? GSA also has the sole responsibility for the Federal travel regulation, which governs travel and conference planning by agencies across the executive branch. 5 U.S.C. 5707(a)(1). As detailed in my office’s report, in putting on the 

WRC, GSA committed numerous violations of contracting regulations and policies, 

and of the Federal travel regulation. This is of special concern because other Federal 

agencies need to be able to look to GSA as a model of how to conduct their contracting and procurement efforts, and manage their travel and conference planning. 

In attempting to model the entrepreneurial spirit of a private business, some in 

the public buildings service seemed to have forgotten that they have a special responsibility to the taxpayers to spend their money wisely and economically. While 

a private business may use its profits to reward employees in a lavish fashion, a 

Government agency may not. Even so, this report should not obscure the fact that 

thousands of GSA employees work hard and do a great job for the American taxpayers. It is only a minority of employees that are responsible for this debacle. 

In preparing the WRC report, numerous dedicated professionals from throughout 

the OIG worked long hours to ensure that the report was accurate and that it drew 

no conclusions beyond those fully supported by the evidence. My office continued to 

receive documents relating to this report as late as this January. We are still receiving documents relating to ongoing investigations. It is my hope that these efforts 

will enable GSA to improve its contracting and conference planning practices in the 

future, so that GSA may not only be a better steward of taxpayer dollars, but act 

as a leader within the Federal Government in efficient procurement and conference 

planning. 

I thank you for an opportunity to discuss this important work of the OIG with 

the subcommittee. I request that the attached report and this statement be made 

part of the record, and I welcome your questions. 

WESTERN REGIONAL CONFERENCE

Senator DURBIN. Mr. Tangherlini, far be it for me to suggest that 

people sitting on this side of the podium, in our profession, have 

not been guilty of bad judgment. It’s happened. It’s been recorded. 

It’s been acknowledged. 

Some of us feel that maybe we had the right teachers in life 

along the way, and I was lucky to work for a number of people who 

I thought were as honest as could be, and I tried my best to follow 

their example. 

There was always this basic standard before you made a decision, how will it look on the front page of tomorrow’s paper. And 

that has, in many ways, I think, brought me back down to Earth 

for something that wouldn’t have looked very good at all. We decided we’re not going there. 

My question is when it gets to this conference in region 9 here, 

it appeared to be a much different mentality. It was, you know, 

we’ll take care of our own. We’ll keep quiet. And if it wasn’t for the 

whistleblower sometime later, it appears that this pattern of regional conferences might have just continued. 

What have you found since you’ve been at the agency about that 

region or that experience or that attitude? 

Mr. TANGHERLINI. We’re working very closely with the inspector 

general. We’ve learned that there is more than just this conference 

in this region we should be concerned about. And there are other 

issues that we should be concerned about across the agency. 
78 

In fact, in the first week, after I had met with the inspector general, I did that on the first day, and we subsequently had other follow-up meetings. 

We agreed to do a joint letter to all 13,000, roughly 13,000, GSA 

employees, asking them, in the future, to please, if you see something you suspect is wrong to talk to your fellow employees, talk 

to your supervisor, talk to your supervisor’s supervisor, and/or, certainly, if you see waste, fraud, and/or abuse, call the inspector general. Reach out to the inspector general through their FraudNet 

Hotline. 

And then I think both of us are discouraged by the fact that 

there were 300 attendees that saw what was intentionally designed 

to be over the top and didn’t raise a concern up to the inspector 

general. 

Senator DURBIN. So how do you explain that after this occurred, after this event occurred, this Mr. Neely got more than $11,000 in 

bonuses? It was almost, not just a seal of approval, but it was congratulations, job-well-done bonuses. 

Tell me how the sequence of his decisionmaking didn’t come to 

the attention of those higher up when they’re deciding whether he 

should get even more taxpayers dollars for his malfeasance? 

Mr. TANGHERLINI. I regret, Mr. Chairman, I’m not sure I’m able 

to describe what happened. I have been there a short time. What 

I’ve learned I’ve simply learned through the hearings over the last 

several days, what I heard through the inspector general’s report. 

So what I can say, though, is as we look at the agency, we go 

top-to-bottom. I think the performance appraisal system is one 

place that we have to start and make sure that we have strong controls in our performance evaluation system that emphasize integrity in our senior leaders, because, to your earlier comment, I think 

that people watch what their leaders are doing and they model that 

behavior. 

INTERN CONFERENCE

Senator DURBIN. So what about this interns conference in Palm 

Springs? I mean, I love my interns. I started off as an intern in 

a Senate office. They do a great job. They don’t get paid for it. So 

why would you hold or why would they hold an interns conference 

in Palm Springs, California? 

Mr. TANGHERLINI. I have no ability to explain what they were 

thinking in having that conference. I know my experience as an intern had really been about hard work, late hours, low or no 

pay—— 

Senator DURBIN. An occasional slice of pizza. 

Mr. TANGHERLINI. Which I bought. So, you know, I understand 

the value of interns. I’m just concerned that a conference like this 

was almost trying to implicate people from the beginning in this 

approach to that work. 

Senator DURBIN. And the other thing that seemed, I mean, we’re 

aware of advance teams with Presidential candidates and others. 

The advance work that was being done for these conferences involved lengthy trips, many employees being treated, you know, in 

kind of lavish circumstances. Was that a standard just in this region or did you find it to apply to other regions as well? 
79 

Mr. TANGHERLINI. Again, we haven’t had a chance to dig into 

other regions. What I understand was that certainly was a culture 

to the approach of this leader within that region. 

But I think what it really tells us is we need to look at the way 

we’ve structured ourselves, so that other people have a chance to 

raise the alarm if they see this kind of thing happening. 

And so, last week, I asked that all the regional offices’ financial 

staff report up to our Chief Financial Officer (CFO), Alison Doone. 

In the past, they had been given a budget allocation and they were 

allowed, within the region, to work within that allocation entirely 

autonomously. 

WESTERN REGIONAL CONFERENCE

Senator DURBIN. So, Mr. Miller, as I understand it, two people 

who attended the conference came forward to a GSA employee who 

had worked on Capitol Hill, and she, in turn, notified your office— 

if that sequence is accurate. I guess my question to you is the environment where a whistleblower feels safe enough to come forward 

with that kind of information is critically important. 

Mr. MILLER. It is. 

Senator DURBIN. For us to have oversight on taxpayer spending. 

What has been your experience before and after this particular investigation? 

Mr. MILLER. Well, Mr. Chairman, the Deputy Administrator, 

Susan Brita, who did work on Capitol Hill, came to our office in 

December 2010. I believe she overheard conversations. I’m not 

aware of specific individuals coming to her to complain about it. 

But she came forward to our office. 

We immediately investigated and found a whole string of problems, not only with the WRC, but with other conferences, such as 

the intern conference and other conferences. 

Having whistleblowers is invaluable to our investigations. We 

rely on the good, hardworking, honest GSA employees who come 

forward and tell us that things are wrong. That often starts our investigation. 

Senator DURBIN. I’m asking you if, before this event was reported 

to you, and since, can you tell me what the environment is? Do 

whistleblowers feel that they can come to you? 

Mr. MILLER. We have been receiving a lot of whistleblower complaints since this report was released. It has gotten tremendously 

better in terms of complaints in terms of whistleblowers. 

The witnesses we interviewed in connection with this investigation reported an atmosphere where people were not encouraged to 

speak up. One witness said that when someone spoke up, they 

were ‘‘squashed like a bug’’. 

Others said that the regional commissioner had a way of putting 

people down in a very uncomfortable way when they would raise 

concerns about expenditures. And it came forward from a number 

of witnesses that there was an environment where people were discouraged from coming forward, raising questions, calling into question expenditures. 

And, as a result, there are a number of over-the-top conferences, 

not just the WRC, but the intern conference that you brought up, 
80 

where they had a team-building exercise focused on a jeep tour and 

many other events. 

Senator DURBIN. Senator Moran. 

Senator MORAN. Mr. Chairman, thank you. 

OFFICE OF INSPECTOR GENERAL REPORTS

First of all, let me ask Mr. Miller, you have issued the inspector 

general’s report dated April 2, 2012. 

Mr. MILLER. Correct. 

Senator MORAN. What is the extent of the problem that this, at 

GSA, that this report covers? Is this the sum total of the problems 

that you see at this agency or is this more the proverbial tip of the 

iceberg? 

Mr. MILLER. Senator, it is one event. As an inspector general, we 

produce reports that we can verify every which way, and it’s totally 

accurate. We did the report on the WRC. We have a number of ongoing investigations. We have not produced reports yet on the number of ongoing investigations, and there are many other ongoing investigations. 

Senator MORAN. Can you quantify that, the magnitude of the investigations that you are now conducting? 

Mr. MILLER. It’s a little difficult because, as I said in my opening 

statement, every time we turn over a stone, we find 50 more, and, 

you know, we find other instances. 

You know, even today we found out that the wife of the regional 

commissioner had a parking space throughout the entire year of 

2012 at the Federal building. And, you know, we just find one 

thing after another, and it’s difficult for me, even now, to quantify 

it. 

Senator MORAN. Would we expect additional inspector general 

reports in the near future? 

Mr. MILLER. Well, we are doing investigations. Our normal 

course would be to complete the investigation and then refer it for 

criminal prosecution, if it’s merited. 

Civil liability, under the False Claims Act or under another civil 

statute or for administrative action, we sometimes will do the report, give it to the Administrator to take administrative action 

against individuals. 

REGIONAL OVERSIGHT

Senator MORAN. Mr. Tangherlini indicated about the autonomous 

nature of the management policy, style, and conduct in this region. 

Mr. Miller, was that unique to that region? 

And I prefer to call you Dan, because I will struggle with your 

last name, but perhaps Dan would like to answer this question as 

well. 

And is that something that was new at GSA? You indicated now 

that you’ve centralized the process, that the CFO now is involved 

in the decision about paying bills as compared to relegating that 

authority to somebody in the field. Is that unique to this region, 

to GSA? And when did that begin? Is that something that occurred 

in Dan’s predecessor’s tenure? 

Mr. MILLER. Well, there’s a number of levels to the answer to 

that question. With region 9, the regional commissioner for PBS 
81 

was also the acting regional administrator in charge of the entire 

region, because that is normally a political appointment and that 

was vacant. So he was acting regional administrator for the whole 

region. 

So, in that sense, region 9 was a little bit different. The other 

acting regional administrators had a shorter tenure because political appointments were made. 

But, generally, regions have a somewhat awkward relationship 

with the central office. They always have. That was exacerbated 

when Acting Administrator Paul Prouty, when he was acting during the interim before Martha Johnson was confirmed, he was a 

PBS regional commissioner for region 8, I believe, and he became 

Acting Administrator. 

One of the orders he put into place was to lower the regional administrator from a political appointment of an Senior Executive 

Service employee down to the equivalent of a GS–15 political appointment and restrict the duties of the regional administrator. 

The result was the regional commissioner for PBS had more authority within the region and the regional commissioner for the 

Federal Acquisition Service had more authority within the region. 

But, Dan, perhaps you’d like to—— 

Senator MORAN. Let me follow up before you respond. That 

would be a change in policy at GSA. 

Mr. MILLER. Correct. 

Senator MORAN. And that would have been at what point in 

time? 

Mr. MILLER. It was before Martha Johnson was confirmed. I 

would say about 6 months prior, maybe 8 months prior. 

Senator MORAN. Thank you. 

Mr. MILLER. I can find the exact date. 

[The information follows:] 

The exact date was September 15, 2009. 

Mr. TANGHERLINI. My understanding of the timeline is as the inspector general described. But it gets to a bigger problem that we 

had allowed the regions to become almost fully autonomous to the 

purposes of budget authority and acquisition authority. 

One of the steps we’ve already taken is to centralize the CFO 

function and make all the regional CFOs, our financial management employees, report up the chain through the central CFO. 

We’ve also required, for conferences and for travel, our chief administrative officer, our Office of the Chief Administrative Officer, 

in headquarters, to review and approve justifications for conferences and conference travel. 

REGIONAL OVERSIGHT

Senator MORAN. Is that because it’s the best management practice, regardless of the evidence that you discovered how poorly 

things were managed, the problems that the inspector general determined? 

If you had come to this agency without the inspector general’s report describing what had happened in this region, would this be 

the same policy that you would want to put in place as a new man-
82 

ager, regardless of the facts that the inspector general demonstrated? 

Mr. TANGHERLINI. The ability at a senior level to have visibility 

straight down into expenditures at the field level, at the ground 

level I think is key to any—— 

Senator MORAN. So you, as a manager, would have put those 

policies in place even if we didn’t know about what went on in this 

region? 

Mr. TANGHERLINI. I don’t know if we would have put the exact 

ones we put in place. Right now, we’re trying to make sure that 

we get a handle on any kind of travel, any kind of conferencing, 

get a sense of what the expenditures are. 

But I believe that having good central office oversight into the 

expenditures and operations of a regional office is, frankly, just 

good, basic best practices management, yes. 

Senator MORAN. I have additional questions, but I assume—— 

Mr. MILLER. With the indulgence of the chairman, the year was 

2009 that the order was entered changing the structure. 

Senator MORAN. Thank you very much. 

WESTERN REGIONAL CONFERENCE

Senator DURBIN. Mr. Miller, I don’t know if this is for you or Mr. 

Tangherlini, but what’s next? Are we going to get any taxpayers’ 

money back from this fiasco? And, second, what’s going to happen 

to the people who were responsible for it? 

Mr. MILLER. Well, when Dan was appointed, we met immediately, and one of our first conversations was about sending demand letters to the officials that had parties in their room and for 

the excesses at the conference. And I’ll let Dan tell you more about 

that. 

Mr. TANGHERLINI. As I mentioned in my testimony, we sent demand letters to three individuals who had inappropriate parties in 

their rooms. 

We also have, using the inspector general’s report, started going 

through to try to identify those activities, extensions of activities, 

related activities for which we can very easily, well, very clearly 

seek reimbursement to the Federal Government, and we’re working 

on that right now. 

Senator DURBIN. Has there been a determination made as to 

whether what you’ve found so far merits review by the Department 

of Justice (DOJ) for criminal action? 

Mr. MILLER. Mr. Chairman, we have met with DOJ, and we’ve 

made a criminal referral. 

Senator DURBIN. I won’t go into any further. I’m sure you can’t 

either. 

Mr. MILLER. Thank you. 

CONSTRUCTION

Senator DURBIN. Let me ask about some other issues related to 

the GSA as an agency. For many years, typically, GSA would spend 

about $700 to $900 million annually from the FBF to build buildings to house Federal agencies. Because of cutbacks in Federal 

spending, that funding reached a new low last year of $50 million, 

compared to the $700 to $900 million in previous years. 
83 

I’m trying to establish what I mentioned at the opening. What 

do you believe is the real cost of delayed construction to specific 

projects? And I can get into those, the Department of Homeland Security (DHS), the Food and Drug Administration (FDA) and others. 

And what is the general impact on cost to the Federal Government, 

realizing that leased space is usually more expensive than an 

owned building? 

Mr. TANGHERLINI. Given that I have just come to this job very 

recently and have been working very much on the earlier issue we 

were discussing, I don’t know if I’m best equipped to answer those 

questions fully today, but I would like to work with you and your 

staff. 

I will say, though, the fact that we have reduced our expenditures to the level we have has some concern about this incredibly 

large and valuable asset that we maintain. And that’s something 

that, collectively, we have to work on to make sure that we are actually investing sufficiently to maintain the quality of those facilities. 

Building things, delaying construction can cost additional money, 

just through the sheer power of inflation and the costs of raw materials, and so that’s an additional concern. 

Senator DURBIN. I’m going to ask you, when you get back to me, 

if you would look specifically at the DHS project at St. Elizabeths 

here in Washington. 

The $3 billion project began in 2009 and now is limping along 

with limited funding. What will be the impact on the cost of this 

project to not bring it to conclusion and the cost to the Federal 

Government of delaying the expenditure? 

Same thing is happening in Denver, the Denver Federal Center, 

where there’s substantial evidence of hazardous materials. And a 

remediation effort was underway, a protective effort, that I understand has either been slowed down or suspended as a result of 

budgetary issues. 

And the FDA—White Oak Campus. That’s been going on for as 

long as I can remember. Definitely overdue, with FDA agencies 

spread around in many different leased buildings. 

So if you would get on those three, I would appreciate that very 

much. 

Mr. TANGHERLINI. Yes, Sir. 

[The information follows:] 

St. Elizabeths and the Denver Federal Center will be addressed in the questions 

submitted for the record. 

With regard to the Food and Drug Administration White Oak campus, General 

Services Administration (GSA) revised and reduced the project scope to accomplish 

portions of the campus with fewer funds. GSA originally requested funding for a 

parking structure on the campus in fiscal year 2012, but changed the plan to instead offer surface parking. The surface parking will provide approximately 1,600 

fewer parking spaces than the original plan of a parking structure. 

Additionally, GSA will not be able to construct a distribution building that was 

included in the master plan in order to complete the project within the funding level 

provided. With the exception of this distribution building and the change in parking, 

the 2006 master plan will be complete in December 2013. 

FEDERAL TRADE COMMISSION BUILDING

Senator DURBIN. This is kind of parochial, but it happens to relate to Capitol Hill and our Appropriations Committee. 
84 

There has been a proposal from a Member of Congress to move 

or to acquire the Federal Trade Commission (FTC) building, which 

can be seen from the Capitol Complex here, and that it be given 

to the National Gallery of Art as an annex or a new facility. And, 

clearly, that suggestion comes with some controversy. 

Recently, the Commissioners at FTC sent us a statement—a bipartisan, unanimous statement—that stated serious concerns about 

the significant and unnecessary cost to the American taxpayer if 

the historic FTC building is given away to the National Gallery of 

Art. 

I happen to agree with the Commissioners in this regard. As I 

understand, the proposal is that FTC would be removed from this 

building, where I believe they started, and sent to some other location. Are you familiar with where that location might be or whether there is a Federal building currently vacant that could accommodate this agency? 

Mr. TANGHERLINI. I have met with a number of representatives 

from the FTC just to gain some initial awareness of this issue. I 

will actually be meeting with the interested Member of Congress 

tomorrow to hear that side. 

I’m not exactly sure what the proposal is for where the entirety 

of the FTC would go, because I haven’t heard that version yet. But 

I do know that there is concern on the FTC side about moving out 

of the Apex Building. 

Senator DURBIN. And the Federal Government owns the FTC’s 

current headquarters? 

Mr. TANGHERLINI. Yes. 

Senator DURBIN. And any replacement building, unless we have 

a vacant one ready to be moved into that the Federal Government 

owns, will be a lease expense, at whatever the costs of the lease 

may be? 

Mr. TANGHERLINI. From what I understand, one proposal that’s 

being discussed would be a leased building. 

Senator DURBIN. And there would typically be a cost in moving, 

physically moving the FTC? We have testimony from them that 

they believe that will be between $70 and $83 million. 

Mr. TANGHERLINI. Yes, that’s what they told me. A large part of 

that, I gather, has to do with some high-tech equipment associated 

with the headquarters facility. 

Senator DURBIN. It’s my understanding they have forensic labs 

and a sophisticated information technology system that would have 

to be moved, relocated at considerable expense to the taxpayers. 

There’s also this notion that if the National Gallery of Art moves 

into this building it will cost about $150 million to bring it up to 

whatever standards they expect to use the space. 

And the suggestion is that there would be a solicitation of charitable contributions to the Federal Government to the National Gallery of Art for that purpose, at least that is the proposal. 

I look out my window and look down the Mall and notice that 

there’s some construction at the National Gallery of Art Annex. Are 

you familiar with that construction? 

Mr. TANGHERLINI. I am familiar with that construction. 

Senator DURBIN. And they’re replacing the marble veneer on the 

building. 
85 

Mr. TANGHERLINI. Right. 

Senator DURBIN. And I asked my staff to check how much was 

being paid for by charitable donations, and the answer is nada, 

nothing. This is all at taxpayers’ expense. 

So the idea of tens, hundreds of millions of dollars flowing into 

the National Gallery of Art to renovate the FTC building seems to 

me to be speculative at least. 

So this notion of FTC leaving its traditional place at considerable 

expense, moving to another space at taxpayers’ expense, and then 

the National Gallery of Art moving into the FTC building and remodeling it seems fairly inconsistent with the notion of a national 

deficit that has been motivating a lot of our budget decisions recently. You don’t have to comment on that. 

I will just add that I understand work has been done at the FTC 

building recently, in terms of plumbing, electrical and such, and 

that it is in fairly good shape for a building of its vintage to continue to serve the FTC as is. Is that your understanding? 

Mr. TANGHERLINI. That’s what I’ve heard from the FTC. 

Senator DURBIN. Thank you. 

Senator Moran. 

WESTERN REGIONAL CONFERENCE

Senator MORAN. Chairman, thank you. 

Mr. Miller, you indicated that there’s been a referral to DOJ. Do 

you expect other referrals? 

Mr. MILLER. We’re working with DOJ every day. We’re working 

very closely with them. When I say referral, I’m specifically being 

nonspecific. I think I’ve said everything I can say about it. 

We’ve met with DOJ. Our special agents are working closely with 

DOJ lawyers. 

Senator MORAN. So when you say a referral, that doesn’t necessarily mean an individual is under consideration for criminal 

charges by DOJ. It could be something broader than that. 

Mr. MILLER. Well, let me—— 

Senator MORAN. Tell me what you mean by the word ‘‘referral’’. 

Mr. MILLER. Okay. I will tell you what happens in the normal 

course, and that is that when we do an investigation generally, we 

will have a matter, we may have one individual. We may have a 

number of individuals, and they may be related. It may be a 

scheme. It may be a conspiracy. They may be related in many different ways. 

We bring the entire matter to DOJ or to the U.S. Attorney’s Office, and DOJ will either accept or decline the case, and then we 

will do further investigation. 

And what we hope will come out of it is indictments against individuals, an individual or more than one individual, as a result of 

the criminal conduct that is the highest criminal charge that is the 

most readily provable by the evidence. 

Senator MORAN. That answers my question for purposes of what 

you can answer. 

Mr. MILLER. Thank you. 
86 

WESTERN REGIONAL CONFERENCE PER DIEM

Senator MORAN. I don’t understand how, for example, Mr. Miller, 

the rooms got paid for. There’s a per diem that I assume every Federal employee would be able to utilize when traveling, including to 

this location. I can’t imagine that the per diem is sufficient to cover 

the cost of what the hotel rooms or at least some of those hotel 

rooms would cost. 

In fact, I understand when the inquiry was made of the M Resort, they indicated that some of the rooms that were utilized in 

this conference were reserved for their, ‘‘high rollers’’ in the casino. 

How is it that a Federal employee is able to be reimbursed for 

the room? How does the per diem that they receive cover the costs 

that they incurred? 

Mr. MILLER. Okay. The per diem for Las Vegas, at that time, was 

$93. And the hotel then would, what they say is they comp the 

room. They will give an upgrade, theoretically, for free. 

And so what they did was instead of a regular room, they gave 

an upgraded room. And these rooms were upgraded to the very 

highest, which was a two-story loft room that normally goes for 

more than $1,100 a night. And so they were giving these loft 

rooms. 

Now, the hotel can afford to do that because they expect to do 

catering. And it’s part of the overall negotiation with the hotel that 

the Government has with the hotel to try and get the lowest, theoretically, try and get the lowest price for the taxpayer. 

Senator MORAN. Were any of the rooms available for $93 a night? 

Mr. MILLER. Yes. Yes. 

Senator MORAN. Okay. So some of them were within the per 

diem. 

Mr. MILLER. Correct. 

Senator MORAN. Others paid the per diem, other employees received the $93 and paid the hotel that $93, but they got better 

rooms than what a normal $93 room would be as a result of the 

inducement by the hotel to have the conference there? 

Mr. MILLER. Correct. It was part of the negotiation. Certain upgrades were included. And the upgrades would be charged at the 

per-diem rate of $93. So even though it was a two-story loft, it was 

charged $93. 

Senator MORAN. Did you discover in your investigation any inappropriate relationship between the vendors, the hotel or the caterers, the folks that GSA contracted with to provide services for this 

conference? Anything inappropriate between the vendor, any vendor and anybody at GSA in arranging for the conference to occur 

here and for the entertainment, et cetera to occur? No better word, 

is there some kind of kickback or inappropriate payment, inappropriate illegal gift provided to the folks who were organizing the 

conference? 

Mr. MILLER. That is under investigation. As we talked about before, we have a criminal referral. 

Senator MORAN. Thank you. 

Any suggestion in your investigation, when you talk to GSA employees or the management in the region, was there a defense that 
87 

kind of this goes on everywhere all the time kind of thing, either 

within GSA or outside the agency? 

Mr. MILLER. Yes. Many of the witnesses we talked to said that 

this conference was similar to previous WRC, and they cited a 

number of them that occurred in Oklahoma, New Orleans, and 

Lake Tahoe. 

And the witnesses we talked to said this was along the same 

lines, that each of the so-called hosts for the conference tried to 

outdo one another, and the regional commissioner for region 9 for 

this one said, ‘‘I want this to be over the top. I want this to be the 

best and most lavish sort of conference.’’ 

Senator MORAN. In your investigation, did people say, Well, this 

goes on at other Government agencies, not just the GSA? 

Mr. MILLER. Not that I know of, but I’ll check the transcripts of 

the interviews. 

TRANSITION AT THE GENERAL SERVICES ADMINISTRATION

Senator MORAN. And then, finally, this may be for you, Mr. 

Tangherlini. I’ve been practicing while I’ve been sitting here. Tell 

me about Ms. Johnson’s resignation. What precipitated that? Was 

she asked to resign? Was this on her own volition? How did this 

vacancy occur and then you take that position, at least acting or 

interim? 

Mr. TANGHERLINI. And, Senator, Dan is fine. 

Senator MORAN. Thank you. 

Mr. TANGHERLINI. But I can only speak to what I’ve heard 

former Administrator Johnson say at other hearings that I’ve participated in over the last couple of days. And from what I understand is that she made the choice herself to resign as a way to 

allow the agency to move forward. 

I was asked by the White House to step in the weekend before 

her resignation and began my job Tuesday. I guess that would be 

April 3. 

Senator MORAN. So the White House was aware of her pending 

resignation and had come to you to ask if you would serve in that 

capacity, and then she ultimately resigned? 

Mr. TANGHERLINI. That’s what I understand what led them to 

ask me over the weekend. 

Senator MORAN. And do you have any understanding as to 

whether or not she was asked by the White House or administration officials to resign? 

Mr. TANGHERLINI. From what I understand, and this was based 

on what I heard at these other hearings, was that she made the 

choice herself. 

Senator MORAN. Mr. Chairman, thank you. 

CIVILIAN PROPERTY REALIGNMENT BOARD

Senator DURBIN. Mr. Tangherlini, one of the issues proposed by 

the administration is the Civilian Property Realignment Board. Are 

you familiar with that concept? 

Mr. TANGHERLINI. I’m familiar with it. 

Senator DURBIN. Best I understand it, it’s something like a base 

closure commission, where we’d find a way to sell unneeded Federal property. And there have been versions that have originated 
88 

in the House, now, in the Senate with Senators Carper and 

Portman. So what is GSA’s view of these bills? 

Mr. TANGHERLINI. So as far as I know, the GSA view is that the 

proposal that the administration put forward is our preferred approach, that it is the most-aggressive proposal. It’s the one that 

will raise the most funds. 

I’m not familiar with the Senate draft, but I would be happy to 

work with my staff to come back and find out what our position 

is. 

[The information follows:] 

GENERAL SERVICES ADMINISTRATION POSITION ON PENDING LEGISLATION ON

CIVILIAN PROPERTY REALIGNMENT

General Services Administration (GSA) supports the administration’s proposal, 

which addresses the key challenges that exist in the current process and should 

streamline and accelerate the disposal process. With respect to the current bills 

being discussed in the Congress, GSA supports legislation that provides additional 

realty tools and incentives that encourage sound management of real estate portfolios. GSA supports, for example, retention of proceeds by individual agencies and 

their reinvestment in agency portfolios. Retention of sales proceeds allows landholding agencies to direct equity from unneeded assets to needed assets. Such incentives will foster portfolio management as opposed to individual asset management. 

CIVILIAN PROPERTY REALIGNMENT BOARD

Senator DURBIN. As I understand it, and I may be wrong, and 

this is just a press report, that what they are suggesting is an alternative that would basically eliminate the board. I think our experience with BRAC has us a little shellshocked. 

Mr. TANGHERLINI. Okay. 

Senator DURBIN. These boards that are supposed to be apolitical 

and turn out to be totally political, and that may be their motivation. I can’t speak for them. 

But what are the safeguards that you think need to be maintained when we talk about the disposal of Federal property? 

Mr. TANGHERLINI. Again, that’s an issue I’m going to have to get 

much further into, but I think one of the things we just need to 

make sure is that we have gone through a thorough and thoughtful 

process, so that we’re not disposing of property merely to maximize 

revenue, but also thinking about the long-term needs of the Federal Government. 

Senator DURBIN. And I hope also take into consideration the 

state of the real estate market at the time that this is taken into 

consideration. 

Mr. TANGHERLINI. Fair enough. 

Senator DURBIN. Fair enough. 

I don’t have any further questions. Do you, Senator Moran? 

Senator MORAN. Mr. Chairman, I do not have any further questions. 

I just would compliment Mr. Miller and his staff, as he did in his 

opening statement. It appears to me that you’ve done a good and 

thorough job. I thank you for your service to the public. 

Mr. MILLER. Thank you. 

Senator MORAN. And, Mr. Tangherlini, I welcome you to the GSA 

at very difficult times. It’s pleasing to me that there are individuals 

who are willing to step forward and perform public service. And I 
89 

wish you well in your new position at what obviously is a very difficult time. 

Mr. TANGHERLINI. Thank you. 

Senator MORAN. And I thank you both for your testimony today. 

Mr. TANGHERLINI. Thank you. 

Senator DURBIN. And let me echo that sentiment, and also note 

the subcommittee has received a prepared statement for the record 

signed by all five members of the bipartisan FTC expressing serious concern about the significant cost to taxpayers resulting from 

proposals to gift FTC headquarters to the National Gallery of Art, 

and without objection, the statement will be placed in the record. 

[The statement follows:] 

PREPARED STATEMENT OF THE FEDERAL TRADE COMMISSION

At the subcommittee’s invitation, we write as the five members of the bipartisan 

Federal Trade Commission (FTC)—Jon Leibowitz, J. Thomas Rosch, Edith Ramirez, 

Julie Brill, and Maureen Ohlhausen—to voice our serious concerns about the significant and unnecessary costs to the American taxpayer if the historic FTC building 

is given away to the National Gallery of Art and the FTC is forced to move into 

commercial leased space. 

Instead of saving the Government money, the proposed transfer would needlessly 

forfeit a valuable Federal building and could initially cost well more than $100 million, with substantial additional costs incurred for years to come. Such an unprecedented giveaway would be contrary to the interests of American taxpayers, especially in this time of fiscal austerity. 

First, under proposals in the House of Representatives, the Federal Government 

would simply give away a Federal building that was recently appraised at $92 to 

$95 million. In addition, appropriated funds still would be required to pay for the 

maintenance of the FTC building if given to the National Gallery of Art. Although 

the National Gallery of Art’s East and West Buildings were acquired with private 

money, their maintenance and operations fall to taxpayers under the National Gallery of Art’s charter. For example, over the past several years, the Congress has appropriated more than $80 million just for repairs to the marble fac ̧ade of the East 

Building. More troubling, in its fiscal year 2013 congressional budget justification, 

the National Gallery of Art identified $45 million in additional critical maintenance 

and repair needs for its East and West Buildings. Although the National Gallery 

of Art purports to have the ability to raise hundreds of millions of dollars to repurpose the FTC building, if this building is given to the National Gallery of Art, taxpayers would be responsible for paying to maintain and operate it. 

Second, American taxpayers would incur $70 to $83 million in estimated costs to 

move the FTC out of its headquarters building. Moving the FTC headquarters would 

require the replication of the FTC’s sophisticated Internet and forensic labs, litigation support technology, and pre-merger filing databases, as well as the Commission’s data center. 

The costs to move would represent about one-quarter of the FTC’s annual appropriation. We would be extremely concerned if any of these costs had to be taken out 

of FTC’s operational budget, and the Commission had to cut back on its critical 

work on behalf of American consumers. As this subcommittee knows, FTC has consumer protection and competition jurisdiction over broad sectors of the economy, including healthcare, privacy, technology, and energy. FTC is also working to protect 

consumers struggling with the economic downturn against all manner of schemes— 

bogus job opportunities, sham debt relief, and fraudulent mortgage modification 

plans. At a time when all Federal agencies face budget cuts, FTC is particularly concerned that the Commission might have to bear the wholly unnecessary cost of 

being moved out of the FTC building and into commercial space. 

Third, the latest proposal to transfer the FTC building to the National Gallery 

of Art would move FTC into privately owned space. To occupy its headquarters, FTC 

currently pays $6 million annually to the Federal Building Fund (FBF) in lieu of 

rent. If FTC headquarters were moved to commercial space and the FTC building 

given to the National Gallery of Art, the FBF would lose that revenue, and more 

of the FTC’s appropriation would be needed to pay a substantially higher rent to 

a commercial landlord. Moreover, the move out of a Federal building into commercial space could mean that FTC costs to move, including the costs to replicate its 

technology systems, could recur periodically. Additional appropriations could be 
90 

1When laying the cornerstone for the FTC building on July 12, 1937, President Franklin Roosevelt stated: ‘‘May this permanent home of the Federal Trade Commission stand for all time 

as a symbol of the purpose of the Government to insist on a greater application of the Golden 

Rule to the conduct of corporation and business enterprises in their relationship to the body politic.’’ 1FSGG bill language: 

SEC. 714. (a) None of the funds made available in this or any other Act may be obligated or 

expended for any employee training that— 

(1) does not meet identified needs for knowledge, skills, and abilities bearing directly upon 

the performance of official duties; 

(2) contains elements likely to induce high levels of emotional response or psychological 

stress in some participants; 

(3) does not require prior employee notification of the content and methods to be used 

in the training and written end of course evaluation; 

(4) contains any methods or content associated with religious or quasi-religious belief systems or ‘‘new age’’ belief systems as defined in Equal Employment Opportunity Commission Notice N–915.022, dated September 2, 1988; or 

(5) is offensive to, or designed to change, participants’ personal values or lifestyle outside 

the workplace. 

(b) Nothing in this section shall prohibit, restrict, or otherwise preclude an Agency from conducting training bearing directly upon the performance of official duties. 

needed every 10 years or so as leases expire and are replaced, through the competitive bidding procurement process, with new leases. 

Finally, the facts do not support claims that the proposed FTC building giveaway 

would save taxpayers hundreds of millions of dollars in building repair expenses because the National Gallery of Art would pay them with private funds. The FTC 

building is in excellent condition and needs no significant renovation, repair, or 

maintenance. In particular, the 75-year-old building has up-to-date electrical, 

plumbing, and HVAC systems, which are in excellent working order. The General 

Services Administration has listed no major projects on its 5-year maintenance and 

renovation schedule for the FTC building. 

Any money that would be privately raised to pay for hundreds of millions of dollars in renovations to the FTC building apparently represents the costs of 

repurposing the FTC building to suit the specifications of the National Gallery of 

Art. This constitutes no savings to taxpayers, but is an estimate of the costs associated with remodeling the building for a completely different purpose than the one 

for which it was designed and built. 

We believe the most cost-effective plan for housing the FTC headquarters is the 

status quo—keep the FTC in the FTC building. There is no need to appropriate significant additional funds to move the FTC headquarters now and every 10 years or 

so—and there is no reason the Federal taxpayer should give away a valuable asset. 

The historic headquarters building was designed and built for the FTC,1 has been 

adapted to meet its evolving needs, and well supports the FTC’s mission into the 

21st century. 

ADDITIONAL COMMITTEE QUESTIONS

Senator DURBIN. The record of the hearing will remain open for 

a period of 1 week, until noon on Wednesday, April 25, for subcommittee members if they wish to submit statements and/or questions. 

[The following questions were not asked at the hearing, but were 

submitted to the Administration for response subsequent to the 

hearing:] 

QUESTIONS SUBMITTED TO DANIEL M. TANGHERLINI

QUESTIONS SUBMITTED BY SENATOR RICHARD J. DURBIN

WAS TRAINING TO ENHANCE JOB SKILLS CONDUCTED?

Question. There is a long-standing Governmentwide general provision carried in 

the Financial Services and General Government appropriations bill relating to funds 

permitted to be expended for training.1

To what extent did the General Services Administration (GSA) take this funding 

limitation into account in planning the Western Region Conference (WRC) for 2010, 

with respect to ensuring that training met identified needs for knowledge, skills, 

and abilities bearing directly upon the performance of official duties? 
91 

Answer. GSA is aware of funding limitations listed in the Financial Services and 

General Government appropriations bill which outlines how funds can be expended 

for training. In light of what happened at the 2010 WRC, Acting Administrator Daniel M. Tangherlini has taken a number of steps to ensure that training addresses 

identified needs for knowledge, skills, and abilities that are directly related to the 

performance of official duties since beginning his tenure on April 3, 2012. The individuals responsible for the 2010 WRC conference are no longer employed by GSA, 

and GSA does not know whether or to what extent these limitations were taken into 

account. 

GSA has consolidated conference oversight in the Office of Administrative Services (OAS), which is now responsible for: 

—Oversight of contracting for conference space, related activities, and amenities. 

—Review and approval of proposed conferences for relation to GSA mission. 

—Review and approval of any awards ceremonies where food is provided by the 

GSA. 

—Federal Government. 

—Review and approval of conference budgets as well as changes to those budgets. 

—Oversight and coordination with GSA conference/event planners and contracting 

officers on conference planning. 

—Review of travel and accommodations related to conference planning and execution. 

—Handling of procurement for all internal GSA conferences. 

—Development of mandatory annual training for all employees regarding conference planning and attendance. 

Additionally, we have cancelled the 2012 WRC as well as a number of other conferences that only or primarily involved internal staff, saving taxpayers $995,686. 

GENERAL SERVICES ADMINISTRATION’S CORRECTIVE ACTIONS

Question. On April 2, 2010, then Administrator Martha Johnson issued her response to the Inspector General’s (OIG) February 12, 2010 draft ‘‘Management Deficiency Report.’’ (As part of that response, Martha Johnson states how on August 9, 

2011, she established OAS to provide greater oversight and accountability for all administrative functions of the agency.) How long do you expect it will take for GSA 

to determine whether it can recover funds improperly expended for nonemployee 

meals? 

Answer. We have formally initiated collection actions for some of the improper expenses incurred at the WRC, including the cost of food provided during in-room parties. We continue to review the invoices and records of the conference to determine 

whether additional actions are appropriate. GSA is required to conduct debt collection in accordance with the Debt Collection Improvement Act and 41 CFR parts 

105–55 and 105–56. These authorities require us to give individuals a minimum of 

30 days to examine documents and the right to request hearings regarding GSA’s 

claims. If hearings are requested, it could be several months before the process is 

complete, and GSA is able to recover funds. 

Question. How long do you expect it will take the Senior Procurement Executive 

to determine whether any of the payment to Royal Productions (the conference A/ 

V firm) can be recouped as a result of double-payment of the lodging charges? 

Answer. Royal Productions has already reimbursed GSA for lodging charges by 

check for $1,962 on April 17, 2012. 

Question. What are the procedures and processes that are underway internally 

within GSA to address disciplinary action against the 10 officials that were placed 

on administrative leave following the publication of the OIG’s report? 

Answer. Requirements for taking an adverse action against an employee are outlined in 5 CFR part 752, to which GSA is adhering. GSA placed individuals on paid 

administrative leave while the agency has been conducting internal reviews and following specified processes. Disciplinary actions have been proposed and employees 

have due process rights under applicable statutes and regulations. 

Question. When do you expect the new OAS to have fully functioning oversight 

of contracting for conference planning? 

Answer. Fully functioning oversight by OAS began as of April 15, 2012. 

IMPROPER CONTRACTING

Question. What system or processes are currently in place to ensure that required 

contract terms are expressly included in documents executed by GSA? 

Answer. GSA currently uses two primary systems to ensure that required terms 

are included in its contracts. The Federal Acquisition Service uses the Solicitation 

Writing System to automatically insert required contract clauses in its Multiple 
92 

Awards Schedules Program. GSA’s Public Buildings Service (PBS) uses an acquisition system called Comprizon, in which contract clauses are added manually, using 

existing clause databases and templates. Comprizon is expected to be replaced by 

a new acquisition system starting in the second quarter of fiscal year 2013. The new 

system will have automatic clause insertion capability and, as a result, will better 

ensure that PBS contracts contain all required clauses and provisions. The clauses 

and provisions will be maintained in the system to ensure that they are current at 

the time the solicitation is issued. 

Question. As you evaluate the omission of mandatory contract clauses, would a 

spot review in the approval chain or other checklist help flag this to avoid future 

incidents of this nature? 

Answer. Yes, spot reviews and checklists would serve to flag incidents. Moving 

forward, GSA will enhance information technology (IT) system capabilities to better 

manage the contract clause process. GSA is set to test a Web-based clause engine 

already developed by the Department of Defense’s (DOD) Defense Procurement and 

Acquisition Policy organization. The Clause Logic Service is a centralized tool that 

will enable increased efficiency, consistency, and accuracy of clause selection in contracts. The use of this system will alleviate the need to develop and maintain similar systems for each service and/or office. The system will automatically include 

clauses and provisions in contract documents based on their particular prescriptions, and input from the contracting officer on contract attributes. The application 

of this system will reduce risk to the Government by ensuring all applicable clauses 

are included in each contract. GSA will work with DOD to add GSA-specific clauses 

to Clause Logic and commence system testing of the Graphic User Interface feature 

in October 2012. In the interim, GSA will take steps to strengthen management review of acquisitions to include a focus on contract clauses. 

LOST CONFERENCE SURVEY FORMS

Question. In the investigative interviews conducted by agents of the OIG, it is disclosed that the conference survey forms completed by the attendees at the final general session at the 2010 WRC to be boxed and shipped back for review cannot be 

accounted for, have never been found, and are apparently declared ‘‘lost’’. What procedures are in place to prevent future situations where valuable information including training evaluations can be safeguarded from loss? 

In general, GSA’s National Records Program (NRP) establishes procedures, from 

a recordkeeping perspective, to safeguard agency information. Record maintenance 

and disposition procedures are documented in GSA Order CIO P 1820.1 (June 8, 

2007). Within that directive, several key requirements for the successful execution 

of GSA’s records program include: 

—Each Service and Staff Office (SSO) and each region is responsible for implementing and operating an effective records management program. 

—Heads of SSOs and Regional Administrators must designate a qualified records 

officer to operate the records management program within their area of jurisdiction. 

—Records officers are responsible for ensuring proper records maintenance and 

disposition within their program and for training, or arranging training for, associates. GSA’s National Records Officer is responsible for planning, developing, 

administering, and providing oversight of records management agency-wide. 

During approximately the past 18 months, and continuing today, GSA is on a 

path to improving our NRP. Specifically, GSA is currently: 

—Modernizing our records management policies by updating them to take advantage of National Archives and Record Administration (NARA) bulletins and incorporating cloud computing. 

—Updating GSA’s records schedules to take advantage of the NARA general 

records schedules and GSA’s new cloud-based applications. 

—Rebuilding our records management program infrastructure. 

—Supporting GSA’s increased usage of electronic documents. 

To accomplish these goals, GSA has: 

—Contracted with the NARA for expert assistance; 

—Requested all SSOs and regions ensure proper personnel are placed in Records 

Officer roles; and 

—Contracted with the Government Printing Office for digitization support to facilitate GSA’s move to increased use of electronic documents. 

GSA understands the need for safeguarding agency records and information from 

improper destruction and loss. In addition to the remedial steps noted above, GSA 

conducts annual records officer training. GSA also conducts records management 
93 

training for employees online at GSA Online University. GSA’s goal this year is for 

all employees to have taken this training by September 30, 2012. 

INTERNS CONFERENCE

Question. What was the purpose of the conference held near Palm Springs for interns? 

Answer. GSA has determined that the conference for interns that was planned by 

then Acting Regional Commissioner Jeff Neely does not reflect the current priorities 

for GSA. Mr. Neely is no longer employed as GSA and the agency does not know 

what his purpose was. 

Question. Why would an off-site conference be held for interns? 

Answer. The conference was planned by then Acting Regional Commissioner Jeff 

Neely and does not reflect the current goals and priorities for GSA. As previously 

stated, Mr. Neely is no longer employed by GSA and the agency does not know what 

his purpose was. As a part of the Acting Administrator’s top-to-bottom review of 

GSA operations, we concluded that all upcoming conferences should be reviewed in 

light of new controls over conferences and travel. Many conferences and meetings 

were cancelled as part of this review. All upcoming conferences must meet the new 

requirements which became effective on April 15, 2012. 

Question. Did the Region 9 Commissioner make that decision? 

Answer. Yes. The then Acting Region 9 Commissioner, Jeff Neely, made the decision to have the conference. 

Question. Have there been intern conferences before? 

Answer. To the best of our knowledge after a review of our records we have not 

found any evidence of other intern conferences in region 9 or any other region or 

GSA central office. 

REGION 9 COMMISSIONER—HISTORY OF EXCESSIVE EXPENDITURES?

Question. In one of the many documents from the OIG provided to the subcommittee, a special agent of the OIG asserts that the Region 9 Commissioner’s 

travel for almost 5 years is almost $250,000. What should the budget be for a regional commissioner for 5 years? 

It appears there may have been additional examples of region 9 excessive expenditures: 

—‘‘Interns Conference’’ in Palm Springs at a cost of $60,000; 

—35 off-site visits conducted in 2010; 

—Episodes of lengthy travel while minimal work conducted (e.g., in connection 

with a ribbon-cutting and site visits); and 

—Spouse attended a GSA conference with registration paid by GSA. 

Answer. PBS headquarters budget office provides a funding limitation to each region for its building operations and maintenance budget. Within that amount, regional management makes decisions about funding priorities within the region, including travel and other budget items. Although the regions and PBS headquarters 

offices were issued targets for travel obligations starting in fiscal year 2011 in response to Executive Order 13589 ‘‘Promoting Efficient Spending’’, PBS does not set 

specific travel budgets for each office of the Regional Commissioners. 

The amount of necessary travel for a Regional Commissioner during the last 5 

years would be dependent on various factors, including: 

—geographic composition of the specific region; 

—the number and type of construction or major leasing projects; 

—the number and type of initiatives or issues with customer agencies; 

—responsibilities with national initiatives or teams; and 

—the number of management meetings that they attended. 

Question. Apparently, the Chief Financial Officer (CFO) for PBS did not review 

the region’s expenditures prior to expenditure. Which GSA official(s) should and will 

be responsible for catching excessive expenditures like this in the future? 

Answer. The GSA CFO is responsible for the expenditure of all funds, including 

travel costs, for PBS. In addition, the Acting GSA Administrator instituted several 

layers of review and approval for conferences and travel, including Head of Services 

or Staff Offices, Regional Administrators, Regional Commissioners, the Chief Administrative Services Officer, and CFO. Travel by a Regional Commissioner for normal business travel would be approved by the Regional Administrator. 

Question. How are we going to ensure that this never happens again? 

Answer. GSA is realigning financial overview and operations from PBS to the Office of the GSA CFO. GSA is working on the formal restructuring of this organization to achieve the additional levels of control to ensure that there is more oversight 

over budgeting and expenditures and prevent this type of spending. 
94 

One of the first changes we made was to implement measures to catch excessive 

spending. Importantly, the Acting Administrator consolidated all PBS financial operations into GSA’s Office of the Chief Financial Officer, which will ensure that 

there is more oversight over budgeting and expenditures. As soon as feasible, all 

GSA financial operations will be consolidated into the CFO’s office. 

As of April 15, 2012, the Acting Administrator implemented new controls over 

travel and conferences. Under this policy, all travel is suspended unless it meets 

certain criteria. Only travel for designated GSA operational mission-related activities is permitted upon approval of the Regional Administrator or other approving 

office. Travel may also occur for an approved conference. Travel may be incurred 

for a routine management meeting upon waiver by the Deputy Administrator or 

Acting Administrator. Travel must be justified and approved, prior to the departure 

date, by the Head of Service or Staff Office. In addition, conferences must be approved by the Head of Service or Staff Office, Regional Administrator, the Chief Administrative Services Officer, and the CFO before any procurement activity takes 

place or cost is incurred by the organization sponsoring the event. 

GSA continues to work on our top-to-bottom review of its operations. As GSA goes 

through this review, it is deliberately looking for additional control mechanisms to 

implement so it can catch excessive spending, save taxpayer dollars, and ensure the 

most efficient delivery of services to GSA’s customer agencies. 

PROBLEMS AT PUBLIC BUILDINGS SERVICE—SYSTEMIC?

Question. Clearly, there has there been a culture of excessiveness and lax accountability within PBS, region 9, and perhaps even in some of the other regions. To 

what degree might this be a problem in other parts of GSA? 

Answer. GSA is committed to renewing our focus on our core mission. GSA currently is conducting a top-to-bottom review of the agency and is pursuing every initiative necessary to ensure this type of excessive spending does not occur in GSA. 

In the meantime we have taken the following steps to improve internal controls and 

oversight to ensure this type of excessive spending and lax accountability never happens again: 

—Established an OAS responsible for oversight and accountability of all administrative functions; 

—Require mandatory annual training for all employees regarding conference planning and attendance; 

—Canceled or reduced 35 conferences; 

—Suspended internal travel unless it is mission-critical; 

—Begun to move PBS regional budget under the direct authority of GSA’s CFO; 

—Implemented new controls over travel and conferences as described above in response to question 14 (How are we going to ensure that this never happens 

again?); and 

—Realigned reporting lines for Regional Administrators directly to Deputy Administrator. 

In addition, GSA’s Acting Administrator Daniel M. Tangherlini made it one of his 

priorities to ensure that there is a culture of integrity and responsibility at all levels 

of the agency and that any questionable activity be reported, investigated, and any 

appropriate disciplinary action taken. In a joint notice signed by himself and GSA 

Inspector General Brian D. Miller on April 11, 2012, he instructed all GSA employees that if they suspect any wrongdoing by any employee of the agency, they discuss 

it with their colleagues, supervisors, or higher levels in the organization. In addition, the notice stated that GSA will not tolerate retaliatory actions against anyone 

who raises concerns. 

EFFECT OF REDUCED SPENDING ON THE GENERAL SERVICES ADMINISTRATION’S ABILITY

TO PAY BILLS AND THE EFFECT ON FEDERAL AGENCIES

Question. In recent years, the amount of funding that the Congress has allowed 

GSA to spend (particularly with regard to amounts allowed from the Federal Buildings Fund [FBF]) has been drastically reduced from the budget requests. How have 

you been able to pay your contractually obligated bills such as rental of space and 

building operations, and what effect has this had on building projects, and Federal 

agencies? 

Answer. The administration directed agencies to make additional reductions in 

travel, administrative support, and contracts. To meet the goals of this Administrative Cost Savings Initiative GSA PBS began making reductions in fiscal year 2011 

and continues to do so into fiscal year 2012. These efforts have made it possible for 

GSA to reallocate funds within our Building Operations account to maintain all es-
95 

sential services at current levels and avoid reductions to the number of Federal employees. 

In addition, through the joint efforts of GSA and our customer agencies to focus 

on consolidating current occupancies and curtail new space and expansions, where 

possible, GSA has been able to operate the Rental of Space program at the appropriated funding level. 

EFFECT ON BUILDING PROJECTS

While GSA has been able to pay our contractual obligations, the reduced funding 

in our Building Operations account has curbed our ability to make necessary and 

prudent investments in our buildings. Reduced funding in both the Building Operations and Minor Repairs and Alterations accounts have limited our ability to lead 

efforts to reduce space, which requires up-front costs associated with planning and 

delivering the optimal portfolio plan. 

The reduced funding in our capital program limits our ability to build out vacant 

or underutilized Federal space that could be used to consolidate agencies, assist 

agencies in reducing their overall space utilization, reduce the amount of costly 

leased space, and maximize the efficiency of our existing Federal assets. Reduced 

funding for repairs and alterations could also result in Federal agencies needing to 

move out of Federal buildings if they are unable to carry out their mission due to 

the repair and reinvestment needs of that building. 

EFFECT ON FEDERAL AGENCIES

Consecutive years of reduced levels of funding prevent GSA from reducing repair 

and alteration liabilities and could lead to major equipment failures and a need to 

conduct emergency repairs and replacements, which cost more than conducting ongoing repairs and maintenance. Emergency repair and alterations cost more than 

conducting ongoing repairs and maintenance. This could disrupt customer agency 

operations and potentially impede them from carrying out their missions. 

GSA’s fiscal year 2012 Major Capital Program request included repairs at seven 

Federal buildings throughout the United States and was submitted in support of the 

operations and missions of several customer agencies including the operations for 

the Headquarter Offices for the Departments of Agriculture, State and the Interior, 

the Veterans Benefits Administration, the Federal Bureau of Investigation, and numerous other Federal agencies. The scope of work involved in these projects included space consolidations and interior construction, exterior renovations, roof replacements, mechanical, electrical, heating, ventilation, and air conditioning systems (HVAC) repairs, fire and life-safety upgrades, entrance screening security upgrades, and hazardous materials abatement. In addition to the impact to our minor 

and major building repairs and alterations, GSA is unable to undertake major lifesafety and fire protection, energy and water conservation, and wellness projects in 

Federal buildings throughout the country. 

Finally, GSA will not be able to provide sufficient alterations to owned space to 

meet agency changing requirements; facilitate consolidation efforts on behalf of our 

customer agencies to reduce vacant Federal space, and reduce leased space needs, 

which is more expensive to the taxpayer. 

Question. What will be the effect, if this trend continues for long? 

Answer. Consecutive years of reduced levels of funding will prevent GSA from 

being able to fully fund those activities that are essential to our mission and to improving our financial performance. If this trend continues GSA will be unable to 

make needed repairs and alterations, which can lead to major equipment failures 

and a need to conduct emergency repairs and replacements, at a greater cost to the 

taxpayer than conducting ongoing repairs and maintenance. Making necessary investments in facilities extends the life of the equipment and buildings, while also 

improving overall customer satisfaction. 

The reductions in funding in recent years for both new construction and modernization projects prevents the Federal Government from being able to take advantage of the favorable pricing conditions of the current market. This will lead to increased costs as agencies are forced to remain in more costly leased space and higher costs when modernization projects are ultimately executed in the out years. 

In addition, GSA’s inability to undertake construction and expansion projects at 

our land ports of entry (LPOE) is a critical concern and impacts both pedestrian and 

vehicular traffic at our Nation’s borders. A majority of the Nation’s LPOE facilities 

currently in operation were designed to accomplish legacy missions from decades 

ago and require significant refurbishment or replacement to function effectively. 

Some of these facilities were built more than 70 years ago and cannot fulfill today’s 

increased traffic demands and additional safety requirements resulting from the 
96 

1994 North American Free Trade Agreement, the increasing security requirements 

after September 11, 2001, and the increasing need for 24-hour operations. 

If this trend continues it will greatly affect GSA’s ability to fund our Building Operations allocation. We need to invest in energy studies and equipment upgrades, 

such as advanced meters in order to identify ways to save utility costs and implement changes that will pay for themselves through utility savings. While travel 

costs have been greatly reduced, there is still a need for mission-critical travel, including that for inspectors to visit construction and repair sites to ensure that contractors are complying with contracts and regulations; inadequate oversight could 

lead to waste, fraud, and abuse. In addition, it is necessary for GSA to train our 

personnel in order to ensure all staff remains current on applicable laws, regulations, and policies. 

Substantial reductions in funding could also impact GSA’s ability to meet contractual obligations in our Rental of Space account, of which approximately 98 percent 

is associated with existing contractual obligations for current leased space that require payment on a monthly basis. 

Question. What has GSA done to help lower costs? 

Answer. GSA is closely managing and monitoring spending with the goal of increasing efficiency and reducing costs. 

PBS has already achieved significant reductions in travel spending in fiscal year 

2011, meeting a GSA-established 25-percent travel reduction goal based on the fiscal 

year 2010 level. GSA will continue to reduce travel in fiscal year 2012 with a cumulative reduction of 30 percent in fiscal year 2013, in accordance with Office of Management and Budget (OMB) Memorandum M–12–12. The reductions have been and 

will continue to be achieved through implementing new GSA-wide travel approval 

procedures, leveraging technology where it makes sense, and limiting travel to that 

which is necessary to support of mission-critical needs of the agency and customer 

needs. 

PBS has taken an active role in reducing management support contracts. In early 

fiscal year 2012, PBS issued both guidance and reduction targets to the regions and 

units within the headquarters, and we will continue to monitor the progress toward 

meeting those targets. In addition, the PBS IT Governance Board currently reviews 

all IT expenses to ensure that they are meeting the PBS mission in the most costefficient manner. Systems reviews have targeted systems for migration or elimination as a means of streamlining business information and reducing operations 

and maintenance costs. 

PBS is looking at cost-savings measures in cleaning, maintenance, and utilities. 

For cleaning and maintenance, we are reviewing and re-evaluating current contract 

requirements and models to gain efficiencies and drive costs down. PBS is engaging 

industry partners and the vendor community to calibrate PBS practices against 

those used by private industry. We are placing a stronger emphasis on operational 

audits to ensure that buildings are running at optimum efficiency and that contract 

services are scoped properly. 

PBS is also achieving significant savings in its utility and operational budgets 

through energy and water reductions. Energy Independence and Security Act 2007 

requires Federal agencies to reduce energy consumption by 3 percent per year in 

British Thermal Units (Btu) per gross square foot (gsf) compared to a baseline of 

fiscal year 2003, to reach a total of 30-percent reduction in fiscal year 2015. Additionally agencies are required under Executive Order 13423 to reduce water consumption on a gallon per gsf basis by 2-percent per year over a baseline of fiscal 

year 2007 to achieve an end result of 16-percent reduction by 2015. Reducing agency’s energy by the mandated 3-percent Btu/gsf per year would result in approximately 425,230 mmBtus and $11.1 million savings annually. Additionally for each 

2-percent reduction in gallons/gsf in water consumption, GSA will save an estimated 

$440,000 and 49.6 million gallons of water annually. 

GSA requested $40 million for Energy and Water line item project funding in the 

fiscal year 2012 budget request. If fully funded, GSA would realize an estimated annual savings of 400,000 million Btus and $6.4 million. The average payback for 

these projects is 6.25 years. 

PBS is also achieving savings through the energy reverse auction program, which 

provides a framework and a mechanism to assist more than 300 Federal facilities 

to purchase natural gas. This real-time auction process allows PBS to receive bids 

for multiple-term lengths and pricing products in a matter of minutes as each auction only takes 5 minutes in total while providing significant reductions in costs 

from the 2003 baseline. Based on the auctions held to date, GSA estimates $9.3 million in annual cost reductions comparing old contract rates to new contract rates, 

and $17 million over the full term of these contracts. From a percentage perspective, 
97 

rates have decreased by 25 percent comparing the old contract rate of $5.85 per 

decatherm (dth) to $4.40 per dth for fiscal year 2012 awards. 

Question. How does GSA determine agencies’ rental costs? 

Answer. GSA’s Fair Annual Rent (FAR) process establishes the rates Federal tenants pay for occupancy in federally owned (GSA) space. In federally owned space, 

rent is based on a rent appraisal specific to the building 

FAR appraisals are developed by independent professional appraisers with local 

market expertise, based on FAR appraisal instructions provided by GSA. They are 

intended to reflect rental rates that would be realized for occupancy in GSA buildings, from a private sector perspective, and account for characteristics of the building and its market. As markets are dynamic, GSA has the rental rates in every 

building appraised at least every 5 years. Every appraisal, developed and reported 

by independent professionals with local market expertise, is subject to a thorough, 

four-level review process, involving Regional and Central Office appraisers. 

For leased space, rent is a pass-through of the underlying lease contract rent, plus 

any standard operating costs not performed through the lease, the PBS lease fee (7 

percent of the lease contract), and security charges. 

Question. I am hearing from some of the other agencies funded by this subcommittee, that they are being asked by GSA to ‘‘improve utilization of their space’’ 

or to reduce their rental space. But even reducing space has costs associated with 

it. Would you please discuss how improving space utilization can have costs? 

Answer. Improving utilization requires agencies to reduce their real estate footprint and possibly move to a mobile workplace environment, which necessitates upfront investments in up-to-date information technology, furniture solutions, and retrofitting of current Federal space at times. The entire Federal community must find 

ways to finance the investments needed to improve utilization and produce longterm savings. 

REDUCED FEDERAL BUILDING CONSTRUCTION AND EFFECT ON AGENCIES

Question. For years, typically in a given year, we allowed GSA to spend about 

$700 to $900 million from the FBF in order to construct buildings to house Federal 

agencies. In the past 2 years, that funding has been drastically reduced, to a new 

low last year of only $50 million. Will this result in agencies being required to move 

to leased space, which is more expensive for the Federal Government, and is contrary to OMB policy and Government Accountability Office (GAO) recommendations? 

Answer. In markets where no other suitable federally owned space exists and a 

Federal agency has a long-term space requirement, reduced funding in our construction budget could lead to increased occupancy of leased space, often times at a higher cost to the taxpayer. 

The reduction in repair and alterations funding also limits our ability to build out 

vacant or underutilized Federal space that could be used to consolidate agencies out 

of costly leased space, assist agencies in reducing their overall space utilization, and 

maximize the efficiency of existing Federal assets. 

Question. Aren’t we being short-sighted by not doing Federal construction since 

the market is competitive now, resulting in lower costs than at other times, and 

projects will only get more expensive in the future? 

Answer. It always is preferable to house our tenants in federally owned space for 

long-term housing needs, as it is the best value overall to the Government and the 

taxpayer. 

GSA has realized significant savings during this competitive bidding climate, particularly through the American Recovery and Reinvestment Act (ARRA), which allowed GSA to fund needed new construction and renovation projects at a time when 

construction costs were at an all-time low. Building materials costs were rapidly escalating when GSA began identifying projects for ARRA funding. However, market 

conditions changed and GSA realized lower construction bid estimates, resulting in 

approximately $565 million in immediate savings from awarding contracts in this 

bidding climate. GSA’s preliminary analysis reports that larger projects were awarded at 8–10-percent less than estimated cost. 

With the construction market still favorable, GSA could award additional modernization and new construction projects previously approved for design by the Congress, if construction funding became available. These projects are either fully or 

partially designed and could be procured for construction quickly. The work would 

support specific systems and modern workplace needs while creating new and durable jobs in a hard-hit sector of the economy. 

Question. Apart from some of the giant Federal department consolidations (such 

as the Department of Homeland Security’s (DHS) St. Elizabeths campus and the 
98 

Federal Drug Administration’s White Oak campus), some of the larger Federal 

building construction projects have been courthouses. In recent years, through design guide requirements and courtroom-sharing policies, courthouse construction 

projects are now smaller. How else have you been working with the courts to reduce 

costs? 

Answer. GSA and the Administrative Office of the U.S. Courts (AOUSC) have 

taken numerous steps to reduce courthouse costs. After the Judiciary declared a 

moratorium on courthouse construction in 2004, the AOUSC, with GSA’s participation, began an Asset Planning Process to re-examine all of the projects that previously were on the 5-year plan. The new process redefined the selection criteria 

used by the Courts to select projects for inclusion in the 5-year plan and has eliminated many projects that previously were on the 5-year plan for new construction. 

GSA and the AOUSC are reviewing projects to reduce scope and costs and discussing other ways to save on courthouse construction costs, including reducing the 

size of all projects currently in design or planned for design in the Courts’ 5-year 

plan by eliminating courtrooms and chambers for future projected judges. Courtroom sharing among senior district, magistrate, and bankruptcy judges has dramatically reduced the cost of new courthouses. In addition, the AOUSC is considering 

limiting raised access flooring to the well of the courtroom, and introduction of flexible office environments where appropriate. 

EFFECTS OF SLOWING DOWN THE DEPARTMENT OF HOMELAND SECURITY

HEADQUARTERS CONSTRUCTION PROJECT (ST. ELIZABETHS)

Question. The consolidation of the DHS headquarters at St. Elizabeths has been 

the highest-priority construction project of this and the previous administration’s, 

and is a $3 billion project that will consolidate DHS offices in the Washington area, 

many of which are in leased space. 

Construction began in July 2009, and typically, construction funding requests 

amounted to a significant investment. Now, this project is limping along, due to the 

reduced amount of funding the Congress is able to provide for GSA construction due 

to funding constraints. What are the effects of slowing down this huge project? 

Answer. Completion of the consolidated DHS headquarters project was projected 

for 2016, but curtailed funding of both GSA and DHS has delayed completion by 

at least 5 years. The Congress has appropriated $1.36 billion to the project through 

fiscal year 2012, and GSA and DHS will seek remaining appropriations in the coming fiscal years. 

GSA and DHS are working collaboratively to update the original project plan to 

reflect appropriations to date and the impact on cost and schedule for completion. 

GSA anticipates finalizing the revised project plans this summer and will provide 

the Congress with the revised plan once finalized. 

The effects of the schedule slowdown include increases in total project cost due 

to escalation, lack of project integration, inability to take advantage of bulk purchases, and continued lease payments in high rental rate submarkets in Washington, DC. For example, there is approximately 1.5 million square feet of leased 

space in the East End and another 1.9 million square feet in southwest D.C., two 

submarkets with the highest average rental rates in the Washington, DC area. 

The slowdown also affects DHS housing requirements. The DHS National Capital 

Region Housing Master Plan and the DHS Consolidation Headquarters Collocation 

Plan provide the mission and operational needs for headquarters campus. DHS is 

better able to answer questions about specific implications for DHS’s mission. 

Question. What changes are you considering to the project as a result of construction funding levels? 

Answer. Due to the reduced fiscal year 2011 and fiscal year 2012 funding levels 

for St. Elizabeths, GSA and DHS are working to finalize a revised project schedule. 

GSA and DHS currently are evaluating the overall consolidation program, including 

mission support within the national capital region and St. Elizabeths, in order to 

more efficiently utilize the space at St. Elizabeths. 

DENVER FEDERAL CENTER REMEDIATION

Question. Most of the buildings on the Federal Center were constructed in 1941 

for the Denver Ordnance Plant that produced ammunition in support of World War 

II. The site has since been used by more than 27 different Federal agencies for more 

than 67 years. 

Since fiscal year 2004, GSA has received $39 million over 6 years in requested 

construction funds for remediation of the Denver Federal Center, a 640-acre secured 

Federal facility located west of Denver in the city of Lakewood, Colorado. GSA has 

identified more than 600 areas on the site that could be impacted by hazardous ma-
99 

terials, so the Federal Government must conduct remediation under three Colorado 

State consent orders. Is GSA on track to meet the requirements of the consent orders and what will happen if GSA does not receive the funding? 

Answer. The $3 million identified in the fiscal year 2012 the reprogramming request that accompanied the fiscal year 2012 spend plan submitted to the Congress 

was adequate for GSA to continue to comply with the consent decree through fiscal 

year 2013 and until such time that future funds can be secured. Based on the consent order, no punitive action will occur if GSA requests funding from the Congress. 

However, if GSA cannot demonstrate that funding has been requested, the Colorado 

Department of Public Health and Safety can fine GSA $25,000 per day per incident 

under the Resource Conservation and Recovery Act. 

Question. When do you expect the project to be finished? 

Answer. The original project schedule was fiscal year 2008 through fiscal year 

2012. This schedule assumed all fiscal year 2012 funds would be provided in full. 

Due to the limited availability of funding in fiscal year 2012, GSA determined that 

a lower level of funding could be dedicated to continue the remediation and still adhere to the terms of the consent decress. GSA will need to request additional funds 

in a future fiscal year to complete the remediation efforts. We anticipate completion 

of the project 2 years after receipt of necessary funding, assuming that no new, unanticipated issues are discovered on-site during excavation for ongoing remediation. 

It is important to note that as investigation and remediation continue, the estimate of future needs may change as we may identify better defined areas requiring 

remediation as well as the volume of waste and/or contaminated soil. 

REDUCED FEDERAL BUILDING REPAIRS

Question. Prior to the enactment of ARRA, GSA had a backlog of $8.4 billion in 

buildings needing repairs or alterations. Through ARRA, GSA has been able to reduce that backlog by $1.4 billion, while improving the energy-efficiency in 257 of the 

Nation’s buildings, and creating 60,326 jobs. However, for the past 3 years, we have 

not been able to meet the requested levels for repair projects. In fact, for the past 

2 years, no funding has been allowed for major repair projects. How has that affected the backlog and what is the effect on the health, safety, and mission of Federal agencies? 

Answer. Prior to the enactment of ARRA, GSA had identified $8.4 billion in its 

10-year investment liability, which is the funding GSA should invest in their buildings over the next 10 years. GSA’s financial statements did not record a deferred 

maintenance backlog. In fiscal year 2012, GSA did not have the funds for major 

modernizations as we needed the allocated funds for minor repairs and alterations 

in order to maintain our buildings at a basic level. Consecutive years of reduced levels of funding prevent GSA from being able to reduce our current repairs and alterations investment liability of an estimated $4.7 billion, which will continue to increase without adequate funding. GAO has issued audit reports discussing the impacts and concerns over this large backlog estimate. While ARRA has helped, the 

pool of these needed repairs is still significant with an average age of buildings totaling 47 years. The inability to fund these needed repairs will lead to major equipment failures and a need to conduct emergency repairs and replacements, costing 

taxpayers more than conducting ongoing repairs and maintenance. These emergency 

repairs could disrupt customer operations and potentially impede them from carrying out their mission. 

Question. What are some of the critical repair projects not able to be addressed? 

Answer. GSA’s nonprospectus basic repairs and alterations program funds alterations in 1,599 Federal buildings nationwide. Enacted budgets cut GSA’s minor repair and alterations budget request by nearly 20 percent in fiscal year 2011 and approximately 35 percent in fiscal year 2012, limiting our ability to do necessary upkeep to maintain the condition of GSA PBS’s portfolio. 

GSA’s fiscal year 2011 Major Capital Program request included repairs at eight 

Federal buildings throughout the United States and was submitted in support of the 

operations and missions of such Federal agencies as the Department of State, the 

Internal Revenue Service, the Social Security Administration, the U.S. Courts, Federal Bureau of Investigation (FBI), and Immigration and Customs Enforcement. The 

scope of work for these projects included space consolidations and interior construction; exterior renovations; roof replacements; repairs to mechanical, electrical, and 

HVAC; fire and life-safety upgrades; entrance screening security upgrades; and 

abatement of hazardous materials. 

In addition to preventing GSA from making minor and major building repairs and 

alterations, these cuts affected our ability to undertake major life-safety and fire 
100 

protection, energy and water conservation, and wellness projects in Federal buildings throughout the country. 

For example, the proposed but unfunded fiscal year 2012 project at the Major 

General Emmett J. Bean Federal Center in Indianapolis, Indiana provides for security upgrades to bring the complex into compliance with the DOD’s Unified Facilities Criteria standards which is necessary in order for DOD’s continued occupancy 

of the Federal Complex. The project includes important security features such as the 

introduction of a setback, the installation of blast-resistant windows, the relocation 

of the loading dock and mailroom, and protection of air intakes. Additionally, the 

project would remedy drainage deficiencies that plague the complex through the installation of an underground storm water drainage system. GSA has utilized stopgap measures to address the problem, but prospectus level funding is required to 

resolve the root cause of the problem. This project is critical to ensure the Bean Federal Center remains occupied by DOD as a safe, well maintained asset within the 

GSA portfolio. 

GSA’S SPEND PLAN BASED ON ENACTED LEVELS 

[In thousands of dollars] 

Repair and alteration President’s 

budget Enacted level 

Nonprospectus basic repairs and alterations ........................................................................ 335,297 271,724 

Indianapolis, Indiana—Major General Emmett J. Bean Federal Center ............................... 65,813 ........................

Van Nuys, California—James C. Corman Federal Building .................................................. 11,039 ........................

New York, New York—Daniel Patrick Moynihan U.S. Courthouse 1 ....................................... 28,000 2,031 

Richmond, California—Frank Hagel Federal Building ........................................................... 113,620 ........................

Washington, District of Columbia—West Wing Design Phase II .......................................... 6,245 6,245 

Los Angeles, California—Federal Building/Parking Garage [FBI] ......................................... 51,217 ........................

San Diego, California—Edward J. Schwartz U.S. Courthouse and Federal Building [ICE] .. 22,336 ........................

Washington, District of Columbia—E. Barrett Prettyman U.S. Courthouse .......................... 22,900 ........................

Energy and water retrofit and conservation measures .......................................................... 20,000 ........................

Fire Prevention Program ......................................................................................................... 20,000 ........................

Wellness and fitness program ................................................................................................ 7,000 ........................

Washington, District of Columbia—West Wing/East Wing Infrastructure Systems Replacement 2 ................................................................................................................................. ........................ 46,000 

NOA repairs and alterations ................................................................................................... 703,467 326,000 

1 Design only 

2 Reprogrammed funds 

GSA’s fiscal year 2012 Major Capital Program request included repairs at seven 

Federal buildings in support of operations and missions of the Department of Agriculture, the headquarters operations for the Departments of State and the Interior, 

the Veterans Benefit Administration, the FBI, and numerous other agencies. The 

scope of work for these projects included space consolidations and interior construction; exterior renovations; roof replacements; repairs to mechanical, electrical, and 

HVAC systems; fire and life-safety upgrades; entrance screening security upgrades; 

and abatement of hazardous materials. 

In addition to preventing GSA from making minor and major building repairs and 

alterations, these cuts affected our ability to undertake major life-safety and fire 

protection, energy and water conservation, and wellness projects in Federal buildings throughout the country. 

GSA’S FISCAL YEAR 2012 REPAIR AND ALTERATIONS PROGRAM 

[In thousands of dollars] 

Repair and alteration President’s 

budget Enacted level 

Non-Prospectus Basic Repairs and Alterations ..................................................................... 402,388 260,000 

Washington, District of Columbia—Main Interior Building ................................................... 50,400 ........................

Washington, District of Columbia—Harry S Truman Building .............................................. 11,039 ........................

Honolulu, Hawaii—Prince J. Kuhio Kalanianaole Federal Building and Courthouse ............ 198,650 ........................

San Francisco, California—Phillip Burton FBI Consolidation ............................................... 49,900 ........................

Overland, Missouri—Prevedel Federal Building ..................................................................... 24,386 ........................

Washington, District of Columbia—Eisenhower Executive Office Building Pennsylvania 

Avenue screening facility ................................................................................................... 17,000 ........................

Los Angeles, California—Federal Building [ICE] Design ....................................................... 9,478 ........................
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GSA’S FISCAL YEAR 2012 REPAIR AND ALTERATIONS PROGRAM—Continued 

[In thousands of dollars] 

Repair and alteration President’s 

budget Enacted level 

Energy and water retrofit and conservation measures .......................................................... 40,000 ........................

Fire prevention program ......................................................................................................... 15,000 ........................

Wellness and fitness program ................................................................................................ 7,000 ........................

Judiciary capital security program ......................................................................................... ........................ 20,000 

NOA repairs and alterations ................................................................................................... 868,902 280,000 

PROPOSAL TO MOVE THE FEDERAL TRADE COMMISSION FROM ITS HEADQUARTERS

BUILDING

Question. H.R. 2844 would require GSA to transfer ownership of the current headquarters of Federal Trade Commission (FTC) to the National Gallery of Art. Please 

provide a status update on the condition of the FTC headquarters building, including the most recent upgrades and the cost of such upgrades. Please include specific 

detail on the following: 

—the electrical system; 

—the plumbing system; 

—the HVAC systems; 

—the roof; 

—the windows; and 

—any other items GSA deems critical for proper maintenance of the building. 

Answer. The administration opposes legislation that would require GSA to transfer ownership of the current headquarters of the FTC to the National Gallery of Art. 

The FTC headquarters is fully utilized and does not require significant renovation. 

Investment in FTC headquarters by both FTC and GSA has exceeded $30 million 

over the last decade. This work entailed capital improvements to the building such 

as a new roof, a new chiller plant, repairs to the air handling system, new security 

windows, a new energy management and control system, and upgrades to the building’s fire alarm system. This also includes sizable information technology investments made by FTC in its data center and technology labs. Repairs to building 

plumbing and electrical systems have been minor. 

Question. Does GSA have any major projects on its 5-year maintenance and renovation schedule for FTC headquarters? 

Answer. GSA has no major projects on its 5-year maintenance and renovation 

schedule for FTC headquarters building. 

Question. Does the current FTC headquarters space fit the needs of FTC, now and 

in the future? 

Answer. Yes. FTC is very satisfied with their current headquarters space and it 

fits their requirements, including special space and hearing rooms. Currently, the 

building is in relatively good condition and is therefore not included in GSA’s 5-year 

plan for renovation. 

Question. FTC Commissioners submitted unanimous testimony for the record stating that physically moving FTC headquarters operation would cost $70 to $83 million. Are these costs in line with typical moving costs for agencies? What other costs 

are associated with physically moving an agency? 

Answer. Based on FTC’s requirements to relocate headquarters components and 

associated special space (including their data center, technology laboratories, and 

hearing rooms), these costs are within the average range for agency moving costs. 

The cost of physically moving an agency may include moving services, tenant fitouts, furniture, fixtures and equipment, information technology, and telephone 

needs. If the agency is moving from federally owned to leased space, the rent revenue flows to a third-party lessor rather than another Government agency. Finally, 

there may be additional costs if the moving agency is displacing a current or intended occupant as a result of the move. 

Question. GAO, Congressional Budget Office, and OMB have found that it is more 

cost-effective to house agencies in federally owned space rather than leased space. 

Does GSA concur with this assessment? 

Answer. Yes. Ideally, GSA would use Federal construction to meet all long-term 

Federal agency space needs, as leasing is the most expensive form of space acquisition for long-term requirements. GSA relies on the FBF to operate, maintain, and 

reinvest in all of its owned assets in the Federal inventory, to meet all current lease 

commitments, and to fund the acquisition of new leased or owned assets. Funds to 

acquire new assets for emerging Federal agency space requirements are limited to 
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the FBF resources that remain available after GSA meets all existing commitments 

for its owned and leased assets. The long-term cost advantages of ownership are 

preferable to leasing. 

Question. If the FTC headquarters building is given to the National Gallery of 

Art, is there vacant federally owned space for the FTC to occupy, or, would GSA 

be forced to move the agency into leased space? Would this impose an increased cost 

on the taxpayer? 

Answer. There is no vacant federally owned space available and suitable for housing FTC. In order to accommodate FTC in Federal space, another Federal agency 

would be forced to move out of the space, and this would be a significant increase 

in the cost to taxpayers. 

Question. Given these findings, what does GSA believe is the best use for the FTC 

headquarters building? 

Answer. GSA believes the taxpayer is best served by maintaining the FTC headquarters’ current location. A forced move of FTC would increase the net amount of 

Government leased space and incur relocation costs and rent, both of which would 

occur if the building was given to a quasi-governmental entity such as the National 

Gallery of Art. 

Additionally, whenever a federally owned property is transferred to a quasi-Governmental entity, existing laws and regulations require that entity to compensate 

the Federal Government for the full value of the property involved. In this instance, 

the value of the FTC headquarters’ current location is $92.8 million. Thus the Federal Government risks the potential loss of the building, plus relocation expenses 

and dislocation costs, if any. 

Given the overall negative impact to the American taxpayer, the administration 

opposes proposed legislation that would direct the transfer of the FTC headquarters. 

FISCAL YEAR 2013 BUDGET FOR THE FEDERAL BUILDINGS FUND

Question. Your request for rental of space is a $338.4 million or a 6.5-percent increase. What will you do if forced to be on a continuing resolution of significant duration? 

Answer. Typically, obligations for rental of space are higher in the second half of 

the fiscal year as leases are renewed. Over the last 4 years, obligations through 

March have only amounted to 47.7 percent of the annual obligations. Unobligated 

balances and recoveries of prior year obligations, along with the timing of the obligations will allow the Rental of Space account to operate for several months while 

on a continuing resolution. 

Question. Last year, you requested almost $470 million for seven construction 

projects and this year, you are requesting $56 million for two acquisition (building 

purchase) projects. Does this represent a shift in your thinking? 

Answer. GSA has proposed a responsible budget reflective of the current budget 

climate. We are prioritizing our existing financial obligations and the most critical 

and exigent investment needs in our inventory. While there remain additional valuable investments in consolidations like the acquisition of the currently leased buildings in Martinsburg, West Virginia, and Riverdale, Maryland, we must acknowledge 

the reality of the budget climate. 

Question. How much funding do you expect to save with the acquisition of these 

buildings? 

Answer. Purchasing the two buildings at Martinsburg, West Virginia, and Riverdale, Maryland, will eliminate costly lease obligations and result in millions in out 

year cost avoidance to the Government. The purchase of Riverdale alone could save 

the Federal Government more than $10 million in annual rent. For Martinsburg, 

the Congress authorized the appropriations for acquisition, through an existing purchase option, of this building as part of the fiscal year 2011 Capital Investment and 

Leasing Program. GSA has continued to lease the building and since fiscal year 

2011 has spent more than $6 million in rental payments. The current lease expires 

in 2015, and if it is allowed to expire GSA will lose the purchase option. If GSA 

is required to extend the lease versus purchasing the building it is anticipated that 

the rental rate for continued occupancy will be as much as $6 million, or approximately double the current rent rate. 

Question. In a departure from your typical requests for major Federal building repair projects, instead, this year you are requesting $123 million for ‘‘Exigent Needs’’ 

at 16 Federal buildings. Can you give us a few examples of the highest-priority and 

most-critical needs? 

Answer. GSA considers all of the projects requested in the fiscal year 2013 Exigent Needs program to be of high priority and a critical need. GSA is requesting 

a limited amount of funding to support exigent need projects in 20 Federal buildings 
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2Fiscal year 2013 request of $21 million; fiscal year 2012 request of $38 million (received 

zero); and fiscal year 2011 request of $15 million (received $7 million). 

to repair and update critical building and safety systems including elevators; fire 

and life-safety, electrical, and heating and ventilation systems; and to repair structural deficiencies. 

The program addresses such essential work items as fire alarm system replacements on antiquated and irreparable systems that could jeopardize the safety of occupants and the building if left unaddressed. The program also intends to secure 

the fac ̧ade and parking structure at two facilities that could pose hazards to building occupants and the general public if unrepaired, and remove hazardous materials 

at two other locations. Upgrades and repairs to electrical and elevator systems are 

designed to ensure continued operations of several Government-owned facilities and 

prevent disruption to agency missions and service to the American taxpayer. 

Question. Do you expect that these types of acquisition and repair projects will 

become a trend in the short-term (in lieu of construction and major repair projects)? 

Answer. GSA will continue to assess and prioritize the conditions and needs of 

our assets, as well as the needs of our Federal tenant agencies. We will work with 

OMB to discuss these needs in relation to competing priorities from other executive 

branch agencies. GSA’s budget requests for FBF obligational authority will reflect 

efforts to balance our needs with those of other agencies within the overall Federal 

budget framework. 

COST-CUTTING MEASURES

Buyouts 

Question. Of the buyouts GSA is offering, what percentage of employees do you 

believe will accept them and what will be the effect on the agency? 

Answer. GSA implemented a buyout program in March 2012 with an 18-percent 

take rate. GSA is considering additional requests for Voluntary Early Retirement 

Authority/Voluntary Separation Incentive Payment authority. If that authority is 

granted, GSA expects the take rate to be in the same 18-percent range. The agency 

will be able to reduce the workforce commensurate with the decline in the workload. 

Also, where the nature of the work has shifted and requires new skills due to process improvements, technology and changing business delivery models, GSA intends 

to recruit and hire people with the skills required to accomplish the mission. 

Question. How will you avoid or mitigate the loss of knowledge when workforce 

reductions occur? 

Answer. The buyout is targeted and focused on specific organizational components 

or occupations across the enterprise. GSA balanced the need to acquire different 

skills with the need to avoid or mitigate the loss of knowledge by offering buyouts 

to a percentage of the organization/population, not the organization/population as a 

whole. 

Effort To Streamline Acquisitions and Reduce Costs 

Question. In 2001, OMB established a Governmentwide initiative, to be carried 

out by GSA, to bring together different acquisition data systems in a unified and 

fully integrated manner. This effort, called the Integrated Acquisition Environment 

(IAE), will enable Federal agencies to share data and make informed decisions, 

make it easier for contractors to do business with the Government, and result in 

cost savings to the taxpayer. In 2008, GSA began consolidating its own portfolio of 

10 stove-piped systems with different contractors into one integrated system called 

the System for Award Management (SAM), under IAE. 

GSA has requested various levels of funding for the past 3 years for IAE.2 While 

some costs have increased due to lack of funding in fiscal year 2012, since 2009, 

development costs for the System for Award Management have increased significantly. Why is this? 

Answer. The SAM program encompasses a range of activities beyond just the specific development of the SAM application itself. These activities include requirements definition, architecture and technical design, consolidation of help desk support, transition planning, coordination, and execution for the legacy IAE systems, 

interface design, and associated support services. 

The projected development costs remain substantially the same; however, the 

overall program costs have increased. For example, GSA has needed to expand the 

scope and level of support services to meet the needs of the Federal grants and 

loans communities and incorporate new requirements that were not anticipated at 

the onset of the SAM planning and costs have increased as a result of needing to 

incorporate changes to the Federal Acquisition Regulations (FAR) and other legisla-
104 

tive changes. Funding limitations have also delayed GSA’s ability to meet the originally scheduled objectives, which has resulted in the need to retain contract support 

longer than anticipated for our legacy systems, as well as for SAM program management and integration support. In addition, several contracts were inflexibly structured and payments for services were not well-aligned to the actual work being performed and delivered. GSA is presently taking corrective action to address this. 

Question. Do you believe that your current acquisition strategy is the most costeffective alternative or have you reassessed your plans—where does this stand? 

Answer. GSA is actively reassessing its plans, including the acquisition strategy. 

A GSA conducted ‘‘TechStat’’ to review the current project management and governance structure to determine what additional oversight or change in direction might 

be needed, in light of the GAO findings. The TechStat validated the findings of the 

GAO and identified gaps in governance. As a result, GSA established an Integrated 

Project Team (IPT), comprised of technical, legal, program, and acquisition experts, 

to assess and ensure a more comprehensive, objective, and transparent understanding of current needs and challenges and to develop options and recommendations on the best way to move ahead. The IPT is in the process of further assessing 

program and project management, the SAM architecture, performance reporting, 

cost drivers and corresponding budget requirements, and other control processes. 

GSA management is committed to ensuring improved overall management of IAE/ 

SAM. The objective is to develop a new executable vision of IAE/SAM that comprehensively addresses governance, business, technology, program and project management, contracting, and funding requirements. 

Question. While the subcommittee is supportive of initiatives that will enable 

agencies to share data, make it easier to conduct business with the Federal Government, and save taxpayer dollars, there is often an upfront cost as well as annual 

maintenance costs, as is the case here. You are requesting $21 million, but apparently, we need to fund all of it—it can’t be broken into smaller funding amounts? 

Answer. The amount of funding that GSA receives directly impacts the schedule 

and scope of continuing to implement SAM, as well as GSA’s ability to retire the 

legacy systems associated with the functionality that is incorporated into SAM. (For 

example, Phase One of SAM is focused on ‘‘Entity Management’’ functionality and, 

once in production, will allow GSA to decommission the Central Contractor Registration system, the Online Representations and Certifications Application system, 

and the Excluded Parties List System). 

That said, GSA is prepared to implement SAM in phases and revise its project 

schedules as necessary. However, implementing SAM in phases will extend the 

amount of time that GSA must continue to maintain parallel legacy. Operations and 

support services for the remaining IAE systems. In addition to increasing costs over 

the long-term, a phased implementation of SAM would: 

—result in the need to revise acquisition plans; 

—hamper GSA’s ability to readily and more cost-effectively incorporate legislative 

and FAR changes; 

—negatively impact the acquisition workforce’s ability to efficiently perform their 

duties due to the need to access multiple systems; and 

—limit how quickly we can move forward on improving data quality and transparency objectives. 

CIVILIAN PROPERTY REALIGNMENT BOARD

Question. The administration has proposed an independent entity—the Civilian 

Property Realignment Board, modeled after the Base Realignment and Closure 

(BRAC) process—which would sell unneeded Federal property in a streamlined 

manner. The funding requested for the Board and the Revolving Fund totals $57 

million for fiscal year 2013. The House has passed two bills relating to Federal real 

property disposal and the Senate has introduced a bill on the topic. None of these 

matches exactly the administration’s proposal. What is GSA’s view of these various 

bills (please discuss each one)? 

Answer. GSA supports the administration’s proposal, which addresses the key 

challenges that exist in the current process and should streamline and accelerate 

the disposal process. With respect to the current bills being discussed in the Congress, GSA supports legislation that provides additional realty tools and incentives 

that encourage sound management of real estate portfolios. GSA defers to OMB to 

address the administration’s position on the various bills drafted. 

Question. What are the safeguards that must be maintained if an expedited disposal process is authorized? 

Answer. There are four important safeguards that must be maintained as part of 

the development of an expedited disposal process: 
105 

—A process to ensure that disposals are authorized as a consolidated package, as 

opposed to one-by-one; 

—Methods to evaluate which assets are mission-critical and which assets are not; 

—Utilization of authorities, resources, and expertise available within the Federal 

Government to achieve asset repositioning objectives; and 

—Incentives such as retention or reinvestment of proceeds from the sale of real 

estate assets for all landholding agencies to promote broader portfolio management. 

Question. For several years, the figure of $15 billion in savings has been stated 

as the savings that could be achieved by ridding the Government’s property inventory. Do you really believe that figure is still accurate? 

Answer. From fiscal year 2005 to the end of fiscal year 2011, PBS has disposed 

of approximately 286 assets, consisting of more than 13 million rentable square feet 

of unneeded real estate. Proceeds from fiscal year 2005 to fiscal year 2011 were approximately $244 million. PBS estimates that through these disposals, the agency 

avoided approximately $298 million in reinvestment needs and liabilities during this 

time period. 

QUESTIONS SUBMITTED BY SENATOR MARK KIRK

Question. At a House Oversight and Government Reform Hearing on April 16, 

2012, you testified: ‘‘Well, I think we definitely had a cultural problem in region 9. 

Probably tied to a leadership problem. But I can’t say that I know enough—enough 

about General Services Administration (GSA) to say whether we do or do not have 

a cultural problem across the organization when it comes to these issues.’’ In your 

testimony for this subcommittee you said, ‘‘. . . I am committed to renewing GSA’s 

focus on its core mission: saving taxpayers’ money by efficiently procuring supplies, 

services, and real estate, and effectively disposing of unneeded Government property.’’ 

The ‘‘Mission, Vision and Goals’’ of GSA, as listed on the Web site, use the word 

‘‘green’’ three times and some variant of the word ‘‘sustainable’’ three times. However, the words ‘‘budget’’ and ‘‘cost’’ never appear, nor does any variant of the word 

‘‘spending’’. The word ‘‘waste’’ appears, but in the context of environmental waste, 

not wasted tax dollars. There are passing mentions of efficiency, but it is unclear 

if this refers to the environment or efficient use of tax dollars. 

Do you believe the failure of the ‘‘Mission, Vision, and Goals’’ of the GSA to clearly 

make cost efficiency or low spending the top priority is indicative of a broader ‘‘cultural problem’’ or ‘‘leadership failure’’? I recommend that you begin at the top, and 

rewrite your ‘‘Mission, Vision, and Goals’’ statement so that cost efficiency is your 

top priority. 

Answer. GSA is currently conducting a top-to-bottom review of our operations and 

goals with the objectives of streamlining the way we do our business, saving taxpayer dollars, and ensuring the most-efficient delivery of services to our customer 

agencies and American citizens. We are continuing to pursue every initiative necessary to restore the trust of the American taxpayer. 

Question. In the wake of the scandal surrounding the 2010 Western Regions Conference (WRC), you canceled all GSA conferences, creating fairly substantial cost 

savings. Why were these conferences approved in the first place if they were nonessential enough to be canceled and could create substantial cost-savings? 

Answer. As part of the top-to-bottom review of GSA operations, it was determined 

that all upcoming conferences should be reviewed in light of new controls over conferences and travel. Many, but not all, previously scheduled conferences and meetings were cancelled as a result of this review, saving $995,000. The conferences that 

were cancelled either did not meet the new standards or were cancelled because we 

did not have adequate time to conduct the review. All upcoming conferences must 

meet the new requirements which became effective on April 15, 2012. 

Question. What is the oversight protocol for compliance with the terms of Blanket 

Purchase Agreements (BPAs)? Specifically, what actions does GSA take to ensure 

that purchases from vendors under BPAs are made at prices matching the bid 

prices? What protocol is followed if a payment to a BPA vendor substantially in excess of the bid price is reported to the GSA? What, if any, enforcement measures 

have been taken against BPA vendors whom have charged in excess of their bid 

prices? 

Answer. GSA has risk-management controls in place to ensure that the prices 

contractors propose when establishing BPAs or placing task and delivery orders are 

at or below the GSA Multiple Award Schedule (MAS) price. Specifically, Acquisition 

Management has the Supplier Management Division which has approximately 100 
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Industrial Operation Analysts (IOAs) who perform contract-compliance reviews of 

MAS contracts every 2–3 years through the life of the contract. One of the areas 

the IOAs review for compliance is adherence to GSA schedule pricing. These reviews 

are performed by taking a sample of the BPA or order information. Review findings 

are documented in a report that is sent to the Contracting Officer (CO) and Administrative Contracting Officer (ACO) to take action, if necessary as appropriate. The 

possible actions the CO or ACO can take in response to findings of mischarging 

could include requesting a postaward audit from the GSA Office of Inspector General (OIG), requiring the vendor to perform a self-audit and develop an action plan 

to take corrective action measure, and seeking recoveries of overcharges and sending 

it back to customer agencies or the Treasury. 

As an example, GSA recently issued an instructional letter (IL 2011–07) entitled 

‘‘Procedures for Reviewing Contractor Compliance with prompt Payment Discount 

(PPD) Terms on Federal Supply Schedules (FSS) contracts’’. This IL specifically addresses noncompliance with prompt payment discount terms as a result of a GSA 

audit. The same process will be followed for overcharges to the GSA schedule price. 

Question. In a March report, OIG found that some cost-reimbursement contracts 

entered into by GSA were not in compliance with regulations and that such contracts provide no incentive for contractors to control costs. What does GSA estimate 

the excess cost of such contracts have been over the past several years? What steps 

is GSA taking to transition to more cost-effective and regulation compliant contracting processes? 

Answer. As a result of the OIG findings, GSA will continue to take steps to ensure 

that proper incentives are in place to control costs for current and future contracts. 

The OIG audit did not identify any estimate of excess costs for these types of contracts. 

In addition, the July 2009 Office of Management and Budget (OMB) Memorandum M–09–25, ‘‘Improving Government Acquisition’’ and the Office of Federal 

Procurement Policy’s (OFPP) October 27, 2009 guidance, ‘‘Increasing Competition 

and Structuring Contracts for the Best Results’’ called for heightened management 

attention on agency use of various types of high-risk contracts and provided strategies for reducing their use. OFPP defined high-risk contracts as those that are 

awarded noncompetitively, received only one bid in response to a competitive solicitation, are cost-reimbursement awards, and/or are time and material labor awards. 

To date, GSA has taken a number of actions to comply with the OMB and OFPP 

guidance and ensure more cost-effective and regulation-compliant contracting processes, which include: 

—Developed a Governmentwide working group team (AcqStat) comprised of representatives from GSA’s Office of Governmentwide Policy, Public Buildings 

Service (PBS) and Federal Acquisition Service (FAS), which has been meeting 

regularly since fiscal year 2010. 

—Conducted quarterly Federal Procurement Data System reporting, which is reviewed by FAS and PBS and discusses high-risk reduction and any specific 

areas that require attention or training emphasis. 

—Established FAS and PBS action plans, which are updated based on quarterly 

reviews. 

—Developed a yearly Competition Advocate report, which summarizes a variety 

of best practices, lessons learned, and necessary actions. 

—Issued an Acquisition Alert (2012–01), which increases awareness among the 

Acquisition community. 

—Developed a training webinar for the acquisition workforce. 

—Continued review of high-risk action plans by the Procurement Management 

Review (PMR). 

—Releasing an Acquisition Planning Wizard to aid execution of the acquisition 

planning process. 

—Established a FAS ‘‘ask competition advocate’’ link that allows and encourages 

contracting professionals to ask questions related to increasing competition and 

reducing high risk. 

—Issued a FAS IL (July 27, 2011), regarding the reduction of high-risk contracting. The instructional letter was intended to provide directions to acquisition personnel for adhering to the new FAR rule on managing cost reimbursement activities—to include requiring documentation on why a contract type was 

selected, how it will manage and mitigate risk, whether consideration was given 

to firm-fixed price, and sets rules for appropriate approval and staffing of the 

contract. 

—Continued training to the workforce on high-risk contracting through FAS Acquisition Industry Days. 
107 

—Implemented a BPA for strategic sourcing aimed to provide efficiency, lower 

costs, and reduced environmental impact, while improving competition and reducing high-risk contracting. 

—Continued emphasis on proper acquisition planning as outlined in the (OFPP 

Myth Busting memorandum), to include: 

—early engagement with industry; 

—development of sound requirements packages; 

—ensuring sufficient time for proposals/quote responses; 

—challenging brand name specifications; 

—limiting period of performance on sole-source/noncompetitive awards; 

—encouraging industry days to communicate requirements; and, 

—releasing requests for information and proposals, through GSA eBuy and 

FedBizOpps, as appropriate. 

Question. I am encouraged to see that GSA has moved to dispose of excess Federal 

buildings, a step that will raise revenues and encourage more efficient use of highcost buildings. What congressional actions could expedite the sale of excess buildings? 

Answer. Based on our experience, we believe that a reform to real property asset 

management must address these central challenges: 

—Incentivizing disposals by enabling agencies to realize the benefits of proceeds. 

—Addressing the upfront costs associated with disposals and consolidations. 

—Resolving competing stakeholder interests that can slow down or prevent good 

asset management decisions. 

To address these challenges the President proposed a bill last year that would 

usher in a new approach to Federal real estate. The President’s proposal would create an independent board of experts to identify opportunities to consolidate, reduce, 

and realign the Federal civilian real estate footprint as well as expedite the disposal 

of properties. 

This proposal would utilize bundled recommendations, a fast-track congressional 

procedure, streamlined disposal and consolidation authorities, and a revolving fund 

replenished by proceeds to provide logistical and financial support to agencies in 

their disposal of high-value properties. It would serve as a comprehensive solution 

to key obstacles that hinder the Federal Government’s progress on improving real 

estate management decisions. The proposal expands upon the June 2010 Presidential Memorandum that directed Federal civilian agencies to increase efforts to 

dispose of unneeded Federal real estate and to maximize the utilization of the current inventory to achieve billions in savings. 

GSA supports the administration’s goals and those of this subcommittee and other 

Members of Congress to dispose of unneeded Federal real property and streamline 

the current disposal process. 

The administration’s efforts anticipate working with the Congress to create a successful program, and GSA welcomes the efforts of this subcommittee and other 

Members of Congress to successfully reform and improve Federal real property management. 

Question. According to OIG’s report on the 2010 WRC, there were multiple violations of contracting regulations resulting in wasted taxpayer dollars. Given the 

GSA’s central role in the procurement process for the Government as a whole, it 

is very troubling that oversight and controls did not prevent these violations, which 

included disclosing a competitor’s proposal price to a favored contractor, contracting 

to a large business in violations of small-business set-asides and disclosing to a contractor GSA’s maximum budget for 1 day of training, then agreeing to pay the contractor that amount. 

What steps is GSA taking, both internally and Governmentwide, to ensure these 

types of violations do not happen going forward? Specifically, what changes are 

going to be made to improve contracting oversight, ensure access to contracts for 

small business and prevent overpayments? 

Answer. Internally, GSA has taken corrective action to ensure these violations do 

not happen going forward. To improve contracting oversight, small business, and 

overpayment concerns GSA will take the following steps: 

—Increase resources devoted to the PMR function to assess the effectiveness of 

oversight measures and to mandate corrective action where needed. 

—Explore changes to the GSA Head of Contracting Activity structure. 

—Provide refresher training to Heads of Contracting Activities on key roles and 

responsibilities. 

—Conduct training on ethics and procurement integrity, conference planning, and 

contracting. 

—Continue to encourage employees to report waste, fraud, and abuse. 

—Redouble efforts to ensure that small-business set-aside protocols are followed. 
108 

—Realign management of Chief Financial Officer (CFO) regional functions to report to the GSA Central Office CFO to provide greater ability to detect and prevent improper payments. 

—Centralizing oversight of GSA internal travel activities in the Office of Administration. 

QUESTIONS SUBMITTED TO BRIAN D. MILLER

QUESTIONS SUBMITTED BY SENATOR RICHARD J. DURBIN

WAS TRAINING TO ENHANCE JOB SKILLS CONDUCTED?

Question. Based on your year-long probe of this event, can you identify any specific seminars or sessions from the Western Regional Conference (WRC) that had 

the objective of enhancing job skills for the attendees? 

Answer. We made the decision not to assess the quality or substance of the training seminars or sessions held at the WRC, but instead focused our investigation on 

the excessive costs and impermissible contracting actions associated with the planning and execution of the WRC. 

IMPROPER CONTRACTING

Question. In your report, you describe the circumstances surrounding the execution of the original agreement with M Resort as the conference site. You state that, 

among the weaknesses, ‘‘the agreement was missing many clauses that statutes and 

regulations required to be included in contracts with the Federal Government.’’ Can 

you elaborate on what particular necessary contract terms were omitted? 

Answer. Our investigation revealed that the WRC event planner simply signed 

and returned the M Resort’s standard-form contract as opposed to a Government 

standard-form contract, which would have included the Federal Acquisition Regulation (FAR 12.301) and the General Services Administration Acquisition Regulation 

(GSAR 512.301 and 552.212–71) clauses (or equivalents) required for the acquisition 

of commercial items by the Government. The original agreement with the M Resort 

also failed to include a clause that should per diem rates change for the selected 

site, the hotel will honor the Government’s prevailing per diem rate. The inclusion 

of such a clause, while not required by the FAR, would be necessary to preserve the 

Government’s interest, because, as GSA should be well aware the per diem rates 

are subject to change. 

Question. What problems arise as a result of omitting required clauses? 

Answer. These clauses are intended to protect the United States Government. For 

example, FAR 52.212–4, one of the required clauses, states the Government’s rights 

under a termination for convenience, sets forth the terms of payment, and requires 

the contractor to keep its Central Contractor Registration entry up to date, which 

correspondingly binds the contractor to those representations. It does not appear 

that GSA needed to use these particular provisions. If, however, GSA had needed 

to terminate the contract, or had encountered a dispute regarding timely payment, 

it would have lacked the protection of these clauses. As you are aware, GSA did encounter problems with a change in the Government per diem rate. Had GSA included a clause to anticipate this problem, it might not have felt a need to increase 

catering in order to cover the ‘‘loss’’ to the M Resort. 

Question. Were you able to determine whether omission of the required clauses 

was negligent or was it deliberate/intentional? 

Answer. We do not have sufficient evidence to make a determination as to whether the omission of the required clauses and the use of the hotel’s standard contract 

were negligent or willful. 

Question. Based on your experience, was this omission an unusual aberration or 

have you detected any similar omissions and cited the GSA for them? 

Answer. We are currently reviewing other conferences on a case-by-case basis and 

will examine whether these clauses have been omitted in other contracts with conference vendors. 

NONCOMPLIANCE WITH FIRE SAFETY ACT

Question. You also explain that ‘‘Federal conferences may only be held at a hotel 

that is on FEMA’s list of Fire Safety Act-approved accommodations.’’ You note that 

the GSA conference site—the M Resort—is not on that list. While the requirement 

may be waived, you find no evidence in the contract documents indicating that a 

waiver was granted. Does the curriculum for contracting officers include a discussion of this? If not, shouldn’t it? 
109 

Answer. The provision of the Fire Safety Act which mandates that Federal conferences be held at a hotel that is on FEMA ’s list of approved accommodations is 

in section 301–11.11 of the Federal Travel Regulation. We do not believe this requirement is discussed in the curriculum for contracting officers. We also believe, 

however, that this provision should be known to contracting officers and event planners responsible for selecting a hotel. 

PROBLEMS AT PUBLIC BUILDINGS SERVICE—SYSTEMIC?

Question. Clearly, there has there been a culture of excessiveness and lax accountability within the Public Buildings Service (PBS) Region 9, and perhaps even in 

some of the other regions. To what degree might this be a problem in other parts 

of GSA? 

Answer. Since the release of the WRC report, our Office of Investigations has seen 

a noteworthy increase in hotline tips and complaints, and our agents are diligently 

looking into these. Our office is also looking into other conferences. We would not 

want to make generalizations about other regions or components without the necessary supporting facts. We do note, however, that systemic changes can be put into 

place to eliminate opportunities for excessive, impermissible, and unchecked spending in the future. We have proposed that the Chief Financial Officer’s (CFO) office 

be centralized to assure that the CFO has direct authority over all regional and 

service budget offices as well as visibility into all agency budgeting, down to the dollar level. In his testimony before the Subcommittee on Financial Services and General Government, Acting Administrator Daniel M. Tangherlini stated his intention 

to pursue these reforms. We also believe that the agency should separate the contracting function from the program function—a contracting officer should not report 

to the program officer. We believe that, if implemented, these steps could produce 

the necessary checks and balances to ensure top-down accountability in GSA’s financial operations. 

‘‘HATS OFF’’ PROGRAM—EMPLOYEE REWARDS PROGRAM

Question. PBS Region 9 developed an awards program store known as the ‘‘Hats 

Off Store’’ in 2001. The Hats Off program initially maintained items of nominal 

value such as mugs, mouse pads, and backpacks, labeled with GSA logos or insignia. 

However, over time, high-value items such as iPods, digital cameras, GPS devices, 

and other electronics were introduced into the program. The budget for this program 

went from $45,000 in fiscal year 2007 to $212,000 in fiscal year 2009 and the Inspector General found significant control weaknesses, plus the loss of $20,000 worth 

of Apple iPods. What began with nominal reward items and gift cards turned into 

high-value items, and store and restaurant gift cards. Did anyone other than in region 9 have oversight over this program? 

Answer. Our investigation identified a serious lack of oversight over this program. 

In fact, our major concerns with the Hats Off program were the lack of oversight 

of the inventory and on the exchange of awards between employees. The abuse of 

the Hats Off employee award store is another example of the importance of a centralized CFO. If GSA’s CFO has greater visibility into regional spending, down to 

the dollar level, these types of abuses might not occur as easily. 

Question. What did you find with regard to the employees who received the 

awards—how many and what types benefited from the program? 

Answer. We identified many problems with the exchange of awards. First of all, 

employees appeared to ‘‘swap’’ awards, meaning that within minutes of one employee receiving award cards, the employee returns the same or nearly the same 

number of award cards back to the original employee. This occurred no fewer than 

300 times. Second, we found that on at least one occasion, a supervisor accepted an 

award from a subordinate. Additionally, we found that some of the top receivers of 

awards were actually involved with the awards store administration. 

Question. Did you examine what types of actions employees performed to receive 

awards? 

Answer. Exhibit 9 of our Hats Off Report of Investigation lists some of the reasons 

or justifications for points-swapping, including ‘‘taking charge’’, ‘‘promoting fun in 

the workplace’’, and ‘‘thrilling the customer’’. We question the value and substance 

of these justifications, particularly because of the ‘‘swapping’’ patterns we found between employees. 
110 

QUESTIONS SUBMITTED BY SENATOR MARK KIRK

Question. At a House Oversight and Government Reform Hearing on April 16, 

2012, Acting Administrator Daniel M. Tangherlini testified: ‘‘Well, I think we definitely had a cultural problem in region 9. Probably tied to a leadership problem. 

But I can’t say that I know enough—enough about GSA to say whether we do or 

do not have a cultural problem across the organization when it comes to these 

issues.’’ 

In your experience as Inspector General at the General Services Administration 

(GSA), and in light of the events surrounding the 2010 Western Regions Conference 

(WRC), would you say the GSA has a cultural problem across the organization? Do 

you believe any such problems are tied to a leadership problem? 

Answer. We hesitate to make generalizations about other regions or components 

without the necessary supporting facts and sufficient evidence. We do note, however, 

that systemic changes can be put into place to eliminate the opportunities for excessive, impermissible, and unchecked spending in the future that were abused by 

some in region 9. We have proposed that the Chief Financial Officer’s (CFO) office 

be centralized to assure that the CFO has direct authority over all regional and 

service budget offices as well as visibility into all agency budgeting, down to the dollar level. In his testimony before the Subcommittee on Financial Services and General Government, Acting Administrator Daniel M. Tangherlini stated his intention 

to pursue these reforms. We believe, if implemented, these steps could produce the 

necessary checks and balances to ensure top-down accountability in GSA’s financial 

operations. 

Question. In your testimony, you mentioned numerous investigations of Federal 

property managers and contractors taking bribes and kickbacks under the American 

Recovery and Reinvestment Act (ARRA), specifically saying, ‘‘My own office has 

issued numerous audit reports relating to GSA’s construction and renovation contracts under the American Recovery and Reinvestment Act. We discovered and investigated eleven Federal property managers and contractors taking bribes and 

kickbacks.’’ Did the rapid manner in which projects under ARRA were selected and 

funded increase the likelihood of malfeasance and corrupt practices? 

Answer. ARRA provided GSA with $5.5 billion to convert Federal buildings into 

‘‘High Performance Green Buildings’’ as well as to construct Federal buildings, 

courthouses, and land ports of entry. As you know, ARRA mandated that $5 billion 

of the funds be obligated by the end of fiscal year 2010, with the remaining $0.5 

billion obligated by the end of fiscal year 2011. This short timeframe strained the 

capabilities of project teams, even with the addition of contract support staff, and 

forced the acceleration of planning and executing multiple large-scale projects simultaneously. This resulted in contracting irregularities, Federal Acquisition Regulation 

and Competition in Contracting Act (CICA) requirement violations, and improper 

negotiations. Our Offices of Audits and Investigations are currently conducting oversight activities related to ARRA-funded projects. We anticipate these activities will 

continue for the next several fiscal years. 

Question. In your testimony you mentioned, ‘‘The core mission of GSA is to provide low-cost goods and services. When GSA wastes its own money, how can other 

agencies trust it to handle the taxpayer dollars given to them?’’ Do you think that 

GSA’s current statement of ‘‘Mission, Vision, and Goals’’ is consistent with a core 

mission of providing low-cost goods and services or does it provide greater emphasis 

on other priorities? Do you think this is indicative of a larger culture of departing 

from cost efficiency as a central mission and instead focusing on parochial or political priorities? 

Answer. We believe that GSA should get back to basics and align its programmatic activities and strategic goals with the core mission of providing low-cost 

goods and services, as stated by the Acting Administrator. During our WRC investigation, we found that many agency contracting personnel did not fully understand 

fiscal law or the Federal Travel Regulation, or were unaware of the existence of 

agency policies that directly governed their daily work. We also believe that the accountability requirement associated with the Anti-Deficiency Act (ADA) should be 

applied to CICA. Currently, agencies that violate the ADA must ‘‘report immediately 

to the President and Congress’’, as well as the Comptroller General, the facts surrounding each violation and the actions taken to remedy the program (31 U.S.C. 

1517(b)). If agencies fail to ‘‘obtain full and open competition through the use of 

competitive procedures’’ as mandated by CICA, they should be held to the same accountability standards for violating the ADA. An emphasis on contracting knowledge and the implementation of these accountability standards could achieve greater 

cost savings. Additionally, GSA must separate its contracting function from its program functions—a contracting officer should not report to the program officer. Fur-
111 

thermore, as mentioned earlier, centralizing the CFO’s office could produce the necessary checks and balances to ensure top-down accountability in GSA’s financial operations. These steps, and a continued emphasis by the Acting Administrator on 

cost savings, would help bring GSA back to its core mission. 

SUBCOMMITTEE RECESS

Senator DURBIN. At this point, the hearing stands recessed. 

Thank you. 

[Whereupon, at 3:23 p.m., Wednesday, April 18, the subcommittee was recessed, to reconvene subject to the call of the 

Chair.] 

(113) 

MATERIAL SUBMITTED SUBSEQUENT TO THE 

HEARING 

[CLERK’S NOTE.—The following testimony was received subsequent to the hearing for inclusion in the record.] 

ADDENDUM ON AGENCY IMPROVEMENTS

To build on a familiar General Services Administration (GSA) theme as emphasized by previous Administrators, the Administration needs to become ‘‘One GSA.’’ 

One GSA, with top-to-bottom control and accountability should replace a system of 

diffused ‘‘matrix’’ management that has led to fiefdoms and feudal kingdoms. No Administrator should have to plead ignorance or weakness when the public trust is 

being abused. If GSA’s senior leaders are going to be held accountable for the work 

of the agency—and they will be as recent events show—leadership must have the 

authority and tools for carrying out their responsibility. As it is, with senior regional 

leadership having two supervisors, accountability becomes divided and diffused. The 

supervisory matrix really becomes a sieve through which oversight is lost. This is 

the problem with a weak Chief Financial Officer’s (CFO) structure. One GSA accountable to the Administrator, as the Western Regions Conference failures attest, 

also requires One CFO. When financial responsibilities are so dispersed they fall beyond the control of the CFO, there is no CFO—and the Administrator is deprived 

of one of an agency head’s lead reins to control spending and provide leadership over 

agency programs. A theme of a unified GSA leads to a unified CFO and a unified 

CIO. Diffused information systems lead to redundancies, cost, and barriers that are 

inimical to the concept of accountability and transparency. 

CENTRALIZE PROGRAM AND BUDGET MANAGEMENT

GSA’s CFO testimony before the Subcommittee on Economic Development, Public 

Buildings and Emergency Management of the House Committee on Transportation 

and Infrastructure indicated that the CFO is essentially a figurehead. 

The CFO should have direct authority over all regional and service budget offices 

(and should be the only employee with the title ‘‘CFO’’). The CFO should have visibility into all agency budgeting, down to the dollar level. 

CENTRALIZE AGENCY INFORMATION MANAGEMENT

Likewise, the Office of the Chief Information Officer (OCIO) should have control 

over all agency information systems. Currently, it is not clear that the OCIO is even 

aware of the full list of the agency information systems that exist. The OCIO should 

have final authority to access and manage all systems. 

Despite the Inspector General Act’s requirement that the Office of Inspector General (OIG) is authorized ‘‘to have access to all records’’ of the agency that relate to 

the OIG’s responsibilities, currently requests by the OIG for read-only access to 

agency information systems are often met with extraordinary delays (sometimes 

more than a year) or are never fulfilled. GSA systems ‘‘owners’’ who fail to provide 

access to the OIG within 14 days should be required to make an explanation of that 

failure to the Administrator, with a copy to the Inspector General, by the end of 

the 14-day period. 

GET BACK TO BASICS

As the Acting Administrator has stated, GSA needs to re-focus on its core missions—procurement and building operations. We found that many agency contracting personnel did not understand fiscal law or the Federal Travel Regulation, 

or were unaware of the existence of agency policies that directly governed their 

daily work. This is unacceptable. 

The agency must separate its contracting function from its program functions. 

That is, the Contracting Officer should not report to the program officer. 
114 

GET OUT OF THE ‘‘MATRIX’’ 

As the former GSA Administrator testified, GSA employee supervision is not presently linear; it is a ‘‘matrix’’. Because many high-level personnel report to two supervisors, each supervisor can deflect supervisory responsibility onto the other, or claim 

to. The matrix is really a sieve. 

REQUIRE PROCUREMENT ACCOUNTABILITY

Currently, agencies that violate the Anti-Deficiency Act must ‘‘report immediately 

to the President and Congress’’, as well as the Comptroller General, the facts surrounding each violation and the actions taken to remedy the problem (31 U.S.C. 

1517(b)). This same accountability requirement should be added to the Competition 

in Contracting Act, which requires that agencies ‘‘obtain full and open competition 

through the use of competitive procedures in accordance with the requirements of 

(CICA) and the Federal Acquisition Regulation.’’ (41 U.S.C. 3301(a)(1)). This accountability would indicate that the agency takes seriously the concerns of businesses, particularly small businesses, that have not received a full and fair opportunity to compete for Federal contracts. 
(115) 

FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 

YEAR 2013 

WEDNESDAY, MAY 9, 2012 

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

The subcommittee met at 3:48 p.m., in room SD–138, Dirksen 

Senate Office Building, Hon. Richard J. Durbin (chairman) presiding. 

Present: Senators Durbin, Moran, and Lautenberg. 

FEDERAL COMMUNICATIONS COMMISSION 

STATEMENT OF JULIUS GENACHOWSKI, CHAIRMAN 

OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

Senator DURBIN. My apologies. What can I say? There is no excuse. I’m sorry. Let me just put my opening statement in the 

record. 

Thanks to those for attending this hearing of the Appropriations 

Subcommittee on Financial Services and General Government. 

Thank you, Senator Moran. Thank you, Senator Lautenberg, and 

Chairman of the Federal Communications Commission (FCC), Julius Genachowski. 

And, let me at this point, defer to Senator Moran. I’ll put my 

opening statement in the record. 

STATEMENT OF SENATOR JERRY MORAN

Senator MORAN. Mr. Chairman, I’ll just have a brief opening 

statement. I want to do that because I requested that you have this 

hearing, and I appreciate your honoring my request. 

This is the first time that the FCC Chairman has appeared before this subcommittee since 2002, and incredible advancements in 

technology and communications have occurred in the past decade. 

And I’m thankful to have this opportunity to explore some of those 

topics with the Chairman. 

As we all know, our country faces many challenges, the greatest 

of which is we have a crippling debt. In my view, there are two 

steps to get our fiscal house in order, and the Congress must make 

some responsible decisions to rein in Government spending. And, 

of course, in the appropriations process, we have that opportunity. 

But, second, we need to grow our economy, and because when 

more people are working, more revenue is generated. And one of 
116 

the best ways we can do that is to encourage entrepreneurship and 

certainly our Nation’s communications policies are critical to creating a platform for that entrepreneurial innovation that grows the 

economy. 

Economic growth is central to both addressing our debt and providing our children with a bright future. One of the fastest growing 

sectors of our economy is technology, and much of that growth is 

dependent upon advanced telecommunications infrastructure. 

I recently met a former National Aeronautics and Space Administration (NASA) engineer, now in the technological world, who described the principles of getting a rocket to launch or an airplane 

to fly. And he described two forces—thrust and drag. 

And we often spend lots of time in the Congress talking about 

thrust, how to make things happen, and spend more money, create 

programs. But, it’s also important that we eliminate the drag, and 

our regulatory environment has a lot to do with how much drag 

that rocket or that airplane experiences. 

So much of the focus of Government and the Congress is about 

generating thrust. I want to make sure that we’re reducing all the 

drag that we can and our economy can grow and people can earn 

a living and our children can experience the American dream. 

So I look forward to exploring a number of issues with the Chairman. I’m very interested in spectrum, and I appreciate you, Mr. 

Chairman, coming to my office and having a conversation about 

that, as well as a recent FCC order related to broadband deployment and the Universal Service Fund (USF). 

And I have some concerns about the consequences of that order 

on particularly small and rural providers of broadband services. 

So, Mr. Chairman, I thank you for the opportunity that we have 

to learn more about these topics. 

Senator DURBIN. Thank you, Senator Moran. Senator Lautenberg, do you have an opening statement? 

STATEMENT OF SENATOR FRANK R. LAUTENBERG

Senator LAUTENBERG. Yes, and I’ll try to be short, Mr. Chairman. 

I am pleased to see Chairman Genachowski here. He was in New 

Jersey a few weeks ago at a technology conference on apps making 

at one of our universities, and we learned something. That therein 

lies a major area of interest in innovation and that is with the 

‘‘Apps’’. 

And so we went through innovation, a cornerstone of our economic development, and I introduced new legislation that’s going 

to invest in America’s technology innovators. 

The American Innovates Act will create a bank to provide capital 

for researchers and companies to turn their discovery into marketable products. But we will also make sure that our science and 

technology students get practical training in areas like business development. 

And we think that this bill will help support and expand our Nation’s innovation economy in which the FCC plays an important 

role. FCC also plays a vital part as one of the guardians of our democracy. 

Increasingly, fewer and fewer companies control what Americans 

see and hear in the media, and one of those companies was re-
117 

cently found to have misled the British Parliament in order to 

cover up its wrongdoing. 

So it’s never been more important to have a strong FCC acting 

in the public interest to make sure that broadcasters are held to 

high standards, are held accountable to their communities they are 

supposed to serve. 

And as Chairman Genachowski knows, local service has been an 

ongoing problem in New Jersey, and I look forward to discussing 

this issue further. And, we also want to help provide access to communications technology and the opportunity that comes with it. 

But it must be done efficiently. And I’m pleased to see the FCC 

moving the USF reforms. As the FCC updates the funds for the 

digital age, one of the agency’s primary goals would be bringing relief to States like New Jersey where consumers contribute significantly more than we get back. 

And I applaud FCC’s work on this important issue. I look forward to seeing additional reforms. And, finally, after years of hard 

work, the Congress has authorized the FCC to devote resources 

and spectrum to the creation of a public safety network. The 9/11 

terrorist attack demonstrated the need to provide our police, firefighters, and rescue personnel with dedicated lines of communication. 

And I look forward to hearing more about FCC’s progress in ensuring that our first responders are our first priority. So I thank 

Chairman Genachowski for being here, and I look forward to hearing his testimony. 

Thanks, Mr. Chairman. 

Senator DURBIN. Thank you, Senator Lautenberg. 

Once again, Mr. Chairman, and all those in the audience, I 

apologize for my tardiness. Please proceed. 

SUMMARY STATEMENT OF JULIUS GENACHOWSKI

Chairman GENACHOWSKI. Chairman Durbin, thank you, Ranking 

Member Moran, and Senator Lautenberg. I appreciate this opportunity to be the first FCC Chairman to appear before you since 

2002. 

I’m proud to say that few, if any, Federal agencies deliver a higher return on investment than the FCC. Spectrum auctions have 

raised more than $50 billion for the U.S. Treasury in the past two 

decades. 

And economists place the economic value created by FCC auctions as being about 10 times that number, about $500 billion in 

economic value. 

Shortly after FCC delivered its budget, the Congress authorized 

the Commission to create, develop, and conduct voluntary incentive 

auctions—a new market-based mechanism to repurpose underutilized spectrum for flexible use such as mobile broadband. 

Incentive auctions are an opportunity to unleash vitally needed 

additional spectrum for mobile broadband and create tremendous 

value for American consumers while raising billions of dollars for 

deficit reduction. 

It’s a key part of the puzzle to unleashing the mobile broadband 

opportunity. And, it’s a privilege for the FCC to be entrusted with 
118 

this responsibility which of course will require a great deal of work 

and effort by the agency. 

Incentive auctions are unprecedented. The United States will be 

the first country in the world to conduct them. It will be a complex 

task affecting major parts of our economy and involving many challenging questions of economics and engineering. 

FCC staff is hard at work planning for the challenges ahead. We 

recently announced steps to begin implementing the law which are 

outlined in my written statement. 

Incentive auctions are part of our overall agenda to unleash the 

opportunities of modern communications technology, to benefit our 

economy, create jobs, bring opportunity to all Americans. 

Just yesterday at the wireless industries annual conference I presented FCC’s mobile action plan. This plan will help ensure that 

America maintains the position it has now regained as the global 

leader in mobile. 

It includes incentive auctions, but recognizes that we must have 

an all-of-the-above strategy that includes removing barriers to 

spectrum use, harnessing emerging technologies like small cells 

and accelerating spectrum sharing between Government and commercial users. 

On the latter, I was pleased to announce that we’re moving 

ahead in partnership with National Telecommunications and Information Administration (NTIA) at the Commerce Department to 

test spectrum sharing between commercial and Government users 

in the 1755 to 1780 megahertz band, a band that’s of particular interest to commercial carriers. 

This work reflects FCC’s focus on broadband communications, 

wired and wireless. In 2009, we developed America’s first national 

broadband plan which identified key challenges and opportunities 

throughout the broadband ecosystem and proposed solutions to ensure that the United States lead the world in broadband access and 

innovation. 

In fact, one of those proposed solutions was incentive auctions. 

We’ve been working hard on implementing the broadband plan. Together with my colleagues at FCC, we’ve made tremendous 

progress in the past 3 years taking many steps to unleash investment, innovation, and job creation. 

These include freeing spectrum for both licensed and unlicensed 

use, modernizing and reforming major programs like the USF and 

removing barriers to broadband buildout. Indeed, investment, job 

creation and innovation are up across the broadband economy. 

These metrics are up both when looking at the broadband applications and services and when looking at broadband providers and 

networks. 

Our work is helping create jobs across the country, from workers 

constructing broadband infrastructure, to agents at new broadband 

enabled customer contact centers, to employees of small businesses 

using broadband to expand to new markets, to engineers and other 

innovators inventing the new digital future. 

And, in the past 3 years, the United States has regained global 

leadership in mobile innovation. American-designed apps and services are being adopted faster than any other. Our mobile innovation economy has become the envy of the world. 
119 

We’re also now ahead of the world in deploying 4G mobile 

broadbanded scale with 64 percent of the world’s 4G LTE subscribers, the next generation of mobile broadband, here in the 

United States. 

These next-generation networks are projected to add more than 

$150 billion in gross domestic product growth over the next 4 

years, creating an estimated 770,000 new American jobs. 

The health of our broadband economy would be enhanced by closing broadband gaps. My written statement highlights FCC’s 

progress addressing the broadband deployment and adoption gaps. 

Public safety, as was mentioned, is a core mission of FCC, and 

the agency is working to harness the power of communications to 

make our communities safer. 

As part of our longstanding role in helping ensure the security 

and reliability of our communications networks, an FCC-led panel 

recently issued a series of recommendations to address three critical threats to our cyber security: botnets; Internet route hijacking; 

and domain name fraud. 

Internet service providers serving roughly 90 percent of all U.S. 

broadband subscribers will implement these proposals. FCC also 

provides value by protecting and empowering consumers. 

For example, smart phone theft is on the rise and poses a real 

threat to consumers. Last month, together with the wireless industry and law enforcement from around the country, we announced 

the launch of a new database that will allow consumers and carriers to disable stolen smart phones, dramatically reducing their 

value on the black market. 

We’ve also made progress tackling consumer issues like bill 

shock and cramming, which are highlighted in my written statement. At the FCC, we’re committed to smart, responsible Government, and we have taken steps to modernize our programs and insure that they are efficient and fiscally responsible, saving billions 

of dollars. 

In addition to our programmatic reforms, we’ve also reviewed the 

agency’s rules and processes asking tough questions to make sure 

FCC is operating efficiently and effectively. 

In connection with this review, we’ve already eliminated dozens 

of outdated rules and five unnecessary data collections. We’ve identified two dozen more data collections for elimination, and we’ve 

done everything I’ve listed and more with the lowest number of 

full-time employees (FTEs) in 10 years. 

Maximizing the ability of 21st century communications technology to deliver value to the American people, and doing so in a 

smart and responsible way. That’s FCC’s record in the past 3 

years, and that’s our plan for the year ahead as reflected in our fiscal year 2013 request in budget. 

To implement our responsibilities under the Communications 

Act, the budget requested a 2 percent more than the previous year 

level from about $340 million to about $347 million, essentially flat 

adjusting for inflation. 

As in previous years, this amount will be derived entirely from 

fee collections. The budget reflects savings in several areas and includes a few new initiatives, primarily, technology investments de-
120 

signed to save money, and public safety investments aimed at saving lives. 

The budget also provides a flat number of FTEs, despite increasing workloads in many areas. 

PREPARED STATEMENT

In conclusion, the wired and wireless broadband sectors are critically important to our economy and global competitiveness. I look 

forward to working with the subcommittee on implementing the 

new incentive auction law and unleashing the opportunities of communication technology for our economy and the American people. 

Thank you. 

[The statement follows:] 

PREPARED STATEMENT OF JULIUS GENACHOWSKI

Chairman Durbin, Ranking Member Moran, and other members of the subcommittee, I appreciate this opportunity to appear before you on the Federal Communication Commission (FCC) fiscal year 2013 budget. 

I’m proud to say that few, if any, Federal agencies deliver a higher return on investment than the FCC. 

Spectrum auctions have raised more than $50 billion for the U.S. Treasury in the 

past two decades, and economists regard the economic value created by FCC auctions as being about 10 times that number, or $500 billion in value. FCC has conducted 80 auctions, granting more than 30,000 licenses. A few months ago, a group 

of 112 leading economists from across the ideological spectrum wrote, ‘‘The original 

simultaneous, multiple-round auction system implemented in 1994 was novel, but 

the FCC was able to implement the path-breaking auctions that were the basis for 

successful auctions around the world.’’ 

Shortly after FCC delivered its budget, the Congress authorized the Commission 

to create, develop, and conduct voluntary incentive auctions—a new market-based 

mechanism to repurpose spectrum for flexible use such as mobile broadband. 

Incentive auctions are an opportunity to unleash vitally needed additional spectrum for mobile broadband and create tremendous value for American consumers, 

while raising billions of dollars for deficit reduction. It’s a key part of the puzzle 

to unleashing the mobile broadband opportunity. 

At FCC, we’re focused on faithfully implementing this new legislation and maximizing the opportunities of the new law for our economy and all Americans. 

It’s a privilege for FCC to be entrusted with this responsibility, which of course 

will require a great deal of work and effort by FCC. 

Incentive auctions are unprecedented. The United States will be the first country 

in the world to conduct them. It will be a multifaceted task affecting major parts 

of our economy, involving many challenging questions of economics and engineering. 

FCC staff is analyzing the complex incentive auction law, assessing the challenges 

ahead, and last week we announced steps to begin implementing the law. 

We will run a process that is open, inclusive, fact-based, and guided by economics 

and engineering. We have already formed an FCC incentive auctions task force that 

has brought in staff from across the Commission. 

FCC’s work will be assisted by world-leading experts, including some of the 

world’s most distinguished auction-design experts. 

The work of our task force and staff will feed into a robust public process, which 

will include webinars, workshops, public notices, and rulemaking proceedings. 

In 2 days, FCC will take up its first policy action to put the law into effect—an 

order establishing a framework for broadcaster participation in a channel-sharing 

agreement with another station in conjunction with an incentive auction. 

We are aiming for Notices of Proposed Rulemaking under the new law by the fall 

of this year. 

Incentive auctions are part of our overall agenda to unleash the opportunities of 

modern communications technology to benefit our economy and all Americans. 

We have focused the agency on broadband communications—wired and wireless. 

In 2009, we developed America’s first National Broadband Plan, which identified 

key challenges and opportunities throughout the broadband ecosystem, and proposed solutions to ensure the United States leads the world in broadband infrastructure and innovation. In fact, one of those proposed solutions was incentive auctions. 
121 

Since the plan’s release, we have been working on its implementation. Together 

with my colleagues at the FCC, we have made tremendous progress in the past 3 

years, taking many steps to unleash investment, innovation, and job creation. These 

include freeing spectrum for both licensed and unlicensed use, modernizing and reforming major programs like the Universal Service Fund (USF), and removing barriers to broadband buildout. 

And indeed, investment, job creation, and innovation are up across the broadband 

economy. These metrics are up both when looking at broadband applications and 

services, and when looking at broadband providers and networks. 

In 2011, the U.S. information and communications technology sector grew three 

times faster than the overall economy. Broadband is helping create new jobs all 

across the country—and not just for engineers (although it’s vitally important that 

we lead the world in engineering talent), but also for salespeople, construction workers, and small business owners increasingly using the Internet to boost sales and 

lower costs. 

The apps economy, which barely existed in early 2009, has already created almost 

500,000 new jobs, according to expert estimates. 

And similar reports estimate that over the past several years wireless innovation 

and investment are responsible for more than 1.5 million new jobs. 

In the past 3 years, the United States has regained global leadership in mobile 

innovation. American-designed apps and services are being adopted faster than any 

others. Our mobile innovation economy is the envy of the world. 

We are also now ahead of the world in deploying 4G mobile broadband at scale— 

with 64 percent of the world’s 4G LTE subscribers here in the United States and 

these next-generation networks are projected to add $151 billion in GDP growth 

over the next 4 years, creating an estimated 770,000 new American jobs. 

In 2011, overall investment in network infrastructure was up 24 percent from 

2010, with broadband providers investing tens of billions of dollars in wired and 

wireless networks. 

Internet start-ups attracted $7 billion in venture capital in 2011, almost double 

the 2009 level and the most investment since 2001. 

In today’s hyperconnected, flat world, the success of American companies, as well 

as global prosperity, depends on a dynamic and open global Internet. And so we are 

working to preserve the Internet as a free-market globally, and oppose international 

proposals that could stifle Internet innovation. Working with our colleagues in government and stakeholders outside government, we are seeking to head off barriers 

to the global expansion of cloud computing, and encouraging free flows of data 

worldwide. 

And we are working to oppose proposals from some countries that could undermine the longstanding multi-stakeholder governance model that has enabled the 

Internet to flourish as an open platform for communication, innovation, and economic growth. 

If adopted, these proposals would be destructive to the future of the Internet, including the mobile Internet, and the U.S. Government has consistently and strongly 

opposed such proposals. 

This is why at the Organisation for Economic Co-operation and Development last 

year, I worked with my colleagues in the U.S. Government and in other countries 

to respond to significant threats to Internet-driven growth by adopting a broadly 

supported communique ́ that emphasized the need for continued support of the 

multi-stakeholder model which has fostered innovation and opportunity worldwide. 

The health of our broadband economy would be enhanced by closing broadband 

gaps, and so the FCC has focused on bringing universal service into the broadband 

era. 

Today, millions of rural Americans live in areas with no broadband infrastructure. 

Our plan, adopted unanimously in October, to modernize the USF will spur wired 

and wireless broadband buildout to hundreds of thousands of rural homes in the 

near term, and puts us on the path to universal broadband by the end of the decade—while keeping the fund on a budget. Together with my colleagues, we crafted 

a set of reforms that honor fiscal responsibility and help bring broadband to 

unserved Americans around the country, in every State. 

In addition to the broadband deployment gap, we are making strides on the 

broadband adoption gap. 

Nearly one-third of Americans—100 million people—haven’t adopted broadband. 

The Connect to Compete Initiative enlists government, nonprofit, and private sector 

leaders to tackle the barriers to adoption—one of several public-private initiatives 

driven by the Commission to promote solutions to major challenges. 

FCC’s successful E-Rate program has already helped connect virtually every library and classroom in America, and in 2010 we adopted several important mod-
122 

ernizations of the program, including removing barriers to wireless use, and removing barriers to schools opening their computer labs as hot spots for community 

Internet use when students aren’t in school. 

Public safety is a core mission of FCC, and the agency is working to harness the 

power of communications to make our communities safer. 

We are working with multiple stakeholders to advance next-generation 9–1–1. 

And we accelerated the launch of Wireless Emergency Alerts that allows local, 

State, and Federal authorities to send targeted alerts to mobile devices of people 

who are in the vicinity of an emergency. 

As the Nation’s expert agency on communications networks and technology, the 

FCC has always had as a fundamental part of our mission the security and reliability of communications networks. In early 2011, I charged a panel of stakeholders 

from across the broadband ecosystem with developing practical, nonregulatory solutions to three critical threats to our cybersecurity: 

—botnets; 

—Internet route hijacking; and 

—domain name fraud. 

This past month, the team issued a series of recommendations to tackle these 

challenges in a meaningful way. Internet service providers serving nearly 90 percent 

of all U.S. broadband subscribers have agreed to implement these recommendations 

that will promote greater security in our communications networks. 

Working with government, private-sector, and nonprofit partners, we also developed a Small Business Cyber Planner to help small businesses guard against cyber 

attacks, which are estimated to cost targeted small businesses an average of 

$200,000 in damages. 

FCC also provides value by protecting and empowering consumers. 

Smartphone theft is on the rise, and poses a real threat to consumers. In Washington, DC, New York, and other major cities roughly 40 percent of all robberies 

now involve cell phones. Two weeks ago, together with the wireless industry and 

law enforcement from around the country, we announced the launch of a new database that will allow consumers and carriers to disable stolen smartphones and tablets dramatically reducing their value on the black market. 

Working with wireless providers, we found a common-sense solution to bill shock, 

a problem that has cost millions of consumers tens, hundreds, and sometimes thousands of dollars in unexpected charges, and just last week we introduced a new online tool to help consumers track implementation of the commitments made by wireless carriers to provide usage alerts. 

This coming Friday, FCC will consider an order to put an end to abusive, thirdparty charges on phone bills, what’s commonly known as ‘‘cramming’’. Previously, 

FCC’s Enforcement Bureau issued $12 million in fines against four companies that 

had engaged in widespread cramming, part of a record-breaking year for our Enforcement Bureau, which logged $67.2 million in monetary penalties and settlements on behalf of consumers in fiscal year 2011. 

I want to highlight not only what FCC has accomplished, but how we conduct our 

work. FCC is committed to smart, responsible government, and we have taken significant steps to modernize our programs and ensure that they are efficient and fiscally responsible—saving billions of dollars. 

Our work to modernize the USF and Intercarrier Compensation will not only spur 

broadband buildout, it also eliminates billions of dollars in hidden subsidies from 

consumers’ phone bills. 

Our work to reform the Lifeline program is expected to save up to $2 billion over 

the next 3 years. Even before this order was adopted, we made changes that eliminated 270,000 duplicate subscriptions, saving $35 million. 

We reformed our Video Relay Service Program, which provides vital communications for people who are deaf or hard-of-hearing, saving $250 million per year without reducing availability of service. 

In addition to our programmatic changes, we have also reviewed FCC’s rules and 

processes—asking tough questions to make sure the agency is operating efficiently 

and effectively. 

In connection with this review, we’ve already eliminated more than 200 outdated 

rules and five unnecessary data collections. We have identified two dozen more data 

collections for elimination. 

We estimate that internal reforms like consolidated information technology maintenance and new financial system have already saved the agency almost $8 million. 

And we’ve done everything I’ve listed and more with the lowest number of fulltime employees (FTEs) in 10 years. 

Maximizing the ability of 21st century communications technology to deliver value 

to the American people, and doing so in a smart and responsible way. That’s the 
123 

FCC’s record the past 3 years, and that’s our plan for the year and years ahead, 

as reflected in our fiscal year 2013 fiscal year budget request. 

To implement our responsibilities under the Communications Act, FCC’s budget 

requests a 2-percent increase more than the previous year level, from $339,844,000 

to $346,782,000. This proposal is essentially flat adjusting for inflation. 

As in previous years, this amount will be derived entirely from fee collections. 

These funds will ensure the successful operation of FCC’s core activities, including 

the strategic goals outlined in the Performance Plan submitted with FCC’s budget. 

The requested amount is based on internal cost savings applied to essential ongoing projects, and necessary adjustments to our baseline. 

The budget includes a few new initiatives—primarily technology investments designed to save money, and public safety investments aimed at saving lives. 

The budget also provides a flat number of FTEs, which represents the lowest 

number of FTEs in 10 years, despite increasing workloads in many areas. Last year, 

a senior Apple executive wrote FCC advocating for additional staffing for FCC’s Office of Engineering and Technology (OET). This office certifies that wireless devices 

use spectrum efficiently and don’t create harmful interference, among other things. 

The number of applications for certified devices has grown at an annual rate of 

nearly 12 percent each year—from 3,671 in 2001 to 13,645 in 2011—and the explosive growth of complex devices like smartphones has significantly increased demands on OET staff in recent years. Apple’s executive wrote, ‘‘If OET can complete 

its work efficiently, companies building innovative devices can get those new products to customers quickly. But if applications for innovative devices are delayed because OET staff are overtaxed, consumers are the losers.’’ 

In conclusion, the wired and wireless broadband sectors are critically important 

to our economy and global competitiveness. I look forward to working with the subcommittee on implementing the new incentive auctions law, and unleashing the opportunities of communications technology for our economy and the American people. 

Thank you. 

Senator DURBIN. Thanks, Mr. Chairman. Senator Moran had requested this hearing. Let me yield my opening round of questions 

to him. 

Senator MORAN. Mr. Chairman, thank you very much. 

SPECTRUM CRUNCH

Let me start first with spectrum. You covered that in your written and oral testimony. But let me reiterate what I think is called 

out there, the crunch, the spectrum crunch. The demand is significant. 

And my question, Mr. Chairman is, are there any proceedings or 

options FCC can consider to more quickly address the need of spectrum in the private marketplace? 

Chairman GENACHOWSKI. It is a central focus of ours. It’s why 

we push so hard for incentive auction legislation, and we’ve moved 

quickly to begin to implement it. 

There are other proceedings we have opened now that will free 

up additional spectrum. We have a proceeding that would eliminate 

unnecessary regulations on certain satellite spectrum so that could 

be made available for terrestrial use. It’s called the S-band. 

We have other proceedings to open up new spectrum. I think one 

of the biggest opportunities is if we can move forward with Federal 

users of spectrum quickly to accelerate sharing between Federal 

users and commercial users. 

And I’d be happy to talk further about any of those topics. 

UNIVERSAL SERVICE REFORM

Senator MORAN. Let me then raise the topic of USF, and the recent order on it and the Intercarrier Compensation Reform. 
124 

We have the circumstance, Mr. Chairman, in my view, in which 

many companies have relied upon grant programs from the Rural 

Utility Services (RUS), from the stimulus funds, in which they 

have made significant investments in regard to deploying 

broadband in rural areas across the country. 

In my view, the order now handicaps, significantly, the revenue 

necessary for them to repay those loans and grants. And you and 

I had a conversation about this in my office in which you indicated 

that the waiver process would be an option for those companies. 

If they had the need, the waiver process would work in their benefit to see that they had the capacity to continue to deploy 

broadband, but also to pay for the loans and grants, to repay the 

loans and grants. 

It seems to me, first of all, that the threshold for a waiver being 

granted is a very high threshold. 

Because the words of the order say that, we permit any carrier 

negatively affected by USF reforms may file a petition for waiver 

that clearly demonstrates that good cause exists for exempting the 

carrier from some or all of those reforms, and that waiver is necessary and in the public interest to ensure that consumers in the 

area continue to receive voice services. 

And that threshold about voice services, that would be a pretty 

high threshold, in my view, for a waiver to be granted. And so, I’m 

concerned that while you indicated that waivers would be an option, my guess is that’s not a practical option for most companies. 

Because voice is always, or almost always, going to be available. 

Am I missing something? 

Chairman GENACHOWSKI. Well, a few points, Senator. One—— 

Senator MORAN. You’re polite not to say I’m missing something. 

Chairman GENACHOWSKI. Reforming the USF and intercarrier 

compensation was one of the hardest things that the agency has 

tackled. And we were able to do it on a bipartisan basis, and take 

a program that was wasting Government dollars, focus it on its 

central mission of getting broadband to people in rural America 

who are unserved. 

Across the country, there are about 18 million people who live in 

areas that are unserved. In Kansas, I think the number is about 

90,000. And we made the commitment as a Commission to do that 

by reducing inefficiencies, waste in the existing program, operating 

within a budget, and funding new service out of that. 

It turns out that reining in Government spending, being serious 

about fiscal responsibility is hard work. We all know that. And we 

have the job now of implementing this in a way that’s consistent 

with the three core principles we had when we put in place the 

order. 

One was getting broadband to rural Americans who don’t have 

it. And the second was fiscal responsibility. And the third was 

being cognizant of business realities of existing companies. 

And there are existing companies that for whom this is challenging. And we have been and we will continue to work with them 

because we recognize that flash cuts don’t make sense. That a 

waiver process is important. We have several waivers in front of 

us that we’re considering. 
125 

We’ve already adopted some modifications to our rules. My instruction to our staff was let’s listen very carefully when we hear 

concerns and respond to all of the ones that are appropriate. 

Senator MORAN. Mr. Chairman, is a waiver available even 

though voice services continue to be received? 

Chairman GENACHOWSKI. Well, the fundamental service that we 

thought was critical to preserve was voice service. And, certainly, 

anything that we did that would inadvertently shut off voice service to a local community is something that we wanted to make 

clear that’s something that we will stop. 

We do think that in order to accomplish our goals, get broadband 

to unserved Americans consistent with fiscal responsibility, it will 

require flexibility on our part to deal with real legitimate issues 

and address them. 

Flexibility on the part of RUS in thinking about its loans. And, 

in my view, as long as we all focus together on these core objectives, getting broadband to people that don’t have it, fiscal responsibility, and cognizance of business realities, we’ll work through implementation and individual hard cases one by one, and we’ll get 

them right. 

Senator MORAN. I assume we’ll have another round of questions. 

But I would indicate that Commissioner McDowell stated on 

March 19 here in Washington, DC that if your company looks like 

it won’t survive, there’s a waiver process. 

I still want to explore with you the threshold by which, what a 

company has to demonstrate, because I think there are serious 

issues here with the ability to continue to deploy broadband. 

And, the other fiscal aspect of this is the ability for a company 

to continue to repay its loans to RUS or others. And I want to explore with you the relationship that you’ve developed with the Department of Agriculture and the RUS program. 

So, thank you, Mr. Chairman. 

Senator DURBIN. Senator Lautenberg. 

LICENSE RENEWALS

Senator LAUTENBERG. Mr. Genachowski, I know that you are 

aware of the fact that News Corporation controls 27 local television 

stations in the United States. 

And last week, I mentioned earlier, a British parliamentary committee found that News Corp. misled the committee in order to 

cover up the illegal activity. 

And its chairman and CEO Robert Murdoch, is, ‘‘. . . not fit to 

run an international company.’’ 

Now, how do these findings affect your analysis of News Corp.’s 

license renewals in the United States? 

Chairman GENACHOWSKI. Well, Senator, a couple of points, if I 

may. 

As a general matter, it’s not appropriate for me to comment on 

specific adjudications that might come before FCC. But here is how 

the law works, the Communications Act, and the FCC. 

Licensees do have to meet certain qualifications to be licensees. 

Those qualifications include technical, financial qualifications, and 

character qualifications. 
126 

FCC has issued over the years policy statements and precedents 

that lay out what that entails. And, of course, if any issues arise, 

FCC has an obligation. We would take this very seriously. To look 

at the record, look at the facts, apply the precedent, apply the law. 

Senator LAUTENBERG. So that doesn’t pass without notice by 

FCC? The British response. 

Chairman GENACHOWSKI. We’re certainly aware of the serious 

issues that have been raised in the United Kingdom, the ongoing 

process that’s going on there. 

Senator LAUTENBERG. And the code by which FCC functions, it 

does say, measure of the character of the applicant though, is to 

be considered. 

Chairman GENACHOWSKI. Character is one of the qualifications, 

and there are FCC policy statements that spell that out. 

Senator LAUTENBERG. Okay. So I assume, therefore, I won’t get 

your word, but I’ll take the intent, of the position that FCC has to 

have, and that is, that character flaw, a character flaw, will be in 

consideration of any decisions that are made, affecting new or renewal—brand new or renewal applications for license. 

Chairman GENACHOWSKI. FCC has serious responsibilities that it 

applies across the board consistent with our policy statements and 

our precedent. 

UNIVERSAL SERVICE REFORM

Senator LAUTENBERG. New Jersey is a net contributor of close to $200 million a year to the USF. As the USF has grown, the burden 

on New Jersey and other donor States has gotten bigger and bigger. 

And I applaud the FCC for recognizing the need for the reform 

of the Fund. Now, will these reforms bring some balance to donor 

states like New Jersey? 

Chairman GENACHOWSKI. Well, and thank you for that. The USF 

is comprised of a high cost fund that’s focused on rural areas. The 

E-rate fund which is focused on schools and libraries across the 

country. 

A lifeline fund which is focused on low-income Americans. One 

by one, we have been modernizing each of these programs for the 

broadband era, in each case, bringing accountability and fiscal responsibility to the programs and making sure that they tightly and 

effectively meet their mission. 

There is a compact in this country. We need to make sure that 

everyone, wherever they live, has a chance to benefit from the opportunities of the communications revolution. 

Whether it’s someone in rural America. Someone in an urban 

center. Whether its seniors or small business owners. And that’s 

the challenge that we’ve taken up. 

FUNDING FOR RESEARCH AND DEVELOPMENT

Senator LAUTENBERG. The too-often scientific breakthroughs sit 

on a shelf for the lack of investment. Last month, I introduced the 

American Innovation Fund which would provide funds for researchers to turn their discoveries into product. 

And has the early stage investment affected the telecommunications industry? 
127 

Chairman GENACHOWSKI. The core idea behind new legislation, 

Senator, is something that’s very, very important, and it’s related 

to what Senator Moran said in his opening remarks. 

Innovation and entrepreneurship is at the core of how we’ll create jobs in the United States. How we will lead the world globally. 

We have a series of challenges to meet in order to sustain our leadership position. 

Your legislation identifies one, which is, that we have in some 

cases research going on that is underfunded. In some cases research that’s going on where some help is needed to commercialize 

a product that could be commercialized. 

And so I certainly applaud the focus on entrepreneurs, innovation, and look forward to working with you on the legislation and 

on these issues. 

Senator LAUTENBERG. And thank you. 

Because the cry that we hear from many would be company developments, and that is, that lack of funding slows things down. 

And perhaps then even diverts them from ever taking place. And 

we shouldn’t be in that condition. 

PUBLIC SAFETY NETWORK

I’m proud that the Congress passed legislation to provide our 

first responders the spectrum and the resources needed to develop 

the public safety network. 

Since the 9/11 Commission report revealed an enormous communication problem 8 years ago, we fought to get the job done. And 

now, we finally have it. And we look at the FCC, look to the FCC, 

to implement the network. 

When can we expect our first responders to have the public safety network that they must have in order to function efficiently? 

Chairman GENACHOWSKI. As soon as possible. The Congress’ action in passing that provision was extremely important and something that we’d been calling on for quite some time. 

And as you point out, the 9/11 Commission recommended it 

many years ago. The statute gives much of the responsibility to 

NTIA for implementation. FCC has responsibilities with respect to 

setting standards. 

We’ve already begun working very closely with NTIA. There are 

some early deadlines in the statute that have already been met in 

terms of setting up boards and processes and proceedings. 

It’s extremely important, and I know that Assistant Secretary 

Strickling at NTIA and I are very committed to moving forward on 

the legislation and to getting our first responders what they need 

in terms of modern communications. 

Senator LAUTENBERG. It’s essential that we press on with that 

because we knew, we learned unfortunately the worst that could 

happen. And for that not to be corrected by this time seems awfully 

slow. 

And so I look to you to make sure that we’re moving at a faster 

pace. 
128 

LICENSE RENEWALS

Last, in November 2007, FCC held a hearing in Newark on the 

license renewal of WWOR, which is one of the Murdoch-owned stations. 

New Jerseyans testified about the station’s failure to cover New 

Jersey and events. Now, 4 years later, the station is still operating 

under an expired license. And there’s evidence that its service to 

New Jersey has gotten even worse. 

And I certainly don’t think that it ought to take that long to 

make a decision about whether or not we ought to close this out. 

And I would ask when we might expect FCC to make a decision 

on the WWOR license renewal application? 

Chairman GENACHOWSKI. Well, today, the staff is working on 

that as you know, and we talked about this. There’s a complex history involving the station, and the issues of its particular obligations to provide service to New Jersey and moves the station facilities, et cetera. 

And so it’s complex in a number of different ways, but the staff 

is working on it, and there will be a decision as soon as possible. 

Senator LAUTENBERG. Well, there are not many things that are 

easy to accomplish, and your structure of responsibilities. This one 

we ought to be able to get on with, and I look forward to hearing 

from you about where we stand with this. 

Thank you. Thanks, Mr. Chairman. 

PRIVACY

Senator DURBIN. Thank you very much, Senator Lautenberg. 

I’d like to address a couple issues of privacy. About every other 

week when I log into iTunes, they tell me I need to have a new 

agreement with them. A lot of terms and conditions. 

And I scroll through page after page after page until I get to the 

bottom where it says accept, decline, punch accept, go on about my 

business. 

I’m worried that I may have signed off all of my rights to any 

royalties from music that I produce in the future. I’m not sure 

what I’ve done here. 

So, tell me, is this your responsibility, to make sure that this 

kind of a thing is put in simple language and the most important 

parts of it are highlighted so consumers know what they’re actually 

waiving or giving up in terms of privacy? 

Chairman GENACHOWSKI. The Federal Trade Commission (FTC) 

has taken the lead on the kind of issue you’re raising, but it is an 

issue that we’ve been engaged with and interested in as well. 

One is, consumer protection with respect to communications providers, is part of our statutory mission, number one. 

Number two, in addition to the kind of core confusion and privacy issues that you raise, another concern is that the more that 

people distrust the Internet, the slower broadband adoption will be, 

which then undermines the economic opportunities of broadband. 

And so whether you look at this as just a basic privacy and 

rights issue, or whether you look at it as an economic issue, you 

get to the same place. 
129 

Senator DURBIN. So is FTC the cop on the beat here? Should they 

be deciding what should be highlighted, what’s important for me to 

know if I’m about to sign off on something? 

Chairman GENACHOWSKI. And they’ve been doing excellent work. 

Senator DURBIN. This isn’t your bailiwick? 

Chairman GENACHOWSKI. Our statutory responsibility extends to 

the communications providers, and not to the applications. 

Senator DURBIN. Let’s talk about Google. They have quite an operation. One of the Fortune 500 companies. One of the top 20, I 

guess. And they invited me in several times to their headquarters 

in Chicago. Very impressive. 

And in one of the visits I made several years ago talked about 

how they were mapping America. They literally had vehicles driving all over the streets of America and they were gathering images. 

They were deployed everywhere. 

And they were gathering data and video and putting it into the 

Google map information and so forth. Turns out they were gathering even more. European and Canadian regulators found these 

Google vehicles were collecting and storing personal data from 

unencrypted home networks of private citizens without permission. 

The New York Times described the data as personal email messages, instant messages, chat sessions, conversations between individuals, and Web addresses revealing sexual orientation that could 

be linked by Google to specific street addresses. 

So they were collecting all of this as they were cruising. So FCC 

completed an investigation and came to the conclusion that Google 

had deliberately impeded and delayed the investigation. And you 

decided to impose a fine of $25,000 on a company worth $111 billion. 

So I would say that is somewhere short of a tap on the wrist. 

And could you tell me if you thought that what they had done was 

not that serious. You concluded, I think, that they didn’t violate the 

Wiretap Act. 

It turns out a court in California reached the opposite conclusion. 

So how are you protecting our privacy with a $25,000 fine for that 

kind of collection? 

Chairman GENACHOWSKI. So there are two points. We launched 

an investigation because in this case there were concerns about 

using communications networks, Wi-Fi, to get access to personal, 

private information. 

And we did have an obligation to determine whether or not that 

violated any of our rules and laws. That was the reason for the investigation. 

The conclusion of our enforcement bureau and our general counsel’s office was that as a legal matter, because it was unencrypted 

Wi-Fi that information was being obtained from, it wasn’t a violation of the law as it was written. 

And we suggested that the Congress look at that and that consumers look at that because everyone should encrypt their Wi-Fi. 

And so as a matter of that issue, the career staff found that it 

wasn’t a violation of law, but encouraged congressional action. 

The fine itself was for serious concerns that our staff had about 

the process itself. The investigation process itself. And the fine that 
130 

the bureau imposed was one that’s consistent with precedent in 

this area for companies that act improperly during our process. 

Clearly for the company, compared to its revenue and market 

cap, it’s a small amount. On the other hand, the educational purposes that have been served by this, educating them and other 

companies, educating the Congress, educating consumers, certainly 

important benefits of the process that we ran. 

Senator DURBIN. I guess what puzzles me, and maybe this really 

does come down to the Congress not doing its job as we’re often reminded of that whenever we find fault with agencies and individuals, is the notion that my Internet activity out of my home, if it 

is not encrypted, is not protected. 

And that virtually anyone can tap into it for any purpose, commercial or otherwise, with impunity. It appears if they had cooperated with your investigation, you might not have even fined them 

in this circumstance. 

Now, this California court saw it quite differently, and said that 

they believe that it was at least analogous to a wiretap for them 

to be gathering this personal information about street addresses. 

So your legal counsel kind of leaned the other way and said, no, 

you have no rights for privacy if you’re not encrypted. 

Can you tell me as a former Supreme Court clerk and such, I 

mean, is that the starting point on your investigation, that there 

is no protection if it is a close call? 

Chairman GENACHOWSKI. Well, I have great confidence in our 

general counsel, the chief of our enforcement bureau, who are both 

very experienced lawyers, former prosecutors, who take this as 

they take all matters, very seriously. 

So this was a serious effort, run by serious people, and I have 

complete confidence in their legal conclusions. I do look forward to 

working with the Congress on a way to address this because your 

central point no one can disagree with. 

People should, the law should protect people even if they have 

unencrypted Wi-Fi. 

Senator DURBIN. I find it hard to believe that encryption is the 

threshold, and how in the world would the average person know 

that or be able to protect themselves. 

So, is it possible for you to share the legal memorandum that 

was the basis for your conclusion that this was not a violation of 

the Wiretap Act? 

Chairman GENACHOWSKI. We will share whatever we can share. 

So I would be more than happy to provide you with whatever you 

would like and whatever you would need. 

Senator DURBIN. I appreciate it. Let’s take a look at it because 

I think it’s something that if it requires change in the law, I’d like 

to consider that. 

[The information follows:] 

For more information please access http://transition.fcc.gov/foia/Updated-Releaseof-NAL.pdf. 

Senator DURBIN. Senator Moran. 

Senator MORAN. Mr. Chairman, thank you. 
131 

UNIVERSAL SERVICE REFORM

A threshold seems to be the operative word. I want to go back 

to what we were talking about earlier, Mr. Chairman. 

The order published on November 18 clearly states, and then I 

quoted what the criteria were for a waiver. And it seems to me that 

there’s three components to that. The carrier must be first, negatively affected by the USF reforms. 

I assume that’s a standard that could be met. It clearly demonstrates that good cause exists for exempting the carrier from 

some or all of the reforms. 

So, number two, there’s good cause. And then number three is, 

that the waiver is necessary in the public interest to ensure that 

consumers continue to receive voice services. That’s the one I want 

to again focus on. 

Because it seems to me you could meet the first two, assuming 

that I am analyzing the words of your order correctly. A carrier 

could be negatively affected. It could show good cause. 

But still, in most instances, provide voice services. Is that true? 

Chairman GENACHOWSKI. Well, I’d want to go back and look at 

the language myself. I certainly understand that you’re looking at 

it there. If I could, let me explain what we’re trying to accomplish. 

The kinds of steps that we think we need to take for fiscal responsibility, and emphasize again our openness to companies that 

have issues to come in and to continue to work with us on how to 

fine tune our reforms so that we can achieve our goals of serving 

unserved Americans and being fiscally responsible. 

So one of the things that the program had supported, for example, there might be an area where USF subsidies, money that 

comes from consumers, Government programs, were subsidizing a 

telephone company in an area that was also being served by another unsubsidized company. 

And the decision that we had to make is, can a Government program continue to support those kinds of subsidies? And we answered that unanimously at FCC, no. 

And we have to back away from that kind of funding. We had 

a principle of no flash cuts, and we don’t want to turn off anything 

in a day. But some of the examples that you might be getting at 

might fit into that bucket. 

There are many different kinds of examples where it is simply 

impossible to justify under any theory of fiscal responsibility the 

Government supporting these. 

And what we tried to do very thoughtfully was say, okay, we 

can’t support these anymore. Let’s wind this down in a way that 

recognizes that some of the companies have loans, some of the companies have made decisions based on certain assumptions. 

We recognize that. Those are business realities, but we also have 

to recognize that these do have to change. We have said we have 

and we will continue to work with those companies to moderate the 

impact while we get as fast as possible broadband to the 18 million 

Americans who don’t have it, the 90,000 people in Kansas who 

don’t have it. 
132 

Senator MORAN. I don’t think you’ve said anything that I disagree with, but that’s the point I’m trying to get to when you tell 

me that you will work with those companies to get the right result. 

My assumption is that you work with those companies through 

a waiver process, and I’m worried that the waiver process is at 

least worded in your order that nearly almost no company would 

qualify for a waiver because there will always be voice services. 

We can continue this discussion as you would like. But your 

point about fiscal responsibility, and I’m certainly not arguing for 

anything other than that. I particularly agree with your sentiments 

that you expressed about competition when there’s already service 

provided and one receives USF support and one doesn’t. 

There’s many reasons in which the USF justifiably needed to be 

reformed, but I’m worried about the consequences. And, again, you 

tell me, no, I don’t know what the words are. No flash. 

Chairman GENACHOWSKI. Flash cuts. 

Senator MORAN. Flash cuts. 

But I’m worried about how a company who’s trying to make investment decisions, borrow money, make decisions about whether 

to invest in additional plant and equipment, expand their business, 

is going to have the certainty that they’re not going to have a flash 

cut. 

Because there’s a waiver process that prohibits, that allows them 

relief. You have, as I understand it, some petitions for reconsideration pending. I think some of those petitions at least are a request 

for change in that threshold related to waivers. 

And, again, on fiscal responsibility, I want to go back to the USF, 

and its consequences, the alteration of the universal service funds, 

consequences on another Government agency, RUS, part of the Department of Agriculture. 

And what I experienced in our State and we had the administration in many instances following passage of the Stimulus Act encouraging companies to invest in broadband. Again, a noble cause. 

Many companies chose to finance that expansion of broadband, 

their investments, through grants and loan programs using the 

American Recovery and Reinvestment Act, as well as loans from 

the USDA’s RUS. 

RUS telecom portfolio has more than $4 billion in loans. I don’t 

know exactly what percentage of those loans are expected to be repaid by funds generated from the USF that may no longer be there 

because of your order. 

And can you assure me, and I’ve had this conversation in an Appropriations subcommittee with Secretary Vilsack, and he indicates 

that he is working with FCC and others within the administration 

to make certain that we don’t have a major default because of a 

decision by the FCC affecting the ability of a private company to 

repay another Federal agency—RUS. 

Chairman GENACHOWSKI. And for that reason, from early in our 

process, we worked closely with RUS because we were aware that 

this would be an issue. And we both agree that both the FCC and 

RUS and potentially the Congress will have to show flexibility to 

solve this problem the right way. 

The easy solution would be no change. And even in areas where 

we look at it from the fiscal responsibility perspective and say how 
133 

can we justify Government money going to that, well, it’s too late 

to make any changes for many, many years. 

That result would be unfair to the people who are paying into the 

fund. Similarly, a result that says, as a result of these rules, you 

have to end service tomorrow. That also would be unfair. 

So flexibility from us, from RUS, there may be actions that will 

collectively need the Congress to take, will be important, so we can 

get the balance right between the legitimate concerns that businesses have, the legitimate concerns that consumers who live in 

those areas have, and the legitimate concerns that the consumers 

have who are putting money into the Fund that are funding things 

that are hard to justify. 

And so I look forward to working together on that path through. 

Senator MORAN. That flexibility, and again, I would point out, 

you said it may take flexibility on the Congress maybe to do something that RUS may need to do something, flexibility is required 

of FCC, and I still would be interested in knowing how that flexibility is going to be granted except through a waiver process. 

And in regard to the waiver, if you are granted a waiver. If a 

company is granted a waiver, where does the money come from to 

compensate them to be able to, for example, repay the loan? Or the 

flexibility that you’re saying will be there, or may be there, where 

does that flexibility come from as far as the revenue stream to 

allow them to repay the loan? 

Chairman GENACHOWSKI. It’s the right question. It comes from 

other companies who would use that money to build out broadband 

to people who don’t have it. Because we’re committed to a budget. 

So getting this balance right, a company that really needs help, 

will get the help it needs, but that will slow down broadband to 

other parts of America, other parts of Kansas. 

So this is the hard job that we have to make sure that we’re 

turning the dial to the place where we’re doing right by consumers 

wherever they live, right by businesses, whether they’re in areas, 

you know, in this part of the State or that part of the State. 

It’s a hard challenge, and we’d be happy to take you through a 

deeper level of detail on it. And, you know, we’d made a suggestion 

in our national broadband plan that some of these hard issues 

could be softened by an appropriation for a one-time capital infusion into the USF that would allow us both to turn the dial down 

over here on spending that’s hard to justify, while simultaneously 

turning the dial up faster over here to parts of Kansas and the rest 

of America that don’t have service. 

I continue to think that would be a good idea. I understand the 

various issues. In the absence of that, we’ll work within a budget 

and we’ll do the best we can. 

Senator MORAN. Chairman Durbin, I think Chairman 

Genachowski has once again said the Congress could solve this 

problem. 

Are there waiver requests pending? 

Chairman GENACHOWSKI. Yes. 

Senator MORAN. And by the numbers? 

Chairman GENACHOWSKI. Single digits so far. We issued some 

clarifications in the last few weeks. It’s certainly possible that we’ll 

get more waiver requests in. 
134 

We’ve set aside staff to take the waiver requests seriously, and 

we understand—— 

Senator MORAN. How long would the process take to be granted 

a waiver, if one is justified? 

Chairman GENACHOWSKI. We have a shot clock that we’ve imposed on ourselves. I don’t remember the length so I don’t want to 

get that wrong. 

We found that in order for us to make a decision in the shot 

clock, it requires getting certain information from the companies. 

And so there’s a little bit of a cat and mouse where in some cases 

we stopped the shot clock until we get the information we need. 

Again, this is the blood and guts of trying to make this work, and 

meet these big objectives of broadband to unserved America, fiscal 

responsibility and recognizing business reality. 

Senator MORAN. You’re dealing with the macro and the micro. 

Chairman GENACHOWSKI. Every day. 

Senator MORAN. Mr. Chairman, thank you. 

CRAMMING

Senator DURBIN. I’d like to talk to you about cramming. In the 

1990s, this became a more serious problem on consumer phone 

bills. 

When telephone companies open their billing up to third- party 

vendors who were selling satellite services and long distance services, many vendors took advantage of it to put fees on our phone 

bills that we’d never seen before. 

And some people didn’t question, just automatically paid it and 

found out later on that some of these things were not warranted 

at all. 

The Senate Commerce Committee found third-party billing on wire line bills generated $2 billion a year. Much of that was from 

cramming. The industry voluntarily worked to curb cramming, and 

FCC adopted Truth in Billing rules to improve disclosure. 

Yet, third-party billing was not outlawed and continues to be a 

problem. Now the crammers are targeting wireless phones for obvious reasons. Cramming complaints on wireless bills as a percentage of total cramming complaints has increased from 16 percent in 

2008 to 2010 and now up to 30 percent in 2011. 

However, wireless billing is more complicated due to legitimate 

downloads for videos and apps. FCC approved a rulemaking requiring wire line phone companies to provide consumers a clear opt out 

of third-party billing. 

And both Verizon and AT&T announced in March they would no 

longer permit unwanted billing by third-party vendors on wire line 

accounts, not wireless, wire line accounts. 

So why did you choose the weaker opt-out provision rather than 

protecting the consumer with an opt in provision? 

Chairman GENACHOWSKI. Well, there were some other things 

that we did as part of that order too. Cramming clearly is a serious 

issue, particularly on wire line based on the record that we had. 

In addition to the clear opt out, we also required that phone companies separate out third-party billing charges so that it’s easy for 

a consumer to determine whether a third-party charge on their bill 

was something they ordered or something that they didn’t. 
135 

The record that we had before us, our conclusion was that if we 

did that, that would empower consumers, deter crammers. The 

other thing we’d been doing is increasing our enforcement efforts 

for crammers. 

We issued fines totaling I believe $11 million for crammers. And 

we continue to monitor this very closely because you’re right. It’s 

a very serious issue. 

On wireless, the record that we had suggested that there may be 

a problem, but it wasn’t clear. And so when we adopted the new 

rules for wire line, we launched a proceeding on wireless. We are 

gathering data. We made it very clear that if there’s a problem, we 

will act in wireless as we did in wire line. 

On the wire line side, we made it very clear that if the separate 

disclosures don’t work in eliminating cramming, the next option is 

opt in. 

Senator DURBIN. So what are you waiting for? The percentage of 

total cramming complaints has almost doubled in 3 years on wireless. 

Chairman GENACHOWSKI. I’d have to, if I could, Sir, I’d have to 

get back to you on the data that we had before us when we did 

our proceeding. I don’t recall what was in the record. 

But it was clear to our staff that there is potentially an issue on 

wireless. We didn’t have enough of a record nor to proceed with 

rules just then. 

We didn’t close the proceeding. We issued what in our parlance 

is a further notice of proposed rulemaking so that we can gather 

more information and put us in a position to act. 

It’s important for us to have the evidence we need. There’s no 

point in us adopting rules that we’ll lose in court. And again, I 

trust our staff on making sure that if the record is there and we 

can justify this kind of consumer protection action, we’ll do it. 

We’ve done it in many other areas. 

Senator DURBIN. Well, and let me go back to the earlier point. 

Please make this intelligible to ordinary consumers so they know 

what they’re getting into here. And that’s why the opt out thing 

really leaves me cold. 

I really think, an opt in, most people will say, why in the world 

would I do that? And they won’t. And that’s why the companies beg 

for the opt out because they think they can just kind of slide in 

there. 

POSTING BROADCASTERS’ PUBLIC INSPECTION FILES ONLINE

Let me, if I can, ask a question here. After Citizens United, we 

virtually have no rules when it comes to money being spent on 

campaigns. I lived through the McCain-Feingold era where we applauded ourselves for restricting soft money, taking it out of the 

process. 

We’re down to hard money, baby, and you report every buck of 

it, and we’re going to have accountability. Then came Citizens 

United and said, none of this counts anymore. 

And a Las Vegas casino magnate can dump $15, $20 million into 

a Presidential campaign for his favorite and nothing can stop him. 

I mean Citizens United has opened the gate wide. 
136 

I wish a couple Supreme Court justices had stood for office at 

some point in their life, maybe they would understand this issue 

a little more. 

One of the last sources of information about what’s happening is 

end user, and that relates to the broadcasters file, that they keep 

the records that they keep. 

And, historically, I know because I used to walk into radio and 

TV stations, and they’d push a questionnaire in front of me, a consumer survey, community survey, which was being collected in the 

old, old days. 

But I know that at most of these stations there is a written 

record that is kept that includes a lot of basic information. In part 

of that record that is available in written form is information on 

political advertising, the amount that’s being spent on that. 

It’s physically available at the station, public comment, political 

files and so forth. Now, you recently approved a rule that takes 

this into the 21st century and says the entire file for all broadcasters has to be posted on the FCC’s Web site in searchable format. 

So no longer does it require a physical visit. You can pick up this 

information online. And it’s searchable for the first time. It increases transparency on political ad buys. It educates the public on 

which candidates and groups are using the public’s airtime. 

And it is the public’s airtime. This is important because of the 

rise in anonymous, large political donations through Super PACs 

and things like that. We have tried to pass a DISCLOSE Act here 

in the Congress so that the Super PAC folks would have to say, actually say on the ad, I paid for this, or I’m not a foreign national. 

Things like that. But we can’t get that through. That’s considered radical thinking. So how do citizens access the political file 

now? Is there any information that will be newly available to the 

public under this rulemaking? And is the FCC considering the 

same requirement for cable and satellite providers? 

Chairman GENACHOWSKI. So until we adopted this rule as you 

said, the information that the Congress required broadcasters to 

put in public files, was only available at a station. You had to physically go and you could get it that way. 

As part of our general effort to move all of our filing requirements, disclosure requirements into the 21st century, we proposed 

and now we have in fact required that those political files and everything else in broadcasters’ public files be placed on line. 

That will go into effect in the first tranche over the next 6 

months. In full, over the next 2 years. And then that information 

will be available to anyone who has access to the Internet. 

Senator DURBIN. So has there been a complaint that you’ve got 

another Federal mandate here, imposing another expense on a private company, and it’s a hardship that some stations won’t be able 

to meet? Have you heard that? 

Chairman GENACHOWSKI. We heard those complaints. We took 

them seriously. We went and did some investigation ourselves. We 

learned some interesting things. 

Our staff went to one station, asked for the public file and it was 

said, okay, you know, if you wait and sit here for a while, we’ll 
137 

bring it out to you. You can look at it here, but it’s going to take 

some time. 

And, eventually, the person came back and said to our staffer, 

you know what, here it is in a thumb drive, why don’t you just take 

this. 

And we concluded that the arguments about burden really 

weren’t realistic. We’re in an era where all of our licensees are increasingly doing everything with the FCC on an electronic basis. 

They’re submitting their applications, their modifications for engineering. Everything is online. The question for us is should this 

be the one thing that doesn’t go online? 

And we concluded that it just didn’t make any sense. 

Senator DURBIN. So what about the argument that somehow you 

are forcing disclosure of sensitive pricing data that otherwise would 

not be disclosed? 

Chairman GENACHOWSKI. The data that will be disclosed is data 

that’s already disclosed. It’s available already to anyone in the 

market with an economic interest. 

We found in our work that either other ad buyers are interested 

and they can get the information locally. It’s very easy. In some 

cases, we learned that they did. Or they’ve concluded that it really 

doesn’t affect the market. They don’t need the information because 

of how ad deals ultimately get negotiated. 

The Congress made the decision that this information, and it was 

explicit, that this information should be made public, including the 

rate. It was upheld by the Supreme Court explicitly over similar 

arguments about burden and about the negative effects of disclosure. 

But in this case, the Supreme Court said, no, we reject the arguments. This is okay. And our action was completely consistent with 

the Congress’ directive and with the Supreme Court upholding 

those provisions of the 2002 law. 

Senator DURBIN. May I ask one last question if I can, and then 

I’ll turn it over to Senator Moran for whatever he would like to 

ask. 

BUDGET REQUEST FOR THE FEDERAL COMMUNICATIONS COMMISSION

INSPECTOR GENERAL

Let’s discuss your inspector general’s appropriation, the amount 

that’s being requested. You’re asking for an overall 2-percent plus 

increase for the FCC. But you’ve cut the inspector general’s budget 

by about 10 percent. 

Inspectors general around here are a little more popular since 

the General Services Administration mess, and why would you 

want to cut back on your inspector general’s capacity? 

Chairman GENACHOWSKI. I believe that those aren’t the correct 

facts. Our practice has been, is and will be to pass through the inspector general’s request for a budget and to support their budget. 

The work of the inspector general is incredibly important. The 

independence of the inspector general is important. There may 

have been a mistake somewhere in the process. 

Senator DURBIN. The fiscal year 2013 request is $8.75 million for 

the inspector general. The fiscal year 2012 enacted level is $9.75 

million. 
138 

Chairman GENACHOWSKI. We will work on that with you, but I 

want to be very clear on this. Our policy is to pass through the inspector general’s request and to support him. 

Senator DURBIN. Thank you. 

Senator MORAN. Mr. Chairman, thank you. 

I think this should be able to conclude my questions of the Chairman. Thank you for your patience. 

POSTING BROADCASTERS’ PUBLIC INSPECTION FILES ONLINE

In regard to the political broadcasting issue that the chairman 

raised, I just want to ask one question. Does FCC envision going 

beyond what is currently included in the political file to require the 

collection of any additional information? 

And what I heard you saying is that this is what the Congress 

authorized to be collected and retained. It’s what the Supreme 

Court said was fine. 

So, I assume the answer to that is, ‘‘No’’, but I wanted to make 

certain that I gave you the opportunity to say that. 

Chairman GENACHOWSKI. I think you’re right. The steps that we 

put in place simply said, we’ve already worked out what should be 

the disclosures. Let’s move them from paper to online. 

They’re many people with many different views who think that 

disclosure should be done differently. That’s a discussion that could 

be had including broadcasters who have proposed some ideas on 

how to modify the disclosures. 

We’ll be open to those suggestions, but the default is, what has 

been disclosed is what will continue to be disclosed. 

Senator MORAN. Do you have the statutory authority? Are you 

able to do what you did because of the law you indicated the Congress has passed? Do you have the authority to collect more information? 

Chairman GENACHOWSKI. I would presume that we do. There’s a 

long history as part of—— 

Senator MORAN. I guess collect and disclose. 

Chairman GENACHOWSKI. Collect and disclose. As part of broadcasters’ public trustee obligations, which go back many, many decades, I would presume we have that authority. 

There have been a few instances where the Congress said to 

FCC, whatever you do, make sure you do this, and this is one of 

those cases. But I think most people would agree that our authority with respect to information from spectrum licensees is pretty 

broad. 

UNIVERSAL SERVICE REFORM

Senator MORAN. I want to just as a final, a couple of questions 

related to the regression model that the order outlined. 

The order incorporated a regression model to evaluate when companies are perhaps not being as efficient with resources as possible. 

The regression model has raised concerns, I assume to you and certainly to me. 

It was brought to my attention that FCC may have entered incorrect data into the regression analysis used to set the upper limits of high cost loop paid to incumbent rate of return, local exchange carriers. 
139 

This is an important aspect for future broadband investment. 

The other criticism that I’ve heard is that the outcomes will 

change, the regression model’s outcomes will change from year to 

year as companies choose whether or not to make investments. 

And the concern here is that companies may be fearful to invest 

because if they choose to but other companies don’t, the regression 

model may return results that indicate the company is an outlier 

in the model and therefore not eligible for recovery of their investment. 

Are either one of those concerns legitimate and something that 

you’re attempting to address? 

Chairman GENACHOWSKI. I’m not certain about the status of that 

back and forth with our staff. But, again, any issues like that that 

get raised, we have a professional staff that’s been directed to take 

them very seriously. 

The kinds of things we’re trying to do, and the direction they’ve 

received from FCC, if I could be at a macro level for a minute, we 

want to distinguish instances like the following. 

A company is receiving Federal funds who set up multiple subsidiaries with the same CEO at each subsidiary, paying themselves 

multiple times, using what in effect is taxpayer money. Well, we 

want to stop that. 

We don’t want to stop the perfectly honorable company in small 

town America that’s doing the best it can under difficult circumstances to provide communications infrastructure in areas that 

have low population density. 

And our charge, and not just mine, but FCC on a bipartisan 

basis to the staff, has been let’s get this right. Let’s distinguish 

those cases where we can’t defend the outflow of money from the 

ones where they’re legitimate businesses doing the right things. 

Let’s take these cases like what I mentioned before, where 

there’s an overlap and phase them out in a reasonable way. Let’s 

work with RUS to make sure that there’s flexibility there on the 

loans as that’s appropriate. 

So these are all legitimate issues that you’re raising, and I want 

you to know that we care about any negative effects that we have 

in places where we don’t want to have negative effects. 

And it’s a hard job, and I’m just so proud of our staff for taking 

this seriously. The easier thing for us to do would have been to 

leave the program just the way it was, and not try to reform it, and 

not try to get broadband to people in rural America who don’t have 

it, and not deal with these problems. 

But we took on the challenge. I’m proud of FCC for having done 

it on a bipartisan, unanimous basis. I look forward to working with 

you on this, but I’d ask that if we can receive bipartisan support 

to keep on doing the hard work of reform and fiscal responsibility 

in meeting these goals, I think we can do great things for the country in moving this program forward. 

Senator MORAN. Chairman Durbin, thank you very much for this 

hearing today and thank you for the opportunity I’ve had to visit, 

to question, to have a conversation with Chairman Genachowski. 

Mr. Chairman, Chairman Genachowski, I don’t think you volunteered to come to Kansas. But, Chairman, in the conversation that 
140 

you and I had, you indicated a willingness to accept an invitation. 

I would like to extend that again. 

We’d love to have you come spend some time with folks in rural 

America, and in the interim, I would ask your commitment that 

your staff work with me and my staff, the subcommittee staff, as 

we try to sort out the questions that I’ve raised and some others, 

to give some additional information to those who are trying to 

make decisions about what to do next. 

Chairman GENACHOWSKI. I would be happy to do that. 

Senator MORAN. Thank you very much. Thank you. 

Senator DURBIN. I would consider it an honor to come to Kansas 

and—— 

Senator MORAN. Chairman Durbin, I would invite you to come to 

Kansas, but—— 

Senator DURBIN. As long as it’s Norfolk, Kansas. 

Mr. Chairman, thank you for being here today. Thanks for your 

testimony. Senator Moran, thank you too. 

Senator MORAN. Thank you. 

ADDITIONAL COMMITTEE QUESTIONS

Senator DURBIN. We are going to keep the file open for a week, 

if there are any questions or comments to be added. You may get 

a question in the mail, please take it seriously. 

[The following questions were not asked at the hearing, but were 

submitted to the Commission for response subsequent to the hearing:] 

QUESTIONS SUBMITTED BY SENATOR JERRY MORAN

WAIVER

Question. In our previous discussions about Universal Service Fund (USF) reform, 

you have cited the ‘‘waiver process’’ as a remedy for companies who may experience 

severe financial challenges as a result of lost USF support. The order published on 

November 18 clearly states, ‘‘We permit any carrier negatively affected by the universal service reforms we take today to file a petition for waiver that clearly demonstrates that good cause exists for exempting the carrier from some or all of those 

refunds, and that waiver is necessary and in the public interest to ensure that consumers in the area continue to receive voice service.’’ The threshold you have established for the waiver is related to a consumer’s loss of access to voice service. This 

is an extremely low threshold of service to consumers particularly in the transition 

to a broadband world. 

At the March 19 event here in Washington, Federal Communications Commission 

(FCC) Commissioner Robert McDowell stated, ‘‘If your company looks like it won’t 

survive, there is a clear waiver process.’’ Later the day, when questioned at an appropriations hearing, Commissioner McDowell said ‘‘We also looked at a waiver 

process that is very frugal . . . if indeed there is a carrier experiencing undue 

hardship because of the reform they can file a waiver with the FCC where they will 

have to open their books in a very detailed fashion so we know exactly what is going 

on with the money but they can get a waiver.’’ 

Can you explain to me how can we make certain waivers will be granted to those 

companies who might have to walk away from their current networks? 

Answer. In reforming the USF, FCC unanimously agreed that, as a matter of fiscal responsibility and accountability, and to protect consumers and small businesses 

paying into the USF, a thorough, but fair waiver process was necessary for any company seeking a waiver. Any carrier facing reduced support as a result of FCC’s universal service reforms may file a petition for waiver clearly demonstrating that good 

cause exists for exempting the carrier from some or all of those reforms, and that 

the waiver is necessary and in the public interest to ensure that consumers in the 

area continue to receive service. 

Waivers will be granted where an eligible telecommunications carrier can demonstrate that, without additional universal service funding, its support would not be 
141 

‘‘sufficient to achieve the purposes of section 254 of the Act.’’ In particular, a carrier 

seeking such a waiver must demonstrate that it needs additional support in order 

for its customers to continue receiving service in areas where there is no terrestrial 

alternative. Several weeks ago, I circulated a draft order to my colleagues to clarify 

that waivers can be granted to prevent loss of broadband service, not just loss of 

voice service. 

A full discussion of FCC’s waiver process is available in the Connect America 

Fund order beginning at page 177 (available at http://hraunfoss.fcc.gov/edocspublic/ 

attachmatch/FCC–11–161Al.pdf). 

Question. Additionally, assume a waiver is granted. What rules will companies 

who are granted a waiver fall under? 

Answer. The waiver process is structured to address the specific relief needed by 

the company and to grant tailored relief to address its needs. Otherwise, the generally applicable rules for the USF will apply. Careful, tailored relief is consistent 

with fiscal responsibility and accountability and to protect consumers and small 

businesses paying into the fund. 

Question. Will there be increased reporting requirements? 

Answer. That is a possible condition for granting a waiver. As FCC stated in the 

order, we intend to subject such requests to a fair and thorough review and will 

take appropriate measures to both ensure consumers do not lose service and protect 

public funds from waste, fraud, or abuse. This is consistent with our commitment 

to fiscal responsibility to consumers and businesses paying into the USF. 

Question. Will companies receive more support to help fund their networks? If so, 

what money will be used to pay for companies who are granted waivers? 

Answer. Any money used to grant a waiver will necessarily come from funds that 

could otherwise be used to support deployment of broadband to unserved areas. In 

the order, to address concerns about growth in the USF and to protect consumers 

and small businesses paying into the fund, we adopted an overall budget for the 

USF. 

Question. Is it possible rural Americans could lose broadband service which is currently available to them today? 

Answer. FCC’s framework will ensure that consumers who have access to 

broadband will continue to have access to broadband. 

Question. What is the timeframe within which the FCC will respond to waiver requests from companies? 

Answer. The Bureau is reviewing each petition individually and will make final 

decisions as expeditiously as possible. To expedite review of waivers, FCC delegated 

to the Wireline Competition and Wireless Telecommunications Bureaus the authority to approve or deny all or part of requests for waivers of phase-downs in support. 

We required that the Bureaus initiate the process for public comment within 45 

days of receipt of a waiver petition. 

REGRESSION MODEL

Question. That regression model outline in the USF/Intercarrier Compensation 

(ICC) reform order has raised concerns. It was brought to my attention that the 

FCC may have entered incorrect data into the quantile regression analysis used to 

set the upper limit of the high-cost loop paid to incumbent rate-of-return local exchange carriers. This is important for future broadband investment. Another criticism of the regression model is that the outcomes will change from year to year as 

companies choose whether or not to make investments. I have been told companies 

are fearful to invest because if they choose to and other companies do not, the regression model may return results that indicate the company is an outlier in the 

model and therefore will not eligible for recovery of the investment. 

Can you comment on the regression model and potential incorrect inputs and 

what the FCC is doing to address this issue? 

Answer. FCC created a streamlined, expedited process to correct any problems. 

So far, the Wireline Competition Bureau has received two petitions to correct data, 

and both of the petitioners received responses within 2 weeks. FCC also launched 

a process to collect a full set of updated data from companies before benchmarks 

take full effect. 

Question. How is FCC determining what caps for support should be in various 

areas? 

Answer. The caps are based on comparing carriers to other similarly situated providers based on a range of criteria. For instance, the benchmarks take account of 

local conditions like population density, soil type, climate, as well as any recent investment by the company. In some cases, carriers spend almost three times as much 

per customer as smaller carriers right next door. 
142 

Question. How is FCC able to tell companies they should invest in serving their 

areas if the regression caps are changing year to year? 

Answer. The reforms adopted by FCC will make support more predictable for carriers spending efficiently. In response to concerns about the timing of changes to the 

benchmarks, the Wireline Competition Bureau’s order determined that the benchmarks should initially remain in effect until 2014. In the interim, FCC will consider 

whether benchmarks should subsequently be set for multiple years. 

Question. How are you responding to companies who have asked about the regression model? 

Answer. FCC has an open-door policy—Commission staff takes all meeting or call 

requests from companies to address any questions that come up, and has made all 

aspects of the regressions available for public inspection. 

QUESTIONS SUBMITTED BY SENATOR MARK KIRK

Question. I strongly support the deployment of fixed and mobile broadband to increase economic development, productivity and America’s global competitiveness. 

One analysis estimates the productivity gains from the deployment and use of wireless broadband will generate almost $860 billion in additional GDP by 2016. Spectrum auctions and rural broadband development are key tools to accomplishing our 

ambitious goals and ensuring economic success. However, I am concerned about the 

administration’s execution of these programs and have the following questions. 

The administration recently announced its support for spectrum sharing in order 

to accelerate broadband development throughout the Nation. 

Given that the National Telecommunications and Information Administration 

(NTIA) recently reported that moving Federal users off the Federal Exclusive Band 

airwaves will take more than a decade and cost $18 billion, how does the Federal 

Communications Commission (FCC) intend to work with NTIA to ensure that the 

mutually beneficial short-term goal of spectrum sharing occurs, while at the same 

time balancing longer-term spectrum reallocation and incentive auction plans? 

Answer. FCC’s Mobile Action Plan employs an ‘‘all-of-the-above’’ approach to the 

spectrum crunch which includes more spectrum, but also more efficient use of spectrum and new ways to manage spectrum, both in the near-term and in the longterm. FCC is working now with NTIA and other stakeholders on near-term sharing 

and small cell opportunities in the 1755 MHz and 3.5 GHz bands. We are moving 

expeditiously forward with incentive auctions in a parallel process. We will continue 

to work with all stakeholders to meet the Nation’s spectrum needs. 

Question. How long will it take to complete the testing process with NTIA before 

spectrum sharing can be implemented? 

Answer. I am hopeful that testing of sharing in the 1755 MHz band can be completed in a timeframe that would allow it to be paired with the 2155 MHz band for 

auction, as required by statute. FCC intends to initiate a 3.5 GHz rulemaking this 

year. 

Question. How does FCC intend to handle the costs of Federal spectrum relocation? 

Answer. FCC will follow the direction of the Congress, as set forth in the statute 

with respect to reimbursing relocation costs. 

Question. What assurances does the FCC have from Government spectrum users 

that they will participate in spectrum sharing and that such sharing can be implemented in a timely manner? 

Answer. FCC will continue to engage in discussions with NTIA and other Federal 

agencies, particularly the Department of Defense, to find solutions that meet commercial spectrum needs, while also enabling vital Government operations to continue. 

Question. I have introduced legislation to establish a process nearly identical to 

the successful Base Realignment and Closure (BRAC) process to determine which 

Federal spectrum should be auctioned for sole or shared use by the private sector. 

I believe this is a key model for spectrum relocation because it forces the relocation 

process to move forward unless the Congress passes legislation to block it. What is 

the FCC’s position on using a BRAC-like approach to addressing our spectrum 

crunch and providing the telecommunications industry with a certain path forward 

to reliably clear spectrum for wireless advancements? 

Answer. This is an intriguing approach and I am interested in discussing all potential methods for identifying and deploying Federal spectrum. We should consider 

a broad range of solutions to the spectrum crunch and ensure that we have not left 

any concept off the table. 
143 

In the meantime, FCC has moved ahead to work with its counterparts to deploy 

Federal spectrum as soon as possible. The National Broadband Plan recommended 

a number of approaches to increase the availability of spectrum for commercial mobile and fixed wireless use, including working with NTIA to develop a roadmap to 

identify opportunities to make Federal spectrum available for exclusive, shared, licensed and/or unlicensed use. FCC continues to collaborate with NTIA on this approach and we will work with our Federal partners to develop plans for identifying 

and freeing up this valuable resource. 

Question. I am concerned about the overlap in programmatic goals and implementation of the Universal Service Fund (USF) and the Department of Agriculture’s 

(USDA) Rural Utility Service (RUS). Additionally, carriers use USF funds, that 

would otherwise have been used to build out broadband, to repay their RUS loans. 

What are the default criteria mechanisms in place that the FCC will use to enforce 

repayment of RUS loans? 

Answer. RUS administers its loan program and has a better understanding of its 

default criteria. That said, as I mentioned at the hearing, we have worked closely 

with RUS throughout the USF reform process and our waiver criteria specifically 

consider debt, including RUS loans. 

Question. How is the FCC working with USDA’s RUS to ensure that taxpayer dollars are not diluted through duplicative projects that are also funded under USF? 

Answer. RUS loans and USF support serve complementary purposes. USF provides ongoing support, while RUS provides low-cost loans. More generally, our USF 

reform was designed to ensure that USF support only goes where it’s needed, and 

includes new accountability and safeguards for all USF spending. 

Question. A recent study conducted by a Georgetown University researchers found 

that, based on the analysis of previous FCC auctions, the success of spectrum auctions depends greatly on whether or not conditions are placed on the auction. The 

study found that the full auction potential of broadcast spectrum with no conditions 

imposed could generate as much as $91 billion in revenue, whereas the same auction which carries heavy conditions, such as net neutrality requirements. A free auction could raise 250 percent more funds than an unconditioned one. 

What, if any, kinds of conditions will FCC place on the spectrum auctions authorized by Public Law 112–96? Will any restrictions be placed on participants? 

Answer. FCC’s incentive auctions team currently is preparing rulemaking notices 

for the incentive auction process. FCC will comply with all statutory requirements, 

and our process will be open, inclusive, fact-based, and guided by economics and engineering. 

Question. How will FCC ensure that the value of the spectrum will be upheld 

throughout the auction process? 

Answer. FCC has a long history of raising revenue through the auctions process, 

generating $50 billion to the United States Treasury since 1993. Spectrum value 

goes beyond direct payments to the Treasury for spectrum licenses—spectrum deployment supports technological development, job creation and economic growth. 

FCC will consider these factors as well as all relevant statutory mandates as it initiates the incentive auctions process. 

CONCLUSION OF HEARINGS

Senator DURBIN. This meeting stands in recess. 

[Whereupon, at 4:55 p.m., Wednesday, May 9, the subcommittee 

was recessed, to reconvene subject to the call of the Chair.] 

(i) 

LIST OF WITNESSES, COMMUNICATIONS, AND 

PREPARED STATEMENTS 

Page 

Congress of the United States, Letter From the ................................................... 21 

Durbin, Senator Richard J., U.S. Senator From Illinois: 

Opening Statements of ...................................................................... 1, 33, 65, 115 

Prepared Statements of ..................................................................................... 2, 67 

Questions Submitted by.......................................................................... 57, 90, 108 

Federal Trade Commission, Prepared Statement of the ...................................... 89 

Geithner, Hon. Timothy F., Secretary, Office of the Secretary, Department 

of the Treasury ..................................................................................................... 33 

Prepared Statement of ..................................................................................... 35 

Summary Statement of .................................................................................... 35 

Genachowski, Julius, Chairman, Federal Communications Commission ........... 115 

Prepared Statement of ..................................................................................... 120 

Summary Statement of .................................................................................... 117 

Gensler, Hon. Gary, Chairman, Commodity Futures Trading Commission ....... 1 

Prepared Statement of ..................................................................................... 7 

Summary Statement of .................................................................................... 5 

Kirk, Senator Mark, U.S. Senator From Illinois: 

Questions Submitted by............................................................... 61, 105, 110, 142 

Lautenberg, Senator Frank R., U.S. Senator From New Jersey: 

Prepared Statements of ..................................................................................... 4, 41 

Questions Submitted by ................................................................................... 60 

Statements of............................................................................................. 4, 41, 116 

Miller, Brian D., Inspector General, General Services Administration .............. 75 

Prepared Statement of ..................................................................................... 76 

Questions Submitted to .................................................................................... 108 

Moran, Senator Jerry, U.S. Senator From Kansas: 

Prepared Statement of ..................................................................................... 3 

Questions Submitted by ................................................................................... 140 

Statements of...................................................................................... 3, 45, 69, 115 

Tangherlini, Daniel M., Acting Administrator, General Services Administration ........................................................................................................................ 65

Prepared Statement of ..................................................................................... 72 

Questions Submitted to .................................................................................... 90 

Summary Statement of .................................................................................... 70 

(iii) 

SUBJECT INDEX 

COMMODITY FUTURES TRADING COMMISSION 

Page 

Agricultural Swaps .................................................................................................. 20 

Business Conduct Rules .......................................................................................... 13 

Core Principles ......................................................................................................... 15 

Emergency: 

Actions ............................................................................................................... 24 

Authority ........................................................................................................... 23 

Fear of Growth ......................................................................................................... 29 

Funding Needed for New Responsibilities ............................................................. 28 

Genesis of the Market ............................................................................................. 27 

Implementation ........................................................................................................ 15 

Legal Segregation With Operational Comingling ................................................. 19 

Market Impact on Prices ......................................................................................... 17 

Position Limits.................................................................................................. 14, 16, 26 

Registration and Product Reviews ......................................................................... 8 

Speculation ............................................................................................................... 26 

and Pricing ........................................................................................................ 21 

Surveillance: 

Meetings ............................................................................................................ 25 

To Detect Emergencies ..................................................................................... 25 

User Fees .................................................................................................................. 14 

DEPARTMENT OF THE TREASURY 

OFFICE OF THE SECRETARY

Accelerated Depreciation ......................................................................................... 48 

Additional Committee Questions ............................................................................ 56 

Derivative Market Reforms .................................................................................... 46 

Domestic Finance: 

Financial Institutions/Federal Insurance Office ............................................ 59 

Housing ...................................................................................................... 57, 60, 61 

Early Effects of Home Affordable Modification Program Principal Reduction 

Alternative on Redefault Rates ........................................................................... 43 

Economic: 

Growth and Job Creation ................................................................................. 37 

Policy ................................................................................................................. 61 

Entrepreneurship Opportunities ............................................................................ 47 

Federal Housing Finance Agency’s Lack of Principle Reduction Policy ............. 38, 42 

Financial Crimes Enforcement Network Information Technology Modernization ........................................................................................................................ 53

Improving Efficiency, Reducing Taxpayer Costs, and Reforming Government .. 36 

International Affairs ................................................................................................ 62 

Mortgage Principle Reduction ................................................................................ 41 

Office of Foreign Assets Control Sanctions Against Iran, Sudan, Belarus, 

and Syria ............................................................................................................... 53 

Protect Our National Security Interests and Prevent Illicit Use of the Financial System ............................................................................................................ 37 

Sale of Agricultural Goods to Cuba ........................................................................ 55 

Small Business Lending Fund ................................................................................ 53 

Student: 

Loan Crisis ........................................................................................................ 48 

Loans ................................................................................................................. 42 
Page

iv 

Taxpayer Support of Freddie Mac and Fannie Mae ............................................. 56 

Terrorism and Financial Intelligence: 

Financial Crimes Enforcement Network ........................................................ 59 

Terrorist Financing and Financial Crimes/Office of Foreign Assets Control Sanctions ................................................................................................ 63 

The Effect of the Principal Reduction Alternative on Redefault Rates in 

the Home Affordable Modification Program: Early Results ............................. 42 

Volcker Rule ............................................................................................................. 52 

FEDERAL TRADE COMMISSION 

Additional Committee Questions ............................................................................ 140 

Budget Request for the Federal Communications Commission Inspector General ........................................................................................................................ 137 

Cramming ................................................................................................................. 134 

Funding for Research and Development ................................................................ 126 

License Renewals ................................................................................................ 125, 128 

Posting Broadcasters’ Public Inspection Files Online ...................................... 135, 138 

Privacy ...................................................................................................................... 128 

Public Safety Network ............................................................................................. 127 

Regression Model ..................................................................................................... 141 

Spectrum Crunch ..................................................................................................... 123 

Universal Service Reform ................................................................. 123, 126, 131, 138 

Waiver ....................................................................................................................... 140 

GENERAL SERVICES ADMINISTRATION 

Addendum on Agency Improvements ..................................................................... 113 

Additional Committee Questions ............................................................................ 90 

Centralize: 

Agency Information Management ................................................................... 113 

Program and Budget Management ................................................................. 113 

Civilian Property Realignment Board .......................................................... 87, 88, 104 

Construction ............................................................................................................. 82 

Cost: 

Cutting Measures ............................................................................................. 103 

Savings at the General Services Administration ........................................... 73 

Denver Federal Center Remediation ...................................................................... 98 

Effect: ........................................................................................................................

Of Reduced Spending on the General Services Administration’s Ability 

To Pay Bills and the Effect on Federal Agencies ....................................... 94 

On: 

Building Projects ....................................................................................... 95 

Federal Agencies ....................................................................................... 95 

Effects of: 

Little Construction and of No Major Repairs to Buildings ........................... 68 

Slowing Down the Department of Homeland Security Headquarters Construction Project (St. Elizabeths) ................................................................. 98 

Federal Trade Commission Building ...................................................................... 83 

Fiscal Year 2013 Budget: 

For the Federal Buildings Fund ...................................................................... 102 

Request ............................................................................................................. 69, 73 

General Services: 

Administration: 

Inspector General Report on the Western Regions Conference ............. 67 

Position on Pending Legislation on Civilian Property Realignment ..... 88 

Administration’s Corrective Actions ............................................................... 91 

Get: 

Back to Basics ................................................................................................... 113 

Out of the ‘‘Matrix’’ ........................................................................................... 114 

‘‘Hats Off’’ Program—Employee Rewards Program .............................................. 109 

Holding Officials Responsible ................................................................................. 72 

Improper Contracting............................................................................................ 91, 108 

Intern Conference .................................................................................................... 78 

Interns Conference .................................................................................................. 93 

Lost Conference Survey Forms ............................................................................... 92 

Noncompliance With Fire Safety Act ..................................................................... 108 

Office of Inspector General Reports ....................................................................... 80 
Page

v 

Problems at Public Buildings Service—Systemic?.............................................. 94, 109 

Promoting Efficiency and Reducing Costs ............................................................. 72 

Proposal To Move the Federal Trade Commission From Its Headquarters 

Building ................................................................................................................. 101 

Reduced Federal Building: 

Construction and Effect on Agencies .............................................................. 97 

Repairs .............................................................................................................. 99 

Region 9 Commissioner—History of Excessive Expenditures? ............................ 93 

Regional Oversight.................................................................................................. 80, 81 

Require Procurement Accountability ..................................................................... 114 

Taking Action ........................................................................................................... 72 

Targeted Investments in Critical Infrastructure .................................................. 73 

The Federal Buildings Fund ................................................................................... 68 

Transition at the General Services Administration .............................................. 87 

Was Training To Enhance Job Skills Conducted?.............................................. 90, 108 

We Must Pay the Obligatory Bills ......................................................................... 68 

Western Regional Conference................................................................... 77, 79, 82, 85 

Per Diem ........................................................................................................... 86 

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