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S. HRG. 111–817 

FINANCIAL SERVICES AND GENERAL GOVERNMENT 

APPROPRIATIONS FOR FISCAL YEAR 2011 

HEARINGS 

BEFORE A

SUBCOMMITTEE OF THE 

COMMITTEE ON APPROPRIATIONS 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

ON

S. 3677 

AN ACT MAKING APPROPRIATIONS FOR FINANCIAL SERVICES AND 

GENERAL GOVERNMENT FOR THE FISCAL YEAR ENDING SEPTEMBER 

30, 2011, AND FOR OTHER PURPOSES 

Commodity Futures Trading Commission 

Consumer Product Safety Commission 

Federal Trade Commission 

Office of Personnel Management 

Securities and Exchange Commission 

United States Postal Service 

Printed for the use of the Committee on Appropriations 

( 

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

COMMITTEE ON APPROPRIATIONS 

DANIEL K. INOUYE, Hawaii, Chairman 

ROBERT C. BYRD, West Virginia 

PATRICK J. LEAHY, Vermont 

TOM HARKIN, Iowa 

BARBARA A. MIKULSKI, Maryland 

HERB KOHL, Wisconsin 

PATTY MURRAY, Washington 

BYRON L. DORGAN, North Dakota 

DIANNE FEINSTEIN, California 

RICHARD J. DURBIN, Illinois 

TIM JOHNSON, South Dakota 

MARY L. LANDRIEU, Louisiana 

JACK REED, Rhode Island 

FRANK R. LAUTENBERG, New Jersey 

BEN NELSON, Nebraska 

MARK PRYOR, Arkansas 

JON TESTER, Montana 

ARLEN SPECTER, Pennsylvania 

THAD COCHRAN, Mississippi 

CHRISTOPHER S. BOND, Missouri 

MITCH MCCONNELL, Kentucky 

RICHARD C. SHELBY, Alabama 

JUDD GREGG, New Hampshire 

ROBERT F. BENNETT, Utah 

KAY BAILEY HUTCHISON, Texas 

SAM BROWNBACK, Kansas 

LAMAR ALEXANDER, Tennessee 

SUSAN COLLINS, Maine 

GEORGE V. VOINOVICH, Ohio 

LISA MURKOWSKI, Alaska 

CHARLES J. HOUY, Staff Director 

BRUCE EVANS, Minority Staff Director 

SUBCOMMITTEE ON FINANCIAL SERVICES AND GENERAL GOVERNMENT

RICHARD J. DURBIN, Illinois, Chairman 

MARY L. LANDRIEU, Louisiana 

FRANK R. LAUTENBERG, New Jersey 

BEN NELSON, Nebraska 

JON TESTER, Montana 

DANIEL K. INOUYE, Hawaii (ex officio) 

SUSAN COLLINS, Maine 

CHRISTOPHER S. BOND, Missouri 

LAMAR ALEXANDER, Tennessee 

THAD COCHRAN, Mississippi (ex officio) 

Professional Staff 

MARIANNE CLIFFORD UPTON

DIANA GOURLAY HAMILTON

MELISSA ZIMMERMAN PETERSEN

DALE CABANISS (Minority) 

BROOKE HAYES STRINGER (Minority) 

LASHAWNDA SMITH (Minority) 

Administrative Support 

MOLLY BARACKMAN-EDER
(III) 

C O N T E N T S 

THURSDAY, MARCH 18, 2010 

Page 

United States Postal Service .................................................................................. 1 

WEDNESDAY, MARCH 24, 2010 

Office of Personnel Management ............................................................................ 61 

WEDNESDAY, APRIL 14, 2010 

Consumer Product Safety Commission .................................................................. 111 

WEDNESDAY, APRIL 28, 2010 

Commodity Futures Trading Commission ............................................................. 141 

Securities and Exchange Commission ................................................................... 165 

THURSDAY, MAY 20, 2010 

Federal Trade Commission ..................................................................................... 195 

(1) 

FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 

YEAR 2011 

THURSDAY, MARCH 18, 2010 

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

The subcommittee met at 2:40 p.m., in room SD–192, Dirksen 

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

Present: Senators Durbin and Collins. 

UNITED STATES POSTAL SERVICE 

STATEMENT OF HON. JOHN E. POTTER, POSTMASTER GENERAL, 

CHIEF EXECUTIVE OFFICER 

OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

Senator DURBIN. My apologies to those of you who were here on 

time when we weren’t. I would like to blame the Senate leadership, 

except I’m part of it. 

And we had a rollcall that went a little bit longer than we expected. 

Good afternoon. And I’m pleased to convene this hearing before 

the Senate Appropriations Subcommittee on Financial Services and 

General Government. Our focus today is on the financial circumstances facing the United States Postal Service (USPS). This is 

the first in a series of hearings which we’re planning this spring 

as we start to develop our fiscal year 2011 spending bill. 

I’m glad that my friend and fellow member of the subcommittee 

Senator Susan Collins of Maine is here today. And other colleagues 

may join us, as their schedules allow. 

We are all familiar with that famous maxim, ‘‘Neither snow nor 

rain nor heat nor gloom of night stays these couriers from the swift 

completion of their appointed rounds.’’ Its origin is a reference to 

the ancient courier service of the Persian Empire in Herodotus’ 

‘‘Histories,’’ dating to 450 B.C. It’s also inscribed over the James 

Farley Post Office in New York City. And it has, over time, been 

an often-spoken but unofficial motto ascribed to the dedicated work 

of the men and women of the United States Postal Service. 

America’s Postal Service has enjoyed a vibrant history, dating 

back to the system instituted by Benjamin Franklin, as chairman 

of the committee of the Second Continental Congress in 1776. This 

history is rooted in a single, stalwart principle, that every person 
2 

in the United States, no matter who, no matter where, has the 

right to equal access to secure, efficient, and affordable mail service. 

Today alone, letter carriers and truckers will drive 4.1 million 

miles to deliver 584 million pieces of mail to more than 150 million 

residences, businesses, and post office boxes across our Nation. 

Today alone, 1.1 million customers will go online to the Postal 

Service Web site to conduct $608,000 worth of postal business, and 

another 7 million customers will go into a physical post office building. Today alone, $224.4 million in revenue will be received, 584 

million mail pieces will be processed and delivered, 115,000 plus 

address changes will be processed, 3,000 plus new addresses will 

be added to the postal network, and 402,000 plus gallons of fuel 

will be consumed. And today alone, like each day of the year, no 

tax dollars will be used to operate the United States Postal Service. 

Even amid these captivating day-in-the-life statistics, we continue to witness a remarkable, even revolutionary, transformation 

of the modes of personal communication and business interchange, 

from electronic mail and online bill paying, to instant messaging 

and social networking, via the Internet. As a result, mail volume 

has continued to spiral in decline, dropping from 213 billion pieces 

in 2006 to 177 billion pieces last year. Couple this with an economic recession, and you see circumstances that have dramatically 

impacted the ability of the U.S. Postal Service to thrive and to 

meet its goals. 

The Postal Service recently unveiled an action plan of proposals 

to address grim realities that its expenses will likely continue to 

outpace revenues. It is prudent that we engage in a thoughtful and 

open national dialogue on the wisdom of the solutions proposed by 

the Postal Service. 

Monday through Saturday mail delivery dates back to 1863. It’s 

been mandated in our annual appropriations bill for over a quarter 

of a century. I didn’t know that. I knew it was in there, but nobody 

ever talked about it until there was a proposal to go to 5-day service, and then they said, ‘‘Senator Durbin, Senator Collins, this is 

your issue.’’ And that’s why we’re here today. 

Serious questions need to be asked and answered before Congress simply changes the course and embraces major changes in 

mail delivery. Who will benefit? Who is going to be harmed? Can 

we mitigate the impact? What savings will actually be gained? How 

reliable are the estimates that we’re working with? What will we 

sacrifice? Will it drive mailers away or divert more commerce to 

the Internet or postal competitors? Have all the options been identified and explored? Will a reduction in delivery service enhance, 

or will it hinder, the long-term position of the Postal Service as a 

vital component of America’s economy, a $900 billion industry? 

Even if the delivery frequency is changed, is the Postal Service still 

contemplating a rate hike and closing or consolidating facilities? 

What will be the impact on the postal workforce? I think these 

issues are just the tip of the iceberg. We’ll start talking about them 

today. 

As the chairman of this subcommittee of jurisdiction, which provides a small stream of annual reimbursement payments, known as 

‘‘revenue foregone,’’ and the current author of the bill that carries 
3 

the nearly 30-year-old mandate that 6-day delivery and rural delivery of mail shall continue at no less than the 1983 level, I welcome 

the opportunity to provide this forum. I’m also interested in learning more details about the array of proposed reforms. I am going 

to welcome the Postmaster General, after I yield to my colleague, 

the ranking member of this subcommittee, Senator Susan Collins 

of Maine. 

STATEMENT OF SENATOR SUSAN COLLINS

Senator COLLINS. Thank you, Mr. Chairman. 

Let me begin by expressing my appreciation to you for holding 

this important hearing to discuss the dire and declining financial 

condition of the Postal Service, an institution that is critical to our 

economy and our way of life. 

The Postal Service, as the chairman has pointed out, is one of 

our oldest institutions. It is the lynchpin of a $900 billion mailing 

industry that employs close to 9 million people in businesses as diverse as paper manufacturing, printing, catalog companies, publishing, newspapers, and financial services. 

I must say, Mr. Chairman, that I’m experiencing a sense of de ́ja`

vu in attending today’s hearing on this topic. The Homeland Security and Governmental Affairs Committee has held 14 hearings related to the Postal Service and its financial crisis since 2003, and 

I chaired the vast majority of those hearings. I want to commend 

you, Mr. Chairman, for holding another hearing to address this 

complex and seemingly eternal issue. 

Nine years ago, in 2001, the Government Accountability Office 

(GAO) first placed the Postal Service on its high-risk list, because 

it faced formidable financial, operational, and human capital challenges that threatened its long-term viability. Five years later, as 

the result of the passage of postal reform legislation in 2006, which 

I authored with Senator Carper, the GAO removed the Postal Service from the high-risk list. But, last year the Postal Service, losing 

billions, and facing a crisis, once again was added to the high-risk 

list. 

Approximately every 3 years—in 2003, in 2006, and again last 

year, in 2009—the Postal Service has come to Congress seeking relief from its financial obligations in exchange for promises of future 

profitability. The Postmaster General’s request to Congress for relief from its retiree health benefit payments and from its obligation 

to deliver mail 6 days a week is just the most recent in a long history of Postal Service requests for financial assistance in exchange 

for the promise of becoming financially solvent—someday. 

In 2003, Congress passed postal reform legislation—I coauthored—that reduced the Postal Service’s pension costs by approximately $9 billion. In 2006, the Postal Accountability and Enhancement Act that Senator Carper and I authored relieved the Postal 

Service of a $27 billion obligation, primarily by transferring the 

Postal Service’s obligation for retirement benefits for its employees 

with prior military service to the Treasury Department. In 2009, 

Congress voted, at the Postal Service’s request, to reduce by $4 billion a retiree health benefits payment that was due on September 

30. I reluctantly supported this reduction, too—in fact, I cast the 
4 

deciding vote—because the fact is that the Postal Service simply 

could not make the full payment. 

My point is, and my frustration is, that, over and over again, the 

Postmaster General has promised that if only Congress would 

allow the USPS relief from its financial obligations and take other 

actions, it would be on a solid financial footing. But, time and time 

again, I’ve been disappointed in the results after I’ve agreed to 

these requests; indeed, led the fight on these requests. 

During the past year, the Postmaster General has been particularly critical of the payment stream set up in the 2006 law in exchange for the elimination of the expense of the escrow requirement and the transfer of the retirement obligations for employees 

with previous military service to the General Treasury. Yet, this 

very payment obligation from which the Postal Service now seeks 

relief was part of a recommendation from the Postal Service to 

prefund its future retiree health benefits. When the law passed in 

2006, here’s what the Postal Service said, and I quote: ‘‘The new 

law directs the Department of the Treasury to resume the funding 

of military pensions for postal employees and abolishes a federally 

mandated escrow requirement, directing those monies to prefund 

retiree health benefits. Over the next decade, these changes will 

free the Postal Service of future legacy costs. We are now on firm 

financial footing for the future.’’ 

Now, after the Postal Service, in my judgment, has been slow to 

take advantage of the increased flexibilities also provided by the 

2006 law, the Postmaster General has once again returned to Congress seeking billions in relief from its liabilities and once again 

making promises of improvements. 

I will, of course, carefully consider the Postmaster General’s latest request. I’ve already proposed stretching out the payment 

schedule to ease the burden. But, we simply cannot just wish away 

these liabilities, or pretend that they do not exist. 

I also support allowing the Postal Service more flexibility in determining its infrastructure needs. It may well be more convenient 

for customers, as well as less expensive for the Postal Service, to 

locate postal services within a grocery store or a pharmacy within 

some communities. 

With respect to 5-day delivery, the Postal Service will have to 

present a compelling case that reduced delivery will not further depress volume, setting off a death spiral. It’s going to take all the 

members of the postal community, including the postal management, its dedicated employees, members of the mailing community, 

Congress, and the administration, to contribute to the solution to 

this financial crisis. 

I look forward to today’s dialogue and hope it will not be a prelude for a similar discussion 3 years from now. 

And I thank the chairman for his indulgence. 

Senator DURBIN. Thank you, Senator Collins. 

Our first witness is Postmaster General John Potter, who’s 

served since 2001. He is America’s 72d Postmaster General, starting as a career postal employee in New York in 1978, and he leads 

the second-largest civilian workforce in the United States. 

Postmaster General Potter. 
5 

SUMMARY STATEMENT OF JOHN E. POTTER

Mr. POTTER. Good afternoon, Chairman Durbin and Ranking 

Member Collins. I appreciate the opportunity to discuss the serious 

financial situation of the United States Postal Service. 

Today, we stand at a critical juncture. I see both challenges and 

opportunities ahead for the Postal Service and all of our stakeholders. 

In the short term, the Nation’s economy has experienced the 

worst decline in decades, a decline that significantly affected most 

every sector of the U.S. economy, especially large mailers in the financial and housing sectors, and caused the largest reduction in 

mail volume history. 

The Postal Service faces further reductions in volume due to a 

tremendous revolution in technology, a revolution that has fueled 

a global transformation from an Industrial Age to an Information 

Age, a transformation that was accelerated by the downturn in the 

economy. This situation has resulted in the diversion of traditional 

mail to electronic mail and in the rise of online bill paying and 

other practices. We also face severe challenges, some deriving from 

mandates imposed over time through regulation and legislation. 

As a result, the Postal Service finds itself on a fiscal course that 

is unsustainable. This situation could not have been avoided, and 

no one is to blame. No one could have envisioned the economic crisis that has rocked this country and the mail. At just about halfway through fiscal year 2010, we project a loss of approximately $7 

billion. In 2006, we reached a record level of 213 billion pieces of 

mail. For fiscal year 2010, we expect volume to be about 166 billion 

pieces. That means one in five pieces of mail has disappeared. As 

a result, the cost of delivering a piece of mail has risen. Our revenues are simply not keeping up with the cost of supporting a system designed to serve a much larger volume of mail. 

The declines in mail volume and revenue have caused us to 

rethink everything that we’re doing. We’ve managed aggressively 

and took actions within our control. We took aggressive cost-cutting 

measures and reduced costs by $2.8 billion in 2008, by more than 

$6 billion in 2009, and this year we plan to take out another $3.8 

billion in costs. Postal employment, which was over 800,000 10 

years ago, is now below 600,000, and with the help of our unions 

and management associations, we did this without layoffs. But, we 

are rapidly reaching the point of diminishing returns. Only so 

much can be cut before service suffers. Overcoming our financial 

challenges will be an enormous undertaking. If we are to succeed, 

rapid, aggressive, and fundamental changes are absolutely necessary. 

Accordingly, we have developed a plan for action—a plan of action for the next decade that is bold, but is also balanced, in that 

it considers the interest of all stakeholders in the mail. To help develop our plan, we engaged three of the world’s most experienced 

and respected management consulting firms: McKinsey & Co., The 

Boston Consulting Group, and Accenture, LLC. We asked each firm 

to independently conduct studies, talk with stakeholders, and 

produce ideas that would help close the growing gap between our 

revenues and expenses without undue impact on our customers. 
6 

The consultants projected that there will be 150 billion pieces of 

mail in 2020, and that without significant changes, cumulative 

losses could exceed $238 billion by that time. 

Drawing from the consultants’ recommendations, we crafted a 

balanced and reasonable plan for a financially sound future. Our 

solutions are: to restructure the prefunding of retiree health benefit 

payments; adjust the number of mail delivery days; continue to enhance and expand all alternate access to our products and services; 

establish a more flexible workforce; apply the consumer price index 

cap to all market-dominant products, as opposed to just by class; 

introduce more new products and services, consistent with our mission; establish more clearly defined, appropriate, and agile oversight. Some of these solutions could be implemented quickly, while 

others require more time to achieve. And no one solution is the answer to reversing our financial condition. 

The financial position—picture for the Postal Service is grim, and 

without changes, will surely worsen. We urgently need your help 

and legislative change. No matter which decisions are made, it’s 

absolutely critical that they be made in a timely fashion. 

The two most urgent changes which we’d like you to consider are 

a restructuring of the funding payments for retiree health benefits 

and a change in the frequency of mail delivery. 

Regarding the retiree health benefits, the Postal Act of 2006 requires us to prefund 73 percent of all future retiree health benefits, 

a 75-year liability, in just a 10-year period of time. The aggressive 

annual prefunding payments average $5.6 billion, along with separate insurance payments that average $3.4 billion annually. Although we recognize our obligation to prefund retiree health benefits, in this economic environment, we no longer have the ability to 

pay at the accelerated pace. The trust fund holding our payments 

had a balance of more than $35 billion at the end of 2009, which 

is sufficient to pay the premiums for all of our roughly 500,000 currently participating retirees, through their expected lifetimes. 

Another large financial burden is a statutory requirement for 6- 

day mail delivery. There is no longer sufficient volume to sustain 

the cost of the 6-day delivery network. Reducing delivery frequency 

would substantially reduce our annual costs by approximately $3 

billion. Recent independent surveys show that consumers support 

this change. 

In anticipation of a possible change, we’ve developed a comprehensive operations plan for 5-day delivery that will address all 

possible impacts. We will seek an advisory opinion from the Postal 

Regulatory Commission at the end of this month. Should Congress 

allow a change, we would provide 6 months’ notice, prior to putting 

a change in place, ensuring a smooth transition for our customers 

and our employees. 

Although changes in retiree health benefits and delivery frequency will go a long way to helping alleviate our financial pressures, they will not be enough to make the Postal Service profitable. We also need an improved model of oversight, and that provides us with the management flexibility to adjust our operations 

network to reflect the rapid decrease in mail volume, expand our 

products and services, that we may react more rapidly and aggres-
7 

sively to market-driven environment, base prices for our marketdominant products on demand and cost of each individual offering. 

We require and need the help of Congress, because many of the 

solutions that we just described, those with significant changes, are 

not within our control. We do not have the unilateral power to 

change employee wages or benefits, change the legacy costs of retiree health benefits, change delivery frequency, diversify our products and services, change prices, or address Civil Service Retirement System (CSRS) overfunding. 

Our plan is a path to a future in which the Postal Service will 

remain a vital driver of the American economy and an integral part 

of every American community. Even in an increasingly digital future, the mail, which is projected to total about 150 billion pieces 

in 2020, will remain a powerful delivery and marketing channel, a 

preferred means of commercial and personal communication for 

many purposes, and a complement to e-commerce. 

PREPARED STATEMENT

Thank you for your support of our ongoing efforts to ensure a solvent and sound Postal Service. I look forward to working with you 

and other Members of Congress to achieve the passage of legislation that will address our near-term and future challenges, and I 

would be pleased to respond to any questions that you may have. 

[The statement follows:] 

PREPARED STATEMENT OF JOHN E. POTTER

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

Subcommittee. I appreciate the opportunity to discuss the serious financial situation 

facing the United States Postal Service and to provide details of our plan for reducing the number of mail delivery days, should a frequency change be approved by 

Congress. I also would like to share aspects of our new action plan for the next decade titled, ‘‘Ensuring a Viable Postal Service for America.’’ 

For over 235 years, the Postal Service has provided trusted, affordable universal 

service to the nation. Our goal is to continue to do so. As the members of this Subcommittee are well aware, the Postal Service is in a dire financial situation. The 

situation has occurred despite the efforts of Congress through passage of the Postal 

Accountability and Enhancement Act of 2006 (Postal Act of 2006). Our current financial circumstances have come about in spite of the massive efforts of Postal 

Service management and employees who have adopted aggressive cost-cutting measures to save over $1 billion each year since 2001. For 2009 alone, the savings exceeded $6 billion. 

Our financial situation has many causes: a severe national recession that significantly affected the financial and housing sectors, which were important users of the 

mail; the powerful and rapid evolution of new technologies that have diverted mail 

to other channels; and the changing use of the mail to communicate and conduct 

business. This situation could not have been avoided and no one is to blame. No 

one could have envisioned the economic crisis that has rocked this country. 

Further complicating the fiscal health of the Postal Service are limitations under 

which we operate, including: 

—A statutorily mandated requirement to provide 6-day a week delivery. 

—Accelerated annual payments to pre-fund a significant portion of our retiree 

health benefit obligation. 

—A restriction to not close Post Offices solely on an economic basis. 

—The requirement to submit to binding arbitration to finalize labor contracts. 

—Constraints on our ability to restructure and streamline our processing and distribution networks. 

—Restrictions on the types of products and services the Postal Service can offer. 

—A lack of clarity between the role of the Governors of the Postal Service and 

the Postal Regulatory Commission (PRC), and an oversight model that adds unnecessary burden and time to decision-making. 
8 

Without critically needed fundamental changes, the Postal Service expects significant losses in fiscal year 2010 and in each year into the near future. Our fiscal year 

2010 financial plan estimates a revenue decline of roughly $2 billion and a net loss 

of approximately $7 billion. These projections assume there will be no changes this 

year in the number of mail delivery days per week or in the current retiree health 

benefits prefunding schedule. If we were not to react and simply move forward with 

business as usual, the Postal Service is likely to have a cumulative loss of $238 billion by 2020. 

The Postal Service ended fiscal year 2009 with a net loss of $3.8 billion, despite 

cost-cutting efforts that yielded more than $6 billion in cost savings and a $4 billion 

reduction in the required 2009 payment to the Postal Service Retiree Health Benefits Fund (PSRHBF) provided by the enactment of Public Law 111–68. We are very 

grateful to Congress and the Administration for that legislation. However, Public 

Law 111–68 did not restructure the PSRHBF payments beyond 2009, and the Postal 

Service continues to be in financial crisis. We urgently need retiree health benefits 

legislative restructuring from Congress. 

In fiscal year 2009, mail volume continued to drop. At 177 billion pieces, volume 

was down 26 billion pieces or 12.7 percent from the previous year—representing the 

largest volume decline in Postal Service history. Our volume losses continue against 

a backdrop of an ever growing mail delivery network that presently has more than 

150 million delivery points. 

The $6 billion in savings we successfully achieved during fiscal year 2009 included 

a reduction of 115 million workhours—the equivalent of 65,000 full-time employees. 

For fiscal year 2010, our plan is to cut an additional $3.8 billion of costs, including 

the elimination of approximately 90 million more workhours. In addition to 

workhour reductions, our targeted activities will include maximizing operational efficiencies, re-negotiating contracts with major suppliers, continuing the freeze on 

construction of most new facilities, and using our pricing flexibility to grow new revenue. We have also worked closely with our union representatives to agree on adjustments that reduced costs and increased delivery efficiency. We also will continue 

to aggressively pursue initiatives to generate new revenue. 

Given that the mail volume declines and financial pressures will continue 

throughout the next decade, the choices for overcoming this serious situation are not 

easy and there is no single remedy that can return the Postal Service to good financial health. But we do have an action plan for the next decade—one that is both 

ambitious and aggressive. Through a careful and comprehensive effort, we have 

identified a set of the most reasonable business choices for the Postal Service and 

the customers we serve. 

To help develop our plan we engaged three of the world’s most experienced and 

respected management consulting firms: McKinsey & Company, The Boston Consulting Group, and Accenture, LLC. We asked each of these firms to act independently and to conduct studies and have conversations with postal customers, mailers, 

labor associations, regulators, and mailing industry stakeholders. We wanted them 

to gather information to help us determine the likely state of the mailing industry 

and the Postal Service over the next decade. Our expectation was for the consultants to produce ideas that would allow the Postal Service to close the growing gap 

between our revenues and expenses without undue impact on our stakeholders. 

The consultant’s key findings included the following: 

—Without fundamental changes, the Postal Service’s losses will continue. By 

2020, cumulative losses will exceed $238 billion. 

—Mail volume will decline by roughly 15 percent to about 150 billion pieces in 

2020, from a 177 billion pieces in fiscal year 2009. 

—The mix of mail received by the Postal Service will change; First-Class Mail will 

fall sharply and Standard Mail will stay fairly flat. First-Class Mail contributes 

more toward covering institutional costs, which supports the processing and delivery network. 

—The Postal Service could close the gap by as much as $123 billion, without statutory or regulatory changes, by taking product and service actions, by continuing to improve processes and productivity, by adopting workforce flexibility 

improvements, and by pursuing purchasing savings. Achieving this level of savings will be extremely challenging. 

—Key areas were identified and options provided to close the remaining $115 billion gap. However, legislative and regulatory changes are needed to achieve 

them. 

—The best way to address the financial challenges and preserve the strength of 

the Postal Service and the entire mailing industry is through a comprehensive 

approach that balances the needs of all key stakeholders. 
9 

The Postal Service created its plan—Ensuring a Viable Postal Service for America—upon thorough review and consideration of the consultant’s recommendations. 

The plan provides options to address the challenges we face and is a balanced and 

reasonable approach to creating a financially sound future. No single option will be 

able to close the whole $115 gap; if it came to pass that only one option were used 

to close the gap, it would likely cause severe disruptions that would have significant 

adverse impacts. To implement the plan, a number of fundamental changes are necessary, some of which would require legislative changes from Congress. Our solutions are as follows: —Restructure the Prefunding of Retiree Health Benefits.—We request that Congress permit these payments to be deferred and shifted to a ‘‘pay-as-you-go’’ system comparable to what is used by the rest of the Federal government and the 

private sector. This would provide the Postal Service with an average of $5.6 

billion in cash flow per year through 2016. In addition, overpayments to the 

CSRS pension fund by the Postal Service also need to be resolved. —Delivery Frequency.—We request that we be permitted to adjust the number of 

mail delivery days to better reflect current mail volumes and customer usage. —Expand Access.—We will continue to modernize our channels for alternate access by providing services where our customers are. We also will continue to increase and enhance customer access through private sector retail partnerships, 

kiosks, and improved online offerings. However, the Postal Service needs to be 

relieved of the statutory prohibition against closing a Post Office for solely economic reasons. —Workforce.—We will work during our upcoming collective bargaining negotiations to establish a more flexible workforce that is better positioned to respond 

to changing needs of our customers and take advantage of the over 300,000 voluntary separations projected to occur over the next decade. We would also ask 

that Congress pass legislation that requires an arbitrator to take the financial 

health of the Postal Service into consideration in making an arbitration determination. —Pricing.—We request that Congress apply the Consumer Price Index price cap 

to the entire basket of Market-Dominant products, rather than the current restriction which caps prices for every class at the rate of inflation. This will allow 

pricing to respond to the demand for each individual product and its costs. In 

addition, we will use our existing flexibility to pursue an exigent price increase. 

Assuming other parts of our plan can be implemented, the exigent price increase will be moderate and not occur before 2011. —Expand Products and Services.—We ask that Congress permit us to evaluate 

and introduce more new products and services consistent with our mission. This 

will allow us to better respond to changing customer needs. —Oversight.—We ask that Congress provide us with more clearly defined, appropriate, and agile oversight and more streamlined processes. This will help to 

achieve the solutions in our action plan. 

As you can see, some of these solutions could be implemented relatively quickly 

within the short-term, while others would require much more time to achieve. No 

one solution is the answer to reversing our financial condition. And doing nothing— 

the status quo—is not an option. We believe a balanced approach that provides the 

Postal Service with the flexibility to respond to market dynamics and the speed to 

bring products to the market quickly, and that incorporates initiatives focused on 

cost, service, price, new product, and changes in the law would be the best approach. 

It is also the one that is most likely to perpetuate a financially sound Postal Service, 

able to meet the needs of the American people. 

We are ready to proceed with our plan. But we need Congress to provide the legislative reform necessary for us to begin our recovery and move forward. 

Now, I would like to discuss in greater detail the financial burden the Postal Service faces with respect to retiree health benefits. A provision established in the Postal 

Act of 2006 requires the Postal Service to prefund 73 percent of all future retiree 

health benefits—a 75-year liability—in just a 10-year period ending in 2016. This 

prefunding mandate is not shared by other Federal agencies or private sector companies. The aggressive schedule, a product of budget scoring rules, requires the 

Postal Service to make annual prefunding payments averaging $5.6 billion into the 

PSRHBF. In addition, the law requires the Postal Service to make separate insurance premium payments for retirees that average $3.4 billion annually through 

2016. 

When the prefunding payment schedule was being considered in 2006, the Postal 

Service envisioned that it would be able to make the payments, while knowing it 

was a challenging goal. Since then, however, circumstances have changed dramatically. Between 2006 and 2009, mail volume fell by 17 percent and revenue fell by 
10 

6 percent. We no longer have the ability to meet this unique statutory requirement 

to prefund retiree health benefits at the accelerated pace. The enormous obligation 

costs the Postal Service and its customers—not taxpayers—$55 billion in prefunding 

over the 10 year period. The Postal Service recognizes its obligations to fund its retiree health benefits; however, our financial circumstances must be recognized. I 

would note that the trust fund holding the Postal Service’s payments had a balance 

of more than $35 billion at the end of fiscal year 2009. Thirty-five billion dollars 

is sufficient to pay the premiums for all of our roughly 500,000 currently participating retirees through their expected life times. 

The Postal Service greatly appreciates the action taken by Congress last year to 

enact legislation that restructured the payment for 2009. However, for 2010 and beyond, there is no assurance that similar adjustments will be granted. A restructuring of the payment obligation is urgently needed to allow the Postal Service to 

continue to fulfill its mission now and in the future. Legislative change would also 

reduce the need for the Postal Service to borrow funds from the U.S. Treasury for 

the sole purpose of depositing the money into the PSRHBF. We recognize there are 

a number of options, ranging from making no changes to the statutory payments 

schedule to adopting the Postal Service’s Inspector General (IG) recommendation 

that Congress remedy a Postal Service over-funding of its Civil Service Retirement 

System obligation. The Postal Service supports the IG’s recommendation. However, 

what the Postal Service needs is a relatively quick decision by Congress on how this 

issue will be addressed to provide the Postal Service clarity as we consider other 

options to close the gap. 

Next, I would like to provide greater details on our request to change the frequency of the number of mail delivery days each week. The statutorily mandated 

requirement for 6-day mail delivery has been in existence since 1983 and it places 

a very large financial burden on the Postal Service. Due to the unprecedented decline in mail volume, there no longer is sufficient volume to sustain the cost of the 

current 6-day delivery network. The number of pieces of mail per delivery has declined from an average of 5 pieces in 2000 to 4 pieces in 2009, which represents 

a 20 percent reduction. Assuming a scenario of 5-day delivery and fiscal year 2009 

mail volume, the amount of mail per delivery would increase to more than 5 pieces. 

Revenue per delivery point dropped by 24 percent between 2000 and 2009, because 

our largest volume declines occurred in profitable First-Class Mail. 

Moving to 5-day delivery is absolutely necessary to ensure financial viability, both 

now and into the future. Reducing the frequency of delivery is the single most effective way for the Postal Service to substantially reduce operational costs—allowing 

us to reduce annual net costs by approximately $3 billion. It would greatly assist 

us with regaining a portion of our financial footing and help to ensure that affordable universal service is maintained nationwide. 

Market surveys conducted independently and on behalf of the Postal Service show 

that customers want to see the Postal Service survive and flourish. Most are willing 

to accept the elimination of Saturday delivery to reduce the Postal Service’s losses. 

And, most would rather have Saturday delivery eliminated than have stamp prices 

increased significantly, as would be needed to ensure the Postal Service’s financial 

stability. I would also like to cite the results of a Gallup survey conducted in June 

of 2009. The survey showed that 66 percent of those polled favored a change to 5- 

day delivery ‘‘as a way to help the Postal Service solve its financial problems’’ over 

other alternatives such as increasing postage prices or closing local Post Offices. 

This result was echoed by studies conducted by Rasmussen in 2009 and 2010. 

In anticipation of a possible change, we have conducted extensive stakeholder outreach through dozens of meetings with customers. We identified mailer issues and 

ensured their consideration in our planning. These exchanges helped us to understand and address the needs of the mailing industry and the public concerning a 

potential change in the frequency of mail delivery. The Postal Service has developed 

a comprehensive operations plan for 5-day delivery that addresses all possible impacts from required software programming modifications to workforce adjustments 

and that addresses issues raised by our customers, to the extent possible. Two major 

assumptions guided the development of the concept: existing service standards 

would be maintained and any changes would comply with existing collective bargaining agreements. 

Our plan for 5-day delivery, which we will file with the PRC later this month, 

will present an overview of our 5-day delivery concept and include cost and revenue 

impacts. As currently envisioned, our concept for 5-day mail delivery service would 

include the following: 

—Residential and business delivery and collections would be discontinued on Saturday. 

—Post Offices that are usually open on Saturdays would remain open. 
11 

—Post Office Boxes would receive mail delivery on Saturday. 

—Express Mail would continue to be delivered 7 days a week, including Saturday 

and Sunday. 

—Remittance mail (bill payments) addressed to Post Office Box and Caller Service 

customers would be made available to recipients 7 days per week. 

—Firm hold outs (mail that a business picks up at the Post Office) would be available for Post Office Box addressed mail Monday through Saturday, nationwide. 

—No mail pick-up from blue collection boxes on Saturdays except for dedicated 

Express Mail collection boxes. 

—Acceptance and drop-shipping of destinating bulk mail would continue on Saturday and Sunday. 

—Alternate contract locations would remain open 7 days a week on their normal 

schedules. 

—Access to all of our online services via usps.com would continue to be available 

24/7. 

The Postal Service is fully aware that before a change in the number of delivery 

days could be adopted, legislative action would be required by Congress to amend 

the appropriations language that mandates 6-day a week delivery. Should Congress 

approve a change that grants us the latitude to change the frequency of mail delivery, know that we are committed to implementing an in-depth communications plan 

for our customers and our employees to make the transition as smooth as possible. 

Upon approval, we intend to provide our customers with 6 months notice prior to 

implementing a change which we estimate would be no earlier than mid-2011. The 

impact on our employees would be minimal and it would occur through attrition, 

not layoffs. 

Another issue for the Postal Service involves limitations that delay or prevent adjustments to our network operations and workforce. Despite these constraints, we 

are continuing to identify, pursue, and implement various solutions and strategies 

to make operational activities more efficient and reduce costs to help mitigate the 

impact of our financial difficulties. Some of the efforts we have adopted to improve 

efficiency and produce cost savings include consolidating functions, adjusting delivery routes, and restructuring administrative and processing operations—all while 

continuing to maintain excellent service levels. 

The Postal Service needs more flexibility to respond quickly to a changing business environment. We need legislative and regulatory changes to allow us to modernize our network of facilities to meet changes in customer needs and mail volume. 

We are completing a process of reviewing retail facilities located in larger urban and 

suburban areas to identify sites where we have a number of facilities in close proximity. This process will help us determine where consolidations are possible so that 

we may conserve our resources and adapt our customer access to current needs. Related to these efforts, on March 10, 2010, the PRC issued an Advisory Opinion to 

the Postal Service concerning our Station and Branch Optimization and Consolidation Initiative. In its opinion, the PRC agreed with our approach and made a number of recommendations which we are in the process of reviewing. 

Business processes that involve evaluating and relocating or consolidating retail 

outlets are reasonable and warranted practices used by many companies to streamline their operations and reduce costs. Often when a business is losing money, they 

resort to selling a portion of their assets, closing locations, or other options such as 

laying off employees. Here are just a few examples of business actions taken by private companies to improve their financial condition: 

—In 2009, Sears closed 62 underperforming stores and initiated an aggressive 

global digital strategy. 

—In November 2009, L.L. Bean announced it would be closing an outlet store in 

Portland, ME. 

—In September 2009, a news item reported that Citigroup was considering shutting or selling some of its 1,001 branches in North America following a $45 billion Federal bailout. In 2008, Citigroup announced it was cutting its workforce, 

worldwide, by 14 percent, through the sale of some units or through layoffs. 

—In 2008, Starbucks announced it was closing 5 percent—more than 600—of its 

stores. In 2009, it announced it would close an additional 300 stores. 

—In 2009, GM told 1,100 dealerships that it would drop them from its retail network effective October 2010; GM also discontinued the Saturn, Pontiac and 

Hummer lines of cars. 

—A January 2010 news item reported a 10 percent cutback in the number of 

available airline seats, caused by airlines using smaller planes or reducing the 

number of flights. 

If the Postal Service were provided with the flexibilities used by businesses in the 

marketplace to streamline their operations and reduce costs, we would become a 
12 

more efficient and effective organization. Such a change would also allow us to more 

quickly adapt to meet the evolving needs, demands, and activities of our customers, 

now and in the future. 

The Postal Service is committed to continuing to fulfill the needs of customers. 

To help alleviate the concerns of our customers and to better match their changing 

retail needs, we have been emphasizing the easy and convenient availability of our 

expanded alternate access points. Today, 30 percent of retail revenue is generated 

by means other than a Post Office counter. Increasingly, customers are paying for 

postage stamps and conducting business at thousands of supermarkets, drug stores, 

and other postal retail partners, and by using our automated kiosks, and our 

website, usps.com. Our world class web site is available 24/7 to everyone with online 

access. The Postal Service continues to be committed to fulfilling the needs of customers. Postal customers now can access the services they need using a variety of 

readily available options including free carrier pick up of outgoing mail at every address. For many customers, these alternatives are simply more convenient and more 

suited to their lifestyles. Largely as a result of changing customer preferences, Post 

Offices had 117 million fewer transactions in 2009 than in 2008. 

Throughout this difficult period, our employees continue to deliver very high levels of service. 

As just one example, during quarter one of fiscal year 2010—and for the fifth 

straight quarter—our employees attained a score of 96 percent for the on-time delivery of single-piece overnight First-Class Mail. Our dedicated and hard working employees deserve tremendous credit for their successful efforts to provide excellent 

service under very challenging conditions. 

Even so, the financial picture for the Postal Service is grim and without changes 

the situation will surely worsen. Mail volume has sharply declined from a peak of 

213 billion pieces in 2006 to 177 billion pieces in 2009. Despite extraordinary efforts 

to cut costs, the Postal Service incurred multibillion dollar net losses in the last 3 

years. With many fixed operational costs that cannot be eliminated without diminishing service levels, we are running out of ways to cut more costs. 

Nonetheless, the Postal Service is continuing to pursue available options to grow 

revenue during these challenging economic times. We understand that to best serve 

the American people in 2020 and beyond, we must be able to quickly offer products 

and services that meet the mailing and shipping needs of our customers. However, 

at present we must work within the framework provided in the Postal Act of 2006. 

One excellent example of how we employed the full range of strategies available 

to us to successfully compete and generate revenue was our popular Priority Mail 

Flat Rate Box promotional campaign during 2009. The campaign offered customers 

a simple, economic way to ship their goods. We used a highly integrated media plan 

that incorporated TV, direct mail, print and digital advertising and we encouraged 

our retail clerks, letter carriers, and other employees to actively participate in and 

support the campaign. By being aggressive, we managed to avoid the double-digit 

revenue declines in the expedited market. We attribute this success to the pricing 

freedoms provided to us under the Postal Act of 2006, proven advertising, and outstanding customer service. 

In 2009, we also introduced our first Summer Sale. Working with the PRC, we 

developed the Summer Sale concept that provided a 30 percent price discount on 

incremental volume of advertising mail available for 3 months during the summer. 

Over 400 of our largest customers participated in the sale and mailed a significant 

number of incremental pieces of Standard Mail. 

The success of the Summer Sale led to the design and launch of a similar stimulus program for First-Class Mail. This program offered a 20 percent credit on the 

volume of presorted and automation First-Class Mail cards, letters and flats exceeding an established threshold. We know that mail is a powerful tool to help businesses grow. These sale programs help to ensure our customers know that they matter to us and we want to help them grow their business. 

Another positive aspect of the Postal Act of 2006 has provided the Postal Service 

the ability to offer contract pricing to commercial customers. Prior to this time, everyone paid the same price no matter how much volume they shipped. With contract 

pricing, we can now compete somewhat more effectively with private carriers on 

price, which has allowed us to grow our profitable package business. Contract pricing has become a key strategy to grow our commercial business with large and medium sized customers. However, these pricing freedoms fall short of the freedoms 

our competitors enjoy, since each postal contract must be approved by both by our 

Board and our regulator, the PRC, in advance of implementation. Streamlining 

these requirements would enable us to capture more revenue opportunities with sufficient oversight to limit risk. 
13 

By 2020, the Postal Service plans to expand products and services across targeted mail and package segments to increase profits by $2 billion. We will continue to 

work to increase direct mail use among small and medium-sized businesses, and to 

increase volumes in both First-Class Mail and advertising mail through targeted 

promotions. We also will continue to leverage our last-mile network to deliver packages to all households, forming partnerships with others serving the growing e-commerce industry. We also will continue to grow other retail services, such as passports and Post Office Box rentals to increase revenue. However, if we had the authority to offer a wider range of products and services consistent with our business, 

we could bring in more new revenue. 

We urgently need legislative change from Congress. Without it, the Postal Service 

may have difficulty paying all of the obligations due this year. At present, our financial situation raises significant uncertainty about our ability to generate sufficient 

cash flows to fund the large cash obligations due in September. In addition, we believe the liquidity of the Postal Service will be seriously threatened beginning in 

early fiscal year 2011, to the point where it will impact our ability to meet payroll 

and other financial obligations, as we will come dangerously close to running out 

of cash. 

At present, the two most immediate changes the Postal Service urgently needs 

from Congress involve legislation that provides a restructuring of the prefunding 

payments for retiree health benefits and allows the Postal Service to reduce the frequency of mail delivery. Although these two changes will go a long way in helping 

to alleviate the financial pressures facing the Postal Service, by themselves they will 

not be enough to make the Postal Service profitable. The Postal Service must address the fact that mail volume is declining, especially First-Class Mail volume 

which has historically made a substantial contribution to support the overall network. Therefore, we need the flexibility to adjust our operations network to reflect 

this rapid decrease in today’s mail volume, which will continue to decline for sometime into the future. We also need the ability to expand our products and services, 

and ensure prices for our Market-Dominant products are based on the demand and 

cost of each individual product. And finally, all of these changes need to be reinforced with more clearly defined and appropriate oversight roles for our many regulators and with more streamlined processes. 

We understand that to best serve the American people now and in 2020 and beyond, the Postal Service must be leaner and have the ability to quickly respond to 

customer mailing needs. 

Our action plan is a path to a future in which the Postal Service will remain a 

vital driver of the American economy and an integral part of every American community, and will continue to deliver the greatest value of any comparable post in 

the world. If given the flexibility to respond to an evolving marketplace, the Postal 

Service will continue to be an integral part of the fabric of American life for a long 

time to come. 

The mail and the Postal Service will continue to play a vital role in the personal 

and commercial lives of all Americans over the next 10 years and beyond. Even in 

an increasingly digital 2020, the mail will remain a powerful delivery and marketing channel; a preferred means of commercial and personal communication for 

many purposes; and a complement to e-commerce. In order for this to happen, today’s constraints must be removed so that over the next decade the Postal Service 

can become as dynamic and adaptive as the marketplace and customers we serve. 

Thank you for your support of our ongoing efforts to ensure a solvent and sound 

Postal Service. 

I look forward to working with you and other members of Congress to achieve the 

passage of legislation that will address our near-term and future challenges. 

I would be pleased to respond to any questions you may have. 

POSTAL SERVICE BUSINESS MODEL

Senator DURBIN. Thank you, Mr. Postmaster. 

Let me just ask a few questions. First, I’m trying to step back 

and look at your brand, what the American consumer sees when 

you say ‘‘The U.S. Postal Service.’’ And I’m sure there are a lot of 

things they can point to. First, the fact that I can take that Mother’s Day card, put it in an envelope, put an address on it, and, for 

44 cents, expect it to be delivered in a timely fashion to virtually 

any place in the United States of America. Forty-four cents. That 

is still an amazing bargain, by any modern standards. Second, that 
14 

you do reach every corner of this country. Third, that there’s reliable service. Now, occasionally there will be people who will complain, and I’ve complained about service in parts of my State, but, 

by and large, our Postal Service is as reliable, if not more reliable, 

than most any in the world. It is a system which people trust. They 

develop an ongoing working and social relationship with the men 

and women who work for the Postal Service. 

I know David Lasley, my personal mailman in Springfield. I’ve 

known David since he was in college, and he’s a friend of our family. He’s done little favors for us that go way beyond his responsibilities in the Postal Service. That helps a lot, in terms of explaining who you are and what you mean to so many people. 

Your competitors—the Internet—it’s going to be up 24/7 no matter what you do. Those e-mails are going to be there Sunday at 

midnight, delivered back and forth. The people who deliver packages will deliver on Saturdays, and may charge a premium for it, 

which I think you’re suggesting, too, as part of 5-day service. 

But, I guess what I’m getting to is, tell me what your business 

model looks like. When you start reducing your contact with postal 

customers and consumers, when you decide that you’ll only be 

there 5 days instead of 6, tell me what it looks like to them, in 

terms of your long-term goal and your economic model, what your 

brand’s going to be as you cut back on the service that’s available 

to the people of this country. 

Mr. POTTER. Well, we are very concerned about that, and that’s 

why there were a number of surveys done of the American public 

to talk about the Postal Service and options that were facing the 

Postal Service. And, there was, for example, one of the things we 

surveyed was, we could save money by changing the location of 

your mailbox from your door or your curb to a street corner. That 

could save us almost $3 billion. But, over 90 percent of Americans 

said, ‘‘Absolutely not.’’ That would be considered a major diminution in service. When they were asked about the frequency of delivery and the fact that we were considering going from 6-day to 5- 

day delivery, every survey I’ve seen—and there have been many 

done around the country—people look at that as a favorable option, 

versus either raising rates or doing something on the order of what 

I just described to you. 

They also recognize that they use and receive less mail. Today, 

the average address in America gets four pieces of mail a day. 

Senator DURBIN. Boy, we’re above average. 

Mr. POTTER. And it’s true. But, I think that oftentimes people 

look at their own mailbox and don’t think about the averages. But, 

back in 2000, it was five pieces of mail per delivery per day. Today 

it’s four, and we project that in 2020, it will be three. 

And the other thing that’s interesting is you have the volume of 

mail that’s going to every address. In addition to that, it’s the mix 

of mail. In 2000, more of what was delivered to your home was first 

class than today; today, there’s more advertising. So in 2000 dollars, we delivered $1.80 to every door, every day in 2000. Today, 

we’re delivering $1.40 to every door, every day. And in 2020, the 

projection is, because the mail mix will continue to move in the direction of more advertising mail and less first-class mail, that we 

will be delivering $1 to every door every day. 
15 

FIVE-DAY DELIVERY

Now, when you look at that, the question becomes, How can you 

improve the efficiency of delivery to make up for the fact that the 

revenue that you’re bringing to every door, every day, changes? 

And working with our unions, we have done that. But, we have not 

been able to close the entire gap. And that’s what’s led us to the 

conclusion that one way to make delivery more efficient is to eliminate that one day of delivery. And again, surveys were done of the 

American people, and that were positive, not in the sense that everyone would prefer that we not change, but I think people understand that, given their use of the mail and the fact that it’s declining, that a change has to occur, and this is one that was acceptable 

to them. 

Senator DURBIN. So, let me ask you about specifics you must 

have taken into consideration. If there’s a 3-day gap in delivery 

from Friday to Monday—in regular mail delivery—have you considered the impact on the delivery of pharmaceuticals and medicines, 

perishables, live animals, government checks such as Social Security checks and disability checks, holiday season issues? Some 

times of year, I know I’m flooded with Christmas cards and other 

cards that come in, where you’re going to have a larger volume, 

where you’re cutting down, for 3 straight days, that delivery. And 

will public desire for Saturday delivery migrate to post office boxes? 

And will that mean that you’ll have to have a larger volume of 

those? Are you anticipating that possibility? 

Mr. POTTER. Let me just say that we have been doing a lot of 

research around 6- to 5-day delivery. We’ve reached out to 40 

stakeholder groups, major users of the mail, to determine how the 

elimination of a 6-day delivery might impact their businesses. The 

vast majority of people have told us that they will make arrangements. 

So, for example, pharmaceuticals: If you have an immediate need 

for prescription drugs, you go to your local pharmacy and get that 

filled. You’re not relying on the mail. People who are in the mail 

are the ones who are getting their regular prescriptions on 90-day 

fulfillment, and so, there’s time there for delivery. When it comes 

to other things, like advertising, magazines, Time has just moved 

their magazine delivery from Monday to Saturday, because they 

thought there was an advantage in the marketplace. We’ve worked 

with Time magazine, and they have said yes, they can make an accommodation and make a change. 

Now, what we’ve done in this process of reaching out to stakeholders is, we’ve changed our plan around 6- to 5-day delivery to 

make sure that we minimize the impact. So, initially, we just said 

we were going to close—not deliver on Saturday at all, including 

to P.O. boxes. Well, we heard back from people who receive remittances, and we’re going to continue to process the mail and deliver 

it to P.O. boxes on Saturday. 

Senator DURBIN. What do you anticipate would be the increase 

in volume to post office boxes if you went to 5-day delivery? 

Mr. POTTER. We don’t have a specific increase, because most of 

the folks who do receive bill payments in large quantity already 

have some kind of an arrangement where they have to pick up mail 
16 

at a plant before it even gets to the post office, or they pick mail 

up at a post office, so they can get it early in the morning, as opposed to receiving it later. But what we’re embarking on now—we 

will file, with the Postal Regulatory Commission (PRC), our complete plan for 6- to 5-day delivery. They will review that plan. I 

know that they are planning to have an outreach to customers, 

maybe those that we have not reached out to, and they will give 

us an advisory opinion on our plan. So, there will be a public forum 

for consideration. 

Over the last 6 months, we have modified our original plan to try 

and accommodate as many of the concerns that were raised by 

mailers, and I think we’ve truly narrowed the gap somewhat. 

Now I don’t want to mislead anyone to think that we could satisfy everybody. There are certain people, for example, newspapers 

that have 6-day delivery, if we’re not delivering on Saturday, we 

won’t be able to accommodate. Some customers were concerned 

about, you know, would they be able to pick up their packages on 

Saturday. The post offices that are open Saturday today will be 

open Saturday in the future. 

So, again, where accommodations could be made, they have been 

made. It wasn’t perfect. We do think that we will lose revenue. 

That is part of the plan that will be submitted, and it will be validated by the Postal Regulatory Commission. So, we do know there 

will be a revenue impact, but the net impact will be $3 billion in 

savings. 

Senator DURBIN. So, that represents a little over 4 percent of 

your annual budget? 

Mr. POTTER. Yes. 

Senator DURBIN. And I assume you’ve taken a look at some other 

options to save money, other than cutting that 6-day service. 

Mr. POTTER. Without a doubt. We have built into our plan $123 

billion in savings over the next decade. So, this is—after we cut as 

aggressively as we could. And part of that plan includes consolidation of our processing facilities. We are concerned that there may 

be some oversight that would attempt to slow those processes 

down. But, you know, we know those opportunities exist, and we’re 

ready to go after them. 

Senator DURBIN. Let me go into another area here. You mentioned in your opening testimony the impact of changing mail delivery frequency, ‘‘The impact on our employees would be minimal, 

and it would occur through attrition, not layoffs.’’ On what basis do 

you believe the impact would be minimal? Can you quantify the 

number of people working for the Postal Service, either as rural 

letter carriers, city letter carriers, other postal employees—all of 

the people that make up the Postal Service today—can you quantify the number of jobs that will be lost to save the $3 billion that 

you’re talking about? 

Mr. POTTER. Yes, that’s part of the plan that will be submitted. 

Let me just make sure that I’m 100 percent clear on how we would 

achieve that. When I talk about employees, I’m talking about postal career employees. And so the way we would address the 

downsizing as a result of going from 6- to 5-day delivery will be 

first to eliminate overtime where it exists in the letter carrier craft. 

Second, it will be to eliminate some noncareer jobs that exist in the 
17 

two crafts that are—rural letter carriers, as well as the city letter 

carriers. 

Senator DURBIN. How many jobs would be lost in those areas? 

Mr. POTTER. There are 13,000 rural—city letter carrier noncareer 

employees today—somewhere around 13,300, in that neighborhood. 

In the rural carrier area, we have some 40,000 people who work 

1 day a week. We would have to sit down with the union and work 

through what role they would play after we move from 6-day to 5- 

day delivery. And that’s the reason we get the advisory opinion 

from the Postal Regulatory Commission, and after the law changed, 

there would be a 6-month period where we work through the issues 

around employment, as well as giving our customers the opportunity to change their operations to accommodate the 6- to 5-day 

delivery. 

Senator DURBIN. But, I want to make sure I understand. When 

you use the word ‘‘minimal,’’ do you have a number in mind, or a 

percentage in mind, when it comes to any of these employee 

groups? 

Mr. POTTER. In terms of noncareer? In terms of career—— 

Senator DURBIN. Do both. 

Mr. POTTER. In terms of career employees, I don’t anticipate we’d 

have to lay anybody off. 

Senator DURBIN. And noncareer? 

Mr. POTTER. And noncareer, we would eliminate jobs. 

Senator DURBIN. Do you have a number in mind? 

Mr. POTTER. Thirteen thousand noncareer jobs for—— 

Senator DURBIN. Oh, I see what you’re saying. 

Mr. POTTER [continuing]. City carriers and 45,000 people who 

work 1 day a week in the rural area. 

Senator DURBIN. Okay. 

Mr. POTTER. Okay. 

Senator DURBIN. Senator Collins. 

Senator COLLINS. Thank you, Mr. Chairman. 

Let me pick up on the issue of 5-day delivery. One of the major 

problems that the Postal Service is facing is a reduction in volume. 

Would you agree with that? 

Mr. POTTER. Yes. 

Senator COLLINS. And I believe your testimony indicates that 

there was a 12-percent reduction in volume last year. Is that accurate? 

Mr. POTTER. Yes. 

Senator COLLINS. The—what is your estimate for the further volume reduction that would be the result of going to 5-day delivery? 

Mr. POTTER. I don’t have a specific volume number. I do know 

that we would lose $200 million in profit. But, there is a detailed 

plan that lays that out by class of mail. 

Senator COLLINS. It’s my understanding that the Postal Regulatory Commission hired some consultants to look at the reduction 

in revenue which reflected a 2-percent reduction in volume. Are 

you familiar with those studies? 

Mr. POTTER. Yes, I am. 

Senator COLLINS. Do you disagree with that estimate? 

Mr. POTTER. I think there’s a slight difference between the Postal 

Service estimate and the Postal Regulatory Commission estimate. 
18 

Senator COLLINS. There’s a considerable difference in the estimates of savings. You have estimated that the Postal Service would 

save more than $3 billion annually by going to 5-day delivery. Is 

that correct? 

Mr. POTTER. Yes. 

Senator COLLINS. And it’s my understanding that in 2008, when 

the Postal Regulatory Commission looked at this issue, it estimated 

that savings under the plan would only be $1.9 billion and that the 

Postal Regulatory Commission is now estimating savings of approximately $2 billion. That’s a big difference; $3 billion to $2 billion. Why is your estimate of savings significantly higher than the 

PRC’s? 

Mr. POTTER. Ours is significantly higher because of the estimate 

for how much of the work that moves from Saturday to either Friday or Monday could be absorbed by operations. Our experience— 

because we have holidays today—when that occurs, 90 percent of 

the workload is absorbed. The number that the Postal Regulatory 

Commission used was somewhere, I believe, in the neighborhood of 

67 percent. We based our analysis on our actual experience. We 

have that experience today with holidays. And so, we are going to 

present, by the way, that information, as part of our plan, to the 

Postal Regulatory Commission. We hope that they’ll review that information and that I anticipate that the data will prove our assumptions to be correct. 

Senator COLLINS. Well, that remains to be seen. 

Mr. POTTER. It does. 

Senator COLLINS. But, it is—— 

Mr. POTTER. There’s a process, and we’ll follow it. 

Senator COLLINS. And I appreciate that, but that is a notable difference. You mentioned when you have holidays—one of the problems with eliminating Saturday delivery is we have, what, 10, 11 

Monday holidays each year, on which there is no mail delivery. So, 

we’re really talking about, in many months, there being a time 

where there would be delivery on Thursday and the next delivery 

would not be until Tuesday. You have talked about reaching out to 

the stakeholders, and that you were confident that you could mitigate the impacts. I’m confident that you’re going to lose volume. 

And, I think all of us would agree on that. The question is how 

much, and whether the tradeoff is worth it. 

I’ve talked to weekly newspaper publishers in my State that put 

their newspapers in the mail on Thursday. It’s delivered on Saturday. They’re only publishing once a week, and what they tell me 

is, if the news doesn’t get to their customers until Tuesday, in the 

case of a week where there’s a Monday holiday, their customers are 

not going to subscribe to the paper. It’s also a problem for daily 

newspapers, for obvious reasons. But, I think it’s an even bigger 

problem for the weekly newspapers. And I’ve had the publishers 

say to me, they don’t know what they’re going to do, but they’re 

going to explore alternatives to using the Postal Service. That’s a 

real problem for you. 

Similarly, there’s a lot of advertising mail that’s time-sensitive. 

The sale is that weekend. Netflix. I’ve got to believe that Netflix, 

which relies on daily delivery of its movies, although I know you’re 

talking to them, and I know that they’re looking at being able to 
19 

stream their movies, is concerned about what this would mean for 

their business model. And, by the way, isn’t the result going to be 

that a company whose business model relies on daily delivery, like 

Netflix, is going to start streaming those movies and no use—no 

longer using the Postal Service at all? Those are the issues that 

concern me. 

So, let me ask you what is the bottom-line question, and this was 

one that the GAO is asking, as well. And that is, How would eliminating Saturday delivery affect the Postal Service’s efforts to grow 

mail volume and encourage commercial mailers to expand their use 

of the mail? 

Mr. POTTER. Well, first of all, I agree with every question that 

you had, and I am as concerned as you are about those issues. The 

local newspaper that mails and, right now, expects to have delivery 

on Saturday—obviously they have a choice on whether or not they 

want to deposit a day sooner and get the mail into the home on 

Friday. One of the things, when we talked last year about this— 

one thing I didn’t realize, when we first had our discussion about 

this, was how many of the advertisers have actually moved to try 

and get mail delivered by Friday, because of what you just described. People shop on Saturday. Bill presenters want the bill in 

people’s hands by Friday, so that they can pay over the course of 

the weekend. So, to be truthful, mail was moving in the direction 

away from Saturday anyway, because of the fact that they want— 

folks want the mail in people’s hands so they can act on it over the 

course of the weekend. 

Now, one of the things that we have to consider is—and one of 

the things that we responded—because there was very fair criticism, by yourself and others last year, that we did not present a 

broad-based plan and that we were focused on one or two things. 

And that’s why we hired the consultants, so that we could come 

and look at this from a broad-based perspective. And when you 

look at the future, a lot of the people that—you know, you just described Netflix—their business model is to move away from the 

mail today anyway. 

Senator COLLINS. Well, I can tell you, you’re encouraging them 

to move faster. 

Mr. POTTER. They might accelerate that pace. On the other hand, 

the people who do intend to be with the mail—and this is the key 

point—we have to keep mail affordable. So, price is very, very important to a lot of the advertisers who use the mail; in particular, 

cataloguers and others who use us for advertising. Price is extremely important. And when it comes to looking at advertising 

channels, you know, we’re competing with the Internet. We’re competing with mobile apps. We’re competing with newspapers, television. And so, we have to keep our price competitive. 

And so, yes, something will be lost as a result of moving from 6- 

to 5-day delivery, but I look at what’s being protected. What’s being 

protected is the 150 billion pieces of mail that we anticipate being 

in the system. And it’s a balancing act. I’m not going to say that 

it’s not judgmental and it’s not without its share of risk, but, given 

what we have going forward, I think it’s a risk we have to take. 

Senator COLLINS. Well, when I look at financially troubled businesses—and there are, unfortunately, many in today’s economy— 
20 

they’re trying to grow their business. They’re trying to expand their 

service. They’re trying to entice more customers. And it seems like 

you’re choosing a route that goes in the opposite direction. 

Go ahead. 

Mr. POTTER. Let me assure you, we’re very much focused on 

growth. You know, we’ve had our first sale ever. We’re out aggressively advertising priority mail. And I know that you would like us 

to do more, and we do intend to do more. 

Senator COLLINS. And the summer sale worked; it increased—— 

Mr. POTTER. Right. 

Senator COLLINS [continuing]. Your volume—— 

Mr. POTTER. And we’re going to—— 

Senator COLLINS [continuing]. Which should tell you something. 

Mr. POTTER [continuing]. Which we’re going to do again this 

year. We’re also working with the cataloguers who want year-overyear sales, not just specific seasonal sales, and we’re going to do 

that, Senator. But, the real challenge here is a $7 billion gap. 

Senator COLLINS. I know, but let me switch—— 

Mr. POTTER. Sure. 

Senator COLLINS [continuing]. Because I know I don’t have much 

time left. 

One of the best sources of cost-saving ideas are from your employees; they’re the ones on the front lines. And as you know, the 

President of the National Association of Postmasters, last year, 

made a very specific suggestion to you. He said, ‘‘I encourage the 

Postmaster General to negotiate with our unions about cross-craft 

training. An agreement in this area would augment the skills of individual postal employees, and enable postmasters to more effectively utilize the talents of their employees.’’ He argues that this 

would save you money, enhance skills. What have you done to implement that proposal? 

Mr. POTTER. First of all, I 100 percent agree with him. We have 

our negotiations with our unions—two of our unions, the Rural Letter Carriers and the American Postal Worker’s Union (APWU), 

begin this summer. The other two unions, the Mail Handler Union 

and the National Association of Letter Carriers, is the following 

year. And we intend to work on those issues during the course of 

those negotiations. They’re a nonstarter, outside of negotiations. 

EMPLOYEE-RELATED COSTS

Senator COLLINS. And I guess that brings me to my final question. The GAO says that 80 percent of the Postal Service’s costs are 

employee related. Is that accurate? 

Mr. POTTER. Yes. 

Senator COLLINS. The GAO also says that the Postal Service 

pays a considerably higher percentage of the employees’ health insurance and life insurance, compared to the average Federal agency. I realize you’re not a Federal agency, but you’re participating 

in the same programs. It’s a—the exact same programs. I believe, 

in the case of health insurance, although it’s declining by 1 percent, 

it’s about 83 percent versus 72 percent. In the case of life insurance, the Postal Service, I am told by the GAO, pays 100 percent 

of the premium, and I believe for Federal employees it’s about one- 
21 

third of the premium. Are—is your cost structure in line for what 

it should be, given where the money’s being spent? 

Mr. POTTER. Well, Senator, thank you for recognizing that we did 

negotiate, in the last round of negotiations, with all four of our 

unions. That—on an annual basis each year, the percentage that’s 

paid by the employer would be reduced by 1 percent. 

Senator COLLINS. For health insurance. 

Mr. POTTER. For health insurance. And that, again, is recognition 

of the—of what you just described, the fact that we are out of line 

with what’s paid for, in terms of the Federal Government—what 

they pay for an employee’s healthcare. Our unions and management recognized this problem, and we negotiated the change into 

our contracts. What we agreed was fair was that we’d make this 

change over time, as opposed to doing it in one move. And so, that’s 

why we went the 1 percent per year. 

Now, some people have said we should have been more aggressive and gone the 3 percent a year or 2 percent a year. Well, the 

fact of the matter is, we got that through collective bargaining. If 

we didn’t reach agreement with the unions—and we were very 

happy that they worked with us to make that change—that issue 

would have gone to binding arbitration. And so, the decision 

wouldn’t have been made by either party; it would have been made 

by an arbitrator. 

So, again, we recognize what you just described as a difference 

between the Federal Government and the Postal Service, and we’re 

working to move in that direction. It will be the subject of negotiations once again this summer and the following summer. 

Senator COLLINS. Thank you, Mr. Chairman. 

Senator DURBIN. Mr. Postmaster, if I can ask you just a series 

of quick questions. 

Have you considered doing pilot tests on 5-day delivery, to see 

what the reaction would be, what the impact would be on volume? 

Mr. POTTER. We could, but by law, we can’t. 

Senator DURBIN. Well, we make laws. 

Mr. POTTER. Okay. We would be willing to test it. 

Senator DURBIN. Okay. I think that might be an interesting 

thing, to see if some of the surveys and opinion polls actually end 

up in consumer satisfaction, with the approach on 5-day service, 

and we’ll talk about that possibility. 

In 6 months, the next annual statutory installment payment of 

$5.5 billion is due to the Postal Service retiree health benefit funds. 

Are you going to make that payment? 

Mr. POTTER. We’re going to ask for relief from that payment. Not 

because we don’t have enough cash to pay it this year, but we’re 

very concerned about cash flow in October and November of next 

year, because of payrolls and because of workers’ comp costs. So, 

we are going to ask for an adjustment. We will have enough cash, 

if we had to pay it, but we’d run the risk, just similar to last year, 

of running out of cash in the fall 2010. 

CIVIL SERVICE OVERPAYMENT

Senator DURBIN. Well, the inspector general says you’ve overpaid 

$75 billion into the Civil Service Retirement System. If this is accu-
22 

rate, could you use this as a source for retiree health benefits and 

some of the other economic issues you’re facing? 

Mr. POTTER. Yes, sir. 

Senator DURBIN. Are you trying? 

Mr. POTTER. Are we trying? 

Senator DURBIN. Are you trying to recover the $75 billion? 

Mr. POTTER. Well, back in 2000—now, I can’t remember, Senator, 

whether it was 2003 or 2006—the Senator, in her legislation, provided an opportunity for us to appeal a decision—that was made 

by the Office of Personnel Management (OPM); and back then, the 

board of actuaries determined that the conclusion was that we 

would have $17 billion in overpayment, rather than the $92 billion 

outlined by the inspector general, was the right number. We are 

working, and have appealed to OPM and the Office of Management 

and Budget (OMB), to reopen this very matter. If it were to happen, it would literally, I think — we would almost be in a fully 

funded mode on our Retiree Health Benefit Trust Fund, because 

the $75 billion that would—would be, probably, directed there. It 

would take a lot of pressure off. If that were to happen, we 

wouldn’t have to go to 6- to 5-day delivery. 

Senator DURBIN. What’s the timeframe for that to be decided? 

Mr. POTTER. It’s beyond me. There’s no schedule. 

Senator DURBIN. But, you’re saying if the $75 billion is found, 

you wouldn’t have to cut the frequency of service? 

Mr. POTTER. Right. 

Senator DURBIN. We might look into that. 

Let me ask you about the way you market your products and 

services. Postal Service has 36,500 retail branches; more than 

McDonald’s, Starbucks, Walgreens, and Wal-Mart combined. An 

average postal branch sees 600 customers each week; an average 

grocery store, 20,000 weekly customers. I know that more people 

are doing things over the Internet, in their homes and at desks, but 

I wonder if the Postal Service is providing its products and services 

where people are, and whether or not there’s good reason for you 

to start building your facilities as part of other places that draw 

much larger crowds of people. 

Mr. POTTER. Sir, that’s our proposal. Today, we cannot close a 

post office for economic reasons. So, as other businesses—if you go 

into a large grocery store, you see banks, coffee shops, other things 

that are housed along with those grocery stores. That’s where we 

would like to be. We would like people to have access 7 days a 

week. We would like them to have access 24 hours a day, in some 

cases. However, we’re precluded from closing post offices. 

And let me just say this, that when it comes to post offices, part 

of the 600 folks who walk in on a weekly basis—part of the reason 

it’s only 600 is because over 30 percent of people today buy what 

they had come to a post office for—they either buy it online or they 

buy it at grocery stores—— 

Senator DURBIN. Thirty percent? 

Mr. POTTER [continuing]. Over 50,000 grocery stores sell stamps 

today. And our anticipation is, in the next decade, that that 30 percent will probably move to 60 percent, because we’re working very 

hard to improve our Internet, our Web site. 
23 

We have put up—just to show the interest in the Postal Service—we created a postal mobile app, and within 3 weeks, it went 

to the top of the charts, in terms of the most-used mobile app. That 

was to look up locations of post offices, ZIP Codes, and the like. So, 

we know there’s a big interest in the Postal Service. We’d like to 

be where people are; online or in locations where they’re already 

conducting their business. 

Senator DURBIN. Taking the downtown Chicago Post Office out 

of this conversation—the old one—do you have excess property and 

real estate that is in a valuable location that you could consider 

selling to try to come up with some of the revenue the Postal Service needs? 

Mr. POTTER. Yes, and we are aggressively pursuing that. In some 

cases, what we’re doing—for example, in San Francisco, we’re consolidating delivery units and selling our buildings and moving our 

retail into a location in a very proximate area to where our current 

location is. We have done that, historically. It’s been a slow-moving 

process, for a whole host of reasons. As you know, in big cities, 

transactions tend to take a lot longer, even though they’re much 

more lucrative—but, they do take a long time. We worked very 

close on that Chicago Main Post Office, as you know, but if opportunities—— 

Senator DURBIN. You offered me—— 

Mr. POTTER [continuing]. Exist, we do pursue them. 

Senator DURBIN. I don’t know if it was in jest, but you offered 

me the Chicago Main Post Office for a dollar once. I don’t know—— 

Mr. POTTER. Only because it was costing us $14 million a year 

to maintain it, even though we no longer had a presence there. 

Senator DURBIN. Thank you. 

Senator Collins. 

Senator COLLINS. Thank you, Mr. Chairman. 

Mr. Chairman, I want to follow up on the issue you raised about 

the inspector general’s report, which indicates an overfunding to 

the Civil Service Retirement System, because it is such an important issue. 

Mr. Potter, it’s my understanding that the OPM and the GAO 

both strenuously disagree with the inspector general’s conclusion. 

Is there a change that’s happened since those disagreements? 

Mr. POTTER. To the best of my knowledge, no. 

Senator COLLINS. Okay. So, the administration has stuck to its 

belief that there is not the kind of overpayment that the inspector 

general has found. 

Mr. POTTER. To the best of my knowledge, no. But, I would prefer 

that they respond—— 

Senator COLLINS. Right. 

Mr. POTTER [continuing]. Obviously. But—— 

Senator COLLINS. I just wanted to bring that—— 

Mr. POTTER. Right. 

Senator COLLINS [continuing]. To the chairman’s—— 

Mr. POTTER. Right. 

Senator COLLINS [continuing]. Attention. 
24 

RETIREE HEALTH BENEFITS

I personally don’t know who’s right. This is a case where different actuaries have come to different conclusions. But, I do know 

that OPM considers itself to be expert in how you fund retirement 

programs. 

On that point, and switching to your retiree healthcare benefits, 

you talk about that the money that’s currently in the fund—the 

$35 billion—is sufficient to pay the premiums for all of our roughly 

500,000 currently participating retirees, through their expected 

lifetimes. Doesn’t that ignore the fact that you’re going to have a 

huge wave of retirees coming? I—the reason I know this is the 

chairman and I fly back and forth, and people sit next to us on the 

plane and take advantage of that opportunity to educate us on 

issues. 

And I sat next to the postal district manager, who I believe told 

me that something like one-half of your workforce is eligible to retire in the next decade. 

Mr. POTTER. Right. No, what that was meant to say—that there’s 

a sizable amount of money there. And so, when you’re looking at 

funding obligations going forward, there’s a thing, I learned about 

in the last couple years, called ‘‘normal cost.’’ In fact, I was educated by OPM on this, which is—basically, you begin to pay into 

the Retiree Health Benefit Trust Fund, based on how many employees you have, against what their anticipated cost is in the future, versus—as we both know, the payment schedule that we’re on 

now, was more linked to a scoring issue than the normalization. 

And so, that’s what that was meant to imply, that there was a way 

of looking at this a little differently. 

Senator COLLINS. I just don’t want to lead what—leave what 

would be a misleading—— 

Mr. POTTER. Oh, no. 

Senator COLLINS [continuing]. Impression. The fact is, you’ve got 

billions of dollars of future liabilities that they—— 

Mr. POTTER. There’s still a $50 billion gap. I’m not trying to—— 

Senator COLLINS. That’s correct—— 

Mr. POTTER. Okay. Yes. 

Senator COLLINS [continuing]. And I think that’s a really—— 

Mr. POTTER. Okay. 

Senator COLLINS [continuing]. Important point. 

Mr. POTTER. I didn’t mean to mislead anyone, but just to say 

that there is a sizable amount of money there. 

Senator COLLINS. Right. 

Mr. POTTER. Because, when we started on this process, years 

ago, the concern was that, at some point in time, the Postal Service 

might not be an ongoing concern, and the liability would fall back 

on the Federal Government. 

Senator COLLINS. Correct. 

Mr. POTTER. When you look at normalization, what you look at— 

in addition to just how many employees you have, you look at what 

would happen if the business were to go under. And the fact is, if 

it were, not all of our employees would be eligible for retiree health 

benefits. Only those who are eligible to retire could do that. And 
25 

so, you know, again, it was just because I’ve become educated, in 

the last couple years, on other approaches that could be taken. 

Senator COLLINS. I just wanted to make sure that was very clear 

for the—— 

Mr. POTTER. Right. 

Senator COLLINS [continuing]. Record. I would also note that, 

back in 2006, when Senator Carper and I authored our bill, we initially had a 40-year amortization schedule. And it was only in the 

final negotiations with OMB where the amortization schedule was 

truncated considerably. 

What I don’t want to see is another year like this past year—and 

I voted to allow you to do it—where the payment is significantly 

reduced. That is not a good situation. That is just wishing away liabilities. But, I do think that we should stretch out and smooth out 

the amortization schedule for this unfunded liability. 

I’m tempted to ask whether you’d agree with that, but I’m not 

sure what you would say. 

Mr. POTTER. No—— 

Senator COLLINS. I’ll ask anyway. 

Mr. POTTER. First of all, let me assure you that we’re not walking away from the obligation for retiree health benefits for our employees. I hope to get that benefit in the future. So, I—we want to 

make sure that that’s fully funded. I would agree that the timing, 

in terms of the pace at which you pay for that, obviously the current situation has to be taken into consideration. The amortization 

over a longer period of time does give us welcome relief. And we 

all know that, although we were in agreement about a 40-year amortization back in 2006, that option was taken off the table—— 

Senator COLLINS. Correct. 

Mr. POTTER [continuing]. Not by either party, but by a third 

party. 

Senator COLLINS. Right. 

Mr. Chairman, just one final comment for this witness, and that 

is, whatever plan we adopt, we have to make sure that it truly positions the Postal Service for the future and that we’re not back 

here, 3 years from now, once again facing billions of dollars in annual losses, huge unfunded liabilities, declining volume, and being 

in no different a place. And that means that there needs to be a 

new business model and some very tough decisions made. 

I vowed, in 2006, that I would never do a major postal bill again, 

because it was so difficult to get all of the stakeholders. And we 

thought that we had put the Postal Service on track for viability. 

And that was your testimony. I read part of it at the time. GAO 

removed you from the high-risk list. And I just don’t want to see 

this movie again. 

Thank you, Mr. Chairman. 

Senator DURBIN. I’d say to my colleague that I agree with her 

completely. 

Mr. POTTER. Well, I would, too. 

So, I’ll second what she just said. But, the only thing—— 

Senator DURBIN. But, I’d just add—— 

Mr. POTTER. The only thing we didn’t anticipate was this recession—— 

Senator DURBIN. I was going to say—— 
26 

Mr. POTTER [continuing]. Of the magnitude that we had, and a 

tipping point that it affected—how it affected the mail. 

Senator DURBIN. As a precautionary note, I don’t think any of us 

could have predicted the depth and seriousness of the current recession on every aspect of our lives. And, second, you are in a field 

that is being affected by this galloping change in technology and 

the change in habits by the American people. Who would have 

guessed, 10 years ago, American newspapers would be flat on their 

back at this point and struggling to survive. And it’s a reality. And 

so, there’s this change in technology. You are right in the middle 

of this competition, and I understand that part. But, we’re going 

to try to make some decisions, or help you make some decisions, 

which will give us a breather—maybe 4 years before we see you 

again. 

Mr. POTTER. Let’s hope it’s a little longer than that. 

Senator DURBIN. Then maybe even a little longer. 

Mr. Potter, very much for your testimony. 

Mr. POTTER. Thank you. 

Senator DURBIN. I’m going to welcome the second panel to take 

their place at the table. 

ADDITIONAL SUBMITTED STATEMENTS

And while they do, I note that the subcommittee has received 

prepared statements from a number of postal labor organizations: 

the National Association of Letter Carriers; the National Rural Letter Carriers Association; the National Postal Mail Handlers Union; 

the American Postal Workers Union; the National Association of 

Postmasters of the United States; and the National Association of 

Postal Supervisors. And, without objection, their statements will be 

made a part of this record and reviewed carefully by us and our 

staff. 

[The statements follow:] 

PREPARED STATEMENT OF THE NATIONAL ASSOCIATION OF LETTER CARRIERS

Thank you, Chairman Durbin, for holding this important hearing on the financial 

situation facing the United States Postal Service. On behalf of the 295,000 members 

of the National Association of Letter Carriers, I submit this statement for the subcommittee’s consideration. 

Overview 

There is no doubt that the Postal Service faces the worst crisis since the Great 

Depression of the 1930s. The collapse of the housing bubble and the financial meltdown of 2008–2009 affected the most mail-intensive sectors of the economy. This occurred at a time when the impact of electronic diversion of traditional letter mail 

caused mail volume to stagnate after peaking in 2006. Yet the deep recession and 

the negative impact of the Internet on postal volumes are not the most important 

causes of the Postal Service’s large deficits in recent years. Unfortunately, the main 

driver of the USPS’s current financial distress stems from a policy decision, albeit 

well-intentioned, adopted by the U.S. Congress in 2006 to require the Postal Service 

to massively prefund decades of future retiree health benefit obligations in just 10 

years. This requirement has cost, and will continue to cost, the Postal Service some 

$5.6 billion per year until the year 2016. 

That’s right. This immediate crisis was initiated in 2006 when Congress, in cooperation with the Bush administration, included the prefunding requirement in the 

Postal Accountability and Enhancement Act (PAEA). What appeared to be affordable in 2006 is clearly unaffordable today. Over the past 3 years, as the economy 

slipped into the worst recession in 80 years, the Postal Service has had to pony up 

$12.4 billion to prefund future retiree health benefits—on top of some $6 billion for 

current retiree health benefits. 
27 

1See Figures 29 and 30 in ‘‘Accounting for Pensions and other Postretirement Benefits 2009, 

Reporting Under FAS 87 and FAS 106 Among the Fortune 1000, A Watson Wyatt Survey Report,’’ pages 21–22. 2 USPS Office of Inspector General study: ‘‘The Postal Service’s Share of CSRS Pension Responsibility,’’ January 22, 2010, see http://www.uspsoig.gov/foialfiles/RARC-WP-10-001.pdf; and 

USPS Office of Inspector General report: ‘‘Estimates of Postal Service Liability for Retiree 

Health Benefits (Report Number ESS–MA–09–001(R)), July 22, 2009, see http:// 

www.uspsoig.gov/foialfiles/ESS-MA-09-001R.pdf. 

No other agency—including the United States Congress—or private company 

faces such a legal obligation to prefund. Indeed, such prefunding is not even required by the Financial Accounting Standards Board (FASB), which establishes accounting rules for both private and public organizations. And as an annual survey 

conducted by Watson Wyatt found in 2009, only about a third of Fortune 1000 companies voluntarily prefund retiree health obligations at all—and those that do have 

set aside much less than the Postal Service has already.1

What makes this situation worse is that the size of the prefunding payments is 

grossly inflated due to actuarial methods adopted by the Office of Personnel Management (OPM). These methods, which have been exposed by a series of reports by 

the Office of Inspector General of the USPS, not only shortchanged the Postal Service Retiree Health Benefits Fund (PSRHBF) by tens of billions of dollars when it 

was established in 2007, but also greatly exaggerated the USPS’s future liability for 

retiree health benefits—which prompted the Congress to establish a completely unrealistic schedule of prefunding payments in the PAEA. 

The USPS has responded with tremendous resilience to the challenges of the recession, which began in 2006 for our industry when the credit crunch hit. And my 

union, the NALC, has been a responsible and reliable partner in helping it react 

to the steep decline in mail volume. Working together at the bargaining table, we 

strove to negotiate flexible and fair means for adjusting all 160,000 city carrier 

routes to ensure 8-hour assignments, boosting efficiency and saving hundreds of millions of dollars. In fact, we adjusted every city carrier route in the country not once, 

not twice, but three times over the past 18 months. Using the traditional method 

of route evaluation would have taken more than 5 years to adjust every route. 

In fact, the Postal Service has been so successful in cutting costs to align work 

hours with recession-level volumes that it would have earned a net surplus of $1.6 

billion over the past 4 years in the absence of the onerous prefunding burden. This 

burden is directly responsible for the dramatic rise in the Postal Service’s outstanding debt. See the chart below. 

PREFUNDING PAYMENTS, NET INCOME AND DEBT OF THE U.S. POSTAL SERVICE 

[In billions of dollars] 

Year 

Payments to the 

Postal Service 

Retiree Health 

Benefits Fund 

Net Income Debt Increase 

2006 ........................................................................................................... ........................ 0.9 2.1 

2007 ........................................................................................................... 5.4 ¥5.1 2.1 

2008 ........................................................................................................... 5.6 ¥2.8 3.0 

2009 ........................................................................................................... 1.4 ¥3.8 3.0 

Totals ............................................................................................ 12.4 ¥10.8 10.2 

Notes: (1) A modified version of H.R. 22 was enacted in 2009, slashing the prepayment from $5.4 to $1.4 billion; (2) In 2005 the Postal Service had no debt at all. 

Congress Should Fix the Prefunding Policy First 

Today your subcommittee is going to hear a lot about 10 and 20-year predictions 

about future mail volume and the mega-sized postal deficits that will occur if we 

do nothing. You will no doubt also be asked to embrace draconian suggestions developed by the Postal Service’s consultants and perhaps other witnesses. The 200,000 

men and women who deliver the mail on city carrier routes today urge you exercise 

great caution and to stop and consider the real cause of the immediate crisis: The 

unworkable and unreasonable pre-funding policy adopted in 2006. 

Congress should correct the retiree health prefunding policy first—it is the single 

most effective step you can take to stabilize the Postal Service’s finances. We urge 

you to fully implement the recommendations contained in the two OIG reports on 

this issue.2 (See the attached fact sheets prepared by the NALC’s Department of 
28 

Legislative and Political Affairs.) While we appreciate the efforts undertaken last 

year by the Obama administration and other Senate leaders to offer limited relief 

from the pre-funding burden in S. 1507, that bill does not go far enough and its 

adoption by the Senate Committee on Homeland Security and Governmental Affairs 

was marred by an antiunion amendment that would permanently and unfairly tilt 

the interest arbitration process in favor of postal management. NALC urges the 

Senate to start over with a fresh approach suggested by the USPS OIG. 

Congress Should Retain 6-Day Delivery 

The Postal Service is too important to the country to make rash decisions in an 

environment of financial distress. NALC believes it would be unwise to downsize to 

meet recessionary levels of demand before we know how soon and how well the 

economy and the postal market will recover. Specifically, we believe that eliminating 

Saturday collection and delivery services would be penny-wise and pound-foolish. No 

business has ever restored itself to health by offering slower service and turning 

customers away—too many businesses (including mail order merchants, online 

pharmacies, DVD and game rental companies and newsmagazines) rely on 6-day delivery to simply leave them in the lurch. Rather than saving the Postal Service 

money, 5-day delivery could worsen its bottom line over time as a result of further 

volume and revenue losses. And it would needlessly destroy 50,000 good jobs at a 

time of extremely high unemployment. (See the attached fact sheet on Saturday delivery prepared by the NALC’s Department of Legislative and Political Affairs.) 

Eliminating Saturday collections and delivery should be a last resort policy, not 

a first resort policy. It certainly should not be considered until we see the impact 

on demand for postal services when the economy recovers—as well as the results 

of the next round of postal collective bargaining. Nor should it be considered before 

Congress corrects the deeply flawed prefunding policy adopted in 2006. In any 

event, the Postal Service has not yet presented its 5-day collection and delivery proposal to the PRC for review, as mandated by law. Congress and this subcommittee 

should await the results of that review and conduct extensive hearings to ensure 

it understands the full implications of eliminating Saturday delivery before debating 

changes to the annual appropriation legislation that mandates 6-day services. The 

data and assumptions in the Postal Service’s plan yet to be scrutinized and special 

attention must be given to the impact of service cutbacks on tens of millions of 

small businesses, including those in rural communities and economically distressed 

neighborhoods. 

Conclusion 

We know that prefunding reform may not be enough to secure the long-term viability of the USPS. We know the Postal Service’s business model deserves a serious 

and comprehensive debate. However, NALC and the other postal unions are prepared to deal with the lingering effects of the recession and the negative impact of 

the Internet at the negotiating table, just as we have adapted to varying business 

conditions for some 40 years of successful collective bargaining. And we believe that 

it is only in the context of financial stability that a serious and careful legislative 

debate can take place. That will require us to do our part at the bargaining table 

and for Congress to do its part on retiree health prefunding reform. 

NALC is committed to preserving a strong and viable Postal Service that can 

meet the evolving needs of the American people and American businesses. We look 

forward to working with this subcommittee and the entire United States Senate to 

find a sensible and realistic way forward. Thank you for inviting us to submit this 

statement. 

NALC FACT SHEET—STRENGTHENING THE POSTAL SERVICE: REFORM ITS RETIREE

HEALTH PRE-FUNDING SCHEDULE

The Postal Service is facing a financial crisis in the midst of the worst recession 

in 80 years. Congress spent much of 2009 debating short-term financial relief for 

USPS in the form of reduced prefunding payments for future retiree health benefits. 

On September 30, 2009, Congress adopted a measure which reduced the level of 

USPS prefunding in 2009 from $5.4 billion to $1.4 billion and reduced the Postal 

Service’s operating loss from $7.7 billion to $3.7 billion. While it was helpful last 

year, this type of last-minute relief will not adequately address the larger problems 

caused by the prefunding requirements. In 2010, Congress must reform the 

prefunding schedule adopted by Public Law 109–435 to provide for long-term financial stability. The current schedule is unaffordable and unfair: 

—The USPS is the only enterprise in the country required by law to prefund retiree health benefits while most Fortune 1000 companies (two-thirds) don’t 

prefund at all. 
29 

1Postal OIG study, ‘‘The Postal Service’s Share of CSRS Pension Responsibility’’. Jan. 20, 

2010. http://www.uspsoig.gov/foialfiles/RARC-WP-10-001.pdf. 2Postal Regulatory Commission study, July 30, 2009. http://www.prc.gov/Docs/63/63987/ 

Retiree%20Health%20Fund%20Studyl109.pdf. 

—The annual payments required are extremely onerous, requiring the USPS to 

effectively prefund 80 percent of a 75-year liability in just 10 years, and are 

based on flawed calculations by the Office of Personnel Management (OPM). 

—The actuarial methods used to determine the retiree health benefit liability are 

deeply flawed and inequitably overstate the Postal Service’s liability. Congress 

should mandate a new prefunding schedule based on fair and accurate actuarial 

calculations. 

Background on Prefunding 

The Postal Accountability and Enhancement Act of 2006 established the Postal 

Service Retirees Health Benefit Fund (PSRHBF) by calling on OPM to calculate the 

‘‘postal’’ surplus in the Civil Service Retirement System and to transfer it to the 

PSRHBF in 2007. The law also dictated 10 annual payments into the Fund averaging $5.5 billion each between 2007 and 2016, also based on OPM calculations. 

In establishing the Fund and setting the payment schedule, Congress sought to 

minimize the ‘‘budget score’’ of the legislation and relied on the OPM estimates of 

the value of the CSRS surplus and the cost of future retiree health benefit liabilities. A study conducted by the USPS Office of Inspector General shows that OPM 

underestimated the size of the postal CSRS pension surplus by roughly $75 billion.1

Furthermore, the Postal Regulatory Commission has found that OPM’s healthcare 

inflation assumptions are overstated.2 As a result of these calculations, the Postal 

Service has been saddled with an unaffordable prefunding schedule that threatens 

its future viability. 

A Fair Calculation of the Postal CSRS Surplus 

In 2003, OPM made the initial determination of the postal pension surplus in 

order to implement a CSRS funding reform law (Public Law 108–18). This process, 

which was repeated in 2007 under the PAEA (with the Treasury taking responsibility for CSRS military benefits), required the OPM to allocate the cost of CSRS 

benefits earned by postal employees between the Treasury (taxpayers) and the Postal Service (ratepayers) for all workers who performed service before and after July 

1, 1971. That was the day the Post Office Department (POD) was reorganized and 

became the U.S. Postal Service, an independent agency of the government separate 

from other cabinet agencies. Unfortunately, OPM shifted much of the cost of CSRS 

benefits earned by POD employees to the Postal Service by making the USPS responsible for any and all increases in the value of benefits accrued for POD service 

due to wage increases after July 1, 1971. Any fair calculation of benefits accrued 

before postal reorganization in 1971 should have included some recognition of normal wage increases in the future, since CSRS benefits are based on end-of-career 

earnings. Instead, OPM froze the value of accrued benefits at July 1, 1971, pay levels—effectively shifting much of the cost of pre-reorganization service to the Postal 

Service. The OPM also failed to recognize that the CSRS benefit formula is 

backloaded and unfairly assigned the low-cost early years to the POD and the high 

cost later years to the Postal Service. 

By overstating the Postal Service’s liability for CSRS benefits, the OPM understated the value of the postal surplus in the CSRS by as much as $75 billion, according to a review by the OIG. As a result, the Postal Service was short-changed 

when the surplus was transferred to the PSRHBF in 2007. Under OPM’s method, 

the fund was credited $17 billion. Using the more fair and accurate method advanced by the OIG, however, the postal surplus may have exceeded $80 billion, 

more than enough to cover all of the Postal Service’s future retiree health liability. 

Adjusting the OPM’s Health Inflation Rate 

The OPM has also inflated the cost of the Postal Service’s prefunding payments 

by assuming an extremely high rate of long-term healthcare inflation—some 7 percent annually for 75 years. Most Fortune 1000 companies use a 5 percent long-term 

rate, while Medicare and Medicaid assume costs will rise by 6.25 percent annually. 

Both the Inspector General and the PRC have concluded that more accurate inflation assumptions could reduce or eliminate the Postal Service’s PAEA-required payments. The OIG’s report concluded that ‘‘[t]he Postal Service could pay an average 

of $4 billion less each year from fiscal years 2009–2016 to prefund its retiree health 

benefits and still achieve the same level of prefunding [80 percent] anticipated 

under OPM assumptions.’’ 
30 

1 USPS Office of Inspector General report: Estimates of Postal Service Liability for Retiree 

Health Benefits (Report Number ESS–MA–09–001(R)). See http://www.uspsoig.gov/foialfiles/ 

ESS-MA-09-001R.pdf. 2Postal Regulatory Commission Review of Retiree Health Benefit Fund Liability as Calculated 

by the Office of Personnel Management and the U.S. Postal Service Office of Inspector General, 

July 30, 2009. See www.prc.gov/Docs/63/63987/Retiree%20Health%20Fund%20Studyl109.pdf. 

The current long-term cost assumption is inaccurate and places an unfair burden 

on the Postal Service, its employees and ratepayers. It must be adjusted to more 

accurately reflect the reality of the Postal Service’s future obligations. 

Eliminating Saturday Delivery Not the Answer 

Correcting OPM’s actuarial calculations involving the CSRS postal surplus and the long-term cost inflation rate would significantly reduce the $5.5 billion 

prefunding payments mandated by the Postal Accountability and Enhancement Act 

of 2006. It would also strengthen the financial stability and future viability of the 

Postal Service. 

Adopting a more accurate and affordable prefunding schedule should be given the 

highest priority in any postal reform legislation considered during the remainder of 

the 111th Congress. This step should certainly be taken before Congress considers 

more radical measures such as the elimination of Saturday delivery. 

NALC FACT SHEET—SAVE THE POSTAL SERVICE: DEMAND FAIRNESS IN USPS PENSION

AND RETIREE HEALTH FUNDING

As the economy struggles to recover from the worst recession in 80 years, the 

Postal Service continues to face a financial crisis. The loss of revenue resulting from 

declining mail volume is compounded by a provision in the 2006 postal reform that 

requires the Postal Service to massively prefund its future retiree health benefits 

at a cost of $5.6 billion annually. The requirement has resulted in mounting losses, 

rising debt and destructive job and service cuts. 

The unprecedented prefunding provision—no other agency or private enterprise is 

required to prefund by law or by widely accepted accounting standards—was made 

worse by how it was implemented by the Office of Personnel Management. The 

OPM’s calculations to determine the initial balance in the Postal Service Retiree 

Health Benefit Fund (PSRHBF) and the size of the Postal Service’s future retiree 

health liability were deeply flawed. Studies conducted by the Office of the Inspector 

General of the Postal Service (OIG) 1 and the Postal Regulatory Commission 2 have 

shown that the ‘‘postal surplus’’ in the CSRS pension fund, which was transferred 

to the retiree health fund in 2007, was grossly undervalued by OPM. As a result, 

USPS was shortchanged by as much as $75 billion when the PSRHBF was created. 

Returning these surplus funds to the postal retiree health fund would greatly alleviate the Postal Service’s financial stress. In fact, doing so would fully fund the 

Postal Service’s 75-year liability for future retiree health benefits and the current 

prefunding requirements would be unnecessary. 

In 2010, in order to rectify the unfair, inequitable and financially destructive impact of the prefunding policies resulting from the OPM’s methods, Congress must: 

—Demand that OPM recalculate the postal pension surplus using actuarial methods that are fair to the Postal Service and its ratepayers, as proposed by the 

OIG; 

—Require that OPM transfer the corrected surplus fund to the Postal Service Retiree Health Benefits Fund; and 

—Repeal the prefunding requirement found in Section 8909a of Public Law 109– 

435. 

The long-term viability of the USPS will require all stakeholders to adapt and innovate and may require Congress to adopt further legislative changes to allow the 

Postal Service to provide new services and to generate new revenue. But reform of 

the prefunding provisions cannot wait until a consensus forms on a new business 

model. Congress must act this year. 

NALC FACT SHEET—ELIMINATING SATURDAY DELIVERY IS NOT THE ANSWER

The U.S. Postal Service faces the worst crisis in its history. It expects to lose $6– $7 billion in 2009. Although the collapse of the housing and financial sectors in late 

2008 is responsible for the largest decline in mail volume since the Great Depression in the 1930s, the main cause of the financial crisis is the decision advanced 

by the Bush administration in the postal reform law of 2006 to require the USPS 

to prefund its future retiree health benefits, a 75-year liability, in just 10 years. The 

cost of this unaffordable prefunding payment, $5.4 billion in 2009, accounts for most 

of the projected loss this year. The annual cost will rise to $5.8 billion by 2016. 
31 

While the NALC is working with postal management to address the crisis with the 

Interim Route Adjustment Process, Congress must take action to relieve this 

prefunding burden to preserve affordable, universal service. See the NALC Fact 

Sheets on H.R. 22 and S. 1507. 

Postal management’s proposal to deal with the crisis-eliminating Saturday mail delivery—is not a sensible solution to the USPS’s financial crisis 

The Postal Service estimates that by eliminating one-sixth of its delivery service, 

it can cut operating expenses by $3.4 billion or 4.6 percent—not the 16.6 percent 

you might expect. The model it used to estimate potential savings is based on many 

unproven assumptions and did not specifically study the elimination of Saturday delivery, the day most Americans are home to receive packages. 

To date, no study has been conducted to estimate how a reduction in delivery days 

would affect mail volume and delivery costs in the remaining 5 days or how different types of mailers would be affected. 

A study conducted on behalf of the Postal Regulatory Commission suggests that 

total cost savings by eliminating one of delivery could be as low as $1.9 billion or 

just 2.5 percent of total postal expenses. 

The Postal Service is rushing to judgment 

In letters to employee groups dated June 11, 2009, USPS management requested 

input on a study of the feasibility of weekday-only delivery with replies due back 

by June 19, 2009. In July it informed the unions that it planned to finish its review 

in 3 weeks. The USPS appeared to be recycling an old IBM study it used for the 

PRC Universal Service investigation. A more thoughtful and serious study is needed. 

The proposed reduction in delivery services would be the most radical change to 

postal operations in the 230-plus year history of the U.S. Mail. No such policy decision should be made after just a few weeks consideration, much less without a comprehensive study of its effects. 

Six-day delivery makes the Postal Service unique 

One of the defining characteristics of the U.S. Postal Service is its policy of nationwide uniform pricing with 6-day delivery. Competitors charge don’t deliver or 

charge high premiums for Saturday delivery while the USPS provides affordable 

universal as mandated by the Constitution. 

American businesses value 6-day delivery 

Business in the United States is conducted 6 days—and in many sectors 7 days— 

per week. Small and large businesses alike, from individual entrepreneurs to largescale financial firms, rely on the delivery of the mail 6 days per week to operate 

successfully. Saturday delivery is especially important to growing companies like 

eBay, Netflix and Caremark, and has long been vital for news magazines. The elimination of Saturday delivery will make the USPS less valuable to business and accelerate electronic substitution. 

American citizens value Saturday delivery too 

Billions of prescriptions are delivered through the mail each year—a 2-day delay 

in their delivery would seriously inconvenience senior citizens and others. Delayed 

delivery of payments, subscriptions and food products would adversely affect millions of households. 

Rural communities would be disproportionately affected 

Americans living in rural areas where the Postal Service’s competitors do not deliver or where broadband connectivity is not available rely especially on 6-day USPS 

delivery and would be adversely affected by any service cuts. Farmers rely on the 

delivery of seeds and other products through the mail and citizens who live far from 

retail outlets need the USPS for mail-order delivery. 

Broad coalition of stakeholders favors 6-day delivery 

According to the PRC’s 2008 study of universal service, parcel shippers, direct 

marketer, magazine publishers and other major mailers along with consumer advocacy groups and the seven postal employee groups agreed: The elimination of 6-day 

delivery would hurt business and consumer interests while costing thousands of 

jobs. 
32 

PREPARED STATEMENT OF THE NATIONAL ASSOCIATION OF POSTAL SUPERVISORS

Chairman Durbin, Ranking Member Collins and Members of the Subcommittee: 

Thank you for holding this hearing on the financial crisis afflicting the United 

States Postal Service and the current proposal to eliminate 6-day mail delivery to 

American households and businesses. The current mandate upon the Postal Service 

to deliver 6-days-a-week, as you know, is contained in the annual appropriation law 

covering the Postal Service. 

The National Association of Postal Supervisors, which represents the interests of 

the 33,000 supervisors, managers and postmasters who are responsible for mail operations throughout the Postal Service, wants to express our deep concern about the 

merit of introducing 5-day delivery. 

I should note at the outset that our association represents Postal Service supervisors who are doing their share to help the Postal Service modernize and change. 

We support changes in the law, infrastructure and operations of the Postal Service 

that make sense and will modernize and sustain Postal Service operations, products 

and services. 

However, we believe that the elimination of 6-day delivery will be devastatingly 

counter-productive to the Postal Service and its customers. It will pose problems for 

thousands of business mailers who depend upon Saturday delivery, who likely will 

adopt alternative delivery measures that only accelerate the migration of business 

mail to the Internet. Elimination of Saturday delivery will be harmful to the millions of household customers of the Postal Service, including the elderly who rely 

upon the timely receipt of their Social Security checks and the sick who rely upon 

the timely receipt of medicine and other medical products. 

More fundamentally, elimination of 6-day delivery will damage the Postal Service 

brand, the competitive position of the Postal Service and cyclically draw down volume faster. Business competitors will fill the vacuum and offer Saturday delivery 

at premium prices, thereby gaining overall market share against the Postal Service. 

Congress should refrain from changing current law and granting approval to 5- 

day delivery, at least for the time being. Five-day delivery should be the last resort, 

not the first. Better options are available now to preserve the health and vitality 

of the nation’s postal system. 

Foremost among them is Congressional passage of legislation that mandates the 

re-calculation of the Postal Service’s pension obligation to the Civil Service Retirement System pension fund, using more equitable, reasonable and financially-stable 

calculation methods and assumptions; and credits to the Postal Service $75 billion 

for an overcharge in its payments into the CSRS pension fund and transfers that 

credit to satisfy the Postal Service’s obligation to the Postal Retiree Health Benefit 

Fund, which will fully fund all mandated payments through 2016. 

In addition, Congress and the Postal Service should adopt new ways to increase 

revenues and cut costs. Congress should confer greater authority to the Postal Service to introduce and sell new products and services that expand the definition of 

‘‘mail,’’ as well as provide wider pricing flexibility. This should involve re-examination of the Postal Service business model and its underlying legal and regulatory 

framework. 

The Postal Service also needs to continue to cut costs, reduce excess postal facility 

capacity, and eliminate wasteful programs—continuing the steps taken thus far that 

already have generated billions of dollars in savings. 

During the past several years, our organization has collaborated with the Postal 

Service on major organizational changes to cut costs and increase efficiencies. Some 

of these changes have eliminated management and supervisory jobs. In 2009 alone, 

nearly 3,600 management positions were eliminated in the Postal Service. These 

changes have dramatically impacted the lives of management employees represented by our organization. Nonetheless, we acknowledged the necessity for these 

changes because of their underlying merits. 

In contrast, the elimination of 6-day delivery lacks business sense and is counterproductive. Reducing delivery days now, when other steps are available, will only 

degrade the value of mail services for households and the mailing industry that use 

and rely upon the Postal Service. 

Thank you for your leadership and your consideration these comments. 

PREPARED STATEMENT OF THE NATIONAL ASSOCIATION OF POSTMASTERS OF THE

UNITED STATES

Chairman Durbin, Ranking Member Collins, and Subcommittee members, my 

name is Robert Rapoza. I am President of the National Association of Postmasters 

of the United States (NAPUS). My organization represents the managers-in-charge 
33 

of Post Offices throughout the United States. I am pleased to share with you 

NAPUS’ thoughts regarding the finances of the United States Postal Service, with 

specific attention to necessity of maintaining a universal Postal Service. 

Presently, there are about 27,000 Post Offices in the country; at the turn of the 

20th century approximately 77,000 Post Offices dotted our cities and heartland. Although the numbers of surviving Post Offices are a mere fraction of their past magnitude, they continue to serve as the sole threshold to government services for millions of citizens and businesses situated in rural areas, small towns, and isolated 

communities. Simply stated, these treasured public facilities have been, currently 

are, and will continue to be an essential communications and commercial lifeline for 

America. Eight percent of this nation’s Gross Domestic Product is postal-related, 

employing approximately 800 million Americans. The Post Office and its influence 

will reach far into the future, in spite of the digital juggernaut and the cataclysmic 

impact that the recent recession has had, and continues to have, on the U.S. Postal 

Service and its customers. As Postmasters, we interact on a daily basis with citizen 

mailers, destination point postal customers, and small businesses. While these customers may not be the so-called ‘‘major mailers’’, they are the foundation of the 

American postal system, and the reason why the Postal Service remains the most 

trusted, respected and valued governmental institution. It is important that Congress work to strengthen and not weaken the Postal Service’s ability to continue to 

perform its historic and vital mission. 

NAPUS recognizes the financial challenge confronting the Postal Service, but closing Post Offices, as being suggested by the Postmaster General and others within 

the agency should be one of last options. In recent speeches and visits to editorial 

boards, the Postmaster General has advocated the deletion of the statutory prohibition against closing a Post Office ‘‘solely for economic reasons.’’ On behalf of the 

many communities for which a self-sustaining Post Office is beyond the means of 

a community, NAPUS strongly opposes the Postmaster General’s pitch. There are 

reasons, other than financial, in which a Post Office may be closed. In fact, the Postal Regulatory Commission is presently reviewing a Postal pattern of circumventing 

the rules under which a Post Office may be ‘‘temporarily suspended.’’ Impacted communities are sharing their insight with the PRC, within the context of a case initiated by Hacker Valley, West Virginia. 

In the report accompanying the fiscal year 2010 Financial Service and General 

Government Appropriations Bill, this Subcommittee reaffirmed Congress’ strong 

commitment to rural America in stating that ‘‘none of the funds provided [in the 

Act] be used to consolidate or close small rural and other small post offices.’’ The 

subcommittee went on to say ‘‘These are services that must be maintained in fiscal 

year 2010 and beyond.’’ Postmasters and Americans fervently believe that Post Offices are key linchpins that bind our nation together. America agrees with this view. 

A June 2009 Gallup Poll illustrated that 55 percent of Americans oppose the closing 

of Post Offices; that number escalates to 88 percent if the target is their Post Office. 

NAPUS believes that the Subcommittee should consider appropriating the statutorily authorized postal public service subsidy; it amounts to a modest $460 million. 

The authorization dates back to 1971, yet the Postal Service has not requested it 

since 1982. The motivation for the provision is obvious, and it highlights the value 

that Congress bestows on Post Offices. Section 2401(b)(1) of Title 39 states that the 

appropriation is to provide ‘‘a maximum degree of effective and regular postal service nationwide, in communities where post offices may not be deemed self-sustaining . . .’’ [Emphasis added] Congress cannot be more succinct in setting aside 

funds to assist small and rural Post Offices. The PRC estimated that closing all 

small and rural Post Offices would have shed only $549 million in postal operating 

costs, in fiscal year 2008. 

One of the most vexing quandaries is how to accurately and fairly evaluate the 

Postal Service’s retiree health and Federal annuity obligations. The Committee Report that accompanied the fiscal year 2010 Financial Services and General Government Appropriations Bill acknowledged the problem. This Subcommittee documented that Office of Postal Inspector General projected the Postal Service to be on 

a schedule which would ‘‘result in a 6 percent overpayment to the [Postal Retiree 

Health Benefits] Fund by the end of 2016.’’ Consequently, the Report directed the 

Postal Service, in conjunction with the Office of Personnel Management and Office 

of Management and Budget, to develop legislation to address the prefunding issue. 

It does not appear that there was a meeting of minds between the Postal Service 

and the Administration. We urge the Committee to direct the Office of Personnel 

Management to calculate the FEHBP inflation rate consistent with the methodology 

used by other large employers and by Medicare. This would reduce the FEHBP 

index by 2 percent and provide much-needed breathing room for the Postal Service. 
34 

Compounding the healthcare pre-funding inequity suffered by the Postal Service is the Postal IG conclusion that the Postal Service has overpaid $75 billion into the 

Civil Service Retirement and Disability Trust Fund. This is the result of not correctly allocating the pension costs of pre-1971 postal employees. Ironically, if this 

pension overpayment were to be applied to pre-funding the Postal Retiree Health 

Fund, the health liability would be wiped away. 

NAPUS understands that remedial legislation may have budget implications. This 

byproduct of postal relief impact stems from entanglement of postal operations, the 

unified budget and budget score-keeping. We believe that it should be made clear, 

through legislation and through credible representations, that postal funds paid into 

the Retiree Health Fund and the CSRS Fund are not taxpayer-generated, and, as 

a consequence, should not impact the Federal budget. The only reason the transactions ‘‘score’’ is because the Postal Fund is an ‘‘off-budget’’ account, while the 

health and retirement funds are ‘‘on-budget’’, and CBO incorrectly asserts that relief 

increases postal spending. We believe that congressional budget rules should not penalize the Postal Service for overpaying into the funds, and should not exploit the 

Postal Service as a cash-cow for the government—particularly since the agency has 

no milk to give. 

Thank you. 

PREPARED STATEMENT OF THE NATIONAL RURAL LETTER CARRIERS’ ASSOCIATION

Chairman Durbin, and members of the Senate Appropriations Subcommittee on 

Financial Services and General Government, my name is Don Cantriel, and I am 

President of the National Rural Letter Carriers’ Association (NRLCA), which represents 123,000 bargaining unit rural letter carriers. Our members work in rural, 

suburban, and urban areas throughout the United States and function as a ‘‘post 

office on wheels’’ because rural letter carriers offer Postal customers all of the services performed over the counter at a post office. We sell stamps and money orders, 

accept express and priority mail, offer signature and delivery confirmation, registered and certified mail, and, of course, collect our customers’ parcels. 

Mr. Chairman, first and foremost, I would like to thank you for allowing me to 

submit a written statement for the record. Our country is experiencing a myriad of 

economic challenges, and the Postal Service has not been immune to these difficult 

financial times. The typical mailers who represent a large portion of the mailing 

business—the financial, mortgage, and credit card industries—have all scaled back 

their mailings as a direct result in cost cutting measures by businesses and the 

American consumer, resulting in unusually low mail volumes. This unusually low 

mail volume has caused the Postal Service to take drastic steps to change its business model and its operations. 

One drastic step the Postal Service proposes is to eliminate Saturday mail delivery. Mr. Chairman and members of the Financial Services and General Government 

Subcommittee, I urge you in the strongest and most forceful way not to eliminate 

the congressionally-mandated 6-day delivery language provision. The provision stating ‘‘That 6-day delivery and rural delivery of mail shall continue at not less than 

the 1983 level’’ must be included once again in the 2011 Financial Services and General Government Appropriations bill. 

The Administration’s Budget Proposal recommends the inclusion of the mandated 

6-day delivery provision. The Administration recognizes that the Postal Service, 

through no fault of its own, is facing real financial challenges. The Administration 

has pledged to work with the Postal Service, the employee unions, Congress, and 

other stakeholders to make sure that the Postal Service remains viable and a pillar 

of the economy. I encourage you to follow the Administration’s lead by including the 

mandated 6-day delivery language in the 2011 bill and allow the Postal Service to 

do what it does best—serve the American public. 

The Postal Service cannot expect that by working less it will achieve more. There 

is a dispute between the Postal Service and the Postal Regulatory Commission 

(PRC), which has regulatory oversight of the Postal Service, over how much money 

may actually be saved by eliminating a day of delivery. The Postal Service claims 

it will save $3.5 billion if it were to eliminate Saturday delivery. The PRC disagrees, 

reporting the savings will be only $1.9–$2.1 billion. Either number represents a very 

small savings compared to the amount of revenue the Postal Service will lose as 

businesses or consumers find other methods of delivery to have their mail, packages, 

and products delivered. Recent history supports my contention that there will be a 

major loss of revenue if the Postal Service is given the green light to stop Saturday 

delivery. After passage of the Postal Reorganization Act of 1970, the Postmaster 

General essentially gave away the parcel business, because the Postal Service be-
35 

lieved that its future was going to be in the collection and delivery of letters—not 

parcels. The Postal Service thereafter created an Express Mail product, only to give 

that business away—once again—to private delivery companies. The Postal Service 

has been fighting ever since to regain a share of each of those markets. 

The point I am trying to make Mr. Chairman, is that consumers and businesses 

will not use a Postal Service that reduces service by 1 day a week or 17 percent. 

Once consumers and businesses find an alternative—and they surely will—they 

likely will stay away from the Postal Service for good. The vacuum that would be 

left by shutting down delivery operations on Saturdays is sure to be filled by a competitor and once we lose that business, we will forever be fighting—at even greater 

expense—to get it back. This is why I urge you to include the mandated 6-day delivery provision in the 2011 Financial Services and General Government Appropriations bill. 

There is an easier way to put the Postal Service on firm financial footing that 

does not involve eliminating Saturday delivery. First, something must be done about 

the pre-funding of the Future Retirees Health Benefits Fund (FRHBF). When the 

2006 Postal Accountability and Enhancement Act (PAEA) was passed, the Postal 

Service was experiencing high mail volumes and record revenues. Much has 

changed since then. Under the PAEA, the Postal Service’s statutorily-required payment schedule is too much to bear and is patently unfair during these trying times. 

No other government agency or corporation is required to pre-fund their retiree 

health benefits—let alone required to almost fully pre-fund them at an accelerated 

pace. Reducing the amount of money the Postal Service is required to pay into the 

FRHBF has the potential to save the Postal Service billions of dollars and still not 

put employee pensions at risk. 

Moreover, the Inspector General reported that the Postal Service has been overcharged $75 billion on its CSRS Pension Fund responsibility. According to the OIG 

report, this overcharge has been used to pay the retirement costs of Federal employees, not just postal employees. The report continues to say that if the overcharge 

was used to prepay the FRHBF; it would fully meet the retiree healthcare liabilities 

and eliminate the need to continue for the Postal Service to continue paying $5 billion annually as mandated by the PAEA. The Postal Service should be permitted 

to have the monies it was overcharged returned. 

Finally Mr. Chairman, I ask that the Postal Service receive its limited appropriation reimbursement as mandated by the Revenue Forgone Reform Act of 1993. Revenue is considered forgone when Congress mandates the Postal Service provides 

mail services for designated mailers at free or reduced rates; such as free mail for 

the blind and overseas absentee balloting materials. Congress typically then appropriates money to reimburse the Postal Service for that revenue. While this amount 

will vary from year to year depending on actual usage, the Postal Service is still 

owed this revenue and I ask that Congress appropriate the proper amount the Postal Service is owed in forgone revenue. 

Once again, I thank you for allowing me to submit a statement for today’s Subcommittee hearing. If you have any questions, please do not hesitate to contact me 

at your convenience. 

PREPARED STATEMENT OF THE NATIONAL POSTAL MAIL HANDLERS UNION

Thank you, Chairman Durbin, for holding this timely oversight hearing. The Postal Service’s financial situation has been garnering lots of headlines and editorials 

recently, but not all of them have been accurate or fair. These hearings certainly 

are an important part of gathering the facts, and starting the process necessary to 

provide financial and other relief to the nation’s postal system. 

The National Postal Mail Handlers Union (NPMHU) represents 50,000 mail handlers. Our members are located in all of the major mail processing facilities. Mail 

handlers load and unload the trucks; cancel, prepare, sort, and dispatch the mail; 

and perform most of the allied duties necessary to the processing of mail. It is difficult and sometimes dangerous work. 

In recent years, the NPMHU has worked diligently with Postal Service management on a variety of cost-saving initiatives. We have been meeting on a regular 

basis, at every level where results can be achieved, from the workroom floor to 

USPS headquarters at L’Enfant Plaza. We have adopted voluntary programs to improve safety, prevent accidents, and cut ergonomic injuries; we have produced joint 

interpretation manuals to reduce labor-management disputes and the overall number of grievances and arbitrations; we have agreed to early retirement programs, 

both with and without incentives; and we have cooperated with USPS efforts to 

automate and save costs while processing the mail more quickly. Mail handlers also 
36 

have experienced substantial decreases in the number of career employees, as well 

as cuts in hours and overtime; and we have had thousands of our members involuntarily reassigned or excessed into other hours, onto other tours or days of work, or 

into other facilities, sometimes in far off locations. 

The NPMHU recognizes that the current economic environment may require additional responses. We do not believe, however, that eliminating Saturday delivery is 

change for the better. Saturday delivery anywhere in the United States is a hallmark of the Postal Service, and weekend processing and delivery of mail is vital to 

maintaining the postal network. 

The Postal Service acknowledges, as it must, that the elimination of Saturday delivery will adversely affect some of its current business. There are numerous examples: Netflix is one of the Postal Service’s largest customers. Many of your constituents look forward to that Saturday delivery of a DVD, as it provides entertainment 

for the weekend. What about the delivery of VA or Social Security checks, particularly if there is a Monday holiday? Businesses, particularly small businesses, often 

rely on Saturday delivery and weekend processing for their financial well-being. 

There are just too many ways that this proposal is wrong for the Postal Service to 

allow it to go forward. The NPMHU simply cannot agree that artificially accelerating the loss of volume is a good idea. 

Thus, eliminating Saturday delivery is a last resort that should not be seriously 

considered when there are better solutions available that will not degrade the Postal 

Service. Several alternatives are obvious, and require action by Congress: 

First and foremost, Congress must fix the wholly unrealistic, but statutorily required, schedule for the pre-payment of retiree healthcare benefits. The provisions 

of the 2006 Postal Accountability and Enhancement Act (PAEA) that established the 

Retiree Health Benefit Fund (RHBF) may have made sense in 2006 when the economy was healthy and the USPS was growing, but today they need to be modified. 

Congress and the White House need to step up to the plate and make changes to 

the RHBF. No Federal agency or significant private entity has any yearly liability 

remotely resembling the $5 billion burden now imposed on the Postal Service. Those 

who want the Postal Service to run more like a private business should allow the 

USPS to do what businesses are allowed to do: let the Service postpone and adjust 

its payments to reflect the economic realities currently presented. 

Furthermore, the size of the future liability for retiree health was calculated improperly. Gross errors were made on the number of retirees and the annual rate 

of inflation for healthcare, to name the two most prominent examples. These should 

be fixed, as the adjustments will provide an important lifeline to the Postal Service. 

In short, protestations to the contrary, whether in the halls of Congress or publicly, do not change the actual facts: the calculations underlying the Retiree Health 

Benefit Fund, and the repayment schedules established by the PAEA, are to blame 

for a large part of the Postal Service’s current financial woes. 

Second, the USPS portion of the CSRS pension fund also was improperly calculated. The Office of Personnel Management must be directed to recalculate the 

USPS liabilities using actuarial methods that are accurate and fair, and then must 

initiate an inter-governmental transfer of the resulting surplus to the USPS and its 

ratepayers. 

The NPMHU also urges support for the ‘‘vote-by-mail’’ legislation currently before 

the Senate. 

We also urge Congress to grant the Postal Service more flexibility in developing 

new, innovative ways of conducting its business and increasing its customer base. 

With regard to specific legislation, the NPMHU supported the original version of 

S. 1507, which had a realistic approach to the RHBF funding schedule. Had that 

legislation passed as introduced, this entire proceeding would have a different character to it. The original version of S. 1507 was legislation that most parties agreed 

was acceptable. However, the bill was amended into a vehicle to tilt the collective 

bargaining process in favor of management, despite the fact that the process for four 

decades has functioned as it was intended, without any labor stoppages, lock-outs, 

or similar labor-management strife since its inception. The changes added to S. 1507 

about the financial condition of the Postal Service were an unnecessary block to constructive resolution of these serious funding issues. 

As noted, the financial situation facing the Postal Service calls for immediate resolution, and that resolution rests with Congress and the Executive Branch. Congress must act to ensure that changes to the Retiree Health Benefit Fund and the 

calculation of the CSRS overpayments are made, so that the Postal Service is able 

to follow rational accounting methods and commonsense budgeting while it struggles to remain solvent during these tough economic times. 

Thank you, again, for holding this oversight hearing. 
37 

1 Congressional Research Service, The U.S. Postal Service and Six-Day Delivery: Issue for 

Congress, July 29, 2009, p. 1. 2 U.S. Government Accountability Office, U.S. Postal Service: Mail-Related Recycling Initiatives and Possible Opportunities for Improvement, GAO Report GAO–08–599, June 2008, p.1. 

PREPARED STATEMENT OF THE AMERICAN POSTAL WORKERS UNION, AFL–CIO 

Mr. Chairman and members of the Subcommittee, my name is William Burrus, 

President of the American Postal Workers Union, AFL–CIO. On behalf of the 

260,000 members of my union, I thank you for holding this hearing today to examine the financial condition of the United States Postal Service (USPS), and for providing the APWU an opportunity to submit testimony. 

Since 1775, the Postal Service has sorted, transported and delivered mail throughout the nation. The Service began as a conduit for communication between the Continental Congress and our armies during the Revolutionary War. In 1863, pursuant 

to statute, the USPS began delivering mail to certain addresses if postage was 

enough to ‘‘pay for all expenses of the service.’’ By 1896, the Postal Service was 

making deliveries to certain rural and urban homes 6 days a week. In some cities, 

in fact, delivery occurred more than once per day until 1950. In other more remote 

rural areas, deliveries continued to occur fewer than 6 days per week. Today, the 

USPS delivers to 146 million homes and businesses, 6 days a week. Throughout the 

Service’s history, however, there have been discussions about reducing the number 

of delivery days to conserve fuel and reduce costs.1

The Postal Service’s mission is to provide the nation with affordable and universal 

mail service. However, the USPS’ authority was revised on December 20, 2006, with 

the enactment of the Postal Accountability and Enhancement Act (PAEA). Through 

this legislation, Congress sought to provide the USPS with tools and mechanisms 

to help ensure that the USPS is efficient, flexible, and financially sound, but the 

law has had the opposite effect. 

USPS Financial Condition 

The PAEA has forced the Postal Service virtually into insolvency. It imposed on the Postal Service a $75 billion obligation to pre-fund retiree health benefits, a liability that is not borne by any other Federal agency. 

This requirement, more than any other single factor, has created a USPS deficit of alarming size. A 2008 GAO report found the USPS’s $5.3 billion shortfall in fiscal 

year 2007 was caused primarily by this provision of the PAEA.2

If the USPS were to release financial records showing liabilities minus this obligation, such documents would clearly demonstrate the disastrous effect the legislation 

has had. Absent this pre-funding burden, the Postal Service would have experienced 

a cumulative surplus of $3.7 billion over the last 3 fiscal years, despite declining 

mail volume, an economy in chaos, and electronic diversion. 

The APWU is compelled to ask: If funding future healthcare liabilities meets 

sound accounting standards, why isn’t this requirement applied to all Federal and 

private enterprises? Why doesn’t every branch of government, including Congress, 

pre-fund future healthcare liabilities? 

The PAEA was a mistake, a gross miscalculation, which provided no new revenue 

stream for the Postal Service while imposing massive, artificial new costs. The prefunding provision is the central cause of USPS financial difficulties, and we urge 

Congress to correct it. If this single requirement were rescinded, the elimination of 

Saturday mail delivery would be unnecessary. 

USPS Share of CSRS Pension Responsibility 

We also strongly urge Congress to give serious consideration to the USPS Office 

of Inspector General’s findings that the methodology for determining the Postal 

Service’s contribution to the Civil Service Retirement and Disability Trust Fund is 

flawed. 

For employees who began their career before the Postal Reorganization Act of 

1970, pension responsibility is shared between the Federal government and the 

USPS. The Office of Personnel Management (OPM) established the methodology to 

be used in determining the contribution of both entities. The USPS OIG commissioned the Hay Group, a well-known actuarial firm, to review the allocation of liabilities for postal pensions between the Federal government and the USPS. The Hay 

Group’s findings, ‘‘Evaluation of the USPS Postal CSRS Fund for Employees Enrolled in the Civil Service Retirement System,’’ describes the results of its analysis. 

Among the findings in the report is that if ‘‘the more equitable years-of-service 

allocation methodology had been used to determine the value of the Postal CSRS 

Fund, the OIG estimates its value on September 30, 2009, would have been approximately $273 billion rather than $198 billion—a difference of $75 billion.’’ The $75 
38 

billion overpayment would allow the Postal Service to pay a $10 billion unfunded 

liability, pay off its remaining debt, and add approximately $55 billion into the Retiree Health Benefits Fund, which already has an approximately $35 billion balance. 

With $90 billion, the Postal Service would be positioned to fully fund the PAEA obligation. 

There is no dispute that the USPS faces a serious financial challenge as a result 

of the requirement to pre-fund retiree healthcare liabilities and the flawed pension 

allocation methodology. A more equitable allocation of pension liabilities would offer 

the USPS stability, which could delay any reduction in the number of mail delivery 

days and other policies that would undermine its ability to provide universal service 

at uniform rates to American citizens. 

The APWU urges Congress to develop a legislative solution to correct the formula 

which so unfairly requires postal customers to subsidize pension obligations that 

should be covered by the Federal government. 

Recently, Postal Service announcements have included projections of a $238 billion deficit over the next 10 years. Frankly, these predictions are outlandish and unsupported. The USPS has offered no justification for these wild claims, and, unfortunately, the media has failed to challenge them. 

Six-Day Delivery 

Following the USPS briefing on March 2, 2010, I was critical of USPS proposals 

to reduce mail delivery to 5 days per week, writing to APWU members, ‘‘It would 

be the beginning of the demise of the Postal Service.’’ 

In 2008, both the PRC and the USPS conducted studies of mail delivery. The 

USPS study concluded that the elimination of one delivery day could save the Service $3.5 billion per year, while the PRC finding was savings of $1.93 billion. 

Congress considered the reduction in service delivery days more than 30 years ago 

in response to an earlier study by the USPS. After holding a dozen hearings with 

hundreds of witnesses, the House of Representatives approved a resolution opposing 

the service reduction by a vote of 377–9. 

Then, as now, the key question was: Is the USPS a profit-driven organization, or 

a public service? 

In 1980, Postmaster General William F. Bolger appeared before Congress insisting that reducing the number of delivery days was necessary to ensure the Postal 

Service’s economic stability. He estimated that the switch to 5-day delivery would 

result in the loss of 15,000 to 20,000 Postal Service jobs. Based on statements reported by participants in a 2010 meeting of the Mailers Technical Advisory Council, 

the 2010 version could result in the loss of as many as 199,000 good-paying, middleclass USPS jobs. 

However, the APWU’s opposition to eliminating Saturday delivery is not based on 

a concern about losing jobs. (Approximately 2,500 jobs in positions represented by 

the APWU would be affected.) We are concerned about protecting the vitality of the 

USPS for the future, and we support the right of every citizen—including those 

without Internet access and the disabled—to receive high-quality mail service. 

Former Postal Regulatory Commission Chairman Dan G. Blair addressed some of 

the dangers of the proposal in testimony before the Senate Subcommittee on Federal 

Financial Management, Government Information, Federal Services, and International Security on January 28, 2009. Senator Susan Collins stated that the decision to further reduce postal services would cause ‘‘an even bigger drop’’ in mail volume that could lead to a ‘‘death spiral’’ for the USPS. 

New Services 

It is easy to suggest that the Postal Service should offer new services in order 

to remain financially sound while ignoring free-market obstacles. However, it is unlikely that a single new service or product would be accepted without challenge by 

private-sector competitors; furthermore, it is unlikely that such services would result in short-term profits for the USPS. 

In testimony before the House Subcommittee on Federal Workforce, Postal Service, and the District of Columbia on November 5, 2009, GAO officials said, ‘‘Allowing 

USPS to compete more broadly with the private sector would raise risks and concerns. As with USPS’s non-postal ventures before PAEA was enacted, new non-postal ventures could lose money; and even if they were to make money, issues related 

to unfair competition would need to be considered.’’ 

How can the USPS be expected to fund new enterprises that would require significant start-up costs while it is saddled with a $75 billion debt? The reality is that 

requiring a payment averaging $5.6 billion annually for 10 years would bankrupt 

any American corporation. 
39 

Savings and Collective Bargaining 

In recent years, the USPS has achieved unprecedented savings through productivity increases, a series of cost-cutting initiatives, and sacrifices by workers. More 

than 100,000 jobs have been eliminated through attrition over the last 21⁄2 years, 

and workers have begun paying an increased share of health insurance premiums. 

In addition to 5-day mail delivery, the USPS has proposed numerous changes that 

relate directly to workers’ rights and benefits and are governed by collective bargaining. We reject any effort to influence the process with threats of severe workrule changes. Contract negotiations for both the American Postal Workers Union 

and the National Rural Letter Carriers Association begin in the fall. 

We believe it is unreasonable to single out a handful of provisions achieved 

through bargaining that benefit workers (such as protection against layoffs) from 

the host of negotiated stipulations that are contrary to workers’ objectives. 

Conclusion 

Mr. Chairman, we believe the rush to 5-day mail delivery is an ill-conceived reaction to declining mail volume during an economic slowdown. While volume may 

never return to 2006 levels, even a modest return, coupled with repeal of the requirement to pre-fund retiree health benefits, would go a long way toward sustaining the Postal Service for many years into the future. 

STATEMENT OF HON. RUTH Y. GOLDWAY, CHAIRMAN, POSTAL REGULATORY COMMISSION 

Senator DURBIN. I might also say to those in attendance that our 

next panel includes Ruth Goldway, Chairman of the Postal Regulatory Commission. 

We’re glad you’re here. 

She’s the longest-serving full-time Senate-confirmed Presidential 

appointee within the executive branch of the United States Government. 

Congratulations. 

Also appearing is David Williams, independent inspector general 

for the U.S. Postal Service since 2003. He’s served as inspector general for a number of agencies: the Nuclear Regulatory Commission, 

Social Security Administration, Department of the Treasury, and 

the Department of Housing and Urban Development, held top posts 

at Labor and Transportation Security agencies, former special 

agent with the Secret Service, and a decorated veteran, and, I’m 

proud to note, a native of Illinois, graduate of Southern Illinois 

University in Edwardsville, where my wife attended, and holds a 

master’s in education as a graduate of the University of Illinois, 

Champaign. 

Phillip Herr joins us from the U.S. Government Accountability 

Office. He’s Director in the Physical Infrastructure Team of the 

GAO. Since joining GAO in 1989, he’s managed reviews of a broad 

range of domestic and international programs. His current portfolio 

focuses on programs at the U.S. Postal Service and the Department 

of Transportation. And prior to joining the GAO, he worked in 

management consulting, and holds a Ph.D. from Columbia University. 

Thanks, to each of you, for being here. 

I’m going to allow each of you an opportunity to make an opening 

statement. Your entire statement will be made part of the record. 

Ms. Goldway, why don’t you proceed. 
40 

SUMMARY STATEMENT OF HON. RUTH Y. GOLDWAY

Ms. GOLDWAY. Thank you. Thank you, Chairman Durbin and 

Ranking Member Collins. Thank you for the opportunity to testify 

today. 

I’m pleased to represent the Postal Regulatory Commission and 

to explain our role in whether or not the Postal Service should reduce mail delivery to 5 days. 

Under the Postal Accountability and Enhancement Act, whenever the Postal Service considers a nationwide change in the nature of postal services, it must submit a proposal to the Commission requesting an advisory opinion on the change. Under Commission rules, such a request must be filed no fewer than 90 days before the date the Postal Service proposes to make the change effective. 

The Commission provides a public, on-the-record hearing process 

so that mail users and the public can test the Postal Service’s proposals and offer supporting or opposing views. Then the Commission issues an opinion that balances all applicable public policies, 

especially the need to maintain adequate and effective universal 

service and the need to provide services in an economic and efficient manner. 

In this specific instance involving a plan to eliminate Saturday 

delivery, the Postal Service must also seek congressional approval, 

because, for over 25 years, since 1983, the delivery levels of that 

year have been specified as the minimum annual appropriations 

legislation. 

For comparison, just last week the Commission issued and distributed another advisory committee—commission—another advisory opinion in which we reviewed a proposal regarding the process 

for closing the more than 4,000 retail facilities it denominates as 

classified stations and branches. There was an overwhelming public support for the maintenance of post offices from all of our participants in the hearing process. The Commission advised the Service to make significant improvements in the process, which would 

result in a more accurate, comprehensive, and balanced financial 

projection and would ensure the rights of affected customers who 

should have a meaningful opportunity to provide input before a decision to cut service is made. Congressional review in this matter 

could be helpful, but is not required. 

When the Postal Service requests our opinion on elimination of 

Saturday delivery, it will have to provide comprehensive evidence 

to justify this change. The Commission will follow well-established 

administrative procedures to analyze the evidence. This includes 

an opportunity for us to question the Postal Service and an opportunity for the public to provide its views. The Postal Service and 

participants will have the opportunity to file briefs and issue briefs 

and submit reply briefs. 

The Commission expects to hear from a wide variety of businesses and associations that are dependent on, or make significant 

use of, the Postal Service. We will build a comprehensive record on 

the potential cost savings, on volume declines, and on impacts on 

maintenance of timely and reliable service. 
41 

On this important matter, the Commission will also expand participation to include both individuals and groups representing average citizens. As we have done before, we will hold field hearings 

in cities around the country to learn about specific experience that 

give meaning to the broad national trend data that we generally 

rely on. 

The Postmaster General’s testimony, filed here today, describes 

a complex plan for 5-day delivery. It is difficult to say precisely how 

much time will be necessary to develop a thorough advisory opinion. Depending on the completeness of the information presented 

by the Postal Service, and the issues and the motions raised by individual business participants, a rough estimate would be 6 to 9 

months. 

The Commission studied the cost savings associated with 5-day 

mail delivery in 2008 as a part of our ‘‘Universal Postal Service and 

Postal Monopoly’’ report to Congress. In that report, the Commission presented an estimate that cutting Saturday delivery would 

have saved the Postal Service $1.9 billion in 2007, about $1.6 billion less than the Postal Service calculation at that time. About 

one-third of the difference was because the Postal Service didn’t 

figure in any volume losses. We estimated a 2-percent reduction in 

volume, caused by a reduction in service. The Service also didn’t 

account for the added costs of delivering pieces that otherwise 

would have been delivered on Saturday. 

But, neither the Postal Service nor the Commission was quantifying a fully developed change of the type outlined today. We will 

carefully analyze the Postal Service’s filing that should include, 

when it’s filed, a sophisticated and comprehensive presentation of 

potential cost, volume, and revenue changes to support its estimates of net savings. Hopefully, it will also explore the impacts of 

5-day delivery on the Postal Service and on the economic and social 

interests of its customers. I believe our conclusions will be of help 

to you and inform your deliberations on legislation. 

Today, you also asked witnesses to comment on the current financial situation facing the Postal Service. We hope to discuss our 

Commission’s annual compliance determination with you when it is 

issued late this month. It will provide a solid analysis of the Postal 

Service’s precarious finances, and in the context of the rate and 

service performance of fiscal 2009. Suffice it to say that the situation is serious and we are unanimous on the—in the Commission 

in our hope that Congress will address the retiree healthcare benefit issue promptly. 

PREPARED STATEMENT

Thank you again for providing me the opportunity to testify. I 

would be pleased to respond to any questions that you have today. 

Senator DURBIN. Thanks, Ms. Goldway. 

[The statement follows:] 

PREPARED STATEMENT OF RUTH Y. GOLDWAY

Chairman Durbin, Ranking Member Collins and members of the Subcommittee, 

thank you for the opportunity to testify. I am pleased to represent the Commission 

today, and to explain its role in the process of reviewing the coming Postal Service 

proposal for a reduction in the mandated mail delivery frequency. This proposal impacts virtually every citizen in the Nation, and this Subcommittee is wise to turn 
42 

its attention so quickly to this issue. Today, I hope to provide you with a clear understanding of the Postal Regulatory Commission’s statutory obligation and how we 

intend to fulfill it. 

When the Postal Service determines that there should be a change in the nature 

of postal services which will generally affect service on a nationwide, or substantially nationwide basis, it must submit a proposal to the Commission requesting an 

advisory opinion on the change. This requirement was established by the Postal Reorganization Act of 1970, and was retained by the Postal Accountability and Enhancement Act of 2006. Our rules provide that such a request must be filed with 

the Commission no less than 90 days in advance of the date on which the Postal 

Service proposes to make the change effective. 

The Commission is responsible for providing a public, on-the-record, hearing process so that mail users and other interested members of the public can test the Postal Service’s proposal and offer supporting or opposing views. The Commission will 

then provide an opinion that takes into account all applicable public policies, such 

as the need to maintain adequate and effective universal service, and the need to 

provide services in an economic and efficient manner. 

While we have not yet received a formal proposal from the Postal Service to eliminate Saturday delivery, we have been told to expect one this month. In this specific 

instance, the Postal Service must also seek approval from Congress, since for over 

25 years, 1983 delivery levels have been specified as a minimum in annual appropriations legislation, thereby requiring maintenance of 6-days-a-week city and rural 

delivery. 

Last week, on March 10, the Commission submitted an advisory opinion on another service change proposal. The Postal Service requested a review of its process 

for closing the more than 4,000 retail facilities it denominates as classified stations 

and branches. The Commission found that significant improvements should be made 

to this process. These improvements would result in more accurate, comprehensive, 

and balanced financial projections as a basis for Postal Service decisions, and would 

ensure the rights of affected customers who should have a meaningful opportunity 

to provide input before a decision to cut service is made. Copies of that opinion have 

been provided to members of this Committee. I believe this case is representative 

of the thorough review and constructive advice the Commission provides in response 

to Postal Service requests. 

When the Postal Service submits the request for an advisory opinion on elimination of Saturday delivery, it will provide evidence explaining why it believes this 

change is justified. The Commission will follow established procedures and create 

a schedule to analyze that evidence. The schedule will include an opportunity to 

question the Postal Service, and an opportunity for the public to provide its views, 

both informally and as part of more formal, technical presentations. The Postal 

Service and interested members of the public will have the opportunity to brief 

issues and submit reply briefs. 

Based on recent experience, I expect the Commission will receive detailed and 

thoughtful comments from a wide variety of businesses and associations that are dependent upon, or make significant use of, the Postal Service. To the extent necessary, the Commission will issue information requests so that a comprehensive 

record exists to support conclusions on potential cost savings, volume declines, and 

impacts on the maintenance of timely and reliable service. 

Additionally, the Commission will expand its outreach efforts to encourage participation by both individuals and groups representing businesses and average citizens 

affected by the proposal. In recent cases, the Commission has found that going outside of Washington, DC, and holding field hearings in such places as The Bronx, 

New York, Independence, Ohio, St. Paul, Minnesota and Flagstaff, Arizona has 

proven extremely helpful. During these hearings, we learn about specific experiences that give meaning to the broad national trend data we generally rely on. 

As we have not yet seen the actual Postal Service proposal, it is difficult to estimate precisely the amount of time that will be necessary to develop a thorough advisory opinion. Depending on the complexity of the issues raised both by the Postal 

Service and by individual and business participants, a rough estimate would be 6 

to 9 months. 

The invitation to testify today also sought witness comments on the current financial situation facing the Postal Service. Suffice it to say that we are all well aware 

of the seriousness of the Postal Service’s current situation, and hopeful that Congress may see fit to address the retiree healthcare benefit issue promptly. The Commission will issue its Annual Compliance Determination later this month that will 

provide a full analysis of the Postal Service finances in the context of its rate and 

service performance in fiscal year 2009. I will make certain that each member of 
43 

this Committee is immediately provided with a copy of the Annual Compliance Determination. 

As a point of reference, the Commission recently had occasion to approximate the 

cost savings associated with 5-days-a-week mail delivery. In December 2008, the 

Commission submitted a report to Congress entitled ‘‘Universal Postal Service and 

the Postal Monopoly’’, as required by the Postal Accountability and Enhancement 

Act of 2006. Specifically, the Act required the Commission to estimate the costs of 

the Universal Service Obligation and the value of the existing monopoly. 

The Commission accepted as reasonable an estimate developed by a team of outside consultants that reducing the frequency of delivery from 6 to 5 days would have 

increased the Postal Service’s fiscal year 2007 profits by $1.9 billion. This was about 

$1.6 billion less than a Postal Service calculation at that time. About one-third of 

the difference was due to the fact that the Postal Service assumed no mail volume 

would be lost as a result of the reduction in service. The consultants’ estimates reflected a 2 percent reduction in volume due to the reduction in service. The other 

major difference related to the costs of delivering pieces that otherwise would be delivered on Saturday. 

However, neither the Postal Service nor the Commission were quantifying a fully 

developed change proposal of the type the Postal Service has said it will be providing later this month. I look forward to carefully analyzing a Postal Service proposal that includes a sophisticated presentation of potential cost and revenue 

changes to support its estimates of the impact of elimination of Saturday delivery 

both on the Postal Service and on the economic and social interests of its customers. 

Thank you again for providing me the opportunity to testify today. I would be 

pleased to respond to any questions Subcommittee members may have. 

Senator DURBIN. Mr. Williams. 

STATEMENT OF HON. DAVID C. WILLIAMS, INSPECTOR GENERAL, OFFICE OF INSPECTOR GENERAL, UNITED STATES POSTAL SERVICE 

Mr. WILLIAMS. Thank you, Mr. Chairman and Senator Collins. I 

appreciate the opportunity to discuss the Postal Service’s current 

financial condition. 

The Postal Accountability and Enhancement Act of 2006 set the 

Postal Service on a visionary, imaginative course to behave with 

the agility and customer responsiveness found in the private sector. 

However, the act’s incentives and pressures served to illuminate 

chronic business-model problems that required rapid correction. 

Also, the recent economic downturn hit the postal community very 

hard. Last, the Digital Age has entered a creative-destructive 

phase, disrupting numerous industries, including the Postal Service. 

The Postal Service is moving in the right direction, but its velocity is insufficient to avoid an economic catastrophe that will severely challenge its viability. Actions are needed now in several key 

areas. 

Each year, the Postal Service pays $7 billion more than is warranted for its benefit funds. This overcharge is the result of exaggerated healthcare inflation percentages, a transfer of Federal pension responsibilities to the Postal Service, and excessive prefunding 

targets for retiree healthcare and pension funds. Addressing this 

overcharge could allow needed time to plan and integrate largescale cost-reduction initiatives. The large network of post offices, 

plants, and administrative apparatus is financially burdensome. To 

its credit, the Postal Service has streamlined some of its network, 

reducing over 130,000 employee positions since 2003 and cutting $6 

billion in costs for 2009 alone. 

The Postal Service must accelerate its infrastructure optimization plan while balancing its commitment to service. The Postal 
44 

Service’s complex workforce rules do not always match mission requirements. The ebb and flow of mail in the processing plants suggest the need for a more flexible staff willing to perform a wider 

range of duties. The current method of paying carriers by the hour 

requires closer management than is possible and disincentivizes optimal performance. 

We, along with the Postal Service, have recognized the need for 

a simplified, modernized pricing structure. The Postal Service has 

three primary product lines: letters, flat mailings, such as magazines, and packages. Yet, it has thousands of price variations for 

them. Additionally, 24 of the 135 work-share discounts exceed costs 

avoided, and other discounts may no longer be of value. A simple 

pricing structure could be easier to use and allow more accurate 

charges to customers. 

A recent poll indicated that reducing 6-day delivery to 5 days has 

the support of mail recipients, though mailers have expressed concerns. Mail pieces per mailbox have declined significantly, from six 

pieces per day to four. And reducing delivery days would seem to 

balance cost by restoring the number of pieces being delivered. Additionally, with the Nation’s 40-hour workweek—managing resources for a 5-day business cycle is much simpler than for 6 days. 

The Postal Service needs to weigh potential savings against possible decreases in revenue and loss of its competitive advantage, 

since other companies charge premiums for Saturday delivery. 

Last, my office is concerned that the Postal Service builddown 

could be so rapid that the dynamics within and among the large 

initiatives are not fully understood. Adding 5-day delivery changes 

to infrastructure optimization, management of the FSS investment, 

and intelligent mail barcode implementation is daunting. Perhaps 

a test, beginning in the quieter summer months, would provide a 

great deal of useful information. 

To conclude, I’m not aware of a business in the world that could 

forfeit $7 billion annually before its doors open, and survive. Benefit prefunding overcharges should be fixed. Additionally, the Postal Service should aggressively right-size it’s infrastructure without 

delay. The clock is ticking, and this may be their last shot. Work 

rules should be better aligned with mission requirements. A simplified pricing structure should be implemented to bring in new 

business and enable accurate calculation of revenues due. 

The world is in the midst of a digital revolution, and it’s a wild 

ride for the Nation’s entire communications infrastructure. 

Globalization and the Digital Age are providing exciting opportunities, but only for some. Tech centers in India and China are tightly 

surrounded by people pulling ploughs with water buffalo, people 

who have been completely left behind. 

America has taken many actions in the past, such as land-grant 

universities, TVA, rural mail delivery, and interstate highways, to 

ensure that people are not left behind. The powerful and unpredictable events facing the communications industry may require such 

action, to assure that all Americans have universal access and the 

opportunity to take part in this exciting new world. 

Our communications infrastructures have to recover from the 

shock and trauma of a changed world to assure their readiness to 

play both traditional and emerging roles in support of our citizens. 
45 

Thank you. 

Senator DURBIN. Thanks a lot. 

Mr. Herr, your turn. 

STATEMENT OF PHILLIP HERR, DIRECTOR, PHYSICAL INFRASTRUCTURE ISSUES, GOVERNMENT ACCOUNTABILITY OFFICE 

Mr. HERR. Thank you, Chairman. 

Chairman Durbin and Ranking Member Collins, I’m pleased to 

participate in this hearing on the U.S. Postal Service. 

Today, I will briefly discuss its financial condition and forecast. 

I will also provide GAO’s perspective on the Postal Service’s need 

for restructuring, as well as highlight questions for Congress to 

consider regarding changing delivery from 6 to 5 days. 

Turning first to the Postal Service’s financial condition. As mail 

volume declined by 35 billion pieces in fiscal years 2007 through 

2009, the Postal Service’s financial viability has deteriorated, leading to $12 billion in losses. Current forecasts, discussed earlier, are 

that mail volume will decline to 167 billion pieces this fiscal year, 

the lowest levels since 1992. The Postal Service projects a record 

loss of over $7 billion this fiscal year, while taking on $3 billion in 

debt. Its outstanding debt will increase to $13.2 billion, close to its 

$15 billion statutory limit. 

The Postal Service does not expect total mail volume to return 

to its former levels when the economy recovers. Simply put, the 

economic downturn and continuing shift to electronic communications and payments has changed how mail is used. By fiscal year 

2020, the Postal Service projects further volume declines of about 

16 percent, to 150 billion pieces, the lowest level since 1986. Firstclass mail volume is projected to decline by another 37 percent over 

the next decade, as seen in figure 3 of my written statement. And 

less-profitable standard mail, primarily advertising that’s subject to 

economic fluctuations, is projected to remain roughly flat over the 

next decade. 

Turning to restructuring and 5-day delivery. As Senator Collins 

noted, in July 2009 GAO added the Postal Service’s financial condition to our high-risk list again and reported that action is urgently 

needed in multiple areas so that the Postal Service can achieve financial viability. Such actions should include restructuring its operations, networks, and workforce to reflect changes in mail volume 

and revenue. The longer it takes for the Postal Service and Congress to address these challenges, the more difficult they will be to 

overcome. 

We believe that no single change will be sufficient to address the 

Postal Service’s pressing challenges, and have identified key actions the Postal Service and/or Congress could take. Compensation 

and benefits costs represent 80 percent of the Postal Service’s costs, 

as Senator Durbin mentioned earlier. Cost-savings opportunities 

are possible with regard to personnel and benefits. 

In terms of retirements, annually through 2020, about 5 percent 

of Postal Service employees will be eligible and are expected to retire. That represents approximately 300,000 employees, about onehalf the current workforce. In terms of benefit costs, postal employees have 80 percent of their health benefit premiums covered, 8 

percent more than most Federal employees. 
46 

Consolidating processing and retail networks is also needed, 

given mail volume declines. Removing excess capacity is necessary 

in the 600 processing facilities, where first-class mail processing capacity exceeds needs by 50 percent. 

In the retail area, approximately 30 percent of revenue currently 

comes from purchases at nonpostal locations, such as grocery 

stores, indicating that consumers have begun shifting to alternatives. The network of 36,500 retail facilities can also be reduced. 

Maintenance has been underfunded for years, resulting in deteriorating facilities and a backlog. 

Another opportunity for savings is consolidating the postal field 

administrative structure by reviewing the need for 74 district offices and eight area offices. And because cost-cutting alone will not 

ensure a viable Postal Service, generating revenue through new or 

enhanced products is needed to maximize profitable mail volume. 

Two additional options that would require congressional approval 

involve, first, the funding requirements of retiree health benefits. 

As mentioned today, last-minute congressional action was needed 

this past September to reduce the Postal Service’s required payments from $5.4 billion to $1.4 billion. And, second, reducing delivery from 6 to 5 days. 

Questions we have raised that Congress might wish to consider 

regarding changing delivery from 6 to 5 days include: How would 

eliminating Saturday delivery affect efforts to increase volume? 

How would delivery service standards be affected? How will consumers and business customers be affected in their operations? 

And how much leadtime would be needed to modify postal operations and financial systems for this actually to take place? 

Such issues must be addressed so that stakeholders fully understand the potential ramifications of these changes. GAO also expects to analyze this proposal when it becomes available. 

Mr. Chairman, in conclusion, the longer it takes for the Postal 

Service and Congress to realign the Postal Service to the changing 

use of the mail, the more difficult change will be. Toward that end, 

GAO has an ongoing review to evaluate options for long-term structural and operational reforms and we plan to issue our report in 

April. 

PREPARED STATEMENT

This concludes my prepared statement, and I’m pleased to answer any questions. 

Thank you. 

[The statement follows:] 

PREPARED STATEMENT OF PHILLIP HERR

HIGHLIGHTS

Why GAO Did this Study 

The U.S. Postal Service’s (USPS) financial condition and outlook deteriorated significantly during fiscal year 2009. USPS was not able to cut costs fast enough to 

offset declining mail volume and revenues resulting from the economic recession and 

changes in the use of mail, such as electronic bill payment. 

In July 2009, GAO added USPS’s financial condition and outlook to its High-Risk 

List and reported that USPS urgently needed to restructure to improve its financial 

viability. Declines in mail volume and revenue, large financial losses, increasing 

debt, and financial obligations will continue to challenge USPS. 
47 

This testimony provides (1) information on USPS’s financial condition and forecast 

and (2) GAO’s perspective on the need for USPS restructuring. In addition, questions and issues are included for Congress to consider regarding USPS’s proposal 

to reduce delivery from 6 to 5 days. This testimony is based on GAO’s past and ongoing work, including its work on postal reform issues, its report adding USPS’s financial condition and outlook to its High-Risk List, and updated information on 

USPS’s financial condition and outlook. 

FINANCIAL CRISIS DEMANDS AGGRESSIVE ACTION

What GAO Found 

As mail volume declined by 35 billion pieces (about 17 percent) in fiscal years 2007 through 2009, USPS’s financial viability deteriorated, with close to $12 billion 

in losses, and it does not expect total mail volume to return to its former level when 

the economy recovers. USPS forecasts that total mail volume will decline to 167 billion pieces in fiscal year 2010—the lowest level since fiscal year 1992, and 22 percent less than its fiscal year 2006 peak. It also projects a record loss of over $7 billion. Further, USPS has halted construction of most new facilities and expects to 

borrow $3 billion in fiscal year 2010, which would bring its total outstanding debt 

to $13.2 billion, close to its $15 billion statutory limit. Looking forward, USPS 

projects that by fiscal year 2020, total mail volume will further decline by 16 percent, to the lowest level since 1986. Absent additional actions to cut costs and increase revenues, USPS expects financial losses will escalate over the next decade. 

Action is urgently needed in multiple areas by USPS and Congress to address 

USPS’s pressing challenges so that it can achieve financial viability, including restructuring USPS operations, networks, and workforce to reflect changes in mail 

volume, revenue, and use of mail. The longer it takes for USPS and Congress to 

address USPS’s challenges, the more difficult they will be to overcome. When GAO 

placed USPS’s financial condition and outlook on its High-Risk List, it identified the 

following key actions USPS and/or Congress could take: reduce employee compensation and benefits; consolidate retail and processing networks; consolidate administrative field structure; generate revenue through new or enhanced products; change 

funding requirements for retiree health benefits; and realign delivery services. GAO 

will analyze USPS’s proposal to reduce delivery from 6 to 5 days when it becomes 

available. Included in this testimony are questions and issues for Congress to consider regarding delivery changes. GAO will also be issuing its report later this 

spring that provides its perspective on USPS’s financial crisis, as well as additional 

options for restructuring. 

Mr. Chairman and Members of the Subcommittee: I am pleased to participate in 

this hearing on the U.S. Postal Service’s (USPS) financial condition, a topic we have 

been continually monitoring given USPS’s deteriorating financial condition during 

fiscal year 2009. My statement will provide (1) information on USPS’s financial condition and forecast and (2) our perspective on the need for USPS restructuring. In 

addition, we provide questions and issues for Congress to consider regarding USPS’s 

proposal to reduce delivery from 6 to 5 days. 

My statement is based upon our past and ongoing work, including our work on 

postal reform issues, our report adding USPS’s financial condition and outlook to 

our High-Risk List, and updated information on USPS’s financial condition and out-
48 

1GAO, High-Risk Series, Restructuring the U.S. Postal Service to Achieve Sustainable Financial Viability, GAO–09–937SP (Washington, D.C.: July 28, 2009). 2 A looming cash shortfall in 2009 necessitated last-minute congressional action to reduce 

USPS’s mandated payments to prefund retiree health benefits from $5.4 billion to $1.4 billion. 

Pub. L. No. 111–68, § 164, 123 Stat. 2023 (Oct. 1, 2009). 

look. We conducted this performance audit in accordance with generally accepted 

government auditing standards. Those standards require that we plan and perform 

the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based 

on our audit objectives. 

USPS’S FINANCIAL CONDITION HAS DETERIORATED AND ITS OUTLOOK IS POOR

As mail volume declined by 35 billion pieces (about 17 percent) in fiscal years 

2007 through 2009, USPS’s financial condition deteriorated, with close to $12 billion 

in losses, and it does not expect total mail volume to return to its former level when 

the economy recovers. This volume decline was largely due to the economic downturn and changing use of the mail, with mail continuing to shift to electronic communications and payments. In July 2009, we added USPS’s financial condition and 

outlook to our High-Risk List and reported that USPS urgently needed to restructure to address its financial viability.1 Despite $6.1 billion in cost savings in fiscal 

year 2009 as well as congressional action that relieved USPS of $4 billion in mandated payments to prefund postal retiree health benefits,2 USPS still reported a loss 

of $3.8 billion for the year. Also, USPS debt increased by the annual statutory limit 

of $3 billion, bringing outstanding debt to $10.2 billion at the end of fiscal year 

2009. 

These declines along with large financial losses, increasing debt and financial obligations, are projected to continue to challenge USPS. Most recently, total mail volume for the first quarter of fiscal year 2010 was down almost 4.5 billion pieces, a 

decrease of almost 9 percent over last year. For fiscal years 2010 and 2011, USPS 

is projecting annual deficits exceeding $7 billion and additional pressures to generate sufficient cash to meet its obligations. Further, USPS has halted construction 

of most new facilities and has budgeted $1.5 billion in capital cash outlays (mostly 

for prior commitments), which is down from the average of $2.2 billion in the previous 5 fiscal years. USPS also expects to borrow $3 billion in fiscal year 2010, 

which would bring its total outstanding debt to $13.2 billion, close to its $15 billion 

statutory limit, which it could reach as early as fiscal year 2011. USPS projects that 

financial losses will escalate over the next decade, with cumulative losses of over 

$230 billion by fiscal year 2020 if its planned cost reduction and revenue generation 

initiatives are not implemented. (see fig.1). 

Further, USPS does not expect total mail volume to return to its former levels 

when the economy recovers. It projects that total mail volume will decline to 167 

billion pieces in fiscal year 2010—a level not seen since fiscal year 1992, and 22 per-
49 

cent less than its fiscal year 2006 peak. By fiscal year 2020, USPS projects, at best, 

further volume declines of about 16 percent, to about 150 billion pieces, the lowest 

level since 1986 (see fig. 2). 

—First-Class Mail volume has declined 19 percent since it peaked in fiscal year 

2001 and USPS projects that it will decline by another 37 percent over the next 

decade. (see fig. 3). This mail is highly profitable and generates over 70 percent 

of the revenues used to cover USPS overhead costs. 

—Standard Mail (primarily advertising) volume has declined 20 percent since it 

peaked in fiscal year 2007, and is projected to remain roughly flat over the next 

decade. This class of mail is profitable overall but lower priced, so it takes 2.5 

pieces of Standard Mail, on average, to equal the profit from the average piece 

of First-Class Mail. Standard Mail volume was affected by large rate increases 

in 2007 for flat-sized mail, such as catalogs, and the recession that affected advertising such as mortgage, home equity, and credit card solicitations. These solicitations appear unlikely to return to former levels. Standard Mail also faces 

growing competition from electronic alternatives, increasing the possibility that 

its volume may decline in the long-term. 
50 

3 USPS’s plan and related material are available at http://www.usps.com/strategicplanning/ 

futurepostalservice.htm. 4Pub. L. No. 109–435, § 710 (Dec. 20, 2006). 

5GAO–09–937SP. 

In addition to the projected losses caused by declining mail volume, USPS believes 

that stagnant revenue, costs of providing universal service, and rising workforce 

costs will also lead to losses. 

USPS AND CONGRESS NEED TO ACT AGGRESSIVELY TO ADDRESS FINANCIAL CRISIS

USPS urgently needs to restructure to improve its current and long-term financial 

viability. On March 2, 2010, USPS addressed these issues in its plan, entitled ‘‘Ensuring a Viable Postal Service for America: An Action Plan for the Future,’’ 3 which 

identified seven key areas where-in it would need legislative changes or congressional support. Improving its financial viability is critical because USPS plays a 

vital role in the U.S. economy, and is at the core of a mailing industry valued at 

about a trillion dollars, according to USPS. Moreover, it is the largest civilian Federal agency, employing approximately 599,000 career employees as of December 31, 

2009 and operating a total of about 38,000 facilities nationwide as of September 30, 

2009. 

We have previously concluded that restructuring is needed in multiple areas, including action and support by Congress, since no single change will be sufficient to 

address USPS’s pressing challenges. According to USPS, even if it took all of the 

actions it could under existing law, it would still face unsustainable losses of at least 

$115 billion by 2020. A major challenge for USPS is to cut costs and restructure 

quickly enough to offset unprecedented volume and revenue declines—particularly 

costs related to its workforce, retail and processing networks, and delivery services—so that it can cover its operating expenses. We have an ongoing review, as 

mandated by the Postal Accountability and Enhancement Act of 2006,4 to evaluate 

options and actions for the long-term structural and operational reforms of USPS. 

Due to the urgency of the USPS financial crisis, we plan to issue our study in April 

2010, ahead of the December 2011 statutory deadline. 

When we placed USPS’s financial condition and outlook on our High-Risk List, 

we identified the following key actions USPS and/or Congress could take: 5
51 

6 USPS plans call for continuing providing window retail service and delivery to post office 

boxes on Saturday, as well as remittance mail service for business mailers. 

—Reduce compensation and benefit costs through 

—retirements: Annually through 2020, about 5 percent of USPS employees will 

be eligible and expected to retire, according to USPS. That represents approximately 300,000 employees, about half of the workforce as of March 2, 

2010. 

—lower benefit costs: USPS pays a higher percentage of employee health benefit 

premiums than other Federal agencies (80 percent versus 72 percent, respectively). In addition, USPS pays 100 percent of employee life insurance premiums, while other Federal agencies pay about 33 percent. 

—Consolidate retail and processing networks 

—Remove excess capacity in the 600 mail processing facilities nationwide, 

where processing capacity for First-Class Mail exceeds processing needs by 50 

percent. 

—Maximize use of lower-cost retail alternatives: Approximately 30 percent of 

USPS retail revenue currently comes through alternate channels, such as 

stamps bought by mail, on the Internet, and at grocery stores, indicating that 

customers have begun shifting to such alternatives. 

—Reduce the network of 36,500 retail facilities, where maintenance has been 

underfunded for years, resulting in deteriorating facilities and a maintenance 

backlog. USPS recently reported that it has more retail facilities than McDonalds, Starbucks, and Walgreens combined. Further, it stated that its post offices average about 600 visits per week, representing only 10 percent of average weekly visits to Walgreens. 

—Consolidate field administrative structure: Review the need for 74 district offices and 8 area offices. 

—Generate revenue through new or enhanced products: Use its pricing and product flexibility to maximize profitable mail volume. 

In the past, we have also discussed, and the Postal Service has recently proposed, 

additional options for restructuring that would require congressional approval: —Change funding requirements for retiree health benefits.—USPS asked Congress 

to revise the funding requirements for its retiree health benefit obligation. 

USPS had difficulty making its required payment to prefund retiree health benefits in fiscal year 2009 and has warned that it may have similar difficulty for 

fiscal year 2010. As noted, in fiscal year 2009, a looming cash shortfall led to 

last-minute congressional action to reduce USPS’s required payments to 

prefund retiree health benefits from $5.4 billion to $1.4 billion. —Realign delivery services with changing use of mail.—USPS has asked Congress 

to allow it to reduce delivery from 6 days to 5 days per week, stating that eliminating Saturday delivery would provide annual savings of about $3 billion.6 The 

Postal Regulatory Commission (PRC) estimated in 2008 that eliminating Saturday delivery would result in savings of about $1.9 billion, based on somewhat 

different assumptions regarding the likely effects on mail volume and costs. 

The Postmaster General stated in March 2010 that USPS plans to request a PRC 

advisory opinion on this change, which would lead to a public proceeding that would 

include input by interested parties. Before this plan could be implemented, Congress 

would need to stop including statutory restrictions contained in USPS annual appropriations that mandate 6-day delivery. Congress might wish to consider several 

questions regarding such a change: 

—How would eliminating Saturday delivery impact USPS’s efforts to grow mail 

volume and encourage commercial mailers to continue using the mail? 

—How would eliminating Saturday delivery affect mail processing costs? Salary 

and benefits for mail processing employees and carriers? 

—What will be the expected effects on delivery service standards? 

—How will consumers and business customers be affected by a move to 5-day delivery? How does USPS plan to mitigate these effects? 

—How does USPS plan to communicate eliminating Saturday delivery and other 

related changes to mailers and the public? 

—Will there be sufficient P.O. boxes to handle a potential spike in demand for 

those customers wishing to pick up mail on Saturdays? 

—How much lead time would be needed for USPS to modify its operations and 

financial systems before eliminating Saturday delivery? 

—What other options has USPS considered that could significantly reduce costs 

without reducing delivery service? 

These issues need to be addressed in the expected USPS 5-day delivery proposal 

so that stakeholders fully understand the potential ramifications of these changes. 
52 

More broadly, USPS faces larger issues with regard to restructuring and its financial viability. The longer it takes for USPS and Congress to address USPS’s challenges, the more difficult they will be to overcome. 

Mr. Chairman, this concludes my prepared statement. I would be pleased to answer any questions that you or other Members of the Subcommittee may have. 

Senator DURBIN. Thanks a lot, to the panel. 

Now, we all understand what’s happened to the Postal Service— 

the loss of volume, the loss of revenue and such—but, Mr. Williams 

thinks he’s found a winning lottery ticket here, for $75 billion. And 

before we start talking about the pain of cutting, I’ve got to ask Ms. 

Goldway what the Postal Regulatory Commission is doing about 

this opinion of Mr. Williams and the $75 billion. 

Ms. GOLDWAY. The Postal Service has asked, under a provision 

in the Postal Accountability Act, to—asked the Commission to hire 

an independent actuarial firm to review this issue and to provide 

a report to the Commission and to the public on the reliability of 

the inspector general’s estimate. And we have issued a statement 

of work and expect to get a contract with an independent actuary 

in place in a little more than 30 days, perhaps 45 days, and we’ll 

determine, then, just how long it takes, but we certainly want to 

be part of the discussion about the financial reliability of that proposal before it moves forward. 

I should also mention that, as part of a request that was made 

by Chairman Lynch of the House subcommittee last year, we were 

asked to look at the Healthcare Retiree Benefit Fund, and our actuarial review of that issue pointed to a position where the Postal 

Service, under assumptions that were somewhat different from the 

OPM’s assumptions, but more in line with general actuarial assumptions, could be paying at least $2 billion less each year, and 

still have the same amount of funding for the retiree health payments at the end of the 10-year period that was required under the 

law. So, I think that, in both cases, the research that we provide 

can give you options in the decisions that you might make about 

how to proceed. 

Senator DURBIN. So, can you tell me the timetable there on the $75 billion issue? 

Ms. GOLDWAY. Well, unfortunately, we don’t have a response 

from the actuarial yet as to how much time it will take. We think 

we can do it within 45 days. We’re certainly going to work with our 

bidders to see who can provide us that information as quickly as 

possible. 

Senator DURBIN. And what is the next step after PRC has made 

its judgment on this estimate? 

Ms. GOLDWAY. We report the—our findings to the Postal Service 

and share it with the public. And then, it’s really up to the other 

players, the—in the administration or in Congress, to determine 

what information they feel is most reliable to act on. 

Senator DURBIN. So, let’s assume, for the sake of discussion, that 

you find it’s true, they’ve overpaid—— 

Ms. GOLDWAY. Right. 

Senator DURBIN [continuing]. $75 billion. Can the Postal Service 

recapture that money? 

Ms. GOLDWAY. I think if we find that, we will certainly present 

an argument that it would be fair for the Postal Service to recapture that money. Just how it’s done, in terms of transferring funds 
53 

from year to year or all at once, would be something that I think 

the Congress and OPM and OMB would have to participate in. 

Senator DURBIN. Mr. Williams, you didn’t mention the $75 billion 

in your testimony. Are you having second thoughts? 

Mr. WILLIAMS. We are not having second thoughts, sir. The—I— 

actually, I did try to allude to it, but I was trying to cover as much 

ground as the hearing title suggested. 

Senator DURBIN. And so, I won’t go into a great deal of detail on 

that, but I assume that that is what’s being debated currently, with 

the independent actuaries and such, at the Postal Regulatory Commission. 

Mr. WILLIAMS. It is. After our finding on the healthcare overpayment, Congress asked that OPM and OMB and the Postal Service 

get together to try to come up with a fiscally responsive—responsible proposal for legislation. I believe this issue has been added to 

that issue so that there’ll be a comprehensive solution that’s to be 

developed by the three of them and presented to Congress. 

Senator DURBIN. One of the things you talked about is a—and 

I underlined it—‘‘exaggerated healthcare inflation percentage.’’ It 

was—which Senator Collins is more aware of than I am. 

Mr. WILLIAMS. Yes. 

Senator DURBIN. But, are you suggesting that the anticipated 

cost of the healthcare system of the Postal Service should be lower, 

that they have anticipated more expenses than you believe are 

warranted? 

Mr. WILLIAMS. OPM has set a growth rate for the—for future 

costs, of 7 percent a year. We benchmarked that against the private sector, and we discovered that it was the general consensus— 

the overwhelming general consensus—that 5 percent was a more 

realistic growth rate. That’s also what the Department of Health 

and Human Services (HHS) uses for Medicare growth rate. That— 

the delta there was $13.2 billion. OPM set about downgrading its 

estimates much more closely to that growth rate, and then they’ve 

gone into these three-party talks to try to understand what to do. 

Senator DURBIN. And if it is decided to take a lower growth rate, 

then, of course, the annual payment is going to be reduced accordingly. 

Mr. WILLIAMS. Yes, sir. 

Senator DURBIN. And what’s the timetable on that decision? 

Mr. WILLIAMS. There was not a timetable set. I believe the meetings have begun. There have been one involving the principals, and 

I believe there’ll be some followup meetings—— 

Senator DURBIN. Well, it sounds to me like we have two or three 

major issues outstanding here that will determine whether or not 

we have to make this decision about reducing service. 

Mr. WILLIAMS. These are very large, very serious—— 

Senator DURBIN. Seventy-five billion dollars overpayment—question mark—Postal Regulatory Commission. Two billion dollars that 

you mentioned, Ms. Goldway, that may be an overpayment. Perhaps an exaggeration on the anticipated healthcare benefits down 

the line. So, it seems to me that before we start making dramatic 

changes in the Postal Service, some of these questions need to be 

answered. I would think that would be reasonable. 
54 

But, Mr. Herr, I think what you’re saying is, ‘‘But, if you look 

at the economics of Postal Service’’—— 

Mr. HERR. Right. 

Senator DURBIN [continuing]. ‘‘Let’s get real.’’ 

Mr. HERR. Well, I think part of it, looking at the long-term analysis—that was part of the study the Postal Service just released in 

March, they had some consulting firms make a projection out to 

2020, and one of the things that we noted there is that they’re expecting a long-term decline, in terms of the more profitable mail 

and how mail is used. So, as we stand back and look at it, we think 

that it’s a good opportunity to take that footprint into consideration, in terms of the network and workforce. 

Senator DURBIN. I’m going to violate every law—or every rule 

that I learned in law school and ask you a question anyway. How 

big a problem is Congress, when it comes to this issue about the 

future of the Postal Service? 

Mr. HERR. Well, as you know, there’s often instances where there 

are prohibitions put in place, in terms of closures and things of 

that nature. 

Senator DURBIN. Guilty, as charged. 

And it’s a tough issue. And we realize that it’s a difficult issue, 

but it’s also one that—I think, as you look at these broader, longerterm trends, it’s important to look at the Postal Service and then 

think about what the Service is, and how that could be realigned 

with the demand for mail. 

I tried to pose this question to the Postmaster General, about the 

business model for the Postal Service in this changing world. And 

I know that’s a challenge. I don’t know that many executives with 

his responsibility could really envision how to reinvent, to keep up 

with it. And you kind of see some elements here that are obvious, 

in terms of infrastructure and the future. 

Mr. HERR. Well, and I think—in the hearing today, there’s been 

some good discussion about retail alternatives, in terms of moving 

some of those into places like supermarkets or pharmacies, where 

people are already going, that would be an opportunity to save. 

Also, on the processing side, just looking at what’s needed to handle the mail volumes now, and then what’s projected. 

Senator DURBIN. Thanks a lot. 

Senator Collins, we have two votes starting at 4:15, so—— 

Senator COLLINS. I’ll be fast. 

Senator DURBIN [continuing]. Proceed. 

Senator COLLINS. The witnesses will be happy about that. 

Ms. Goldway, just for clarification, the process that you go 

through, which may take as long as 6 months or 9 months—assuming Congress changed the law to allow the Postal Service to make 

its own decision on delivery, would the Postal Service be precluded 

from going ahead with that decision until the PRC has given its 

judgment? 

Ms. GOLDWAY. It’s my understanding that the Postal Service has 

to seek our advisory opinion. It doesn’t have to follow that opinion, 

but it has to seek our opinion. And the process of public input becomes really valuable. 

So, for instance, in this recent case, where the Postal Service 

wanted to close what they call ‘‘stations’’ and ‘‘branches,’’ the level 
55 

of public participation and concern that was raised about the fact 

that customers weren’t getting the input that they wanted, and 

that they wanted postal services maintained in the offices, slowed 

down the Postal Service’s decisionmaking, and they began to 

rethink just how they were going to realign their postal network, 

and the public process was helpful. 

We believe the public process will be helpful regardless of what 

the Congress does. But, we do think that the public process will 

probably help you, because this is a very serious issue. And as you 

had said earlier, the brand of the Postal Service, its commitment 

to having people on the street 6 days a week, its notion of what 

it is in the future, is really threatened by the reduction from 6 to 

5 day. 

One of the interesting figures we heard was that young people 

value 6—the 6th day more than older people, even though they 

don’t use the mail as much, that’s the day they want it. So, if you 

want young people to keep going into the mail, this process may 

not be the right business model. 

Those of the kinds of issues we are going to explore when we 

have our hearings. 

Senator COLLINS. Thank you. 

Mr. Williams, I am troubled, obviously, by the prospect of the 

Postal Service laying off 13,000 people in this terrible economy, letter carriers all across the United States. And I’m particularly troubled by that because there are reports—and you have done, I believe, one of the reports—concluding that what is out of whack in 

the personnel costs of the Postal Service are the benefit levels for 

health insurance and life insurance. I mentioned the 100-percent 

payment for premiums for life insurance, versus 3—33 percent for 

the Federal employees. 

Has there been any analysis done of relative savings? For example, if you cap the 6-day delivery and didn’t have to lay off 13,000 

people who are going to have a hard time finding work, but instead, you brought the benefit structure into line with the benefits 

that Federal employees receive who are participating in the same 

kinds of programs. Has there been any sort of relative analysis? 

Mr. WILLIAMS. To my knowledge, there has not been. We’re—the 

actual proposal is 2 months away, and it may contain something 

like that. We’re unaware of its contents that will go to the PRC. 

We did do that body of work, and that was our finding. We would 

be pleased to work with your staff to try to make a—that sort of 

determination. That would certainly be an interesting discovery. 

Now, those agreements are contained in the labor—— 

Senator COLLINS. Yes. 

Mr. WILLIAMS [continuing]. Agreements, and would have to be 

shifted. But, at this point, I know that the leadership of the unions 

is certainly looking out for the well-being of their people, and they 

might well be interested in that, as well, and—when they go into 

negotiations. 

Senator COLLINS. I think that would be helpful information for 

us to have. 

Mr. Herr, have you looked at that issue, by chance? The—— 

Mr. HERR. We have not looked at it. I remember at the Senate 

hearing last January, you and Senator Carper were there—I think 
56 

the Postmaster General offered an estimate of a $700 million annual savings if something like that were to be adjusted. But, we’ve 

not done any specific analysis on that. 

Senator COLLINS. Okay. Thank you. 

OVERPAYMENT

I want to clarify two issues, just to make sure that I personally 

understand the issues before us. Mr. Williams, when you came up 

with your $75 billion estimate of an overpayment, is that an overpayment for the pensions of retired postal workers, not to be confused with the money that goes into the Retiree Health Benefits 

Fund? 

Mr. WILLIAMS. It is, Senator; that regards—there was an earlier 

report that had to do with the inflationary growth and the overpayment into the Healthcare Fund. This most recent report, regarding 

the $75 billion, regards the Pension Fund. 

Senator COLLINS. I think that’s very important for us—— 

Mr. WILLIAMS. Yes. 

Senator COLLINS [continuing]. To understand, that we’re talking 

about two different pots of money here. 

And, Mr. Herr, what is your analysis on both of these issues, on 

whether or not there is an overpayment of such a staggering 

amount to the Pension Fund for retirees? Let’s deal with that issue 

first. 

Mr. HERR. On that particular issue, I’ve asked our financial folks 

and our chief actuary to look at this, and they noted—and it’s also 

noted in the back of the inspector general’s report—that the board 

of actuaries reviewed that, and we believe that their assessment is 

correct, that OPM’s methodology was valid and was consistent with 

the law. 

Senator COLLINS. And so, you would disagree with OPM’s assessment, in—— 

Mr. HERR. No, we believe that OPM’s assessment is correct. 

Senator COLLINS. I’m sorry. So, you agree with OPM, and you do 

not agree with Mr. Williams’ assessment, that his study—I’m not 

trying to create conflict here, I’m just trying to get an understanding. I’m really not. 

Mr. HERR. Yes. 

Senator COLLINS. Is that accurate? Okay. 

And it’s my understanding, though—we’ll go back to OPM—that 

OPM has stuck to that decision, as has OMB. 

I would note, Mr. Chairman, that in our conference report last 

year, we asked the Postal Service to work with OPM and OMB to 

come to us with a proposal and an answer to this, and I think we 

need to push them and follow up on that. 

Mr. Herr, the second issue is the payment to the Retiree Health 

Benefits Fund—— 

Mr. HERR. Right. 

Senator COLLINS [continuing]. And that is the stream of payments established by the 2006—— 

Mr. HERR. Yes. 

Senator COLLINS [continuing]. Act. And I would like your best 

judgment on, what should we do about that issue? I won’t go on 

with my opinion, but I’d like your best judgment. 
57 

Mr. HERR. Yes. 

Senator COLLINS. What’s the best way for us to handle that 

issue? 

Mr. HERR. Senator Collins, we have a report—I mentioned our 

business model report—that we’re expecting to release in about 3 

weeks, that has a discussion of that. We talk about several approaches for Congress to consider. One, we take a look at what the 

Postal Service has proposed, which is a pay-as-you-go model. We 

also looked at a reamortization and we lay out in a table what that 

would mean, in terms of the costs. We provide, I think, a clear explanation, so Congress has a sense of what’s involved here, what 

the magnitude of the funding is, to help you make some really 

tough policy decisions about where things are now, where they 

stand, and then where you might want to go, going forward. 

Senator COLLINS. And we’ll get that study shortly, then? 

Mr. HERR. Yes, you will. 

Senator COLLINS. Great. I think that’s going to be very helpful. 

My final question, since I know our time is short. Mr. Herr, isn’t 

it a problem if we come up with an amortization schedule that suspends payments for several years and then ramps them up? Is 

there any reason to believe that the Postal Service, given what 

you’ve described about the projections for its volume and the pressure, would be able to better afford a greater payment, say, beginning 4 or 5 years from now, than would be the case under the current law? 

Mr. HERR. Everything we’ve seen suggests that they’re going to 

have difficulty, now or in the future, with some of these payments. 

They’re large numbers, but they’re also very large obligations— 

500,000 current retirees; we talked about 300,000 people going into 

retirement in the next 10 years. So, it’s really important to assess 

what they’re able to do and then try to find the amount that will 

be a reasonable payment toward those obligations. 

Senator COLLINS. Thank you very much. 

Thank you very much, Mr. Chairman. 

Senator DURBIN. So, Ms. Goldway, as I understand it, the Postal 

Service asked the Postal Regulatory Commission to study the 5-day 

service model. 

Ms. GOLDWAY. Yes. 

Senator DURBIN. And I think you concluded by saying, ‘‘But, they 

don’t have to pay much attention to what you conclude.’’ 

Ms. GOLDWAY. The Postal Regulatory Act—the Postal Regulatory 

Commission, under the act, gives us some very clear, specific responsibilities and some advisory responsibilities. And in this case, 

with regard to the nature of service, we have an advisory responsibility. 

On the other hand, every year we have to make a report on 

whether the Postal Service has complied with the law, and that 

means whether it’s met its obligations to provide an efficient and 

fair level of universal service. 

So, if they don’t take our advice on this, and, at the end of the 

year, they’ve entered into an activity that we deem has—is less 

than universal service, we could find them out of compliance and 

require them to start up some new activity again. But, we could 

not tell them, at the time of our advisory opinion, what to do. 
58 

So, it’s—our—we—just as the Postal Service is trying to learn 

how to operate under this new law, which has given them price 

flexibility and product flexibility, but at the time of the—of a recession, we are learning, as well, how to regulate the Postal Service 

with both new law—new responsibilities and power, but less power 

than we had in certain areas with regard to rates, before. It’s a balancing act that we will have to implement. 

Senator DURBIN. I’d ask who wrote the law, but I know. So, if 

the Postal Service ignores your advice, they may have a day of 

reckoning ahead of them, when you make your annual report and 

have the power to order them to do certain things. 

Ms. GOLDWAY. That’s right. 

Senator DURBIN. And I guess I’d have to say, bluntly, that Congress can ignore both of you. And for 27 years, we’ve been including 

a sentence, which no one has noticed, in this appropriation bill, 

which is, ‘‘Maintain 6-day service and rural service across America 

at 1983 standards.’’ I don’t think it was ever brought to my attention until a few weeks ago, because it became so routine. But, it 

is within the power of Congress in general, perhaps this subcommittee, to make that decision, regardless of what the PRC, 

Postal Regulatory Commission, or the Postal Service decides. I 

don’t want to speak for—— 

Ms. GOLDWAY. Right. 

Senator DURBIN [continuing]. Anyone else on the subcommittee. 

I certainly would like to hear an evaluation of this proposal from 

those who look at it seriously. You talked about facing this in the 

past and asking some hard questions about what it meant and 

whether it saved as much money as proposed, and so forth. That 

is all reasonable, and I think we’re dutybound to try to reach that. 

Now, what about this idea—and I think Mr. Herr referred to it, 

about the quiet summer months—what about this idea of a pilot 

project on 5-day delivery. Can this be done? Does the Postal Regulatory Commission have to be part of that decision? 

Ms. GOLDWAY. I would venture to say, if the pilot program is envisioned as something that would potentially be implemented nationwide, then it would be something that would have to come to 

us for prior approval, as well. If—— 

Senator DURBIN. Well, it’s the nature of—— 

Ms. GOLDWAY [continuing]. It’s just an experiment—— 

Senator DURBIN. It’s the nature of a pilot—— 

Ms. GOLDWAY [continuing]. Under the law, there’s a certain level 

of experiment that they can undertake without our direct review. 

Senator DURBIN. That’s the nature of a pilot program, or a demonstration project, is to see what the impact will be in the real 

world. I don’t know if it’s even realistic to decide that, you know, 

a few counties in the—— 

Ms. GOLDWAY. I’m reluctant—— 

Senator DURBIN [continuing]. United States will try this. 

Ms. GOLDWAY. Yeah. I’m reluctant, without advice of counsel, to 

be specific, but it does seem, to me, smaller, discrete experiments 

with service certainly would be possible. After all, while the Postal 

Service does provide 6-day delivery pretty much uniformly across 

the country, there are areas where it does not now provide 6-day 

delivery—either it’s a business area, or it’s an extremely rural 
59 

area—so that its opportunity to provide 5-day delivery in some experimental fashion, I think, would be possible without the kind of 

comprehensive review that we require, or that you would require. 

Senator DURBIN. Well, here’s the way I’d see it, at this point. 

And I defer to my colleague to close here, as we hustle off to vote. 

As I see it, there are two or three big questions out there about the current economic status of the Postal Service: the $75 billion 

question, the $2 billion question, which you’ve raised, questions 

about healthcare benefits that could have a direct impact on the 

immediacy of this decision. 

Long term, I think Mr. Herr is right, we have to look at the Postal Service evolving into a different agency as it faces new challenges that cost money and create more competition. 

I’d like to know what the Postal Regulatory Commission concludes, on the issue of 5-day service, before making a final decision. 

I am not against the idea of a pilot project, if that appears to be 

feasible or necessary, to see what the actual reaction of postal consumers would be if you tried it in a given area, and to try to measure from that whether this makes good public policy. 

We’re kind of stuck. It’s kind of go or no-go, when it comes to the 

appropriation bill, in whether we include the language or we don’t 

include it. And, thank goodness, I have the wise counsel of the Senator from Maine to help me reach that conclusion. 

And I’ll let her have the last word. 

Senator COLLINS. Thank you, Mr. Chairman. Those are my last 

words. 

SUBCOMMITTEE RECESS

Senator DURBIN. Thanks, everybody. Appreciate your attending 

this hearing. 

[Whereupon, at 4:25 p.m., Thursday, March 18, the subcommittee was recessed, to reconvene subject to the call of the Chair.] 

(61) 

FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 

YEAR 2011 

WEDNESDAY, MARCH 24, 2010 

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

The subcommittee met at 2:32 p.m., in room SD–192, Dirksen 

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

Present: Senators Durbin and Collins. 

OFFICE OF PERSONNEL MANAGEMENT 

STATEMENT OF HON. JOHN BERRY, DIRECTOR 

OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

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

hearing before the Senate Appropriations Subcommittee on Financial Services and General Government. 

Our focus is on fiscal year 2011 budget request of the Office of 

Personnel Management (OPM). OPM has not appeared before our 

subcommittee since 1997. So we have been waiting a long time to 

see you. 

I welcome my ranking member, Senator Susan Collins of Maine. 

The Office of Personnel Management serves as the principal adviser to the President on personnel management issues for the 

country’s 2 million Federal civilian employees. It designs, develops, 

and oversees compliance with workforce policies and sets the guidance in areas of recruiting, selection, development, and compensation. To facilitate the Federal employment application process at a 

single location, OPM manages the USAJOBS Web site, which: 

posts 30,000 job vacancies a day; maintains 15.4 million re ́sume ́s 

on file; and sends more than 500,000 e-mails daily to job seekers. 

OPM manages the world’s largest single employer-sponsored 

health insurance plan with 8 million insured individuals, which 

also insures Members of Congress. The agency also administers retirement benefits for the Federal Government with more than 2.5 

million retirees. 

In addition, OPM conducts 90 percent of Federal background investigations each year and provides observers to monitor the election process as assigned by the Attorney General. 

OPM’s newly unveiled strategic plan presents goals that will help 

prepare our Federal civil service for the 21st century. 
62 

OPM’s priority, and one I hope is shared by every Federal agency, is to recruit and retain the best and the brightest. Our Nation’s 

civil servants are called on to defend our Nation, restore confidence 

in our financial system, administer a historical economic recovery 

effort, ensure adequate healthcare for veterans and others, and 

search for cures to the most vexing diseases. So we depend on 

these men and women who are dedicating their lives to public service. 

I am pleased to note that the 15.4 million re ́sume ́s I mentioned 

OPM has on file are up from 1.9 million just a few years ago. With 

the surge of interest in public service, it is important that appropriate OPM policies and procedures be reformed to attract the best 

candidates. 

For fiscal year 2011, OPM is requesting $240 million in discretionary funds, the same as the enacted amount for fiscal year 2010, 

of which $95.7 million is for basic operating expenses. They are requesting an additional 40 full-time equivalents (FTEs) in the area 

of retirement processing. 

Mr. Berry, since you assumed the directorship last April, you 

have undertaken changes and improvements in hiring, including 

veterans hiring. And I know that disability hiring policy changes 

are a high priority for you. 

In addition, you have overseen new efforts in the area of wellness 

with funding we provided last year, which we will talk to you 

about. I know you intend to recommend changes to the Federal pay 

system, increasing telework eligibility, improving the security 

clearance process, and getting the retirement system modernization 

project on track. 

According to an article from a recent Government Executive 

magazine—whose cover you graced—with the title ‘‘High Hopes,’’ 

you have been referred to as a ‘‘change agent,’’ ‘‘the quintessential 

Energizer bunny,’’ and ‘‘shot out of a cannon.’’ Given what you hope 

to accomplish during your tenure, that is good because it looks like 

you have your work cut out for you. 

I would like to turn now to Senator Susan Collins, the ranking 

member. 

STATEMENT OF SENATOR SUSAN COLLINS

Senator COLLINS. Thank you, Mr. Chairman. 

Director Berry, welcome. It is good to see you before us here 

today. 

I appreciate your leadership at OPM and your efforts to fulfill 

the agency’s mission to recruit, retain, and honor a world-class 

Federal workforce to serve the American people. 

I have always been a strong advocate for our Federal workforce. 

Because of the good work of our Federal employees, the United 

States Government is able to protect our Nation and provide crucial services to our citizens each and every day. Without their dedication, this vital work could not be done, and their commitment to 

public service makes for a stronger America. 

Many Federal employees place their very lives at risk on a daily 

basis. They knowingly put themselves in harm’s way. The very nature of their work—whether it is military personnel, as Federal law 

enforcement or intelligence officers, or in other dangerous 
63 

callings—puts them on the front lines of an often challenging or 

even life-threatening missions. But as the recent attack on the 

building in Austin, Texas, and other past assaults directed at Federal buildings and personnel have demonstrated, Federal employees can become the target of terrorists and criminals. 

Over the next decade, the Federal Government is facing a retirement wave, and with it, the loss of leadership and institutional 

knowledge at all levels. On average, retirements from the Federal 

workforce have exceeded 50,000 a year for a decade. Those numbers will certainly rise in the near future. 

The Office of Personnel Management calculates that 60 percent 

of the current Federal workforce will be eligible to retire during the 

coming years. Federal agencies, which must already hire more than 

one-quarter of 1 million new employees each year, will need to 

work hard to replace these retirees, as the private sector and State 

and local governments will be competing for the same qualified applicants. 

To meet this challenge, agencies must use the recruitment and 

retention tools they already have, such as student loan repayment, 

recruitment and retention bonuses, and the ability to rehire Federal annuitants to fill critical needs. That has been a particular 

concern of mine. Last year I authored a bill to allow just that. 

OPM also needs to develop an effective and fair pay-for-performance system that rewards the very best Federal employees. 

Director Berry, you have some very significant responsibilities 

that you work to accomplish those goals. And given fiscal constraints, I will be interested to hear how you will ensure that OPM 

will provide employees, agencies, and retirees with the important 

service they need but, most of all, ensure that the public has the 

qualified workforce we all need. 

So, Mr. Chairman, I look forward to working with you on this 

issue. 

Senator DURBIN. Thanks a lot. 

Director Berry has quite a background, worked as legislative director for Congressman Steny Hoyer for 10 years, Assistant Secretary of Treasury, and the Interior Department’s Director of both 

the National Fish and Wildlife Foundation and the National Zoo, 

which means he will be comfortable here in Congress. 

We will ask questions about the panda later. 

I now invite you to present your testimony, and your written testimony will be part of the record. 

Director Berry. 

SUMMARY STATEMENT OF HON. JOHN BERRY

Mr. BERRY. Chairman Durbin and Senator Collins, thank you so 

much for this opportunity to appear before you today. 

I also want to personally thank both of you for your incredible 

leadership over so many years for our Federal employees and for 

retirees. On behalf of all of them, let me just say thank you. I know 

that if they could be here today, they would want to express thanks 

for your constant and stalwart leadership. 

With your indulgence, I would also like to introduce my Deputy 

Director, Christine Griffin, who is with me today. Mr. Chairman, 

as you mentioned in your opening statement there are concerns 
64 

with both diversity and people with disabilities. Christine is one of 

the highest-ranking people in the Federal Government with a disability, and she is doing a phenomenal job. As I tell people, she is 

not really disabled, she is abled-squared. She is amazing and could 

do anything plus, and it is just an honor to be with her. 

I appreciate the opportunity to appear before you to defend the 

President’s budget request for the Office of Personnel Management 

for fiscal year 2011. I know that I am preaching to the choir, but 

I can’t overstate the importance of our mission to recruit, retain, 

and honor a world-class workforce to serve America. We are developing plans to achieve these goals, and I look forward to sharing 

some of those details with you today. For fiscal year 2011, OPM has requested $240 million in discretionary resources. With this money, we will serve the taxpayers by 

establishing, implementing, and overseeing all Federal human resource policies, completing background security investigations for 

over 90 percent of the Federal agencies, ensuring compliance with 

merit system principles, and administering of benefits for over 2 

million Federal employees, 2.5 million retirees, and their families, 

totaling over 8 million lives. 

Even as we innovate and try to do more, this request stays level 

with the funds appropriated to OPM in fiscal year 2010. 

The President has asked me to make Government ‘‘cool’’ again. 

And so, we have developed several initiatives to make the Federal 

Government the model employer for the 21st century. Both of you 

are supporting many of these initiatives, letting job seekers know 

that the Federal Government is already a great employer with the 

best workforce in the Nation. 

In the past year, we have worked hard to expand the recruitment 

and hiring of veterans throughout the Government. Through an 

Executive order, the President established the Veterans Employment Initiative, creating a partnership between OPM, Departments 

of Labor, Veterans Affairs, and Defense. 

OPM is requesting $2.4 million, an increase of $800,000 from fiscal year 2010, for this initiative in 2011. We plan to use those resources to increase our support and access for veterans seeking employment with the Federal Government. With your leadership, we 

have also provided benefits to support our soldiers and their families. 

I am particularly proud of our efforts to create a new special hiring authority for agencies that allow them to hire the spouses of 

members of our armed forces, who, as you know, have to move on 

a regular basis burdening them with a unique disadvantage. Consequently, we are trying to help them gain access to Federal employment not in violation of our veterans hiring program, but rather in addition to it. 

OPM also issued guidance in December to expand the paid leave 

benefits of members of the National Guard and reservists to help 

their families when they are called to active duty. Mr. Chairman, 

I want to specifically thank you for your leadership. This essentially enacts the legislation that you personally introduced, and for 

the first time ever, employees from the civil service sector who 

serve in the Reserve aren’t disadvantaged by having their pay cut. 

This legislation has allowed us to restore their pay and maintain 
65 

that pay while they are serving in the military. So God bless you 

and thank you for your leadership. We have worked to implement 

this legislation so that these reservists are not penalized in any 

way with regard to their pay. 

Another initiative is our effort to work with agencies to streamline the Federal hiring process. We are in the final clearance process with the Office of Management and Budget now and are ready, 

once we finish the agency clearance process, to send to the President a major hiring reform proposal that will essentially bring the 

Federal Government into the 21st century, or I should say the 20th 

century, where we will just start using re ́sume ́s like everybody 

else. 

I think that if we do nothing else, this will be a landmark shift 

that will allow us to greatly benefit from progress that has been 

made long ago in the private sector. 

We requested $4 million for the next year to build additional and 

improved assessments that will develop more shared, registered, 

and enhanced Government-wide recruitment, and we can talk 

about that more in the questions. We are reforming the Federal security clearance process and are seeking your authority to meet 

those demands by increasing our Investigative Services Division by 

an additional 160 employees. 

In addition, we are taking a measured approach to updating our 

retirement systems and will be focused on improving overall electronic data collection. We must ensure that benefits are processed 

quickly and accurately and that our reform measures are deliberate 

and don’t waste any more of the taxpayers’ money. 

I know you all have been very diligent in overseeing this 

throughout the years. There have been multiple failures. We want 

to make sure that we can guarantee success with regard to any 

steps we take on this issue. 

In fiscal year 2011, OPM has requested $1.5 million to develop 

a better calculator for our retirement processing. This will allow 

our caseworkers to process claims more expeditiously and to meet 

current needs. Basically, right now we don’t have an automated 

system. As you know, RSM was disbanded and that effort closed 

down. We had started to actually decrease our staff under the expectation there was going to be a new system. 

We are not going to have that system. Consequently, we do need 

to increase some staff. I am asking for 40 more employees so that 

we can just keep pace with the growth in demand that we are seeing. We are receiving, just this year, from the Postal Service alone 

an additional 18,000 retirements that we will have to process. 

We are looking for additional resources to conduct the employee 

viewpoint survey on an annual basis rather than every other year. 

We believe that this can be a very effective management tool. 

For the first time ever—and this really surprised me when I got 

there. We should have the best health database in the country. We 

have the largest single plan, covering 8 to 9 million lives and yet 

we have never collected any data from it. And so, we miss, quite 

frankly, enormous opportunities for improving cost efficiencies, 

evaluating which programs are working better, and determining 

what the needs of our current population are. 
66 

We want to make sure we can do that well. Thus, we are asking 

you for the necessary resources. It is a substantial investment, but 

it will allow us to begin collecting data for the first time ever about 

our employees’ health benefit program, not at an individual level, 

but at the level where we can learn where our weaknesses are and 

where there are possible cost savings that could help us control 

costs in the future. 

These priorities and the priorities in our budget reflect the strategic goals that you have discussed in our strategic plan: to hire 

the best, respect the workforce, expect the best of our workforce, 

and honor their service. If we want enhanced performance and superior results from our Federal Government, we must invest in our 

employees and attract, hire, and retain the best workforce. 

To do this we must give our people the tools that they need to 

succeed and the incentive to perform at their maximum potential. 

We must assure employees that their services are and will continue 

to be respected and honored. I thank you on behalf of all Federal 

employees and retirees for both of your roles in doing that throughout your careers. 

PREPARED STATEMENT

Thank you for this opportunity to be with you today, and I look 

forward to answering any questions that you might have. 

[The statement follows:] 

PREPARED STATEMENT OF JOHN BERRY

Chairman Durbin, Ranking Member Collins, and Members of the Subcommittee: 

As Director of the Office of Personnel Management, I appreciate the opportunity to 

testify before you today on the President’s fiscal year 2011 budget request for the 

Office of Personnel Management (OPM). This budget will help us meet our responsibilities for establishing, implementing, and overseeing the Federal Government’s 

human resources policies, background security investigations, merit system compliance, and administration of a broad range of benefits for the 2 million strong Federal civilian workforce, 2.5 million retirees, their families and survivors. I look forward to sharing with you the Administration’s vision to recruit, retain, and honor 

a world-class workforce to serve America. 

Included in the fiscal year 2011 budget request are my strategic goals for the 

agency: Hire the Best, Respect the Workforce, Expect the Best, and Honor Service. 

These guiding principles have framed my initiatives of the past year and will continue to guide our activities and priorities in the next fiscal year. 

The President has asked me to make Government ‘‘cool’’ again, and to that end, 

we have several initiatives to reinforce the Federal Government to be the best workplace with the best workforce in the Nation. In the past year, with this subcommittee and Congress’ support, we have worked hard to expand the recruitment 

and hiring of veterans throughout the Government; provide benefits to support the 

war fighter and his or her family; foster collaboration between labor and management in order to improve delivery of Government services; reform the Federal security clearance process, and propose initiatives to streamline the Federal hiring process. However, many challenges still remain. Nonetheless, OPM is well-prepared to 

meet these challenges, and the priorities outlined in this budget request are critical 

toward the success of these efforts. 

HIGH PRIORITY PERFORMANCE GOALS

The following High Priority Performance goals are measurable commitments to 

the American people. They represent high priorities for both the Administration and 

the Office of Personnel Management and are expected to achieve significant results 

over the next 12 to 24 months. Each of the four goals is related to OPM’s major 

performance improvement initiatives reflected in our budget. The High Priority Performance Goals include: 
67 

Hiring Reform.—80 percent of Departments and major agencies will meet agreed 

upon targeted improvements to: Improve hiring manager satisfaction with applicant 

quality, improve applicant satisfaction, and reduce the time it takes to hire. 

Telework.—Increase by 50 percent the number of eligible Federal employees who 

telework by fiscal year 2011, increase by 50 percent the number of eligible Federal 

employees who telework over the fiscal year 2009 baseline of 102,900. 

Security Clearance Reform.—Maintain or exceed OPM-related goals of the Intelligence Reform and Terrorism Prevention Act of 2004 and provide the OPM 

deliverables necessary to ensure that security clearance reforms are substantially 

operational across the Federal government by the end of CY 2010. 

Retirement Claims Processing.—Reduce the number of retirement records OPM 

receives that are incomplete and require development to less than 38 percent by the 

end of fiscal year 2010, 35 percent by the end of fiscal year 2011, and 30 percent 

by the end of fiscal year 2012. 

Wellness.—By the end of 2011, every agency has established and begun to implement a plan for a comprehensive health and wellness program which will achieve 

a 75 percent participation rate. 

OPM REORGANIZATION

Shortly after becoming OPM Director in April 2009, I tasked the agency’s senior 

leadership with developing a simplified model for restructuring the agency’s executive offices and program divisions. The agency and its employee unions were partners throughout this process with a shared commitment to ensure employees are 

treated fairly, and to ultimately make OPM a better and more effective agency. 

The foremost reason for reorganizing OPM was to enable our customers, as well 

as OPM employees, to see in clear, plain English, the functions that we perform and 

the organizations responsible for implementing them. The five main functional organizations within OPM now are: 

—Employee Services, which provides policy direction and leadership in designing, 

developing and promulgating Government-wide human resources systems and 

programs; 

—Retirement and Benefits, which administers retirement, health, and life insurance benefit programs for Federal employees, retirees, their families and survivors; 

—Merit System Audit and Compliance, which ensures that Federal agency human 

resources programs are effective and meet merit system principles and related 

civil service requirements; 

—Federal Investigative Services, which ensures the Federal Government has a 

suitable workforce that protects National Security and is worthy of Public 

Trust; and 

—Human Resources Solutions, which provides effective human resources solutions 

to assist Federal agencies in achieving their missions. 

There are three newly created offices that I believe will help improve the agency’s 

operations. First, I created an independent Ombudsman that will address issues 

raised by OPM employees and some customers of OPM. I have also created an Internal Oversight and Compliance Office that will undertake reviews and assessments 

of OPM operations, as well as assist program offices with responses to and follow 

up on audits conducted by the OPM Inspector General and Government Accountability Office. Through these offices we will have an internal check on OPM’s operations that will allow us to better identify and improve problem areas. 

Also, I created an Office of Planning and Policy Analysis. Included in the OPM 

budget request is $7 million to start a data warehouse to analyze the claims experience of participants in the Federal Employees Health Benefits Program (FEHBP). 

Through this effort we hope to identify trends in employee health issues and potentially drive down costs through a better understanding of the Federal employee and 

retiree population’s most common healthcare needs. 

Under this reorganization, OPM is more streamlined. Our customers—both internal and external—are better able to understand the services and products that we 

provide. The execution of the reorganization has also made OPM more effective in 

making the Federal Government the model employer for the 21st century through 

successful achievement of critical priorities. 

FISCAL YEAR 2011 BUDGET REQUEST

The budget request presented to you today continues the path we began to chart 

last year in an effort to bring civil service into a new era. For fiscal year 2011, OPM 

is requesting $240,071,000 in discretionary appropriations, the same as enacted for 

fiscal year 2010. The total includes appropriations from general funds as well as 
68 

limitations on transfers from the earned benefit Civil Service Retirement and Disability Fund, Federal Employees Health Benefits Fund, and the Federal Employees 

Group Life Insurance Fund, all of which are under OPM’s management. 

For basic operating expenses of the agency, our request includes $95,770,000 in 

general funds for Office of Personnel Management Salaries and Expenses, 

$22,564,000 of general funds and trust fund transfers for Office of the Inspector 

General Salaries and Expenses. Also, we are requesting a total of $121,737,000 in 

transfers from the Trust Funds for the administration of the civil service retirement 

and insurance programs. This funding will provide the resources necessary to aid 

in carrying out several major initiatives. 

Hiring Reform 

The Administration believes that reforming the Federal hiring process is an urgent priority to attract the best and brightest talent into the workforce. The current 

hiring process is cumbersome and slow, frustrating managers and discouraging 

many talented individuals from considering Federal jobs and opportunities. In order 

to address this problem, OPM’s fiscal year 2011 budget requests $4,000,000 in order 

to promote innovative and coordinated approaches to help agencies streamline their 

end-to-end hiring process. This synchronization will better enable agencies to recruit 

and hire qualified students, mid-career professionals, and retirees. As part of the 

Administration’s effort to create a more positive experience for Federal job applicants, OPM will continue efforts to overhaul the USAJOBS website. The effort will 

build on improvements that have already been made to make the site more userfriendly. 

OPM is also committed to increasing employment outreach to veterans, in accordance with President Obama’s Executive Order, ‘‘Employment of Veterans in the Federal Government’’ signed on November 9, 2009. This order established the Veterans 

Employment Initiative, with the goal of transforming the Federal Government into 

a model of veterans’ employment. OPM, in collaboration with the Departments of 

Defense, Labor and Veterans Affairs, is leading the development and implementation of a Government-wide Veterans Recruitment and Employment Strategic Plan 

to address barriers to entry for Veterans and transitioning service members pursuing careers in the Federal civil service. We are requesting $2,400,000 in fiscal 

year 2011 to advance this effort. 

Finally, this year OPM launched a Federal Diversity Office to make creation of 

a diverse workforce a greater priority in the Government. The Diversity Office is 

looking at the development of a Government-wide diversity strategy to support Federal agencies in improving outreach to and hiring of diverse groups of candidates. 

In fiscal year 2011, budget resources will be used to fully staff the Diversity Office 

and deploy new policies, processes and procedures for improving diversity and promoting inclusion across the Federal Government. 

Wellness and Work-Life 

Availability of health, wellness, and work-life options for Federal employees is a 

critical tool for improving the ability of the Government to recruit and retain a highperforming workforce. In 2010, OPM received an appropriation of $2,654,000 to develop and operate a comprehensive worksite wellness pilot program for the downtown Washington campus including GSA, Interior, and OPM. The development of 

Government-wide health and wellness policies and programs to provide employees 

with a meaningful balance of work and life will continue to be a top priority at OPM 

in fiscal year 2011. 

Telework is another essential part of OPM’s overall effort to improve work-life 

flexibilities for Federal employees. Increased use of telework in Federal offices 

across the country, particularly in major metropolitan areas with large concentrations of employees, would enable the uninterrupted delivery of Government services 

if employees were instructed to work from home due to extreme weather conditions, 

natural disasters, or other threats to health, including concerns regarding the 

spread of influenza. In fiscal year 2010 and 2011, OPM will continue its initiative 

on telework and provide support to agencies, managers, and employees about how 

to effectively implement telework programs. 

Employee Viewpoint Survey 

Since 2002, OPM has conducted a biennial survey of Federal employees to assist 

Congress and OPM in determining the overall direction and needed changes for future HR policy. The survey is also a valuable tool for agencies to improve employee 

engagement and satisfaction as well as to address areas in need of improvement 

identified in the survey. Beginning this year, OPM will be conducting surveys annually and our budget request includes $2,500,000 for this effort in fiscal year 2011. 
69 

The improved annual surveys will provide the data necessary to chart the course 

for making the Federal workplace a model for the nation. 

Security Clearance Reform 

In 2004, Congress passed the Intelligence Reform and Terrorism Prevention Act 

of 2004 (IRPTA) which included provisions to address ongoing concerns regarding 

the timeliness and quality of personnel background investigations and employment 

suitability services. Since the enactment of IRPTA, OPM has significantly shortened 

the amount of time needed to complete initial clearance investigations and has 

eliminated the backlog of pending background investigation cases. In fiscal year 

2011, continued efforts will ensure Federal customer agencies have the information 

they need to make timely decisions on the credibility and suitability of Federal employees, contractors, and military members. 

OPM conducts investigations for Federal agencies on a reimbursable basis 

through the Revolving Fund. The fiscal year 2011 budget includes an estimated 

$970,127,000 in new budget authority for Federal Investigative Services. This funding will be used to continue the transformation effort underway for the core FIS 

technology systems; to continue making improvements to security questionnaires 

used to collect investigative information; for implementation of a training program 

to standardize the investigative and suitability adjudicative process for all background investigations; and to cover fiscal year 2011 core FIS operational costs necessary to produce a quality and timely background investigation. 

Retirement Systems Modernization 

OPM has initiated the Retirement Systems Modernization (RSM) program to modernize and automate retirement processes to ensure Federal retirees and annuitants 

are paid accurately, timely, and receive high-quality customer service. The Federal 

Government’s retirement systems face significant challenges and are at high risk of 

failure due to technology gaps. These challenges have been identified in numerous 

OPM and GAO reports, and congressional staff members have been briefed on the 

ongoing response to these challenges. Because of the strategic importance of this 

issue, I have asked OPM’s Deputy Director, Christine Griffin, to take the lead on 

RSM and make this her top priority. Our budget requests $1,500,000 to stabilize 

the retirement systems in fiscal year 2011. 

During this fiscal year, our primary focus for modernization efforts is to lay the 

foundation for upgrading the retirement calculator, and to transition from a paperbased operation to an automated retirement process. OPM is also focused on implementation of an online retirement application tool that will utilize data gathered 

through the Enterprise Human Resources Integration (EHRI) program, allowing us 

to gather initial retirement information electronically for the first time. This capability will help improve the accuracy of retirement calculations by eliminating the 

potential for manual data entry errors and permitting real-time validation of the 

data provided. These initiatives will help to ensure that OPM and agency benefits 

officers have access to information necessary to perform their duties of processing 

claims and providing customer service to employees and annuitants. However, enhanced efficiencies will not happen overnight. The transition will require incremental and deliberate change in order to ensure that past mistakes do not occur 

again, and that taxpayer dollars are not wasted on an ineffective effort. In the interim, OPM must increase staffing levels in order to fulfill its responsibility to process its anticipated workload in a timely manner. For fiscal year 2011, we are requesting 40 FTE and an additional $2,800,000 to 

increase retirement claims processing staffing levels. The 40 FTE will permit OPM 

to process an additional 24,000 claims and reduce claims processing time from 45 

days to 40 days in fiscal year 2011. In 2012, as staff is fully trained and seasoned, 

they will be able to process an additional 32,000 claims. The increase in FTE will 

assist in reducing the claims processing times to 38 days. 

Acquisition Improvement 

Finally, the Administration is seeking to strengthen the acquisition process Government-wide. As a result, they requested a general provision that provides for 

$670,210 to increase OPM’s acquisition workforce in order to improve contract oversight. OPM’s Contracting Group has assumed a dramatic increase in contracting responsibilities over the past several years as a result of the increased scope of OPM’s 

Government-wide support functions. OPM will use these requested funds to recruit, 

hire, and train five additional Contracting Officers, plus one additional Contracting 

Officer to increase staff devoted to small and disadvantaged business utilization. 

The agenda I have presented to you reflects a commitment toward a new day for 

civil service. If superior results are what we want from our Federal Government, 

then we must attract, hire and retain a talented workforce. We must give them the 
70 

tools that they need to succeed, and the incentive to perform to their maximum potential, including our assurance that their services are and will continue to be respected and honored. 

Mr. Chairman, this concludes my formal testimony on the Office of Personnel 

Management’s fiscal year 2011 budget request. I look forward to addressing any 

questions or concerns that you and the Members of the Subcommittee may have. 

Thank you. 

NEW ADMINISTRATION WELLNESS INITIATIVES

Senator DURBIN. So, Director Berry, the President asked us to 

give you $5 million for wellness, for pilot programs to deal with 

smoking cessation, disease management, and the like. Tell me how 

that is going. 

Mr. BERRY. Mr. Chairman, the President’s budget for fiscal year 

2011 has actually consolidated these funds in the Health and 

Human Services (HHS) budget. And so, you will see a decreased request from that in the 2011 budget. You were very generous in allowing us to stand this up this year, and so the first, we are looking at creating demonstration projects where we can promote 

wellness in the workplace for Federal employees. 

The first one that we are setting up is in our own headquarters, 

which will also serve our little campus. Right across the street from 

us is the General Services Administration (GSA) and the Department of the Interior. The three of us are going to share a new 

health unit. 

Thanks to your support for this fiscal year, we have just issued 

a request for proposals from the health carriers that will come in 

and provide complete screening—free of charge—for employees at 

the workplace, during work hours on a comprehensive basis, so 

that people can get their blood sugar and their cholesterol levels 

checked and also receive pre-cancer screenings. 

Our belief is that this program is going to produce enormous savings. Companies that have done this in the private sector have produced productivity increases of 40 to 50 percent in the first couple 

of years alone. 

Senator DURBIN. Did you consult with those companies when you 

were thinking about how to approach this? 

Mr. BERRY. Absolutely, and a number of our staff have been 

going around the country and meeting with some of the more innovative companies that do this in the workplace well. And so, I am 

very excited by this. 

We just finished the renovation of our health unit. If you are 

ever down in our neighborhood, we welcome you to stop in and see 

it. It is now once again a place that you would not mind getting 

healthcare. I have to tell you that when I arrived at OPM, I would 

not have had a band-aid put on in our health unit. But we have 

made extreme advances in this. 

We are going to be doing other demonstration projects. In addition to the one in the District of Columbia, there will be others conducted around the country. We are going to try to select units in 

the Midwest and on the west coast so that we can get a good sample and bring you back strong data as to the impact that this will 

make in the Federal employee community. 
71 

NURSING SHORTAGE AND INTERGOVERNMENTAL PERSONNEL MOBILITY

PROGRAM

Senator DURBIN. I am going to give you a little bit of a challenge 

here on a different issue, and it relates to a national problem, 

which I think the Federal Government can help to address. 

We anticipate a nursing shortage in America that will grow to 

260,000 registered nurses, which we will need and not have, by the 

year 2025, twice as large as this country has seen since the 1960s, 

reflects the baby boomers and more healthcare and more primary 

care and the critical role that nurses play. 

And so, when I looked at this nursing shortage in my State and 

across the country, it turned out that one of the major reasons was 

the lack of nursing faculty. In other words, registered nurses (RNs) 

or those with master’s degrees or could obtain master’s degrees 

coming in to teach. 

Now it turns out the Federal Government currently employs 

about 53,000 nurses that have the educational background and expertise to teach the next generation of nurses. Now I appreciate 

that you are struggling to find the nurses we need in the Federal 

Government. I am hoping that I can talk to you about some possibilities here because if nurses out of the Federal workforce teach 

in nursing schools, they are, in fact, not only teaching, they are recruiting. 

They are telling stories about their careers and why they chose 

the Federal Government, which I think may increase the likelihood 

that you will have an available nursing pool in the future. We 

talked to you—I know that you began to address the problem 

through the Intergovernmental Personnel Act Mobility Program, 

which allows temporary assignment of personnel between the Federal Government, State and local governments, colleges, and universities. But my staff feels there is some hesitation at your agency. 

I would be interested in your perspectives on the potential benefit of rotating qualified federally employed nurses through nursing 

schools, what authorities the OPM has to improve recruitment of 

Government nurses in a future pipeline, and whether you have 

given any thought to the possibility of extending the Intergovernmental Personnel Mobility Program to retired Government nurses. 

Have you thought about this issue and how we might address it? 

Mr. BERRY. Mr. Chairman, thank you, first, for your leadership 

in helping to create the opportunity for a program like this to exist. 

I think that the IPA Program, the Intergovernmental Personnel 

Act Program, that you were instrumental in creating, is a very 

powerful tool to achieve the objectives, just as you have identified. 

And I am in lock step with you on this. 

You are right to identify that we have a huge nursing shortage 

in the Federal Government, especially with regard to staffing our 

veterans hospitals. And so, for example, to meet those needs, we 

have allowed direct hire authority to the Veterans Affairs Department, as well as throughout the Government in that regard. 

At the same time, recognizing that shortage, it is a huge opportunity for us to have some of our more experienced registered 

nurses—and, I think yours and Senator Collins idea, to bring peo-
72 

ple back and out of retirement who aren’t ready to sit, or play golf 

full time, and to reengage them to allow us to outreach, be the recruiters and tell their story, not only passing on their knowledge 

to the shortage which exists throughout our State and local government operations, but in the Federal Government. I think it is a 

powerful thing. 

The Federal Government should always be in a leadership role. 

I really believe we have that responsibility. And so, prior administrations had somewhat deemphasized this program. They had even 

stopped reporting on it to you. So, we didn’t know for a while how 

many people were doing this, and whether this program was having an effect or whether agencies were stepping up to play this 

role. 

We have reinstituted reporting to you on this matter. Therefore, 

we are going to start tracking again how many people are doing 

this. So we will be able to tell you from year to year whether we 

are achieving the goal that you want, which is making sure that 

we are stepping up not only in the nursing program, but in many 

programs. 

I think that you have identified and put your finger on a critical 

place that we have got to pay careful attention to, and that is the 

nursing shortage throughout the country. And the IPA Program 

can allow the Federal Government to play a leadership role. 

If there is any back stepping or slow stepping on my staff’s part, 

my commitment to you is that I will goose them along very aggressively. We would be very happy and honored to work with you and 

Senator Collins’ staff to make sure that we are aggressively pursuing this program, and that you are proud of its results. 

Senator DURBIN. If Senator Collins will spare me one little vignette here? About 4 or 5 weeks ago, I was in Africa with Senator 

Sherrod Brown, and we visited with the president of Ethiopia, and 

I discussed with him, among other things, the fact that so many 

Ethiopian medical professionals now practice in the United States. 

In the Washington, DC, area there are about 2,500 Ethiopiantrained doctors. 

And I said I know your country desperately needs medical professionals, and we are stealing them away, and I would like to know 

your reaction to it. He said, well, we have a plan. And our plan is 

called flooding and retention. You want Ethiopian doctors? We are 

going to produce more than you could possibly dream of, and they 

are going to go to your country and work and send money back to 

Ethiopia, and we will keep enough here to meet our needs. 

It is interesting that they have decided rather than to fight us, 

to basically say if you want our people, we will train more of them. 

And the United States seems to be slow to get to that point. We 

just don’t seem to be ready to make a commitment. We know this 

is looming, and it is going to cause a lot of problems. 

So I hope the Federal Government can inspire and lead in this 

area and show some innovation. 

Mr. BERRY. Mr. Chairman, if I could? I would just like to give 

an extra shout out to the Department of Veterans Affairs. The 

leadership there, Secretary Shinseki and their Deputy Secretary 

Scott Gould, their human resources Assistant Secretary John Sepulveda, have been phenomenal to work with. On this issue, I 
73 

think they take the philosophy that the way to beat this is not to 

try to outcompete State and local government. It is to try to grow 

the pool together. 

They are investing significant resources this year to help move 

up not only as we—to get LPNs move to the RN level. We have all 

of these pools that with the right accredited training, we can increase these pipelines. It is an advantage for us to retain. It is also 

an attraction for recruitment. 

Through the multiple training we can jointly work with State 

and local governments so that both benefit from this program. They 

are putting real resources on this, millions of dollars. I think we 

are going to be able to move the needle on this this year for the 

first time in a long time. 

Senator DURBIN. Well, let us try to work together. 

Mr. BERRY. Absolutely. Be honored to, sir. 

Senator DURBIN. Senator Collins. 

Senator COLLINS. Thank you, Mr. Chairman. 

POSTAL SERVICE OBLIGATION TO RETIREMENT TRUST FUND

Mr. Berry, we held a hearing last week about the Postal Service’s 

financial crisis, and there are two major issues that have come up 

with which the Postal Service is working closely with OPM. And 

I want to ask your opinion on both. 

First of all, we had testimony from the inspector general of the 

Postal Service, who discussed a report that his office issued, which 

concluded that the current system of funding the Postal Service’s 

obligation to the Civil Service Retirement System has resulted in 

the Postal Service overpaying by $75 billion, a truly astonishing 

find. 

Now it is my understanding that the OPM determined this payment amount and explained its rationale in a 2004 letter to the 

Postmaster General, and I have read that letter that says the 

Board of Actuaries approved it and reviewed it. But this is a huge 

difference, and the reason this is important is if, in fact, there is 

an overpayment of $75 billion, it would help solve a lot of the Postal Service’s problems. 

Getting a handle on this, however, has been extremely difficult. 

Can you tell us whether OPM still stands by the analysis and 

payment levels that were established in 2004? 

Mr. BERRY. Senator, this is a very tough issue, as you have identified it. I am keenly aware of the challenges the Postal Service is 

facing right now and have met with the Postmaster General as 

well as the Postal Service inspector general on this very issue. 

Let me answer your question directly. Yes. For the time being, 

we do stand by the initial assessment. That assessment, as you 

mentioned, was upheld by the Board of Actuaries and the Government Accountability Office (GAO), not just the Board of Actuaries. 

Now, the Postal Service inspector general has a new argument 

that they are advancing. I am very happy to go back and have that 

reconsidered. We will reevaluate our position, reconsidered with 

GAO and the Board of Actuaries to see if we are wrong. If so, we 

will adjust. 
74 

My responsibility to you as trustee of the retirement funds is to 

make sure that whatever we do, the fund is whole and that we can 

retain solvency and pay the claims as they come due. 

That being said, I recognize the complexity and the challenges 

that are before us, and have made very clear that I am very willing 

to sit down with the Treasury Department, OMB, the Postal Service, and GAO and be a constructive partner in crafting a solution 

that guarantees that we can meet the Postal Service’s concern and 

protect the solvency of the fund. I think I have made very clear 

that, in other words, we are very open minded to try to help however we can. 

If, at the end of the day—because, like you, I am not an actuary, 

the lawyers and the actuaries say, John, your trustee responsibilities prohibit you from doing what these other folks want to do, I 

will be very happy to come back and tell you that this might require this change in legislation to do what you would like to do. 

This is how I could advise you on how best to move forward. 

Right now, you are exactly right. We need to get everybody 

around one table and have people work together to try to crack this 

and resolve this once and for all. 

Senator COLLINS. And while you are doing that, you also need to 

look at the payments to the retiree health benefits fund. 

Mr. BERRY. Yes. 

Senator COLLINS. It is a different issue, but another issue, and 

I know that you have been having some meetings on that as well, 

but that there is not yet a consensus. 

We are just trying—well, let me speak for myself. I am just trying to get a handle on what is the appropriate payment. I just left 

a meeting where a person told me that the inspector general is 

wrong and is at one end of the spectrum, and OPM is wrong and 

at the other end of the spectrum, and the truth is somewhere in 

the middle. I don’t know. I am not an actuary. There are obviously 

budget implications to shifting from the Postal Service the obligation to the Treasury, and I understand that. But it would be nice 

to know what the answer is in terms of just doing a factual analysis when we are hearing such diverse things. 

DOMESTIC PARTNER BENEFITS

I will go back to that. I apologize for cutting you off, but just so 

in this first round, I could quickly get one more question in, and 

that is on the domestic partners benefit bill. 

As you know, last October, our Homeland Security and Governmental Affairs Committee held a hearing on the domestic partners 

benefits and obligations bill, which I introduced with Senator Lieberman. This bill would provide the Federal workforce with the 

same kinds of benefits that are very prevalent in the Fortune 500 

benefit structure, and those are the people we are competing with, 

by the way. 

At the conclusion of the hearing—not to give you a hard time, 

but at the conclusion of the hearing, you did indicate to Senator 

Lieberman and me that ‘‘the cost of the bill is of such a level that 

I think we will be able to identify efficiencies to fully offset the cost 

over the term of the administration. If you need a commitment or 

a promise to that effect, I am happy to deliver it.’’ 
75 

It has been 5 months since that hearing, and we are still waiting 

for those offsets, which, you should understand as a strong supporter of the bill, is preventing the bill from being taken up on the 

Senate floor until we identify those offsets. And so, where are we 

on that issue? 

Mr. BERRY. Senator, first, thank you again for your leadership on 

this issue. The administration strongly supports the legislation 

that you, Senator Lieberman, Senator Durbin and many others are 

supporting. I don’t want this to be a catch 22. Let me make this 

ironclad promise to you. 

Currently, we have an offset that is going through the clearance 

process with Office of Management and Budget. We are waiting for 

the committee to wrap up its report so that we can get Congressional Budget Office (CBO) scoring so we can guarantee that the 

offset we will give you equals the CBO cost estimate. Once we 

know that for sure, then I can meet our word to you. We have identified, I think, a very good offset. 

Now, the chairman mentioned that my last job was Director of 

the National Zoo. As you know, especially in these times, offsets 

have become a very precious commodity. I feel like having a good 

offset is like going into the lion and tiger house with a plateful of 

meat. You get a lot of attention. 

So, I am sort of loathe to reveal the offset for fear, quite frankly, 

that a larger tiger might take it away for another purpose. 

My promise to you would be as soon as the subcommittee is 

ready to go to the floor and we have that CBO scoring, we will 

have an offset to cover the entire cost of the amendment for you 

so that you can move expeditiously to the floor without any delay. 

I don’t offer that as trying to be cute, but that is essentially 

where we are right now. 

Senator COLLINS. Thank you. 

GUARD AND RESERVIST DIFFERENTIAL PAYMENTS

Senator DURBIN. You talked a little bit in your opening about an 

effort I had underway for years to try to make sure that those Federal employees who were activated to serve, deployed as members 

of the Guard and Reserve would not suffer any pay loss. State, 

local governments, private companies have all stepped forward, 

and we used to honor them with a special Web site at the Pentagon, thanking them for their patriotism. And yet the largest employer of Guard and Reserve in America, the Federal Government, 

failed to do the same thing. 

So I had one Senator who was an obstacle. I never convinced 

him, but I outlasted him and eventually passed in fiscal year 2009 

the language necessary for this. Can you give me any idea—we 

talked at the time how it was important that those who qualified 

be paid on a timely basis. Give me an idea of the process that a 

Federal employee who is notified that his or her unit had been activated, about to be deployed, would follow to make sure that if they 

do qualify, they would receive these payments. 

Mr. BERRY. Mr. Chairman, again, let me commend you on your 

leadership on this issue for so many years. Thank you on behalf 

of all of our reservists for delivering this great success. 
76 

I apologize for the delay in issuing guidance to the agencies 

about this. We got that guidance out in December. The reason, we 

found, wasn’t that the civilian pay was complicated. It was the 

military pay side that was very complicated, trying to figure out do 

you include the housing payment? Do you include the hazard allocation? What is included in terms of military pay to define what 

the gap would be to ensure that we were treating them very fairly. 

We finally reached a consensus with the Defense Department 

and the Office of Management and Budget on this and were able 

to issue that guidance. 

The first thing I want to assure you about is the law you enacted 

took effect in 2009, March 11, 2009. We didn’t get around to 

issuing the guidance until last December. Reservists are eligible for 

that pay back to the date of enactment. Even though we have made 

that clear in the guidance, and we will make sure that everyone 

is made whole back to the date of enactment. I want to promise 

you that we will ensure that no one is shortchanged because of our 

delay in getting that guidance out because of the complexity. 

There are essentially four finance centers that pay employees on 

the civilian Department of Defense (DOD) side and throughout the 

Federal Government. The GSA runs one; the Department of Defense has the DFAS center; the Interior Department has what is 

called the National Business Center; and the U.S. Department of 

Agriculture (USDA) has the National Finance Center. We have 

been working with them to implement adjustments to their pay 

systems so that these calculations can now be made, and the reservists can be made whole. 

And so, that is underway. I don’t know if we have an exact date. 

If I could supply it to you for the record—— 

Senator DURBIN. Of course, you can. 

Mr. BERRY [continuing]. The exact date we will be able to do 

that? 

Senator DURBIN. And if you could, and if you don’t know at this 

moment, the number of Federal employees who are in the Guard 

and Reserve. I don’t know if you have that. If you don’t, you can 

provide that to me as well. 

Mr. BERRY. We estimate that the number could range, depending 

on the year, somewhere between 5,000 and 15,000 Federal employees at any one time that are on active military duty in the Reserve. 

That is the total number of the estimate that we gave this morning, 150,000? 

We believe that several thousand or so will be eligible for direct 

payment under this proposal have been paid less than what they 

would have been paid in their civilian job and that this bill will 

allow us to make up for that. So it will be significant, and we will 

make sure it gets implemented quickly. 

[The information follows:] 

STATUS OF RESERVIST DIFFERENTIAL PAYMENTS

The status of making reservist differential payments varies among payroll providers. The most recent information we have from the four major providers is as 

follows: 
77 

General Services Administration (GSA) 

On June 1, 2010, GSA reported that it had implemented automated capability for 

processing reservist differential during pay period ending May 8, 2010. GSA made 

its first reservist differential payments during pay period ending May 22, 2010. 

National Business Center (NBC, Department of the Interior) 

On June 2, 2010, NBC reported that since February 2010 it had manually processed several reservist differential payments. NBC reported that it continues to remain on schedule to automate the reservist differential in its Federal personnel/payroll system August 2010 release. 

National Finance Center (NFC, Department of Agriculture) 

On June 4, 2010, NFC reported that effective April 19, 2010, client agencies of 

NFC were able to enter reservist differential payments into its Special Payment 

Processing System (SPPS). NFC published processing instructions on its website via 

an NFC bulletin dated April 16, 2010. NFC reported that it had processed a total 

of 30 payments as of June 4 thru its SPPS system. 

NFC also reported that effective May 9, 2010, the programming modifications for 

OPM’s Update 52 to the Guide to Processing Personnel Actions (GPPA) related to 

reservist differential were completed and available for clients to begin their processing. NFC has published processing instructions related to these changes on its 

website via an NFC bulletin dated May 18, 2010. 

NFC reported that it continues to perform the necessary analysis and research 

to address the system changes needed for the new Pay Status/USERRA codes related to the Nature of Action Code (NOAC) changes for reservist differential as per 

OPM’s Update 61, Update 02, of the OPM Guide to Data Standards, issued April 

1, 2010. Once this task has been completed, NFC will establish a target implementation date for this final phase of the project. 

Defense Finance and Accounting Service (DFAS, Department of Defense) 

On June 9, 2010, DFAS reported that it had a manual workaround in place to 

make reservist differential payments. As of pay period ending May 22, 2010, 331 

payments have been made for a total of approximately $800,000. All of these payments were made to DOD civilians. 

On August 17, 2010, DOD reported it had identified approximately 5,558 appropriated-fund DOD employees so far as being eligible for reservist differential (i.e., 

had qualifying active duty service). Approximately 532 of these employees were due 

retroactive differential payments. For those 532 employees, the consolidated amount 

of reservist differential owed is approximately $1.3 million. The total amounts covering anywhere from 1 pay period to 24 pay periods ranged from $10.75 to 

$26,665.02. The median total figure was $1,518.71. The average amount (before 

taxes) is approximately $2,500. DOD is in the final stages of analyzing a second 

group of employees that may be eligible for retroactive reservist differential payments. Payments will be effected starting September 17, 2010. 

On June 24, 2010, DFAS provided non-DOD client agencies procedures to follow 

for authorizing reservist differential payments and followed up with a discussion 

during a quarterly customer meeting in July 2010. As of September 2010, DFAS has 

processed payments for the Departments of Veterans Affairs and Energy and the 

Environmental Protection Agency. 

HIRING INDIVIDUALS WITH DISABILITIES

Senator DURBIN. If I could ask one other question, and it relates 

to disability policy in hiring. I talked to my staff because I think 

Congress is slow to meet the needs when it comes to the disability 

community. And I talked to my staff about our office and said, 

‘‘What can we do here?’’ 

I meet a lot of disabled veterans out at Walter Reed and a lot 

of folks who have served, come back needing a job, as an example, 

disabled veterans and others in the disability community. It has 

been hard. It has been more difficult than I thought it would be. 

Sometimes it is matching up our job description with their talents, and our schedule, as crazy as it is from time to time, with 

their personal and family needs. And I am wondering what you are 

doing, as you look at the Federal Government, to address this, 
78 

whether our problem is unique or we just didn’t go to the right 

place for information and guidance. 

What can we do, should we do as Congress or as the Federal 

Government to give talented disabled people a chance to serve their 

Government? 

Mr. BERRY. Mr. Chairman, thank you for your leadership on the 

Americans with Disabilities Act, with the amendments. You have 

been a stalwart leader over the decades on this issue. I know you 

and Tony Coelho and Mr. Hoyer have been partners in advancing 

this effort and this initiative, and your leadership is deeply appreciated. 

When you look at the diversity equation in the Federal Government, the only group that has gone backward have been people 

with disabilities. We used to be over 1 percent. We are now under 

1 percent, around 0.5 percent. It is embarrassing. 

This is after the passage of the Americans with Disabilities Act, 

after the passage of the amendments that you all secured. We need 

to do better. And so, one of the reasons that I sought and recruited 

Christine Griffin from the Equal Employment Opportunity Commission (EEOC) is whenever you deal with diversity and Federal 

law, it is a very complicated area, as you all know, relative from 

Supreme Court cases on down. 

Chris is both an attorney as well as someone who is skilled on 

this issue through her practice in the EEOC, where she was a 

Commissioner just before becoming Deputy Director of OPM. I 

have asked her to lead our effort on behalf of the President of an 

initiative that will focus not only on disability, but also on a diversity initiative that we could present to the President this summer 

that is going to try a new approach, within the scope of the law, 

that will allow us to better provide access to all communities in the 

country, including people with disabilities. 

Now especially for people with disabilities, to focus specifically on 

your question, Chris has worked with agencies across the Government to organize the largest-ever hiring event, which we are holding at the Washington Convention Center in April. 

What is the date, Chris? 

Ms. GRIFFIN. April 26. 

Mr. BERRY. April 26. And we welcome, if you have time to be 

able to join us at some point during that day. 

What we have done is, rather than make this just another job 

fair, we have conducted outreach through the disability community 

and advocacy groups across the country, we have worked with Federal agencies to identify jobs that are currently available, and then 

we have had people apply in advance of this event so that we can 

try to do exactly what you said, Mr. Chairman, match their skills 

and ability with the positions that are now available and open in 

the Federal Government. And then, using Schedule A authority, 

what we are going to do at this hiring event is actually set up 

interviews between the agencies where we think those matches are 

in the ballpark so that they can interview those candidates at the 

Washington Convention Center and, if it works, hire them on the 

spot. So we will have OPM staff there to advise agencies and applicants, and get them started immediately. 
79 

We have very powerful tools that you and Congress have given 

us with Schedule A authority. They just haven’t been used very effectively. And so, Chris and I are going to work very hard on this. 

The goal is to achieve forward momentum and progress on all 

fronts on the diversity level. But the place where we just have to 

move this needle, because it is the only one we have fallen backwards on, is with people with disabilities. They do deserve special 

attention, and we do have the ability to do it. 

Last, but not least, if I could just thank you all for the appropriation that you give the Department of Defense to fund the Technology Support Center because what you have done through that 

is essentially take advantage of our market strength. Now the Federal Government can buy all of the technical equipment that is 

needed to accommodate people’s disability in one place and get 

lower prices because they can buy them in bulk rather than an 

agency buying one specialized piece of equipment. You have centralized that in the Department of Defense, and then they do it on 

behalf of all Federal agencies. And so, for any Federal agency that 

wants to hire a person with a disability, if there is a special highcost technology accommodation that needs to be made, it is covered 

thanks to the program. 

The Department of Defense has been working in lock step with 

us on this program and they are going to be there with us on the 

26th to help us in case anybody says, well, you know, ‘‘I have the 

skills to do this job, but I need a special computer,’’ or ‘‘I need this 

special phone line.’’ 

So, Mr. Chairman, we are committed to this issue. I am with you 

110 percent, and I hope to God by next year, we are going to be 

able to move the needle for you. 

Senator DURBIN. I will ask you. 

Senator Collins. 

Senator COLLINS. Thank you, Mr. Chairman. 

FEDERAL EMPLOYEE PAY

Mr. Berry, I want to ask you about an allegation that I am hearing with increasing frequency, and that is the average pay for a 

Federal employee is almost double the average pay overall. And because I am hearing this repeated by my colleagues, by my constituents, by commentators on television so often, I would like to ask 

you to address that issue in a factual way, to help us better understand this charge. 

Mr. BERRY. Senator, I really appreciate that. There is a lot of 

misinformation out there right now. 

Many of these jobs that you hear about compare Federal salaries, 

sort of the average Federal salary to the average private sector salary. However, they are not really comparing apples to apples. 

The Federal Government 50 years ago used to be a largely blue 

collar operation. Today, it is a significantly white collar operation, 

with very high-skilled positions, including everything from financial regulation and derivative monitoring to National Institutes of 

Health (NIH) research, to law enforcement and cybersecurity. The 

skill sets that are required for the Federal Government to meet its 

responsibilities in the 21st century continue to increase in complexity. The average Federal salary includes those high-ranking po-
80 

sitions. On the other hand the private sector includes a large number of service jobs that we do not have in the Federal Government—restaurant workers, kitchen staff, things like that for which 

there are very few counterparts left in the Federal Government in 

these areas. And yet that is a significant portion of the average private sector salary. 

And so, you see how if you are going to put in a lot of lower-paid 

workers into the average private sector salary, it is going to be 

lower than the average Federal salary. However, you are not comparing like jobs with like jobs. 

And so, whenever you do that, whenever you try to compare like 

jobs with like jobs and put the level of responsibility with it and 

the level of education that is required, Federal jobs are behind the 

private sector. So, and I don’t want to say in each and every case 

because there will be outliers, and where there are outliers, quite 

frankly, we need to adjust the pay system to make sure we are not 

ahead of the private in those areas by any significant amount. 

But a good case is nurses, Mr. Chairman, to go back to an earlier 

example. Only one-third of nurses in the private sector have a 

bachelor’s degree. Over one-half of the nurses in the Federal sector 

have a bachelor’s degree. 

So, for example, in the USA Today story, they compared nurses 

in the private sector to nurses in the public sector, and the nurses 

in the public sector were paid, I think, something like $5,000 more. 

Well, when you accounted for the bachelor’s degree and the percentage increase, then immediately, that number evaporates. 

Senator COLLINS. Let me just say that I think you need to respond to that because that is gaining currency, and it would be 

helpful to have in writing your analysis and response to that. You 

have raised a number of excellent points, but I don’t think those 

points are getting out there, and I am starting to hear this more 

and more often. 

What I hear is a comparison that the private sector, it is $41,000, 

and for the average Federal employee, it is like $70,000 something. 

And I think that needs to be addressed, and I would encourage you 

to do that. 

Mr. BERRY. And quite frankly, one of the things we are looking 

at, Senator Collins, on this issue and what I found was interesting 

was that the formula we used was based on Bureau of Labor Statistics data. Well, over the years, they have stopped collecting the 

data at the level that we can really make careful analysis and comparisons. And so, there may be requirements needed to change this 

formula. 

And so, I have appointed a task force to wrestle with this formula so that we can come forward and actually defend with ironclad validity for you and for the American public exactly what the 

facts are based on the data. And so, we are working on that right 

now, and as soon as I get that, I will bring that up and make sure 

we carefully brief you and the chairman on this issue. 

Senator COLLINS. That would be very helpful because, obviously, 

if there is an imbalance, that is a problem at this time of great 

budget strain. But if there isn’t, we need to better make that case 

and explain why. 
81 

FEDERAL LONG-TERM CARE INSURANCE PROGRAM

Let me switch to another issue. You will recall that there have 

been a lot of problems in the Federal long-term care insurance program, and we have talked a lot today about making the Federal 

Government the model employer. And believe me, it has not been 

a model employer when it comes to that program. 

So many people signed up for that program with these false assurances based on very misleading brochures from the provider, 

the insurance provider that indicated there would never be an increase in premiums if they paid this higher rate at a particular 

time. And I have those brochures. Literally, I personally have those 

brochures. 

So I was so sympathetic to the witnesses who came before us and 

now were all faced with a 25 percent premium increase. Well, adding insult to injury, when the provider sent out the new forms for 

us to make our choices, they made further errors in describing it. 

That is just so unacceptable, and I think OPM needs to do a far 

better job of overseeing that program. 

I have a point of personal pride here because I was a coauthor 

of the law that created this program because we wanted to encourage Federal employees to plan for long-term care and because so 

many people are under the misimpression that Medicare covers 

long-term care, which it doesn’t. So—and this isn’t an argument for 

the CLASS Act, in case my chairman is about to make that comment. He has a smile on his face. So I see that coming my way. 

But the administration of this program has been far too lax, and 

it is not protecting retirees, participants, and future participants. 

So participants and beneficiaries are not getting the protection that 

they have a right to look to OPM to provide. 

Mr. BERRY. Senator Collins, I want to apologize to our retirees 

who especially did not have full access to that information and who 

were essentially misled and are now put in this awkward position. 

This is obviously a program that I have inherited and am trying 

to do the best we can, and we will have recommendations for how 

we can hopefully prevent this from happening again. 

What I have tried to do to, at least, to ease the blow, if you will, 

is to create alternatives so that not every employee or every member who is in that program would suffer that same increase. That 

would only be if they had the highest level of inflation protection 

over the long term. 

And so, we have tried to create options for the employees so that 

they can understand the cost of that inflation protection in the long 

term, obviously, it is not the same level of protection. It is lower 

inflation protection, but it would—it lowers, obviously, the cost of 

the increase as you create these alternatives. 

And so, we worked with the insurer to try to create as many of 

those alternatives as we could, and then allow the retirees who 

were in the program plenty of time to try to make their decision 

as to what level they wanted to pay for. And so, we have extended 

that through March to give them the time to wrestle with this. I 

know it is a tough decision, and I am very empathetic to the pain 

that this is causing them, and I hope we have given them sufficient 

choices that they can adjust to the budget that they find them-
82 

selves in, as I appreciate many of these people are on fixed incomes 

now. 

That being said, one of the biggest weaknesses, in my opinion, 

as the new person coming into this program here at the end here, 

is that when the law was created, because this was an emerging 

market, Congress told us that we needed to recompete this program entirely every 7 years. And so, there are no—there hasn’t 

been an increase in rate in 7 years because we were able to enforce 

that. 

But what happens is when you recompete to ensure that you 

have people applying and actually stepping up to offer the service, 

the market has matured. And so, every 7 years, we will find ourselves in this exact same position where whoever bids on the new 

contract 7 years from now could do the exact same thing and increase rates all over again. 

And so, I think what I would like to—we have got a team working on this and to work with your staffs. Because the market has 

now matured in this program, we may want to look at a more 

longer-term contract that we could then enforce more stability in 

the program and prevent these spikes every 7 years. 

And quite frankly, my biggest fear is, okay, what happens 14 or 

21 years from now when some future OPM Director is going to 

have to recompete this program and now you have more retirees 

taking the benefits than might be joining the program, and all of 

the private sector saying, ‘‘I don’t know if I want to join that program.’’ And so, we may have no one bid. That would be a horrible 

situation. 

So we need to, I think, take a longer view on this program and 

really design it for the longer term and not in these 7-year slices. 

And so, that is a long answer, but I appreciate the sensitivity of 

the issue. 

Senator COLLINS. Thank you. 

It is a difficult issue because if you lock one provider in for that 

many years, you may see a decline in service levels. That is not 

necessarily a—— 

Mr. BERRY. Right. 

Senator COLLINS. It is a tradeoff, but I apologize for going over. 

Senator DURBIN. No, that is fine. 

LESSONS FROM THE 2010 SNOWSTORMS/TELEWORK

Director Berry, I just have one last question. When I was outside 

today and it was so sunny and beautiful, and I looked at the trees 

budding and blossoming, I thought 6 weeks ago, we were in the 

midst of a blizzard, the worst snowstorm in the history of Washington, which literally shut down the Capitol and shut down most 

agencies of the Federal Government for the better part of a week. 

What did you learn from that? 

Mr. BERRY. Ah—— 

Senator DURBIN. Aside from the fact that we need better snow 

removal in a lot of places. 

Mr. BERRY. We are working, Mr. Chairman, with the Council of 

Governments in the region. There is going to be on April 5 an after 

snow event to discuss lessons learned, and there are a lot of areas 
83 

we could do better in terms of coordination with the region with 

lanes and snow removal. We had it in both directions. 

For example, Key Bridge was plowed—all the lanes on the bridge 

were plowed, but then when you got to Arlington, only two lanes 

of traffic were open. So that didn’t work well. And vice versa, the 

same, 14th Street was plowed, but when you got into the city, only 

two lanes were open on 14th Street. 

So we created these bottlenecks by just not coordinating and saying, okay, if we are going to open four lanes here, let us open it 

the whole way and not pieces. So there is a lot that we can learn. 

I think the biggest thing we learned, and it is actually, I think, 

a good news story. The President called me on Wednesday during 

the second blizzard to check in and see how things were going. And 

I explained to him, I said, you know, Mr. President, in 1996, which 

was the last storm of similar import where the Government was 

closed for a period of time, less than 1 percent of the workforce 

could telework at that time because at that time, the two biggest 

obstacles to telework were security, protecting secure information, 

and second was technology. You just didn’t have the memory capacity that, for example, this gentleman has right here on that portable computer. 

Bring the clock forward to this past snowstorm a month ago. 

Over 35 percent of our workforce we know was online with our 

mainframes in many agencies across the Government. Some agencies, for example, the Patent and Trademark Office (PTO), had an 

85 percent productivity level during the snowstorm while we were 

technically closed. 

Well, they did that because they had a very aggressive telework 

program, the staff had the equipment and the security all tied up. 

The last major hurdle that we are trying to defeat right now is 

management intransigence. Managers just like—they think the 

person has to be at their desk, in that chair, or they are not doing 

the job. And we need to move our managers to be more results-focused. Because quite frankly, if they are doing a good job defining 

the result, then who cares where the work is getting done? Who 

cares when it is getting done? 

Many women and men both with child-raising responsibilities, 

would love to do work at night between 9 and 11 p.m. once the kids 

have gone to bed. And should we, as a Government, care about 

that? Yes, we give them the tools to allow them to get the work 

done. Maybe they are not working from 3 to 6 p.m. because they 

pick the kids up from school and are helping with the homework 

but as long as the work gets done that’s what matters. 

And so, I think we can still get the 40 hours, but we can be more 

flexible in how we approach it. And where agencies that are doing 

that like the Patent and Trade Office, when we were closed, they 

weren’t closed. They accomplished 85 percent productivity for the 

taxpayers. 

At OPM, we accomplished only about 35 percent in that area, but 

we did 95 percent in our background investigations. You know 

why? All of our security background investigations, 90 percent of 

what is done throughout the Government are done out of people’s 

homes. We have our caseworkers all across the country working 
84 

out of their homes. They do it securely, and they do it professionally. And we can do this. 

So I told the President in 12 years, we have got it to a point 

where we went from 1 to 30 percent of the Government being able 

to operate. Shouldn’t the goal really be 80 to 90 percent, where everybody would be like the PTO? So that may be within the next 

couple of years, if we really put our shoulders to this, and we get 

people the right equipment and we deal with this management 

problem of intransigence, we could have 85, 90 percent Government functionality during any event because we ought to be able 

to maintain continuity of operations. 

And what I ought to be able to say is we’re not closed today. We 

are on a mobile work day. And whether it is a snowstorm or whether, quite frankly, if a dirty bomb goes off somewhere in the city and 

we might have to evacuate a portion of the city for a long period 

of time, we still need to maintain those Government operations. 

And so, I think this is essential for continuity of service. We need 

to get there, and telework is the most powerful tool to do it. 

And so, that would be my biggest lesson learned, Mr. Chairman, 

where I think there is a lot of hope, and we can do a lot better. 

Senator DURBIN. Thank you. 

Senator Collins. 

Senator COLLINS. Thank you, Mr. Chairman. 

ADDITIONAL COMMITTEE QUESTIONS

Senator DURBIN. Director Berry, thanks for coming. We are going 

to submit some questions to you. If you can get back to us in a 

timely fashion, we would appreciate it. Look forward to working 

with you. Thank your staff and all the committed people at OPM. 

Mr. BERRY. Thank you, sir. 

[The following questions were not asked at the hearing, but were 

submitted to the Office for response subsequent to the hearing:] 

QUESTIONS SUBMITTED BY SENATOR RICHARD J. DURBIN

RETIREMENT SYSTEMS MODERNIZATION

Question. OPM’s processing of Federal employee retirements has long been recognized as paper-intensive and reliant on antiquated systems while not providing 

prompt and complete benefit payments upon retirement. Since 1987, the agency has 

attempted to modernize its retirement process and systems through a series of four 

initiatives, none of which has been successfully completed. The following timeline 

shows the retirement modernization initiatives from 1987 to present. 

In April 2009, GAO reported that OPM’s latest retirement modernization effort 

(referred to as RetireEZ) remained far from achieving the modernized capabilities 

the agency intended. Also, OPM did not have a complete plan for proceeding with 

the modernization. What are OPM’s specific plans for retirement modernization, including program scope, implementation strategy, lines of responsibility and authority, management processes, schedule, and expected results? 

Answer. OPM is deeply committed to modernizing the Federal retirement system 

and addressing the issues identified in the Government Accountability Office’s 

(GAO) April 2009 report regarding OPM’s Retirement Systems Modernization 

(RSM) program. To ensure that work on RSM receives the highest level of attention, 
85 

Deputy Director Christine Griffin is leading our efforts on this program and she has 

made it her top priority. We have also realigned the program to the Chief Information Officer. 

Consistent with Director Berry’s ‘‘back-to-basics’’ strategy for the RSM program, 

priorities for fiscal year 2010 include modernizing the retirement calculators used 

to calculate the bulk of Civil Service Retirement System (CSRS) and Federal Employees Retirement System (FERS) retirements and establishing key ‘‘building 

blocks’’ to transition from a paper-based to an automated retirement process. Those 

‘‘building blocks’’ include a data warehouse to store and allow access to retirement 

data and establishment of a method for agencies and Shared Service Centers (SSCs) 

to send electronic retirement information to OPM and across the government (‘‘data 

feeds’’). 

The data warehouse improvements will help OPM to process retirements faster 

by enabling collection of retirement data over the course of an employee’s career 

rather than primarily at the time of retirement. Collection of this information 

through recurring data feeds, and an online retirement application will allow for 

validation of data prior to submission, thereby preventing incomplete or erroneous 

information from being submitted for retirement processing. Storage of this information will speed the adjudication process by making clear what information is available and what information may be outstanding. Given today’s environment where 

over 30 percent of retirement cases are incomplete when submitted to OPM for processing, the possibilities exist to vastly reduce the amount of work required to ‘‘hunt 

down’’ missing information. 

Improvements to the retirement calculator consolidate all calculations into a central rules engine that can be utilized across retirement processing systems as applicable; and will allow for integration with the data warehouse, thus eliminating timeconsuming and error-prone manual data entry from today’s paper files. This integration will reduce processing time and claim adjudication errors. 

During fiscal year 2010, OPM improved the management of the program to address the concerns GAO identified in their April 2009 Report. Specifically, the RSM 

program was put under the Executive leadership of Deputy Director Griffin, with 

a clear strategy, lines of authority and management best practices implemented and 

identified in key program documents including a program Executive Charter. The 

RSM program generated cost estimates based on GAO’s Cost Estimating and Assessment Guide and developed a comprehensive project plan, with a schedule and 

expected results (Integrated Master Schedule). OPM tracked the RSM program 

progress through OPM’s Earned Value Management System, which measured 

RSM’s performance based on adherence to scope, cost and schedule. We have and 

will continue to keep Congress and GAO apprised of our progress in addressing the 

recommendations made in GAO’s 2009 Report. 

For fiscal year 2011, the RSM program continues to focus on the ‘‘building blocks’’ 

needed to improve the retirement system and transition from a paper-based environment, including: 

—Modernizing critical calculator and retirement systems; 

—Automating manual paper-based retirement system through electronic data collection and applications; 

—Implementing automated tools to improve retirement case processing; and 

—Imaging incoming paper retirement records. 

This approach differs from previous modernization attempts in several ways. 

First, each of the previous approaches were based on a complete overhaul and replacement of all retirement processing systems. The current approach takes a more 

measured approach in assessing which systems are operating effectively and targeting specific systems for replacement or upgrade. The second differentiator is the 

role of the government in integrating the various components. In all previous 

iterations, OPM relied primarily on vendors, either the prime vendor or a second 

vendor to integrate the systems components into a comprehensive retirement solution. OPM has realized that it was extremely difficult to identify a contractor with 

sufficient knowledge of OPM’s current systems and proposed solution components 

to complete this task effectively. The current approach puts OPM Federal staff in 

this role, augmented by contractors for specific tasks, but with overall OPM staff 

leadership. The current approach differs from previous efforts by focusing on incremental improvements rather than a ‘‘big-bang’’ implementation with the completely 

revamped retirement system available on day one. This approach allows for much 

more efficient use of resources and decreased risk of system failure that would jeopardize retirement processing operations. The primary advantage to enabling the success of the current incremental approach is a Federal-wide standard, The Guide to 

Retirement Data Reporting, which defines the data and formats for agencies to send 

retirement data feeds to OPM. 
86 

Question. For more than two decades, the agency has attempting to modernize its 

retirement processes and systems, including in-house and privately sourced efforts, 

and none of these has been fully successful. Most recently, almost 2 years ago, OPM 

abandoned the latest effort. Where are you now in your decisionmaking process with 

regard to development of a new system? 

Answer. OPM senior leadership and the leadership of OPM Retirement and Benefits have fully endorsed the RSM priorities identified for fiscal year 2010 and fiscal 

year 2011, which are consistent with the Director’s ‘‘back to basics’’ approach for the 

program. These activities move the program in a methodical and deliberate fashion 

in order to ensure successful delivery of key ‘‘building blocks.’’ These activities align 

to the capabilities GAO identified for a modernized retirement system including upgrading the aging OPM calculators and moving from a paper-based retirement process to an automated process. Delivering modern, improved retirement services, including web-enabled retirement applications, self-service tools, retirement estimators, and a comprehensive retirement case management system is dependent on 

first establishing the core ‘‘building blocks’’. 

Funding has been approved by OPM’s Capital Investment Committee and is being 

put in place for the retirement calculator improvements and development of a pilot 

online retirement application tool in fiscal year 2011. 

Question. For fiscal year 2011, you are requesting an additional 40 FTE in order 

to speed the retirement claims processing time. This staffing is needed because over 

the past few years, staffing levels were reduced in anticipation of expected efficiencies which did not occur. Please elaborate on the nature of the staff to be 

hired—what will happen to staffing once the efficiencies occur? 

Answer. Retirement processing staffing levels were reduced mainly through attrition over the past few years in anticipation of increased automation of retirement 

processing under prior RSM efforts. Since Director Berry’s ‘‘back-to-basics’’ strategy 

for RSM will not deliver on significant efficiencies in the short-term, OPM must increase staffing levels in order to process its anticipated workload in a timely manner. Beginning in fiscal year 2011, the 40 FTE will permit OPM to process an additional 24,000 claims. The additional claim processing will reduce claims processing 

time by up to 5 days. Furthermore, the 40 FTE will have a greater impact when 

the Legal Administrative Specialists (LAS) have been fully trained and possess more 

experience. The LAS’s will then be expected to process 32,000 more claims which 

will reduce claims processing times by an additional 2 to 4 days. As greater efficiencies are achieved, staffing needs going forward will be evaluated. 

Question. OPM’s February 2010 Retirement System Modernization Quarterly Report to the Appropriations Committee identified two main components of the retirement modernization program: (1) updating all computer systems that relate to the 

administration of retirement benefits; and (2) transitioning from a process that is 

heavily dependent upon the use of paper documents to one that utilizes electronic 

data. What has been OPM’s specific progress toward developing these two components? Has OPM developed results-oriented (i.e., objective, quantifiable, and measurable) performance goals and measures to use in determining and reporting program progress? 

Answer. In terms of updating the computer systems that support the administration of retirement benefits, OPM has focused on improving the retirement calculators that perform the bulk of Civil Service Retirement System and Federal Employee Retirement System retirement calculations. In fiscal year 2010, the RSM program: 

—Completed standardizing 50 percent of rules and calculations. 100 percent will 

be completed in September 2010 and will be used to verify that all OPM calculators are using standard, current and correct calculations. 

—Started to code the standard calculations into a new calculator platform (pilot). 

In fiscal year 2011, RSM will continue to code all calculations into a single calculator with a goal to consolidate OPM calculators in a modern, up-to-date system. 

In terms of transitioning from a paper-based to an automated retirement system, 

in fiscal year 2010, the RSM program: 

—Established a retirement data warehouse, which meets all security requirements. 

—Transferred over 9 million imaged retirement records to the warehouse. 

—Implemented data feeds to receive data electronically from the National Business Center and National Finance Center. Three other Shared Service Centers 

(SSCs) are providing timelines to send electronic retirement data via data feeds 

with OPM (GSA, DOD and U.S. Postal Service). 

—Provided initial access to electronic and imaged retirement information. 
87 

—Completed the Guide to Retirement Data Reporting and publically posted the 

data standard, enabling agencies and SSCs to send retirement data in one format, and share that information across the Federal government. 

The work supporting the transition to a paper-less retirement system will continue in fiscal year 2011. 

In addition to measurement of RSM’s performance against the program’s Integrated Master Schedule and Earned Value Management reporting addressed above, 

the RSM program has provided results-oriented program goals in all budget submissions (i.e., Exhibit 300 Capital Asset Plans). To demonstrate this, one of the retirement program’s priority goals is to reduce the percentage of incomplete retirement 

records OPM receives from agencies to less than 30 percent by the end of 2010 and, 

going forward, to reduce the percentage of incomplete records to 28 percent by the 

end of 2011 and 25 percent by the end of 2012. This is one of only five of the Director’s near-term High Priority Performance Goals, on which OPM is reporting quarterly progress at Performance.gov. 

Question. According to OPM’s February 2010 Retirement System Modernization 

Quarterly Report to the Appropriations Committee, the agency has been coordinating with other Federal agencies regarding timing and application capabilities for 

its retirement system modernization. In addition, OPM’s report stated that it plans 

to continue developing standardization rules through interagency coordination. To 

what extent is OPM dependent on other Federal agencies to modify or make 

changes to their system(s) in order for OPM to accomplish its goals for retirement 

system modernization? 

Answer. The key to transitioning to a paperless retirement process is for OPM to 

receive electronic data from Shared Service Centers (SSCs). RSM continues to meet 

regularly with the SSCs to discuss retirement data requirements and the steps necessary to begin sending electronic data versus paper. The SSCs are providing schedules to send electronic retirement data to OPM. Two SSCs are already providing retirement data to OPM electronically, and the rest are planning to do so. Regular 

meetings and discussions with the SSCs also entail coordinating the validation 

checks that can be applied to information when it comes to OPM in order to verify 

it is complete and properly formatted. These requirements are documented in the 

Guide to Retirement Data Validations version 1.0. This guide will help OPM identify problems SSCs may have when sending information to OPM and also any problems with the data itself. OPM will be able to report these problems back to the 

SSCs so they can be corrected in advance of retirement processing. 

Question. OPM’s February 2010 Retirement System Modernization Quarterly Report to the Appropriations Committee included retirement call center goals for the 

agency. According to these measures, OPM has not been meeting agency established 

customer service standards. For example, OPM has not met its established goal for 

answering calls within an average of 1 minute since August 2009. What steps is 

OPM taking to improve the call center’s service to Federal employees and retirees? 

Answer. In our commitment to provide high quality customer service, OPM has 

taken several steps to improve the Call Center’s service by promoting our Retirement Services Online webpage; focusing on resolving customer inquiries in the first 

call; adjusting work schedules; and employee training. 

Many telephone inquiries that are received are transactions that can be performed by our customers online. Call Center agents are educating our customers 

about the online tools that are available 24 hours a day, 7 days a week. This will 

help customers get their annuity information faster, view and manage their annuity, and will help reduce call volume and customer hold times. 

Stronger emphasis has also been placed on resolving customer telephone inquiries 

in the first call, which will significantly reduce the number of times a customer 

needs to contact the Call Center. Call Transfer Rates have decreased by 40 percent 

over past 2 years, and although Average Talk time increased by 18 percent over 

past year customers are more satisfied having their inquiries resolved in one call. 

In an effort to adequately staff the Call Center, staffing schedules have been adjusted to better handle the hourly call volume during peak times. Higher skilled employees (Customer Service Specialists) will now handle calls, which will result in improved resolution rates and improved efficiencies. 

Finally, of the current Call Center staff of 84, there are 18 newly hired customer 

service specialists. Talk time should come down as new employees become comfortable and familiar with their positions. We have already seen a 3 minute decrease 

in Average-Speed-of-Answer (ASA) in July 2010 over the previous month (from 15.8 

minutes to 12.8 minutes). However, this may not be sustainable as we return to the 

busy times of the year. 

Implementing the steps above will improve customer service at the Call Centers, 

but not be enough for us to reach the 1 minute goal for the average speed of answer. 
88 

This goal is a by-product of past priorities which was based on the provision that 

OPM would have a fully automated retirement system and substantially increased 

Call Center staff. Unfortunately, those provisions did not come to fruition. Nonetheless, customer service is a priority for OPM and we will analyze this in more detail 

to further improve our performance. 

Question. GAO made recommendations that OPM correct significant weakness in 

five key management areas that are vital for effective development and implementation of a modernized system: cost estimating, project monitoring (using earned value 

management), requirements management, system testing, and project oversight. 

Specifically, GAO reported that OPM had not developed a cost estimating plan or 

established a performance measurement baseline—prerequisites for effective cost estimating and earned value management. In addition, the agency had not established 

processes and plans to guide system requirements development work or addressed 

test activities. Finally, although OPM’s Executive Steering Committee and Investment Review Board were aware of retirement modernization activities, these bodies 

did not exercise effective oversight, which allowed the aforementioned management 

weaknesses to persist. Correcting these weaknesses is critical not only for the success of OPM’s retirement modernization, but also for that of other modernization efforts within the agency. What is the status of OPM’s efforts to address and overcome the program management weaknesses GAO identified? What steps is OPM 

taking to ensure that the program management weaknesses GAO identified are not 

adversely impacting the financial systems modernization program? 

Answer. OPM has met with the GAO as a follow-up to their April 2009 Report 

on weaknesses with the technical implementation and management of the RSM program. RSM’s continuous review process is central to fully adopting the recommendations of GAO to ensure the restructured program meets its objectives on time and 

within budget. To this end, RSM developed a reliable program cost estimate in 2009 

in response to GAO findings and OMB guidance to rejustify further investment. 

Using GAO’s Guide to Cost Estimation and Assessment the RSM Business Case 

Analysis (BCA) was developed and provided to OMB in September 2009 with the 

BY 2011 Exhibit 300. The BCA was recently updated for 2010 in support of the BY 

2012 program budget and investment justification and provides more informed basis 

for acquisition and other planning. RSM established a new Program Management 

Baseline in June 2010 based on this information and updated and continues to develop several documents which are used in managing the program. 

These key documents were specifically cited by the 2009 GAO Report as inadequate, and have subsequently been updated to correct those weaknesses, improve 

program oversight and reflect current program priorities. Status of these documents 

follows: —RSM Executive Steering Committee (ESC) Charter.—This charter was updated 

to improve program oversight. The Charter reflects OPM’s reorganization, designating the Chief Information Officer as the ESC Chair and adding OPM’s 

Deputy Director as an ESC member. 

—RSM Change Control Board Charter.—This Charter reflects OPM’s reorganization and reestablishes standard processes to approve and manage program requirements. 

—Program Management Plan.—The update is currently under review. This document provides an overview of RSM’s governance, describes program management roles and responsibilities, and identifies the automated tools used by the 

program for management and reporting purposes. 

—Requirements Management Plan.—Version 3.0 was approved by the RSM 

Change Control Board in March and is currently in use in every RSM effort to 

document requirements and calculations for retirement business processes. 

—Test Management Plan.—The plan is currently under review. This document 

outlines the testing approach that ensures the programs deliver the systems 

and services required by OPM and that those systems work efficiently to meet 

the requirements of the users. 

OPM continues to engage with GAO as they follow up on OPM’s progress in addressing the recommendations made in GAO’s 2009 Report. OPM will continue to 

update our external stakeholders on the program as the execution progresses. 

Question. OPM’s February 2010 Retirement System Modernization Quarterly Report to the Committees on Appropriations discussed the development of a plan and 

timeline for the modernization of OPM’s legacy retirement IT systems. What is the 

specific plan and timeline for modernizing OPM’s legacy retirement IT systems? 

Answer. OPM has developed a plan and timeline for modernizing the 32 aging 

OPM retirement systems, prioritizing modernization of the systems as follows: 

—Fiscal year 2011–2012.—OPM retirement calculators, employee data systems, 

Service Credit system and Case Control Systems. 
89 

—Fiscal year 2013–2014.—OPM consolidated annuity payment systems and postadjudication support systems. —Fiscal year 2015–2016.—OPM consolidated data repository and retirement reporting systems. 

OPM will undertake modernizing these systems. 

IMPLEMENTATION OF GUARD AND RESERVIST PAY

Question. Director Berry, at our hearing on March 24, 2010, you testified that between 5,000 and 15,000 Guard and Reservists employed in the Federal Government 

are eligible for the benefit in a given year, and that several thousand would require 

the pay differential. Following up on that, please answer for the record, how many 

Guard and Reservists there are overall in the Federal Government? 

Answer. For the purposes of this response, the term ‘‘reservist’’ refers to members 

of the National Guard, as well as members of one of the Reserves. Based on a recent 

computer match between DOD records on reservists and OPM records on Federal 

civilians, there are (as of March 2010) at least 150,000 Federal civilian employees 

who are reservists. (The OPM database does not contain data on all Federal Government personnel. Among groups excluded from the OPM database are employees of 

the Postal Service, the Tennessee Valley Authority, the Federal Reserve, various intelligence agencies, DOD nonappropriated fund entities, the judicial branch, and 

much of the legislative branch). 

DOD reports that the total number of reservists as of June 2010 was about 

1,320,000 (including about 1,080,000 in the Ready Reserve). Thus, about 11.4 percent of all reservists are known to be Federal civilian employees. DOD reported to 

OPM that, as of June 2010, 102,644 DOD civilian employees were reservists (including 87,670 in the Ready Reserve). Thus, DOD employees make up about two-thirds 

of the known Federal civilian employee population of reservists. 

As far as the number of reservists who are actually performing military service, 

OPM has made changes in its centralized employee data collection program, which 

should eventually result in readily available counts of the number of employees who 

are absent to perform service in the uniformed services in each quarter of the calendar year. Based on special analyses of existing Central Personnel Data File data, 

we estimate that 16,429 Federal employees were called to active duty during fiscal 

year 2009 and that 16,260 Federal employees were absent for military service as 

of the end of September 2009. (The corresponding estimates for fiscal year 2008 

were 14,752 and 12,153.) Not all of these employees’ service is qualifying for a reservist differential. For example, some active duty service is voluntary—i.e., not 

under the involuntary call-up laws that trigger eligibility for a reservist differential. 

Also, about 10 percent of the service is less than 30 days, which indicates the service is probably annual training and not qualifying for reservist differential. We note, 

however, that agencies may not have been reporting all annual training service if 

employees covered the training with paid leave. Thus, the true percentage of active 

duty call-ups that are annual training is probably more than 10 percent. We have 

changed the reporting requirements so that agencies should use the Absence—Uniformed Services nature of action code even for short call-ups covered by paid leave. 

Question. Can you provide a breakdown by Federal agency? 

Answer. We are able to provide a report showing the result of a recent OPM–DOD 

computer match (as of March 2010), which shows counts of Federal civilian employee reservists by agency. (The OPM database does not contain data on all Federal Government personnel. Among groups excluded from the OPM database are 

employees of the Postal Service, the Tennessee Valley Authority, the Federal Reserve, various intelligence agencies, DOD nonappropriated fund entities, the judicial 

branch, and much of the legislative branch.) 

Agency Federal Civilian 

Reservists 

Agency for International Development ................................................................................................................. 55 

American Battle Monuments Commission ........................................................................................................... 3 

Armed Forces Retirement Home ........................................................................................................................... 9 

Broadcasting Board of Governors ........................................................................................................................ 6 

Commodity Futures Trading Commission ............................................................................................................ 3 

Consumer Product Safety Commission ................................................................................................................ 9 

Corporation for National and Community Service ............................................................................................... 3 

Court Services and Offender Supervision Agency ............................................................................................... 14 

Defense Nuclear Facilities Safety Board ............................................................................................................. 14 

Department of Agriculture ................................................................................................................................... 1,366 

Department of Commerce .................................................................................................................................... 682 
90 

Agency Federal Civilian 

Reservists 

Department of Defense (other) ............................................................................................................................ 4,623 

Department of Education ..................................................................................................................................... 40 

Department of Energy .......................................................................................................................................... 484 

Department of Health and Human Services ........................................................................................................ 821 

Department of Homeland Security ....................................................................................................................... 8,950 

Department of Housing and Urban Development ................................................................................................ 135 

Department of Interior ......................................................................................................................................... 1,027 

Department of Justice .......................................................................................................................................... 5,634 

Department of Labor ............................................................................................................................................ 334 

Department of State ............................................................................................................................................ 249 

Department of the Air Force ................................................................................................................................ 44,803 

Department of the Army ...................................................................................................................................... 55,220 

Department of the Navy ....................................................................................................................................... 9,020 

Department of Transportation .............................................................................................................................. 2,702 

Department of Treasury ....................................................................................................................................... 1,297 

Department of Veterans Affairs ........................................................................................................................... 10,285 

Election Assistance Commission ......................................................................................................................... 1 

Environmental Protection Agency ......................................................................................................................... 190 

Equal Employment Opportunity Commission ....................................................................................................... 62 

Export-Import Bank of the United States ............................................................................................................ 5 

Farm Credit Administration ................................................................................................................................. 3 

Federal Communications Commission ................................................................................................................. 15 

Federal Deposit Insurance Corporation ................................................................................................................ 73 

Federal Election Commission ............................................................................................................................... 3 

Federal Housing Finance Agency ......................................................................................................................... 2 

Federal Labor Relations Authority ........................................................................................................................ 3 

Federal Mediation and Conciliation Service ........................................................................................................ 1 

Federal Retirement Thrift Investment Board ....................................................................................................... 3 

Federal Trade Commission ................................................................................................................................... 7 

General Services Administration .......................................................................................................................... 284 

Government Printing Office .................................................................................................................................. 34 

International Boundary and Water Commission .................................................................................................. 11 

Merit Systems Protection Board ........................................................................................................................... 5 

Millennium Challenge Corporation ....................................................................................................................... 3 

National Aeronautics and Space Administration ................................................................................................. 341 

National Archives and Records Administration ................................................................................................... 58 

National Capital Planning Commission ............................................................................................................... 1 

National Credit Union Administration .................................................................................................................. 21 

National Foundation on Arts and Humanities ..................................................................................................... 2 

National Labor Relations Board ........................................................................................................................... 9 

National Science Foundation ............................................................................................................................... 14 

National Security Council ..................................................................................................................................... 1 

National Transportation Safety Board ................................................................................................................. 18 

Nuclear Regulatory Commission .......................................................................................................................... 168 

Office of Administration ....................................................................................................................................... 4 

Office of Government Ethics ................................................................................................................................ 6 

Office of Management and Budget ..................................................................................................................... 9 

Office of National Drug Control Policy ................................................................................................................ 2 

Office of Personnel Management ......................................................................................................................... 142 

Office of Special Counsel .................................................................................................................................... 4 

Office of the U.S. Trade Representative .............................................................................................................. 1 

Overseas Private Investment Corporation ............................................................................................................ 4 

Peace Corps ......................................................................................................................................................... 4 

Pension Benefit Guaranty Corporation ................................................................................................................. 10 

Presidio Trust ....................................................................................................................................................... 2 

Railroad Retirement Board .................................................................................................................................. 14 

Recovery Accountability and Transparency Board ............................................................................................... 1 

Securities and Exchange Commission ................................................................................................................. 25 

Selective Service System ...................................................................................................................................... 16 

Small Business Administration ............................................................................................................................ 45 

Smithsonian Institution ........................................................................................................................................ 82 

Social Security Administration ............................................................................................................................. 768 

U.S. Holocaust Memorial Museum ....................................................................................................................... 2 

U.S. International Trade Commission .................................................................................................................. 2 

U.S. Tax Court ...................................................................................................................................................... 2 
91 

Agency Federal Civilian 

Reservists 

U.S.-China Economic and Security Review Commission ..................................................................................... 3 

Total ........................................................................................................................................................ 150,274 

Question. Are you able to get more specific numbers from the Defense Department 

about how many eligible for the benefit and how many would require the pay differential? 

Answer. OPM has made changes in employee data collection which should eventually provide more information on Federal employees absent for military service, including counts of those performing service that is qualifying under the reservist differential law. 

OPM issued a memorandum to agencies on April 14, 2010, requesting the following: 

‘‘An estimate of the number of employees in your agency with active duty service 

between March 11, 2009, and the date of this memorandum that is qualifying under 

the reservist differential authority. This estimate should include all members of the 

Reserve or National Guard that have qualifying service, regardless of whether they 

are eligible for or are actually receiving reservist differential payments. The data 

should be consolidated so that one report is provided to OPM for each agency.’’ 

Based on agency responses to the above request shown on the table below, 17,572 

employees performed active duty between March 11, 2009, and April 14, 2010, that 

is qualifying under the reservist differential law. (This count does not reflect employees who received reservist differential payments—only those who had qualifying 

service.) This count included some agencies that do not participate in OPM’s centralized employee database, including the Postal Service, which reported 1,824 employees. DOD had the largest number of employees with 11,704, which represents about 

two-thirds of the total. These counts were for a 13-month period, thus including employees with any amount of qualifying service during that period. A count for employees performing qualifying service as of a single point in time would produce a 

smaller number. 

No. employees 

with qualifying 

service 

DEPARTMENTS 

Agriculture ............................................................................................................................................................ 278 

Commerce ............................................................................................................................................................. 37 

Defense ................................................................................................................................................................. 11,704 

Education ............................................................................................................................................................. 3 

Energy ................................................................................................................................................................... 48 

Health and Human Services ................................................................................................................................ 44 

Homeland Security ............................................................................................................................................... 810 

Housing and Urban Development ........................................................................................................................ 10 

Interior .................................................................................................................................................................. 200 

Justice .................................................................................................................................................................. 1,329 

Labor .................................................................................................................................................................... 18 

State ..................................................................................................................................................................... 20 

Transportation ...................................................................................................................................................... 1 129 

Treasury ................................................................................................................................................................ 111 

Veterans Affairs ................................................................................................................................................... 777 

DEPARTMENTS TOTAL .............................................................................................................................. 15,513 

INDEPENDENT AGENCIES 

BBG ...................................................................................................................................................................... ........................

Commission on Civil Rights ................................................................................................................................ ........................

Corp National and Community Svc ..................................................................................................................... 3 

DFNSB ................................................................................................................................................................... 2 

Defense Intelligence Agency ................................................................................................................................ 20 

Export-Import Bank .............................................................................................................................................. ........................

FERC ..................................................................................................................................................................... ........................

GPO ....................................................................................................................................................................... 4 

GSA ....................................................................................................................................................................... 10 
92 

No. employees 

with qualifying 

service 

Missile Defense Agency ........................................................................................................................................ ........................

Morris K. Udall Foundation .................................................................................................................................. ........................

NASA ..................................................................................................................................................................... 18 

National Gallery of Art ......................................................................................................................................... 1 

National Geospational Intelligence Agency .......................................................................................................... 22 

Nuclear Regulatory Commission .......................................................................................................................... 4 

National Security Agency (NSA) ........................................................................................................................... 23 

OPIC ...................................................................................................................................................................... ........................

OPM ...................................................................................................................................................................... 13 

RRB ...................................................................................................................................................................... 2 

SEC ....................................................................................................................................................................... 2 

Selective Service System ...................................................................................................................................... 1 

Small Business Admin (SBA) ............................................................................................................................... 5 

Smithsonian ......................................................................................................................................................... 11 

SSA ....................................................................................................................................................................... 70 

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

U.S. Senate ........................................................................................................................................................... 13 

USAID .................................................................................................................................................................... 5 

USPS ..................................................................................................................................................................... 1,824 

U.S. Trade Rep ..................................................................................................................................................... 1 

INDEPENDENT AGENCIES TOTAL ............................................................................................................. 2,059 

GRAND TOTAL .......................................................................................................................................... 17,572 

1 109 of the 129 are FAA employees. 

We asked DOD to provide us with more up-to-date data on DOD-employed employee-reservists. DOD reports that the 11,704 records are being analyzed in two 

parts. As a result of the first group analysis, approximately 5,558 appropriated-fund 

employees were identified as being eligible for reservist differential. Approximately 

532 were due a differential payment. For those 532 employees, the consolidated 

amount of reservist differential owed is approximately $1.3 million. The total 

amounts covered from 1 pay period to 24 pay periods and ranged from $10.75 to 

$26,665.02. The median total figure was $1,518.71. The average amount (before 

taxes) is approximately $2,500. The second group of retroactive records is now in 

its final review stage before distribution to DOD components to process payment actions. Payments will be effected starting September 17, 2010. DOD does not currently have data for service periods covering April 24, 2010, to the present, as those 

records are still being analyzed. 

At any one point in time, about 13,600 DOD appropriated-fund employees are in 

an Absent-U.S. status. Of these, DOD estimates 5,400 are potentially eligible for reservist differential (i.e., called up under one of the qualifying legal authorities), and 

540 are actually due a differential payment. However, some employees may only be 

due a payment for as little as a single pay period, often associated with first entering or leaving active duty when overseas allowances/payments are not being paid. 

Others are due a differential payment every pay period of absence. 

NURSING SHORTAGE AND INTERGOVERNMENTAL PERSONNEL ACT MOBILITY PROGRAM

Question. Following up on the questions I asked at the hearing, I have an additional question on this topic. I understand that the Intergovernmental Personnel 

Mobility Program sets guidelines for the Departments interested in participating. It 

is also my understanding that in 2007, the Department of Defense, through the 

leadership of the U.S. Army, engaged in a similar project with the University of 

Maryland. OPM was not involved, but can you speak to the possibility of providing 

assistance to other agencies that may want to follow the example of the DOD’s effort? 

Answer. Even though we do not have the details of the 2007 project involving the 

U.S. Army, Department of Defense (DOD), and the University of Maryland, as the 

Federal agency responsible for establishing guidelines and regulations for the administration of the Intergovernmental Personnel Act Mobility Program (IPA), OPM 

remains interested in innovations that would expand the use of the IPA Program 

Governmentwide. That could include providing assistance to agencies that may 

want to duplicate other agencies’ successful efforts. 
93 

For example, in March 2010 OPM sponsored a forum that included representatives from the Department of Defense, the Department of Health and Human Services, and the Department of Veterans Affairs. The purpose of the forum was to begin 

a dialogue with Federal agencies that have some involvement in the nursing profession to explore what role the IPA Program could play in addressing the nursing 

shortage, particularly the impact of the faculty shortage on the nursing shortage. 

Additionally, the Employment Services Division of OPM recently established a collaborative listserv for representatives of Federal agencies who administer the IPA 

program at the operational level for their agencies. It is our hope that the listserv 

will act as a valuable resource to Federal agencies by allowing them to share ideas, 

ask questions, and share best practices about the IPA Program across Government. 

Finally, OPM plans to engage policy and programmatic stakeholders, both within 

and outside the Federal Government, in recommending initiatives to promote the 

IPA Program. 

PROHIBITIONS ON THE HIRING OF IMMIGRANTS

Question. The Financial Services and General Government Appropriations bill 

carries a government-wide general provision (Section 704) relating to restrictions on 

the hiring of non-citizens in the Federal workforce. This provision has been a component of annual appropriations bills dating back to the Treasury and Post Office Departments Appropriations Act for Fiscal Year 1939. It has been modified at least 

18 times in the past 70 years. As I developed the fiscal year 2010 bill last summer, 

I worked with the Chairman of the Homeland Security and Governmental Affairs 

Committee on revisions to the language to eliminate discrimination among immigrants based on their nation of origin. The changes were included as part of our 

enacted bill in December (Public Law 111–117, Division C, Section 704). 

The modified provision permits the hiring of all legal permanent residents, refugees, and recipients of asylum, provided that they affirm that they are seeking citizenship. I note that the President’s fiscal year 2011 budget request proposes to retain the fiscal year 2010 modifications. This provision applies to excepted service positions since a Ford-era executive order (1976) still prohibits non-citizens from being 

employed in the Federal competitive service. What actions has OPM taken to implement the changes in the law? Has OPM issued guidance to Federal agencies and 

updated the website? If not, when do you expect to do so? What assurances can you 

give the Committee that Federal agencies’ human resources staff are aware of the 

changes and understand that the law no longer prevents them from considering and 

hiring immigrants in thousands of Federal positions? 

Answer. OPM has provided information for agencies and job applicants on the 

USAJOBS website (http://www.usajobs.gov/EI/noncitizensemployment.asp#icc) regarding the changes to non-citizen hiring restrictions contained in Section 704. Also, 

OPM is discussing the statutory change with the Chief Human Capital Officers 

(CHCOs), and has asked CHCOs to inform OPM if agencies seek guidance on implementation of the new appropriations provision governing Federal hiring. We note 

that it is the obligation of each agency and its counsel to determine the scope of 

that agency’s appropriation law restrictions in any given year and to ensure that 

hiring is done in accordance with such laws. OPM will work with OMB to issue 

guidance, if sought, on particular aspects of the new provision. 

Question. Under Executive Order 11935, only United States citizens and nationals 

(residents of American Samoa and Swains Island) may compete for, and be appointed to, competitive service jobs. To what extent has OPM been engaged in discussions with the Administration and OMB officials to evaluate Federal immigrant 

hiring policies and possible revisions to E.O. 11935? 

Answer. OPM has had general discussions with OMB regarding Federal immigrant hiring policies and options for revisions to E.O. 11935. However, no determination has been made regarding whether revisions are needed and what they 

might include. 

TECHNOLOGY

Question. What percentage of OPM’s budget request is allocated for technology? 

Answer. The total for all Information Technology spending (for example, equipment, software renewals, and applications and systems development support) budgeted for fiscal year 2011 is $242.85 million, which is 12 percent of OPM’s total resources including appropriated funds, Common Services funds, and revolving fund 

activities. 

Question. Please describe the programs that would receive major portions of technology funding for fiscal year 2011. 
94 

Answer. OPM’s major IT investments in fiscal year 2011 include: $77.531 million 

for Enterprise Human Resources Integration (EHRI), which streamlines and 

automates information exchanges in order to give the Federal HR community improved access to employee HR data to improve workforce planning for hiring, skills 

development, and retention strategies; $39.759 million for EPIC Transformation and 

$27.619 million for EPIC Operations and Maintenance, which will ensure agencies 

have information to make credentialing, suitability and/or security clearance decisions; $33.484 million for operation and management of OPM’s IT infrastructure, 

which provides the backbone for OPM’s mission-critical systems; $20.520 million for 

the Consolidated Business Information System (CBIS), OPM’s core financial budget 

and procurement system; $13.621 million for USAJOBS for technology and program 

operations to offer Federal agencies and job seekers a modern platform to support 

online recruitment and job application; $5.105 million to develop a data warehouse 

for the Federal Employees Health Benefit Program; $3.160 million for Human Resources Line of Business (HR LOB), which drives improved HR solutions and services through the establishment of Shared Service Centers service delivery models 

and strategies for agencies; and $1.5 million for Retirement Systems Modernization, 

a multi-year transformation of the Federal civilian retirement system. 

COMPREHENSIVE NATIONAL CYBERSECURITY INITIATIVE

Question. The White House recently released the unclassified version of its Comprehensive National Cybersecurity Initiative—the government’s plan to secure public and private sector computer networks. To this end, the White House formed an 

interagency working group to examine the promotion of cybersecurity. Reportedly, 

the working group’s efforts would include roles for OPM and the Department of Defense to create a high performing cybersecurity workforce. What is OPM doing to 

help achieve this goal? 

Answer. OPM is leading Track 3, Federal Workforce Structure, of the National 

Initiative for Cybersecurity Education (NICE). Our primary objective is to implement strategies to ensure Federal agencies can attract, recruit, and retain skilled 

employees to accomplish cybersecurity missions today and in the future. We are implementing an incremental approach to understanding and defining cybersecurity 

work, developing competency models, analyzing workforce issues, and developing 

strategies that may be needed to address Federal workforce needs. We are working 

closely with agencies to meet current requirements, have granted Schedule A hiring 

authority to several agencies, and are encouraging the use of existing hiring flexibilities to meet agency needs. 

Question. What are the costs associated with this initiative? 

Answer. OPM did not receive any funding under the Comprehensive National Cybersecurity Initiative (CNCI). OPM is working with NICE leadership and National 

Security Staff to identify strategic priorities and match those to resource needs. 

OPM formed a NICE Track 3 workgroup, and personnel from OPM policy and program offices are accomplishing projects in support of the cybersecurity workforce. 

Approximately $23,000 from other objects funding was applied toward facilitated 

workshops for Track 3 efforts. 

Question. Please explain in detail the particular qualifications and skills required 

for positions in the cybersecurity workforce. 

Answer. In general, qualification requirements for Federal positions are based on 

the occupational series to which each position is classified. However, defining those 

requirements for the cybersecurity workforce is not a simple matter. ‘‘Cybersecurity’’ 

is a term of art; it is not a specific Federal occupation. Working with agencies, we 

have identified at least 18 different occupations (including Computer Science, Computer Engineering, Information Technology, Intelligence and Investigations) that 

cover the different aspects of cybersecurity work, each having its own education and 

experience requirements. 

Within its role in NICE, OPM is currently conducting a Governmentwide study 

to identify critical competencies needed across the Federal cybersecurity workforce. 

This information will help us correctly identify the occupations involved in cybersecurity work and the qualification requirements associated with those occupations. 

We have gathered initial information from agencies and stakeholders and will soon 

be surveying the workforce. 

TELEWORK AND CONTINUITY OF OPERATIONS

Question. An oft-cited reason for the lack of progress on telework implementation 

in the Federal government is resistance by managers and supervisors. How many 

OPM managers and supervisors have or are teleworking either as an aspect of an 

ongoing program or in a pilot program? 
95 

Answer. We do no currently have the ability to track and report on telework instances/participation by individual supervisors. We are in the process of implementing a new database that will enable us to capture information regarding the 

number of supervisors who telework. In the recent Employee Viewpoint Survey, 56 

percent of OPM managers and supervisors indicated that they telework (either regularly-scheduled, or on an ad-hoc basis) under the provisions of our ongoing Agency 

telework program. Assuming the survey respondents are representative of the general supervisory population, this equates to approximately 223 supervisors who may 

telework. Director Berry has been a strong proponent of telework governmentwide 

and as the leader of OPM. 

Question. What feedback have these managers and supervisors provided to top 

OPM management on policy changes or approaches that could facilitate telework 

implementation government-wide? 

Answer. We recently held managerial/supervisory focus groups on May 24 and 26, 

2010, in the District of Columbia and on June 23 and 24, 2010, for supervisors in 

our field locations. Focus group comments reflected that supervisors and managers 

are supportive of telework flexibilities provided at OPM. They would like to see 

more consistency across organizations and expansion of the use of telework arrangements. In general, they favor encouraging flexibility without micromanaging. 

Question. Of the Federal employees who are deemed essential government-wide, 

how many are able to telework in an emergency? 

Answer. OPM does not have Governmentwide data on the number of employees 

deemed ‘‘essential’’. 

Question. Do you have any government-wide data on how many essential Federal 

employees were able to perform mission critical functions during the 4 days of the 

snow blizzard in February 2010? 

Answer. Based on information we obtained from a special request to agencies in 

the area most affected by the snow storms, we estimate the number of essential 

Federal employees who worked in the National Capital Region during the 4 days 

of the snow blizzard was 13,523. 

Question. How many agencies have incorporated telework into their continuity of 

operations planning? 

Answer. In response to OPM’s annual call for 2008 telework data, 56.4 percent 

of the 78 responding agencies had incorporated telework into their continuity of operations planning. Based on a preliminary review of the 2009 data, this number is 

closer to 70 percent of responding agencies. 

Question. How many essential OPM employees were able to continue their critical 

functions? 

Answer. All 48 essential OPM employees were able to continue their critical functions. 

Question. What are the savings—or cost avoidance—for each employee who is able 

to telework during continuity of operations situations? 

Answer. We do not have per-employee savings data. 

Question. What lessons were learned from the snow blizzard? 

Answer. In view of the extreme circumstances of the snow events, we made a special request to the Chief Human Capital Officers (CHCO) Act agencies. We sought 

their voluntary responses to a number of questions in an attempt to identify some 

success stories emerging from the events. We received replies from 19 agencies. Following are some of the overall results. 

—Thirteen of the respondents stated that telework was incorporated into their 

emergency response plans. Five agencies stated that telework was not incorporated into their emergency response plan. 

—All agencies that said they had used telework considered it effective for those 

individuals who had power and who had their issued equipment available. 

—Agencies that had employees who teleworked experienced little or no issues 

with telework. 

—No agencies reported that they had incorporated transportation, sleeping, and 

food arrangements into plans for emergency personnel who were required to 

come into work during the closure event. 

—Several agencies are conducting reviews of their related plans and policies after 

the snow closures of February 2010. 

—Several agencies are planning on expanding existing telework opportunities. 

Some agencies reported that not all of their employees eligible to telework had 

brought the necessary equipment and/or work material home with them prior to the 

snow event. Several agencies noted that some employees were not able to telework 

effectively through the event as they did not have necessary ‘‘hard’’ files/paperwork. 

Clearly, some agencies need to do more to facilitate remote access by teleworking 

employees to files stored on their networks. Our query of the agencies also revealed 
96 

that there are still some agencies that have not yet incorporated telework into their 

emergency response plans, which all agencies need to do. 

Question. Last year, OPM and other agencies (to varying degrees) established or 

refined emergency preparedness plans for the possibility that a pandemic flu might 

require social distancing and working off-site. Did these plans enhance agencies’ 

continuity of operations during the snow blizzard? If so, please elaborate. If not, 

what emergency preparedness policies and procedures might be need for future 

events, whether they are caused by natural disasters or terrorist acts? 

Answer. OPM provided guidance to agencies regarding planning for pandemic influenza in 2009 (see http://www.opm.gov/pandemic/OPM-PandemiclAllIssuances.pdf) which emphasized, among other things, the importance of 

agencies and their employees being telework ready. The blizzard demonstrated that 

agencies still have work to do when it comes to having the necessary infrastructure 

to accommodate telework during emergencies. 

Question. During the February snow blizzard, it was reported that the cost of closing the Federal government was an estimated $100 million per day. In a radio interview during the blizzard, you indicated that the estimate was out of date and that 

a re-estimate was in order. What factors should be considered and what methodology would be used for estimating the cost of a 1-day government shutdown? Has 

OPM recalculated the cost of a 1-day government-wide closure? If so, what is the 

revised estimate? If not, when might a recalculation be available? 

Answer. Factors considered in estimating the cost of closing the Federal Government include the estimated numbers and pay grades of employees in the National 

Capital Region (the area most affected by the storms), less the number of emergency 

personnel and estimated teleworkers who worked during the closure. Our revised 

estimate of the cost of a 1-day Governmentwide closure is approximately $71 million. 

FEDERAL EMPLOYEE RECRUITMENT AND RETENTION

Question. In January 2010, OPM released its report to Congress, Recruitment, Relocation and Retention Incentive—these incentives are often referred to as the 

‘‘3Rs.’’ In calendar year 2008, 47 agencies spent a total of $284 million on 39,512 

recruitment, relocation, and retention incentives for Federal employees. Would you 

elaborate on the implementation of the 3R programs? 

Answer. Agencies have used recruitment, relocation, and retention incentives 

(3Rs) to help recruit and retain Federal civilian employees since the authorities 

were originally enacted in the early 1990s. In May 2005, changes in law became effective that provided additional flexibility to grant 3Rs payments. Under OPM’s regulations, agencies have discretionary authority to grant 3Rs payments to employees 

without OPM approval in most situations. Currently, OPM approval is required only 

for 3Rs payments in excess of the normal payment limitations (e.g., for retention 

incentive payments in excess of 25 percent for individual employees and 10 percent 

for a group of employees, up to a maximum payment of 50 percent) and to cover 

non-General Schedule categories of employees under the 3Rs authorities. 

Question. Are there categories of occupations and positions that have received the 

major portion of these incentives? 

Answer. In calendar year 2008, agencies typically paid 3Rs payments to employees in occupations critical to agency missions, such as healthcare, engineering, security, and information technology. 

Of the top 30 occupations that received recruitment incentives, 7 occupations were 

in healthcare fields and 7 in engineering fields. The single occupation for which recruitment incentives were most used was patent examiners, who accounted for more 

than 11 percent of all recruitment incentives paid. 

Relocation incentives were spread across a wide array of occupations. Of the top 

10 occupations for which relocation incentives were used, the two fields in which 

they were most likely to be used were occupations in criminal investigating and contracting, accounting for 7.35 percent and 6.62 percent, respectively. 

Retention incentives were primarily used to retain employees in healthcare occupations, accounting for 34 percent of all retention incentives paid. Security and engineering occupations each accounted for almost 8 percent of retention incentives 

issued. Information technology employees received 4 percent of retention incentives 

paid. 

Question. How many employees have received more than one of these incentives— 

for example, how many, if any, employees received both a recruitment and relocation incentive? 

Answer. OPM’s regulations prohibit employees from receiving recruitment, relocation, and retention incentives concurrently in most situations. However, the regula-
97 

tions do not limit how many non-concurrent incentives an employee may receive 

over the course of his or her career, provided all the regulatory criteria for these 

incentives are met. OPM is currently working with agencies to improve the quality 

and accuracy of 3Rs data submitted to OPM’s Enterprise Human Resources Integration (EHRI) data system. Once EHRI data from agencies is certified to be accurate, 

OPM expects to be able to track trends such as how many employees received more 

than one incentive over the course of their career. 

Question. What improvements, if any, may be considered? 

Answer. Over the last year, OPM has led an initiative, in coordination with an 

interagency workgroup, to review existing policies and identify ways to improve the 

administration and oversight of the 3Rs authorities. In February 2009, OPM issued 

a memo to agencies explaining what we found in our review and, as a result, we 

plan to— 

—Develop additional guidance and tools to help agencies write stronger justifications for 3Rs authorizations, improved 3Rs plans, and more explicit agency internal monitoring procedures, with greater emphasis on the consideration of the 

costs and benefits of the 3Rs; 

—Issue proposed regulations to require agencies to review all retention incentives 

and group recruitment incentives at least annually to determine whether they 

should be revised or discontinued; and 

—Review the 3Rs data submitted to EHRI for agencies that used the greatest 

number of 3Rs. OPM will ask agencies to validate or certify the data accuracy. 

Once the 3Rs data is validated, OPM and agencies will be better able to track 

3Rs trends on an ongoing basis and, if necessary, investigate any 3Rs data 

anomaly and take corrective actions immediately. 

Question. Are there any preliminary data on the use of the 3Rs in 2009? 

Answer. We are currently compiling the calendar year 2009 report from the data 

submitted by agencies. We expect to release the report later this year. 

Question. Please describe how OPM has used each of the 3Rs in your own organization. 

Answer. During fiscal year 2010 OPM has granted 1 recruitment and 2 relocation 

incentives as a recruiting tool for some of our hard-to-fill positions, including a senior program director position in our USAJobs program office, a supervisory Criminal 

Investigator who was relocated between duty stations within OPM, and a senior 

Human Resources Specialist who was relocated between duty stations within OPM. 

Question. The Chief Human Capital Officer at the Department of Homeland Security has testified before Congress on the use of ‘‘virtual job fairs’’ to recruit employees, particularly information technology staff. Please explain how a ‘‘virtual job fair’’ 

works. 

Answer. OPM did not participate in DHS’s ‘‘virtual job fair,’’ however, on September 14, DHS will present a briefing to OPM on its use of a virtual job fair to 

recruit top talent. 

Question. To what extent has OPM used this approach to hire employees? 

Answer. OPM has not used this approach to hire employees because of the lack 

of 508 compliance (an accessibility issue for individuals with disabilities) of ‘‘virtual 

job fair’’ sites. We are currently pursuing a 508-compliant job fair site, and when 

funds become available, we plan to pursue the purchase of such a site. 

Question. What safeguards are in place to ensure that the merit system principles 

codified in Title 5 are upheld? 

Answer. As with any recruitment and hiring activity, agencies must ensure their 

practices are in conformance with the merit system principles, as well as with all 

other applicable provisions of title 5. In addition, OPM, in its oversight role, will 

hold agencies accountable for compliance with the laws and regulations governing 

recruitment and selection. 

Question. Has the economic downturn slowed the rate of retiring Federal employees? 

Answer. We are not able to determine the specific impact of the recession on the 

rate of retirement among Federal employees. However, we do have historical data 

as shown with regards to the number of employees added to the retirement roll each 

year since 2000 which may be useful to provide some perspective on the trends in 

retirement of Federal employees. 

Fiscal year Total retirements 

2000 ..................................................................................................................................................................... 77,383 

2001 ..................................................................................................................................................................... 77,330 

2002 ..................................................................................................................................................................... 74,153 

2003 ..................................................................................................................................................................... 81,128 
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Fiscal year Total retirements 

2004 ..................................................................................................................................................................... 90,441 

2005 ..................................................................................................................................................................... 94,977 

2006 ..................................................................................................................................................................... 103,292 

2007 ..................................................................................................................................................................... 92,349 

2008 ..................................................................................................................................................................... 86,615 

2009 ..................................................................................................................................................................... 87,907 

Question. What is the current projection for the retirement of baby boomers? 

Answer. It is difficult to make projections regarding retirements due to the variety 

of factors that go into retirement decisions (i.e. the economy, retirement savings). 

Accordingly, OPM is not currently able to provide specific projections regarding the 

retirement of baby boomers in the Federal workforce. 

Question. What guidance, if any, does OPM provide to departments and agencies 

to ease the expected retirements of baby boomers in the next 5 years? 

Answer. To ease the expected effect of retirements, OPM supports knowledge 

transfer from one generation of leaders to the next generation of leaders. OPM has 

submitted a legislative proposal that would allow Federal employees covered by the 

Civil Service Retirement System or the Federal Employees Retirement System to 

enter a phased retirement status at the end of their careers, under certain circumstances. This would enable agencies to retain the services of highly valued and 

experienced employees for longer periods than they would otherwise be able to. This 

proposal would require that part of the individual’s time be spent mentoring other 

employees. 

To prepare for an increase in the number of retirements from the Federal Government, OPM works with agencies to assess leadership needs and use current leaders 

to prepare new and emerging leaders for future assignments and roles. The following are some examples of recent OPM programs and activities: 

—OPM hosted a best practices forum on mentoring when our ‘‘Best Practices in 

Mentoring’’ booklet was made available to agencies through the OPM website. 

OPM participated in a mentoring forum conducted by and for the Intelligence 

Community. 

—OPM is working with agencies to develop an executive on-boarding framework. 

A forum was held for agencies to investigate methods and techniques to better 

prepare new Federal executives for successful executive careers. For example, 

the National Science Foundation has initiated a pilot on-boarding program, 

which includes a letter from the outgoing executive to his or her successor, 

among other features. 

—OPM is developing a wiki that will facilitate knowledge sharing for the training 

and development community. The wiki will debut with five initial topics later 

this summer. 

—OPM facilitates knowledge management by hosting best practices forums or 

webcasts. Webcasts on leadership development programs have been offered, 

which are recorded for posting on OPM’s YouTube channel. 

—Best practices forums are hosted quarterly for performance management and 

executive resources practitioners. At these forums, OPM provides agencies with 

guidance and advice. Agencies, in turn, present information on their best practices on a wide variety of topics, including their Senior Executive Service (SES) 

career development programs, diversity, and leadership succession management. 

—In the Guide to Strategic Leadership Succession Management Model, OPM provides recommendations for assessing executive workforce needs, projecting attrition, and designing strategies for meeting staffing needs. These guidelines are 

followed by agencies in the preparation of their Strategic Leadership Succession 

Plans and their Human Capital Management Reports. 

—Through the Federal Executive Institute in Charlottesville, Virginia, OPM offers a course entitled ‘‘Leaders Growing Leaders; Building Your Organization by 

Developing Leaders at Every Level.’’ The course offers participating executives 

the opportunity to gain experience practicing informal roles as exemplar, mentor, coach, and teacher to help cultivate the next generation of leaders. Participants also learn how to frame their life and work experiences as stories to help 

others learn leadership lessons. 

Question. The government-wide website, USAjobs.opm.gov, has been reconfigured. 

Please discuss the improvements, if any, to the website. 

Answer. The refreshed USAJOBS site enhances the user experience by updating 

the look and feel, including introducing social media and increased personalization; 

improving site navigation, making it easier to move about the site; enhancing the 
99 

job search tool so applicants find the right job for them; streamlining employment 

information to ensure guidance is readily available; and providing targeted resources for those with special needs (students, executives, veterans, and individuals 

with disabilities). Also, applicants can now email their resumes that they created 

using the USAJOBS resume builder. 

Question. Are there enhanced features to assist veterans and persons with disabilities in their job search? 

Answer. All veterans’ employment information has been consolidated onto one site 

(www.fedshirevets.gov). A re ́sume ́ mining capability has been added for preference 

eligible veterans and 30 percent or more disabled veterans. 

For persons with disabilities, a new page has been added to USAJOBS with information that includes tips for applying competitively or under the Schedule A appointing authority. Template letters have been created for download, to be used 

when applying under Schedule A. 

Question. What partnerships have OPM formed to reach out to college campus to 

recruit the best talent to public service? Have these efforts been successful? 

Answer. In January 2010, OPM created a Student Programs Office to promote innovative and coordinated approaches to recruiting and hiring students into the Federal Government. A significant part of this new office’s role involves collaborating 

with academia and other organizations focused on the recruitment of students and 

recent graduates into the Federal service. 

Through the Call to Serve initiative, OPM works in collaboration with the Partnership for Public Service to educate a new generation of leaders about the importance of a strong civil service, help re-establish links between Federal agencies and 

college campuses, and provide students with information about Federal jobs. 

Through this network, we are able to reach more than 700 schools and more than 

75 Federal agencies. Throughout the year, we nurture these relationships by providing training workshops, a Federal Service Summit, best practices, and other key 

resources relating to Federal employment. 

In addition to the Call to Serve initiative, OPM has worked with a variety of colleges and universities nationwide to promote the Federal Government as an ideal 

place to work. Earlier in fiscal year 2010, we sponsored five Federal Career Days— 

at Johns Hopkins University, City College of San Francisco, Massachusetts Institute 

of Technology, University of New Mexico, and Rutgers University—to showcase the 

Federal Government as the most dynamic and progressive employer in the country 

as well as a ‘‘cool’’ place to work. These schools offer strong curricula relating to 

Federal agency mission-critical occupations and demonstrate a willingness to promote Federal employment opportunities for their students. In addition to the Federal Career Days, we have partnered with, and participated in many events at, 

other colleges, universities and organizations that have key roles in attracting a diverse student population into the Federal workforce. Over the past fiscal year, these 

have included the American Society of Public Administration, National Association 

of Colleges and Employers, Government College Relations Council, Federal Employed Women, League of United Latin American Citizens, Southeast Federal Recruiting Council, Hispanic Association of Colleges and Universities (HACU), and 

Gallaudet University. 

Finally, in 2010 the Presidential Management Fellows (PMF) Program expanded 

its outreach to over 30,000 graduate school contacts across the country. This outreach included e-mail blasts, campus visits, presentations, and partnering with associations. Recently, OPM Director John Berry approved a variety of reinvigoration efforts to enhance the PMF Program: 

—Increasing investment in the assessment process to improve the quality of PMF 

finalists. For the upcoming PMF Class of 2011, we are enhancing the PMF assessment process to improve both the quality of finalists and the applicant experience. 

—Improving the PMF Program experience. The Program is in the process of creating ‘‘PMF Power Packs,’’ consisting of current PMFs, to work on 5 program 

areas: (1) diversity outreach, (2) development of a new orientation program ‘‘for 

PMFs, by PMFs’’, (3) assistance with the new assessment process, including logistics, event planning, and coordination of the in-person phase, (4) development 

of a job-matching process for PMF finalists, and (5) creation of an alumni program. 

—Increasing outreach efforts through strategic partnerships. This includes work 

with organizations such as the National Association of Schools of Public Affairs 

and Administration (NASPAA), National Association for Equal Opportunity in 

Higher Education (NAFEO), HACU, etc., to create a marketing and outreach 

plan to reach all segments of society. Many Federal Executive Boards (FEBs) 
100 

also reach out to local colleges and universities to share information on Federal 

employment. 

As a result of the aforementioned efforts, we have witnessed an increase in the 

number of students and recent graduates entering the Federal Government through 

Governmentwide student programs and the PMF Program. The PMF Program experienced a 70 percent increase in its number of applicants over the number of PMF 

applicants from 2009. In 2009, we had approximately 500 Fellows appointed in Federal agencies, representing the highest number of Fellows appointed in the history 

of the program. We are expecting even more in 2010. 

WORK-LIFE PROGRAMS

Question. What amount and percentage of the OPM budget is allocated for administration of work/life programs? How many full-time equivalents (FTEs) are associated with this function? What are the two most important issues facing the Federal 

workforce in terms of work/life issues and what are OPM plans to address these 

concerns? 

Answer. Of OPM’s budget of $905 million, 0.42 percent is allocated for the Governmentwide oversight of work/life programs. There are currently 6 FTEs allocated 

for this function. 

The two highest priority issues are the Federal telework program and employee 

health and wellness. OPM Director John Berry has shown his commitment to these 

two areas by establishing a high priority performance goal for each. 

The goal for telework is, by the end of fiscal year 2011, to increase by 50 percent 

the number of eligible Federal employees who telework over the 2009 baseline of 

102,900. 

Key components of OPM’s strategy to meet this goal include: working with agencies to make sure they have effective telework policies that translate into successful 

programs; and developing high-quality and broadly accessible telework training. 

The goal for health and wellness is, by the end of fiscal year 2011, for every agency to have established and begun to implement a plan for a comprehensive health 

and wellness program which will achieve a 75 percent participation rate. Key components of OPM’s strategy to meet this goal include: providing guidance to Federal 

agencies on what constitutes a comprehensive health and wellness program and criteria for assessing the adequacy of agency plans; and producing a training package 

aimed at employees and managers that agencies can use to inform their employees 

of the value of health and wellness programs. 

Another area that we believe to be an important issue facing Federal employees 

is dependent care. The range of dependents for which employees are expected to provide support, and the range of support necessary for those individuals, is broad. 

More than half of Federal employees fall into the age category of adult Americans 

who are caring for both elders and children. Providing support through workplace 

programs allows Federal employees convenient access to supports and resources, 

and facilitates productivity while at work. 

OPM’s plans to address the dependent care needs of Federal employees include 

providing: training and resources for Federal work/life staff; networking opportunities for agency work/life staff; and guidance documents and handbooks. 

Question. Some versions of the healthcare reform legislation would assign a role 

to OPM regarding benefit negotiations and administration with health insurance 

providers for plans. How many FTEs and appropriated monies currently support 

Federal Employee Health Benefit Program (FEHBP) administration functions in 

OPM? 

Answer. Currently, OPM is appropriated approximately $11.7 million to administer the FEHBP, with approximately 90 FTEs. This does not include the support 

of the Office of Inspector General, which is responsible for auditing FEHBP health 

plans. It also does not include a proportionate share of accounting or legal services. 

[Dollars in millions] 

Appropriated 

Money FTE 

Policy, including Office of the Actuary ................................................................................... $5.5 22.1 

Operations ............................................................................................................................... 6.2 68.0 

Total ........................................................................................................................... 11.7 90.1 
101 

Question. What staff would need to be hired and what additional expertise would 

be needed if the OPM role were expanded in this area? How would this added role 

affect OPM’s performance of its core mission? 

Answer. The Patient Protection and Affordable Care Act (Public Law 111–148), 

enacted March 23, 2010, gives OPM additional health insurance plan oversight and 

administrative responsibilities. Under section 1334, OPM will contract with health 

insurance issuers to offer at least 2 multi-State health plans through each State 

Health Insurance Exchange. The Exchanges will make available qualified health 

plans, including multi-State plans, to the general public beginning in 2014. 

This added role will not have any effect on OPM’s performance of its current core 

mission. OPM will need to develop the capacity, including additional staff, to manage the Multi-State Plan option(s) that will be available via State exchanges in 

2014. Development of such capacity includes examining the interaction between 

multi-State plan requirements and State insurance regulations, analyzing potential 

enrollee demographics and utilization patterns, and modeling potential premium 

costs. Work over the next several months will focus on shaping the OPM role with 

the Multi-State Plan option from the framework outlines presented in the new law 

and identifying the institutional support that OPM will require to develop and manage this program from 2010 to 2014. 

Question. OPM has announced that it is revamping the human capital survey that 

is designed to gauge Federal employee views on a variety of key Federal workforce 

practices on an annual basis. What are the significant changes/enhancements in the 

survey methodology? Will the data be disaggregated to allow for a more in-depth 

look into the views of employees in various offices and units of a department rather 

than just the department as a whole? 

Answer. Starting in 2010, OPM plans on administering the Federal Employee 

Viewpoint survey annually to fulfill the growing need for Governmentwide standardized data. While changes to the survey in regard to content, process, and depth of 

reporting are currently being planned for the future, some minor changes were 

made to the FedView survey for 2010 administration. The survey was revised to add 

items in the areas of employees’ work experience, supervision, leadership, and work/ 

life issues. 

In addition, OPM decided to move questions on Governmentwide benefits, like life 

insurance, health insurance, and retirement, to a separate survey; most agencies 

supported these changes. OPM already provides data below department or agencywide level to allow visibility into the perceptions of employees within major organizations and subdivisions, and OPM works with agencies to support their needs for 

specialized views or cuts of survey results. In all cases, OPM ensures the identity 

of individual respondents is protected. 

FEDERAL EMPLOYEES AND GOVERNMENT PROCUREMENT

Question. Within the government procurement community, the state of the acquisition workforce is of great interest. Generally, it is understood that the acquisition 

workforce as a whole—which is dealing with complex acquisitions and increased 

government procurement spending, and learning new acquisition methods—is 

undermanned and undertrained. How is OPM assisting the Office of Federal Procurement Policy, and other Federal agencies, in bolstering the government’s acquisition workforce? 

Answer. OPM has designated the 1102 Series as a Governmentwide mission-critical occupation. OPM’s shared registers include the contracting series. We also assist agencies with employees in the 1102 Series in providing fiscal year reporting 

for OFPP on the 1102 Series workforce strength and 5-year projections of attritions 

and accretions. 

Agency reporting includes: 

—Resource data for entry-, mid- and senior-level as part of the measures reported 

for each agency’s annual Human Capital Management Report. 

—Target acquisition workforce profile and actual attrition at the end of the reported measurement year. 

—Comparison of current workforce targets with actual population to determine 

gaps or surpluses. 

—Workforce targets and projected attrition for the next fiscal year (short-term 

goal). 

—Workforce targets and projected attrition for an additional 4 fiscal years in the 

future (long-term goal). 

Agencies this year were to establish targets and project attrition for fiscal year 

2010 and fiscal year 2014. Agencies were also to report their current population and 
102 

certifications as of the end of fiscal year 2009. OPM will continue to work with agencies and assist them with efforts to provide accurate and complete reporting. 

Question. What hiring authority flexibilities can agencies use to hire acquisition 

professionals in a timely fashion? 

Answer. From September 30, 2007, through September 30, 2012, agencies have 

direct hire appointing authority for certain Federal acquisition-related positions, 

such as entry-level and senior contracting positions and all purchasing positions. 

Through December 31, 2011, agencies are also authorized to reemploy annuitants 

in the acquisition-related positions mentioned above without offsetting their salaries, as is normally required when reemploying annuitants. Agencies’ decisions to 

use this authority must be based on the unusually high or unique qualifications of 

an individual, exceptional difficulty in recruiting or retaining a qualified employee, 

or a temporary emergency hiring need, which makes the reemployment of the individual essential. 

Question. What constraints exist, if any, that might impede agencies’ efforts to 

hire and train individuals for their contracting offices? 

Answer. One constraint is the challenge of accurately projecting future workforce 

needs. This depends, in part, on how many positions are defined as having ‘‘inherently governmental’’ functions. The definition of ‘‘inherently governmental’’ affects 

the workload of contract specialists and informs agencies’ decisions regarding the 

number of positions they need to fill. A strong desire to avoid over-hiring can also 

complicate workforce planning efforts. 

In addition, Federal contracting is quite technical and requires in-depth knowledge of Government policy and regulations, as well as substantial training and experience to be fully productive. Effective training programs that are adequately 

resourced are essential. Moreover, once their contract specialists are trained, Federal agencies face competition from non-Federal employers willing to pay more for 

employees with Federal work experience and training and credentials. 

Question. As the Director of the Office of Management and Budget noted in a July 

2009 memorandum, ‘‘[f]ederal agencies use both Federal employees and private sector contractors to deliver important services to citizens.’’ His memorandum also stated that overreliance on contractors ‘‘can lead to the erosion of the in-house capacity 

that is essential to effective government performance,’’ and counseled that achieving 

the best mix of Federal employees and contractor employees can be accomplished 

by identifying the proper role of each sector. What is the human resources perspective on the multisector workforce? 

Answer. We believe an effective balance between Federal employees and contractors can be achieved by taking into account strategic human capital planning, the 

concept of ‘‘inherently governmental function’’ and ‘‘critical function’’ and effective 

talent management. 

—Strategic human capital planning is essential to an understanding of the full 

picture of workforce requirements for mission accomplishment. 

—The concept of ‘‘inherently governmental’’ function and ‘‘critical’’ function must 

be clearly understood and properly applied to ensure inherently governmental 

functions are performed only by Federal employees and critical functions are 

performed by Federal employees to the extent necessary to ensure the government maintains control of its mission and operations. 

—Effective talent management strategies should be used (including effective recruiting and retention strategies) to ensure that agencies have adequate numbers, and the right skill mix, of employees to accomplish the mission. 

Question. What are some of the issues that an agency might encounter when it 

has Federal employees and contractor employees working side-by-side? 

Answer. Many of the issues that arise when Federal employees and contractors 

have been working side by side concern differences in systems for pay and reward, 

discipline, and termination, as well as general ethical considerations (including organizational and personal conflicts of interest). Some examples of these differences 

include: 

—Contractor employees are not subject to the various laws governing Federal employment, which impose various protections and restrictions. 

—There are generally no limits on the compensation that may be provided to contract employees, while Federal employees generally are subject to compensation 

limits. If contract employees are paid at higher rates than Federal employees 

providing similar services, this could create morale problems within the Federal 

workforce. It could also lead to Federal employees leaving Federal service to accept contract jobs. 

—A retired Federal employee who works for the agency as a contractor will receive his or her full annuity whereas that same retired employee would be subject to the reemployed annuitant salary offset if working for the agency as a 
103 

rehired annuitant unless a waiver is granted. The difference in how retirement 

is treated in these scenarios could be viewed as inequitable. 

Question. What steps can agencies take to maintain a clear distinction between 

the management of its own employees and the management of contractor employees? That is, how can agencies avoid the appearance of a supervisor-employee relationship between agency staff and contractor employees? 

Answer. The agency should take appropriate steps to ensure its employees are 

made aware when contract employees are performing work onsite, such as to provide professional and technical services. Such steps might include requiring contractor employees to wear distinctive badges, work in clearly identified work areas, 

and use e-mail addresses that clearly identify their status as contractors. In addition, agencies should ensure their employees are not directing the work of contractor 

employees but instead that agency contracting officials are giving direction to the 

contract supervisor. 

Question. Under Office of Management and Budget Circular A–76, agencies may 

conduct public-private competitions to determine who—Federal employees or contractor employees—will perform work that agency employees had been doing. When 

a competition results in the awarding of a contract to a company, the Federal employees are no longer needed in that function. While it is possible that at least some 

of the agency employees will be hired by the contractor, there is no guarantee that 

this will happen. What role, if any, has OPM played in public-private competitions 

conducted by other agencies? 

Answer. There have been no recent public-private competitions, in part as a result 

of a statutory moratorium on public-private competition. However, in past years, 

when agencies conducted public private competitions under OMB Circular A–76, 

OPM worked with agencies to provide soft landings for affected employees both 

where work was converted to private sector performance as well as where work was 

retained in-house but involved a reduction in labor. These efforts included consideration of buyouts and early retirements under OPM’s Voluntary Early Retirement 

Authority (VERA) and the Voluntary Separation Incentive Payments (VSIP) Program. OPM’s regulations govern how the agency’s workforce is reduced because of 

that decision. General and detailed restructuring guidance material is available on 

OPM’s website, and we offer on-site assistance through our reimbursable services 

staff. 

Question. Generally speaking, what options are available to Federal employees 

who have been displaced by the outcome of a public-private competition? 

Answer. If a permanent Federal employee is separated because of the contracting 

decision, the employee may be eligible either for retirement benefits if the employee 

meets the age and service requirements, or for severance pay. 

The employee is entitled, by regulation, to reemployment priority in his or her 

former agency for 2 years to positions at the same or lower grade and in the same 

commuting area. Qualified employees are offered reemployment based on their tenure and veterans’ preference. A displaced employee is also entitled by regulation to 

selection priority for 1 year to positions in other agencies at the same or lower grade 

in the same commuting area. This program requires former employees to apply for 

positions matching their skills and to be well-qualified for the positions. Both of 

these programs provide selection priority over candidates from outside the agency’s 

permanent workforce. 

Question. How might OPM track Federal employees who have been displaced? 

Answer. OPM can track, through the Central Personnel Data File, those employees who were separated because of a decision to contract the work under OMB Circular A–76. 

FEDERAL PAY AND FURLOUGHS

Question. Discussions of Federal pay rates have been prominent in the news of 

late with the USA Today articles presenting Federal and private sector pay comparisons and CNBC commentary calling for salary rollback. What is OPM’s response to 

these viewpoints? 

Answer. We have been closely following stories of Federal pay during the last few 

months. However, we view reports published by USA Today, the Cato Institute, and 

the Heritage Foundation critical of Federal workers as simplistic and misleading. 

Average salary comparisons as published by the Cato Institute and others ignore 

the huge differences in the occupational makeup of the Federal and non-Federal 

workforces; they do not reflect the complexity of the work, level of skill and education required, scope of responsibility/impact, special requirements such as security 

clearances, or the location where the work must happen. 
104 

On average, positions in the Federal government generally have a higher level of 

education than the private sector positions. About 19 percent of Federal workers 

have a master’s degree, professional degree, or doctorate versus only 11 percent in 

the private sector. A full 48 percent of Federal employees have at least a college 

degree compared to 32 percent in the private sector. For example, the two largest 

private-sector occupations today are retail salesperson and cashier, low-paid occupations not found in Federal service. In contrast, the vast majority of Federal workers 

are in professional, administrative, and technical occupations that are well-paid in 

the private sector. Job-by-job comparisons published by USA Today are based on 

data published by the Bureau of Labor Statistics (BLS), but the data are improperly 

used. The Federal Government uses recognized statistical methods and professionally conducted pay surveys. BLS economists, working with OPM, have thoughtfully and carefully compared occupations in the Federal and non-Federal sectors for 

more than 50 years to provide Government policymakers with factual information 

in making their decisions on Federal employee salary levels. 

When taking into account factors such as differences in occupational mix, geographic distribution, and level of work, we believe reports finding that Federal 

workers are paid substantially more on average than similarly situated non-Federal 

workers are false comparisons. 

Question. In early 2009, you discussed sending a legislative proposal to reform 

Federal pay setting to Congress. What is the status of this proposal and what are 

likely to be the key components of any pay reform? 

Answer. We continue to believe that reform of Federal personnel systems is vital, 

but based on experience and research in this field, especially given the current fiscal 

situation, we feel it makes more sense to focus now on enhancing the quality of employee reviews and feedback so they are more helpful and fair. 

Question. The Department of Transportation had to furlough some employees recently because of an interruption in its appropriated funds during debate of a bill 

that would have extended funds for the National Highway Trust Fund on a shortterm basis. What have other departments and agencies been reporting to OPM 

about the possibility of furlough actions this fiscal year? 

Answer. We do not have any information from agencies regarding possible furlough actions this year. 

Question. What specific guidance has OPM provided proactively to the departments and agencies both in general and specifically with regard to mechanisms that 

might provide alternatives to furloughs? 

Answer. OPM provides guidance to agencies for options on how to reduce budgetary outlays in order to avoid or minimize the likelihood of furloughs or other actions such as reduction in force. 

OPM’s guidance notes that furlough is not a viable option if the agency is faced 

with a continuing, rather than temporary, lack of work and/or funds. For example, 

an agency may furlough an employee under the reduction-in-force regulations only 

when the agency plans to recall the employee to duty within 1 year in the position 

the employee held when furloughed. 

Also, the fiscal savings from a furlough are sharply reduced when a furloughed 

employee becomes eligible for unemployment compensation that must be paid by the 

agency. For example, an employee who is furloughed for 5 or more consecutive days 

is generally eligible for unemployment compensation. 

Finally, because furlough is a temporary situation, voluntary early retirement authority (VERA) and voluntary separation incentive payments (VSIP) are not an option to lessen the impact of furlough on the agency and its employees. VERA and 

VSIP are available only when an agency is undertaking long-term restructuring actions. 

Question. Which departments and agencies are in the forefront with effective 

workforce planning models and what specific features of such workforce planning 

could be applied across the Federal Government? 

Answer. Several agencies, including the Departments of State, the Department of 

Transportation, and the Nuclear Regulatory Commission, have consistently demonstrated effective workforce planning. These agencies have a defined governance 

structure for the workforce planning function, a systematic process that is used for 

workforce analyses, and they use automated tools for analyses and staffing projections. All of these agencies have a seamless integration of the strategic human capital planning and workforce planning activities. 
105 

OPM’S STRATEGIC PLAN FOR 2010–2015

Question. As stated prominently on the OPM website, OPM’s mission is Recruiting, Retaining and Honoring a World-Class Workforce to Serve the American People. What are the most pressing challenges for OPM in the next fiscal year? 

Answer. As the Director stated in his testimony and as are reflected in OPM’s 

High Priority Performance Goals, the agency’s fiscal year 2011 budget request reflects the strategic goals for the agency: Hire the Best, Respect the Workforce, Expect the Best, and Honor Service. These guiding principles also represent the most 

pressing challenges for OPM in achieving the vision of making the Federal government a model employer for the 21st century. 

The current Federal hiring process is cumbersome and slow, frustrating managers 

and discouraging many talented individuals, including veterans, from considering 

Federal jobs and opportunities. OPM is also challenged to promote greater diversity 

and inclusion in the Federal workforce. The development of Government-wide training, health and wellness policies and programs to provide employees with a meaningful balance of work and life is another challenge that must be faced to improve 

Federal government performance. 

The Federal Government’s retirement systems face significant challenges and are 

at high risk of failure due to technology gaps. These challenges have been identified 

in numerous OPM and GAO reports and improvements are needed to ensure that 

employees’ claims are settled timely and accurately. 

Question. What initiatives or improvements are needed to address these challenges? What are the costs of these initiatives? 

Answer. As stated in the Director’s testimony, the Administration believes that 

reforming the Federal hiring process is an urgent priority to attract the best and 

brightest talent into the workforce. OPM’s fiscal year 2011 budget requests 

$4,000,000 in order to promote innovative and coordinated approaches to help agencies streamline their end-to-end hiring process. OPM is also committed to increasing 

employment outreach to veterans. OPM has requested $2,400,000 in fiscal year 2011 

to advance efforts to reduce barriers to entry for Veterans and transitioning service 

members pursuing careers in the Federal civil service. 

OPM has initiated the Retirement Systems Modernization (RSM) program to modernize and automate retirement processes to ensure Federal retirees and annuitants 

are paid accurately, timely, and receive high-quality customer service. OPM has requested $1,500,000 to stabilize the retirement systems in fiscal year 2011, with a 

focus on upgrading the retirement calculator, transitioning from a paper-based operation to an automated retirement process, and implementing an online retirement 

application tool. OPM has also requested an additional $2,800,000 to increase retirement claims processing staffing levels and assist in reducing the claims processing 

times. 

Question. Would you describe the key components of OPM’s recently released, A 

New Day for Federal Service, Strategic Plan 2010–2015? 

Answer. The strategic plan positions the agency to make the Federal government 

America’s model employer. The plan outlines four broad strategic goals that define 

OPM’s direction for the next 6 years in order to achieve its mission to Recruit, Retain and Honor a World-Class Workforce to Serve the American People. 

The key components of the plan are the strategic goals that have been designed 

to assist agencies in enhancing the experience as individuals moves from applicant 

to Federal employee to retiree. The ‘‘Hire the Best’’ strategic goal concentrates on 

improving the Federal hiring process. The focus of the ‘‘Respect the Workforce’’ strategic goal is on employee retention through training and work-life initiatives. OPM’s 

‘‘Expect the Best’’ strategic goal strives to provide the tools and resources necessary 

for employees to perform at the highest levels while stressing accountability. Finally, the ‘‘Honor Service’’ strategic goal seeks to recognize the service of Federal 

employees through well-designed and well-administered compensation and retirement benefits programs. 

Question. How will the fiscal year 2011 budget request specifically address each 

of the strategic plan’s goals? 

Answer. Each of the strategic goals is related to OPM’s major performance improvement initiatives reflected as in the budget request: 

—Hire the Best.—Funding requested will be used to reform Federal government 

recruiting and hiring policies, programs and procedures. The initiative will better enable agencies to recruit and hire qualified students, mid-career professionals, and retirees. OPM will continue efforts to revamp the USAJOBS 

website, building on improvements that have already been made to make the 

site more user-friendly and aligned with the Hiring Reform initiative. The budget request supports ongoing Administration efforts to assist veterans to find op-
106 

portunities in the Federal workplace, and to promote diversity in the Federal 

workforce. Finally, the request continues efforts to have the information they 

need to make timely decisions on the credibility and suitability of Federal employees, contractors, and military members. 

—Respect the Workforce.—The budget request calls for the Federal government to 

invest in its employees in order to improve the results of Federal programs and 

services. The development of Government-wide health and wellness policies and 

programs to provide employees with a meaningful balance of work and life will 

continue to be a top priority in fiscal year 2011 in order to help continue to attract the best and the brightest for Federal employment. Focus will continue on 

the importance of training throughout an employee’s career, as well on programs and initiatives such as alternative work schedules, telework, and employee assistance programs that benefit current employees and help us continue 

to attract the best and brightest for Federal service. Resources will also help 

continue efforts to encourage labor-management collaboration in the furtherance of agencies’ goals. —Expect the Best.—Funds requested in the fiscal year 2011 budget will support 

OPM’s responsibilities to advise and assist agencies on strategic human resources management. This includes operational activities to monitor compliance 

with civil service laws and regulations, ensure appropriate use of flexibilities 

and authorities, and providing agencies with tools, resources, guidance, education, and evaluation to continuously improve their human resources operations. 

—Honor Service.—The budget request addresses the strategic goal to honor the 

service of Federal employees by ensuring timely and accurate delivery of OPMadministered retirement and insurance benefits for 2 million Federal retirees. 

Continued funding for the Retirement Systems Modernization (RSM) program 

will go toward priorities like upgrading the retirement calculator, automating 

the manual paper-based retirement system, and imaging incoming paper retirement records. The implementation of an online retirement application tool for 

gathering initial retirement information electronically from service centers will 

help improve the accuracy of retirement calculations. Altogether, these initiatives will help to ensure that OPM and agency benefits officers have access to 

information necessary to perform their duties of processing claims and providing customer service to employees and annuitants. 

NATIONAL COUNCIL ON FEDERAL LABOR-MANAGEMENT RELATIONS

Question. In December 2009, President Obama issued an Executive Order (EO), 

Creating Labor-Management Forums to Improve Delivery of Government Services, 

which created the National Council on Federal Labor-Management Relations. The 

Council will support the creation of labor management forums across the Federal 

government to allow agency managers, employees, and union representatives to discuss agency operations in a non-adversarial setting. How will the Council ensure 

that the forums result in the implementation of productive ideas and innovation 

among Federal agencies? 

Answer. The Executive order required each agency to develop, and submit for certification, a written implementation plan which addressed, among other things (1) 

how the agency would conduct a baseline assessment of the current state of labor 

relations and (2) how the agency will develop metrics to monitor improvements in 

such areas as productivity gains and cost savings resulting from establishment of 

labor-management forums. The achievement of productivity gains and cost savings 

is clearly dependent on the adoption of productive ideas and innovation by agencies. 

The operation and effectiveness of these forums will be monitored both internally 

by agencies and externally by the Council. As discussed below, the Council has 

adopted general recommended metrics and has established a work group on metrics, 

which is developing more detailed and focused metrics for agencies to use. 

Question. Did all Federal agencies meet the March 9 deadline to submit plans to 

create labor-management forums? 

Answer. While not all Federal agencies met the March 9 deadline to submit plans, 

all but a handful of agencies did submit plans by early April, and plans were received from all agencies by early May. 

Question. How many of the plans have been certified? What are the issues in certifying the plans? 

Answer. Fifty of the 51 agency plans have been certified by the Council. At the 

request of the National Council, SSA submitted a revised implementation plan on 

July 23, 2010. The National Council is currently evaluating that plan, and working 

with the agency on certification. 
107 

Question. At this point, what measures has the Council developed to ensure that 

these labor-management forums will improve efficiency in government operations 

and improve services to clients? 

Answer. At its initial meeting in February, the Council adopted recommended categories of metrics for agency use in establishing and implementing forums. Those 

metrics were organized under three broad goals, the first and most important one 

being improvement in the agency’s ability to accomplish its mission and deliver 

high-quality products and services to the public. At its May meeting, the Council 

established a work group to develop more detailed metrics. That work group has 

held a number of meetings, will be collecting information from and drafting guidance for the forums, and expects to make recommendations for the full Council to 

adopt this fall. 

Question. How can you ensure that these councils will improve government operations and services to clients? 

Answer. The LMF metrics working group is currently exploring practical answers 

to this question—to figure out what and how to track and measure to learn from 

each LMF experience and apply those lessons to improving government operations 

and services. We recognize that the overriding reason for creating labor-management forums is ‘‘to improve the productivity and effectiveness of the Federal Government,’’ and we are confident this goal will be achieved. 

FEDERAL LONG-TERM CARE INSURANCE PROGRAM

Question. The Federal Long-Term Care Insurance Program (LTC) insurance program has entered a new contract cycle and OPM has notified Federal workers enrolled in the Automatic Compound Inflation Option (ACIO) (about 60 percent of enrollees) that their premiums will increase 25 percent from current rates. At congressional hearings last fall, OPM acknowledged that the marketing materials used during the first contract cycle could have misled enrollees in assuming that premiums 

would not increase in the future if that option was chosen. What processes and procedures does OPM have in place to ensure that this does not happen again? 

Answer. New educational and marketing materials, along with new applications, 

were introduced in October 2009. These materials more prominently and frequently 

describe the conditions under which premiums may increase and that premiums are 

not guaranteed, including in the sections that describe the different types of inflation protection. We are also planning new marketing materials and application 

forms for an open season which we expect to hold in the spring of 2011. We are 

committed to making any other changes needed to make the rate information clear 

to current and prospective enrollees. 

As an example of what we have done, every enrollee not eligible for or receiving 

benefits (e.g., not in a nursing home) received a decision package in late 2009 outlining options for moving to the new plan design or avoiding the premium increase 

(for those facing an increase). The decision package included background material 

illustrating the difference over time between a 4 percent and a 5 percent compound 

benefit increase. Historical inflation increase data were also provided. Modeling 

tools were available online to allow enrollees to project the growth of their current 

daily benefit under each inflation rate. The decision packages also contained detailed comparisons of specific benefits and the differences between the original plan, 

FLTCIP 1.0, and the new plan, FLTCIP 2.0. 

In addition, the materials for the new FLTCIP 2.0 benefits are currently online 

at www.ltcfeds.com and available by request from LTC Partners. The new materials, both in hard copy and online, provide detailed information and graphs that 

illustrate the difference over time between 4 percent and 5 percent compounded 

benefits, as well as detailed information about other benefit decisions. 

The new educational materials state prominently and frequently that premiums 

are not guaranteed, and they explain the conditions under which premiums may increase. In addition, the Agreement and Acknowledgement section of the application, 

which requires the applicant’s signature, discloses that premiums are not guaranteed. The new Benefit Booklet (the contractual statement of benefits) contains on 

the second page a section titled, ‘‘When We May Increase Your Premium’’ and discloses in several other places that premiums are not guaranteed. All current and 

future enrollees will receive a copy of this new Benefit Booklet. 

Finally, Long Term Care Partners conducts hundreds of educational seminars 

each year at Federal agencies and meetings of Federal employee groups like the National Active and Retired Federal Employees Association (NARFE). They keep in 

frequent contact with Agency Benefit Officers to make sure information about the 

FLTCIP is widely available. Enrollees and prospective applicants can call Long 
108 

Term Care Partners toll-free to speak with a Certified Long Term Care Consultant 

for expert assistance in learning about the Program. 

Question. Since the stated purpose of the Federal LTC Insurance program was to 

encourage people to purchase long-term care insurance and serve as a model for 

other employer-sponsored programs across the Nation, how does OPM intend to restore confidence in the program among Federal workers and to promote future participation given this issue? 

Answer. OPM conducts close contractual oversight of the carrier, which means we 

can shape the LTC policies and products. OPM includes the NAIC Shoppers Guide 

to Long Term Care Insurance in the Information Kit provided to all applicants who 

request a hard copy application. This Guide is also available online as part of the 

online application process. OPM also requires its insurer to price its premiums according to NAIC rate stability guidelines. It is important that standard rate stability 

guidelines be applied universally across the long term care industry. While we understand there have been concerns about the program, we take our responsibility 

very seriously to serve the interests of enrollees by doing all we can to improve and 

to promote the continued success of the Program. 

OPEN GOVERNMENT

Question. In December 2009, the President issued an Open Government Directive 

to Federal agencies instructing them to launch open government web sites within 

60 days, draft open government plans with long- term steps to improve transparency, and solicit public feedback on agencies’ core mission activities. Please describe OPM’s actions to fulfill the President’s open government and transparency 

initiative. 

Answer. In response to the President’s Open Government Directive, OPM has established an Open OPM governance structure that comprises the Executive Board, 

their respective representatives on the Core Team and Component Teams. The 

Teams will develop and implement actions to ensure accountability and the sustainability of transparency, participation, and collaboration at OPM. All Component 

Teams include OPM employees as well as members from public/nonprofit groups, 

other agencies, academia and unions. The Component Teams will gather information from the individual team members, exchange ideas and generate innovative options for solving problems. Those ideas and options will be forwarded to the Core 

Team (OPM employees) for analysis and to make recommendations to OPM leadership on the Executive Board. 

It is our policy to integrate Open Government into OPM’s ongoing mission activities, including, but not limited to, partnering with stakeholders, advising and assisting agencies, working with Congress and other stakeholders on developing policies, 

promoting effective and efficient human resources policies and practices across government while leading by example. The Open Government ethos will be integrated 

into our programs and sustained throughout each of the aforementioned methods for 

improving Federal customer service life cycle, from hiring, employment, retirement 

to annuitant. 

The agency has created an Open OPM web site at http://www.opm.gov/open/ for 

providing information on OPM’s Open Government activities, including high-value 

data sets, the agency’s Open Government Plan, and an Open OPM blog to provide 

updates and receive feedback from the public. 

Question. Have you received feedback from citizens? If so, can you summarize 

some of the responses OPM has received? 

Answer. We used the Open OPM Web site to solicit and receive public suggestions 

for our Open Government Plan. We have received and processed more than 1,000 

e-mails from the public via our Open Government e-mail address and have received 

58 unique ideas to improve Open Government through an IdeaScale Web tool. Feedback from the public focused primarily on the Agency’s operations in recruitment, 

staffing, retirement, and benefits. The Director’s goal ‘‘Expect the Best’’ was echoed 

in these comments, as was the Vision that ‘‘The Federal Government will Become 

America’s Model Employer for the 21st Century.’’ The Open OPM team continues 

to receive and respond to feedback from citizens through the use of a new Searchable FAQs tool on OPM’s website, the Open OPM email address, and the Open OPM 

Blog. 
109 

SUBCOMMITTEE RECESS

Senator DURBIN. The session stands recessed. 

[Whereupon, at 3:33 p.m., Wednesday, March 24, the subcommittee was recessed, to reconvene subject to the call of the 

Chair.] 

(111) 

FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 

YEAR 2011 

WEDNESDAY, APRIL 14, 2010 

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 and Collins. 

CONSUMER PRODUCT SAFETY COMMISSION 

STATEMENT OF HON. INEZ TENENBAUM, CHAIRMAN 

OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

Senator DURBIN. Good afternoon. This hearing of the Financial 

Services and General Government Appropriations Subcommittee 

will come to order. 

And I’ve got to report that Senator Collins will arrive momentarily. She’ll miss my opening remarks. It will be devastating, but 

she’ll recover. 

Today’s hearing is on the President’s fiscal year 2011 budget request for the Consumer Product Safety Commission (CPSC). And 

testifying is Chairman Inez Tenenbaum. 

Thank you for being here. 

The Consumer Product Safety Commission is the Federal regulatory body tasked to protect children and families from unsafe consumer products. Every day, infants sleep in cribs, children don bike 

helmets and ride bicycles, and adults purchase medicines. We rely 

on the Consumer Product Safety Commission to make sure that infants aren’t strangled by the slats or sides of the cribs, that children don’t sustain head injuries while biking, and that parents 

don’t worry that their children will open the child-resistant packaging. 

Two years ago, the Consumer Product Safety Improvement Act 

(CPSIA) was enacted, giving the CPSC new authorities and resources, and significantly strengthening its ability to protect Americans from defective and unsafe products. Many people deserve 

credit for that, and I want to single out Senator Mark Pryor of Arkansas. What a great job he did bringing us all together for a bipartisan bill to authorize and empower your Commission. 
112 

For example, lead content levels for cribs, bunk beds, infant rattles, and children’s jewelry have been reduced. Levels must be certified, based on independent third-party testing by a CPSC-recognized laboratory. Tracking labels will soon be on children’s products, accompanied by product registration cards. And a publicly 

available, searchable database with safety information on consumer 

products is being established and will be operational early next 

year, we hope. 

While the new lead limits are among the most stringent in the 

world for some children’s products, the Commission voted to defer 

enforcement of testing and third-party certification requirements 

until February 10, 2011, in order to increase the number of available testing and certification facilities. 

What a difference a few years can make. The Consumer Product 

Safety Commission has been transformed from a quiet, modest little agency with mostly voluntary enforcement powers to a more robust and proactive agency with enhanced enforcement authority. 

Staffing, at a low of 385 in January 2008, is now at 502 and will 

grow to more than 530 by the end of this year. The budget this 

year, 2010, is double what it was 6 years ago. The first foreign office in Beijing has been opened, after all of the publicity that came 

out about products that were being exported from China into the 

United States. The need—now, this is a significant—of all the statistics—the need for toy recalls has declined 75 percent from 2008 

to 2009, including an 80-percent decline in toy recalls due to leadcontent violations. 

For fiscal year 2011, CPSC is requesting $118.6 million— 

$400,000 more than the fiscal year 2010 enacted amount of $118.2 

million, and a staffing level of 576, which is an increase of 46 

FTEs. 

I’m not going to go through all the details of the budget request. 

They’re going to come up during the course of our questioning here. 

I’m looking forward to the testimony of Chairman Tenenbaum, 

and I am going to introduce her after I defer to my colleague here, 

Senator Collins. 

STATEMENT OF SENATOR SUSAN COLLINS

Senator COLLINS. Thank you, Mr. Chairman. 

And thank you for calling this hearing. 

While the Consumer Product Safety Commission is a relatively 

small agency, as your statements pointed out, it has a critical mission of keeping the public safe from dangerous products. We all remember the alarming and too frequent tragic stories of hazardous 

toys that demonstrate the need to strengthen protections for consumers, particularly for children, as the chairman has pointed out. 

In 2008, we acted to strengthen the laws governing the safety of 

goods entering this country and to provide much-needed additional 

resources to intercept unsafe products by passing the Consumer 

Product Safety Improvement Act. This new law included provisions 

resulting from a 2007 product safety investigation that I conducted 

in my role as the ranking member of the Homeland Security and 

Governmental Affairs Committee. That investigation produced provisions that included better coordination and information sharing 

between the Commission and Customs and Border Protection 
113 

(CBP) so that inspectors at our Nation’s ports can focus their resources on the most risky shipments, targeting products, manufacturers, and importers with poor consumer safety records. And I’ll 

be interested today to hear more about this improved import surveillance plan and the efforts to improve coordination with CBP. 

While it is crucial for the Consumer Product Safety Commission 

to implement regulations to protect children from lead and other 

hazardous materials, we do want to ensure that the regulations do 

not prove overly burdensome or costly to small businesses, such as 

thrift shops and those who produce handmade crafts, clothing, and 

toys. The Commission needs to consider these small, often homebased businesses when issuing its rules and guidance, particularly 

for third-party testing. 

Again, I very much look forward to hearing from the Chairman 

today, and appreciate our chairman, as we consider the budget request for the Commission. 

Senator DURBIN. Thanks, Senator Collins. 

I’m pleased to welcome Chairman Inez Tenenbaum, the ninth 

Chairman of the Consumer Products Safety Commission, sworn 

into office on June 23, 2009. Previously, Ms. Tenenbaum was elected as South Carolina’s State superintendent of education, where 

she served two terms. She has extensive experience in legal, legislative, administrative, and regulatory matters and served on numerous task forces that provide oversight on children and family 

services. 

Thanks for being here. I look forward to your testimony. 

Ms. TENENBAUM. Good afternoon, thank you—thank you. I’ll 

start all over again. 

Good afternoon, Chairman Durbin and Ranking Member Collins. 

Thank you so much for this opportunity to appear in front of you. 

I am pleased to be here today to discuss the U.S. Consumer 

Product Safety Commission’s fiscal year 2011 budget. During the 

past 9 months as Chairman of the CPSC, I have had the opportunity to see firsthand the great work that the Commission undertakes every day. From new regulations to ensure the safety of 

cribs, to enforcement action against children’s jewelry with harmful 

levels of lead, cadmium, and other toxic metals, the CPSC is once 

again an agency that means business when it comes to protecting 

the safety of the American consumer. 

Much of this progress would not have been possible without the 

reauthorization of the Commission through the Consumer Product 

Safety Improvement Act of 2008 and the additional funding received by the agency in fiscal years 2009 and 2010. I greatly appreciate the increased resources that members of this subcommittee 

have supported over the past 2 years, and can assure you that 

these resources have been put to good use through increased staffing and improved import surveillance and enforcement efforts. It 

has also provided the resources necessary for the Commission to 

develop robust responses to new and emerging hazards, such as 

contaminated drywall, that has caused serious problems for thousands of homeowners. The results of this new commitment to the 

CPSC are already very encouraging. 

One concrete example of this increased staffing and resources at 

the agency: During 2008, the number of CPSC full-time employees, 
114 

FTEs, had dropped to only 385. This was the lowest level in the 

agency’s history and down from a high of 978 in 1980. Section 202 

of the CPSIA required the agency to increase the number of FTEs 

to at least 500 by the end of fiscal year 2013. And I’m very pleased 

to report that we’ve already reached that milestone and currently 

have 505, as of April 9, dedicated FTEs at the CPSC. 

But, employee numbers are only one indicator of change. Another 

key metric is results. One concrete example of that is our ability 

to stop dangerous products before they enter the stream of commerce. In fiscal year 2007, the CPSC collected approximately 750 

samples of suspect products entering our country. In 2009, that 

number rose to almost 1,600. At the same time, we started to see 

a commensurate decrease in the number of voluntary recalls, from 

563 in fiscal year 2008 to 466 in fiscal year 2009. The Commission’s 

proposed 2011 budget requests $118.6 million—and it’s designed to 

accelerate this forward momentum by continuing internal modernization and rebuilding efforts. 

As noted in my written statement, the proposed 2011 budget is only $400,000 over our current 2010 level, but it will allow the 

Commission to support the key areas of emphasis by reallocating 

$13.9 million in funds used in 2010 nonrecurring activities. Specifically, the proposed budget will allow the Commission to pursue 

new and enhanced initiatives in four key areas: 

The first is the Commission’s compliance initiative. Since the 

passage of the CPSIA, the Commission’s staff has worked diligently 

to promulgate and implement the numerous rules required by that 

law. In 2011, the CPSC’s work will shift from developing rules 

mandated by the CPSIA to enforcing those rules, both within our 

borders and at ports of entry. To further facilitate those efforts, the 

CPSC’s 2011 budget requests approximately $4.6 million and an 

addition of 41 full-time employees to support additional responsibilities associated with three key elements of the compliance program: 

regulatory enforcement, import surveillance, and defect investigations. 

The second area is information technology modernization and 

Commission implementation of a searchable public database of consumer product safety information. Section 212(b) of the CPSIA requires the Commission to upgrade its information technology systems and to develop a database that allows consumers to submit 

incident reports that can subsequently be reviewed by all members 

of the general public. 

In response to this mandate, CPSC is developing a single, integrated, Web-based environment. The Consumer Product Safety 

Risk Management System, or RMS, will change the way the Commission receives and analyzes data. With the new RMS, the CPSC 

will be transformed. The Commission will have one powerful database for the input and analysis of multiple sources of data. Overall, 

this new capability has the potential to uncover more defect patterns for staff to examine and to triage. This, in turn, could lead 

to an increase in recalls of defective products and the prevention 

of injuries and deaths. The Commission has already allocated approximately $20 million to fund many of the initial planning and 

design costs of the RMS and deeply appreciates this subcommittee’s 

past support of the program. 
115 

In 2011, funding resources—requirements will largely shift from 

design-and-build costs to maintenance items. Therefore, the 2011 

budget requests $1.8 million for a staffing combination of eight 

FTEs and contract positions to maintain the system and comply 

with OMB’s requirements for information technology governance, 

cybersecurity, and privacy. 

The third area is consumer outreach and education. Providing 

consumers with recall and product hazard information that helps 

make families and communities safer is one of my top priorities. 

Over the past year, the Commission has made great strides in consumer outreach by reestablishing our presence on network television, in the national newspapers, and on the radio. The agency 

also launched CPSC 2.0, a social media initiative that is reaching 

out to tens of thousands of consumers via YouTube, Twitter, Flickr, 

the OnSafety blog, and our own recall widget. This year and in fiscal year 2011, the Commission plans to accelerate efforts to conduct 

grassroots education and advocacy in hard-to-reach and vulnerable 

populations. We will also continue to focus on public education and 

outreach efforts to prevent drownings and entrapment involving 

children in residential and public pools. Fourth, the 2011 budget proposes an additional $2 million for the 

CPSC to support the National Nanotechnology Initiative. In the 

last few years, there have been increasing public concerns over potential health impacts associated with this technology. Although 

nanomaterials may have the same chemical composition as nonnanomaterials, at the nano scales, they may demonstrate different 

physical and chemical properties and behave differently in the environment and the human body. The $2 million proposal will allow 

the Commission to conduct exposure and risk assessments of nanotechnology materials, allow for database updates to properly flag 

reports of nanotechnology incident with consumer products, and 

conduct consumer outreach efforts, such as public meetings. 

PREPARED STATEMENT

Mr. Chairman, thank you again for the opportunity to testify on 

the proposed 2011 budget for the U.S. Consumer Product Safety 

Commission, and I look forward to working with you and other 

members and Ranking Member Collins on this subcommittee, and 

will be happy to answer any of your questions. 

[The statement follows:] 

PREPARED STATEMENT OF INEZ TENENBAUM

Good afternoon, Chairman Durbin, Ranking Member Collins, and Members of the 

Subcommittee on Financial Services and General Government. I am pleased to be 

here today to discuss the U.S. Consumer Product Safety Commission’s (CPSC) fiscal 

year 2011 budget request. 

During the past 9 months as Chairman of the CPSC, I have had the opportunity 

to see first-hand the great work that the Commission undertakes every day. From 

new regulations to ensure the safety of cribs to enforcement action against children’s jewelry with harmful levels of lead, cadmium and other toxic metals, the 

CPSC is once again an agency that means business when it comes to protecting the 

safety of American consumers. 

Much of this progress would not have been possible without the reauthorization 

of the Commission through the Consumer Product Safety Improvement Act of 2008 

(CPSIA), and the additional funding received by the agency in fiscal year 2009 and 

fiscal year 2010. I greatly appreciate the increased resources Members of this Subcommittee have supported over the past 2 years, and can assure all of you that 
116 

those resources have been put to good use through increased staffing, improved import surveillance, and increased compliance activities. It has also provided the resources necessary for the Commission to develop robust responses to new and 

emerging hazards such as contaminated drywall that has caused serious problems 

for thousands of homeowners. 

The results of this new commitment to the CPSC are already very encouraging. 

One concrete example of this is increased staffing and resources at the agency. During fiscal year 2008, the number of CPSC full-time employees (FTEs) had dropped 

to only 385—the lowest in the agency’s history. Section 202 of the CPSIA required 

the agency to increase the number of FTEs to at least 500 by the end of fiscal year 

2013. I am very pleased to report that we have already reached that milestone, and 

have 502 FTE positions filled at the CPSC as of April 1, 2010. 

But employee numbers are only one indicator of change. Another key metric is 

results. One concrete example of that is our ability to stop dangerous products before they enter the stream of commerce. In fiscal year 2007, the CPSC collected approximately 750 samples of suspect products entering our country. In fiscal year 

2009, that number more than doubled to almost 1,600. At the same time, we started 

to see a commensurate decrease in the number of voluntary recalls from 563 in fiscal year 2008 to 466 in fiscal year 2009. The Commission’s proposed fiscal year 2011 budget request of $118.6 million is 

designed to accelerate this forward momentum by focusing on modernization efforts 

that will flag emerging hazards and help us keep those products out of our country 

and the hands of children. 

While this request is only $400,000 over the fiscal year 2010 level, it will allow 

the Commission to increase the FTE level by 46 in fiscal year 2011 (for a total of 

576 FTEs), fund a broad new compliance initiative, implement the second phase of 

the Commission’s continued Information Technology (IT) modernization, continue to 

improve consumer outreach, and direct $2 million in support of the Federal National 

Nanotechnology Initiative by reallocating $13.9 million in funds used for fiscal year 

2010 nonrecurring activities. 

THE COMMISSION’S COMPLIANCE INITIATIVE

Since passage of the CPSIA, Commission staff has worked diligently to promulgate and implement the numerous rules required by that law. In 2011, the CPSC’s 

work will shift from developing rules mandated by the CPSIA to enforcing those 

rules—both within our borders and at ports of entry. 

To further facilitate those efforts, the CPSC’s fiscal year 2011 budget requests 

$4,647,000 and the addition of 41 full-time employees (FTEs) to support additional 

responsibilities associated with three key elements of the compliance program: regulatory enforcement, import surveillance, and defect investigations. 

Regulatory Enforcement 

Experience shows that enforcing new rules takes considerably more resources 

than enforcing an existing rule that has been in place for a number of years. The 

number of new rules mandated by the CPSIA during fiscal year 2009 and fiscal year 

2010 are more than double the number of rules promulgated by the Commission 

since 1990—and will result in a dramatic increase in enforcement responsibility. 

The fiscal year 2011 budget, therefore, requests $1,647,000 and 15 FTEs to enforce the new rules. This includes four new compliance officers, five field investigators, three lab testing and other technical specialists, two attorneys, and one FTE 

to coordinate with state and local authorities. 

Import Surveillance 

The Commission’s import enforcement workload will also increase as investigators 

ramp up efforts to verify testing certifications and collect increasing numbers of suspect product samples at our Nation’s ports. The need for more staff and better coordination with U.S. Customs and Border Protection (CBP) was specifically highlighted in an August 2009 Government Accountability Office (GAO) report. Mr. 

Chairman, I know this is an area of critical interest for both you and Ranking Member Collins, and the Commission is eager to fully address this issue. 

Accordingly, the fiscal year 2011 budget requests $1,965,000 to expand coverage 

at the ports, verify third-party testing certifications, collect samples of suspect products, and—most importantly—stop unsafe products from entering the country. This 

request will support an additional sixteen FTEs dedicated to import surveillance 

(five investigators and analysts that will be stationed at ports, two compliance officers to process additional import samples, and nine FTEs for lab testing and other 

specialties), as well as $100,000 for the destruction of goods refused at the ports by 

CPSC. 
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Defect Investigations 

The number of product incident reports the Commission receives almost doubled 

between fiscal year 2003 and now. With the rollout of the searchable public database by March 11, 2011, we expect that the number of incident reports will grow 

exponentially. These reports often provide critical information and data to the 

CPSC. However, with current resources, CPSC staff is only able to thoroughly investigate a very small number (approximately 10 percent) of the total reports received. 

Increased resources are needed to enhance our defect investigation capability, and 

ensure that the Commission can adequately review and process the rapidly increasing number of product incident reports. Therefore, the fiscal year 2011 budget requests $1,035,000 and ten additional FTEs (three compliance officers, five field investigators, one technical specialist, and one attorney) to support this critical effort. 

INFORMATION TECHNOLOGY MODERNIZATION

Section 212(b) of the CPSIA requires the Commission to develop a database that 

allows consumers to submit incident reports that can subsequently be reviewed by 

all members of the general public and upgrade its information technology systems. 

As noted above, the searchable public database will be launched in less than 1 

year, and I look forward to working with Members of this Subcommittee to ensure 

that your constituents know how to access and use it. In the course of completing 

the database, we are also working to solicit extensive public input and establish 

clear rules for how the database will operate and how CPSC will interact with consumers and manufacturers. 

In order to support the data that will be generated by the database and meet the 

information technology modernization mandate, CPSC is developing a single, integrated, web-based environment, the Consumer Product Safety Risk Management 

System (RMS), that will change the way the Commission receives and analyzes 

data. Current systems at the Commission are fragmented, and information flows 

often have to be manually sorted by staff to identify new and emerging hazard patterns. 

CPSC will be transformed with the new RMS. The Commission will have one powerful database for the input and analysis of multiple sources of data. This capability 

will be absolutely critical as data streams from the new public database start flowing into the Commission. In addition, the system will have new predictive ‘‘data 

mining’’ tools that will allow the CPSC to compare new incidents electronically with 

all prior incidents. Overall, this new capability has the potential to uncover more 

defect patterns for staff to examine. This, in turn, could lead to an increase in recalls of defective products and the prevention of injuries and deaths. 

The Commission has already allocated approximately $20 million to fund many 

of the initial planning and design costs for the RMS, and deeply appreciates this 

Subcommittee’s past support of this program. In fiscal year 2011, funding requirements will largely shift from design and build costs to maintenance items. Therefore, the fiscal year 2011 budget requests $1.880 million for a staffing combination 

of eight FTE and contract positions to maintain the system and comply with Congressional and Office of Management and Budget (OMB) requirements for information technology governance, cybersecurity and privacy. 

CONSUMER EDUCATION AND OUTREACH

Providing consumers with recall and product hazard information that helps make 

families and communities safer is one of my top priorities. Over the past year, the 

Commission has made great strides in consumer outreach by re-establishing our 

presence on network television, in national newspapers, and on the radio. We have 

also re-established the trust of consumers that CPSC is putting their interests first. 

The agency also launched ‘‘CPSC 2.0,’’ a social media initiative that is reaching 

tens of thousands of consumers via YouTube, Twitter, FlickR, the OnSafety blog, 

and our Recall Widget. This year the Commission plans to further accelerate this 

initiative by expanding the platforms we use to include cell phone text messages. 

The Commission also plans to accelerate efforts to conduct grassroots education 

and advocacy in hard-to-reach and vulnerable populations. In August 2009, the GAO 

released a report recommending that the CPSC increase its focus on reaching minority populations. Since becoming Chairman of the CPSC, I have directed Commission staff to explore additional outreach efforts to underserved populations. In carrying out a special Minority Outreach initiative, we will increase our use of existing 

tools, such as the Neighborhood Safety Network (NSN) program—that provides vital 

information to more than 5,600 community organizations and leaders—as well as 

use new tools, such as targeted, grassroots programs for Hispanics, African-Ameri-
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cans, American Indians, and other minority groups. This will also remain a key priority of the Commission in fiscal year 2011. 

One of the most tragic subjects the Commission deals with are drownings and entrapments involving children in residential and public pools. I am pleased to note 

that the fiscal year 2011 budget contains $1,000,000 specifically for continuing pool 

and spa safety education. This funding will build on the previous funding of $8.1 

million in fiscal year 2009 and fiscal year 2010, and continue to help the agency 

drive down the 300 child drownings each year and increase compliance with the Virginia Graeme Baker Pool and Spa Safety Act. 

NANOTECHNOLOGY

The CPSC’s fiscal year 2011 budget also proposes $2 million to support the Federal National Nanotechnology Initiative, and seeks to collect additional data and explore environmental, health, and safety issues related to the increasing use of nanotechnology in consumer products. 

In the last few years, there has been increasing public concern over potential 

health impacts associated with this technology. Although nanomaterials may have 

the same chemical composition as non-nanomaterials, at the nanoscale they may 

demonstrate different physical and chemical properties and behave differently in the 

environment and in the human body. 

The $2 million proposed will allow the Commission to conduct exposure and risk 

assessments of nanomaterials, allow for database updates to properly flag reports 

of nanotechnology incidents with consumer products, and conduct consumer outreach efforts such as public meetings. Perhaps even more importantly, it will also 

allow the Commission to take a very proactive approach to this emerging issue, 

rather than merely reacting to incident reports after they are received. 

Mr. Chairman, thank you again for the opportunity to testify on the proposed fiscal year 2011 budget for the U.S. Consumer Product Safety Commission. It provides 

the funding necessary to continue the transformation of this agency from what some 

have described as a ‘‘teething tiger’’ into the world’s leading lion of consumer protection. 

I look forward to working with you and other members of the Subcommittee on 

the Budget Request, and would be happy to now answer any questions you may 

have. 

STAFFING INCREASES

Senator DURBIN. Thanks, Chairman Tenenbaum. 

And I might note that the increase—or, should I say—the restoration of employees at the Consumer Products Safety Commission, we thought, was warranted, because of the massive numbers 

of products that come your way, and particularly the increase in 

imports into the United States, which created a brand new challenge for us. And so, just for the record, that was our thinking behind the increase in full-time equivalent employees. 

I want to discuss about five issues, and I’m sure I won’t get into 

all of them. 

LEAD STANDARDS

So, let me ask about lead, because we were concerned, when we 

wrote the bill, as to whether or not we came up with a reasonable 

standard for lead in toys. And before the bill was written, there 

was no lead limit at all for children’s products. In February 2009, 

permissible lead levels in children’s products were reduced to 600 

parts per million. By August, the lead limit in children’s products 

were to come down to 300 parts per million. In those coated with 

paint, the limit dropped to 90 parts per million. 

A stay of enforcement on third-party testing requirements was 

granted by the Consumer Products Safety Commission in February 

2009 for 1 year because there was ‘‘substantial confusion,’’ in the 

industry, regarding specific requirements related to the applica-
119 

bility, as well as testing and certification. An extension of that stay 

of enforcement was granted in December of last year on testing and 

certification for many children’s products for 1 year, until February 

2011, while the CPSC continues to accredit third-party-testing labs. 

Now, I want to make sure I understand. If we have written this 

law in a fashion that makes it difficult for you to either understand 

or enforce—when I read the word ‘‘confusion,’’ I want to make sure 

I understand what’s behind that—then it’s our responsibility to 

step forward and correct any errors that we’ve made there. If, however, this is a question of just setting up the mechanism for enforcement, that, to me, is a different question, and I can understand it takes more time. So, could you address the lead issue in 

toys and children’s products first? 

Ms. TENENBAUM. Thank you, Mr. Chairman. 

Yes, we did stay the enforcement on certain products while we 

put in place the specific testing requirements for those products, so 

that we could have laboratories who knew how to go about testing 

those products. But, third-party testing and certification was never 

stayed on lead in paint, which now is at 90 parts per million. We 

are also enforcing full- and nonfull-sized cribs; pacifiers; small 

parts; and lead content on metal children’s jewelry. What we 

stayed was lead content in nonmetal, not in children’s jewelry or 

in paint. So, it could be lead content in brass or something else, but 

not children’s jewelry. 

But, we’ve also realized that the strict levels under 101, which 

says that you can exempt articles where the lead is inaccessible to 

the child or if you can show that, through normal and foreseeable 

use and abuse, any lead is not absorbed into the body. So, it’s that 

‘‘any lead,’’ where you might have very small levels and contact 

with the children’s product is very infrequent. For example, bicycles and all-terrain vehicles (ATVs). 

Senator DURBIN. We heard about that. 

Ms. TENENBAUM. So, we stayed the bicycles and the ATVs, in 

terms of testing, until we could work this out, and also certain 

books. The newly printed ordinary children’s books do not contain 

lead, but, the children’s books printed before 1985 do. We had a 

problem with exempting those. So, if we had more flexibility 

around section 101 for any lead, then we would be able to work 

with the products as they came up for our consideration. 

We have proffered a discussion around functional purpose. It 

would require industry to come to us and say, ‘‘We need this lead 

in our product for the functional purpose. If it’s an ATV, we need 

it to make the ATV stronger. The contact with lead components on 

the ATV will be infrequent. It will have no adverse health effect 

on the user.’’ And so, then, we could give the ATV or the bicycles 

an exemption. 

So, it’s a narrow class of products that, if we had a functional 

purpose amendment to the CPSIA, then we would be able to exempt those products, like ordinary children’s books. 

Senator DURBIN. But, do you think that’s going to require an 

amendment to the law? 

Ms. TENENBAUM. We do. 

Senator DURBIN. Okay. So, we ought to look at that. 
120 

Now, let—and to make it clear, the stay does not apply to lead 

paints, small parts, or children’s jewelry. We are talking about 

functional products and ATVs and the like. If—— 

Ms. TENENBAUM. And we stayed enforcement of the lead in ATVs 

last year. 

Senator DURBIN. Okay. 

OTHER TOXIC SUBSTANCES

Now, I’m going to go 2 extra minutes and give Senator Collins 

the same time, because I wanted to ask, as a followup—and we’re 

finding that there were replacements by some who are sending 

products into the United States—replacing lead with cadmium and 

antimony. And are you regulating those, as well? 

Ms. TENENBAUM. Well, I issued a stern warning to Chinese manufacturers, in a speech to the Chinese, back at the beginning of this 

year. I was unable to attend the conference in China, because I had 

a hearing in Congress. But, we gave a stern warning. And our 

counterpart in China, the AQSIQ, issued the same stern warning 

to manufacturers and said, ‘‘Do not substitute any of these metals 

for lead.’’ Now, we really don’t think that that is occurring, that 

they’re intentionally substituting. But, we think they’re being careless in not realizing that you cannot use these metals in children’s 

products. 

Under the ASTM F963 standard, which is the toy standard, the 

surface coating on toys is regulated. 

Senator DURBIN. But, I understood—— 

Ms. TENENBAUM. Also, children’s jewelry is regulated under the 

Federal Hazardous Substance Act. We could call a toxic metal a 

banned hazardous substance. And right now, we are doing our research to establish the level of what we will allow for cadmium and 

other metals in children’s jewelry. 

Senator DURBIN. So, I understood that the children’s pets—Zhu 

Zhu pets out of China, there was—they found some evidence of antimony in those. Are you saying that—— 

Ms. TENENBAUM. Well, the company—— 

Senator DURBIN [continuing]. They did or didn’t? 

Ms. TENENBAUM. The company who manufactures the Zhu Zhu 

pets came to the CPSC, just days after one nonprofit organization 

announced they had found the antimony, and showed us all of their 

laboratory tests. We did our own testing, and then we established 

that the antimony was not at harmful levels to children. And we 

put that press release out that there were no harmful levels of antimony in Zhu Zhu pets. 

Senator DURBIN. Okay. 

Senator Collins. 

Senator COLLINS. Thank you, Mr. Chairman. 

Obviously, our first priority is to make sure that all products, including toys for children, are safe. There has been an issue with 

small home-based businesses finding it very expensive to comply 

with the standards in the new law. They obviously do not want to 

be selling products that aren’t safe, that are not—that would in 

any way endanger our children. But, the cost of third-party testing 

can be prohibitive. 
121 

And I want to give you an example. Last year, I met with a 

woman who owned a business called The Little Hat Company in 

South Berwick, Maine. And she produced children’s hats. And she 

had this network of women who made the hats out of their homes. 

It worked so well for them, because they all had young children 

and they could stay home with the children, yet be able to make 

some money. Well, the combination of the cost of third-party testing for the Consumer Product Safety Improvement Act plus the 

economic downturn has forced this business to close up altogether. 

And that affected not only the business owner, but all of these 

part-time sewers whom she employed who were producing these 

cute little caps out of their homes. 

As a result of this concern, last year we included language in the 

report accompanying the omnibus bill noting the concerns of these 

very small manufacturers—seems even odd to call them ‘‘manufacturers’’; they’re really craftspeople—regarding the third-party testing requirements. And we urged you to consider these types of 

home-based businesses when you issue your rules and your guidance on third-party testing, because we really need to find a way 

that allows them to ensure their products are safe, but doesn’t put 

them out of business when, in fact, their products are safe. 

What efforts have you made to address the concerns of these 

small businesses? 

Ms. TENENBAUM. Thank you, Senator. 

We have been extremely sensitive to the concerns of small businesses and crafters throughout the implementation of the CPSIA. 

In fact, we wrote a guidance on the CPSIA for small businesses, 

resaler crafters, and manufacturers of children’s products. And over 

the last 9 months, the Commission has had four actions which provided relief to small businesses and crafters. And here are the four 

rules that we promulgated to do this: 

First of all, tracking labels. The CPSIA required that children’s 

products have a tracking label. We decided that there was no ‘‘one 

size fits all’’ and for small crafters, that was very important to 

them. 

Two, lead determinations proceeding. This was a rule that we 

wrote, and we said products made out of cotton, paper, untreated 

wood, to name a few, do not—will never have—contain lead. Therefore, businesses like The Little Hat Company, if it was a cotton 

hat, would not have to have third-party testing. And we put that 

out to tell people that you do not even have to have a certificate, 

which would save them a tremendous amount of resources. 

The third thing was component-part testing. If the hat was made 

of cotton, the hat would not have been testing, but if they had buttons sewn on it to make it decorative, if they bought buttons from 

a company that could certify they were lead-free, then The Little 

Hat Company would not have had to do additional testing. And so, 

if you could just test the component, then you would not have to 

test the whole product. 

And the fourth is, we continue to stay enforcement on testing 

and certification for many children’s products, giving people time to 

understand this law, and also to let the component-part testing 

market develop. Groups like the Handmade Toy Alliance have recognized our work, and they continue to work with us. We, for ex-
122 

ample, just last month, we had two Webinars with the ETS4 community, which is the handmade toy and handmade crafters, on 

eBay, and the Handmade Toy Alliance, so that we could talk to 

them about what the CPSIA requires and make sure they understood how to comply with the law. 

We will continue to keep small manufacturers in mind as we go 

into our rulemaking. And we also want to make our small business 

ombudsman, which is a part-time job, a full-time job, and expand 

this into education and outreach, so that we can have regularly 

broadcast Webinars for small businesses and answer their questions individually to allay their concerns with compliance. 

Senator COLLINS. Thank you. Those sound like very worthwhile 

and protective moves on the Commission’s part. 

This women’s business was cotton hats. And she did ornamate 

them, at times, with buttons, and was concerned about having to 

test the buttons. And I remember raising with her, ‘‘Well, wouldn’t 

that be the button manufacturer’s job?’’ So, I’m very happy that 

you’ve clarified that. And I will relay that information to her, in 

the hopes that, when the economy improves, she can get back in 

business and not have to worry about adding what really is a tremendous cost to a very small business. 

I’d like to, in my remaining moment, just ask you a little more 

about the small business ombudsman, since I did note that you 

plan to establish a full-time position. How would you ensure that 

this position is truly going to be able to assist small businesses? 

How are you going to inform small businesses that it even exists? 

Ms. TENENBAUM. Well, we’ve had a small business ombudsman 

for a number of years, and most recently the small business ombudsman was located in the Office of International Programs and 

Intergovernmental Affairs, and the duties were only part time. 

We are working with Booz Allen Hamilton to write a new strategic and operational plan for the Commission. And we are already 

beginning to realize that one of our primary functions should be 

education and outreach. So, we could place this full-time small 

business ombudsman in a larger Office of Education Outreach, 

where we would work with colleges and universities. We could invite professors to participate. We could work with nonprofits. And 

also, we would have a regular curriculum, where we would regularly host workshops. Since I’ve been the Chairman, we’ve hosted 

two workshops. One was a workshop for the database and another 

one was for continued testing. And we reached out and reserved a 

block of seats just for the Handmade Toy Alliance and small businesses. And so, we will continue to be very sensitive to small businesses in that regard. 

Senator COLLINS. Thank you. 

Thank you, Mr. Chairman. 

ADDRESSING HARMFUL CHEMICALS/ELEMENTS IN PRODUCTS

Senator DURBIN. I want to ask you about a couple of issues that 

raise a larger question: the relationship of the CPSC to some other 

agencies of the Federal Government, when it comes to particular 

hazards. 

The first one is known as BPA—I’m going to mispronounce this— 

Bisphenol A, which is, as I understand it, a plastic coating that 
123 

may be in virtually every canned product we buy and shows up in 

other things—baby bottles and sippy cups, sometimes; maybe pacifiers. And it’s been linked to heart disease and cancer in humans 

and abnormal development in animals. 

The EPA, Environmental Protection Agency, listed BPA as a 

chemical of concern. Although some products are labeled BPA free, 

they’re still found to contain this chemical. So, to what degree does 

the Consumer Product Safety Commission feel a responsibility, 

under the law, to verify labeled contents or claims, such as ‘‘BPA 

free’’ in consumer products? 

Ms. TENENBAUM. We feel very responsible. In fact, we work regularly on interagency committees with the EPA, with the National 

Institute of Standards and Technology (NIST), with the National 

Science Foundation (NSF), and the National Institutes of Health 

(NIH). And the research that all of these agencies do, we read and 

take very seriously. So, we are tracking the research on BPA and 

other chemicals. We track all the nanotechnology research. And 

then, our scientists will make determinations and recommendations, and we will eventually go into rulemaking if we think that 

it’s necessary. 

We also can take the information and begin voluntary recalls or 

mandatory recalls. 

Senator DURBIN. Have you done that in relation to BPA yet? 

Ms. TENENBAUM. Let me get back with you. I know we have done 

extensive work on BPA. And before I misspeak today, let me get 

you a full report on what we’ve done on that. 

[The information follows:] 

U.S. CONSUMER PRODUCT SAFETY COMMISSION ACTIVITY ON BISPHENOL-A (BPA) 

Overview 

Bisphenol-A (BPA) is used in the manufacture of polycarbonate plastics and epoxy 

resins. Small amounts of BPA can migrate out of products made out of 

polycarbonate (such as reusable bottles and food containers) during their normal 

use. BPA is considered an endocrine disruptor. BPA has also been shown to cause 

reproductive and developmental effects in animals at high doses. However, there is 

a lack of scientific consensus over whether BPA causes these types of effects at low 

doses. 

Regulatory Jurisdiction 

Jurisdiction over BPA is split between two agencies: The Food and Drug Administration (FDA) and the CPSC. 

—BPA used in food containers or surfaces that come in contact with food is considered an unintentional food additive and is subject to the jurisdiction of the 

FDA. 

—Polycarbonate is also used in bicycle helmets and safety glasses, which is under 

CPSC jurisdiction. These products are made of polycarbonate because that material is very hard. The hardness of the polycarbonate in these products is beneficial in terms of the safety provided to the user, and CPSC Health Sciences 

staff does not believe the exposures from these products would be significant 

compared to products under FDA jurisdiction that come into contact with food 

or liquids. 

—If BPA is used in children’s products that are intended for children to mouth 

or which children could mouth, that would also fall under CPSC jurisdiction. 

In such products, staff would have to look at the hazard, the exposure and the 

subsequent risk posed by any BPA present. 

—Several Federal agencies (the National Institute for Environmental Health 

Sciences (NIEHS), FDA, the National Toxicology Program, and the U.S. Environmental Protection Agency (EPA)) are currently conducting research on the 

safety of BPA, especially at low levels of exposure. CPSC staff is monitoring 
124 

these studies and are participating, as appropriate, to provide technical input 

and peer review. 

Current Efforts Involving CPSC and Our Federal Partners to Further Study BPA 

CPSC’s Heath Sciences staff recently participated in an Office of Management and 

Budget (OMB) coordinated Federal agency review of the EPA draft Notice of Proposed Rulemaking (NPRM) to establish the Concern List under section 5(b)(4) of the 

Toxic Substances Control Act (TSCA). This list included BPA. 

Health Sciences staff are also currently participating in the activities of the revitalized President’s Task Force on Environmental Health and Safety Risks to Children. One of the reasons for revitalization of this task force is to create a high-level 

group that can ensure coordination across agencies that are dealing with common 

chemical concerns. CPSC was specifically recognized as a key partner on this group. 

Staff from EPA’s Design for the Environment (DfE) project recently invited CPSC 

staff to participate in a group being organized to look at BPA alternatives in thermal paper. CPSC staff has participated in meetings with that working group. 

Senator DURBIN. So, now let me raise another question, another 

issue, involving other Federal agencies, from a slightly different 

perspective. The first example was a claim that a product was BPA 

free. And, as I said, it could have contained a chemical of concern, 

and the manufacturer said, ‘‘No, it doesn’t.’’ And you’re saying that 

you accept the responsibility to test to make sure that it doesn’t. 

Ms. TENENBAUM. We would. 

If it’s within our jurisdiction as a consumer product, we would 

follow the research and we would ask for copies of the reports. Our 

scientists also sit on numerous committees with the other Federal 

agencies. 

Senator DURBIN. So, let me give you another example that comes 

at it from a different angle. Recent research has questioned whether Triclosan—I hope I’m pronouncing it correctly—an antibacterial 

chemical widely used in home products, such as liquid soaps, hand 

sanitizers—I probably put it on my hands 10 times a day—dishwashing liquid, shaving gels, toothpaste, some clothing and toys— 

may disrupt the body’s endocrine system—so, that explains my 

problems—and whether it helps to create bacteria that are resistant to antibiotics. Now, the Centers for Disease Control has found 

that the chemical is so pervasive that it has been found in 75 percent of Americans. 

This chemical is regulated by three agencies: Food and Drug Administration (FDA), Environmental Protection Agency, and the 

Consumer Product Safety Commission. The FDA now says that recent research raises valid concerns about the possible health effects 

of this chemical, and EPA is also reexamining it. 

So, what—in light of that situation, where no claim is being 

made that it’s free of Triclosan, but there have been questions 

raised by other Federal agencies about its safety and impact on humans—what is the CPSC’s responsibility, and what have you done, 

related to this? 

Ms. TENENBAUM. We saw the same article and were discussing 

it on the way over here. And again, we will receive the research, 

work with our colleagues in the other agencies, and if their concerns are such that we think consumers are endangered, then we 

will take action either to issue a safety warning, do a voluntary recall, or write regulations. 

Senator DURBIN. So, here’s what I’m getting at, Madam Chairman. Assume, hypothetically—I won’t mention this particular 

chemical—but, assume the set of circumstances I just described for 
125 

chemical x. But, assume that the industry says, ‘‘Well, you’re just 

wrong. It doesn’t create these problems. And we have our scientists, who come to a different conclusion.’’ What is the threshold 

at which the CPSC says, ‘‘Here is what we’re looking for. We are 

looking for an assertion—a credible assertion by a certain Federal 

agency that puts us on notice that we have to be sensitive to and 

look for this certain chemical. It can be litigated in court, it can be 

disputed in laboratories, but we are looking for this threshold.’’ 

What is that threshold on a chemical, such as Triclosan, as to when 

the CPSC says, ‘‘We are sufficiently warned that it could be dangerous that we are going to step forward and try to protect Americans from exposure’’? 

Ms. TENENBAUM. The threshold would be whether or not it 

causes harm or the threat of harm to a consumer. 

Senator DURBIN. Who makes that decision on—— 

Ms. TENENBAUM. We would on our products. For example, in this 

year’s—in the 2011 budget, we’re requesting $2 million so that we 

can work with the National Nanotechnology Initiative to get the 

agencies who are doing the research on nanotechnology to test our 

consumer products so that we will know, firsthand, what we have 

to do with those products, regarding nanotechnology. 

Senator DURBIN. So, you aren’t looking to the FDA or the EPA 

or the Centers for Disease Control. You’re basically establishing 

testing standards to establish whether there’s a danger to humans, 

and then regulating, based on your conclusions. 

Ms. TENENBAUM. We have our own scientists who draw the 

threshold. In fact, they are working right now to come up with a 

threshold, in children’s jewelry, for cadmium and any other metals. 

So, we will look at what the research other agencies have done. We 

would not duplicate it. But, if we feel like—that the work is good 

science, good solid data, then we can act on it. 

Senator DURBIN. Do you take into consideration if States have 

decided to regulate? For example, BPA, if I’m not mistaken, has 

been regulated—I think it’s in California, maybe even in Connecticut. Do you take that into consideration? 

Ms. TENENBAUM. We do. And, in fact, when I became Chairman, 

I asked the Office of General Counsel to have quarterly meetings 

with all the States’ attorneys general. We wanted to not have an 

adversarial position with them. We felt like they were our partners, 

because we’re a small agency. We need our attorneys general in all 

50 States—and I came out of State government—to work with us. 

And in the last meeting we had, nearly every one of them attended 

either in person or by conference call they or their representative. 

So, we feel like California, for example, is very aggressive when it 

comes to consumer products, and they give us information on what 

they find. 

Senator DURBIN. Thank you. 

Senator Collins. 

Ms. TENENBAUM. Illinois’ attorney general is also very proactive. 

Senator COLLINS. Madam Chairman, I want to go back to an 

issue I raised in my opening statement, and that is, I authored provisions of your new law that were intended to bring about better 

coordination and information sharing between the Commission and 

Customs and Border Protection. I was alarmed to learn that CBP 
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had so little authority, prior to this law, to actually seize and destroy dangerous consumer products. So, what was happening is, a 

lot of times, the products were turned back at one port and then 

would be shipped through another port. 

So, we were trying to close that port-shopping hole, if you will. 

The bill authorized CBP to seize and destroy these products that 

are entering our ports, rather than just refusing them. But, the 

success of that depends on close coordination with the Commission, 

and the Commission was charged with developing a comprehensive 

risk assessment so that there would be better targeting of the incoming shipments for inspection. So, the idea was that the Consumer Product Safety Commission was supposed to target the shipment, and then CPB would go inspect that, and could actually destroy the products, rather than just refusing them. 

That is why I was disappointed when the Government Accountability Office (GAO) reported, last August, that not as much 

progress been made in this area as I would have held—hoped. The 

Commission, for example, it says, does not have access to key CBP 

import data that it could use to target the incoming shipments. It 

said that it—the agreements hadn’t been updated between the two 

agencies, that there still was not the kind of information sharing 

that’s absolutely essential for this to be successful. 

Why hasn’t there been more progress made in this very important area? Because this is really critical to keeping dangerous products from ever coming into our country in the first place. 

Ms. TENENBAUM. You are so right. And actually, the GAO report 

helped propel us to having even closer coordination and cooperation 

with the CBP. 

On March 25 of this year, we submitted our concept of operation 

to define our plans for using the International Trade Data System 

to the CBP. And that will help us look at the types of products and 

the names of importers, to help us quickly and more proactively 

identify potential risk and provide more timely responses. 

And we’re also asking for resources, in the 2011 budget, so that 

we can have the capacity for our IT system and CPB’s to talk to 

each other; we need to be able to data-mine between the two agencies. 

We are working with the CBP and have piloted enforcement programs that are developing new and streamlined import procedures 

with them. So, we already have pilot projects going. We have 

placed a full-time employee at the Commercial Targeting and Analysis Center (CTAC), right here in Washington, which is CTAC, 

which allows us to look at pre-arrival manifest systems, so that our 

people know what is coming in on the shipments. We can target 

whether or not our products—consumer products—are on that shipment. 

We also have developed a repeat-offender listing and work with 

the CBP to identify and stop potentially hazardous shipments. 

Also, we work with them to have specific targeting operations 

which have proven that, when we can target shipments, we’re finding a very high percentage of products that are violative of the 

standards. 

We have the Operation Guardian Program, which we use the 

CBP’s resources, and they will go ahead and identify violative holi-
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day lights, Christmas lights, children’s upper- and outerwear with 

drawstrings, and seize those products. 

Right now, we’re waiting to have the memorandum of understanding (MOU) between the two agencies signed. Once that MOU 

is signed, then we hope that we will have access to their automated 

targeting system. And once we have access to their system, we will 

have greater knowledge and potential information on how to improve further targeting methodologies. In fact, we will have a risk 

assessment methodology, and we’re asking for funding in the 2011 

budget to help us with this project, because then we’ll be able to 

have information to develop a full-risk assessment methodology so 

that CBP and the CPSC can share data and collectively target incoming ships. 

Senator COLLINS. Well, I’m pleased to hear of that progress, a lot 

of which is quite recent. I think it might be helpful, after 6 months 

or so, if the Chairman and I ask the GAO for a new assessment 

on how that relationship is working. 

I just have one final issue that I wanted to raise with you, and 

that’s the Chinese-made drywall problem. Now, I feel fortunate, because my State, fortunately, did not, apparently, get a lot of the 

Chinese-made drywall that has produced such problems in 37 other 

States. What concerns me is, there were some 3,000 reports from 

residents of 37 States related to problems with this drywall, including health concerns, noxious fumes, metal pipe corrosion—significant problems. What can CPSC do to better anticipate and prevent 

problems like this? It seems like you shouldn’t have to get to a 

point where you have 3,000 complaints before a problem is identified. 

Ms. TENENBAUM. Well, let me start by saying that I understand 

the anxiety and stress that the families that have had the impacted 

drywall have gone through. I’ve visited homes in Florida and Virginia, and I saw, firsthand, the impact that they had on people’s 

lives. Young families, where all their equity was tied up in this one 

home, had to move out and move in with relatives. Some of them 

had to file for bankruptcy. And it was a crisis that I walked into 

when I became the Chairman last year. There have been more resources spent on this—over $3.5 million—than any other investigation we’ve ever undertaken at the 

CPSC. It’s taken longer than we had liked for it to, but, we were 

also pioneering protocols and testing to validate a new science. 

We partnered, last year, with other Federal agencies to do a 51- 

home study. We were able to find out that certain gases were being 

off-gassed in the homes. With that information, we then went to 

Lawrence Berkeley Laboratories. We recently released the findings 

of those chamber tests, in which we found that the Chinese drywall 

was off-gassing hydrogen sulfide at 100 times greater limits than 

domestic drywall. 

Now, not all Chinese drywall was off-gassing the hydrogen sulfide. In fact, there were over 6 million pieces of Chinese drywall 

imported into the country after Hurricane Katrina, and not all of 

it had the problem. What we are able to do working with the Department of Housing and Urban Development (HUD), is to develop 

an identification protocol to determine if you have the off-gassing 

in your home. We’ve just come out with our own protocol for reme-
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diation, which basically is, remove all the Chinese drywall, rewire 

the house, and remove the pipes. This is the only way to make the 

homeowner able to move back into the home. 

Now, we provided all of our research to the multidistrict litigation, which was a Federal lawsuit in Louisiana, and the judge in 

that case, last week, even went further. There was a company—a 

Chinese company, called Taishan, which did not respond to the 

complainant. It was a damages hearing tried in their absence, in 

which the judge awarded $2.6 million to seven Virginia homeowners. In that case, he said, ‘‘Take out all the drywall, Chinese 

and non-Chinese. Take out all the wiring. Take out all the cabinets 

and appliances, carpet. And essentially take the home down to the 

studs, and rewire. So, it was more extensive than what we said 

was the remedy. 

And now we are wrapping up studies. We have one study ongoing on long-term corrosion. How much would this corrosion result 

in any kind of fire hazard, for example? And that’s what the longterm corrosion is. But, this was an anomaly, the off-gassing of hydrogen sulfide, because it wasn’t found in all the Chinese drywall, 

just some out of parts of China. 

So, the next step is, how can homeowners find resources to remediate? There are really four ways. 

In some cases, the builder has gone back in—I’ve seen this in 

Florida and in Virginia—and torn out the drywall, torn out the wiring, rewired the house, put in new drywall, and moved the homeowners back in. And that has happened in both States. 

In other cases, there have been civil suits. We have the multidistrict suit, down in Louisiana. There have been other civil suits 

where builders, retailers, manufacturers on up the chain of commerce are being sued. 

A third way is to try to find some kind of public funding. I know 

that the Director of HUD has sent a letter saying States can use 

the community block grant funding. If that funding is available, 

that funding can be used. 

And then, the fourth way is to try to get some participation from 

Chinese manufacturers. We have told the AQSIQ and the Chinese, 

from the Chinese Ambassador to all the people with whom we deal, 

that we are going to work with the Chinese companies to try to 

find a just and fair solution. We want them to participate in some 

way, financially. And so, we will begin those talks relatively soon. 

Senator COLLINS. Thank you. 

Senator DURBIN. I had the same issue on my list to bring up, and 

I’m glad Senator Collins did. And I think her question, though, is 

one that I still want to try to probe a little more. 

After 3,000 complaints, we knew we had a problem. The question 

is, when it comes to children’s products and toys, we’re basically 

trying to reach a point where we have a certification of testing before they arrive in the United States. So, let me ask about a product like drywall, here. Is it your impression that there is any requirement for testing in China of such things before they are exported to the United States? 

Ms. TENENBAUM. The regulations relating to drywall in the 

United States have to do with the strength, in terms of how much 

weight it can bear. We did not have regulations which said, ‘‘You 
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cannot off-gas hydrogen sulfide.’’ It was a novelty. And so, therefore, we had to build the protocols. We had to start from the 

ground up and work through getting the test designed to even figure out what was coming off the drywall. 

Senator DURBIN. So, look at it prospectively. If there was another 

shipment of drywall being manufactured in China for export to the 

United States, would it be subject to testing for this hydrogen sulfide? 

Ms. TENENBAUM. Not right now. And it was only after Katrina, 

when we needed more drywall than we could manufacture domestically, that we started importing the drywall. We were handling our 

own needs just in the United States, and we did not have the problem. 

Senator DURBIN. Well, I would say—— 

Ms. TENENBAUM. But, the other thing is, we have started requiring labeling. We want tracking labels so that we know the company 

and the area of China in which the drywall was manufactured. And 

we also have worked with the CBP, where they have stopped shipments into the country. In fact, they found a shipment coming in 

from San Francisco, and they notified us. And then we went out 

to check on it, and it was not gypsum. 

Senator DURBIN. Well, I can tell you that—whether it’s this situation with drywall or the melamine spiking into the pet food, which 

showed up as a higher level of protein, and therefore, was worth 

more—nominally worth more, until they discovered it was dangerous. It really might be beyond us to imagine how many possible 

things could happen from products coming in from a place where 

there are very few standards being applied at the source of manufacture. 

I’d like to close by asking about one of your beloved retirees, 

whom we talked about over and over again in this subcommittee. 

And I don’t even remember his last name, but his name was Bob. 

And Bob was the toy-tester. And some of our staff went out with 

their cameras and took pictures of Bob’s workshop, which consisted 

of a table with toys stacked up on them. And Bob had made some 

marks on the wall at certain levels—4 foot and 6 foot—and then 

would drop the toys from those levels and see if they busted into 

little pieces that kids could swallow. And it didn’t strike most of 

us as the kind of sophisticated testing most Americans would expect from an agency with your reputation. Now, Bob has retired, 

God bless him. And I know he did a good job for us while he was 

there, with the resources available. But, please tell me what the 

world of toy testing looks like at CPSC after Bob. 

Ms. TENENBAUM. Well, thank you. Bob the toy-tester has retired. 

And we do not have just one person testing toys. Our staff estimates, depending on the workload, that toy-testing involves up to 

20 staff from the Office of Hazard Identification and Reduction at 

any given time, including the laboratory, the engineering, human 

factors, and health scientists. 

In addition, our field and import surveillance staff tests or screen 

toys at the port and the field. For example, investigators at the 

port have XRF machines, and they can screen for lead and other 

metals. If the toy fails XRF screening, it’s sent to the laboratory for 

further analysis by our toxicologists and our chemicals. And if the 
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toy fails on the small-parts screening, then it’s sent to human factors to conduct an age determination to identify the age of the child 

for whom the toy will be purchased and is most appropriate. And 

based on this age determination, the laboratory and health scientists test the toy for small parts and sharp edges. 

For toy hazards that fall outside of a specific toy regulation, 

many other CPSC technical personnel conduct product safety assessments on the specific toy in support of compliance activities. 

And if you give me a moment, I’d like to tell you about our new 

lab. We brought pictures of the new lab. After 35 years at our current antiquated lab space, the CPSC will open a new modern testing facility in Rockville, Maryland. We’re leaving Gaithersburg. 

And we will open it in December 2010. And this facility has 63,000 

square feet, and we will be able to hold 100 staff and guest researchers in our laboratory. And for the first time, we’ll have all 

of our technical personnel involved in testing housed under one 

roof. 

This building was built by a private company as a laboratory. 

And it’s very impressive. And we invite you, when we open the lab 

later on this year—you might want to wait til January 2011—to go 

with us out to see our new lab. 

Senator DURBIN. Only if you invite Bob. 

Ms. TENENBAUM. All right. We’ll bring Bob back. 

But, we want to show you—this is our new lab, and this is the 

old lab. The old lab has 37,000 square feet, as compared to the 

63,000 square feet. And these were nine buildings that were 1950sera buildings, all over that campus. And it only was able to hold 

42 people. And we would have to do one test and then take the 

equipment down to reassemble it to do another test. This new lab 

allows us to test multiple products at one time. It enhances our 

ability to look at the children’s electrical, combustion, sports, recreational equipment. We will have a dedicated space for children’s 

testing. So, we’d love to show it to you, when we’re ready. 

ADDITIONAL COMMITTEE QUESTIONS

Senator DURBIN. Chairman Tenenbaum, we’re going to send you 

some more questions in writing—— 

Ms. TENENBAUM. Thank you. 

Senator DURBIN [continuing]. And open it up to other members 

of the subcommittee who might like to do the same. 

Keep the record open until Wednesday, April 21, at 12 noon for 

subcommittee members to submit statements or questions. 

And I thank you very much for your testimony. 

I thank Senator Collins for joining me today. 

[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 RICHARD J. DURBIN

CHINESE PRODUCTS

Question. How are things progressing with the safety of Chinese products? 

Answer. Recalls of product manufactured in China have begun to decline. After 

increasing steadily for many years, from a low of 121 in fiscal year 2003 to a high 

of 346 in fiscal year 2008, the number of recalls of consumer products manufactured 
131 

in China dropped to 230 in fiscal year 2009. Through June of fiscal year 2010, we 

have recorded 80 recalls of these consumer products, indicating a rate that should 

put the China recalls well below 200 for fiscal year 2010. 

In general, we find the Chinese government cooperative in pressing its industry 

to correct specific issues. However, while the government has publicly stated its policy that industry should comply with best manufacturing practices for making safe 

consumer products, it needs to put more resources behind that policy. 

Question. Have the Chinese disseminated information on standards and manufacturing processes throughout China and are their toys being tested and certified? 

How does the process work? 

Answer. The Chinese government has stated that its own laboratories that inspect 

toys for export under Chinese rules must adhere to the safety requirements of the 

export market. We have conducted training for these laboratories on numerous occasions. CPSC also has made a significant amount of information about toy safety requirements available in Chinese on our web site and Chinese toy industry publications have picked up our material and reprinted it for their readers on several occasions. 

All toys imported from China (and elsewhere) are subject to the CPSIA mandate 

that they be certified compliant with U.S. regulations and tested for compliance by 

an independent third party conformity assessment body (lab) accepted by CPSC. Importers typically select a lab from CPSC’s list and instruct their Chinese suppliers 

to have the product tested by the lab. Alternatively, they permit the Chinese suppliers to select the lab from our approved list. 

Question. In October 2009, the Chinese CPSC (AQSIQ) agreed to take immediate 

action to eliminate the use of lead paint in toys. Have the Chinese banned products 

with lead paint? What about products with lead? 

Answer. There is an AQSIQ directive in place prohibiting the practice. AQSIQ has 

been aggressive in taking corrective action with manufacturers who attempt to use 

lead paint on toys exported to the United States. Overall, we have seen a substantial decrease in cases of toys with lead paint level exceeding current limits. 

Question. When is your next meeting with Chinese officials and what do you hope 

to accomplish? 

Answer. I will participate in a trilateral U.S.-EU-China Product Safety Summit 

in October 2010. AQSIQ will participate at the ministerial level and the European 

Commission will send their Commissioner responsible for product safety. Both the 

CPSC and our European partners view the event as an important opportunity to 

impress upon AQSIQ the need to get Chinese manufacturers to rely on best manufacturing practices for producing safe consumer products. 

Question. Have any other countries followed suit to make their products safer? 

Answer. The European Commission is a close partner with CPSC in our work 

with China. We have conducted joint training for manufacturers and continue to coordinate our messaging on product safety to the Chinese government. 

BEIJING OFFICE AND ACTIVITIES

Question. I understand that at the end of last year, you established CPSC’s first 

overseas office at the U.S. Embassy in Beijing and hired a Product Safety Specialist 

to work there. What are the responsibilities of this individual? 

Answer. The Product Safety Specialist— 

—acts as a pro-active resource distribution point for Chinese suppliers and government officials who need U.S. consumer product safety compliance information; 

—serves as a liaison with AQSIQ to ensure timely exchange of critical regulatorto-regulator information; 

—reports regularly to CPSC, in writing, on China’s regulatory implementation of 

product safety measures and the effectiveness of Chinese product safety reform 

efforts; 

—works closely with the CPSC Office of International Programs and Intergovernmental Affairs’ China Program Coordinators to facilitate implementation of the 

U.S.-China Product Safety Work Plan (i.e., personnel and information exchanges); 

—proposes and coordinates monitoring and evaluation activities to determine the 

impact of CPSC product safety initiatives for Chinese suppliers; 

—analyses data from Chinese government and industry sources regarding safety 

and quality of consumer products; 

—provides information to CPSC and the Beijing Embassy Economic Section on 

changes in Chinese practice, regulations, laws, or structures associated with 

product safety; 
132 

—translates relevant product safety documents and verifies document translations; 

—coordinates visits to China of CPSC officials and assists with visits to CPSC by 

Chinese officials; 

—with approval from CPSC headquarters and using fully cleared materials, provides selected Chinese audiences with briefings on U.S. requirements for consumer products; 

—upon specific request by CPSC headquarters, visits production facilities and test 

labs, by arrangement with, and at the invitation of Chinese government officials 

and facility managers, in order to observe specified operations and verify specific activities. 

Question. What are your plans to hire a Regional Product Safety Officer? What 

will be the responsibilities of that individual and what countries will be overseen? 

Answer. The recruiting announcement for the Regional Product Safety Officer was 

listed on USAJOBS.gov on August 6, 2010. The deadline for applications is September 6, 2010. 

The Regional Product Safety Officer will have the following responsibilities in the 

Asia-Pacific region: 

—act as a pro-active resource distribution point for Asia-Pacific regional regulators, suppliers, and other stakeholders, who should understand U.S. consumer 

product safety compliance information; 

—serve as a liaison with regional regulators to ensure timely exchange of critical 

regulator-to-regulator information; 

—report regularly to CPSC on important regulatory implementation of product 

safety measures in the region and the effectiveness of national product safety 

programs; 

—speak at appropriate events in the region to brief key target audiences on U.S. 

requirements for consumer products. 

—with CPSC headquarters approval, visit regional production facilities and test 

labs, by arrangement with, and at the invitation of local government officials 

and facility managers, in order to observe specified operations and verify specific activities; and 

—supervise the local hire Product Safety Specialist working in Beijing. 

STAFFING

Question. Your 2010 operating plan states that staffing will remain at 530 FTEs 

in 2010, however, our enacted fiscal year 2010 conference report language states 

that the increased funding we provided shall support new staff hires, including at 

key ports of entry. May I have your assurances that you intend to hire additional 

staff in 2010? What will your FTE goal be? How many part-time and full-time employees are currently employed at the Commission? 

Answer. The Commission continues to aggressively hire key staff during the remainder of fiscal year 2010. As of July 28, we have made 96 new hires since the 

start of the fiscal year 2010, which represents a 21 percent increase in overall agency staffing. During the current fiscal year, we have hired four additional employees 

at ports of entry for our Import Surveillance Division, and currently have five additional hires pending in this Division. 

To date in fiscal year 2010, the CPSC has had 38 resignations and retirements. 

As a result, we project that we will average about 490 ‘‘annualized’’ FTEs for the 

fiscal year. This is a 13 percent increase over the annualized FTE usage for fiscal 

year 2009. The current FTE ceiling target we have given managers for fiscal year 

2011 is 576 FTEs. This is the FTE number funded in the fiscal year 2011 CPSC 

budget request. 

As of August 7, 2010, CPSC employment stood at 520.4 FTEs. This number includes approximately 25 temporary student hires that count against our FTE limit. 

As of August 7, 2010, we also have 15 pending hires and over 69 active vacancy 

announcements. 

Question. I am aware that a number of long-time, well-qualified and knowledgeable staff have left the Commission. What are you doing to fill the gaps left by these 

important staff members? Are you having difficulty recruiting the highly technical 

staff that you need? 

Answer. Our attrition rate has remained steady and is 5.9 percent thus far in fiscal year 2010. We continue to hire in all of our technical areas to handle the workload, provide for expertise in each technical area and ensure the transfer of knowledge as staff leave. 

We have had difficulty filling positions for a few technical areas such as Mathematical Statisticians, Engineering Psychologists, Fire Protection Engineers, Toxi-
133 

cologists, and Chemists. To maximize hiring potential in these areas, we have utilized the full range of recruitment flexibilities and incentives available for these positions, including recruitment and relocation bonuses, annual leave service credit, 

superior qualifications appointments, and telework opportunities. We have also 

opened many of these positions at both the entry grade level and at the senior journeyman level to ensure opportunities for applicants with varying degrees of education and experience. 

The CPSC has also sought to expand the pool of qualified applicants by attending 

targeted job fairs, posting ads in professional journals and engaging in outreach to 

colleges and universities with a concentration in the technical areas we are recruiting. 

WORKLOAD

Question. The reauthorization placed many new requirements on CPSC along 

with deadlines for achieving those milestones. How is CPSC managing the balance 

of meeting its long-standing responsibilities with the new mandates placed on the 

agency by the Consumer Product Safety Improvement Act? 

Answer. In the Consumer Product Safety Improvement Act (CPSIA), Congress set 

an aggressive regulatory agenda for the CPSC over the course of the first 2 to 3 

years after enactment. While the CPSIA mandates 42 separate action items for the 

Commission to undertake, that number understates the agency workload that results from each of those mandates. For example, that count does not include any 

interpretative rules, such as the definition requirements for ‘‘child care article’’ and 

‘‘toy’’ under section 108. 

To put this in context, mandatory rulemaking activity averaged less than seven 

per year from fiscal year 2000 through fiscal year 2008, with the number of rulemaking projects per year ranging from a low of one in fiscal year 2005 to a high 

of 10 in both fiscal year 2007 and fiscal year 2008. With the passage of the CPSIA, 

rulemaking activity has increased significantly, averaging about 26 substantial rulemaking activities each year for fiscal year 2009, fiscal year 2010 and proposed fiscal 

year 2011. The Commission also conducted an additional 15 activities supporting 

rulemaking proceedings in fiscal year 2009 and 15 to date in fiscal year 2010. 

The work required by the CPSIA is in addition to the Commission’s ongoing regulatory activity in a variety of areas, including upholstered furniture, portable generators and cigarette lighters, as well as our ongoing compliance work in evaluating 

and recalling products that present hazards to consumers. 

Timely implementation of the CPSIA is the agency’s top priority, but we have also 

tried to prioritize our work in a way that maximizes effectiveness and provides flexibility if new hazards emerge. One example of this flexibility is the Commission’s ongoing investigation of contaminated drywall, which is now the largest investigation 

in the history of the CPSC. 

Question. How is the Commission prioritizing work associated with new responsibilities as a result of the reauthorization act? What criteria are being used to 

prioritize this work? 

Answer. The CPSIA established a schedule of mandatory rulemaking activities, 

and these requirements have been placed on the Commission’s rulemaking agenda. 

In addition, the CPSC has a regulation entitled ‘‘Policy on Establishing Priorities 

for Commission Activities,’’ (16 CFR § 1009.8) that guides its efforts to prioritize the 

work of the agency. A description of the process for prioritizing Commission action 

can be found in our semi-annual regulatory agenda/plan submission that summarizes the regulation cited above and lists following general criteria: frequency and 

severity of injuries; causality of injuries; chronic illness and future illness; cost benefit of CPSC action; unforeseen nature of the risk; vulnerability of the population; 

probability of exposure to the hazard; and any additional criteria. 

Completion of congressionally mandated tasks is a key agency priority and resources have been allocated accordingly. Other work, such as the investigation of 

contaminated drywall and other potential emerging hazards are also allocated priority resources as necessary. 

Question. In what areas do you feel that CPSC has been slow to act due to the 

complexity of issues and why? 

Answer. The development of a draft proposed rule addressing the third-party testing requirements under CPSA section 14(d)(2) has been extremely complex and involved thousands of hours of staff resources. This proposed rule has the potential 

to offer families a vital new layer of safety and reassure U.S. consumers that toys 

and other children’s products are free of many known hazards. On the other hand, 

the rule also impacts tens of thousands of manufacturers and importers across all 
134 

of the various industry sectors producing children’s products, including small business entities. 

Given the complexity of the global supply chain and the number of various industries affected by these requirements, CPSC staff has sought extensive public comment from all interested stakeholders to further inform development of the proposed 

rule. On December 10 and 11, 2009, the Commission held a Testing Policy Workshop and invited public comment on aspects of section 14 of the CPSA, as amended 

by the CPSIA. Staff presentations were given, and breakout sessions were held on 

the following topics: Sampling and Statistical Considerations; Verification of ThirdParty Test Results; Reasonable Test Programs and Third-Party Testing; Challenges 

for Small Manufacturer/Low Volume Production; Component Testing and Material 

Changes; and Protection Against Undue Influence. 

A draft Federal Register notice for the proposed rule was published April 1, 2010, 

and the comment period expired August 3, 2010. Work is progressing, with the final 

rule scheduled for completion this year. 

PORT SURVEILLANCE

Question. How many full-time CPSC staff work at how many U.S. ports? 

Answer. The Import Surveillance Division currently staffs 11 U.S. ports with 14 

on-site compliance investigators. The 11 U.S. ports with current on-site CPSC staffing include: Buffalo, New York; Denver, Colorado; Houston, Texas; John F. Kennedy 

International Airport, New York City, New York; Los Angeles/Long Beach, California; Miami, Florida; Newark, New Jersey; Norfolk, Virginia; San Francisco, California; Savannah, Georgia; and Seattle, Washington. We are currently recruiting for 

four additional locations (Chicago, Illinois; Laredo, Texas; Detroit, Michigan; and 

Port Everglades, Florida) and expect to have staff in place in those locations by October 30, 2010. 

CPSC has also co-located staff in the Commercial Targeting and Analysis Center 

(CTAC) located within the Office of International Trade at U.S. Customs and Border 

Protection in Washington, DC. 

Question. How will your fiscal year 2011 budget request augment this? 

Answer. The fiscal year 2011 budget request proposes to increase the number of 

personnel in the Import Surveillance Division to 23 FTEs. Of those 23 FTEs, 19 

would be stationed in ports of entry. 

Question. In what ways are you working with Customs and Border Patrol? 

Answer. CPSC has partnered with U.S. Customs and Border Protection (CBP) on 

a series of efforts focused on increasing surveillance of imported consumer products. 

In March 2010, CPSC submitted to CBP our revised Concept of Operations that 

defines CPSC’s plans for using the International Trade Data System. This plan includes defined processes to create screening and targeting criteria and the overall 

automation of import enforcement mechanisms. By doing so, we have identified 

touch points between the agencies where cooperation and coordination can be developed. 

On April 26, 2010, CPSC was the first agency to sign an interagency Memorandum of Understanding (MOU) with CBP allowing CPSC personnel to co-locate 

at the Commercial Targeting and Analysis Center (CTAC). This MOU will greatly 

improve upon our interagency communication and information sharing. 

This month, CPSC also formally executed an MOU with CBP that will give CPSC 

access to information in the Treasury Enforcement Communication System (TECS). 

This will assist CPSC investigators in the ports by providing them access to information that will improve local targeting and product interdiction activities. 

CPSC is also actively involved in supporting the Importer Self Assessment-Product Safety (ISA–PS) program that is currently being piloted by CBP. The ISA–PS 

is envisioned to be a partnership among CBP, CPSC and importers to maintain a 

high level of product safety compliance to prevent unsafe imports. The ISA–PS is 

a voluntary approach to product safety compliance and will allow the agency to direct our resources to those companies with higher risk. 

Question. For the future, do you envision locating a testing laboratory on the west 

coast so that many of the nation’s imports can be tested at, or near their point of 

entry? 

Answer. It does not appear that funding will be available in the near future for 

an additional CPSC testing laboratory on the west coast. However, CPSC and CBP 

have been in discussions for several months on utilizing CBP laboratories to test 

samples collected by CPSC at import. Training of select CBP laboratory personnel 

has been completed and beginning September 20, 2010, targeting will begin for an 

operation at several ports of entry focusing on potentially violative imitation jewelry. 
135 

Products collected as part of this operation will be sent to both CPSC’s lab and 

a CBP lab for analysis. This pilot analysis program will enable us to determine if 

the results obtained at a CBP lab are comparable to those obtained at the CPSC 

lab. If the pilot confirms that the results are comparable, the anticipated next step 

is to begin having CBP labs test CPSC samples independently, with Compliance relying on those results to make admissibility determinations. When implemented, the 

use of CBP labs will increase the number of import samples that can be collected 

and tested. 

GAO REPORT ON CPSC’S OVERSIGHT OF IMPORTED PRODUCTS

Question. A GAO report from August 2009 found that CPSC didn’t have access 

to key Customs and Border Patrol import data that could be used to target incoming 

shipments for inspection. Further, the report found that CPSC’s activities at U.S. 

ports could be strengthened by better targeting incoming shipments for inspection 

and by improving CPSC’s coordination with CBP. What is being done to address 

these issues? Are you revising your agreements with Customs and Border Patrol? 

Please address the additional key issues raised in the August 2009 GAO report 

(GAO–09–803) on CPSC’s Oversight of Imported Products, and discuss steps taken 

to address these concerns. 

Answer. As noted in a previous response, CPSC is now an active participant in 

the Commercial Targeting and Analysis Center (CTAC) that has been developed by 

U.S. Customs and Border Protection (CBP) to spearhead the coordination of the efforts of the various Government agencies responsible for import safety enforcement. 

On April 26, 2010, CPSC and CBP signed a Memorandum of Understanding 

(MOU) for the exchange of information within the CTAC. This document gives both 

agencies authority to share information, combining for the first time CBP entry and 

advance cargo data with CPSC violator information. This partnership has enhanced 

information exchange, improved targeting decisions, and assisted in development of 

risk analysis capability. 

In addition, CPSC and CBP just executed an MOU that gives CPSC access to information in the Treasury Enforcement Communication System (TECS). This will 

assist CPSC investigators at the ports by providing them access to information that 

will improve local targeting and product interdiction activities. 

NANOTECHNOLOGY

Question. Your fiscal year 2011 request includes $2 million to support the Federal 

National Nanotechnology Initiative data collection activities and environmental, 

health and safety research, related to consumer products. Why are nanomaterials 

of concern? What kinds of activities will CPSC undertake as part of the National 

Nanotechnology Initiative? 

Answer. The National Nanotechnology Initiative (NNI) has developed a definition 

of nanomaterials that specifies that these materials have a specific size range in the 

nanoscale, 1–100 nm (a nanometer (nm) is one-billionth of a meter), and unique 

physical and chemical properties that differ from other materials not in that specific 

size range. Because of the small size and unique properties of nanomaterials, there 

is a concern that they may cause health effects in humans or organisms in the environment. In particular, there is concern about nanomaterials incorporated into consumer products, and the potential risk of nanomaterials entering the bodies of 

adults and young children who use products that contain these materials. 

As part of the NNI activities, several Federal agencies, including the CPSC, have 

worked together to identify and prioritize the questions that should be addressed 

and the types of research to be conducted to ensure the responsible development of 

nanotechnology and the safe use of nanomaterials. These research priorities are listed in the Federal environmental, health, and safety research plan that is currently 

undergoing revision by several Federal agencies. (A copy of the plan is available online at http://www.nano.gov/NNIlEHSlResearchlStrategy.pdf). 

There are also international efforts, including the OECD Working Party on Manufactured Nanomaterials (WPMN), to prioritize the testing needed for nanomaterials, 

sponsor health effects studies, and share information on test results. The CPSC staff 

participates in the international efforts along with several Federal agencies. 

CPSC staff is aware of its role in the national and international efforts to address 

nanomaterial health and safety concerns, and has proposed a number of projects for 

fiscal year 2011 that address the identified needs outlined in the Federal strategy. 

In fiscal year 2011, CPSC plans to establish agreements with a number of agencies 

including the Environmental Protection Agency (EPA), National Institute for Occupational Safety and Health (NIOSH), the National Institute for Standards and Technology (NIST), and the National Science Foundation (NSF) to develop testing meth-
136 

ods and conduct studies to quantify the releases of a variety of nanomaterials from 

several classes of consumer products. The information derived from these studies 

will be used in evaluations to determine if there are any potential risks associated 

with identified releases of nanomaterials from tested products. The CPSC also intends to work with other Federal agencies to increase the availability of information 

about nanomaterials in publically available databases and literature. 

CHINESE DRYWALL INVESTIGATION

Question. I understand that CPSC and HUD have now issued guidance to homeowners with problem drywall, instructing that all problem drywall and wiring be 

eliminated and replaced. Is your guidance the culmination of your work on this subject or what are the next steps with regard to Chinese drywall? 

Answer. CPSC and HUD have provided the public an effective means of identifying homes with problem drywall and of remediating those homes through the 

issuance of our interim guidance. In our remediation guidance, we have recommended the replacement of all possible problem drywall, all fire safety alarm devices, all electrical components and wiring, and all gas service piping and fire suppression sprinkler systems. CPSC and HUD expect to fine-tune our guidance documents as we analyze the results of our scientific studies as those studies wrap up. 

While our scientific investigation is wrapping up, the CPSC continues to vigorously pursue avenues for relief for consumers as we continue to monitor private litigation and remain engaged with AQSIQ. 

LABORATORY STATUS

Question. I believe you were scheduled to move into your new laboratory space 

this year but the contract award process took longer than expected and you now expect to move at the end of the year. What activities will occur at the new laboratory 

space? 

Answer. The CPSC Laboratory supports the overall CPSC mission to reduce unreasonable risk of injury associated with consumer products. This function requires 

selecting, procuring, calibrating, operating, and maintaining sophisticated laboratory equipment by knowledgeable and skillful personnel. Work results must be competent in order to withstand the scrutiny of litigation. 

The new laboratory will house facilities for the testing and evaluation of products 

for hazards under Sections 7, 8, 12, or 15 of the Consumer Product Safety Act. This 

includes facilities for testing of regulated products such as children’s sleepwear, general wearing apparel, mattresses and futons, and carpeting. 

The flammability test laboratory will include a 2-hour fire-rated burn room for 

large- and bench-scale ignition test, various hoods and test chambers for small-scale 

ignition tests, and a chemistry laboratory and chemical hood for fiber analysis and 

specialized (plastic film, chemicals and solids) flammability testing. 

The chemistry laboratory will house all the analytical instrumentation used by 

the chemists to evaluate children’s and consumer products and household chemicals. 

This laboratory will contain four separate laboratory testing cells used for sample 

preparation where solvents and acids are used, the analysis of total acids and bases, 

testing for flash point and viscosity analysis and extractions such as those used in 

the phthalate plasticizer project. 

The Instrumentation Laboratories will house the inductively coupled plasma spectrometer, which is used for analysis of metals, two Gas Chromatograph Mass Spectrometers, a Fourier Transform Infra-red Spectrophotometer, and two small indoor 

air quality exposure chambers. 

CPSC’s combustion products and appliances laboratory will contain three specialized and highly sophisticated chambers and instrumentation for testing a range of 

residential appliances including furnaces, stoves, ovens, gas-fueled fireplace sets, 

unvented space heaters, and camp stoves and heaters. A temperature- and humidity-controlled carbon monoxide gas chamber used to test CO alarms will also be situated in that space. Adjacent to these chambers, we plan to install the apparatus 

of the mechanical test laboratory: a large fatigue cycle test frame, a 14-foot tall 

monorail head-form drop tester for helmet and playground surface testing, two tensile/compression strength testers for evaluating mechanical support structures (such 

as bicycle frames), and a hydraulic pressure test facility for evaluating fire suppression sprinklers. 

The electrical and mechanical test laboratories will be used for testing various 

consumer products, such as ATVs, small electrical household appliances, cribs, baby 

walkers, and toys. We will also have fireworks laboratory space to test some of the 

characteristics of Class C pyrotechnic devices for compliance with Federal regulations. 
137 

Question. I understand that the new facility does not allow for fireworks testing? 

Are you not testing fireworks then? 

Answer. CPSC is not able to conduct the full range of fireworks testing at our 

current laboratory and will not be able to conduct the full range of testing at our 

new facility. We conduct testing to evaluate fireworks fuse burn time, functionality 

and reliability of the fuse to ignite the device, launch tube integrity, functionality 

and location of the aerial effects, and other characteristics at the Blossom Point Research Facility in southern Charles County. 

SEARCHABLE CONSUMER PRODUCT SAFETY INCIDENT DATABASE

Question. In less than a year, the public will be able to access a CPSC database 

that will allow an individual to report an incident or injury from a product and also 

allow an individual to research safety information about a product. Where is the 

Commission, at this point, in developing the system? 

Answer. In September 2009, funds were apportioned by the Office of Management 

and Budget (OMB) for the development of the public database. Since that apportionment, CPSC staff has worked diligently to complete the tasks required to implement 

the database by the March 2011 deadline. 

In January, public workshops were held with consumer groups and industry to 

solicit comments and suggestions about how to best meet the requirements of Section 212 of the CPSIA. In April, the Commission proposed a rule specific to the implementation of the database. Comments received through this implementation proceeding have been used to help develop the system. 

With strong support from agency executives, much of the development work has 

been completed and internal and several external focus groups have reviewed specific parts of the application. CPSC has also taken advantage of opportunities for 

presentations at meetings held by the Consumer Federation of America, the International Consumer Product Health and Safety Organization, and with the National 

Association of Manufacturers. Comments have been positive. 

Later this fall, CPSC plans to hold more workshops with industry and consumer 

groups to garner more feedback. CPSC’s Office of Public Affairs is also coordinating 

the development of the public awareness campaign consistent with the release of the 

database in March 2011. Overall, development work for the public consumer product 

safety incident database is on target and we anticipate a successful release in March 

2011. 

Question. What types of issues are you grappling with as you envision the system’s development? 

Answer. CPSC has not run into significant issues with the development of the system. During the public workshops held on the database many useful comments and 

suggestions were provided by industry and consumer groups. The Commission also 

received close to 50 comments in response to the proposed rule. These comments are 

currently being analyzed in preparation of the final rule. Although some of the technical details of the database design may be affected by the adoption of the final rule, 

the possible changes are manageable within the implementation timeframes. 

Question. What types of input or assistance are you receiving for this type of undertaking? 

Answer. As noted above, CPSC held public workshops with industry and consumer groups to help provide input for the design and functionality of the system. 

Meetings with other stakeholders and external focus group testing in recent months 

have also proven useful. Additional workshops are planned, along with more extensive use of the Commission’s saferproduct.gov website to provide more information 

to the public as updated information becomes available. CPSC will continue to work 

as closely with industry and consumer groups well in advance of the launch of the 

public database to ensure its success. 

STATEMENT SUBMITTED SUBSEQUENT TO THE HEARING

Senator DURBIN. Subsequent to the hearing Senator Mary Landrieu has requested that a statement she has submitted be inserted into the record. 

[The statement follows:] 

PREPARED STATEMENT OF SENATOR MARY L. LANDRIEU

Thank you Chairman Durbin and Ranking Member Collins for calling this oversight hearing on the Consumer Product Safety Commission’s (CPSC’s) budget for fiscal year 2011. The Consumer Product Safety Commission continues to do great work 
138 

to ensure that consumers protected against hazardous products. Of particular interest to me and the state of Louisiana is the CPSC’s ongoing investigation into defective drywall made in the People’s Republic of China. As homeowners in my state, 

and nationwide face possible health and environmental risks from Chinese-made 

drywall products, it is my hope that the CPSC will be able to provide a definitive 

solution in the investigation into this issue facing impacted consumers in the near 

future. 

According to published reports, since 2006 more than 550 million pounds of 

drywall have been imported to the United States from China. This is enough to 

make tens of thousands of homes. However, these products may have come into the 

country as far back as 2000 and could be in over 100,000 homes nationwide. This 

is because since 2004, builders have turned overseas for materials because our own 

U.S. suppliers could not keep up with demand created by the U.S. construction 

boom, as well as a series of hurricanes and other natural disasters. This would include the 2004 Florida hurricanes, Hurricanes Katrina and Rita of 2005, and other 

disasters. The drywall entered the United States through numerous ports, including 

the Port of New Orleans. As I understand it, Florida was the number one destination for these products with over 3 million drywall boards. Louisiana was next with 

almost 660,000 drywall boards. In Louisiana alone, this could be as many as 7,000 

homes. Overall to date, the CPSC has received about 3,082 incident reports from 

37 states, the District of Columbia, Puerto Rico, and American Samoa. This problem 

spans the country, from California in the West to right here in the District of Columbia and Virginia. It is not just an isolated issue for homeowners in the Gulf 

Coast—Chinese drywall is a nationwide problem. 

It is my understanding that the CPSC received its first consumer incident report 

from Florida in December 2008. In Louisiana, we began to see reports from homeowners in southeast Louisiana in late February of 2009. These reports were similar 

to those seen in Florida homes: a ‘‘rotten egg’’ smell within homes; health issues 

such as skin irritation, persistent cough, bloody noses, hair loss, and asthma attacks; lastly homeowners noticed blackened and corroded metal components in their 

homes. According to the Louisiana Department of Health and Hospitals, 990 calls 

have been received regarding defective drywall, and 551 of those callers have completed the DHH survey. The majority of these reports were centered in New Orleans 

and surrounding parishes in southeast Louisiana. From Orleans Parish, 151 calls 

have been received, followed by St. Tammany Parish with 118 calls, and Jefferson 

Parish, St. Bernard Parish, and East Baton Rouge Parish follow close behind. Just 

to give you an example of how widespread this issue is in my state, we have seen 

hundreds of homeowners ranging from St. Bernard Parish Fire Chief Thomas Stone 

to New Orleans Saints Head Coach Sean Payton report this product in their homes. 

Many parents have been seeking answers on what might be making their kids sick 

or, now that more details are coming out, how they should safely remove this product from their homes. This defective Chinese drywall represents an attack on these 

families and presents another obstacle on our road to Gulf Coast recovery. 

In response to these reports, my office has heard from countless constituents on 

the need for consistent, scientifically-based information on the product, as well clear 

guidance on the public safety, health, and environmental impact. Families have 

asked for information on which Federal or State agencies to contact, in addition to 

any updates we have on the health risks posed by this product. Many families also 

called concerned about the impact of defective drywall not just on their children but 

also on pets. To address these questions, on April 23rd, my office issued a fact sheet 

for homeowners updating them on the Federal/State response, providing key contact 

information, and answering frequently asked questions. My office updates this document regularly as new information becomes available. 

On the state level, it is my understanding that the calls which the Louisiana Department of Health has received have ranged from homeowners requesting home inspections, advice on home evacuations, in addition to inquiries on specific health information to provide their primary care physicians and veterinarians. A key question is that of remediation or possible financial assistance in order to deal with this 

problem. Many of my constituents received either Federal Emergency Management 

Agency (FEMA) or Small Business Administration (SBA) disaster assistance to rebuild these homes following Hurricanes Katrina and Rita of 2005. These families 

spent months in FEMA trailers and rental units following these disasters, they paid 

out of pocket or took on debt to rebuild. Now they find their rebuilt homes in worse 

shape than these post-disaster temporary units. In this situation, families are looking for answers and a timeline for when more information will be known on the definitive health impacts of this product. 

In response to these concerns from my constituents, I have been working closely 

with Senators whose states contain contaminated drywall. Along with my col-
139 

leagues, I have sent letters to various agencies requesting appropriate assistance for 

homeowners and I have filed S. 2731, the ‘‘Small Business Administration Disaster 

Recovery and Reform Act of 2009.’’ S. 2731 includes a provision, which with restrictions, would authorize SBA to make disaster home loans for the repair and replacement of Chinese drywall. Senator Nelson has co-signed, and I look forward to pushing for this bill to become law to provide relief to homeowners. 

Earlier this year, CPSC and the U.S. Department of Housing and Urban Development (HUD) issued a protocol to help identify problem drywall in homes. Further, 

interim remediation guidance was released by these agencies on April 2 based on 

CPSC’s ongoing scientific research. These guidelines are a positive step to relief for 

affected homeowners, and the coordination of the CPSC and HUD is to be commended. However, it is important for all Federal agencies to better coordinate with 

CPSC and HUD in an effort to better assist in the remediation and recovery efforts. 

While I understand the need to be thorough and build a case that might stand 

up to future legal scrutiny, and I understand that accurate scientific testing takes 

time, my constituents need definitive answers now. Parents caring for sick children 

or pets need answers, workers removing these products from homes need to know 

potential health risks, and local health officials need to know what environmental 

impact may occur if this drywall is dumped into landfills. Though results which 

have been released and interim remediation protocol are great leaps, I must stress 

the importance of a final solution. 

In closing, I believe that the scope of this problem is huge because it touches on 

so many different stakeholders. The first thought is on the impact to homeowners 

and renters, as it should be for a health risk of this nature. However, medical professionals and veterinarians are also dealing with this issue as families report 

health problems. The possible public safety impact also draws in fire marshals, construction workers, and environmental inspectors. So this defective product is not 

just a concern for homebuilders or homeowners, but is a concern for many other professions in both the public and private sectors. That is why the testing of this hazardous material is so important—we must ensure that there is a timely and effective Federal response in cooperation with local health authorities. I look forward to 

working closely with my colleagues to support additional efforts to address this critical matter facing our homeowners. 

I thank the Chairman and ask that a full copy of my statement appear in the 

record. 

SUBCOMMITTEE RECESS

Senator DURBIN. And this meeting of the subcommittee stands in 

recess. 

[Whereupon, at 3:26 p.m., Wednesday, April 14, the subcommittee was recessed, to reconvene subject to the call of the 

Chair.] 

(141) 

FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 

YEAR 2011 

WEDNESDAY, APRIL 28, 2010 

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

The subcommittee met at 2:36 p.m., in room SD–138, Dirksen 

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

Present: Senator Durbin, Lautenberg, Collins, Bond, and Cochran. 

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 

hearing and apologize for being a few minutes late. 

This is a hearing to consider the fiscal year 2011 funding request 

of two of our most important Federal regulatory agencies, the Commodity Futures Trading Commission (CFTC) and the Securities 

and Exchange Commission (SEC). 

I am happy to welcome my colleague, a little tired I am sure 

from yesterday, Senator Susan Collins of Maine, who is my ranking 

Republican on this subcommittee, my friend. We have worked together on many aspects of many different laws over the years, and 

this is a very important one. 

We will have other colleagues who will join us during the course 

of the hearing. 

I want to welcome Gary Gensler, Chairman of the Commodity 

Futures Trading Commission, and after his testimony, Mary 

Schapiro, Chairman of the Securities and Exchange Commission. 

Both Chairmen have invested countless hours in helping to craft 

a more reliable regulatory foundation to guide us in the future. 

These two agencies occupy pivotal positions at the forefront of stimulating and sustaining economic growth. 

When this subcommittee was created and started, I insisted that 

it bring these two agencies together into one Appropriations subcommittee because they parallel one another in their regulatory responsibilities and I felt that the ancient separations no longer applied, that they really should be considered as a tandem operation 

to bring confidence to important marketplaces in America. And I 
142 

think the President has chosen well in the two people who guide 

these agencies today. 

The SEC, of course, is responsible for maintaining orderly and efficient stock and securities markets and conducting day-to-day 

oversight of major market participants. 

The Commodity Futures Trading Commission, well known to me, 

is an agency that also carries out market surveillance, compliance, 

and enforcement programs in the futures arena, very important to 

our Nation and certainly to the city of Chicago and the State of Illinois. 

This subcommittee has an oversight responsibility over both of 

these agencies. We are now debating whether or not any committee 

like the Appropriations Committee should have oversight over 

these two agencies. I believe sincerely that we should. We have 

dramatically increased the resources and personnel at both of these 

agencies, and I hope we will continue that trend because their responsibilities are growing and we have to provide them the people 

and the technology to meet that challenge. But as we provide these 

resources, we also need to provide oversight. No agency that comes 

before this Government should be above oversight and review. That 

is why this subcommittee will continue to work diligently to exercise its oversight responsibility. There are some who question that, 

but I feel very strongly that not only will these agencies receive resources but they will be held accountable for the way they use 

these resources and spend them. 

I will not go into detail here about the money that has been allocated so far to both of these agencies. We will get into that in the 

course of questioning. 

I would like to, at this point, give my colleague, Senator Collins, 

an opportunity to make an opening statement before Mr. Gensler 

testifies. 

STATEMENT OF SENATOR SUSAN COLLINS

Senator COLLINS. Thank you, Mr. Chairman. 

Mr. Chairman, let me begin by associating myself with your comments, in fact, with all of your comments. I know that both of us 

share such a commitment to providing these two important consumer agencies with the resources that they need, but like you, I 

also believe in effective congressional oversight. And if we essentially put the budgets of these two agencies off budget, if we allow 

them to avoid the annual appropriations process, I believe congressional oversight and accountability will suffer. 

Therefore, I am going to try to ensure that the financial reform 

bill that passes—and eventually a financial reform bill will pass— 

does not take these agencies—and particularly it has been proposed 

for the SEC—outside of the annual appropriations process. I think 

it is so important. 

And I would note to the two Chairmen that we have before us 

today that this subcommittee has been extremely responsive to concerns for more resources. We want to reverse the years when you 

had insufficient staff to do effective enforcement. Indeed, as we 

begin to review your budget requests for this year, we should take 

note of the significant funding increases that our subcommittee 

provided for your agencies last year. In the case of the SEC, we 
143 

went above the President’s budget request. We gave an increase of 

nearly $159 million over the previous fiscal year; in the case of the 

CFTC, an increase of $23 million over the previous year. 

I have been pushing very hard to make sure that you not only 

have the levels of staffing that you need, but you have the skilled 

staff that you need. In fact, I have a feeling that the two chairs are 

competing for skilled staff in many ways, for the attorneys, the experts, the accountants that you need. 

The roles that you are playing are so important. 

I will say that I am very disturbed by the recent press reports 

that senior SEC staff were looking at pornography at work instead 

of focusing on securities fraud. That behavior is despicable at any 

time, but it appears to have occurred during the height of the financial crisis and that makes it even more inexplicable. 

I look forward to discussing a lot of the important issues in financial reform with our witnesses today. 

Again, thank you, Mr. Chairman, for your leadership in this 

area. 

Senator DURBIN. Thank you, Senator Collins. 

Senator Bond, unless you have an opening statement, I am going 

to recognize Chairman Gensler, but you are going to be recognized 

if you do. 

STATEMENT OF SENATOR CHRISTOPHER S. BOND

Senator BOND. Let me state very briefly because I do have a 

question or two for the Chairman. We welcome him here. 

Everybody is talking about the financial regulatory system and 

the changes. In the heartland I am from, we hear and understand 

that Wall Street provides critical financial support. We also understand that the changes to the system are necessary on Wall Street, 

but if they alter significantly the way people do business back 

home, we want to make sure reform is done right. 

The derivatives, yes. Some of the derivatives really need to be 

regulated. But a lot of the small businesses back home are in commodities hedging where the contracts pose no systemic risk, and 

lumping these into risky derivatives trading, as far as I am concerned, makes no sense. These are not speculative contracts. They 

are contracts between parties who operate normally. And to be 

blunt, if that goes through, I am afraid that this will entail higher 

costs for energy production, for transportation, particularly for 

farmers. 

So I would like to ask you about that and appreciate the chance 

to raise that, Mr. Chairman. 

Senator DURBIN. Thank you very much, Senator Bond. 

Let us let Mr. Gensler give his opening statement, and then we 

will pose some questions. Please proceed. 

SUMMARY STATEMENT OF HON. GARY GENSLER

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

Collins, and Senator Bond. I thank you for inviting me here to testify on behalf of the Commodity Futures Trading Commission. I am 

also honored to be here with Chairman Schapiro. Mary and I work 

very closely on many things. I remember last year we were at the 
144 

table together, and I appreciated that as well because she took 

more questions than me. 

But I guess this year I’m at the table alone. 

With the help of this subcommittee, the CFTC has risen to staffing levels of 600 people. This is roughly where we were in the 

1990s, but it is with your help that we came back from about 440 

people just 21⁄2 or 3 years ago. We do believe, to fulfill our mission 

and protect the American public and promote transparency in markets, we need 745 people. We also need to get a bit more in our 

technology budget. 

The CFTC, as you know, ensures that futures exchanges and the 

clearinghouses that we oversee work to lower risk to the public and 

increase transparency. We also oversee all of the intermediaries or 

the dealers in these markets as well. 

Though our staffing level is only slightly higher than it was 10 

years ago, futures trading volume—and I think I have a chart over 

here, if I might. The blue is the trading volume in this period of 

time in the 10 years since 1999. And as you can see, our staff actually shrunk and we are coming back. 

Now, one might look at this and say that is productivity, but just 

imagine a city with police officers that has grown five-fold. You 

would not really want to have the police force shrink because you 

cannot investigate cases. You cannot protect the public. It is the 

same thing really in an agency like ours. We are like that police 

force that shrank while the city grew five-fold. 

But with the help of this subcommittee, we have turned the corner. We have come back to, as I said, where we were in the 1900s. 
145 

And this increased funding, if I can just tell you what we have 

been able to do with it, but why we think we need some more. 

First, we have been able to significantly increase our Enforcement Division. That Enforcement Division by the end of this year 

will be about 170 people. We think we need to get to 200 people 

however. 

Second, we have embarked—we have just started—on a program 

to do automated surveillance. We have hundreds of thousands of 

trades that come in to us a day. We see all those trades. That is 

very good and the exchanges see them. But we want to automate 

the surveillance of those and bring 21st century computing power 

to the American public. 

Third, we have also implemented the authorities that you and 

others in Congress granted us under the farm bill in 2008. That 

was to bring enhanced regulation to the markets and put out rules. 

We have proposed rules on position limits. We have proposed rules 

on foreign exchange. We are planning to put out rules on collocation in the near future. 

But even with these recent increases, we need more. The market 

participants have technology now that we have to stay up with, 

and that is the thought. 

So starting in 2010, we started a multiyear project to automate 

our surveillance. It is going to take us several years, and we have 

included that in the numbers. 

Second, we do need staffing levels and resources to conduct annual reviews. When I got to the CFTC, I said are we like the bank 

examiners. Are we inside the banks every year? And I found out 

actually because we had shrunk, that we were not inside the exchanges and inside the clearinghouses every year just to do what 

is called a rule enforcement review. We think that we really need 

to be there every year and work with the exchanges, work with the 

clearinghouses to do that. 

Third, our enforcement staff. We really do feel we need to get up 

to 200. Our financial crisis exposed more fraudulent schemes that 

require extensive staff resources. Manipulation cases particularly 

can take up to 2 to 3 years, and what Doug is putting up for me 

is just our overall funding request. And then I think my time will 

be up. 

But our overall funding, which you helped us get to, is $169 million, on the left. And what we are asking for in 2011 is $216 million, or 745 full-time equivalents (FTEs). Much of that is to keep 

current services. We have taken out some more space because of 

the growth. Of course, there will be a cost-of-living increase and 

technology. But in addition to that, if Congress were to move forward, as I hope in the next few days that the Senate will—I was 

encouraged, Senator Collins, by what you said on that. But if the 

Senate takes up the full debate on derivatives reform, the SEC and 

CFTC will have a lot of additional responsibilities and authorities. 

The over-the-counter derivatives marketplace is 8 to 10 times the 

size of the on-exchange derivatives market measured in notional 

amount. I do not want to frighten you. It is a smaller number of 

transactions. 
146 

PREPARED STATEMENT

The President was good enough to include a $45 million request 

that will get us part-way there. We think in 2011, we will need 

somewhere on the order of 240 more people and $18 million more 

in technology to get started on the derivatives oversight. And I 

know that Chair Schapiro will have some of those numbers as well, 

but the thought is for 2011, it may be a conditional appropriation 

or if the derivatives reform were to go through, maybe you would 

include it in the whole appropriations package. 

With that, I would be glad to take any questions. 

[The statement follows:] 

PREPARED STATEMENT OF GARY GENSLER

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

Subcommittee. I am pleased to testify on behalf of the Commodity Futures Trading 

Commission (CFTC), and I thank you for the opportunity to discuss issues related 

to the Commission’s 2011 budget. 

In the fall of 2008, the financial system and the financial regulatory system failed. 

While more than 1 year has passed and the system appears to have stabilized, we 

cannot relent in our mission to vigorously implement our mandate to protect the 

public from fraud, manipulation and other abuses in the commodity markets. I 

would like to express my gratitude to Congress for the recent increases in appropriations that now permit the Commission to address longstanding regulatory and 

oversight weaknesses. The CFTC, however, requires additional resources to hire 

staff with new competencies and skill sets and to ensure our technological infrastructure and systems keep pace with the industry we regulate. These improvements are essential to promoting transparency and integrity in the marketplace. 

Only through strong, intelligent regulation can we fully protect the American people 

and keep our economy strong. 

CFTC REGULATORY REGIME

Before I discuss the President’s budget request for the CFTC, I will take a moment to discuss the agency’s oversight of the futures markets. Futures have traded 

since approximately the Civil War, when grain merchants came together and created the new marketplace. It took nearly 60 years and the Great Depression until 

President Franklin Roosevelt and the Congress regulated the futures markets. 

The CFTC ensures that futures and commodity options exchanges have procedures to protect market participants and ensure fair and orderly trading, free from 

fraud, manipulation and other abuses. Exchanges are where buyers and sellers meet 

and enter into a transaction. The CFTC also oversees clearinghouses, which enter 

the picture only after two counterparties enter into the transaction. Clearinghouses 

act as middlemen between the two parties and take on the risk that one 

counterparty to the trade may fail to meet its obligations under the contract for the 

duration of the contract. Centralized clearing has helped lower risk to the markets 

for decades in both calm markets and in the stormiest of markets, such as during 

the 2008 financial crisis. 

The CFTC has wide-ranging transparency efforts designed to provide as much information about commodity futures markets and trading to the American public as 

possible under current law. The agency also has broad surveillance powers to police 

the markets for fraud, manipulation and other abuses. 

THE BUDGET

The President’s budget proposes that $216 million be appropriated for the Commission for fiscal year 2011 to remain available until expended through fiscal year 

2012. 
147 

This amount would be for the agency to perform its duties under current statutory 

direction. In addition, the budget proposes that $45 million be appropriated to be 

available through fiscal year 2012 contingent upon the enactment of authorizing legislation of new or enhanced financial regulation activities of the Commission. 

Ten years ago, the CFTC was near its peak staffing level at 567 employees, but 

shrunk by 20 percent over the subsequent eight years before hitting a historic low 

of 437. Thanks to increased funding from Congress, the CFTC now has almost 600 

staff on board, which is a net increase of 100 staff over were we stood a year ago. 
148 

All Commission programs: technology, market and intermediary oversight, enforcement, economic, legal and risk analysis have benefited from increased staff resources. Still, merely raising our staffing levels to the same as a decade ago will 

not be enough to adequately fulfill the agency’s statutory mandate. In the last 10 

years, futures trading volume increased almost five-fold. 

The number of actively traded futures and options contracts increased seven-fold, 

and many of these have become considerably more complex in nature. 
149 

We also moved from an environment with open-outcry pit trading to highly sophisticated electronic markets. What was once a group of regional domestic markets 

is now a global marketplace. What was once just a $500 billion business has grown 

to a $33 trillion industry. In short, the Commission requires funds to hire and retain highly trained professionals and equip them with information technologies that 

are as sophisticated as the expanding markets they we oversee. 

Despite rapid advances in technology and the increased size and number of regulated futures markets, funding for the CFTC has lagged behind the growth of the 

markets. 
150 

While market participants have the technology to automate their trading, we do 

not yet have the resources to employ modern technology to automate our surveillance. Further, the CFTC still does not have the staffing levels or the resources to 

conduct regular examinations of market intermediaries, exchanges and clearinghouses. Until additional staff resources are acquired we can conduct those examinations only periodically and have no choice but to leave routine examinations of intermediaries to self-regulatory organizations. The CFTC needs additional staff, with 

new expertise to conduct yearly examinations of the registrants we regulate. 

For these reasons, it is appropriate for our staffing levels and our technology to 

be bolstered to meet the new financial realities of the day. As such, the CFTC’s 

Budget and Performance Estimate for fiscal year 2011, for existing statutory authorities, would increase the agency’s funding by $47.2 million to $216 million and 

would augment agency staff by 95 FTE to a total of 745 FTE. 

The requested funding increase to cover current statutory authorities includes resources to accomplish the following goals: 

Updating the Commission’s Surveillance and Technology Programs.—The Commission requires additional resources to replace legacy surveillance technology with 

21st Century computers and software. Significant changes in the markets demand 

new systems capable of efficiently receiving and managing massive amounts of raw 

data and converting it to useful information for analysis by skilled market experts, 

economists and technologists. For example, existing Commission surveillance systems annually process more than one billion transactions to capture mission-critical 

data. Recent Commission initiatives to promote transparency of market data reveal 

the need for a substantial investment in systems development. 

The timely reporting of quality and meaningful market information is not possible 

with current legacy systems. Integration of two legacy systems, one with position 

data and one with trade data, is vital to building necessary functionality to capture 
151 

more detailed data by trader, account ownership, inter-day transactions and intraday transactions across all markets. 

Upgraded systems and analytical tools, such as market compliance detection and 

alert software, together with new staff competencies and skill sets, will increase the 

staff’s efficiency and ability to monitor the markets and provide better information 

about futures and options trading to the American public. Market transparency is 

crucial to public trust and confidence in the price discovery and risk management 

functions of the futures and option markets. In addition, increased transparency, sophisticated use of automation and a heightened level of oversight will foster market 

compliance and integrity and enable the CFTC to keep pace with a rapidly evolving 

industry. 

Strengthening the Commission’s Enforcement Program.—The CFTC should be adequately resourced to vigorously investigate and litigate complex market manipulation and trade-practice violations. Properly functioning markets must be free from 

fraud, manipulation and other abuses to ensure their integrity in setting prices and 

offsetting risk. A robust Enforcement program will foster regulatory compliance in 

the marketplace, protecting the American public and the marketplace. Adequate 

legal staff is necessary to act swiftly to investigate and prosecute fraudulent acts, 

such as the rash of Ponzi schemes uncovered during the recent market downturn. 

Rigorously Exercising Existing Authorities to Ensure Market Integrity.—Additional 

economic and legal staff will enable the CFTC to conduct mandatory annual reviews 

of all contracts listed on exempt commercial markets (ECMs) to determine if they 

are significant price discovery contracts (SPDCs). Such contracts must be reviewed 

to determine whether the ECM should be subject to statutory Core Principles and 

Commission’s regulations. These and other new and increasingly diverse products 

add to the scope and complexity of products staff must review and monitor to ensure 

the integrity of the marketplace. 

Initiating Major Reviews of Existing Programs.—The Commission seeks additional 

resources to initiate major programmatic reviews of existing programs; expand development of the Commission’s continuity of operations program (COOP); increase 

public and consumer education and outreach; implement the strategic plan; improve 

performance metrics; and enhance the Commission’s equal employment opportunity 

program. The Commission is committed to creating a diverse pool of qualified candidates. 

Continuing Current Service Level.—The CFTC requires additional resources to 

provide a continuation of the fiscal year 2010 current service level into fiscal year 

2011. This includes annual merit based compensation adjustments for staff, lease 

of office space, utilities and communications, printing, supplies, capital equipment 

and fixed equipment. 

Specifically, the funding will be allocated to increase staffing levels in the following divisions: 

Division of Enforcement.—The Commission’s Enforcement program is on track to 

reach a staff level of more than 170 by the end of this fiscal year. This is a significant program turnaround from an all-time low of 109 in fiscal year 2008. Nevertheless, a staff of 170 may be below what is needed to address the current challenges 

brought by the recent financial crisis. Our goal for fiscal year 2011 is to have an 

Enforcement staff of 200, including strategic plans to double the Enforcement staff 

in the Kansas City office. In addition, the Commission intends to augment the enforcement staff with improved litigation and forensics support technologies, such as 

the e-Law system. Use of the e-Law system improved productivity and has permitted the Commission to pursue resource-intensive investigations and litigation involving manipulation. It also has improved our ability to implement our new Farm 

Bill authorities in the over-the-counter forex futures market. 

Division of Market Oversight.—The rapid changes occurring in the futures markets over the last decade have brought new challenges to the Commission’s Division 

of Market Oversight (DMO). DMO now needs additional experienced professional 

staff to actively monitor exchanges to ensure compliance with CFTC regulations; 

keep a close eye for signs of manipulation or congestion in the marketplace and decide how to best address market threats; and ensure that traders do not exceed Federal position limits. Thus, the Commission seeks to increase DMO’s staff from 139 

in fiscal year 2010 to 168 in fiscal year 2011. 

Specifically, DMO requires additional highly skilled economists, investigators, attorneys and statisticians so that: (1) position data may be analyzed quickly and 

thoroughly; (2) exchange applications and rule changes may be reviewed efficiently 

and comprehensively to ensure compliance with Core Principles and CFTC rules 

and policies; (3) exchange self-regulatory programs may be examined on an on-going 

annual basis with regard to trade practice oversight, market surveillance and compliance with disciplinary, audit trail and record-keeping regulations; (4) comments 
152 

related to a proposed energy position limits rulemaking, proposed significant price 

discovery contract determinations and other proposed rulemakings and industry filings can be comprehensively reviewed and summarized; and (5) proposed 

rulemakings and determinations can be effectively implemented should the Commission approve them. 

Division of Clearing and Intermediary Oversight.—Additional resources would 

allow the Commission to perform regular and direct examinations of registrants and 

more frequently assess compliance with Commission regulations. 

In the case of intermediaries, the Commission requires additional resources to directly assess compliance instead of relying on designated self-regulatory organizations (DSROs). The frequency of the reviews will increase to once a year from approximately once every 3 years. New staff will permit the review annually of all derivatives clearing organizations (DCOs) and the audit and financial surveillance programs of each DSRO ensuring ongoing rather than intermittent oversight. The Commission seeks to increase the Division of Clearing and Intermediary Oversight staff 

from 113 in fiscal year 2010 to 120 in fiscal year 2011. 

Offices of the Chairman and the Commissioners.—The Offices of the Chairman 

and the Commissioners require professional, legal and economic expertise as they 

undertake a number of high priority programmatic initiatives, including: (1) subject 

to enactment of new authorities, regulation of derivatives markets and regulatory 

changes to protect the American public from systemic financial risks; (2) regulatory 

coordination with other agencies such as the Securities and Exchange Commission 

(SEC) and Federal Energy Regulatory Commission (FERC); (3) promoting market 

transparency; (4) promoting transparency on the Commission’s website; (5) regulation of energy markets—especially with regard to position limits and the Commission’s review of significant price discovery contracts; (6) increasing frequency of reviews and audits of Commission registrants; and (7) technology modernization, resource justification and program performance. The Commission proposes to bolster 

these offices from 35 staff in fiscal year 2010 to 47 staff in fiscal year 2011. 

Office of the Chief Economist.—The CFTC’s Office of the Chief Economist (OCE) 

conducts research on major economic issues related to the futures and options markets; participates in the development of Commission rulemakings; provides expert 

economic support and advice to other CFTC offices; conducts special studies and 

evaluations; and participates in the in-house training of staff on matters related to 

futures, options, swaps and risk management. OCE requires additional economists 

to review and analyze new market structures and off-exchange derivative instruments. OCE also needs additional resources to review and analyze risk management 

models supportive of the Commission’s enforcement and surveillance programs. The 

Commission proposes to increase OCE staff from 13 in fiscal year 2010 to 17 in fiscal year 2011. 

Enterprise Risk Management Office.—The budget proposes a new Enterprise Risk 

Management subprogram, consisting of three staff, to focus on proactively developing and employing methods and processes to manage risks that may be obstacles 

to the discharge of the Commission’s responsibilities. The staff will identify plausible risks posed by current and future events or circumstances that may affect the 

Commission’s ability to respond effectively. Risks will be assessed in terms of the 

likelihood and magnitude of impact. The program will determine an appropriate response strategy and monitor outcomes. 

Office of the Executive Director.—The budget requests additional staff within the 

Office of the Executive Director to establish a Commission strategic and operational 

planning and evaluation function, the first such permanent resource. The additional 

two staff members will assist the Commission’s programs in establishing metrics to 

track, monitor and evaluate program results, outcomes and goal achievement to ensure the effective and efficient allocation of resources. Adequate staff in the office 

is needed to ensure a sufficient level of human capital expertise focusing on employee development, recruitment and outreach, leadership, management training 

and employee relations. The Commission is mindful of the need to effectively manage staff resources to develop and sustain a professional workforce capable of keeping pace with our growing regulatory responsibilities. 

Office of International Affairs.—The budget requests an additional staff member 

in the Office of International Affairs, which coordinates the Commission’s non-enforcement related international activities, represents the Commission in international organizations such as the International Organization of Securities Commissions (IOSCO), coordinates Commission policy as it relates to U.S. Treasury global 

initiatives and provides technical assistance to foreign market authorities. The financial crisis has heightened the need for international cooperation among regulators, and an additional staff member is required to meet the mission critical responsibilities of the office. 
153 

Office of Proceedings.—The Office of Proceedings is responsible for providing an 

inexpensive, impartial and expeditious forum for handling customer complaints 

against persons or firms registered under the Commodity Exchange Act. The Commission requires one additional staff to ensure expeditious processing of complaints. 

REGULATORY REFORM

In addition to implementing the authorities established in the Commodity Exchange Act, the CFTC also is working with Congress to bring comprehensive regulation to the over-the-counter derivatives marketplace. The Commission’s budget request includes an additional $45,000,000 and 119 full-time equivalent employees for 

fiscal year 2011 to begin implementation of the Administration’s comprehensive proposal for financial regulatory reform. As proposed, the request is contingent on Congressional enactment of legislation giving the Commission new authorities. The 

Commission’s fiscal year 2012 total (current and proposed new authorities related 

to financial regulatory reform) staff requirement is estimated to be approximately 

1,000 FTE. The requested funds will permit Commission implementation of new responsibilities under consideration by Congress, such as: 

—Requiring swap dealers and major swap participants to register and come under 

comprehensive regulation, including capital standards, margin requirements, 

business conduct standards and recordkeeping and reporting requirements; 

—Requiring dealers and major swap participants to use transparent trading 

venues for their standardized swaps; 

—Ensuring that dealers and major swap participants bring their clearable swaps 

into central clearinghouses; and 

—Providing the CFTC with authority to impose aggregate position limits including in the OTC derivatives markets. 

Specifically, the Commission’s fiscal year 2011 budget request for regulatory reform would be allocated as follows: 41 additional staff for Market Oversight; 30 additional staff for Clearing and Intermediary Oversight and Risk Surveillance; 18 additional staff for Enforcement; 15 additional staff for Information Technology; eight 

additional staff for General Counsel; five additional staff for Human Resources and 

Management Operations; one additional staff for the Chief Economist; and one additional staff for International Affairs. 

CLOSING

The staff of the CFTC is a talented and dedicated group of public servants. The 

financial crisis and the significant increase in trade volume, market complexity and 

globalization require that additional resources be committed to the protection of 

American taxpayers. For all of these reasons, it is necessary and appropriate that 

Commission staffing levels and technology be bolstered to address the new financial 

realities of the day. 

In short, despite the recent increase in funding, the Commission remains an underfunded agency. With additional resources, we will be more able to police the market, promote market integrity and protect the public from fraud, manipulation and 

other abuses. 

I thank you for inviting me to testify today. I will be happy to answer any questions you may have. 

Past 2004–2008 Present 2009–2010 Future 

AUTOMATING MARKET SURVEILLANCE 

Critical IT systems for the surveillance 

of positions and trading practices 

were not robust. They have not been 

upgraded to reflect the vast increase 

in volume and complexity of the 

markets.

Development of new staff skill sets 

with access data query, analysis, algorithmic models and reporting tools 

that alert staff to the conditions for 

potential abusive trading or misconduct.

Robust, linked and fully integrated IT 

surveillance systems that produce 

the surveillance reports needed to 

meet the analytical needs of our 

professional staff and the transparency needs of the public. 
154 

Past 2004–2008 Present 2009–2010 Future 

IMPROVING MARKET TRANSPARENCY 

Lack of market transparency stemming 

from lack of reliable data about the 

size or effect of influential investor 

groups and potential harm posed by 

a commodity asset bubble.

New staff with new skill sets have improved data collection and reporting 

on the size of positions held by 

large traders.

New public reports include: 

Disaggregated Commitment of 

Trader Reports.

Supplemental Report on Commodity Index Traders.

Swap Dealer Reports. 

Collect and report data from swaps 

dealers and index investors. Release 

data on commodity index investment 

on a monthly basis rather than 

quarterly. 

ENFORCEMENT 

The Commission’s enforcement program 

reached an all-time low of 109 as 

recently as in fiscal year 2008. The 

financial crisis revealed fraudulent 

schemes that could only stay afloat 

during periods of rising asset values. The downturn exposed more 

leads than the Commission can 

thoroughly and effectively investigate. This is true both as it relates 

to fraud and Ponzi schemes as well 

as staff-intensive manipulation investigations.

Appropriations increases have permitted the Commission to enhance 

Enforcement staffing and resources 

committed.

Staffing increased by more than 

50 percent in 2 years.

Leads and investigations increased by more than 100 percent over 2 years.

New investigations will exceed 

250, which is the highest level 

in 10 years.

The Enforcement division filed 31 

civil actions involving Ponzi 

type schemes in fiscal year 

2009, which was more than 

twice the amount in fiscal year 

2008.

New tools and competencies are 

being developed to address 

and identify trends, analyze 

data and explore resources 

previously unavailable to the 

Commission.

Future initiatives include: 

Pursuing all potential fraud cases 

reported to the Commission; 

Keeping pace with the proliferation in trading and the emergence of new electronic trading 

facilities. Effective enforcement 

requires looking beyond the exchanges to multi-level platforms and bilateral trading, 

which is very resource intensive; 

Enhancing the Commission’s ability to respond efficiently to 

major market movement or 

major collapse of an entity 

without adversely affecting 

other on-going investigations 

and litigation; and 

Rebuilding bench strength and 

succession planning. 

INCREASED AUDIT OVERSIGHT 

The Commission does not conduct: annual compliance audits of every designated contract market (DCM). Audits occur every 3 years, on average; 

annual compliance audits of every 

derivatives clearing organization 

(DCO). Periodic reviews on selected 

core principles occur every 3 years; 

or routine examinations of CPOs, 

CTAs, & FCMs, which are currently 

performed by self regulatory organizations.

The Commission currently assesses or 

conducts: financial surveillance programs of SROs; certain regulatory 

functions performed by the NFA; 

other self-regulatory organizations 

such as DCM SRO functions; and 

examinations of FCMs for compliance with the CEA and Commission 

regulations.

Future initiatives include: 

annual reviews of DCOs, which is 

critical as the volume of positions cleared by DCOs and the 

complexity of positions grow; 

annual compliance reviews of 

DCMs; 

examination of the books and 

records of additional FCMs on 

a ‘‘for-cause’’ basis and expand the reviews of certain 

compliance areas, such as 

sales practices and foreign 

currency trading; and 

additional examinations of CPOs 

and other registrants to ensure 

a better understanding of 

firms’ operations, trading 

strategies, back office procedures and other factors integral to firms’ compliance. 
155 
156 

TECHNOLOGY

Senator DURBIN. Thanks a lot, Mr. Chairman. And there are so 

many questions to ask, and I know we will not likely have time to 

ask all of them today. 

But I do want to reiterate what was said by Senator Collins. 

There are substantially greater investments in the resources that 

your agency and the SEC have to work with. I think it calls for 

substantially more oversight from our side of the table because 

there is a certain level of absorption which you can add to your 

staff in a professional manner and increase the workload. And then 

I have found, in the time that I have been around Congress, there 

reaches a tipping point where perhaps they cannot be absorbed effectively. There should be a committee of Congress watching this, 

following this, making certain that we are moving toward the same 

goal and that you are achieving that goal. 

Let me ask you in a specific way about technology. My impression, having worked with Senator Collins on this issue since 9/11 

when we were both on the Homeland Security Committee, is that 

the Federal Government is like the last to pick up on new technology. We create rules and obstacles for purchasing and acquisition and all sorts of security questions, and we fall far behind the 

private sector. Do you feel that your technology improvements parallel or are consistent with the technology available in the private 

sector for similar functions? 

Mr. GENSLER. Well, first, let me say I welcome the oversight of 

this subcommittee and our authorizing committee as well and 

working with Marianne and Dale and all the staffs that are with 

you. 

In terms of technology, we have had, with your help, an ability 

to get the data resources. We can actually take in all the transactions on the next day. We can take in all the positions at the end 

of the day. That is very helpful. We also rely on the exchanges because they have a lot of the technology as well. 

But what we are trying to build is 21st century software to actually do automated surveillance—consider it sort of flags and alerts 

so that our staff can then see whether it is a wash sale, whether 

it is a position limit concern, and then go back to the exchanges, 

work to see if there is a violation, work with the Division of Enforcement if something has to be followed up on. With hundreds of 

thousands of trades a day, we need to do that. 

I think, Senator, we are probably not there yet. I mean, think of 

algorithmic trading experts—we need to get some of that expertise 

into Government. 

Senator DURBIN. What I am asking you, is there any built-in obstacles to your acquiring the technology that you believe is available and that you need? 

Mr. GENSLER. The good news is we have the legal abilities. We 

do it through procurement laws and so forth, but we do have the 

legal ability to acquire it. It is usually just resources. In the past, 

we actually did not even have the hardware to store all the data. 

We have taken care of the storage side, but now we have to build 

some of that software. 
157 

Senator DURBIN. Is the answer no? I am asking if there are obstacles to your—— 

Mr. GENSLER. I am not aware of obstacles other than dollars and 

then the human time to actually do this. 

TRANSPARENCY

Senator DURBIN. One other aspect of this is how much of this is 

being made available to the public to review your work and the activities that are not proprietary, obviously, of the exchanges which 

you monitor. 

Mr. GENSLER. Well, there is a great deal of information that we 

make available in the aggregate data, and then Senator Bond 

asked about derivatives reform. If derivatives reform were to move 

forward, there would be a lot of information about that market as 

well on real-time reporting. I think that answers your question. 

Senator DURBIN. I am just wondering if there is more and more 

of this information that is being made available to the public. 

Mr. GENSLER. Well, we have had success in the last year. We 

have actually made more information available about index investments in the market. For years, we have put out reports on every 

Friday about the markets, and we have broken that down between 

commercial and noncommercial traders. Now people can see what 

swap dealers and money managers or hedge funds are doing in the 

market in aggregate. Again, we do not break out the individuals. 

Senator DURBIN. I see. 

I am going to yield now to Senator Collins. 

Senator COLLINS. Thank you, Mr. Chairman. 

ENERGY POSITION LIMITS

Chairman Gensler, as you know, I have had a great interest in 

seeing the Commission establish position limits to apply to the energy markets. Senator Lieberman and I held hearings looking at 

the price spikes in the energy markets a couple of years ago, and 

position limits can potentially help prevent those kinds of abrupt 

price movements or market disruptions. Could you update us on 

what is being done by the Commission to establish position limits 

for energy markets? 

Mr. GENSLER. I thank you, Senator, for your leadership on this 

issue. 

We published proposed rules in January and asked for public 

comment—that comment period actually closed yesterday—to reestablish position limits. There were position limits in the energy 

markets with the exchanges through 2001. So we were looking to 

possibly reestablish them. We have over 8,000 comments. So what 

we will do as an agency is review those—the staff is just embarking on that—and then bring those recommendations and review up 

to the five Commissioners and we will see how best to proceed 

based on those recommendations. 

OVER THE COUNTER DERIVATIVES LEGISLATION

Senator COLLINS. The second issue that I want to talk to you 

about in this first round has to do with the regulation of derivatives. This is such a complex and important issue. We clearly need 
158 

more transparency. One of the debates, however, is the extent to 

which end-user manufacturers or grocery stores, like Hannaford’s 

in my State, should face increased costs for investing in commodities essential to their products. And they will face increased costs 

if, in fact, they have to go through the clearinghouses. 

Help us understand the debate on derivatives and whether there 

should be exemptions for end-users, whether you see the Agricultural Committee’s bill providing exemptions. There is a dispute 

over whether or not they do. Educate us a bit on this issue. 

Mr. GENSLER. Well, I thank you. 

One of the key ways to lower risk in the derivatives marketplace 

is something called a clearinghouse. They have existed since the 

1890s. They have been well regulated since the 1930s by us for exchange traded derivatives, and then there are other clearinghouses 

by the SEC. And they stand as middlemen or middlewomen, if I 

could say, between two parties. So if one of the parties fails, then 

they stand behind the contract. So that fundamentally lowers risk, 

and those clearinghouses have been very strong. 

They, by the way, have not had access to the discount window. 

I think we probably should keep it that way. We should not expand 

the safety net to them. But they stand between the two parties. 

So what we are recommending and what the bills do say is there 

would be clearing on those products that are standard enough to 

be brought into a clearinghouse. Some people think that may be 

three-quarters of the market. 

But the Senate Agriculture bill, as merged into the Senate Banking bill, will have an exemption. The exemption would be for nonfinancial entities, if I might call them commercial entities, hedgers. 

It could be Hannaford Brothers in your State or it could be some 

of the commercial entities that Senator Bond referred to. They, if 

they are hedging whether it is for corn or wheat or it is an interest 

rate or a currency they are hedging, if they are not a financial entity—now, on the other hand, if it is an insurance company or a 

bank or a hedge fund, they would have to use the clearinghouse for 

their standard product. Their customized things they could still do. 

Senator COLLINS. Thank you, Mr. Chairman. 

Senator DURBIN. Senator Bond. 

END USERS

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

Mr. Gensler, I am delighted you said they would not require an 

end-user to clear hedging. 

If a community bank had a large portfolio of loans and wanted 

to offset part of that risk by going short or buying some form of 

put, who would be the appropriate person to regulate that? Would 

it be the bank regulator? Would it be the CFTC? 

Mr. GENSLER. The bank regulator would regulate those banks. 

Senator BOND. The CFTC would not be involved in it. 

Mr. GENSLER. They would not regulate the bank. We would regulate the exchanges. If it was so standard that it was bought or sold 

on an exchange, we would regulate the exchange as we do now. 

That community bank might buy a future right now in the Chicago 

Mercantile Exchanges to hedge an interest rate. We do not regulate 
159 

the bank. We regulate just the exchanges in that example or the 

clearinghouse, of course. 

Senator BOND. So they would not have to pay a separate fee if 

they were doing that. They would pay the fees that are already 

built in through the existing exchanges? 

Mr. GENSLER. Well, I believe that is correct. That community 

bank could do a customized, tailored transaction. It might not even 

come to a clearinghouse. But if it is so standard that the clearinghouse is there, they would bring it there. 

Senator BOND. Now, do I understand that you and the Secretary 

of the Treasury should say that where there are customized transactions, two parties that have worked together have adopted a customized derivative or hedging operation where it cannot be 

cleared—do you agree that there is no reason for two parties who 

have developed a complex contract be cleared or have margin? 

Mr. GENSLER. Well, one, if it is customized, it would not be 

brought to a clearinghouse, and that is the recommendation. We 

are recommending that the swap dealers themselves, the dealers, 

the large banks be regulated, and that the banking regulators be 

able to lower risks to the American public by setting capital and 

margin requirements for those big financial houses that are the 

swap dealers themselves. But the customized transactions could 

occur and not be brought to the clearinghouses. 

MARGIN

Senator BOND. Would they have to post margins on that? 

Mr. GENSLER. What we have recommended is that the banking 

regulators, what is called prudential regulators, would have the authority to ask for those large swap dealers to either post or receive 

margin. 

Margin also protects the other parties. What we need in our society, I believe, is that the large swap dealers should be able to fail. 

The terrible place that our Secretaries of the Treasury have been, 

Republicans and Democrats alike—they sit in the office, an ornate 

office. They get all the phone calls, and they say, can I let this company fail? And one of the problems is they are saying, well, if I let 

it fail, it is going to bring down the community banking system or 

it is going to bring down the farm credit system. So part is to have 

them post margin as well. 

Senator BOND. But requiring margins, if a small bank hedges its 

risk, would it have to put up a margin or would that be up to the 

prudential regulator to determine whether it was appropriate to 

make that transaction? 

Mr. GENSLER. If it is a custom-tailored product as you say, it 

would really be up to the banking regulators to say whether the 

big swap dealer—it is the regulator regulating the swap dealer 

would have that authority if the bill were to go through Congress. 

SWAPS DEALERS

Senator BOND. If you are a major energy producer that has lots 

of contracts with a lot of—say, it is a coal or a natural gas company 

that has lots of contracts with lots of energy companies. Would 

these be major swap dealers who would be under the new regulations? 
160 

Mr. GENSLER. Senator, I think that the important thing is if they 

present themselves to the public dealing in swaps, they would be 

regulated. 

Senator BOND. Not to the public but present themselves to their 

customers. 

Mr. GENSLER. Well, what we want to guard against is the next 

AIG. We would not want to have an exemption or a loophole that 

the regulation is only regulating some swap dealers and not other 

swap dealers. Most energy companies are not swap dealers. Most 

energy companies are just hedging their own business. 

Senator BOND. That was the question, whether by doing that, 

that would fall in a major swap dealer category. 

Mr. GENSLER. I do not think most of them will. Some are swap 

dealers. Some do that. They actually have registered trading entities and so forth. 

Senator BOND. Thank you, Mr. Chairman. Thank you, Mr. 

Gensler. 

OTC MARKET SIZE

Senator DURBIN. Chairman Gensler, this whole conversation we 

are having about the future of derivatives, what will be regulated, 

what will not be regulated, what is standard, what will be custom—do you have any projection if we move into this new world 

of the volume that we would be talking about? You talked earlier 

about the number of contracts versus the size of the contracts. 

Could you give us some estimation of what we are looking at? 

Mr. GENSLER. Mr. Chairman, I wish I had. This is such a dark 

market. It is hard to estimate. But the size of the market worldwide is about $600 trillion, which is about 12 times the world economy. It is estimated about one-half of that is in the United States, 

which is about 20 times our economy. We Americans use them 

more than overseas. 

But in terms of the numbers of transactions, we do not have an 

actual estimate. It is probably not a multiple. The market we oversee now is—I think the numbers were about $34 trillion in futures. 

So you can see that is the 9 to 1 or something. But the numbers 

of transactions probably are less. The futures transactions are in 

the hundreds of thousands of trades a day. This new market is 

smaller than that in terms of numbers of trades a day, but we do 

not have an exact number. I wish I did. 

Senator DURBIN. So if we embark on this brave new world, do 

you see a demand for more staffing and more activity at your agency? 

ADDITIONAL RESOURCES NEEDED

Mr. GENSLER. I do. I mean, our best estimate—the Congressional 

Budget Office (CBO) asked us for 2011, and we forwarded these 

238 people. What the President’s budget did is said let us fund onehalf of those people, or 119, in 2011 because we would be sort of 

growing during the course of the year. And I know the Securities 

and Exchange Commission has their numbers as well. We both do 

envision that this is a really important market to the American 

public, but it means little if Congress just authorizes it and we do 

not marry it with the appropriations. 
161 

Senator DURBIN. You talked about audits. What funding level 

would allow the CFTC to perform annual reviews of every DSRO 

and derivatives clearing organization, as well as annual examinations of commodity pool operators, trading advisors, and the futures 

commission merchants. 

Mr. GENSLER. We believe, in the funding we have asked for this $216 million, that we can do much of what you just said, the annual reviews of the clearing organizations, the trading organizations, and so forth. I may have not even listened closely. Some of 

those reviews that you mentioned are actually done by the self-regulatory organizations, but the ones we do we think that is the 

level. 

STAFF EXPERTISE

Senator DURBIN. So my last question is kind of historic. When I 

first visited the Board of Trade and Mercantile Exchange over 25 

years ago, they were still clinging to their early image as protectors 

of the agriculture sector in terms of the trading that was going on 

on the floor, and they were just starting to branch out into new 

worlds of futures. 

And now I see, when I take a look at the activities that you are 

watching closely, that the financial commodity futures and option 

contracts make up approximately 79 percent of the trades that you 

regulate and other contracts like metals and energy products, 

about 13 percent. Only 8 percent can really be characterized as agricultural in nature. 

What kind of challenges does this present to your agency to have 

this kind of mix which is moving toward much different objects 

that are at the soul and heart of the futures trading markets? 

Mr. GENSLER. Well, I think you are right. It is actually a development that has happened over those 25 years. I think there is a 

uniformity and consistency of derivatives. They are all based upon 

some underlying commodity. We call a Euro dollar actually a commodity in the law. 

But what we have to do as an agency is we have experts who 

have expertise in corn and wheat. We have some other experts in 

our Division of Market Oversight that have expertise in the financial products. So as these products continue, we try to build separate expertises that have a uniform expertise around derivatives 

but then have some product expertise. This is a little bit different. 

We have problems in the wheat market still about wheat convergence. That is very different than what goes on in the Euro dollar 

market, but we build the expertise across the product sets, as we 

will have to in the future as we take on more responsibilities possibly in what is now called the swaps market. 

Senator DURBIN. Let me ask you about that. Are those going to 

be so unique by contract that they are going to put a special burden on your regulators to try to understand the real heart and nature of the transaction? 

Mr. GENSLER. Well, I think humility suggests that there is going 

to be a lot we are going to learn along the way because we have 

not as a Nation regulated these products in the past. We do not 

have the authority. But I do think, for instance, interest rate derivatives where the CFTC will take the lead—we will share a lot 
162 

with the SEC—that that has a lot of similarities to what we do 

overseeing the Euro dollar contracts for now. Of course, the commodity derivatives have a lot of similarities, but there will be 

things that we are going to be learning along the way. We will be, 

hopefully, sharing that with you. 

Senator DURBIN. Thank you. 

Senator Collins. 

Senator COLLINS. Thank you. 

PROPOSED COUNCIL OF REGULATORS

Chairman Gensler, I think you said in response to Chairman 

Durbin’s question that the futures market was something like $34 

trillion. That raises the question in my mind. Under Senator 

Dodd’s bill, is the CFTC a member of the Systemic Risk Council 

of Regulators? 

Mr. GENSLER. I believe the answer is yes. 

Senator COLLINS. Let me ask the next question. Should you be 

a member? 

Mr. GENSLER. I think so. I think so. Thank you. 

Senator COLLINS. And if you are not a member of the council, I 

am going to offer an amendment to put the Commodity Futures 

Trading Commission Chairman on that council. I think it is really 

important that we try to be as inclusive—— 

Mr. GENSLER. The only reason I hesitated, I could not remember 

what it was called. I know there is a council. It may have different 

names in different bills. 

Senator COLLINS. It does. 

But they are in. Okay. The Chairman confirms it. 

TOO INTERCONNECTED TO FAIL

Let me ask you a question then. How do you plan to help monitor and mitigate the potential for systemic risk arising from the 

concentrations or interconnectedness of risks that are related to derivative products? 

Mr. GENSLER. Well, derivatives do weave sort of a spider’s web 

between the financial system, and one of the reasons that we have 

been fighting to lower risk for the American public is to bring the 

derivatives into clearinghouses. Clearinghouses, again, stand between buyers and sellers, and that is one of the ways that we lower 

interconnectedness. Our system today does not just have ‘‘too big 

to fail.’’ When Continental Illinois Bank—because I know it is in 

your State—that was thought years ago to be too big to fail in a 

sense, but now we have banks that are too interconnected to fail. 

If we let it go, it is going to pull down everything else. That was 

the central lesson of AIG. And tens of billions of dollars of our 

money, taxpayer—all of it went through AIG to other financial institutions. 

So I believe we really need to, hopefully, stand—there will be 

some stress and pressures. There will be amendments probably offered to have another exemption here, another exemption there. 

And I hope—I would advocate we not have those exemptions for financial entities. We have an exemption for the commercial entities, 

but hopefully, we do not for the financial entities. 
163 

TRANSPARENCY

Senator COLLINS. Could you give us an example of the kind of 

transparency that would be helpful to you that would come about 

because of moving derivative trades to a clearinghouse? Let me ask 

this in a better way. 

What would you know that you do not know now if more of the 

trades go through a clearinghouse? 

Mr. GENSLER. There are two types of transparency, one to the 

regulators and one to the public. Clearinghouses and something 

called trade repositories will give transparency to the regulators 

and we will know a lot. We will be able to—and I know the SEC 

will be able to—better enforce and police the markets for manipulation and fraud because so much can be now just transferred. We 

can currently look at wheat futures. We can look at Euro dollar futures. Somebody can just move the same trade over into an overthe-counter interest rate or a complex credit default swap. So as 

enforcement agencies, we get to follow it across to those other markets. 

But there is also public market transparency, and public market 

transparency only comes really from reporting the transactions on 

a real-time basis. And for that, every end-user, Hannaford Brothers 

and others alike, will actually benefit because transparency leads 

to lower cost, lower bid spreads. It does shift the information advantage away from Wall Street. Wall Street is not happy with the 

proposals the administration has made, but public market transparency does that. 

It also lowers risk. Remember we were all debating about toxic 

assets. The more transparency we bring, it lowers risk as well to 

the public. 

Senator COLLINS. That is very helpful. 

END USER EXEMPTION

My final question to you is one that I raised with you in my office but I want to raise for the record as well, and that is, I have 

been hearing from some home heating oil companies in Maine that 

are worried that if they have to go through clearinghouses, that 

they will jeopardize their ability to enter into contracts with their 

customers that would be fixed price contracts for the upcoming 

winter. Do you see any problems created for them in this area? 

Mr. GENSLER. I think you have heard from them because there 

have been a variety of bills, and even I as an advocate—I have advocated for no exceptions. But I think where Senator Lincoln and 

Senator Dodd and all the people that have worked on those two 

committee bills have come out, there would be an exception for 

commercial parties hedging as long as they were not financial. So 

the home heating oil companies would be exempted from having 

their transactions coming to a clearinghouse, as long as they were 

not speculating, which I do not think that is what they are doing. 

Senator COLLINS. No, they are not. 

Mr. GENSLER. So I think the bill accommodates that interest. 

Commercial entities make up maybe, on worldwide statistics, 

about 9 or 10 percent of the market. We do not know precisely 

what it is in each and every market, but the exemption that is in 
164 

the Senate Agriculture and the Senate Banking bill is a balancing 

of interests, and it has exempted that 9 or 10 percent. But it is the 

commercial enterprises like the home heating oil companies in 

Maine. 

Senator COLLINS. Thank you. 

Senator DURBIN. Senator Cochran. 

Senator COCHRAN. Mr. Chairman, thank you. 

BUDGET IMPACT OF PENDING LEGISLATION

Chairman Gensler, I am curious to know about the new authorities which you are suggesting the CFTC should have. What is the 

status of the legislative authority that you are talking about? Has 

that been enacted into law, or is it just a proposal at this point? 

Mr. GENSLER. It is a proposal. And the reason it came up here 

is, in terms of if it went through, the funding levels would be different. But right now the House of Representatives has passed a 

strong bill, but then the Senate hopefully in the next few days, you 

would tell me better. 

Senator COCHRAN. I am not the chairman anymore. You forgot 

they had an election. 

Mr. GENSLER. But I think that the Agricultural Committee and 

the Banking Committee have merged their product. They have a 

very strong derivatives portion that I believe is getting merged into 

the overall financial reform bill. I am hopeful, with Congress’ deliberations, that we will get something to the President’s desk. 

Senator COCHRAN. This has a budgetary impact, does it not? Because it is going to cost more to enforce the new authorities. I assume there will be new hires required. 

What are the other funds that you expect to be needed to be used 

for? 

Mr. GENSLER. We have estimated to the Congressional Budget 

Office that in 2011 that we would need about 240 more people and 

about $18 million more in technology budget. There is an awful lot 

of information that will be stored and will have to be assessed and 

so forth. That is included in the President’s budget request in sort 

of a conditional way if Congress were to adopt financial reform. 

Senator COCHRAN. Okay. Thank you very much. 

Mr. GENSLER. Thank you. 

Senator DURBIN. Chairman Gensler, thank you. There are plenty 

of other questions which we would like to share with you in writing 

and hope that you might be able to respond in a timely way. Other 

members of the subcommittee may have some questions. But we 

thank you for being here today and we will continue to work with 

your agency. 

Mr. GENSLER. I thank the chairman and Senator Collins. Thank 

you. 

Now you get Chairman Schapiro. Do I stay or do I leave? All 

right. Good luck, Mary. 
(165) 

SECURITIES AND EXCHANGE COMMISSION 

STATEMENT OF HON. MARY SCHAPIRO, CHAIRMAN 

Senator DURBIN. We now will hear from the Securities and Exchange Commission Chairman, Mary Schapiro, and following her 

presentation, we will proceed with question rounds of 5 minutes. 

Chairman Schapiro, thank you for joining us today. We welcome 

your staff as well. Please proceed. 

Ms. SCHAPIRO. Thank you very much, Mr. Chairman. 

Chairman Durbin, Ranking Member Collins, Senator Cochran, 

thank you for the opportunity to describe how the President’s fiscal 

year 2011 budget request would allow the SEC to better pursue our 

mission of protecting investors, regulating markets, and facilitating 

capital formation. 

When I joined the Commission only last year, we were just 

emerging from an extraordinary economic crisis. The markets were 

still trying to regain a firm footing and confidence in the institutions of Government generally—and the SEC specifically—was 

badly shaken. 

Thanks to the strong support that this subcommittee has provided, the SEC has begun to rebuild that confidence by making 

needed and significant changes to virtually every aspect of our operations. We brought in new leadership throughout the agency, 

streamlined procedures, and reformed operations. We began putting new technology in place, and we initiated one of the most significant investor-focused rulemaking agendas in decades. Our Enforcement Division undertook a top-to-bottom review, leading to a 

complete restructuring. Silos inhibiting internal communications 

were torn down. A layer of management was eliminated, freeing up 

professionals for front-line duty. And we created specialized units 

that will bring a deeper focus to critical areas such as market 

abuse and structured products. 

These efforts are already paying dividends. Thanks to the support of this subcommittee, among the highlights of my first year we 

sought more than twice as many temporary restraining orders and 

asset freezes in 2009 as in 2008. We issued well over twice as 

many formal orders of investigation. We won $540 million more in 

disgorgement orders. Penalty orders more than doubled. And we 

filed nearly 10 percent more actions overall, including nearly twice 

as many involving Ponzi schemes. 

Our Office of Compliance, Inspections, and Examinations is undergoing a similar review which we expect to yield significant restructuring and improvements. 

And to get ahead of the next financial challenge we may face, we 

created a new Division of Risk, Strategy, and Financial Innovation 

and are staffing it with people who bring us new and different perspectives and expertise. 
166 

We have made real progress, but restoring investor confidence 

and rebuilding the trustworthiness of financial institutions and 

markets will require a sustained regulatory commitment. Fiscal 

year 2011 will be a critical year in continuing our efforts to reinvigorate the Commission and its programs. The challenge we face 

grows every day. Since 2003, the number of registered investment 

advisors has increased by nearly 50 percent and their assets under 

management have grown by $12 trillion. Today we rely on fewer 

than 4,000 individuals to monitor more than 35,000 regulated entities. And yet, it was only this year that the SEC staff members returned to the level last seen in 2005, and in the intervening years 

tight budgets forced us to cut investments in new information technology by more than one-half. This subcommittee’s support has allowed us to reverse those harmful trends, and I thank you deeply 

for that. 

And the President’s fiscal year 2011 budget will allow us to continue on this new path. More staff will mean a deeper pool of institutional expertise, as we hire specialists with deep experience with 

today’s markets and products. More staff will also mean more investigations and trials and a smaller gap between the number of 

examiners and the firms they examine and greater capacity to respond to emerging trends. 

The President’s budget will also provide a much-needed $12 million increase in information technology (IT). Our top IT priority is 

completion of a new system for reviewing complaints, tips, and investigative leads provided by whistleblowers or other sources. The 

initial phase is done, creation of a single searchable database for 

existing tips and complaints. To this we will add risk analytics that 

help us quickly and efficiently identify high-value tips and search 

for trends and patterns across the data. 

We are also enhancing collection, analysis, and distribution of 

the disclosure documents filed with the Commission. This will 

allow us to monitor macro trends, search for hidden risks, and 

track systemic changes. 

We also plan to complete improvements to the case and exam 

management tools available to our enforcement and examination 

programs. While we will never match the technology available to 

the financial institutions we regulate and the big law firms we 

face, the ability to search and use the vast mountains of data we 

collect will make our team much more competitive. New technology 

will be accompanied by comprehensive training, allowing staff to 

navigate the constantly evolving financial environment they monitor. 

And in the year ahead, we will also continue our pursuit of rulemaking that looks after the interests of investors and responds to 

changes in the American financial marketplace. Key goals include 

a thorough review, already underway, of the rapidly evolving equity market structure, helping shareholders more effectively exercise their rights, and giving investors better information to make 

sound decisions regarding investments in municipal and other securities. 
167 

1The views expressed in this testimony are those of the Chairman of the Securities and Exchange Commission and do not necessarily represent the views of the President. 

PREPARED STATEMENT

I am pleased with the progress we have made, but we recognize 

that much work remains to be done to continue to restore investor 

confidence in our markets. The funding level of the President’s 

budget request is critical for us if we are to continue to improve 

our performance in an increasingly complex financial world. 

Thank you and I would be happy to answer your questions. 

[The statement follows:] 

PREPARED STATEMENT OF MARY SCHAPIRO

Chairman Durbin, Ranking Member Collins, Members of the Subcommittee: 

Thank you for the opportunity to testify today in support of the President’s fiscal 

year 2011 budget request for the Securities and Exchange Commission.1 I am grateful for the support that you and this Subcommittee have provided to the Commission. I welcome this opportunity to answer your questions and provide you with additional information on how the SEC would make effective use of the $1.258 billion 

that the President has requested for the coming fiscal year. 

When I joined the Commission early last year, we were just emerging from an 

economic crisis that threatened our financial system and the entire American economy. The markets were still trying to regain a firm footing, and confidence in the 

institutions of government generally—and the SEC specifically—was badly shaken. 

Since then, we have taken significant steps to make the SEC more vigilant, sharp, 

and responsive—and focus the agency squarely on its mission to protect investors, 

maintain orderly markets, and facilitate capital formation. We brought in new leaders across the agency. We streamlined our procedures. We worked to reform the 

ways we operate. We began modernizing our systems. We set out to regulate more 

effectively. We fully engaged in the debate on regulatory reform, and we initiated 

one of the most significant investor-focused rulemaking agendas in decades. 

While we made real progress over the past year, restoring investor confidence and 

rebuilding the trustworthiness of financial institutions and markets will require a 

sustained regulatory commitment. Fiscal year 2011 will be a critical year in our continuing efforts to reinvigorate the Commission and its programs. 

My testimony will provide an overview of the actions and initiatives that we 

began over the past year thanks to the support that this Subcommittee has provided. I will then discuss the President’s fiscal year 2011 request and the important 

work which these resources would make possible. 

NEW LEADERSHIP, ORGANIZATIONAL STRUCTURES, AND EXPERTISE

Without a doubt, the most critical element to success in improving the Commission’s operations is the agency’s talented and capable staff. During the past year, 

I am pleased to have been able to bring on board new senior managers who are 

playing a vital role in our efforts to transform the agency. 

We brought in new leadership to run the agency’s four largest operating units— 

the Division of Enforcement, the Office of Compliance Inspections and Examinations, the Division of Corporation Finance, and the Division of Trading and Markets. 

We also selected a new General Counsel, Chief Accountant, head of the Office of Investor Education and Advocacy, and directors for the New York, Miami, and Atlanta 

regional offices. The efforts of these new senior managers, together with the efforts 

of other leaders who are continuing their service, are already making the SEC a 

more agile, responsive and intelligent agency. 

This new leadership team is committed to a culture of collaboration—sharing information and sharing ideas. To encourage that culture, I established several crossfunctional teams to focus on issues such as life settlements and the development of 

a consolidated audit trail. We have begun integrating our broker-dealer and investment adviser examinations and are moving to consolidate our multi-office oversight 

of clearing agencies. 

Significantly, we’ve created and staffed a new division—the Division of Risk, 

Strategy, and Financial Innovation—to bore through the silos that for too long have 

compartmentalized and limited the impact of our institutional expertise. A principal 

lesson learned from the financial crisis is that, because today’s financial markets 

and their participants are dynamic, fast-moving, and innovative, the regulators who 
168 

oversee them must continue to improve their knowledge and skills in order to regulate effectively. The Division of Risk, Strategy, and Financial Innovation will help 

to re-focus the agency’s attention on and response to new products, trading practices, and risks. Already, this new Division has attracted renowned experts in the 

financial, economic, and legal implications of the financial innovations being crafted 

on Wall Street. 

In addition, we are working to establish a deeper reservoir of experts throughout 

the agency to conduct risk analysis, spot emerging trends and practices, and reduce 

the likelihood that a problem might grow into a more potent risk. 

We also are committed to improved training and education of agency staff in order 

to close competency gaps and expand knowledge of industry activities and trends. 

Training needs to be current, continuous, and mandatory—and it needs to equip the 

SEC’s workforce with the tools they need to enforce the Federal securities laws and 

protect investors. 

Last year, we launched an effort to ensure that employees throughout the agency 

receive timely and relevant training which will allow them to fulfill the agency’s 

mission. This agency-wide initiative includes a new integrated structure to identify 

training needs and to approve professional education and leadership development 

programs. The new training initiative also seeks to improve collaboration with other 

regulators and has enabled hundreds of employees to take advantage of external 

professional certification programs. While it will take time to fully implement all the 

components of our new training initiative, we are already seeing good results from 

this increased focus on staff development. 

REINVIGORATING THE ENFORCEMENT PROGRAM

Enforcement of the securities laws is the foundation of the SEC’s mission. Swift 

and vigorous prosecution of those who have broken the law is at the heart of the 

agency’s efforts to restore investor confidence. But in recent years, the SEC’s enforcement program had suffered under a variety of procedural, structural, and budgetary constraints. 

Over the past year, we have improved our law enforcement capabilities and sent 

a clear signal to our staff that we value toughness and speed by removing procedural roadblocks impeding their investigations. For example, we delegated to senior 

staff the authority to issue subpoenas, so investigations can be launched without the 

prior—and time-consuming—approval of the Commission. We also abolished the requirement that staff obtain Commission approval before entering into settlement 

talks involving civil monetary penalties against public issuers. 

We added a host of measures to encourage corporate insiders and others to come 

forward with evidence of wrongdoing. These new cooperation initiatives establish incentives for individuals and companies to fully and truthfully cooperate and assist 

with SEC investigations and enforcement actions, and they provide new tools to 

help investigators develop first-hand evidence to build the strongest possible cases 

as quickly as possible. 

Last year, I hired as the Director of the Enforcement Division, Robert Khuzami, 

a longtime Federal prosecutor who had served as Chief of the Securities and Commodities Fraud Task Force of the U.S. Attorney’s Office for the Southern District 

of New York. Under his leadership, we are undertaking the most significant structural reforms of the enforcement program since 1972—reforms designed to maximize 

resources and enable us to move swiftly and vigorously against securities fraud. 

Highlights of the initiatives currently being implemented include: 

—Specialization.—The Division has created five new national specialized investigative groups dedicated to high-priority areas of enforcement, including Asset 

Management (hedge funds and investment advisers), Market Abuse (large-scale 

insider trading and market manipulation), Structured and New Products (various derivative products), Foreign Corrupt Practices Act violations, and Municipal Securities and Public Pensions. The specialized units will utilize enhanced 

training, specialized industry experience and skills, and targeted investigative 

approaches to better detect links and patterns suggesting wrongdoing—and ultimately to conduct more efficient and effective investigations. 

—Management Restructuring.—The Division has adopted a flatter, more streamlined organizational structure under which it has reallocated a number of staff 

who were first line managers to the mission-critical work of conducting frontline investigations. While a layer of management has been eliminated, the Division is maintaining staff-to-manager ratios that will allow for close substantive 

consultation and collaboration, resulting in a management structure that facilitates timeliness, quality, and staff development. The Division also has hired its 

first-ever Managing Executive, who is focusing on the Division’s administrative, 
169 

operational, and infrastructure functions, thus freeing up valuable investigative 

resources for mission-critical work. —Office of Market Intelligence.—The Enforcement Division has established an Office of Market Intelligence, which will serve as a central office for the handling 

of complaints, tips, and referrals that come to the attention of the Division; coordinate the Division’s risk assessment activities; and support the Division’s 

strategic planning activities. In short, this office will allow the Division to have 

a unified, coherent, coordinated response to the huge volume of complaints, tips, 

and referrals we receive every day, thereby enhancing the Division’s ability to 

open the right investigations, bring solid cases, and effectively protect investors. 

In my first year, compared to the previous year, the SECs enforcement activity 

increased significantly. We sought more than twice as many temporary restraining 

orders and asset freezes; we issued well over twice as many formal orders of investigation; we won $540 million more in disgorgement orders while penalty orders 

more than doubled; and we filed nearly 10 percent more actions overall, including 

nearly twice as many involving Ponzi schemes. 

Of course, numbers alone don’t capture the complexity and range—or the importance—of the actions we brought. For example, we have brought a number of cases 

involving issues surrounding the financial crisis, including cases alleging accounting 

fraud at subprime lenders, misrepresentation of complex investments as appropriate 

for retail investors seeking safe financial products, fraud in connection with CDO 

marketing materials, and misleading investors about exposure to subprime investments. Our cases have included actions against Goldman Sachs and Co., American 

Home, Countrywide, New Century, Brookstreet Securities, and Morgan Keegan. 

Examples of where the SEC’s actions have benefitted investors include: 

—Charging Boston-based State Street Bank and Trust Company with misleading 

investors about their exposure to subprime investments while selectively disclosing more complete information only to certain favored investors. As a result 

of this one action, more than $300 million will be distributed to investors who 

lost money during the subprime market meltdown. 

—Charging the investment adviser for the Reserve Primary Fund with failing to 

properly disclose to investors and trustees material facts relating to the value 

of the fund’s investments in Lehman-backed paper. We also charged the adviser 

with misrepresenting that it would provide the credit support necessary to protect the $1 net asset value of the Primary Fund when, according to our complaint, the adviser had no such intention. In bringing the enforcement action, 

the SEC also sought to expedite the distribution of the fund’s remaining assets 

to investors by proposing a pro-rata distribution plan, which the Court has approved. To date, investors have been provided with recovery of more than 98 

cents on the dollar, with a Court-ordered distribution to be effected in the coming days that will bring their recovery to over 99 cents on the dollar. 

In addition to the significant cases we have brought arising out of the financial 

crisis, we have continued to bring cases in many other important areas. 

—In a pension fund pay-to-play case, we filed a settled action against a private 

investment firm, Quadrangle Group LLC, and one of its affiliated entities, 

charging them with participating in a widespread kickback scheme to obtain investments from New York’s largest pension fund. 

—In the municipal securities arena, we settled fraud charges with J.P. Morgan 

Securities for its alleged role in an unlawful pay-to-play scheme in Jefferson 

County, Alabama. J.P. Morgan paid $50 million directly to Jefferson County, 

forfeited more than $647 million in claimed termination fees, and paid a penalty 

of $25 million. At the same time, the SEC also charged two of J.P. Morgan’s 

former managing directors with fraud arising out of this scheme and had previously charged others, including the former Birmingham mayor—who last 

month was sentenced to 15 years in prison and fined $360,000—a JP Morgan 

banker, and the local operative who served as go-between. 

—In the area of accounting and financial fraud, auditor Ernst & Young LLP paid 

an $8.5 million settlement—one of the largest ever paid by an accounting firm— 

and six current and former partners were sanctioned for their conduct in the 

audit of Bally Total Fitness Holding Corporation. We charged that they abdicated their responsibility to function as gatekeepers while their audit client engaged in fraudulent accounting. 

—Finally, in the Galleon and Cutillo cases, we charged more than a dozen hedge 

fund managers, lawyers and investment professionals in two overlapping serial 

insider trading rings that collectively constitute one of the largest insider trading prosecutions in Commission history. In the parallel criminal prosecutions, 

ten individuals have already pled guilty and nine additional individuals have 

been indicted. 
170 

STRENGTHENING EXAMINATIONS AND OVERSIGHT

Strong regulation is essential to the fair, orderly, and efficient operation of markets. A vigorous examination program cannot only reduce the opportunities for 

wrongdoing and fraud, but also provide early warning about emerging trends and 

potential weaknesses in compliance programs. Over the past year, we have begun 

reforming the Office of Compliance Inspections and Examinations in response to 

ever-changing Wall Street practices and lessons learned from the Madoff fraud. Reforms include: 

—Placing greater reliance on risk assessment procedures and techniques to better 

identify areas of risk to investors. 

—Requiring examiners to routinely verify the existence of client assets with third 

party custodians, counterparties, and customers, and have developed procedures 

to ensure compliance with the Commission’s new rules to strengthen custody 

controls of an investment adviser’s client assets. 

—More rigorously reviewing information about firms before sending examiners 

out to the field, so that we can use our limited resources more effectively and 

to target those firms with the greatest risks. 

—Enhancing the training of examiners and re-focusing on basics such as exam 

planning, tracking, and accountability. 

We also plan to make significantly greater progress during the current year under 

the leadership of our new OCIE director, Carlo di Florio, who came to the SEC from 

PricewaterhouseCoopers, where he was a national leader in corporate governance, 

enterprise risk management and regulatory compliance and ethics. He also has extensive experience investigating corporate fraud, corruption, conflicts of interest and 

money laundering. At my request, he is undertaking a top-to-bottom assessment of 

the Office’s operations to determine where additional opportunities exist to strengthen our exam program. As I will discuss later, there is such a huge disparity between 

the number of examiners and the number of entities that we must examine that 

we must ensure that we are using our limited resources wisely. 

IMPROVING AGENCY SYSTEMS AND MANAGEMENT

A key priority for me as Chairman is to ensure that our staff has the tools they 

need to conduct oversight of vast financial markets. Between fiscal year 2005 and 

fiscal year 2009, investments in new information technology systems dropped by 

more than half, resulting in a growing gap between our mission and the ability of 

our systems to help us accomplish it. Thanks to the resources provided by this Subcommittee, this fiscal year we have been able to begin investing in several new or 

improved IT projects and systems. 

One of the first initiatives I launched was a strategic review of the agency’s systems for reviewing complaints, tips, and investigative leads provided by whistleblowers or other sources. Having an effective process to identify the most important 

tips can give the agency an early jump on frauds and other violations of securities 

laws, help guide compliance exams, and provide important information across the 

agency to aid staff working to protect investors and maintain market integrity. The 

absence of such a system directly contributed to past failures by the agency. 

We have completed the first phase of this effort, which was to centralize into a 

single, searchable database all our existing tips and complaints that were previously 

in multiple databases. This means that complaints we receive in Chicago are now 

downloaded into the same database as complaints received in Miami or any of our 

other offices, and the information investors share with our investor assistance hotline can be searched alongside complaints received by our markets hotline in our 

Division of Trading and Markets. Additionally, we released for the first time a set 

of agency-wide policies and procedures to govern how employees should handle the 

tips they receive. 

Simultaneously, we have been working on a new intake system that will allow 

us to capture more information about tips and complaints. The new system will provide more robust search capabilities so that tips can be better assessed or triaged. 

In addition, this new system will add enhanced workflow abilities so we can track 

how tips and complaints are being used throughout the agency. We expect to deploy 

this system later this year. Meanwhile, we also are in the early stages of designing 

the third phase of this system, which will add risk analytics tools to help us quickly 

and efficiently identify high value tips and search for trends and patterns across the 

data. 

In addition, we are enhancing the collection, internal analysis, and subsequent 

distribution of disclosures filed with the SEC, so that this unique set of data can 

be aggregated both across firms and over time—allowing us to monitor macro 

trends, search for hidden risks, and track systemic changes in filings. 
171 

During my first year, I also focused much attention on improving the agency’s 

basic internal operations—the processes that guide our work, support the agency’s 

infrastructure, and determine how we are organized. The public appropriately holds 

the SEC to a very high standard for integrity and professionalism, and we must 

hold ourselves to that very high standard as well. In the past year, we took major 

steps to implement a compliance program to guard against inappropriate securities 

trading by SEC staff. We have acquired and deployed a computer compliance system 

to track, audit, and oversee employee securities trading and financial disclosures in 

real time, and have hired a new Chief Compliance Officer to oversee these efforts. 

We also are strengthening internal rules governing employee securities trading and, 

in May 2009, we submitted proposed rules to the Office of Government Ethics 

(‘‘OGE’’) that would prohibit staff from trading in the securities of companies under 

SEC investigation—regardless of whether an employee has personal knowledge of 

the investigation—and require the preclearance of all trades. 

Also during the past year we hired a new Chief Freedom of Information Act 

(FOIA) Officer and have undertaken a comprehensive overhaul aimed at strengthening our FOIA program and our commitment to open government. 

Within the next few weeks, we will also have on board a Chief Operating Officer. 

As I mentioned to the subcommittee last year, this is a new position that we are 

creating to help us manage our significant rebuilding projects. Our COO will provide 

executive leadership in the areas of information technology, financial management, 

and records management (including FOIA). 

I have approved a new internal audit follow-up rule that sets forth roles, responsibilities, and procedures to ensure that SEC staff take timely and appropriate corrective action to address recommendations by the Government Accountability Office 

or the SEC’s Office of Inspector General. 

In addition, we are undertaking significant efforts to eliminate the material weakness in our internal controls over financial reporting, including automating the numerous processes that have been performed manually and strengthening our core 

financial system. 

ENGAGING IN A SIGNIFICANT INVESTOR-FOCUSED RULEMAKING AGENDA

Of course, the changes we have initiated have not just been internal. The past 

year has witnessed one of the Commission’s most significant rulemaking agendas 

in years. Here are some highlights: 

Adopted: 

—Custody controls.—We adopted a rule in the wake of the Madoff fraud designed 

to provide greater protections to investors who entrust their assets to investment advisers. The rule leverages our own resources by relying on independent, 

third-party accountants serving as a ‘‘second set of eyes’’ to confirm client assets 

and review custody controls in situations where the possibility for misappropriation of client assets is most acute because of the adviser’s possession of, or control over, client assets. 

—Proxy enhancements.—We adopted rules that require companies to provide investors with more meaningful information about the leadership structure of 

boards, the qualifications of board nominees and the relationship between a 

company’s overall compensation policies and risk taking. 

—Discretionary voting by brokers for directors.—We approved a New York Stock 

Exchange rule to eliminate broker discretionary voting for all elections of directors, whether contested or not. This helps to ensure that director elections are 

determined by investors with an economic interest in the company. 

—Short selling/Fails-to-deliver.—We adopted a rule that will restrict short selling 

when a stock is experiencing significant downward price pressure. This rule will 

also enable long sellers to stand in the front of the line and sell their shares 

before any short sellers once a circuit breaker is triggered. In addition, we addressed the potentially harmful effects of abusive ‘‘naked’’ short selling, adopting rules that require that fails-to-deliver resulting from short sales be closed 

out immediately after they occur. Since this rule was adopted, the number of 

failures to deliver securities has dropped significantly. 

—Money market funds.—We adopted new rules that will help avoid a recurrence 

of the serious problems exposed in 2008, when the Reserve Primary Fund 

‘‘broke the buck.’’ The rules will strengthen the oversight and resiliency of these 

funds by, among other things, increasing credit quality, improving liquidity, 

shortening maturity limits, and requiring stress testing of money market fund 

portfolios and the disclosure of the funds’ actual ‘‘mark-to-market’’ net asset 

value. 
172 

—Central Clearing of Credit Default Swaps.—We took action to address 

counterparty risk and improve transparency in the multi-trillion dollar credit 

default swap market by approving conditional exemptions that allowed certain 

clearinghouses to operate as a central counterparty for clearing credit default 

swaps. 

—Credit Rating Agencies.—We adopted rules, and proposed others, to create a 

stronger, more robust regulatory framework for credit rating agencies—including measures designed to improve the quality of ratings by requiring greater 

disclosure, fostering competition, addressing conflicts of interest, shedding light 

on the practice of rating ‘‘shopping,’’ and promoting accountability. 

Proposed: 

—Asset-backed securities.—We proposed rules to fundamentally revise the regulatory regime for asset-backed securities. This comprehensive proposal would revise the disclosure, reporting, and offering process for asset-backed securities to 

better protect investors in the securitization market and promote efficient capital formation. —Proxy access.—We proposed rules to facilitate the effective exercise of the rights 

of shareholders to nominate directors to the boards of the companies they own. 

If adopted, this rule would increase shareholders’ ability to hold boards accountable. 

—Large Trader Reporting.—We proposed rules to create a large trader reporting 

system that, if adopted, would strengthen our oversight of the markets by enhancing our ability to identify large market participants and collect information 

on their trades so we can better analyze the data and investigate potentially 

illegal trading activity. 

—Flash orders.—We proposed rules that would effectively prohibit all markets 

from displaying marketable flash orders. 

—Sponsored Access.—We proposed a new rule that would effectively prohibit 

broker-dealers from providing customers with ‘‘unfiltered’’ or ‘‘naked’’ access to 

an exchange or ATS. 

—Dark pools.—We proposed rules to generally require that information about an 

investor’s interest in buying or selling a stock be made publicly available, instead of available only to a select group operating within a dark pool. 

—Pay-to-Play.—We proposed rules to address pay-to-play practices where investment advisers are managing or seeking to manage public monies that fund 

state and local pension plans and other important public programs. 

—Municipal Securities Disclosure.—We proposed rules to improve the quality and 

timeliness of disclosure of material events related to municipal securities, such 

as payment defaults, rating changes and tender offers. 

Our rulemaking agenda makes it clear that the Commission is now willing to address challenging issues and make tough choices. 

SEC RESOURCES

The financial crisis reminded us just how large, complex, and critical to our economy the securities markets have become. Over the last 20 years, the dollar value 

of the average daily trading volume in stocks, exchange-traded options, and security 

futures has grown by over 25 times, reaching approximately $245 billion a day. The 

number and size of market participants have grown as well. For example, since 

2003, the number of registered investment advisers has increased by 49 percent, 

and their assets under management have jumped by over 57 percent, to $33 trillion. 

Yet, while the markets were growing exponentially in size and complexity, the 

SEC’s workforce was getting smaller and its technology was falling further behind. 

We are only just now returning to the staffing levels of 5 years ago. As you know, 

between fiscal year 2005 and fiscal year 2007, the agency experienced 3 years of flat 

or declining budgets, losing 10 percent of its employees, which severely hampered 

our enforcement and examination programs. In the context of rapidly expanding 

markets, limited SEC staffing levels hindered the agency’s ability to effectively oversee the markets and pursue violations of the securities laws. 

Fortunately, thanks to support from the members of this Subcommittee, we have 

begun to rebuild our workforce and to invest in needed new technologies. Yet, the 

SEC is still responsible for overseeing more than 35,000 entities with just over 3,800 

staff. Additional resources are essential if we hope to make the SEC a dynamic and 

effective regulator of our financial markets. 

The President is requesting a total of $1.258 billion for the agency in fiscal year 

2011, a 12 percent increase over the fiscal year 2010 funding level. If enacted, this 

request would permit us to hire an additional 374 professionals, a 10 percent increase over fiscal year 2010. That would bring the total number of staff to about 
173 

4,200. The request also will permit us to continue expanding our investments in surveillance, risk analysis, and other technology, as well as in better training for SEC 

staff. 

Of this total request, $24 million would be contingent upon the enactment of financial reform—so that if reform is passed, we would have the resources to begin 

implementing our enhanced authorities. 

It is important to note that the proposed increase in spending would be fully offset 

by the fees we collect on transactions and registrations. In fiscal year 2011, we estimate that we will collect $1.7 billion—an increase of $220 million over fiscal year 

2010. 

If we were to receive the proposed increase in spending, we anticipate it would 

be broken out as described below. 

In the Enforcement Division, the budget request would enable us to add about 130 

new full time employees so we can reinforce our investigations process, support 

more cases, and strengthen the intelligence analysis function. With these new staff 

resources—along with the Division restructuring and initiatives outlined above that 

will make the Division more efficient and effective—the Division projects that we 

will be able to open 75 more inquiries than the previous year, open 130 more formal 

investigations, and file charges in 70 more civil or administrative cases. 

In addition to fully staffing the new Office of Market Intelligence and its critical 

risk assessment and strategic planning functions, we plan to use additional Enforcement Division resources in the following ways: —Hire Individuals with Specialized Industry Experience.—One of the SEC’s priorities is to seek persons with specialized financial industry experience. We intend 

to hire enforcement staff with specialized expertise in financial products, including structured products and hedge funds, trading strategies, risk, and financial 

analysis. Building upon the existing strengths of the Division, specialists will 

increase the Division’s depth of understanding of the patterns, links, trends, 

and motives of wrongdoers. Moreover, the specialists can utilize their unique experience to more quickly target, analyze, and bring to light unlawful activities. —Hire Additional Trial Attorneys.—It is essential that the SEC be able to act decisively on its growing caseload and that the Division has the resources to 

present effective cases at trial and to negotiate potential settlements from a position of strength. We intend to hire additional experienced trial counsel, not 

only to enable the Division to carry a caseload that includes increasingly complex cases, but also to allow the SEC and the Division to demand tough but appropriate sanctions with the confidence that we have the resources to litigate 

if necessary. It is critical that the Division convey to defendants that we are 

prepared to go to trial and to win. With our increased case load, our trial unit 

needs to expand to ensure that we are able to maintain a program of rigorous 

enforcement for the protection of investors. 

—Increase Administrative Staff.—Division lawyers spend too much time on tasks 

more efficiently handled by support and paraprofessional staff. We can leverage 

our resources by transferring document management, case filings, and other administrative tasks to support staff with the appropriate expertise, thereby freeing up our attorneys to tackle critical front-line work of investigating cases, 

bringing enforcement actions and allowing all levels of the staff to leverage 

their specialized knowledge. 

—Train Strategically.—It is critical that the Division invest in employee development to prepare its staff to respond to continuing changes in the securities industry, sophisticated new products and novel trading strategies. In addition, the 

Division needs to ensure that all staff has access to training to improve on the 

competencies and skills required for their jobs and to maximize individual potential. 

—Information Technology.—Information technology is also a priority for the Division. We are spending significant resources on a number of ongoing projects— 

improving the Division’s case management system, managing ever-increasing 

amounts of electronic evidence with sophisticated new tools, and establishing a 

more centralized system for reviewing and analyzing tips, complaints, and referrals. We intend to commit whatever resources are necessary and available to 

ensure a timely conclusion to these upgrades. We also anticipate major future 

projects, including a new IT Forensics Lab, enhanced data and trading analytics, and improved document and knowledge management to further enhance 

efficiency and consistency across the Division. 

In our Examinations unit, the budget request would allow us to add about 70 staff 

to help us begin closing the gap between the number of examiners and the growing 

number of registered firms we oversee. With these new resources, OCIE expects to 

be able to expand the scope and coverage of adviser and fund examinations and to 
174 

staff fully the oversight function for credit rating agencies, allowing us to examine 

half of the rating agencies in fiscal year 2011. If the financial regulatory reform legislation now under consideration requires hedge fund advisers to register, we will 

expand our inspection program to include these new registrants. 

It is important to note, however, that even with an increase in the number of 

exams these additional resources will enable us to conduct, we anticipate examining 

only nine percent of SEC registered investment advisers and 17 percent of investment company complexes in fiscal year 2011. 

In the newly created Division of Risk, Strategy, and Financial Innovation, the 

budget request would enable us to add about 20 new professionals. The new staff 

would allow the Division to establish a deeper reservoir of experts who can conduct 

risk and economic analysis and spot emerging trends and practices in support of 

rulemaking and enforcement activities. We anticipate hiring professionals with significant knowledge and expertise in financial markets and products, including 

economists, academics, lawyers, and financial market professionals. 

Among the other divisions, the budget request would permit us to add almost 50 

staff to the Divisions of Investment Management and Trading and Markets. These 

personnel will help us enhance oversight of money market funds, clearing agencies, 

broker-dealers, credit rating agencies, and, if brought under the agency’s jurisdiction, hedge fund advisers and OTC derivatives. The Division of Corporation Finance 

would add about 25 professionals to allow it to focus more, and with greater frequency, on the financial statements and other disclosures of large and financially 

significant companies. 

Finally, the fiscal year 2011 budget request proposes to spend an additional $12 

million on information technology investments, focused on several key projects. Our 

top priority, as I described earlier, will be the third phase of our new system for 

analyzing tips, complaints, and referrals. 

We also intend to continue our efforts to build a suite of surveillance and risk 

analysis tools that will substantially improve the agency’s ability to find connections, patterns, or trends in the data we collect. The agency has numerous internal 

information repositories which result from disclosure filings, examinations, investigations, economic research, and other ongoing activities. With better tools, we will 

be able to mine this data, link it together, and combine it with data sources from 

outside the Commission. This will enable staff to more effectively identify risks to 

investors, trends in the markets, and to identify patterns of activities meriting further examination or investigation. 

We also plan to complete improvements to the case and exam management tools 

available to our enforcement and examination programs. We intend to modernize 

our financial systems and implement a new system to handle the significant increase in the volume and complexity of evidentiary material obtained during the 

course of investigations. We also need tools to significantly improve the efficiency 

of loading, storing, and archiving the roughly three terabytes of data received per 

month during the course of investigations in order to improve turnaround time to 

staff and to contain costs. 

MANAGING AGENCY GROWTH

While the budget request anticipates significant growth in the size of the SEC, 

the agency is properly positioned to implement this spending plan. To accomplish 

the hiring of hundreds of new staff during the course of fiscal year 2011, the SEC 

is enhancing its human resources staff and, consistent with its current authorities, 

streamlining its hiring process. Improvements include simplifying the application 

process and maintaining a searchable database of applicants, so that it is possible 

to interview for a vacancy as soon as it appears rather than having to go through 

the lengthy posting process each time. Being able to better tailor, target and speed 

recruiting will enhance the quality of applicants and help the agency acquire the 

necessary talent to perform effectively in an increasingly complex financial environment. 

CONCLUSION

Thank you, again, for your past support, and for allowing me to be here today 

to present the President’s budget request. 

While the SEC is a relatively small agency, we are charged with protecting millions of investors every day, including the nearly one-half of all households that own 

securities. I am pleased with the progress that we have made to date, but recognize 

that much work remains to be done to continue to reinvigorate the SEC and restore 

investor confidence in our securities markets. The funding level in the President’s 
175 

budget request is critical for us if we are to succeed in these efforts, and continue 

to improve our performance in an increasingly complex financial world. 

I am happy to answer any questions that you might have. 

SEC STAFF LEVELS HAVE NOT KEPT PACE WITH INDUSTRY GROWTH

The SEC’s staff of 3,816 FTE (estimate for fiscal year 2010) oversees more than 

35,000 entities. These include: 11,500 investment advisers; 5,400 broker-dealers; 

7,800 mutual funds; about 600 transfer agents; clearance and settlement systems; 

12 securities exchanges; 10,000 public companies; 10 credit rating agencies; and 

FINRA, MSRB, & PCAOB. 

The following charts provide examples of how various aspects of the markets have 

grown since 2003, relative to the SEC’s staff: 
176 

OVERSIGHT OF CREDIT RATING AGENCIES

Senator DURBIN. Thank you, Chairman Schapiro. 

I have joined a lot of other people in just finishing Michael Lewis’ 

book, ‘‘The Big Short’’, and it is really an eye-opener of what was 

going on at the time that this real estate bubble was created. One 

of the areas that I had heard about many times that he made reference to was the work of credit rating agencies and the fact that 

some of the credit ratings that were given were misleading, to say 

the least. 

Now, since the beginning of the credit crunch in early 2007, 

these agencies have come under fire for inflated ratings of mortgage-backed securities that did not reflect the financial stability of 

the borrowers. At our hearing last June, I asked you some questions about what the SEC was doing to restore confidence in these 

credit rating agencies, what improvements were needed. 

In your budget justification materials submitted to the subcommittee in February, you indicate on page 4 that the fiscal year 

2011 budget will enable the SEC to carry out a more robust oversight function for credit rating agencies and conduct examinations 

at one-half of the registered, nationally recognized statistical rating 

organizations next year. Underlined, ‘‘next year.’’ You explained 

that in 2006, the SEC took on a major new responsibility with the 
177 

Credit Rating Agency Reform Act, which gave the agency authority 

to regulate internal processes of nationally recognized statistical 

rating organizations, such as recordkeeping and policies to guard 

against conflicts of interest. You contend ‘‘The SEC never received 

any increased or dedicated funding to carry out these new responsibilities, and it has been forced to divert positions from other programs in order to staff this vital function.’’. 

I am puzzled by that statement. In fiscal year 2009, Congress 

provided the SEC with $970 million in budget authority, $57 million above the President’s request of $913 million. And in fiscal 

year 2010, this current year, Congress provided $1.1 billion, $85 

billion above the President’s request. 

If the SEC regards its obligation to oversee credit rating agencies 

as a high priority, why were you not able to devote some of the increased funds we provided for this function in fiscal year 2009 and 

2010? 

Ms. SCHAPIRO. Senator, we have. I do not have the statement 

right in front of me. But let me assure you we are very committed 

to aggressive oversight of credit rating agencies. We have, in fact, 

created a new examination branch for credit rating agencies, and 

our goal would be to try to examine all the credit rating agencies 

on a regular basis. So we are quite committed to solving the problems that we have seen with respect to credit rating agencies. 

In addition—— 

Senator DURBIN. Is this a typo where it says that you are going 

to start this work next year? 

Ms. SCHAPIRO. We have already begun this work, and I will—— 

Senator DURBIN. This was in the budget justification materials 

given to this oversight committee. 

Ms. SCHAPIRO. I can assure you this work has begun. We have 

a new head of our Office of Compliance, Inspections, and Examinations. Credit rating agencies are a focus of that office. 

Senator DURBIN. We have the justification materials, and I would 

like to share them with you because what you have just said is not 

consistent with what was given to the subcommittee. 

[The information follows:] 

As a follow up to your question during the hearing, I wanted to offer clarification 

regarding the SEC’s examinations of credit rating agencies. As we discussed, page 

4 of the SEC’s fiscal year 2011 Congressional Justification says: ‘‘. . . the SEC 

never received any increased or dedicated funding to carry out these new responsibilities, and it has been forced to divert positions from other programs in order 

to staff this vital function.’’ I understand that, in the months immediately following 

the passage of the Credit Rating Agency Reform Act of 2006, the SEC did not receive additional funds to handle these responsibilities, and the SEC during this period was in the middle of a 10 percent cutback in its overall staffing levels. However, this statement leaves the incorrect impression that the SEC has not received 

budget increases since that time. Accordingly, I have asked that this sentence be 

stricken from the version of the document that appears on the SEC website. As I 

mentioned in my testimony, your subcommittee’s support has in fact resulted in significant budget increases since I became Chairman and is allowing us to rebuild the 

agency’s workforce. In fiscal year 2009 the SEC was able to create a team of staff 

dedicated to examining credit rating agencies, and the fiscal year 2011 budget request asks for additional staff resources to expand the program. 

I hope this information helps clarify the state of the SEC’s program to examine 

credit rating agencies. 
178 

WHISTLEBLOWER BOUNTY PROGRAM

Senator DURBIN. Let me ask about another issue. In the wake of 

the massive Ponzi scheme perpetrated by Bernie Madoff, the SEC 

has undertaken an array of reforms to reduce similar frauds and 

the fact that they would go undetected. Among the actions cited in 

SEC materials is, ‘‘advocating for a whistleblower program,’’ as 

part of the financial reform legislation. The SEC has requested expanded authority from Congress to reward whistleblowers who 

bring forward substantial evidence about Federal securities violations. Current law permits the SEC to award a bounty to a person 

who provides such information, leading to the recovery of a civil 

penalty from an inside trader, from a person who tipped information to an inside trader, or from a person who directly or indirectly 

controlled an inside trader. 

Now, a few weeks ago on March 29, the SEC’s inspector general 

issued a report on how the bounty program is working at your 

agency. The SEC inspector general noted that while the SEC has 

had a bounty program in place for more than 20 years for rewarding whistleblowers for insider trading tips, there have been very 

few payments under the program. Likewise, the SEC has not received a large number of applications from individuals seeking a 

bounty over this 20-year period. The inspector general also found 

the program is not widely recognized either inside or outside your 

agency. 

The inspector general indicated that although the SEC is seeking 

expanded authority to reward whistleblowers who bring forward 

substantial evidence about other significant Federal security law 

violation, the current SEC bounty program is not fundamentally 

well-designed to be successful. 

They called for a long list of improvements by your inspector general. Make the application more user-friendly. Establish internal 

policies and procedures to assist staff in assessing contributions 

made by whistleblowers in making bounty award determinations. 

Routinely provide status reports to whistleblowers regarding their 

bounty applications. Track the applications to ensure timely and 

adequate review. 

The inspector general acknowledged that the SEC has begun to 

take steps to correct the deficiencies identified in this whistleblower bounty program, including consultation with the Department of Justice, the Internal Revenue Service, and other agencies. 

After the embarrassment of Bernie Madoff, this inspector general 

report about your whistleblower program is troubling to me. It indicates that the level of energy which we expected in response to 

Madoff and the embarrassment he brought to your agency and to 

our Government would create a whistleblower program to try to 

save some of those investors and savers who could be exploited by 

people like him. 

Ms. SCHAPIRO. Senator, I would very much like to address that. 

First of all, when I arrived, I asked that we build a more robust, 

effective whistleblower program simply because the insider trading 

program has not been effective. And that is in part because insider 

trading rarely is brought to the attention of the SEC by tips. It is 

generally discovered as a result of surveillance done by the ex-
179 

changes or surveillance that is done by the SEC itself. So we needed a program that was far more effective and covered much more 

than insider trading, which is a small proportion of the cases that 

we bring every year. 

So the SEC staff, in fact, crafted the whistleblower legislation 

that we believe would be far more effective, addresses the issues 

that are raised in the inspector general’s report, and we think will 

allow us to really leverage the information that whistleblowers 

bring to the SEC on a broad range of potential violations. 

Senator DURBIN. But you are asking for expanded authority to 

reward whistleblowers. If you were discounting what they could do, 

why would you ask for expanded authority in that program? 

Ms. SCHAPIRO. But I am not discounting what they do. I believe 

we can make tremendous use of tips and complaints from whistleblowers. 

In the narrow context of insider trading, which is the only place 

the existing program can be applied, it has not been an effective 

program. So we need legislative authority to craft a program that 

will allow us to give whistleblowers more meaningful recovery on 

their claims and that will cover more than simply insider trading 

which, as I said, frequently is not the result of a whistleblower 

coming to us because insider trading tends to be detected from abnormal trading activity in a stock prior to the announcement of a 

merger or an acquisition that is detected by exchange surveillance 

systems referred to the SEC and then prosecuted by us. So the program was flawed in many ways, which is why we asked to expand 

the program, make it more robust, and have the legislative authority to do that. 

Senator DURBIN. So is the inspector general’s report on the right 

track of what you need to do within your own agency about this 

program? 

Ms. SCHAPIRO. I think the inspector general’s report is on the 

right track, and in fact, many of the recommendations he made are 

really a result of talking extensively with our staff about how to 

make this program better. 

Senator DURBIN. Senator Collins. 

ENFORCEMENT ACTIONS

Senator COLLINS. Chairman Schapiro, there have been three 

issues in the press lately that affect the SEC that I particularly 

want to ask you about today to get your answers on the record and 

perhaps put an end to some of the speculation about one of these 

issues and that is the first one that I am going to begin with. 

There has been speculation reported in the financial press that 

the SEC’s case against Goldman Sachs was somehow motivated by 

the timing of the financial reform bill that the Senate will shortly 

consider. For the record, was the timing of the SEC’s enforcement 

action against Goldman in any way connected to the Senate’s actions on financial reform? 

Ms. SCHAPIRO. Absolutely not, and I put out a statement to try 

and make that quite clear that we do not time our enforcement actions by the legislative calendar or by anybody else’s wishes. We 

bring our cases when we have the law and the facts that we believe 

support bringing our cases, and that is exactly what happened 
180 

here, as has happened in the more than a dozen other financial crisis cases that we have brought in the past year. 

Senator COLLINS. I share your view on that issue, but I think it 

is important for me to ask you for the record. 

Ms. SCHAPIRO. I appreciate the opportunity to answer it. 

EMPLOYEE MISUSE OF COMPUTERS

Senator COLLINS. The second question I want to ask you has to 

do with the disciplining of SEC employees who were involved in the 

porn case. 

I really am so appalled at those findings by the inspector general 

because it was not just one or two people. According to the inspector general’s report, 33 staffers at the agency were found to have 

looked at porn on their computers at work over the past 5 years, 

and 17 of them were highly paid employees that were earning between $99,000 and $222,000 a year. 

An unrelated issue but another issue that causes me to ask what 

your process is and what are you doing to discipline employees has 

to do with the inspector general’s criticisms of the SEC’s failure to 

uncover the Madoff Ponzi scheme. Has the SEC taken any disciplinary actions against employees as a result of the inspector general’s findings in the Madoff case? 

Ms. SCHAPIRO. Senator, I am happy to respond to both of those. 

In the first instance, let me say that it was the agency’s own filters that detected the activity that was reported by us to the inspector general, and there were 33 persons, as you point out, cited 

in the inspector general’s report over a 5-year period. And a number of those, in fact, were outside consultants. 

That said, I completely share your disgust with this conduct. It 

is unacceptable at the Securities and Exchange Commission or anywhere else. We will deal very swiftly and very severely within the 

limits of the Federal employment rules and laws with anybody who 

abuses SEC resources. In fact, last week, I put out a message to 

all employees making it clear that anyone who abuses SEC resources in this manner or misuses them will be subject to termination. So we will deal with this very swiftly and severely, and all 

employees are clearly on notice with respect to that. 

Many of these actions were a number of years ago, and disciplinary actions have already been taken at one level or another. We 

have significantly ramped up the potential penalties. 

With respect to your last question regarding Madoff, as a result 

of the inspector general’s investigation of the agency’s failure to detect the Madoff fraud, there was a recommendation that we consider whether discipline is appropriate with respect to employees. 

I should say that, for example, in the Enforcement Division, of the 

20 employees who were involved with Madoff investigations or examinations, 15 have already left the agency. With respect to those 

who are left, we have put in place a disciplinary process in accordance with the Federal rules that apply to all Federal workers in 

all situations like this. That process is intended to be fair and deliberative but appropriate, and we are going through that right 

now. It is well underway, and I cannot really comment on any specific actions, but I can assure you that a disciplinary process is underway. 
181 

Senator COLLINS. Thank you. 

Senator DURBIN. Senator Cochran. 

Senator COCHRAN. Mr. Chairman, thank you. 

CORRECTIVE AND DISCIPLINARY ACTIONS

May I ask whether or not any of the findings and recommendations of the inspector general in the case that Senator Collins 

raised have been implemented, or have those who were found to 

have violated regulations or laws in this connection been punished? 

You mentioned that five are still working there, and there were 

others who resigned, as I understand it. 

Ms. SCHAPIRO. The inspector general, Senator, issued his reports 

in August and October, and between them, they included about 69 

different recommendations for the staff. As a result of that, very 

promptly, the offices that were involved, primarily our inspections 

group and our enforcement group, issued corrective action plans, 

which under Federal law generally require that corrective actions 

in response to an inspector general report be taken within 1 year. 

As of March 31—so between 41⁄2 and 6 months after those reports 

were issued—the offices have completed corrective actions on 35 of 

the 69 recommendations. We are awaiting the inspector general’s 

concurrence on 19 of those. The rest are substantially well underway and I think we are making very significant progress. 

With respect to the employees, as I mentioned, a number of them 

have already left. We are looking at whether personnel action 

should be taken. There is, as I said, an established process that we 

are legally required to follow, as we would in any employment 

issue involving a Federal worker. And that process is well underway, and we will be happy, upon its completion, to report back to 

the subcommittee. 

STANFORD PONZI SCHEME

Senator COCHRAN. I have several constituents from Mississippi 

who called and came up to Washington to visit with me and other 

Members of Congress and the Senate to tell us about their experiences in the really serious financial dislocations that have been 

caused by this scheme. It is really heartbreaking to realize that 

these people were really innocent victims of somebody’s greed and 

corruption, and I want to be sure that whatever can be put in place 

to prevent this kind of thing from happening in the future is acted 

on and done quickly. 

Can you assure the subcommittee that that is the step and that 

is the intent of the SEC in this case? 

Ms. SCHAPIRO. Senator, absolutely. As soon as I arrived last January, I put into motion a number of things that we hope will reduce the chances of a tragedy like this ever happening again. So 

we changed leadership across the agency. We restructured our Enforcement Division. We are in the process of restructuring our examinations group. We are bringing in people who have new skills 

that are better able to understand some of the information that Mr. 

Madoff managed to so expertly fool the staff with. We are doing 

much better training. We have over 500 employees who have gone 

through either certified fraud examiner training or chartered financial analyst training. 
182 

We have put in place new rules that will allow us to leverage the 

work of accounting firms when an investment adviser custodies assets with an affiliate, which is what happened in this situation. 

They are now required to have a surprise audit by a PCAOB registered accounting firm and allow us to have access to that information immediately so we can look for suspicious activity. 

And as I mentioned in my statement, we have put in place a system to try to better track tips and complaints and referrals so that 

the kind of information that the staff had about Madoff will have 

far less chance of slipping through the cracks. 

We have worked day and night to do everything we can think of 

to try to minimize the chances of a horrific event like this ever happening again. I share your deep concern about it. 

Senator COCHRAN. I appreciate your response and the obvious interest you have in helping to change things so that it will be less 

likely, we hope not likely at all, for something like this to happen 

in the future. 

I wish there was some way that we could provide some kind of 

restitution, or through a request from the administration, Congress 

could provide you with some authorities to help do something to 

compensate these victims for this terrible scheme. 

Ms. SCHAPIRO. Through the SIPC program, Madoff victims are 

entitled to recovery. It will not come anywhere close to replenishing 

the funds that many of them have lost or thought they had earned 

over many years of this Ponzi scheme. But I believe at this point, 

the SIPC trustee has paid out somewhere around $680 million, and 

the trustee has gathered about $1.5 billion for distribution to victims. It is a long and difficult process, but it is well underway. 

Senator COCHRAN. Well, thank you very much. 

Senator DURBIN. Senator Lautenberg. 

Senator LAUTENBERG. Welcome, Ms. Schapiro. 

Ms. SCHAPIRO. Nice to see you again. 

Senator LAUTENBERG. Congratulations on the earnestness with 

which you have taken over this assignment. That was desperately 

needed because not only did people lose lots of money, but they lost 

faith in Government at the same time. 

Ms. SCHAPIRO. Absolutely. 

TIPS AND COMPLAINTS

Senator LAUTENBERG. It is a subject of interest of mine over 

some years. I still sit on the board of the Columbia Business 

School, my alma mater, and in 2001 I was able to establish a chair 

at Columbia that called for better business ethics in corporate governance in 2001. And while I claim some clairvoyance, the fact of 

the matter is that to me, having come from the corporate world, I 

saw a situation developing that I found very discouraging. And we 

have seen it in the last years when looking back at the testimony 

given the people who served earlier, without direct criticism, that 

there were responses to questions that said, well, we just did not 

know. We were not aware with whistleblowers presenting fairly 

significant evidence of failures on the part of the SEC. 

Is that still a source of information? Do we still get that kind of 

information? What happens when you get something? 
183 

Ms. SCHAPIRO. Senator, we do in fact. We get hundreds of thousands of tips and complaints a year. One of the problems I discovered when I arrived last year was that they came in from many 

different sources, investors, other regulators, companies, other regulated entities, and they came in all over the SEC. And there was 

no mechanism to centralize this information, connect the dots that 

might provide useful information about a trend or a growing problem with a particular product or a trading strategy or a particular 

firm. 

So we spent the money that this subcommittee very generously 

gave this agency last year in technology dollars to begin to build 

a centralized repository for all the tips and complaints and referrals that come into the agency. That phase one is completed. The 

next phase is to add risk analytics to that, and we have created an 

Office of Market Intelligence in our Enforcement Division that is 

charged with the responsibility for knowing the data that is in 

there, understanding what creates the highest level of risk for the 

investing public, following up on those leads, triaging them, following up on them, tracking them, and making sure that we act 

on them as responsibly as we can. 

There are hundreds of thousands, and I would not sit here and 

tell you we will never miss another one. But we have done everything we can think to do. 

Senator LAUTENBERG. That is important. Could it be considered 

a fairly reliable source of inquiry that the SEC will look to these 

things? Because there was a pathetic response to why action was 

not taken in one case. 

Ms. SCHAPIRO. Absolutely. 

Senator LAUTENBERG. I see that your budget request clearly 

identifies enforcement as SEC’s top priority, and obviously, it is 

brought about by the years of neglect that preceded this. 

How do you stimulate your people to go after these things when 

the culture before was so neglectful? Are you able to keep track of 

what is going on there? 

IMPROVING SEC ENFORCEMENT

Ms. SCHAPIRO. It is a great question. And I will tell you that I 

think—and I do not mean to sound Pollyannaish about this, but 

that the culture of the agency was maybe submerged a little bit 

over the last several years, but there is tremendous enthusiasm 

again for our enforcement role. We took the handcuffs off our Enforcement Division within 1 week after I arrived at the end of January last year. We told the enforcement staff that they could issue 

subpoenas without waiting for the five Commissioners to sit in a 

meeting and vote on it. It took months off the investigative process. 

We enabled our staff to go ahead and negotiate corporate penalties with public companies in enforcement cases instead of getting permission in advance from the Commission, again speeding 

up the process, empowering them to do their jobs. 

We created five specialized units of people with deep expertise 

and we are having tremendous success in recruiting people that 

will focus on specific areas and get deep and knowledgeable about 

structured products, asset management, insider trading, and market abuse, Foreign Corrupt Practices Act, and so forth. So we have 
184 

these specialized units that are going to be far more efficient, I believe, in bringing cases. 

We took a layer of management out of the Enforcement Division 

and put hundreds of really talented people back on the front lines 

of doing the investigations and bringing cases. 

We have done the most significant restructuring of the enforcement program in 30 years, and I think we are already seeing it pay 

dividends in the level of complexity of cases that we are bringing. 

If you look at the major cases over the last year, they are quite extraordinary. And, also the number of cases. For example, in 2009 

over 2008, we shut down twice as many Ponzi schemes far earlier 

than the Madoff scheme would ever have been shut down. 

CORPORATE COMPENSATION PROGRAMS

Senator LAUTENBERG. I would just ask the chairman, if I might 

take a moment from using and say that as you look at executive 

compensation, which I know is one of the things that you see—I 

ran a pretty good-sized company before coming here and was very 

conscious of things that we did to stimulate attitudes within the 

working population of the company, and when we put any money 

into the outside world to try and help us, we have effectively. 

To me, a year-end—a termination bonus, what not to be the 

mark—a mark based on the stock price, but based on what good 

the individual did for the company, and instead of paying a bonus 

immediately, trail it out over maybe a 5-year period and say if the 

company achieved certain marks after you have been here, that is 

when the big bonuses ought to come. And I do not know what right 

you have at the SEC to make the recommendations on that basis 

or even to think about it. 

Ms. SCHAPIRO. Senator, while I do not think we can dictate the 

terms of compensation arrangements, we did approve new rules in 

January that are in effect for this current proxy season that require the board of directors to explain to shareholders how they 

compensate risk-taking within the corporation and whether their 

compensation programs broadly, for all employees, not just the top 

five, might incentivize short-term risk-taking, how the board handles risk within the organization more broadly, as well as some 

others that we call proxy enhancements. 

It is disclosure based, as much of our rules are, but I think it 

is forcing boards to really think about what do they want to say 

about their compensation programs and how do they want to explain the linkage between compensation and risk which we have 

seen over the financial crisis to be a strong link and one that had 

very deleterious effects at the end of the day. 

Senator LAUTENBERG. I am glad to see that there is some fire in 

the belly over there. 

Ms. SCHAPIRO. There is much fire. 

CHIEF COMPLIANCE OFFICER WITHIN SEC ORGANIZATION

Senator DURBIN. Chairman Schapiro, you announced the appointment of a new chief compliance officer to serve as the internal 

watch dog to monitor security holdings and transactions by your 

own employees and, in your own words, said that this had to be 
185 

a world-class compliance program just as we expect from those we 

regulate. 

There was an article that followed that decision, once they found 

out where this compliance officer would be standing on the pecking 

order or the administrative stair steps of your agency. There was 

a concern that this person really did not report—was in a post buried within the Office of Ethics Council, did not have an independent status, and did not report to you or another high-ranking 

official. The question was raised as to whether or not this really 

was a world-class attempt to deal with a serious problem that 

might involve some conflict of interest within your own agency. 

Ms. SCHAPIRO. Senator, let me address this because I think the 

article was actually quite off the mark. 

When I arrived at the SEC, I was surprised, I will say, to learn 

that there was not a system for monitoring employees’ stock transactions, and I had come from an organization where we had quite 

a rigorous one. So I immediately brought in a contractor to help us 

develop a system that requires every employee to enter all of their 

stock holdings and all of their securities accounts into a centralized 

system. It enables employees to pre-clear any trades and ultimately 

will receive directly from brokerage firms duplicate copies of employees’ statements. 

At the same time, we are working with the Office of Government 

Ethics to bolster the existing rules that apply across the Government and no employee will be permitted to trade in the stock of 

any company under investigation by the SEC, whether or not they 

have any knowledge of it at all. That will also require preclearance 

and certification that they have access to no nonpublic material information about those companies. We are negotiating those rules 

out with the Office of Government Ethics right now. 

The person we hired is responsible for that system. We have an 

entire Office of Ethics within the SEC. I meet with them regularly. 

In fact, I met with the new compliance officer this morning. But 

her responsibility is with respect to that system. It is not a chief 

compliance officer in the sense of one in a brokerage firm, which 

I think that article was trying to equate. 

Senator DURBIN. So can this person report directly to you? 

Ms. SCHAPIRO. She could. In fact, I met with her yesterday, and 

she knows my door is open to her at any time. 

Because she is responsible for managing the system within the 

context of the many other ethical reviews that go on within the 

agency, it made sense to put her in the Office of the General Counsel. I would have no problem changing the reporting line. I think 

she will actually get more attention, though, and more focus there, 

and she knows she can come to me anytime, frankly, as every employee does on any issue that is of concern to them. 

STANFORD PONZI SCHEME

Senator DURBIN. Let me ask you about the report that was released on April 16 from the Inspector General’s Office about the 

Stanford case and the fact that this case was—Allen Stanford was 

indicted last year by the SEC in a $7 billion fraud case, accused 

of fleecing more than 21,000 people, primarily through the sale of 
186 

a prized investment, certification of deposits issued by his bank 

headquarters in Antigua, and then sold at a brokerage. 

The SEC’s Fort Worth office was aware since 1997 that Robert 

Allen Stanford was likely operating a Ponzi scheme. But as the inspector general report states, no meaningful effort was made by enforcement to investigate. SEC agents began looking at Stanford’s 

companies in 1998, 2002, and 2004, but dropped their efforts. The 

inspector general report also said SEC supervisors were more interested in quicker turnaround cases at the time, not the kind of examinations needed to look into a complex entity like Stanford. And 

to make it worse, the former chief of enforcement at SEC’s Fort 

Worth office who helped quash the inquiries later went to work for 

Stanford in 2006 before he was told by the SEC to stop because it 

‘‘was improper to do so.’’ 

Like the case of Madoff, the scathing report offers another reminder of potential breakdowns in regulatory oversight. I recognize 

that these circumstances like the Madoff situation preceded your 

arrival. Yet, cases like this can fester and then bubble up to surface years later. 

What controls does the SEC have in place now that would ensure 

that a disturbing mess like the Madoff and Stanford cases do not 

reoccur? What else should be done to make sure that they do not? 

Ms. SCHAPIRO. Senator, let me speak specifically to Stanford because I have talked quite a bit about all the changes that we have 

put in place with respect to Madoff, although I am happy to discuss 

those in much more detail. 

With respect to the conduct that was discussed by the inspector 

general in the Stanford case, there were many missed opportunities, without a doubt, in that 1997 to 2005 period before the agency 

took Stanford up seriously and earnestly to have done something. 

I was not there, so I do not truly understand what happened. 

I will tell you that we have new leadership across the board in 

this agency, in the inspections program, as well as in the enforcement program. We have created escalation committees so that if an 

examiner believes that they have found something that is a real 

problem and they are not getting the response when they refer it 

over to the Enforcement Division that they want, they take it to 

an escalation committee and that will go all the way up into the 

senior ranks of the organization. 

We have new management reporting metrics that have been put 

in place in the Enforcement Division and regular review of open 

matters in both the examinations group and the enforcement group 

so that we can be sure things are not sitting for a long time. 

Decisions will be made sometimes to shut down a matter because 

there is not sufficient evidence, and we could miss something by 

doing that. But it has to be a conscious decision based on the evidence that is in front of people at the time. It cannot be because 

of neglect that something has not been pursued. 

So I think between the leadership changes, the structural 

changes within enforcement, the structural changes that I anticipate we will be announcing in the inspections group before very 

long, the creation of the escalation committees, and the new reporting mechanisms within the divisions, I am hopeful that we will 

never have a repeat of that incident. 
187 

OVERSIGHT BY APPROPRIATIONS COMMITTEE

Senator DURBIN. Let me say in closing, before turning it over to 

Senator Collins, the questions I have asked you today have been 

pointed. They have involved issues that are important and controversial. It is part of our responsibility on this side of the table 

with the oversight of your agency to ask those questions. There are 

some in the Senate now who want us to be taken out of this process. They do not want these questions to be asked, and I think that 

is wrong. We have a responsibility to make sure that you do your 

job and do it well and provide you with the resources to accomplish 

your goals, and the notion that the oversight of the Appropriations 

Committee is unnecessary for an agency as important as the Securities and Exchange Commission is just plain wrong. And I hope 

that we can continue a positive, constructive relationship providing 

you the resources and support you need, but you can count on this. 

As long as this Appropriations Committee is involved, each year 

you will face questions that get to the heart of your activities and 

be held accountable as we are held accountable. 

Ms. SCHAPIRO. Senator, I appreciate that. I always endeavor to 

be completely transparent about what is happening at the SEC, 

what I see that is wrong, and how I am trying to fix it. This is an 

institution that must always learn from its mistakes, and that is 

my commitment to you. I will answer your questions. 

Senator DURBIN. Make no mistake. I still have confidence in your 

leadership, but we have a responsibility on our side of the table as 

well. 

Ms. SCHAPIRO. I understand. 

Senator DURBIN. Senator Collins. 

Senator COLLINS. Mr. Chairman, let me first wholeheartedly 

agree with the statements that you just made. I am going to bring 

up one of those kinds of questions right now too. 

GLOBAL SECURITY RISK MANAGEMENT

In 2004, at the direction of Congress, the SEC established the Office of Global Security Risk Management, and this was created— 

and probably the chairman was involved because I know this is an 

issue that has mattered to him for a long time. It was created to 

protect investors from the risk associated with investing in companies doing business in nations that are designated as state sponsors of terrorism by the Department of State. 

But the office within the SEC has failed to vigorously carry out 

its mandate. Its most important mandate is to ensure that all companies that are sold on American exchanges that operate in those 

countries are disclosing their activities to investors. I know the 

chairman and I have supported legislation that has allowed State 

pension funds to divest their holdings in such cases. 

Why has the SEC not been more aggressive in following through 

by issuing regulations to ensure that corporations do disclose the 

information about their activities in such countries to their investors? 

Ms. SCHAPIRO. Senator, the Office of Global Security Risk, as you 

point out, was created in 2004. In that period between then and 

now, that office has reviewed about 800 corporate filings that dis-
188 

close doing business on some level with Iran, Syria, Sudan, or Cuba 

that are on the State Department list. 

The disclosure requirements are based on materiality, and that 

is something we could change. But there is not a separate line item 

disclosure for any level of business with one of those countries. So 

we look at materiality both quantitatively and qualitatively—the 

amount of the business that is done with one of those countries relative to the size of the company. Is it humanitarian or is it potentially business that could have a military application, for example? 

Is the business continuous or isolated? Is there just one instance 

and so forth? So we do this materiality analysis, and if the staff 

determines that the contact with one of these countries is material, 

then disclosure is required. 

We could look at—in fact, I will tell you we are looking at whether this should be line item disclosure without regard to the materiality of the business conduct between the public company and one 

of these four nations that are currently on the list. 

DISCLOSURE AND MATERIALITY TEST

Senator COLLINS. Well, let me follow up on that because I am 

told that in November 2007, the SEC issued a concept release seeking comment on whether to develop a better mechanism to allow 

investors to have better disclosures in this area and that the comment period ended in January 2008 and that the SEC has taken 

no action since that time. 

Ms. SCHAPIRO. I have asked the staff to—— 

Senator COLLINS. Is that incorrect? 

Ms. SCHAPIRO [continuing]. Go back to that. Again, as I said, we 

are looking at whether line item disclosure here as opposed to our 

normal you must disclose material risks to the business or material 

levels of business in this regard. 

Senator COLLINS. But why has there been no action for 2 years 

since the comment period—more than 2 years? 

Ms. SCHAPIRO. I think there has been a general view that our 

disclosure system is about disclosure that helps people make investment decisions and make the right decision about purchasing 

or selling a financial asset, and that if it is a de minimis amount 

of business that is being done with respect to one of these countries, does it meet either the qualitative materiality or the quantitative materiality standards, that it will not be useful disclosure. 

As I said, we are revisiting that issue now. 

Senator COLLINS. Well, what I would say is I think you have a 

good point about de minimis business, but you ought to complete 

the work on it so that investors do have access to that information 

because there are many investors who will not want to do business 

with a company or will not want to buy shares in a company that 

is doing business with one of these countries. 

Ms. SCHAPIRO. And if I could just add one thing because you 

mentioned the law with respect to divestiture. Our very recent filing reviews show that two mutual funds, CREF and Old Mutual, 

have actually relied on that safe harbor to divest themselves of 

stocks of companies doing business in the Sudan. So I think that 

is very good news. 

Senator COLLINS. I do too. 
189 

FIDUCIARY DUTIES OF BROKER-DEALER

Yesterday, as you know, at the hearings on Goldman Sachs, I 

asked what I thought was a pretty straightforward question to several of the bankers. I asked them whether they considered themselves to have a duty to act in the best interests of their clients, 

the kind of fiduciary obligation that investment advisors have. And 

to say that they danced around and evaded answering my question 

would be an understatement. But the fact is that the law currently 

does not impose that kind of fiduciary obligation on broker-dealers. 

In your judgment, should the law impose a fiduciary obligation 

on broker-dealers? 

Ms. SCHAPIRO. It absolutely should, and we have been strongly 

advocating for the regulatory reform bill to require that both investment advisors—and we have discussed this in a retail context, 

I will say, not with respect to the discussions this week about large 

institutional investors. But at a minimum, when you are dealing 

with the retail public, they are entitled to know that the financial 

services professional sitting across the table from them puts their, 

the customer’s, interest first ahead of their own in all circumstances. There are some conflicts that perhaps can be disclosed. 

There are some conflicts that cannot be disclosed away in my view. 

The duty that exists on the investment advisory side does not 

exist clearly on the broker-dealer side, and we need the law to 

make this a uniform fiduciary duty, and I am very hopeful that the 

Senate bill which does not have that provision right now will 

emerge with that provision in place. Right now we are required 

under the Senate bill to do a study. We are happy to study the 

issue, although I will say the SEC contracted with the RAND Corporation several years ago to do a study of this issue. So there is 

lots of work out there. 

We will look at it again, but we would hope that when a study 

is done, it would trigger our ability to write the rules that would 

create a fiduciary duty if the study suggested that that is what is 

necessary. My personal bias, I will tell you out of the box, is that 

that is necessary. 

Senator COLLINS. In writing this new rule, if we did, should we 

distinguish between individual retail investors for whom having 

that obligation is perhaps even more important because they are 

less sophisticated arguably than most institutional investors, or 

should it apply across the board? 

Ms. SCHAPIRO. I think in the first instance, we have got to take 

care of retail investors. This is really a disgraceful situation in 

many ways. 

But I would also note that in the Senate Agriculture Committee 

bill, there is a fiduciary duty that swap dealers owe to pension 

plans and municipalities, and that seems to me to be a very good 

idea. 

So I think we could step this up over time to be broader, but I 

would start very clearly with retail. 

Senator COLLINS. Thank you. 

If you would provide me with a copy or provide the subcommittee 

with a copy of the RAND study, that would be helpful to us. 

Ms. SCHAPIRO. I would be happy to do that. 
190 

[The information follows:] 

The Rand Report on Investor and Industry Perspectives on Investment Advisers 

and Broker-Dealers can be found at the following website address: http:// 

www.rand.org/pubs/technicallreports/TR556.html. 

Senator COLLINS. Mr. Chairman, I apologize for exceeding my 

time. 

I am going to submit a question on Allied Capital, that case 

which was also criticized by the inspector general, for the record 

and some other questions as well. 

But thank you for the additional time. 

Senator DURBIN. Senator Collins, thank you very much. 

And let me just also say that I applaud your last line of questioning and believe that you have really touched on something that 

is absolutely essential. Maybe we can find some bipartisan ground 

to share here on this. I think I could support your effort, and I am 

glad to hear that the chairman believes it is a wise undertaking. 

So maybe we can build on that. 

ADDITIONAL COMMITTEE QUESTIONS

The record of this subcommittee is going to be open until next 

Wednesday, so we may submit some written questions, and other 

members may join us. 

In the meantime, thank you so much for being with us today. 

Ms. SCHAPIRO. Thank you. 

Senator DURBIN. Keep up your good work. 

Ms. SCHAPIRO. Thank you. 

[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 THAD COCHRAN

Question. There is a proposal in the financial reform bill that would make the 

SEC self-funded through the fees that it recovers. This effectively would exempt the 

SEC from Congressional appropriations and budgetary oversight. Before Congress 

decides to give up its constitutional responsibilities for directing Federal spending 

and providing necessary oversight over the Executive branch, we ought to know exactly what circumstances justify such an exemption for the SEC. What do you think 

those circumstances are? 

It seems to me that, now more than ever, Congressional oversight is needed to 

‘‘regulate the regulators’’ and to hold accountable those regulators who fail to do 

their jobs correctly. The SEC made many mistakes during the financial crisis. Recent reports by the Inspector General and others show that these problems were 

caused by mismanagement at the SEC, and not by any funding shortages. Shouldn’t 

Congress demand even more accountability of the SEC, rather than allowing the 

SEC to freely spend a greatly expanded budget? 

Answer. As you know, the final Dodd-Frank Act that became law on July 21, 2010 

did not include the self funding provision. That said, the Dodd-Frank Act does contain several funding reforms that I believe are very positive for the SEC. These improvements to the funding process should ensure appropriate Congressional oversight while addressing important issues regarding the agency’s funding. In particular, I am pleased that the Act will permit the SEC to provide information directly to the Committee regarding our funding requirements. I believe this enhanced 

communication will complement the ongoing Congressional oversight. I fully support 

these funding reforms and ensuring full transparency by the agency. 

Question. The Office of the Inspector General identified several problems at the 

SEC, following its investigation of Stanford Financial. None of these involved inadequate funding or inadequate staffing at the SEC. Other recent reports identified 

senior-level employees using SEC computers to view pornography for hours a day 

when they should be protecting investors, and enforcement officials refusing to pur-
191 

sue novel or more complicated cases. None of this suggests that if we give the SEC 

more funding, or the ability to fund itself, that the SEC’s competence would improve 

as a result. Can you explain why Congress should give so much deference to the 

SEC, when it is plagued by these failures and mismanagement? 

I am very troubled by the Inspector General’s report on Stanford Financial. Many 

Mississippians and other Americans lost their life savings by investing in what were 

freely marketed as safe, Certificate-of-Deposit investments. Dating back to 1997, the 

SEC’s Fort Worth Examination Group repeatedly requested that an enforcement action be brought against Stanford Financial. That was over 12 years before the SEC 

actually brought an enforcement action. The Inspector General found serious managerial, cultural, and performance-based problems at the SEC, which led to this terrible failure. First, what are you doing to help compensate the victims of the Stanford Financial fraud? And second, what steps are you taking to ensure that the performance problems identified in the Inspector General’s report are corrected at the 

SEC? 

Answer. The SEC is taking the situation of Stanford victims very seriously. In addition to working aggressively to maximize recovery to investors harmed by the 

Stanford fraud, Commission staff is studying all the facts relating to the Stanford 

case with respect to whether a legal basis exists for a SIPA liquidation of the registered broker-dealer, the Stanford Group Company. As part of this review, I have 

met with representatives of the Stanford Victims Coalition, and Commission staff 

also has met with a number of Stanford victims to discuss this matter. We continue 

to review the facts of the case to determine whether there is a statutory basis for 

providing SIPC coverage to the victims, and will continue to work with Congress 

in this regard. 

With respect to the conduct that was discussed by the inspector general in the 

Stanford case, there were clearly many missed opportunities in the 1997 to 2005 

period covered by the report. Since that time, much has changed regarding the 

agency’s leadership, its internal procedures and its culture of collaboration. Even before the IG’s report, the agency had taken a number of steps which address the concerns raised in the report. These steps include: 

—Establishing escalation procedures and revamping the process for handling tips, 

complaints and referrals. 

—Changing performance metrics so that quantity does not trump quality. 

—Streamlining approval procedures in enforcement investigations. 

—Establishing and consistently applying factors for referring matters to others 

agencies. 

—Making effective use of other resources within the agency, such as economic and 

international experts. 

—Training Enforcement Division staff on potential remedies available under the 

laws applicable to both investment advisers and broker-dealers. 

—Sensitizing employees who leave the organization to their ongoing restrictions. 

QUESTIONS SUBMITTED BY SENATOR SUSAN COLLINS

Question. An Inspector General report found that the SEC did not properly pursue 

allegations made against Allied Capital, but instead went after the hedge fund manager who challenged the value of Allied Capital’s investments. This allegedly occurred after heavy lobbying by Allied, who was represented by a former SEC official. 

These actions raise concerns about how decisions are made at the agency about 

bringing and conducting investigations. 

What procedures and criteria does the Enforcement Division use to review and 

approve new investigations? 

Answer. The Division pursues all information it receives concerning potential violations of the Federal securities laws and Commission rules. We generate and receive leads for new investigations through a variety of efforts, including research, 

market surveillance, examination referrals, and observation by Division staff. We 

also receive tips and other information from outside the Division and outside the 

agency. 

Upon receipt of a Tip, Complaint or Referral (‘‘TCR’’), the Division’s Office of Market Intelligence analyzes TCRs and triages the information provided, sometimes in 

consultation with other Divisions and Offices, to determine whether the information 

provided (along with any other similar information already available to the Commission) alleges a potential violation of the Federal securities laws or Commission 

Rules such that further review by an investigative group is warranted. If the information warrants further review, the Office of Market Intelligence assigns the TCR 
192 

to an investigative group that, among other things, analyzes the information to determine programmatic significance and resource availability. 

When the investigative staff generates information or receives a TCR concerning 

potential violative conduct, the investigative staff determines whether to open a 

Matter Under Inquiry (‘‘MUI’’) based on whether a sufficiently credible source or set 

of facts suggests that a MUI could lead to an enforcement action that would address 

a violation of the Federal securities laws. Basic considerations used when making 

this determination may include, but are not limited to: 

—The statutes or rules potentially violated; 

—The egregiousness of the potential violation; 

—The potential magnitude of the violation; 

—The potential losses involved or harm to an investor or investors; 

—Whether the potentially harmed group is particularly vulnerable or at risk; 

—Whether the conduct is ongoing; 

—Whether the conduct can be investigated efficiently and within the statute of 

limitations period; and 

—Whether other authorities, including Federal or State agencies or regulators, 

might be better suited to investigate the conduct. 

While the threshold analysis for opening a MUI is relatively low, determining 

whether the MUI should be converted to an investigation or whether to open an investigation, is typically a more detailed evaluation that is based on additional information. The evaluation for whether to convert a MUI to an investigation (or open 

an investigation) turns on whether, and to what extent, the investigation has the 

potential to address violative conduct. Threshold issues for the investigative staff to 

consider when evaluating the facts include: (1) Do the facts suggest a possible violation of the Federal securities laws involving fraud or other serious misconduct? (2) 

If yes, is an investment of resources by the staff merited by: (a) the magnitude or 

nature of the violation, (b) the size of the victim group, (c) the amount of potential 

or actual losses to investors, (d) for potential insider trading, the amount of profits 

or losses avoided, or (e) for potential financial reporting violations, materiality? (3) 

If yes, is the conduct: (a) ongoing, or (b) within the statute of limitations period? 

In addition to the threshold issues above, one way to determine whether the conduct is serious is to consider the following supplemental factors: 

—Is there a need for immediate action to protect investors? 

—Does the conduct undermine the fairness or liquidity? of the U.S. securities 

markets? 

—Does the case involve a recidivist? 

—Has the SEC or Division designated the subject matter to be a priority? 

—Does the case fulfill a programmatic goal of the SEC and the Division? 

—Does the case involve a possibly widespread industry practice that should be addressed? 

—Does the matter give the SEC an opportunity to be visible in a community that 

might not otherwise be familiar with the SEC or the protections afforded by the 

securities laws? 

—Does the case present a good opportunity to cooperate with other civil and 

criminal agencies? 

Both senior management and frontline staff participate in the analysis to determine whether to open a MUI, to convert a MUI into an investigation, or to open 

an investigation. Leveraging the skill sets and experience of staff and management 

ensures that Division resources are efficiently utilized in the investigation of enforcement matters. This process gives the Division the ability to have a unified, coherent, coordinated response to the huge volume of information we generate or receive every day, thereby enhancing the Division’s ability to open the right investigations, bring solid cases, and more effectively protect investors. 

Question. How does the Commission evaluate the implementation of these procedures to ensure that the division is managing its operations efficiently? 

Answer. Managing the flow of information into and throughout the Division is 

critical to effective operations within the Division. We have established systems and 

procedures that enable senior management to track a host of critical elements including the flow of information and the progress of investigations. For example, 

TCRs are now logged into a single, searchable database system. This allows management to track TCRs to ensure that each TCR is appropriately referred to the investigative staff, or otherwise resolved. The staff has been instructed as to procedures for memorializing their resolution decisions, which ensures that there is a 

record that can be audited. 

Simultaneously, we have been working on a new intake and resolution system 

that will allow us to capture even more information about TCRs. The new system 

will provide more robust search capabilities so that TCRs can be better assessed or 
193 

triaged. In addition, this new system will add enhanced workflow abilities so we can 

track how TCRs are being used throughout the agency. We expect to deploy this system later this year. Meanwhile, we also are in the early stages of designing the 

third phase of this system, which will add risk analytics tools to help us quickly 

and efficiently identify high value tips and search for trends and patterns across the 

data. 

We have also enhanced our ability to manage workflow to improve the oversight 

of our investigations. Senior management tracks all MUIs and investigations within 

the Division to ensure that resources are allocated appropriately, MUIs and investigations are conducted efficiently, and enforcement recommendations, or other resolutions, are completed timely. A bi-weekly report on MUI openings allows senior 

management to closely track new matters. Investigations are reviewed on a quarterly basis by senior management and the investigative staff. This review process 

ensures that robust investigative theories are developed, potential obstacles are 

identified early, and investigations advance appropriately. The quarterly review 

process also increases the Division’s opportunities to coordinate enforcement efforts 

with other agencies. 

Additionally, senior management designates certain investigations as National 

Priority investigations; these include, among others, cases of potential programmatic 

significance, where the alleged misconduct occurred in connection with products, 

markets, transactions or practices that pose particularly significant risks for investors or a systemically important sector of the market. The Office of the Director 

tracks National Priority investigations on a monthly basis to ensure swift and efficient resolution of these matters. The Director routinely meets with investigative 

staff and management assigned to each matter designated as a National Priority investigation. 

In addition to the systems and procedures to manage TCRs and the progression 

of MUIs and investigations, the Division has implemented several methods to track 

routine investigative benchmarks such as issuing subpoenas, taking testimony, and 

making recommendations to the Commission. We implemented a practice whereby 

the staff must obtain the Director’s approval before requesting an extension of a 

tolling agreement. Division management uses a Dashboard metric to continually 

measure the progress of the Division and we compare our progress to both our internal goals and past results. 

SUBCOMMITTEE RECESS

Senator DURBIN. The subcommittee stands in recess. 

[Whereupon, at 4:08 p.m., Wednesday, April 28, the subcommittee was recessed, to reconvene subject to the call of the 

Chair.] 

(195) 

FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 

YEAR 2011 

THURSDAY, MAY 20, 2010 

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

The subcommittee met at 3:03 p.m., in room SD–192, Dirksen 

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

Present: Senators Durbin and Collins. 

FEDERAL TRADE COMMISSION 

STATEMENT OF HON. JON LEIBOWITZ, CHAIRMAN 

OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

Senator DURBIN. Good afternoon. 

I am pleased to welcome you to this hearing before the Financial 

Services and General Government Appropriations Subcommittee. 

And my apologies for running a few minutes late. We had a vote 

at 2:30 and had to wait until the end to make sure that everything 

turned out just right. 

Today’s hearing focuses on the Federal Trade Commission (FTC), 

both in the agency’s budget request for fiscal year 2011 and on 

oversight. 

Testifying before us this afternoon is the Chairman of the FTC, 

Jon Leibowitz. 

Thank you for being here. 

Mr. LEIBOWITZ. Thank you. 

Senator DURBIN. I welcome my distinguished ranking member, 

Senator Susan Collins of Maine. 

Consumers are affected every day by the Federal Trade Commission’s work. Thanks to the Federal Trade Commission, consumers 

receive fewer telemarketing calls and e-mail spam, obtain free credit reports, receive identity theft victim assistance, can rely on 

truthful information on products and services, and benefit from 

competition in the marketplace through lower prices, more choice, 

and higher-quality products and services. 

Funding provided to the FTC supports these successful outcomes. 

Over the past 3 years, the Federal Trade Commission saved consumers more than $1.4 billion in economic injury by stopping illegal practices in the marketplace. Last year alone, the FTC took action against mergers likely to harm competition in markets, with 
196 

a total of $22.3 billion in sales. Since 2006, the FTC’s budget has 

grown to support a staff of 1,170, a cumulative 4-year staffing increase of 16 percent. New staff have enhanced the agency’s ability 

to protect consumers and preserve competition. The growth of the 

staff and budget reflect a rapidly evolving and sophisticated marketplace. As technology continues to transform, consumers are enjoying revolutionary services and information unimaginable just a 

short time ago. 

But, unfortunately, the risk from new technology has also increased, such as identity theft, privacy violation, and data security 

concerns. Newly hired FTC staff have been assigned to respond to 

these increased risks, not just through enforcement, but also 

through education of consumers and industry. 

Funds provided to the FTC have also allowed the Commission to 

focus on risks from the current economic downturn. Unemployment 

and the foreclosure crisis have created prime opportunities for 

fraudsters to prey on financially vulnerable Americans. Since 2009, 

the FTC, working with States and other agencies, has been involved in bringing more than 200 cases against firms deceiving 

homeowners into paying for bogus mortgage modifications and foreclosure-avoidance schemes. 

PREPARED STATEMENT

I am not going to go through the rest of my statement here, but 

make it part of the record, because I’m anxious to give my colleague a chance and then to open it up to questions. 

[The statement follows:] 

PREPARED STATEMENT OF SENATOR RICHARD J. DURBIN

Good afternoon. I am pleased to welcome you to this hearing today before the Financial Services and General Government Appropriations Subcommittee. 

Today’s hearing focuses on the Federal Trade Commission, both on the agency’s 

budget request for fiscal year 2011 and on oversight of previously appropriated 

funds. 

Testifying before us this afternoon is the Chairman of the FTC, Jon Leibowitz. 

I welcome my distinguished Ranking Member Susan Collins, others who join me 

on the dais today and others who may arrive. 

Consumers are affected every day by the FTC’s work. Thanks to the FTC, consumers: receive fewer telemarketing calls and e-mail spam; obtain free credit reports; receive identity theft victim assistance; can rely on truthful information about 

products and services; and benefit from competition in the market through lower 

prices: more choice, and higher quality products and services. 

Funding provided to the FTC supports these successful outcomes for consumers. 

Over the past 3 years, the FTC saved consumers more than $1.4 billion in economic injury by stopping illegal practices in the marketplace. 

And last year alone, the FTC took action against mergers likely to harm competition in markets with a total of $22.3 billion in sales. 

Since 2006, the FTC’s budget has grown to support a staff of 1,170, a cumulative 

4-year staffing increase of 16 percent. 

New staff have enhanced the agency’s ability to protect consumers and preserve 

competition in the marketplace. 

NEW TECHNOLOGIES, FINANCIAL FRAUD SPUR FTC GROWTH

The growth of FTC’s staff and budget reflects a rapidly evolving and sophisticated 

marketplace. As technology continues to transform, consumers are enjoying revolutionary services and information unimaginable just a decade ago. 

But unfortunately, the risks from new technology and capabilities have also increased, such as identity theft, privacy violations, and data security concerns. 

Newly-hired FTC staff have been assigned to respond to these increasing risks, not 

just through enforcement but also through education of consumers and industry. 
197 

Funds provided to the FTC have also allowed the FTC to focus on risks resulting 

from the current economic downturn. 

Unemployment and the foreclosure crisis have created prime opportunities for 

fraudsters to prey on financially vulnerable Americans. 

Since 2009, the FTC, working with states and other agencies, has been involved 

in bringing more than 200 cases against firms deceiving homeowners into paying 

for bogus mortgage modifications and foreclosure avoidance schemes. 

To reduce mortgage-related scams in the long term, the FTC has initiated a rulemaking proposing to prohibit companies from charging fees in advance of any loan 

modification services and to require specific disclosures so that consumers can make 

informed decisions. 

MARKET MONITORING AND ANALYSIS PROMPTS FTC GROWTH

Staffing increases over the last several years have also enhanced the FTC’s ability 

to monitor and review the competitiveness of increasingly complex industries. One 

of these is the petroleum market. Americans rely on this market for transportation 

and to heat and light our homes and businesses. 

The FTC continuously monitors gas and diesel prices to track trends and potential 

market distortions. Just last year, the FTC created a new rule to prohibit fraud and 

deceit in wholesale petroleum markets. The FTC also educated businesses on compliance with the specific directives included in the new rules. Together these steps 

will enhance the competitiveness of the petroleum market. 

FUTURE FUNDING

For fiscal year 2011, the FTC requests $314 million. This is an increase of 7.6 

percent over the fiscal year 2010 enacted level and would allow the FTC to hire 40 

new staffers in similar growth areas from previous years. In particular, the FTC requests to add staff to handle the increasing workload related to financial practices, 

privacy and data security, and complex merger transactions. 

I look forward to discussing these and other issues with you. 

Senator DURBIN. But, Mr. Chairman, thank you for being here. 

My apologies, again, for running late. 

Mr. LEIBOWITZ. No problem. 

Senator DURBIN. Senator Collins. 

STATEMENT OF SENATOR SUSAN COLLINS

Senator COLLINS. Thank you, Mr. Chairman. 

I appreciate your holding this hearing on the budget request of 

the Federal Trade Commission. 

As you pointed out, the FTC deals with issues that affect the economic life of all Americans. Through its administration of a wide 

variety of consumer protection laws, the FTC protects consumers 

from deceptive practices, such as fraudulent and predatory scams, 

identity theft, and credit fraud. The FTC also works to help American consumers by preventing unfair methods of competition in the 

marketplace. 

I’ve long had an interest in combating consumer fraud. As the 

chairman may recall, when he was a member of what was then the 

Governmental Affairs Committee, we worked together on a lot of 

consumer fraud hearings. 

Unfortunately, today we see that the incidence of fraud and predatory scams appears to be on the rise as con artists prey on citizens, particularly the elderly, who are facing financial hardship. 

And, unfortunately, in tough economic times, people seem to be 

more vulnerable to scams and schemes because, in many cases, 

they are in desperate financial straits. These con artists exploit 

these tough economic times to lure Americans into scams that look 

and sound legitimate. 
198 

At the Homeland Security Committee, we held hearings at which 

the FTC Chairman testified, looking at the scams associated with 

the stimulus bill last year. These con artists not only rob their victims of money, but also of their dignity. And that, in many cases, 

can make senior citizens reluctant to come forward and seek the 

help that they deserve. 

I look forward to hearing from Chairman Leibowitz on the FTC’s 

most recent efforts to identify and publicize these types of scams 

and other financial frauds. 

I’m also very interested to learn more about the FTC’s efforts to 

address anticompetitive pay-for-delay patent settlements, which 

keep lower-cost generic drugs off the market and cost consumers 

and taxpayers billions of dollars. And, judging from the charts before us, I think that the Chairman is going to address that issue, 

and I’m very glad that he is. 

Finally, as I represent a State that borders Canada, I’m also interested to hear more about the Commission’s effort to combat 

cross-border fraud, which periodically rears its ugly head in my 

State. 

I also look forward to getting into a discussion about certain privacy issues, such as whether the FTC is investigating allegations 

against Google violating the privacy rights of our citizens as 

through its street view mapping activities. That’s the allegation, 

and I look forward to discussing that, as well. 

Thank you, Mr. Chairman. 

Senator DURBIN. Thank you, Senator Collins. 

Chairman Leibowitz. 

SUMMARY STATEMENT OF HON. JON LEIBOWITZ

Mr. LEIBOWITZ. Thank you so much, Chairman Durbin, Ranking 

Member Collins, for inviting me to testify today, and for those very 

kind words about our agency. 

As you know, the mission of the Federal Trade Commission is extraordinarily broad. And we pursue it vigorously, but with a very 

limited number of people. 

For fiscal year 2011, we’re requesting $314 million and 1,207 

FTEs. But, to put that into perspective, in 1979, when the population of the United States was only 225 million, before the Do Not 

Call list, before Internet scams, actually before the Internet, and 

a host of new statutory responsibilities, the FTC had nearly 1,800 

FTEs. 

With the active support of this subcommittee, we have been aggressive in our efforts to protect consumers from unfair and deceptive acts and unfair methods of competition. We look forward to 

doing even more in 2011. And we’re going to have to do more, because, unfortunately, the recession has meant that American consumers are at an even greater risk than usual for financial frauds. 

As scams have proliferated, we have tried to step up our efforts 

to stop them. Since the beginning of last year, the FTC has brought 

more than 40 cases against fraud targeting financially distressed 

consumers—and we’re partnering more with the State attorneys 

general these days, although we always have—we’ve brought more 

than 300 cases to shut down foreclosure rescue scams, fake job of-
199 

fers, and, as you mentioned, Senator Collins, phony access to Federal stimulus money. 

These sorts of scams are not new. In the last decade, sadly, we’ve recovered nearly $500 million for consumers who lost their money 

in the financial frauds area alone, which is a strikingly large 

amount of money. 

The Commission has also used the rulemaking authority that 

you provided for us. In February, we proposed the rule that would 

ban advance fees by mortgage modification companies. And we expect to complete that rulemaking this summer. As we’ve seen in 

our law enforcement actions, far too often, consumers pay thousands of dollars in advance for these services, but they receive 

nothing in return. And that’s often because these scams have 95 

percent of their employees in sales and 3 percent of their employees doing modifications. The Commission has also proposed rules 

in the debt settlement and mortgage servicing and advertising 

areas. 

We continue to prioritize consumer privacy and data security. We 

bring actions against companies that don’t adequately protect consumers’ personal information; we’ve brought 29 cases, to date. And 

we provide information to 15,000 consumers a week who call about 

identity theft. 

Emerging technologies and business models, including social networking behavioral advertising, hold significant promise for consumer benefits, but also, as you mentioned, risks to privacy. So we 

are examining them closely. We’ve held a series of roundtables. We 

plan to share what we’ve learned and make recommendations later 

this year. 

Do Not Call continues to be a success. I was almost going to say 

‘‘ringing success,’’ but I thought that would be a bad pun. But, I 

guess I did, and I guess it was. We anticipate that, by the end of 

June, 200 million numbers will be registered. The FTC took action 

in the past year against eight companies making robocalls. We’ve 

recovered $40 million in fines over the past 5 years for Do Not Call 

violations. Just recently, we shut down one company—and the investigation was done out of our Chicago regional office—that alone 

placed more than 1 billion calls offering auto warranties. 

Today, we’re announcing a major case against AMS Financial for 

falsely representing that they could lower consumers’ credit card 

interest rates and making illegal robocalls. We obtained a temporary injunction—or a restraining order in this case, freezing the 

defendant’s assets. And we worked with several State attorneys 

general, including the wonderful Lisa Madigan, to do it. 

We’ve also challenged hidden fees in prepaid telephone cards. 

And today we’re announcing a $500,000 settlement with Diamond 

Phone Card, which targeted the immigrant community. And you 

can see, this is their ‘‘Hasta la vista’’ card. It purports to give you 

a certain number of minutes for $2, but, in fact, it gave consumers 

far less than that. 

Protecting non-English speakers is a task we take very, very seriously. We produce most of our consumer educational material in 

both English and Spanish. 

And we make extensive efforts to protect other vulnerable populations, including outreach activities to alert senior citizens to 
200 

fraud and reverse mortgages. We’ve brought multiple cases involving senior citizens in the last 11⁄2 years. 

And we have various initiatives underway to protect children. In 

the last year, we’ve distributed an online Internet safety guide 

called ‘‘Netcetera’’ to school districts—you may have copies on your 

desk; launched a kid-friendly campaign to teach kids how to evaluate advertising; and released our seventh entertainment-industry 

marketing report. And just as critically, pursuant to this subcommittee’s direction, we are leading a multiagency task force on 

marketing food to children. 

And, as you know, we also enforce the Federal antitrust laws in 

a wide range of areas, including healthcare, technology, energy, 

consumer goods and services, and the top priority, as you mentioned, Senator Collins, of the Commission’s competition agenda— 

and we take a greatest-good-for-the-greatest-number-of-people approach—is stopping pay-for-delay settlements between brand name 

and generic drug makers. To be blunt, these are really sweetheart 

deals, and we estimate that it costs consumers about $3.5 billion 

a year. 

And here’s what really is going on: A brand name drug company 

will sue a generic company. And they claim that the generic has 

violated their patent. And then they turn right around and they 

settle the case, literally by paying off the generic not to compete. 

So, the brand continues to charge monopoly prices. The generic 

companies collect a big fat paycheck. And consumers keep paying 

higher prices for much-needed medicines. 

And so, it’s win-win for the companies, but it is absolutely loselose for consumers. And because of a few misguided court decisions 

in 2005, as you can see, the problem has only gotten worse. There 

wasn’t a single pay-for-delay deal in 2004. The two adverse decisions, which, of course, we disagreed with, came down at the end 

of 2005. And you can see, as our chart shows, there were a record 

19 deals like this last year. 

Every single Commissioner at the Federal Trade Commission 

supports ending these deals. And we’re currently litigating two 

cases, with the hope of getting one to the Supreme Court. Today, 

we filed an amicus brief in the second circuit on a pay-for-delay 

case, along with 34 State attorneys general, including the State attorneys general of Maine and Illinois; they filed a companion brief. 

A much quicker solution, however, would be legislation that ends 

this unconscionable practice. And so, we greatly appreciate the cosponsorship of both you, Mr. Chairman, and you, Ranking Member 

Collins, of precisely that legislation. And we’re hopeful, because the 

bill passed the Senate Judiciary Committee, the full House, and we 

have the endorsement of the President to abolish this practice, that 

it’s possible we can get it done this year. 

And I’d like—in my last 4 seconds, I ask unanimous consent for 

15 additional seconds, just to mention one more—— 

Thank you so much, Mr. Chairman. 

I’d like to talk about just one other area of particular focus for 

the Commission, and that’s gasoline prices. When the price of gasoline hit $4 a gallon in mid-2008, every household in the country felt 

the impact. Everyone in this room did. And we realize how important it is that petroleum markets remain competitive. So, in the 
201 

1While the views expressed in this written statement represent the views of the Commission, 

my oral presentation and responses to questions are my own and do not necessarily reflect the 

views of the Commission or any other Commissioner. 2The Commission currently enforces or otherwise implements more than 60 laws. 

past year, we’ve added to our arsenal by adopting a rule prohibiting manipulation of wholesale petroleum markets and allowing us 

to fine violators. 

PREPARED STATEMENT

We’re doing a lot of other important work. I would be glad to talk 

about it, but I know I’ve exceeded my time, so I’m happy to answer 

questions. 

[The statement follows:] 

PREPARED STATEMENT OF JON LEIBOWITZ

INTRODUCTION

Chairman Durbin, Ranking Member Collins, and Members of the Subcommittee, 

I am Jon Leibowitz, Chairman of the Federal Trade Commission (‘‘FTC’’ or ‘‘Commission’’).1 I appreciate the opportunity to appear before you today, to testify in support of the Federal Trade Commission’s fiscal year 2011 appropriation request and 

to share with you some of the work the agency has done and plans to do over the 

next year. The Commission thanks you for this opportunity and looks forward to 

working with you to protect American consumers and promote competition. 

The FTC is the only Federal agency with both consumer protection and competition jurisdiction across broad sectors of the economy. It enforces the Federal Trade 

Commission Act, which prohibits anticompetitive, deceptive, or unfair business practices, as well as a broad range of other laws.2 The FTC’s Annual Report, released 

last month, is attached to this testimony. The report highlights the agency’s efforts 

to protect consumers and promote competition, including initiatives to stop fraud 

targeting financially distressed consumers, protect privacy, and prevent anticompetitive practices such as ‘‘pay-for-delay’’ in the pharmaceutical industry, which costs 

consumers $3.5 billion a year in higher drug costs. 

This past year, the staff of the FTC has handled a growing workload, which includes its strong and effective law enforcement program. The additional funding 

that Congress provided over the past fiscal year, for which we are grateful, has enabled us to increase the staff who are working to protect consumers from deceptive 

practices, particularly fraudulent schemes that have proliferated during these challenging economic times. 

This testimony first describes some of our work under both our consumer protection mission and our competition mission and then summarizes the FTC’s budget 

request for fiscal year 2011. To meet the challenges of the next fiscal year, the FTC 

requests $314 million which will support 1,207 FTE. This request represents an increase of $22.3 million and 40 FTE over the fiscal year 2010 enacted levels. 

CONSUMER PROTECTION MISSION

The FTC Is Protecting Consumers During the Economic Downturn 

With the economic downturn, the Commission has increased its emphasis on protecting consumers in financial distress. In the past year, the FTC has brought almost 40 law enforcement actions to stop scams that prey on consumers suffering 

from the financial downturn, and the agency is also engaged in rulemaking and consumer education efforts related to financial services. In the financial services area 

alone, the FTC has filed more than 100 actions against providers of financial services over the past 5 years, and obtained nearly $500 million in redress for consumers of financial services in the past 10 years. By working closely with state attorneys general, we have expanded the reach of law enforcement efforts to help consumers in economic distress through hundreds of additional cases. 

Helping Distressed Homeowners: Challenging Mortgage Modification and 

Foreclosure Relief Scams and Writing New Mortgage Rules 

Since 2008, the Commission has filed 28 law enforcement actions focused on stopping mortgage loan modification and foreclosure relief scams. Companies operating 

these scams make deceptive claims about their abilities to modify the terms of consumers’ loans and prevent foreclosure. During 2009, as these scams proliferated, we 
202 

3See FTC Press Release, Federal and State Agencies Target Mortgage Relief Scams (Nov. 24, 

2009), www.ftc.gov/opa/2009/11/stolenhope.shtm; FTC Press Release, Federal and State Agencies 

Target Mortgage Foreclosure Rescue and Loan Modification Scams (July 15, 2009), www.ftc.gov/ 

opa/2009/07/loanlies.shtm. 4See FTC v. Dinamica Financiera LLC, No. 09–CV–03554 (C.D. Cal. preliminary injunction 

issued June 3, 2009). 5Mortgage Assistance Relief Services Notice of Proposed Rulemaking, 75 Fed. Reg. 10,707 

(Mar. 9, 2010). 6Mortgage Acts and Practices Advance Notice of Proposed Rulemaking, 74 Fed. Reg. 26,118 

(June 1, 2009). 7FTC v. EMC Mortgage Corp., No. 4:08–CV–338 (E.D. Tex. final order Sept. 9, 2008). 8Mortgage Acts and Practices Advance Notice of Proposed Rulemaking, 74 Fed. Reg. 26,118 

(June 1, 2009). 9See FTC Press Release, Three Home Loan Advertisers Settle FTC Charges; Failed to Disclose Key Loan Terms in Ads (Jan. 8, 2009), www.ftc.gov/opa/2009/01/anm.shtm. 10See FTC Press Release, FTC Cracks Down on Con Artists Who Target Jobless Americans 

(Feb. 17, 2010), www.ftc.gov/opa/2010/02/bottomdollar.shtm. 11See FTC Press Release, FTC Cracks Down on Scammers Trying to Take Advantage of the 

Economic Downturn (July 1, 2009), www.ftc.gov/opa/2009/07/shortchange.shtm. 

partnered in sweeps with Federal and state law enforcement agencies to collectively 

file more than 200 lawsuits to combat these scams.3 For example, in one case, the 

FTC obtained a preliminary injunction that prevented defendants from falsely representing in Spanish-language radio and magazine ads that they would obtain mortgage loan modifications or stop foreclosure in all or virtually all instances.4 Consumers paid more than $3.3 million to these defendants, and the FTC is seeking 

consumer redress. 

To curb deceptive and unfair practices in the mortgage industry, the FTC is also 

considering rules on three mortgage-related topics: —Mortgage Assistance Relief Services.—In March 2010, the Commission published 

a notice of proposed rulemaking covering loan modification, foreclosure relief, 

and other mortgage assistance relief services.5 If adopted, the proposed rule 

would ban providers from collecting fees prior to delivering promised results, 

prohibit misrepresentations in marketing, and require affirmative disclosures. 

The FTC expects to complete this rulemaking proceeding within the next 90 

days. —Mortgage Servicing Practices.—The Commission published an advance notice of 

proposed rulemaking addressing mortgage servicing practices and plans to determine in the near future whether to propose such a rule.6 Commission cases 

in this area have targeted core servicing issues such as failing to post payments 

upon receipt, charging unauthorized fees, and engaging in deceptive or unfair 

collection tactics. For example, in September 2008, the FTC settled charges that 

EMC Mortgage Corporation and its parent, The Bear Stearns Companies, LLC, 

violated Section 5 of the FTC Act and the Fair Debt Collection Practices Act 

in servicing mortgage loans, including debts that were in default when EMC obtained them.7 The EMC settlement required the defendants to pay $28 million 

in consumer redress, and the Commission has sent checks to more than 86,000 

consumer victims. —Mortgage Advertising Practices.—The Commission published an advance notice 

of proposed rulemaking addressing mortgage advertising practices and plans to 

determine in the near future whether to propose such a rule.8 FTC cases in this 

area have targeted mortgage lenders and brokers for deceptive marketing of 

loan costs or other key loan terms, such as the existence of a prepayment penalty or a large balloon payment due at the end of the loan. For example, the 

Commission announced settlements with three mortgage lenders charged with 

advertising low interest rates and low monthly payments, but failing to disclose 

adequately that those rates and payments would increase substantially after a 

short period of time.9

Helping American Workers: Stopping Employment Opportunity Scams, Bogus 

Government Grants, and Get-Rich-Quick Schemes 

In February 2010, along with state and Federal partners, the Commission announced Operation Bottom Dollar, a sweep that involved 69 civil and criminal actions against organizations making false promises of employment or employment 

placement opportunities.10 Last July, the FTC announced Operation Short Change, 

another Federal-state crackdown that challenged 120 schemes selling bogus government grant opportunities, illusory get-rich-quick plans, job opportunity scams, and 

phony debt-reduction services.11

In addition, in October 2009, MoneyGram paid $18 million to settle FTC charges 

that its money transfer system helped con artists trick U.S. consumers into wiring 
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12See FTC Press Release, MoneyGram to Pay $18 Million to Settle FTC Charges That it Allowed its Money Transfer System To Be Used for Fraud (Oct. 20, 2009), www.ftc.gov/opa/2009/ 

10/moneygram.shtm; FTC Press Release, FTC Mails Redress Checks to Fraud Victims Who Lost 

Money Through MoneyGram’s Money Transfer System (Apr. 28, 2010), www.ftc.gov/opa/2010/04/ 

moneygram.shtm. 13See prepared statement of the Federal Trade Commission on The Debt Settlement Industry: 

The Consumer’s Experience, before the Senate Committee on Commerce, Science, and Transportation (Apr. 22, 2010), www.ftc.gov/os/testimony/100422debtsettlement.pdf; prepared statement 

of the Federal Trade Commission on Financial Services and Products: The Role of the Federal 

Trade Commission in Protecting Consumers, before the Senate Committee on Commerce, 

Science, and Transportation (Feb. 4, 2010), www.ftc.gov/os/testimony/P064814financial-services.pdf. 14Telemarketing Sales Rule Proposed Rule, 74 Fed. Reg. 41,988 (Aug. 19, 2009). 15Dave & Busters, Inc., FTC File No. 082–3153 (proposed consent order Mar. 25, 2010). 16FTC v. Navone, No. 2:08–CV–01842 (D. Nev. final order Dec. 29, 2009). 17 U.S. v. ChoicePoint, Inc., No. 1:06–CV–0198–JTC (N.D. Ga. final order Oct. 14, 2009). 18The Credit Card Accountability Responsibility and Disclosure Act of 2009 required the Commission to issue a rule to prevent deceptive marketing of ‘‘free credit reports.’’ The amended rule 

went into effect on April 2, 2010. See Free Annual File Disclosures Final Rule, 75 Fed. Reg. 

9,726 (Mar. 3, 2010). 19FTC v. LifeLock, Inc., No. 2:10–cv–00530–NVW (D. Ariz. final order Mar. 15, 2010). See also 

State of Illinois Press Release, FTC, 35 States Reach Agreement with LifeLock for Misleading 

Advertising (Mar. 9, 2010), www.illinoisattorneygeneral.gov/pressroom/2010l03/20100309.html. 

them money in connection with fake lottery schemes, secret shopper scams, and 

bogus guaranteed loans. In April the FTC sent more than 34,000 checks to consumers identified as victims in these schemes.12

Halting Scams Promising to Relieve Consumers of Debt or Repair Their Credit 

Histories 

Many consumers faced with mounting debt have turned unwittingly to scam artists for help. Since 2008, the Commission has brought ten lawsuits challenging 

sham nonprofit credit counseling firms, debt settlement services, and debt negotiators. During the same period, the FTC filed a dozen lawsuits against credit repair 

organizations that falsely misrepresented their ability to remove negative but accurate information from credit reports.13

To curb ongoing abuses in the debt relief industry, in August 2009 the Commission proposed a rule to, among other things, prohibit debt relief service providers 

from charging consumers a fee until they have delivered the promised results.14 The 

FTC expects to complete this rulemaking proceeding within the next 60 days. 

Protecting Consumers in the Online World 

The Commission devotes significant resources to protecting consumers in a hightech world by promoting data security, preventing identity theft, and protecting online privacy. 

To date, the FTC has brought 29 enforcement actions against businesses for failing to protect consumers’ personal information. For example, in the past 7 months, 

the Commission has (1) announced a settlement with restaurant chain Dave & 

Buster’s arising from a data breach that allegedly compromised the credit card numbers and expiration dates of approximately 130,000 customers; 15 (2) in a case where 

a mortgage broker threw out consumer credit reports in a dumpster, obtained the 

first civil penalty for violation of a new Commission rule that requires companies 

to adequately dispose of sensitive credit report information;16 and (3) obtained a 

stipulated modified order against ChoicePoint after charging that the company 

failed to implement a comprehensive information security program, as required by 

a 2006 Federal court order.17

The FTC also helps consumers avoid identity theft and responds to 15,000 consumers each week who call the FTC identity theft hotline. Under Federal law, consumers have a right to a free credit report to help them detect identity theft and 

errors in their credit reports, which are used not only to obtain credit but also for 

employment, housing, and insurance. In recent years, however, companies have offered so-called ‘‘free’’ credit reports that are conditioned on enrollment in a costly 

plan, often an identity theft protection plan. To protect consumers from this confusing and deceptive marketing, the FTC amended the Free Credit Report Rule to 

require prominent disclosures for advertising of these supposedly ‘‘free’’ credit reports.18 Now, consumers will be better able to avoid supposedly ‘‘free’’ offers that 

actually cost money. In addition, in one of the largest FTC-state coordinated actions, 

the FTC and Illinois Attorney General Lisa Madigan jointly announced a settlement 

with LifeLock, Inc., which advertised its identity theft prevention service, claiming 

that it was ‘‘the first company to prevent identity theft from occurring.’’ 19 The order 
204 

20FTC v. Pricewert, LLC, No. 09–CV–2407 (N.D. Cal. final order issued Apr. 4, 2010). 21See Official Google Enterprise Blog, Q2 2009 Spam Trends, http:// 

googleenterprise.blogspot.com/2009/07/q2-2009-spam-trends.html. 22Sears Holdings Mgmt. Corp., FTC File No. 082–3099 (final order Aug. 31, 2009). 23See generally FTC Exploring Privacy web page, www.ftc.gov/bcp/workshops/ 

privacyroundtables/index.shtml. 24See, e.g., FTC Press Release FTC Sues to Stop Robocalls With Deceptive Credit Card Interest-Rate Reduction Claims (Dec. 8, 2009), www.ftc.gov/opa/2009/12/robocall.shtm. 25 U.S. v. DIRECTV, Inc., No. 09 2605 MRP FMOx (C.D. Cal. final order May 14, 2009); U.S. 

v. Comcast Corp., No. 2:09–cv–01589–HB (E.D. Pa. final order Apr. 16, 2009). Last year, the 

FTC also charged satellite television provider Dish Network with causing telemarketing calls— 

including robocalls—to be made to numerous consumers whose numbers are on the National Do 

Not Call Registry. See U.S. v. Dish Network, LLC, No. 3:09–cv–03–73–JES–CHE (C.D. Ill. filed 

Mar. 25, 2009) (action brought jointly with the Attorneys General of California, Illinois, Ohio, 

and North Carolina). 

requires LifeLock to pay $11 million to the FTC for consumer redress and $1 million 

to 35 state attorneys general co-plaintiffs. The order also bars the company from 

making deceptive claims that its services offer absolute prevention against identity 

theft and requires it to take more stringent measures to safeguard the personal information it collects from customers. 

The FTC also has brought numerous cases to meet the challenges of protecting 

consumers and their privacy while they are using the Internet. For example, in 

June 2009, the FTC moved quickly to shut down a rogue Internet Service Provider 

that knowingly hosted and actively participated in the distribution of illegal spam, 

child pornography, and other harmful electronic content.20 The FTC complaint alleged that the defendant actively recruited and colluded with criminals seeking to 

distribute illegal, malicious, and harmful electronic content. After the Commission 

shut down this ISP, there was a temporary 30 percent drop in spam worldwide.21

Just last month, the court ordered the operation to turn over $1.08 million in illgotten gains to the Commission. 

Also last summer, the Commission settled allegations that Sears failed to disclose 

adequately the scope of consumers’ personal information collected via software that 

Sears represented would merely track their ‘‘online browsing.’’ 22 The FTC charged 

that the software, in fact, monitored consumers’ online secure sessions as well—including those on third-party websites—and collected information such as the contents of shopping carts, online bank statements, e-mail headers and subject lines, 

and other sensitive data. Only deep in a lengthy end user license agreement did 

Sears disclose the extent of the tracking. 

In an effort to examine privacy issues more broadly, FTC staff convened three 

public roundtables to explore concerns about consumer privacy and ensure that the 

Commission’s approach to privacy keeps pace with the latest technologies and 

emerging business models.23 Participants discussed developments in areas such as 

social networking, cloud computing, online behavioral advertising, mobile marketing, health privacy, and the collection and use of information by data brokers 

and other businesses. The Commission plans to release recommendations for public 

comment later this year. 

Enforcement of the National Do Not Call Registry 

The National Do Not Call Registry is an unqualified success. So far, there are 

more than 198 million unique numbers on the Registry. By the end of June 2010, 

the Commission anticipates we will reach 200 million telephone numbers. To protect 

these consumers’ privacy, the Commission strictly enforces the Do Not Call list and 

fights other abusive telemarketing practices. 

During the past year, the Commission filed eight new actions that attack the use 

of harassing ‘‘robocalls’’—the automated delivery of prerecorded messages—to deliver deceptive telemarketing pitches that promised consumers extended auto warranties and credit card interest rate reduction services.24 In addition, DIRECTV 

paid a $2.3 million civil penalty to settle charges that it placed prerecorded calls 

to consumers who previously had told the company not to call them, and Comcast 

paid $900,000 to settle charges that it called consumers who had specifically asked 

not to be called.25

Stopping Deceptive Advertising of Prepaid Phone Cards 

The Commission continues to protect consumers from hidden fees and false claims 

about how many minutes prepaid phone cards deliver. This type of deception often 

targets recent immigrants from Latin America, Africa, Asia, and elsewhere around 

the world. This week, the Commission announced a settlement with Diamond Phone 

Card, Inc., which agreed to pay $500,000 to settle FTC allegations that it charged 

hidden fees and misrepresented the number of calling minutes delivered by its pre-
205 

26FTC v. Diamond Phone Card, Inc., No. 09–CV–03257–NGG–VVP (E.D.N.Y. final order May 

14, 2010). In 2009, the FTC resolved similar charges in two cases against prepaid phone card 

companies. See FTC v. Clifton Telecard Alliance One LLC, No. 2:08–CV–01480–PGS–ES (D.N.J. 

final order June 12, 2009) (imposing $1.3 million judgment); FTC v. Alternatel, Inc., No. 1:08– 

cv–21433–AJ (S.D. Fla. final order Apr. 1, 2009) (imposing $2.25 million judgment). 27The Working Group is comprised of the FTC, the U.S. Department of Agriculture, the U.S. 

Food and Drug Administration and the Centers for Disease Control, and was established pursuant to Congress’ (and this Subcommittee’s) direction in the 2009 Omnibus Appropriations report. 28See generally Sizing Up Food Marketing and Childhood Obesity web page, www.ftc.gov/bcp/ 

workshops/sizingup/index.shtml. 29Marketing Food to Children and Adolescents: A Review of Industry Expenditures, Activities, 

and Self-Regulation (2008), www.ftc.gov/os/2008/07/P064504foodmktingreport.pdf. 30See FTC Press Release, OnGuardOnline.gov Off to a Fast Start with Online Child Safety 

Campaign (Mar. 31, 2010), www.ftc.gov/opa/2010/03/netcetera.shtm. 31See FTC Press Release, FTC Helps Prepare Kids for a World Where Advertising Is Everywhere (Apr. 28, 2010), www.ftc.gov/opa/2010/04/admongo1.shtm. 32See Children’s Online Privacy Protection Act of 1998, 15 U.S.C. §§ 6501–6508 (2009). The 

FTC’s implementing regulations (the ‘‘COPPA Rule’’) are found at 16 C.F.R. Part 312 (2009). 

paid cards.26 In total, the FTC has obtained more than $4 million from companies 

charged with deceptive marketing of prepaid calling cards. 

Protecting and Educating Children Through New and Innovative Initiatives 

Promoting the Marketing of Healthier Foods to Children 

The Commission continues its efforts to combat childhood obesity. Since 2005, the 

FTC has hosted three public forums on food marketing to children and childhood 

obesity. At an event in December 2009, the Interagency Working Group on Food 

Marketed to Children 27 suggested possible voluntary nutrition standards. Experts 

also presented new research on the impact of food advertising on children’s food 

choices, discussed the legal ramifications of possible restrictions on food advertising 

to children, and assessed food industry self-regulatory efforts to impose nutritional 

standards on their advertising to children.28

FTC staff is working on a follow-up report to the FTC 2008 Report on Marketing 

Food to Children and Adolescents. The 2008 report reviewed industry expenditures 

and activities in marketing foods and beverages, including integrated advertising 

campaigns that combine traditional media, such as television, with previously 

unmeasured forms of marketing, including packaging, in-store advertising, sweepstakes, Internet, and cross-promotion with movies.29 The follow-up report, expected 

in 2011, will analyze marketing activities and expenditures in 2009 by dozens of 

food and beverage companies in promoting their products to children and teenagers. 

It will be an important tool to track the marketplace’s response to childhood obesity 

and identify areas where more action is needed. The report also will examine the 

nutritional quality of those products and compare them to the nutritional quality 

of products marketed to children and teenagers in 2006. 

Promoting Children’s Internet Safety and Advertising Literacy 

During the past year, the FTC developed additional resources for use by children, 

parents and teachers to stay safe online and learn about how advertising works. In 

response to the Broadband Data Improvement Act of 2008, the FTC produced the 

brochure Net Cetera: Chatting With Kids About Being Online to give adults practical tips to help children navigate the online world.30 Since its release in late 2009, 

more than two million copies of Net Cetera in English and Spanish have been distributed nationwide. 

At the end of April 2010, the FTC launched Admongo.gov, a campaign designed 

to help children think critically about online and offline advertising, and better understand the ads they see.31 Through this campaign, children learn to ask: Who is 

responsible for the ad? What is it actually saying? What does it want me to do? The 

FTC is working with schools, libraries, and other organizations to get this important 

education to kids, as well as their parents and teachers. 

Protecting Children’s Online Privacy 

The Commission protects the safety and privacy of children online through enforcement and administration of the Children’s Online Privacy Protection Act of 

1998 (‘‘COPPA’’) and its implementing rule.32 COPPA requires operators of websites 

and online services that target children under age 13 to obtain verifiable parental 

consent before they collect, use, or disclose personal information from children. The 

FTC engages in broad business and consumer education to ensure widespread 

knowledge of and adherence to COPPA. In the past 10 years, the Commission has 

brought 14 law enforcement actions alleging COPPA violations and has collected 

more than $3.2 million in civil penalties. In light of significant changes to the online 
206 

33 Although the Commission generally reviews its rules approximately every 10 years, the continued rapid-fire pace of technological change led the agency to accelerate its COPPA review by 

5 years, to this year. See FTC Press Release, FTC to Host Public Roundtable to Review Whether 

Technology Changes Warrant Changes to the Children’s Online Privacy Protection Rule (Apr. 

19, 2010), www.ftc.gov/opa/2010/04/coppa.shtm. 34Kellogg Co., FTC File No. 082–3245 (final order July 27, 2009). 35Walgreens agreed to pay $5,970,000 in consumer redress, CVS Pharmacy, Inc. agreed to pay $2,783,047, Rite Aid Corp. agreed to pay $500,000, and Improvita Health Products, Inc.’s principals agreed to pay $565,000 to settle these matters. See FTC Press Releases, Walgreens Will 

Pay Nearly $6 Million to Settle FTC Deceptive Advertising Charges, Suppliers of Airborne-like 

Cold-and-Flu Supplements Reach Separate $565,000 Settlement (Mar. 23, 2010), www.ftc.gov/ 

opa/2010/03/walgreens.shtm; CVS to Pay Nearly $2.8 Million in Consumer Refunds to Settle 

FTC Charges of Unsubstantiated Advertising of AirShield ‘‘Immune Boosting’’ Supplement 

(Sept. 8, 2009), www.ftc.gov/opa/2009/09/cvs.shtm; Rite Aid to Pay $500,000 in Consumer Refunds to Settle FTC Charges of False and Deceptive Advertising (July 13, 2009), www.ftc.gov/ 

opa/2009/07/riteaide.shtm. 36FTC v. Direct Marketing Concepts, No. 04–CV–11136–GAO (D. Mass. final order Aug. 13, 

2009). 37FTC v. Roex, Inc., No. SACV 09–0266 (C.D. Cal. final order Mar. 4, 2009). 38See FTC Press Release, FTC Issues Report to Congress on Use of Its Enhanced Authority 

Under the U.S. SAFE WEB Act (Dec. 15, 2009), www.ftc.gov/opa/2009/12/safeweb.shtm. 

environment, including the explosion of social networking and the proliferation of 

mobile web technologies and interactive gaming, the Commission recently initiated 

an accelerated review of COPPA’s effectiveness.33

Using Aggressive Law Enforcement to Combat Health Fraud 

The FTC continues to protect consumers from false and misleading health claims 

involving products as diverse as cereals and cold remedies and claims as significant 

as cancer cures. Last year, the Commission settled a case with Kellogg Company over charges that 

its advertising falsely claimed that Frosted Mini Wheats was clinically shown to improve children’s attentiveness by nearly 20 percent.34 The Commission also responded to the burgeoning area of immunity-boosting and cold and flu prevention 

and treatment claims when it investigated and reached a settlement with Airborne, 

Inc., the leading seller of effervescent tablets that purported to protect against exposure to germs in crowded environments. The Commission then settled similar 

charges against three major pharmacy retail chains that marketed their own storebrand ‘‘copycat’’ cold and flu products, and the manufacturer of these copycat products, requiring the companies to pay a total of $9.8 million.35

Importantly, the FTC also challenges claims that dietary supplements and devices 

treat, cure, or prevent cancer and other serious diseases. Last summer, a Federal 

district court ordered Direct Marketing Concepts to pay nearly $70 million for consumer refunds for dietary supplements it claimed would treat, cure, or prevent cancer and other serious diseases.36 In FTC v. Roex, Inc., the FTC alleged that the defendants’ nationally broadcast, live, call-in radio show made claims that an infrared 

sauna device could treat cancer and that various dietary supplements would treat, 

reduce the risk of, or prevent diseases such as cancer, HIV/AIDS, diabetes, strokes 

and heart attacks, Alzheimer’s disease, and Parkinson’s disease.37 The defendants 

agreed to pay more than $3 million for consumer redress and are prohibited from 

making such claims in the future. 

Protecting Consumers from Cross-Border Fraud and Promoting International Consumer Protection 

The FTC plays a leadership role in international consumer protection and privacy 

matters to better protect American consumers in a globalized world. The Commission’s use of the U.S. SAFE WEB Act—which allows the sharing of information with 

our foreign sister agencies when working together to stop global scams—has directly 

benefitted American consumers because many of the foreign agency requests involved schemes directed at American victims. In December, the FTC submitted a 

3-year report to Congress detailing its use of the powers Congress gave it to fight 

cross-border fraud. As explained in the report, the FTC has shared information in 

response to 38 requests from 14 foreign law enforcement agencies, resulting in more 

than 17 enforcement actions by U.S. and foreign authorities, and issued 26 civil investigative demands on behalf of 6 foreign agencies in 12 investigations.38 The vast 

majority of these SAFE WEB information sharing requests resulted in actions 

against companies harming American consumers. 

On the policy front, the FTC continues to shape international policies on issues 

such as electronic commerce, green marketing claims, and consumer economics to 

provide sound protection for American consumers in the global marketplace. This 

month, the Commission hosted a 2-day forum and ‘‘best practices’’ training session 
207 

39See FTC Competition Enforcement Database, www.ftc.gov/bc/caselist/index.shtml. 40See Pay-for-Delay: How Drug Company Pay-Offs Cost Consumers Billions, FTC Staff Study 

(Jan. 2010), www.ftc.gov/os/2010/01/100112payfordelayrpt.pdf. 41 In a mature market, generic drugs are 15 percent of their brand name equivalent. See id. 42 In re Androgel Antitrust Litig. (No. II), 1:09–MD–2084–TWT (N.D. Ga. Feb. 22, 2010) 

(granting defendants’ motion to dismiss). 43See Ark. Carpenters Health & Welfare Fund v. Bayer AG, Nos. 05–2851–cv(L), 05–2852– 

cv(CON) (2d Cir. Apr. 29, 2010) (affirming summary judgment for defendants but inviting plaintiffs to petition for rehearing en banc). 44FTC v. Cephalon, Inc., No. 2:08–cv–2141 (E.D. Pa. Mar. 29, 2010) (denying motion to dismiss), www.ftc.gov/os/caselist/0610182/index.shtm. 

of the International Consumer Protection and Enforcement Network for consumer 

protection officials from over 40 countries. Participants discussed global scams, electronic transactions, emerging trends and risks associated with social networking 

sites, and advance-fee fraud. 

COMPETITION MISSION

Anticompetitive mergers, collusive behavior, and exclusionary conduct by monopolists can harm American consumers in dramatic, if sometimes less visible, ways. As 

our recent enforcement activity emphasizes, anticompetitive activity can raise the 

cost of prescription drugs, real estate services, and other consumer products and 

services, and can impede innovation that would bring better and more cost-effective 

products and services to American consumers. During fiscal year 2009, the Commission brought 25 competition enforcement actions, including filing a record seven 

merger challenges in Federal district court or in an administrative proceeding, and 

through the first half of fiscal year 2010, the Commission has already brought 16 

competition enforcement actions.39

Ending Pay-for Delay Patent Settlements. 

One of the Commission’s highest antitrust priorities is stopping pay-for-delay patent settlements in the pharmaceutical industry, a practice that costs consumers $3.5 

billion each year.40 In these deals (also known as exclusion- or reverse-payment settlements), the brand-name drug firm pays its potential generic competitor to abandon a patent challenge and delay entering the market with a lower-cost generic 

product. Such settlements limit competition at the expense of consumers, whose access to lower-priced, generic drugs is delayed—sometimes for many years—and raise 

the costs of prescription drugs for businesses and the government.41 We thank you, 

Mr. Chairman and Ranking Member Collins, for co-sponsoring a bill in the Senate 

to end these deals. 

Since 2005, some court decisions have taken a lenient approach to such agreements in drug patent settlements. As a result, it has become increasingly difficult 

to halt pay-for-delay settlements through litigation, and such settlements have become a common industry strategy. 

Because these settlements cause enormous consumer harm, the Commission devotes substantial resources to this problem. For example, we are appealing the U.S. 

District Court for the Northern District of Georgia’s dismissal of our complaint in 

a pay-for-delay case against Solvay Pharmaceuticals regarding the drug Androgel, 

a testosterone replacement medication.42 We continue to conduct new investigations 

into pay-for-delay agreements. 

Importantly, we have reason to believe that the tide may be turning. Just last 

month, an appellate panel in the Second Circuit, which had previously adopted a 

permissive legal standard on pay-for-delay settlements, took the extraordinary step 

of questioning its own standard and explicitly encouraging consumer plaintiffs to request the full court’s consideration of the pay-for-delay issue.43 And just 2 months 

ago, in March 2010, a Federal district court judge in Philadelphia denied a defense 

motion to dismiss the FTC’s currently pending pay-for-delay case against Cephalon, 

the manufacturer of the drug Provigil, a sleep disorder medication with nearly $1 

billion in annual U.S. sales.44

Beyond individual cases, we have employed our full expertise to attack pay-fordelay settlements. In the past year, we have issued studies measuring the scope of 

this problem, which found: 

—The number of these agreements is increasing, from zero in fiscal year 2004 to 

19 in fiscal year 2009; 

—On average, the deals delay the availability of cost-saving generics by 17 

months; and 
208 

45Pay-for-Delay: How Drug Company Pay-Offs Cost Consumers Billions, supra note 40. 46FTC v. Ovation Pharm., Inc., No. 08–cv–06379 (D. Minn. complaint filed Dec. 16, 2008). 47Watson Pharm., Inc., FTC File No. 091 0116 (final order Jan. 7, 2010); Schering Plough 

Corp., FTC File No. 091–0075 (proposed order accepted for public comment Oct. 29, 2009); Pfizer 

Inc., FTC File No. 091–0053 (final order Jan. 25, 2010). 48FTC v. CSL Ltd., No. 09–cv–1000 (D.D.C. complaint filed May 28, 2009). 49Thoratec Corp., FTC File No. 091–0064 (administrative complaint dismissed Aug. 11, 2009). 50 CVS Caremark Corp., FTC File No. 072–3119 (final order Jun. 18, 2009). Respondent independently agreed to pay $2.25 million to resolve Department of Health and Human Services allegations that it violated HIPAA, the Health Insurance Portability and Accountability Act of 

1996. 

—If not stopped, pay-for-delay deals will, conservatively, cost consumers $3.5 billion a year.45

Finally, we are continuing our efforts to encourage legislation that would more 

rapidly fix this enormous problem, working closely with Congress and the Administration. 

Health Care 

The healthcare system plays an important role in the lives and economic security 

of all Americans and has a significant impact on Federal, state, and local government budgets. Accordingly, it is one of the Commission’s top priorities. Our efforts 

to protect and promote competition in the healthcare system are critical to reduce 

costs, improve quality, and encourage innovation. 

The Commission has acted aggressively to stop anticompetitive healthcare mergers. In December 2009, the FTC trial team challenged, in Federal court, Ovation’s 

acquisition of a drug for premature infants with congenital heart defects, introducing evidence showing that Ovation acquired its only competitor and took advantage of its monopoly to raise prices by 1,300 percent. The Commission is seeking 

a divestiture to restore competition and consumer recovery of Ovation’s illegally obtained profits.46 The FTC also reviewed several pharmaceutical mergers and required divestitures in Watson/Arrow, Merck/Schering Plough, and Pfizer/Wyeth to 

preserve competition that otherwise would have been lost.47 In the past year, the 

Commission also has sued to block Talecris’ acquisition of CSL, which the Commission alleged would have raised prices for plasma derivative protein therapies used 

to treat a variety of illnesses, including immunodeficiency diseases.48 The parties 

abandoned the deal in the face of the FTC’s challenge. 

Merger enforcement also promotes innovation. In medical device markets, the 

Commission blocked Thoratec’s proposed acquisition of Heartware, its only potential 

competitor for left ventricular assist devices. These devices are surgically 

implantable blood pumps that provide a life-sustaining treatment for patients with 

advanced heart failure.49 Blocking the transaction ensures that the two companies 

will continue to compete to develop better devices, which will benefit consumers. 

Pharmacy Benefit Management (PBM) services are a critical part of the 

healthcare industry, and the Commission has allocated substantial resources to enforcement, advocacy, and policy development in this area. PBMs can help healthcare 

plans manage the cost and quality of the prescription drug benefits they provide to 

their enrollees, but many have criticized PBMs for a lack of transparency in their 

operations, for improper use and inadequate protection of consumer information, 

and for utilizing their position in the market to undermine competition. 

Last year, the Commission took action against CVS/Caremark, a leading PBM, in 

order to protect the personal information of consumers.50 As CVS/Caremark has acknowledged, the Commission is currently investigating whether certain CVS/ 

Caremark business practices may violate the FTC Act. This investigation is ongoing 

and has been structured as a joint effort of the Bureau of Consumer Protection and 

the Bureau of Competition so that the investigation can efficiently and effectively 

address both antitrust and consumer protection issues. 

Energy 

The petroleum industry plays a crucial role in our economy, and few issues are 

more important to consumers and businesses than the prices they pay for gasoline 

and energy to heat and light their homes and businesses. Accordingly, the Commission carefully monitors energy markets and devotes significant resources to maintain and protect competition across a wide range of industry activities. This work 

is undertaken by a large number of expert economists and attorneys who specialize 

in the energy sector. 

Merger reviews are an essential part of this effort. In 2009, the Commission reviewed proposed acquisitions involving energy products under the Hart-Scott-Rodino 

(‘‘HSR’’) Act and also monitored the industry for transactions that were not filed 
209 

51See Gasoline and Diesel Price Monitoring, www.ftc.gov/ftc/oilgas/gaslprice.htm. 52See FTC Press Release, New FTC Rule Prohibits Petroleum Market Manipulation (Aug. 6, 

2009), www.ftc.gov/opa/2009/08/mmr.shtm; 74 Fed. Reg. 40686 (Aug. 12, 2009). 53Guide to Complying with Petroleum Market Manipulation Regulations, www.ftc.gov/os/2009/ 

11/091113mmrguide.pdf. 54See Comment of the Federal Trade Commission on Control and Affiliation for Purposes of 

the Commission’s Market-Based Rate Requirements Under Section 205 of the Federal Power Act 

and the Requirements of Section 203 of the Federal Power Act, FERC Docket No. RM09–16– 

000 (Mar. 29, 2010); Comment of the Federal Trade Commission on Control and Affiliation for 

Purposes of the Commission’s Market-Based Rate Requirements Under Section 205 of the Federal Power Act and the Requirements of Section 203 of the Federal Power Act, FERC Docket 

No. PL09–3–000 (Apr. 28, 2009); Reply Comment of the Federal Trade Commission on Transmission Planning Processes Under Order No. 890, FERC Docket No. AD09–8–000 (Dec. 3, 2009). 55 Intel, FTC File No. 061–0247 (administrative complaint Dec. 16, 2009). 

under HSR. In particular, the Commission investigated acquisitions involving refined petroleum products pipelines and terminals, liquefied petroleum gas (propane), 

lubricant oils, natural gas, and natural gas liquids storage and transportation. 

In addition, the Commission continues the ‘‘Gas Price Monitoring Project’’ that 

began in 2002. The monitoring project is a daily, in-depth review of retail and 

wholesale prices of gasoline and diesel fuel in 20 wholesale regions and approximately 360 retail areas across the United States. The project provides information 

that allows the Commission to investigate potentially anticompetitive conduct in 

fuel markets and serves as an early-warning system to alert our experts to unusual 

pricing activity.51

Last November, the Commission added another tool to its arsenal. Pursuant to 

authority granted by Congress under the Energy Independence and Security Act of 

2007, the Commission issued the Petroleum Market Manipulation Rule, which prohibits fraud or deceit in wholesale petroleum markets.52 The agency conducted an 

extensive rulemaking proceeding to decide whether and how to craft such a rule, 

holding a public workshop with participants representing industry, government 

agencies, academics, and consumers; conducting numerous meetings with consumer 

groups, trade associations, and businesses; and considering over 150 written comments from consumers and businesses. The Commission worked diligently on this 

issue for 16 months and now has instituted a rule that meets the goal of Congress. 

Importantly, the rule specifies that statements that intentionally omit material information and are likely to distort petroleum markets are violations of the rule. 

Commission staff has prepared and made available a compliance guide for businesses, which explains the Rule in depth and provides examples of the type of actions that would violate it.53 These examples include descriptions of potential violations, such as false public announcements of planned pricing or output decisions, 

false statistical or data reporting, and wash sales intended to disguise the actual 

liquidity of a market or the price of a particular product. The Market Manipulation 

Rule has only been in effect for a short time, and the agency plans to aggressively 

enforce the rule as needed. 

In addition to these actions, Commission economists and attorneys utilize their 

expertise to provide reports on energy matters, including market statistics and 

trends for use by Congress and other policymakers. For example, the Commission 

issues semi-annual reports on oil and gas activities and an annual report on ethanol. The Commission also has submitted multiple comments to the Federal Energy 

Regulatory Commission (FERC) on a broad range of competition-related issues, including, among others, ways to assess the competitive effects of partial acquisition 

of electric power providers, efforts to encourage consumer price responsiveness, and 

appropriate metrics to measure the performance of electric regional transmission organizations.54

Technology Markets 

Technological advances are critically important to growing our economy, creating 

jobs, and introducing more efficient products and processes into the marketplace, 

and the Commission focuses significant resources on promoting competition in technology sectors. In December 2009, the Commission charged chip manufacturer Intel 

Corporation with illegally using its position to stifle competition, strengthen its monopoly, and raise prices to consumers in violation of the FTC Act.55 Trial is expected 

to start in September. 

The Commission also monitors business relationships between firms with competing technology products. Section 8 of the Clayton Act prohibits, with certain exceptions, the same person from serving as a director or officer of two competing corporations. After an FTC investigation raised concerns about two individuals serving 
210 

56 Realcomp II, Ltd., FTC Dkt. No. 9320 (Opinion of the Commission Oct. 30, 2009). 57See West Penn MLS, FTC File No. 081–0167 (final order Feb. 13, 2009); Multiple Listing 

Serv., Inc., FTC File No. 061–0090 (final order Mar. 13, 2008); MiRealSource, Inc., FTC File 

No. 061–0266 (final order Mar. 20, 2007); Info. and Real Estate Servs, LLC., FTC File No. 061– 

0087 (final order Nov. 22, 2006); N. New England Real Estate Network, Inc., FTC File No. 051– 

0065 (final order Nov. 22, 2006); Williamsburg Area Ass’n of Realtors, Inc., FTC File No. 061– 

0268 (final order Nov. 22, 2006); Realtors Ass’n of N. Wisconsin, Inc., FTC File No. 061–0267 

(final order Nov. 22, 2006); Monmouth County Ass’n of Realtors, FTC File No. 051–0217 (final 

order Nov. 22, 2006); Austin Bd. of Realtors, FTC File No. 051–0219 (final order Aug. 29, 2006). 

Indeed, due to pressure from the Commission and DOJ, the National Association of Realtors 

dropped its optional rule that prohibited affiliated Multiple Listing Services from transmitting 

prohibiting discount broker listings to public web sites.on its web site. 58Serv. Corp. Int’l, FTC File No. 091–0138 (final order Jan. 6, 2010). 59Serv. Corp. Int’l and Keystone N. Am., Inc., FTC File No. 101–0013 (final order Apr. 30, 

2010). 60PepsiCo, Inc. FTC File No. 091–0133 (proposed order accepted for public comment Feb. 26, 

2010). 61Polypore Int’l, Inc., FTC Dkt. No. 9237 (initial decision Mar. 1, 2010). 

on the boards of both Apple and Google, these individuals each stepped down from 

the boards of one of the companies. 

In addition to its enforcement role, the Commission also has been empowered by 

Congress to provide substantive policy analysis and guidance. During 2009, the FTC 

completed a series of eight hearings to explore the competitive dynamics of evolving 

markets for intellectual property, and FTC staff is drafting a report analyzing the 

competitive implications of information gathered at the hearings. 

Consumer Goods and Services 

The Commission works to protect competition in markets for consumer goods and 

services and has taken actions involving a variety of products, including recent 

cases involving real estate services, funeral and cemetery services, and soft drinks. 

A home is one of the most important purchases, and usually the most expensive 

purchase, that Americans make. The Commission therefore has devoted substantial 

resources to ensure that home buyers benefit from competition. In November 2009, 

the Commission ruled that Realcomp II, Ltd., a real estate Multiple Listing Service 

(MLS) in Michigan, could not impede competition from non-traditional and discount 

brokers by prohibiting them from listing on popular real estate websites.56 Such 

hurdles can raise the costs that home buyers pay for real estate services. The Commission has been particularly active in this market and has obtained consent orders 

with several other Multiple Listing Services throughout the United States (Texas, 

Pennsylvania, New Jersey, Colorado, Wisconsin, and New Hampshire) to protect the 

competition that discount brokers provide.57

The funeral industry is also important to consumers and a focus of the Commission. In the past year, the Commission has taken action in two matters to preserve 

competition in cemetery and funeral services. When Service Corporation International (SCI) proposed to acquire Palm Mortuary, the third-largest provider of cemetery services in Las Vegas, Nevada, the Commission required SCI to first divest 

its existing cemetery and funeral home in Las Vegas.58 When SCI proposed to acquired Keystone North America, the Commission ordered SCI to divest 22 funeral 

homes and four cemeteries in 19 areas throughout the country to preserve competition that otherwise would have been lost.59

In another consumer sector, the Commission required PepsiCo, Inc. to restrict its 

access to the confidential business information of rival Dr Pepper Snapple Group, 

as a condition for proceeding with a proposed $7.8 billion acquisition of Pepsi’s two 

largest bottlers and distributors. Those bottlers also distribute Dr Pepper and 

Snapple Group soft drinks, and, without the restrictions, Pepsi would have had opportunities to obtain and use that information to reduce competition and harm consumers.60

Industrial and Chemical Sectors 

The Commission took action this year in several mergers between chemical companies that threatened to increase costs to manufacturers, state and local governments, and farmers, which might ultimately increase costs to end users. Commission staff successfully litigated a challenge against Polypore International Inc.’s acquisition of Microporous Products, securing an administrative order requiring complete divestiture of the acquired assets in order to restore competition in the manufacture of battery separators, a key component in car batteries, batteries for 

uninterruptible power supplies, and other flooded lead-acid batteries.61 The Commission also investigated mergers in other chemical markets and required 
211 

62K∂S Aktiengesellschaft, FTC File No. 091–0086 (final order Nov. 9, 2009). 63 Horizontal Merger Guidelines For Public Comment (Apr. 20, 2010), www.ftc.gov/opa/2010/ 

04/hmg.shtm. The proposed revisions are the result of a very open and public process, including 

public comments and input received during a series of five joint FTC/DOJ public workshops held 

over the past 6 months. The five workshops were open to the public and attended by attorneys, 

academics, economists, consumer groups, and businesses. 64Workshop information is available at www.ftc.gov/opp/workshops/news/index.shtml. 65 Emerging Health Care Issues: Follow-on Biologic Drug Competition (June 2009), 

www.ftc.gov/os/2009/06/P083901biologicsreport.pdf. 66 A follow-on biologic (FOB) is a drug that can be prescribed to treat the same condition as 

the branded product. To obtain FDA marketing approval the FOB applicant does not have to 

duplicate the safety and efficacy findings of the branded product; rather, it must show that it 

is biosimilar to the branded product. 67 Authorized Generics: An Interim Report (June 2009), www.ftc.gov/os/2009/06/ 

P062105authorizedgenericsreport.pdf. 

divestitures for high-performance chemical pigments, bulk de-icing salt sold to state 

and local governments, and anhydrous ammonia fertilizer used by farmers.62

Promoting Transparency and Process Improvements 

The Commission uses its resources to provide better guidance to companies and 

courts about when mergers are likely to run afoul of the antitrust laws and harm 

consumers. This provides businesses and their counsel a clearer understanding of 

the ‘‘rules of the road’’ and helps them to avoid anticompetitive conduct without the 

need for government intervention. It also helps judges to develop an appropriate 

framework to interpret and apply the antitrust laws. To this end, senior staff have 

been working with the Antitrust Division of the Department of Justice to jointly review, revise, and update the agencies’ Horizontal Merger Guidelines, which were released for public comment last month.63 The Guidelines explain, in clear, plain language, how the Federal antitrust agencies evaluate the likely competitive impact of 

mergers and when the agencies are likely to challenge proposed mergers. The 

Guidelines were last updated in 1992, and since then advances in economic understanding and additional enforcement experience have gradually modified the way 

that the agencies evaluate and investigate mergers. The new version is intended to 

more accurately reflect current agency practice. 

Policy and Research 

The Commission promotes competition through research, reports, and workshops. 

A recent example is a series of workshops entitled ‘‘How Will Journalism Survive 

the Internet Age?’’ 64 The expansion of electronic commerce and media is challenging 

traditional news organizations, and many might not survive. This sea change may 

have implications for competition among media outlets and our democratic society. 

Our workshops have focused attention on this emerging concern, assessed the range 

of economic and policy issues raised by the changes in the market, and explored how 

competition can be used to enhance consumer welfare. 

The workshops began in December 2009, and the opening session featured contributions from a diverse group of well-informed participants. Owners of news organizations, journalists, bloggers, technologists, members of Congress, economists, and 

other academics discussed the changing dynamics of the news business and considered what new journalism business models might evolve in the future. The workshops continued in March 2010, when experts in a variety of fields discussed certain 

proposals to reduce the costs of and increase the profitability of journalism. Next 

month, the Commission will hold a final public workshop to compare, contrast, and 

seek consensus about the policy options that have been proposed over the last 6 

months. After evaluating the various issued raised, the Commission plans to issue 

a report in the fall. 

The Commission also has issued reports studying the pharmaceutical industry. 

Last summer, the Commission released a report entitled ‘‘Follow-on Biologic Drug 

Competition,’’ which concluded that providing the U.S. Food and Drug Administration (FDA) with the authority to approve follow-on biologics would be an efficient 

way to bring lower-priced drugs to market.65 Biologics—products manufactured 

using living tissues and microorganisms—are increasingly used to treat arthritis, 

cancer, diabetes, and other diseases.66 The Commission also released a report analyzing the competitive impact of authorized generics, which are drugs approved by 

the FDA as brand-name drugs but that the brand subsequently chooses to market 

(or have marketed) as generic.67

International Competition Activities 

The Commission actively develops strong working relationships with foreign antitrust agencies, helping to ensure that markets around the world, in which U.S. com-
212 

68 Commissioner Kovacic believes the Commission will need additional resources but he disagrees with certain aspects of the analysis in Section IV of this testimony. 

panies compete, are fair and transparent. Now that over 100 jurisdictions have competition laws, it is more critical than ever that the Commission continue to promote 

sound antitrust policies and practices abroad. The agency uses a wide range of tools 

to accomplish these goals. The FTC promotes coordination and cooperation with foreign antitrust agencies to obtain necessary information and assistance for our investigations and to avoid divergent outcomes on cases that are reviewed in multiple 

jurisdictions. Over the past year, the FTC worked on almost 40 international antitrust investigations, including significant mergers such as Pfizer/Wyeth—a case in 

which agency staff worked with staff in the Australian, Canadian and EU competition agencies. 

The FTC continues to build a strong network of cooperative relationships with our 

counterparts abroad, ranging from the EU and Canada to China and India. For example, the FTC recently signed a Memorandum of Understanding with the Russian 

Federal Antimonopoly Service. In addition, with congressional support, the Commission expanded its longstanding technical assistance program to help competition 

agencies in new market-based economies. More broadly, the Commission is a recognized leader in key multilateral competition fora, such as the International Competition Network (ICN), the competition committee of the Organisation for Economic 

Co-operation and Development, the experts committee of the United Nations conference on Trade, and the Development and Asia-Pacific Economic Cooperation. 

NEEDED RESOURCES FOR FISCAL YEAR 2011

The FTC has a small staff to accomplish its consumer protection and competition 

goals. Today, the Commission’s fiscal year 2010 budget supports 1,167 full-time 

equivalents (FTEs). This is considerably fewer than it had at its peak in 1979, when 

the Commission had approximately 1,800 FTEs.68 While the U.S. population has increased by 35 percent since then, and the gross domestic product (adjusted for inflation) has more than doubled, the size of the agency staff has not kept pace. The 

FTC has done and will continue to do more with less, but it needs further resources 

to tackle the critical problems described above. The FTC appreciates the strong support it has received from Congress and the Appropriations Committees over the last 

decade. With additional funding, we look forward to doing even more to address the 

needs of American consumers and promote vigorous, competitive markets in the future. 

The fiscal year 2010 enacted appropriation provides the FTC with $291,700,000, 

which supports 1,167 FTE. The fiscal year 2010 appropriation enables the FTC to 

protect more consumers in areas including financial services, healthcare, and hightech marketing, and to challenge anticompetitive mergers and business practices in 

the technology, healthcare, pharmaceutical, and energy industries. To meet these 

challenges going forward, the FTC requests $314,000,000 which will support 1,207 

FTE in fiscal year 2011. This request represents an increase of $22,300,000 over the 

fiscal year 2010 enacted level and includes: 

—$11,962,000 in mandatory cost increases associated with contract expenses (CPI 

adjustment) and personnel (salaries and within-grade increases); 

—$6,164,000 for 40 additional FTE: 

—23 FTE to staff high-priority consumer protection matters in such areas as 

financial practices, fraud targeting vulnerable Americans, privacy and data 

security, health fraud advertising, mobile marketing and new media, data 

analysis, forensic accounting services, and domestic and international outreach; and otherwise provide support for the effective operation of the consumer protection goal. 

—17 FTE to meet the needs of increasingly resource-intensive merger investigations and litigation and to challenge anticompetitive business practices in the 

healthcare, pharmaceutical, energy, and technology sectors among others; promote convergence in competition policy of foreign enforcement practices; and 

otherwise provide support for the effective operation of the competition goal. 

—$4,174,000 to cover the costs of acquiring and outfitting a new building to replace the 601 New Jersey Avenue building upon the expiration of the lease in 

2012, as well as interim space to house anticipated increased staff, which will 

occur over the next several years. 

Offsetting collections will fund a substantial portion of the FTC’s fiscal year 2011 

budget request. HSR filing fees and Do Not Call fees will provide the agency with 

an estimated $129,000,000 in fiscal year 2011. The General Fund in the U.S. Treas-
213 

ury would make a direct appropriation of $185,000,000 to fund the agency’s operations. 

CONCLUSION

The FTC very much appreciates the strong support it has received from Congress. 

We hope to continue to earn that support by vigorously and aggressively fulfilling 

our mission to protect American consumers and promote a competitive marketplace. 

BEHAVIORAL MARKETING

Senator DURBIN. Well, Chairman Leibowitz—we can tell you’re a 

former Senate staffer; you actually pay attention to the red light. 

So, let me start with this ‘‘behavioral marketing,’’ because it appears that what is happening is that many people are doing things, 

joining things, logging on to things, and, in the process, they are 

giving away their identities and their activities for people to use in 

a commercial way—or for other purposes, really. 

But, tell me how far along this is, what you’re doing about it, and 

how we keep ahead of the game. 

Mr. LEIBOWITZ. Well, it’s a great question. 

With behavioral marketing, there are benefits and there are concerns. So, on the benefit side, consumers prefer to have targeted 

advertising rather than advertisements that they’re not interested 

in. And the advertising supports the free content that we’ve all 

come to like and to expect. 

On the other hand—imagine you were walking around a shopping mall and there was someone behind you. He’s following you 

around, and he’s taking notes on where you’re going, and sending 

it off to where you’re going later, saying ‘‘He has a platinum card. 

He’s interested in a particular color shorts.’’ It would be a little disturbing to you. And if the person being followed was a child, if it 

was my daughter, I’d want to punch that person out. 

And, at some level—I don’t mean to make light of this—but, at 

some level, that’s exactly what’s going on; information is being obtained by companies, and consumers don’t know exactly where it’s 

going. Sometimes those companies will change their policies in 

midstream, and they won’t tell consumers about it. 

So, we have sort of a two-track approach here—three tracks, actually. One is, we bring enforcement actions. And so, we brought 

a major enforcement action last year against Sears for illegal data 

mining. We believe they didn’t give consumers adequate notice that 

they were getting a lot of sensitive information—bank account 

records, drug information, prescription information, things like 

that. 

Another is, we try to think these issues through, and try to figure out where the marketplace is going, and try to understand it 

better. So, we did a series of workshops in the last few months 

under David Vladeck, our head of the Bureau of Consumer Protection, who’s sitting right behind me, to look at privacy and to look 

at behavioral marketing. And we had stakeholders in from industry, from consumer groups, from academia. We held the workshops 

across the country—two in Washington and one on the west coast. 

And that’s helping us think through these—— 

Senator DURBIN. Can I ask—— 

Mr. LEIBOWITZ. Yes, sir. 
214 

Senator DURBIN. Like just—let me give you a couple 

hypotheticals, and you—— 

Mr. LEIBOWITZ. Sure. 

Senator DURBIN [continuing]. Tell me if there is a legitimate concern there. 

Assuming that I use my credit card, and it’s one of the two giant 

credit cards, for my purchases, is that information available to others, in terms of where I shop, what I buy, how often I pay? 

Mr. LEIBOWITZ. Well, it depends on the terms and conditions of 

your credit card company. Now, my guess—— 

Senator DURBIN. Which we all pore over the details of—— 

Mr. LEIBOWITZ. Well, I mean—— 

Senator DURBIN [continuing]. Every single—— 

Mr. LEIBOWITZ. Look—— 

Senator DURBIN [continuing]. Month. 

Mr. LEIBOWITZ [continuing]. We held a workshop a couple years 

ago on this issue, and it turned out, according to a submission, that 

people with Ph.D.s, when asked if they understood the privacy policies, only about 35 percent of the Ph.D.s and Ph.D. candidates 

knew that. And, of course—— 

Senator DURBIN. They have a tendency—— 

Mr. LEIBOWITZ [continuing]. Not everybody has a Ph.D. 

Senator DURBIN. They have a tendency to exaggerate, anyway. 

Mr. LEIBOWITZ. That’s exactly right. 

And if you think about how many times you read through the 

privacy policy, or we do. I mean, you’re clicking and clicking and 

clicking. 

So, most companies, to protect their brands, and because they 

think it’s the right thing to do, won’t trade this information or sell 

it—but, it is conceivable that some companies do, and that is very, 

very troubling. And if a company says, ‘‘We’re not going to do anything with your information,’’ and then it does, we think that’s an 

unfair and deceptive act or practice. 

Senator DURBIN. So, is this an opt-in or an opt-out, or none of 

the above, or both? 

Mr. LEIBOWITZ. Well, there is a roiling debate about opt-in versus 

opt-out. It depends. We believe—or, speaking for myself—sometimes it’s better to use opt-in, particularly when you’re dealing with 

more sensitive information, so that the default is, you’re not giving 

anyone your personal information. 

But, you can have a good opt-out policy, as well, in which consumers understand what information they’re giving. And a lot of 

consumers, particularly if the information is kept on the Web site 

you’re looking at, and is limited, I think most consumers would be 

fine with that. But, it’s very complicated. 

Senator DURBIN. So, there’s no uniformity—— 

Mr. LEIBOWITZ. There’s no—— 

Senator DURBIN [continuing]. No standard. 

Mr. LEIBOWITZ [continuing]. Uniformity. There is no uniformity. 

Senator DURBIN. And I don’t know—aside from my credit card, 

I don’t know, if I buy something online, whether that information 

is going to be sold. 

Mr. LEIBOWITZ. Right. I mean—I think the better companies will 

not sell that information. They don’t want to do that. They want 
215 

to have a trust relationship with their customers—the people who 

buy from them. But you don’t know. And so, we brought some cases 

in this area. 

And of course the other issue, which we haven’t talked about, is 

data security. And most companies will have reasonably good data 

security. But, we’ve seen so many breaches over the last few years. 

And we’ve brought major cases against TJ Maxx and Dave & Buster’s for inadvertently allowing information to be released to the 

public or to malefactors, who just because they had inadequate security, bad guys go around and they try to mine the data. So, it’s 

a very difficult area. We’re going to try to write something up, particularly on social networking, in the fall, to give guidance to businesses. And, hopefully, most businesses will try to keep their information at a high standard. We go after the ones that don’t. 

FEDERAL TRADE COMMISSION BUILDING

Senator DURBIN. For the last minute of my first round, I will let 

you answer another question. A certain Congressman came to see 

me and said that it would be a great idea if you moved out of your 

building. He’d like to use it for the National Gallery. It’s been a 

passion of his for a long time. So, are you ready to move? 

Mr. LEIBOWITZ. We are not ready to move. And I think we left 

on your desk a copy of the photograph of Franklin Delano Roosevelt dedicating our building, the Federal Trade Commission 

building in 1937, in which he proclaimed it the permanent home 

of the FTC—for the FTC for all time. 
216 

No. You know, this has been our home for more than 70 years. 

The General Services Administration (GSA) has called it ‘‘appropriate.’’ We can get you that information. And I’ve seen that Congressman’s proposal, and it is baffling where he is going to find the 

money for it. Because, you know, if you move us out of the FTC 

building, we have to go somewhere else. You can’t just put us on 

the street. And it costs a lot to buy a new building. It’s not clear 

whether the National Gallery would pay into the District fund or 

the Federal fund. 

And so, we are as one, as a Commission, in opposing that. 

Senator DURBIN. Senator Collins. 

Senator COLLINS. Thank you, Mr. Chairman. 
217 

PAY-FOR-DELAY SETTLEMENTS

First, I want to commend the FTC for pursuing the pay-for-delay 

settlements. I think that’s a huge issue. At a time when healthcare 

costs are spiraling out of sight, and the cost of prescription drugs 

is a major part of that, the idea that consumers are paying $35 billion more, over the last—or over the next 10 years because of these 

settlements, is truly outrageous. 

Your chart doesn’t surprise me, however, because, I believe it 

was in 2002, we passed legislation that I was a cosponsor of—— 

Mr. LEIBOWITZ. You were. 

Senator COLLINS [continuing]. With Senator McCain, Senator 

Schumer, and Senator—then-Senator Edwards—and, probably, my 

friend Senator Durbin was a cosponsor, as well—that was an attempt to end this practice. 

Mr. LEIBOWITZ. Well, you did. And what we had asked for then— 

I wasn’t at the Commission, it was in the Medicare Modernization 

Act—was just to get notice of these agreements. Because everyone 

believed at that time that the deals were per se illegal; absolutely 

illegal. And if we had notice of these deals in the same way we 

have notice of mergers, we would be able to go after the anticompetitive arrangements. 

Because, of course, if a brand and a generic want to settle their 

dispute, we have no problem with settlements. We just have a 

problem with settlements where the brand pays the generic to sit 

it out. 

Senator COLLINS. Exactly. 

Mr. LEIBOWITZ. And so you gave us that authority. We review all 

of these deals. But, what happened after that, in 2005, was that 
218 

two courts ruled that these deals were generally permitted; they 

articulated very permissive rules. And after that, it became the 

new way of doing business, not for every pharmaceutical company, 

but for all too many. 

Senator COLLINS. Well—— 

Mr. LEIBOWITZ. So, we see this as really just an extension to 

make it clear what the antitrust laws mean and what Hatch-Waxman was designed to mean, which is early entry of generic drugs. 

As you know, generic drugs cost about 15 percent, on average, of 

brands. 

Senator COLLINS. Well, that’s something that I’m sure we’re 

going to continue to work on. Both of us are cosponsors of your 

former boss’s bill. 

I wonder where he got the idea for that bill. I just can’t imagine. 

GOOGLE COLLECTION OF DATA VIA WI-FI

Mr. Chairman, I want to turn next to an issue I mentioned in 

my opening statement, and that is: last Friday, Google issued a 

statement that it had engaged in the unauthorized collection of 

user data from Wi-Fi networks in connection with Google’s street 

view mapping activities. And this was an admission by Google that 

it had accumulated an enormous amount of data; I believe it’s some 

600 gigabytes of data that was accumulated as its street view cars 

canvassed residential neighborhoods. 

Is the FTC investigating this matter? 

Mr. LEIBOWITZ. Well, we don’t acknowledge investigations, unless 

the companies do, until those investigations are completed. But, I 

can certainly tell you, we’re going to take a very, very close look 

at this. 

And, in fact, Google has already come in to talk to our staff about 

precisely what happened. 

Because, obviously, this is just one example of why consumers 

have very serious privacy concerns about data that’s being collected. So, we are going to take a look at it, absolutely. 

Because, who would have guessed, as those cars were going by, 

taking photographs for Google Maps, that, in fact, they were collecting all this personal data. That’s just really troubling. 

Senator COLLINS. It has this Big Brother connotation to it that 

is very disturbing. 

Mr. LEIBOWITZ. It does. We’ve already received some letters from 

Members of Congress. And we will absolutely take a very close look 

at exactly what’s going on. 

Thank you. 

HOSPITAL MERGERS

Senator COLLINS. I want to bring up a more local issue that has 

occurred in Maine and—in my State—and it involves hospitals attempting to do mergers. I—without naming the hospitals, I’m just 

going to read you the first sentence of this newspaper story. And 

it says that, ‘‘A small hospital and a larger hospital said that they 

expected their proposed merger to sail through the Federal Trade 

Commission. With one hospital having only 53 licensed acute-care 

beds, it is much smaller than other hospitals that had merged with 

the larger hospital, and well below the FTC guidelines that abbre-
219 

1The Statements are available on the public Commission Website at http://www.ftc.gov/bc/ 

healthcare/industryguide/policy/index.htm. 2 I am able to confirm publicly the Commission’s investigation of the acquisition because at 

least one of the parties to the transaction ‘‘has publicly disclosed the existence of [the] transaction or proposed transaction in a press release or in a public filing with a government body.’’ 

Federal Trade Commission Notice of Policy of Disclosing Investigations of Announced Mergers: 

Notice of Revised Policy, 62 Fed. Reg. 18630 (Apr. 16, 1997); see also Federal Trade Commission 

Policy Concerning Disclosures of Nonmerger Competition and Consumer Protection Investigations: Notice of Revised Policy, 63 Fed. Reg. 63477 (Nov. 13, 1998). 

viate reviews for small facilities. Other Maine hospital mergers 

have quickly gained Federal clearance, but not this time.’’ And it 

goes on. 

I am not taking a position on whether or not this merger should 

be approved, but I am troubled about what happened in this case. 

Because, what happened is, the FTC sent what was perceived, at 

least, as being such a burdensome request for data that the two 

hospitals interpreted that as a signal that they should not go forward. The hospitals reported providing an additional 2,000 pages 

of documents required by the FTC. And furthermore, the cost of 

complying with the request from the FTC, they felt, would be so 

prohibitively expensive that they abandoned the plans. 

Mr. LEIBOWITZ. Well, it’s a fair concern, generally. And with respect to this matter, I’ve talked to the head of the Maine Hospital 

Association. And I think there was maybe a little bit of 

miscommunication, because what we do when we go to second request is we try to find out more about a deal. 

So, there is a safe harbor for acquisitions of small hospitals, but 

it’s a presumption. And you want to make sure that it’s within the 

safe harbor. We had a case in Texas where a hospital thought it 

was in the safe harbor. It turned out not to be. We actually let that 

deal go through anyway. 

And you want to make sure that it won’t raise prices for payers 

and ultimately for consumers. And so, if they decide to restart this 

transaction, we will make sure, as we almost invariably do, that 

what we call a ‘‘second request’’ is not unduly burdensome. And our 

staff is going to reach out to that hospital group directly, to let 

them know about that. 

Senator COLLINS. Thank you. That’s—— 

Mr. LEIBOWITZ. And we’re going to send back a letter to the Hospital Association. We’ll make sure that the subcommittee has it. 

Senator COLLINS. That would be very helpful. Thank you. 

Mr. LEIBOWITZ. Sure. 

[The information follows:] 

FEDERAL TRADE COMMISSION, 

Washington, D.C., June 22, 2010. 

STEVEN MICHAUD, 

President, Maine Hospital Association, 

33 Fuller Road, Augusta, Maine 04330. 

DEAR MR. MICHAUD: Thank you for your letter to the Federal Trade Commission 

regarding the joint FTC/Department of Justice Statements of Antitrust Enforcement 

Policy in Health Care (‘‘Statements’’) 1 as they may relate to the Commission investigation of the proposed acquisition of Goodall Hospital by MaineHealth.2

In your letter, you raise three questions: 

(1) ‘‘Why did the FTC staff decline to give clearance to the MaineHealth-Goodall 

Hospital transaction, given that Goodall Hospital qualified as a small hospital under 

the ’safety zone’ guidelines?’’ 
220 

3 15 U.S.C. § 18. 

4 15 U.S.C. § 45. 

(2) ‘‘What was so extraordinary about the circumstances of the MaineHealthGoodall Hospital transaction to warrant a departure from the ‘safety zone’ guidelines?’’ 

(3) ‘‘Will the FTC follow its guidelines for small hospital mergers going forward, 

or is the FTC abandoning its guidelines in practice without having yet formally announced that it has done so?’’ 

With respect to your first two questions, I should note that a number of statutory 

prohibitions and the Rules of the Commission prevent me from disclosing the details 

of any nonpublic Commission investigation. As a general matter, of course, Congress 

has empowered the Commission to prevent mergers and acquisitions that may substantially lessen competition or tend to create a monopoly, in violation of Section 

7 of the Clayton Act 3 or Section 5 of the Federal Trade Commission Act.4 In carrying out these law enforcement responsibilities, the Commission and its staff seek 

to identify and challenge only those mergers or acquisitions which the Commission 

has a reason to believe violate the foregoing statutes. 

In response to your third question, the Statements remain an accurate and current reflection of Commission policy. Of course, any determination as to whether a 

particular transaction falls within the ‘‘safety zone’’ set forth in the Statements is 

necessarily a fact-intensive inquiry that requires investigation by Commission staff. 

In addition to the Statements, both the Commission and the Department of Justice 

Antitrust Division in certain instances provide more specific guidance on particular 

proposals through the Commission’s advisory opinion procedure and the Department 

of Justice’s business review procedure. Information about the Commission’s advisory 

opinion procedure regarding healthcare proposals is posted on the Bureau of Competition part of the Commission Website at the following location: http:// 

www.ftc.gov/bc/healthcare/industryguide/adv-opinionguidance.pdf. 

I understand that you discussed this subject in a June 2, 2010 telephone conversation with Matthew Reilly, the Assistant Director within our Bureau of Competition whose office is involved with antitrust hospital merger reviews. Mr Reilly 

would be happy to provide any additional information on this subject within the 

above-mentioned statutory and regulatory parameters. Mr. Reilly’s direct dial telephone number is (202) 326–2350. We appreciate your interest in this subject, and 

thank you again for your letter. 

DONALD S. CLARK, 

Secretary of the Commission. 

UNSUBSTANTIATED HEALTH CLAIMS

Senator DURBIN. I’m trying to figure out what you don’t look at. 

And I assume that there are some areas where you clearly are—— 

Mr. LEIBOWITZ. Yes. 

Senator DURBIN [continuing]. Precluded, under the law. But, one 

area that you have been involved in are false and misleading 

health claims. 

Mr. LEIBOWITZ. Yes. 

Senator DURBIN. And I know Kellogg’s was charged with going 

too far in claiming their Frosted Mini-Wheats made kids smarter, 

more attentive. I like Frosted Mini-Wheats, don’t get me wrong, 

but it hasn’t helped my I.Q. 

Under another case, the FTC charged the company Roex and two 

individuals with making false or unsubstantiated claims for advertising products ranging from an infrared sauna for treating cancer 

to nutritional supplements to reduce the risk of a variety of medical conditions, like HIV and Alzheimer’s. 

What resources do you have, when it comes in areas of health 

claims? How much do you work with other Federal agencies, like 

the Food and Drug Administration (FDA)? 

Mr. LEIBOWITZ. So, our biggest resource is our staff, because 

they’re terrific in this area, whether it’s phony dietary supplements 
221 

or other sorts of phony healthcare products. And the other thing we 

do—and we’re very—I think we’re very good at it—is, we reach out 

to other agencies. So, we work with the FDA quite a bit. We work 

with the Department of Health and Human Services (HHS). And 

because—you know, you need to aggregate your resources, here. 

And we work with State attorneys general, too, because I don’t 

want to say we’re doing triage, because that’s not the case. But 

there are many more malefactors out there than we have resources 

to go after. And so, we try to prioritize the most important cases. 

And in the House financial reform bill, they gave us easier rulemaking authority. And if we get some relief from our very burdensome Magnuson-Moss Act—it’s a sort of medieval form of rulemaking, where rules take 8 to 10 years—unless Congress directs 

us to do standard notice and comment rulemaking, which you’ve 

done in some instances—then I think we can try to set standards 

and make things more efficient, and try to be even more useful in 

this area. 

FREE CREDIT REPORTS

Senator DURBIN. So, since the FTC has worked to make certain 

we have access to free credit reports—— 

Mr. LEIBOWITZ. Yes? 

Senator DURBIN [continuing]. When we see ads on television that 

a company is paying for to advertise free credit reports, does that 

put us on guard? 

Mr. LEIBOWITZ. Well, you know, this has been a very complicated 

area from the beginning. We litigated a case against free credit reports. But, we were very supportive, and obviously drafted a rule 

that we recently released to require that free credit reports be 

given to consumers. Because, after all, if it says ‘‘free credit report,’’ 

you ought to be able to get it. Not every consumer knows that you 

should go to AnnualCreditReport.com. 

Senator DURBIN. AnnualCreditReport.com? 

Mr. LEIBOWITZ. Yes. AnnualCreditReport.com—or if you happen 

to go to FreeCreditReport.gov, we have that Web site, or that domain name, and we’ll send you right to AnnualCreditReport.com— 

free—— 

But, we’re going to stay on top of this area. We’re looking to see 

whether companies are following the new rule that we did pursuant to the Credit CARD Act. And if they’re not, we’ll go after them. 

IDENTITY THEFT

Senator DURBIN. I’ve had personal experience with identity theft. 

Mr. LEIBOWITZ. I know you have. 

Senator DURBIN. And it’s an eye-opener, when you get that call. 

And it seems to me that there’s quite a strong likelihood that most 

identity thefts go unreported, that people don’t follow through. Do 

you have any statistics to indicate how many people realize it and 

do something about it, as opposed to those who—— 

Mr. LEIBOWITZ. Let me get back to you. 

[The information follows:] 

The Commission’s most recent identity theft survey reported that 43 percent of 

victims said that they contacted or were contacted by a company where an account 

was opened in their name or where an existing account was misused; 26 percent 
222 

of victims said that they had contacted the police; 21 percent of victims reported 

contacting one or more credit reporting agencies; and 4 percent of victims reported 

contacting the FTC. The survey also reported that 38 percent of victims said they 

did not contact anyone. This data, which is based on the responses of the 559 individuals surveyed who indicated that their personal information had been misused 

between 2001 and the date they were interviewed, includes both new account identity theft as well as existing account identity theft. See Federal Trade Commission, 

2006 Identity Theft Survey Report: Prepared for the Commission by Synovate, at 44– 

45 (November 2007), available at http://www.ftc.gov/os/2007/11/ 

SynovateFinalReportIDTheft2006.pdf. 

Mr. LEIBOWITZ. My instincts are the same as yours. We periodically do reports about how many people, annually, are victims of 

identity theft. The number is around 9.5 million victims a year— 

or instances of identity theft a year in America. 

And, you know, if it’s identity theft with a credit card, a lot of 

times consumers won’t go to the police or they won’t go to law enforcement authorities. They’ll call the credit card company, of 

course. We’re fortunate to have this identity theft hotline, and people use it. And that is a good thing. 

And then, we also try to do things like bring data security cases, 

so companies have better data protection, making it harder—— 

Senator DURBIN. What are the most common sources of a person’s identity if they’re going to have it pilfered and exploited? 

Mr. LEIBOWITZ. Yeah. 

Senator DURBIN. What are the most common? 

Mr. LEIBOWITZ. What are the most common sources? Probably 

credit cards more than anything else, or data breaches by companies, which often involve credit card information. Sometimes companies use Social Security numbers. You can buy them online. It’s 

often done by people outside of the country that have a marketplace going, and they sell data for $1 or $5—credit card information, Social Security numbers. It’s just extraordinary. 

We try to do a lot to leverage our resources with our sister law 

enforcement agencies around the world. But, as you know, it is 

very hard to have extraterritorial reach, and it is very hard to 

tamp down on all instances of identity theft. But, we’re working 

very, very hard. And when we see criminal cases, we of course give 

those to the criminal authorities, because identity theft is really a 

kind of fraud or—— 

GASOLINE PRICES AND THE OIL INDUSTRY

Senator DURBIN. I have a—— 

Mr. LEIBOWITZ [continuing]. Crime. 

Senator DURBIN [continuing]. Standard press release that I put 

out at least once a year complaining that gasoline prices have just 

gone up way too high, not reflected in the price of a barrel of oil, 

and clearly these oil companies, once again, are taking advantage 

of consumers, and I’m calling on the FTC to investigate it right 

now. I issue that at least once or twice a year. 

Mr. LEIBOWITZ. We try to be responsive. 

Senator DURBIN. I know you do. But, we basically don’t come up 

with much. At the end of a long investigation, people throw up 

their hands and say, ‘‘I guess we can’t prove it, one way or the 

other.’’ Is that about where it stands? 
223 

Mr. LEIBOWITZ. Well, you know, if you want to find an antitrust 

conspiracy you have to have people talking to each other. And we 

have done investigations. We continue to do investigations of the 

oil industry. A lot of the cost of a barrel of oil, as you know, is due 

to OPEC. Now, OPEC engages in output restrictions. If American 

companies did that, they would go to jail for an illegal, criminal 

antitrust cartel. And so, that’s a part of it. 

But, as for whether the American petroleum companies are engaged in anticompetitive behavior, violating antitrust laws, it is 

really hard to prove a criminal conspiracy or any kind of conspiracy. But, we will try to stay on top of this. 

And we did pass our market manipulation rulemaking, which 

will give us a little more flexibility going forward. 

Senator DURBIN. Senator Collins. 

Senator COLLINS. Mr. Chairman, I’m glad that you brought up 

that last issue. I can’t tell you how often my constituents say to 

me, ‘‘But, wait. Supply is ample. Why are prices going up?’’ And it’s 

not the seasonal change that you see when different kinds of gasoline are refined. It seems to them, and I will say it seems to me, 

to be disconnected with supply or demand. 

Mr. LEIBOWITZ. Well this is an issue that resonates with consumers. No one would be happier than me to be able to bring a 

case against the oil industry for a violation of the antitrust laws. 

And our staff would be very happy to. And we do, again, have some 

investigations in the pipeline. But, it is very hard to prove. 

When my older daughter was 8 years old, or 9 years old, we were 

stopped at—on River Road, in Bethesda, and there were, like, four 

gas stations right around us, and she said, ‘‘Why do they all have 

the same price?’’ 

And so, I think it is very baffling to many people. The truth is, 

if there’s no meeting of the minds, there’s no antitrust violation, 

even though the effect is the same on consumers. 

Senator COLLINS. Yeah. It is a source of frustration, though, I 

think also—and this is an issue I’ve raised with the Commodity 

Futures Trading Commission (CFTC), which also comes before us— 

I also think that the way the futures markets are working, where 

we now have investment funds and pension funds chasing the 

product, when those markets were originally designed for producers and end users and not as an investment hedge, also has 

something to do with the fluctuations. 

Mr. LEIBOWITZ. It may very well. And, you know, we periodically 

track prices. And so, we have done, in the last 2 or 3 years, investigations into anomalous prices in the Pacific Northwest, into western New England, and into the price of jet fuel, as you know. And 

it is sometimes hard to find the reasons why prices go up. 

CONSUMER EDUCATION

Senator COLLINS. Speaking of the cost of heating oil—home heating oil or gasoline, there was a company in my State that was recently the victim of cybercrime because, unfortunately, the—one of 

the financial clerks responded to a phony Web site that was mimicking the bank that this company used, and, within moments, the 

accounts—the banking account of this company was drained, be-
224 

cause she, unfortunately and naively, over the Web site, gave the 

password and other information. 

I mention this because this is a fair-sized company in Maine, and 

it’s not an unsophisticated business; it’s a very well-run operation. 

And yet, it, too, was duped into—to a move that led to a loss of 

tens of thousands of dollars. 

My question to you is, What does the FTC do to try to better 

publicize scams, whether they’re via the Internet or coming 

through the mail, and educate small businesses and consumers in 

this area? 

Mr. LEIBOWITZ. Well, we have a number of educational materials. 

I think we put a few of them on your desk. We’re very proud of 

the educational work we do here. And to distribute educational materials, we often either co-brand with companies or community organizations, or we don’t brand at all, we simply design them and 

let others distribute. I think you might have a copy of ‘‘Deter. Detect. Defend.,’’ which is an identity theft brochure. So, that’s a part 

of what we do. 

And then when we bring cases—because part of this is alerting 

consumers to be more careful—we try to pair with State attorneys 

general, because if we do a joint announcement, very often it gets 

picked up, people read it in the papers, they see it on the television 

news, and they think a little bit more about it. And then we don’t 

have—going back to Senator Durbin’s earlier question, we don’t 

have jurisdiction over banks, but we do try to bring cases involving 

inadequate data security. And that keeps companies on their toes. 

And then, we do workshops and other things where we bring 

stakeholders together and we try to think through how to respond. 

ADMINISTRATIVE PROCEDURES ACT RULEMAKING AND ADDITIONAL

AUTHORITIES

Senator COLLINS. And finally, I’d like to pursue the issue that 

you raised about your rulemaking, because I was surprised that 

you don’t use the Administrative Procedures Act (APA). Most agencies do. The Securities and Exchange Commission (SEC) does. A lot 

of the agencies that you deal with use the APA. Could you provide 

me with some information on, What is the history of why you don’t 

use the APA? 

Mr. LEIBOWITZ. Well, under the Magnuson-Moss Act, which was 

passed in 1974, Congress circumscribed our rulemaking in a way 

to slow it down. I don’t think Congress meant to slow it down quite 

as much as they have. We haven’t begun to make a new rulemaking under Magnuson-Moss since the late 1970s. And the reason 

why is because it can take 8 or 10 years to do a rule. And if a company or an entity—if it’s within the ambit of the proposed rule— 

feels aggrieved, they can call, essentially, regulatory timeouts and 

ask for independent referees. 

Now, in fairness, Congress has given us APA rulemaking for 

some specific instances. And we’ve used it in a very thoughtful 

way. In our mortgage modification rulemaking, it will take, from 

the time we put out an advance notice of proposed rulemaking 

(ANPR) to the time we finish it, about 15 months; a little slower 

than we wanted, but you want to do it deliberately so you can get 

it right. 
225 

But, it has been a real impediment for the Commission, and one 

that we’re trying to get out from under the restrictions of. Because 

we think we can be more effective, on behalf of the consumers that 

we serve, if we had some degree of relief. 

And the other proposal that’s in the House bill that has garnered 

a little bit of attention is civil fining authority for violations of section V, or unfair or deceptive act and practices rule, and there, I 

think, more than 40 State attorneys general, who have baby FTC 

acts, have fining authority under that. We don’t. And we’re trying 

to go after real, hardcore malefactors. Because, essentially, sometimes we’re going after people who are engaged in fraud because 

the criminal authorities don’t have the capacity to bring those 

cases. We would like to have fining authority. 

Casper Weinberger, when he was Chairman of the Federal Trade 

Commission in the early 1970s, called for that. And on this issue— 

I wouldn’t say on this issue alone—but, on this issue, I think the 

vast majority of the Commission supports the Weinberger approach. 

Senator COLLINS. Is this a problem where the cases that you develop may be under the prosecutorial guidelines, as far as dollar 

amount, that they’re too—— 

Mr. LEIBOWITZ. Yes. Yeah, I mean—— 

Senator COLLINS [continuing]. Small for them to be brought—— 

Mr. LEIBOWITZ. Look—— 

Senator COLLINS [continuing]. At the U.S.—— 

Mr. LEIBOWITZ [continuing]. Criminal authorities—U.S. attorney’s offices—and we do try to pair with U.S. attorney’s offices 

whenever we can. And we have taken some of the worse frauds 

we’ve gone after and given to the criminal division, for example, in 

the Department of Justice. But, they have other priorities. And so, 

we pick up a lot of the sort of small-time—pick up a lot of the fraud 

against consumers. And, in the aggregate, it can be a fairly substantial amount. And it would be better if we had fining authority. 

We believe that we would have a more effective deterrent. 

Senator COLLINS. Thank you. 

PAYDAY LENDING AND DEBT COLLECTION

Senator DURBIN. Mr. Chairman, one of the things that I was disappointed in during the debate on the floor on financial reform was 

that I had hoped that we would be able to offer an amendment related to the so-called ‘‘title loans,’’ or ‘‘payday loans,’’ a type of predatory lending. And for reasons which are hard to explain to the 

normal population in America, we have not been able to get to that 

issue. That strikes me as one aspect of credit in America that is 

highly abusive to people in low-income categories and desperate situations. And I noticed that the number two complaint, second only 

to identity theft, at your agency relates to debt collection. 

So, can you tell me what efforts have been made by the FTC to 

deal with this industry? 

Mr. LEIBOWITZ. Yes. Well, it’s a couple of things. With respect to 

payday lenders, we have brought cases. I think we’ve brought at 

least two in the last year. Usually, they don’t involve too high a 

rate. The rates may be very, very high, but States have basically 

set per-State caps on what they can charge. And what we found, 
226 

though, is that sometimes they’ll charge additional fees but they 

won’t tell the consumers. And so, we brought a case in that area. 

We brought another case involving the use of the data. The case 

was called, I think, ‘‘EDebitPay,’’ and it was an online payday lender. And what they had done was fail to disclose certain things to 

consumers, and garnish wages, without telling the consumers that 

they were going to do that. 

And then, we brought another case against several payday lenders who weren’t giving the required statutory APR data. It’s required by statute, under TILA, I think. 

And so, we try to stay active in this area. And it is one where 

I think the complaints that we have gotten tell us that there are 

problems out there. 

And, of course, they prey on the people at the lowest rung of the 

economic totem pole. Congress has—and I think you might have 

been involved in this—has capped the rates on payday lending outside of military bases. 

Senator DURBIN. Yes, we’re protecting military families; but not 

nonmilitary families, we don’t protect all families when it comes to 

these bottom-feeders. 

EMERGING INTERNET SCAMS

You’ve made reference to the Internet and services being offered. 

It seems like this adds a new level of challenge and complexity, 

that now certain things can be offered in the ether, on the Internet. 

And really the source of them might be hard to find, whether 

they’re actually in the United States, North America, Europe, 

wherever they may come from. So, how do you cope with that 

Internet challenge? 

Mr. LEIBOWITZ. Well, several years ago, you passed something 

called the SAFE WEB Act, which allowed us to do confidential investigations with our sister law enforcement agencies from around 

the world. We have to sign agreements with them, and we’ve done 

this with a number of jurisdictions. So, that’s been helpful. 

But, as you know, con artists all around the world are very, very 

smart, and they’re very nimble. We had a foreclosure rescue scam 

case where the domain name was registered in Berlin, but the company was actually operating out of Orange County, California. And 

so sometimes it takes a long time to pierce through the corporate 

veil and find out who these real malefactors are. Now, we were fortunate enough to work with foreign law enforcement authorities to 

shut this company down. But it’s very hard, although it’s a challenge that we accept. That’s what we’re supposed to do. 

Senator DURBIN. Do you have such an agreement with Nigeria? 

Mr. LEIBOWITZ. We do not believe we have one with Nigeria. But, 

I do believe, at this point, American consumers are on top of most 

Nigerian scams. 

Senator DURBIN. Thank you. 

Senator Collins. 

Senator COLLINS. Thank you. 

Senator DURBIN. Chairman Leibowitz, thanks for being here. 
227 

ADDITIONAL COMMITTEE QUESTIONS

We’ll work hard on your appropriation, try to find some more resources. You’re doing important work. Thanks. 

Mr. LEIBOWITZ. Thank you so much. Thank you. 

Senator DURBIN. We may have some written questions. 

[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 RICHARD J. DURBIN

Question. The Energy Independence and Security Act of 2007 gave the Federal 

Trade Commission (FTC) authority to issue regulations prohibiting market manipulation involving wholesale transactions of crude oil, gasoline, and petroleum distillates. The FTC issued the Final Rule in August 2009 and provided guidelines to 

industry for compliance. 

How does the ‘‘market manipulation’’ rule change, expand, or enhance the FTC’s 

jurisdiction and enforcement authorities? 

Answer. The market manipulation rule (MMR) is a fraud-based rule. The MMR 

prohibits persons from knowingly engaging in fraudulent or deceptive conduct connected with wholesale transactions of petroleum products. The MMR also prohibits 

persons from intentionally omitting material facts in statements whenever the omission can be expected to distort wholesale petroleum markets. Thus, in addition to 

the FTC’s traditional enforcement program focused on anticompetitive conduct, including anticompetitive mergers and unfair business practices that result in a sustained diminution of competition, the MMR enables the Commission to prevent specific instances of fraudulent or deceptive conduct, even when that conduct does not 

have durable competitive consequences. 

Question. How will the FTC monitor compliance with the new rule? 

Answer. The Commission has established a dedicated e-mail and telephone MMR 

‘‘hotline’’ to receive complaints from anyone who has information about conduct prohibited by the MMR. The Bureau of Competition also has a litigating section of approximately 25 attorneys who specialize in energy matters that will have the primary responsibility for bringing appropriate cases under the MMR. In addition, staff 

from both the Bureau of Competition and the Bureau of Economics regularly monitors the petroleum industry to discern any anomalous price movements that need 

further investigation to determine whether they are caused by shifts in market conditions or wrongful behavior. 

Question. The FTC published an investigation of the increases in gas prices occurring in 2006, concluding that rising gas prices could be explained entirely by market 

forces and not illegal anticompetitive behavior. Will the new market manipulation 

rule change the standard for how the FTC will evaluate and reach conclusions on 

behavior in the petroleum market? 

Answer. As noted above, the MMR targets fraudulent or deceptive practices that 

might not otherwise be reachable by Section 5 of the FTC Act. However, it does not 

alter the FTC’s standard for evaluating behavior in the petroleum industry under 

either Section 5 or Section 7 of the Clayton Act. The FTC’s long-established enforcement aim is to protect consumers from unfair methods of competition or unfair or 

deceptive business practices. The issuance of the MMR does not change that mission; rather it provides the Commission with an additional tool to fulfill it. 

Question. The FTC shares concurrent jurisdiction with other agencies such as the 

Commodity Futures Trading Commission, the Securities and Exchange Commission, 

the Department of Justice, and the Food and Drug Administration. 

Please describe the FTC’s concurrent jurisdiction with these and other agencies 

and how such jurisdiction is either complementary or duplicative. 

Answer. The FTC has concurrent authority with many agencies to a greater or 

lesser extent. The concurrence is broadly complementary; for example, the agencies 

may have generally consistent but different missions or goals (e.g., FTC with FDA, 

EPA, SEC, CFTC, CPSC), or divide up primary responsibility (e.g., FTC with FDA, 

FCC), or share enforcement over a very substantial number of entities or acts while 

arranging to avoid duplication (e.g. FTC with DOJ Antitrust Division), or aid each 

other with special expertise in certain areas (e.g. FTC with FDA, EPA, FCC), or can 

apply different remedies to the same or similar conduct, such as civil vs. criminal, 

injunction and restitution vs. seizing product (e.g., DOJ, U.S. Postal Inspector, EPA, 
228 

FDA). Attached is a brief summary of the FTC’s primary areas of coordination with 

various Federal agencies. 

Question. To curb fraudulent practices in the mortgage industry, the FTC plans 

to issue a rule banning upfront fees for mortgage modification or foreclosure rescue 

assistance. The FTC is also contemplating rules on advertising mortgages. 

How would new rules related to mortgage advertising practices strengthen the 

FTC’s authorities in the mortgage arena? 

Answer. The Commission currently enforces mortgage advertising requirements 

under the FTC Act, the Truth in Lending Act (TILA), including the Home Ownership and Equity Protection Act (HOEPA), and Regulation Z rules written by the 

Federal Reserve Board (Board). The Commission lacks authority to obtain civil penalties for violations of these statutes and rules, with the exception of certain Regulation Z rules promulgated pursuant to HOEPA. 

The Commission has not published a proposed or final mortgage advertising rule, 

so I cannot discuss the specific conduct that a final rule might prohibit or restrict. 

Generally, however, enacting new rules in this area would enable the Commission 

to protect prospective borrowers more effectively by establishing clearer standards 

for mortgage advertisers and giving the Commission more effective tools to stop and 

deter violations. As you know, the Commission is conducting the mortgage advertising rulemaking using the authority Congress granted to it in the Omnibus Appropriations Act of 2009, as clarified by the Credit Card Accountability Responsibility 

and Disclosure Act of 2009. Those laws authorize the Commission to enact rules 

with respect to unfair or deceptive mortgage practices, and to enforce those rules, 

with the states, through a variety of remedies including civil penalties. 

Question. The proposed rule prohibiting upfront fees for mortgage modifications 

is being implemented around the same time as the rule prohibiting upfront fees for 

debt settlement. Does the FTC plan to prohibit upfront fees for other financial services, given that these fees have been a key tactic for deceiving consumers? 

Answer. The Commission’s amendments to the Telemarketing Rule governing 

debt relief services include a ban on the collection of advance fees. The FTC proposed rule on mortgage assistance relief services also would ban advance fees, but 

that rule is not yet final. With respect to the Telemarketing Rule’s debt relief 

amendments, the Commission concluded that the collection of advance fees by debt 

relief providers, which often takes place in the context of transactions involving telemarketing that are permeated with deception, is an abusive practice under the Telemarketing Act. The record in the debt relief proceeding—including the public comments, a study by the Government Accountability Office, information gathered at 

a public forum, consumer complaints, and the law enforcement experience of the 

Commission and state enforcers—demonstrated widespread deception and substantial consumer injury in the provision of debt relief services. Consumers in the midst 

of financial distress suffer monetary harm—often in the hundreds or thousands of 

dollars—when, following sales pitches frequently characterized by high pressure and 

deception, they use their scarce funds to pay in advance for promised results that, 

in most cases, never materialize. In finding this practice abusive, the Commission 

applied the test for an unfair practice in section 5(n) of the Federal Trade Commission Act. The Commission found that the practice (1) causes or is likely to cause 

substantial injury to consumers, that (2) is not outweighed by countervailing benefits to consumers or competition, and (3) is not reasonably avoidable. The Commission relied on a similar analysis in prohibiting under the Telemarketing Rule the 

collection of advance fees for credit repair services, recovery services, and offers for 

certain loans. 

At present, there are no other rulemaking proceedings in which the Commission 

has proposed or issued an advance fee ban. The determination of whether an advance fee ban is appropriate is very much dependent on the specific circumstances, 

including the extent to which the transactions at issue take place in the context of 

widespread deception. 

Question. The FTC reports that Identity Theft was the number one consumer 

complaint during 2009. Consumers are worried that in an increasingly high-tech 

world, their personal data is being collected improperly and stored insecurely. 

What responsibilities do Facebook and other companies have to their users to disclose their websites’ privacy policy? What about changes to that policy over time? 

Answer. Although there is no generally applicable requirement for social networking companies to disclose their privacy practices, they still must satisfy certain 

responsibilities with respect to privacy policy disclosures. First, any claims they 

make must be truthful. The Commission has brought one case against a social networking site—Twitter—for making a misrepresentation about the level of security 

provided. See In the Matter of Twitter, Inc., FTC File No. 092 3093 (June 24, 2010) 

(consent order approved for public comment). Second, if websites collect information 
229 

from children, they must provide parents with notice and an opportunity to consent. 

The Commission has brought several cases against companies for violating the Children’s Online Privacy Protection Act by not securing the required parental consent 

before collecting information from children through social networking websites. See 

United States v. Xanga.com, Inc., No. 06–CIV–6853(SHS) (S.D.N.Y.) (final order 

Sept. 11, 2006); United States v. Industrious Kid, Inc., No. 08–CV–0639 (N.D. Cal.) 

(final order Mar. 6, 2008); United States v. Sony BMG Music Entm’t, No. 08–CV– 

10730 (S.D.N.Y.) (final order Dec. 15, 2008); United States v. Iconix Brand Group, 

Inc., No. 09–CV–8864 (S.D.N.Y.) (final order Nov. 5, 2009). Third, if companies 

change their privacy policies in a way that materially affects data that consumers 

have already provided, they must provide clear notice and the opportunity for the 

consumers to provide their affirmative express consent to the change. See In the 

Matter of Gateway Learning Corp., FTC Docket No. C–4120 (Sept. 10, 2004) (consent order). 

Question. If users decide to cancel or restrict their accounts on Facebook, photo 

storage sites, or other sites where they have stored personal information, what assurances do they have that their personal information is completely removed and 

deleted from storage? 

Answer. Several companies make specific disclosures to consumers about what 

happens to their data once they leave a site. If the disclosures are false, the FTC 

can bring an enforcement action under Section 5 of the FTC Act. In addition, if a 

website does not honor requests from parents to delete information being stored 

about their children, the FTC can bring an enforcement action under the Children’s 

Online Privacy Protection Act. 

We have also examined the issue of data retention as part of a series of 

roundtables we hosted on consumer privacy over the last several months. A number 

of roundtable participants and commenters emphasized the value of businesses’ retaining data only as long as necessary to fulfill a specific business purpose. The 

Commission staff will make recommendations on this issue as part of an upcoming 

report on privacy, to be released later this year. 

Question. Net Cetera is a guide published by the FTC to assist parents in talking 

to their children about the Internet. 

How has the FTC distributed the Net Cetera guide? 

What feedback has FTC received on the guide? 

Answer. The FTC is working with outside groups to promote and distribute the 

booklet. For groups and individuals who want to share it with their families, 

friends, and communities, Net Cetera is available at OnGuardOnline.gov and in 

Spanish at AlertaenLı ́nea.gov. People also can order free copies through the FTC’s 

bulk order site, bulkorder.ftc.gov. Like all the FTC’s consumer materials, Net Cetera 

is free and in the public domain. The FTC encourages groups and individuals to 

order as many copies as they can use, include sections of it in their newsletters and 

blogs, and grab the web button from OnGuardOnline.gov for use on their own 

websites. 

Many schools use OnGuardOnline.gov and Net Cetera as part of their online safety programs. Because so much computer and other media use takes place in the 

home, pairing teachers and parents in these efforts more fully encourages safe and 

responsible online behavior, and reinforces consistent messaging. 

Net Cetera has been available to the public since October 21, 2009. To date, the 

FTC has distributed more than 3,700,000 copies of the guide in English and more 

than 350,000 copies in Spanish. Distribution highlights include: 

—Schools or school systems in all 50 states and D.C. have ordered copies of Net 

Cetera. This includes large orders by the Prince George’s County (MD) Public 

Schools (∼150,000), the Cobb County School District (∼120,000), and the Cleveland Metropolitan School District (∼50,000). 

—Illinois schools, police departments, and community groups have ordered over 

100,000 copies of the guide. 

—Members in both Chambers signed and circulated letters about Net Cetera to 

their Hill colleagues, encouraging them to use the guide in their districts and 

to link to it from their websites. The FTC sent copies of the booklet to district 

offices as well, and will continue to work with Congress to spread the word 

about online safety. 

—Companies including Facebook, MySpace, and Sprint are linking to Net Cetera 

from their safety or resources pages. 

—Nonprofits such as the Boys and Girls Clubs of America and the Internet Keep 

Safe Coalition distributed the guide at events across the country. 

As the order numbers illustrate, Net Cetera has been very well received by parents, educators, police officers, and online safety experts. The Online Safety and 

Technology Working Group highlighted Net Cetera as an ‘‘outstanding’’ project that 
230 

should be promoted as an opportunity for public-private partnerships in online risk 

prevention. Also, the FTC has secured opportunities to speak about Net Cetera at 

conferences for groups including the International Society for Technology in Education and the National Association of School Resource Officers. 

Question. To stop advertisements from deceiving consumers into paying for socalled ‘‘free’’ credit reports, the FTC implemented a rule requiring that these advertisements contain a clear disclosure that the only authorized free credit report is 

available at AnnualCreditReport.com. 

How is the FTC enforcing the new rule requiring that a disclosure is displayed 

on all commercial ‘‘free credit report’’ websites? 

Answer. To determine compliance with the rule, the FTC monitors websites offering free credit reports. The FTC recently sent letters to 18 websites offering free 

credit reports, warning them that they must clearly disclose that a free report is 

available under Federal law. This campaign appears to have been effective: several 

of the websites have changed their practices. The Commission anticipates follow up 

law enforcement action against those companies that do not come into compliance. 

Question. What other measures have been taken to inform consumers of 

AnnualCreditReport.com, and how effective have those measures been? 

Answer. The Commission has made extensive outreach efforts to educate consumers about their right to a free credit report through the authorized source, 

AnnualCreditReport.com. When the free annual credit report program initially took 

effect in 2004, the FTC issued press advisories and radio public service announcements informing consumers of their new rights, and published a ‘‘how to’’ guide on 

ordering the Federally-mandated free reports. The Commission also has issued public warnings about ‘‘imposter’’ sites that pose as the official free report site, 

AnnualCreditReport.com. In addition, the FTC has created videos that highlight the 

differences between AnnualCreditReport.com and other sites that claim to provide 

‘‘free’’ credit reports. Moreover, each time the FTC announces an enforcement action 

or new rule in the credit reporting area, it publicizes the AnnualCreditReport.com 

website. Most recently, it did so when it announced the warning letters described 

above. We believe these measures have been quite effective. Since 2004, consumers 

have obtained over 150 million free credit reports from the nationwide CRAs. 

Question. Experian, the company that ran ‘‘Free Credit Report.com’’ has now shifted its strategy and set up ‘‘Free Credit Score.com.’’ Is the FTC continuing to monitor 

these companies to make sure they are complying with the new rule? Is there a plan 

to create a truly free credit score website similar to AnnualCreditReport.com? 

Answer. The FTC generally monitors consumer reporting agencies and other companies for their compliance with the provisions of the FCRA and other applicable 

rules. The Free Credit Report Rule does not apply to credit scores and consumers 

do not have a general right to a free credit score under the FCRA. Instead, the 

FCRA provides consumers a right to purchase a credit score from consumer reporting agencies and to obtain a free credit score in specified circumstances, such as 

when they apply for certain home loans. In addition, under the Risk-Based Pricing 

Rules which take effect on January 1, 2011, creditors can provide a free credit score, 

along with information about that score, to all consumers, instead of providing riskbased pricing notices to specific consumers. Finally, the Consumer Financial Protection Act of 2010 will allow consumers turned down for credit or offered less favorable terms because of their credit report or score to get a free credit score disclosure 

with their adverse action notice. The FTC oversees compliance with all of these 

FCRA requirements for entities under its jurisdiction to ensure that consumers are 

able to obtain their credit scores as required by law. 

Question. In April 2010, the FTC launched ‘‘Admongo,’’ an online video game 

where kids explore a virtual world filled with commercial messages to teach them 

to think critically about advertisements. 

What was the cost of developing Admongo? 

How does the FTC plan to evaluate the program’s effectiveness? 

Are there ongoing costs associated with operating the online game? 

Answer. The Federal Trade Commission has developed an interactive campaign 

to give kids the skills they need to understand how advertising works and to interpret the information that ads contain. The campaign, targeted to tweens (kids ages 

8 to 12), is based on the website Admongo.gov, which teaches core ad literacy concepts and critical thinking skills through game play. Other elements of the campaign include in-school lesson plans, developed in cooperation with Scholastic, Inc., 

that are tied to state standards of learning for grades 5–6; sample ads that can be 

used at home and in the classroom; and teacher training videos. 

Advertising literacy funding was approved for up to $2.2 million per year for up 

to 4 years; the full amount was budgeted in the first year, but two subsequent years 

have seen funding set at $2 million. Through June 2010, at the end of the second 
231 

1Public Law No. 103–297, 108 Stat. 1545 (1994). The Act defines telemarketing to mean ‘‘a 

plan, program, or campaign which is conducted to induce purchases of goods or services by use 

of one or more telephones and which involves more than one interstate telephone call.’’ Telemarketing and Consumer Fraud and Abuse Prevention Act, § 7, Public Law No. 103–297, 108 

Stat. 1545 (1994). 2The Commission could seek to promulgate a rule establishing a ‘‘Do Not Text’’ registry under 

the rulemaking procedures of Section 18 of the Federal Trade Commission Act. Section 18 would 

be an impractical tool for addressing a Do Not Text registry, however, as it includes numerous 

burdensome and time-consuming requirements that typically have required from 3 to 10 years 

to complete. See prepared statement of the Federal Trade Commission on ‘‘Consumer Credit and 

Debit: The Role of the Federal Trade Commission in Protecting the Public’’ before the House 

Comm. on Energy and Commerce, Subcomm. on Commerce, Energy, and Consumer Protection 

at 21–23 (Mar. 24, 2009), available at http://www.ftc.gov/os/2009/03/ 

P064814consumercreditdebt.pdf. 3The Commission has previously considered the limitations of its authority under the Telemarketing Act. For example, when creating the Telemarketing Sales Rule (TSR), the Commission considered a definition of ‘‘telemarketing’’ that would have covered campaigns involving fax 

machines, modems, or ‘‘any other telephonic medium.’’ This was rejected, however, upon the 

Commission’s conclusion that a narrower definition would ‘‘follow[] more closely the statutory 

definition set forth by Congress in the Telemarketing Act.’’ 60 Fed. Reg. 30411 (June 8, 1995). 

Instead, the statutory definition of telemarketing was incorporated almost verbatim into the 

TSR. 4 Because an effective ‘‘Do Not Text’’ registry might involve the collection of e-mail addresses, 

the creation of such a registry would raise a number of the same concerns the Commission highlighted in its report to Congress regarding a National Do Not E-mail Registry. Federal Trade 

Commission, Report to Congress, National Do Not E-mail Registry (June 2004) (detailing security and privacy concerns, including the likelihood that an e-mail registry would be misused by 

spammers, thereby increasing rather than reducing the volume of spam emails). 5We note that the Federal Communications Commission has asserted that a text message is 

a ‘‘call’’ within the meaning of the Telephone Consumer Protection Act (TCPA), and thereby concluded that the TCPA prohibits the use of an automated dialer to send commercial text messages to a cellular telephone number without the prior consent of the recipient. See Federal 

Continued 

year of funding, the cost of creating the website, all related lesson plans and materials, and the promotion of the site was approximately $4.2 million. The ongoing 

costs to operate the game will include FTC staff time, web hosting fees, and occasional technical support from experts in web programming, as needed. The amount 

of money involved should be minimal. 

Plans are underway now to evaluate the effectiveness of Admongo. FTC staff are 

initiating the Paperwork Reduction Act (PRA) approval process to conduct a study 

of student and teacher use of campaign resources. This will supplement the ongoing 

feedback we receive from teachers via the mailbox at admongo@ftc.gov and through 

conferences and meetings. 

Question. The FTC anticipates reaching 200 million numbers on the Do Not Call 

List by this summer. 

Has the FTC received complaints about unwanted text messages? Does the FTC 

need specific authority to create a ‘‘Do Not Text’’ list or can it bar messages under 

the Do Not Call List? 

Answer. Since January 1, 2010, the Commission has received approximately 1,300 

consumer complaints that primarily concern text messaging practices, including unsolicited text messages. In addition, approximately 5,600 of the more than 1 million 

Do Not Call complaints received during this period mention text messaging and may 

relate to unsolicited text messages. Including both groups, the total number of complaints concerning text messaging practices represents less than 1 percent of all 

complaints received by the Commission since the start of the year. 

The Commission has not taken the position that sending an unsolicited text message violates the Telemarketing Sales Rule, which prohibits initiating an ‘‘outbound 

telephone call’’ to a person whose telephone number has been entered on the National Do Not Call Registry (DNC Registry). Moreover, it is not clear whether the 

rulemaking authority provided to the Commission under the Telemarketing and 

Consumer Fraud and Abuse Prevention Act (Telemarketing Act),1 which was the 

basis for the DNC Registry, extends to text messages.2

The question whether a text message may fall within the provisions of the Telemarketing Act is muddied, among other reasons, by the facts that text messages 

typically lack an audio component, and that their dissemination can take many 

forms.3 Although some unsolicited text messages are sent from one phone to another, others are sent over the Internet to an e-mail address that has been automatically assigned to the subscriber’s account by his or her mobile carrier.4 For 

these reasons, the FTC’s authority under the Telemarketing Act to address text 

messages is uncertain.5
232 

Communications Commission, Rule and Regulations Implementing the Telephone Consumer 

Protection Act of 1991, 69 Fed. Reg. 55765, 55767 (Sept. 16, 2004). The FCC’s interpretation 

of the TCPA, however, does not resolve the separate issue of the FTC’s authority under the Telemarketing Act. 6Federal Trade Commission, Staff Report, Beyond Voice: Mapping the Mobile Marketplace 

(Apr. 2009). 7 Id. 

8See, e.g., Satterfield v. Simon & Schuster, Inc., 569 F.3d 946 (9th Cir. 2009). 9 E.g., FTC v. Spear Systems, Inc., No. 07–5597 (N.D. Ill. 2007) ($3.7 million judgment obtained against key players in an international spam ring); United States v. ValueClick, Inc., No. 

08–1711 (C.D. Cal. 2008) ($2.9 million civil penalty). 

Some tools already exist that may minimize concerns about unsolicited text messages. Unlike telephone calls, text messages are not covered under common carrier 

regulations and therefore can be filtered by mobile carriers, which state that they 

block hundreds of millions of unsolicited messages every month.6 Consumers can 

also work with many carriers to block text messages entirely or just those messages 

from a particular unwanted source.7 In addition, consumers who have received certain types of unsolicited text messages may seek damages through a private right 

of action under the Telephone Consumer Protection Act.8

Moreover, to the extent the sending of unsolicited text messages is an unfair or 

deceptive practice, Section 5 of the Federal Trade Commission Act provides the 

agency with a flexible tool for addressing commercial practices that are unfair or 

deceptive. The Commission has pursued a vigorous law enforcement program 

against unfair or deceptive unsolicited commercial messages in a variety of contexts 9 and will continue to bring the same resolve to the issue as more of this activity migrates to the arena of text messaging. 

In short, while the DNC Registry has proven to be extremely effective in curbing 

unwanted telemarketing calls, it is not clear at this point that adopting a similar 

program for unsolicited text messages would be advisable. However, should the Congress determine that a Do Not Text registry would help consumers, we will be 

happy to assist you with legislative language. 

QUESTIONS SUBMITTED BY SENATOR FRANK R. LAUTENBERG

Question. Manufacturers and retailers of electronic cigarettes (e-cigarettes) claim 

that they are safe, and even that these products can help smokers quit traditional 

smoking. However, there have been no clinical studies to prove these products are 

effective in helping smokers quit, nor have any studies verified the safety of these 

products or their long-term health effects. The World Health Organization (WHO) 

has stated that it has no scientific evidence to confirm the products’ safety and efficacy. 

What is the FTC doing to police health claims made in e-cigarette advertisements? 

Answer. Electronic cigarettes are battery-powered devices that usually contain 

cartridges filled with nicotine and other chemicals. The devices are designed to convert the nicotine and other chemicals into a vapor to be inhaled by the user. 

Electronic cigarettes are currently the subject of Federal court litigation, stemming from the Food and Drug Administration’s (FDA) detention of certain of these 

products at ports of entry to the United States. Specifically, upon reviewing a number of electronic cigarettes, FDA determined that they qualified as both a drug and 

device under the Federal Food, Drug, and Cosmetic Act (FDCA), and that agency 

approval was therefore needed before the products could be marketed in the United 

States. Because such approval had not been obtained, FDA determined that their 

sale would violate the FDCA and denied them entry into the country. 

In April 2009, a lawsuit challenging FDA’s jurisdiction over electronic cigarettes 

was filed in Federal district court. In January 2010, the district court granted the 

plaintiff’s motion for a preliminary injunction enjoining FDA from detaining or refusing admission into the United States of the plaintiff’s electronic cigarette products on the ground that those products are unapproved drugs, devices, or drug-device combinations. Smoking Everywhere, Inc., v. FDA, 680 F. Supp. 2d 62 (D.D.C. 

2010). The Department of Health and Human Services and the Food and Drug Administration appealed the court’s order, and oral argument before the U.S. Court 

of Appeals for the D.C. Circuit is scheduled for September 2010. 

Under the FTC Act, the Commission has jurisdiction over deceptive or unfair 

claims made in the marketing of most products, including electronic cigarettes, and 

the Commission has a strong record of exercising its enforcement authority to protect the health and safety of consumers. If the district court’s ruling that FDA lacks 
233 

10 Johnston, L.D., et al., Monitoring the Future National Results on Adolescent Drug Use: Overview of Key Findings, 2009 (NIH Publication No. 10–7583), Table 3. 11OMB approval under the PRA is required in cases where the Commission sends identical 

information requests to 10 or more entities. See 44 U.S.C. § 3502. 

jurisdiction over electronic cigarettes is sustained on appeal, FTC monitoring of the 

marketing claims made for these products would be appropriate. However, if FDA’s 

assertion of jurisdiction over electronic cigarettes is ultimately upheld by the courts, 

sale (and, therefore, marketing) of these products will be prohibited pending agency 

approval under the FDCA. 

Question. In 2003, the FTC recommended that the alcohol industry abide by a voluntary standard that required alcohol advertisements to be placed only in media in 

which at least 70 percent of the audience for each advertisement consisted of adults 

21 and over. Since then, several reports have indicated that youth exposure to alcohol advertising is increasing. 

Despite the reported increase in youth exposure to advertising, the FTC’s 2008 

report entitled ‘‘Self-Regulation in the Alcohol Industry’’ did not increase the advertising standard. I am concerned that the report based this conclusion on premises 

that are not supported by research or the public health community, or are contradictory to previous statements by the Commission. 

Will you commit to reviewing the FTC’s 2008 report, the process by which it was 

created, and any contradictions between the premises upon which the Commission 

relied and its earlier statements and those of the public health community? 

How will you evaluate whether the industry should increase its advertising standards to reduce advertising exposure to those who are not legally permitted to purchase alcohol? 

Answer. Underage drinking is a critical public health issue, contributing to risky 

behavior, injury, and an intolerable 5,000 deaths per year. Fortunately, reliable data 

show long-term, gradual declines in underage drinking. According to the Monitoring 

the Future survey, past 30-day alcohol use by 8th, 10th, and 12th graders, combined, has fallen by 27 percent over the past 14 years.10

Nonetheless, too many teens still drink. Federal, state, and local governments all 

play a role in reducing teen drinking. The FTC is a member of the Interagency Coordinating Committee to Prevent Underage Drinking. We have particular responsibility over alcohol marketing, and also engage in consumer education designed to 

help reduce teen access to alcohol, as further described below. 

The FTC addresses issues related to underage appeal of alcohol ads by pressing 

for effective industry self-regulation, through studies and ongoing monitoring. Our 

2008 Alcohol Report evaluated industry compliance with the 70 percent standard. 

It showed that 92.5 percent of ads placed during the study period complied with the 

70 percent placement standard, and that when all audiences for all ads were aggregated, more than 85 percent of the audience consisted of adults 21 and older. 

The 2008 Alcohol Report made a number of recommendations for improvement of 

the industry’s voluntary standards. Among other things, it announced that industry 

had agreed to adopt a 70 percent standard, with buying guidelines, for Internet advertising; it recommended that the beer and wine industries apply a 70 percent 

standard to sports sponsorships (the spirits industry already had done so); it recommended application of the 70 percent standard to product placements in movies; 

and it recommended that industry consider the need to maintain an 85 percent aggregate audience composition when making placements. Although it did not recommend an immediate change in the baseline standard, the 2008 Alcohol Report 

placed the industry on notice that it will be necessary to do so when the 2010 census 

data are released. 

Since 2008, the Commission has continued to press for additional changes in the 

self-regulatory standards. The staff has advised the industry that the baseline placement standard should be raised to 75 percent. Additionally, the staff has advised 

industry members that ads on sites that have registered users, such as Facebook, 

MySpace, and YouTube, should be delivered only to persons who have registered as 

being 21 and older. 

This January, the Commission will begin the process of seeking Office of Management and Budget approval, under the Paperwork Reduction Act, to conduct another 

major study of alcohol marketing and self-regulation.11 The study will evaluate the 

advertising practices of the major alcohol suppliers and consider the appropriateness 

of the placement standard. In the course of this study, the Commission will review 

the FTC’s 2008 Alcohol Report, the process by which it was created, and the other 

issues you raise. Our analysis will be based on the record as a whole, including but 

not limited to public health concerns, any comments received during the study, the 
234 

available placement data, and the potential costs and benefits of a modified standard. 

The Commission also knows that education is an important consumer protection 

tool. Data show that most teens who drink alcohol obtain it from social sources, 

such as older family members and friends. Accordingly, we developed a consumer 

education program to help parents protect their children from alcohol-related harm. 

The message of the ‘‘We Don’t Serve Teens’’ (WDST) program is, ‘‘Don’t Serve Alcohol to Teens. It’s unsafe. It’s illegal. It’s irresponsible.’’ Components of the WDST 

program include a website, www.DontServeTeens.gov; radio ads; and signs. WDST 

signage is used nationwide by alcohol retailers, police departments, schools, and 

mental health organizations. 

ATTACHMENT

BRIEF SUMMARY OF THE FTC’S PRIMARY AREAS OF COORDINATION WITH VARIOUS

FEDERAL AGENCIES

FDA: concurrent jurisdiction with respect to labeling and marketing of foods, OTC 

drugs, and devices; under a Memorandum of Agreement the FDA has primary responsibility for overseeing product labeling and the FTC has primary responsibility 

for non-label advertising; the agencies cooperate closely and frequently. 

FCC: (1) broadly concurrent jurisdiction with respect to telemarketing; the agencies consulted on rulemaking, developed consistent rules; coordinate on enforcement; 

(2) concurrent jurisdiction with respect to advertising in broadcast media; under a 

liaison agreement the FTC has primary responsible for unfair or deceptive advertising in media and provides that the FCC will take false and misleading advertising into account in licensing and other decisions; in this and other areas, the 

agencies consult and coordinate as applicable. 

DOJ: nearly complete concurrent jurisdiction on antitrust matters; under a clearance agreement the agencies determine which one will examine any particular matter; FTC issues premerger review rules with DOJ concurrence; the agencies cooperate closely on these and other issues. 

EPA: concurrent jurisdiction with respect to unfair or deceptive practices involving the environment, e.g., pesticides; the agencies consult and coordinate on scientific issues, such as those involved in the FTC Green Guides and business education and in amending the FTC Care Labeling Rule, and on enforcement as applicable. 

SEC: concurrent jurisdiction with respect to unfair or deceptive practices involving securities and investment advice; FTC generally defers to SEC where securities 

expertise is needed; agencies coordinate on enforcement as applicable. 

CFTC: some concurrent jurisdiction with respect to unfair or deceptive practices 

involving commodities futures; agencies consult as applicable, such as in the FTC’s 

petroleum market manipulation rulemaking. 

Postal Service/DOJ: concurrent jurisdiction with respect to mail fraud; agencies 

cooperate closely on enforcement, sometimes including parallel investigations and 

criminal referrals. 

BATF: concurrent jurisdiction with respect to unfair or deceptive practices involving alcohol, tobacco, and firearms; agencies consult on matters as applicable. 

CPSC: some concurrent jurisdiction with respect to unfair or deceptive practices 

involving product safety; agencies consult and coordinate on enforcement as applicable. 

Depository institution regulators: parallel jurisdiction, and limited concurrent jurisdiction, with respect to unfair or deceptive practices and a number of consumer 

financial laws; agencies consult on rulemaking, and some has been conducted jointly 

or in coordination; agencies consult or coordinate on enforcement as applicable. 

The new Consumer Financial Protection Bureau: concurrent jurisdiction with respect to some financial practices and entities; the statute provides for consultation 

and coordination on rulemaking, enforcement, and other matters. 

CONCLUSION OF HEARINGS

Senator DURBIN. This meeting of the subcommittee will stand recessed. 

Thanks, everybody, for attending. 

[Whereupon, at 3:50 p.m., Thursday, May 20, the hearings were 

concluded and the subcommittee was recessed, to reconvene subject 

to the call of the Chair.] 
(i) 

LIST OF WITNESSES, COMMUNICATIONS, AND 

PREPARED STATEMENTS 

Page 

American Postal Workers Union, AFL–CIO, Prepared Statement of the ........... 37 

Berry, Hon. John, Director, Office of Personnel Management ............................. 61 

Prepared Statement of ..................................................................................... 66 

Summary Statement of .................................................................................... 63 

Bond, Senator Christopher S., U.S. Senator From Missouri, Statement of ........ 143 

Cochran, Senator Thad, U.S. Senator From Mississippi, Questions Submitted 

by ........................................................................................................................... 190 

Collins, Senator Susan, U.S. Senator From Maine: 

Questions Submitted by ................................................................................... 191 

Statements of........................................................................... 3, 62, 112, 142, 197 

Durbin, Senator Richard J., U.S. Senator From Illinois: 

Opening Statements of ........................................................... 1, 61, 111, 141, 195 

Prepared Statement of ..................................................................................... 196 

Questions Submitted by........................................................................ 84, 130, 227 

Gensler, Hon. Gary, Chairman, Commodity Futures Trading Commission ....... 141 

Prepared Statement of ..................................................................................... 146 

Summary Statement of .................................................................................... 143 

Goldway, Hon. Ruth Y., Chairman, Postal Regulatory Commission ................... 39 

Prepared Statement of ..................................................................................... 41 

Summary Statement of .................................................................................... 40 

Herr, Phillip, Director, Physical Infrastructure Issues, Government Accountability Office ......................................................................................................... 45 

Prepared Statement of ..................................................................................... 46 

Landrieu, Senator Mary L., U.S. Senator From Louisiana, Prepared Statement of .................................................................................................................. 137 

Lautenberg, Senator Frank R., U.S. Senator From New Jersey, Questions 

Submitted by ........................................................................................................ 232 

Leibowitz, Hon. Jon, Chairman, Federal Trade Commission .............................. 195 

Prepared Statement of ..................................................................................... 201 

Summary Statement of .................................................................................... 198 

National Association of Letter Carriers, Prepared Statement of the .................. 26 

National Association of Postal Supervisors, Prepared Statement of the ............ 32 

National Association of Postmasters of the United States, Prepared Statement 

of the ..................................................................................................................... 32 

National Postal Mail Handlers Union, Prepared Statement of the .................... 35 

National Rural Letter Carriers’ Association, Prepared Statement of the ........... 34 

Potter, Hon. John E., Postmaster General, Chief Executive Officer, United 

States Postal Service ........................................................................................... 1 

Prepared Statement of ..................................................................................... 7 

Summary Statement of .................................................................................... 5 

Schapiro, Hon. Mary, Chairman, Securities and Exchange Commission ........... 165 

Prepared Statement of ..................................................................................... 167 

Tenenbaum, Hon. Inez, Chairman, Consumer Product Safety Commission ...... 111 

Prepared Statement of ..................................................................................... 115 
Page

ii 

Williams, Hon. David C., Inspector General, Office of Inspector General, 

United States Postal Service ............................................................................... 43 
(iii) 

SUBJECT INDEX 

COMMODITY FUTURES TRADING COMMISSION 

Page 

Additional Resources Needed ................................................................................. 160 

Budget Impact of Pending Legislation ................................................................... 164 

CFTC Regulatory Regime ....................................................................................... 146 

End User Exemption ............................................................................................... 163 

End Users ................................................................................................................. 158 

Energy Position Limits ............................................................................................ 157 

Margin ...................................................................................................................... 159 

Over the Counter: 

Derivatives Legislation .................................................................................... 157 

Market Size ....................................................................................................... 160 

Proposed Council of Regulators .............................................................................. 162 

Regulatory Reform ................................................................................................... 153 

Staff Expertise ......................................................................................................... 161 

Swaps Dealers .......................................................................................................... 159 

Technology ................................................................................................................ 156 

The Budget ............................................................................................................... 146 

Too Interconnected to Fail ...................................................................................... 162 

Transparency ....................................................................................................... 157, 163 

CONSUMER PRODUCT SAFETY COMMISSION 

Additional Committee Questions ............................................................................ 130 

Addressing Harmful Chemicals/Elements in Products ......................................... 122 

Beijing Office and Activities ................................................................................... 131 

Chinese: 

Drywall Investigation ....................................................................................... 136 

Products ............................................................................................................. 130 

Consumer Education and Outreach ....................................................................... 117 

GAO Report on CPSC’s Oversight of Imported Products ..................................... 135 

Information Technology Modernization ................................................................. 117 

Laboratory Status .................................................................................................... 136 

Lead Standards ........................................................................................................ 118 

Nanotechnology ................................................................................................... 118, 135 

Other Toxic Substances ........................................................................................... 120 

Port Surveillance ..................................................................................................... 134 

Searchable Consumer Product Safety Incident Database .................................... 137 

Staffing ..................................................................................................................... 132 

Increases ............................................................................................................ 118 

The Commission’s Compliance Initiative ............................................................... 116 

U.S. Consumer Product Safety Commission Activity on Bisphenol-A (BPA) ..... 123 

Workload .................................................................................................................. 133 

FEDERAL TRADE COMMISSION 

Additional Committee Questions ............................................................................ 227 

Administrative Procedures Act Rulemaking and Additional Authorities ........... 224 

Behavioral Marketing .............................................................................................. 213 

Competition Mission ................................................................................................ 207 

Consumer: 

Education .......................................................................................................... 223 

Protection Mission ............................................................................................ 201 

Emerging Internet Scams ....................................................................................... 226 
Page

iv 

Federal Trade Commission Building ...................................................................... 215 

Free Credit Reports ................................................................................................. 221 

Future Funding ........................................................................................................ 197 

Gasoline Prices and the Oil Industry ..................................................................... 222 

Google Collection of Data via Wi-Fi ....................................................................... 218 

Hospital Mergers ..................................................................................................... 218 

Identity Theft ........................................................................................................... 221 

Market Monitoring and Analysis Prompts FTC Growth ...................................... 197 

Needed Resources for Fiscal Year 2011 ................................................................. 212 

New Technologies, Financial Fraud Spur FTC Growth ....................................... 196 

Pay-for-Delay Settlements ...................................................................................... 217 

Payday Lending and Debt Collection ..................................................................... 225 

Unsubstantiated Health Claims ............................................................................. 220 

OFFICE OF PERSONNEL MANAGEMENT 

Additional Committee Questions ............................................................................ 84 

Comprehensive National Cybersecurity Initiative ................................................ 94 

Domestic Partner Benefits ...................................................................................... 74 

Federal: 

Employee: 

Pay .............................................................................................................. 79 

Recruitment and Retention ...................................................................... 96 

Employees and Government Procurement ..................................................... 101 

Long-term Care Insurance Program............................................................. 81, 107 

Pay and Furloughs ........................................................................................... 103 

Fiscal Year 2011 Budget Request .......................................................................... 67 

Guard and Reservist Differential Payments ......................................................... 75 

High Priority Performance Goals ........................................................................... 66 

Hiring Individuals With Disabilities ...................................................................... 77 

Implementation of Guard and Reservist Pay ........................................................ 89 

Lessons From the 2010 Snowstorms/Telework ..................................................... 82 

National Council on Federal Labor-Management Relations ................................ 106 

New Administration Wellness Initiatives .............................................................. 70 

Nursing Shortage and Intergovernmental Personnel Act Mobility Program...................................................................................................................... 71, 92 

OPM Reorganization ............................................................................................... 67 

OPM’s Strategic Plan for 2010–2015 ..................................................................... 105 

Open Government .................................................................................................... 108 

Postal Service Obligation to Retirement Trust Fund ........................................... 73 

Prohibitions on the Hiring of Immigrants ............................................................. 93 

Retirement Systems Modernization ....................................................................... 84 

Status of Reservist Differential Payments ............................................................ 76 

Technology ................................................................................................................ 93 

Telework and Continuity of Operations ................................................................. 94 

Work-Life Programs ................................................................................................ 100 

SECURITIES AND EXCHANGE COMMISSION 

Additional Committee Questions ............................................................................ 190 

Chief Compliance Officer Within SEC Organization ............................................ 184 

Corporate Compensation Programs ....................................................................... 184 

Corrective and Disciplinary Actions ....................................................................... 181 

Disclosure and Materiality Test ............................................................................. 188 

Employee Misuse of Computers ............................................................................. 180 

Enforcement Actions ................................................................................................ 179 

Engaging in a Significant Investor-Focused Rulemaking Agenda ...................... 171 

Fiduciary Duties of Broker-Dealer ......................................................................... 189 

Global Security Risk Management ......................................................................... 187 

Improving: 

Agency Systems and Management .................................................................. 170 

SEC Enforcement ............................................................................................. 183 

Managing Agency Growth ....................................................................................... 174 

New Leadership, Organizational Structures, and Expertise ............................... 167 

Oversight: 

By Appropriations Committee ......................................................................... 187 

Of Credit Rating Agencies ............................................................................... 176 

Reinvigorating the Enforcement Program ............................................................. 168 
Page

v 

SEC: 

Resources ........................................................................................................... 172 

Staff Levels Have Not Kept Pace With Industry Growth ............................. 175 

Stanford Ponzi Scheme ....................................................................................... 181, 185 

Strengthening Examinations and Oversight ......................................................... 170 

Tips and Complaints ............................................................................................... 182 

Whistleblower Bounty Program .............................................................................. 178 

UNITED STATES POSTAL SERVICE 

Civil Service Overpayment ..................................................................................... 21 

Employee-related Costs ........................................................................................... 20 

Financial Crisis Demands Aggressive Action ........................................................ 47 

Five-Day Delivery .................................................................................................... 15 

Highlights ................................................................................................................. 46 

Overpayment ............................................................................................................ 56 

Postal Service Business Model ............................................................................... 13 

Retiree Health Benefits ........................................................................................... 24 

USPS and Congress Need to Act Aggressively to Address Financial Crisis ....... 50 

USPS’s Financial Condition Has Deteriorated and its Outlook is Poor .............. 48 

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