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48–296 PDF 2009

S. HRG. 111–194 

FINANCIAL SERVICES AND GENERAL GOVERNMENT 

APPROPRIATIONS FOR FISCAL YEAR 2010 

HEARINGS 

BEFORE A

SUBCOMMITTEE OF THE 

COMMITTEE ON APPROPRIATIONS 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

ON

H.R. 3170/S. 1432 

AN ACT MAKING APPROPRIATIONS FOR FINANCIAL SERVICES AND 

GENERAL GOVERNMENT FOR THE FISCAL YEAR ENDING SEPTEMBER 

30, 2010, AND FOR OTHER PURPOSES 

Commodity Futures Trading Commission 

Department of the Treasury 

General Services Administration 

Securities and Exchange Commission 

Small Business Administration 

Printed for the use of the Committee on Appropriations 

( 

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html 
(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

MARY DIETRICH (Minority) 

RACHEL JONES (Minority) 

LASHAWNDA SMITH (Minority) 

Administrative Support 

MOLLY BARACKMAN

Detailee 

RICHARD P. BURKARD
(III) 

C O N T E N T S 

TUESDAY, JUNE 2, 2009 

Page 

Securities and Exchange Commission ................................................................... 1 

Commodity Futures Trading Commission ............................................................. 43 

TUESDAY, JUNE 9, 2009 

Department of the Treasury: 

Office of the Secretary ...................................................................................... 69 

Internal Revenue Service ................................................................................. 123 

TUESDAY, JUNE 16, 2009 

Small Business Administration .............................................................................. 161 

General Services Administration ............................................................................ 191 

Material Submitted Subsequent to the Hearings ................................................. 225 

(1) 

FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 

YEAR 2010 

TUESDAY, JUNE 2, 2009 

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

The subcommittee met at 10:33 a.m., in room SD–138, Dirksen 

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

Present: Senators Durbin, Tester, and Collins. 

SECURITIES AND EXCHANGE COMMISSION 

STATEMENT OF HON. MARY L. SCHAPIRO, CHAIRMAN 

STATEMENT OF SENATOR RICHARD J. DURBIN

Senator DURBIN. Good morning. I’m pleased to convene this hearing on the fiscal year 2010 funding request for two key Federal regulatory agencies within the jurisdiction of this Appropriations Subcommittee on Financial Services and General Government, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). 

I also want to welcome my friend and my distinguished Ranking 

Member Senator Susan Collins. We have worked together in many 

venues, and I’m glad that we’re going to share the responsibilities 

of this subcommittee. 

Joining us today to present testimony on the two budgetary proposals are the Honorable Mary Schapiro, Chairman of the SEC, 

and the Honorable Gary Gensler, Chairman of the Commodity Futures Trading Commission. 

Both of these agencies enjoy unique histories, hold specialized 

and independent responsibilities and take different approaches to 

markets that serve different purposes, yet the CFTC and SEC both 

occupy pivotal positions at the forefront of stimulating and sustaining economic growth and prosperity. 

We are enduring an extraordinary set of circumstances in our 

Nation today. We are beginning to slowly emerge from one of the 

greatest economic crises in decades. After years of struggle, countless families have lost their hard-earned savings, seen their dreams 

deferred and even denied. 

Some may view the subject matter of this hearing as dry as dust, 

how much money to give to two Federal agencies, but if you step 

back for a moment and translate their work into the real world, re-
2 

alize that their oversight and their regulation literally protects the 

savings and futures of American families and ensures that economies in countries around the world will view our economy and the 

way we run it with respect to as to whether or not the rule of law 

is going to be followed. 

The unprecedented price volatility of our markets for fiscal commodities, such as energy and grains, has hurt our economy, in addition to the previous mention I made of some of the problems that 

we’ve had with savings and the like. 

Now perhaps more than ever, we need our markets to function 

transparently and be insulated from manipulation and unfettered 

excessive speculation. Much remains to be done to stabilize and 

sustain our financial system. 

Chairman Schapiro and Chairman Gensler each bring vast experience to their new leadership posts in this administration and 

have undoubtedly identified in their brief tenure ways to improve 

the way we approach regulating securities and futures markets. 

As the subcommittee prepares to make difficult funding decisions, I look forward to hearing about the challenges their agencies 

will face. 

In the interest of time, I am going to ask that the remainder of 

my statement be made a part of the record so that we will have 

opportunity for testimony and for questions. 

[The statement follows:] 

PREPARED STATEMENT OF SENATOR RICHARD J. DURBIN

The CFTC and the SEC enjoy unique histories, hold specialized and independent 

responsibilities, and take different approaches to markets that serve differing purposes. Yet the CFTC and the SEC both occupy pivotal positions at the forefront of 

stimulating and sustaining economic growth and prosperity in our country. 

Market users, financial investors, and the U.S. economy rely upon vigilant oversight by these two agencies in today’s evolving—and often volatile—global marketplace. 

We are enduring an extraordinary set of circumstances in America today. We are 

beginning to slowly emerge from one of the greatest economic crises since the Great 

Depression. After years of sweat and struggle, countless families have lost their 

hard-earned savings, seeing their dreams daunted, deferred, and even denied. 

When a man named Bernard Madoff can, over the span of 10 or 20 years, lure 

investors into what has turned out to be a Ponzi scheme, causing many of them to 

lose millions of dollars, and his wrongdoing goes unnoticed by major regulatory 

agencies, it is clear more has to be done. 

When some of the major ratings agencies that gauge whether a company is doing 

well basically ignore their responsibility and fail to make accurate reports, everyone 

loses as a result of it. 

The unprecedented price volatility of our markets for physical commodities, such 

as energy and grains, has hurt our economy. Now—perhaps more than ever—we 

need our markets to function transparently and insulated from manipulation and 

unfettered excessive speculation. 

The Obama administration recently announced a comprehensive plan to significantly regulate credit default swaps and other over-the-counter derivatives. Exempting these investments from regulation has proven to be a costly mistake—contributing to the $180 billion taxpayer bailout of AIG, the collapse of Lehman Brothers, 

and the demise of Bear Stearns. 

This proposal will require far more transparency and responsibility from derivatives traders that have long operated in the shadows. 

Things are still very fragile. Much remains to be done to stabilize, repair, and sustain our financial system on which we all depend. It will take time to redeem the 

lost faith of the American people in the government institutions they expected would 

protect them. But I believe we are moving forward with resolve toward a brighter 

economic course. 
3 

I appreciate the fact that Chairmen Schapiro and Gensler have each accepted 

President Obama’s call to be part of the economic leadership team to help craft a 

more reliable regulatory framework and guide us to a better future. 

Both Chairmen bring vast experience to their new leadership posts in this administration—and have undoubtedly identified, even in their brief tenures, ways to improve the way we approach regulating in the securities and futures markets. 

As the subcommittee prepares to make difficult funding decisions for the next fiscal year, I look forward to hearing about the particular challenges their respective 

agencies face in today’s tumultuous economic environment. I welcome their input on 

how we can best help to address those needs. 

Before hearing from our panelists, I’d like briefly outline the missions of these 

agencies and their budget proposals: 

Turning first to the SEC, its three-prong mission is to protect investors; maintain 

fair, orderly, and efficient markets; and facilitate capital formation. The SEC is the 

investor’s advocate. 

The SEC is responsible for overseeing more than 12,000 publicly traded compa- nies, over 11,300 investment, nearly 8,000 mutual funds with $9 trillion in assets, 

fund complexes, 5,500 broker dealers with over 174,000 branches, 10 credit rating 

agencies, and close to $44 trillion worth of trading conducted each year on America’s 

stock and option exchanges. 

The strength of the American economy and our financial markets depends on investors’ confidence in the financial disclosures and statements released by publicly 

traded companies. Investors expect the SEC to be the vigilant ‘‘cop on the beat.’’ Regrettably, in many respects, we let them down. I have faith in Chairman Schapiro’s 

leadership and tenacity to turn things around. 

This subcommittee wants to make certain that the SEC has the necessary resources to effectively fulfill its obligatory singular mission: protecting shareholders. The SEC’s budget request for fiscal year 2010 totals $1.026 billion, an increase of $8.8 million, or 8.8 percent over the agency’s fiscal year 2009 enacted level of 

$943 million. This proposed fiscal year 2010 budget would fund 3,692 FTE, just 40 

more than the current year funding permits. 

Crucial to the SEC’s effectiveness is its enforcement authority. Each year the SEC 

brings hundreds of civil enforcement actions for violations of the securities laws, 

such as insider trading, accounting fraud, and providing false or misleading information. 

Serious, thoughtful questions have been raised about whether the proposed enforcement budget is adequate to keep pace with the growing demands. 

Second, the CFTC: The CFTC is charged with protecting the public and market 

users from manipulation, fraud, and abusive practices. It is also responsible for promoting open, competitive, and financially sound markets for commodity futures. 

The CFTC helps ensure that the futures markets are equipped to better perform 

their vital function in the U.S. economy—providing a mechanism for price discovery 

and a means of offsetting price risks. 

The CFTC’s oversight and enforcement mission becomes tangible when you consider that futures prices impact what we pay for the basic necessities of our daily 

lives: our food, clothing, shelter, fuel in our vehicles, and heat in our homes. 

This year—2009—marks the 35th year since the establishment of the Commodity 

Futures Trading Commission. At the time of its inception in 1974, CFTC’s 500 employees were tasked with the mission of ensuring fair practices and honest dealings 

on the commodity exchanges of America’s then-$500 billion futures industry. 

Today it is a $22 trillion industry that looks vastly different. Yes, the traditional 

agricultural products like wheat, corn, soybeans, and the proverbial pork bellies are 

still part of the picture. But the landscape has been remarkably altered and diversified with novel and complex commodities... everything from grains to gold, currencies to carbon credits. 

In the past decade, trading volume has increased more than ten-fold—reaching 

well over 3.4 billion trades in 2008, and actively traded contracts have quintupled— 

from 286 in 1998 to 1,521 in 2008. CFTC oversees $5 trillion of trades—daily. 

Adding to this challenge is a significantly transformed globalized, electronic, and 

round-the-clock marketplace. Moreover, the emergence of derivatives and hedge 

funds have altered the regulatory environment. 

Layered on this are new authorities added through the 2008 farm bill, coupled 

with escalating public angst about record energy and agricultural commodity price 

hikes and fluctuations, and a growing influx of financial funds into the futures markets. 

Further complicating the picture are transactions that the CFTC currently has no 

power to presently regulate—the vast ‘‘shadow’’ world of over-the-counter derivatives—like credit default swaps. 
4 

Surprisingly, what hasn’t changed is the number of staff. Despite the phenomenal 

surge in volume and activity, CFTC staffing levels have simply not kept pace. In 

fact, staffing levels have dropped by over 20 percent. CFTC’s workforce—like its 

predecessor over three decades ago in the agency’s fledgling years—presently numbers only 500. 

For fiscal year 2010, the President’s budget request funding for the CFTC of 

$160.6 million. This represents an increase of $14.6 million—a 10 percent hike— 

above the fiscal year 2009 enacted level of $146 million. 

Of the $14.6 million in increased funding for next year, $7.4 million is slated for 

increased compensation and benefit costs for a staff of 572; $0.2 million will be devoted to increased operating costs for information technology modernization, lease 

of office space, and other services; and $7.8 million will support the salary and expenses of 38 additional full-time staff. 

Last August, I had the opportunity to visit the CFTC’s Chicago Regional Office. 

I met with a group of dedicated staff committed to doing outstanding work under 

challenging circumstances. I learned first-hand just how thin the staffing is. 

The CFTC’s Chicago market surveillance staff consisted of 10 economists who conduct daily oversight of each actively traded market and 6 trading specialists who 

process the daily reports detailing traders’ actual positions in each market. 

These economists are responsible for surveillance of over 1,250 different commodity futures and option contracts, of which 325 are active, involving 13 different 

commodity types. The commodities underlying the futures contracts the staff must 

monitor are highly diverse—including grains, livestock, lumber, currencies, Treasury instruments, equity indexes, single stock future, and dairy. More recently, 

weather derivatives, real estate indexes, and environmental products such as carbon 

credits and emission allowances became part of their portfolio. 

A single staff economist must cover many markets. For example, one staffer is responsible for 10 grains, one for 90 currencies, and one for the surveillance of over 

500 hundred single stock futures. Aside from supervision by the chief of the Chicago 

surveillance section and Washington, DC supervisory personnel, there is limited redundancy built into the system. As a consequence, each one of those economists is 

critical. 

The six trading specialists maintain an extensive daily data-gathering and 

verification system by collecting reports from exchanges, futures industry firms, and 

traders. As our energy debate in Washington throughout the last Congress demonstrated, this data collection is very important to the Commission’s oversight and 

to market transparency. 

As I pledged since assuming the Chairmanship of this committee, I am serious 

about addressing the resource deficiency facing this agency. 

I will appreciate hearing from both Chairmen their honest appraisals about the 

resources they will require to achieve their missions, keep pace with change, and 

becomes as sophisticated as, if not more so, than the entities they monitor—while 

responsibly managing taxpayer dollars. 

Senator DURBIN. And I now turn it over to my Ranking Republican Member, Senator Collins. 

STATEMENT OF SENATOR SUSAN COLLINS

Senator COLLINS. Thank you, Mr. Chairman. 

Let me begin by saluting you for your leadership on this subcommittee. I am just delighted to be your new ranking member. 

About two decades ago, I spent 5 years in Maine State government as a financial regulator overseeing the bureau of banking, insurance, securities administration, and I have a great personal interest in this area because I know that the decisions made by the 

SEC and the CFTC do, as you have pointed out, have such an impact not only on our economy but on the daily lives of most American families. 

So it’s a great honor to serve with you as your ranking member 

and I very much look forward to working cooperatively with you 

throughout this Congress. 

As we begin to consider the fiscal year 2010 budget requests for 

the SEC and the CFTC, let me also salute the chairman for his 
5 

leadership in securing significant increases for both of these agencies. 

Thanks to the work of this subcommittee and the chairman’s 

leadership, the budget for the SEC is now nearly 9 percent above 

the fiscal year 2007 funding level and the budget for the CFTC is 

49 percent above that year. 

These increases are extremely important, given that both of 

these agencies were woefully underfunded for years. I personally 

believe that they’re still underfunded and that more work needs to 

be done. 

I want to congratulate the two chairmen for appearing before our 

subcommittee today with aggressive agendas for change and reform. I look forward to hearing the details about the budget requests. 

As the chairman has indicated, the current economic crisis has 

left our markets in turmoil and the loss of trillions of dollars of 

value in these markets has depleted family savings, shuttered 

small businesses and damaged retirement and pension funds. 

I am convinced that we not only need to make sure these two 

agencies have the resources necessary but that we need to proceed 

with regulatory reform, as well, in order to restore confidence in 

our markets and to prevent the root causes of the current financial 

crisis from springing up once again. 

Mr. Chairman, I am going to follow your lead and submit the remainder of my statement, as well, but I am delighted to be joining 

you to work on these critical issues. 

Thank you. 

[The statement follows:] 

PREPARED STATEMENT OF SENATOR SUSAN COLLINS

Good morning. At this first hearing of our subcommittee, I want to thank you, 

Chairman Durbin, for your leadership. This Subcommittee has jurisdiction over a 

diverse group of agencies, many of which have a profound impact on the financial 

stability of our economy and on the lives of most Americans. So it is an honor to 

serve with you as Ranking Member of this subcommittee, and I look forward to 

working cooperatively with you during this Congress. 

Mr. Chairman, as we begin to consider the fiscal year 2010 budget requests for 

the SEC and the CFTC, I want to salute you for your leadership in securing significant increases for both these agencies during your chairmanship of this subcommittee. Thanks to your hard-fought efforts, the budget for the SEC is now 8.9 

percent above the fiscal year 2007 funding level, and the budget for the CFTC is 

49 percent above the fiscal year 2007 level. These increases were extremely important, given that both of these agencies had been woefully underfunded over the 

years. 

Chairman Schapiro and Chairman Gensler: Congratulations and thank you both 

for appearing before our subcommittee today. I look forward to hearing the details 

of your fiscal year 2010 budget requests and the key efforts that you plan to undertake this year. You both have crucial roles in our economy: SEC, by protecting the 

public through enforcement of securities laws, and CFTC, by protecting market 

users and the public from fraud, manipulation, and abusive practices related to the 

sale of commodity and financial futures and options. 

Protecting investors is more compelling than ever since many first-time investors 

have turned to the markets to help secure their retirements, pay for homes, and 

send their children to college. 

Our current economic crisis has left our markets in turmoil. The loss of trillions 

of dollars in value in these markets has depleted family savings, shuttered small 

businesses, and damaged retirement and pensions funds. 

Chairman Schapiro, I am troubled by reports that an environment of lax oversight 

and enforcement at the SEC was a contributing factor to the current financial crisis. 

For example, some investment banks were allowed to become over-extended, which 
6 

led to the collapse of several of Wall Street’s largest banks. The Bernard Madoff 

ponzi scheme went undetected for decades, resulting in $50 billion in investor losses. 

So Madam Chairman, I am pleased that you have developed an ambitious agenda 

of management reforms for the Commission, and I am interested in hearing what 

resources you need to accomplish these reforms. 

Chairman Schapiro and Chairman Gensler: You both have challenging tasks in 

front of you. You must improve transparency in our securities markets and uncover 

fraud and deception, while not over-regulating our markets and hindering our economic recovery. I look forward to working with both of you, and with Chairman 

Durbin to ensure that you have the resources and the tools you need to ensure investors are protected and that markets are functioning properly. 

I look forward to your testimony and I thank you for your service to our Country. 

Thank you, Mr. Chairman. 

Senator DURBIN. Thanks a lot, Senator Collins. 

Senator Tester, would you like to make an opening statement? 

Senator TESTER. Thank you, Mr. Chairman. 

Just to welcome Mary and Gary to the subcommittee today. I appreciate the work that you have done and I appreciate the work 

you are about to do. I think it’s critically important that we have 

good, solid, reasonable enforcement and I think both of you are up 

to that challenge. 

So with that, we’ll move on. Thank you, Mr. Chairman. 

Senator DURBIN. Thank you, Senator Tester. 

Chairman Schapiro, the floor is yours. 

Ms. SCHAPIRO. Chairman Durbin, Ranking Member Collins, and 

Senator Tester, thank you very much for the opportunity to testify 

today. 

In the short time that I’ve been at the SEC, we have taken on 

an active agenda, all with the goal of protecting investors, revitalizing the agency, and restoring confidence in the markets. We are 

making great strides, yet recognize that we have quite a distance 

to go. 

In the area of enforcement, we have changed our policies so that 

our investigators do not have to jump over unnecessary hurdles before seeking penalties or launching investigations. We have hired 

a former Federal prosecutor to lead the Enforcement Division, 

someone who is focused on bringing significant cases with a meaningful impact as quickly as possible and ensuring that the Division 

is appropriately organized to do just that. 

We have begun to update our management systems, to upgrade 

our risk assessment capabilities so that we can better detect fraud, 

and we have expanded and improved upon our training so that our 

staff will be able to keep pace with the new financial products and 

strategies created on Wall Street. 

Already we are seeing results. Since the end of January, as compared with the same period last year, we have filed nearly three 

times as many temporary restraining order cases, issued more than 

twice as many formal orders and opened over 20 percent more investigations into fraud. 

Although enforcement is central, it is still just one part of our 

agency. As you know, we are tasked with overseeing broker-dealers, investment advisors, and mutual funds, and we are taking 

steps to improve our ability to do just that. 

For instance, we are working on a risk-based initiative to improve our oversight methods so that we can better identify and 

focus resources on riskier institutions. We also are recruiting senior 
7 

professionals with new skill sets, such as trading, risk assessment 

and financial analysis, and we have created an Industry and Risk 

Management Fellows Program to bring top talent into the agency. 

SEC’S RULEMAKING AGENDA

In addition to internal management directives, we also have engaged in an active rulemaking agenda. Last month, the SEC proposed significant changes to the rules governing investment advisors who maintain custody of their clients’ assets. 

Should the proposals be adopted, advisors with custody will have 

to undergo a surprise exam by an independent public accountant 

once a year to verify client assets and any custodian affiliated with 

an advisor would also be subject to custody controls reviews by an 

independent accountant. The goal is to expose Ponzi schemes and 

other frauds earlier. 

In the area of short selling, the Commission unanimously voted 

to propose two distinct approaches to limit short selling. One would 

impose a permanent market-wide short sell price test, the other approach would impose temporary short selling restrictions upon individual securities during periods of severe price declines. 

Later this month, the SEC will consider proposals to strengthen 

the money market fund regulatory regime. We will focus on tightening credit quality, maturity and liquidity standards for money 

market funds. 

We’re also exploring whether more fundamental changes are necessary, such as converting money market funds to a floating rate 

net asset value to better prevent abuses and avoid runs on the 

funds. 

Additionally, I have asked the staff to undertake a comprehensive review of rule 12(b)(1) which allows mutual funds to use fund 

assets to compensate broker-dealers and other intermediaries for 

distribution and servicing expenses. 

In the area of proxy access, the Commission already has proposed rules that would enhance the ability of shareholders to nominate company directors and next month we will take up a broad 

packet of corporate disclosure improvements around compensation 

policies, the use of compensation consultants, and the interplay between risk-taking and incentive arrangements. 

But there is still more to do in the regulatory arena. We have 

been working closely with other Federal agencies to bring the unregulated world of credit default swaps into the sunlight. 

Operating under the limitations of the current legislative structure, we recently issued temporary orders to facilitate the establishment of central counterparties for clearing credit default swaps. 

In the coming months, we will also tackle issues related to municipal market reform, stock lending, trading in non-transparent 

markets or dark pools, and hedge fund oversight. I look forward to 

working with Congress on these issues. 

RESOURCES NEEDED FOR SEC’S MISSION

The financial crisis has reminded us all just how large, complex 

and critical to our economy the securities markets have become. At 

the SEC, our 3,700-person staff now oversees more than 35,000 

registrants, including about 12,000 public companies, 8,000 mutual 
8 

funds, 11,000 advisors, and 5,000 broker-dealers, and it is a number that is growing rapidly. 

Nonetheless, during this same period the SEC’s resources have 

fallen. Between 2005 and 2007, the agency saw 3 years of flat or 

declining budgets and lost 10 percent of its employees. This has an 

impact. 

With support from this subcommittee during the last 2 fiscal 

years, the SEC has been able to lift its hiring freeze and begin rebuilding its workforce, and I am very grateful for that support. 

But even with these important steps, the number of staff remains below the levels of only a few years ago. I believe additional 

resources are essential to restoring the SEC as a vigorous and effective regulator. The President has requested a total of just over $1 billion for the 

agency in fiscal year 2010, a 7 percent increase over this year’s 

level. This budget request would permit us to fully fund an additional 50 staff positions over 2008 levels. These positions would 

help the SEC’s Enforcement Program enhance its pursuit of tips 

and complaints and fully fund our new Fellows Program that 

brings in seasoned industry professionals. 

In addition to expanding our workforce, the President’s request 

also would enable us to invest more in new technology, a budget 

item that has dropped by more than one-half in the last 4 years. 

Mr. Chairman, I came to the SEC to shape public policy in the 

interest of investors and to strengthen our Enforcement Program. 

The measures I have described today are important to those efforts, 

but what I have also discovered is that we cannot neglect the internal operations of the agency, the processes that guide our work and 

the agency’s infrastructure. 

I am committed to a complete review of the internal operations 

to ensure that we meet the highest standards and that we are fully 

supporting the important work of our employees. To ensure that we 

do it right, I intend to bring in a chief operating officer to manage 

that process. 

I want to thank you for your continued strong support of the 

SEC and its critical mission. I believe that by strengthening our 

Enforcement Program, enhancing risk-based oversight, and 

leveraging technology, we can restore investors’ confidence in both 

the SEC and in our Nation’s securities markets. 

PREPARED STATEMENT

I look forward to answering your questions. Thank you. 

Senator DURBIN. Thanks, Chairman Schapiro. 

[The statement follows:] 

PREPARED STATEMENT OF MARY L. SCHAPIRO

Chairman Durbin, Ranking Member Collins, Members of the Subcommittee, 

thank you for the opportunity to testify today. I sincerely appreciate the support 

this Subcommittee has shown the Securities and Exchange Commission, and I am 

pleased to have the opportunity to discuss with you the Commission’s role in helping 

to address the financial crisis, and to discuss reforms to improve investor protection 

and restore confidence in our markets. 

The last year has been a wrenching time for the investors whom the SEC is 

charged with protecting. Trillions of dollars in wealth have been destroyed during 

the economic downturn, and millions of Americans have seen their retirement nest 

eggs and college tuition funds shrink dramatically as a result. The economic crisis 
9 

1SEC v. Reserve Management Company, Inc., et al., Lit. Rel. No. 21025 (May 5, 2009). 

has challenged faith in our system of capital formation and allocation—a system 

that has proved over the long term to be the greatest for creating wealth the world 

has seen. 

As an agency charged with protecting investors, maintaining fair, orderly and efficient markets, and facilitating capital formation, we are dedicated to understanding 

and learning from recent events and from the causes that were building in the system over the years, so that we can do our part to restore market integrity and investor confidence. The SEC must act promptly, decisively, and with resolve. We also 

must have a renewed commitment to protecting investors; they provide the capital 

used to fund the productive enterprises that create jobs and wealth. While we have 

a tripartite mission at the SEC, investor protection is the foundation upon which 

all our responsibilities are built. 

To that end, I’ve already announced several changes at the agency that will reinforce our focus on investor protection and market integrity and redirect our energies 

toward restoring investor confidence. 

REINVIGORATING SEC ENFORCEMENT

One of my very first actions as Chairman was to end the 2-year ‘‘penalty pilot’’ 

program, which had required the Enforcement staff to obtain a special set of approvals from the Commission in cases where the staff sought fines against public companies that violated the law. Some enforcement staff had complained that the procedures unnecessarily delayed the prosecution of cases, and discouraged the staff from 

either seeking a penalty or seeking an appropriately high penalty. At a time when 

the SEC needs to send a clear message that corporate wrongdoing will not be tolerated, and penalties for securities violations will be stiff, the penalty pilot program 

was an unnecessary hurdle to more active enforcement. 

Another change I implemented to bolster the SEC’s Enforcement program was to 

provide for more rapid approval of formal orders of investigation, which allow SEC 

staff to use the power of subpoenas to compel witness testimony and the production 

of documents. In investigations that require the use of subpoena power, time is of 

the essence; delay can be costly to an investigation. To ensure that subpoena power 

is available to the staff when needed, the agency has returned to a policy of timely 

consideration of formal orders by the seriatim process or, where appropriate, by a 

single Commissioner acting as duty officer. 

In addition, I have hired a new enforcement director, a longtime Federal prosecutor who served as Chief of the Southern District of New York’s Securities and 

Commodities Fraud Task Force, charged with focusing our enforcement efforts on 

bringing meaningful, high impact cases quickly. We are working together on management reforms—including harnessing technology, improving risk assessment, and 

improving training and supervision for our line law enforcement personnel—so that 

we can maximize our resources to combat fraud and wrongdoing in our markets. 

Our Division of Enforcement has been working diligently. Since the end of January, 

—We have filed at least 34 emergency temporary restraining orders. During 

roughly the same period last year, we filed 12. 

—We have opened more than 358 investigations. During roughly the same period 

last year, we opened 292. 

—The Commission has issued at least 188 formal orders. During roughly the 

same period last year, the Commission issued 74. 

Since January, we have brought a number of important and complex cases. For 

example, in the Reserve Fund matter filed in May, we charged certain operators of 

the Reserve Primary Fund, a $62 billion money market fund whose net asset value 

fell below $1.00 or ‘‘broke the buck’’ last fall, with fraud for failing to provide key 

material facts to investors and trustees about the Fund’s vulnerability as Lehman 

Brothers Holding, Inc., sought bankruptcy protection. As part of this action, we are 

seeking to bring about an expedited, efficient, and equitable pro-rata distribution to 

shareholders of the Fund’s remaining assets, including $3.5 billion originally set 

aside in the Fund’s litigation reserve.1 We believe this will help Reserve Fund investors recover a larger share of their assets. 

In March, we initiated a case alleging fraud in connection with a kickback scheme 

involving New York’s largest pension fund. Namely, we charged New York’s former 

Deputy Comptroller and a top political advisor with extracting kickbacks from investment management firms seeking to manage the assets of the New York State 

Common Retirement Fund. Since March, we have amended the complaint to add additional defendants, including a former New York State political party leader, a 
10 

2SEC v. Henry Morris, et al., Lit. Rel. No. 20963 (March 19, 2009), Lit. Rel. No. 21001 (April 

15, 2009), Lit. Rel. No. 21018 (April 30, 2009); Lit. Rel. No. 21036 (May 12, 2009). 

former hedge fund manager, a Dallas-based investment management firm and one 

of its founding principals, and a Los Angeles-based ‘‘finder.’’ 2

As committed as we are to vigorous enforcement of the securities laws, we are 

also mindful that the complexity of 21st century markets, as well as the varied nature of frauds and scams, require that the sophistication and tools available to our 

Enforcement and Examination programs keep pace. Important questions have been 

raised concerning the agency’s handling of tips or whistleblower information related 

in particular to the activities of Bernard Madoff. Clearly this is something we must 

learn from, and I am committed to addressing it. Former Chairman Cox asked the 

SEC Inspector General to look into what happened, what failed to happen, and to 

report back to the Commission. We expect to receive the IG report this summer and 

will promptly take all appropriate actions and address any remaining shortcomings. 

It is clear that, regardless of any findings of the Inspector General, the agency 

must improve its ability to process and pursue appropriately the hundreds of thousands of tips and referrals it receives annually. In February, we retained the Center 

for Enterprise Modernization which began work immediately on a comprehensive review of internal procedures to evaluate tips, complaints, and referrals. We are in 

the process of creating a system that will centralize this information so we can track 

it, analyze it and more effectively identify valuable leads for potential enforcement 

action and compliance exams. 

STRENGTHENING EXAMINATION AND OVERSIGHT

In addition to these changes, it is essential that we work to improve our riskbased oversight of broker-dealers, investment advisers and mutual funds. Our Office 

of Compliance Inspections and Examinations (OCIE), together with other agency 

staff in the Office of Risk Assessment, are presently working on an initiative to 

identify the key data points that would facilitate an improved risk-based oversight 

methodology to allow the staff to identify and focus on those firms presenting the 

most risk. OCIE has improved training and, under a newly authorized program, 268 

examiners are now participating in the training and certification program offered 

by the Association of Certified Fraud Examiners, to identify the warning signs and 

red flags that indicate evidence of fraud and fraud risk. OCIE is also recruiting additional individuals with experience in different facets of the industry, such as trading, risk assessment and compliance. These steps taken together will expand the 

knowledge base of our inspections staff, better enabling them to conduct oversight 

of complex trading strategies and products that exist in our markets today. 

I have also launched an Industry and Markets Fellows Program in our Office of 

Risk Assessment. Through this program, we have begun recruiting fellows with extensive experience in such areas as equity and fixed income securities trading, 

structured products, complex derivatives, financial analysis and valuation, fund 

management, investment banking and financial services operations. 

IMPROVING TRANSPARENCY AND INVESTOR PROTECTION

The agency is working hard in other areas as well. In the area of accounting 

standards, the SEC staff completed a congressionally-mandated study of fair value 

accounting. The staff issued guidance to financial institutions so that they can give 

fuller disclosure to investors, particularly with respect to hard-to-value assets. The 

staff has also continued to work closely with the Financial Accounting Standards 

Board to deal with such issues as consolidation of off-balance sheet liabilities, the 

application of fair value standards to inactive markets and the accounting treatment 

of bank support for money market funds. FASB recently took steps to clarify treatment of off-balance sheet items in a manner designed to increase market transparency. 

In the area of combating false rumors and manipulative activity in the marketplace, the agency initiated examinations of the effectiveness of broker-dealers’ and 

investment advisers’ controls to prevent the spreading of false information. When 

concluded, the results of these examinations will be used by regulators to assist 

firms in crafting and implementing robust policies and procedures to prevent the 

spreading of false information. 

In the wake of recent Ponzi schemes and other investment adviser abuses, the 

Commission last month proposed significant changes to the custody requirements 

for investment advisers. These proposals focus on the value of an independent public 

accountant serving as another set of eyes to better assure the safekeeping of investor assets. One proposal would require all advisers with custody or control of client 
11 

assets to engage an independent public accountant to conduct an annual ‘‘surprise 

exam’’ to verify those assets exist. A second proposal would apply only to investment 

advisers whose client assets are not held by a firm independent of the adviser. In 

such cases, the investment adviser would be required to be subject to a review that 

results in a written report—prepared by a PCAOB-registered and inspected accounting firm—that, among other things, describes the controls in place relating to custodial services, tests the operating effectiveness of those controls and provides the results of those tests. These reports are commonly known as SAS–70 reports. The reports would include an opinion of an independent public accountant issued in accordance with the standards of the PCAOB, which will provide an important level 

of quality control over the accountants performing this review. In addition, advisers 

would be required to publicly disclose the name of the accountant conducting these 

reviews, so that our staff can better monitor compliance and assess adviser compliance risks. Accountants also would be required to disclose the reason for any termination or resignation from performing these reviews, which should highlight any 

‘‘red flags’’ for regulators and investors. 

At my request, our staff is also developing investor-oriented enhancements to the 

municipal securities area. It is time for those who buy the municipal securities that 

are critical to State and local funding initiatives to have access to improved quality, 

quantity and timeliness of information. On a related note, so called ‘‘pay-to-play’’ 

practices by investment advisers to public pension plans must be curtailed. I have 

asked the staff to revisit the Commission’s 1999 proposal to address harmful payto-play practices, and I expect that the Commission will consider that proposal this 

summer. 

COMBATING ABUSIVE SHORT-SELLING

In my brief tenure as Chairman, the issue of short selling has outpaced any other 

in terms of the number of inquiries, suggestions and expressions of concern we have 

received. On April 8, 2009, the Commission unanimously voted to propose two distinct approaches to short selling restrictions. One approach would impose a permanent, market-wide short sale price test, while the other would impose temporary 

short selling restrictions upon individual securities during periods of severe declines 

in the prices of those securities. On May 5, 2009, the Commission held a public 

roundtable to solicit the views of investors, issuers, financial services firms, self-regulatory organizations and the academic community on key aspects of these proposals. The Commission is committed to conducting a thoughtful, deliberative process to determine what is in the best interests of investors, including examining a 

variety of trading and market related practices such as securities lending. 

We also recognize that strong rules and vigorous enforcement are needed to curb 

abusive short selling and restore confidence in our markets. The Commission has 

been focused on the issue of abusive ‘‘naked’’ short selling since before my arrival 

in late January, and the Commission’s regulatory actions have led to a significant 

decline in failures to deliver securities on time following a short sale. Moreover, our 

Division of Enforcement has a number of active investigations involving potentially 

abusive short selling in a variety of contexts. 

FILLING REGULATORY GAPS

In an effort towards bringing the unregulated world of credit default swaps into 

the sunlight, the Commission, working in close consultation with the Board of Governors of the Federal Reserve System and the Commodity Futures Trading Commission (‘‘CFTC’’) and operating under the limitations of the current legislative structure, recently issued temporary orders to facilitate the establishment of central 

counterparties for clearing credit default swaps (‘‘CDS’’) by LCH.Clearnet Ltd., ICE 

US Trust LLC, and Chicago Mercantile Exchange Inc. The Commission is committed to increasing investor protection and reducing systemic risk by facilitating 

the development and oversight of central counterparties to clear CDS. 

We have also been working with the CFTC and Treasury Department to fill regulatory gaps in this area to help increase transparency and minimize risks associated 

with certain derivative products, including CDS, as well as market participants 

transacting in these products. I look forward to working with Congress to make the 

necessary legislative changes to ensure that these markets and market participants 

are appropriately regulated. 

In addition, we are closely examining the broker-dealer and investment adviser 

regulatory regimes and assessing how they can best be harmonized and improved 

for the benefit of investors. Many investors do not recognize the differences in standards of conduct applicable to broker-dealers and investment advisers. It is essential 

that comparable and effective protections be afforded to investors, whether they 
12 

turn to a broker-dealer or an investment adviser for assistance in accessing the securities markets. 

Finally, hedge funds and other unregulated private pools of capital have flown 

under the radar for far too long. We are currently examining whether these funds, 

their managers or both should be subject to SEC registration and oversight, so that 

investors, regulators and the marketplace have more complete and meaningful information about the funds and their market activities. I look forward to working 

with Congress on this important issue. 

STRENGTHENING SHAREHOLDER RIGHTS

We have launched an agenda of proxy reforms with a proposal approved by the 

Commission for public comment that would significantly support shareholders’ 

rights to nominate company directors. Next month we will take up a broad package 

of corporate disclosure improvements, all designed to provide shareholders with important information about their company’s key policies, procedures and practices, including compensation policies and incentive arrangements. With this additional information, shareholders will be better able to hold directors accountable for the decisions that they make. For example, the Commission will consider proposals to enhance disclosure of director nominee experience, qualifications and skills, so that 

shareholders can make more informed voting decisions. The Commission will also 

consider proposed disclosures to shareholders about why a board has chosen its particular leadership structure (whether that structure includes an independent chair 

or combines the positions of CEO and chair), so that shareholders can better evaluate board performance. Also, shareholders should understand how compensation 

structures and practices drive an executive’s risk-taking. The Commission will be 

considering whether greater disclosure is needed about how a company—and the 

company’s board in particular—manages risks, both generally and in the context of 

compensation. The Commission will also consider whether greater disclosure is 

needed about a company’s overall compensation approach, beyond decisions with respect only to the highest paid officers, as well as about compensation consultant conflicts of interests. 

IMPROVING MONEY MARKET AND MUTUAL FUND REGULATION

Later this month, the SEC will consider proposals to strengthen the money market fund regulatory regime. The proposals will focus on tightening the credit quality, 

maturity and liquidity standards for money market funds to better protect investors 

and make money market funds more resilient to risks in the short-term securities 

markets, like those that unfolded last fall. In addition, we are exploring whether 

more fundamental changes are necessary, such as converting money market funds 

to a floating rate net asset value, in order to protect investors from abuses and runs 

on the funds. 

In addition, on June 18, the SEC and the Department of Labor will hold a joint 

hearing on target date funds. Target date funds and other similar investment options are investment products that allocate their investments among various asset 

classes and automatically shift that allocation to more conservative investments as 

a ‘‘target’’ date approaches. These funds have become quite popular, and growth in 

target date fund assets is likely to continue since these funds can be default investments in 401(k) retirement plans under the Pension Protection Act of 2006. However, target date funds have produced some troubling investment results. The average loss in 2008 among 31 funds with a 2010 retirement date was almost 25 percent. In addition, varying strategies among these funds produced widely varying results. Returns of 2010 target date funds ranged from minus 3.6 percent to minus 

41 percent. 

These returns cause concern for investors and regulators alike. I can assure you 

that SEC staff is closely reviewing target date funds’ disclosure about their asset 

allocations. In addition, in connection with our joint hearing with the Department 

of Labor, we will consider whether additional measures are needed to better align 

target date funds’ asset allocations with investor expectations. Among other issues, 

we will consider whether the use of a particular target date in a fund’s name may 

be misleading or confusing to investors and whether there are additional controls 

the SEC should impose to govern the use of a target date in a fund’s name. 

I also have asked the staff to prepare a recommendation on rule 12b–1, which permits mutual funds to use fund assets to compensate broker-dealers and other intermediaries for distribution and servicing expenses. These fees, with their bureaucratic sounding name and sometimes unclear purpose, are not well understood by 

investors. Yet in 2008, rule 12b–1 was used to collect over $13 billion in investors’ 

funds out of fund assets. It is essential, therefore, that the SEC engage in a com-
13 

prehensive re-examination of rule 12b–1 and the fees collected pursuant to the rule. 

If issues relating to these fees undermine investor interests, then we at the SEC 

have an obligation to step in and adjust our regulations. 

In addition to these initiatives, the agency continues to annually review 5,000 corporate filings, over 1,000 SRO rules, and nearly 3,000 new investment company 

portfolio disclosures. We establish the standards for 13 securities exchanges, 4 securities futures product exchanges, FINRA (a national securities association), the Municipal Securities Rulemaking Board, 10 nationally recognized statistical rating organizations, 10 registered clearing agencies, approximately 600 transfer agents, and 

securities information processors. Despite the extreme volatility and uncertainty in 

the markets over the past year, transactions continue to trade at both record volumes and record speed. 

SEC RESOURCES

The financial crisis has reminded us just how large, complex, and critical to our 

economy the securities markets have become in recent years. Whereas the dollar 

value of the average daily trading volume in stocks, exchange-traded options and 

security futures was $10 billion a day in February 1989, over the last 20 years it 

has grown to over 25 times that size, reaching approximately $251 billion a day in 

February 2009. And not only has the size of our markets exploded, the number and 

size of its participants have jumped as well. For example, since 2005, the number 

of registered investment advisers has increased by 32 percent, and their assets 

under management have jumped by over 70 percent to reach more than $40 trillion 

as of the beginning of this fiscal year. Broker-dealer operations have expanded significantly in size, complexity, and geographical diversity, as exemplified by the 67 

percent rise in the number of broker-dealer branch offices. In all, the SEC’s 3,652 

staff now oversee more than 35,000 registrants, including about 12,000 public companies, 8,000 mutual funds, 11,300 investment advisers, 5,500 broker dealers, and 

600 transfer agents. By comparison, other financial regulators often have close to 

parity between the number of staff and the number of entities they regulate. For 

additional detail, attached to this testimony is an appendix, ‘‘SEC Staff Levels Have 

Not Kept Pace with Industry Growth.’’ 

Yet at the same time that the securities markets have undergone such tremendous growth, the SEC’s resources have fallen further and further behind. Between 

fiscal year 2005 and fiscal year 2007, the agency experienced 3 years of flat or declining budgets, losing 10 percent of its employees and severely hampering key 

areas like our enforcement and examination programs. In the context of rapidly expanding markets, I believe these reductions in the SEC’s staff seriously limited the 

agency’s ability to effectively oversee the markets and pursue violations of the securities laws. 

With support from this subcommittee, during the last 2 fiscal years, the SEC has 

been able to lift its hiring freeze and begin rebuilding its workforce. By increasing 

the SEC’s appropriation for this fiscal year, approving a reprogramming of additional resources, and just recently supporting emergency supplemental funds for the 

agency, this subcommittee has expressed its strong support for the SEC and its mission. I am very grateful for that support. 

However, even with these important steps, the number of staff with which the 

SEC can detect fraud, prosecute wrongdoing, ensure proper disclosure, conduct 

strong oversight of the markets, and take other actions to protect investors, is still 

significantly below the levels of only a few years ago. Under the SEC’s current funding level, the agency’s workforce still will fall about 200 staff, or about 5 percent, 

short of the fiscal year 2005 level. 

I believe additional resources are essential if we hope to restore the SEC as a vigorous and effective regulator of our financial markets. The President is requesting 

a total of $1.026 billion for the agency in fiscal year 2010, a 7 percent increase over 

the fiscal year 2009 funding level. This proposal would permit the SEC to fully fund 

an additional 50 staff positions over 2008 levels, enhance our ability to uncover and 

prosecute fraud, and begin to build desperately needed technology. 

Specifically, these positions would help the SEC’s Enforcement program enhance 

its pursuit of tips, complaints and other leads, thus increasing the resources the 

SEC can dedicate to frauds that citizens bring to our attention. They would also 

allow us to hire more trial lawyers and staff with specialized skills that will help 

our Enforcement program’s efficiency, expertise and success. The Examination program would hire market experts to strengthen risk-based oversight of the investment management industry and expand its inspections of credit rating agencies. 

Our Division of Trading and Markets would strengthen its oversight of entities that 

play critical roles in our markets, such as broker-dealers, exchanges, clearing cor-
14 

porations, and other self-regulatory organizations. And the President’s Budget 

would allow us to expand our Office of Risk Assessment by fully funding our program to bring in seasoned industry professionals to help uncover hidden risks to investors. 

Although expanding our workforce is a critically important step, I believe we also 

must give our staff better tools to conduct oversight of vast financial markets. That 

is why the President’s request for fiscal year 2010 also contains funds for additional 

investments in our information systems. Investments in new systems have dropped 

by more than half over the last 4 years, and as a result the SEC has a growing 

list of technology needs that have gone unfunded. With the additional IT funds provided under the President’s Budget for fiscal year 2010, I would plan to focus on 

several key projects: 

First and foremost, we would use additional funds to enhance our systems for 

handling tips, complaints and referrals. Although the SEC has a number of different 

processes to track this kind of information, there is no central repository or system 

through which this information comes together to ensure it is handled consistently 

or appropriately. Nor is there any present capability to mine the data to find connections, patterns or trends that would enable us to more intelligently focus our enforcement efforts. 

The SEC also plans to improve our ability to identify emerging risks to investors. 

We have many internal data repositories from filings, examinations, investigations, 

economic research and other ongoing activities. But the SEC needs better tools to 

mine this data, link it together, and combine it with data sources from outside the 

Commission to determine which firms or practices raise red flags and deserve a closer look. 

Finally, we would invest in our multi-year efforts to improve the case and exam 

management tools available to our enforcement and examination programs. These 

systems would give our senior managers better information on the mix of cases, investigations, and examinations, so they can apply resources swiftly to the continually evolving set of issues and problems in the markets. In addition, these tools 

will provide better support for line staff in these programs, so they can be more productive and better able to match the sophisticated systems used by the financial industry. 

I came to the SEC to shape public policy in the interest of investors and to 

strengthen our enforcement program. The things I have described in this testimony 

are important to those efforts. But what I have also discovered in the past 4 months 

is that much attention needs to be focused on the internal operations of the agency, 

the processes that guide our work, the agency’s infrastructure and how we are organized. I have been disappointed to find that in some areas of our internal operations, we fall short of what the taxpayer has a right to expect of us, and what our 

employees have a right to expect of a world class organization. I am committed to 

a complete review of areas large and small, including FOIA operations, call centers 

operations, records management, and others, to ensure that we meet the highest 

standards and that we are fully supporting the important work of our employees 

in these operations. Doing this will take time and energy and focus. To ensure that 

we do it well and thoroughly, I intend to bring in a Chief Operating Officer to manage the process. Federal agencies do not manage themselves; we must be actively 

engaged in that process everyday. 

In one area, we have already made progress: we are moving to build an internal 

compliance program that is second to none. The public appropriately holds the SEC 

to a very high standard for integrity and professionalism, and we hold ourselves to 

that very high standard as well. That is why I have initiated several steps to guard 

against inappropriate securities trading by SEC staff, as well as to avoid any appearance of inappropriate trading. Among other steps, the agency has drafted new 

internal rules 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 preclearance of all trades. The SEC also is 

contracting with an outside firm to develop a computer compliance system to track, 

audit and oversee employee trades and financial disclosures in real time. Finally, 

I consolidated responsibility for this area within our Ethics Office and authorized 

the hiring of a new chief compliance officer. To further enhance the SEC’s financial 

controls, the agency also will continue its multi-year efforts to build an automated, 

integrated financial management system. 

I want to thank you for your continued strong support for the SEC and its critical 

mission. I believe the steps I have outlined here—strengthening our enforcement 

program, enhancing risk-based oversight of the markets and leveraging technology—are essential for restoring investors’ confidence in both the SEC and in our 

Nation’s securities markets. 
15 

I would be happy to answer any questions you may have. 

APPENDIX: SEC STAFF LEVELS HAVE NOT KEPT PACE WITH INDUSTRY GROWTH

(Tables show cumulative growth relative to 2003 levels) 

The SEC’s staff of 3,652 FTE (estimate for fiscal year 2009) oversees more than 

35,000 entities. These include: 

—11,300 investment advisers; 

—5,500 broker-dealers; 

—8,000 mutual funds; 

—About 600 transfer agents; 

—Clearance and settlement systems; 

—11 securities exchanges; 

—12,000 public companies; 

—10 credit rating agencies; 

—FINRA, MSRB, and PCAOB. 

The following charts display how various aspects of the markets have grown since 

2003, relative to the SEC’s staff: 
16 
17 

BUDGET AND WORKFORCE OF THE SEC

Senator DURBIN. We’ll have 5-minute rounds here, and I’m sure 

we’ll have several questions. 

It seems to me that there are two things we’re dealing with here 

just on the surface. First, the number of people working in your 

agency. It appears that over the years, as Senator Collins noted, 

we’ve allowed the number of professionals working there to decline 

in real terms and certainly decline precipitously in relation to the 

volume of trade that you have to keep an eye on. 

Between 2005 and 2007, the SEC lost 10 percent of its employees, if you can imagine at that moment in time, undermining the 

agency’s ability to oversee the markets, and at the same period of 

time, the market ballooned in size and complexity. 

Registered investment advisors grew 32 percent, assets jumped 

by over 70 percent, and so we’re seeing the caseload or at least the 

area that needs to be regulated is growing and the number of people to keep an eye on it is diminishing. 

So there is, in the first instance, the question of the right number of people working at the agency, and the second issue goes to— 

I don’t know how to characterize it—I guess the internal culture 

of the agency. 
18 

Bernard Madoff was a wake-up call. The fact that this man could 

swindle as many people as he did with impunity for so long to me 

is nothing short of amazing. 

According to SEC data, in fiscal year 2008, the SEC staff handled over 600,000 tips sent by individuals to your Enforcement 

Complaint Center. I did a calculation. I think that’s more than 

2,000 a day for every business day. People sending in items you 

ought to look at. Well, that to me is an overwhelming number and 

perhaps you could put it in some kind of perspective. 

Now, some have taken a look inside your agency and asked 

whether the enforcement function within the agency is a healthy 

one. Is there a risk-averse culture within the SEC to step up and 

say, you know, we ought to take a look at this Mr. Madoff or people 

like him? 

So let me ask you at the outset, number 1, what would be the 

optimal number of people that you believe you need to do an effective job at the SEC in light of the volume of business that you have 

to regulate, and second, do you perceive a cultural problem within 

the agency when it comes to enforcement? 

Ms. SCHAPIRO. Thank you very much, Mr. Chairman. 

I think you’ve really summarized very well with respect to the 

staffing pressures on the SEC, the current situation. 

With over 35,000 regulated entities and 3,700 staff, it’s a job that 

we really can’t do in the way I think the public would like to believe we can do in the sense of routine onsite presence in many regulated entities. That’s going to really require that we leverage third 

parties. 

So, for example, in the rules I discussed related to the custody 

of customer assets by investment advisors, a huge problem in the 

Madoff area, we’re going to rely on PCAOB-registered accounting 

firms to leverage our capability to ensure the customer assets are 

being protected by the custodians and by the investment advisors, 

and we will look for every opportunity we can to leverage third 

party resources. 

But at the end of the day, we do need significantly more staff, 

I believe, over the next several years to keep up with the growth 

and the complexity of this industry, and if there are additional responsibilities as a result of regulatory reform that accrue to the 

SEC in the context of hedge funds, credit default swaps or other 

areas, that, of course, will require sufficient additional resources 

because we can’t stretch any thinner than we already are. 

So I do believe—and if you look at our 2011 budget request, you 

will see we’ve asked for a significant ramp-up in the number of 

full-time equivalents (FTE), close to 400 FTE and 1,000 new positions, and I believe that if we’re able to achieve that number in 

2011 or over the course of the next several years, that will go a 

long way toward getting this agency to the appropriate size to handle the job that’s in front of it. 

I don’t think there’s any danger that we’re about to become too 

big in any event. 

I think, with respect to your second question, the Madoff fraud 

is a tremendous tragedy. It’s really a tragedy of epic proportions 

and I think it really will put the onus on this agency to prove that 

it is capable of managing the responsibilities that it has been given 
19 

under the law and it’s really critically important for us to ensure 

that both our culture, our operations, and our procedures, our staff 

and our skill sets are up to the task. 

You pointed out, for example, that we get somewhere around 

600,000 to, in peak years, 11⁄2 million tips a year. We can’t manage 

those that come into the organization through a wide variety of 

entry points. We don’t have databases that are connected so that 

we can do a trend analysis of those tips and complaints or connect 

that data to external sources of data to see what might be developing more broadly in the marketplace. 

Right after I started, I brought in the Mitre Corporation’s Center 

for Enterprise Modernization to do a complete review of how we 

handle tips and complaints. They’ve concluded the first round of 

their work and we’re now in the implementation phase of some 

short-term and intermediate-term remedies and processes to help 

us manage tips and complaints. 

But it’s also about leadership and it’s about freeing our Enforcement Division to do the kind of job that I know they’re capable of 

doing. 

I was at the SEC 15 years ago when the agency had a really 

first-class reputation for aggressive enforcement and I know we’re 

capable of that again. We have a new Enforcement Director who’s 

very committed to bringing large cases in a timely way that have 

the maximum investor protection impact. 

It’s about enabling our enforcement staff through technology and 

the right skill sets to bring those kinds of cases, that when a whistleblower presents them with information, as had happened in the 

Madoff case, they have the ability to understand it and pursue it. 

It’s about being a little bit humble about the information that 

comes to us and appreciating that there may be real value in 

what’s being presented to us. 

We’re also going to seek whistleblower legislation to enable us to 

reward whistleblowers, as the Internal Revenue Service (IRS) and 

other agencies do, when they bring us well-formed cases and documentation, a fraud that we can then pursue, and it’s about filling 

the regulatory gaps, through such as the custody requirements I 

just spoke of, so that we are sure that the regulatory regime, coupled with aggressive enforcement, coupled with the tools and the 

skill sets, combine to create an agency that’s absolutely committed 

and focused on investor protection. 

I’m sorry. That’s a very long answer. 

Senator DURBIN. No. It’s a very good answer, and I thank you 

for it, and I’m going to turn to Senator Collins and return in later 

rounds. 

Senator COLLINS. Thank you, Mr. Chairman. 

Ms. Schapiro, you talked about the increased number of positions 

that you have requested as part of the fiscal year 2011 budget, but 

in fact, the President’s budget for this coming fiscal year does not 

allow you to hire any new positions, is that correct? 

Ms. SCHAPIRO. That’s correct, Senator. The increase in the 2010 

budget covers the annualized costs of the increases in the fiscal 

year 2009 budget that we were able to have as a result of the approval of our reprogramming requests and taking $17 million of 
20 

unobligated funds from prior years, dedicating those to staffing, additional staffing in 2009. 

The annualized costs of those additional 50 positions that we’re 

bringing on this year are the increase in the 2010 budget. 

Senator COLLINS. Do you need new positions for the upcoming 

fiscal year? 

Ms. SCHAPIRO. Well, I would say that we’re, first of all, extremely 

grateful to the President for the increase in the 2010 budget and 

it’s a meaningful increase for this agency, and as I pointed out, 

2011 we sought a much greater increase. 

The opportunity to start to move toward that 2011 budget earlier 

would be a wonderful opportunity for us to bring that number of 

staff on over a 2-year period rather than all in 2011, if Congress 

ultimately approves that number. 

Senator COLLINS. Because I am troubled that the current funding 

level supports a staff that is 5 percent lower than your peak level 

back in fiscal year 2005. 

If you look at the growth of regulated entities and if you look at 

the amount of money involved, if you look at the number of American families who now have savings in the stock market, the fact 

that these staffing levels are below what they were 5 years ago is 

troubling to me. 

So are you saying that it would be helpful to be able to ramp up 

those staffing starting in the next fiscal year rather than waiting 

to fiscal year 2011? 

Ms. SCHAPIRO. Absolutely, it would be helpful. The reprogramming request, in addition to allowing us to get a little bit of a jump 

on 2010, enabled us to do some technology investment. 

We need fundamentally more investment in technology at the 

SEC to support our Enforcement and Examination Programs and 

we can use more boots on the ground in Enforcement and Examination, absolutely. 

INVESTOR PROTECTION AND EDUCATION

Senator COLLINS. Aggressive enforcement is absolutely critical, 

but there’s another way that’s important for protecting investors, 

particularly smaller investors who may be less sophisticated in 

choosing their investments, and that is through a robust education 

effort. 

You’ve spoken a lot about the need to protect investors and I 

know that in my State, I’ve seen thousands of individuals who have 

seen their retirement nest eggs shrink, money set aside for their 

children’s college education virtually disappear, and they’re wondering what can be done about it. They’re seeking more information. 

Several years ago, the SEC used to conduct very valuable educational sessions, town meetings, outreach to seniors groups. 

What are your plans to reach out to investors, particularly small 

investors or senior citizens, in two ways; one, to help them better 

understand risk and suitability requirements, but, two, to help 

them spot scams? 

Ms. SCHAPIRO. It’s a wonderful question, and I’m very committed 

and personally quite passionate about investor education and had 

a program at my former employer, FINRA, as Senator Tester 
21 

knows, where we did investor forums which the SEC used to do 

years ago around the country and to great success and with tremendous participation all over the country. 

The SEC has a small program that does that now. Commissioner 

Walter in fact did an investor forum just last week with our Boston 

office in the State of Maine. 

My plans would be, given sufficient resources, that we dramatically increase that program, that we enable our offices around the 

country to provide local education in senior citizens centers, community centers, local high schools, and that we really take a leadership role in the Federal Government in educating investors about 

the kinds of questions they need to ask when they’re being offered 

investment products, about the kinds of scams and pitfalls that 

they need to be on the alert to. 

I’m very concerned, given the current environment and the 

amount of money people have lost in their retirement plans and in 

their other investments, that they will be reaching to try to make 

that money back through some particularly risky investments. I 

have no doubt that the scam artists have already figured this out 

and are beginning to prey on people’s real fears about their financial futures. 

I think the SEC can play a critical role here, bringing together 

other agencies of the Federal Government but also on its own, 

reaching out very directly as well as through the development of 

content put on websites and in investor forums. 

Senator COLLINS. Thank you. Glad to hear it. 

Senator DURBIN. Senator Tester. 

Senator TESTER. Thank you, Mr. Chairman. 

Chairman Schapiro, you come into an agency, the SEC, that has 

been around about 75 years and to be honest, from my perspective, 

probably come into it at a time when it’s hit an all-time low as far 

as both morale and effectiveness. So you’ve got to rebuild this agency, I think, maybe not from the ground up but from the foundation 

up. 

We’ve talked about manpower levels. If you have the technology 

that you spoke about, do you have a figure in mind about what the 

right number of people are for this agency, considering the massive 

workload? 

Ms. SCHAPIRO. I think it’s very hard to give an exact number. As 

I said, our 2011 budget request seeks 1,000 additional positions 

which would take us to just under 5,000. That would still be smaller, for example, than the Federal Deposit Insurance Corporation 

(FDIC) which regulates about 5,000 to 6,000 banks. 

Senator TESTER. Okay. 

Ms. SCHAPIRO. I do think there’s also practical limitation on how 

many people you can just bring on board and train—— 

Senator TESTER. Right. 

Ms. SCHAPIRO [continuing]. At any given time. The faster that we 

can move toward a substantial increase like that I think the better. 

Senator TESTER. Okay. 

Ms. SCHAPIRO. It also depends largely on our ability of effectively 

utilized technology to save on human resources. 
22 

Senator TESTER. Right on. Consumer confidence is one of the 

things that everybody’s concerned about. Nobody—you know, we’ve 

lost a bunch of money. People’s confidence is shaken. 

RESTORING INVESTOR CONFIDENCE

What do you see as being two or three of the major things that 

you have to do in your agency to have consumer confidence back 

at a level that’s reasonable, and, quite honestly, what do you see 

we need to do, the two or three things that we need to do to help 

re-establish consumer confidence with the groups that you regulate? 

Ms. SCHAPIRO. I think it’s a great question. I think enforcement 

is just a part of what we do, but it’s a very visible part, and I think 

it’s really critical for investors to see that there is a cop on the beat 

who’s trying to ensure that the playing field is level, that the insiders aren’t taking advantage of the rest of the participants in the 

marketplace. 

So we need to have a very timely enforcement response to the 

problems that arise in the marketplace and short of doing that, I 

think people won’t have confidence. We can write all the rules we 

want, but if nobody’s enforcing them, we’re not going to restore investor confidence. 

I think investors also need to have complete confidence in the 

transparency of corporate disclosure. They need to believe that the 

companies in whose stock they are buying are getting then the accurate numbers and the accurate disclosure and information about 

that company’s prospects so they can make informed decisions 

about where to put their money. 

And I think we have to have a focus on consumers issues, on mutual funds sales, on sales practices generally, on the issues around 

fees and fee structures and disclosures that investors really care 

about at the end of the day. 

We’ll be announcing later this week the creation of an Investor 

Advisory Committee for the first time in many, many years at the 

SEC that will give investors a regular way to interact with the 

Commission on policy issues that are of interest to them. 

I think we have to reorient everything we do toward rebuilding 

the investor confidence in both the agency and in the fairness of 

our markets. 

Senator TESTER. What do we need to do, Congress? 

Ms. SCHAPIRO. I think supporting the agency, quite honestly, as 

the appropriators with sufficient resources to accomplish what we 

need to do and hold our feet to the fire that we’re delivering on the 

commitments that we’re making to the American public. 

Senator TESTER. Have you been able—I mean, there’s been talk 

about the future roles of the SEC, the CFTC that we’ll hear from 

shortly, after a regulatory modernization has been done. 

Assuming that that goes forward, can you talk about the challenges, opportunities, possible consequences of merging your two 

agencies? 

Ms. SCHAPIRO. Sure. And, you know, I have the unique position 

of having been Chairman of the CFTC and now Chairman of the 

SEC. So in honesty, I can tell you I’ve argued both for and against 

merger over the years. 
23 

I think it’s obviously a decision that’s ultimately for the Congress 

about whether or not to combine the two agencies. Short of that, 

I believe that with Gary as Chairman of the CFTC that we can 

have an incredibly positive and constructive working relationship, 

to ensure that products and practices don’t fall between the cracks 

of the two agencies and that we don’t leave large swaths of the financial markets unregulated and unaccountable to the American 

public—— 

Senator TESTER. Do you think that would be—excuse me. Do you 

think that would be done better if you were combined? 

Ms. SCHAPIRO. I think—in my personal view, there is a logic and 

an efficiency that can be achieved from the merger of the two agencies, but short of that, I also think that the two agencies can do 

a better job of working together to ensure the protection of investors. 

Senator TESTER. My time is up, but we’ll be back. 

Senator DURBIN. I was just advised by my colleague that there’s 

a vote on and I’m going to try to continue asking until someone returns, but I ask the indulgence of our witness and those in the audience as we try to balance a few things here. 

ADDRESSING RESOURCE CONSTRAINTS

The numbers of investigative attorneys at the SEC decreased 

11.5 percent between fiscal years 2004–2008 and some believe that 

that’s resulted in delayed cases, reducing the number that can be 

brought to trial and potentially undermining the quality of cases 

that are pursued. 

How have resource constraints impacted the effectiveness of the 

SEC? 

Ms. SCHAPIRO. There’s no question but that—and there’s a recent 

Government Accountability Office (GAO) report that suggests this, 

as well, that the resource constraints have hindered the ability of 

the Enforcement Division to pursue as many cases in as timely a 

way as I would like to see. 

In addition, there are some procedural difficulties placed in the 

path of the Enforcement Division over the last several years that 

slowed cases down and discouraged, if not explicitly, implicitly 

seeking penalties from corporate issuers in certain kinds of cases, 

and we’ve eliminated those hurdles and cases can be started much 

more quickly now. Investigations can be pursued with the approval 

of one commissioner, not the full Commission sitting in a meeting. 

We’ve eliminated what was called the Penalty Pilot Program 

completely and we are reorganizing the Enforcement Division 

under the leadership of our new Director in a way that we hope 

will eliminate some layers of management and some of the 

stovepiping that’s existed over the years and allow us to be more 

nimble and more aggressive, pursuing much larger cases, particularly those arising out of the financial crisis. 

Senator DURBIN. On another issue, there was a mindset for a 

long period of time that as long as the economy was expanding and 

wealth was being created, we didn’t dwell and ask a lot of embarrassing questions, but with the downturn in the economy, downturn in the fortunes of many families and the investment of our 

Federal Government into many of the largest businesses in Amer-
24 

ica, there appears to be an awakening on the part of the average 

person about how many corporations are being managed and particularly in the area of executive compensation. 

CORPORATE GOVERNANCE

I won’t go into chapter and verse about bonuses given to executives who have nothing to show for it, other than failure, but let 

me ask you, what is the SEC currently doing to improve the accountability of corporate directors and enhanced disclosure of executive compensation? 

Ms. SCHAPIRO. Mr. Chairman, I’ve made corporate governance 

one of my highest priorities in the last 4 months. We are engaged 

in a couple of things. 

First of all, in May we approved for comment a proposal that will 

facilitate the ability of shareholders to nominate on the company’s 

proxy directors to serve on the corporate—on the company’s board 

and it’s out for comment now. It will be highly controversial, but 

if ultimately approved and not challenged in court, it will greatly 

facilitate the abilities of shareholders to elect nominees to corporate 

boards and thereby hold directors more accountable for their oversight of the corporation. 

With respect to compensation in particular, as you know, we already require disclosure of all plan and non-plan compensation by 

the senior-most officers of a company. 

Next month we will be considering amendments to the compensation disclosure rules that will simplify something called the 

summary compensation disclosure table to provide more information there about compensation. 

It will require disclosure about the overall compensation approach within the company. There will be enhanced disclosure 

about the use of compensation consultants who are sometimes in 

a conflicted position in advising both the compensation committee 

and the company’s management, and we’re going to require disclosure about the linkage between compensation plans and risk-taking 

by executives, traders and others within the company, so that investors will be able to understand how risk-taking which was such 

an important component of the financial crisis has been potentially 

incentivized in some companies. 

CREDIT RATING AGENCIES

Senator DURBIN. On another issue, in late 2006 the Credit Rating Agency Reform Act gave the SEC exclusive authority over rating agency registration and qualification. In the less than 3 years 

since enactment the SEC has undertaken no fewer than five 

rulemakings to implement the law. These rules, which are all still 

relatively new, extend from registration and recordkeeping to disclosure and managing conflicts of interest. 

Yet, even though the credit rating agencies were under SEC’s 

purview, rating agency performance in the area of mortgage-backed 

securities backed by residential subprime loans and the 

collateralized debt obligations linked to such securities has shaken 

investor confidence to the core. 
25 

It used to be that credit ratings were kind of like the gold standard in terms of whether you could trust a business to be in solid 

financial shape. Well, I think a lot of questions have been raised. 

What are you doing at the SEC now to restore consumer and investor confidence, and what improvements are needed in the way 

that you monitor credit rating agencies? 

Ms. SCHAPIRO. There’s no question but that credit rating agencies played a significant role in facilitating, I guess, in some ways 

the financial crisis. 

The agency has engaged, as you point out, in many rulemakings, 

most recently the rule in 2008 which required a series of disclosures about performance statistics, the different kinds of models 

that were used for initial ratings versus surveillance ratings, documentation, disclosure of conflicts and so forth. 

The Credit Rating Agency Reform Act, which Congress passed in 

2006, specifically does not allow the agency to regulate the substance or the procedures or the methodologies of the rating agencies and something we’re looking at is whether we need to ask Congress to reopen that legislation to provide greater authority. 

Senator DURBIN. Who does? 

Ms. SCHAPIRO. Nobody. But nonetheless, despite the limitations 

in the law, we are looking at doing a couple of things. 

One is my perhaps my greatest concern in this area is something 

called ratings shopping which allows the creator of a structured 

product to get preliminary ratings from multiple rating agencies 

and then select the one they want to rate the product, presumably 

that being the highest rating they’ve gotten. 

Senator DURBIN. Wish I could have had that for my report card 

in grade school. 

Ms. SCHAPIRO. Don’t we all? 

Senator DURBIN. Shopping teachers. 

Ms. SCHAPIRO. Exactly. If you’ll give me an A, I’ll take your class 

is what it amounts to. 

So we’re looking at what we can do with respect to rating shopping. Removing references potentially to ratings in the Federal securities laws and regulations which gives an air of credibility and 

respectability to ratings that perhaps they don’t entirely deserve, 

looking at whether we should require different symbols for rating 

structured products versus rating plain vanilla corporate debt, and 

we’re looking at more detailed disclosure about how ratings have 

performed over time. 

So there’s some things the SEC clearly can do and we are doing. 

We held a roundtable with rating agencies just about 1 month ago 

to explore some of the failures of the different business models and 

some of the—not the failures of the different business models but 

the different business models, some of the other failures that have 

become clear over the last year. 

We’re moving ahead with what we can do and we will come back 

to Congress if we believe at the end of the day we need more authority. 

Senator DURBIN. Thank you. I’m going to ask that the subcommittee stand in recess for just a few moments and as soon as 

Senator Collins returns, I’m going to ask her to resume the hearing. I apologize, but it just so happens we have a rollcall vote. 
26 

The subcommittee will stand in recess. 

Senator COLLINS [presiding]. The hearing will reconvene. 

In Senator Durbin’s absence, he’s permitting me to continue the 

hearing. I’m certain he’ll be back very soon. He’s just voting. 

Ms. Schapiro, last September the SEC’s inspector general issued 

a report on its investigation of the Consolidated Supervised Entity 

Program, the CSE Program, through which the SEC monitored the 

five major investment banks. 

This inspector general report found that the SEC has severely 

understaffed its CSE Program and thus could not effectively manage its responsibilities to monitor or question these investment 

banks. 

As you know, I’m particularly concerned that an investment 

bank like BearStearns was allowed to have a leverage ratio of 30:1, 

truly astonishing, and yet it appears that there was not a system 

in place, other than a very loose voluntary system that the SEC 

had, to monitor these banks, and in many ways this report was 

truly prescient since just a few months after it was issued none of 

these investment banks existed anymore. They all had either 

failed, been acquired or merged into bank holding companies. 

REGULATION OF LARGE INVESTMENT BANKS

Let me ask you a number of questions about this. First, does the 

SEC have the right mix of staffs to conduct the kind of oversight 

of a large investment bank? A lot of the SEC’s employees are attorneys which is obviously very useful and helpful on the enforcement 

side, but does it need more auditors, more economists to have the 

expertise to analyze complex financial data and risk models? So the 

first question is the mix of expertise. 

Ms. SCHAPIRO. I believe that we haven’t historically had enough 

financial analysis experience, experience with structured products 

and complex derivative products. 

In the last couple of months that’s been an area of focus for recruitment, not just in the Enforcement Program but also in the 

Trading and Markets Division which has responsibility for brokerdealer risk oversight. So that even though the CSE Program is discontinued, there are still a large number of—not maybe a large 

number but a number of large investment banks and broker-dealers for whom the SEC still has responsibility. 

That’s an area that we are building and increasing our capability 

in in a very conscientious and sort of directed way and have been 

working on over the last couple of months. It’s really important for 

us to have that capability. 

Even with the presence ultimately of a systemic risk regulator, 

that’s the result of regulatory reform, it will be important for the 

SEC, as the day to day regulator of over 5,000 broker-dealers, to 

have the capability to really understand the financial and operational status and condition of those brokerage firms. 

Senator COLLINS. Second, how should—I realize these large investment banks don’t exist any more but they could reappear. How 

should they be regulated for safety and soundness? 

I cannot imagine a federally or State-chartered bank being allowed to have a leverage ratio of 30:1. 
27 

Ms. SCHAPIRO. I think the answer is they need to be regulated 

on a consolidated basis. So that, as you know, the securities laws 

are generally geared toward the protection of customer assets within the broker-dealer, but there are affiliates of the broker-dealer, 

there’s a holding company structure, there are a lot of other entities where significant risk can be taking place, and it’s important 

that the regulator of the entire entity have a view into what’s going 

on in all of the related parts of the operation, so not just in the 

broker-dealer but also in the holding company affiliates and subsidiaries. 

It is that consolidated view that will allow our regulator to make 

a judgment about whether leverage is excessive, capital is sufficient, the quality of management across the enterprise is up to the 

task. 

Senator COLLINS. Another reform that we need is the ability to 

identify and prevent what I refer to as regulatory black holes, and 

the emergence of credit default swaps or other exotic and poorly 

disclosed derivatives certainly indicates that the current system 

has not been sufficient to prevent gaps in regulation of products or 

practices that can have consequences for the entire financial system. That’s why I support having a council of regulators to look at 

systemic risk. 

ROLE OF A SYSTEMIC RISK REGULATOR

What do you think are the advantages and disadvantages of a 

council approach versus vesting in the Federal Reserve the authority to be the systemic risk regulator? 

Ms. SCHAPIRO. Well, I’m very much in agreement that the existing regulatory regime is riddled with holes and that there are large 

parts of the financial marketplace that were really not under the 

regulatory umbrella at all or in any meaningful way and credit default swaps is an example. Hedge funds and some other private 

pools of pooled funds would fall into that category, as well. 

As you know, I like the concept of a council, whether it’s a standalone council or in conjunction with a systemic risk regulator, because it brings a diversity of perspective that I think is really important to identifying where gaps may be arising, where new products may be being created in the intricacies between regulatory authorities, so that we can avoid those potentially harming the system. 

And when you have a council of regulators, where you’ve got securities regulators, for example, which is very much focused on investor protection and transparency and bank regulators very much 

focused on prudential standards and safety and soundness, and insurance regulators with yet another perspective, I think you have 

a better chance of capturing the entire financial landscape and the 

potential places where those new products are arising, where those 

new gaps are being created. 

At the same time I think there needs to be the ability, whether 

it’s a council or a single system risk regulator or a combination, to 

step in and raise standards when necessary, where the functional 

regulator may not be aggressive enough in requiring higher capital 

standards or reining in leverage, that there be the ability ultimately to protect the system, to force those kind of changes. 
28 

Senator COLLINS. Thank you. Senator Tester. It’s nice being temporarily chairman. 

Senator TESTER. Thank you. Thank you, Senator Collins, and 

you’re doing a fine job, I might add. 

ENFORCEMENT OF THE SECURITIES LAWS

Secretary Schapiro, I’m sure you read the article yesterday in the 

Washington Post that dealt with enforcement actions of the SEC 

over the past few years. If that article’s true, it is more than just 

a little bit distressing. 

You have stated the imperative to take the handcuffs off the Enforcement Division. That article yesterday would imply to me that 

I don’t care how much money we put at the agency, if people on 

top are making arbitrary decisions about how to not do their job 

appropriately, no amount of money is going to make it work correctly. 

You’re not going to do that, I know that. I’ve met you and long 

before when you were in FINRA, as you stated in your opening 

statement, in Montana and did a fine job education-wise and you 

have done a fine job in this position. 

But could you just give me a little bit of insight on how this 

budget would help you accomplish the goal of taking the handcuffs 

off the Enforcement Division? 

Ms. SCHAPIRO. I’d be happy to. I should say that in my 4 months 

at the agency, I talk a lot about enforcement. I’ve done some town 

halls with the staff. I e-mail with the staff. 

I will tell you that the response has been tremendous eagerness 

and enthusiasm on the part of employees to get back to what we 

do and what we can do so well and—— 

Senator TESTER. Good. 

Ms. SCHAPIRO [continuing]. Particularly in the enforcement context. 

I think what the budget will enable us to do is have more people 

to bring the cases that need to be brought. We are not in danger 

of running out of cases. So on a very simplistic level, more people 

will enable us to do that. 

Bringing in the right skill sets so that we’re not risk averse, so 

that we’re not afraid to tackle the most complex trading strategies 

or the most complex products or the most complex frauds will be 

important. So we need to train our people better in more sophisticated methodologies. We need to bring in the right kinds of skill 

sets, as well, and we need to support our people with technology. 

The amount of data that comes into the agency that is unmanageable, even in the course of one major litigation, is extraordinary 

and we have our people wasting their times archiving e-mails and 

dealing with millions and millions of records when we should be 

able to rely almost solely on technology to do that. 

We need technology to help us sort out the tips and complaints 

that we get, as I spoke about earlier. 

Senator TESTER. The ranking member talked about potentially 

inadequacies of this budget. In a previous line of questions, you 

said you can’t bring on everybody you need because it’s simply impossible to manage that influx of people. 
29 

Is the budget adequate to get to where you need to go? I’m sure 

you have goals, either written or mental, where you want this 

agency to go. Is this budget adequate to get you where you need 

to be a year from now? 

Ms. SCHAPIRO. As I said, we are genuinely grateful to the President for the increase the 2010 budget represents over 2008 and 

2009. We’ve asked for a very significant increase in 2011 and the 

ability to get to that number sooner, we could handle, and I think 

it would make a difference in our ability to do our job. 

REGULATION OF SHORT SELLING

Senator TESTER. Okay. Uptick rule. Can you discuss the Commission’s effort to reinstate the Uptick rule, what’s the likelihood, 

timing and opposition to that? 

Ms. SCHAPIRO. I would be happy to do that. This is an issue of 

enormous, enormous public interest, and it’s an issue of investor 

confidence, as well. 

As you know, the SEC took the Uptick rule off a couple years ago 

after careful study and evaluation. In some ways it was a model 

rulemaking to eliminate it. 

Nonetheless, that coincided with dramatic increases in volatility 

in the marketplace and investors have been clamoring for us to revisit this issue. In April, the Commission voted unanimously to 

seek public comment on two different approaches to short selling. 

One is essentially the reinstatement of the Uptick rule as we 

used to know it, with some variations. The other is a short sale circuit-breaker that would be kicked into effect if the price of a stock 

declined by, say, 10 percent in a day, no short selling thereafter for 

a period of time. 

We’ve already gotten 3,000 comment letters. The comment period 

closes in about 2 weeks, and then we will wade through those comment letters and hopefully bring back to the Commission a proposal for consideration. 

At the same time we’re looking at a couple of other issues. 

There’s a rule, it’s a temporary rule that expires in July that’s had 

a very, very positive effect on eliminating or diminishing the fails 

to deliver in securities and short sales, requiring them to be closed 

out the next day. I expect the Commission will make that a permanent rule this summer, and we’re looking at some other issues, like 

the potential for pre-borrow requirement. 

So we are actively focused on short selling and will continue to 

do so. 

Senator TESTER. Do you anticipate that the proposal you’re going 

to take back to the Commission will be voted on when? 

Ms. SCHAPIRO. I think we’re looking at August for a vote. The 

comment period closes toward the end of June. With 3,000 comment letters at this point, I expect significantly more and we’ll 

have to evaluate those, so some time this summer. 

Senator TESTER. After the Commission votes on the rule, is it 

typically an immediate effective date? 

Ms. SCHAPIRO. Generally not, if it requires technology changes at 

either exchanges or brokerage firms. 

Senator TESTER. Would this? 
30 

Ms. SCHAPIRO. Yes, the reinstatement of the Uptick rule requires 

significantly more technology work than the circuit-breaker would. 

Senator TESTER. Okay. 

Ms. SCHAPIRO. So it could be quite dependent upon which of the 

two approaches. 

Senator TESTER. One last and it has to do with this. Who’s opposing the Uptick rule from going back into effect? 

Ms. SCHAPIRO. I haven’t been through the comment letters, to be 

honest, but I would say historically there’s certain kinds of algorithmic traders, some kinds of hedge funds that are large short 

sellers that oppose it. There are—— 

Senator TESTER. That are for the most part unregulated at this 

point in time, right? 

Ms. SCHAPIRO. That might be right. 

Senator TESTER. Okay. 

Ms. SCHAPIRO. There are others who believe that short selling 

plays a very legitimate role in the marketplace in terms of adding 

liquidity. It has impacts on options market-makers and others. So 

there is opposition to reinstatement. 

I think the pure weight of the comment letters will tell us that 

there is much more support for doing something, whether it’s the 

Uptick rule or the circuit-breaker. 

Senator TESTER. Thank you. 

FEE COLLECTIONS BY AND FUNDING OF THE SEC

Senator DURBIN [presiding]. Thank you. Chairman Schapiro, just 

for some perspective here, the SEC is fairly unique in that it collects a lot of money in fees and if I’m not mistaken, that number 

is somewhere a little north of or around $1.4 billion, is that correct? 

Ms. SCHAPIRO. The 2009 expectation is, yes, about $1.35 billion. 

Senator DURBIN. Okay. And the appropriation for your agency is around $1 billion, a little over $1 billion. 

Ms. SCHAPIRO. Yes, 2009 $916 billion, including the reprogramming request. 

Senator DURBIN. So you are a cash generator—— 

Ms. SCHAPIRO. We are. 

Senator DURBIN [continuing]. In terms of the revenues into the 

Treasury. 

Ms. SCHAPIRO. And historically a very significant cash generator. 

Senator DURBIN. And if the argument can be made that the industry is paying your agency to do its job and we’ve started this 

testimony here today arguing that you needed more people to do 

your job, it might be fair for those who are being regulated saying 

we’re doing our part, in fact we’re sending you about 40 percent 

more than you’re actually spending in this agency. 

Would that be a fair comment? 

Ms. SCHAPIRO. It might be. 

Senator DURBIN. Okay. Well, this concerns me because if we 

were going in the other direction, we’d be arguing, well, we need 

to come up with some revenue source here to provide the regulatory structure to make sure that the Government’s doing its job, 

but in fact the marketplace that you regulate is creating the revenue opportunity. 
31 

Ms. SCHAPIRO. That’s correct, and actually that doesn’t include 

penalties and fines that are paid into the Treasury in those instances where we don’t create a fair fund to distribute back to investors. So there’s actually additional funding over the fee generation. 

Senator DURBIN. Okay. Let me go to a few more specific questions. 

Broker-dealers who sell stocks and bonds on commissions and investment advisors who offer advice are regulated under different 

Federal laws. The key difference is the rules governing their standard of conduct. Investment advisors held to a fiduciary standard 

which requires them to make investment decisions in the best interests of their clients. Brokers, in contrast, are held to something 

called a suitability standard under which they can sell securities 

as long as they are suitable to their clients. 

Interesting little distinction there, but the variations between 

brokers and advisors has been blurring in recent years and it’s 

raised concern among some regulators that customers won’t be able 

to tell the difference. 

I understand that you’re taking a look at this. 

Ms. SCHAPIRO. Absolutely. There’s really no good reason for people not to get the same fiduciary protection and the same standard 

quality of regulation from people who are essentially giving them 

the same service but are called by different names. 

Senator DURBIN. Let me ask you a question. First, let me preface 

it by saying I asked my staff this. I said, now is this for Chairman 

Schapiro or Chairman Gensler. They said, well, you better ask her. 

So here’s a hedge fund issue for you. 

The Pension Protection Act of 2006. Would this be your jurisdiction? 

Ms. SCHAPIRO. The Pension Protection Act is largely administered by the Department of Labor, but there are elements that 

intersect with the SEC. 

Senator DURBIN. Okay. Let me give you the situation. You tell 

me if this is something that you think falls in your jurisdiction. 

This Pension Protection Act made it easier for hedge funds to 

take pension money without registering it as an ERISA fiduciary, 

meaning they don’t have disclosure and other requirements of 

other pension plan managers. Is this your field? 

Ms. SCHAPIRO. This is the Department of Labor, I believe. 

Senator DURBIN. Okay. Let me stop at that point and save this 

for the Department of Labor then. 

REGULATION OF DERIVATIVES

Derivatives, contracts between two investors, betting on whether 

a stock, bond or other security will go up and down in value have 

ballooned into one of the world’s largest trading markets, estimated 

to be tens of trillions of dollars, yet it’s largely outside the regulatory umbrella. Losses, as we know, at AIG have led to a Government bailout of $170 billion or $180 billion. 

On May 13, President Obama unveiled a plan to regulate this 

market which had four stated goals. 

What do you consider to be the role of the SEC in this regulation? 
32 

Ms. SCHAPIRO. This is such an important area for both the SEC 

and the CFTC and, as you point out, the Treasury letter of May 

13 lays out some requirements that we hope will be embodied in 

legislation with respect to credit default swaps and other standardized over-the-counter derivatives. 

It will be very important to have standardized clearing mechanisms, potentially exchange trading of standardized contracts, promote transparency, have adequate margin and collateral requirements in place for these transactions and subject the dealers in 

these instruments to regulation. 

Exactly where the lines between the SEC and the CFTC fall, I 

think, are something we’ll be discussing certainly over the next 

several weeks, but it is clearly my view, and I believe Chairman 

Gensler’s view and the Treasury’s view, that we need to work together to ensure that we bring credit default swaps and other OTC 

derivatives firmly under the Federal regulatory umbrella and how 

we exactly draw those lines will be something we’ll be discussing 

and obviously Congress will have a deep interest in, as well. 

Senator DURBIN. I’ll ask a question that relates to last week it 

was reported that two attorneys from SEC’s Enforcement Division 

engaged in suspicious trading in stocks of companies under SEC investigation, according to a March 3 report by the SEC Inspector 

General David Kotz. 

Mr. Kotz concluded that the SEC previously had essentially no 

compliance system in place to ensure that its employees did not engage in insider trading themselves. On May 22, the SEC issued a 

press release outlining how the agency would increase accountability. 

How will this new process impact the current SEC workload? 

Will it require additional resources or staff to implement? 

Ms. SCHAPIRO. Thank you for asking that question. It’s really an 

important area. 

When I learned about this inspector general report in March, I 

immediately set in motion—and some things were already underway, I should say—a number of changes to our process which was 

acceptable under the Office of Government Ethics rules but clearly 

not sufficient in my view. 

We now require all trades by employees to be pre-cleared. We’ve 

created a restricted list that prohibits an employee from trading in 

any stock of a company that’s under investigation by the SEC, 

whether they know anything about the investigation or its existence or not. 

We prohibit any ownership in stocks of broker-dealers, investment advisors, publicly traded exchanges, and we’re requiring employees to authorize that their brokers in duplicate trade confirmation statements to the SEC where they will be incorporated into a 

computerized system that will make monitoring compliance with 

all of these new rules much more effective, and we’ll be hiring a 

chief compliance officer. I expect we’ll sign the contract for the new 

system in the next several days and it should be operational in 1 

to 3 months. 

The new rules requiring pre-clearance of all trades by the Ethics 

Office and the creation of the prohibited list and so forth are pend-
33 

ing at the Office of Government Ethics and have been there for 

about a week. We jumped on this immediately. 

Senator DURBIN. Thank you very much. 

Senator Collins. 

Senator COLLINS. Thank you, Mr. Chairman. 

CONSUMER PROTECTION

Ms. Schapiro, there is an idea that is being discussed to consolidate the consumer protection functions of a variety of regulators 

under a single entity and one such proposal would result in the 

SEC losing its consumer protection responsibilities. 

I personally don’t think this makes any sense at all because to 

me, the whole reason we have an SEC is to act to protect consumer 

investors. 

What are your views on creating a single consumer protection entity that would include the SEC’s responsibilities? 

Ms. SCHAPIRO. I think that it certainly is one of the ideas that’s 

being bandied about and there are many, and I think discussions 

continue to be very vigorous and ongoing throughout the regulatory 

community about the right approach here. 

I think the one thing everybody agrees on is that we must have 

a reorientation toward consumer and investor protection among all 

of our financial regulatory agencies. So whether we have the creation ultimately of a single entity or we just reheighten and refocus 

within the bank regulatory agencies and the SEC on the protection 

of the end users of financial products, we, I think, all agree that 

we have to go down that path. 

My view is that, and it’s been reported that, I don’t want to create new gaps in the regulatory system and I fear that moving mutual fund regulation out of the SEC and into a new agency has the 

potential to do that. 

Mutual fund—investor protection and the mutual fund concepts, 

it’s about more than the end product of the sale to the investor. It’s 

really about what’s the governance of the mutual fund. What’s the 

quality of execution that the mutual fund is getting when it’s buying stocks for its portfolio? What’s the quality of the disclosure of 

those companies that the mutual fund is buying? What’s the quality of the disclosure that the mutual fund itself is making? 

These are all a piece. They’re all woven together to create the 

fabric of investor protection in the mutual fund space and so I want 

to be sure we don’t damage that fabric. 

That said, whatever Congress in its wisdom and the administration working together to create that will protect investors better 

and consumers better, we intend to, you know, play as strong a role 

as we can. 

Senator COLLINS. Thank you. Mr. Chairman, I’m just going to 

ask one final question, if I may, and that has to do with the credit 

rating agencies. I understand you, too, brought this issue up, but, 

unfortunately, I wasn’t here. I was voting when you did. So I apologize if this is redundant. 

I’m very concerned about the role that was played by credit rating agencies in this crisis as far as their ratings of subprime mortgages of mortgage-backed securities. 
34 

It seems to me that the current system has so many inherent 

conflicts of interest built into it, not the least of which is that the 

credit rating agencies are being paid by the firms that are marketing the securities. 

What are you looking at to improve the integrity of the credit 

ratings process? 

Ms. SCHAPIRO. You very correctly highlight that in the issuer 

paid model where I create a security and then I ask you to rate 

it and I pay you for that rating and I pay you on an ongoing basis 

for future ratings, if I’m happy, has profound conflicts of interest 

and we are looking in particular, as we discussed earlier, at the 

rating shopping phenomenon which allows me to select the ratings 

agency that provides or promises to give the highest rating and 

we’re also looking at more robust disclosure about fees that are 

paid and the conflicts of interest that exist in the issuer paid 

model. 

We held a roundtable about 1 month ago. We brought in all different kinds of rating agencies to talk about their different business models and the pros and cons of each and we’ve gotten a lot 

of very good ideas from that process and we’re hoping this summer 

to pursue some additional rulemaking in this area. 

We will focus on rating shopping. We will focus on disclosure. We 

will also look at whether we need to eliminate references in SEC 

rules which creates a market for rating agencies and gives a certain amount of credibility and stature to ratings that perhaps they 

don’t always deserve. 

Senator COLLINS. Thank you. Thank you, Mr. Chairman. 

Senator DURBIN. Senator Tester. 

Senator TESTER. Yeah. I just do want to get to the CFTC Chairman, but I just want to just close by saying thank you. Thank you 

for what you’ve done, thank you for what you’re going to do. 

I would ask that, you know, as these budgets come forward, 2005 

to 2007 budgets were visited about here on a couple different occasions, somebody dropped the ball. Congress probably had a part to 

do with it. Your predecessor may have had a part to do with it. 

But it ended up in a disaster and we need to make sure that you 

have the resources, no more, no less, but just the resources you 

need to do your job, and I think that, as a friend of mine pointed 

out last week, we need to quit thinking in Government in silos, we 

need to start thinking about the consumer and whoever is consuming that product, whether it’s in education or housing or in this 

case securities, and make sure that Government works for the betterment of everybody. 

But I really want to thank you for the work you’ve done so far. 

It’s very impressive, and I look forward to working with you in the 

future. 

Ms. SCHAPIRO. Thank you very much. 

Senator DURBIN. Thank you very much, Senator Tester. 

Chairman Schapiro, thank you for your testimony. 

Ms. SCHAPIRO. Thank you, Mr. Chairman. 

ADDITIONAL COMMITTEE QUESTIONS

Senator DURBIN. We’ll be working closely with you and your 

agency as we put together the appropriation bill. 
35 

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 RICHARD J. DURBIN

STAYING ON THE CUTTING EDGE OF TECHNOLOGY

Question. With rapid acceleration of electronic innovations in the securities markets, the Securities and Exchange Commission faces the challenge of keeping 

abreast of advancements. In the face of aggressive efforts of trading firms to invest 

in new technology, it is critical that SEC investigators understand the nuances of 

modern trading operations. 

Does the SEC have sufficient resources to hire the best and brightest financial 

technologists? 

Have you identified specific gaps in SEC’s workforce expertise when it comes to 

electronic trading? 

Answer. As you may know, the SEC has launched a new initiative with existing 

resources to broaden the skill sets within its workforce, ranging from financial analysis to complex trading strategies. As part of this effort, the SEC is recruiting seasoned industry professionals into our enforcement, examination, and risk assessment programs, through efforts such as the Industry and Market Fellows and the 

Senior Specialized Examiner programs. The SEC is also implementing enhancements to the SEC’s existing training programs, in areas such as the examination 

program which is enhancing staff expertise in topics such as fraud detection, complex financial products, and trading and where more than a third of the staff have 

signed up for training to become Certified Fraud Examiners. If Congress were to 

approve additional resources for the SEC, then the agency would look to expand 

these recruiting and training efforts very significantly. 

A key repository at the SEC for expertise on trading systems is the Automated 

Review Program within the Division of Trading and Markets. The program conducts 

examinations of the trading systems of markets and clearing agencies, to assess the 

data’s confidentiality, integrity, and availability. The program has been able to stay 

on top of this rapidly evolving field, through efforts such as the CYBER CORPS program, which has served as a great resource for identifying talented IT professionals, 

and through the NSA, which has provided non-commercial software and technical 

training. Over the past few years, the program has increased its expertise in IT security and launched new initiatives in the areas of cyber security, auditing intermediaries in credit default swaps, and international markets. The Division now 

plans to implement new source code review of trading systems and more sophisticated penetration testing, to the extent resources are available. 

EXPEDITING FAIR FUNDS DISBURSEMENTS

Question. Under the ‘‘Fair Funds for Investors’’ provision (Section 308(a) of Sarbanes-Oxley), the Securities and Exchange Commission is required to return money 

to investors victimized by securities fraud. Previously, disgorgements and penalties 

were deposited into a U.S. Treasury General Fund. 

Answer. The Fair Funds provisions of the Sarbanes-Oxley Act of 2002 gave the 

Commission authority to increase the amount of money returned to injured investors by allowing civil penalties to be included in Fair Fund distributions. Prior to 

Sarbanes-Oxley, only disgorgement could be returned to investors. 

Question. What improvements have been realized so far from the creation of a 

specialized office on ‘‘Fair Funds’’ disbursement? 

Answer. The Commission established the Office of Collections and Distributions 

(OCD) to, among other things, expedite the distribution of Commission recoveries 

to injured investors. The Office is responsible for overseeing the distribution of 

funds to investors who have been injured by securities law violations, implementing 

the Enforcement Division’s collections and distributions programs, and conducting 

litigation to collect disgorgement and penalties imposed in certain Enforcement actions. In addition, the Office tracks, records, and provides financial management assistance with respect to the funds and provides overall case management services 

for the Division. 

The Office has helped streamline the distributions process and enhance its internal controls, and it has overseen the distribution of approximately $3.2 billion to injured investors to date. Among the Office’s recent initiatives has been to issue 

standardized, step-by-step guidance to enforcement staff on developing and imple-
36 

menting distribution plans in both civil actions and administrative proceedings. In 

addition, the Office has consolidated collections and distributions information onto 

the enforcement program’s internal website so that is more accessible to staff nationwide. In collaboration with other SEC offices, OCD has created templates to 

standardize the reporting of periodic and final accountings for distributions of 

disgorgement funds and Fair Funds, as well as to facilitate the examination of administrative expenses. In order to manage receivership expenses, the Office also developed billing instructions for receivers. OCD conducts training for the staff on the 

use of both the standardized reports and the billing instructions. 

Question. SEC’s financial tracking system (Phoenix) was established to improve 

management of distribution of Fair Funds to victims of securities law violations. Is 

the ‘‘Phoenix’’ system fully functional at this time? What remains to be done to improve its capabilities? 

Answer. To date, the Phoenix system has only been partially deployed. Under the 

functionalities that are already operational, Phoenix assists with tracking and recording the disgorgement and penalties ordered in Enforcement actions. However, 

the Phoenix system does not yet track and record distribution information. This 

function is currently performed in a limited way within CATS 2000, the SEC’s case 

tracking system, which is itself slated to be replaced. 

To that end, the agency is developing business requirements for a new module 

that would record and monitor distribution-related information, including information reported on the newly developed standardized accounting reports. Once fully 

built, this module would enable the SEC to track a distribution fund’s current status or phase in the distribution process, enhance reporting and internal controls 

over the accuracy and integrity of distribution data, and provide better information 

about the investment of Commission funds with the Department of the Treasury’s 

Bureau of Public Debt. This effort also will support integration with the agency’s 

core financial management system. 

The SEC expects to finalize and deploy the distributions module in fiscal year 

2010, depending on the availability of sufficient funding. 

Question. I note that SEC is currently reviewing its performance measure of the 

percentage of Fair Funds and disgorgement dollars designated for distribution to 

victims within a year. What are the challenges? What is hampering SEC’s ability 

to track the timeliness of the fund distributions and maintain accurate data? 

Answer. As noted in the Commission’s fiscal year 2010 budget justification, this 

measure is currently under review and may be adjusted in the future. One of the 

primary challenges with respect to such a measure has been the SEC’s inadequate 

systems to collect, analyze, and report on distributions (described above), which 

have hampered the Commission’s ability to track the timeliness of the fund distributions and maintain accurate data. 

Question. What portion of this year’s budget (fiscal year 2009) and the proposed 

needs for fiscal year 2010 will be devoted to the Fair Funds distribution project? 

Answer. The first major expense associated with Fair Funds distributions is information technology, most notably the Phoenix system. In fiscal year 2009, the SEC 

expects to obligate approximately $0.1 million in ongoing maintenance and support 

related to Phoenix. For fiscal year 2010, the agency estimates that distributions-related projects will cost approximately $3.2 million. These projects include efforts to 

develop new collections and distributions tracking functionalities, enhance the current Phoenix system, integrate Phoenix with the enforcement program’s new HUB 

tracking system and the core financial system, and conduct ongoing system maintenance. 

A second component of the SEC’s distributions-related costs is the expense associated with the Office of Collections and Distributions. OCD’s costs amount to approximately $6.0 million in fiscal year 2009 and $6.2 million in fiscal year 2010. 

However, it is important to note that the Office performs a variety of functions in 

addition to distributions, including assisting with collection of delinquent debts and 

maintenance of internal controls. 

The final element is the substantial staff time spent on distributions functions 

within other parts of the SEC. For example, within the enforcement program (outside of OCD), attorneys spend considerable time on the development, oversight, and 

implementation of distribution plan actions, while support staff perform data input 

for all cases. In addition, the SEC’s Office of Financial Management aids with funds 

investment and disbursement, as well as internal controls; the Office of the General 

Counsel reviews and comments on distribution-related documents; and the Office of 

Economic Analysis evaluates the methodologies for measuring investor loss. Although the staff time involved is significant, the SEC does not currently track costs 

at this level. 
37 

QUESTION SUBMITTED BY SENATOR BEN NELSON

RULE 151A, ISSUED JANUARY 16, 2009

Question. On January 16th of this year, the Commission issued a new rule regarding indexed annuities and certain other insurance contracts. This rule takes effect 

on January 12, 2011. 

What level of resources will the SEC devote in fiscal year 2010 to preparing to 

implement this rule? Can you calculate the cost to the Commission of the work necessary to fully implement this rule so that it can be operational on January 12, 

2011? 

Looking ahead to the next fiscal year (fiscal year 2011), in taking on this additional regulatory responsibility, will additional staff be required? What will additional staff needs and additional regulatory responsibility mean for the Commission’s budget? 

Answer. The release adopting this rule (Rule 151A) articulated the Commission’s 

determination that investors in certain indexed annuity contracts are entitled to the 

protections of the federal securities laws. The rule includes a new definition of ‘‘annuity contract’’ that, on a prospective basis, will define a class of indexed annuities 

that are outside the scope of Section 3(a)(8) of the Securities Act, which provides 

an exemption under the Securities Act for certain insurance contracts. These indexed annuities will, on a prospective basis, be required to register under the Securities Act. With few exceptions, indexed annuities historically have not been registered as securities. The new definition will apply to indexed annuities that are 

issued on or after the January 12, 2011, the effective date of the rule. 

The staff is currently considering how to tailor disclosure requirements for indexed annuities. As with any other rulemaking, if the staff determines to recommend that the Commission propose new disclosure requirements, resources will 

be applied to develop a proposal, analyze public comments on the proposal, determine whether to recommend adoption of the proposal and consider whether and how 

it should be modified to reflect commenters’ concerns. 

In addition, the Commission encouraged insurance companies, sellers of indexed 

annuities, and other affected parties to submit specific requests for guidance regarding the implementation of the rule. We anticipate that any responses to such requests will require staff resources. 

The Division of Investment Management also anticipates reviewing filings for approximately 400 new indexed annuity contracts in the first year. 

In all, the Division of Investment Management believes the implementation of 

Rule 151A will require an allocation of seven staff positions during the first year, 

with that number likely to decrease in the years following the initial implementation. The estimated cost of these seven positions is $1.6 million for fiscal year 2011. 

As discussed above, these staff will perform further rulemaking as appropriate, provide interpretive advice, and review disclosure filings. 

QUESTIONS SUBMITTED BY SENATOR SUSAN COLLINS

Question. Chairman Schapiro, recently many news outlets have issued stories 

about the administration’s proposal to move some consumer-protection powers outside of the SEC. Reports state that that you are opposed to such a proposal. A May 

20th Wall Street Journal article quotes you as saying that such a plan would 

‘‘. . . be hugely expensive and highly inefficient . . .’’ Would you discuss your objections? 

Answer. I did not believe that investors would be better protected by separating 

some securities products from others, potentially creating gaps in the regulatory and 

enforcement regime. Securities products are different from consumer credit products: generally they are not guaranteed and include a number of inherent risks, including the loss of principal. The administration’s white paper outlining its consumer protection plan appears to recognize this, and I do not object to that approach. 

Question. Secretary Geithner recently laid out a framework for overseeing the derivatives market including rigorous reporting requirements. Such a proposal would 

give the SEC and CFTC new authorities to regulate derivatives. What are your 

thoughts on the plan and the role of the SEC in the regulation of derivatives? 

Answer. I agree with the Secretary’s approach. Both the SEC and CFTC have a 

role in regulating derivatives products. We continue to work together and make 

progress on how such a regime might work to best fill gaps in the regulatory framework and prevent regulatory arbitrage. I look forward to working with Congress to 

make the necessary legislative changes. 
38 

Question. Two veteran enforcement lawyers at the SEC are currently under investigation for insider trading. A May 16 a Wall Street Journal article quotes a report 

by the SEC Inspector General saying that ‘‘the SEC has ‘essentially no compliance 

system’ to detect potential insider trading.’’ As a result of the investigation into the 

trading activities of the two attorneys’, the SEC has proposed the imposition of new 

rules on employee trades. How does this investigation affect your confidence in the 

ability of the SEC staff? In your estimation, do the recent troubles at the SEC signify fundamental problems within the organization, and if so how do you propose 

to rectify the issues? 

Answer. I have the utmost confidence in the ability of the SEC’s staff and their 

unflagging dedication to the protection of investors. Time and time again, I have 

been impressed by the staff’s talent, integrity, and enthusiasm for the agency’s mission. However, it became clear to me soon after joining the agency that the SEC’s 

system for ensuring compliance with employee trading rules was not sufficient. The 

report by the agency’s Inspector General concerning trading activity by certain employees reinforced my belief that the SEC should have a trading compliance system 

that is second to none. 

I know the agency’s staff shares my belief that, in light of the SEC’s mission, it 

is vital that we conduct ourselves according to the highest standards of ethical conduct when it comes to our own financial holdings and transactions. To that end, we 

have taken several significant steps to strengthen the SEC’s compliance system and 

reduce the potential for even the appearance of inappropriate securities trading: 

—We have proposed new rules concerning employee trading. These rules will, 

among other things: 

—Require the pre-clearance of all trades. 

—Prohibit all trading in the securities of a company under SEC investigation, 

regardless of whether the employee is aware of the investigation. 

—Require all employees to authorize their brokers to provide duplicate trade 

confirmation statements to the agency. 

—Prohibit the ownership of securities in publicly-traded exchanges and transfer 

agents, in addition to existing prohibitions against owning securities in other 

firms directly regulated by the Commission. 

—Require employees to certify that they do not have any non-public information 

about the company whose securities they are trading. 

These rules were submitted to the Office of Government Ethics (‘‘OGE’’) on 

May 22, 2009, and we await OGE’s comments. 

—We recently retained an outside firm specializing in automated compliance systems to develop a new computer compliance system for the agency, which will 

automate and simplify the transaction reporting process and make it easier to 

verify and monitor employee trading. 

—We are creating a new Chief Compliance Officer position, and have already received applications from a number of excellent candidates for the new position. 

—I have consolidated responsibility for the oversight of employee securities transactions within the SEC’s Ethics Office and devoted additional staff resources to 

monitor, review, and spot-check these transactions. 

These measures will bolster and modernize the agency’s compliance program, and 

help the talented and committed staff do its critical work of protecting investors 

without distraction. 

Question. The fiscal year 2010 budget request does not include an increase for the 

SEC Inspector General. Considering the likelihood of an increased workload at the 

IG’s office, as the SEC increases surveillance and monitoring of employee trading, 

do you think that the IG will need additional funds? 

Answer. The Inspector General submitted a request for three additional positions 

only a few days before the publication of the SEC’s Congressional Justification for 

fiscal year 2010, and therefore these additional positions were not reflected in the 

document. However, I have since approved the addition of these personnel, which 

would bring the OIG to a total of 19 positions. When these new staff are combined 

with the two positions approved for OIG in January 2009, the Office will have 

grown by a total of 73 percent within this calendar year, which is the highest 

growth rates of any SEC office during this timeframe. 

Question. Please provide a breakdown of the tips and complaints the SEC received 

in fiscal year 2007 and fiscal year 2008, to help explain the large decline in that 

year. 

Answer. As you mentioned, the number of tips and complaints received by the 

SEC’s Office of Internet Enforcement declined significantly between 2007 and 2008, 

from about 1,586,000 to about 615,000 in 2008. Unfortunately, the SEC has not had 

a tracking system that can break down those figures into their component parts or 

support rigorous analysis of underlying trends. 
39 

1 ‘‘SEC makes inroads against financial spam; Crackdown pays off as e-mail campaigns slow,’’ 

by Matt Krantz, USA Today, Oct. 5, 2007 at p. 7A. 2http://eval.symantec.com/mktginfo/enterprise/whitelpapers/entwhitepaperlinternetlsecuritylthreatlreportlxiil09l2007.en-us.pdf. Copyright 2007 

Symantec Corporation. All rights reserved. Symantec, the Symantec Logo, BugTraq, Symantec 

Brightmail AntiSpam, and Symantec DeepSight are trademarks or registered trademarks of 

Symantec Corporation or its affiliates in the United States and other countries. Apple, Mac OS, 

and QuickTime are trademarks of Apple Inc., registered in the United States and other countries. Safari is a trademark of Apple Inc. Microsoft, ActiveX, Windows, and Windows Media are 

either registered trademarks or trademarks of Microsoft Corporation in the United States and/ 

or other countries. Sun, Java, and Solaris are trademarks or registered trademarks of Sun 

Microsystems, Inc. in the United States and other countries. 3See http://www.msnbc.msn.com/id/18955115/(arrest of Robert Alan Soloway); http:// 

www.sophos.com/pressoffice/news/articles/2008/02/japan-spam.html (Yuki Shiina); http:// 

spamkings.oreilly.com/archives/2006/03/stocklspammerslstunglbylsecret.html (‘‘g00dfellas’’ 

spam gang). 

The SEC’s initiative to bolster its systems for tracking tips and complaints, working with the Center for Enterprise Modernization, will help the agency perform 

much better analyses in the future. Such analyses will help the SEC understand 

the overall statistics on tips and complaints and identify trends among specific firms 

or practices that can provide valuable information for potential enforcement action 

and compliance exams. The SEC also is working to streamline and standardize the 

agency’s handling of tips and complaints, so they can be addressed more consistently and effectively. Nevertheless, for the 2007–2008 period, the SEC is reliant on 

anecdotal evidence to explain the decline in tips and complaints during that timeframe. 

In general, the number of complaints the agency sees is related to the volume of 

spam and commercial email traffic received by investors. A number of factors likely 

affected this volume during the 2007–2008 timeframe. First, the SEC’s initiative 

starting in 2007 to combat spam-driven stock manipulations was reported to have 

been a major contributor to reducing the amount of spam.1 Under this initiative, 

the SEC suspended trading in the securities of dozens of companies that had been 

the subject of spam stock promotions and initiated several spam-related enforcement actions. According to a private-sector Internet security report, a 30 percent decrease in stock market spam ‘‘was triggered by actions taken by the U.S. Securities 

and Exchange Commission, which limited the profitability of this type of 

spam . . .’’ 2

Another major factor is the growing use and sophistication of commercial-grade 

spam email filters, blacklists, and experimental ‘‘data mines,’’ which radically diminish the number of mass investment solicitations received by the average investor. 

Additionally, tough state and federal anti-spam laws, and high-profile prosecutions 

under those laws, likely helped to deter spammers.3

General market conditions also likely played a role in the decline in tips and complaints. Email stock promoters’ activities lend themselves best to the promotion of 

obscure, thinly-traded stocks, such as the tech stocks that flourished during the late 

1990s market ‘‘bubble.’’ Since the collapse of that bubble, it seems fewer investors 

have been interested in these microcap stock promotions. 

It is important to note that, while the number of tips and complaints went down 

significantly in 2008, the figure is still 146 percent higher than it was 5 years previously. By comparison, the number of full-time equivalents in the SEC’s enforcement program increased by only 23 percent during that period. Also, while the 

quantity of complaints the SEC received decreased between 2007 and 2008, the SEC 

believes that the quality of complaints has increased dramatically. Thus, the agency’s workload from these complaints has actually become greater over the past year, 

despite the reduced number of complaints relating to spam. 

ADDITIONAL SUBMITTED STATEMENT

[CLERK’S NOTE.—The subcommittee has received a statement 

from the Investment Company Institute which will be inserted into 

the record at this point.] 
40 

1The Investment Company Institute is the national association of U.S. investment companies, 

including mutual funds, closed-end funds, exchange-traded funds (ETFs), and unit investment 

trusts (UITs). ICI seeks to encourage adherence to high ethical standards, promote public understanding, and otherwise advance the interests of funds, their shareholders, directors, and advisers. Members of ICI manage total assets of $10.18 trillion and serve over 93 million shareholders. 2See Letter to The Hon. Mary L. Schapiro from Paul Schott Stevens dated February 18, 2009 

(attaching recommendations for SEC priorities under Chairman Schapiro’s leadership). See also 

Financial Services Regulatory Reform: Discussion and Recommendations, which is available at 

http://www.ici.org/pdf/pprl09lreglreform.pdf. Chairman Schapiro also noted in her testimony 

that she intends to improve the overall management of the SEC, including by hiring a Chief 

PREPARED STATEMENT OF THE INVESTMENT COMPANY INSTITUTE

The Investment Company Institute 1 appreciates this opportunity to submit testimony to the Subcommittee in support of the administration’s fiscal year 2010 appropriations request for the Securities and Exchange Commission (SEC). We commend 

the subcommittee for its consistent past efforts to assure adequate resources for the 

SEC. For the reasons expressed below, we urge Congress to provide appropriations 

at least at the funding level requested by the President. 

As SEC Chairman Mary Schapiro noted in her testimony, the recent financial crisis has served as a reminder of the importance and interconnectedness of the securities markets to our nation’s economy and the financial health of millions of Americans. The crisis also demonstrated that the current regulatory system is not up to 

the challenges posed by modern financial markets and needs to be significantly 

strengthened and modernized. It has led to broad support for reform of the U.S. system of financial services regulation, including numerous calls for Congress to close 

regulatory and disclosure gaps to ensure appropriate oversight with regard to hedge 

funds, derivatives, and municipal securities. Toward these ends, it is critically important to provide the SEC with the resources necessary to assure its ability to 

soundly and effectively regulate securities offerings, market participants, and the 

markets themselves. And, to the extent that the scope of the agency’s responsibilities is expanded with respect to hedge funds, derivatives, and/or municipal securities, it will be imperative that it have sufficient staffing and resources to effectively 

perform all of its oversight functions. 

More generally, the ongoing policy discussions about regulatory reform have highlighted why adequate funding for the SEC should continue to be a Congressional 

priority. Unlike other financial regulators, the SEC is specifically charged with protecting investors. The agency seeks to fulfill this mission in many different ways, 

including through the disclosure and substantive rules it adopts and administers, 

through examinations of regulated entities, and through its enforcement program, 

to name a few. In the wake of the financial crisis, it is essential to provide the SEC 

with the resources it needs to successfully pursue its investor protection mission. 

Mutual funds and other registered investment companies have a strong stake and 

vested interest in having a well-funded and effective SEC. Registered investment 

companies are an integral part of our economy. They represent, as a whole, the largest group of investors in U.S. companies, holding 27 percent of the outstanding stock 

in U.S. companies at year-end 2008. Registered investment companies also held the 

largest share of U.S. commercial paper—an important source of short-term funding 

for major U.S. and foreign corporations. In addition, they continue to be one of 

America’s primary savings and investment vehicles for middle-income Americans. 

Today, over 93 million investors in more than 53 million U.S. households own 

shares of registered investment companies; the median household income of these 

investors is $80,000. And, since 1990, the percentage of U.S. retirement assets held 

in mutual funds and other registered investment companies has more than quadrupled. These millions of Americans continue to recognize that mutual funds are the 

best means of achieving their long-term financial goals. They deserve and benefit 

from continued vigilant regulatory oversight of mutual funds and other registered 

investment companies. 

The administration’s fiscal year 2010 budget proposes SEC funding at a level that 

represents a 7 percent increase over fiscal year 2009. Chairman Schapiro explained 

in her testimony that this would permit the SEC to fully fund an additional 50 staff 

positions over 2008 levels, enhance its ability to uncover and prosecute fraud, and 

allow it to begin to build desperately needed technology. More specifically, Chairman Schapiro stated that the additional funding would allow the SEC to hire seasoned industry professionals and market experts to strengthen and expand the 

SEC’s Office of Risk Assessment, improve its examination program, and bolster its 

oversight of the investment management and broker-dealer industries. We have 

strongly supported precisely these types of measures.2 It is essential that the agency 
41 

Operating Officer to manage the organization. We also supported this idea in both our February 

18, 2009 letter to Chairman Schapiro and Financial Services Regulatory Reform white paper. 3See Report of the Money Market Working Group, submitted to the Board of Governors of the 

Investment Company Institute on March 17, 2009, available at http://www.ici.org/pdf/ 

pprl09lmmwg.pdf. 

have greater ability (and resources) to attract and retain professional staff having 

significant prior industry experience. Their practical perspectives would enhance the 

agency’s ability to keep current with market and industry developments and better 

understand the impact of such developments on regulatory policy. The new Industry 

and Market Fellows Program is an encouraging step in the right direction, but we 

also believe that the agency should build strong economic research and analytical 

capabilities and should consider having economists resident in each division. 

We are particularly pleased that a key strategic priority for the SEC’s Division 

of Investment Management will be to strengthen and improve the money market 

fund regulatory regime. Last November, we convened a high level industry working 

group to study the money markets. In March, the group made a series of comprehensive recommendations that responded directly to weaknesses in current 

money market fund regulation, identified additional reforms that will improve the 

safety and oversight of money market funds and position responsible government 

agencies to oversee the orderly functioning of the money market more effectively.3

We look forward to working with the SEC on this critically important issue. 

In conclusion, the SEC and the fund industry share a common objective of assuring that mutual funds remain a vibrant, competitive and cost effective way for average Americans to access the securities markets and realize their long-term financial 

goals. Future regulatory and oversight actions by the SEC will play a key part in 

this process. It is therefore critically important that the SEC have sufficient resources to adequately fund the staffing of the agency and to take other steps to fulfill its mission of protecting the nation’s investors, including the over 93 million 

Americans who own mutual funds. Accordingly, we urge Congress to provide appropriations at least at the funding level requested by the President. 

We appreciate your consideration of our views. 

(43) 

COMMODITY FUTURES TRADING COMMISSION 

STATEMENT OF HON. GARY GENSLER, CHAIRMAN 

Senator DURBIN. I’d like to invite Chairman Gensler from the 

Commodity Futures Trading Commission to come forward. 

This year, 2009, marks the 35th year since the establishment of 

this agency. At this time of its inception in 1974, CFTC’s 500 employees were tasked with ensuring fair practices and honest dealings on the commodity exchanges of America’s then $500 billion industry in 1974. Today, it is a $22 trillion industry and it looks a lot different. 

The traditional agricultural products are still there, but the landscape has been diversified with novel and complex commodities, 

from grains to gold, currencies to carbon credits. 

In the past decade trading volume has increased more than tenfold, reaching over 3.4 billion trades in 2008. Actively traded contracts have quintupled from 286 in 1998 to 1,521 in 2008. CFTC oversees $5 trillion of trades every single day. So we don’t 

want you to stay at the table too long. We want you to get back 

and keep an eye on those trades, but we invite you, Chairman 

Gensler, to give your testimony at this point. 

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

Collins, and members of the subcommittee, Senator Tester. 

I’m pleased to be here today to discuss our budget and especially 

pleased to learn that Senator Durbin recently visited our Chicago 

office which very encouraged the staff and I thank you for it. 

I’m also grateful to each of you for your individual support on my 

recent confirmation. It’s an honor to serve the country in this capacity. 

I come before you having served as Chairman just 6 calendar 

days, but with full knowledge of the failures of our regulatory system, failures that affected all Americans, failures that we must ensure do not happen again, and as Chairman, I will use every authority available to protect the American people from fraud, manipulation, and excessive speculation. 

I will also work with Congress on new authorities to bring muchneeded transparency and regulation to the over-the-counter derivatives marketplace. 

I am grateful on behalf of the agency for the $146 million recently appropriated for this Commission. This boost has allowed us 

to get back to beginning to address the alarmingly low staffing levels there are at the agency. Our size, however, is still roughly 

equivalent to the Commission that was established 35 years ago. 

Today, the futures market is dramatically different, as Chairman 

Durbin just outlined, being some 45 times larger than it was 35 

years ago, and much more complex as well. 

Just 10 years ago the CFTC was near its peak staffing levels, 

near 580 full-time equivalents. It’s shrunk over 20 percent in the 
44 

past years, but with your help the fiscal 2009 funding will permit 

us to get back to where we were in 1999. 

Since 1999, however, volumes have gone up fivefold, the number 

of contracts have gone up sixfold. The complexity, of course, I don’t 

need to tell you, has gone up dramatically. We’ve gone from open 

outcry pits to electronic trading which is in some cases harder to 

monitor. We’ve also lived through the worst financial crisis in 80 

years and seen the results of an asset bubble in commodity prices. 

In short, the Commission remains an underfunded agency and 

we’re very grateful to the President’s budget of $160.6 million in 

recognition of some of these needs. If I could just share with you 

some of the things that have been highlighted to me in my first 6 

days. I think we still need to ensure that our enforcement effort is 

larger to ensure robust enforcement of our laws. Currently, we 

have about 141 attorneys in our Enforcement Division. I believe 

this is still quite lower than what’s required, given the financial 

turmoil we’ve lived through. 

We must ensure greater transparency. I believe that commodity 

index funds did contribute to the asset bubble that we’ve just lived 

through. To bring greater transparency will require more economists. It’s going to require announcements in our weekly commitments in traders’ reports. We’ll also need to upgrade our systems 

as well. 

We must ensure that position limits consistently applying across 

the board, and that we’re reviewing hedge exemptions and no action processes in that regard. 

Our information technology (IT) systems and particularly our 

mission critical systems on positions and transactions have not 

been upgraded for quite some time and I’ve looked forward to working with this subcommittee on getting funds to try to upgrade these 

mission critical systems. 

And also, we need to ensure timely review of new products and 

rule change filings. This has lagged a great deal and just last year 

with the new farm bill, the review of significant price discovery 

contracts will be important moving forward. 

These are only a few of the funding priorities, but I wanted to 

give the subcommittee a tangible sense of some of the things that 

we’re grappling with and struggling with. 

With that in context, the $14.6 million of additional funding, 

about one-half of that is to stay at current services and one-half of 

that in the President’s budget, fortunately, is for 38 new full-time 

equivalents to bring us back just above where we were 10 years 

ago, to about 610 full-time equivalents. These positions are essential. The increase, however, still won’t allow us to fully address 

these complex markets and what we need to do. 

Before I close, I would like to highlight that the additional funding needs will also accompany much-needed regulatory reform. I, 

along with other regulators, and the administration feel we need 

to broaden reforms in the over-the-counter derivatives marketplace 

and bring it all under the regulatory umbrella. I look forward to 

working with this subcommittee and Congress for funding those 

new authorities to make sure they’re properly implemented. 
45 

PREPARED STATEMENT

And with that, I thank you very much and I look forward to answering your questions. 

I hope my written testimony can be entered into the record. 

Senator DURBIN. Of course. It will be. 

[The statement follows:] 

PREPARED STATEMENT OF GARY GENSLER

Thank you, Chairman Durbin, Ranking Member Collins, and other members of 

the Subcommittee. I am pleased to be here to testify on behalf of the Commodity 

Futures Trading Commission, and I appreciate the opportunity to discuss issues related to the Commission’s 2010 Budget. I am also grateful to have had each of your 

individual support for my recent confirmation. It is a great honor to serve my country in this capacity. 

I come before you today having only served as CFTC Chairman for 6 calendar 

days, but with the full knowledge of the failures of our financial regulatory system; 

failures that affected all Americans and failures that we must ensure never occur 

again. 

The last decade, and particularly the last 21 months, has taught us much about 

the new realities of our financial markets. We have learned the limits of foresight 

and the need for candor about the risks we face. We have learned that transparency 

and accountability are essential and that only through strong, intelligent regulation 

can we fully protect the American people and keep our economy strong. 

As Chairman of the CFTC, I will use every tool and authority available to protect 

the American people from fraud, manipulation and excessive speculation. I also look 

forward to working with Congress to establish new authorities to close the gaps in 

our laws and bring much-needed transparency and regulation to the over-thecounter derivatives market. I firmly believe that doing so will strengthen market 

integrity, lower risks, protect investors, promote transparency and begin to repair 

shattered confidence in our financial markets. 

I would like to thank the Committee for the $146 million recently appropriated 

for the CFTC for the 2009 fiscal year and special thanks to Chairman Durbin for 

visiting our Chicago office last year. As a result of this much needed boost in funding, the Commission has begun to address our alarming staffing levels; levels that 

recently reached historic lows. 

At present, the Commission employs about 500 career staff—roughly equivalent 

to when the Commission was created in 1975. Three decades later, the futures market has changed in every way: with respect to volume, complexity, risk and locality. 

What was once a group of regional domestic markets trading a few hours 5 days 

a week is now a global market trading 24/7, and what was once just a $500 billion 

business has exploded to a $22 trillion annual industry. 

Ten years ago, the CFTC was near its peak staffing level at 567 employees, but 

shrunk by 20 percent over the subsequent 8 years before hitting a historic low of 

437. 

With the increase in fiscal year 2009 funding the CFTC can reach 572 employees. 

While this is a start, I believe that merely raising our staffing levels to the same 

as a decade ago will not be enough to adequately fulfill all of the agency’s missions. 

In the last 10 years, trading volume went up over five fold. The number of actively 

traded futures and options contracts went up over six fold, and many of these are 

considerably more complex in nature. We also moved from an environment with 

open-outcry pit trading to highly sophisticated electronic markets. 

In addition to the dramatic evolution of the futures industry, we have experienced 

the worst financial crisis in 80 years. We also experienced, in my view, an asset 

bubble in commodity prices. The staff of the CFTC is a talented and dedicated group 

of public servants, but the significant increase in trade volume and market complexity, as well as rapid globalization, commands additional resources to effectively 

protect American taxpayers. 

For all of these reasons, I feel it is appropriate for our staffing levels and our technology to be further bolstered to more closely match the new financial realities of 

the day. 

In short, despite the recent increase in funding, the Commission remains an underfunded agency. The President’s Budget recommendation of $160.6 million is recognition of this need. Specifically, the Commission needs more resources to hire and 

retain professional staff and develop and maintain technological capabilities as sophisticated as the markets we regulate. 
46 

I’d like to identify some of my priorities and provide some illustrations of how resource limitations have constrained the Commission. Among my priorities will be to: 

—Ensure robust enforcement of our laws. Currently, the Commission’s enforcement program consists of 122 employees—the lowest level since 1984. Though 

fiscal year 2009 funding will get us back to 141 enforcement employees, this is 

still below the agency’s peak of 167 and well below what we need given the current financial turmoil. Any financial downturn reveals schemes that could only 

stay afloat during periods of rising asset values. Our current, and much larger, 

downturn is exposing 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. The regulations we enact 

to protect the American people are meaningless if we do not have the resources 

to enforce them; 

—Ensure greater transparency of the marketplace. Also, I believe that commodity 

index funds and other financial investors participated in the commodity asset 

bubble. Notably, though, no reliable data about the size or effect of these influential investor groups has been readily accessible to market participants. The 

CFTC could promote greater transparency and market integrity by providing 

further breakdowns of non-commercial open interests on weekly ‘‘Commitments 

of Traders’’ reports. The American public deserves a better depiction of the marketplace. The temporary relief from higher prices does not negate this need, especially given that a rebounding of the overall economy could lead to higher 

commodity prices; 

—Ensure position limits are consistently applied. The CFTC has begun a review 

of all outstanding hedge exemptions to position limits. This review will consider 

the appropriateness of these exemptions and look for ways to institute regular 

review and increased reporting by exemption-holders. The Commission also has 

begun a review of the process and standards through which no-action letters are 

issued. As part of these reviews, CFTC staff will consider the extent to which 

swap dealers should continue to be granted exemptions from position limits; 

—Ensure the Commission has the tools to fully monitor the markets. We must 

upgrade the Commission’s mission critical IT systems for the surveillance of positions and trading practices. Neither is robust enough nor have they been upgraded to reflect the vast increase in volume and complexity. Our systems must 

begin to produce the surveillance reports needed to meet the analytical needs 

of our professional staff and the transparency needs of the public; and finally 

—Ensure timely reviews of the many new products and rule change filings of the 

futures markets. These have lagged due to the growth and complexity of markets and the added responsibilities extended to the Commission in the 2008 

Farm Bill. The Farm Bill requires staff to review all contracts listed on Exempt 

Commercial Markets (ECMs) to determine if they are significant price discovery 

contracts—if they are, then any ECM that lists such a contract must also be 

reviewed to determine compliance with a stringent set of core principles under 

the Commodity Exchange Act. 

Other examples that I believe are illustrative of the difficult tradeoffs caused by 

resource constraints are: 

—The Commission does not conduct annual compliance audits of every Designated 

Contract Market (DCM)—rather only periodic reviews on average, every 3 

years; 

—The Commission does not conduct annual compliance audits of every Derivatives Clearing Organization (DCO)—rather periodic reviews are conducted of selected core principles that are rotated and completed every 3 years; and 

—The Commission does not conduct routine examinations of Commodity Pool Operators, Commodity Trade Advisors, and Futures Commission Merchants—a 

function currently performed by Self Regulatory Organizations. If the Commission were to perform direct periodic audits our staff would better understand 

the operations of brokers and managed funds and could better assess compliance with the law and regulations. 

These are only a few of our important funding priorities and the workload challenges imposed by resource limitations. There are, of course, others. I hope that this 

helps the Committee to understand, in a tangible way, the challenges the Commission faces in regulating the futures markets the way the Nation requires. 

Although the work of the Commission can be highly technical in nature, the mission of the agency is quite straightforward. The CFTC is charged with: 

—Protecting the public and market users from manipulation, fraud, and abusive 

practices and 

—Promoting open, competitive and financially sound futures markets. 
47 

With that context, I would like to address the specifics of the fiscal year 2010 

Budget request. The fiscal year 2010 Budget proposes an increase of $14.6 million. 

Approximately half of the increase is needed to maintain our fiscal year 2009 level 

of operations into fiscal year 2010. The balance would fund an additional 38 positions. 

Twenty-six of the 38 staff would be allocated to principal program areas. Specifically, we would allocate 11 positions to Enforcement, 8 to Market Oversight, 6 to 

Clearing and Intermediary Oversight, and 1 to the Chief Economist’s office. The remaining 12 positions will provide critical mission support in the areas of legal analysis and counsel, technology support, international coordination, legislative and public outreach, and human capital and management support. 

The additional 38 positions are essential to addressing some of the limitations I 

mentioned earlier. This increase, however, will not provide the Commission with the 

critical mass of professional and technical expertise needed to ensure that the growing markets remain free of manipulation and fraud. 

For example, our enforcement staff needs to be significantly expanded to: 

—Ensure that crimes are punished to the fullest extent of the law; 

—Develop strategies aimed at quickly identifying and eradicating fraudulent 

schemes, such as Ponzi and foreign exchange ‘‘boiler rooms’’; and 

—Importantly, pursue resource-intensive investigations and litigations involving 

manipulation, including energy-related market abuses, so wrongdoers will not 

believe they are immune from enforcement simply due to the complexity of an 

enforcement action. 

Insufficient resources in the enforcement division force it to be too selective in the 

matters it investigates. 

Our market oversight operation needs additional highly-skilled economists, investigators, attorneys and statisticians to: 

—Analyze trading reports quickly and thoroughly, identify potential market problems or trader violations promptly, and avoid market disruptions and pricing 

anomalies; 

—Conduct timely and complete reviews of regulated entities to ensure compliance 

with all core principles; 

—Examine exchange self-regulatory programs on an on-going and routine basis 

with regard to trade practice and market surveillance; and 

—Ensure their compliance with disciplinary, audit trail, record-keeping and governance obligations. 

Our clearing and intermediary oversight program needs additional auditors, analysts, and attorneys. This would allow us to: 

—Ensure clearing systems protect against a single market becoming a systemic 

crisis; 

—Protect investors’ funds from being misused or exposed to inappropriate risks 

of loss; and 

—Guard against abusive sales practices that harm customers and undermine 

market integrity. 

Our economic research program needs more economists to review and analyze 

new market structures and off-exchange derivative instruments, especially in light 

of novel and complex products and practices that call for state-of-the-art economic 

analysis. Further, additional resources would enhance our economic and statistical 

analysis, improving transparency of markets and better supporting the Commission’s enforcement and surveillance programs. 

We also need to transform the current legacy information technology systems into 

robust systems capable of efficiently receiving and managing massive amounts of 

raw data as well as transforming them in to useful analytical and research tools. 

The Commission has made a substantial investment in technology over the past 

2 years—focusing first on upgrading obsolete computer hardware to industry standards. We need technology, however, that is as modern and dynamic as the technology-driven markets we are charged with overseeing. Our investment in technology must be more than just periodic equipment upgrades and maintenance. The 

Commission must leverage resources by employing 21st century technology to protect the American people. 

As the Commission informed this Committee in February of this year, the agency 

believes it needs $177.7 million for fiscal year 2010 to perform its present duties. 

I look forward to working with this Committee to secure the funding necessary to 

meet our current regulatory responsibilities. 

Before I close, I would like to briefly highlight funding needs that might go along 

with much needed regulatory reform. The CFTC along with the administration and 

other financial regulators is committed to working with Congress on broad regu-
48 

latory reform. This is particularly true for the markets that the CFTC currently regulates and the markets that may soon come under our regulation. 

Specifically, we must urgently regulate the over-the-counter derivatives market 

and address excessive speculation through aggregated position limits. 

President Obama has called for action by the end of this year to strengthen market integrity, lower risks, and protect investors. The future of the economy and the 

welfare of the American people depend on a vibrant Commission to assist in leading 

the regulatory reform ahead. Additional funding will be necessary to properly implement these reforms. 

I look forward to working with the Members here today and others in Congress 

to accomplish this goal. 

Thank you very much. I would be happy answer any questions you may have. 

STAFFING

Senator DURBIN. Chairman Gensler, thank you for being here 

and we’re glad that you’re on the job, and it strikes me that if we 

look at your recent arrival and the recent arrival of a lot of money 

into your agency, that you’re really going to be tested quickly in 

terms of whether or not you can gather together the professional 

staff to do your job and the added responsibilities that you mentioned in the farm bill. I don’t know if you have had a chance to 

look at the inspector general’s report on your agency but that was, 

I think, one of the major points made by that report, as to whether 

or not you would have the human capital necessary to monitor the 

complex situations that you face. 

Now, there’s been some problems in the past at CFTC when it 

comes to Federal pay parity, where the Government basically said 

let’s start treating all the professionals in our agencies alike and 

CFTC seemed to be lagging in the past in bringing the income levels up to meet the pay parity standard. 

You mentioned my visit to the office in Chicago and I’m glad I 

did it. I don’t know how many other Congressmen or Senators have 

been there, but it’s an eye-opener. It’s a small staff but it’s an 

amazing staff and I was very impressed. There are some people we 

have working for our Government in that office who do such exceptional work. 

One man they introduced me to, I’ve forgotten his name unfortunately, and they told me what his responsibility was each day and 

they said he is the go-to guy. He watches all of these transactions 

going and he’s the one who monitors them and if he weren’t here, 

you know, I’m not sure how good a job we’d do. It would take a 

lot more people to try to do what he does every day. I said, ‘‘Does 

this man take a vacation?’’ They said, ‘‘Yes, he does and we try to 

hang on until he gets back.’’ 

It’s that kind of person and that kind of responsibility which 

leads me to ask, now that we’ve sent you a substantial amount of 

money in this year’s fiscal year bill, in the omnibus bill, and now 

that we’ve told you you need more professional people and now that 

you’re looking at this pay parity issue, how are you trying to fit 

these pieces together into some coherent way of expanding your 

agency in a manner that is consistent with rewarding the good performance of people there and bringing onboard the kind of folks 

that you need to meet these new electronic markets? 

Mr. GENSLER. Senator, I think you’re right in these are important challenges. Just being in the job for 6 days, what I see are talented staff facing significant challenges ahead. 
49 

Senator DURBIN. Incidentally, you’re new to this, but it’s always 

great to start your answer with Senator, you’re right. Please proceed. 

Mr. GENSLER. Senator, you’re right. As I understand it, the agency’s been able to fulfill all of the job postings—about 95 job postings. There’s confidence, at least within the staff, as to what might 

be achieved by September 30. We all know there’s a summer and 

August and so forth, but all the postings are up. Some of the recruiting has already occurred and people have been coming in. 

But I also agree with Chairman Durbin that this agency, which 

was so sorely underfunded and actually shrank over 20 percent in 

the face of this complexity during the last 8 years, has too many 

jobs that are being done by one person or not enough. As an example, when I asked, well, how large is the group that oversees clearing, this really important function in futures. I was told that there 

is a nine-person staff out in Chicago, which is part of that larger 

staff, I said, ‘‘Is that enough?’’ Well, you know, everybody said, 

‘‘Well, that’s what we have. We’ve had to make tough choices.’’ 

So I think that’s very important. I’m committed to make sure 

that taxpayer dollars are put to work most appropriately and efficiently, but I do have confidence in what I’ve seen in 6 days, that 

there’s a plan of action for these hires. 

Senator DURBIN. What about the pay parity issue? 

Mr. GENSLER. On pay parity, as I understand it, we’ve been able 

to bring up to a figure of about $4 to $4.5 million. 

Senator DURBIN. I might say that there—— 

Mr. GENSLER. I’m sorry Senator, let me just correct this. There 

is $1.4 million in the fiscal 2010 budget specifically with regard to 

that. 

STUDENT LOAN REPAYMENT

Senator DURBIN. One obscure little thing which I accomplished 

when Senator Collins was chairing the Governmental Affairs Committee. 

Senator COLLINS. Governmental Affairs. 

Senator DURBIN. Governmental Affairs Committee, when it started, was the whole question of student loan repayment as an incentive to bring in professionals to Federal agencies. 

The SEC is one of the best agencies in Government on this front, 

385 of their staff, 181 of whom are attorneys have used the student 

loan repayment, and I believe this brings them into Federal Government where their services are very valuable. Otherwise they 

might not be able to consider it. 

CFTC has not instituted such a program, probably for lack of 

money, and I’m wondering if you expect to be able to provide that 

benefit as part of recruitment in the future. 

Mr. GENSLER. The answer is yes, sir, I think that we tried to 

do—I think it was just a small amount this year, $200,000 in this 

fiscal year. 

Senator DURBIN. I see. 

Mr. GENSLER. In fiscal 2009, actually. 

Senator DURBIN. Well, I think it can be a major part of attracting 

really talented college graduates who otherwise would be lured to 

something that may pay a little more just to defray their costs. 
50 

Mr. GENSLER. The agency shares that view. 

Senator DURBIN. Thank you. 

Senator Collins. 

UNDERFUNDING

Senator COLLINS. Thank you, Mr. Chairman. 

Mr. Gensler, Senator Lieberman and I, as the chairman and 

ranking member of the Homeland Security and Governmental Affairs Committee, held three hearings last year looking at speculation in the commodities markets, and I want to talk about some of 

our findings as a result of those hearings. 

The first we’ve already discussed at some length and that is that 

the CFTC has been woefully understaffed. We were told by the 

Commission that there were more than 3 billion futures and options contracts that were traded last year, I guess it would have 

been the year before last, and that was up from 37 million in 1976 

when the Commission was first created, so 37 million to 3 billion 

contracts, and yet the Commission was operating with fewer employees than it had 30 years ago. Just an untenable situation. 

Now, the Acting Chairman of the Commission in February wrote 

to the Office of Management and Budget (OMB) Director in protest 

of the budget that had been handed down by OMB of having a 

budget of $160.6 million and he described it as perilously inadequate. He went on to say that it would not allow the Commission 

to implement all of its responsibilities. That is the budget that 

we’re talking about today. 

Do you disagree with the letter that was written by the Acting 

Chairman or do you share his concerns? 

Mr. GENSLER. I share the concerns that this agency is both underfunded, as you and Senator Lieberman’s panel determined last 

year. I think, as the Acting Chairman Mike Dunn did an excellent 

job these past 4 months laying out that this agency needs more. 

We’re very appreciative of the President’s budget and the 38 additional employees, but I don’t think it’s really yet up to the task that 

the American people expect or how we’re going to protect against 

fraud, manipulation, and, as your hearings looked at, the burdens 

of excess speculation in these markets. 

SPECULATION

Senator COLLINS. Let me turn to the speculation issue. As a result of the hearings that we held, Senator Lieberman and I introduced a bill that directed the CFTC to establish position limits that 

would apply to an investor’s total interests in a commodity, regardless of whether they originate on a regulated exchange, the overthe-counter market or on foreign boards of trade that deal in U.S. 

commodities. 

Do you support establishing position limits, having the Commission do it rather than the exchanges? 

Mr. GENSLER. I think, Senator, that it’s important that we bring 

a broader view of this even than was being discussed then, that we 

have the over-the-counter derivatives marketplace under regulation, but, in addition, that the position limits that are set—for instance, if it was for crude oil, that it would look across markets and 

aggregate not only internationally, as you were discussing, but also 
51 

with the over-the-counter derivatives marketplace. There may be 

contracts that are really quite similar, as you addressed in the 

farm bill, but more broadly as we work with Congress later this 

year and try to get aggregate position limit authority for Federal 

regulators to look across markets and across futures and swaps. 

INDEX TRADERS

Senator COLLINS. What our hearings demonstrated was that 

speculation in the commodities markets by noncommercial investors, not individuals or entities that are actually taking possession 

of the commodity at some point, but entities, like pension funds, 

university endowments and other institutional investors, has 

grown enormously from 2003 to 2008. 

In just that 5-year period the total value of their futures contract 

and commodity index funds investments soared from $13 billion to 

$260 billion. So you have this influx of money from speculators. 

There’s always been speculation in the commodities futures markets. 

I understand that and I understand that speculation is useful for 

hedging risk, but we’re talking now about speculation from individuals who are not the traditional buyers and sellers of the commodity, and I understand that those investors’ intention is to provide good returns as a hedge against inflation, asset diversification, 

but the effect of that activity cumulatively appears to drive up the 

price for some of the traditional users of the commodity markets. 

Just a week ago Maine’s fuel dealers were in my office saying 

that they believe excessive speculation by noncommercial players is 

once again driving up the cost of oil. That’s a tremendous issue in 

a State where 80 percent of the families use home heating oil to 

stay warm. 

So two questions. First, what is your general opinion on whether 

the influx of funds from nontraditional players is putting artificial 

price inflation or causing prices to go up beyond what they otherwise would, and second, what, if anything, should we do about it? 

Mr. GENSLER. Two excellent questions. I do think that, looking 

back, in that period that you named and when oil prices peaked 

last summer, that a contributing factor, not the only factor because 

there were many factors, but a contributing factor to the commodity asset bubble was index investors and other financial investors. 

We have also lived through other asset bubbles in housing, unfortunately, in the stock market in the late 1990s and then again 

maybe last year. So in a similar way, I think financial actors contributed to this but were not the only cause. 

I do think that the Commodity Futures Trading Commission, at 

its core and has been for 70 plus years, one of its missions is to 

make sure that markets’ integrity is sound, that there’s not manipulation and fraud but also that the burdens of excessive speculation be guarded against through position limit authority. 

So in terms of that mission, the Commodity Futures Trading 

Commission is not a price-setting agency, but it is an agency that 

has to guard to make sure that the markets are operating free of 

manipulation, free of fraud, and that through the position limit au-
52 

thority the Congress first granted back in the 1930s, that there’s 

some limit to the actors within the marketplace. 

Senator COLLINS. Thank you. 

Senator DURBIN. Senator Tester. 

Senator TESTER. Thank you, Mr. Chairman, and thank you for 

those questions, Senator Collins. 

I’ve just got a follow-up that goes right under her question and 

that is, do you think the marketplace right now is being impacted 

by—I’m talking about the oil marketplace is being impacted by 

trading of nontraditional traders? 

Mr. GENSLER. Senator Tester, again I’ve only just been in the job 

for 6 days and mostly been preparing for this Appropriations hearing and a hearing for Thursday on other matters, so I haven’t 

formed a view. 

I do think that, just as the asset bubble broke last year with this 

financial crisis, that part of what we’re seeing is with some confidence coming back in the stock market and in other investment 

markets, just as Senator Collins mentioned, some investments of 

firms and others are having more confidence in the value in the 

commodities marketplace. 

But again, I’ve only been there 6 days and haven’t, you know, 

been able to meet with economists and sort through the specifics 

of this market. 

It is likely that, as economy—if we’re able to get out of this recession and get away from the financial crisis, the commodity prices 

will move and I’m not saying where, but a lot will change in the 

economy, as well. 

Senator TESTER. Being a farmer, I don’t mind having commodity 

prices go up. I can tell you that the price of gasoline at the pump 

in Montana over the last 6 weeks has probably went up a buck a 

gallon. I don’t see that kind of increase at the barrel level. I can 

still hear about ships floating around out in the ocean full of oil. 

I can’t make any sense of what’s going on and what further frustrates me is that last year, during the last Congress, we had people 

in, and you’re right, it was a multifaceted thing, but very, very few 

people would step up to the plate last year and say part of this— 

a good part of this is caused by speculation in the marketplace. 

It was all supply and demand, supply and demand, supply and 

demand, and that was part of it, but I think a good part of it was 

just flat speculation and greed. 

Mr. GENSLER. Senator Tester, as I just mentioned to Senator Collins before you arrived, I believe that index investors, hedge funds, 

and other pension and financial investors were a contributing factor in this asset bubble of last year. I just haven’t been able to 

tease out exactly what’s happened in my first 6 days. 

Senator TESTER. I look forward to further communication, either 

in committee or outside the committee, on that issue because I 

think it’s really important. I think it’s really important that we 

make sure that we have honest markets here. 

Mr. GENSLER. I fully agree with that. 

MERGER

Senator TESTER. Okay. I asked a question to Secretary Schapiro 

about the discussions of future roles of your agency and the SEC 
53 

as we conduct a regulatory modernization effort, if they were combined, if CFTC were combined with SEC. 

Can you just tell me some of the challenges, opportunities, possible consequences? 

Mr. GENSLER. You said if. 

Senator TESTER. That’s right. 

Mr. GENSLER. Well, thank you for your question, Senator. I think 

whether it’s in Government or in commerce, it’s important to consider that a merger just for merger’s sake is probably not much 

reason to do that, whether it’s in Government or in commerce. 

Senator TESTER. Yeah. 

Mr. GENSLER. I think some of the challenge is that each of these 

agencies, agencies that date back to the 1930s, have a mission to 

protect against fraud manipulation but with different missions. 

At the CFTC, its core was around farmers and ranchers, which 

you know a great deal about, to protect their markets so they can 

hedge a risk, buy the seed and plant a crop knowing that the market pricing mechanism is honest. 

That’s at the core of the CFTC and if, for any reason, Congress 

and the President working together wanted to merge these agencies, which again I’m saying merger for merger’s sake probably 

isn’t it, we’d have to really protect that root mission, that we’re 

protecting the pricing mechanism for farmers, ranchers, commercial users, all the users of the futures and derivatives marketplaces 

that the CFTC oversees. 

Senator TESTER. Okay. If the President’s working group recommends combining the two agencies, if again, and you believe 

that they should be separated, would you support the working 

group’s regulatory modernization proposal? 

Mr. GENSLER. I chair an independent regulatory agency. My responsibility, I think, to the American public would be to tell you 

what I believed at that time. So I think I would speak out openly 

and share with this subcommittee and the rest of the Congress 

what I thought. 

DERIVATIVES REGULATION

Senator TESTER. All right. Good. Derivatives. You’ve been involved in a conversation on regulating or deregulating derivatives 

for over a decade in past positions that you’ve held. 

Could you give me a quick synopsis, because I’m already out of 

time, on how your opinion of derivatives and the regulation has 

evolved over the last 5 to 10 years? 

Mr. GENSLER. It has evolved, Senator. I think now that we must 

bring under regulation the over-the-counter derivatives marketplace through two complementary schemes. 

One is the dealers or institutions that actually deal in these 

swaps, if I may call them, and that’s nearly 100 percent of the market, probably in 20 or 25 big institutions. We know their names 

and you’re familiar with them. 

We should police for fraud manipulation. We should get 100 percent of the record, both for standardized and customized swaps and 

set capital standards at the Federal level and margin requirements 

through the dealer side. 
54 

But, in addition, in an additive way, also regulate the markets 

and then we can lower risk, we can lower risk if we have standard 

products go through central clearing and we can promote transparency and this is critical that we promote transparency through 

having regulated exchanges, as well. 

Senator TESTER. Okay. Thank you very much, Mr. Chairman. 

Senator DURBIN. Chairman Gensler, as you look at the volume 

of work that you’re faced with, the new responsibilities, what do 

you think is the—let me state it this way. 

What would you recommend as the optimal number of people 

that you need in your agency to do that job effectively? 

Mr. GENSLER. Under the current authorities, because, of course, 

we’ll work together with Congress and with the rest of the administration on new authorities,—thank you, Senator Tester. 

Under the current authorities, the agency put forward, as Senator Collins said, an appeal letter in February that was speaking 

to—I think it was about 650 full-time people under that $177 million. 

I don’t know yet, again through just 6 days, whether that’s going 

to allow us to fully cover, but I agree with Acting Chairman Dunn 

that it’s more toward that number of people and it may be as high 

as some figures I’ve seen inside that are a little higher than that, 

closer to the 700-person figure. 

ENFORCEMENT PENALTIES: AMOUNT, RECOVERY AND DETERRENCE

Senator DURBIN. When Chairman Schapiro was here, I noted 

that the fees collected by her agency within the marketplace generated about 40 percent more than the annual appropriation for 

her agency. 

Similarly, in your situation, the penalties that have been assessed for wrong-doing and the amounts collected, I’ve seen varying 

estimates of this amount, but they appear to be over the last 8 

years somewhere between $1.5 and $2 billion your annual appropriation, for last year $146 million, in comparison there. 

So could you say to me, I mean, or could we say to those who 

are observing this hearing that when your agency does its job and 

ends up with a trustworthy marketplace, it also is engaged in enforcement actions which bring in more revenue than the actual 

budget of the agency? 

Mr. GENSLER. I think, Mr. Chairman, that the agency—we could 

say to those looking at this is a sound investment of a $160 million 

for the next year of taxpayer money because in helping police these 

markets, enforcing these markets, bringing integrity to the markets, making sure that they’re fairly priced in the marketplace is 

the crucial thing. 

But in addition, you’re right, there are enforcement actions that 

have penalties. The penalties are at least greater than the budget. 

The collections tend to be a little less than that, as you know. 

Senator DURBIN. How well is the CFTC able to measure the deterrent impact of these enforcement actions? 

Mr. GENSLER. It’s a challenge to measure the results, but we believe that the stronger we are in enforcement, just as Chairman 

Schapiro said, in finding some of those cases that you can really 
55 

bring the wrong-doers to bear is critical to make sure that the markets operate better. 

Senator DURBIN. What is your recovery rate? 

Mr. GENSLER. As I understand it, the collections on the large manipulation cases are very high. The collection on the Ponzi schemes 

and fraud cases, unfortunately, is very low because so often those 

individuals behind those cases don’t have any money, but I believe 

it’s somewhere in the 30 to 40 percent when you average out high 

recoveries on complex manipulations and low recoveries on these 

Ponzi schemes. 

Senator DURBIN. I’d like your thoughts, and maybe you can share 

them with me in separate communication, about whether the current penalty structure is in fact at a level consistent with creating 

a deterrent and what additional remedies or instruments you may 

need for that recovery rate to improve, and I understand that, as 

you said, some recovery is going to be extremely difficult. 

But if you would take a step back and look at those two aspects, 

the deterrence and recovery, and give us your thoughts on that, I 

would appreciate that very much. 

Mr. GENSLER. We will follow up with you, Mr. Chairman. 

Senator DURBIN. Thank you. 

Senator Collins. 

DERIVATIVES REGULATION

Senator COLLINS. Thank you, Mr. Chairman. 

Just two final questions from me. Senator Levin and I have introduced a bill that would repeal the language that prohibits the 

Commodity Futures Trading Commission from regulating derivatives, and I understand that the administration’s new proposal 

would give both the SEC and the CFTC new authority to regulate 

derivatives. 

What are your thoughts on this plan and the role of the CFTC 

in the regulation of derivatives? 

Mr. GENSLER. I wish to applaud you and Senator Levin on that 

bill. I believe that we have to have, working with Congress, significant amendments to the Commodities and Exchange Act and seeking the same goal, to bring all the over-the-counter derivatives 

marketplace under regulation. 

I think the Commodity Futures Trading Commission has the 

lead expertise on derivatives. Futures are a form of derivatives and 

these things that are now called over-the-counter swaps are another form of derivatives. 

Working with Chair Schapiro, I’m hopeful that we can present a 

unified front and, as she said, you know, there’s the boundary 

issues are important. 

I think it’s critical that we not have any gaps in regulation, but 

we believe at the CFTC and I believe interest rate swaps, currency 

swaps, commodity swaps, equity swaps, credit default swaps and 

any swaps invented in the future that are just a blip on the radar 

need to come under this regulatory regime. 

There may be areas where a swap is more security-like, like a 

single issuer credit default swap, where, of course, we need multiagency work, insider trading and SEC, you would want very much 

involved in things like that. 
56 

Senator COLLINS. Actually, I would argue that the credit default 

swaps were more like an insurance product and yet they were not 

regulated by State insurance agencies either. 

Mr. GENSLER. They had many insurance attributes. There were 

many lessons, unfortunately, out of this crisis. You were earlier 

asking Chair Schapiro, but I think one of the great lessons of AIG 

was that there was unregulated institutions. That’s why I am for 

regulating all derivative dealers, whether they’re affiliated with 

banks or not. 

But then these products, as you say, credit default swaps, have 

attributes of insurance, like monoline insurance. They have attributes of securities. 

Senator COLLINS. Exactly. 

Mr. GENSLER. They have attributes of derivatives that the CFTC 

is the expert on. 

Senator COLLINS. Which is why we need this council of regulators approach because the problem now is the marketplace is always going to be innovating and we want it to be innovative and 

producing new kinds of products and we need a system where just 

because a product is new does not mean that it falls into a regulatory black hole and no regulator ends up having responsibility 

and no regulator or regulators is looking at the impact across the 

financial system. 

When you think of a credit default swaps situation, here we have 

a new product that grows into the trillions of dollars, jeopardizes 

the entire financial market, and yet it doesn’t fall under securities, 

it doesn’t fall under insurance, it doesn’t fall under the Consumer 

Product Safety—I mean the Commodity Futures Trading Commission. So clearly, we need to resolve that. 

Let me just turn to another loophole that our hearings took a 

look at and that’s the so-called swaps loophole that allows financial 

institutions to evade position limits on commodity contracts that 

regulators are using to prevent unwarranted price swings or attempts at manipulation. 

What should be done to close that loophole? 

Mr. GENSLER. I think that explicit authority should be given to 

the Federal regulators, with the CFTC taking the lead on position 

limits, to bring the over-the-counter derivatives marketplace under 

a regulatory regime: that we regulate all of the dealers to make 

sure that they are not manipulating, that we’re policing fraud, that 

we’re policing position limits, aggregate position limits, as I referred to earlier, that we, amongst the regulators, have an enormous opportunity to see 100 percent of the transactions. 

INTERNATIONAL

Senator COLLINS. Finally, do you have sufficient funds to pursue 

your international responsibilities? 

What I’m thinking of is there is a problem with foreign exchanges and what rules they’re going to play by, particularly if 

they’re dealing with U.S. commodities which they are, and particularly when they have a presence in the United States. 

I don’t know whether that’s an issue you’ve looked at yet, but the 

SEC seems to be far more active in that area than the CFTC is. 
57 

Mr. GENSLER. Well, Senator, you’re right that we’ve had to make 

as an agency tough trade-offs, an agency that shrunk 20 percent 

in the last years, but thankfully with this year we’ll start to move 

back. 

There’s a small Office of International Effort but it’s very small, 

I think four or five people at the CFTC. We do share your concern 

and share the view that we have to make sure that foreign boards 

of trades that are influencing these markets and are in our markets have consistent regulation, come under the position limits and 

other authorities here. 

Though the CFTC has moved forward in this regard, we do think 

that it’s important to work with Congress to embed in statutes 

some additional authorities with regard to foreign boards of trade. 

Senator COLLINS. Thank you. Thank you, Mr. Chairman. 

Senator DURBIN. Thank you, Senator Collins. 

ADDITIONAL COMMITTEE QUESTIONS

Chairman Gensler, thanks for your testimony. We’re going to 

keep the hearing record open until next Wednesday, June 10, at 12 

noon for subcommittee members to submit statements and/or questions, and we ask that the information we requested you do your 

best to comply with at a convenient time. 

[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

MOST SERIOUS MANAGEMENT CHALLENGES IDENTIFIED BY INSPECTOR GENERAL

Question. The Reports Consolidation Act of 2000 requires the Inspector General 

to summarize the ‘‘most serious’’ management and performance challenges facing 

the Commodity Futures Trading Commission (CFTC). In the Inspector General’s assessment report of November 14, 2008, the Inspector General identified two management challenges for fiscal year 2009. 

The first concern is with the Modernization of Electronic Market Surveillance. 

The Inspector General explains that while market surveillance has always been an 

integral part of CFTC operations, the past years have witnesses the transformation 

of futures trading from an open outcry trading floor based system to an electronic 

system. In fact, in 2008, electronic trading accounted for 84 percent of total exchange traded derivatives. 

The second area is the Efficient Acquisition and Integration of Skilled Human 

Capital. The Inspector General cites the fact that recent economic turbulence has 

simulated an interest in applying the historically successful centralized clearing 

mechanism to the bilateral and complex swap markets. The Inspector General expressed skepticism that the CFTC currently has the human capital to monitor these 

complex markets and that situation may demand review of existing hiring procedures. 

Chairman Gensler, have you had an opportunity to review the Inspector General’s 

analysis? 

What is your reaction? 

What is your plan for prioritizing these two key items in your management agenda? 

Answer. Yes, certainly the need to modernize electronic market surveillance will 

require additional technological capabilities. It is also apparent that if the Congress 

entrusts the Commission with significant additional responsibilities, the Commission will need to expand its staff and pay particular attention to needed skill sets. 

The Congress provided the Commission with substantial additional funds for fiscal 

year 2009. At this point we have almost completed hiring the new staff funded for 

this year. I asked the staff to provide the following information on the modernization of electronic market surveillance: 
58 

In late 2008, the CFTC contracted with the Promontory Group to review the market surveillance program. Commission staff is finalizing its assessment of the Promontory report and preparing recommendations for the Commission. The objective is 

to ensure that the CFTC has an effective approach to surveillance, from both a programmatic and operational perspective. 

The CFTC also is in the process of modernizing its trade surveillance system in 

order to perform its statutorily mandated oversight functions and to keep pace with 

the explosive growth in electronic trading. In 2007, the CFTC’s Division of Market 

Oversight (‘‘DMO’’) and Office of Information and Technology Services (‘‘OITS’’) embarked on a multi-year plan to develop a new trade surveillance system (‘‘TSS’’), to 

replace the Commission’s antiquated system. TSS is designed as a database of exchange data maintained by the Commission which can be evaluated with off-theshelf alert and analysis tools. A contract was awarded to Actimize in 2008 to deliver 

such a product. OITS expects to have all of the exchanges connected to the Actimize 

tool by the end of the first quarter 2010. 

A challenge to the Commission in implementing TSS has been a lack of data uniformity. To resolve this problem, in May 2007, DMO formed a subcommittee 

through the Joint Compliance Committee to discuss and formulate a plan for using 

‘‘FIXML’’ as a standardized format for trade data submitted to the Commission and 

to formulate a FIXML transition plan. In December of 2008, a schedule was presented to all exchanges for submission of trade data in FIXML by the end of 2009. 

The Commission has also been working to better link its trade surveillance and 

market surveillance systems. Currently, the Commission is unable to connect accounts identified by large traders with their intra-day transactions. To resolve this 

problem, the Commission has issued an advanced notice of proposed rulemaking to 

solicit comments on the collection of account ownership and control information from 

exchanges. Such information would be used to improve DMO surveillance by serving 

as an adjunct to the CFTC’s ISS (large trader position data) and TSS databases. 

ADEQUACY OF FUNDING TO PERMIT PAY PARITY

Question. In response to the 1980s banking crisis, Congress passed the Financial 

Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) (Public Law 

101–73) which provided for pay parity among federal financial regulatory agencies. 

The Commodity Futures Trading Commission was granted comparable pay authority (Public Law 107–171) with other financial agencies to level the playing field 

with a goal of attracting the best and brightest talent. Despite the authorization, 

the CFTC has not been fully funded to the level of comparable agencies covered 

under the law. 

During recent years, the Commodity Futures Trading Commission’s budget situation has resulted in hiring freezes and has not permitted a meaningful review by 

the IG to determine its effect on employee retention and whether new hires are appreciably more experienced or better qualified. 

Chairman Gensler, what has been the practical impact of the CFTC’s not having 

sufficient annual budget authority to accomplish pay parity for your workforce? 

Answer. The Commission is currently near pay parity with the other FIRREA 

agencies with regard to pay, having implemented merit pay and new pay ranges. 

There are several areas where we need to align the Commission with the FIRREA 

agencies; these include personnel benefits and possibly some job reclassification. 

The implementation of pay parity without sufficient budget authority has had the 

same practical effect as meeting all other resources challenges without sufficient 

budget authority—the Commission froze and/or restricted hiring and deferred investment in Information Technology. These steps were taken after exhausting all 

other savings from administrative efficiencies. 

Question. To what extent has the CFTC’s inability to compensate staff at comparable levels led to departures of experienced personnel to positions in other Federal financial regulatory agencies? 

Answer. Since the Commission is currently comparable with other FIRREA agencies with regard to pay, and nearly comparable with regard to benefits, the Commission is no longer losing, as it once did, a significant number of staff to other financial regulatory agencies as a result of inadequate compensation. However, those 

past losses tell us it is important that the Commission maintain comparability with 

these agencies. 

Question. What funding level would permit the CFTC to move toward providing 

pay parity? 

Answer. The fiscal year 2010 budget includes approximately $1.4 million that 

would permit the Commission increased contribution to personnel benefits package 

thereby making it more comparable to FIRREA agencies. Funding would also permit 
59 

the Commission to reclassify selected positions if an ongoing review concludes that 

is appropriate to support parity and to improve recruitment and retention. 

Question. As CFTC Chairman, what are your goals in this area? 

Answer. As a new Chairman I look forward to reviewing the findings and recommendations of the Commission Pay Parity Governance Committee before advancing any new goals of my own. However, I am committed to ensuring that the Commission receives adequate funding to stay comparable with our fellow financial regulatory agencies. 

Question. When does the CFTC plan to institute a student loan repayment program as a recruitment and retention tool? 

Answer. Our goal is to implement a student loan repayment program by the end 

of the year. 

Question. What resources would that require? 

Answer. We have initially set aside $200,000 for the implementation of this program. 

DERIVATIVES MARKET REGULATORY REFORM

Question. Derivatives—contracts between two investors betting on whether a 

stock, bond, or other security will go up or down in value—has ballooned into the 

world’s largest trading market, estimated to be in the tens of trillions of dollars. 

Much of the activity is not currently under a regulatory apparatus. 

This market has also helped catalyze the current economic crisis. Losses on one 

type of derivative known as credit-default swaps helped topple American International Group (AIG), prompting a government bailout that has grown to $180 billion. 

On May 13, President Obama unveiled a plan to regulate the derivatives market. 

This proposal includes new rules to restrict banks, hedge funds, and other investors, 

and has four goals: (1) force the trade of most derivatives through a regulated clearinghouse and require traders to report activities and hold a minimal level of capital 

to cover losses; (2) improve oversight by ensuring clearinghouses and firms dealing 

in derivatives provide copious information to regulators about their trades; (3) empower regulators to force traders to submit detailed information and pursue cases 

of fraud and manipulation; and (4) prevent derivatives from being marketed to 

groups that may not understand their complexities. 

How would expanded derivatives regulation impact the CFTC workload? What 

budgetary considerations need to be considered? 

Answer. We must establish a comprehensive regulatory regime to cover the entire 

over-the-counter derivatives marketplace. This will help the American public by: (1) 

lowering systemic risk; (2) providing transparency and efficiency in markets: (3) ensuring market integrity by preventing fraud, manipulation, and other abuses; and 

(4) protecting the retail public. I envision this will require two complementary regimes—one for regulation of the dealers and one for regulation of the market functions. 

The Department of the Treasury, on behalf of the Administration, has submitted 

legislation to Congress to regulate the over-the-counter (OTC) markets. Although 

some improvements are appropriate to ensure that we best meet the goals stated 

above, the Administration’s comprehensive proposal is consistent with regulatory reforms that the CFTC has proposed in testimony to Congress. The Administration’s 

proposal will lower risk by requiring capital and margin on dealers and mandatory 

clearing of all standardized products. It will enhance market integrity by protecting 

against fraud, manipulation, and other abuses and establishing new authorities to 

set aggregate position limits. It will promote transparency and market efficiency by 

requiring recordkeeping and reporting for all derivatives and requiring that standardized derivatives be traded on transparent trading platforms. 

Of course there would be a need for some additional resources at the CFTC to 

handle this expanded regulatory obligation. Until the nature and scope of the regulation of OTC derivatives markets is determined by the Congress, the resources necessary for implementation cannot be predicted with certainty. 

Whatever the cost of regulation, it will pale in comparison to the cost of doing 

nothing. If the current financial crisis has taught us anything, it is that that the 

derivatives trading activities of a single firm can threaten the entire financial system. The costs to the public from the failure of these firms has been staggering, 

$180 billion of American taxpayer financial support for AIG alone. The AIG subsidiary that dealt in derivatives was not subject to any effective federal regulation. 
60 

MEMORANDUM OF UNDERSTANDING BETWEEN CFTC AND SEC

Question. Last year (March 11, 2008), then-Commodity Futures Trading Commission (CFTC) Acting Chairman Walter Lukken and then-Securities and Exchange 

Commission (SEC) Chairman Christopher Cox entered into a formal ‘‘Memorandum 

of Understanding’’ (MOU) setting forth several principles designed to guide interagency collaboration. The premise of this agreement was to seal some of the regulatory gaps and better accommodate new products that blur the lines between the 

futures and the securities worlds. 

The MOU establishes a permanent regulatory liaison between the CFTC and 

SEC; requires quarterly joint meetings of staff; sets up a framework for extensive 

information sharing and exchange confirms existing enforcement policies; creates 

guidelines for new financial products that combine elements of securities, futures, 

or options; and addresses jurisdictional overlaps. 

Chairman Gensler, can you describe some of the benefits to the CFTC since entering into the MOU with the SEC in March 2008? 

Answer. The MOU has provided a formal mechanism to assure dialogue among 

senior staff of the two agencies regarding the treatment of novel derivative products 

and other issues of mutual regulatory interest. In addition, following on the MOU, 

the CFTC and SEC Divisions of Enforcement undertook efforts to improve coordination and cooperation. Specifically, in the summer of 2008, the CFTC and SEC Divisions of Enforcement appointed senior staff to serve as liaisons for their respective 

agencies, and also established quarterly meetings to discuss issues related to investigation and litigation dockets for matters of common concern. The enhanced cooperation between the CFTC and SEC Divisions of Enforcement is also reflected in 

the May 2009 joint training session for enforcement staff in which experts from both 

agencies discussed strategies regarding the agencies’ coordination, investigation and 

prosecution of several recent Ponzi fraud matters. 

Question. What impediments hinder CFTC’s ability to oversee and regulate new 

products that have mixed characteristics of futures and securities? 

Answer. Neither the CFTC nor the SEC currently has regulatory jurisdiction with 

respect to OTC derivatives transactions, some of which are relevant to both the futures and the securities markets. In areas where jurisdiction does exist, further enhanced communication between the CFTC and SEC staff—specifically, ongoing communications regarding whether activity detected by one agency implicates the jurisdiction of the other agency—will improve the CFTC’s ability to oversee and regulate 

such new products. 

Question. How do intend to collaborate with SEC Chairman Schapiro in advancing 

the goals of this MOU? 

Answer. In addition to direct communications with Chairman Schapiro, as we 

have done in discussing regulatory reform with respect to OTC derivatives, I anticipate that Chairman Schapiro and I will actively direct and guide our respective 

staffs to fulfill the objectives of the MOU. We will work cooperatively and collaboratively to remove unnecessary duplication and other regulatory roadblocks to innovative market developments, while assuring that there are no regulatory gaps that 

endanger the public interest. The agencies’ focus on this goal is currently reflected 

in our joint harmonization project, including the unprecedented joint meetings recently held by our two Commissions. 

Question. Do you envision the need for any modifications to the agreement to 

strengthen the current interagency relationship? 

Answer. The MOU was intended to be a ‘‘living’’ document. Just as the agencies 

have entered into an Addendum to the MOU with respect to novel derivative products, additional Addenda may be considered as the agencies address new issues and 

harmonization on a going-forward basis. 

ENFORCEMENT ACTIONS TO PRESERVE MARKET INTEGRITY AND PROTECT MARKET USERS

Question. Detecting and deterring against illegitimate market forces requires 

CFTC’s steady vigilance and swift response. Over the past 8 years, CFTC has assessed over $2 billion in civil penalties against perpetrators of various fraud 

schemes. For instance: 

—To address manipulation, attempted manipulation, and false reporting in the 

energy arena, the CFTC filed 43 enforcement actions against 73 entities or individuals in the December 2001 to September 2008 period resulting in $445.5 million in assessed civil penalties. 

—To address misconduct in connection with commodity pools and hedge funds by 

unscrupulous and unregistered operators and advisors, from October 2000 and 

September 2008, the CFTC filed 73 enforcement actions against 24 entities, 

with $564.13 million in penalties assessed. 
61 

—To combat the problem of foreign currency (forex) fraud, between December 

2000 and September 2008, on behalf of nearly 26,000 affected customers, the 

CFTC has filed 98 enforcement actions, charging 374 entities or persons, culminating in over $562 million in civil monetary penalties and $454 million in restitution. 

How well is the CFTC able to measure the deterrent effect of these enforcement 

actions? 

Answer. Measuring the deterrence effect of enforcement actions remains a challenge to the CFTC and other law enforcement agencies. The CFTC has undertaken 

a number of actions to increase deterrence as noted below by staff: 

—The CFTC maximizes the deterrent effect of its enforcement program through: 

the filing of enforcement actions, cooperative enforcement, public outreach and 

investor education. In cases of ongoing fraud, the CFTC’s objective is to bring 

its enforcement action as quickly as practicable in order to stop the fraud, freeze 

assets, and preserve books and records. The CFTC also leverages the impact of 

its enforcement actions by working cooperatively with federal and state criminal 

and civil authorities who often bring their own actions based upon the conduct 

that violates the Commodity Exchange Act and CFTC Regulations. Whenever 

the CFTC files an enforcement action and obtains a final judgment in one of 

its enforcement actions, it publicizes these events through press releases and 

media interviews. To alert market users and the public to the dangers of fraud, 

the CFTC has issued a number of Consumer Advisories warning the investing 

public of potential risks and scams, and has posted these Advisories on its 

website. The CFTC also seeks to maximize the deterrent effect of its enforcement program by tracking industry trends. For example, the CFTC’s Acting Director of Enforcement gave Congressional testimony in June 2009 regarding the 

observed uptick in fraud involving solicitation of retail customers for purported 

off-exchange transactions in precious metals, and certain energy and agricultural products. The fraudsters appear to have drafted customer agreements to 

make them appear to be spot contracts outside of CFTC jurisdiction and not futures contracts covered by the Commodity Exchange Act. 

—The CFTC remains committed to developing improved performance measures to 

reflect the deterrence effect of its enforcement program. For example, the CFTC 

has requested funds every year since the fiscal year 2007 OMB budget request 

thru fiscal year 2010, to study the performance measurement issue, however, 

funds, to date, have not been approved. 

Question. How rapidly are you able to collect restitution, disgorgement of ill-gotten gains, and civil monetary penalties imposed against violations of the federal 

commodities laws? 

Answer. When the CFTC files enforcement actions that include allegations of 

fraud, its general practice is to seek a statutory restraining order to immediately 

freeze the defendants’ known assets, including trading and bank accounts, homes 

and other real property and cars. These assets are then preserved for purposes of 

customer restitution or disgorgement at the conclusion of a successful prosecution. 

The CFTC Division of Enforcement may also request that the federal district court 

order defendants to make an accounting, which assists the CFTC in tracking money 

flows and identifying additional assets for recovery. The CFTC also names as relief 

defendants in its enforcement actions persons known to have received funds derived 

from the fraud and to which they have no legitimate claim, and seeks to freeze and 

recover these funds for return to customers as well. At the conclusion of litigation, 

and in the event of a remaining judgment, the Commission follows an established 

protocol to ensure that matters are appropriately referred to the Department of Justice and Department of the Treasury for collection. 

Question. What is the annual recovery rate? 

Answer. Staff has supplied the following information: 

Below is a table that sets out the CFTC’s annual recovery rate for civil monetary 

penalties assessed for fiscal years 1992 through 2008. 

CIVIL MONETARY PENALTIES 1

[Fiscal year 1992-fiscal year 2008] 

Fiscal year Penalties imposed Penalties collected 

1992 .................................................................................................................................... $3,207,277 $2,285,664 

1993 .................................................................................................................................... 3,313,100 3,514,715 

1994 .................................................................................................................................... 4,112,407 3,134,266 

1995 .................................................................................................................................... 11,201,100 9,430,239 

1996 .................................................................................................................................... 1,335,000 1,526,000 
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CIVIL MONETARY PENALTIES 1—Continued 

[Fiscal year 1992-fiscal year 2008] 

Fiscal year Penalties imposed Penalties collected 

1997 .................................................................................................................................... 4,532,000 1,752,636 

1998 .................................................................................................................................... 132,623,756 125,803,781 

1999 .................................................................................................................................... 85,863,311 22,165,368 

2000 .................................................................................................................................... 179,811,562 3,299,362 

2001 .................................................................................................................................... 16,876,335 3,170,252 

2002 .................................................................................................................................... 9,942,382 5,922,387 

2003 .................................................................................................................................... 110,264,932 87,699,077 

2004 .................................................................................................................................... 302,049,939 122,468,925 

2005 .................................................................................................................................... 76,672,758 34,163,077 

2006 .................................................................................................................................... 192,921,794 12,364,509 

2007 .................................................................................................................................... 345,614,139 12,137,848 

2008 .................................................................................................................................... 234,835,121 140,745,252 

1 The discrepancy between the amount of civil penalties imposed and the amount collected is accounted for by the following factors: (1) 

when courts order the defendants to both pay restitution to victims and a civil monetary penalty to the Government, established Commission policy directs available funds to satisfy restitution obligations first; (2) in fraud actions, it is not uncommon that the proceeds of the fraud have been dissipated and/or that the penalty far exceeds the defendants’ represented financial ability to pay; (3) delinquencies assessed in default proceedings against respondents who are no longer in business and who cannot be located or are incarcerated; (4) penalties imposed 

in one year may not become due and payable until the next year; (5) a penalty may be stayed by appeal; (6) some penalties call for install- ment payments that may span more than 1 year; (7) penalties have been referred to the Attorney General for collection; and (8) collection may still be in process. 

Question. What has been the impact of more sophisticated information technology 

to monitor and detect fraud more readily? 

Answer. In the enforcement arena for fraud cases, information technology assists 

in asset tracing, account reconstruction, and electronic data recovery of financial 

records. Improvements in information technology have improved the CFTC’s search 

capability for evidence of illegal activity involving Internet websites, instant messages, e-mail and audio. 

In the regulatory arena, as discussed above, the CFTC is currently implementing 

its new trade practice surveillance system (TSS). TSS is designed as a database of 

exchange trade data maintained by the Commission upon which off-the-shelf alert 

and analysis tools can be connected. A contract was awarded to Actimize in 2008 

to deliver an alert and analysis tool that has the capability to perform sophisticated 

pattern recognition and data mining to automate basic trade practice surveillance, 

and to detect novel and complex abusive practices. TSS also will fill a vacuum in 

inter-market surveillance which only the Commission can address, e.g., where 

NYMEX and NYSE Liffe both list metals contracts. 

Question. Are there any statutory or administrative impediments that prevent the 

CFTC from doing more to combat fraud? 

Answer. As noted above, the CFTC has observed an upswing in retail customer 

complaints regarding potential fraud involving off-exchange transactions in precious 

metals, energy products and agricultural commodities. It appears that fraudsters 

are drawing upon the adverse precedent of a line of cases under CFTC v. Zelener, 

373 F.3d 861 (7th Cir. 2004), in which the Seventh Circuit held that certain contracts were spot transactions beyond the jurisdiction of the CFTC. Congress addressed this problem in the CFTC Reauthorization legislation included in the 2008 

Farm Bill with respect to Zelener-type foreign currency transactions. A similar fix 

is needed if the CFTC is to effectively prosecute boiler rooms offering Zelener-type 

contracts in metal, energy, and other commodity contracts to retail customers (and 

is included in the Administration’s proposed OTC derivatives reform legislation). 

In addition, in the wake of the decision in CFTC v. Wilshire, 531 F.3d 1339 (11th 

Cir. 2008), defendants in fraud cases increasingly are asserting that federal courts 

lack authority under the Commodity Exchange Act to award restitution based on 

customer losses suffered as a result of the fraud. Wilshire held that the proper 

measure of restitution is the gain to the wrongdoer, rather than the losses suffered 

by customers. In cases where the fraudster retains only a small portion of the monies fraudulently induced from customers, this limit on restitution threatens the 

CFTC’s ability to obtain make-whole relief for defrauded customers. 

Staff advises that additional statutory measures that may increase the CFTC’s 

ability to combat fraud include, among others, the following: 

—Amendment of the Privacy Act to clarify that CFTC investigators may seek promotional material and verbal sales solicitations without identifying themselves 

as CFTC employees or providing personal information as to their true identity. 
63 

—In Section 4n of the Commodity Exchange Act, provide authority to require accountants to maintain records of audit activity concerning commodity pools that 

would be available for inspection by the CFTC. 

—Clarify that the CFTC need not show criminal intent in actions based on conversion under Section 9(a)(1) of the Commodity Exchange Act. 

Question. Is the current penalty structure designed to serve as an effective deterrent? 

Answer. Yes. Commission staff supplies the following background: 

—Section 6(e) of the Act, 7 U.S.C. § 13a–1(d), instructs the Commission to impose 

a civil monetary penalty that is appropriate to the gravity of the violation. Commission precedent has long recognized the importance of deterrence in preventing violations, most recently in In re DiPlacido [Current Transfer Binder] 

Comm. Fut. L. Rep. (CCH) ¶ 30,970 (CFTC Nov. 5, 2008) (‘‘[g]iven the gravity 

of DiPlacido’s offenses and potential maximum fine, the focus of the Commission’s analysis shifts to assessing a specific penalty appropriate to the level of 

gravity and suitable to deter future violations’’). Indeed, the Commission signaled the paramount role that deterrence plays when it emphasized that ‘‘[i]n 

imposing monetary sanctions, the primary focus of the Commission’s analysis 

has been deterrence.’’ In re Murlas, [1987–1990 Transfer Binder] Comm. Fut. 

L. Rep. (CCH) ¶ 24,440 at 35,929 (CFTC Apr. 24, 1989) (emphasis added). 

—Also, in last year’s CFTC Reauthorization legislation, Congress increased the 

maximum civil monetary penalty for manipulation, attempted manipulation, 

and false reporting to $1 million per violation. See Title XIII of the Food, Conservation and Energy Act of 2008, Pub. L. No. 110–246, 122 Stat. 1624 (June 

18, 2008); 7 U.S.C. § 13(a). 

Question. What additional remedies or authorities might be useful to boost your 

recovery rate? 

Answer. Staff has advised that additional statutory measures that could potentially boost the CFTC’s recovery rate include, among others, the following: 

—Similar to provision for non-payment of penalties imposed in CFTC administrative enforcement actions (see Section 6(e)(2) of the Commodity Exchange Act), 

provide that a defendant’s non-payment of civil monetary penalties imposed in 

enforcement actions in federal court shall result in the non-paying defendant 

automatically being prohibited from trading and automatically suspending any 

applicable registration until the defendant pays the full amount of the penalty, 

with interest to the date of the payment. 

—Provide that collection of judgments and orders in fraud actions shall not be 

subject to State homestead exemptions or other State or local impediments to 

collection. 

—Provide that disgorgement and restitution awarded in CFTC enforcement actions are non-dischargeable in bankruptcy. 

—Add disgorgement as an available sanction in administrative enforcement proceedings. 

PERFORMANCE GOALS/MEASURING OUTCOMES

Question. The Commodity Futures Trading Commission (CFTC)’s performancebased budget for fiscal year 2010 delineates four specific goals tied to the agency’s 

overall mission. For each of the goals, several outcomes are specified. 

First Goal.—Of the $160.6 million in appropriations requested for fiscal year 

2010, the CFTC would designate $48.2 million (or 30 percent of the total funding) 

and 185 FTE to meet the first goal—to ensure the economic vitality of commodity 

futures and options markets. 

The outcomes to be achieved as a result of the investment made related to this 

goal are markets that accurately reflect the forces of supply and demand for the underlying commodity, are free of disruptive activity, and are effectively and efficiently 

monitored to ensure early warning of potential problems or issues. 

How does (or will) the CFTC measure whether and how well these outcomes are 

achieved? 

Answer. The Commission has developed nine performance measures intended to 

measure progress in achieving the stated outcome objective. The performance results along with an annual performance analysis and review are included in pages 

46–55 of the Fiscal Year 2008 Performance and Accountability Report available on 

the CFTC website at: www.cftc.gov/aboutthecftc/cftcreports. 

Question. How does the CFTC intend to meet a performance goal of ‘‘no price manipulations or other disruptive activities that would cause loss of confidence or negatively affect price discovery or risk shifting’’? 
64 

Answer. This goal is fundamentally tied to the Commission’s mission and is a priority of the Commission market surveillance and enforcement efforts as noted by 

staff below: 

—Continuous monitoring of market activity is the principal way the Commission 

seeks to protect the economic function of the markets. Effective market surveillance requires sufficient staff with expertise in each of the diverse markets 

under the Commission’s jurisdiction. The Commission takes preventive measures to ensure that market prices accurately reflect fundamental supply and demand conditions, including the routine daily monitoring of large trader positions, futures and cash prices, price relationships, and supply and demand factors in order to detect threats of price manipulation. 

—As discussed above, the CFTC maximizes the deterrent effect of its enforcement 

program through: the filing of enforcement actions, cooperative enforcement, 

public outreach and investor education. The CFTC also leverages the deterrent 

impact of its enforcement actions by working cooperatively with other federal 

criminal authorities who often bring their own actions based upon the conduct 

that violates the Act and CFTC Regulations. 

Question. When it comes to a performance goal of ‘‘improving effectiveness and efficiency of market surveillance’’ what indicators will be used to determine if you 

have indeed reached this goal and how well? What is the baseline from which 

progress is to be measured? 

Answer. A strategic priority of the Commission is to enhance the Commission’s 

technological capability, improve data standards, and enhance in-house human analytical and decisionmaking capability—each in order to recognize, understand and 

adapt to market changes early on. Indicators of success will be progress in achieving 

the following tasks: upgrading ISS to get more timely market position information 

and to integrate trading data with position data; developing capability to provide 

real-time margin and settlement information; promoting data standards throughout 

the industry; developing and implementing sophisticated trade surveillance systems; 

developing automated capability to analyze and integrate off-exchange data as it relates to surveillance and investigations; developing a recruitment plan to address 

required skills; identifying needed competencies and developing a training plan that 

empowers employees to react quickly in understanding and resolving regulatory 

matters. Each of these tasks represents a strategic need of the Commission that is 

not currently being met adequately. 

Question. Second Goal.—Of the $160.6 million in appropriations requested for fis- cal year 2010, the CFTC would designate $42.9 million (or 27 percent of the total 

funding) and 160 FTE to meet the second goal—to protect market users and the 

public. The three outcomes to be achieved as a result of the investment made related to this goal are better detection and prevention of violations of commodities 

laws, high standards for professionals, and expeditions handling of customer complaints. 

How does the CFTC plan to increase the probability of violators being detected 

and sanctioned? 

Is this readily measurable? 

What is the baseline against which future performance will be gauged? 

Answer. Having sufficient resources to pursue violations is key to increasing the 

probability of violators being detected and sanctions. The Commission has developed 

four performance measures to assess progress in detecting violators. The performance results along with an annual performance analysis and review are included in 

pages 58–63 of the Fiscal Year 2008 Performance and Accountability Report available of the CFTC Web-site at: www.cftc.gov/aboutthecftc/cftcreports. 

Like all enforcement programs, we face a challenge in establishing overall performance measures that indicate the percentage of violative activity deterred, since 

no way has yet been devised to measure the total universe of violative activity that 

exists. The Commission keeps extensive records on the number of investigations 

opened and cases filed during the year, the number and amount of sanctions obtained, as well as the number of cases filed by criminal and civil law enforcement 

authorities that included cooperative assistance from the Commission. However, 

these statistics do not measure complexity of the matters opened and filed. For example, the Commission met its performance target in fiscal year 2008 with regard 

to the number of enforcement investigations opened. However, commencing in 2002, 

the complexity of Commission investigations has increased substantially over prior 

years (including the Commission’s investigation of alleged energy market manipulation). As a result of these investigations, the complexity of the Commission’s cases 

filed and litigated also has increased substantially since 2002. The Commission’s 

performance target tries to take into account both of these factors but they cannot 

be predicated with precision. 
65 

Question. How will the CFTC ensure there are ‘‘zero unregistered, untested, or 

unlicensed commodity professionals (unless they are exempt from registration)’’? 

Answer. There are several complementary aspects to the Commission’s program 

that ensure compliance with registration requirements as summarized by staff 

below: —Registration and NFA Membership.—Under Section 17 of the Commodity Exchange Act (‘‘CEA’’), the National Futures Association (‘‘NFA’’) performs registration functions on behalf of the CFTC. NFA registers members through its 

Online Registration System (‘‘ORS’’) a web-based registration and membership 

filing and processing system. With certain exceptions, all persons and organizations that intend to do business as futures professionals must register under the 

CEA. The primary purposes of registration are to screen an applicant’s fitness 

to engage in business as a futures professional and to identify those individuals 

and organizations whose activities are subject to federal regulation. 

In addition, all individuals and firms that wish to conduct futures-related 

business with the public must apply for NFA membership or associate status. 

Mandatory membership serves an important function: NFA Bylaw 1101 prohibits members from conducting customer business with non-NFA members. —Testing.—Individuals who are applying for NFA membership as a sole proprietor FCM, IB, CPO, CTA or for registration as an AP of any of these categories 

must satisfy proficiency requirements. Applicants generally must have passed 

the National Commodity Futures Examination (NCFE or Series 3) within the 

2 years preceding their application. —Ethics Training.—The CFTC Statement of Acceptable Practices (see Appendix 

B to Part 3 of the Commission’s regulations) for ethics training allows flexibility, permitting firms to tailor their training programs to best suit their particular operations. In an Interpretive Notice to its Compliance Rule 2–9, NFA 

states that good business practice dictates that employees receive periodic training to keep them cognizant of new developments in technology, commercial 

practices and regulations, and their ethical implications. —Oversight.—NFA conducts ongoing audits of its registrants for compliance with 

NFA rules. In turn, Commission staff pursues formal and ongoing oversight of 

NFA’s compliance and registration programs. Formal oversight activities involve 

periodic reviews of NFA programs and inspection of records and interviews with 

NFA staff. 

NFA pursues statutory disqualification and other disciplinary matters 

through Registration, Compliance & Legal Committee (‘‘RCLC’’) cases. On a 

quarterly basis, Commission staff meets with NFA to provide guidance on registration issues generally, and to review the past quarter’s RCLC cases. 

These oversight activities are designed to protect market participants and the 

public interest by ensuring that persons who deal with customers and those who 

handle customer orders and funds meet the standards for fitness and integrity established under the Commodity Exchange Act. 

Question. What type of tracking system is in place to demonstrate that this outcome has been achieved? 

Answer. Currently, there are more than 67,000 individuals and companies registered with the CFTC in some capacity. Although it would be impossible to track 

the negative (i.e., that there are unregistered individuals conducting business), 

through its oversight of NFA’s registration program, the Commission ensures both 

that qualified applicants are properly registered, and that unqualified applicants (or 

registrants) are denied registration (or have their registration revoked). Through the 

quarterly meetings of the Registration Working Group involving CFTC and NFA 

staff, the Commission ensures that standards for such actions are applied consistently, and gives guidance when questions arise. 

Question. With regard to meeting timeframes for resolution of customer complaints, how does the CFTC track disposition of complaints, proceedings, and appeals in order to show that the targets are achieved in the caseload? 

Answer. The various Divisions at the CFTC (Enforcement, Clearing and Intermediary Oversight, Market Oversight, and General Counsel’s Office) each operate 

an ‘‘officer of the day program’’ to receive, and address or refer, inquiries (including 

complaints) from members of the public. The Office of Proceedings handles and 

tracks the disposition of adjudicatory matters at the hearing level. With respect to 

adjudicatory appeals to the Commission, pending cases are maintained with the 

Secretariat, with monthly status reports issued by the Office of General Counsel. 

Question. Third Goal.—Of the $160.6 million in appropriations requested for fiscal 

year 2010, the CFTC would designate $38 million (or 24 percent of the total funding) and 144 FTE to meet the third goal—to ensure market integrity in order to 

foster open, competitive, and financially sound markets 
66 

The outcomes to be achieved as a result of the investment made related to this 

goal are that clearing organizations and firms holding customer funds have sound 

financial practices, commodity futures and options markets are effectively self-regulated, markets are free of trade practice abuses, and the regulatory environment is 

flexible and responsive to evolving market conditions. 

How will the CFTC work to ensure zero loss of customer funds as a result of 

firms’ failure to adhere to regulations and ensure that no customers are prevented 

from transferring funds from failing firms to sound firms? 

What mechanisms does the CFTC have to monitor self-regulatory organizations 

to ensure that no funds are lost as a result of the failure of SRPs to comply with 

their rules? 

Answer. Again, the Commission has several complementary programs that address the protection of customer funds held by FCMs) and derivatives clearing organizations (‘‘DCOs’’). They are summarized by staff below: —Protection of Customer Funds—Statute and Regulations.—The Commodity Exchange Act and Commission regulations require each FCM to segregate from its 

own assets all money, securities or property deposited by customers to margin 

or secure futures and option on futures positions traded on designated contract 

markets or funds that accrue to customers from these open positions. Each FCM 

also must set aside in accounts (i.e., ‘‘secured accounts’’), separate from its proprietary accounts, sufficient funds deposited by customers trading on nonUnited States futures markets to meet its obligations to customers trading on 

foreign markets. —Notification.—Commission regulations also require each FCM to perform daily 

calculations demonstrating compliance with the segregation and secured 

amount requirements. Any FCM that does not maintain sufficient funds in segregated accounts or in secured accounts, as applicable, to meet its obligations 

to its customers (i.e., is ‘‘under segregated’’) is required to provide immediate 

telephone notice, confirmed immediately in writing, to the Commission and to 

the FCM’s self-regulatory organization (‘‘SRO’’) that conducts financial surveillance over the firm. —Commission and SRO Responsive Action (Direct Examinations).—Upon receipt 

of a notice, Commission staff work with the applicable SRO to determine the 

facts and to assess whether the situation is a temporary under segregation that 

can be immediately rectified by the FCM infusing additional funds into segregated or secured accounts, or indicative of a more serious issue that may require prompt SRO or Commission action to protect customer funds. In certain 

situations, Commission and/or SRO staff may conduct an immediate onsite examination of the firm’s books and records to assess the FCM’s compliance with 

its financial requirements. —SRO Oversight.—The Commission conducts periodic reviews of SROs’ financial 

surveillance programs. The SROs’ financial surveillance programs include routine examinations of FCMs to assess their compliance with Commission and 

SRO minimum financial requirements and related reporting requirements, including minimum capital requirements and compliance with the segregation 

and secured amount requirements. The Commission and SROs also may conduct an examination of an FCM on an exigent basis in response to an FCM filing a notice that it is not in compliance with the customer funds segregation 

or secured amount requirements. Experience has demonstrated that if the Commission and SROs can react promptly at the initial signs of weakness in the 

financial condition of an FCM, it is more certain that customer funds will be 

protected. In this regard, open futures and options on futures positions may be 

expeditiously transferred to another FCM if the FCM that is experiencing financial difficulties has properly segregated and secured customer funds. 

—Communication With SROs.—Commission staff hold periodic meetings with the 

financial surveillance staff of the SROs for the purpose of discussing emerging 

issues and to coordinate examination procedures and policies. This includes an 

annual review of the detailed SRO audit programs, which are submitted to the 

Commission for review. 

The resources requested by the Commission for the protection of customer 

funds would allow Commission staff to conduct more frequent assessment of the 

SROs’ execution of their financial surveillance programs. Additional resources 

would also allow the Commission to conduct more frequent direct examinations 

of FCMs for compliance with financial and other requirements, including the 

segregation of customer funds. 

—Risk Surveillance Program.—The Commission’s risk surveillance and DCO review programs also serve to protect customer funds by (i) identifying traders 

that pose risks to firms and firms that pose risks to DCOs, and (ii) taking steps 
67 

to mitigate those risks thereby decreasing the likelihood of default. Additional 

resources would allow the Commission to enhance these programs. 

Question. What are the advantages and disadvantages of ‘‘regulatory restructuring’’ from the perspective of the CFTC? 

Answer. Exchange traded futures and options contracts are derivatives relied 

upon by the nation’s businesses for price discovery and risk management. The 

CFTC’s mission is to protect market users and the public from fraud, manipulation, 

and abusive practices related to the sale of commodity and financial futures and options, and to foster open, competitive, and financially sound futures and option markets. Like exchange traded futures, OTC swaps and similar transactions are derivatives. Like futures, OTC derivatives are used for risk shifting purposes. In recent 

years the OTC market has grown to far exceed the exchange traded market in size. 

Bringing OTC dealers and markets under CFTC regulatory oversight will greatly 

enhance the ability of the Commission to fulfill its mission and to protect the price 

discovery and risk shifting functions of derivatives markets. Additionally, bringing 

the OTC dealers and markets under federal regulation will significantly improve financial integrity and transparency, qualities that were lacking in the collapse of 

firms like AIG and Lehman Brothers. 

Question. Fourth Goal.—Of the $160.6 million in appropriations requested for fiscal year 2010, the CFTC would designate $31.5 million (or 19 percent of the total 

funding) and 121 FTE to meet the first goal—to facilitate agency performance 

through organizational and managerial excellence, efficient use of resources, and effective mission support. 

Among the outcomes to be achieved as a result of the investment made related 

to this goal are a productive, technically competent, competitively compensated and 

diverse workforce, a modern and secure information system, and an organizational 

infrastructure that effectively and efficiently responds to and anticipates both the 

routine and emergency business needs of the agency. 

How does the CFTC intend to measure progress and the extent to which these 

outcomes have been achieved? 

Answer. The Commission has developed 18 performance measures intended to 

measure progress in achieving the stated outcome objective. Of the 18 measures 11 

results were determined to be effective, one was determined to be moderately effective, and six were determined to be adequate. The performance results along with 

an annual performance analysis and review are included in pages 91–110 of the Fiscal Year 2008 Performance and Accountability Report available of the CFTC Website at: www.cftc.gov/aboutthecftc/cftcreports. 

QUESTION SUBMITTED BY SENATOR SUSAN COLLINS

Question. Excessive speculation in the commodities market is prohibited under 

CFTC’s statutes. However, determining what constitutes excessive speculation is a 

thorny question. Last year, as oil and other commodities skyrocketed on the futures 

market, many in Congress became concerned that these market prices were more 

reflective of the activity of speculators than commercial interests in the underlying 

product. Last year, under the leadership of Chairman Lukken, the CFTC stated that 

despite the rapid increase in prices, the data did not reflect manipulation by speculators. Critics, however, contend that in this arena, the CFTC is simply outmatched. 

It lacks the manpower and resources to effectively collect the large volume of data 

in the commodities markets and to effectively analyze that data. Do you believe the 

CFTC needs more resources to gather relevant data and effectively analyze it to better understand the role and the effects of speculators? 

Answer. The Commission examines markets by studying the behavior of commercial and non-commercial traders. In determining the status of traders, the Commission has traditionally accepted their self-classification. The Commission has begun 

to examine trader patterns to ascertain the general accuracy of these classifications. 

Commission assessments of the self-classifications are staff intensive and in order 

to accomplish them expeditiously and on a sustained basis, additional resources will 

be required. 

On another front the Commission relies on market positions information that is 

updated daily. Without intraday position information, the Commission cannot examine any price effect occurring on the same day as a position change. This problem 

could be addressed were position information available throughout the trading day. 

Obtaining and processing such information will require additional resources for both 

staff and data processing capacity. 
68 

SUBCOMMITTEE RECESS

Senator DURBIN. Thank you very much for coming in. 

Mr. GENSLER. Thank you, Mr. Chairman, Ranking Member Collins. Thank you so much. 

Senator DURBIN. Thank you very much. 

The subcommittee hearing is hereby recessed. 

[Whereupon, at 12:27 p.m., Tuesday, June 2, the subcommittee 

was recessed, to reconvene subject to the call of the Chair.] 
(69) 

FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 

YEAR 2010 

TUESDAY, JUNE 9, 2009 

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

The subcommittee met at 10:30 a.m., in room SD–138, Dirksen 

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

Present: Senators Durbin, Lautenberg, Nelson, Tester, Collins, 

and Bond. 

DEPARTMENT OF THE TREASURY 

OFFICE OF THE SECRETARY

STATEMENT OF HON. TIMOTHY F. GEITHNER, SECRETARY 

OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

Senator DURBIN. Good morning. My apologies. I was on the floor, 

defending the administration, that’s all I can say. To my colleagues, I apologize. 

Please convene this hearing to examine the fiscal year 2010 funding request of the Department of the Treasury, including the Internal Revenue Service (IRS). Mr. Secretary, thank you for joining 

Senator Collins and my other colleagues this morning. We know 

that IRS Commissioner, Doug Shulman, is also here and prepared 

to testify. 

And I am going to waive the remainder of my opening statement, 

in the interest of time, and to allow my colleagues to say few words 

so that we can catch up with the schedule. 

Senator Collins. 

STATEMENT OF SENATOR SUSAN COLLINS

Senator COLLINS. Thank you, Mr. Chairman. Secretary Geithner, 

Commissioner Shulman, I am very pleased to welcome you to this 

hearing and I thank you for your service to our Nation. 

Mr. Secretary, you have so many challenging responsibilities that 

it’s difficult to know where to begin. You’re responsible for reinvigorating bank lending to consumers and small businesses, stabilizing 

the housing markets, overseeing the automobile industry and encouraging sustainable economic growth. Most important, you must 

try to protect American taxpayers and their investments and pro-
70 

mote the long-term financial security of the United States at a time 

of unprecedented debt. 

The current financial crisis is rooted in a tangled web of highrisk financial instruments backed by high-risk loans, issued by 

high-risk individuals. To emerge from this crisis and to overcome 

its effects, we must restore trust in our Nation’s financial institutions and financial markets. And, in my view, that will require significant reforms in our system of financial regulation, an issue that 

I want to discuss with you today. 

Several developments are shaking American’s trust in the economy. First among these is the dangerous increase in our Nation’s 

long-term debt. While I supported the short-term fiscal stimulus as 

necessary to get our economy back on track, I am troubled that the 

President’s budget proposes to double the debt in 5 years and triple 

it in 10. I am concerned that the long-term debt proposed by this 

administration poses a threat to the sustainability of our economy. 

Where will the money come from to pay these debts? China, where 

you have recently visited? Saudi Arabia? Sovereign wealth funds? 

Will this public debt crowd out private investment and slow the recovery? Who ultimately will pay for this—our children and our 

grandchildren? We need to assess what we’re doing to our country’s 

long-term financial health. 

Finally, Mr. Secretary, I remain very concerned, as I indicated to 

you in our conversation yesterday, about the management accountability and transparency of the troubled asset relief program 

(TARP) fund. Originally, TARP was envisioned as a fund to prevent 

our largest banks and financial institutions from failing and to increase liquidity in our credit markets. Today, however, TARP encompasses 12 different programs, not just for banks but also for insurance companies and automobile manufacturers, and involves 

Government funds combined with private funds adding up to almost $3 trillion. 

It is disturbing to me that we really cannot assess what impact 

TARP funds has had on recipients, and whether TARP has truly 

increased lending. And the Treasury Department has yet to articulate how it will measure whether this injection of capital has been 

an effective use of taxpayer dollars. I am concerned that we’re 

being asked simply to trust that this large infusion of capital into 

the economy will lift us out of a severe financial crisis, whose complex origins are still being untangled. 

Secretary Geithner and Commissioner Shulman, you both face 

great challenges in managing the Federal Government’s finances 

and attempting to reinvigorate our economy. These truly are extraordinary times. I pledge to work very closely with you, as well 

as with our chairman, to make sure that you have the staff, the 

authority, and the resources that you need to serve the American 

people. 

Thank you, Mr. Chairman. 

Senator DURBIN. Thank you, Senator Collins. I am going to invite 

my colleagues to make brief opening statements. 

And Senator Lautenberg, I recognize you. 
71 

STATEMENT OF SENATOR FRANK R. LAUTENBERG

Senator LAUTENBERG. Thanks very much Mr. Chairman. Greetings Mr. Geithner, Secretary Geithner. You’ve taken on a formidable task and, so far, I think that the score in the ball game is 

going your way, but we are quite a distance from the ninth inning. 

As we meet today, the economy is slowly beginning to show signs 

of a possible recovery and the challenges still remain. This recovery 

will require strong reforms to place our financial system on a firm 

footing. We’ve got to give the regulators the tools that they need 

to predict and prevent financial crisis. 

And we’ve got to change corporate culture. That says, the people, 

the leadership at the top, can often take its compensation without 

regard for what happens with the employees or the future investing for the well-being of the company and taxpayers. 

I am still on the board of the Columbia Business School and 

some time ago I gave them the chair, I was out of the Senate for 

a couple years, I took a hiatus, and what I proposed was that salaries at the top be related to salaries at the bottom. And instead of 

letting the ratio slip as it has, from 40 times typically in the 

eighties, to 400 times recently at times, and also—and I don’t 

know, Mr. Secretary, what kind of latitude you have or what kind 

of authority you have to suggest conduct in the CEOs office. But 

one of the things I think we have to look at while we change this 

corporate culture is to make it clear that, when an executive retires, that the reward ought to be, my view, in the performance of 

the company after the leader leaves. And the bonuses should be expanded as time goes by, and not simply related to the stock price. 

Because stock price may be at the expense of investing in the future of the business. 

Anyway, we’re glad to see you here and urge you to carry on and 

work hard. Thank you. 

Senator DURBIN. Senator Nelson. 

STATEMENT OF SENATOR BEN NELSON

Senator NELSON. Thank you, Mr. Chairman. Secretary, we are 

glad you’re here. We appreciate the efforts that you are providing 

and that the progress that we hope will come will, in fact, come. 

When I go home, I have people come to me complaining about 

the bailouts, complaining about TARP, complaining about putting 

the auto industry into bankruptcy and they’re all concerned about 

that. They’re concerned also about the growing deficit and the increasing budget. The one thing that they are now becoming 

alarmed about is the Government ownership of stock. And when we 

come to the questions, I’ve got some questions about that. Because 

they come to me and say, look, aren’t we drifting into socialism at 

a rapid rate. And I assure them that our goal is not to hold the 

stockholdings or warrants or any other financial instruments that 

we shouldn’t be holding. That our goal is to get these companies 

so that they are functioning on their own, so that they are either 

publicly traded or that they are privately owned, but not Government owned. So, I’ll be asking you for reassurance on that side. 

Because I hope and I believe that our goal is just as I’ve stated 

it, to help these companies get on their feet and, when on their 
72 

feet, to become private once again, not to have that kind of public 

ownership that we currently have. So I’ll be anxious to get your 

take on that. 

Thank you, Mr. Chairman. 

Senator DURBIN. Senator Tester. 

STATEMENT OF SENATOR JON TESTER

Senator TESTER. Thank you, Mr. Chairman. Commissioner 

Shulman, Secretary Geithner. It’s good to have Secretary Geithner 

and Commissioner Shulman here today. I’ve gotten to visit with 

Secretary Geithner on several occasions and I look forward to the 

one today. 

We have just, we have just experienced, over the last little over 

1 year, the biggest economic downturn since the 1930’s. We have 

seen irresponsibility on Wall Street, we have seen irresponsibility 

in Government, with a lack of regulation. In some cases, no regulation. We have stepped forth with the TARP program, we have 

stepped forth with the recovery bill. You are in the eye of the 

storm. 

I look forward to visiting with you about all those things that impact the economy and where we’re going from here. And I appreciate your coming in front of the subcommittee. 

Thank you. 

Senator DURBIN. Senator Bond. 

STATEMENT OF SENATOR CHRISTOPHER S. BOND

Senator BOND. Thank you very much, Mr. Chairman, Ranking 

Member Collins. Welcome, Secretary Geithner. 

Everybody knows, over the past year, we’ve had a major economic storm raging with great damage to everybody. The Federal 

Government has responded to the economic crisis with aggressive 

and unprecedented, but unfortunately, I believe, ad hoc actions 

through taxpayer-funded bailouts of too-big-to-fail private corporations, a $1 trillion stimulus, foreclosure rescue programs, just to 

name a few. 

We’ve seen some positive signs of green shoots, but there are 

some wondering whether they will wither away due to continuing 

problems in the housing sector, consumer debt remaining high, significant de-leveraging occurring in the financial sector, and lingering questions about the solvency of banks. Are we seeing a 

‘‘dead cat bounce’’ in the markets? 

Economic and financial experts are telling us that economic recovery cannot occur or be sustained until we address the root 

cause, the credit crisis. That’s what TARP was supposed to do, but 

it got off on the wrong foot last fall, in my view, and it’s still there. 

And President Obama told us in January we can’t have a recovery 

until we get the toxic assets out. 

These are questions that I want to follow-up with. The size of the 

stimulus also is now causing questions from the Federal Reserve. 

If we get in a position of monetizing our debt, we will face an unprecedented disaster and go the way perhaps of Argentina. And tripling the debt in 10 years seems to me to be a very risky approach. 
73 

We’ve seen the United Kingdom, which was recently warned 

about its credit rating. Perhaps that is the canary in the coal mine 

for our Nation’s own future. 

Thank you, Mr. Chairman. 

Senator DURBIN. Thank you very much, Senator Bond. 

[The statement follows:] 

PREPARED STATEMENT OF SENATOR CHRISTOPHER S. BOND

Thank you Chairman Durbin and Ranking Member Collins for holding today’s 

hearing on the Department of the Treasury and the Internal Revenue Service (IRS). 

I welcome both Treasury Secretary Timothy Geithner and IRS Commissioner Douglas Shulman and thank them for appearing before our subcommittee. 

Over the past year, a major economic storm has raged across America causing 

hardships and damage to families, communities, and businesses. Families have lost 

their jobs and homes. Retirement savings have plummeted turning 401(k)s into 

‘‘201(k)s.’’ Students have seen their college savings evaporate. And, our financial 

and auto industries have been shaken to their core. 

The Federal Government has responded to the economic crisis with aggressive 

and unprecedented, albeit ad hoc, actions through taxpayer-funded bailouts of ‘‘too 

big to fail’’ private corporations, a trillion dollar stimulus, and foreclosure rescue 

programs, just to name a few. 

In recent weeks, some have identified positive signs of economic recovery or 

‘‘green shoots.’’ But other experts believe that these green shoots may just wither 

away due to continuing problems in the housing sector, consumer debt remaining 

high, significant deleveraging occurring in the financial sector, and lingering questions about the solvency of some of our big banks. As they say in the financial industry, we may be experiencing a ‘‘dead cat bounce.’’ 

Economic and financial experts believe that true economic recovery cannot occur 

or be sustained until the root cause of the crisis is addressed—the credit crisis. The 

financial system cannot be fully repaired unless the toxic assets are cleansed from 

the balance sheets of financial institutions. I strongly agree. 

Unfortunately, the administration has failed to develop or execute a credible plan 

to cleanse the toxic assets that continue to choke our financial institutions. The center-piece of the administration’s financial rescue plan to remove the toxic assets— 

the Public-Private Investment Program or ‘‘PPIP’’—remains sidelined, and based on 

the recent comments by leaders such as Secretary Geithner’s successor at the Federal Reserve Bank of New York, the growing sentiment is that it will never be 

launched. 

Due to fundamental flaws with the design of PPIP that placed most of the risk 

at the taxpayers’ feet, it is frankly no surprise that this program has stalled and 

is not likely ever to be implemented. 

It cannot be emphasized enough that a well-functioning credit market must be restored for economic recovery. Too much money has been thrown at our financial institutions without removing the toxic assets, and further delay only makes the problem worse as we have seen with Japan in the 1990s. The good news is that we can 

face this 800-pound gorilla by using a true-and-tried approach that helped our Nation recover from the Savings and Loan Crisis. 

Unfortunately, the administration has resisted the creation of a Resolution Trust 

Corporation approach but continues an ad hoc, incremental approach to our ‘‘too big 

to fail’’ financial institutions without any semblance of an exit strategy. 

But when it comes to our domestic auto industry, the administration has not 

shied away from taking a different approach. It fired the head of General Motors 

and orchestrated the bankruptcy of both GM and Chrysler. 

The creation of jobs will be an essential ingredient to economic recovery and 

President Obama has staked his performance on this measure. The administration’s 

main effort to create jobs was a trillion dollar ‘‘stimulus’’ bill with the promise of 

saving or creating at least 3 million jobs, which would prevent the unemployment 

rate from rising above 7.8 percent. Clearly, this estimate was overly rosy as the 

most recent jobs report showed that unemployment had reached 9.4 percent. 

To be fair, the sliding economy necessitated a significant fiscal stimulus. But instead of stimulating the creation of jobs, so far, it only seems to be stimulating the 

growth of Government programs and ballooning our debt. 

While the lack of stimulus is extremely troubling, what is truly alarming is the 

administration’s future budget plan, which promises more spending that will double 

the debt in 5 years and triple the debt in 10 years. This means that our children 

are going to inherit an obligation where interest payments on the debt—around 
74 

$800 billion annually—are likely to be the largest single item of the Federal Government. These figures are certainly not funny to future generations, but it is difficult 

not to laugh when administration officials publicly claim that lending money to the 

U.S. Government is still safe. 

Frankly, our country’s fiscal health and viability are serious matters that must 

be addressed sooner than later. There are recent signs of investor concern about our 

Nation’s fiscal health. Interest rates on 10-year Treasury notes have recently shot 

up. This means that the Government’s cost to borrow money will increase by tens 

of billions of dollars. One of the most stable and industrialized nations in the world, 

the United Kingdom, was recently warned about its credit rating. What is happening in the United Kingdom should be viewed as a ‘‘canary in the coal mine’’ for 

our own Nation’s future fiscal situation. Even Federal Reserve Chairman Ben 

Bernanke recently called for our Nation to begin planning now for the restoration 

of fiscal balance. 

The good news is that we still have the opportunity to change course, but we can 

only do so if there is the will to confront the most treacherous political landmines, 

such as entitlement spending. Much has been said publicly about the importance 

of our fiscal health and the commitment to tackle spending matters. However, action speaks louder than words, and until I see action, many Americans, including 

myself, will continue to sound the alarm. 

Thank you. 

Senator DURBIN. Mr. Secretary, the floor is yours. 

SUMMARY STATEMENT OF HON. TIMOTHY F. GEITHNER

Secretary GEITHNER. Chairman Durbin, Ranking Member Collins, and members of the subcommittee, it’s a pleasure to be before 

you today, my first time appearing before you about the Treasury’s 

budget. I look forward to building a close working relationship and 

I look forward to having a chance to answer the many important 

questions you raised in your opening statements. 

While we see some initial signs of economic improvement, I think 

you could say that the force of the storm is weakening a bit. And 

although the financial system is beginning to heal, our country 

faces very substantial economic and financial challenges. 

Now the President and the administration are working to meet 

these challenges. We are working hard to get Americans back to 

work, to get our economy back to a growth path again, by committing to restoring fiscal discipline to ensure and sustain recovery 

and by making the long-neglected investments in healthcare reform 

and energy and education necessary to improve the productive capacity of our economy and to ensure that, over the longer term, we 

enhance the competitiveness of the U.S. economy. 

To achieve these goals, we are working to repair and reform our 

financial system so that it works for, not against, recovery. We are 

working to restore growth and meet our fiscal goals by redesigning 

our Tax Code, bolstering enforcement. We are working to advance 

our interests globally, working with other countries to promote economic recovery and financial repair and to ensure more open markets for U.S. businesses. 

And to protect our Nation’s national security interests, we are 

deploying all of the tools at our disposal to exclude terrorists, 

proliferators, and other illicit actors from the international financial stage and thereby secure our financial system and prevent 

threats to our security. 

Now, the fiscal year 2010 budget you have before you will allow 

Treasury to pursue these core missions. The $13.4 billion request 

includes a $676 million, or 5.3 percent increase over the enacted 

2009 levels. 
75 

Just a few brief highlights about the budget request. Of the increase we are seeking, $14 million would go to bolstering the staffs 

of our domestic finance and tax policy offices. Now, these offices, 

domestics finance and tax policy, are at the center of the administration’s efforts to support strong design, rigorous analysis, improve the financial system, reform the financial system, and implement reforms to our tax policies and Tax Code. 

We include in the budget a $137 million request to more than 

double our community development financial institutions, our community development financial institutions (CDFI) fund, to ensure 

that the benefits of our financial efforts reach beyond major banks 

and businesses to help economically distressed communities. These 

communities were underserved by our financial system even before 

the current crisis and they have been deeply hurt by the job losses 

and business failures that the crisis has exacerbated. 

We propose a total of $332 million for new IRS enforcement efforts, including $128 million to add nearly 800 new IRS employees 

to combat offshore tax evasion and improve compliance with the 

U.S. international tax laws by businesses and high-income individuals. Another $130 million would go to bolster the security of the 

IRS’s information technology, improve the efficiency of its business 

systems, and upgrade its fraud detection capabilities. 

Now, although not directly under the jurisdiction of the subcommittee, I just wanted to note also that our budget includes 

funds to meet our international obligations and to help us craft a 

global response to the crisis in this more integrative global system 

we live in today. 

Now, as we seek these additional funds to respond to our Nation’s immediate challenges, we’ve cut back on some programs that 

are either ineffective or we believe can be safely deleted. Just one 

example, even as we are trying to increase capital investment for 

the IRS, our budget would reduce the Department-wide Treasury’s 

Department-wide capital investment account by 65 percent, for a 

modest savings of $17 million. 

Now, just before I end, I want to say a few words about the 

Treasury staff. I have the honor of leading a team of exceptionally 

smart and dedicated individuals who are working very hard to 

make our Government more effective. They’re performing a great 

service to our country under challenging circumstances. I am very 

grateful to them and I think if you look at the scale of what we’ve 

set in motion, just in the last 6 months, they have done extraordinary things in a very short period of time. 

PREPARED STATEMENT

Thank you, Mr. Chairman, I’d be happy to answer any questions. 

[The statement follows:] 

PREPARED STATEMENT OF TIMOTHY F. GEITHNER

Chairman Durbin, Ranking Member Collins, members of the Subcommittee, I appreciate the opportunity to testify before you for the first time as Treasury Secretary 

on the President’s fiscal year 2010 budget request for the Department of the Treasury. 

While we see some initial signs of economic improvement and the financial system 

is beginning to heal, our country faces very substantial economic and financial challenges. 
76 

President Obama and his administration are working to meet these challenges by 

getting Americans back to work and getting our economy to grow again; by restoring 

fiscal discipline to ensure a sustained recovery, and by making the long-neglected 

investments in health care, energy and education needed to enhance America’s global competitiveness and produce more balanced, sustainable growth over the longterm. 

TREASURY’S KEY PRIORITIES

To achieve these goals, we are repairing and reforming our financial system so 

that it works for, not against, a recovery that serves all Americans. 

To restore growth and meet our fiscal goals, we are redesigning and bolstering 

enforcement of our tax code so that it is both fairer and more efficient. 

To advance our interests globally, we are working with other nations to promote 

economic recovery and financial repair, and to ensure more open markets for U.S. 

business. 

And to protect the country, we are deploying all of the tools at our disposal to 

exclude terrorists, proliferators, and other illicit actors from the international financial stage, and thereby secure our financial system and combat threats to our security. 

The fiscal year 2010 budget that you have before you will allow Treasury to pursue these core missions assigned to the Department by the President and the Congress. The $13.4 billion request includes a $676 million, or 5.3 percent, increase over 

enacted 2009 levels. 

Of this increase, $14 million would go to bolstering the staffs of our Domestic Finance and Tax Policy offices, which are at the epicenter of administration efforts 

to support rigorous analysis and implementation of revenue policy and to redesign 

and improve our tax policies and tax code. 

Some $137 million would be devoted to more than doubling our Community Development Financial Institutions (CDFI) Fund to ensure that the benefits of our financial repairs reach beyond our major banks and businesses to help economically distressed communities. These communities were underserved by our financial system 

even before the current crisis, and have been deeply hurt by the job losses and business failures that the crisis has spawned. 

A total of $332 million would be devoted to new Internal Revenue Service (IRS) 

enforcement efforts, including $128.1 million to add nearly 800 new IRS employees 

to combat offshore tax evasion and improve compliance with U.S. international tax 

laws by businesses and high-income individuals. Another $130 million would go to 

bolster the security of the IRS information technology, improve the efficiency of its 

business systems and upgrade its fraud detection capabilities. 

Although not directly under the jurisdiction of this Subcommittee, our budget also 

includes funds to meet our international obligations to help us in mounting a global 

response to the crisis and in creating mutually reinforcing growth around the world. 

As we seek these additional funds to respond to our Nation’s troubles, we have 

cut back on some programs that are either ineffective or that we believe can be safely delayed. 

For example, while the Earned Income Tax Credit (EITC) continues to be one of 

the most effective anti-poverty programs that the Federal Government administers, 

the Advanced EITC, a related program which provides benefits in advance of filing 

a tax return, has been prone to exceptionally high levels of error and low use by 

those eligible for it. Accordingly, our budget proposes to end this latter program for 

savings next fiscal year of $125 million. 

Similarly, even as we seek to increase capital investment for the IRS, our budget 

would reduce the Department-wide capital investment account by 65 percent for a 

savings of $17 million. 

The Treasury budget would reduce the number of international economic attache ́s 

from 20 to 16, saving $2 million next fiscal year. It would absorb a portion of our 

non-pay inflation through more efficient use of contracting and other cutbacks, saving $18 million. It would take advantage of the growth of efficient electronic filing 

of tax returns to reduce the IRS processing budget by $8 million next fiscal year. 

Given we have had control over the budget for fewer than 5 months, the reductions that I have just described represent a first attempt to do more with less. As 

we begin work on the Budget for fiscal year 2011, Treasury has prepared itself for 

a more rigorous assessment of its spending. 

I have already issued guidance to Treasury senior staff that says, in part: ‘‘To afford any new investments, we will have to take new approaches to solving old problems. I expect each bureau and policy office to identify opportunities for innovation 
77 

that will transform how Treasury fulfills its missions in order to both improve performance and reduce cost.’’ 

In addition, the President has announced his intention to nominate Dan 

Tangherlini to be our Assistant Secretary for Management and Budget. Consistent 

with the President’s mandate, I will look to Mr. Tangherlini to scour the Treasury’s 

budget for efficiencies and cost savings. He comes to the job with an impressive 

track record of working on budget, management and performance issues with District of Columbia Mayor Adrian Fenty, and I am convinced that he will bring the 

same results-oriented approach to the Federal Government. 

REPAIRING AND REFORMING THE FINANCIAL SYSTEM

The President has assigned the Treasury to repair key sectors of our economy so 

that they help revive growth and produce broadly shared prosperity. 

The Treasury has been working to repair and reform every major element of our 

financial system, and to fill gaps in the system so that it benefits all Americans. 

Last month, Federal banking supervisors announced results of the stress tests 

that we asked them to conduct on our 19 largest financial institutions. The aim of 

these assessments was to ensure that these institutions have sufficient capital buffers to absorb the losses that they could suffer under worse-than-expected economic 

conditions and continue to make the loans necessary to sustain recovery. 

The clarity and transparency provided by the tests has helped improve market 

confidence in the banks, making it possible for them to collectively raise nearly $90 

billion through private equity offerings, bond issuances without Government guarantees and sales of business units. 

On housing, Treasury is working with HUD to bolster our housing markets by 

helping to drive down mortgage interest rates and by assisting responsible homeowners to refinance into more affordable mortgages or modify their at-risk loans to 

avoid preventable foreclosures. 

In terms of the non-bank financial sector, Treasury is working to revive critically 

important securitization markets for both new and old asset-backed securities. 

We have begun to boost new consumer and business lending by re-starting the 

markets for asset-backed securities that financed almost half of all lending in this 

country before the crisis. There were more securities of this type issued the 4 

months after we launched our effort than in the preceding 9. 

Additionally, Treasury is about to join with private investors in seeking to restart 

the markets for legacy mortgage loans and securities that are now stuck on bank 

balance sheets, keeping these institutions from making new loans to families and 

businesses. 

As we have made repairs to the financial system, we have understood that repair 

alone is not enough. We must also reform the system so that it is less prone to crises of the dimensions that we now face. 

In the next few weeks, we will outline a comprehensive plan of reform that will 

include systemic risk regulations to ensure that no large and interconnected firm 

or market can take on so much risk that its failure could destabilize the entire financial system. The plan calls for bolstering consumer and investor protections. And 

it will streamline our out-of-date regulatory structure so that our regulatory system 

matches the size, shape and speed of our modern financial system. Together, these 

changes will help prevent another crisis of the magnitude that we have just lived 

through, and give the Government new tools to better cope with similar problems 

should they occur in the future. 

In addition to the financial system, Treasury is helping to ensure that the Nation 

has a viable auto industry in the future. We are working with General Motors and 

Chrysler to make sure these companies make the changes necessary to again prosper. As President Obama has said ‘‘we cannot... must not... and will not let 

our auto industry simply vanish.’’ 

The resources for administering key elements of both our financial and auto repair efforts were authorized by the Emergency Economic Stabilization Act. 

These activities are being handled by our Office of Financial Stability (OFS), 

which is focused on ensuring that TARP funds serve the public purpose of economic 

and financial stabilization; that they are fulfilling this purpose in ways that protect 

taxpayers; and that we can provide a clear account to the Congress and the American people about the effectiveness of the funds’ use. 

In order to administer TARP and ensure compliance by TARP recipients, OFS has 

had to quickly assemble a substantial staff. OFS staffing levels, which were at 88 

when I arrived in office, had risen to approximately 165 by the end of last month 

and are expected to rise to 225 by next fiscal year. The office’s budget for next fiscal 

year will total $262 million, a 6 percent decline from the current fiscal year’s $279 
78 

million. The change is largely due to a decline in estimated spending on contracts 

as part of the program’s initial start-up. 

While TARP is proving effective at improving the immediate stability of the financial system, the scope of the issues that this administration and this Department 

face extend beyond TARP to include striking the delicate balance between intervention and allowing market participants latitude to operate; devising a new financial 

regulatory structure for the future; and working through the tough problems of 

what form our Government-sponsored enterprises, Fannie Mae and Freddie Mac, 

should take as we emerge from this difficult period. 

All of these issues fall to Treasury’s Office of Domestic Finance, which, together 

with OFS, is having to operate on new policy terrain, tackling problems that the 

country has not faced in generations and for which we have few guideposts in our 

immediate past. 

That is why the workload of the Office Domestic Finance has already expanded 

greatly, and is all but certain to expand still further. And it is why we are seeking 

to modestly increase its size and bolster its expertise in several critical areas. 

Our budget requests an additional $8.7 million for the office to add 26 full-time 

equivalent (FTE) positions to the staff. This represents a 26 percent increase from 

the office’s current fiscal year staffing of 101. 

The additional funds will be used to create two new Deputy Assistant Secretary 

positions, one for housing finance, small business and consumer issues, and a second 

for capital markets. These two new officials will lead teams that will perform the 

economic and institutional research necessary to ensure that we understand all of 

the policy options in each of these areas and choose the most effective ones for solving our problems. 

As we seek additional funds for Treasury, we must also seek them for the frontline institutions that will sustain our economic recovery and ensure that its benefits 

are broadly shared. 

Our budget would more than double the resources of the Community Development 

Financial Institutions (CDFI) Fund to $243.6 million. The fund’s mandate is to help 

low-income, economically distressed communities that were poorly served by our financial system even in economic good times, and—although they had nothing to do 

with causing current conditions—have been significantly hurt by the economic and 

financial fallout of the crisis that we now face. 

The $136.6 million, or 128 percent increase in funding, would allow this program 

to support financial institutions in making job-creating investments and in providing access to capital in communities that are often considered too risky for mainstream financial institutions to serve. By targeting lenders and borrowers in these 

communities, the Fund would help some of our most vulnerable populations weather 

the crisis and benefit once recovery is underway. 

The aim of the fund is to make sure that we provide distressed communities with 

more than simply Government grants and aid. We must also build the capacity of 

their local financial institutions to ensure that capital is flowing to homebuyers and 

businesses so that they can finance their own economic futures. Since its inception 

in 1994, the fund has directed nearly $1 billion to distressed communities, and allocated $19.5 billion in tax credits through its New Markets Tax Credit program. 

Financial institutions funded through the CDFI program make loans to small 

businesses and micro-enterprises and take equity positions in them. They provide 

mortgages to low-income homebuyers, and finance developers of low-income housing 

and community facilities, such as charter schools, health clinics and child care centers. 

One example can be seen right here in the Anacostia neighborhood of Washington, 

DC. City First Bank—a local CDFI—and Charter Schools Development Corporation 

partnered to provide a $13.3 million New Markets Tax Credit for the Thurgood Marshall Academy, the city’s first charter school focused on law, serving 360 students 

in grades 9 through 12 and achieving a 100 percent college acceptance rate for its 

first three graduating classes. 

Historically, the CDFI program has been heavily oversubscribed and has had to 

turn away qualified applicants. For example, in the current fiscal year, the program 

for CDFI financial and technical assistance awards is budgeted at $55 million, but 

it expects to receive applications for more than $500 million in funding. 

REDESIGNING THE TAX SYSTEM FOR FAIRNESS AND EFFICIENCY

The President has asked Treasury to redesign and bolster enforcement of our tax 

code so that it supports growth, sets the stage for our return to a sustainable fiscal 

path, and accomplishes these goals in a manner that is fair, efficient and supportive 

of our society’s broadest goals. 
79 

To make good on the President’s assignment, our budget requests a modest increase in funding for Treasury’s Office of Tax Policy and more substantial increases 

to expand IRS enforcement activities and to improve its information technology. 

Treasury has moved quickly in implementing the more than 30 tax provisions of 

the President’s economic recovery plan. Treasury also has played an integral role 

in designing the tax provisions of the President’s fiscal year 2010 budget, and it will 

play a similar role in implementing these. 

The President has made clear that he will not seek any major revenue increases 

until 2011 when the recovery should be firmly in place. He has, however, been 

equally clear that once recovery is underway, we must get our fiscal house in order 

or risk having Government borrowing crowd out productive private investment. 

Treasury and the White House will work with Congress to make the tax changes 

that are necessary to reduce deficits and to do so in a manner that is fair to all 

Americans. 

As part of our efforts to make sure that the tax system is working for recovery 

and is operating fairly, we have designed new policies to curb the use of off-shore 

tax havens, close the international tax gap, remove tax incentives for companies to 

shift jobs overseas, and replace these incentives with ones that encourage creation 

of jobs at home. 

Our tax work on the recovery plan, the fiscal year 2010 budget, and these international tax issues are just the beginning of an ambitious agenda for this administration. 

On healthcare, the President has made clear that the road to fiscal discipline and 

to solvency for Medicare and Social Security runs through overall healthcare reform. 

Although much of the cost of the President’s reform plan will be covered by savings 

from the system, we will need to design programs to cover some of the costs in ways 

that are fair to all Americans and do not harm the economy. Treasury is deeply involved in this effort and in the related work to expand coverage and improve our 

healthcare system in other important ways. 

On retirement and economic security, Treasury and, in particular, the Office of 

Tax Policy, is taking the lead in developing and actively working with Congress to 

flesh out the initiatives proposed in the President’s budget to help enhance retirement security and savings for the half of working Americans who have no retirement provisions beyond Social Security. These proposals would make it easier for 

people to save for their own retirement, either through their workplaces or on their 

own, and would move us toward universal retirement savings coverage. 

On climate change, Treasury is already working closely with Congress to design 

the auction mechanisms that will be needed to implement the administration’s 

greenhouse gas cap-and-trade program. 

Our Office of Tax Policy has been deeply involved in all of these issues from the 

outset of the administration. Like our Office of Domestic Finance, its workload already has substantially increased and is certain to grow as the health reform, retirement security and climate change debates get underway in earnest. 

At the moment, the Office of Tax Policy’s career staff includes 30 lawyers and 44 

economists as well as support staff for an overall staffing level of 93. This is lower 

than its usual complement of over 100 professionals. 

Our fiscal year 2010 budget would increase the office budget by $4.9 million to 

add 15 full-time equivalent (FTE) positions in order to increase overall staffing to 

108, and would therefore represent a return to historical norms. The additional staff 

is needed to perform analysis and revenue estimates for new policy proposals, conduct research for, among other things, congressionally mandated studies, and develop regulations and guidance for new legislation. 

The vast majority of the new funds that we request in this budget are for improving the enforcement efforts and the information technology of the IRS. 

As I have said, $332 million would go to new IRS enforcement efforts, including 

$128.1 million to improve international tax compliance. The balance of these funds 

would be used to support three critical programs: 755 employees to increase examinations of tax returns for businesses and high-income individuals; 300 employees to 

expand the IRS document matching program, which compares tax returns to other 

forms such as W–2s and 1099s; and an additional 491 employees to improve collection operations and build two new IRS automated collection center sites. 

Turning to IT, our Budget requests a $90 million increase in funding to protect 

taxpayers’ personal records from the increasing number and sophistication of Internet-based attacks. With these funds, the agency will deploy state-of-the-art, automated tools to improve record access management, risk assessment and system auditing. This effort would address concerns noted in the past by both the Government 

Accountability Office and the Treasury Inspector General for Tax Administration. 
80 

Our budget also requests an additional $18 million for systems to help the IRS 

return review program detect noncompliance and fraudulent refunds, and a $22 million increase to continue modernizing the agency’s core taxpayer account database 

and modernized the e-File web-based platform. 

REENGAGING WITH THE WORLD ON ECONOMIC ISSUES

The President assigned Treasury to ensure that this country reengages with the 

world, not just on issues of war and peace, but also on the current crisis, and on 

issues crucial to our common economic futures. 

This is a global crisis. Recovery here depends on recovery abroad. We are working 

closely with other major economies to put in place the fiscal stimulus and make the 

financial repairs necessary to ensure U.S. and global recovery. 

The United States is seeking to mobilize the financial resources of the better-off 

nations to help the emerging and developing economies that have been especially 

hard-hit by this crisis. We are doing this for more than simply humanitarian reasons; as recently as last fall, these economies accounted for fully 42 percent of all 

U.S. exports. 

Last month, the President and leaders of the other G–20 nations agreed on the 

need to make more than $1 trillion in financial resources available to support global 

growth and trade. 

Those funds include our commitment of up to $100 billion for an expanded New 

Arrangements to Borrow, a permanent back-up mechanism that provides the International Monetary Fund with supplemental resources to help emerging markets and 

developing nations weather the crisis. 

As part of our effort to rekindle global growth for the sake of our own recovery, 

we are seeking to meet our past and present financial commitments to the multilateral development banks that help emerging and developing countries. 

Although the funds to do this are not directly within the purview of your Subcommittee, I mention them to illustrate how Treasury’s entire budget is tailored to 

let us fulfill the missions that the President has set out for us. Our budget request 

includes $2.5 billion for international programs, most of which would serve to meet 

our past and present commitments to the multilateral development banks. 

Our financial reform effort in the United States must be matched by similarly 

strong efforts elsewhere in order to succeed. 

CONCLUSION

Before I end, let me say a word about the Department’s staff. I have the honor 

of leading a team of smart and dedicated individuals who are working to make our 

Government more effective and our society fairer, who are following a long tradition 

of debating policies fearlessly on their merits, doing what is right and not what is 

expedient, and drawing on the best ideas and expertise that are available. They are 

performing an incalculable service to our country in these challenging times, and 

I am immensely grateful to them. 

The Department of the Treasury is responsible for promoting the Nation’s economic prosperity and protecting its financial security. We advance our interests 

around the world through the strength not only of our economy but of our ideas. 

This President and Treasury have already begun the hard work of recovery and 

reform. Our fiscal year 2010 budget will allow us to pursue these critical goals, and 

deliver the balanced and sustainable growth that the American people seek and deserve. 

MORTGAGE FORECLOSURE

Senator DURBIN. Mr. Secretary, many of the questions we’ll ask 

will be policy questions, somewhat global in scope. I will try to 

bring those home to the actual budget aspects of this hearing as 

best I can. 

Let me start with a topic that you won’t be surprised that I’m 

interested in, mortgage foreclosure. I have brought before the Senate, twice now unsuccessfully, an attempt to change the bankruptcy code so that we can create more incentives for renegotiating 

mortgages to avoid foreclosure. I failed in both efforts and, in the 

last effort, was opposed by virtually all of the banking institutions 
81 

of the United States, save one, Citigroup, that supported our efforts. 

The Mortgage Bankers Association reported last week that about 

12.07 percent of mortgage loans were delinquent or in foreclosure 

in the first quarter, the highest level ever recorded since the survey 

was launched in 1972. Also, for the first time, most mortgages in 

foreclosure were prime loans, 49.8 percent, compared to 43.2 percent subprime, which we initially identified as our major concern. 

Foreclosures bounced up 32 percent to 342,000 during the year 

over year period ending in April, according to Realty Track. 

The Obama administration’s ‘‘Making Home Affordable’’ program 

has resulted in only 55,000 mortgage modifications in the last 2 

months. According to The Washington Post, experts say foreclosure 

prevention programs will not be successful unless they address 

homeowners who owe more than their properties are worth. 

I sense that this was the catalyst that led us into this recession. 

It is my feeling that the previous administration and, so far, this 

administration has failed to come up with an approach which is 

dramatically, could dramatically turn around this increasing number of mortgage foreclosures. A year ago, the estimate was 2 million, this year it’s 8 million. Ultimately, one out of every six home 

mortgages faces foreclosure based on current predictions. 

Do you agree that we need to strengthen incentives to modify 

more mortgages to turn this economy around? And wouldn’t it help, 

wouldn’t that help spur participation in the Treasury’s own mortgage modification program? And can you suggest a better method 

to give homeowners more leverage than to change the bankruptcy 

code? 

Secretary GEITHNER. Senator, you’re right that housing is at the 

center of this crisis and, of course, millions of Americans are losing 

their homes, including many who were very responsible and are 

suffering simply because of the actions of those borrowers who 

lived way beyond their means and those banks that made a bunch 

of loans they should not have made. 

And I agree with you that I think this Government should have 

moved earlier to address this crisis. We were late, as a country, 

and behind the curve. I do believe though that the President’s program is a, does provide a very powerful set of incentives to induce 

a substantial increase in successful modifications. We are at the 

very early stage of implementing that program. 

It’s true we’ve been in office now almost 6 months, but—and this 

program was laid out, in terms of its detail, only a few months ago, 

but there is a substantial increase in efforts to put out notifications 

to potentially eligible borrowers and I expect to see a very substantial acceleration of the pace of modifications. 

Now, this program does create significant incentives for servicers 

to participate. It also does reach homeowners that are significantly 

underwater. It won’t reach all homeowners. There are some homeowners that simply borrowed—got themselves to the point where 

they’ve got a completely unsustainable mortgage and are unlikely 

to retain their house. But the program is designed to reach homeowners that are living today with significant amounts of negative 

LTV’s, or high LTV’s, negative equity. 
82 

Now, the program has been successful in helping bring down interest rates, working alongside the Fed. It has been successful in 

substantially increasing refinancing so that more Americans can 

take advantage of those lower rates and, as I said, we are just beginning to see the effects of these very substantial incentives we 

put in place to encourage modifications. 

Realistically, I don’t think we are going to know, until probably 

early fall, whether we’ve got the incentives right and whether they 

will prove powerful enough. But our judgment is that this is the 

best package of incentives which offers the best return for the taxpayer’s resources we are going to use to help address the housing 

crisis. 

Senator DURBIN. I would just say that I have asked this question 

of your predecessor; in perhaps a little different form, and still remain skeptical that the voluntary approach to mortgage renegotiation is going to save us from this crisis that we are facing. 

I think, until we get an honest approach that really results in 

substantial renegotiation of mortgages, that the real estate industry and the housing industry are going to continue to be weak. I 

don’t know how we can build a strong American economy if our 

homes are losing value and we see our neighbors facing foreclosure 

as we find across this country. 

Secretary GEITHNER. Senator, I understand your concern and I 

commend you for your leadership and focus on this issue from an 

early perspective. But this program is a dramatically different program from what was tried in the previous administration. The financial incentives that we put in place here are very substantial. 

And it came alongside a substantial change in policies by Fannie 

and Freddie to help allow for refinancing, even for homeowners 

who were slightly underwater. 

So, I think that we all want to see results. And you should judge 

us by our results. And it will take a little longer though to judge 

whether this is as powerful as we expect it to be. Now, I think if 

you just step back and look what’s happened in the housing market 

over the last 6 months or so, partly because the effectiveness of the 

recovery program and confidence and partly because of the impact 

of the Fed’s programs and the Treasury’s programs, the pace of decline in house prices has started to slow. And that is early signs 

of us being able to look to the other side of this. 

But realistically, I think you are going to still see a very challenging period ahead for many homeowners, many more Americans 

are still at risk of losing their homes and that’s why we want these 

programs to work. 

Senator DURBIN. Senator, I might say that each member will 

have 5 minutes and probably more than one go-round. 

Senator Collins. 

TROUBLED ASSET RELIEF PROGRAM

Senator COLLINS. Thank you, Mr. Chairman. 

Mr. Secretary, I want to follow-up on the discussion we had 

about the use of TARP funds. It troubles me that banks have received billions of dollars without having to demonstrate that 

they’ve increased lending as a result and without having to be fully 
83 

accountable and transparent in the expenditure of the funds they 

have received. 

I mentioned to you that I’ve seen, in my State, a large recipient 

of TARP funding constrain credit, to actually cut off lines of credit, 

to cease lending to a nonprofit hospital in my State, and a major 

retailer. 

So I don’t see, on the grassroots level, the benefits of putting billions of dollars into financial institutions, the intent of which was 

to prevent this constrained credit. In addition, the Special Inspector General for TARP, in his report in April, criticized the Treasury 

for not adopting recommendations to require that all TARP recipients account for the use of the funds. 

So, I’d like to ask you to comment on why the Treasury hasn’t 

made, as conditions for receipt of TARP funds, requirement for increased lending and full transparency? 

Secretary GEITHNER. Senator, excellent question. Could I just 

start by saying that we, you know—this is a crisis produced, in significant part, by two things. 

One is, families across the country substantially increased the 

amount they borrowed. So household debt rose dramatically as a 

share of our overall economy. And we had pockets of excess leverage, too much lending buildup, across the financial system. Now we 

are going through a very deep recession. In any recession, the demand for credit falls because economic activity falls. In a recession 

that follows a long credit boom like this, you would normally have 

expected the credit to fall quite sharply. That’s an important context because it’s hard to know how best to measure the full impact 

of these programs. Because again, it would have been, under any 

circumstance, we would have had a period where borrowing would 

fall, as homeowners, as families decided to go back to living within 

their means, decide to save more, reduce their debt outstanding. 

And lending would fall as the weaker parts of the financial system 

decline to a more sustainable level. 

Now, it is very important to us that we have better ways of 

measuring the impact of these programs. So when we came into office, we put in place a much more comprehensive reporting so that 

all banks that received TARP assistance have to report monthly on 

what is actually happening to lending behavior. We started with 

the major banks and we extended that out to all TARP recipients 

and you will be able to see monthly now, on the Treasury website, 

what banks are actually doing in terms of lending. And that is the 

ultimate measure of the impact of these capital assistance programs. 

We are very committed to improving the overall quality, transparency, and accountability across these programs and each of the 

programs we have designed provides for an exceptionally careful 

level of oversight, and a level transparency so people can measure 

the actual impact and effects. 

Now, if there are other things that we can do to strengthen that, 

we will do it. Because nothing is more important to the credibilities 

programs than a better sense among the American people that they 

have the chance to judge and measure impact. 

Now, just to finish quickly, where do you begin. My own judgment is that the programs that the Congress authorized last fall, 
84 

and the actions that my predecessor took initially to put capital 

into the U.S. banking system, were absolutely essential to prevent 

a catastrophic financial collapse. If you look back to that period of 

time, lending absolutely stopped. And because lending stopped, and 

because confidence was so badly damaged, basic business stopped. 

And it happened around the world. And when that capital was put 

into those banks initially, that was the first step in beginning to 

lay a foundation for recovery and repair. 

We cannot know with certainty what would have happened in 

the absence of that action, but my judgment is that, without those 

actions, you would have faced the prospect of a catastrophic failure 

in the U.S. financial system and much, much, more damage to economic activity than we already saw. 

Now today, we’re seeing, over the last several weeks, we are seeing some very impressive and encouraging signs of improvement in 

the overall credit conditions. So if you look at concern about risk 

and exposure to banks, and if you look at the ability of banks to 

go raise equity to replace the Government’s investment, if you look 

at what’s happening to the borrowing in businesses across the 

country. If you look at what’s happening to mortgage rates, the interest rates, there have been substantial improvements in those 

basic measures of these programs. So, my sense it is early days, as 

I said, and this is just the beginning, but I think where the Government has acted, you can see very tangible benefits in improvement. 

Now, we have a ways to go. This crisis took a long time, the conditions of this crisis took a long time to build up and it will take 

a long time to work through, but I think these programs are having, are achieving traction and they’re the right mix of programs. 

And we will do everything we need to do to make sure that we are 

adopting sensible recommendations by not just the SIGTARP, but 

by the congressional oversight panel and the Government Accountability Office (GAO) who are looking very, very carefully at all 

these programs. 

Senator COLLINS. Thank you. 

Senator DURBIN. Senator Lautenberg. 

EXECUTIVE COMPENSATION

Senator LAUTENBERG. Thank you, Chairman. 

Mr. Geithner, the financial crisis that we’re seeing was, in my 

view, due in significant part to the poor management of these companies and particularly I am pained by the outcome of the management years in the automobile industry who refused to see what the 

public appetite was, when we refused to be competitive, and thus 

jobs have been lost and an industry practically destroyed that we 

loved and admired for so many years. 

When we look at the risks taken by corporate executives, decisions made, many of these executive pay packages insulate CEOs 

from the risk and, again, I may, I don’t want to take you out of 

your bailiwick, but to avoid this excessive mismanagement, should 

executive compensation be tied to the long term health of the company? Where do we have a right to interject our views? 

Secretary GEITHNER. Senator, this is a very important issue. And 

I agree with you that I think, although many things caused this 
85 

crisis, what happened to compensation and the incentives that created risk-taking did contribute in some institutions to the kind of 

vulnerability we saw in this financial crisis. And my view is that 

we need to help encourage substantial reforms in compensation 

structures, particularly in the financial industry because of the dependence of the economy on a well-functioning, more stable, better 

set of judgments by financial institutions. 

I think boards of directors did not do a good job. I think shareholders did not do a good job in terms of disciplining compensation 

practices. And I think a centerpiece of sensible reforms would be 

to tie compensation to better measures of long-term investment and 

return and to adjust them to reflect the risk, to reflect risk. That’s 

part of the reforms and we are, as part of our broader regulatory 

reform proposals, our proposals to reform the whole framework of 

renewed regulation in the United States, will include some suggestions for trying to encourage reform in compensation practices. 

Senator LAUTENBERG. Where does the start begin? Is it in Treasury or is it IRS or the Securities and Exchange Commission (SEC)? 

How do we get things introduced into the governance of these 

things? 

Secretary GEITHNER. Well, as you’ll hear from us in the next few 

days, the SEC has some important responsibilities and obligations 

in this area and some tools and authorities they may seek in this 

area. The bank supervisors, under the leadership of Chairman 

Bernanke and others, have already initiated a process to define 

standards and principles that supervisors would use to help bring 

about reforms in compensation practices in the financial industry. 

Those are two ways we can have influence over the shape of 

practice in these areas. There are other ways, too, but my own 

sense is that the core will be those two authorities. 

Senator LAUTENBERG. Senator Nelson mentioned something 

about the Government owning shares in these companies and its, 

I think it has to happen. Who, for instance, would vote the shares? 

Would the Government be, the American Government, be likely to 

appoint the board of directors and have them make a decision? 

Secretary GEITHNER. Senator, this is an enormously important 

set of questions. As we said before, the President and I have said, 

we are an extremely reluctant investor, an investor. We do not 

want to be in the business of managing these companies on a dayto-day basis. We would like to make sure that we have the ability 

to get out as quickly as we can and have these companies emerge 

on their own as viable entities without our assistance on an ongoing basis and the capacity to go raise capital in the markets to 

repay the Government’s investments. 

To underscore that, we are—we’ve designed a set of policies and 

mechanisms that will ensure that people understand we only intend to use our voting rights for a very limited number of core 

judgments about financial structures of the firm, to make sure that 

there’s a strong board and management in place at the time that 

we take our equity investments so that the taxpayers’ interests are 

protected. So we have confidence in their ability to oversee a sufficiently robust restructuring plan. 

We do not want to leave the impression or the reality in place 

that the Government of the United States will, will be able to and 
86 

will have the capacity to exercise judgments over the day-to-day operations of these businesses. We think that would be damaging to 

franchise value, damaging to the interests of the taxpayers in trying to make sure that we can get out as quickly as possible. And 

our hope is that we design a set of institutional protections to avoid 

that risk. 

Senator LAUTENBERG. Thank you, Mr. Chairman. 

Senator DURBIN. Thank you. Senator Bond. 

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

FAILED BANKING INSTITUTIONS

Mr. Secretary, a lot of us in the heartland are wondering why 

you are treating failed banking institutions differently from General Motors and Chrysler? The administration has orchestrated 

forcing car companies into bankruptcy, but they seem to be reluctant to force failed large financial institutions, like Citi, into restructuring. Now, we’ve seen in the past that large organizations, 

not as large as Citi, but IndyMac has gone through a Federal Deposit Insurance Corporation (FDIC) cleansing program and this one 

is outside of politics. And when you do it through the FDIC, you 

don’t get the political questions that are asked, you don’t get the 

political involvement in it. And, as The Wall Street Journal asked 

today, if Citi is not forced into an FDIC-like restructuring, you 

know, how can you ensure taxpayers that failed banks will not continue to return for billions and billions of bailouts, which I think 

all of us have heard great concerns from our constituents about. 

Secretary GEITHNER. Senator, I share those concerns and I think 

it’s important to acknowledge that the actions that the Government 

has had to take, over the last 12 months in particular, to help protect the economy from this financial crisis have created, well, they 

have been exceptional and extraordinary, and they have created 

the risk that, unless we reform the system, we are going to face 

a greater risk of financial crises in the future, because we will have 

created a moral hazard that might make the system more vulnerable in the future. 

I am deeply worried about that, I share that concern. And that 

is why it is so important that we put in place stronger protections 

against constraints on risk taking in the future. A centerpiece of 

what the President will recommend, in terms of financial reform, 

will be a set of much more conservative set of constraints on risk 

taking across the financial system, more evenly enforced with a 

more effective oversight. And, as part of that, we need to have a 

better capacity to deal with potential failure of large institutions. 

Now the system that you referred to, the system that the Congress helped to put into place, built around the FDIC, strengthening in the wake of the savings and loan (S&L) crisis, is a very 

effective process, but it was designed to deal with relatively small 

banks and thrifts and was it not designed for a crisis of this severity. That is why we do not have—and that system was not designed 

to deal with a more complex set of failures, for example like AIG. 

That’s why a centerpiece of what the President will recommend 

would be a stronger capacity to resolve, address, better manage the 

risks to the system posed by those types of institutions. 
87 

Now, I just want to underscore just a couple things about context. Now, when I came into office, the Government of the United 

States had already invested roughly $200 billion in our Nation’s 

banks. As I said to Senator Collins, I think that was a necessary 

thing to do. We would never want to do that, but it was the correct 

thing to do. 

TOXIC ASSETS

Senator BOND. Mr. Secretary, I’m running out of time but I think 

everybody would agree, the Federal Reserve came up and flooded 

the system with money, we put—the TARP money in. But now 

we’re past that. And unless we take some steps to deal with toobig-to-fail, we’re going to have a moral hazard. And I’m also worried about the PPIPs, a lot of people saying that the banks aren’t 

participating because it looks like it’s going to be political. And if 

they get in—who would want to get in partnership with the Federal Government when they see what some of our fellow Members 

of Congress are doing? 

Are you going to be able to get any of these toxic assets out with 

PPIP? Where are the participants? 

Secretary GEITHNER. Senator, again, I want to underscore that 

you are right. This issue of too-big-to-fail moral hazard is a really 

important thing. And that’s why the President wants to move so 

quickly on legislation. 

Now on the issue of these legacy assets, that are still on the 

books of the Nation’s banks. You’re right that there is some concern in the market still about participation and whether that 

brings some risk of political conditions imposed in the future. And 

that could limit participation in the beginning and that would be 

an unfortunate thing. I think we all have a responsibility to act to 

reduce that sense of risk and uncertainty about the rules of the 

game. 

It’s also true that banks have found it more easy to raise equity 

than they thought. And that, combined with a slight improvement 

in confidence in the system, may also reduce participation. In my 

judgment though, these funds still are an important part of the 

necessary framework of tools to help get our country through this 

crisis. And I believe it is important that we go ahead and put them 

in place, even if we see participation somewhat more limited than 

people would have expected because of both the political concerns 

and because the basic improvement—— 

Senator BOND. I would hope that we would use the FDIC model 

I and others and Senator Dodd have proposed, beefing up the 

FDIC, we need to use them. And I’ll have further questions for the 

record. 

And Mr. Chairman, I would ask that my full statement and all 

of my good advice in it be included in the record, in the hopes that 

somebody might read it someday. 

Senator DURBIN. Well, we’ll look forward to reading that and it 

will gladly be inserted. Thank you, Senator Bond. 

Senator Nelson. 
88 

AUTOMOBILE INDUSTRY

Senator NELSON. Thank you, Mr. Chairman. Secretary Geithner, 

you mentioned that we are reluctantly in a position of holding the 

shares of General Motors and perhaps in a position of controlling 

other institutions, but we are doing so reluctantly. 

I am so reluctant to be one of those holders of that stock that 

I am introducing a resolution, as a sense of the Senate resolution, 

that we begin the process to divest ourselves of that stock ownership over a reasonable period of time, making clear that we are 

only a temporary shareholder and that we should take obviously all 

steps to protect the American taxpayer dollars and begin to divest 

the ownership as expeditiously as possible and call for a GAO 

study to help determine the period of time that it may take to return General Motors and Chrysler to solvency and complete the divestiture. 

I think that says what I would like to say. In addition, I’ve heard 

it said that, for those who worry that somehow we are drifting into 

socialism, that socialism is where the Government wants to take 

over profitable ventures, as opposed to being where we are right 

now. 

Apart from the levity, I think it is probably accurate. And so I 

hope that the administration will be supportive of every effort to 

make public statements that this is a temporary situation, not one 

that is optimum or optimal in terms of what we would prefer to 

do, but where we are at the moment but to make certain also that 

we are not going to stay there one day longer than we should in 

that position of ownership. 

And I’m encouraged where you say that we won’t exercise dayto-day judgment over many of the decisions and opportunities that 

the industry will have. 

I’ve got some other questions about that and that relates to the 

dealerships. I know they’re very concerned about summarily being 

dismissed after decades of relationships with the auto industry. Is 

there any effort to try to establish some sort of a recognition of the 

rights, and not just contractual rights, but the rights of dealerships 

in this dismissal where any compensation is being directed toward 

those dealerships to soften the blows? 

It’s not taking their position that is so important, it is recognizing that, in small communities all across America, particularly 

Nebraska, where dealerships are going to be lost, people are going 

to lose their jobs as well. In small communities where job replacement can be even more difficult than in the urban centers. I wish 

you might comment on that. 

Secretary GEITHNER. Senator, can I just begin where you began 

to say, and I think you said it right, in terms of the Government 

stake in these entities, where we take a stake, temporary, clear 

path to exit, not a day longer than is necessary, no ongoing role 

in day-to-day management. 

And, in that context, this broader question about the impact of 

communities of the substantial reduction in dealerships that the 

automobile companies have decided was necessary to get back on 

the path of viability. I just want to underscore that these were 

their judgments, based on a careful analysis of what was necessary, 
89 

again, to get them down to a cost basis that was more attainable 

over time. 

But I understand the concern about the impact and would be 

happy to explore with you and talk to my colleagues about—to 

make sure you have responses to your thoughtful questions about 

with the companies themselves might be able to do to help to soften the blow. 

Senator NELSON. I appreciate that. Thank you. 

Secretary GEITHNER. But it has to be their judgment—— 

FINANCIAL REGULATORY REFORM

Senator NELSON. Of course, of course. 

In terms of financial regulation, can you give us a preview of 

what you have planned for financial regulation? For example, are 

there any plans to change the State-based regulation of insurance? 

Will you propose an Office of Insurance Information or a similar 

position or will you seek authority to regulate insurance at the 

Federal level? 

Secretary GEITHNER. Senator, I don’t want to get ahead of the 

President of the United States on this. He is going to layout a comprehensive set a proposals next week. In that context, we will lay 

out our judgment about what we think is the most practical way 

to help begin the process of ensuring more effective supervision of 

at least parts of our insurance industry. But I don’t want to get out 

in front of him. But we’ll be taking a careful look at what is the 

most practical way to help to begin that, begin progress against the 

objective. 

Senator NELSON. Well, as you take a look at the case of AIG, although it’s an insurance holding operation, keep in mind that the 

insurance subsidiaries were profitable. That they didn’t have bad 

assets. That this is not, this is not something that has rippled 

through the insurance industry. But focus on what happened with 

the Glass-Steagall modifications that permitted AIG to do what it 

did. 

And so let’s don’t cure problems that don’t exist as we try to take 

a ‘‘comprehensive approach’’. Let’s just make sure that it is not so 

comprehensive that the sweep in regulatory schemes and mechanisms that are currently working. 

Secretary GEITHNER. Senator, I completely agree and we are 

bringing a broader pragmatic spirit to this exercise and try to focus 

on things that were central to the crisis, not things that were not. 

On things that are necessary to do, not just those, not those that 

would be desirable to achieve over time. 

Now, we may not all agree on the judgments we’re making, but 

that’s the pragmatic framework we’re trying to make. 

Senator NELSON. Apparently, you are making a commitment not 

to have collateral damage, right? 

Secretary GEITHNER. Well, that is something of an obligation 

that we all share and we would be very careful to try to avoid that, 

but Senator we did have really systematic failures across the regulatory framework of the United States and we are going to have to 

change a lot of things to address those failures. 

Senator NELSON. Thank you. Thank you, Mr. Chairman. 

Senator DURBIN. Thank you, Senator Nelson. Senator Tester. 
90 

TROUBLED ASSET RELIEF PROGRAM: RESERVE FUND

Senator TESTER. Thank you, Mr. Chairman. 

So many questions, so little time. Secretary Geithner, in your 

budget there’s a financial stabilization reserve of $250 million. In 

front of the Banking Committee last week, Herb Allison was there. 

He is going to oversee the TARP, hopefully. He talked about, he 

called it head room, I interpret it as being reserve, of $100 billion. 

Can you tell me why we need $250 million in the budget? 

Secretary GEITHNER. Senator, could I just begin by saying that 

I announced this morning that banks have, we’ve indicated to 

banks, the Fed indicated to banks that they have the right to repurchase $68 billion, return $68 billion of those initial investments 

and those will be coming back into the general fund. Now the way 

the EES legislation is designed, that does create additional flexibility to allow us to use those funds, if we believe there’s a strong, 

compelling case. And since were—things are getting better in the 

financial system, I think, to be realistic, there’s a lot of risk ahead 

for us and we need to be careful, to remind people that that flexibility authority is important. 

Now, in the reserve fund. The President put in the budget this 

additional reserve fund, in an abundance of caution, against the 

possibility that we could face a deepening crisis. Now, we do not 

expect, at this time, to come back to Congress to ask for authority 

to use those resources. 

I began by pointing out the $68 billion repayment thing, because 

it does provide some modest encouragement, I think, that we are 

going to be able to get through this without having to put you in 

the position of coming back for substantial additional funds. 

Senator TESTER. We appreciate that. I guess the question is out 

of $700 billion, $250 million, even though it’s a ton of money, is like 

spitting in the ocean. 

Secretary GEITHNER. Well, you’re right. We are a $14 trillion 

economy. This is a very severe financial crisis, the worst in generations, and financial crises are expensive to solve, particularly if you 

wait to solve them. 

Senator TESTER. All right. I interpret by your answer to the last 

question that you anticipate the money that is going to be paid 

back will go into the general fund and not reinvested in the troubled banks. 

Secretary GEITHNER. By law, it goes to the general fund but it 

also goes, as the law is written, and I think this was wise, it does 

give us flexibility to use that, again, if we think there’s a compelling case. 

EXTENSION OF TROUBLED ASSET RELIEF PROGRAM

Senator TESTER. Okay. In the end—well, you have an opportunity to extended it to the fall of 2010, the TARP program. 

Secretary GEITHNER. We do. 

Senator TESTER. Do you anticipate that that trigger will be asked 

for? 

Secretary GEITHNER. I don’t know at this stage. There’s a range 

of exceptional programs we put in place, as Senator Collins just 

said, and some of them expire at the end of October and some of 
91 

them have a longer fuse on them. Some of them can be extended. 

We will have to make that judgment as we get a little more—— 

Senator TESTER. If you ask for an extension, I assume it applies 

to all the money and not just a portion? Is that correct? 

Secretary GEITHNER. That’s right. The way the law is structured, 

the authority is about the $700 billion and it applies to the full 

$700 billion. 

TRANSPARENCY OF THE TROUBLED ASSET RELIEF PROGRAM

Senator TESTER. Okay. You talked about, and it has been referenced before, about reluctant investor, not involved in day-to-day 

decisions. It has been pointed out to me that some of the TARP 

funds are being used by banks for speculation in the oil market 

and the commodities market. Is there enough transparency now 

that they are using the TARP funds for you to know that? 

Secretary GEITHNER. Well, I think that’s really a question that 

I would have to refer to the supervisors. The supervisors of those 

banks that receive assistance have the full capacity to judge what 

kind of risk they’re taking generally and whether those risks are 

appropriate, given the conditions of the—— 

Senator TESTER. I know you don’t want to be day-to-day, and I 

don’t want you to be in on the day-to-day decisions. The question 

is, do you think that’s an appropriate use of TARP monies? 

Secretary GEITHNER. Look, I want to make a big distinction between banks and others. Banks, because the risks they pose to the 

economy and because of the protections they enjoy, they are subject 

to a very intensive level of supervision and regulation by the Nation’s banking authorities. That was not strong enough in some 

cases and needs to be stronger, but that is a perfectly legitimate 

public policy interest because of the interest of the system. So, I 

would distinguish that from the role of the Government as temporary shareholder. 

Senator TESTER. Okay. In the previous question, you said that, 

as far as closing down dealerships, that was their decision. Who is 

they? 

Secretary GEITHNER. The companies themselves. And their 

boards. 

Senator TESTER. Okay. In the plan for General Motors, the investment of billions of dollars into that, were there any assurances 

that they wouldn’t move manufacturing overseas? 

Secretary GEITHNER. In the context of General Motors, the company has publicly committed to lay down a path for production in 

the United States as a share of total production. And in those 

plans, they’ve indicated that they expect production to be maintained at current levels, and perhaps expand slightly as they build 

this new plan for small cars. 

So their plans now are, and these were part of the framework established for a bunch of reasons, they expect production in the 

United States to not just level off, but to expand slightly. 

Senator TESTER. Okay. Thank you. 
92 

REPAYMENTS UNDER THE TROUBLED ASSET RELIEF PROGRAM

Senator DURBIN. Thanks, Senator Tester. Going back to the repayment of TARP, which is $68 billion which was announced this 

morning. What is the expected return on investment for taxpayers? 

Secretary GEITHNER. The way the terms were initially established, these preferred investments came with a 5 percent coupon. 

I don’t have my press statement with me, but the Treasury has already earned several billion dollars in terms of those dividend payments on the preferred. 

Now, the full terms for the Government include the value of the 

warrants that Treasury took as part of these investments. We are 

in the process of going through a judgment about what fair market 

value for those warrants is likely to be and in the release we put 

out this morning, I’m not sure we made an estimate, but some of 

the estimates now are in the several billion dollar range for those 

initial banks that are repaying. 

Government—so people will bring all sorts of financial prisms to 

judge the return, of course you have to look at the returns to the 

country, not just in terms of the direct financial returns to country 

which are significant. They really are significant. But you have to 

look at the broader benefit in avoiding a financial collapse because 

there is dramatically more credit available today than there would 

have been if these banks were forced to shrink dramatically. 

Senator DURBIN. That’s the second question. Assuming that you 

wouldn’t allow repayment, if there’s any question of soundness in 

the institution, what kind of assurance do we have that these 

banks that return this money are going to be issuing credit, which 

was one of the original goals? 

Secretary GEITHNER. Right. Well, the judgment on the law was 

made by the Federal banking industry’s responsible, so they did a 

very careful process of judging whether they really could prudently 

repay this money. And the figure I announced this morning reflects 

the judgment of the Federal banking agencies. That means these 

banks are in the position now where they can make normal business judgments about lending. And I think, by many measures, 

lending is very—expanding credit is a very economic thing to do 

today. 

But as I said, we are in recession that followed a huge boom in 

credit. So it’s going to be, for many parts, many families, many 

businesses, borrowing will decline as we go through this. And that 

is a healthy, necessary thing. It makes it very hard to judge, because you don’t know what would have happened in the absence of 

investments, what lending would have been produced. 

But I think you have a different financial system today that is 

substantially stronger than it was 2, 3, 6, 9 months ago and is in 

a much better position to provide the credit necessary to help us 

get through this recession and to get back on a growth path again. 

CREDIT CARD INTERCHANGE FEES

Senator DURBIN. Mr. Secretary, we recently enacted or passed in 

the Senate an historic credit card reform bill, which I commend my 

colleague, Senator Dodd, although the Banking Committee worked 
93 

so hard on it. It’s been 25 years or more since we’ve done anything 

in that field. 

There was the third rail in this discussion which we couldn’t 

bring up and couldn’t discuss for fear it would explode the whole 

process, interchange fees. Interchange fees are the fees that are 

charged by credit card companies and imposed on retailers, and 

there’s very little room, when it comes to the retailers, to negotiate 

these fees. Approximately 2 percent of our purchases using credit 

cards are paid back to the credit card company in interchange fees 

and the retail establishments across America are very concerned 

about this because they have little or no voice in that. 

I’d like to ask you two questions about interchange fees. First is 

a more general question about what the Treasury is doing, if anything, to look into the interchange fee system. 

But then, in particular, since it turns out that the Federal Government is now accepting credit cards, it turns out that there are 

200 Federal entities that accept credit cards, Amtrak, the Postal 

Service, the Treasury’s financial management services, it turns out 

that our Government paid these credit card companies over $200 

million in interchange fees to Visa and MasterCard, in fiscal year 

2007. 

I have repeatedly asked the credit card industry and the banks 

to demonstrate that the rates that they’ve established are legitimate to process the card transactions and unfortunately they have 

not been able to provide any data or information to suggest that 

the amount charged, even to the Federal Government, represents 

a reasonable fee. In fact, the GAO report on this recently said that 

the FMS tried to negotiate lower interchange fees with Visa and 

MasterCard and negotiations were not successful. 

So, in addition to the general question of interchange fees on retail establishments across America, what is the status of your effort to make sure that Uncle Sam isn’t paying too much to these 

credit card companies for the use of the credit cards? 

Secretary GEITHNER. Senator, this is a very complicated question 

and, to be honest with you, I have not thought about this very 

much yet. But I would be happy to spend some time with you and 

your staff, understanding your concerns about this and taking a 

careful look at both questions you raised. 

If I’m not mistaken, I think you asked the GAO to do a study 

of one of these dimensions and of course we would look carefully 

at the conclusion of this study. But I am happy to commit to spend 

some time on this and see if we can—see if there are some sensible 

things that we can do to protect the Government’s interests, not 

just to address the broader reform question you raised. 

STAFFING OF THE TROUBLED ASSET RELIEF PROGRAM

Senator DURBIN. If Senator Collins would just bear with me for 

one more question. I think, with the establishment of TARP under 

the previous administration and the continuance under this administration, there has been a shift of personnel within the Department of the Treasury to deal with the obvious demands, administrative demands. 

Can you give me a general impression of whether or not this has 

created dislocations in other parts of the Treasury Department 
94 

which need to be addressed and whether the repayment or the payback on these TARP funds is some indication that we be getting 

out of this business and can get back to business as normal? 

Secretary GEITHNER. The way that the EESA legislation was 

written it provided funding for the administrative resources required to design and run these programs and we have substantially 

increased resources, using that authority, to staff that part of 

Treasury, the Office of Financial Stability. 

But we are also going to have to increase, as we proposed in the 

budget, the rest of the domestic finance staff. Because they have 

got this greatly expanded, much more complicated set of challenges 

in a range of policies, including the one you just raised. And we did 

announce several weeks ago the appointment of a new Deputy Assistant Secretary for Consumer Policy Issues in the financial sector. 

I do not believe that we’ve had to devote resources from other 

parts of the Government to these financial crisis imperatives on a 

scale that would jeopardize our capacity to carry out those broader 

responsibilities. And we will be very careful to avoid that risk. But 

there are parts of the Treasury, as I suggested, where we think 

that we are going to need to have some modest increases in baseline, like tax policy, which is outside of domestic finance. And I 

think, with that support, I think we will be in a stronger position 

to meet these broader objectives. 

But my basic answer to your question is, no, I’m not concerned 

now that we’ve had a substantial diversion of resources, as important as the financial crisis is, at the expense of other core priorities 

of the Government. 

Senator DURBIN. Senator Collins. 

AUTOMOBILE DEALERSHIP TERMINATIONS

Senator COLLINS. Thank you, Mr. Chairman. 

Mr. Secretary, I want to follow up on the questions that Senator 

Nelson asked you with regard to the decision of General Motors 

and Chrysler to terminate dealerships. 

This decision has been perplexing to many of the automobile 

dealers in my State. Everyone understands that General Motors 

and Chrysler have to restructure and shed costs in order to survive, but the dealerships in Maine tell me that they pay for the 

cars, that they pay for the shipping, that they own their own showrooms, and they pay for their sales people. So, they’ve raise the 

question of how does this save money for the automobile manufacturers to have fewer people promoting their products? Could you 

shed some light on this for us? 

Secretary GEITHNER. Senator, that is an excellent question and 

I have spent some time, I’ve never run an automobile company, but 

I’ve spent some time trying to—— 

Senator COLLINS. Until now. 

Secretary GEITHNER. I don’t expect to be running one now either. 

But I’ve spent some time looking at this and I guess I would say, 

I’m not sure this is going to be convincing or persuasive to you, but 

if you look at the broad consensus, people who looked at what was 

going to be necessary to put these companies back on a better financial foundation, I think there is a very broad consensus that, 

to do that, they need to get the distribution costs down and the dis-
95 

tribution system more efficient. And that’s why the companies 

themselves, at the center of their plans, have proposed very substantial reduction in the number of dealers. 

Now, I know that it’s—I’m not sure that’s persuasive, but my 

sense, again, in reading a bunch of and listening to people who 

study these companies look at them and say, a very broad sense, 

that this is a part of, an important part, to get them down to a cost 

basis to allow them to be viable. Now that comes with enormous 

damage in those communities, and it is a wrenching adjustment, 

but the reality is that these restructuring programs will leave the 

country with many, many more dealers then what would have existed in the absence of these programs. 

The balance, it may not be perfect, but I think that my sense in 

looking at it is that this is a necessary part of their efforts to get 

back to a path where they don’t need the Government. 

Senator COLLINS. Was the decision to reduce dealerships made 

by the manufacturers or was it imposed upon them by the auto industry task force? 

Secretary GEITHNER. It was not imposed by the auto industry 

task force. It was a judgment made by those boards of directors 

and their management, again, about what was a critical part of a 

restructuring plan. 

Senator COLLINS. Thank you. 

FINANCIAL REGULATORY REFORM

I’d like now to return to the issue of financial regulatory reform. 

I introduced a bill in March to create a council of regulators to act 

as a systemic risk monitor. I know that the other model for that 

is to have the Federal Reserve assume that responsibility. I think 

there’s widespread consensus that we do need to have a systemic 

risk monitor so that someone, or some entity, is looking across the 

financial system and identifying high-risk practices, policies, or 

products and regulatory black holes, so that we don’t have the 

problem of no one regulating faulty credit or swaps or the next 

product that comes along. 

The reason that I support the council is I believe there’s value 

in bringing many perspectives to the table and many areas of expertise. The Fed frankly has its hands full. There are also issues 

about congressional oversight. We want the Federal Reserve to be 

independent in order to set monetary policy. If it’s also going to be 

the systemic risk monitor, there’s going to have to be more congressional oversight of its operations. 

So tell me, I know you don’t want to precede the President in announcing his plan, but discuss with me the pros and cons of the 

two approaches. 

Secretary GEITHNER. Well, I should begin by saying, although I 

am not going to get ahead of the President, that we share many 

of the objectives you laid out. 

I think a necessary part of the solution for the U.S. financial system will be a more effective body to bring together the responsible 

supervisory agencies, alongside the Fed, to make sure we are looking across the system as a whole, that we are keeping abreast of 

changes in the structure of the system so that we can better limit 
96 

the risk in the system. And I think a council has a lot of merits 

in that context. 

And I don’t believe it is necessarily desirable for us to concentrate all authority for dealing with the future risk of the system 

in one part of our complicated governmental structure. 

So, although we are going to propose some important streamlining consolidation simplification of the oversight regime, we are 

not going to propose to concentrate all the authority for systemic 

issues in only one place. It’s too complicated really to do that. 

I think the really important thing is, again, is that we have more 

effective oversight over the core institutions that are critical to the 

system, that we bring critical markets like derivatives under an effective framework of oversight and protections there, that we have 

much better enforcement with tougher rules for enforcement for 

consumer investor protection. That we have better tools for managing future crises. And we are going to have to have tougher constraints on risk-taking involving better constraints on leverage and 

capital, so that you have thicker shock absorbers, thicker cushions 

against future crises. We are more able to let firms fail. The system 

is more robust to potential failure. 

So, those are broader objectives in our approach. But you’ll find 

many of the concerns and objectives you laid out present in our recommendations. 

Senator COLLINS. Thank you. 

Senator DURBIN. Senator Tester. 

TERMINATION OF AUTOMOBILE DEALERSHIPS

Senator TESTER. Thank you, Mr. Chairman. I don’t want to beat 

this horse, but I will just say this. And I like ya. There’s an overwhelming attitude in this country that bigger is better. And I think 

what we’re allowing General Motors and Chrysler to do, by closing 

down these small dealerships, is putting all the forces into a few 

big dealerships because, number one, it is easier to deal with a few 

people than it is a lot. And number two, it will reduce competition. 

And I’ve got to tell ya, if the dealership is making money, I don’t 

see any criteria for shutting them down. And that’s my only editorial comment I will tell you. 

And the only other thing to keep in mind is, in rural America, 

it’s a heck of a lot different than it is in urban America. You shut 

down some of these smaller dealerships in some of these small 

towns that are making money, that General Motors is making 

money off of, its going to have an incredible impact on the economy. That’s all. And I know you aren’t making that decision, but 

if you could pass that along to the powers that be, I would appreciate it. 

Secretary GEITHNER. Message heard and received. 

Senator TESTER. Okay. Thank you. 

FEDERAL DEFICITS

Chairman Bernanke talked restoring fiscal balance. Could you 

just comment on that and where you see us going over the next few 

years, assuming the economy gets turned around? 

Secretary GEITHNER. It is critically important for this country, 

it’s central to the prospects of recovery, that we put in place a 
97 

framework that gives confidence to Americans and investors 

around the world, that we are going to have the ability, the will 

and ability, to bring our fiscal deficits down to a sustainable position over the medium term. And that’s why the President, in his 

initial budget, laid a path for dramatic reductions in the deficit to 

bring them down over a 5-year period to a level at which our overall debt is not growing and can start to come down. 

Senator TESTER. I just heard the Government will triple in 10 

years not more than one-half an hour ago. 

Secretary GEITHNER. Well, you know, we came into—I last 

served in the administration during the period where we had an 

extraordinary accomplished record of fiscal discipline, produced 

surpluses, helped bring down interest rates, helped lay the foundation for not just a strong dollar but an incredibly long period of private investment growth, productivity growth. So, I am a deep believer in and have deep conviction in the central importance of fiscal responsibility for this country. 

Now, we started this year in the worst financial crisis in decades 

and, because of that crisis and the damage done by the financial 

system, we had to do, with the Congress, extraordinary things. And 

those, by necessity, produced a short-term temporary increase in 

our deficits. There was no path through this crisis that did not involve some temporary short-term increase in borrowing. But at the 

time that we proposed and, again, the President proposed and he 

acknowledged that we were going to have to bring this deficit down 

over time and that’s what we’re going to do with the Congress, it 

is going to be difficult to do, and it is going to be important to do, 

because, again, we are going to find that recovery will be weaker, 

private investment will be weaker, interest rates will be higher unless we are able to convince people that we’re going to have the will 

and ability to do that. 

FINANCIAL REGULATORY REFORM

Senator TESTER. Okay. Too-big-to-fail. It can’t be an option in 

any industry and I think we may be there in energy and we may 

be there in food systems. We are absolutely there in the banking 

industry. How do we fix it? Do we fix it with regulation? How do 

we fix it? 

Secretary GEITHNER. I think there are, I would just mention a 

few things and they will be the core of what the President lays out 

soon. 

First, you have to have better design, tougher constraints on leverage, on risk taking in the core parts of the system. You have 

to have better oversight of the central markets like derivatives, because those are the markets that sort of effect whether failure is 

going to risk wrecking the system or whether failure can be absorbed and accommodated. So you need thicker shock absorbers in 

those central market, too. 

You need resolution authority, as I said in response to Senator 

Bond’s comments, that allows us to deal with the perspective failure of a large complex institution like AIG. Those are some of the 

things you need. 

And I would just make one observation, Senator, just to show 

how hard and complex this is. It’s not just the size. And in some 
98 

ways size is not the most important factor. It is the role the firm 

plays in the system, how connected it is, what impact its failure 

has. And you’ve had, in this crisis, what are not the largest institution in the world, present the risk of catastrophic damage because 

of how interconnected they are. 

So, better capital applied across the system to limit scale of leverage, much better oversight and shock absorbers in the central 

infrastructure to limit the risk of damage caused by failure and 

better resolution tools. 

Senator TESTER. Okay. I want to step back, step back for just a 

second. Neel Kashkari said that that the big guys had an advantage over the community banks in particular, because of their access to credit due mainly to TARP, I would imagine. Do you think 

that they have an unfair advantage and—— 

Secretary GEITHNER. I don’t, I don’t—you know, we have 9,000 

banks in this country. I expect that, 10 years from now, we will 

still have a financial system, and it is very important that we have 

a financial system, that has thousands and thousands of small 

community banks operating across the country. I think that makes 

our system more resilient and stronger and I think this crisis 

would have been worse without that. And one of the importance of 

the reforms that we are going to layout is to make sure that large 

institutions have constraints on leverage that are appropriate, 

given their scale and risk. And that will help offset some of the potential concerns you raised about a level playing field for community banks. 

Senator TESTER. Thank you very much. 

FINANCIAL PRODUCT SAFETY COMMISSION PROPOSAL

Senator DURBIN. Mr. Secretary, I was glad the President announced the support for the concept of a Financial Product Safety 

Commission. I first introduced that bill in March and I think that 

to have an agency charged with protecting consumers from predatory tricks and traps is a good idea and could have spared us some 

of the problems we are currently going through with prepayment 

penalties on mortgages, for example. 

But, in a way that is the easy part of my question. The tougher 

part gets to the heart of the issue and the heart of the issue would 

be an interest rate charge. Is there too much, is there an interest 

rate that is too high in America? Do we have an obligation as a 

country to say that certain levels of interest rates are unconscionable, intolerable, illegal, unacceptable? 

I put in a bill to put the usury rates at 36 percent because I 

thought that was so high that we would be just fine. As I said, if 

you wanted to start a snake farm, you should put in a usury bill 

and watch what crawls under your door. The folks that came from 

title loans and payday loans could sit and say to me, with a 

straight face, Senator, you’re going to put us out of business. Thirty-six percent will put you out of business? Yes. I asked them how 

much do you charge for loans? Oh, somewhere between 58 percent 

and 800 percent. People used to go to prison, they called it juice 

in the old days, when people were engaged in that sort of thing, 

you know, in the back alleys. Now it is acceptable, legal in this 

country. 
99 

Is there, should there be a consideration about limiting interest 

rates charged for certain products in America? 

Secretary GEITHNER. Senator, I believe that we have to have a 

much stronger set of protections for consumers, particularly in the 

area of financial products that involve debt and credit. Those were 

where the failures were the most stark and I think it is going to 

require more than institutional and I agree with you, just establishing a commission doesn’t, it just doesn’t—it may be necessary 

but it is not sufficient. 

So, I think you need to have stronger protections. I think the 

credit card reform bill is a good step, but it is a not a sufficient 

step. And we’re going to propose what we believe and the President 

believes is a necessary set of much stronger protections. 

Now, I understand your, the reason why you’re supportive of a 

cap on interest rates. You have been exposed to a lot of the concerns on the other side of that, in terms of that would have unintended effects, in terms of denying people the rights to some forms 

of credit. I think you’re right, it’s sort of hard to make the case as 

to why some of those products are necessary or desirable, but I do 

not believe that those caps are a necessary part of a strong, credible consumer protection regime. And what I suggest is, I hope that 

when we lay out our proposals, we will have a chance to look at 

those and talk to you about whether those go far enough to meet 

your concerns. 

USURY CAP

Senator DURBIN. Can I ask you to also consider the following? If 

we can’t sell the notion of a usury cap, shouldn’t we prevail upon 

institutions? I mean, credit unions have been coming to me for over 

two decades saying we’re different, we’re not greedy like banks, 

we’re just trying to serve our little group of people that save there 

and we loan to them. 

Shouldn’t we be talking about making credit available to the poor 

people who are lured into these payday loans and title loans? Have 

credit available in lower amounts at reasonable interest rates so 

that these people are not exploited? I just don’t think we can continue to look the other way. I have challenged the credit unions to 

do it, they haven’t responded. 

But perhaps the banks bear some responsibility here. If we are 

going to have credit available for people who are truly struggling 

in this economy, why do we throw them to the wolves with these 

payday loans and title loans? 

Secretary GEITHNER. I agree. I think people who have spent their 

lives, like you, thinking about these issues believe that an important part of the solution is to make sure that all our citizens feel 

that they have the capacity to be part of the broader financial system that has these protections. And one step toward the objective 

you laid out is to make sure that they have bank accounts, have 

a relationship that allows them access credit which is going to be 

on forms where they are less vulnerable—I think that’s an important thing. 

The President’s nominee for Assistant Secretary for Financial Institutions at the Treasury, his name is Michael Barr, has spent his 

life’s work on these kinds of questions and he is one of the more 
100 

thoughtful people in the country thinking about to bring about reform in those areas. 

Senator DURBIN. Thank you. Senator Collins. 

REGULATORY REFORM

Senator COLLINS. Thank you, Mr. Chairman. 

Mr. Secretary, another issue that keeps coming up is regulatory 

shopping. In other words, financial institutions will figure out 

which regulator gives them the most advantages. I saw this on the 

State level 20 years ago where we would have a financial institution come in and threaten to switch to a Federal charter because 

our audits were too tough or our consumer protections were too 

strong. 

I don’t think that it’s a coincidence that AIG bought a small federally chartered thrift, or established a small federally chartered 

thrift, in order to get under the regulation of the Office of Thrift 

Supervision, OTS, which is generally viewed as being a weaker regulator than the Comptroller of the Currency. 

Are you looking, as part of your reforms, on combining the OTS 

with the OCC? That’s what my bill does. And needless to say, I 

think it’s a brilliant idea and needs to be done. 

Secretary GEITHNER. Senator, you’re absolutely right that one of 

those things that helped produce this crisis was that, in our country, we allowed people to choose their regulator, to put risk in 

areas where they thought it was going to be least well-regulated, 

and that level of unevenness in the basic standards and protections 

in our system proved tragically damaging to the stability of our 

system. And fixing that will be critically important. 

And, as part of that, we are looking at the areas in our system 

where we are most vulnerable to that kind of shopping for regulators and regulatory arbitrage. You pointed out one example, and 

I think it is one the more compelling examples, of that failure and 

weakness in our system. But just to say that we’re looking beyond 

that. Of course, we’re looking at that, but we know that this is 

something that we need to do globally, too. Because we need to 

make sure that we’re not vulnerable in the future to risks if we get 

the standards better here, risks just moving offshore to other areas 

where there is still risk to our system. So, we want to have a level 

playing field, more conservatively set, more evenly enforced across 

the U.S. financial system. And we want to try to bring the world 

to those higher standards as well. 

Senator COLLINS. You know, you also made an excellent point 

when you talked about the excessive leverage in the system. I 

think when Bear Stearns failed, its leverage ratio was an astonishing 30:1. That’s something that never would have been allowed 

to happen under our regulatory process for a small community 

bank or a credit union. 

So, I hope, as you look at this issue, that we’re going to be establishing safety and soundness requirements regardless of the type of 

institution. It seems to me that Bear Stearns, the larger investment banks, all of which have either disappeared, have been acquired, or no longer exist, should have been required to meet the 

same kinds of capital requirements and leverage ratios that we 

would impose upon a community bank or a credit union. 
101 

Secretary GEITHNER. Senator, I have a lot of sympathy for that 

view and I think that, again, a centerpiece of what we need to do 

for this country is to make sure there are more conservative, better 

designed constraints on leverage applied more evenly across those 

institutions that play a critical role in how our markets function, 

both in normal times and in distress. 

Now, it is true that, in the United States, we were fortunate to 

have, across the banking system, a very simple, easily enforceable, 

crude constraint on leverage. And for that reason, in many ways 

our financial troubles today are much less acute than they are for 

countries around the world where that kind of constraint did not 

exist. 

So just an example, banking assets in our country today about 

one times gross domestic product (GDP). They are between two and 

eight times GDP across Europe. In part because they did not have 

in place that kind of simple, crude constraint on leverage. So, you 

are right. That is an important part of the reform. We want to 

have, as I say, thicker shock absorbers in the system, thicker cushions of capital against risk, that are more simple, more evenly enforced, and are less pro-cyclical, you know, that they dampen future crises rather than amplify them. And that would be a part of 

what we propose. 

Now, I want to just say that these are things that—these are 

very complicated things. Of course, we want to get them right. And 

we are going to go through a very careful process to bring experts 

together and thinking about what the right mix of those constraints are so that we have them in place before we start to see 

the seeds of next boom. 

Senator COLLINS. If you haven’t already looked at them, I would 

encourage you to look at the Canadian and the Australian twin 

peaks system, which I think also have benefits to them. 

Canada has not had the kind of financial crisis that we’ve had, 

and it is very interesting to look at the differences in their regulatory structure, their mortgage lending, and their tax deductions. 

It’s fascinating to look at those differences and then look at the results. 

My time has expired, so I am going to submit for the record, with 

the chairman’s permission, some questions on our debt level because I wasn’t able to get to that important issue today. 

Thank you. 

Senator DURBIN. Of course, Senator Collins, your questions will 

be submitted for the Secretary, along with others, for him to consider. 

The last question will come from an organic farmer from Montana, Senator Tester. 

STRESS TESTS AND ECONOMIC RECOVERY

Senator TESTER. Thanks, Mr. Chairman. The Congressional 

Oversight Board issued a report this morning stating that additional stress tests may be necessary due to uncertain economic conditions. What are your thoughts on that? 

Secretary GEITHNER. Yeah. I haven’t had a chance to look at the 

report, but of course I’ll look at it and read it. But I did see some 

of the initial coverage of the report. 
102 

I think I should say that—just two things. The process was designed by the Federal Reserve, it was a very conservative test. And 

I want to cite one example. People are focused, like the Congressional Oversight Board did, on the unemployment assumptions in 

the initial scenarios. Those were not the binding constraint. The 

loss estimates that the Fed used for its estimate were more conservative than the worst 2 year period in the Great Depression, 

when unemployment was in the high 20s, 30s for a period of time. 

Those were the ones, those were the parts of that test where the— 

those were the ones that were most important. 

I think it was a reasonably conservative and, in some ways, the 

best test of that was that, in the wake of that conclusion of those 

results, we’ve seen a very, very substantial amount of equity come 

back into the financial system because it provided a level of clarity 

and disclosure about balance sheets that did not exist before. And 

I think that’s a good test. 

Now, markets don’t get everything right and, you know, we’re 

still going through a deep recession and we are at the early stage 

of repair and recovery. Life is uncertain and there are risks ahead. 

But I think it was a very carefully designed conserve test and it 

has helped play an important role in improving confidence in the 

system. 

REFORMING GOVERNMENT SPONSORED ENTERPRISES

Senator TESTER. Okay. The administration, you’ve referenced it 

several times, is going to be sending out a plan for Congress on 

modernization and regulation for financial markets. Will there be 

a recommendation for Freddie Mac and Fannie Mae? 

Secretary GEITHNER. The future of the GSEs, including Fannie 

and Freddie, will be an important, is an important challenge for us, 

but we are not going to—I’m violating my rule of getting ahead of 

the President, we’re not going to recommend, in our initial proposals for reform, precisely what we think the future of those 

issues should be. 

We are going to begin the process of consulting with Congress 

and a broad section of housing experts on what we think the range 

of options are. But we are going to defer recommendations on those 

things for a bit longer. 

Senator TESTER. Okay. Can you give me any kind of timeframe 

that you’re looking at? 

Secretary GEITHNER. I can’t yet, but we probably will next week 

when we lay it out. But it’s just a little early, just given the scale 

of the stuff that we are going to get to take on. We want to do this 

carefully. 

Senator TESTER. No problem. Thank you. 

Senator DURBIN. Mr. Secretary, thank you for your time here 

today. We are going to allow you to leave, of course, and go about 

your business of saving the American economy, or lunch. Whatever 

is on your schedule. 

ADDITIONAL COMMITTEE QUESTIONS

But we thank you very much for being here. We’ll send you some 

questions that you might consider and, while we’re changing wit-
103 

nesses here. Mr. Shulman is going to come up here, the IRS always 

has the last word. We will let him take the table. 

Secretary GEITHNER. Thank you. He is doing a great job and I 

hope you will give him the support he needs. 

[The following questions were not asked at the hearing, but were 

submitted to the Department for response subsequent to the hearing:] 

QUESTIONS SUBMITTED BY SENATOR RICHARD J. DURBIN

DEPARTMENTAL OFFICES

Question. Secretary Geithner’s testimony stated that the Treasury Department 

will be reducing costs by cutting the number of the Department’s economic attache ́s 

from 20 to 16. 

During this global economic crisis, why has the Department requested to eliminate staff tasked with communicating with our international economic partners? 

Answer. The Department is working daily to address the current economic problems and ensure the quickest path to recovery. The fiscal year 2010 budget for the 

Departmental Offices will improve the analytical capabilities at the Department to 

address these challenges while also maintaining fiscal responsibility. We looked to 

offset some of the proposed increases in the Office of Domestic Finance and the Office of Tax Policy by identifying savings in the attache ́ program. The reallocation 

of resources will not negatively impact our long-term missions. 

Treasury places great value on its international attache ́ presence, which helps advance Treasury priorities across a broad range of issues. Indeed, the attache ́ program has grown from 8 attache ́s in April 2007 to the 15 attache ́s currently in the 

field. Nonetheless, the five attache ́ posts in question are currently vacant. By extending the vacancies in the four posts in question, Treasury can help free up funding for programs focused on the domestic economic situation. We will continue to 

actively communicate with our international partners through our existing 15 

attache ́s posted around the world, and we remain committed to working with our 

existing staff and other Executive Branch agencies to promote and support economic 

prosperity at home and abroad. 

Question. The fiscal year 2009 omnibus provided $6.2 million for a new Operations Center to provide the Department with a 24/7 capability to monitor the global 

market. 

What is the current status and timetable for full functionality of the Center? 

Do you agree with the previous Administration that this 24/7 capability will enhance Treasury’s responsiveness to global partners and to financial crises? 

Answer. The Department does support the development of an Operations Center. 

Construction of the Operations Center is set to start at the end of September with 

phase 1 (24/7 call center ops). 

Phase 2, which is ongoing, is to reassess the requirements for the Treasury Markets Room in light of the evolving mission of Treasury related to financial stability 

and economic recovery requirements. In this context, we are also refining the interaction between the Markets Room staff, the executive communications support 

team, and the emergency planning team. Since the original concept of the Treasury 

Operations Center was developed in 2007, prior to the 2008 financial crisis and the 

onset of the recession, Treasury leadership has been working to leverage investments in the Operations Center to full effect. To do so, we are refining the capabilities needed in the areas of financial markets and economic policy analysis as a result of financial stability and economic recovery initiatives. Results of this assessment will be completed this fall and will inform decisions related to staffing and 

organizational alignment of the Markets Room. 

Phase 3 will reassess the coordination and interaction between the Treasury Operations Center and the Intelligence Operations Center. Phase 3 should not require 

additional resources. 

COMMITTEE ON FOREIGN INVESTMENT (CFIUS)

Question. The Department has seen a significant increase in its CFIUS caseload 

over the last several years. The fiscal year 2009 omnibus provided additional funds 

for CIFIUS to address the growing backlog of cases. 

To what extent have the additional funds allowed CFIUS to make progress in 

clearing out the backlog of cases? 

Has the caseload dropped off significantly due to the economic crisis? 
104 

Answer. Treasury has utilized additional funding to increase critically needed 

staffing for CFIUS to handle the significant increase in caseload over the last several years. The number of covered transactions reviewed by CFIUS nearly tripled 

between 2005, when 64 notices were filed, and 2008, when 155 notices were received. Because of the statutory timelines for CFIUS reviews (30 days) and investigations (45 days), cases cannot accumulate in a backlog but must be reviewed 

within those required periods regardless of the transaction volume at any particular 

time. This is why adequate staffing to fully review each case for potential national 

security concerns is essential. Although there was a decline in the number of cases 

during the economic crisis of recent months, the number of anticipated cases in the 

pipeline has begun to rise. We expect that case volumes will return to levels of recent years when merger and acquisition activity picks up with economic growth. 

OFFICE OF FOREIGN ASSETS CONTROL (OFAC)

Question. Building on the lifting of certain travel and trade restrictions included 

in the fiscal year 2009 omnibus, President Obama has committed to further opening 

trade and communication with Cuba. 

What is the economic potential in agricultural trade between the United States 

and Cuba if all agriculture trade restrictions are lifted? 

How does that compare to the level of agricultural trade today? 

Answer. The Census Department reports that goods trade between the United 

States and Cuba since 2000 has been as follows: 

U.S. GOODS TRADE WITH CUBA 

[Millions of 2008 dollars] 

Exports Imports 

2000 ................................................................................................................................................ 8.8 0.4 

2001 ................................................................................................................................................ 8.8 ....................

2002 ................................................................................................................................................ 174.6 0.2 

2003 ................................................................................................................................................ 303.2 0.4 

2004 ................................................................................................................................................ 460.6 ....................

2005 ................................................................................................................................................ 406.8 ....................

2006 ................................................................................................................................................ 363.6 0.1 

2007 ................................................................................................................................................ 464.3 0.3 

2008 ................................................................................................................................................ 711.5 ....................

1Q09 ................................................................................................................................................ 182.5 ....................

Source: http://www.census.gov/foreign-trade/balance/c2390.html#2000. 

The Trade Sanctions Reform and Export Enhancement Act of 2000 or TSRA allows sales of agricultural commodities to Cuba, while prohibiting U.S. government 

assistance, foreign assistance, export assistance, credits, or credit guarantees for 

purposes of financing such exports. TSRA also denies exporters access to U.S. private commercial financing or credit; all transactions must be conducted with cash 

in advance or with financing from third countries. 

We do not have an estimate of the potential increase in agricultural trade with 

Cuba if remaining trade restrictions are lifted. A July 2007 report by the International Trade Commission estimated that the U.S. share of Cuban agricultural, 

fish and forest imports would increase if financing restrictions were lifted. 

Question. In April of 2009, President Obama announced his intent to allow U.S. 

telecommunications network providers to provide phone and internet services in 

Cuba. However, the Cuban government would have to allow the presence of U.S. 

providers in Cuba for U.S. companies to enter the Cuban market, and it is unclear 

if or when that approval will occur. 

How do you plan to pursue persuading the Cuban government to accept the operation of U.S. telecommunications companies in Cuba? 

Answer. While Treasury is responsible for implementing and enforcing the Cuba 

Sanctions program, this question is more appropriately addressed to the Departments of State and Commerce. This would likely be part of a larger dialogue between the United States and Cuban governments over diplomatic and trade issues. 

COMMUNITY DEVELOPMENT FINANCIAL INSTITUTIONS (CDFI) FUND

Question. Like a lot of individuals and businesses, CDFIs are having trouble finding financing in this economy. The budget proposes to continue a provision in the 

Recovery Act that temporarily waives the matching fund requirement for CDFIs. 
105 

How much of the requested budget increase will fill in the gaps left open by the 

decrease in private financing, and how much will actually go toward expanding the 

reach of CDFI funds? 

Answer. Treasury estimates that private sector capital contributions to CDFIs will 

decline by at least $125 million in fiscal year 2010. The requested increase of $136.6 

million, or a 127 percent increase in fiscal year 2010 for the CDFI Fund, which includes $80 million for the new Capital Magnet Fund and $113.6 million for the 

CDFI Program, will provide considerable support to CDFI industry. The request 

also includes additional funding to support a more robust research and evaluation 

program and the implementation of operational improvements. 

Treasury believes that 100 percent of its CDFI Program award dollars allow 

CDFIs to expand their reach by: (i) introducing new financial product offerings; (ii) 

expanding their geographic service areas; and/or (iii) increasing the number of customers served. 

Question. When does the Department project that CDFIs will be able to once 

again secure sufficient private funding so that Congress can reinstitute the matching funds requirement? 

Answer. With the onset of the financial crisis in 2008, and resulting mergers 

among major banks, CDFIs have experienced severe reductions in capital contributions and investments by the major depository institutions in the CDFIs over the 

last 2 years, as well as significant reductions in philanthropic contributions. Declining capital contributions from depository institutions, corporations, and philanthropic institutions (amounting to a decrease of at least $125 million in private sector investments in 2010) necessitate a matching funds waiver for fiscal year 2010. 

Treasury is hopeful that conditions in the market will change significantly such that 

the matching fund requirements can be reinstated in full in fiscal year 2011. The 

2010 budget requested a waiver only through 2010. 

Question. Even without the matching funds requirement, CDFI grants generally 

only make up part of the financing package for projects such as housing units and 

community centers. 

Considering the economic downturn, is there enough demand from high-quality 

CDFIs to spend the additional funds requested in fiscal year 2010? 

Answer. CDFIs have seen a huge increase in loan applications since the current 

economic crisis began from both existing customers and customers who had been 

working with regulated financial institutions. Also, many CDFIs are developing 

neighborhood stabilization programs which entail housing and neighborhood rehabilitation, including community services. Finally, there is continuing demand for 

small business financing in neighborhoods that are heavily impacted by foreclosures 

and high vacancy rates. 

Given this tremendous need for capital, Treasury believes that the $90 million in 

Recovery Act funding and $113.6 million requested in fiscal year 2010 will provide 

significant support to qualified CDFI Program applicants. Including the additional 

Recovery Act resources, the CDFI Fund will make approximately 90 awards totaling 

$145 million through the CDFI Program. 

CAPITAL MAGNET FUND

Question. The fiscal year 2010 budget requests an $80 million appropriation to 

jump start the Capital Magnet Fund. The Capital Magnet Fund will be much like 

the CDFI program but will focus exclusively on the development of affordable housing. When the Capital Magnet Fund was created, Fannie Mae and Freddie Mac 

were required to provide revenues to the fund. However, the program has not been 

started because Fannie Mae and Freddie Mac are not currently in a financial position to allow them to make any contributions. 

Considering the start-up time needed to administer a new program, how soon will 

Capital Magnet Fund grants be disbursed? 

Answer. In March 2009, the CDFI Fund solicited public comments regarding the 

design and implementation of the Capital Magnet Fund (CMF). Over the next several months, the CDFI Fund will develop proposed regulations, the Notice of Funding Availability (NOFA) for a fiscal year 2010 funding round, a funding application, 

standard operating procedures for application review and awardee compliance/performance monitoring, and related automated systems. The CDFI Fund’s goals are 

to publish the NOFA and solicit applications in the spring of 2010 and to make 

CMF award announcements in the summer of 2010. 

Question. Please describe the major differences between the CDFI Fund and the 

Capital Magnet Fund. 

Answer. The CMF is similar to the CDFI Program, and consistent with the CDFI 

Fund’s core mission, in that it provides capital to organizations to support their fi-
106 

nancing activities, rather than providing subsidies for specific projects or units, as 

is the case with most other Federal housing programs (e.g., Hope VI; Low-Income 

Housing Tax Credit; Section Eight). However, there are several differences between 

the CMF and the CDFI Program: 

—The CMF targets a broader pool of applicants than the CDFI Program. CMF 

funding is available to CDFIs and to other nonprofits, whereas CDFI Program 

financial assistance is only available to CDFIs. 

—The size of CMF awards is expected to be much larger than CDFI Program 

awards. CDFI Program award requests have been capped at $2 million per application, and award amounts have actually been lower (averaging $1 million 

per applicant in the fiscal year 2008 funding round). By contrast, with an $80 

million appropriation, the CDFI Fund anticipates that it can make CMF awards 

in much larger amounts. 

—CMF awards may only be used to attract private capital to finance the development, rehabilitation, preservation, and purchase of housing that is affordable to 

low-, very low, and extremely low-income households, and related economic development activities. Thus, the CMF fulfills a distinct need for flexible and innovative affordable housing financing such as: pre-development grants and loans; 

loan guarantees; loan loss reserves; project equity; subordinated gap financing 

and bridge loans. CDFI Program awards may be used for a broader range of 

activities including, among others: business and microenterprise lending; consumer lending; the provision of financial services; and CDFI capacity building. 

Question. The Treasury Department is currently overseeing the management of 

Fannie Mae and Freddie Mac. 

When does Treasury project that Fannie Mae and Freddie Mac will become 

healthy enough to begin the mandatory payments into the Capital Magnet Fund? 

Answer. The Federal Housing Finance Agency (FHFA) placed Fannie Mae and 

Freddie Mac into conservatorship on September 7, 2008, and as conservator is responsible for overseeing the management of Fannie Mae and Freddie Mac. Consistent with its responsibilities as conservator, FHFA suspended the required Housing and Economic Recovery Act of 2008 contributions (which include the Capital 

Magnet Fund) by Fannie Mae and Freddie Mac in view of their losses and draws 

on the Treasury Department’s Senior Preferred Stock Purchase facility. The ability 

of Fannie Mae and Freddie Mac to begin making these contributions will depend 

on an improvement in their overall financial condition, which is closely tied to overall conditions in the housing market. 

FINANCIAL CRIMES ENFORCEMENT NETWORK (FINCEN)

Question. The fiscal year 2009 omnibus provided an $865,000 increase for FinCEN 

to strengthen its global efforts to combat terrorist financing and money laundering, 

including for addressing a large case backlog. FinCEN’s work in this area is expanding as the global financial intelligence community grows. For example, in May of 

2009, the Egmont group, the international organization of Financial Intelligence 

Units, added nine new members, including Saudi Arabia and Sri Lanka. 

Why does the budget request decline to include additional funding to continue to 

enhance the capacity of FinCEN to communicate and coordinate with other Financial Intelligence Units around the globe? 

Answer. FinCEN continues to work with FIUs around the world to expand and 

enhance global financial intelligence sharing initiatives aimed at combating 

transnational crime threats facing U.S. financial markets. FinCEN’s information exchanges and case support workload to support the growing number of FIUs continues to grow. 

This is very important work and continues to be a priority for the Department, 

however, we are operating in a tight fiscal environment with many competing priorities. The President’s budget maintains the level of staff and other resources supporting FinCEN’s work with international partners; it also invests in FinCEN’s IT 

Modernization effort, which will improve data integrity and better equip FinCEN 

analysts to provide accurate, complete and timely responses to requests. 

Question. The President’s fiscal year 2010 budget requests $10 million to fund an 

upgrade to the information technology (IT) system used for financial reporting under 

the Bank Secrecy Act. In July 2006, FinCEN halted work on BSA Direct, the previous attempt to upgrade its IT systems. Treasury spent 2 years of planning and 

invested $14.4 million in that failed system. 

What lessons were learned from the previous attempt to replace FinCEN’s IT systems? 

Answer. An independent review of the BSA Direct program identified several key 

factors that played a part in its failure. The most critical of these were: unclear 
107 

project scope and requirements; inadequate program governance; and a lack of demonstrated project management experience (both Government and Contractor). 

FinCEN has been diligent in resolving all of these factors, as well as taking additional steps necessary to develop a solid foundational approach to assure the success 

of the new BSA IT Modernization initiative. Over the last 3 years, FinCEN has developed a comprehensive IT Modernization Vision and Strategy that identifies the 

scope of what is required to meet customer needs; an Enterprise Transition Strategy 

that outlines the high level plan for how we plan to accomplish the initiative; and 

employed a System Development Lifecycle, based on a model that has been successful within the IRS, to execute and monitor the program. FinCEN has committed to 

transparency and active engagement of internal/external stakeholders, working 

through the Bank Secrecy Act Advisory Group (BSAAG) and establishing an active 

partnership with the IRS at both an operational and strategic level. Further, we are 

currently working to establish a project plan that will allow the IT Modernization 

effort to be accomplished in the most cost-effective manner. 

Finally, and to address the most critical lesson learned, Treasury has emphatically addressed the issue of program governance. FinCEN has collaborated with the 

Department and IRS to establish proper governance and oversight for the BSA IT 

Modernization initiative. In 2008, the Modernization Executive Group (MEG) was 

created and currently serves as the highest level, integrated governing body in support of BSA information management and is tri-chaired by the Treasury Chief Information Officer, the IRS Deputy Commissioner, and the FinCEN Director. The MEG 

established an Executive Steering Committee, comprised of senior Departmental, 

IRS and FinCEN business and technical representatives, to provide oversight and 

guidance to the Modernization program. FinCEN also has a new bureau-wide 

Project Management Office and an IT-specific Modernization Management Office to 

ensure the day-to-day project controls are in place for successful execution of its IT 

Strategy. Finally, this initiative was discussed and endorsed as a Departmental priority by the Treasury Department’s Executive Investment Review Board, consisting 

of representatives of all Treasury components for the purpose of providing executive 

direction and review of significant Treasury IT projects. 

Question. What improvements has FinCEN made to the planning and implementation process that will avoid problems that plagued the previous failed upgrade? 

Answer. FinCEN has established the organization’s first enterprise business 

transformation and IT modernization strategy (the BSA IT Modernization Vision & 

Strategy), which serves as the roadmap for aligning FinCEN’s IT portfolio with business objectives and processes. The bureau has also leveraged the IRS Enterprise 

Life Cycle to develop a System Development Life Cycle (SDLC) to ensure a robust, 

repeatable process is in place to manage the projects and overall program efforts 

required to modernize its IT environment. As part of the SDLC, the Executive 

Steering Committee must approve the results of each phase of the life cycle before 

FinCEN can move to the next phase. 

Since fiscal year 2007, FinCEN has hired six seasoned managers from industry, 

Department of Defense, and other Federal Agencies to oversee the Technology Solutions and Services Division (TSSD), establishing an entirely new senior management team supporting IT. The Chief Information Officer and new TSSD management team have extensive experience in managing large information technology programs and IT Modernization efforts, as well as years of hands-on experience in acquisition. Over the past 2 years, TSSD has elevated all critical Contracting Officers 

Technical Representatives (COTRs) responsibilities to the new senior staff, while 

also ensuring each COTR holds the requisite Federal Acquisition Certification for 

COTRs (FAC–COTR). The manager responsible for overall program control is a certified Project Management Professional from the Project Management Institute and 

is currently undergoing the necessary steps to obtain the Federal Acquisition Certification for PM’s (FAC–PM) for FinCEN’s major IT investment (BSA IT Modernization). 

In addition to ensuring the appropriate planning and execution processes are in 

place, establishing appropriate governance and oversight, and incorporating an entirely new management team, we are continuously involving both our internal and 

external stakeholders to ensure successful project implementation. 

Question. How does FinCEN plan to involve the wide variety of stakeholders in 

the planning for this IT overhaul—including banks, federal law enforcement, state 

and local law enforcement, and other federal intelligence agencies? 

Answer. FinCEN has engaged its internal stakeholders by establishing a CrossFinCEN Integrated Product Team (IPT) made up of representatives from each 

FinCEN Office (Regulatory/Policy, Analytics/Liaison, International, Office of Counsel, and Management Programs). The Data Management Program and Data Management Council (DMC), which is comprised of Federal law enforcement and regu-
108 

latory members, were established to engage FinCEN’s government stakeholders. 

These two entities have participated in the identification and validation of BSA capabilities and requirements. In addition, FinCEN plans to engage the IPT and DMC 

continuously through the modernization initiatives in such System Development 

Life Cycle activities as user acceptance testing, training, and communications. When 

appropriate, FinCEN will also leverage the BSA Advisory Group, comprised of Federal representatives as well as financial institutions, for feedback pertaining to the 

impacts of the Modernization on their respective user communities. Finally, these 

processes will ensure this investment is leveraged in the most efficient manner possible by incorporating the common needs of the over 300 agencies at the Federal, 

State, and local levels that depend upon the system. 

TREASURY INSPECTOR GENERAL

Question. The recent increase in bank failures has forced the Treasury Inspector 

General to defer much of its routine but important audit and investigative work in 

order to meet its statutory responsibility to review certain bank failures. For fiscal 

year 2009, Congress provided $26.1 million for the Treasury Inspector General, a 

$7.6 million increase compared to the fiscal year 2008 level, so that staff could return focus on critical audit and investigative work. However, the budget proposes 

an increase of just $575,000 over the fiscal year 2009 enacted level. 

Considering that analysts anticipate that a significant number of bank failures 

will occur in fiscal year 2010 and over the next several years, without a larger funding increase, how would the Treasury Inspector General’s office be able to fully 

maintain its oversight work while conducting these critical bank reviews? 

Answer. Based on the best information we have to date, we believe that the fiscal 

year 2010 budget request is sufficient for the OIG to meet its responsibilities, including material reviews. The fiscal year 2010 request allows the OIG to retain the 

larger workforce that was approved for fiscal year 2009, an increase of 39 FTEs, or 

nearly 34 percent, over the fiscal year 2008 level. We will continue to monitor OIG 

workload and seek additional resources if necessary. 

ALCOHOL AND TOBACCO TAX AND TRADE BUREAU (TTB)

Question. The fiscal year 2010 budget proposes to charge producers, wholesalers, 

and retailers of beer, wine, and distilled spirits annual regulatory fees. These fees 

would offset the operating costs of TTB. 

What impact would these new fees have on the industry? 

Answer. Revenue from the proposed ongoing permanent ‘‘licensing and registration fee’’ starting in fiscal year 2010 would support the bureau’s mission. Members 

of the alcohol industry (including retailers, wholesalers, breweries, wineries, distilleries, and industrial alcohol businesses) would pay fees ranging from $300 to 

$1,000, depending on the type and size of the business entity. Revenue in the first 

year, from annual estimated offsetting receipt collections would start out low, but 

grow in subsequent years to eventually offset the annual operating costs of TTB 

(currently around $100 million). 

Annual fees are shown in the table below. A licensing and registration fee of $300 

from over 350,000 retailers will generate an estimated 90 percent of the yearly revenue collected, while the remaining 10 percent would be collected from wholesalers 

and alcohol producers. TTB currently collects over $7 billion in federal excise taxes 

from alcohol producers. 

The licensing/registration fee would shift the burden of paying for regulation of 

the alcohol industry from the general public to consumers, producers, wholesalers, 

and retailers of alcohol beverages. 

Annual Fee Requirement 

The annual fees to be charged under this program are as follows: 

Amount 

Retailer Dealers in Liquors and Beer .......................................................................................................................... $300 

Wholesaler Dealers in Liquors and Beer ..................................................................................................................... 500 

Alcohol Producers ......................................................................................................................................................... 1,000 

Distilled Spirits Plant 1

Bonded Wine Cellar 1

Bonded Wine Warehouse 1

Tax paid Wine Bottling House 1

Every Brewer 1 .............................................................................................................................................................. 1,000 

Denatured Spirits, Recovery and Tax Free Users (Industrial Alcohol) ........................................................................ 300 
109 

Amount 

Non-beverage Domestic Drawback Claimants ............................................................................................................. 500 

1 Reduced fees by substituting ‘‘$500’’ for ‘‘$1,000’’ if gross receipts are less than $500. 

$500,000 for the most recent taxable year before the 1st day of the taxable period. 

Certain exemptions and exceptions of the annual fee may apply to the certain business as outlined under the legislative proposal. 

TROUBLED ASSET RELIEF PROGRAM (TARP)

Question. TARP places strict limitations on compensation for executives of companies receiving financial assistance from the federal government, and the Recovery 

Act strengthened those restrictions after weaknesses in the original TARP restrictions emerged. GAO reports that Treasury has been working to increase oversight 

and compliance with executive compensation restrictions, including the new provisions included in the Recovery Act. 

Please provide an update on the steps Treasury is taking to institute a clear, robust process to monitor compliance with the executive compensation restrictions. 

Answer. On June 15, 2009, Treasury published an Interim Final Rule (‘‘IFR’’) entitled ‘‘TARP Standards for Compensation and Corporate Governance’’ that implements the executive compensation provisions of the Recovery Act. The IFR sets forth 

detailed restrictions on executive compensation applicable to TARP recipients, as 

well as periodic reporting and certification requirements and other procedures for 

monitoring compliance. The IFR also provides for the appointment of a Special Master, who has the responsibility to (i) review and approve the compensation of each 

of the 25 most highly compensated employees of each TARP recipient that has received exceptional assistance, (ii) review and approve the compensation plans applicable to the next 75 most highly compensated employees of each such TARP recipient, (iii) review prior compensation paid to Senior Executive Officers by TARP recipients and negotiate the return of any payments that are found to have been contrary to the public interest, and (iv) issue interpretive guidance under the rule. All 

TARP recipients will be required to submit detailed compensation information in 

order to facilitate the review process. 

Question. In light of criticism that Treasury was not requiring institutions receiving TARP funds to provide detailed reports on their use of taxpayer dollars, Treasury has required that all participants in the Capital Purchase Program complete a 

monthly survey of lending activities. Treasury has declined to seek any further details on any TARP recipients’ use of funds, with the exception of Citigroup and Bank 

of America, citing that such data would not be useful and would be difficult to gather. However, the Special Inspector General for TARP sought more detailed data from 

over 350 TARP recipients and found that banks were, in fact, able to provide a reasonable level of detail on their use of funds. The IG reported: ‘‘. . . one thing is 

clear: Treasury’s arguments that such an accounting was impractical, impossible, or 

a waste of time because of the inherent fungibility of money were unfounded.’’ 

Why has Treasury declined to require more detailed reporting from TARP beneficiaries? 

Answer. It is important to distinguish between Treasury’s capital-enhancement 

programs and its other programs. The Capital Purchase Program, Capital Assistance Program and institution-specific programs for AIG, Citigroup and Bank of 

America are designed to provide capital to cushion against losses and allow financial 

institutions to continue operating in the ordinary course of business, including lending to consumers and businesses. In order to serve its purpose, capital must be 

available for any legitimate business purpose. Although Treasury requires applicants for the Capital Assistance Program to specify how they intend to use the 

funds, accounting for actual use of particular dollars invested as capital is not a 

meaningful exercise and therefore not required. Because banks’ double-entry bookkeeping systems do not trace the paths from creating liabilities (receiving capital) 

to investing in assets (making loans), we cannot precisely attribute the contribution 

of TARP capital to particular uses. The banks can, however, report trends in loans 

and other uses of funds, and we do require that they report such to Treasury. 

On the other hand, Treasury’s home ownership preservation program, small business lending initiative, auto industry programs, and the terms of Treasury’s participation in the Term Asset Backed Securities Loan program impose specific limitations on the use of TARP funds, and require controls and periodic reports to insure 

that those limitations are respected. 

Question. When Congress approved TARP, the expectation was that TARP funds 

would be used to purchase toxic assets—mainly, assets related to subprime and 

other troubled mortgages. Since then, TARP has evolved into 12 separate programs 

aimed at addressing different stress points in the market and at rebuilding a basic 
110 

lending capability for domestic markets. The complexity of this program has created 

a communications challenge. GAO reported in March 2009 that TARP is still very 

poorly understood by Congress and the public. GAO reports that Treasury has not 

yet developed an effective strategy for communicating with Congress, the public, 

and other stakeholders. 

How can Treasury’s actions support increasing confidence in the financial markets 

if the public does not have a basic understanding of the goals of TARP? 

How can the Department better articulate and justify its strategy so that Americans and the markets can regain confidence in the economy? 

What can Treasury do to educate concerned members of the public? 

Answer. Treasury publishes a wealth of information about TARP investments and 

the activities of the Office of Financial Stability. In addition to transaction reports 

detailing every transaction, monthly financial reports, and tranche reports that review how each $50 billion of TARP funds have been spent, Treasury posts on its 

FinancialStability.gov website all program descriptions, guidelines, frequently asked 

questions and answers, contracts, press releases, and a variety of other information 

about TARP. Treasury also maintains a separate MakingHomeAffordable.gov 

website that sets forth extensive information about Treasury’s homeownership preservation programs. 

Nevertheless, Treasury recognizes that public perceptions of TARP could benefit 

from improved communications. To that end, Treasury is in the process of developing and implementing an overall communications strategy that will include regular proactive briefings for Congress and the press, clearer explanations of TARP 

programs and OFS activities, discussions of progress being made in achieving program objectives, and expanded efforts to communicate with and educate the public 

about the goals and achievements of TARP. 

Question. Firms that repay preferred stock purchased under the TARP program 

will also have the option to repurchase warrants that Treasury holds at Fair Market 

Value. 

How is Treasury ensuring that the valuation of the warrants is accurate so that 

taxpayers get a return at fair market value? 

Answer. Treasury will ensure that taxpayers’ interest are protected by conducting 

a process to determine whether to accept the bank’s initial determination of the fair 

market value of the warrants. Treasury has developed a robust set of procedures 

for evaluating repurchase offers, based on three categories of input: market prices, 

financial modeling, and outside consultants/financial agents. 

Question. Contracts for implementing TARP include the primary, large contract 

for the asset manager, Bank of New York Mellon, as well as smaller contracts for 

tasks such as legal and accounting services. These contracts have for the most part 

been priced on a ‘‘time and materials’’ basis. GAO has warned that such contracts 

are considered ‘‘High Risk’’ to the taxpayer dollar. This is because, unlike fixed-price 

contracts, the structure of the time-and-materials contracts provides no incentive for 

the contractor to control for cost or labor efficiency. In a recent TARP review, GAO 

reported that in response to GAO’s warning, Treasury has converted two time-andmaterials contracts into fixed-price arrangements and is closely assessing new contracts to identify those that may effectively utilize a fixed-price contract. 

What do TARP officials consider when determining the appropriate compensation 

structure for new contracts? 

Is Treasury conducting a thorough, comprehensive review of all of its existing contracts so that more can be converted to fixed-price, lower-risk arrangements? 

Answer. Treasury considers the degree to which the contract requirements can be 

clearly defined to permit negotiation of a reasonable price. In the legal services contracts, the requirement to create novel, unprecedented financial structures for government investment in private corporations inhibits Treasury’s ability to accurately 

predict the level of effort that will be required. Over time, as certain transactions 

are repeated, our ability to reasonably predict the level of effort increases. Treasury 

gathers data on the number of hours required to complete transactions and uses the 

data to negotiate fixed prices on a per transaction basis. 

Opportunities have been limited thus far to convert significant number of contracts to fixed-price due to the difficulty in estimating with a reasonable degree of 

accuracy the extent or duration of the required services. Due to this high degree of 

uncertainty, fixed-price arrangements may not be appropriate for many TARP contracts. Treasury selects appropriate contract types based on the risk to successful 

performance and the capacity to negotiate a fair and reasonable price for the required services. Given the still-evolving nature of TARP, and the challenge of reasonably forecasting the level of effort required to design new financial structures 

and execute transactions, premature conversion to fixed price contracts would place 

Treasury at risk of agreeing to too high a price for services rendered. Treasury is 
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gathering cost data from all of its time and materials and labor hour contracts to 

identify areas where the level of effort can be reasonably predicted, and the costs 

associated with those efforts, to support the future negotiation of fixed pricing for 

follow-on work where appropriate. 

QUESTIONS SUBMITTED BY SENATOR BEN NELSON

Question. While much of the focus up until recent weeks has been placed on the 

auto manufacturers, the dealerships also have much at stake. Considering that the 

Treasury has provided auto manufacturers with a significant amount of funding and 

has taken on significant ownership in these companies, how much of the assistance 

already provided is the Treasury prepared to allow to dealerships that have lost 

their franchise designations and have been left with few options? 

Answer. Both General Motors (GM) and Chrysler and have committed to operating with transparency with regard to the dealership closings. The plans to consolidate dealer networks were developed by each company over a long period of time 

and were a part of their overall plans to restructure in order to achieve financial 

viability. Without the funds provided by the Treasury Department, GM and Chrysler’s entire dealer network might have been eviscerated. Chrysler has worked to 

have the majority of its inventory off of the rejected dealership lots. GM has set up 

an appeals process for its rejected dealers and is providing them with 18 months 

of support to allow them to dispose of their inventory, which GM believes should 

be a sufficient amount of time given current inventory levels. 

Question. No one disputes the importance of the domestic auto industry to our 

country and economy. Everyone understands we aren’t only talking about the auto 

manufacturers. For instance in my state we are also talking about the dealerships, 

parts supplier, and a host of other industries that are either touched directly or indirectly by the auto industry. 

However, I have great concerns about the United States government having an 

open-ended ownership stake in private companies because of the assistance that the 

federal government has provided. 

What oversight is the Treasury Department prepared to take or conditions established so that domestic automakers are being good stewards of taxpayer money and 

can ensure the taxpayers of a return of their investment? 

Answer. The government expects to protect the taxpayers’ investment by managing its ownership stake in a hands-off commercial manner. Both companies now 

have new Boards of Directors comprised of distinguished business professionals who 

will help guide these companies through their ongoing restructurings. The Treasury 

Department will continue to monitor the taxpayer’s investment under the TARP 

program and will seek to dispose of the ownership interest as soon as is practicable. 

Question. While the federal government is a reluctant stakeholder in domestic 

companies, what should the American taxpayer expect when it comes to the divestment of funds they’ve provided to these auto companies? Are there benchmarks of 

solvency that are established or are planning on being established that will allow 

the taxpayers to be repaid of their investment in the auto companies? Will repayment of federal funds be on a continual basis? 

Answer. The return will depend on the overall market, the economy, and the recovery of the auto sector. The decision to provide funds to the companies by the current Administration was based upon a determination that the companies have viable business plans. As a result, we will monitor GM and Chrysler’s performance and 

seek the return of taxpayer funds as soon as is practicable. 

Question. How can technology best be utilized to maximize transparency with regard to TARP transactions and the use of TARP funds by recipients? How can we 

ensure that this information is available as quickly, comprehensively and understandably as possible, for the benefit of both taxpayers and market participants? 

Answer. Improving the ways in which the Office of Financial Stability (OFS) communicates its activities and shares relevant data with the public, market participants, and our oversight bodies is one of my highest priorities. Treasury has already 

improved its ability to share information through the development of our website, 

FinancialStability.gov, and I fully expect that the Internet will continue to play a 

central role in our efforts to operate in as transparent a fashion as possible. 

We are working to add to the website’s functionality, increase the resources available through the site, and develop additional features. I believe we need to expand 

the ability of people to interact with OFS, such as through a question and answer 

feature, and offer presentations of information tailored to the widest possible audience, including those people who do not regularly read the business page or follow 

the financial markets. 
112 

QUESTIONS SUBMITTED BY SENATOR SUSAN COLLINS

Question. An analysis of the Obama administration budget proposal by the Congressional Budget Office projects that the public debt ratio will double in 10 years, 

to 82 percent of GDP. This would be the highest debt level since World War II. 

The CBO analysis also shows that the Obama budget will produce a deficit level 

averaging 5.3 percent of GDP across the 10-year budget window. Worse, the deficit 

level will be rising—not shrinking—toward the end of the 10-year period, reaching 

5.7 percent in 2019. 

Last month, you told Bloomberg Television that: ‘‘It’s very important that this 

Congress and this president put in place policies that will bring those deficits down 

to a sustainable level over the medium term,’’ and you added that the proper deficit 

target is 3 percent of GDP or smaller. 

What policies do you believe should be put in place to reduce the deficit to 3 percent or less of GDP over the long term? 

Answer. When we developed the fiscal year 2010 budget, we projected that the 

budget deficit would shrink to just above 3 percent of GDP on average during 2012– 

2019. The Administration’s Mid-Session Review projections show a higher deficit 

outlook, with deficits averaging just above 4 percent of GDP over that period. This 

increase is primarily driven by changes in our economic assumptions, based on new 

data on the severity of the recession that weren’t available when we developed the 

fiscal year 2010 budget. 

Our first priority is to make sure that we do not choke off recovery in the near 

term by taking actions to reduce the deficit in the near term. As the recovery proceeds and the temporary surge in spending retreats, the deficit will fall. The process 

of developing the 2011 budget will include proposals for further deficit reduction to 

the extent that they are needed to put the nation back on a fiscally sustainable 

path. 

Question. Thinking about our long-term debt situation for the moment, do you believe that it will be necessary to raise taxes to achieve a 3 percent deficit-to-GDP 

level? 

Answer. We agree that it is important to keep the deficit at a sustainable level 

relative to GDP in the long term. The proposed fiscal year 2010 budget moved the 

budget deficit to about 3 percent of GDP, with a combination of some programs that 

raise revenue and put fiscal restraint on discretionary spending. The updated economic assumptions in the Mid-Session Review, which reflect a more severe recession 

than evident when the 2010 budget was developed, have raised projected deficits 

relative to GDP over the 10-year budget window. We would consider a wide range 

of approaches consistent with the President’s commitment if we see the need to further lower the deficit after the economy recovers. 

Question. In his testimony before the House Budget Committee last week, Federal 

Reserve Chairman Bernanke made the point that the debt cannot be sustained unless ‘‘debt and interest payments... are stable or declining,’’ with ‘‘tax rates 

[that] are not so high as to impede economic growth.’’ Do you agree with the Chairman that higher taxes can impede economic growth? 

Answer. Most economists agree that high tax rates can hurt economic growth and 

that taxes should be as low as possible while still funding the needs of the United 

States. But large and rising deficits that become a permanent part of the economic 

landscape also pose a threat to economic growth. They destroy confidence in the 

economy and reduce business capital spending, which will lower productivity and 

the standard of living. 

In the longer term, all policymakers will need to balance the goal of creating a 

sustainable fiscal path with the goal of keeping taxes low. It does the economy no 

good overall to have a large deficit that saps business and consumer confidence and 

crowds out business spending just to keep taxes low. And likewise, it does the economy no good if needed government programs are unfunded—with attendant consequences for productivity and quality of life—just to keep taxes low. 

We look forward to working with the Congress to find a sustainable balance of 

policies in keeping with the President’s commitments. 

Question. The Treasury Department has an abysmal record for implementation of 

major capital IT investments. Some of these failures include FinCEN’s Bank Secrecy 

Act (BSA) Direct System, IRS’s web-based Electronic Fraud Detection System, and 

the abandoned Treasury Communication Environment. 

As of last week, the Director of FinCEN was unable to explain to Appropriations 

Committee staff the anticipated total cost for the new BSA IT system. The FinCEn 

Director could also not explain how the fiscal year 2010 requested budget increase 

of $11 million would be used. Given that this is a complex, multi-year effort, we 

would like to have more details about the fiscal year 2010 request and the long- 
113 

term project costs. Secretary Geithner, can you tell us how the $11 million would 

be spent and what the long-term costs of this project will be? 

Answer. The fiscal year 2010 President’s budget request is part of a larger, multiyear initiative, that provides the ability to begin the integrated BSA IT Modernization Effort, including the full scope of BSA IT modernization capabilities. The fiscal 

year 2010 request of $10 million will be combined with base resources of $2.5 million to begin the project. 

Specifically, the resources included in the fiscal year 2010 President’s budget will 

be used to complete the planning, requirements, architecture and design (Lifecycle 

Milestone 3) activities for the following projects: 

—Infrastructure 

—IT Modernization Development and Test Environment 

—Storage Area Network (SAN) 

—Registered User Portal 

—User portals 

—Access Control 

—Identity Management 

—E-Filing 

—E-Filing 

—E-Forms/Paper Filer Analysis 

—Shared Filing Services/Work in Progress Database 

—System of Record (SOR) 

—SOR 

—Bulk Data Dissemination 

—Basic Query 

—Alerts 

—Query Audit Log 

—Advanced Analysis 

—Proactive Analysis 

—Analytic/Visualization Tool 

In terms of long-term costs, initial estimates are for a 4-year project plan estimated at $120 million; however, in order to create the most cost-effective solution 

for the taxpayer’s dollar, estimates will be refined and adjusted based on the results 

of the fiscal year 2009 requirements and alternatives analysis. 

Question. The stimulus provided the CDFI Fund with $100 million for additional 

grants under its core and Native American programs and to cover associated administrative expenses. The stimulus also gave the Fund an additional $3 billion in new 

markets tax credits. These new resources coupled with the Administration’s fiscal 

year 2010 request of $243.6 million represent a huge expansion of the Fund’s programs from the fiscal year 2009 appropriation of $107 million. 

The last two financial audits issued by the Treasury Office of Inspector General 

cited a ‘‘significant deficiency’’ in the CDFI’s monitoring of grant recipients to determine if those recipients had complied with their grant agreements. The auditors reported that CDFI managers continued to have difficulty communicating with each 

other. The auditors called this situation a ‘‘significant deficiency.’’ I understand that 

the Treasury moved the chief financial officer’s function out of the CDFI to the Department even though CDFI is required to have a CFO. Taken together, it appears 

that this office has some serious management and operational problems. 

Mr. Secretary, in light of the large increase for the CDFI in the budget request, 

could you please comment on these issues? Specifically I’d like to know what actions 

the Department has taken to ensure that CDFI is making grants and awarding tax 

credits in a speedy but responsible manner, and how CDFI will monitor those 

grants to determine the money is used for their intended purposes. 

Answer. Although Treasury’s Office of the Inspector General (OIG) did identify 

concerns with respect to compliance monitoring and management communication, 

no material weaknesses were identified in either the fiscal year 2007 or fiscal year 

2008 audits, and the CDFI Fund received a clean opinion on its fiscal year 2008 

balance sheet. Since fiscal year 2007, the Department, in conjunction with the CDFI 

Fund, has taken action to improve the efficiency and operations of the CDFI Fund, 

bolstering: (1) the awardee selection process, (2) compliance monitoring, (3) management communication; and (4) other areas to better meet the CDFI Fund’s mission 

and provide better service to stakeholders and constituents. In addition to improving 

operational efficiency, these steps were taken to ensure that the CDFI Fund is in 

alignment with Treasury directives, orders, policies, procedures, and guidelines. 

Treasury is confident that the CDFI Fund has the necessary systems and processes 

in place to ensure the full integrity of its award programs. 
114 

Awardee Selection 

The CDFI Fund has an extremely rigorous application selection process that ensures awards are made in an expeditious and responsible manner. Further, the 

Fund has developed compliance monitoring protocols and systems to ensure that 

award funds are used for their intended purposes. 

In fiscal year 2008, the CDFI Fund began working with an outside consultant to 

evaluate and streamline the CDFI Program award review and selection process. The 

resultant new Standard Operating Procedures streamline the application process 

and strengthen internal controls and accountability. Among other benefits, through 

these new procedures, the CDFI Fund reduced fiscal year 2009 grant selection decisions by about 60 days and reduced the time from award selection to disbursements 

by 120 days. In fact, the CDFI Fund anticipates disbursing substantially all of the 

$98 million in Recovery Act award dollars within 60 days of award announcement. 

With respect to its two largest programs, the CDFI Program and the New Markets Tax Credit (NMTC) Program, applicants are required to submit uniform application materials. Each funding application is rated and scored independently by 

three readers, followed by a Quality Assurance reviewer. Applications meeting previously established minimum aggregate scoring thresholds are considered eligible 

for an award. These eligible applicants are then reviewed again and an award determination is made. 

There are several internal control safeguards that mitigate against any one person being able to exercise undue influence over the selection of awardees, including: 

—Conflict of interest policies preclude a reader from reviewing an application of 

an applicant for which the reader has a previous, current, or potential relationship, financial or otherwise. 

—Readers score applications independently and in remote locations. They do not 

discuss their reviews with other team members. Reviewers cannot communicate 

directly with one another regarding their applications without first making contact with the Quality Assurance reviewer. 

—Review Forms provide instructions to readers with respect to how each element 

is to be scored, thus helping to limit reader variance. 

—The relative weight ascribed to each scoring element is computer-generated and 

unalterable by the reader, thereby limiting the degree to which a reader can 

change the outcome of an overall application score. 

—Each Review Form is reviewed by a Quality Assurance reviewer to ensure that 

(i) the reader followed the scoring guidelines and (ii) the scores are appropriate, 

given the reader’s ratings and narrative. 

—If a reader review results in a scoring anomaly, the application is re-scored by 

a fourth reviewer and the anomalous score will likely be disregarded. 

—If the Selecting Official varies significantly from the recommendation of the review manager, a third person (the Reviewing Official) is engaged to make a 

final determination. 

Compliance Monitoring 

The significant deficiencies noted by the Treasury Inspector General for the compliance area focused on a lack of consistency in following established written policies 

and procedures to determine awardee compliance. The auditor’s recommendation to 

address these significant deficiencies was to increase staff resources dedicated to 

compliance and monitoring. The CDFI Fund implemented these recommendations, 

hiring a compliance manager and additional staff, as well as providing additional 

training to the compliance staff. It also updated compliance monitoring policies and 

procedures related to awardee financial statements. 

With respect to awardee compliance and performance monitoring, the CDFI Fund 

has developed automated on-line data collection tools, known as the Community Investment Impact System (CIIS) and the CDFI Compliance Monitoring System 

(CCMS), through which CDFI Program and NMTC Program awardees report 

institution- and transaction-level information and reports to the CDFI Fund annually, along with their audited financial statements. The CDFI Fund uses these reports to verify compliance with award agreements, and they are a valuable source 

of data for program evaluation and dissemination of information about the CDFI industry. 

In addition to reviewing the annual financial statements and reports from all of 

its awardees, the CDFI Fund engages in ‘‘desk audits’’ and site visits each year to 

a small percentage of awardees. Desk audits are ordered when a potential issue of 

non-compliance is discovered through standard review of annual reports, and generally require the awardee to provide additional clarifying information and/or supporting documentation. Site visits may be conducted in response to a particular incidence of non-compliance, and are scheduled for a random sample of awardees. 
115 

Management Communication 

The Department takes very seriously the Inspector General’s findings with respect 

to the need to improve management communication within the Fund, and has instituted a number of initiatives to address this concern. In addition to weekly meetings 

with the management team, the CDFI Director has established quarterly all-hands 

meetings and monthly brown-bag lunches with the staff to ensure employees have 

an opportunity to raise concerns, receive recognition for exemplary work and discuss 

cross-cutting issues impacting all of the Fund’s programs. 

Recently, the Fund established the position of Chief Operating Officer to bring together core management and administration functions. 

In addition, the Fund has encouraged program managers to conduct offsite planning retreats with their staff. Three out of seven managers have already held these 

sessions; the remaining four will be convened within the next 60 days. 

Steps and Actions Taken to Improve CDFI Fund Operations 

Numerous other steps and actions taken to improve CDFI Fund operations include: 

—Comprehensive, third-party assessment of the CDFI Fund’s financial management functions and capabilities, which resulted in the appointment of Treasury’s Assistant Secretary for Management/Chief Financial Officer as the CDFI 

Fund’s Chief Financial Officer. Through this action, the CDFI Fund benefits 

from standardized financial management and internal control processes, enhanced cost effectiveness, and improved risk management. 

—Creation of new programmatic Standard Operating Procedures by Booz Allen 

Hamilton, which were implemented in late fiscal year 2008 and continue to be 

refined. 

—Comprehensive skills assessment (conducted by Booz Allen Hamilton) of CDFI 

Fund program staff, to identify the resources necessary to carry out the new 

Standard Operating Procedures. 

—Assessment of the CDFI Fund’s human resource functions and the transfer of 

services to the Office of Human Resources, which allows CDFI Fund employees 

and managers to have consistent with the rest of the Department’s employees, 

in addition to the establishment and implementation of human capital policies 

and procedures approved by the Office of Human Resources. 

—Procurement of a minority-owned vendor to provide support in updating position descriptions of all employees, training in writing employee specific performance plans using Treasury’s new performance management system, and tailoring Individual Development Plans for all CDFI Fund employees to reflect the 

new Standard Operating Procedures and defined roles and responsibilities. 

—Implementation of ‘‘best practice’’ recruitment tools so as to recruit a diverse 

talent pool, including the use of multiple recruiting mechanisms and hiring authorities. 

—Development and implementation of a new strategic plan for fiscal year 2009 

with line staff involvement. 

—Establishment of a performance-based awards program to encourage continued 

improvements of the CDFI Fund’s programs and operations through motivation 

and reward of employees. 

—Creation of a strong collaborative working relationship with union representatives to identify bargaining unit employee needs and concerns. 

Question. Mr. Secretary, during your recent trip to China, I was troubled by the 

response you were given by some in China when you attempted to assure the Chinese that their investments in U.S. Treasuries are ‘‘very safe.’’ As the Washington 

Post put it in an editorial on Friday, the fact that the Chinese question the trustworthiness of bonds backed by the full faith and credit of the United States should 

serve as a ‘‘wake up call’’ for all Americans. 

China is currently the largest purchaser of U.S. Treasurys and many high level 

Chinese officials are worried about the safety of their assets and have begun to push 

for alternatives to the dollar as a reserve currency. Such a move would be disastrous 

for the United States and world economy. How do you intend to avoid such a move 

by the U.S. Government’s largest creditor? 

Answer. We are confident that the dollar will remain the major currency of use 

in international transactions and thus a major reserve currency. The attractiveness 

of the dollar to foreign investors is the unparalleled breadth, depth, and liquidity 

of U.S. financial markets and the confidence that foreign investors have in the longterm prospects of the American economy and American economic policy. 

As Secretary of the Treasury, I am committed to ensuring that the U.S. economy 

and U.S. financial markets are vibrant, robust, and open to foreign investors. In ad-
116 

dition to ensuring a growing economy, the President is committed to reducing the 

medium- and long-term federal budget deficit and securing fiscal sustainability. 

Question. Treasury has pumped at least $70 billion into the failing multinational 

corporation, AIG. This insurance company nearly failed not because of its insurance 

business but because it had engaged in hundreds of Credit Default Swaps transaction which it could not cover when counterparties all came calling for payment 

at the same time. AIG used much of the TARP funds to pay these counterparties, 

not only Goldman Sachs, but many foreign banks, including Deutsche Bank and Societe Generale. The Special Inspector General has raised questions about whether 

Treasury could have used its contribution to AIG as leverage to monitor these payments and force these counterparties to accept a ‘‘haircut’’ on their payments. After 

all, without Treasury’s injection of funds, AIG would have failed and they likely 

would have received nothing at all. Do you believe Treasury missed an opportunity 

to save taxpayer dollars? 

Answer. When evaluating the costs to the taxpayer of Treasury’s support of AIG, 

the benefits also should be taken into account. 

The disorderly failure of AIG would have caused direct damage to the system as 

a whole and would likely have lowered overall risk appetite throughout the system 

due to the heightened uncertainty that such an event would have generated. As 

with all of our TARP programs, we have two goals—preserving the stability of the 

financial system as a whole and making sure that the taxpayers are protected and 

appropriately rewarded for the risk they are taking. The mitigation of systemic risk 

generates significant, but difficult to quantify, benefits for taxpayers. 

Moreover, Treasury makes every effort to protect the taxpayer. Treasury works 

with AIG to maximize the chances that AIG can repay the government for its very 

significant financial support. In this way, the success of AIG as a business and the 

success of AIG’s restructuring are very much in the taxpayer’s medium- to long-term 

interest. 

Treasury understands that, as a steward of taxpayer dollars, we must work hard 

to ensure that the financial support offered to AIG is not wasted or abused. 

Treasury’s ability to impose ‘‘haircuts’’ on AIG’s derivatives counterparties is extremely limited due to the nature of derivatives contracts. Most derivatives trades 

are governed by standardized contracts (ISDAs) and many have so-called credit support annexes or CSAs, which govern the posting of collateral. The purpose of a CSA 

is to mitigate counterparty credit risk, thereby enabling the parties to focus on pricing and trading the underlying risk factors instead of worrying about whether their 

counterparty will be able to pay, should the trade swing in their favor. This feature 

facilitates liquidity, price discovery, risk transfer, and the functioning of markets 

generally. 

Under a CSA, the failure to meet a collateral posting obligation in full generally 

constitutes an event of default and results effectively in the immediate termination 

of the underlying trades. Most of the governing contracts also contain a provision 

that a default on any other such contract (e.g., with another counterparty) constitutes a default on that particular one, which gives rise to so-called ‘‘cross-default 

risk.’’ Put simply, if AIG were to unilaterally ‘‘haircut’’ one of its counterparties by 

posting less than the contractually obligated amount, that would constitute an event 

of default, trigger cross defaults, and result in mass trade terminations. In the fall 

of 2008, AIG had almost 50,000 derivative trades in a wide variety of asset classes 

with over 1,000 counterparties. Defaulting then would have destabilized an already 

fragile market. 

This is why the Administration has proposed a special resolution regime to give 

the government the tools necessary for an orderly resolution of complex non-bank 

firms, in which creditors and counterparties may share in the losses. 

QUESTIONS SUBMITTED BY SENATOR CHRISTOPHER S. BOND

TOXIC ASSETS

Question. The Administration seems to be still treating the symptoms but not the 

cause of the financial credit crisis. Throwing billions of taxpayer dollars at the 

banks without cleansing the toxic assets is simply throwing money down a rat hole. 

And it appears that your plan to address the toxic assets—the so-called PPIP program—may never get off the ground given FDIC Chairman Sheila Bair’s recent announcement to postpone the program. Many people, including myself, are highly 

skeptical of the PPIP program, in the first place, since it is voluntary for the banks 

to participate. Without forcing the banks to clean up their balance sheets and ex-
117 

pected losses mounting in the commercial and residential real estate markets and 

credit card markets, we are simply postponing their day of reckoning. 

In your testimony, you seem to indicate that Treasury intends to still move forward with PPIP. 

How do you intend to go forward with the PPIP program given the government’s 

inability to attract bank participation since it is voluntary? Is there a Plan B? 

Answer. Treasury is committed to the Legacy Securities PPIP, and we have been 

finalizing the details over the past several months. The Legacy Securities PPIP will 

address the market for commercial mortgage-backed securities (MBS) and non-agency residential MBS. Treasury announced in early July that it had selected nine prequalified fund managers that will receive up to $30 billion in investments from 

Treasury. As of October 5, 2009, Treasury announced three additional closings of 

Public-Private Investment Funds (PPIFs) established under the Legacy Securities 

Public-Private Investment Program (PPIP), bringing the total number of initial closings completed to five. As of October 5, total Treasury commitments to these five 

PPIFs amounts to $16.67 billion, of which $9.20 billion has been closed on. Including 

private capital, total PPIP closings to date amount to $12.27 billion. Fund managers 

have established relationships with small, minority- and women-owned businesses. 

Following an initial closing, each PPIF will have the opportunity for two more closings over the following 6 months to receive matching Treasury equity and debt financing, with a total Treasury equity and debt investment in all PPIFs equal to $30 

billion ($40 billion including private investor capital). 

Financial market conditions have improved since the early part of this year, and 

many financial institutions have raised substantial amounts of capital as a buffer 

against weaker than expected economic conditions. However, these legacy assets are 

still highly illiquid despite significant increases in the prices of many of these securities. The difficulty of obtaining private financing on reasonable terms to purchase 

these assets has limited the ability of investors to reduce liquidity discounts in legacy assets. The lack of clarity about the value of these legacy assets has also made 

it difficult for some financial institutions to raise new private capital and has continued to clog balance sheets. 

One of the PPIP’s primary objectives is to facilitate price discovery and reduce excessive liquidity discounts that have been embedded in legacy asset prices. As capital is freed up, U.S. financial institutions should engage in new credit formation. 

Furthermore, enhanced clarity regarding the value of legacy assets should increase 

investor confidence and enhance the ability of financial institutions to raise new 

capital from private investors. Finally, an inherent link exists between the new 

issue securitization market and the secondary market performance of legacy assets. 

As spreads compress in the legacy asset market, new securitization issuance should 

come to market at reasonable borrowing costs. The new issue securitization market 

is an absolutely critical component of lending in the economy. 

REGULATORY REFORM

Question. Clearly, our financial regulatory system must be addressed since it 

played a role in the current credit crisis. One of the core issues is how to address 

‘‘too big to fail’’ companies. Some argue that ‘‘too big to fail’’ is now ‘‘too big to exist.’’ 

Is anti-trust reform being considered as part of the Administration’s regulatory 

reform proposal? How are you proposing to align the incentives properly to prevent 

future irresponsible behavior by financial institutions and future taxpayer-funded 

bailouts? 

Answer. While effective enforcement of anti-trust laws is an important part of protecting consumers and competition in the financial sector, we have not proposed 

anti-trust reform as part of our regulatory reform proposals. We do not believe that 

the risks we propose to address are directly related to competition issues that can 

be addressed through an anti-trust framework. 

In the past 2 years, we learned that the system was not resilient enough to bear 

the failure of a large, interconnected firm or contain the damage from such a failure 

on the broader economy. The problem was that such firms had not been required 

to maintain sufficient capital and liquidity cushions and were not supervised on a 

consolidated basis. In other words, they were not required to internalize the risks 

they presented to the financial system. Our plan fixes that. 

Under our plan, firms that could present risks to the stability of the financial system if they failed will be subject to much higher standards so that the risk of failure 

will be lower. Moreover, our special resolution regime for nonbank financial firms 

gives the government an effective tool for an orderly resolution, in which creditors 

and counterparties may share in the losses rather than a bailout. In addition, we 

will reduce incentives for risk taking by reforming and raising capital standards for 
118 

financial firms and working to address misalignment of incentives in specific markets, like the securitization markets, through such steps as requiring originators or 

sponsors to maintain an economic interest in the performance of a securitization. 

Finally, we have proposed steps to align the compensation of executives with the 

long-term interests of shareholders so that they do not have incentives for excessive 

risk-taking—both through regulation and supervision of financial firms and through 

corporate governance reform, such as ‘‘say on pay’’ legislation and legislation requiring independent compensation committees on corporate boards of directors. 

SOCIAL AND ECONOMIC MISSIONS

Question. There is growing concern about asking weakened financial institutions 

to carry out the government’s economic and social policies. While I understand the 

pressure to have bailed-out banks more engaged in efforts such as foreclosure mitigation, the danger is more financial losses that will be covered with more taxpayer 

funds. Further, this leads to more government involvement in dictating private business practices. 

What is the Administration’s exit strategy when it comes to those financial institutions—such as Fannie and Freddie, Citi—who are being required by the government to carry out various social policy programs? How will you avoid the negative 

consequences of forcing these entities to fulfill the inherent conflicting goals of serving shareholders and meeting the needs of the public good? 

Answer. Given the important role that Fannie Mae and Freddie Mac play in the 

mortgage market, their participation in efforts to reduce preventable foreclosures is 

vital to speeding the housing recovery. The future of Fannie Mae and Freddie Mac 

will require careful consideration of the appropriate role of the Federal government 

in the mortgage market. The Administration has committed to undertaking a wideranging initiative to develop recommendations by early next year on the future of 

Fannie Mae and Freddie Mac. There are a number of options for the reform of the 

GSEs, including: (i) returning them to their previous status as GSEs with the paired 

interests of maximizing returns for private shareholders and pursuing public policy 

home ownership goals; (ii) gradually winding-down their operations and liquidating 

of their assets; (iii) incorporating the GSEs’ functions into a federal agency; (iv) introducing a public utility model, in which the government regulates the GSEs’ profit 

margin, sets guarantee fees, and provides explicit backing for GSE commitments; 

(v) instituting a conversion to providing insurance for covered bonds; or (vi) dissolving Fannie Mae and Freddie Mac into many smaller companies. 

The 2008 Housing and Economic Recovery Act (HERA) reformed and strengthened the regulation of Fannie Mae and Freddie Mac by establishing a Federal Housing Finance Agency (FHFA) as a new independent regulator. In addition to the establishment of FHFA, HERA also provided FHFA with enhanced authority to develop regulations regarding the safety, soundness, and the mission activities of 

Fannie Mae and Freddie Mac. 

STRESS TESTS

Question. Many experts question the reliability of the stress tests that were conducted on the large banks. Some believe that the results are too optimistic because 

the tests were too lenient and banks bargained with the government to reduce their 

capital needs. Further, to meet the capital levels required by the stress test results, 

it was reported that banks are relying on preferred-stock conversions for 22 percent 

of their fundraising. One financial expert stated that ‘‘Conversions from preferred 

to common don’t do anything; you can just ignore them.’’ 

Do you stand by these tests? If so, can you assure the American taxpayer that 

they will not be asked to fund additional rounds of bailouts for these large banks? 

Will you conduct more stress tests? If so, under what circumstances would you conduct more stress tests? 

Answer. The Supervisory Capital Assessment Process (SCAP) or ‘‘stress test’’ was 

a carefully designed, stringent test. The test was designed to account for the highly 

uncertain financial and economic conditions by identifying the extent to which our 

largest banks are currently vulnerable to a weaker than expected economy in the 

future. 

Supervisors applied a historically high set of loss estimates on securities and 

loans, as well as a conservative view towards potential earnings that could act as 

a buffer against those losses. For instance, the 2-year, loan-loss rate assumed under 

the ‘‘more adverse’’ scenario exceeds the observed 2-year loss rates for U.S. commercial banks from 1920 to present. 

Since the stress test results were announced more than $80 billion of total private 

capital has been raised by the 19 participating institutions. This additional private 
119 

capital reduces the likelihood that the U.S. government will need to inject additional 

public capital into the banking system. Treasury must balance the desire to exit its 

investments in private sector entities as quickly as is practicable with the need to 

ensure that such a withdrawal does not put the progress that the Obama Administration has made in restoring financial stability at risk. To that end, Treasury will 

continue to provide support where it is necessary to sustain confidence in the financial system and to support critical channels of credit to households and businesses. 

The SCAP focused not only on the amount of capital but also on the composition 

of capital held by the largest banks. That is, SCAP focused on the proportion of capital that is common equity. The SCAP’s emphasis on common equity reflects the fact 

that common equity is the first element of the capital structure to absorb losses, 

offering protection to more senior parts of the capital structure and lowering the 

risk of insolvency. All else equal, more common equity gives a bank greater permanent loss absorption capacity and a greater ability to conserve resources. Therefore, 

while we were particularly pleased with the record amounts of new common equity 

that was raised following the SCAP, we also believe that exchanges of preferred 

stock for common stock have enhanced the ability of some of our largest institutions 

to withstand a weaker than expected economic scenario. 

Currently there are no plans to conduct another stress test of the largest banks. 

PROTECTIONISM

Question. Despite history’s lessons on how protectionism contributed to the Great 

Depression, there continues to be active efforts from some in Congress to push trade 

protectionism, which will clearly endanger our economic recovery. There are reports 

that the ‘‘Buy American’’ provision in the stimulus has slowed down some projects 

and has contributed to some job losses. Now, there is an effort on the House side 

that is pushing protectionism further on climate change legislation by tying federal 

aid to companies that only develop and produce plug-in cars in the United States. 

What is the Administration’s official policy on protectionism and free trade? What 

is the Administration doing to prevent the growth of protectionism? Will it work to 

stop these types of protectionist measures? 

Answer. President Obama has clearly stated that trade is a key engine for U.S. 

economic growth and job creation. The President has also emphasized the importance of avoiding protectionism in responding to the financial and economic crisis. 

As part of the commitment made by G–20 Leaders to avoid protectionist trade 

measures, the World Trade Organization (WTO) was tasked to monitor and report 

on trade and trade policy-related reactions to the financial and economic crisis, a 

process in which the United States actively participates. While continued vigilance 

is important, thus far the process appears to be working—in large part due to the 

presence of WTO rules and the effect of very visible individual and collective monitoring. Moreover, where protectionist measures are identified, the United States will 

engage our trading partners in both bilateral and multilateral settings. Enforcement 

of WTO rules is a top priority. 

With respect to the American Recovery and Reinvestment Act of 2009, we appreciate that Congress responded to the President’s call to avoid protectionism in responding to the financial crisis and included a provision in the Recovery Act that 

ensures that the ‘‘buy American’’ requirement is applied in accordance with U.S. 

international agreements on government procurement. Public comments have been 

solicited on an interim Federal procurement rule and interim OMB guidance implementing the ‘‘buy American’’ requirement in the Recovery Act. After a thorough review of the public comments, a final rule and final OMB guidance will be prepared 

with the aim of ensuring that the law is implemented effectively and consistently 

with the objective of promoting economic recovery and job creation. 

As the Congress prepares legislation, the Administration will continue to review 

proposed bills with a view to ensuring that they avoid protectionism and that they 

are fully consistent with our international trade obligations. 

REPAYMENT OF TARP FUNDS

Question. The Administration has begun some banks to repay funds from the 

Troubled Asset Relief Program (TARP). 

For these cases—especially those who are still considered ‘‘too big to fail’’—how 

can you assure the taxpayer that they will not return to the government trough for 

more bailout funds? Can you definitely say that they will not be back for more taxpayer-funded bailouts? 

Answer. The government’s Supervisory Capital Assessment Program (SCAP), the 

so-called ‘‘stress test’’, estimated the capital needs for major banks under an adverse 

economic scenario. In particular, the SCAP estimated losses that those banks are 
120 

likely to incur through 2010 and the appropriate level of loan loss reserves at the 

end of that period. The estimated losses and the required level of reserves took into 

account the potential for significant additional declines in housing prices and further increases in mortgage defaults resulting from, among other things, interest rate 

resets. We believe that the SCAP captured the likely capital needs of the major 

banks under an economic scenario that is more adverse than what we, and private 

forecasters, expect. Since the stress test results were announced, many major banks 

have raised a substantial amount of new private capital. This additional private 

capital reduces the likelihood that the U.S. government will need to inject additional 

public capital into the banking system. Treasury must balance the desire to exit its 

investments in private sector entities as quickly as is practicable with the need to 

ensure that such a withdrawal does not put the progress that the Obama Administration has made in restoring financial stability at risk. To that end, Treasury will 

continue to provide support where it is necessary to sustain confidence in the financial system and to support critical channels of credit to households and businesses. 

AUTO RESCUE

Question. The Administration has orchestrated and forced the car companies into 

bankruptcy but seems to be reluctant to force failed large financial institutions like 

Citi into restructuring. 

Why are you treating failed financial institutions differently from GM and Chrysler? If Citi is not forced into a FDIC-like restructuring, how can you assure the taxpayer that they will not return for additional bailouts? 

Answer. In acting to help financial institutions such as Citigroup and the automotive industry, the overarching goals of the Administration have been the same: 

promote the liquidity and stability of the financial system and protect the taxpayer. 

The actions taken have depended on the particular circumstances facing the different institutions. 

The Administration took action to help the automotive industry in order to prevent a significant disruption to the industry, as conditions in the industry posed a 

risk of creating significant disruptions to financial market stability and negative effects on the real economy of the United States. One of the conditions on which the 

Administration initially provided loans to these companies was that they develop viability plans. As a result of development and consideration of these plans, it became 

clear that the best way to achieve viability was for GM and Chrysler to substantially restructure their businesses. Due to a variety of factors, Chapter 11 bankruptcy proved to be the most effective means of accomplishing this important goal. 

Last fall, the Administration and Congress believed quick, forceful action was necessary to stabilize the financial system and certain financial firms. With Congressional authorization, these actions were taken to meet the specific needs of the time 

and to address the distinct difficulties faced by financial firms as a result of the crisis. The Treasury initially provided support to Citigroup on the same terms as over 

650 institutions received funding pursuant to the Capital Purchase Program. The 

Treasury subsequently determined that additional assistance was needed to 

Citigroup pursuant to the Targeted Investment Program. This program is used 

when an institution is sufficiently important to the nation’s financial and economic 

system that a loss of confidence in the firm’s financial position could potentially 

cause major disruptions to credit markets or payments and settlement systems, destabilize asset prices, significantly increase uncertainty, or lead to similar losses of 

confidence or financial market stability that could materially weaken overall economic performance. This assistance is provided on terms that are more restrictive 

than those under the CPP program. These include more stringent restrictions related to executive compensation, dividend payments, share repurchases, corporate 

expenses, internal controls and other matters. 

Citigroup was also one of the banks examined as part of the government’s Supervisory Capital Assessment Program (SCAP), the so-called ‘‘stress test’’, which estimated the capital needs for major banks under an adverse economic scenario. In 

particular, the SCAP estimated losses that those banks are likely to incur through 

2010 and the appropriate level of loan loss reserves at the end of that period. The 

estimated losses and the required level of reserves took into account the potential 

for significant additional declines in housing prices and further increases in mortgage defaults resulting from, among other things, interest rate resets. We believe 

that the SCAP captured the likely capital needs of the major banks, including 

Citigroup, under an economic scenario that is more adverse than what we, and private forecasters, expect. Since the stress test results were announced, many major 

banks have raised a substantial amount of new private capital. This additional private capital reduces the likelihood that the U.S. government will need to inject addi-
121 

tional public capital into the banking system. Treasury must balance the desire to 

exit its investments in private sector entities as quickly as is practicable with the 

need to ensure that such a withdrawal does not put the progress that the Obama 

Administration has made in restoring financial stability at risk. To that end, Treasury will continue to provide support where it is necessary to sustain confidence in 

the financial system and to support critical channels of credit to households and 

businesses. 

(123) 

INTERNAL REVENUE SERVICE

STATEMENT OF DOUGLAS H. SHULMAN, COMMISSIONER 

Senator DURBIN. I am pleased to welcome Douglas Shulman, now 

well-immersed in his second year of a 5 year term as the 47th 

Commissioner of the Internal Revenue Service. Thank you for your 

service and your pledge to lead the IRS from good to great. 

Each year, IRS employees make hundreds of millions of contacts 

with American taxpayers and businesses and represent the face of 

our Government to more U.S. citizens than any other agency. With 

approximately 93,000 employees, the IRS is effectively the accounts 

receivable department of the United States. In fiscal year 2008, the IRS collected $2.7 trillion, 96 percent of 

total Federal receipts. Simply stated, the more revenue the IRS collects, the more revenue Congress has available to deal with some 

of the challenges facing our Nation and the more revenue we have 

available to ease the tax burden on those citizens we believe to be 

deserving of that. Conversely, the less revenue, the less revenue 

Congress has for tax cuts or for worthy expenditures. The President’s proposed budget of $12.126 billion for the IRS is 

an overall increase of 5.2 percent above the fiscal year 2009 enacted level, which supports 95,081 full-time equivalents (FTEs) and 

an additional 2,376 above the current fiscal year 2009 base. 

Mr. Commissioner, thank you for your patience. Thank you for 

joining us. Senator Collins and others may have some questions 

along with mine after you’ve given your presentation. The floor is 

yours. 

OPENING STATEMENT OF COMMISSIONER SHULMAN

Commissioner SHULMAN. Thank you Chairman Durbin and 

Ranking Member Collins. I appreciate the opportunity to testify 

about the IRS’s fiscal year 2010 budget. 

Over the past year, I think the agency has shown that it can improve performance and be agile and respond to changing situations. 

I often say that we need to excel at both service and enforcement. 

It’s not an either/or proposition. And I believe this budget will 

allow us to make continuous improvements in both our service and 

our enforcement, as well as in technology and the workforce. 

As the Secretary mentioned, the President’s budget requests $332 million in additional enforcement initiatives. This set includes 

a robust set of international enforcement initiatives that the President, the Secretary, and I unveiled on May 4. 

Increased resources for IRS compliance initiatives have direct measurable results through a return on investment, and this $332 

million will yield about $2 billion a year once it becomes fully operational in 2012. 

In addition, we’ve asked for money so we can continue to improve 

our service, including face-to-face, telephone, web-based, and self- 
124 

service service models. I believe it is incredibly important and fundamental to keeping honest taxpayers in the system that we have 

world-class service. And it’s a key part of bringing in the $2.5 trillion it takes to run the Government every year. 

And as you mentioned, Mr. Chairman, we are the face of the 

American Government to more people than any other agency. In 

this regard, I also want to point out to the subcommittee that I 

plan to deliver recommendations to the President and the Treasury 

Secretary by the end of this year on how we, the IRS, can better 

leverage the tax return preparer community to increase compliance 

and ensure high ethical standards of conduct for paid preparers. 

Over 80 percent of the American people use either tax software 

or a paid preparer to prepare their return each year. This has been 

a transformational shift in the way taxes are prepared. And because paying taxes is one of the largest financial transactions that 

individual Americans have each year, we need to make sure that 

the professionals who serve them are ethical and that they ensure 

the right amount of taxes are paid. 

I’m also pleased to report that we’ve moved, for the second year 

in a row, to enact stimulus legislation. This year we implemented 

major provisions of the American Recovery and Reinvestment Act, 

getting money into the hands of individuals, as well as small businesses. 

Let me turn briefly to our ongoing effort to modernize our core 

taxpayer account database. We have consistently delivered on commitments over the last several years. This year I have adopted a 

much more focused strategy, which will allow the IRS to complete 

the taxpayer database conversion on an accelerated timeframe. 

We’re doing this by gradually shifting course from simultaneously 

developing the database and the associated applications, to a more 

streamlined focus on completing the modernized database. This is 

going to be key to our future success, to future on-line services, and 

to new compliance and enforcement systems. 

This budget also reflects our long-term commitment to efficiency 

savings and productivity. With e-filing going up, I’ll just note we’ve 

consolidated processing centers into 5 sites instead of 10, and we 

project 5 year savings to be over $100 million. 

And finally, let me just point out three important legislative 

changes in the President’s budget. There are many on which we 

worked and I support them all. Three very important ones are: one, 

the robust set of international legislative proposals which will be 

essential to us curbing offshore tax abuse; two, the proposal to require tax preparers that have a certain volume of tax filings to file 

electronically; and three, the proposal that we eliminate the 20 percent downpayment for a taxpayer who comes in trying to enter a 

offer in compromise with us. Those are often taxpayers in financial 

distress and right now they have to put 20 percent down. There’s 

been some decrease in the program and we want to get the program back up and so we are recommending getting rid of that 20 

percent payment. 

PREPARED STATEMENT

Mr. Chairman and Ranking Member Collins, thank you again for 

the opportunity to testify. I am happy to answer any questions. 
125 

[The statement follows:] 

PREPARED STATEMENT OF DOUGLAS H. SHULMAN

INTRODUCTION

Chairman Durbin, Ranking Member Collins, and Members of the Subcommittee, 

thank you for the opportunity to appear today to discuss the President’s fiscal year 

2010 budget request for the Internal Revenue Service. The President’s budget represents a strategic and wise investment in the Nation’s tax system and will help 

the IRS stay on a path of continuous improvement in such critical areas as service, 

enforcement, technology, and human capital. 

Through its service delivery, the IRS is often the face of government to the American people. The IRS is the only agency that interacts with every business, every 

taxpaying individual, and every non-profit organization each year. We have that 

rare opportunity to influence how people think about their government. 

In terms of service, I believe that taxpayers want to come to the IRS, get their 

questions answered and issues resolved quickly, and be on their way. It sounds simple, but in a time of increasing complexity of the tax law, and challenging economic 

circumstances, achieving this goal will require discipline, focus, and resources. Our 

service operations must be designed with the taxpayer experience as the ultimate 

measure of our success. 

We also need a vigorous and effective enforcement program. In today’s tough economic environment, it is more important than ever that every citizen feels confident 

that individuals and corporations are paying the taxes they owe. 

The American people who play by the rules every day expect the IRS to pursue 

those taxpayers who do not pay their taxes, and we are vigorously enforcing the tax 

law. We are focusing on current enforcement initiatives, such as in the international 

arena, while seeking to evolve and innovate. We can also hone our enforcement 

techniques by adding new tools, such as more information reporting, soft notices, 

and self-correction. 

Of course, all of our efforts depend upon the people of the IRS. We must ensure 

that we have talented and capable leaders and employees for the foreseeable future 

at the IRS, and that they have the tools and resources they need to succeed. 

We also need to continue moving our technology to the next level. The tax system, 

America’s taxpayers, and the approximately $2.5 trillion of revenue depend on it. 

Finally, as I announced last week, I plan to make recommendations by the end 

of the year to Secretary Geithner and the President on how to better leverage the 

tax preparer community to increase taxpayer compliance and ensure uniform and 

high ethical standards of conduct for preparers. Today, over 80 percent of taxpayers 

use either a tax return preparer or third-party software to complete their returns. 

This is nothing less than a transformational shift in tax administration. The first 

part of the review I plan to undertake will involve fact finding and receiving input 

from a large and diverse constituent community. Paying taxes is one of the largest 

financial transactions individual Americans have each year, and we need to make 

sure that professionals who serve them are ethical and ensure the right amount of 

tax is paid. 

A FIRM FOUNDATION UPON WHICH TO BUILD

The IRS has a firm foundation upon which to build. Let me briefly highlight some 

key trends that demonstrate both across-the-board performance improvements and 

the IRS’ ability to be agile and respond quickly to changing situations. 

Service 

As of May 9th, for the 2009 filing season, the IRS has received 133.2 million total 

individual returns and has issued 102.3 million refunds, for a total of $278.5 billion. 

A record 91.6 million tax returns were electronically filed this year—a major milestone for the IRS and testament to our commitment to a robust electronic tax administration program. So far this filing season, the e-filing rate is almost 70 percent 

for individuals, as compared to 61 percent for the same time period last year. 

This year, there was also a surge in e-file from home computers. More than 31 

million people prepared their own e-file return, representing more than a 19 percent 

increase from the previous year. And there were almost 200 million visits to 

IRS.gov, comparable to last year. 

Taxpayers could also find on the IRS Web site the latest information about the 

American Recovery and Reinvestment Act (ARRA), including details on extending 

health insurance for people who lost their jobs and tax breaks for first-time home-
126 

buyers. In addition, the IRS has developed ‘‘What If’’ scenarios and the possible tax 

implications for people who may be facing financially difficult times. 

American Recovery and Reinvestment Act 

The IRS is proud of the role it has played, and will continue to play in helping 

to implement, provide guidance, and publicize many of the provisions of the ARRA 

that will assist both individuals and businesses in economic distress and is getting 

the Nation back on the road to economic recovery. 

For example, a mere 4 days after President Barack Obama signed ARRA into law, 

the Treasury Department and the IRS swung into action in record time, developing 

new withholding tables to ensure money would get into American’s pockets through 

the Make Work Pay Credit. 

In March, the IRS announced that businesses with deductions exceeding their income in 2008 can use a new net operating loss tax provision to get an expedited 

refund of taxes paid in prior years. This provision could throw a lifeline to struggling businesses, providing them with a quick infusion of cash. We are also making 

it as easy as possible for businesses large and small to take advantage of these benefits. 

We have shifted resources to deal with the expected growth of bankruptcies and 

business workouts. Moreover, we worked with the Treasury Department on a number of regulations that clarified rules to unclog the credit markets. 

On the individual front, we have taken a broad approach. Through a series of 

massive, nation-wide outreach efforts, such as ‘‘Super Saturday,’’ we wanted to 

make sure that even more taxpayers are aware of every credit, deduction, and exclusion for which they qualify, including several new benefits this year. 

Our message to taxpayers was that we are going the extra mile to help those in 

economic distress. We want to get them their refunds as quickly as possible. And 

if they think they can’t pay, we ask them to come in and talk about it. There are 

steps we can take to help. 

The bottom line is that we need to be flexible yet principled and to empower our 

employees to use their judgment when dealing with these taxpayers in areas such 

as missed payments and postponing collection actions. 

This year there are also a variety of new benefits and tax credits the IRS is administering that can also help energize the economy and generate much needed 

jobs. We are working with the media and other stakeholder groups to get out the 

message about their availability. 

Enforcement 

In fiscal year 2008, both the levels of individual returns examined and coverage 

rates rose substantially. We conducted nearly 1.4 million examinations of individual 

tax returns in fiscal year 2008, an 8 percent increase over fiscal year 2006. This 

reflects a steady and sustained growth over the past 3 years. Similarly, the audit 

coverage rate has risen from 0.58 percent in fiscal year 2001 to 1.01 percent in fiscal 

year 2008. 

While the growth in examinations of individual returns is visible in all income 

categories, it is most apparent in examinations of individuals with incomes over 

$200,000. Audits of these individuals increased from 105,549 in fiscal year 2007 to 

130,751 during fiscal year 2008, an increase of 24 percent. Their coverage rate has 

risen from 2.68 percent in fiscal year 2007 to 2.94 percent in fiscal year 2008. 

In the business arena, audit coverage rates for small corporation returns (assets 

under $10 million) increased slightly over fiscal year 2007 by .03 percent. Of note, 

coverage rates for three classes of large corporations with assets between $50 million and $250 million and higher all increased. Coverage rates for partnership returns stayed even as compared to fiscal year 2007, while Subchapter S returns reflected a small .05 percent drop due largely to the increase in number of S-corporations. The coverage rate for tax-exempt organizations increased slightly. 

IRS Criminal Investigation has also been vigorously attacking egregious tax 

avoidance, money laundering, and other financial crimes that have a corrosive effect 

on our tax system. For example, overall number of individuals charged in an information or indictment rose from 2,323 in fiscal year 2007 to 2,547 in fiscal year 2008. 

Over the same period of time, prosecution recommendations for employment tax 

evasion more than doubled. The incarceration rate in these investigations was 81 

percent and the average sentence was 29 months. 

In fiscal year 2008, IRS-developed cases related to foreign and offshore issues also 

resulted in 61 criminal convictions, and the average term for those going to jail was 

32 months. For the first 4 months of fiscal year 2009, there were 20 convictions, 

and the average sentence was 84 months. 
127 

IRS Workforce 

In late fiscal year 2008, the IRS established the Workforce of Tomorrow task force 

to address recruitment and retention issues so that the IRS has the necessary leadership and workforce in place to address future challenges. 

The IRS considers employee engagement fundamental to the overall success of the 

organization and believes that employee engagement is an ongoing process. The IRS 

conducts an annual survey to assess the level of engagement of employees. Overall 

satisfaction showed steady improvement from a score of 3.48 in 2002 to a score of 

3.79 in 2008, on a scale of 1 to 5, with 5 being the most satisfied. 

IRS job satisfaction is higher than most other Federal agencies, according to the 

Office of Personnel Management’s Federal Human Capital Survey. 

THE ADMINISTRATION’S FISCAL YEAR 2010 BUDGET REQUEST FUNDS KEY PRIORITIES

Total resources to support IRS activities for fiscal year 2010 are $12,440,801,000. 

This amount includes $12,126,000,000 from direct appropriations, an estimated 

$147,101,000 from reimbursable programs, and an estimated $167,700,000 from 

user fees. The direct appropriation is a $603,402,000 increase, or a 5.2 percent increase over the fiscal year 2009 enacted level of $11,522,598,000. This amount excludes funding to implement the ARRA. 

The IRS continues to achieve efficiency savings in its operations. Because of the 

increase in e-filing, the IRS has effectively revised base operations and continues 

to implement savings resulting from the consolidation of an additional two of the 

paper processing sites. This consolidation has already resulted in significant savings 

and will continue to do so. 

The IRS Strategic Plan 2009–2013 guides program and budget decisions and supports the Department of the Treasury Strategic Plan. The IRS Strategic Plan builds 

on past successes while being innovative and adapting to new situations, such as 

the increasing complexity of tax laws, changing business models, expanding use of 

electronic data and related security risks, accelerating growth in international tax 

activities, and growing human capital challenges. I am a firm believer that organizations must always be evolving, changing, and improving and the strategic plan 

reflects that philosophy. 

The IRS Strategic Plan has two overarching goals: (1) improve service to make 

voluntary compliance easier; and (2) enforce the law to ensure everyone meets their 

obligation to pay taxes. The IRS must excel at both service and enforcement to meet 

its mission; it is not an either-or proposition. 

To improve service and make voluntary compliance easier, the fiscal year 2010 

President’s budget request for IRS provides the necessary funding to implement the 

following key strategic priorities. 

Enforcement Program 

The fiscal year 2010 President’s budget request includes program increases of 

$332.2 million for investments in strong compliance programs, including a robust 

portfolio of international enforcement initiatives that the President and Treasury 

Secretary Geithner and I unveiled on May 4, 2009. 

The international initiatives include reforming business tax deferral rules so 

that—with the exception of research and experimentation expenses that have significant spillover benefits to the United States—companies cannot receive deductions on their U.S. tax returns supporting their offshore investments until they pay 

U.S. taxes on their offshore profits. The Administration also seeks to prevent abuse 

of the foreign tax credit. 

In addition, getting tough on overseas tax havens is an integral part of the Administration’s plan. It would reform the so-called ‘‘check-the-box’’ rules to require 

certain foreign subsidiaries to be considered as separate corporations for U.S. tax 

purposes. It would also crack down on the abuse of tax havens by wealthy Americans. For example, the Administration proposes withholding taxes from U.S. customer accounts at foreign institutions doing business with the United States but 

which don’t share information with the IRS through the ‘‘Qualified Intermediary’’ 

program. To further combat abuse, the Administration proposes extending the statute of limitations for international tax enforcement to 6 years. 

The Administration’s full budget describes additional international tax reform 

proposals. Other legislative proposals to improve compliance and strengthen tax administration can be found later in this testimony. A key focus of our strategy is to 

shift enforcement resources so we can expand programs targeted at non-compliance 

among large corporations, U.S. business with international operations, high networth individuals, flow-through entities and partnerships. 
128 

1 Note that user fees are available to supplement appropriations contingent on demand for 

user fee services and receipt of fees. These amounts are subject to change. 

Increased resources for the IRS compliance programs yield direct measurable results through high return-on-investment activities. The new enforcement personnel 

funded in the fiscal year 2010 President’s budget are expected to generate $2.0 billion in additional annual enforcement revenue once the new hires reach full potential in fiscal year 2012. This estimate does not account for the deterrent effect of 

IRS enforcement programs, which are conservatively estimated to be at least three 

times larger than the direct revenue impact. 

The tax law is complex, and even sophisticated taxpayers make honest mistakes 

on their tax returns. Accordingly, helping taxpayers understand their obligations 

under the tax law is critical to improving compliance. To this end, the IRS remains 

committed to a balanced program of assisting taxpayers in both understanding the 

tax law and paying the proper amount of tax. 

Taxpayer Service Program 

The fiscal year 2010 President’s budget request continues improvements to both 

the quality and efficiency of taxpayer service, using a variety of person-to-person, 

telephone, and web-based and self-serve methods to help taxpayers understand their 

tax obligations and pay what they owe. The IRS taxpayer service program is funded 

in the Taxpayer Services and Operations Support appropriations. It should be noted 

that service investments and strategy are guided by the Taxpayer Assistance Blueprint—a 5-year plan that outlines the steps the IRS should take to improve taxpayer service and the IRS strategic plan. 

Providing quality taxpayer service is fundamental to keeping honest taxpayers in 

the tax system and compliant. It also helps them avoid making unintentional errors 

before returns are filed, which, in turn, reduces the need for follow-up correspondence from the IRS. 

The IRS provides year-round assistance to millions of taxpayers, including outreach and education programs, issuance of tax forms and publications, rulings and 

regulations, toll-free call centers, the IRS.gov web site, Taxpayer Assistance Centers 

(TACs), Volunteer Income Tax Assistance (VITA) sites, and Tax Counseling for the 

Elderly (TCE) sites. 

For example, in the Small Business arena alone, in fiscal year 2008, the IRS participated in over 2,600 meetings, symposiums, and seminars attended by over 

162,000 small business owners and tax professionals. The IRS also holds national 

and local Small Business Forums which provide an open avenue of communication 

between IRS and trade and industry groups. We held 135 Small Business Forums 

and facilitated 410 Small Business Tax Workshops in fiscal year 2008. 

American Recovery and Reinvestment Act 

As noted in the introduction, the IRS is now implementing a number of ARRA 

tax provisions, including individual tax credits, such as the Make Work Pay credit; 

energy credits for certain appliances, education credits, and child credits; tax incentives for business; bond incentives; and a tax credit to provide discounted health 

benefits to certain workers who have lost their jobs. The IRS will be able to continue 

to implement and administer these critical tax programs within the levels contained 

in this budget request. 

EXPLANATION OF BUDGET ACTIVITIES

Enforcement 

The fiscal year 2010 President’s budget request is $5,504,000,000 in direct appropriations and an estimated $60,797,000 from reimbursable programs, plus an estimated $7,800,000 from user fees1, for a total operating level of $5,572,597,000. The 

direct appropriations level is an increase of 7.6 percent from the fiscal year 2009 

enacted level and includes $600,000,000 to support tax enforcement activities funded by an allocation adjustment. This appropriation funds the following budget activities. 

Investigations ($637,694,000 from direct appropriations and an estimated 

$51,553,000 from reimbursable programs).—This budget activity funds the criminal 

investigations programs that explore potential criminal violations of the internal 

revenue tax laws, enforce criminal statutes relating to these violations, and recommend prosecution as warranted. These programs identify and document the 

movement of both legal and illegal sources of income to identify and document cases 

of suspected intent to defraud. It also includes investigation and prosecution of tax 

and money laundering violations associated with narcotics organizations. 
129 

Exam and Collections ($4,706,350,000 from direct appropriations, an estimated 

$8,783,000 from reimbursable programs, and an estimated $7,800,000 from user 

fees).—This budget activity funds programs that enforce the tax laws and compliance through examination and collection programs that ensure proper payment and 

tax reporting. The budget activity also supports appeals and litigation activities associated with exam and collection. 

Regulatory ($159,956,000 from direct appropriations and an estimated $461,000 

from reimbursable programs).—This budget activity funds the development and 

printing of published IRS guidance materials; interpretation of tax laws; advice on 

general legal servicing, ruling and agreements; enforcement of regulatory rules, 

laws, and approved business practices; and supporting taxpayers in the areas of prefiling agreements, determination letters, and advance pricing agreements. 

The Office of Professional Responsibility is funded within this budget activity and 

is responsible for identifying, communicating, and enforcing the Treasury Circular 

230 standards of competence, integrity, and conduct of professionals representing 

taxpayers before the IRS. 

Taxpayer Services 

The fiscal year 2010 President’s budget request is $2,269,830,000 in direct appropriations, an estimated $39,000,000 from reimbursable programs, and an estimated 

$127,000,000 from user fees, for a total operating level of $2,435,830,000. The direct 

appropriations level is a reduction of 1.0 percent from the fiscal year 2009 enacted 

level, though it does not represent a program reduction due to non-recurrent activities and savings. This appropriation funds the following budget activities. 

Pre-Filing Taxpayer Assistance and Education ($676,063,000 from direct appropriations, an estimated $819,000 from reimbursable programs, and an estimated 

$18,700,000 from user fees).—This budget activity funds services to assist with tax 

return preparation, including tax law interpretation, publication production, and advocate services. In addition, funding for these programs continues to emphasize taxpayer education, outreach, increased volunteer support time and locations, and enhancing pre-filing taxpayer support through electronic media. 

Filing and Account Services ($1,593,767,000 from direct appropriations, an estimated $38,181,000 from reimbursable programs, and an estimated $108,300,000 

from user fees).—This budget activity funds programs that provide filing and account services to taxpayers, process paper and electronically submitted tax returns, 

issue refunds, and maintain taxpayer accounts. The IRS continues to make progress 

in decreasing paper returns and increasing the use of electronic filing and payment 

methods. As previously noted, a record 90 million tax returns were filed electronically this year. 

Operations Support 

The fiscal year 2010 President’s budget request is $4,082,984,000 in direct appropriations, an estimated $47,304,000 from reimbursable programs, and an estimated 

$32,900,000 from user fees, for a total operating level of $4,163,188,000. The direct 

appropriation level is an increase of 5.6 percent from the fiscal year 2009 enacted 

level and includes $290,000,000 of support funding for enhanced enforcement activities. This appropriation funds the following budget activities. 

Infrastructure ($900,852,000 from direct appropriations, an estimated $155,000 

from reimbursable programs, and an estimated $16,100,000 from user fees).—This 

budget activity funds administrative services related to space and housing, rent and 

space alterations, building services, maintenance, guard services, and non-Automated Data Processing (ADP) equipment. 

Shared Services and Support ($1,296,629,000 from direct appropriations and an 

estimated $32,228,000 from reimbursable programs).—This budget activity funds 

policy management, IRS-wide support for research, strategic planning, communications and liaison, finance, human resources, and equal employment opportunity and 

diversity services and programs. It also funds printing and postage, business systems planning, security, corporate training, legal services, procurement, and specific 

employee benefits programs. 

Information Services ($1,885,503,000 from direct appropriations, an estimated 

$14,921,000 from reimbursable programs, and an estimated $16,800,000 from user 

fees).—This budget activity funds staffing, equipment, and related costs to manage, 

maintain, and operate the information systems critical to the support of tax administration programs. The IRS business programs rely on these systems to process tax 

and information returns, account for tax revenues collected, send notices for taxes 

owed, issue refunds, assist in the selection of tax returns for audit, and provide telecommunications services for all business activities including the public’s toll-free 

telephone access to tax information. 
130 

Business Systems Modernization (BSM) 

The fiscal year 2010 President’s budget request is $253,674,000 in direct appropriations. This amount is an increase of 10.3 percent from the fiscal year 2009 enacted level. This appropriation funds the planning and capital asset acquisition of 

information technology (IT) to continued modernization of the core taxpayer account 

database. 

This effort is a critical underpinning of the next generation of IRS service and enforcement initiatives. The integration strategy includes a particular focus on enhanced information technology security practices and robust accounting and financial management controls. This activity also funds the ongoing development of the 

Modernized e-File platform for filing tax returns electronically. The account also 

funds BSM labor (salaries and expense dollars) and related contract costs. 

Health Insurance Tax Credit Administration (HITCA) 

The fiscal year 2010 President’s budget request is $15,512,000 in direct appropriations. This amount is an increase of 0.7 percent from the fiscal year 2009 enacted 

level. This appropriation funds costs to administer a refundable tax credit for health 

insurance to qualified individuals, which was enacted as part of the Trade Adjustment Assistance Reform Act of 2002 (Public Law 107–210). 

FISCAL YEAR 2010 BUDGET ADJUSTMENTS

The IRS funding increase for fiscal year 2010 is $603,402,000, which includes 

$256,329,000 for maintaining current levels; a net decrease of $115,794,000 from efficiencies, savings and reinvestments; and a program increase of $462,867,000 to 

strengthen enforcement, address IT security needs and deploy information technology systems. These investments also fund increased front-line enforcement efforts. By fiscal year 2012, these investments are projected to increase annual enforcement revenue by $2.0 billion. 

The budget request supports these activities by proposing: 

—$332,160,000 to target the tax gap by addressing underreporting of tax associated with complex international activities; expanding enforcement efforts on 

noncompliance among business and high-income taxpayers; and minimizing revenue loss by increasing document matching efforts; 

—$108,100,000 to address critical IT operational and security infrastructure 

needs; and 

—$22,607,000 to accelerate efforts to modernize the core taxpayer account database. 

Fiscal Year 2009 Enacted Level 

The fiscal year 2009 enacted level for the IRS is $11,522,598,000, supporting an 

estimated 94,209 FTE. 

Maintaining Current Levels 

Adjustments Necessary To Maintain Current Levels ∂$260,061,000/0 FTE.— 

Funds are requested for: fiscal year 2010 cost of the January 2009 pay increase of 

$80,054,000, the proposed January 2010 pay raise of $148,894,000, and non-labor 

related items such as contracts, travel, supplies, equipment, and GSA rent adjustments of $31,113,000. 

Government-wide Reduction for Productivity Improvements ¥$13,732,000/0 

FTE.—The IRS continues to focus on improving the efficiency of its operations 

through a disciplined process of productivity improvement. Additional efficiency savings are outlined in the next section. 

GAO Audit Reimbursement Pursuant to Public Law 110–323 ∂$10,000,000/0 

FTE.—This estimated adjustment will provide funds to reimburse the Government 

Accountability Office (GAO) for the audit of the IRS annual financial statements. 

The IRS must pay this cost pursuant to Public Law 110–323. In prior years, GAO 

conducted the financial statement audit for which it did not receive reimbursement. 

Efficiency Savings 

Increase e-File Savings ¥$8,360,000/¥182 FTE.—This decrease is a result of 

savings from increased electronic filing (e-File), which is projected to lead to 4.6 million fewer returns filed on paper (2.9 million individual and 1.7 million business) 

in fiscal year 2010. This is projected to result in a savings of 182 FTE in submission 

processing. 

Non-Recur Savings ¥$27,074,000/0 FTE.—This decrease is the net reduction of 

one-time costs associated with the IRS fiscal year 2009 enforcement initiatives. 
131 

Non-Recur Stimulus Savings ¥$67,900,000/¥1,322 FTE.—One-time resources 

were provided in fiscal year 2009 to meet the requirements of the Economic Stimulus Act of 2008 (Public Law 110–185). 

Non-Recur Fiscal Year 2009 Reduction Adjustment/Correspondence Inventory 

¥$13,439,000/0 FTE.—One-time resources were provided in fiscal year 2009 to 

handle the increased adjustment/correspondence workload that resulted from diverting staff from paper correspondence to telephone service to meet the requirements 

of the Economic Stimulus Act of 2008 (Public Law 110–185). 

Non-Recur Pension Plan Form Processing ¥$1,352,000/0 FTE.—This decrease results from the funding of the one-time cost in fiscal year 2009 to test the IRS ERISA 

(Employee Retirement Income Security Act of 1974) Residual Solution (IERS) system. This system will process the electronic Form 5500, Annual Return/Report of 

Employee Benefit Plan from the new Department of Labor ERISA Filing Acceptance 

system and the paper Form 5500EZ, Annual Return of One-Participant (Owners and 

Their Spouses) Retirement. 

Reinvestment 

Submission Processing Consolidation (Andover) ∂$2,331,000/0 FTE.—Increased 

use of electronic filing options has led to consolidation of the individual return processing sites. Increased e-File savings will be reinvested to fund one-time severance 

pay costs for the ramp-down of the Andover submissions processing site. As the Andover consolidation approaches, the IRS will continue to assist employees in finding 

employment either in or outside the IRS. 

Program Increases 

Reduce the Tax Gap Attributable to International Activities ∂$128,064,000/∂784 

FTE.—The IRS plans a multi-year investment, beginning in fiscal year 2010, to deal 

more effectively with increasing international tax activities of individual and business taxpayers. 

This multi-year investment will improve the identification and coverage of international issues and increase issue specialization to address increasingly complex 

international transactions by both business and individual taxpayers. It will bring 

an unprecedented increase in international resources with the specialized skills to 

identify and examine international non-compliance. 

The resources will improve the use of data we receive from non-U.S. entities and 

foreign governments, provide the needed legal resources, and address aggressive 

profit allocation activities of multinational entities doing business in the United 

States. 

This effort will also focus on increasing reporting compliance of domestic taxpayers with offshore activity. The additional resources will allow the IRS to implement a stronger presence in offshore activities that will be able to uncover the use 

of offshore credit cards, disguised corporate ownership, brokering activities, and 

non-U.S. financial institutions providing banking services to U.S. and non-U.S. persons. This initiative will also fund the anticipated growth of collection activities resulting from increases in small and large business examination assessments, foreign 

investment transactions, and withholding compliance for nonresident aliens. 

Finally, this initiative will allow the IRS to increase its overseas presence by adding attache ́s in key countries to continue our efforts to aggressively combat abusive 

foreign tax schemes and other tax evasion schemes. These resources are also a key 

component in supporting the Department of Treasury’s objective of ‘‘Pre-empted and 

neutralized threats to the international financial system and enhanced U.S. national 

security.’’ 

This multi-pronged approach will aggressively target the many areas of offshore 

tax abuse with the goal of identifying more of these abuses and curbing this activity. 

Improve Reporting Compliance of Small Business and High Income Taxpayers 

∂$94,215,000/∂755 FTE.—This initiative will improve reporting compliance by increasing examinations of business and high-income returns and exams involving 

flow-through entities by 47,400; audits targeting employment, excise, and estate and 

gift taxes by 6,350; and investigations of business non-filers by 183,000. This request will generate $567.2 million in additional enforcement revenue once new hires 

reach full potential in fiscal year 2012. 

Expand Document Matching for Business Taxpayers ∂$26,237,000/∂300 FTE.— 

This initiative will increase the coverage of the document matching program to reduce the number of business taxpayers who misreport their income. This request 

will generate $386.5 million in additional revenue once new hires reach full potential in fiscal year 2012. 

Address Nonfiling/Underpayment and Collection Coverage ∂$83,644,000/∂491 

FTE.—With expanded enforcement efforts in recent years, the IRS must invest in 
132 

improving its collection operations to ensure appropriate overall balance and coverage. This initiative will generate $359.4 million in additional revenue once new 

hires reach full potential in fiscal year 2012. In addition, this initiative will fund 

the rent, furniture, telecommunication, and IT costs to build two new Automated 

Collection System (ACS) sites. 

Address IT Security and Material Weakness ∂$90,000,000/∂36 FTE.—Improving 

IT security is necessary to ensure the integrity of the tax system and maintain taxpayer confidence. This initiative will allow the IRS to enhance enterprise security 

risk management; harden software applications and network infrastructure security; 

improve security compliance monitoring and reporting; and provide an enterprise solution to deploy end-to-end audit log collection. 

Implement Return Review Program (RRP) ∂$18,100,000/∂10 FTE.—In fiscal 

year 2008, the Electronic Fraud Detection (EFDS) System stopped $1.4 billion in erroneous refunds. This initiative will complete modernization of the IRS fraudulent 

refund detection systems. It will deliver an integrated and unified RRP system that 

will enhance IRS capabilities to detect, resolve, and prevent criminal and civil tax 

refund and abuse. 

Business System Modernization (BSM) ∂$22,607,000/0 FTE.—This initiative will 

provide funding for the continued modernization of the core taxpayer account database. This effort is a critical underpinning of the next generation of IRS service and 

enforcement initiatives. The integration strategy includes a particular focus on enhanced information technology security practices and robust accounting and financial management controls. 

Legislative Proposals 

The fiscal year 2010 President’s budget includes a number of legislative proposals 

intended to improve tax compliance with minimum taxpayer burden. These proposals will specifically target the tax gap and generate nearly $10 billion over the 

next 10 years. The Obama Administration proposes to expand information reporting, 

improve compliance by businesses, strengthen tax administration, and expand penalties. 

Modify Electronic Filing Requirements.—Electronic filing benefits taxpayers and 

promotes effective tax administration because it decreases processing errors, expedites processing and payment of refunds, and allows the IRS to efficiently maintain 

up-to-date records. This proposal would require electronic filing by tax return preparers (initially defined by a set threshold amount). 

Expand Information Reporting.—Compliance with the tax laws is highest when 

payments are subject to information reporting to the IRS. Specific information reporting proposals would: 

—Require information reporting on payments to corporations; 

—Require a certified taxpayer identification number (TIN) from contractors; 

—Require increased information reporting on certain government payments; and 

—Increase information return penalties. 

Improve Compliance by Businesses.—Improving compliance by businesses of all 

sizes is as important. Specific proposals to improve compliance by businesses would: 

—Require electronic filing by certain large organizations; and 

—Implement standards clarifying when employee leasing companies can be held 

liable for their clients’ Federal employment taxes. 

Strengthen Tax Administration.—The IRS has taken a number of steps under existing law to improve compliance. These efforts would be enhanced by specific tax 

administration proposals that would: 

—Expand IRS access to information in the National Directory of New Hires for 

tax administration purposes; 

—Make repeated willful failure to file a tax return a felony; 

—Facilitate tax compliance with local jurisdictions; 

—Extend statutes of limitations where State tax adjustments affect Federal tax 

liability; 

—Improve the investigative disclosure statute; 

—Repeal the requirement of a partial payment with an application for an offerin-compromise; and 

—Allow assessment of criminal restitution as tax. 

Expand Penalties.—Penalties play an important role in discouraging intentional 

non-compliance. Specific proposals to expand penalties would: 

—Impose a penalty on failure to comply with electronic filing requirements; and 

—Clarify that the bad check penalty applies to electronic checks and other forms 

of payment. 
133 

IMPROVE TAX ADMINISTRATION AND OTHER MISCELLANEOUS PROPOSALS

The Administration has put forward additional proposals relating to IRS administrative reforms. These proposals would: 

—Require information reporting on expense payments relating to rental property; 

—Improve the foreign trust reporting penalty; 

—Apply the Federal Payment Levy Program to contractors before providing Collection Due Process; and 

—Clarify that vendor levy on ‘‘goods and services’’ would not exclude ‘‘property.’’ 

CONCLUSION

Mr. Chairman, thank you again for this opportunity to testify on the President’s 

fiscal year 2010 budget for the Internal Revenue Service. We urge its passage. It 

provides the IRS with the much needed resources to provide taxpayers with high 

quality customer service, and bolster IRS enforcement in critical areas, such as unlawful offshore tax evasion. It also makes wise investments for the next generation 

of technology and the IRS workforce. 

I also urge this Subcommittee to support the enactment of the legislative proposals included in the budget to improve compliance. Collectively, they will generate 

more $10 billion over the next 10 years if enacted. 

I look forward to working with you and the Subcommittee on this important budget request and I will be happy to respond to any questions. 

REGULATION OF PREPARERS

Senator DURBIN. Thank you, Mr. Shulman. Three States that I 

know of here, the staff has found, Oregon, California, and Alabama, already regulate tax preparers. Can you find, in their State 

regulation, evidence that the tax preparers in those States are 

doing a better job? 

Commissioner SHULMAN. Some of this regulation is pretty recent 

and it is a relatively small subset. The Government Accountability 

Office (GAO) has actually done some studies of State regulation 

and what is effective. It kind of is across the board, everything 

from registration, to registration and licensing, to actual continuing 

education. 

What I announced last week is that I’m going to have a wideopen discussion about this. We’re going to invite the industry in; 

we’re going to invite taxpayers in; we’re going to invite consumer 

advocates in. I would love to work with the subcommittee on this 

and look and say, ‘‘what’s the most effective way for us to work 

with that community to make sure there’s good compliance?’’ And 

that could include service and education. It clearly will include 

ramped up enforcement of the bad preparers, and then regulation 

is on the table. And we will closely look at those States—— 

MISTAKES ON RETURNS

Senator DURBIN. Are there some parts of the 1040 or schedules 

and such where you most often find mistakes being made? 

Commissioner SHULMAN. The most common mistakes occur 

where there’s complexity. Refundable credits are one place there’s 

quite a bit of mistakes, including the earned income tax credit. Another common mistake is math error, like not putting your Social 

Security number right. One of the reasons we encourage electronic 

filing is it often catches math errors. You can’t submit it until the 

form is complete. 

Senator DURBIN. Years ago, my bookkeeper in Springfield, Illinois passed away and I said, listen, I’m a lawyer. I took a tax 

course, I’ll do my own tax return. I think every Member of Con-
134 

gress should be required to do their own tax return. I think we’d 

have tax simplification in a hurry in this country. 

And, as you might guess, the IRS sent back my tax return and 

said, you did a math error here, Mr. Durbin, which was a humbling 

experience and disqualifies me from service in the President’s Cabinet. But, having said that, it was an eye opener. 

REFUND ANTICIPATION LOANS

May I ask you about refund anticipation loans (RAL). I don’t 

know if you are familiar with these. I have co-sponsored legislation 

to require companies operating as refund loan facilitators that offer 

loans to register with the Federal Government. The National Consumer Law Center found that the effective annualized rate, interest rate, for a refund anticipation loan can range from 50 percent 

to 500 percent. 

Is the IRS doing anything at this point to address concerns about 

refund anticipation loans? 

Commissioner SHULMAN. A couple of things. One of the most important things we do is continue to get our technology in order, so 

that we can get refunds out quickly to people, so they can get 

money in their pockets without having to take a RAL. Now, if you 

electronically file and choose a direct deposit, you may get your refund back in under 10 days. Anecdotally, it may come back in even 

fewer days. 

If we can finish our modernized taxpayer database, every taxpayer will have the opportunity to get a refund back quicker. So, 

one key to addressing RALs is to get rid of the need. I personally 

think that it’s incredibly unfortunate that people’s financials are in 

a state, many times often not their own doing, that they need to 

take a high-interest loan and that they can’t wait the 10 days to 

get this refund. As we look at the whole preparer issue, refund anticipation loans are clearly an associated service that some preparers provide, and we will take a look at this. 

The focus is on preparer conduct, but clearly all the related industries will be part of the preparer review. 

PERFORMANCE ON TOLL-FREE PHONE LINES

Senator DURBIN. What about answering the phone at the IRS? 

You reduced your performance goal from providing telephone assistance from 82 percent last year to 77 percent this year. I wonder 

why you did that. And what steps are you taking to improve the 

IRS’s telephone performance for next year? 

Commissioner SHULMAN. Phones have been stressed after sending checks out to all the American people last year, this year doing 

the Recovery Act, and the truing up the checks. Just to give you 

a sense, in 2007, we had 48 million calls between January and 

May. In 2008, we actually had 64 million and in 2009 we had 74 

million. 

And so one thing we have done as a result is redone our call 

routing to make it quicker for people to get in the right queue and 

answer important questions quickly for people, filing-dependent 

questions. 

Second is, we’re trying to push more taxpayers to the Web. So, 

for instance, one of the reasons for the decline this year is about 
135 

5 million people called and said, ‘‘what is my adjusted gross income?’’ Next year, we will have a Web service to get your adjusted 

gross income. 

And then third, we’ve actually added an estimated wait time. So, 

if you call and it says it is going to be 15 minutes before we get 

to you, you can hang up and call back when it’s not as busy. 

So, we’re doing a lot of refinements. I think the reality is lots of 

Government services are competing for money. We are trying to figure out the right number for level of service. I think the 77 percent 

doesn’t mean 23 percent are unhappy. Only 7 percent got a busy 

signal or disconnected; it’s a much smaller number. And so we’re 

trying to get better at the Web and figure out the right level of 

service. 

PHISHING AND DATA PROTECTION

Senator DURBIN. Two weeks ago, I got the best e-mail that I 

could possibly imagine. It was from the IRS! And they told me that 

I had a refund coming. I was elated, $600. It’s terrific. I’ll think of 

something to do with that. 

Of course you know as I know, right off the bat, there’s something wrong with this. Can you tell me what it is? 

Commissioner SHULMAN. We don’t send e-mails to people soliciting things. 

Senator DURBIN. And so there are lots of scams like that out 

there. This person wanted me to send back some information so 

they could send me a refund check, nominally in the name of the 

IRS. 

Do you go after these folks? Do you try to initiate prosecution? 

Commissioner SHULMAN. We’re very troubled. We would like to 

get the message out that you are not going to get an unsolicited 

phone call or an e-mail from the IRS telling you that you have 

some special deal with the IRS. So people should just delete that. 

We shut down about 2,000 sites this year. It is called phishing, 

sending out e-mail pretending like they are the IRS. We work with 

law enforcement authorities when we see these. We have hot lines. 

We have lots of people reporting to us. Two thousand Internet sites 

have been shut down just this filing season. We are very aggressive 

about it. 

Some of these are originating from overseas and it’s hard for—— 

Senator DURBIN. My friends from Nigeria have an ongoing correspondence with me. 

Thank you. Senator Collins. 

Senator COLLINS. Thank you, Mr. Chairman. I just want to associate myself with the chairman’s last question to express concern 

about the need for more enforcement and education to deal with 

these scams. They are pervasive. I’ve talked with the Federal 

Trade Commission (FTC), but the IRS can certainly play an important role as well in alerting consumers. 

Consumers are particularly confused because, 2 years ago, they 

received rebate checks from the Federal Government. So when they 

get an e-mail message supposedly from the IRS saying that ‘‘your 

stimulus check is now available,’’ they equate it to the rebate 

checks. 
136 

So I just want to second Senator Durbin’s concern in that area. 

I think we need to do more both to educate consumers and go after 

the people who are perpetrating these scams, which is difficult to 

do in an Internet world. 

TAX GAP

Let me switch to some other issues. The IRS Oversight Board, 

in its statement to this subcommittee, identified two serious weaknesses of our tax administration system. The first is the $290 billion tax gap, and the second is what the Board referred to as the 

archaic nature of IRS information systems. And I am well aware 

of that second issue because year after year after year, the GAO 

puts the IRS informations systems on its high risk list. 

I’d like to start with the tax gap issue and ask you what you 

think should be done to address the tax gap, in addition to better 

enforcement. 

Commissioner SHULMAN. I would say that tax gap numbers are 

imperfect and a lot of them are extrapolated numbers from 1980 

data. The only way to really get good tax gap numbers is to do random audits. We like to do our audits in a more focused, risk-based 

way, so random audits would be a burden on people. 

With that said, we take the tax gap very seriously. I think there 

are three important things that can be done with tax gap. One is 

simplification. As long as the Tax Code is this complex, people are 

going to make mistakes and people are going to have opportunities 

to use the complexity of the system for evasion. 

Second is information reporting. All our statistics show that if we 

get a W–2 from an employer and tax is withheld at the source, we 

have 99 percent compliance. When people operate a cash business, 

and there’s no information reported to us and it is all voluntary, 

the compliance rate is much lower. The Congress passed a couple 

of very important information reporting provisions last year, such 

as credit card reporting for small businesses, as well as basis reporting. They will be helpful. 

The President’s budget this year has very important information 

reporting proposals, especially in the international context. So we 

would get more information about across-border wire transfers, and 

that is going to be important. 

And so, the first step is simplification and the second step is information reporting. We also are taking a look at this whole issue 

of how to leverage preparers to be part of the system. If you think 

about the image of someone sitting down with the 1040 form and 

a pencil, the chairman notwithstanding, not that many people do 

that anymore. People are using a third party, someone as an intermediate. And those people need to be part of the solution to getting 

people to pay the right amount of taxes. Because when they don’t, 

it is actually a huge disservice to the American people. You know, 

if you end up paying penalties and interest and having trouble 

with the IRS, your preparer hasn’t done you any favors. So, I think 

that the whole issue of leveraging preparers is going to be part of 

our tax gap strategy. 
137 

REGULATION OF PREPARERS

Senator COLLINS. Let me follow-up on the issue of so-called bad 

preparers. Do you make referrals to State licensing boards when 

you identify a ‘‘bad preparer’’ who is a CPA? Because they’re the 

ones who have the ability to impose sanctions. 

Commissioner SHULMAN. Under Circular 230, we have the ability 

to impose sanctions on anyone who represents a person before the 

IRS. We can also give preparer penalties and then we coordinate 

with States. And so we do all of the above. It is such a transformational shift, with so many people using a third party, standing between them and the IRS, that we need to have this overall 

strategy. It includes the punitive aspect of enforcement, but also includes making sure that we are getting the right education, the 

right services, to preparers so that they can serve the American 

people well. 

INTERNATIONAL ACTIVITY AND THE TAX GAP

Senator COLLINS. Does the IRS have an estimate of the tax gap 

attributable to international activities? The reason I ask this is you 

mentioned in your opening statement offshore tax abuses, and it 

seems that that is the focus of your fiscal year 2010 enforcement 

initiative. 

Commissioner SHULMAN. The short answer is no. We don’t have 

a good international tax gap estimate. The reason for that is, to get 

good estimates that we are willing to put out, we actually need to 

do random audits. To do them internationally, we have to coordinate with other law enforcement agencies. By its nature, the reason that people evade paying taxes by going overseas is its hard 

for the U.S. Government to get to them. 

There are some wildly high estimates that are based on total deposits and how many are overseas, and assuming that no one is 

paying taxes on them. There are some numbers that get bandied 

about as part of the debate. 

For me, when I think about tax gap and I think about enforcement, I think not only about the dollars that we’re going to bring 

in directly, but also about the deterrent effect and how we project 

fairness to all American people. 

And so the international issues that are very important to me 

are to go get the money that is being hidden offshore. And I also 

think ordinary Americans need to know that, if they are wealthy 

and have a lot of assets and are playing the international capital 

markets, they are not going to get a free pass while firemen and 

teachers are paying their fair share of taxes. And so it’s a long way 

of saying it’s part of collecting the $2.5 trillion you need to run the 

Government. This is a matter of fundamental fairness and the deterrent effect, and people need to know that the U.S. Government 

is on the job. 

BUSINESS SYSTEMS MODERNIZATION

Senator DURBIN. I would like to ask one follow-up question here. 

It is on CADE, customer account data engine. I am kind of noticing, I worked with Senator Collins on this issue after 9/11 on technology in the Federal Government. And I have to tell you, after fol-
138 

lowing it for years, it has been a source of frustration of how many 

bad starts we’ve had different with different agencies, trying to 

bring modern technology. Maybe the private sector has the same 

problem, but it seems to be endemic at the Federal Government. 

Your CADE system, a core component of BSM, Business Systems 

Modernization, was intended to replace the original master file. It 

has now cost over $400 million since work began almost 5 years 

ago. But it has only delivered only about 15 percent of the full capability intended. The fiscal year 2010 budget request proposes a 

10 percent increase for BSM, or about $24 million of the $229.9 

million enacted last year. 

Has the IRS taken actions to address GAO’s recommendations to 

fully revisit the division’s strategy for Business System Modernization, including developing long-term plans for completing the program? 

Commissioner SHULMAN. I’m aware of the GAO report that came 

out yesterday and have a couple of thoughts. 

The first thing I did when I came in is I talked to lots of stakeholders. I talked to GAO and our auditor and I said, you know, tell 

me about CADE. To put it into perspective, CADE is a $50 million 

or so project each year within a $1.5 billion technology portfolio. 

And so while it’s important because it is our core database, it is 

not everything we do on technology. 

CUSTOMER ACCOUNT DATA ENGINE

What I was told by overseers is we’ve made great progress, we’ve 

proven that we can do systems development, but they don’t see a 

path to finishing CADE. And the internal projections for finishing 

were 2015, 2017, 2020. I believe the key to technology projects, the 

way get them done, is you have leaders—not just technology leaders, but the people who run agencies— focus on them and drive toward those results. 

And so what we’ve done is refocus the effort and split apart all 

the application work from the database work. If we get the database done, we will get refunds out quicker, we will address material weaknesses, and we will be able to use data for enforcement 

purposes. So the real business value of CADE comes out of the 

database; we are focused on getting that done now. And we are 

slowing down the application development and just focusing on conversion of the database. 

The other thing that I think is important from that report that 

came out is that the vast majority of that $400 million is being put 

to good use. The key is getting a data model with consistent definitions used in all of our systems. That was under that umbrella. We 

put out faster refunds to millions of taxpayers using the money 

that’s been spent. Especially in these difficult economic times, that 

has been really important. And we are using a huge amount of the 

software and hardware. 

So, this is a gradual shifting of focus. It is what you do with any 

big technology project, you learn as you go along. I certainly would 

hope it is not put in a category of failure; I don’t believe it has 

failed at all. I think it’s a step in what we can get done during my 

5-year tenure. And that is what we are trying to get done. 

Senator DURBIN. Thank you. Senator Collins. 
139 

INFORMATION TECHNOLOGY SECURITY

Senator COLLINS. Thank you, Mr. Chairman. Just one final question and the rest I will submit for the record. 

I appreciate the chairman bringing about the CADE strategy because that has been of concern to me. The other issue that concerns 

me has to do with IT security weaknesses. How much improvement 

in data protection do you believe the IRS will be able to make with 

the $90 million that you are requesting for IT security? Give us 

your assessment of the vulnerabilities and whether that is, in fact, 

a sufficient amount to address the problem. 

Commissioner SHULMAN. Senator, when I came in, all everyone 

talked about was modernization. And I actually believe that if you 

have a big technology portfolio, you need to worry about the current systems, updating those, so that your workers have tools along 

the way, making sure that there’s the right balance between security and infrastructure. You need to worry about data security, especially when you hold the taxpayer records of the United States. 

And you need to worry about your new systems. 

So, one of the things this budget reflects is rebalancing the portfolio so we are not myopically focused on modernization; we care 

a lot about security and data. There’s $90 million in the budget request to upgrade our security posture and infrastructure. It is incredibly important. I think, knock on wood, we haven’t had any 

major data breaches. There is always going to be a spectrum of 

weaknesses that overseers are going to point out, and you have to 

do risk-reward evaluations. You’re never going to get every single 

piece of potential weakness but you have to figure out what is important. 

I pay a lot of attention to GAO procedure reports. All development is now new development. We’re seeing a lot of laws which are 

incredibly important for internal threats. We are consolidating our 

access points into our networks so that we have perimeter security. 

A lot of data security is cultural. You want people who have access to data to wake up every day and feel it’s their responsibility 

to lock down the data. So, we had something called Operation Red 

last year where we stood down every employee of the IRS for 2 

hours to talk about what data is under their sphere and what can 

they do to better protect it, everything from file cabinets to safes 

to technology. 

I would say we are in a better security posture now than when 

I started. The people who are interested in breaching the security 

are always going to be innovating, and so we are going to need to 

stay ahead of the curve. But I think the money requested in this 

budget will allow us to keep improving in that vein. 

Senator COLLINS. Thank you. Thank you, Mr. Chairman. 

Senator DURBIN. I’d like to say that the IRS Oversight Board has 

submitted for inclusion in the record and preliminary recommendations on the fiscal year 2010 IRS budget proposal. The GAO office, 

at my request, is evaluating the budget proposal and will submit 

its analysis and recommendations. 

Colleen Kelly, president of the National Treasury and Employer’s 

Union on behalf of employers has submitted a written statement. 

Without objection, these will all be made part of record. 
140 

[The statements follow:] 

PREPARED STATEMENT OF THE IRS OVERSIGHT BOARD

The Internal Revenue Service (IRS) Oversight Board thanks Chairman Durbin, 

Ranking Member Collins, and members of the Subcommittee for the opportunity to 

present the Oversight Board’s views on the administration’s fiscal year 2010 IRS 

budget request. 

This statement presents the Board’s recommendations for the IRS’ fiscal year 

2010 budget and why the Board believes this level of funding is needed to meet the 

needs of the country and of taxpayers. Created as part of the IRS Restructuring and 

Reform Act of 1998 (RRA 98), the Oversight Board’s responsibilities include overseeing the IRS in its administration, management, conduct, direction and supervision of the execution and application of the internal revenue laws. The Board is 

also responsible for ensuring that the IRS’ organization and operations allow the 

agency to carry out its mission. To this end, the Board was given specific responsibilities for reviewing and approving annual budgets and strategic plans. 

The Board has a responsibility to ensure that the IRS’ budget and the related performance expectations contained in the performance budget support the recently 

published IRS Strategic Plan 2009–2013. In addition to this statement, the Board 

develops a formal report in which it explains in detail why it has recommended this 

budget for the IRS. Because of the late budget cycle caused by the change in administrations, this report is still under development. The Board requests that this report be entered into the meeting record when it is sent to the Subcommittee later 

this month. 

FISCAL YEAR 2010 IRS BUDGET RECOMMENDATIONS

The IRS Oversight Board recommends an fiscal year 2010 IRS budget of $12.489 billion, an increase of $966 million over the enacted fiscal year 2009 amount of 

$11.523 billion. This recommendation is $363 million above the President’s request 

of $12.126 billion. 

Tables 1 and 2 at the end of this statement show more information on the Board’s 

budget recommendations. Table 1 shows the program initiatives or increases the 

Board is recommending, and Table 2 shows the Board’s recommended budget by account. 

As the Board stated in its 2008 Annual Report to Congress, our tax administra- tion system has two serious weaknesses, the $290 billion tax gap and the archaic 

nature of IRS information systems. As a result, the Board recommends that 

strengthening the system be a national priority. 

Addressing those weaknesses is critical and urgent. The Board is fully supportive 

of the administration’s boost in enforcement funding. However, the Board recommends greater funding in the areas of Business Systems Modernization (BSM) 

and Operations Support than the President’s budget requests. While the Oversight 

Board and the administration’s budgets agree in many ways, the Board feels that 

these key additional investments are needed sooner—not later—to strengthen our 

tax administration system. 

The effort required to correct the two weaknesses identified above is not to be 

taken lightly. Although the tax gap can never realistically be eliminated, it is equally as foolish to suggest that nothing can be done to reduce it. As the Board has 

opined on numerous occasions, there is not a single solution to reducing the tax gap. 

Rather, a comprehensive, multi-faceted, multi-year, approach is needed that provides for excellent taxpayer service combined with vigorous enforcement, along with 

a long-term investment in IRS information technology and infrastructure. It is generally recognized that the IRS ‘‘cannot audit its way out of the tax gap.’’ Balance 

between immediate expansion of personnel combined with long term investments in 

information technology and infrastructure is needed. 

The second weakness, modernizing the IRS’ archaic information technology systems, is equally daunting—yet it must be done. As noted in the Board’s 2008 Annual Report to Congress, the IRS’ systems modernization program has been on the 

Government Accountability Office’s (GAO’s) high risk list since 1995. The GAO 

placed this program on its high risk list because it believed that the IRS relied on 

obsolete automated systems for key operational and financial management functions. The Board believes that it is unacceptable for this program to remain on the 

high risk list for so long is unacceptable. 

The Board believes strongly that the IRS’ BSM program must be in a position to 

move forward in fiscal year 2010 and fiscal year 2011 so that program milestones 

scheduled for 2011 can be achieved. Because the President’s budget provides little 

additional funding for the Customer Account Data Engine in fiscal year 2010, it 
141 

puts the fiscal year 2011 milestones at great risk. In addition, the Board believes 

additional funding is needed to refresh and update the IRS’ aging infrastructure. In 

total, of the $363 million difference in the two budgets, about $332 million is for 

investments in critical information technology and infrastructure. 

The Board would also increase funding for several key initiatives to improve taxpayer service. These initiatives are all designed to help the IRS plan and implement 

better taxpayer service in the future. 

Board Fully Supports Increased Enforcement Funding 

The Board’s recommendation for the enforcement account, which at $5.5 billion 

is close to half of the IRS total budget, is identical to the President’s budgets. Both 

the President’s and Oversight Board’s budgets add $332 million for additional enforcement. This increase constitutes a 7.6 percent boost in enforcement funding, and 

includes additional funding to strengthen criminal investigations programs, increase 

examinations and collections, and support a variety of regulatory matters. 

This increase in enforcement resources pays for itself; in some cases many times 

over—a consideration that should not be ignored in the budget process. In addition, 

it helps to reduce the tax gap, which deprives the nation, and hence its citizens, 

of $290 billion it is legally owed. The tax gap is an affront to honest taxpayers and 

efforts must be made to reduce it. 

The President’s request for enforcement funding includes a multi-year investment of $128 million, starting in fiscal year 2010, to deal more effectively with increasing 

international tax activities of individual and business taxpayers. The Board is 

pleased with this, as the effects of globalization on tax administration are significant 

and must be addressed. 

The Board also strongly supports additional funding to improve compliance among 

‘‘high-risk’’ taxpayer segments. Estimates shows that much of the tax gap is due to 

underreporting of income by businesses, mostly run by individuals. It is imperative 

that the IRS not only ensure that all individuals understand their tax obligations, 

but that they report their income and pay their taxes. 

Taxpayer Service Increase Recommended 

For the taxpayer service account, the Oversight Board’s and President’s budgets 

are within 0.2 percent of one another. The President’s budget request for taxpayer 

service benefits from congressional action taken during consideration of the fiscal 

year 2009 budget. By adding additional funding to the IRS taxpayer service budget 

in fiscal year 2009, Congress raised the base amount for taxpayer service in fiscal 

year 2010, giving the IRS additional resources to serve taxpayers in an increasingly 

more complex economic environment. 

The need for taxpayer service is especially acute during periods of economic hardship, as taxpayers may find themselves facing challenging financial situations. In 

addition, taxpayers need additional help to understand new tax provisions and programs designed to help them during difficult times. Every change in the tax code 

causes the tax administration system to become more complex, with more taxpayers 

in need of help to understand and meet their obligations. It is especially important 

during this recession that the IRS be able to follow through on its strategic goal 

to ‘‘make voluntary compliance easier.’’ 

Despite a higher funding base for taxpayer service, there are several areas where 

the Board recommends additional funding. In 2005, Congress asked the IRS, National Taxpayer Advocate, and the IRS Oversight Board to develop a 5-year plan 

to improve taxpayer service. The result was the Taxpayer Assistance Blueprint 

(TAB), which was completed in April 2007. In the Board’s opinion, the IRS needs 

additional resources to more fully carry out the TAB by expanding its on-line capabilities. Additional funding is also needed to optimize the use of Taxpayer Assistance Centers, also known as walk-in sites, which traditionally serve lower income 

taxpayers who depend more on walk-in services. Overall, the Board recommends an 

additional $31.6 million be appropriated for taxpayer service, all of which will be 

focused on improving taxpayer service in the future. 

Strategic Funding Needed for Business Systems Modernization 

The IRS’ archaic computer systems are a serious challenge facing the IRS. The 

Board is dismayed by the long-term under-funding of the BSM program, forcing the 

IRS to stretch out its efforts at a painfully slow pace, to the detriment of taxpayers. 

The Board is pleased that the IRS has revised its BSM approach to put more 

focus on completing the program, and considers it a critical foundation of service 

and enforcement in the future. 

However, the Board questions whether the President’s budget will allow for substantive progress in the coming years. The Board has opined in past years that the 

BSM account is fundamentally under-funded, and despite the additional $7.3 million 
142 

added by Congress in fiscal year 2009 and the President’s fiscal year 2010 requested 

increase of $22.6 million, the fiscal year 2010 request for BSM continues to be far 

too low. Progress will come slowly should that trend continue. The Customer Account Data Engine project, in particular, has funding needs that go far beyond what 

was requested in fiscal year 2010, and those needs will only grow in fiscal year 

2011. 

The Board’s recommended BSM budget of $400 million is 58 percent higher than the President’s BSM budget of $253.7 million. At $253.7 million, the President’s 

BSM budget consumes 2.1 percent of the IRS total budget of $12.126 billion. This 

compares to the Board’s recommendation of a $400 million BSM budget, which consumes 3.2 percent of its total $12.489 billion budget. Although the difference is quite 

small when viewed as a portion of the total budget, the vision presented by these 

two BSM budgets is quite different. The Board believes that funding decisions for 

the IRS must look beyond consideration of short term benefits and immediate return on investment. Serious consideration must also be given to the long term benefits to taxpayers and the tax administration system that will result from a modernized information technology system. These investments will result in fundamental 

changes to tax administration that will benefit both taxpayers and tax administrators alike. 

The Board recommends that a total of $400 million be appropriated for the BSM 

program so that the pace of progress is increased, allowing the IRS to achieve key 

milestones in fiscal year 2011, such as the deployment of a daily Individual Master 

File capability and a Customer Account Data Engine relational database. 

More Funding for Operations Support 

Another important aspect of the IRS’ performance is the state of its legacy infrastructure: the technology and tools used by IRS employees to do their work. IRS 

laptops, software, the telecommunications systems, and the buildings themselves 

are aging and must be updated and maintained. In addition, the IRS must protect 

its hardware and data infrastructure from threat, whether it comes from bad weather or cyber-attack. The administration’s fiscal year 2010 budget calls for $108.1 million in program 

increases to address information technology security and material weaknesses and 

to strengthen the Electronic Fraud Detection System. The Board supports this funding, as both can help ensure the integrity of the tax system and maintain taxpayer 

confidence that its returns remain private and safe from security risks. However, more needs to be done. The Board recommends a total of $292 million 

in infrastructure program initiatives, compared to the $108 million requested by the 

President’s IRS budget. The Board recommends an additional $164 million in technology initiatives and a $20 million initiative related to workforce development. This 

funding is needed to refresh and maintain the IRS’ infrastructure, strengthen its 

ability to protect the personal information of taxpayers, increase the productivity of 

its workforce by leveraging information technology, and upgrade its financial services accounting system that uses a software application product that is so old the 

vendor will no longer support the program in 2013. 

In addition, workforce development cannot be ignored, especially during a period 

when the IRS is losing experienced employees to retirement and is hiring a significant number of new employees. Frontline supervision plays a key role in employee 

satisfaction, quality, and productivity, and the IRS lacks funding to properly train 

frontline managers in a timely fashion. Approximately $15 million of the workforce 

initiative is for frontline management training, with the remaining $5 million for 

succession planning and executive development. 

Long-Term Investment Key to IRS Strength 

Although the magnitude of the Board’s budget recommendations for the IRS are 

not vastly different from the President’s budget request in amount, they do focus 

more on the IRS’ strategic goals and call for investments that are needed today for 

a stronger tax administration system in the future. The Oversight Board believes 

that its approach represents a meaningful long-term investment to benefit our Nation in the decades to come. 

TABLE 1.—IRS OVERSIGHT BOARD RECOMMENDED FISCAL YEAR 2010 IRS BUDGET BY PROGRAM 

INITIATIVE 

[In thousands of dollars] 

Fiscal Year 2009 Enacted .................................................................................................................................. 11,522,598 
143 

TABLE 1.—IRS OVERSIGHT BOARD RECOMMENDED FISCAL YEAR 2010 IRS BUDGET BY PROGRAM 

INITIATIVE—Continued 

[In thousands of dollars] 

Changes to Base: 

Maintaining Current Levels ....................................................................................................................... 256,329 

Efficiencies/Savings .................................................................................................................................. (118,125 ) 

Reinvestment ............................................................................................................................................. 2,331 

Subtotal Changes to Base ................................................................................................................... 140,535 

Total Fiscal Year 2010 Base—Current Services ................................................................................. 11,663,133 

Program Increases 

Taxpayer Service Initiatives: 

TAB Technology Enhancements ................................................................................................................. 6,000 

Optimize TAC Footprint ............................................................................................................................. 17,880 

Research and Analysis to Improve Taxpayer Service ............................................................................... 7,750 

Subtotal, Taxpayer Service Initiatives .................................................................................................. 31,630 

Program Increases 

Enforcement Initiatives: 

Reduce the Tax Gap Attributable to International Activities ................................................................... 128,064 

Improve Reporting Compliance of SB/SE Taxpayers ................................................................................ 94,215 

Expand Document Matching for Business Taxpayers ............................................................................... 26,237 

Address Nonfiling/Underpayment and Collection Coverage ..................................................................... 83,644 

Subtotal, Enforcement Initiatives ......................................................................................................... 332,160 

Infrastructure Initiatives: 

Address IT Security and Material Weakness ............................................................................................ 90,000 

Implement Return Review Program .......................................................................................................... 18,100 

Refresh/Sustain Infrastructure .................................................................................................................. 75,000 

Training and Certifying Project Managers ................................................................................................ 5,000 

Enhance Privacy, Information Protection and Data Security ................................................................... 9,154 

Technology Investments to Enhance Operations ...................................................................................... 35,000 

Upgrade Integrated Financial System (IFS) .............................................................................................. 40,700 

Leadership Training and Development ..................................................................................................... 20,000 

Subtotal, Infrastructure Initiatives ....................................................................................................... 292,954 

BSM Initiative: 

Fund BSM to Accelerate Taxpayer Benefits .............................................................................................. 168,933 

Subtotal, BSM ....................................................................................................................................... 168,933 

Subtotal Fiscal Year 2010 Program Initiatives .................................................................................... 825,677 

Total Fiscal Year 2010 Request ........................................................................................................... 12,488,810 

Fiscal Year 2010 President’s Request for IRS .................................................................................................. 12,126,000 

Increase Over President’s Request .................................................................................................................... 362,810 
144 

TABLE 2.—SUMMARY OF OVERSIGHT BOARD RECOMMENDED IRS FISCAL YEAR 2010 BUDGET BY ACCOUNT 

[Dollars in thousands] 

Taxpayer Service Enforcement Ops Support BSM HITCA Total 

Fiscal Year 2009 Enacted Budget .............................................................................................................. $2,293,000 $5,117,267 $3,867,011 $229,914 $15,406 $11,522,598 Changes to Base: 

Maintaining Current Levels Adjustment ............................................................................................ $60,195 $133,815 $61,060 $1,153 $106 $256,329 Efficiencies/Savings ........................................................................................................................... ($90,918 ) ........................ ($27,207 ) ........................ ........................ ($118,125 ) Reinvestment ...................................................................................................................................... $2,025 ........................ $306 ........................ ........................ $2,331 

Subtotal Changes to Base ............................................................................................................. ($28,698 ) $133,815 $34,159 $1,153 $106 $140,535 Total Fiscal Year 2010 Base—Current Services .......................................................................... $2,264,302 $5,251,082 $3,901,170 $231,067 $15,512 $11,663,133 

Program Increases 

Taxpayer Service Initiatives: 

TAB Technology Enhancements .......................................................................................................... $592 ........................ $5,408 ........................ ........................ $6,000 Optimize TAC Footprint ....................................................................................................................... $4,238 ........................ $13,642 ........................ ........................ $17,880 Research and Analysis to Improve Service ........................................................................................ .......................... ........................ $7,750 ........................ ........................ $7,750 

Subtotal, Taxpayer Service Initiatives ........................................................................................... $4,830 ........................ $26,800 ........................ ........................ $31,630 

Enforcement Initiatives: .......................... ........................ .......................... ........................ ........................ ..........................

Reduce the Tax Gap Attributable to International Activities ............................................................ $3,124 $104,113 $20,827 ........................ ........................ $128,064 Improve Reporting Compliance of SB/SE Taxpayers ......................................................................... $267 $75,114 $18,834 ........................ ........................ $94,215 Expand Document Matching for Business Taxpayers ........................................................................ $1,425 $17,955 $6,857 ........................ ........................ $26,237 Address Nonfiling/Underpayment and Collection Coverage .............................................................. $712 $55,736 $27,196 ........................ ........................ $83,644 

Subtotal, Enforcement Initiatives .................................................................................................. $5,528 $252,918 $73,714 ........................ ........................ $332,160 

Infrastructure Initiatives: 

Address IT Security and Material Weakness ...................................................................................... .......................... ........................ $90,000 ........................ ........................ $90,000 Implement Return Review Program (RRP) ......................................................................................... .......................... ........................ $18,100 ........................ ........................ $18,100 Refresh/Sustain Infrastructure ........................................................................................................... .......................... ........................ $75,000 ........................ ........................ $75,000 Training and Certifying Project Managers ......................................................................................... .......................... ........................ $5,000 ........................ ........................ $5,000 Enhance Privacy, Information Protection and Data Security ............................................................ .......................... ........................ $9,154 ........................ ........................ $9,154 Technology Investments to Enhance Operations ............................................................................... .......................... ........................ $35,000 ........................ ........................ $35,000 Upgrade Integrated Financial System (IFS) ....................................................................................... .......................... ........................ $40,700 ........................ ........................ $40,700 
145 

Leadership Training and Development .............................................................................................. .......................... ........................ $20,000 ........................ ........................ $20,000 

Subtotal, Infrastructure Initiatives ................................................................................................ .......................... ........................ $292,954 ........................ ........................ $292,954 

Business Systems Modernization Initiative: .......................... ........................ .......................... ........................ ........................ ..........................

Fund BSM to Accelerate Taxpayer Benefits ....................................................................................... .......................... ........................ .......................... $119,133 ........................ $119,133 

Subtotal, Business Systems Modernization ................................................................................... .......................... ........................ .......................... $168,933 ........................ $168,933 Subtotal Fiscal Year 2010 Program Changes ............................................................................... $10,358 $252,918 $393,468 $168,933 ........................ $825,677 Total Fiscal Year 2010 Board Recommendation ........................................................................... $2,274,660 $5,504,000 $4,294,638 $400,000 $15,512 $12,488,810 

Fiscal Year 2009 Enacted ........................................................................................................................... $2,293,000 $5,117,267 $3,867,011 $229,914 $15,406 $11,522,598 Fiscal Year 2010 President’s Request for IRS ........................................................................................... $2,269,830 $5,504,000 $4,082,984 $253,674 $15,512 $12,126,000 Increase Over President’s Request ............................................................................................................. $4,830 ........................ $211,654 $146,326 ........................ $362,810 Percent Increase Over President’s Request (Percent) ................................................................................ 0.2 ........................ 5.2 57.7 ........................ 3.0 
146 

PREPARED STATEMENT OF COLLEEN M. KELLEY, NATIONAL PRESIDENT, NATIONAL

TREASURY EMPLOYEES UNION

Chairman Durbin, Ranking Member Collins, and distinguished members of the 

Subcommittee, I would like to thank you for allowing me to provide comments on 

the administration’s fiscal year 2010 budget request for the Internal Revenue Service (IRS). As President of the National Treasury Employees Union (NTEU), I have 

the honor of representing over 150,000 federal workers in 31 agencies, including the 

men and women at the IRS. 

IRS FISCAL YEAR 2010 BUDGET REQUEST

Mr. Chairman, NTEU strongly supports the administration’s fiscal year 2010 

budget request of $12.1 billion for the IRS, a roughly $600 million increase over fiscal year 2009 levels. We believe that the President’s request will allow the IRS to 

continue providing taxpayers with top quality service and will assist efforts to enhance taxpayer compliance and close the tax gap. 

We are particularly pleased the administration’s budget request would provide 

$5.5 billion for IRS tax enforcement, including additional resources made available 

through a program integrity allocation adjustment. According to the administration, 

IRS enforcement efforts recoup $5 for every $1 dollar invested and the program integrity savings from increased investment for IRS enforcement efforts will be more 

than $13 billion between 2010–2014. 

We are also pleased to see the recently passed budget resolution fully funds the 

President’s budget request for the IRS and includes the President’s request for additional resources for IRS tax-law enforcement. 

I would also note that in previous years, NTEU has supported the budget recommendations proposed by the IRS Oversight Board which have generally called for 

additional resources above that requested by the administration. For fiscal year 

2010, the Oversight Board has recommended $12.961 billion in funding for the IRS. 

While we have not seen the specific details of the Board’s updated proposal, we 

would be inclined to support providing additional funding for the IRS above the administration’s request and look forward to reviewing the Board’s final recommendation. 

MAJOR CHALLENGES

Mr. Chairman, NTEU believes the President’s request will allow the IRS to meet 

its customer service and enforcement challenges while also addressing some of the 

most immediate challenges it will face in the coming years, including the growing 

human capital crisis, increasing complexity of tax administration, and a burgeoning 

tax gap. 

HUMAN CAPITAL CRISIS

NTEU believes that IRS employees are the most valuable asset in effective tax 

administration. We are glad to see that the IRS Strategic Plan for 2009–2013 recognizes this fact and stresses the importance of investing in the workforce in order 

to achieve its service and enforcement goals. But as the IRS notes, they face several 

major challenges such as large numbers of retirements and competition with both 

the public and private sectors for critical talent. According to the IRS, more than 

half of IRS employees and managers are age 50 or older. The expected large scale 

retirements of thousands of Service personnel over the next several years will only 

further deplete the decimated IRS workforce that is down by more than 23,000 since 

1995. According to a report by the IRS Oversight Board, an independent body 

charged with providing IRS with long-term guidance and direction, roughly 4,000 

IRS employees a year for the next four years are expected to retire, taking with 

them years of experience and valuable skills. The dramatic decline in staffing levels 

coupled with the pending retirement wave has caused the Oversight Board to identify human capital issues as one the most important strategic challenges facing the 

IRS. 

In the face of an aging workforce and looming wave of retirements, Commissioner 

Shulman created the Workforce of Tomorrow task force to ensure that in five years 

the IRS has the leadership and workforce ready for the next 15 years and to help 

make the IRS the best place to work in government. 

NTEU was happy to see that the President’s budget request acknowledges the 

human capital crisis at the Service and provides for major increases in Service staffing, particularly in the area of enforcement. According to the administration, the 

new enforcement personnel funded in the President’s budget will generate $2.0 bil-
147 

lion in additional annual enforcement revenue once the new hires reach full potential in fiscal year 2012. 

INCREASING COMPLEXITY OF TAX ADMINISTRATION

Under the President’s budget request, the IRS will also be better equipped to handle the challenges associated with the increasingly complexity of tax administration. 

For example, one of the biggest challenges the IRS confronts each year is identifying 

new tax law and administrative changes as well as expiring tax provisions. According to the IRS, in 2007 alone, 41 tax provisions expired affecting a wide range of 

taxpayers. 

During the 2009 Filing Season, the IRS was presented with additional challenges 

due to the enactment of two significant new tax laws, the ‘‘Housing and Economic 

Recovery Act of 2008,’’ which includes a refundable homebuyer credit as well as an 

additional standard deduction for real property taxes, as well as the ‘‘Emergency 

Economic Stabilization Act of 2008,’’ which included 116 different tax provisions. 

In the future, the IRS will also be confronted with the challenges presented by 

the increasing globalization of individual taxpayers and businesses. As more and 

more U.S. taxpayers and businesses expand into global markets, it will be important 

that the IRS has the technical expertise to identify and understand the proliferation 

of complex international activities and the emerging global nature of tax administration. 

TAX GAP

Recent and projected large Federal budget deficits have generated congressional 

and executive branch interest in raising revenue by reducing the tax gap, that is, 

the difference between what taxpayers should have paid and what they actually 

paid on a timely basis. For tax year 2001, the IRS estimated a gross tax gap of $345 

billion, equal to a noncompliance rate of 16.3 percent. 

NTEU believes that efforts to close the tax gap must focus on improving compliance activities and enhancing taxpayer service. By improving document matching, 

examination, and collection activities, the IRS will be better able to prevent, detect, 

and remedy noncompliance. And providing taxpayers with assistance and clear and 

accurate information before they file their tax returns will help reduce unnecessary 

contacts afterwards, allowing IRS to focus enforcement resources on taxpayers who 

are intentionally evading their tax obligations. 

In addition to generating additional revenue for the Federal Government, reducing the tax gap will help strengthen public trust in the fairness of the tax system 

which will positively impact voluntary compliance with tax laws. That is why NTEU supports the President’s request for an additional $332 million 

to help close the tax gap by strengthening compliance and allowing the IRS to better 

address the main components of the tax gap including, underreporting, non-filing 

and underpayment. 

ENFORCEMENT

Mr. Chairman, as you know enforcement of the tax laws is an integral component 

of IRS’ effort to enhance voluntary compliance and close the tax gap. IRS enforcement activities, such as examination and collection, target elements of the tax gap 

and are a high priority for the Service. In fiscal year 2008, the IRS initiated additional information reporting requirements for large partnerships and foreign corporations, soft notices and self-correction to improve compliance. These efforts helped the IRS bring in $56.4 billion in enforcement revenue in 2008, a 65 percent increase over fiscal year 2002. The $56.4 billion in collections 

in 2008 represents a 5 to 1 return on investment for all IRS activities. In addition, 

the IRS showed consistent improvement in its enforcement results meeting or exceeding 78 percent (14 of 18) of its program targets. 

Most impressively, the IRS continues to bring in record amounts of enforcement 

revenue despite severe cuts to enforcement staffing over the past 13 years. In particular, the number of revenue officers and revenue agents—two groups critical to 

closing the tax gap and thereby reducing the Federal budget deficit—have shrunk 

by 33 and 20 percent respectively. Revenue officers went from 8,139 to 5,481 and 

revenue agents fell from 16,078 to 12,951. As noted previously, these drastic cuts 

have come at a time when the IRS workload has increased dramatically due to the 

increasing complexity of tax administration. 

NTEU believes it is essential that the IRS continue to direct resources toward enforcement activities that have the greatest overall impact on compliance and can 

best aid the Service’s efforts to close the tax gap. One such activity is the IRS Automated Underreporter (AUR) program which has evolved as an important Service 
148 

compliance initiative using third-party information returns to identify income and 

deductions that were not reported on tax returns. NTEU believes the program is 

an effective way to detect taxpayer underreporting which accounts for roughly 82 

percent of the gross tax gap. 

In fiscal year 2008, increased AUR contact closures increased by almost 4 percent 

from the previous year and dollars collected through AUR and information return 

processing increased by 22 percent. 

The administration’s budget request acknowledges the import role the AUR program can have in closing the tax gap by reducing the number of taxpayers who 

underreport their income and proposes an increase of $26.2 million and 300 FTE 

to increase coverage of the AUR document matching program. According to the administration, this request will generate $386.5 million in additional revenue once 

new hires reach full potential in fiscal year 2012 resulting in a return on investment 

(ROI) of 17 to 1. 

TAXPAYER SERVICE

Mr. Chairman, NTEU strongly believes that providing quality customer service to 

the taxpayer is an important part of IRS efforts to help the taxpaying public understand their tax obligations while making it easier to participate in the tax system. 

Through many sources, the IRS provides year-round assistance to millions of taxpayers, including outreach and education programs, issuance of tax forms and publications, rulings and regulations, toll-free call centers, the IRS.gov web site, Taxpayer Assistance Centers (TACs), Volunteer Income Tax Assistance (VITA) sites, 

and Tax Counseling for the Elderly (TCE) sites. These efforts have helped the IRS 

raise their standard of service to America’s taxpayers and assisted in efforts to improve voluntary compliance. The IRS has continued to make great strides in recent 

years in the quality of the service it provides despite relatively flat budgets, that 

when adjusted for inflation, have provided the IRS with fewer resources over the 

past several years compared to fiscal year 2002. 

But despite receiving fewer resources and continued reductions in the number of 

customer service representatives at the Service, the IRS was able to deliver a successful 2008 filing season. As you know, the 2008 filing season was particularly 

challenging due to late enactment of the AMT legislation and implementation of the 

Economic Stimulus Payment program. Despite these challenges, the IRS carried out 

another successful filing season during which IRS employees processed more than 

155 million individual returns including returns filed solely to claim an economic 

stimulus payment, an increase of 11 percent over last year and issued 107.6 million 

refunds, totaling $369 billion; answered over 40.4 million calls, an increase of 21 

percent due to a large increase in taxpayer inquiries about the economic stimulus 

checks; completed 52 million automated calls, an increase of over 123 percent; maintained account and tax law accuracy rates of over 90 percent and expanded return 

preparation at IRS Taxpayer Assistance Centers (TACs) preparing over 575,000 returns, a 42 percent increase over last year. 

Mr. Chairman, while IRS employees were able to continue providing quality service to taxpayers in fiscal year 2008, we do have concerns about the potential negative effect on IRS’ ability to continue doing so should the ‘‘efficiency savings’’ assumed in the administration’s budget request not materialize. For fiscal year 2010, 

the budget request identifies ‘‘efficiency savings’’ of more than $118 million at the 

cost of 1,504 FTE’s. If, as sometimes been the case in previous years, IRS fails to 

realize all expected savings then the funds available for critical Service personnel, 

such as those working at the 401 TACs located nationwide, would be further reduced. 

As stated previously, NTEU strongly believes providing quality service to taxpayers is critical to ensuring taxpayers understand their tax obligations while making it easier for them to participate in the tax system. And in the current economic 

climate, we believe it is more important than ever that taxpayers be able to deal 

with the IRS directly to work through any financial difficulties they may encounter. 

IRS employees have a wide range of tools and information at their disposal, which 

allow them to work with taxpayers to address their financial hardships and to become compliant. 

Above all else, the IRS employee’s interest is in assisting struggling taxpayers to 

meet their tax obligations in a way that will not exacerbate their financial distress. 

When an IRS employee works with a taxpayer, the employee has access to all of 

the taxpayer’s information and can answer questions and offer advice. For example, 

they can see whether a taxpayer has not filed a return and explain that the sooner 

the taxpayer makes arrangements to address filing and balance due issues the less 

penalty and interest they will owe. They can look at the taxpayer’s records and an-
149 

swer questions about why they owe a balance and what they can do about it. They 

can also tell the taxpayer that they are not having enough taxes withheld by their 

employer and need to address that or that if an ex-spouse is claiming a child as 

a dependent they will not also be able to receive an exemption. If a simple mistake, 

like a math error, has occurred, they can fix it. They can provide an extension of 

the time period for payment. They can make a determination that the taxpayer 

meets the currently not collectible requirements or whether the taxpayer may be eligible for an Offer in Compromise, in which part of the balance due is foregone. 

NTEU believes providing quality services to taxpayers is an important part of any 

overall strategy to improve compliance and that the President’s request for taxpayer 

services will enable the IRS to deliver another successful filing season, improve the 

responsiveness and accuracy of taxpayer service, and support Service efforts to enhance taxpayer compliance. 

SECTION 1203

Mr. Chairman, while meaningful funding for the IRS is important to operations, 

NTEU also believes that in order to maximize efficiencies at the IRS, Congress must 

act to modify Section 1203 of the IRS Restructuring and Reform Act of 1988 (RRA 

98). Commonly known as the ‘‘Ten Deadly Sins,’’ Section 1203 outlines ten infractions for which IRS employees must be fired, including the untimely filing of Federal income taxes even when a refund is due. No other Federal or congressional employee is subject to similar mandatory termination. 

Without question, Section 1203 has had a negative impact on the morale of the 

IRS workforce and is impeding the ability of the IRS to perform its mission. According to numerous GAO reports, IRS employees greatly fear the threat of being fired 

under Section 1203. This in turn has had a chilling effect on the ability of IRS employees to do their jobs. In particular, employees specifically attribute the decrease 

in recommending a seizure of taxpayer’s assets to Section 1203. Clearly, Section 

1203 impedes IRS’ enforcement mission and is unfair to the IRS employees who 

must work under the constant threat of losing their jobs. 

NTEU believes mandatory termination for Section 1203 violations is unduly harsh 

and should not be the only disciplinary action available. We advocate amending 

RRA 98 to allow for appropriate penalties other than mandatory termination for 

Section 1203 violations and to allow for independent review of determinations. 

To be clear, NTEU does not condone any violation of law or rules of conduct by 

its members at the IRS or in any other government agency. Violations of some rules 

clearly warrant termination of employment. However, one group of Federal employees should not be singled out and required to be fired for offenses that do not subject 

other executive, judicial, or legislative branch employees to the same penalty. 

Mr. Chairman, the large majority of IRS employees work hard, follow the rules 

and pay their taxes on time. It is patently unfair to hold those who are charged with 

enforcing the tax laws to a higher standard than those who write them. NTEU asks 

for your support for changes to section 1203 of the IRS Reform and Restructuring 

Act, so that tax fairness applies to all Americans, even those who work at the IRS. 

CONCLUSION

Mr. Chairman, thank you for the opportunity to provide NTEU’s thoughts on the 

administration’s fiscal year 2010 budget request for the IRS. We believe that by investing in the IRS workforce and demonstrably effective enforcement and taxpayer 

service programs, the administration’s request will ensure the IRS continues to 

meet its mission of providing America’s taxpayers top quality service by helping 

them understand and meet their tax responsibilities and by applying the tax law 

with integrity and fairness to all. 

ADDITIONAL COMMITTEE QUESTIONS

Senator DURBIN. The record will remain open, Mr. Commissioner, until Wednesday, June 17, for subcommittee members to 

submit statements and questions to be submitted to you for consideration. 

[The following questions were not asked at the hearing, but were 

submitted to the Service for response subsequent to the hearing:] 
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QUESTIONS SUBMITTED BY SENATOR RICHARD J. DURBIN

MEASURING RETURN ON INVESTMENT: NEW INITIATIVES

Question. In your fiscal year 2010 budget request, the IRS seeks $332 million for 

new enforcement initiatives projected to yield direct measurable results through 

high return-on-investment. The proposed investments in enforcement personnel in 

fiscal year 2010 are expected to yield $2 billion in additional annual enforcement 

revenue once new hires reach their fully trained potential in fiscal year 2012. 

GAO’s review and written assessment of the proposed budget observes, with concern, that the IRS has no plans to compare the actual performance to the projections. 

Would it not be prudent and beneficial to determine the extent to which your revenue forecasts were accurate and the yield was realized? 

Answer. The IRS maintains a historical record of enforcement revenue produced 

by its enforcement programs at an aggregate level, and the IRS uses this historical 

revenue information to estimate future revenue produced from proposed enforcement initiatives in budget requests and to compare its estimated revenue projections 

with actual revenue. Actual annual enforcement revenue is analyzed to determine 

factors causing variance from expected results. For example, analysis of fiscal year 

2007 enforcement revenue indicated that the increase from $48.7 billion in fiscal 

year 2006 to $59.2 billion was primarily the result of two large settlements. 

While the IRS does compare the actual performance to the projections at the aggregate revenue level, specific examination and collection activities are fungible, and 

therefore, it is difficult to isolate the revenue attributable to a specific initiative. The 

IRS uses its existing suite of performance measures as a tool for managing its activities. IRS performance measure results, including examination and collection coverage, are a better gauge of the efficiency and effectiveness of existing programs. 

Question. Assuming that Congress is able to provide these funds as requested and 

the IRS proceeds with the initiatives planned, how will we know whether this was 

a wise investment? 

Answer. At full performance levels in fiscal year 2012, the additional enforcement 

personnel will produce additional revenue and increases in performance measures 

in examination and collection as presented in the fiscal year 2010 budget request. 

For example, the number of audits in targeted categories is projected to increase, 

and the number of collection accounts resolved is expected to increase, both resulting in increased revenue. The IRS expects these initiatives to yield a return-on-investment (ROI) of 7.8 to 1 once they reach full potential. 

Question. Do you agree that knowing what actually happens as a result of these 

targeted investments would be a helpful indicator of success and useful in making 

future spending decisions and resource allocation plans? 

Answer. The IRS will continue to collect actual cost and revenue data associated 

with high-level enforcement programs, and will continue to analyze actual enforcement revenue results to refine future projections for budget initiatives, as needed. 

The IRS uses actual enforcement revenue from prior years to calculate its Return 

on Investment figures (ROIs) for proposed enforcement initiatives. The ROIs are 

based on rolling, 10-year averages of enforcement revenue produced by specific enforcement functions with greater weight placed on the most recent year revenue. 

The IRS bases revenue estimates on historical yield per FTE, which it evaluates and 

updates annually. 

Question. Will IRS collect data to determine the actual costs, revenues, and ROI 

to determine whether the investment produced the anticipated results? If ‘‘NO’’— 

what is the IRS’s rationale for not keeping track of the actual return on investment 

of these new initiatives? 

Answer. As stated above, the IRS does collect actual cost and revenue data associated with high-level enforcement programs and uses the cost and revenue data to 

develop its proposed budget initiatives. Tracking the revenue produced by each initiative hire is not possible. For example, each new international examiner will work 

on a mix of cases which could include audits that are not associated with the initiative because of shifting work priorities or the emergence of new international issues. 

Additionally, the new international examiner will work on cases as part of an audit 

team. Apportioning actual revenue resulting from a team audit to various audit 

team members, who may or may not be an initiative hire, is not feasible. Initiative 

hires work on a variety of tasks and on group audits, and as a result, tracking the 

revenue derived from a specific initiative hire is not possible, but the revenue is 

tracked and analyzed for high-level enforcement programs. 
151 

DETERRENT EFFECT OF ENFORCEMENT INITIATIVES

Question. In addition to the direct revenue impact of such an investment, isn’t 

there a deterrent effect? 

Answer. Yes. Several empirical studies have indicated that the ‘‘deterrent’’ effect 

from enhanced enforcement efforts could be larger (perhaps much larger) than the 

direct revenue effect. 

Question. How does IRS measure deterrent effect? What is the estimate? 

Answer. By the ‘‘deterrent’’ effect of an IRS activity, we mean the change in voluntary compliance—both subsequent compliance by a person directly contacted as 

a part of that activity and changed compliance behavior by the population in general—that is prompted by an expansion or intensification of that IRS activity. More 

generally, the IRS refers to this phenomenon as the ‘‘indirect’’ effect since deterrence 

may not always be the mechanism at work. For example, the general population 

may demonstrate improved voluntary compliance in response to expanded prosecutions of tax criminals, but not because they fear being caught committing tax 

crimes; rather, the expanded prosecutions may reassure the average taxpayer that 

criminals are receiving justice, which makes the average taxpayer more likely to pay 

his or her taxes in full. Likewise, IRS’s services to taxpayers may have a positive 

effect on the voluntary compliance of those who do not receive those services, but 

who hear positive reports from those who do. 

We can observe the compliance behavior of each taxpayer, but that behavior is 

driven by a complex set of factors (including things outside of IRS control, such as 

economic, demographic, and socio-political factors) that vary widely across the population. We cannot observe how many dollars are paid as a result of each of those 

factors separately; we can only attempt to estimate that. Several academic studies 

have attempted to estimate the indirect effect of audits, and a few have also estimated the effect of criminal investigations and other IRS activities, but since all of 

these statistical studies have limitations and weaknesses, there has not yet formed 

a consensus as to the true indirect effect of these or other IRS activities. The estimates that exist for the indirect effects range from approximately zero to over 10 

times the magnitude of the direct effect. 

Question. Are there particular remedial actions or collection interventions that 

IRS uses that you have found to be more conducive or effective than others when 

it comes to deterrent effect? 

Answer. There is some limited statistical evidence that audits of individuals are 

quite cost-effective in generating an indirect effect (partly because they are less costly to complete than activities such as criminal investigations or complicated corporate audits). The IRS is continuing to research the indirect effects of both enforcement and service activities in an effort to allocate resources optimally. 

ELECTRONIC FILING—STAFFING SHIFTS

Question. The IRS budget for fiscal year 2010 reflects that due to increased e-filing options there will be an expected decline of 4.6 million in the number of paper 

returns filed, resulting in a savings in submission processing of 187 FTE. The IRS 

is also consolidating its individual return processing centers to achieve efficiency as 

the paper return volume drops. The IRS is slated to ramp-down its processing center in Andover, Massachusetts and plans to reinvest $2.3 million to fund a one-time 

severance payment for employees. 

How is the IRS transforming its workforce to adapt to 21st century? 

As the volume of e-filing grows, what is the IRS doing to facilitate retraining of 

processing staff to perform different activities and functions? 

Answer. One of the IRS’ top priorities is to support the Submission Processing employees whose jobs are affected by site consolidation. Though some of the information included below is specific to the Andover, MA site that is scheduled to close 

in September 2009, the actions taken are representative of the efforts that have 

been made with each consolidation and demonstrate the IRS’ strong commitment to 

provide all employees with a wide range of options. 

Mitigation Strategies to Minimize Employee Impact 

A number of mitigating strategies are used to assist employees in minimizing the 

impact of consolidation. These strategies are generally broken down into two distinct groups: 

Formal strategies—outlined in Article 19 (Reduction in Force and Mitigation 

Strategies) of the 2006 National Agreement between IRS and NTEU, these strategies are available to employees 1 year prior to the projected Reduction in Force date. 
152 

Other strategies—undertaken outside of Article 19 to focus on preparing employees for the consolidation. Many of these strategies begin prior to the onset of the 

required Article 19 strategies. 

Formal strategies include: 

—Reassignment Preference Notice (RPN)—entitles directly affected employees to 

priority selection for vacant positions for which they apply and qualify, either 

at their same or lower grade Servicewide, i.e. both within and outside the employee’s commuting area. 

—Voluntary Early Retirement Authority/Voluntary Separation Incentive Payment 

(VERA/VSIP)—provides an opportunity for eligible employees to separate from 

the Service early and receive a buyout. 

—Severance Pay—received by those employees who are separated via a RIF and 

are not eligible to retire. 

—Job Swaps—per Article 19, directly affected employees may swap jobs into other 

occupied positions, either inside or outside the commuting area. 

—Outplacement Services—employees are granted administrative time to participate in outplacement and career services. 

—Relocation to ‘‘Follow Your Work’’—allows directly affected employees who occupy positions to be abolished to voluntarily relocate and be realigned to a vacant position in a continuing site to perform the work that the employee is currently performing. 

—Career Transition Assistance Program (CTAP)—grants the affected employee 

selection priority for any internal vacancy for which s/he applies and is determined to be well-qualified. 

—Inter-Agency Career Transition Assistance Program (ICTAP)—grants affected 

employees selection priority for any external Federal Government vacancy for 

which s/he applies and is determined to be well-qualified. 

—Grade and Pay Retention—provided to affected employees who are selected for 

a position not more than three grades below their current grade. 

Other Strategies include: 

—Identifying work that can be consolidated or redirected into continuing sites. 

The following summarizes the positions created through these efforts: 

Positions 

Brookhaven: 

Centralized Offer in Compromise ......................................................................................................... 325 

Campus Support Department ............................................................................................................... 140 

Memphis: 

Centralized Offer in Compromise ......................................................................................................... 350 

Case Processing .................................................................................................................................... 325 

Campus Support Department ............................................................................................................... 90 

Philadelphia: 

Centralized Insolvency .......................................................................................................................... 280 

Case Processing .................................................................................................................................... 230 

Campus Support Department ............................................................................................................... 180 

Andover: 

Automated Underreporter ...................................................................................................................... 1 200 

Campus Support Department ............................................................................................................... 89 

1Wth plans to grow to about 300–400 total. 

—Communications—numerous vehicles are used to keep employees updated on 

the consolidation plan and to assist employees in minimizing the impact of consolidation, including: 

—Newsletters—the Andover campus developed and distributed a publication titled ‘‘Changing Times’’ to employees on a regular basis beginning in February 

2008. The issues have addressed various consolidation issues and include employee Q&A’s. 

—Webpage—info included on Andover SP webpage includes newsletters, FAQ’s, 

and information on Article 19. 

—Employee Meetings—management holds routine meetings with employees to 

provide consolidation updates and ensure employees are aware of the effect 

consolidation will have on their current and future positions. 

—Flyers and handouts—will cover topics such as buyouts, early outs, and job 

swaps. 

—Info to employees in non-work status—pertinent information is mailed to seasonal employees in non-work status. 
153 

—Training—provided on various topics to assist employees in continuing with or 

finding new employment, including: 

—How to apply for positions on USAJobs, the official job site of the federal government. 

—How to a prepare a re ́sume ́. 

—How to interview for a job. 

—How to apply for a job swap (will be conducted in Andover at a later date). 

—Term Hiring—In an effort to minimize the employee affect from consolidation, 

sites scheduled to consolidate began hiring Term employees at least 2 years 

prior to consolidation. The Andover site initiated this practice in 2003, 6 years 

prior to consolidation. This hiring practice has helped to mitigate the effect of 

consolidation on our career and career conditional employees by limiting the 

number of potential applicants for continuing positions on the campus. Andover 

is the first consolidating site where the number of Term employees exceeds the 

number of career conditional employees. 

—Job Fairs—job fairs include employers from the private sector and IRS Business 

Units that will remain at the campus after consolidation. 

—Tuition Assistance—program offered to all IRS employees to assist them in 

gaining the skills needed for continued employment. 

—Mock Interview Cadre—established to assist Andover employees with upcoming 

interviews. 

—Link Line—a phone number established for Andover employees in non-work 

status to receive information on W&I job openings in Andover Posts of Duty. 

—Career Link—Andover IRS is partnering with local Department of Labor to establish an office within Andover IRS office to provide career guidance, employment workshops, and reemployment assistance. 

—Computer Kiosks—set up in Andover Posts of Duty for employees without access to a computer to look for job vacancies or update their Merit Promotion 

Questionnaire’s (MPQs). 

—Employee Meetings—One-on-One meetings have been held with every employee 

in Andover SP to determine future plans (i.e. continued employment, retirement, etc.) and provide information related to MPQ assistance, Mock Interviews, etc. 

—Job Vacancies—Weekly Career Opportunity Listing (COL) and USAJobs vacancy announcements distributed to SP Operations for dissemination to all employees, in order to keep them informed of potential jobs, both internally and 

throughout the government. 

—Employee Assistance Program (EAP) representatives are in attendance at each 

RIF briefing and have committed to provide extended services to SP employees 

during this transition. 

QUESTION SUBMITTED BY SENATOR FRANK R. LAUTENBERG

Question. Federal receipts at the U.S. Treasury have declined nearly 19 percent 

for the first 7 months of fiscal year 2009 as compared to the same period in fiscal 

year 2008. A significant portion of this revenue loss is due to a decrease in tax receipts as a result of the current economic recession. To what extent do you expect 

tax revenues to increase as a result of federal efforts to create jobs and spur economic recovery? 

FEDERAL RECEIPTS, FISCAL YEAR TO DATE (APRIL 2009) 

Year to date, fiscal year 2009 

Comparable period in fiscal 

year 2008 

Percent change 

Total ........................................................................................................... $1,256,066 $1,549,720 ¥18.9 

Individual Income Tax ................................................................................ $566,369 $747,558 ¥24.2 

Corporation Income Taxes .......................................................................... $70,781 $171,142 ¥58.6 

Answer. The IRS does not predict the effect legislation will have on tax revenues. 

The Joint Committee on Taxation and the Department of the Treasury under certain circumstances will provide estimates of the revenue effects of proposed but unenacted tax legislation. 
154 

QUESTION SUBMITTED BY SENATOR BEN NELSON

Question. In a Ways and Means Subcommittee hearing on June 4, 2009, you said 

you would like to work with Congress to provide the Internal Revenue Service with 

more discretion regarding imposition of the 6707A penalty for failure to include reportable transaction information with a taxpayer’s return. Can you elaborate on 

what kind of discretion would be appropriate, especially in cases where taxpayers 

acting in good faith unknowingly failed to file—or, worse, were mislead into believing they did not need to file information about such transactions? 

Answer. As we have stated before, the IRS is concerned there are taxpayers who 

have been caught in a penalty regime that was not intended by the legislation. 

Many taxpayers are subject to this penalty and the amount due significantly exceeds the tax benefit resulting from the transaction. Furthermore, the statutory language does not allow for any adjustment to the penalty based on the tax benefit to 

the taxpayer. We may be open to changes that allow sufficient flexibility for a 6707A 

penalty to be proportional to the tax benefit associated with the reportable transaction giving rise to the penalty. This change could improve the fairness of the penalty, provide some measure of relief for virtually all taxpayers, and simplify tax administration. 

QUESTIONS SUBMITTED BY SENATOR SUSAN COLLINS

Question. The IRS is in the midst of a significant hiring initiative for enforcement 

staff as a result of its fiscal year 2009 budget. What enforcement areas will the new 

staff be focused on and what do you anticipate the resulting increased revenues to 

be? 

Answer. The enforcement staff hired in fiscal year 2010 will be focused on the activities listed below and will generate over $2 billion in additional revenue once they 

reach full potential in fiscal year 2012. 
155 

RETURN ON INVESTMENT ENFORCEMENT INITIATIVES 

[Dollars in millions] 

Fiscal year 2010 enforcement investment 

First year (fiscal year 2010) Full performance (fiscal year 2012) 

FTE 1 Cost Revenue ROI Cost Revenue ROI 

Direct Revenue Producing Initiatives ........................................................................................................................................... 2,330 $332.1 $611.1 1.8 $262.8 $2,049.7 7.8 

Reduce the Tax Gap Attributable to International Activities. This initiative funds a multi-year investment to deal 

more effectively with increasing international tax activities of individual and business taxpayers. This effort addresses the underreporting of tax associated with international transactions as well as domestic taxpayers involved in offshore activities. It expands the IRS presence in the tax-exempt and governmental sectors and confronts international tax evasion schemes ...................................................................................................................... 784 128.1 93.8 0.7 103.4 736.6 7.1 

Improve Reporting Compliance of SB/SE Taxpayers. This initiative improves reporting compliance among Small Business/Self Employed (SB/SE) taxpayers by increasing examinations of business and high-income returns, exams 

involving flow-through entities, audits targeting employment, excise, and estate and gift taxes, and investigations of business non-filers ........................................................................................................................................... 755 94.2 159.6 1.7 72.6 567.2 7.8 

Expand Document Matching for Business Taxpayers. This initiative increases coverage of the document matching 

program to reduce the number of taxpayers who misreport their income. Matching third party information such as W–2s and 1099s against tax returns is critical to ensure compliance .................................................................. 300 26.2 191.8 7.3 22.8 386.5 17.0 

Address Nonfiling/Underpayment and Collection Coverage. This initiative improves voluntary compliance and decreases nonfiling by broadening collection coverage with a focus on repeat non-filers and non-filers with high 

income. Additional collection staff will increase the number of collection actions against unpaid assessments and allow the IRS to close more collection cases ........................................................................................................ 491 83.6 165.9 2.0 64.0 359.4 5.6 

1 Total includes revenue and non-revenue generating FTE. 
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Question. Commissioner Shulman, how can we address the tax gap? 

Answer. The Internal Revenue Service and Treasury issued an update of the 2007 

Tax Gap Strategy report in early July. That report addressed this question in detail. 

Question. Does IRS have an estimate of the tax gap attributable to international 

activities? 

Answer. No. The data on which we base our tax gap estimates do not generally 

allow us to separate international and domestic issues. Moreover, some forms of 

noncompliance do not lend themselves to a clear characterization based on geography. 

Question. If there is not an estimate of the effect of international activities on the 

tax gap, why is that the focus of the fiscal year 10 enforcement initiative? 

Answer. Globalization has led to an increase in international tax activity, which 

has historically been an area of significant concern to the IRS. For example, foreign 

tax credits claimed by U.S. corporations increased by 71 percent between Tax Years 

2000 and 2007, while foreign tax credits claimed by U.S. individuals increased by 

133 percent during that time period. Likewise, between 2001 and 2006, foreignsource gross income of individuals grew 86.6 percent in real percentage terms, 

whereas worldwide income reported on all individual U.S. tax returns grew only 

14.8 percent during that period. 

Question. Please describe any plans the Service may have to develop an international tax gap estimate. 

Answer. We are conducting a pilot study, beginning with Tax Year 2006, to extend 

our National Research Program (NRP) reporting compliance studies of individual returns to include a small sample of returns with international addresses. We hope 

to determine from this pilot how best to compile representative compliance data for 

this population. If successful, this approach may allow us to estimate this portion 

of the international tax gap. Future studies of corporation income tax reporting compliance will need to address this concern, as well. 

Question. IRS reduced its performance goal for providing telephone assistance 

from 82 percent last year to 77 percent this year. Commissioner Shulman, why was 

the goal reduced and what does it mean for taxpayers? In your opinion, does this 

lower level allow for sufficient access for taxpayers to speak directly with an IRS 

assistor? 

Answer. The IRS is dedicated to providing the best possible service regardless of 

the channel the customer chooses. Although the goal and actual CSR LOS was lower 

this year than in prior years, the IRS funded the Toll-free program in 2009 at higher levels than in prior years by allocating more staffing (full time equivalents 

(FTEs)) during filing season than in 2007 and 2008. The actual toll-free FTEs for 

2007, 2008, and 2009 filing seasons were 3,067, 3,100 and 3,344, respectively. However, increased customer demand, the introduction of new programs such as the 

Identity Protection Specialized Unit, and increased complexity of the calls handled 

by assistors resulted in lower service levels, despite increased resources. From January 1st through April 18, 2009, the IRS serviced over 39 million taxpayers through 

both assistor and automated telephone service during the 2009 filing season. This 

level compares to just over 35 million taxpayers serviced during the same time period during the 2008 filing season and 32 million serviced in 2007. On most days, 

taxpayers were able to get to an assistor if they chose to wait. We provided an estimated wait time to the vast majority of callers, so they could make an informed decision about whether to wait or call back at a later time. 

Question. This year, IRS’s average actual telephone performance has been well 

below its goal. Next year, IRS can expect another year with high call demand given 

the Recovery Act tax law changes. What specific steps are you taking now to improve IRS’s telephone performance for next year should call volume could remain 

high? 

Answer. We are taking numerous steps to prepare for the coming year. During 

the 2009 filing season, there were 4.8 million calls from taxpayers asking for their 

prior year Adjusted Gross Income (AGI) or Personal Identification Number (PIN), 

which is required by online filers to submit their returns electronically. For 2010, 

we are developing both a web and automated telephone application to provide this 

information to taxpayers without requiring interaction with an assistor. This enhancement will free up assistors to handle more complex taxpayer questions. We 

will be implementing improvements in our Toll-free menus, which will get customers to the right resource faster. We will be expanding the use of estimated wait 

time announcements to more applications and customers. Lastly, we are planning 

to increase the number of staff on-rolls at times of peak customer demand during 

the filing season, through seasonal hiring. 

Question. IRS has spent $2.6 billion on its business systems modernization effort 

since 1999. Its Customer Account Data Engine (CADE), a part of BSM intended to 
157 

replace the Individual Master File, has cost over $400 million since work on it began 

almost 5 years ago, but CADE has only delivered about 15 percent of the full capability intended. Please explain this small return on investment? 

Answer. The IRS has received approximately $309.3 million in funding for CADE 

over the past 5 years. With that funding, the IRS has delivered a complete tax return processing system for approximately 40 million taxpayers who are enjoying the 

benefits of substantially faster refunds. In addition, the CADE project has proved 

the IRS is capable of delivering a modern database with significant functionality, 

including improved financial accounting capabilities, which have allowed the IRS to 

make progress against addressing its material weakness in this area. 

CADE also already includes capabilities to process Forms 1040, Schedules A, B, 

C, D, E, F, R, SE and Form 1040A, Schedules 1 and 3 for single and married filers 

and filers with certain dependents; extension Forms 4868; decedent and surviving 

spouse returns; certain math error notices; online address changes; returns with disaster area designations; receipt processing; and last name changes. In addition, 

CADE has supported legislative tax refund programs, such as Telephone Excise Tax 

Refunds and the recent Economic Stimulus payments. 

The IRS created the statistic referenced in your question for different purposes 

during a very specific engineering analysis, and we never intended to reflect a holistic assessment of the status of the effort. It understates nearly half the percentage 

of taxpayers that are in the new system, and it also does not reflect that a substantial portion of the overall effort is expended in setting up infrastructure to process 

the very first tax return. 

Finally, any discussion of return on investment should recognize the public’s return on IRS IT investments. Because of the IRS’s progress on CADE, approximately 

$58 billion in refunds went out on average 5 days faster that they would under legacy systems. This improvement has real economic value to taxpayers, particularly 

those in difficult economic situations. 

Question. Of the vast extent of IT security weaknesses that exist in IRS current 

and modernized systems, how much improvement in data protection can the IRS 

make with the requested $90 million for IT Security and what data and systems 

are still vulnerable? 

Answer. The way IRS business is transacted, the way the Service operates, and 

the way core tax administration is conducted have changed. These activities now 

rely on an interdependent network of information technology infrastructures. At the 

same time, threats from cyberspace have risen dramatically and are growing increasingly more complex, harder to detect and prevent. In order for the Service to 

keep abreast of the latest security threats from cyberspace and elsewhere, more 

strategic and tactical investments will have to be made to protect against the debilitating disruption of the operation of the IRS’ information systems or breaches of the 

sensitive personally identifiable information entrusted to us by the American taxpaying public. 

This initiative requests an increase of $90.0 million and 36 FTE to improve IT 

security and address specific components of the Computer Security Material Weakness. At the more strategic level, this budget initiative will: 

—Better ensure the integrity of the tax system and maintain taxpayer confidence; 

—Allow the IRS to improve the privacy and security of taxpayer information; 

—Segregate securely the development, testing, and production environments for 

IT systems, and; 

—Implement the Federal Information Security Management Act (FISMA) security 

compliance controls on all enterprise-wide Windows and UNIX computing assets. 

At the more tactical levels, specific activities that will be included in this initiative are: 

—Implementation of Network Access Control to better manage what devices are 

permitted to connect to the internal network. This change will specifically 

strengthen controls over many of the 700∂ remote places of duty. 

—Bolsters the disaster recovery capabilities for the enterprise. 

—Improve the replication of our production environment in our test and development environments. This improvement will enable more complete testing of security controls and their impact before moving new applications into production. 

—Improving the real-time ability for the IRS to monitor and report on the security posture of all devices on the IRS network. This enhancement will allow the 

IRS to better understand how new and developing threats could potentially affect core business systems. 

—Implementing data leakage protection tools to monitor and control the movement of sensitive information in and out of the IRS network. 
158 

—Providing an enterprise solution to deploy end-to-end audit log collection, storage, and reporting to directly address a major component of the Computer Security Material Weakness. 

QUESTIONS SUBMITTED BY SENATOR CHRISTOPHER S. BOND

ENFORCEMENT

Question. In the 1998 IRS Restructuring Act, Congress directed the IRS to refocus 

its mission not only to enforcement of the tax laws, but also serve the public and 

meet the needs of taxpayers. With the emphasis that you and the Administration 

has placed on enforcement, it appears that the pendulum is swinging further back 

to the ‘‘bad old days’’ of heavy handed IRS enforcement that led to the restructuring 

legislation in the first place. 

Are the enforcement initiatives that the IRS has announced this year coming at 

the cost of taxpayer service? What steps are you taking to ensure that taxpayer 

service remains an equal part of the IRS’ mission? 

Answer. The IRS remains committed to a balanced program of assisting taxpayers 

in both understanding the tax law and paying the proper amount of tax. 

The fiscal year 2010 President budget request of $2.27 billion for taxpayer service 

will allow the IRS to continue improvements for both the quality and efficiency of 

taxpayer service, using a variety steps including, person-to-person, telephone, and 

web-based and self-serve methods to help taxpayers understand their tax obligations 

and pay what they owe. 

The IRS provides year-round assistance to millions of taxpayers including: Outreach and education programs; issuance of tax form and publications; rulings and 

regulations; toll-free call centers; IRS.gov web site; Taxpayer Assistance Centers 

(TACs); Volunteer Income tax Assistance (VITA) sites; and Tax Counseling for the 

Elderly (TCE). 

The IRS will continue to implement and administer these critical programs within 

the levels contained in the budget request. 

BUSINESS SYSTEMS MODERNIZATION

Question. For many years, the IRS has struggled to update its computer systems 

to improve processing, enhance collections, and strengthen customer service. To address IRS’ computer system problems, the Business Systems Modernization (BSM) 

was created. The center-piece of BSM is the Customer Account Data Engine (CADE) 

project. 

What is the status of BSM? 

Answer. The BSM program is a critically important component of the IRS’s overall technology portfolio. In recent years, the IRS has consistently delivered on its 

commitments and is providing systems that deliver concrete benefits to taxpayers. 

Some of these benefits include: 

—CADE.—Issuing refunds for nearly 40 million taxpayers on average 5 days faster than existing legacy systems; 

—Modernized e-File.—Dramatically reduced processing error rates, which eliminates rework for taxpayers and the IRS; 

—E-Services.—Delivering value-added, web-based services for taxpayers and the 

tax practitioners who serve them; 

—Account Management Services.—Providing IRS customer service representatives 

(CSRs) with faster and improved access to taxpayer account data with real-time 

data entry, validation and update of taxpayer addresses; and 

—Filing and Payment Compliance.—Placed more than 203,800 taxpayers with 

Private Collection Agencies since September 2006, facilitating the collection of 

more than $90 million on cases formerly unassigned for active collection. 

The Modernized e-File project is on track to begin delivery of Form 1040 and certain schedules in 2010, which will extend the benefits of this program to individual 

taxpayers. 

The CADE project has delivered a modern database with significantly more 

functionality than the Individual Master File, including improved financial accounting capabilities, which have allowed the IRS to make progress against addressing 

its material weakness in this area. In 2008, the IRS refined the program focus to 

target an accelerated integration of the legacy and modernized databases to get all 

140 million taxpayers into a common relational database, and into a faster processing cycle. That database will serve as a strategic foundation for the IRS’s next 

generation taxpayer service and compliance programs. 
159 

Finally, as the IRS proceeds with its modernization efforts, we are mindful of 

maintaining a holistic, overall portfolio approach to our technology programs. In 

particular, we are focused on balancing our work on modernization with appropriate 

investments in core IT operations, and in particular, IT security. 

Question. When will the CADE system be able to handle all individual and business tax returns? 

Answer. The Commissioner has set a goal of completing the development of the 

taxpayer account database for all individuals, and moving to a faster processing 

cycle within 5 years. The team has developed and delivered a long-range plan, and 

is in the process of developing the BSM expenditure plan for fiscal year 2010, each 

of which provide further details on the interim deliverables for 2010 and 2011. 

In the interests of prioritization and focus, the IRS plans to deliver on the individual account database before upgrading the business tax account database. 

PRIVATE DEBT COLLECTION

Question. With the start of the new Administration, the IRS abandoned its private 

debt collection program. 

What is your justification from a purely business case perspective for abandoning 

this program for collecting small-dollar, non-complex collection cases? Are we to assume that these tax debts will now just go uncollected, since IRS officials have previously testified that the agency does not have the staff to work these cases? Or, 

do you plan to pull staff off of more complex, higher-dollar cases to work the ones 

that were handled by the private debt collection program? 

Answer. In early 2009, the IRS completed a cost effectiveness study of the Private 

Debt Collection (PDC) program, supported by an independent review, which showed 

that it is reasonable to conclude that when working similar inventory, collection efforts are more cost-effective using IRS employees rather than outside contractors. 

In addition, from 2002 to 2008, the percentage of potentially collectible inventory 

in active IRS collection status increased from 62.2 percent to 71.4 percent, and the 

dollar amount of potentially collectible inventory shelved due to lack of IRS resources declined from $7.6 billion to $3.6 billion. These elements contributed to the 

March 2009 decision not to renew contracts with the private collection agencies 

(PCAs). 

The IRS plans to work the types of cases that were assigned to PCAs as part of 

its overall collection strategy, which includes notice, telephone, and in-person contact. A part of this strategy is supported by a fiscal year 2010 IRS budget initiative 

which requests funding for two new Automated Collection System sites. 

TAX GAP

Question. The Administration’s budget includes a number of proposals aimed at 

closing the so-called ‘‘tax gap,’’ many of which originated in the last couple of budgets submitted by the previous Administration. Yet, the last estimate that the IRS 

undertook to quantify the tax gap was in 2001. 

When is the IRS going to update its tax gap estimates so we can measure accurately the success of these initiatives? 

Answer. We do not have plans to update estimates of all components of the tax 

gap simultaneously for a common year since new data will not be available for all 

components at the same time. Furthermore, any post-initiative tax gap estimates 

will require compliance data to be compiled and analyzed for a tax year in which 

the initiatives are fully implemented. Since the tax gap estimates are, of necessity, 

very approximate, it would probably be more effective to estimate the effect of the 

initiatives by analyzing trends of observable tax data, such as tax revenue or enforcement revenue, accounting for other factors that have caused the trends to vary 

over time. 

Question. Does the IRS plan to estimate the extent to which the current tax gap 

is associated with taxpayers’ intentional efforts to evade the tax law as opposed to 

honest mistakes due to the incredible complexity of our tax code today? 

Answer. The IRS seeks to be able to distinguish intentional noncompliance from 

unintentional mistakes. Several of our reporting compliance studies have tried to 

address this question. However, we have found that it is virtually impossible for 

auditors to know for sure what motivated an error. It is relatively easy for a taxpayer to claim that an error was an unintentional mistake (e.g., ‘‘I lost my receipts,’’ 

or ‘‘I forgot about that income.’’), whether that is true or merely an attempt to avoid 

penalties and more detailed scrutiny. Moreover, even if IRS employees could distinguish between intentional and unintentional errors, the unintentional errors among 

all returns would likely include both overstatements and understatements of tax in 

roughly equal amounts. Since the tax gap is defined as the aggregate amount of un-
160 

derstatements net of overstatements, those unintentional overstatements and understatements are likely to cancel each other when added to the tax gap. If so, the 

tax gap likely includes very little net unintentional noncompliance. Having said 

that, though, the IRS seeks to minimize unintentional noncompliance since it represents unnecessary burden on both taxpayers and the IRS. It is also important to 

point out that, in addition to spawning unintentional errors, the complexity of the 

tax code undoubtedly creates opportunities for willful noncompliance. 

Question. Does the IRS plan to produce an estimate of how much of the tax gap 

is associated with international transactions, since the Administration has placed so 

much emphasis on this compliance area? 

Answer. We are conducting a pilot study, beginning with Tax Year 2006, to extend 

our NRP reporting compliance studies of individual returns to include a small sample of returns with international addresses. We hope to determine from this pilot 

how best to compile representative compliance data for this population. If successful, 

this approach may allow us to estimate this portion of the international tax gap. 

Future studies of corporation income tax reporting compliance will need to address 

this concern, as well. 

IMPLEMENTATION OF TAX GAP STRATEGY

Question. In 2006, the Treasury Department and the IRS prepared a strategy for 

addressing the tax gap, and in 2007, the IRS released a progress report on the implementation of that strategy. 

Please provide me an update on the implementation of the tax gap strategy, including new initiatives that the IRS plans to implement over the next 5 years to 

close the tax gap. 

Answer. The Internal Revenue Service and Treasury issued an update of the 2007 

Tax Gap Strategy report in early July. That report addressed this question in detail. 

SUBCOMMITTEE RECESS

Senator DURBIN. We thank you for your appearance today and 

thank Senator Collins. 

This subcommittee stands recessed. 

[Whereupon, at 12:33 p.m., Tuesday, June 9, the subcommittee 

was recessed, to reconvene subject to the call of the Chair.] 
(161) 

FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 

YEAR 2010 

TUESDAY, JUNE 16, 2009 

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

The subcommittee met at 3:30 p.m., in room SD–138, Dirksen 

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

Present: Senators Durbin, Nelson, and Collins. 

Also present: Senator Bennett. 

SMALL BUSINESS ADMINISTRATION 

STATEMENT OF HON. KAREN G. MILLS, ADMINISTRATOR 

OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

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

hearing to consider the fiscal year 2010 funding request of two 

agencies within the jurisdiction of the Appropriations Subcommittee on Financial Services and General Government—the 

Small Business Administration (SBA) and the General Services Administration (GSA). 

My distinguished ranking member, Senator Collins, will be here 

shortly, along with others. 

SBA and GSA are both playing key roles in the Federal Government’s efforts to stimulate the economy. The Recovery Act provided 

SBA with $730 million to expand access to capital for small business. As the lifeblood of the American economy, small businesses 

must be the main driver of our Nation’s economic recovery. The Recovery Act also provided $5.5 billion for GSA to initiate new Federal building projects. 

These projects employ architects, engineers, electricians, plumbers, carpenters, and many others. They provide an indirect benefit 

to local economies by spurring increased economic opportunity. 

Capital construction projects led by GSA are important investments, not only for the Government, but also for the communities 

in which the projects take place, including many small businesses. 

Small businesses are at the heart of many sectors of the economy, including information technology, retail, and green jobs. In 

fact, in fiscal year 2008 alone, small businesses were awarded over 

$1 billion in GSA contracts. In addition to Recovery Act initiatives 
162 

and implementation, we are also going to discuss the fiscal year 

2010 funding requests for SBA and GSA. 

Joining us for our first panel is Karen Mills, the new Administrator of the Small Business Administration. I welcome you to the 

subcommittee. 

Ms. MILLS. Thank you, Senator. 

Senator DURBIN. The budget request for fiscal year 2010 for SBA 

is $779 million, which will provide funding for a wide array of programs supporting small business lending and entrepreneurial development. SBA has been on the front lines of the economic crisis, 

working to help small business owners as they face difficulty gaining access to capital. SBA oversees a loan portfolio of $85 billion 

and in a typical year makes or guarantees loans to $20 billion for 

small businesses. 

We will discuss the good news regarding the performance of new 

programs, as well as an array of entrepreneurial development programs that can help small businesses stay on their feet and even 

grow in this tough environment. 

Administrator Mills, I look forward to hearing your testimony on 

your fiscal year 2010 budget request and on SBA’s progress on implementing new Recovery Act programs, and I give you the floor. 

SUMMARY STATEMENT OF HON. KAREN G. MILLS

Ms. MILLS. Well, thank you very much, Senator Durbin. 

Chairman Durbin and Ranking Member Collins, who I know is 

going to be here, and members of the subcommittee, it is an honor 

to testify here before you. And I am very pleased to be here to support the President’s 2010 budget for the Small Business Administration. 

First, though, I would like to briefly update you on the progress 

that we have made with the Recovery Act. 

With the launch yesterday of the ARC loans, that is America’s 

recovery capital, the SBA has implemented more than $645 million 

of the $730 million in our Recovery Act funding. So, on March 19, 

we announced that we were going to raise the guarantees—that 

we’d raise the guarantees on most of the 7(a) loans—and that we 

also would reduce or eliminate the fees on 7(a) and 504 loans. 

The results actually are quite encouraging. The problem we are 

trying to address is that we had an environment of very, very tight 

credit for small business, and small businesses were suffering because they couldn’t get any liquidity and any credit. And we were 

able to, with these two programs, increase our loan volume by more 

than 30 percent compared to the weeks before the Recovery Act. 

And just as importantly, we have been able to bring back over 

500 banks who had not been lending, some of them since 2007, and 

who are now lending through the SBA programs. So, at this pace, 

the funding for the 90 percent guarantee and the fee reductions 

will last through December 2009. 

As I said, on Monday, we began the ARC loans, and actually, 30 

were approved yesterday. We actually expect there to be 10,000, 

but we are off to quite a lot of demand. These are loans that are 

going to provide relief for some viable small businesses that are 

struggling. 
163 

They are 100 percent guaranteed by the SBA. They are $35,000, or up to $35,000. They have no interest for borrowers. And they 

have over 12 months before any repayment begins, and then the 

repayment is over 5 years. 

Overall, the SBA is here to ensure that small businesses will 

continue to drive the American recovery and also to be able to build 

a strong foundation for America’s competitiveness and for the creation of what we call 21st century well-paying jobs. The 2010 SBA budget request is $779 million, and it is in support of these objectives. There are four basic functions of the SBA, 

and they are included, each one, in this budget. 

First is our disaster assistance programs, and they are to ensure 

that communities will recover from a disaster and begin to again 

contribute to the economy. We actually have more than 1,200 

trained standby employees, and they go from the ice storms in 

Maine to the wildfires in California, and then they go to the tornadoes in the Midwest and the floods. And now they are ready to go 

down to the gulf coast or the eastern seaboard for hurricane season. 

And they help communities. They are deployed to communities 

who are affected by disaster, and they process and give out both 

homeowner and business loans. And I am pleased to say that they 

are ready to go for this season and that our processing times in 

this disaster center, which we have worked very hard to bring 

quite lower, are on target, and that is 14 to 18 days. Our 2010 request in this area is $101 million for administration 

of the direct loan program. 

The second area is our Capital Access Division, and that oversees 

our business loans. And I heard Senator Durbin mention—I was 

going to say more than $80 billion—you actually said $85 billion. 

Thank you. That actually is right where we are. 

We are requesting the same authorization levels that were en- acted in 2009 to support more than $28 billion in small business 

financing. This is through our 7(a), 504, our SBIC investments, and 

our microloan programs. The total subsidy request for this is $83 

million in fiscal year 2010. 

Our third division is our Government Contracting Division, and 

that helps small businesses that have the opportunity—helps them 

have the opportunity to participate in Government contracting and 

subcontracting. This budget requests an additional $2 million. We 

are going to revise the certification process for our HUBZone and 

8(a) business development programs, and we are going to make 

sure that only eligible businesses participate, and we are going to 

be able to determine when our site visits and our oversight is necessary. 

Our fourth division is our Entrepreneurial Development Division, 

and that is really the backbone of the agency. We have over 900 

small business development centers, SBDCs. We have more than 

100 women-owned business centers. And we have more than 350 

chapters of SCORE, which is our retired executive program. 

Overall, we have 14,000 affiliated counselors. And one of the 

partner organizations said to me the other day that he thinks that 

we are within 45 minutes to an hour of most small businesses with 

counseling assistance. 
164 

The performance of these operations is quite strong. We have 

seen 34,000 clients since October, and that is a 5 percent increase, 

as you can imagine in these times, compared to last fiscal year. 

So, as you can see, we are a small agency with a big mission, especially in today’s economic climate. Already, Federal agencies 

throughout the administration are turning to the SBA. They are 

looking for ways to tap into our network of staff and our partners 

who are already on the ground and working with small business 

owners. 

One recent visible example of our work has been with the auto 

task force and where we have helped devise dealer floor plans, the 

financing for dealer floor plans. This budget is going to allow us the 

flexibility to build more of these partnerships in response to these 

challenging times. Specifically, $20 million in the 2010 budget allows us to create three important collaborations. 

The first initiative is on veterans. We are going to provide an ad- ditional $5 million to focus throughout our agency on serving veterans. We have 12,000 troops returning this summer. We have tens 

of thousands over the next coming year, and we have to be ready 

to serve these veterans who are or who want to become small business owners. 

So already we have eight specialized veterans centers, but we actually need to be serving veterans in all of our other partners. 

There are 2 million women veterans. We need to be ready to serve 

them in our women-owned business centers. We are already in conversations with the Secretary at Veterans Affairs on how to coordinate our efforts, and this is part of an overall objective at the SBA 

and across the administration to collaborate, to break down sacred 

turf in order to make Federal dollars work more efficiently for 

those who need our help. The second initiative is $10 million, which is requested to form 

a ready reserve, or SWAT team. This is an interagency collaboration with SBA. At the request of a community, these teams will go 

into areas that have been disproportionately impacted by the economy and help them plan for jobs and growth. The focus is going 

to be on the manufacturing sector, on the automotive industry, on 

communities that are reinventing their economy from the ground 

up. 

I went to Kokomo, Indiana, which is one of the highest concentrations of Chrysler employment, 2 weeks ago, and the mayor, 

Greg Goodnight, asked me for just this kind of help. Could we send 

this kind of team in? 

The ready reserve teams are going to work closely with this network, this bone structure of SBA partners to help leverage the local 

assets, create jobs, grow small businesses. 

The third initiative in this budget is $5 million to support small 

businesses through regional economic clusters. An example that I 

like to talk about is the Maine boat builders, and the Maine boat 

builders have formed a cluster with the University of Maine, working on new composite technology. This is a 400-year-old industry 

now competing across the globe. 

Maine’s small boat builders are one example, and I know that 

Senator Collins has actually been working with this group for a 

long time, even longer, much longer than I have. 
165 

So clusters like this are forming in every State. They are going 

to be fueled by efforts in the Department of Commerce. The Department of Commerce has $50 million in their budget for these 

cluster activities. The SBA resources on the ground will coordinate 

with Commerce’s manufacturing and export centers, with Labor’s 

trade assistance programs, and a number of other programs to assist the clusters’ needs. 

In the coming year, my personal commitment with all our efforts 

at the SBA is that we will measure our progress on an agency-wide 

basis and transparently report our activities to Congress and to 

taxpayers. 

PREPARED STATEMENT

Already, we are tracking our progress in a systematic and integrated way. We have a dashboard of data on a weekly basis and 

on a monthly basis. And we are going to continue to use these 

metrics in our objectives of implementing the Recovery Act, reinvigorating the agency, and serving as the strongest possible voice for 

small business. 

Thank you very much. I would be happy to—— 

Senator DURBIN. Thank you, Administrator Mills. 

[The statement follows:] 

PREPARED STATEMENT OF KAREN MILLS

Chairman Durbin, Ranking Member Collins and Members of the Committee, it is 

an honor to testify before you. I am pleased to be here to support the President’s 

2010 Budget for the SBA, but first I would like to briefly update you on the SBA’s 

progress with the Recovery Act. 

With the launch of the America’s Recovery Capital (ARC) loan program yesterday, 

the SBA has implemented more than $645 million of the $730 million in total SBA 

Recovery Act funding. On March 19, we announced that we would raise guarantees 

on most 7(a) loans to 90 percent and reduce or eliminate fees on both of our flagship 

loan programs. The results are encouraging. In this environment of tight credit, we 

were able to increase our loan volume by more than 30 percent compared to the 

weeks before the Act was passed. Just as importantly, we have brought nearly 500 

banks and credit unions back to the program who had not participated since 2007. 

By and large, the stimulus money is out in the marketplace—in the hands of entrepreneurs and small business owners—and it is working. At this pace, funding for 

the 90 percent guarantee and the fee reductions will last through December of this 

year. 

Yesterday, we opened up applications in our ARC loans program. These will provide the relief that many viable but struggling small businesses need. The ARC 

loans are up to $35,000 with no interest for borrowers and no repayments for 12 

months. We expect these loans to be in high demand. We have taken steps to ensure 

that smaller lenders and community banks have access to these loans before the 

supply runs out. Specifically, we have limited the number of loans a lender can give 

to 50 a week, with a total from any lending institution of no more than 1,000. And 

if a bank doesn’t use all of the loans one week, they can roll them over to the next 

week. 

The SBA is here to ensure that small business will continue to drive America’s 

economic recovery and build a stronger foundation of American competitiveness 

while creating well-paying jobs in the 21st century. 

The 2010 SBA Budget request of $779 million is key to moving forward with that 

overarching goal in mind. There are four basic functions of the Agency that are supported by this budget. 

First, our disaster assistance programs ensure that businesses and communities 

can recover quickly from disaster and once again contribute to the local economy. 

We have a direct loan volume of more than $1 billion for this area and the processing times for our disaster loans are on target. We also have more than 1,200 

trained standby employees who can be deployed to communities affected by disaster, 

and we continue to find ways to improve operations and planning in this area. 
166 

1 $17.5 billion, $7.5 billion, $3 billion and $25 million, respectively. In addition, $12 billion in 

authority is requested for the Secondary Market Guaranty program. 

The total fiscal year 2010 request in this SBA function is $101 million for administration of the direct disaster loan program. Disaster loan subsidy funding is available through unobligated balances. The budget request also includes $1.3 million in administration expenses for the disaster assistance programs and $1.7 million in credit subsidy funding to conduct 

two pilots of guaranteed disaster loan programs authorized in the 2008 Farm Bill. 

Second, our capital access division oversees our business loan programs which now support a portfolio of more than $80 billion in loan guarantees. We have requested the same authorization levels as enacted in fiscal year 2009 to support more 

than $28 billion in small business financing through our 7(a), 504, Small Business 

Investment Company and Microloan programs.1

The total subsidy request for this is $83 million for 2010, of which $80 million supports $17.5 billion in 7(a) volume and $3 million supports $25 million in 

Microloan volume. 

Also, we continue our multi-year investment in the SBA’s Loan Management Accounting System, an effort to replace our outdated computer system. The budget requests $5 million in additional funds for this effort. Finally, $3 million is requested for Capital Access to conduct a study on the next 

generation of equity capital programs to help stimulate innovation and job creation. 

Third, the SBA’s Government Contracting Division helps small businesses receive 

opportunities to participate in Government contracting and subcontracting, with a 

goal of delivering 23 percent of all Federal prime contracts to small firms. These 

contracts serve as stepping stones for small business growth while allowing Federal 

agencies access to quality products and services with high levels of innovation, service, and responsiveness. This budget requests an additional $2 million to revise the certification process 

for the HUBZone and 8(a) Business Development programs, so that only eligible 

businesses participate in these programs. The money will also improve training programs which target both small businesses and procuring agencies to ensure that 

small businesses have the opportunity to compete. 

Fourth, our entrepreneurial development division is the backbone of the agency, 

harnessing the entrepreneurial spirit of entrepreneurs and small business owners 

across the country. We manage this effort through nearly 900 Small Business Development Centers and more than 100 Women’s Business Centers, 350 chapters of 

SCORE, our mentoring program that matches experienced executives with small 

businesses, and other programs which comprise about 14,000 affiliated counselors 

in total. Entrepreneurial Development also includes major initiatives to reach small 

business owned by veterans, Native Americans, minorities and other populations, 

such as those in rural areas. Our role is to be there for those who need help accessing capital and advice to pursue small business opportunities. 

I should note that the performance of our counseling operations is strong, with 

our Small Business Development Centers serving nearly 34,000 clients since October, a 5 percent increase compared to last fiscal year. 

The major focus of this division in fiscal year 2010 will be not only to maximize 

the impact of the linkages the SBA has with our extensive network of partners, but 

also to improve the coordination between our partners. In addition, we will take advantage of the collaborative opportunities we are seeing with Federal agencies as 

well as state, local and private sector players who can help us serve entrepreneurs 

and small businesses. 

The SBA is also engaged in new collaborations with the Departments of Veterans 

Affairs, Commerce, and others that I will describe further shortly. 

As a foundation to support each of these four areas, the SBA is renewing its focus 

on investing in its people, technology, and other core agency investments that are 

critical to the agency’s future. With technology, the Recovery Act provides $20 million to move forward with efforts such as automating old paper-based systems, boosting data transfer speeds and 

a new web portal and a customer relationship management system. The fiscal year 2010 budget request includes $3 million for additional IT improvements related to technical training, off-site data storage, a better SBA Internet presence, and more email storage capabilities for employees. 

Our people, of course, are our strongest asset. 

This budget request includes $13.6 million in additional funds for salaries and benefits, $10 million of which will go to hire about 80 additional employees, bringing 

total salary expenditures to $268 million with 2,203 employees. These new hires will 

be largely focused on loan purchases and processing. 
167 

This budget also requests an additional $2 million to help the agency address 

much needed efforts in this training, mentoring and our succession planning efforts. 

Our hope is that these investments in SBA staff will allow us to build on our recent 

Most Improved Agency award related to job satisfaction in the Federal Government. 

We rose from 30th to 26th, but there is still much room for improvement. 

As you can see, we are a small agency with a big mission, especially in today’s 

economic climate. 

Already, Federal agencies throughout the Administration are turning to the SBA, 

looking for ways to tap into our vast network of staff and partners who are already 

‘‘on the ground’’ interacting with small business owners across the country. 

The most visible recent example of this has been our work with the Auto Task 

Force. We are moving rapidly to implement a new program to finance dealer floor 

plans. We have also been engaged more recently in the health care discussion to 

ensure that the needs of small business employees will be met in the future. 

This budget allows us the flexibility to build more of these partnerships to adapt 

to the needs of these challenging times. Specifically, $20 million is allocated in the 

2010 budget to allow the SBA to create truly powerful collaborations through three 

major initiatives. 

The first initiative provides an additional $5 million to focus on veterans business 

issues. We have 12,000 troops coming home from Iraq this summer and tens of 

thousands more in the coming year. We must be ready to serve these veterans who 

are, or who want to become, small business owners. 

Already, we have 8 specialized veterans resource centers, but we need to be serving veterans throughout our 900 Small Business Development Centers, our 350 

SCORE chapters and our other partners. Also, there are nearly 2 million women 

veterans, and we need to ensure that our Women’s Business Centers are wellequipped to serve all of them. 

The $5 million requested in the 2010 budget will leverage our existing networks 

to serve veterans. We are already in conversations with the Secretary at Veterans 

Affairs on how to coordinate our efforts. This is the part of an overall objective at 

the SBA and across the Administration to collaborate and break down ‘‘sacred turf’’ 

in order to make our dollars work more efficiently for those who need our help. 

Secondly, a $10 million initiative is requested to create a program of ready reserve teams or SWAT teams. This will be an interagency collaboration with SBA 

experts and experts at other Federal agencies. At the request of the community, this 

team will go into areas that have been disproportionately impacted by the economy 

and help them plan for growth. 

This will include regions that have been hit in the manufacturing sector, the automotive industry, and other communities that are reinventing their local economy 

from the ground up. 

I recently went to Kokomo, Indiana, a town with 25 percent unemployment. The 

mayor, Greg Goodnight, asked me for exactly this kind of help as they work to grow 

new companies in electronics and engineering. 

The ready reserve teams will work closely with our existing partners to leverage 

the local assets in communities like Kokomo and uncover possible new opportunities. They will find ways to grow a broader knowledge base, to learn new skill sets, 

and to create 21st century jobs. 

Third, the Budget contains a $5 million initiative is to support small businesses 

who participate in Regional Economic Clusters. 

An example is the Maine boatbuilders who are working with new composite technology to create lighter, faster boats that are competitive in global markets. Senator 

Collins has been working with this group for some time. Maine’s small boatbuilders 

have clustered together to be a new driver of the State’s economy. 

Clusters are forming in every State and will be fueled by efforts in the departments of Commerce and Energy. The SBA’s resources on the ground will coordinate 

with Commerce’s manufacturing and export centers, Labor’s trade assistance programs, and others to serve each cluster’s particular needs. 

This budget will allow us $5 million for this effort to identify, grow and expand 

the partnerships that will allow us to maximize the national economic impact of regional clusters. 

In sum, this $20 million budget request will allow the SBA to be a strong voice 

for small business across the Administration while reaching out to underserved populations such as veterans... emphasizing innovation in areas hard-hit by the 

recession... and building on the strengths that already exist in small business 

communities. 

As you can see, we are a small agency with a big mission, especially in today’s 

economic climate. 
168 

In the coming fiscal year, my personal commitment with all of our efforts—both 

new and existing—is that the SBA will measure our progress on an agency widebasis and transparently report our activities to taxpayers. Already, we are tracking 

our overall progress in a systematic and integrated way, reviewing a dashboard of 

data on a weekly and monthly basis. We will use these metrics to continue implementing the Recovery Act, reinvigorating our agency and serving as the strongest 

possible voice for small business. 

Provided with the resources, the SBA can continue to be a true catalyst for the 

growth and innovation—helping entrepreneurs and small business owners lead us 

out of this recession, stimulate the economy, strengthen U.S. competitiveness, and 

create new, well-paying 21st century jobs. 

Thank you and now I’m pleased to take your questions. 

SMALL BUSINESS DEVELOPMENT CENTERS

Senator DURBIN. I welcome my colleague Senator Collins. 

I would like to ask a question or two. First, you have requested 

some $20 million for new entrepreneurial development initiatives, 

and your testimony says this money will be used in part for increased focus on veterans, SBA SWAT teams, and small business 

clusters. I like the idea of innovative thought and new approaches. 

However, there is something that I find I can’t resolve. 

Also in this budget is a proposed $13 million decrease in the 

small business development centers. They have an established network of connections across the country, and they are already on the 

street, ready to address the challenges that you have identified. I 

could give you the list of accomplishments of these SBDC associations, but I think you would know them. 

So here is what I am trying to struggle with. Why would you cut 

back on an established network that has proven that it can help 

businesses and then start a new function to go after three specific 

business needs? It would seem to me that we wouldn’t want to sacrifice the SBDCs to create a new experimental program, and also 

will there be SWAT uniforms for the SBA employees? 

Ms. MILLS. Well, yes, on the SWAT uniforms, of course. 

Well, you are absolutely right to point out this anomaly in the 

data. And let me be very clear, it is not our intention to cut the 

SBDC programs. So here is how the anomaly appeared. 

When we proposed our 2010 budget, proposed $97 million for 

SBDCs, that was level funding for this absolutely critical program. 

So 2009 was $97 million. We proposed in our 2010 budget the same 

amount. 

This is a critical program, and it is what we call the bone structure, the foundation stone, as you have pointed out, of how we are 

executing, how we are on the ground. The numbers, the metrics on 

this are very, very good. Not only are they up 5 percent, but we 

have—or we document how—when they serve clients on a longterm basis, the performance of these clients increases versus the 

control group who are not served. So these are really critical elements of our plan. 

The reason that you see $110 million in 2009 is that Congress 

passed the actual 2009 after we had submitted the 2010, and there 

was an increase for the SBDCs, which we are very grateful for. 

Senator DURBIN. So you are saying that the $97 million is flat 

funding from the previous fiscal year? 
169 

Ms. MILLS. Yes, and our intention was never to cut this program. 

We rely on this program. It is a backbone program. So there was 

no replacement contemplated. 

Senator DURBIN. It would seem that flat funding would not anticipate just ordinary increase in cost of living and the like? 

Ms. MILLS. Well, as I said, we are very, very happy to talk about 

supporting this program because this program is a foundation 

stone of everything that we want to do. 

EMPLOYEE TRAINING

Senator DURBIN. Let me ask you about one of the—since you are 

brand new to the agency, I will just ask you what your thought is 

about this particular issue. 

OPM did a survey in 2008 of the best places to work in the Federal Government. The Small Business Administration in 2008 

ranked 26th out of 30 agencies. That is low, but an improvement 

over the previous year, where it ranked 30th out of 30 agencies, 

dead last. 

So when it comes to this issue of morale and the like, I would 

like to know what your thoughts are on how you are going to 

change that particular—or at least address that particular challenge. One of the things that has been suggested is more money 

into employee training so that there is a notion that if they do 

train and improve their skills, that there is a chance for advancement within the organization. 

However, the report states the agency has not yet documented a 

comprehensive plan for training that links core competency to your 

goals. So can you tell us if you are aware of this problem, what you 

are doing to address it, whether it involves any training component 

or things like student loan forgiveness? 

Ms. MILLS. Senator, I am very happy to talk about this. When 

we talk about the priorities, when I talk about my priorities for the 

agency, one of the most important ones is reinvigorating the agency, and there are two components of this—investing in our people 

and investing in information technology. And what you have just 

described is at the core of our plan to invest in our people. 

It is unacceptable to be 30th out of 30. We won an award last 

month for most improved agency, and we are only at 26. This is 

not good enough. 

So we have embarked on a revision of our training program, and 

this is a priority for me as the Administrator and for our whole 

team because we have terrific people. And we ask them, as I said, 

to do a lot of jobs, to carry a big load. And we need to prepare them 

and invest in them in order for them to be great managers, in 

order for them to be great counselors. And we actually have some 

excellent programs in the planning process that we plan to begin 

to implement in the next month. 

So we are also looking at student loan forgiveness, and I am 

pleased to tell you that we are going to do that as well, and that 

is going to be implemented within the next 30 days. 

Senator DURBIN. Do you have the legal authority to do that? 

Ms. MILLS. Yes, I believe we do. 

Senator DURBIN. Good. 

Senator Collins. 
170 

Senator COLLINS. Thank you. Thank you, Mr. Chairman. 

I would ask unanimous consent that my opening statement be 

entered into the record. 

Senator DURBIN. Without objection. 

[The statement follows:] 

PREPARED STATEMENT OF SENATOR SUSAN COLLINS

Thank you, Mr. Chairman. 

Administrator Mills, welcome and thank you for being here today. Before I discuss 

your new role as head of the Small Business Administration, I want to thank you 

for your service to our State of Maine. Your efforts to promote economic development and investment in small businesses in our State have helped retain and create 

jobs, and have helped small manufacturers increase efficiency and competitiveness. 

I am sure that you will bring the same leadership and vision to the SBA as you 

brought to our home State. 

As we all know, small businesses are the backbone of our economy. Our economic 

strength and future are tied to the strength of small businesses. 

During the last decade, America’s small businesses have created about 70 percent 

of all new jobs. Small businesses employ about half of U.S. workers and create more 

than half of nonfarm private GDP. 

In Maine alone, we have 154,000 small businesses. About 112,000 are self-employed individuals, and another 42,000 of these small businesses have employees. 

These Maine entrepreneurs created nearly 5,000 new jobs in 2007 alone. 

Administrator Mills, I look forward to working with you to give small businesses 

the support and assistance they need to emerge from this recession strong and nimble. I am eager to hear about the progress you are making in implementing the 

SBA’s portion of the Recovery Act, which contained many provisions aimed at helping small businesses recover, grow and expand. I also look forward to hearing your 

fiscal year 2010 proposals and how they will continue SBA’s core services of entrepreneurial assistance and access to capital for small businesses. 

Mr. Prouty, the Recovery Act provided $5.5 billion to GSA for construction of new 

facilities, and for renovation and modernization of old ones to create more energy 

efficient Federal buildings. There are plans to spend these funds in all 50 States 

and 2 U.S. territories—creating jobs, constructing buildings the Nation needs, and 

reducing the energy consumption of the Federal Government. The Recovery Act also 

included $300 million for the purchase of energy efficient motor vehicles for the Federal fleet. These funds were intended to help stimulate the economy and maximize 

economic benefit for the ailing auto industry. I look forward to hearing from you 

about the progress GSA is making in executing this enormous investment. 

The President’s fiscal year 2010 budget provides funds for construction projects 

in many States, including my own. However, I am concerned that the President’s 

request does not follow the Judicial Conference’s Five-Year Courthouse Construction 

Plan. In fact, the fiscal year 2010 request does not fund a single courthouse on the 

Judicial Conference plan. Mr. Chairman, I am pleased that we have invited Judge 

Bataillon to testify about the selection process for courthouse construction. As Chair 

of the Space and Facilities Committee for the Judicial Conference, Judge Bataillon 

will be able to discuss how the fiscal year 2010 Budget request will affect the design, construction, and completion of our Nation’s courthouses. 

Mr. Chairman, before I conclude, I would like to submit for the Record a letter 

that Mr. James Duff, Secretary of the Judicial Conference, sent to you and me on 

June 9, 2009. (Pause for Senator Durbin to accept the letter into the Record.) 

This letter expresses the Judicial Conference’s concerns about the President’s 

budget request. It states, in part, that ‘‘if these projects are not funded in fiscal year 

2010, we are concerned that all projects in 2010 and subsequent years will be delayed at least another year-seriously impacting the judicial process where courthouses are already out of space, and critical security deficiencies currently exist.’’ 

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

you as we consider the fiscal year 2010 budget requests of SBA and GSA, as well 

as the other agencies within our subcommittee’s jurisdiction. 

Senator COLLINS. Thank you. 

I want to apologize to you, Mr. Chairman, and to our witness for 

my late arrival. Since the witness is from the State of Maine, she 

can appreciate that I was at the Seapower Subcommittee of Armed 

Services, which is also a very high priority for our State. 
171 

SMALL BUSINESS DEVELOPMENT CENTERS

Administrator Mills, let me first associate myself with the remarks made by the chairman about the small business development centers. As a former regional administrator of the SBA, I 

know personally how valuable those centers can be in providing advice and guidance, which can be at least as important—well, maybe 

not as important, but almost as important as money to a new business or a business that is thinking of expanding. So I, too, hope we 

are not seeing a cutback in those valuable centers. 

AMERICAN REINVESTMENT AND RECOVERY ACT

I would like to ask you for an update on the implementation of 

the Recovery Act. This subcommittee gave the SBA some $730 million to help get small business lending going again through a variety of means, including increasing the amount of a loan that the 

SBA could guarantee, cutting fees, a variety of programs. 

What is the status of the SBA’s efforts to implement the Recovery Act? 

Ms. MILLS. Thank you, Senator Collins. 

The status of the Recovery Act is that as of yesterday, with the 

implementation of the ARC loans, we have implemented $345 million of the $730 million of Recovery Act money now available for 

funding. The first stage went out on March 19, which was the increase of guarantees to 90 percent and the reduction of fees. And 

the reaction—we really have to thank you for putting this money 

forward because the reaction was immediate. 

When small businesses had been having difficulty getting credit, 

we were able to see our loan volume go up by 30 percent. And actually, I am told as of yesterday, it is now 35 percent over the weeks 

before the Recovery Act. 

In addition, we were able to attract 500 new banks into the program who had not made a loan since—some of them since 2007. So 

the formula in that Recovery Act is exactly right, and we are seeing 

the loan volumes increase and increase. We are not back yet to preOctober, pre-2008 levels. But money is in the hands of small businesses, and the Recovery Act is working to keep those jobs. 

Senator COLLINS. That is great to hear. 

Ms. MILLS. It is good. 

SMALL BUSINESS ACCESS TO CREDIT

Senator COLLINS. I will tell you, and I know you hear it back in 

Maine as well, that there is still a lot of small businesses that are 

having their lines of credit terminated, that are having loans 

called, and this infuriates me because a lot of times the financial 

institutions that are cutting off lending to small businesses are 

those that have received billions of dollars in TARP money. 

So it is just infuriating to me that they are cutting off credit to 

small businesses that, in many cases or in most cases, are paying 

on time. They have not violated the terms of their loan agreements, 

but it is just a matter of the bank trying to build up its capital or 

reduce its exposure. 

When I was the regional administrator in New England in 1992 

or 1993—I can’t remember which year—banks were failing 
172 

throughout New England, and we initiated a New England lending 

and recovery project, which I have discussed briefly with you. And 

what this project did is go into failed banks and take out the creditworthy loans and place them with a new lender with an SBA guarantee. And the result was that we were able to intervene in cases 

where, through no fault of its own, a small business was losing its 

credit. 

Is SBA looking at some sort of proactive program like that, 

where you would go in and offer to put a guarantee on a loan in 

order to keep it from being called or the credit line terminated? 

Ms. MILLS. Well, yes. We absolutely have, and in fact, you had 

mentioned this a while ago. There are two programs that are really 

going to be helpful to this quite distressful problem of credit lines 

being cut to small businesses. 

The first is actually the ARC loans. What is happening to many 

of these small businesses is that the credit lines that are being cut 

are actually credit card, business credit card lines. And the availability on those lines has been cut, and therefore, they have no liquidity to run their business. 

The ARC loans, which went out yesterday and became available, 

are $35,000 lines of loans to businesses to pay down any loan they 

want, including credit card loans. And that would give them an additional $35,000 line of credit. 

These are 100 percent guaranteed by the SBA. They have no interest to the borrower. The SBA pays the interest. And they have 

no repayment due for at least 18 months—6 months to give the 

loan, then 12 months after. So this will be very good for smaller 

borrowers who particularly have this issue of their lines of credit 

cut on credit card loans. 

The second—and it will give them a much cheaper option—the 

second thing that we are implementing and have implemented is 

that you can refinance a bank loan into an SBA guaranteed 7(a) 

loan today. And in the next couple of weeks, you are going to be 

able to implement, to refinance into a 504 loan. 

So if you meet the criteria for a 504 expansion loan, you, in the 

past, could not refinance existing debt into that guaranteed loan. 

But because of the provisions of the Recovery Act, we are going to 

be able to implement new rules. And so, those will be available for 

exactly the kind of great businesses that, for various reasons, the 

bank is not able to be the provider of enough liquidity and putting 

it with an SBA bank with a guarantee. 

Senator COLLINS. Thank you, Mr. Chairman. 

DEALER FLOOR PLAN FINANCING PROGRAM

Senator DURBIN. I understand, Administrator Mills, that on July 

1, SBA will begin guaranteeing loans to dealerships to finance inventories of cars, trucks, RVs, boats, and even manufactured 

homes, that this is because of recent changes to old regulations 

that used to prohibit this kind of lending. 

This is kind of a bold step for the SBA, and it clearly will be 

needed by some. But it is a stressed marketplace, and I am just 

wondering as the SBA considers these loans, what steps are you 

taking to mitigate the risks that are part of this new loan program? 
173 

Ms. MILLS. We worked very hard to do a number of things in response to the crisis in the automotive industry. The first was to 

provide some kinds of financing that the distressed dealers were 

looking for, and this goes to not just dealers at Chrysler and GM, 

but, of course, to all dealers, including used car dealers. And it goes 

to boat builders—boat dealers, RV dealers, as you said, and also 

motorcycle dealers, in fact. 

And the steps that we have taken, what we needed to do was 

make sure we were taking no more risk with these loans than with 

our normal 7(a) portfolio. So we actually constructed credit criteria, 

including our guarantee on this, for instance, is 75 percent, not 90 

percent. And the advance rates are of a certain level. 

So we have been quite careful to balance the need to step up and 

provide liquidity to the sector and also to not take on additional— 

to manage our risk at the appropriate level. 

SMALL BUSINESS CONTRACTING

Senator DURBIN. I would like to ask you about one issue that you 

are going to face and we have all faced in the Federal Government. 

Federal agencies reported a total of $78 billion in Federal prime 

contract dollars went to small businesses in 2006. Many of these 

were obtained using contracting preferences, such as sole-source 

awards and set-asides for small businesses. 

The SBA’s inspector general and others have reported flaws in 

this procurement system related to the contracts. There is evidence 

that large firms are awarded contracts reserved for small businesses. In addition, Federal agencies have inappropriately been 

counting contracts performed by large firms toward their small 

business procurement goals. 

SBA introduced a scorecard to rate small business procurement 

practices at Federal agencies, including the accuracy of reporting, 

and issued regulations to require small businesses to regularly recertify. How is the SBA working with Federal agencies to ensure 

contracting personnel are properly trained to understand what is 

a small business, what is a masquerading large business, and how 

we meet our goals to actually do business with smaller entities? 

Ms. MILLS. Well, Senator, our Government contracting program 

is designed to have the SBA help ensure that 23 percent of all Federal contracts throughout all of the agencies go to small businesses. 

And the purpose of this is—it should be—we believe it should be 

a win-win situation. These are very good for small businesses, particularly some of the high-growth, innovative businesses because it 

allows them to get to the next level of volume, and then after that, 

they can export and they graduate and they become job creators 

and sort of the mainstays of the growth in our economy. 

From the Federal agency point of view, it is a win-win also because they get access to some of the most innovative companies 

and technologies. And when you contract with a small business, 

very often you get top management and you get the CEO at the 

table working on these issues. 

However, as you point out, it is difficult sometimes for Federal 

agencies to know how to access great small businesses, and they 

worry: Will the small business that I am contracting with be there? 

Is it financially stable? 
174 

So one of the things that we are focusing on, in answer to your 

question, is increased training and activities that improve the 

reach and access and availability of small businesses to speak to 

these procurement agents and connect to these procurement 

agents. 

The second issue you raise, though, is that we have had a series 

of issues relating to whether this is really reserved for small business. This program is for small businesses. It is not for big businesses masquerading as small businesses. There have been a series 

of findings on this, and we are engaged in addressing every single 

one that has come out of the report. 

And in the budget you will find funding for our HUBZone program and our 8(a) certification programs so that we can re-look at 

a number of ways we do business, certifying that sometimes it is 

good for big business to be affiliated and mentor a small business, 

but it is not good if the small business is not actually the one engaged in the contract and in fulfilling the contract. 

So we are working very hard on these issues that you have described and consider them one of our important priorities because 

we think, actually, this can be a win-win for small businesses and 

for the Federal Government. 

Senator DURBIN. Thank you. 

Senator Collins. 

Senator COLLINS. Thank you, Mr. Chairman. 

LENDER OVERSIGHT

I want to follow up on the questions that the chairman has just 

raised about the ability of your agency to guard against fraud. You 

have had an enormous budget increase as a result of the stimulus 

bill, and yet I am told that SBA’s nondisaster staffing has decreased by about 28 percent since 2001. Your loan portfolio went 

up by 59 percent during that period. Information that you have 

given us today shows that it has gone up even further. 

How is the SBA going to ensure, when you have over 5,000 lenders and 270 certified development companies that are making 

loans, how are you going to ensure the integrity of that process 

when your nondisaster staff is shrinking? 

Ms. MILLS. Well, thank you, Senator Collins, for asking that. 

In fact, this agency went from 3,000 people 8 years ago to 2,000 

people now. The budget has gone down by 24 percent. But to answer your question, I said there are two areas that we were going 

to invest heavily in in reinvigorating the agency. And the first is 

our people. The second is information technology. 

A large part of the information technology investment that we 

are making, and we got some money in the stimulus act—in the 

Recovery Act to look at this—is for lender oversight and risk assessment. We have formed a new committee on risk assessment, 

and we are beginning the process of understanding how we can use 

technology as well as people to identify risk, to collect better data 

on risk, and to be more proactive about our understanding of how 

we go after risk-based solutions. 

And I think we do—at this moment, we have some very good 

components, but we are raising the level of this activity to really 
175 

my level, to the administrator level. So I am getting very involved 

in this myself. 

Senator COLLINS. Speaking of human capital, I am told that the 

chief financial officer of the SBA as well as three senior staff who 

were involved in estimating credit subsidies all recently left the 

agency. That concerns me at a time when you are working so hard 

to expand your lending programs. What are you doing to fill that 

particular gap at a critical time? 

Ms. MILLS. Well, thank you for that question because it gives me 

an opportunity to brag about our people a little bit. 

Our financial staff did at the period of January–February largely 

go over to the Troubled Asset Relief Program (TARP). But we have 

been able to actually build inside a first-rate, crackerjack chief financial officer’s office and staff who are doing just a terrific job. 

So I am pleased to say that the staff has totally risen to the occasion, and we are very confident about our numbers. As you know, 

I am a metrics-oriented person. So that is a first priority for us. 

SMALL BUSINESS CLUSTERS

Senator COLLINS. Thank you. 

And finally, you and I share a common interest in helping to develop business clusters, particularly in rural areas of a State such 

as in our State of Maine. Does this budget have support for the development of small business clusters? 

Ms. MILLS. Yes, Senator Collins. 

There is $5 million in this budget, and Senator Collins put forth 

a bill last year which designed a program for clusters. And much 

of that is now incorporated in the Commerce Department’s $50 million cluster program. This $5 million is designed to have the SBA 

resources, the footprint that we have on the ground, which is so 

substantial, be linked and leveraged and aligned with those cluster 

programs. 

Senator COLLINS. Thank you. 

Senator DURBIN. Thank you, Senator Collins. 

And Administrator Mills, thank you for your testimony today. We 

certainly appreciate it. We will be working with you and your staff 

on your budget for the next fiscal year. 

Ms. MILLS. Thank you. 

ADDITIONAL COMMITTEE QUESTIONS

Senator DURBIN. We will probably submit written questions, and 

if you can take a look at them and send us some replies on a timely 

basis, it would help us to do our work. 

Thank you for being here today. 

Ms. MILLS. Yes, we will do that. Thank you very much. 

Senator DURBIN. Appreciate it. 

[The following questions were not asked at the hearing, but were 

submitted to the Administration for response subsequent to the 

hearing:] 

QUESTIONS SUBMITTED BY SENATOR RICHARD J. DURBIN

RECOVERY ACT: IMPACT ON SMALL BUSINESS LENDING

Question. The American Recovery and Reinvestment Act of 2009 (Recovery Act) provided $375 million to stimulate lending in Small Business Administration (SBA) 
176 

loan programs, supporting, on a temporary basis, reduced-fee loans for borrowers 

and a higher federal guarantee under the 7(a) program. SBA’s loan data shows that 

since the Recovery Act, the volume of weekly lending under these new programs has 

increased by 32 percent. In addition, private lenders who had stopped partnering 

with SBA to make small business loans are returning to the 7(a) program in large 

numbers. 

How long will SBA be able to continue making these reduced-fee loans? 

Answer. The $375 million in Recovery Act funds will support a program level of approximately $8.7 billion for the 7(a) program and approximately $3.6 billion for 

the 504 program with fee elimination and 90 percent guarantees for 7(a) loans. Initially, SBA projected that these funds would last until the end of calendar year 

2009. Given the higher-than-expected increase in lending volume, we now believe 

those funds might run out in early December 2009 for the 7(a) program, and will 

last through the middle of December for the 504 program. 

Question. To what extent does SBA estimate that lending volume will bounce back 

from the large drop-off that occurred early in fiscal year 2009? 

Answer. Lending volumes are steadily increasing to more historic average levels. 

As the overall economy recovers, we believe the lending volume will recover as well. 

In July 2009, the combined 7(a) and 504 volume rose to $1.4 billion, which is approaching the 2008 monthly average of approximately $1.5 billion. 

Question. What steps is SBA taking to ensure that lenders stay in the 7(a) program once the fees and guarantee level return to normal levels? 

Answer. We have heard from lenders that the higher guarantee has helped them 

extend credit to small businesses in the current economic environment. SBA continues to work with lending partners to identify areas of improvement in SBA programs. At the same time, the Agency is working to continue to revise and streamline operating procedures and to provide good customer service to lenders, making 

the agency a better long-term partner. This includes development of a much more 

robust and modern customer relationship management system, allowing SBA to systematically track its interactions with lenders. 

RECOVERY ACT: AMERICAN RECOVERY CAPITAL LOANS

Question. The Recovery Act provided $255 million for a bridge loan program to 

help distressed small businesses make it through the economic downturn. These 

American Recovery Capital loans—or ‘‘ARC’’ loans—are risky because they are intended for small businesses that are already experiencing financial trouble. SBA estimates that the total volume of ARC loans will be around $350 million. 

In deciding which small businesses are eligible to borrow under the ARC loan program, how does SBA determine if a distressed small business is strong enough to 

weather the economy? 

Answer. SBA’s ARC loan program is uniquely designed to meet the needs of viable 

businesses facing immediate financial hardship. SBA asks businesses to demonstrate their viability by showing evidence of profitability or positive cash flow in 

at least one of the past 2 years. Future cash flow projections based on reasonable 

growth going out 2 years should show that the business will be able to meet current 

and future debt obligations, including future repayment of the ARC loan once the 

disbursement and deferred payment period end, and operating expenses. Also, the 

borrower must certify that they are currently no more than 60 days past due on 

any loan being paid with an ARC loan and they must have an acceptable business 

credit score as determined by SBA. 

Question. How does this compare to SBA’s estimated demand for the program? 

Answer. Since it was launched last month, the ARC program has been steadily 

ramping up. Through August 4, SBA has approved over 1,000 loans totaling over 

$34.5 million. SBA estimates that the funding provided will support approximately 

10,000 loan approvals through fiscal year 2010, and the agency believes the program 

is on track to meeting that projection. 

Question. How is SBA ensuring that smaller lenders, like community banks, are 

able to participate in the program before funding is exhausted? 

Answer. SBA trained over 3,300 lending officers at over 1,300 banks on how to 

make these loans and how to use SBA’s electronic lending systems. So far, smaller, 

community based lenders have made most of the loans in the ARC program. In addition, we have limited lenders to no more than 25 loans per week on a cumulative 

basis and no more than 1,000 loans in total to help ensure access to the program. 

LIQUIDITY OF SBA LOANS

Question. The secondary market for SBA’s loans is showing initial signs of improvement due to Recovery Act programs and other changes in capital markets. In 
177 

May, sales into the secondary market reached the levels of months prior to the economic downturn. The Federal Reserve has, through May, made about $170 million 

in loans to investors to purchase pooled SBA loans, and Treasury expects to soon 

make $15 billion in TARP funds available for the federal government to directly 

purchase SBA loans. 

How will the TARP purchases and the Federal Reserve’s loan program complement or support the recent improvements in the marketplace? 

Answer. The programs from Treasury and the Federal Reserve have been important in the fragile recovery of SBA’s 7(a) secondary market. Treasury’s announcement that it would serve as a backstop for the market has provided lenders, brokers 

and investors with confidence around the market’s overall liquidity. Over the past 

3 months, the average monthly loan volume settled from lenders to broker-dealers 

has been $335 million, moving the market closer to pre-recession averages. In July, 

$324 million settled. At the same time, prices for these loans have begun to recover. 

In July, 67 percent of the loans settled (50 percent of the dollar volume) were sold 

at or above premiums of 106. Similarly, the Federal Reserve’s TALF program has now supported over $419 million in SBA-backed securities. SBA continues to work with Treasury and the Federal Reserve to ensure long term health of its secondary markets. 

SUBSIDIZING 7(A) LOANS IN FISCAL YEAR 2010

Question. In a typical year, the fees SBA collects on 7(a) loans fully offset the cost 

of payments the agency makes on defaults. However, SBA’s budget request states 

that in fiscal year 2010, those fees will not be sufficient to keep the 7(a) program 

operational. SBA is requesting an appropriation of $80 million to keep 7(a) loans 

flowing to small businesses throughout fiscal year 2010. 

What changes will occur between 2009 and 2010 that will cause the risk of 7(a) 

loans to increase? 

Answer. In the current economic environment, SBA has seen an increased number 

of defaults in its loan portfolio, and this historical performance is factored into the 

model that estimates the fiscal year 2010 subsidy rate. This increasing default rate 

means that the risk of a subsequent SBA purchase of a 7(a) loan is more likely than 

it may have been in previous years. The risk of default in the 7(a) program is actually closely correlated to the unemployment rate in the macro economy. With unemployment on the rise, and projected to remain elevated for some time, we expect a 

higher default rate in fiscal year 2010. 

Question. Does SBA expect that once the health of the economy improves, defaults 

in the program will return to a level fully supportable by fees? 

Answer. The econometric subsidy model that is used to determine the subsidy 

rates in SBA loan programs uses historical loss rates and defaults in SBA’s portfolio 

as well as macro economic estimates related to unemployment rates and interest 

rates. Unemployment rates are the most significant indicator of loan default in the 

SBA 7(a) program credit subsidy model. Once the overall economy improves, and 

unemployment decreases, SBA may be able to run a zero subsidy 7(a) program. 

However, this could take several years and depends on many other broad market 

and economic factors. 

LENDER OVERSIGHT

Question. SBA’s Inspector General has identified deficiencies in SBA’s oversight 

of lenders. The President’s request for SBA’s lender oversight activities is $11.3 million, a 3.7 percent increase over the fiscal year 2009 enacted level of $10.9 million. 

How will the budget request enhance SBA’s efforts to ensure lenders are properly 

overseen? 

Answer. The request will allow the SBA to continue expanding upon its goal of 

ensuring stewardship and accountability over taxpayer dollars through financial 

portfolio management and prudent oversight. The Agency will achieve this goal by: 

(1) continuing to perform on-site lender reviews with the objective of reviewing all 

large and mid-size lenders and community development companies generally on a 

bi-annual basis; (2) ensure that these lenders and CDCs whose portfolios comprise 

more than 80 percent of the Agency’s guaranty dollars outstanding are accountable 

for managing their portfolios in a prudent manner, thus reducing the SBA’s overall 

credit risk; and (3) continuing to monitor its smaller lenders and CDCs through its 

off-site monitoring process. 

The SBA will expand its oversight efforts to the Microloan program by applying 

its off-site monitoring approach to microloan intermediaries. 

The SBA also plans to issue guidance with regard to the use of loan agents by 

lenders to originate SBA guarantied loans. In addition, as the Loan and Lender 
178 

Monitoring System (L/LMS) continues to be leveraged for oversight and portfolio 

management purposes, more involved data analysis of performance trends will be 

conducted. The results of these analyses will be used for more effective management 

of SBA loan portfolios, as well as to assist in identifying irregularities that may be 

an indication of inappropriate lending activities. 

Finally, the SBA will also apply its portfolio analysis capabilities, first developed 

through L/LMS, to the Agency’s disaster loan portfolio. This portfolio analysis capability will be used to provide relevant information for senior management to use in 

decision making. 

The SBA plans to issue further guidance to lenders regarding grounds for enforcement actions and the types of enforcement actions that may be taken by the Agency 

against lenders. This guidance will increase Agency transparency with its lending 

partners. 

Question. What limitations does SBA face in following up on on-site and document 

reviews of lender activity? 

Answer. As the IG has pointed out, substantial strides have been made in lender 

oversight, and SBA continues to make improvements in its oversight processes. SBA 

utilizes a combination of an offsite portfolio monitoring tool as well as periodic onsite examinations of its largest lenders in its risk based approach to lender oversight. SBA published the Lender Oversight Interim Final Rule in December 2008, 

which provides SBA with increased enforcement capabilities. SBA has a robust system for portfolio management and lender performance evaluation. We are working 

to make the benefits of this tracking technology infrastructure more accessible and 

user friendly. Additionally, staffing has been increased by seven positions in the Office of Credit Risk Management over the last 2 years. 

Going forward, SBA recently re-procured its contract for off-site monitoring and 

is starting to make more information available to lenders and SBA staff for portfolio 

management, redeveloping risk rating metrics to enhance their predictiveness, integration of more dynamic, ongoing evaluation of lenders and loan portfolio—identification and investigation of trends and developments—into oversight activities, and 

development of procedural guidance related to the lender oversight regulation. 

MICROLOAN PROGRAM: FISCAL YEAR 2010 REQUEST

Question. SBA’s Microloan program was provided $22.5 million in fiscal year 2009 

funding as well as an additional $30 million under the Recovery Act. Yet, the President requests only $13 million for fiscal year 2010. While the budget continues to 

support a robust level of lending—$25 million—it reduces funding for grants for borrower counseling. 

Has there been a measurable increase in demand for Microloans since the Recovery Act became law? 

Answer. The Recovery Act provided an additional $6 million in microloan loan 

subsidy, which supports approximately $50 million in additional microlending to 

intermediaries, and $24 million in microloan technical assistance grants. SBA was 

able to expedite expenditure of all 2009 non-Recovery Act microloan funds by midJuly, and now, Recovery Act funds are available for SBA microlending intermediaries to use through fiscal year 2010. 

Question. How will Microlenders provide adequate technical assistance to borrowers in fiscal year 2010 if the grant funding is reduced per the budget request? 

Answer. These funds, combined with the 2010 budget-requested funds will more 

than double the size of SBA’s microloan program over 2009 and 2010. The microloan 

grant fund request is adequate to support the needs of current and future intermediaries. 

MICROLOAN PROGRAM: EXPANDING MICROLOAN ACCESS

Question. The Microloan program can accommodate up to 300 lenders. However, 

there are currently only 165 SBA-approved Microlenders. Additional partners would 

provide small businesses better access to the Microloan program. 

What steps is SBA taking to expand the number of Microlenders? 

Answer. Since the Recovery Act funding was provided, SBA has received 15 new 

applications from intermediaries, 9 of which have already been approved. The Agency has reached out to microlending institutions and made presentations at industry 

conferences and workshops to reach out to potential participant organizations. 

SBA is working to make improvements to its microlending program, including 

through a new electronic application. These program changes and new marketing 

efforts will help expand the number of intermediary partners that provide 

microloans to borrowers. SBA has done extensive work with intermediaries around 

best program practices and is reviewing applications for new intermediaries. 
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Question. How can SBA connect other federal partners to the Microloan program—for example, Community Development Financial Institutions? 

Answer. SBA has reached out to Community Development Financial Institutions 

and continues to discuss this program opportunity with them. 

ENTREPRENEURIAL DEVELOPMENT INITIATIVE: ‘‘SWAT’’ TEAMS

Question. The President’s budget requests $20 million for a new entrepreneurial 

development initiative. Administrator Mills’ testimony states that $10 million of this 

funding would be used to send SBA ‘‘SWAT’’ teams into distressed communities, including regions that have been impacted by the economic crisis. 

What criteria is SBA contemplating to use in selecting communities for this assistance? 

Answer. To evaluate where SBA’s pilot program would be most effective, SBA will 

consider target criteria that show economic distress such as the following: Unemployment; industries in distress (loss of tax revenue); natural disaster impact; involvement with other federal, state and local agencies; and other economic factors, 

including Employment and Training Administration or Economic Development Administration referrals. 

Individual businesses will be targeted to receive an in-depth assessment to identify steps for stabilization and growth. 

ENTREPRENEURIAL DEVELOPMENT INITIATIVE: VETERANS’ BUSINESSES

Question. SBA’s proposed Entrepreneurial Development Initiative requests $5 million to increase SBA’s focus on veterans’ business issues. 

How would the requested funding help SBA help returning veterans start and 

grow their small businesses? 

Answer. Veterans constitute a special class of business owner. Currently SBA supports eight veterans’ centers, but this outreach effort limits the number of veterans 

assisted to those located within one of these eight immediate geographic locations. 

To meet the unique needs of returning service men and women, SBA intends to leverage its Entrepreneurial Development networks to reach out to veterans who will 

need assistance to stabilize veteran-owned businesses and return them to prosperity. With this funding, SBA will: train all of SBA’s current resource partners in 

the unique needs of veterans regarding business start-up or management; and will 

expand the outreach of existing services (business counseling, training and 

mentorship) to more veterans. SBA will leverage the knowledge and skills that reside in existing Veteran’s Business Outreach Centers to more effectively target this 

training and outreach. 

Question. To what extent is SBA coordinating and collaborating with the Department of Veterans Affairs and other organizations to conduct outreach and implement other initiatives to best address the needs of veterans? 

Answer. SBA’s Administrator Karen Mills will meet with the Secretary of Veterans Affairs to develop a strategy for greater collaboration, avoid duplication and 

fill gaps for services to veteran-owned businesses and veterans wishing to explore 

business ownership. 

ENTREPRENEURIAL DEVELOPMENT INITIATIVE: BUSINESS CLUSTERS

Question. Administrator Mills’ testimony states that under SBA’s proposed Entrepreneurial Development Initiative, $5 million of the requested $20 million will be 

used to support small businesses that are part of ‘‘economic clusters’’. 

How would this $5 million enhance the strength of regional cluster businesses? 

Answer. SBA’s clustering program will facilitate networking among like-minded 

businesses that face similar economic problems. The network will promote the development of wide-scale discussions on industry solutions and best practices. SBA’s district offices will promote clustering by leveraging existing programs and training opportunities to bring businesses together to focus on common economic challenges 

and potential linkages between businesses to foster growth. Examples of current or 

planned industry clusters include: The resurgence of the boat-building industry in 

Maine; and the robotics initiative in Michigan and southern Virginia. 

Question. How would SBA leverage these resources with the Department of Commerce’s manufacturing and export programs, trade assistance programs at the Department of Labor, and state and local agencies? 

Answer. To expand the Clustering Program’s impact, SBA will partner with numerous Federal departments and agencies (Commerce, Defense, Energy, Labor, Agriculture, Export Import Bank, etc.) to leverage extensive industrial knowledge and 

expertise. 
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DISASTER LOANS

Question. As of June 2009, carryover balances in the disaster loan program were projected to support over $5.5 billion in new disaster lending. Due to these large 

balances, the budget does not request additional funds for new disaster loans. 

How does the level of balances compare to the needs of the disaster loan program 

in previous years? 

How does that compare to disaster lending after the largest recent disaster, Hurricane Katrina? 

Answer. The following chart shows original loan approvals for fiscal year 2005 

through fiscal year 2009 to date: 

Fiscal Year 

Homes Business Total 

Number Amount Number Amount Number Amount 

2004 ............................... 25,024 $627,425,200 3,486 $256,065,200 28,510 $883,490,400 

2005 ............................... 52,677 $1,388,084,700 9,398 $890,604,800 62,075 $2,278,689,500 

2006 ............................... 145,164 $8,399,440,708 24,819 $2,770,815,600 169,983 $11,170,256,308 

2007 ............................... 11,760 $457,311,500 2,254 $362,358,400 14,014 $819,669,900 

2008 ............................... 12,755 $536,303,400 2,373 $289,536,700 15,128 $825,840,100 

June 2009 ....................... 16,562 $698,964,200 3,020 $318,105,200 19,582 $1,057,334,500 

FEDERAL CONTRACTING

Question. Federal agencies reported that a total of $78 billion in Federal prime 

contract dollars went to small businesses in 2006. SBA’s Inspector General and 

media reports have highlighted flaws in the Federal procurement system related to 

these contracts. There is evidence that large firms are awarded contracts reserved 

for small businesses. Further, federal agencies have inappropriately been counting 

contracts performed by large firms towards their small business procurement goals. 

SBA introduced a ‘‘scorecard’’ to rate small business procurement practices at federal agencies, including the accuracy of reporting data, and issued regulations to require small businesses to regularly recertify that they meet certain standards to be 

considered a small business. 

How is SBA working with other federal agencies to ensure contracting personnel 

are properly trained to understand how small business contracting preferences 

should be implemented? 

Answer. The SBA employs professionals, known as Procurement Center Representatives or PCRs. PCRs are the SBA’s ‘‘eyes and ears’’ at the buying offices they 

cover, ensuring that small businesses, including 8(a), HUBZone, SDVOSB and 

Women-owned small firms, are afforded the maximum, practicable opportunity to 

receive Federal prime contract awards. In addition to the informal training, which 

often occurs during the pre-award consideration stage ‘‘negotiations’’ between the 

PCR and contracting officers, our PCRs provide and participate in formal training 

events for buying office staff, including training on how small business contracting 

preferences should be implemented. Thus far in fiscal year 2009 (October 1, 2008- 

June 30, 2009), SBA’s PCRs have provided training to more than 1,100 staff at Federal buying offices. Additionally, PCRs handle many requests for guidance/training 

from contracting officers on how small business preferences should be handled on 

a daily basis. 

Also, SBA has worked with other agencies to develop a series of data checks to 

help ensure data quality. The checks have been used in to help improve the quality 

of the 2007 data and reduce instances of businesses being incorrectly coded. 

Question. What recourses or remedies does SBA use when identifying an award 

to an ineligible entity? 

Answer. SBA has a number of programs to identify potentially ineligible entities 

for its programs. SBA’s primary program for identifying an award to an ineligible 

entity (i.e., a firm that may be other than small (a large business) is our size determination program. If a contracting officer, an other interested party, or the SBA 

itself believes that a bidder on a Federal contract may have misrepresented its size, 

the SBA (through our field network of Size Specialists) will investigate the allegations and make a formal determination as to the firm’s size. Our determination is 

provided to the contracting officer, other interested party (i.e., the protestor) and the 

protested concern, which under certain circumstances can appeal the SBA’s findings. 

First, size is determined at the time of offer, so firms that are large now may still 

be counted as small for the life of a contract if they were small at the time of offer. 

However, SBA’s recertification rule requires procuring agencies to accurately reflect 

a firm’s change in size status if there is an acquisition, or merger, or, for long-term 
181 

contracts, after 5 years and each option thereafter. Second, SBA performs formal 

size determination in response to protests that may be filed by unsuccessful offerors, 

the contracting officer or SBA, and these determinations apply to the procurement 

in question and are binding on the procuring agency. Third, if we determine that 

a firm willfully or recklessly misrepresented its size status, we may refer the matter 

to the SBA’s Office of Inspector General or propose the firm for suspension or debarment. 

The SBA also maintains a Service Disabled Veteran-Owned Small Business 

(SDVOSB) protest program (at its headquarters) that will investigate claims that 

an entity may have improperly self-certified its SDVOSB status. Our findings are 

set forth in a formal determination. If we determine that the firm is not entitled 

to SDVOSB status, we will issue a formal determination which sets forth the evidence we considered as well the basis for our findings which is provided to the cognizant contracting officer for the appropriate action. 

Question. What other steps is SBA taking to oversee the accuracy of reporting on 

small business contracting? 

Answer. SBA has increased its oversight of agency contracting officers who enter 

the award data into the Federal Procurement Data System, which is the official 

database for Federal procurement information. As briefly described before, we recently provided Federal agencies with ‘‘anomaly reports’’ identifying specific individual contract action reports which may be miscoded. SBA works closely with the 

headquarters of those agencies to investigate these apparent discrepancies and to 

correct the FPDS database, as necessary. 

Additionally, the SBA is conducting 30 Surveillance Reviews at major Federal 

buying offices across the country. Part of these reviews involve an examination of 

contracts reported to have been made to a small business to determine if the awardee is indeed small and the level of due-diligence performed by the contracting officer 

when verifying the firm’s size. 

WOMEN-OWNED BUSINESS RULE

Question. Under the Bush Administration, SBA issued a proposed rule that would 

limit the use of sole-source contracts for women-owned small businesses to four industries. SBA is currently developing a revised rule related to sole-source contracts 

for women-owned small businesses. 

When will the revised proposed regulation become public? 

Answer. One of the Agency’s highest priorities is implementation of the WOSB 

Program as quickly as possible and in a way that withstands legal scrutiny. In furtherance of this goal, the Agency has been working on a revised regulation and is 

preparing to submit a draft proposed rule for inter-agency clearance. Although I am 

unable to give you a precise timeline on the WOSB Program implementation because of the nature of the regulatory process, the proposed regulation will be published in the Federal Register for public notice and comment as soon as practical. 

Question. What resources is SBA consulting to develop the new rule? How is SBA 

involving women business owners and other stakeholders? 

Answer. SBA has already received approximately 1,700 comments on the previous 

proposed rule and SBA is considering these comments in drafting a proposed rule. 

Through the standard regulatory process, SBA will submit a draft proposed rule to 

OMB for approval and inter-agency clearance. Once cleared, SBA will then publish 

a proposed rule in the Federal Register which will provide the public notice of the 

proposed rule and give the public an opportunity to comment on any aspect of the 

proposed rule. Upon the close of the comment period, SBA will incorporate all of 

the comments into the rulemaking record and proceed with an evaluation of each 

comment. SBA will then draft a final rule for publication in the Federal Register 

which will provide an analysis of the comments received. 

QUESTIONS SUBMITTED BY SENATOR MARY L. LANDRIEU

FEDERAL AND STATE TECHNOLOGY PROGRAM

Question. The Federal and State Technology Program—or FAST—and the Rural 

Outreach Program provide opportunities for businesses in underutilized areas to 

participate in the SBIR and STTR programs. By providing matching funds through 

competitive grants, the FAST program has been successful in increasing total SBIR 

dollars for small businesses in participating states. Through Louisiana’s participation in the FAST program, the state jumped from 47th in the United States to 33rd 

in total SBIR dollars. 
182 

The program hasn’t been funded since 2004. Given these programs’ past suc- cesses, do you support funding this program again at the level of $5 million? 

Answer. This program has not had enacted funding since 2004 and the 2010 

President’s budget does not request funding. However, SBA and the SBIR/STTR 

agencies work diligently to ensure that awards support high quality innovations 

through a competitive process. To ensure high-quality innovations, the program elicits applicants from across the country and outreach efforts by participating agencies 

attempt to elicit the widest range of applications possible to enhance the SBIR and 

STTR competitive processes. 

WOMEN’S BUSINESS CENTERS

Question. For 20 years the Women’s Business Center (WBC) program has successfully provided business counseling and assistance to women with an emphasis on 

those who are socially and economically disadvantaged. With the economic turmoil, 

this program, too, is seeing an increase in demand from entrepreneurs hoping to establish a small business, as well as requests from small business owners hoping for 

assistance as they attempt to survive through economic uncertainty. To demonstrate 

the negative impact on our local technical assistance providers, consider our Women’s Business Center in New Orleans, which faced a $45,000 shortfall in funding 

in 2007—despite the increased demand for their services post-Katrina. 

Additionally, much of the country is still not served by this program; with Arkansas, Idaho, Kentucky, Montana, Wyoming, Washington, DC, Guam, Northern Marianas Islands and the U.S. Virgin Islands remaining without centers. 

Question. How much would it take to fund all of the present Women’s Business 

Centers and fund a center for each of the states currently not served by one, at the 

full amount of $150,000? 

Answer. The President’s budget would assist at least 150,000 clients. Funding 9 additional WBCs within the program at $150,000 would cost $1,350,000. 

Question. Why would the President not request the $16.9 million that it takes to 

fund the present centers at the full amount? 

Answer. The current budget provides for a sustained level of performance for existing centers. 

In addition, the entrepreneurial development initiative will also serve similar economically or otherwise distressed populations. 

Question. Why not request at least what was enacted in 2009? 

Answer. The request provides an amount roughly equal to the 2009 enacted 

amount. 

7(A) LOAN GUARANTY PROGRAM

Question. The President requested $80 million for the SBA’s 7(a) loan guaranty 

program for fiscal year 2010. Taking this program to zero subsidy in 2005, as the 

last Administration did, and shifting the cost to borrowers and lenders by raising 

the fees has been very controversial. We want this important source of long-term 

capital to be affordable for borrowers and attractive for lenders, and we want to 

build on the investment we made in this program from the Recovery Act. Nevertheless, $80 million is a big share of SBA’s budget. Please explain why this $80 million is necessary and what are the consequences 

if we don’t provide the funding? 

Answer. The 7(a) upfront borrower and ongoing lender fees are capped by statute 

in the Small Business Act. In fiscal year 2010, even with the historical (i.e., maximum) fees in place, the 7(a) program cannot execute at a zero-subsidy rate, due 

to higher defaults and economic assumptions. The Subsidy rate for fiscal year 2010 

is 0.46 percent. Therefore, in order to maintain the fully authorized program level 

($17.5 billion), the Administration requests $80 million in credit subsidy. If the full 

request is not provided, the SBA would need to reduce its anticipated program level 

that the lower appropriated amount would support. 

DISASTER

Question. As I have mentioned, last year I worked closely with Ranking Member 

Snowe and former Chairman Kerry to enact significant SBA Disaster reforms as 

part of the 2008 Farm Bill. In particular, these reforms increased SBA disaster loan 

limits, improved disaster planning capabilities, and provided the Agency with new 

tools for future disasters. 

It is my understanding that some of these provisions were immediately implemented, while others are still in the process of being tested. As we approach the 

2009 Atlantic Hurricane season, I would like an update from the Agency on its implementation of these reforms. 
183 

Please provide us with a status on what has already been implemented and what 

is in the process of being tested or implemented. 

Answer. SBA quickly began implementation of the 2008 Small Business Disaster 

Response and Loan Improvements Act of 2008 (a.k.a. the Farm Bill), immediately 

after enactment. Many of the provisions were in place for SBA Disaster Assistance 

operations during the very active 2008 Hurricane season. 

As of June 2009 SBA has met 19 of the 26 requirements. SBA has existing authority to undertake four of the seven remaining requirements, and three are in development stages. 

A spreadsheet with status of each provision is attached. This spreadsheet shows 

which provisions have been implemented or completed and which are still in process. 

Section Status 

12061—Economic Injury Disaster Loans to Non-Profits ............................................ Implemented/Regulations in Process 

12062—Coordination with FEMA ................................................................................ Ongoing/Regulations in Process 

12063—Public Awareness of Disaster Declaration and Application Periods ............ Completed 

12064—Consistency btwn. Admin. Regs & SOP’s ..................................................... Completed 

12065—Would allow up to $14,000 of a disaster loan to be disbursed without 

any collateral.

Implemented/Regulations in Process 

12066—Processing Disaster Loans ............................................................................ Implemented 

12067—Information tracking and follow up system ................................................. Implemented 

12068—Increased deferment period .......................................................................... Available if needed 

12069—Disaster Processing Redundancy .................................................................. Completed 

12070—Net Earnings Clause ..................................................................................... Implemented/Regulations in Process 

12071—EIDL loans in Ice Storms and blizzards ....................................................... Available w/Existing Authority 

12072—Develop and implement a Major Disaster Response Plan ........................... Completed 

12073—Disaster Planning—Full-time Disaster Planning Staff ................................ Completed 

12074—Assignment of Employees to the Office of Disaster Assistance and Disaster Cadre.Ongoing 

12075—Comprehensive disaster response plan ........................................................ Completed 

12076—Office Space .................................................................................................. Completed 

12077—Applicants that have become an MSE ......................................................... Implemented/Regulations in Process 

12078—Disaster Loan Amounts/Mitigation ................................................................ Implemented/Regulations in Process 

12079—Small Business Bonding Threshold .............................................................. Ongoing 

12081—Eligibility for Additional Disaster Asst .......................................................... Available if needed 

12082—Additional EIDL Asst ...................................................................................... Available if needed 

12083—Private Disaster Loans .................................................................................. In development 

12084—Immediate disaster assistance program ...................................................... Developing pilot for 2010 

12085—Business Expedited Disaster Assistance Loan ............................................. Developing pilot for 2010 

12086—Gulf Coast Disaster Loan Refinancing Program .......................................... Available if needed 

12091—Reports on Disaster Assistance .................................................................... Monthly reports are being distributed/ 

Annual report pending 

Question. The President’s request for SBA calls for $1.7 million to fund the two 

Guaranteed Disaster Loan Program Pilot Programs that we enacted as part of disaster reform? 

Answer. The President’s budget request for 2010 calls for $1.7 million to fund two 

Guaranteed Disaster Loan Pilot Programs. SBA has developed an outline for these 

programs which will be vetted with banking industry representative in two planned 

focus groups. It is imperative that we develop a program that the industry accepts 

to ensure participation when disaster activity warrants. 

Question. Will it be available for the 2009 Hurricane season? (Yes/No) 

Answer. The guaranteed commercial lending programs will not be available for 

the 2009 Hurricane season. 

PRESIDENT OBAMA’S SMALL BUSINESS RECOVERY PLAN

Question. President Obama’s plan to assist small businesses in gaining access to 

the credit markets contains elements of proposals that have been pushed by this 

Committee from the beginning of this economic downturn. 

Can you tell us how implementation of that plan is proceeding? 

Answer. Through the programs and funding provided in the Recovery Act, SBA 

has helped small businesses access the capital they need to survive the economic 

conditions. Recovery Act programs have helped through increasing lending through 

the 7(a) and 504 guaranteed loan programs, expanding the base of SBA lending 

partners, providing targeted assistance to struggling businesses through the ARC 

loan program, and allowing small businesses with higher dollar contracts to obtain 
184 

SBA-backed surety bonds. All of the $675 million in SBA program funds are currently available to support small businesses. 

Question. Are there any lessons from your business background that can be applied towards improving SBA lending programs? 

Answer. Over the course of my career I’ve had the opportunity to gain valuable 

insight into the capital access challenges faced by entrepreneurs and small businesses. During the recession of the early 1990s, I was operating small manufacturing companies that supplied the auto industry and that experience gave me a 

deep understanding of what our small businesses need today to survive this current 

downturn and to prosper in the years ahead. I’ve also had valuable experience with 

the funding needs of high-growth, high-potential companies that I’ve worked with 

over the years. That understanding of the capital needs small businesses have— 

whether you’re a Main Street business or a high-growth potential business—is 

something I bring to this job and something that is guiding our current efforts at 

SBA to assess the efficiency and effectiveness of our programs and the systems 

through which we deliver them. 

OFFICE OF TECHNOLOGY

Question. The Office of Technology, which promotes and monitors the highly successful Small Business Innovation Research (SBIR) and Small Technology Transfer 

(STTR) programs, has seen its operating budget cut by more than half during the 

last 18 years. At the same time, the SBIR and STTR budgets have more than doubled, with participating SBIR and STTR Federal agencies allocating more than $2 

billion to small high-technology firms across the country each year. 

I find this trend very alarming, particularly when other agencies try to get out 

of complying with the SBIR and STTR laws, as happened with about $229 million 

in the Recovery Act, and I am interested in hearing your perspective on how the 

Office of Technology is handling its oversight responsibilities in light of its diminishing budget. 

In your opinion, does the Office of Technology have the staff and funding to meet 

the program’s demands? (Yes/No) 

Answer. The budget provides $250,000 for the Office of Technology. Within this 

amount, the Office provides oversight of the SBIR and STTR programs. I also understand the value of rigorous oversight. That is why SBA has committed to developing comprehensive performance measures for the SBIR and STTR programs. Currently, no continuous or comprehensive measures exist for the programs. With performance measures in place, we can regularly evaluate the effectiveness of these 

programs. SBA is currently working to implement measures now. 

Question. As I just noted, without adequate funding, the Office of Technology cannot function as it was intended and cannot support the SBIR and STTR programs. 

The Committee believes that in order to provide the Office with the resources it requires, there should be at least $1.5 million allocated for the Office to go toward 

additional staff, oversight, outreach, travel, and maintenance of its databases. 

Would you disagree that at least $1.5 million would be an appropriate amount 

to meet with needs of the Office of Technology, as Senator Snowe and I have recommended? 

Answer. The budget provides $250,000 for the Office of Technology. Within this 

amount, the Office will provide oversight for the SBIR and STTR programs and will 

pursue high-priority activities, such as the development of comprehensive performance measures to regularly evaluate the programs’ effectiveness. 

SBA CONTRACTING PROGRAMS

Question. One of the principle functions of the SBA is to ensure that the Federal 

government meets its 23 percent small business contracting goal, specifically by reviewing more than $400 billion in federal contracts awarded each year. Several 

issues have been raised in the past with respect to the SBA not playing its proper 

oversight role with respect to contracting. 

First, do you intend to increase the contracting oversight staff at the SBA—Procurement Center Representatives (PCRs) and Commercial Marketing Representative (CMRs)? (Senator Snowe and I think we need 100 more PCRs and 50 CRMS, 

which would require $15 million over time.) 

Answer. The SBA is in the process of reassessing our internal procedures regarding the criteria for placement of the PCRs and CMRs. As we add and/or replace 

PCRs and CMRs we want to ensure that they are placed in locations which can 

maximize their individual and group ability to assist the Government’s small business contractor community. Specifically, we are working with the SBA’s Office of the 

Chief Information Officer (OCIO) to move forward with the development and imple-
185 

mentation of the electronic Procurement Center Representative (ePCR) program 

which will allow the Agency to further automate the PCR review process, making 

it possible for them to examine increased numbers of purchase requests while expanding the PCR’s ability to cover Federal buying offices located outside their local 

commuting area. Implementation of the electronic Subcontracting Reporting System 

(eSRS) has enhanced the ability of our CMRs to more closely monitor the subcontracting programs in place at the large prime contractors within their portfolios by 

giving them access to ‘‘real time’’ data. Information entered into eSRS, available to 

the CMRs, provides for greater scrutiny of the prime’s use of small businesses as 

subcontractors. As the CMRs have ready-access to the prime’s reports they can respond more quickly to situations which require their attention. As information on 

Department of Defense large prime contractors is being entered into the eSRS, we 

believe that this additional availability of reporting data will only increase the effectiveness of the CMRs to effectively monitor the large primes. 

Question. Second, what plans do you have to ensure that minority small businesses—whether through the 8(a) program or as Small and Disadvantaged Businesses—have full access to the Federal marketplace? 

Answer. It is crucial that minority-owned small businesses are able to participate 

fully in the federal marketplace. One way to measure this participation is through 

the small disadvantaged business (SDB) procurement goal which has been established by statute at 5 percent. Over the past several years, the Federal government 

has consistently achieved and exceeded this goal. 

Our PCRs continue to work closely with the contracting officers at their assigned 

buying offices to ensure that all small businesses, including 8(a) program participants and SDBs have maximum practicable access to Federal procurement opportunities. Just recently, our PCRs undertook a major initiative with regard to the small 

business ‘‘parity’’ issue in light of a recent GAO decision which seemed to give priority to HUBZone small business concerns over 8(a) firms in Federal contracting. 

The Office of Management and Budget released interim guidance that agencies 

should follow SBA’s parity regulations, while the Executive branch undertakes a review of the GAO opinion. Our PCRs have undertaken substantial efforts to ensure 

that the parity rules are followed while the opinion is being reviewed. To this end, 

the PCRs have increased training for the contracting officers at the buying offices 

to ensure they understand the need to conduct adequate market research and have 

an awareness of their office’s achievements relative to their goals when deciding 

which type of set-aside to use. 

Additionally, our PCRs are conducting 30 Surveillance Reviews at major Federal 

buying offices in fiscal year 2009. As part of these reviews, our PCRs are examining 

the individual buying office’s compliance with the 8(a) Partnership Agreement, in 

place between the SBA and the higher Headquarters of the buying office reviewed. 

While access to federal contracts is one aspect of the business development offered 

through the 8(a) program, it is not the primary purpose of the program. Because 

the program is a business development initiative, the SBA is working diligently to 

better track assistance provided to 8(a) firms through the Business Development 

Management Information System (BDMIS) and the Business Development Assessment Tool (BDAT). 

QUESTIONS SUBMITTED BY SENATOR SUSAN COLLINS

Question. What is the status of efforts to establish an economic stimulus lending 

program, a secondary market guarantee authority for pools of SBA 504 program 

first-lien mortgages, and SBA secondary market lending authority to make loans to 

important broker-dealers that operate in the SBA 7(a) secondary market? 

What are you seeing in terms lending to small businesses? Has the stimulus bill 

been effective in unfreezing the credit market for small businesses? 

Answer. To date, the Recovery Act efforts to eliminate fees and raise guarantees 

has helped restore access to capital for small businesses. Through reduced fee and 

higher guaranteed loans, the Agency has supported nearly $8 billion in lending to 

small businesses using $155 million in Recovery Act subsidy. Additionally, over 800 

banks that had not made an SBA loan since October 2008 have made loans through 

the Recovery Act. At the same time, since March market activity and pricing in the 

7(a) secondary market has rebounded from its severe contraction in 2008. Over the 

past 3 months, the average monthly loan volume settled from lenders to brokerdealers in the secondary market has risen to $335 million, moving closer to pre-recession averages. 

On June 15, SBA announced its ARC loan program, aimed at helping viable small 

businesses weather immediate financial hardship through interest free, deferred 
186 

payment loans to help them make payments on existing, qualified debts. Since it 

was launched, the ARC program has been steadily ramping up. Through August 4, 

SBA has approved over 1,000 loans totaling over $34.5 million. 

Two provisions in the Recovery Act were designed to address market disruptions 

in SBA’s secondary markets for guaranteed loans. Both of these programs are entirely new and complex, requiring regulations, procedures, credit subsidy models 

and systems to implement. SBA is working diligently to develop and implement 

these programs. 

Section 503 established a new secondary market guarantee authority to provide 

SBA guarantees on pools of 504 first mortgage loans—which have not historically 

been guaranteed or securitized by SBA. The Agency has drafted regulations, credit 

subsidy models, procedural guidance and legal forms and agreements for this program. These documents are under review by OMB and through the inter-agency 

process. SBA has also started developing contracts and systems to implement this 

program. 

Section 509 established a new direct loan program to help broker dealers in the 

7(a) secondary market finance their inventories of guaranteed loans. The Agency 

has drafted regulations, credit subsidy models, procedural guidance and legal forms 

and agreements for this program. These documents have been sent to OMB for 

inter-agency and Administrative review. SBA has also started developing contracts 

and systems to implement this program. 

Question. The Recovery Act directed SBA to initiate four new loan programs, and 

mandated revisions to other programs such as increasing SBA’s guaranty on loans 

to 90 percent and increasing the size of surety bond guarantees. The SBA Office of 

Inspector General issued a Recovery Oversight Framework document identifying 

various risks to taxpayer dollars that could result from these new and revised programs. In addition, the OIG recently issued a report on unimplemented recommendations from prior audits that could affect the risks and performance of these 

programs. This included outstanding audit recommendations regarding the 

microloan program, which has now received additional funding under the Recovery 

Act. 

What resources is SBA planning to devote to other risk mitigation efforts to prevent or limit these risks? 

Answer. Lender oversight regulations were issued in the fall of 2008 that established clear responsibilities and a supervisory and enforcement framework for lender oversight. Additionally, staffing has been increased by seven positions in the Office of Credit Risk Management over the past 2 years. Going forward, SBA recently 

re-procured its contract for off-site monitoring and is: (1) making more information 

available to lenders and SBA staff for portfolio management; (2) redeveloping risk 

rating metrics to enhance their predictiveness; (3) integrating more dynamic, ongoing evaluation of lenders and loan portfolios; and (4) ensuring that trends or developments are identified and investigated when oversight activities surface them. 

In the case of the Recovery Act programs, SBA did a comprehensive risk assessment for each of the programs and developed a detailed risk mitigation plan for 

each program. Senior managers from Capital Access, Office of Credit Risk Management, Office of Chief Financial Officer, and the Office of General Counsel participated in the risk assessment and risk mitigation efforts. The Office of Inspector 

General reviewed the plans and provided detailed comments. 

What resources and efforts is SBA devoting to implementing the outstanding 

audit recommendations to improve efficiencies in these programs? 

Answer. The Agency has committed significant resources to improving lender 

oversight technology systems and has staffed up to meet the increased demands for 

new Recovery Act programs and for the processing, servicing and liquidation of Recovery loans. 

During fiscal year 2009, the Agency closed 66 OIG audit recommendations out of 

a total of approximately 200 at the start of the year and addressed in writing the 

majority of the 50 open GAO recommendations. Over the past 2 years, SBA reduced 

the average number of OIG audit findings from around 300 to approximately 150– 

170. In addition, per the 2002 Consolidated Reports Act, SBA’s OIG publishes annually its Major Management Challenges (8 this year), with a scorecard rating system 

from red to orange to yellow to green. ‘‘Reds’’ have gone from 22 to 1 and the number of recommended actions from the high 80s to 26. We continue to work with OIG 

to incorporate lessons learned from previous audits and to develop corrective actions 

to minimize waste, fraud and abuse. Additionally, SBA has put in each senior executives job requirements a goal to address and resolve major audit findings in his/her 

respective program area. 

Question. Please describe the current Veterans’ Assistance programs that SBA operates (1) by the SBA Vets Office, (2) by SBA Capital Access program, and (3) by 
187 

SBA Entrepreneurial Development Office with a detailed description of loan programs (average dollar loans and average business size, geographic breakdown, total 

dollar volume) and grant programs (average dollar grants, average business size, 

total dollar volume). 

Also please describe SBA’s staff efforts at outreach to other federal agencies (U.S. 

Department of Labor, especially its Veterans Employment and Training Services Office, and U.S. Veterans Administration, the U.S. Department of Defense), state and 

local governments, not-for-profit organizations and other stakeholders, and identify 

existing studies, programs, resources and all existing studies, programs, resources 

and all available federal funding to assist veterans in starting and/or growing a 

small business that conduct veterans’ benefit programs. 

Answer. The SBA Office of Veterans Business Development (OVBD) is the lead 

SBA office for Veterans’ Entrepreneurship. OVBD conducts comprehensive outreach 

to veterans including Reserve component members, for the formulation, execution, 

and promotion of policies and programs of the Administration that provide assistance to small business concerns owned and controlled by veterans, service-disabled 

veterans and reservists. The AA/VBD also acts as an ombudsman for full consideration of veterans in all Administration programs. OVBD, working with the Office 

of Capital Access, was responsible for the Agency establishing the Patriot Express 

Pilot loan program, which has approved 3,828 loans for $324.2 million for an average loan amount of $84,702 in 2 years, as of June 30, 2009; we enhanced the surety 

bond guarantee program for veterans, we established a special outreach and web 

based program for veterans and reservists in the SBDC program, we established a 

focused veterans and reservists on line program in SCORE, we market the Small 

Business Training Network to the veterans community, we established, and recently 

improved the Military Reservist Economic Injury Disaster Loan program, we provide funding to and manage the Veteran Business Outreach Center program, and 

we have expanded the District Office-Veterans Outreach Initiative. In addition, we 

oversee the government wide Service-Disabled Veteran Owned Small Business goal 

program, and OVBD provides training too and e-based ombudsman guidance to in 

excess of 10,000 veterans and reservists each year. OVBD works with the independent SBA Office of Advocacy in developing critical Advocacy research into veteran’s entrepreneurship. 

To accomplish its primary responsibilities of outreach and to act as an ombudsman OVBD utilizes: 

—Veteran Business Outreach Centers (VBOC).—8 Veteran specific business centers, which operate from a fiscal year appropriation of $1.2 million or $150,000 

each. 

—District Office-Veterans Outreach Initiatives (DO–VOI).—OVBD Funding and 

support for district office Veteran Business Development Officers. 

—E-Guidance and Ombudsman Assistance.—Program guidance provided to agency customers via e-mail. 

—Service-Disabled Veteran Procurement.—Providing training SD veterans and to 

contracting officials to improving SD Veteran procurement opportunity. 

—Entrepreneurial Tools Development and Distribution.—Development and distribution thousands of Veteran and Reservist specific Program guides annually. 

—Policy and Program Development and Implementation.—Enhanced OVBD, CA, 

ED, GCBD, ODA programs and policies for veterans and reservists. 

—Inter and Intra Agency Coordination.—Coordination and cooperation across SBA 

and representation, liaison and program and policy development with DOD, 

DOL, DVA, State, local and private Veteran Serving Organizations, numerous 

public presentations each year, and representation of agency veteran program 

resources with national media. 

Question. Though the Office of Government Contracting and Business Development, SBA’s 7j program provides training to 8(a) firms (firms that are socially or 

economically disadvantaged). These firms are eligible for government contracts setaside specifically for small businesses; however, because of a firm’s status as a socially or economically disadvantaged firm, its employees need more than just financial opportunities to grow. These firms are also in need of technical assistance to 

help them meet the demands of these contracts. 7j training is a significant part of 

the 8(a) program effort to promote small business opportunities and growth. Please 

give a status update report reviewing the last 5 years of the 7(j) program, including 

number of clients trained, length of training program, cost per client per training 

program, follow-up actions, description and examples of curricula provided, and all 

other relevant information that would provide the Committee with insight into the 

performance of the 7(j) program. 

Answer. 
188 

Fiscal year— 

2005 2006 2007 2008 2009 

Number of 7(j) eligible firms assisted ....................................................... 2,107 2,317 2,486 2,021 2,289 

Per firm cost ................................................................................................ $1,479 $988 $1,344 $2,356 $2,119 

Duration of Training .................................................................................... ( 1 ) ( 1 ) ( 2 ) ( 2 ) ( 2 ) 

1 1 and 2 day workshops. 

2 1 day workshops. 

The U.S. Small Business Administration (SBA), Office of Government Contracting 

and Business Development, 8(a) Business Development Program (BD) is expanding 

its efforts to provide innovative training and business solutions to 8(a) Business Development Program Participants. Over the past 5 years SBA has funded projects to 

enhance the business savvy of 8(a) Participants by providing them with fundamental business development strategies as well as the tools to enhance their ability 

to successfully compete in federal markets. 

SBA monitors contractor/service provider performance and analyzes customer 

feedback from the 8(a) Participant and 8(a) Business Development Field Office personnel to assess the effectiveness of each 7(j) funded project. In addition, periodic 

surveys of BDS staff in the field are conducted to fine tune and develop initiatives 

that will foster business growth and enhance performance and the long term viability of 8(a) firms in the federal and commercial sectors. 

Fiscal Year 2009 

In fiscal year 2009, 7(j) funds have been used to support nine new initiatives. The 

first project involves the establishment of an 8(a) Association for the Washington 

Metropolitan Area that supports members throughout Washington, Virginia and 

Maryland. The 8(a) Association will be established to assist 8(a) certified businesses 

with valuable educational, promotional, and federal contracting information needed 

to further advance their level of experience and achieve a higher degree of success. 

Secondly, the SBA will continue Phase II of its initiative with the John H. Chafee 

Center for International Business at Bryant University to provide international 

business development to 8(a) Participant firms. Phase II of the SBA 8(a) 7 (j) Trade 

Data Matching Program will provide 7(j) eligible businesses with counseling and 

training in the areas of international business development that is designed to help 

small business start, grow and foster success in the international market place. The 

training will include one-on-one counseling, traditional and online training, feature 

business forums and traditional peer to peer networking opportunities, business 

modeling, conferences and access to a sophisticated trade data retrieval system. 

Additionally, three face-to-face projects utilizing traditional classroom as well as 

Webinars are being funded to provide critical business solutions to 8(a) Participants 

to bolster their ability to compete for and manage federal contracts, develop business strategies, maximize E-Commerce business opportunities, recruit, manage and 

retain talented staff, and access the capital necessary to grow and sustain business 

functions. Fifteen workshops are planned which include the following: Marketing to 

the Federal Government; How to Qualify for the GSA Schedule; Government Contract Negotiations; Proposal Preparation Training; Construction Contracting; Federal Contracting and Government Contract Management; Strategic Alliances; Leadership Skills; One-On-One Business Coaching; Small Business 8(a) Co-Ops; Regional 

Conferences and Seminars E-Commerce and Internet Business Strategies; Human 

Capital Management; Participating on Contracting Teams; Obtaining Debt, Equity 

and Contract Financing; and Planning for and Managing 8(a) Program Transition. 

The sixth initiative will permit SBA to develop a Webinars series that will provide 

an online resource to allow 8(a) and 7(j) eligible firms to obtain direct business development advice from key business development resources. The Technology to host 

the Webinars will also be provided. 

Project seven involves the award of a contract that will be awarded to a vendor 

to provide a publication that will be given to approximately 4,000 7(j) eligible and 

8(a) firms. This publication will increase their knowledge of how to do business with 

the government to optimize their contracting opportunities. 

7(j) funding will also be used to provide enhancements to the Business Management Development Information System (BDMIS). The 8(a) Business Development 

Assessment Tool 8(a) BDAT) will provide a uniform mechanism to assess the individual management, technical, financial and procurement assistance needs of 8(a) 

participants. The 8(a) BDAT will also track individualized assistance provided to 

8(a) program participants on an annual basis. 

Finally, the SBA serves as a co-host with the Department of Commerce Minority 

Business Development Agency for the 27th Annual Minority Enterprise Develop-
189 

ment Week Conference. The Office of 8(a) Business Development will provide networking, matchmaking and training opportunities to the 7(j) eligible participants 

during Minority Enterprise Development (MED) Week 2009. 

Fiscal Year 2008 

SBA funded six projects using 7(j) Program funds. The first initiative funded 

Phase I of the international business model developed by the John H. Chafee Center 

for International Business at Bryant University to provide international business 

development assistance to 100 8(a) firms. Projects two and three provided face-toface training and included the following workshop titles, Business Development for 

Small Businesses Parts 1 and 2, Financial Management for Small Business, and 

Cost and Pricing Parts 1 and 2. These workshops were also delivered via the web. 

In addition, SBA awarded a contract to purchase a technical resource for 8(a) 

firms entitled ‘‘Gems of Wisdom for Increasing 8(a) BD Competitiveness. This book 

was provided to increase the knowledge base and competitiveness of 8(a) BD firms 

through the vast network of shareholders such as Offices of Small and Disadvantaged Business Utilization, Procurement Center Representatives and Commercial 

Market Representatives, Acquisition Team Members including contract offices, program offices and mentors. 

The fifth project was awarded in support of the SBA’s Emerging 200 initiative. 

The purpose of this effort was to increase outreach to areas historically challenged 

by high levels of unemployment and poverty. The service provider was tasked with 

identifying 200-inner-city businesses across the country that showed a high potential for growth—and to provide them the network, resources and motivation required to build a sustainable business of size and scale within a designated innercity geographic location. The sixth and final project funded training activities for the 

fiscal year 2008 MED Week Conference. 

Fiscal Year 2007 

During fiscal year 2007, the SBA supported two projects using 7(j) Program funds. 

The initial project financed face-to-face training provided management and technical 

assistance to 8(a) firms and other 7(j) eligible businesses through one day face-toface training for the following workshop titles, Business Development for Small 

Businesses Parts 1 and 2, Financial Management for Small Business, and Cost and 

Pricing Parts 1 and 2. This initiative also included individualized business counseling. 

The second project purchased a business development resource entitled ‘‘Gems of 

Wisdom for Succeeding in the 8(a) BD Program and Beyond.’’ The purpose of the 

publication is to share ‘‘gems of wisdom’’ of successful 8(a) BD graduates about their 

success in the Program. This book guided and encouraged others 8(a) firms, and it 

demonstrated that the ‘‘hands on’’ provided throughout the program really matters. 

Fiscal Year 2006 

SBA funded a single award to provide workshops to 8(a) and other 7(j) eligible 

firms. Workshops titles included Business Development for Small Businesses Parts 

1 and 2, Financial Management for Small Business, and Cost and Pricing Parts 1 

and 2. This initiative also included individualized business counseling. 

Fiscal Year 2005 

SBA funded two awards to provide workshops to 8(a) and other 7(j) eligible firms. 

Workshop titles included Business Development for Small Businesses Parts 1 and 

2, Financial Management for Small Business, and Cost and Pricing Parts 1 and 2. 

This initiative also included individualized business counseling. 

The second project was designed to maximize the return on time invested by each 

participant. Participants explored different areas of their business and discussed the 

common elements that lead to success and what decisions and practices might lead 

a business to fail. Identification of these elements and how they relate to individual 

business environments prepared participants how to analyze specific strengths, 

weaknesses, opportunities and threats so that achievable action plans could be developed and implemented. A companion workbook and DVD were produced which 

enabled SBA Field Offices to provide additional training to 8(a) Participants who 

were unable to attend previously scheduled workshops. 

(191) 

GENERAL SERVICES ADMINISTRATION 

STATEMENT OF HON. PAUL F. PROUTY, ACTING ADMINISTRATOR 

ACCOMPANIED BY THE HONORABLE JOSEPH F. BATAILLON, CHIEF 

JUDGE, U.S. DISTRICT COURT FOR THE DISTRICT OF NEBRASKA; 

CHAIR, SPACE AND FACILITIES COMMITTEE, JUDICIAL CONFERENCE OF THE UNITED STATES 

Senator DURBIN. Next panel is the General Services Administration, and I will give a little introduction here as the panelists are 

going to take the table. 

GSA employs more than 12,000 staff in 11 regions throughout 

our country; oversees a vast and diverse portfolio of Federal assets; 

manages more than 8,600 buildings with a total value of $74 billion, including 1,500 Government-owned buildings. This may be 

one of them. 

It is responsible for servicing the workspace requirements for 57 

Federal agencies with approximately 354 million square feet of 

workspace for over 1 million Federal employees in 2,000 American 

communities. It is a big job. They are big landlords. 

First, we will hear the testimony of Paul Prouty, Acting Administrator of the General Services Administration. We look forward to 

hearing about the GSA’s plans to implement the Recovery Act by 

converting Federal buildings to high-performance green buildings, 

as well as discussing the 2010 budget. 

Also joining us to discuss the budget request for GSA is the Honorable Joseph Bataillon, Chief Judge of the U.S. District Court for 

the District of Nebraska. He is Chair of the Space and Facilities 

Committee of the Judicial Conference, which prepares an annual 5- 

year plan detailing the needs and priorities of the judiciary for 

courthouse space. GSA and the administration use this project plan 

in selecting projects each fiscal year and preparing the budget request. 

We thank you both for being here. Your statements will be made 

a part of the official record, and at this point, the floor will be 

available to each of you for 5 minutes. 

Mr. PROUTY. Thank you very much. 

Chairman Durbin, Ranking Member Collins, Senator Bennett— 

good to see you, sir—distinguished members of the subcommittee, 

I am honored to appear before you today in support of GSA’s 2010 

budget request. With your permission, I would also like to provide 

an update on our efforts to implement the American Recovery and 

Reinvestment Act of 2009. 

GSA’s fiscal year 2010 budget request supports the administration’s commitments to build a transparent, participatory, and collaborative Government through the use of new technologies, as well 

as address significant shortfalls in our national infrastructure. 

The fiscal year 2010 budget request, in conjunction with the Recovery Act, provides $6.4 billion for capital projects. These projects 
192 

will create new jobs for thousands of Americans and will stimulate 

industries that have been battered by the economic downturn. In 

addition, these projects will deliver lasting progress toward modernizing our Nation’s infrastructure, reducing the Federal Government’s consumption of energy and water, and increasing our reliance on clean and renewable sources of energy. GSA’s fiscal year 2010 budget requests $645 million in net budget authority. This amount is just 2.4 percent of our total planned 

obligations of $27 billion. The majority of our funds come in the 

form of customer reimbursements for goods purchased or rent paid 

for space under GSA’s jurisdiction, custody, or control. For the Public Buildings Service, GSA requests $8.5 billion in new obligational authority. Of these funds, $658 million are requested for the construction and acquisition of critical facility 

projects for the Food and Drug Administration, the Federal Bureau 

of Investigation, U.S. Customs and Border Protection, and the judiciary. We also request new obligational authority of $496 million to address the backlog of repair and alteration projects. Although the 

Recovery Act funding provides GSA with some relief from our substantial backlog of repair and alteration needs, our inventory of 

aging Federal buildings requires continued reinvestment. We also request $40 million for our energy and water retrofit and 

conservation program and our Federal high-performance green 

buildings program to help address Federal requirements for energy 

conservation and reduced energy consumption in Federal buildings. 

The GSA Federal Acquisition Service (FAS) is a leading acquisition organization for the Federal Government. Last year, revenues 

increased by 4.6 percent, making fiscal year 2008 the first year 

since fiscal year 2004 that GSA has seen revenue growth across the 

combined programs of FAS. FAS also realized a 2 percent increase 

in cash collections from our multiple award schedules program. 

This business resurgence is the result of a concerted effort to reduce operating costs, standardize the fees we charge our customers, 

and restructure our service offerings. 

Today, GSA and FAS are delivering value to our customers by 

offering products and services that meet or exceed their expectations. As a leader in green Government, GSA continues to encourage Federal agency customers to consider the environmental impact of their acquisition decisions. 

The American Recovery and Reinvestment Act has provided GSA 

with an opportunity to contribute to our Nation’s economic recovery 

by investing in green technologies and reinvesting in our public 

buildings. The Recovery Act provided GSA’s Public Buildings Service with $5.55 billion, including $1.05 billion for Federal buildings, 

U.S. courthouses, and land ports of entry, and $4.5 billion to convert Federal buildings into high-performance green buildings. 

We are moving forward with speed, tempered by careful consideration of our procurement responsibilities and our ultimate accountability to the taxpayer. On March 31, GSA delivered to Congress 

a list of 254 projects in all 50 States, the District of Columbia, and 

two U.S. territories to be completed with funds provided by the Recovery Act. GSA selected the best projects for accomplishing the 

goals of the Recovery Act based on a detailed analysis of a number 
193 

of factors. Our goals in developing this list were to both put people 

back to work quickly and increase the sustainability of our buildings. 

As of June 5, PBS has awarded contracts totaling $244 million 

to begin the construction, modernization, or repair of 25 Federal 

buildings across the country. Of this, $213 million has been obligated to convert GSA facilities to high-performance green buildings. We have also obligated $30 million for the construction of new 

energy-efficient land ports of entry at Calais, Maine and the Peace 

Arch at Blaine, Washington. 

The Recovery Act provided GSA’s Federal Acquisition Service 

with $300 million to replace motor vehicles across the Federal fleet 

with those that are new and more efficient. GSA’s strategy to improve the energy efficiency of the Federal fleet balances energy efficiency goals with the need to expedite procurement, in order to 

maximize economic benefit for the auto industry and the economy 

as a whole. 

To date, GSA has obligated $287 million to order over 17,000 

fuel-efficient vehicles, of which 3,100 are hybrids. In the final 

phase of this procurement, GSA will order $13 million of compressed natural gas and hybrid buses and electric vehicles by September 30, 2009. 

Today, I have discussed our fiscal year 2010 budget request, the 

Recovery Act, and GSA’s eagerness to undertake the new challenges that lie ahead. Your approval of GSA’s budget request is a 

vital step in helping us achieve our mutual goals of economic recovery, energy efficiency, and increased citizen engagement in Government. 

PREPARED STATEMENT

GSA is committed to delivering on these goals, contributing to 

the long-term objectives of the administration, and providing the 

best use of taxpayer funds. I look forward to continuing this discussion of our 2010 budget request with you and the members of the 

subcommittee. 

Thank you. 

Senator DURBIN. Thank you. 

[The statement follows:] 

PREPARED STATEMENT OF PAUL F. PROUTY

Chairman Durbin, Ranking Member Collins, and Distinguished Members of the 

Subcommittee: My name is Paul Prouty and I am the Acting Administrator of the 

General Services Administration (GSA). Thank you for inviting me to appear before 

you today to discuss GSA’s fiscal year 2010 budget request. With your permission, 

I would also like to provide you with an update on our efforts to implement the 

American Recovery and Reinvestment Act of 2009 (‘‘Recovery Act’’). 

GSA’s fiscal year 2010 budget request supports the Administration’s commitments 

to build a transparent, participatory, and collaborative government through the use 

of new technologies as well as address significant shortfalls in our national infrastructure. The fiscal year 2010 budget request, in conjunction with the Recovery 

Act, provides $6.4 billion for capital projects involving the new construction, major 

modernization, and repair of Federal buildings. These projects will create new jobs 

for thousands of Americans and will stimulate industries that have been battered 

by the economic downturn. Our projects will provide jobs for constructions workers, 

carpenters, plumbers, electricians, architects, and engineers nationwide. Our demand for building materials will create or sustain jobs in those industries. And 

these projects will deliver lasting progress towards modernizing our Nation’s infra-
194 

structure, reducing the Federal Government’s consumption of energy and water, and 

increasing our reliance on clean and renewable sources of energy. 

The budget establishes an aggressive agenda for opening Government to the 

American people by rapidly expanding the use of technology across the Executive 

Branch. The President knows that new technology is crucial to delivering greater 

transparency, accountability, and public participation in government. The Recovery 

Act has been the staging ground for the Administration’s new approach to open Government through the innovative use of new technology 

The fiscal year 2010 President’s Budget creates a vision of Federal IT that goes 

beyond increasing the public availability of Government data. Data transparency is 

a key goal of this Administration, but we are limited in our ability to deliver the 

broader goal of participatory government without substantial changes in the Federal 

technology infrastructure. Sound and measured investments are needed to increase 

collaboration across Federal agencies, to open government processes and operations—not just data—to the public, and to consolidate, standardize, and reduce 

common Federal IT services, and solutions. 

Our fiscal year 2010 budget request is a foundational piece for moving forward 

with the President’s vision of transforming Government by transforming Federal information technology. We have proposed nearly $40 million in technology investments, which will improve transparency, accountability, and public participation. 

The investments included in our request look to 21st Century technologies to accelerate rapidly efforts, which are often characterized as ‘‘electronic government’’. 

Our request seeks funding to begin building the capacity in the Federal Government for a culture of openness and transparency. That culture is based on innovative tools by developing new means of delivering Government data, citizen services, 

and Federal IT infrastructure. GSA’s fiscal year 2010 budget requests the resources 

necessary for GSA to support the President’s vision of ‘‘leveraging the power of technology to transform the Federal Government’’. The requested investments will allow 

GSA to take a dramatic step forward towards expanding public participation in and 

access to Government data, which will help to deliver greater transparency, accountability, and public participation in Government. Adopting new technologies and new 

ways to harness existing technology will make the Federal Government more efficient, more effective, and more responsive to its citizens. 

FISCAL YEAR 2010 BUDGET REQUEST

GSA’s fiscal year 2010 budget requests $645 million in net budget authority for 

the Federal Buildings Fund and our operating appropriations. This amount is just 

2.4 percent of our total planned obligations of $27 billion. The majority of our funding is provided through reimbursements from Federal customer agencies, for purchases of goods and services or as rent paid for space in Federally-owned and 

-leased buildings under GSA jurisdiction, custody or control. GSA requests appropriations to support capital investments in the Federal Buildings Fund, to provide 

for our Government-wide responsibilities, and for other activities that are not feasible or appropriate for a user fee arrangement. 

PUBLIC BUILDINGS SERVICE

Our fiscal year 2010 budget requests $8.5 billion in New Obligational Authority 

(NOA) and an appropriation of $525 million for the Federal Buildings Fund. Our 

request proposes a capital investment program of $1.15 billion, for projects for the 

Food and Drug Administration (FDA), the Federal Bureau of Investigation (FBI), 

U.S. Customs and Border Protection (CBP), and the Judiciary. 

We have requested $658 million in NOA for New Construction and Acquisition, 

including $453.5 million for two Agency consolidations and three infrastructure and 

development projects, $151 million for three land port of entry facilities, and $53 

million for two U.S. Courthouse projects. Our request includes the following 

projects: 

—FBI Field Office Consolidation in Miami, FL ($191 million); 

—FDA Consolidation in Montgomery County, MD ($138 million); 

—Acquisition of Columbia Plaza in Washington, DC ($100 million); 

—Southeast Federal Center Remediation in Washington, DC ($15 million); 

—Denver Federal Center Remediation in Lakewood, CO ($10 million); 

—Land ports of entry in El Paso, TX; Calexico, CA; and Madawaska, ME; and 

—U.S. Courthouses in Lancaster, PA and Yuma, AZ. 

GSA also requests NOA of $496 million for Repairs and Alterations (R&A) to Federal buildings. Although the funding provided in the Recovery Act gives GSA some 

relief from our substantial backlog of R&A needs, our inventory of aging Federal 

buildings requires continued reinvestment. The R&A program will continue to be a 
195 

strategic priority for GSA, and our fiscal year 2010 request focuses on the highest 

priority projects in our real property portfolio. 

The request includes $176 million in NOA for four major building modernizations, 

$260 million for non-prospectus level projects, and $60 million for Special Emphasis 

programs. Our proposed major modernization projects are: 

—East Wing (White House) Infrastructure Systems Replacement in Washington, 

DC ($121 million); 

—New Executive Office Building in Washington, DC ($30 million); 

—EEOB (Courtyard Replacement) in Washington, DC ($10 million); and 

—EEOB (Roof Replacement) in Washington, DC ($15 million). 

Our Special Emphasis programs would provide: 

—$20 million for Fire and Life Safety Program; 

—$20 million for Energy and Water Retrofit and Conservation Measures; and 

—$20 million for improvements necessary to transform existing Federal buildings 

into Federal High Performance Green Buildings. 

GSA is dedicating $40 million to our Energy and Water Retrofit and Conservation 

program and our Federal High Performance Green Buildings program, to help address Federal requirements for energy conservation and reduced energy consumption in Federal buildings. These Special Emphasis programs will upgrade Heating, 

Ventilation and Air Conditioning (HVAC) and lighting systems, install advanced 

metering, increase water conservation, support new renewable energy projects, and 

many other items that will conserve energy in Federal buildings. These programs 

are in addition to the energy conservation measures that are already incorporated 

into our prospectus-level New Construction and Repairs and Alterations project requests. 

In fact, the Public Buildings Service (PBS) already incorporates sustainable design principles and conservation measures into the design and construction of, and 

repair and alteration to, many GSA Federal buildings. For example, 100 percent of 

the new construction projects initiated in fiscal year 2008 were registered for the 

U.S. Green Buildings Council’s Leadership in Energy and Environmental Design 

(LEED). These projects will be measured against objective standards for sustainable 

design and construction and will receive LEED certification upon substantial completion. PBS has established a commissioning program, to ensure all building systems are working efficiently, and in a coordinated manner, upon completion of a 

construction project. PBS performs energy audits and environmental risk assessments on a regular basis to determine where resources should be focused. 

These initiatives are just a few of the environmental measures that GSA incorporates into New Construction and R&A projects, in addition to our Special Emphasis programs. Our many environmental initiatives compliment each other to build 

a comprehensive program to promote efficient use of energy and water, increased 

reliance on sustainable energy sources, and environmental stewardship in the Federal inventory. These programs not only benefit the environment but increase the 

value of our assets and reduce operating costs over the life of our buildings. 

In addition to our capital program, GSA requests New Obligational Authority for 

our operating program, in the amount of: 

—$4.9 billion for the Rental of Space program, which will provide for 194 million 

rentable square feet of leased space; 

—$2.4 billion for the Building Operations program; and 

—$141 million for the Installment Acquisition Payments program. 

OPERATING APPROPRIATION REQUEST

While only $270 million of GSA’s proposed budget is funded through GSA’s operating appropriations, the activities they fund are critical. Our operating appropriations provide for GSA’s Office of Governmentwide Policy and the Chief Acquisition 

Officer, the many Government-wide programs of the Operating Expenses account, 

the Electronic Government Fund, the pensions and office staffs of former Presidents, 

and the Federal Citizen Services Fund. 

The largest increase in our request is for major new Government-wide E-Government initiatives, supported by the CIO Council and under the auspices of the new 

Federal CIO. The proposed increase of $33 million in this account would be used 

to address initiatives in the area of Open Government and Transparency, to move 

agencies to realize large potential savings through alternative approaches to IT infrastructure, to increase agency use of collaborative technologies, and to advance the 

adoption of new tools to support innovations in how the Federal Government relates 

to citizens, the private sector, and State and local governments. 

Additional funds requested for GSA operating appropriations include increases for 

the Federal pay raise and inflation, along with proposed program increases to: 
196 

—develop high performance green building standards for all types of Federal facilities; 

—develop and enhance multiple Government-wide databases to improve Federal 

reporting and transparency; 

—provide additional training support for the Federal Acquisition Institute, supporting acquisition workforce of all civilian Executive agencies; and 

—reflect the full-year cost of the pension and related benefits for former President 

George W. Bush. 

FEDERAL ACQUISITION SERVICE

The Federal Acquisition Service (FAS) had a very successful year in fiscal year 

2008. Revenues increased by 4.6 percent last year, making fiscal year 2008 the first 

year since fiscal year 2004 that GSA has seen revenue growth across the combined 

programs of FAS. FAS also realized a solid two percent increase in cash collections 

from our multiple award schedules program. Business with the Department of Defense, FAS’ largest customer, increased by three percent in fiscal year 2008. This 

‘‘business resurgence’’ is the result of a concerted effort to reduce operating costs, 

standardize the fees we charge our customers, and restructure our service offerings. 

Today, GSA and FAS are delivering value to our customers by offering products and 

services that meet or exceed their expectations. 

After 3 years of cost cutting, a protracted hiring freeze, and a major realignment 

of staff out of the Assisted Acquisition Services portfolio, to other parts of FAS and 

GSA, we are beginning to realize benefits. FAS now has a workforce that is better 

aligned with its workload, strong cash balances in the Acquisition Services Fund 

(ASF), and a stable organizational structure to support a strong mix of programs, 

which deliver value to customers. However, many years of cost cutting and reorganization have created new challenges for FAS, as major IT investments have been 

deferred, and staffing levels were reduced across all organizations. GSA must now 

begin to strategically invest in the FAS infrastructure and workforce to ensure a 

successful future. 

Our future depends on investments in technology and continued process improvements in FAS. Short term investments in information technology tools, such as business intelligence, will improve our ability to understand the buying patterns of FAS 

customers. Business intelligence will improve our ability to help customers make 

better procurement decisions, which will result in more efficient use of Federal 

funds and more effective Government. Additional technology investments must be 

made to FAS legacy systems, that are as much as 35 years old. FAS has also implemented a Lean Six Sigma program. Lean Six Sigma is a process improvement methodology focused on improving efficiency and quality while reducing costs. Private 

sector experience suggests that Lean Six Sigma initiatives can produce significant 

improvements. FAS has already launched several Lean Six Sigma initiatives, which 

we expect to begin generating efficiency gains in fiscal year 2010 and beyond. 

FAS also supports the entire Federal community in promoting good-for-Government initiatives, such as strategic sourcing. Strategic sourcing uses business intelligence to analyze customer spending data and makes recommendations to increase 

the efficiency and effectiveness of acquisitions. GSA participates in the Governmentwide Federal Strategic Sourcing Initiative (FSSI), and has established an FSSI Program Management Office in FAS. FAS manages three major FSSI commodity categories: Domestic Delivery Services, Wireless Telecommunications Expense Management Services, and Office Supplies. 

In fiscal year 2008, the Domestic Delivery Services contract had 57 participating 

agencies, boards, and commissions, with a total estimated spend of $94.7 million 

and $33.8 million in estimated savings. Wireless Telecommunications Expense Management Services expects to save agencies 25 to 40 percent off their wireless cost 

of operations. And FSSI Office Supplies has grown to over 50 participating Federal 

agencies, boards, and commissions, with $10 million in spend. Eighty-nine percent 

of this work is conducted with small business. 

GSA and FAS also actively encourage our Federal agency customers to consider 

the environmental impact of their acquisition decisions. FAS offers a specially designed page, within GSA Advantage, which allows customers to shop by ‘‘Environmental Specialty Category.’’ This application enables customers to search for products and services that are environmentally friendly, contain recycled content, or are 

bio-based. Customers are able to save time and make informed procurement decisions, as GSA has brought a wide range of products into a common procurement 

tool. In addition to offering environmentally friendly products, GSA has also a Multiple Award Schedule (Environmental Services, GSA Schedule 899) that is dedicated 

to environmental services. This schedule provides access to services from environ-
197 

mental clean up and remediation and waste management and recycling services, to 

consulting services. 

The GSA Vehicle Leasing program (GSA Fleet) is another example of our leadership in ‘‘Green Government’’. GSA Fleet enables agencies to fulfill their missions 

and meet their environmental responsibilities, offering over 80,000 alternative fuel 

vehicles (AFVs) that are leased to customers to meet their transportation needs. The 

use of AFVs across the Federal Government helps to reduce petroleum consumption, 

introduces more efficient vehicles into the Federal fleet and reduces greenhouse gas 

emissions. This GSA program also helps agencies better meet the requirements of 

multiple environmental statutes and regulations, including the Energy Policy Act 

and the Energy Independence and Security Act of 2007. 

FAS is well positioned to continue as a leading acquisition organization for the 

Federal Government and assist agencies in achieving their missions in support of 

the American taxpayer. 

AMERICAN RECOVERY AND REINVESTMENT ACT

The American Recovery and Reinvestment Act (‘‘Recovery Act’’) has provided GSA 

with an unprecedented and exciting opportunity to contribute to our Nation’s economic recovery, by investing in green technologies and reinvesting in our public 

buildings. The Recovery Act provided GSA’s Public Buildings Service with $5.55 billion, in- cluding $1.05 billion for Federal buildings, U.S. courthouses, and land ports of 

entry, and $4.5 billion to convert Federal buildings into High Performance Green 

Buildings. In addition, the Recovery Act provided the GSA with $300 million to replace motor vehicles across the Federal fleet with those that are new and more efficient. 

Today, I would like to provide you with an update on GSA’s efforts to implement 

the Recovery Act. 

FEDERAL BUILDINGS FUND—RECOVERY ACT

As of June 5, PBS had awarded contracts totaling $244 million, to begin the construction, modernization, or repair of 25 Federal buildings across the country. We 

have obligated $213 million towards measures to convert GSA facilities to High-Performance Green Buildings, including modernizations of the Thurgood Marshall U.S. 

Courthouse in New York, the Birch Bayh U.S. Courthouse and the Minton-Capehart 

Federal Building in Indianapolis, IN, and the Denver Federal Center in Lakewood, 

CO. We have also obligated $30 million for the construction of new, energy-efficient 

Land Ports of Entry at Calais, ME, and the Peace Arch at Blaine, WA. 

The Recovery Act funds that were provided for investments in Federal buildings 

will provide many direct and meaningful benefits. First, the money will help the 

Federal Government reduce energy and water consumption and improve the environmental performance of the Federal inventory of real property assets. Second, 

much of the funding provided will be invested in the existing infrastructure, which 

will help reduce our backlog of repair and alteration needs. This will increase the 

value of our assets and extend their useful life. Third, the funds provided for New 

Construction will reduce our reliance on costly operating leases, by providing more 

Government-owned solutions to meet the space requirements of our customers. Finally, we will stimulate job growth in the construction and real estate sectors and 

drive long-term improvements in energy efficient technologies, alternative energy 

solutions, and green building technologies. 

We know this is not business as usual and we are moving forward with speed, 

tempered by careful consideration of our procurement responsibilities and our ultimate accountability to the taxpayer. In order to streamline business processes and 

provide tools and resources to assist GSA’s regional Recovery project delivery, the 

Public Buildings Service (PBS) has established a nationally managed, regionally executed Project Management Office (PMO). The PMO works closely with counterparts 

in the core PBS organization to leverage PBS resources and expertise. This national 

operation will be accountable for the following: 

—Develop and maintain consistent processes, policies and guidelines; 

—Manage customer requirements and expectations at the national level; 

—Drive successful project oversight and management; 

—Ensure accurate tracking and reporting of Recovery Act funds; 

—Manage cross-agency resources; and 

—Enable PBS to adopt leading practices in the PBS organization generally. 

PBS and the PMO have moved forward quickly. On March 31st, GSA delivered 

to Congress a list of 254 projects in all 50 States, the District of Columbia, and two 

U.S. territories to be completed with funds provided by the Recovery Act. These 
198 

projects fall into the following categories: new Federal construction; full and partial 

building modernizations; and limited-scope, high-performance green building 

projects. In the new Federal construction category, we will invest $1 billion in 17 

projects; in the building modernization category, we will invest $3.2 billion in 43 

projects; and in the limited-scope green buildings category, we will invest $807 million in 194 projects. This totals over $5 billion. GSA selected the best projects for 

accomplishing the goals of the Recovery Act based on a detailed analysis of a number of factors. Our goals in developing this list were to both put people back to work 

quickly and increase the sustainability of our buildings. 

Many of the projects in the new Federal construction and building modernization 

categories have previously received partial funding. We can start construction quickly on these projects, while also identifying ways that existing designs can be improved. These categories include projects such as the Bishop Henry Whipple Federal 

Building in Fort Snelling, Minnesota, a multi-tenant office building project where 

Heating, Ventilation and Air Conditioning (HVAC), plumbing, electrical and life 

safety improvements are expected to deliver 23.6 percent energy savings, once the 

project is completed. This is over and above the 20 percent in energy savings already achieved in this building in recent years. 

An example of the innovative improvements we will be making in some of the construction and modernization projects is the Edith Green-Wendell Wyatt Federal 

Building in Portland, Oregon. As part of this project, GSA will install a new highperformance double glass enclosure over the entire building, which will dramatically 

enhance energy performance and blast resistance. On the west facade, vegetative 

‘‘fins’’ will provide shade, reducing the load on the new high-efficiency HVAC system 

that will be installed. These are just some of the ‘‘green’’ improvements GSA will 

make as part of this project. We expect the building to attain a LEED Gold rating. 

By using well-established contracting techniques we can start work quickly, and 

make simultaneous improvements to the existing designs. 

In the limited scope category, we have identified a number of projects that can 

rapidly be deployed in many buildings at once—buildings as varied as the Oklahoma City Federal Building, the Burlington Federal Building U.S. Post Office and 

Courthouse, and the J. Caleb Boggs Courthouse and Federal Building in Wilmington, Delaware. Through these projects, we can make significant improvement 

to the energy performance of a building and also improve the working conditions 

for the people in them. 

Greening our buildings will be an ongoing process. As the Subcommittee knows, 

the Energy Independence and Security Act of 2007 (EISA) and other laws require 

GSA, among other things, to reduce its energy consumption by 30 percent by 2015; 

reduce fossil fuel-generated energy consumption in our new buildings by increasing 

amounts—from 55 percent in 2010 to 100 percent in 2030; and ‘‘green’’ an even 

greater portion of our inventory. Although the Recovery Act will accelerate our 

progress in these areas, that alone will not enable us to meet these goals. Our fiscal 

year 2010 budget request provides the next steps in a long-term program to meet 

the aggressive goals of EISA and related legislation. 

ENERGY-EFFICIENT FEDERAL MOTOR VEHICLE FLEET PROCUREMENT

GSA’s strategy to improve the energy-efficiency of the Federal fleet balances energy-efficiency goals with the need to expedite procurement, in order to maximize 

economic benefit for the auto industry and the economy as a whole. GSA is focusing 

this procurement on vehicles that will provide long-term environmental benefits, 

and cost savings, by increasing the fuel efficiency of the Federal fleet. GSA will use 

newer and more fuel-efficient vehicles and advanced technologies, while at the same 

time spending funds quickly to provide immediate stimulus to the economy and the 

automotive industry. 

GSA is procuring new motor vehicles only to replace, on a one-for-one basis, operational motor vehicles in the Federal inventory that currently meet replacement 

standards, so as to not increase the overall size of the Federal fleet. Each vehicle 

purchased will have a higher miles-per-gallon rating than the vehicle it replaces and 

the overall procurement will provide a minimum of a 10 percent increase in fuel efficiency over the replaced vehicles. 

GSA will only acquire motor vehicles that comply with all Federal environmental 

mandates. These vehicles will be included in the alternative fuel vehicle-acquisition 

compliance calculations of the Energy Policy Act of 2005, as well as the petroleum 

reduction and alternative fuel use increase requirements of Executive Order 13423, 

‘‘Strengthening Federal Environmental, Energy, and Transportation Management’’. 

Vehicles acquired under this procurement will meet, or exceed, standards for green-
199 

house gas emissions which were established in the Energy Independence and Security Act of 2007. 

On April 14, 2009, GSA obligated $77 million to order 3,100 hybrid vehicles for 

Federal agencies using Recovery Act funds. The vehicles in this initial order are a 

mix of Chevrolet Malibus, Saturn Vues, Ford Fusions and Ford Escapes. This purchase represents the largest one-time procurement of hybrid vehicles for the Federal 

fleet. 

On June 1, 2009, GSA obligated an additional $210 million. To date, we have obligated $287 million, and ordered 17,200 motor vehicles with funds provided by the 

Recovery Act. 

In the final phase of this procurement, GSA will order $13 million worth of Compressed Natural Gas (CNG) and hybrid buses and low-speed electric vehicles, by 

September 30, 2009. While this is the smallest segment of the plan, we are excited 

by the fact that the vehicles purchased will replace some of the highest-emission vehicles in the Federal fleet with much lower-emission vehicles, which will reduce fuel 

consumption and further the Federal Government’s exploration of the use of alternative fuels. 

SUMMARY STATEMENT

Today, I have discussed our fiscal year 2010 budget request, the Recovery Act, 

and GSA’s eagerness to undertake the new challenges that lie ahead. We at GSA 

are strongly committed to ensuring that the responsibilities entrusted to us are exercised in a manner that is effective, efficient, and transparent. My task, and the 

task of everyone at GSA, is to keep building on our recent successes and to fulfill 

GSA’s mission to acquire the best value for taxpayers and our Federal customers, 

while exercising responsible asset management. 

We look forward to carrying out our role in the Recovery Act, to responsibly deliver modernized and energy-efficient Federal buildings and motor vehicles, and to 

stimulate the economy by creating jobs and outlaying Federal funds to industries 

in crisis. Your approval of GSA’ budget request for fiscal year 2010 is a vital step 

in helping us achieve our mutual goals of economic recovery, energy efficiency, and 

increased citizen engagement in Government. GSA is committed to delivering on 

these goals, contributing to the long-term objectives of the Administration, and providing the best use of taxpayer funds. 

CLOSING STATEMENT

Mr. Chairman, this concludes my formal statement. I look forward to continuing 

this discussion of our fiscal year 2010 budget request with you and the Members 

of the Subcommittee. 

Senator DURBIN. Judge Bataillon. 

STATEMENT OF HON. JOSEPH F. BATAILLON

Judge BATAILLON. Good afternoon, Mr. Chairman, Senator Collins, Senator Bennett, members—— 

Senator DURBIN. Would you check and make sure that your 

microphone switch is on? 

Judge BATAILLON. Now it is on. Thank you very much. 

That is what I say to the lawyers all the time. You have to speak 

into the microphone, gentlemen. 

But at any rate, thank you for inviting us here today. I appreciate the opportunity to appear before the subcommittee today to 

discuss the judiciary’s courthouse construction needs, the process 

for identifying and prioritizing these needs for Federal construction 

projects, as well as lease construct projects, which are an alternate 

approach for acquiring smaller courthouse facilities. 

Before addressing those issues, however, I want to convey the judiciary’s gratitude to this subcommittee for supporting and furthering the administration of justice through appropriating monies 

from GSA Federal Buildings Fund for the construction of new 

courthouses and for the renovation of existing courthouses. 
200 

We understand that there are many Federal needs competing for 

scarce capital resources in Government, and we deeply appreciate 

the subcommittee’s willingness to champion the needs of the judiciary in terms of the real estate infrastructure necessary to conduct 

the work of the courts and administer justice. We are particularly 

grateful for the subcommittee’s appropriation of additional funds 

for the San Diego courthouse in 2009 and for its support of courthouse construction with the American Recovery and Reinvestment 

Act funds. 

On April 1 of this year, James Duff, Director of the Administrative Office of the United States Courts, on behalf of the Judicial 

Conference, transmitted to this subcommittee, other cognizant congressional committees, the White House, the Office of Management 

and Budget, and the General Services Administration, the 5-year 

plan for courthouse construction projects as approved by the Judicial Conference of the United States in March 2009. 

An advance copy of the plan was provided to GSA earlier this 

year for use in developing the 2010 Federal Buildings Fund budget 

request. We are disappointed that none of these projects listed on 

the 2000 plan—on the 2010 plan appear on the President’s 2010 

budget. 

The projects that were included, however, were Yuma, Arizona, 

and Lancaster, Pennsylvania, which were initially determined by 

GSA and by the courts as lease construction projects as opposed to 

Federal building projects. They now appear on the budget as Federal building projects. 

The distinction between these two execution strategies for acquisition of new construction has never been in place before, and it 

has never been part of the 5-year plan for the courts. Federally 

constructed projects have to be ranked and prioritized because Federal construction dollars are scarce, and at any given year, only so 

much money is available to be appropriated for these projects. 

Lease construct projects, on the other hand, do not compete with 

each other for funding from a limited pool of Government construction capital but are privately financed. Consequently, there has 

been no need for the judiciary to rank or prioritize lease construction projects as long as they fit within our budget requirements. 

Moreover, Federal construction has been and remains the primary means by which GSA provides new space for the courts. 

Lease construction has only played a small role in one or two courthouse construction projects in low-density population areas where 

a large court presence is not necessarily needed. 

In addition, lease construction courthouse projects are delivered 

in a fraction of the time that it takes the Government to construct 

a Federal courthouse. This expedited delivery feature is a key benefit to the lease construction alternative. 

While the use of the lease construction method has been very 

modest with the judiciary, it has been critical to the judiciary and 

GSA to deliver small projects on an expedited basis. We now understand that the Office of Management and Budget (OMB) has raised 

objections to the lease construction courthouse process, even for 

modest projects like the ones in Yuma and Lancaster. 

If the lease construct execution strategy will no longer be accorded to GSA as an alternative to Federal construction methods 
201 

for delivery of new courthouses, and the administration seeks funding for these projects from the Federal Buildings Fund, the projects 

on the judiciary’s 5-year plan will suffer, and the President’s budget this year is an example of that. None of the 5-year construction 

projects are included in the President’s budget request, only what 

would otherwise be considered as lease constructions. 

If that continues to be the case, lease construction projects would 

have to compete for scarce Federal building dollars, along with 

long-term judicial space requirements, and Yuma is a prime example. Yuma was on the verge of a lease construct contract award and 

scheduled for completion in June 2011. A Federal construction execution will likely delay the project by at least another year or 2 

years. 

Yuma, to date, has handled over 2,000 defendants, and it is anticipated that they will handle at least 5,000 defendants this calendar year. The security requirements are so limited in this leased 

facility that ICE has required the court only to process 40 defendants a day because we don’t have the capacity to do any more than 

that, and it becomes a bottleneck for the prosecution of these individuals. 

The judiciary was not consulted prior to this change in execution 

strategy. We are disappointed that the Yuma and Lancaster 

projects, which we believe are appropriate for the lease construct 

path, have now been redirected to the Federal construction path, 

apparently at the expense of the 5-year plan. 

With regard to the fiscal year 2010 projects, if they are not funded in this budget year, then they will be pushed back yet again another year, and it has been our experience that every time we push 

back a project, the costs for the project increase substantially. The 

judiciary urges the subcommittee to support remaining lease construction as necessary and appropriate and as an alternative to 

Federal construction, especially in locales where the court space is 

modest, acute, and of possible intermediate duration. 

PREPARED STATEMENT

The judiciary believes that GSA has the authority to use this 

procurement method, which is a widely accepted method of delivering buildings in the private sector. Again, the judiciary is grateful for the past and continuing support shown by this subcommittee for its facilities and space needs. 

Thank you very much. 

[The statement follows:] 

PREPARED STATEMENT OF JOSEPH F. BATAILLON

INTRODUCTION

Good afternoon, Mr. Chairman, Senator Collins, and members of the Subcommittee. I am Joseph F. Bataillon, Chief Judge of the United States District 

Court in Nebraska and Chair of the Judicial Conference Committee on Space and 

Facilities. I appreciate the opportunity to appear before this subcommittee today to 

discuss the Judiciary’s courthouse construction needs, the process for identifying 

and prioritizing these needs for Federal construction projects, as well as lease-construction projects which are an alternative approach for acquiring smaller courthouse facilities. 

Before addressing those issues, however, I want to convey the judiciary’s gratitude 

to this subcommittee for supporting and furthering the administration of justice 

through appropriating monies from GSA’s Federal Buildings Fund for the construc-
202 

tion of new courthouses and for the renovation of existing courthouses. We understand that there are many Federal needs competing for scarce capital resources in 

Government, and we deeply appreciate the subcommittee’s willingness to champion 

the needs of the judiciary in terms of the real estate infrastructure necessary to conduct the work of the courts and administer justice. We are particularly grateful for 

the subcommittee’s appropriation of additional funds for the San Diego Courthouse 

in the 2009 appropriations bill, and for its support of courthouse construction with 

American Recovery and Reinvestment Act (ARRA) funds. 

FIVE-YEAR COURTHOUSE PROJECT PLAN PROCESS

I would like to begin by describing the process and criteria used to develop the 

Judiciary’s Five-Year Courthouse Project Plan. On April 1, 2009, James Duff, Director of the Administrative Office of the U.S. Courts, on behalf of the Judicial Conference, transmitted to this subcommittee, other cognizant congressional committees, the White House, the Office of Management and Budget, and the General 

Services Administration, the Five-Year Plan for Courthouse Projects as approved by 

the Judicial Conference of the United States on March 17, 2009. An advance copy 

of the Plan was provided to GSA earlier in the year for its use in developing the 

2010 Federal Buildings Fund Budget request. The Five-Year Plan is a key output 

of the Judiciary’s Long-Range Facilities Planning process. The Plan consists of an 

ordinally-ranked list of new courthouse construction projects for which the Judiciary 

is requesting authorization, funding and execution from the Executive and Legislative Branches. With one minor exception, all of the Federal-construct courthouse 

projects on the Judiciary’s current Five-Year Courthouse Project Plan are projects 

that were not affected by the moratorium on new construction described below, because they all had received either authorization or funding from the Congress. 

These projects were evaluated by the Judicial Conference and its Space and Facilities Committee, and placed on the Plan on the basis of the following four weighted 

criteria: (1) year out of space (weighted 30 percent); (2) security concerns (30 percent); (3) operational concerns (25 percent); and (4) judges without courtrooms (15 

percent). 

In terms of the courthouse projects that populate the Five-Year Plan, it is important to note that a project is removed from the Plan once it receives the requested 

construction funding. Should a previously funded construction project require additional funds due to a budget shortfall (e.g., cost overrun), it is not placed back on 

the list. Thus, the Plan no longer lists the Los Angeles courthouse project, even 

though this remains the Judiciary’s top priority among new courthouse projects. In 

2005, Congress appropriated the full construction amount requested by GSA for the 

Los Angeles courthouse; but when the time came to put the project out for bid, GSA 

determined that it could not be delivered for the appropriated amount. Several years 

later, even with a substantial reduction in scope, GSA awaits sufficient funding for 

this much needed court project. 

As part of its cost-containment effort which I will discuss later in my statement, 

the Judicial Conference has recently adopted changes to its long-range facilities 

planning process. I will briefly describe these changes, because they include revisions to the way new projects not previously authorized or funded will be scored for 

placement on future Five-Year Plans. Again, none of the projects on the current 

Plan were placed there under the new, revised scoring methodology. Under the new 

methodology, however, courthouse locations will be ranked in order of urgency of 

need, based on four criteria: (1) judges without chambers (30 percent); (2) judges 

without courtrooms (20 percent); (3) facility assessment (40 percent); and (4) caseload growth (10 percent). Building security issues are included in the facility assessment criteria. We are in the process of completing plans for approximately 30 districts, representing nearly a third of our courthouse inventory. The Long-Range Facilities Plan includes short- and long-term statistical projections of caseload and personnel in order to estimate future facilities needs, a comprehensive assessment of 

each courthouse building to see how it meets the needs of the court, and a set of 

strategies, some involving real estate and some operational solutions, to address 

current and projected space deficiencies. Security remains an important factor in the 

determination of urgency of need, but it is now part of the facility assessment criterion, rather than a stand-alone criterion. 

COST CONTAINMENT

In 2004, the Federal Judiciary looked into the future and saw that its ‘‘must pay’’ 

requirements, such as GSA rent, would increase at a pace that would exceed projected appropriations within a few years. Budget projections indicated that rental 

costs for existing and new facilities would increase 6 to 8 percent annually, out-
203 

pacing budget growth. The Judicial Conference recognized that controlling rent costs 

was absolutely critical to avoiding personnel reductions. As part of that effort, a national moratorium on courthouse construction was imposed from 2004 to 2006. The 

moratorium lasted 24 months and gave the Judiciary time to re-evaluate its space 

planning policies and practices and to enhance budgetary controls. 

The long-range facilities planning methodology for the Judiciary was re-evaluated 

resulting in a greater emphasis on the ability of a facility to accommodate additional 

space requirements rather than the physical attributes of a facility in determining 

whether or not to recommend a new courthouse construction project. If a building 

has sufficient space, functional issues such as security concerns would then be addressed through repair and alterations and technology strategies. An emphasis on 

cost, which was the key driver in the development of the new rating methodology, 

has resulted in a realignment of the criteria for ranking projects, giving greater 

weight to when a building is out of space and less weight to security and operational 

concerns. While the Judicial Conference undertook many other initiatives to reduce rent 

costs, which I will not enumerate at this time, the moratorium and changes to space 

planning policies and practices affect the Five-Year Plan process most directly. 

LEASE-CONSTRUCTION PROJECTS

While GSA has utilized two execution strategies for the acquisition of new courthouses—Federal construction and lease-construction—the Judiciary has never 

placed lease-construct projects on the Five-Year Plan. Federally constructed courthouse projects have to be ranked and prioritized because Federal construction dollars are scarce, and in any given year, only so much money is available to be appropriated for these projects. Lease-construct projects, on the other hand, do not compete with each other for funding from a limited pool of Government construction 

capital, because they are privately financed. Hence, there has been no need for the 

Judiciary to rank or prioritize lease-construct projects. Moreover, Federal construction has been and remains, the principal means by which the GSA provides new 

space for the courts; lease-construction has only ever played a minor role, for small 

(one or two courtroom) courthouse projects in low population density areas where 

a large court presence is not needed. Use of the lease-construct method has been 

very modest. 

I do want to note, however, that lease-construction is clearly a secondary means 

of new courthouse execution, running far behind Federal construction in terms of 

overall capital value. Nonetheless, the Judiciary is mindful that these projects add 

to the overall rent burden of the courts. Accordingly, it is Judicial Conference policy 

that each lease-construct project be subject to approval by both the Space and Facilities Committee and the Judicial Conference, and if the project is approved, it is with 

a specific dollar rent cap. 

We now understand that the Office of Management and Budget has raised objections to lease-construct courthouses, even for modest project scopes. If the lease-construct execution strategy will no longer be accorded to GSA as an alternative to the 

Federal construct method for the delivery of new courthouses, then the Judiciary 

will need to revisit its courthouse prioritization method. However, the Judiciary 

urges the subcommittee to support retaining lease-construction as a legitimate, valuable and appropriate alternative strategy to Federal construction, especially in 

locales where the court space need is modest, acute and of possible indeterminate 

duration. GSA has the authority to use this procurement method, which is a widely 

accepted practice in the private sector. Furthermore, lease construct courthouse 

projects are delivered in a fraction of the time that it takes the Government to construct a Federal courthouse. This expedited delivery feature is a key benefit of the 

lease-construct alternative. From Judiciary project approval to completed construction, the lease-construct alternative takes approximately 3 years; the Federal construction alternative takes over 10 years, which includes time waiting to place the 

project on the Plan, and then time expended waiting for funding once it is on the 

Plan. 

GSA FEDERAL BUILDINGS FUND 2010 BUDGET REQUEST

The President’s fiscal year 2010 Budget Request for the Federal Buildings Fund 

does not include any projects from the Judicial Conference-approved Five-Year 

Courthouse Project Plan. Instead, funding is included for Federal construction of 

projects in Yuma, AZ, and Lancaster, PA, which GSA and the Judiciary had previously determined should proceed as lease-construction projects. In the case of 

Yuma, AZ, a critically needed facility in a very busy southwest border location, GSA 

had already begun the procurement process of preparing solicitations for offers. 
204 

The Judiciary was not consulted prior to this change in execution strategy. We 

are disappointed that these projects, which we believe were appropriate for the 

lease-construct path, have now been re-directed to the Federal construct path, apparently at the expense of projects on our Five-Year Plan, since no Plan projects 

were included in the President’s fiscal year 2010 budget request. With regard to the 

projects on the Five-Year Plan for 2010, if they are not funded in 2010, these 

projects and all projects in subsequent years would be delayed at least a year. 

CONCLUSION

Again, the Judiciary is grateful for the past and continuing support shown by this 

Committee for the facilities needs of the Federal courts. It is clear that while many 

projects have been successfully executed, much additional work remains to be done. 

I will be glad to take any questions you have at this time. 

Senator DURBIN. Well, thank you both very much. 

And first, let me get it straight ‘‘Prow-ty’’ or ‘‘Pru-ty’’? 

Mr. PROUTY. ‘‘Prow-ty.’’ 

Senator DURBIN. Prouty. Thank you. I’m sorry I mispronounced 

your name to start with. 

DIFFERING CONSTRUCTION PRIORITIES

This really is a classic constitutional confrontation here, the 

building of courthouses, where we literally have three branches of 

Government involved in it and obviously going in different directions. 

It reminds me when I was in the House, and then Appropriations 

chairman Jamie Whitten allowed me to come in as a new member, 

and I said I would like to also serve on the Budget Committee, 

which was permissible. You could be on Appropriations and Budget. And he said, ‘‘You can do it if you want to do it. But just remember, the Budget Committee deals in hallucinations, and the 

Appropriations Committee deals in facts.’’ 

So I went on and took on the Budget assignment. Turned out he 

was right. 

So here, let me show you some charts here just to give you an 

idea of some things that we have noticed about construction. 

This one is interesting, and I think that Senator Bennett will 

like it a lot. And it shows on the left-hand side what the judiciary 

lists as priorities in fiscal year 2010, and Salt Lake City is on 

there. 

Senator BENNETT. Why do you think I am here? 

Senator DURBIN. I know. 

Your timely arrival. And you will notice the President’s budget 

zeroed it out, and then you will notice what the history has been 

in the past. We have, I guess, appropriated some $40 million for 

a $211 million project. 

I won’t go into detail here other than just to show you that the 

three branches of Government all have different priorities when it 

comes to this construction. I am going to mention in a moment 

much of the last chart, the bar chart there, that shows the increased cost, which was a point that was made by Judge Bataillon. 

Salt Lake City, off on the right, has been delayed for 9 years, and 

the estimated cost of construction has gone up from somewhere in 

the range of $50 million to over $200 million. And we have all been 

very cognizant of that. 

So it appears that the judicial branch picks its priorities. The 

President then picks his priorities, and then Congress decides what 
205 

to fund, which may be a different priority. And that has been the 

way this has worked back and forth or has failed to work back and 

forth. And I don’t know if we will be able to resolve that at this 

moment, Judge. But we will try to at least discuss it here. 

SAN DIEGO COURTHOUSE

If I can ask about two specific courthouses, and I believe one or 

both have been mentioned. The San Diego courthouse, in the fiscal 

year 2009 appropriation, we provided an additional $100 million to 

cover cost overruns necessary to complete the project. The law was 

enacted in March, but a contract has yet to be awarded. It appears 

it is stalled once again. 

The GSA didn’t inform us of a delay. Would you like to tell us, 

Mr. Prouty, what is going on in San Diego? 

Mr. PROUTY. We are currently, at the request of the House staff, 

reviewing the San Diego housing plan. It appears that there may 

be some space that is in the building which we, like you, would like 

to award that is not currently designated for the courts. 

So we are putting a plan together. We think that there is some 

space that we can give to another Federal agency until such time 

as the courts need that space. So it is just a space requirements 

issue. 

Senator DURBIN. So what is going to happen to the $110 million? 

Mr. PROUTY. It is going to be spent and, hopefully, soon. 

Senator DURBIN. Okay, and the contracts will be awarded soon? 

Mr. PROUTY. I certainly believe that to be true. 

LOS ANGELES COURTHOUSE

Senator DURBIN. Let us take a look at a downtown photograph 

of the home of the National Basketball Association (NBA) champion Los Angeles Lakers. 

We appropriated $300 million for the construction of a Federal 

courthouse in fiscal year 2005, and you will notice that empty lot 

in the corner there. There is no indication that construction will 

begin anytime in the foreseeable future. Costs have obviously escalated dramatically in 4 or 5 years, making the initial project prohibitively expensive. As a result, GSA and judiciary have been exploring less costly alternatives. 

Can you tell us, when we are so short on money and we do appropriate the money and nothing happens for 4 or 5 years, you can 

understand why that gives us a fair degree of angst. Would you 

like to comment on that? 

Mr. PROUTY. I think it is safe to say that we are at a total impasse. For the amount of money that we have, we can’t build what 

the courts want. So we currently have a project that—the original 

project, as you indicated, is with the scope, even the reduced scope, 

is beyond the money that we have got. We proposed a project, 

which included a smaller building and a renovation of an existing 

Federal building, and the discussions continue. 

Judge BATAILLON. It has been very problematic for us, and that 

is a tremendous understatement. I have been on the Space and Facilities Committee for 9 years. The Los Angeles courthouse showed 

up on the 5-year plan in 1999, and it was scheduled for site and 
206 

design, number one on our list in 1999 and number one on our list 

for construction in 2000. 

And frankly, the extraordinary increases in construction costs in 

the Los Angeles area have presented tremendous problems for both 

the courts and GSA. And we have tried to work together to solve 

these problems. 

The latest scenario would be to split the courts even more than 

they are already, and Los Angeles is one of the largest courts, if 

not the largest court in the country that has not had a comprehensive housing plan. And it is important for the courts in order to 

maintain the way we operate to get this problem solved. And unfortunately, we haven’t been able to overcome that. 

And part of the problem, I believe, is that any further authorization from the House side for this project has pretty much been 

blocked. 

Senator DURBIN. One last quick question, Mr. Prouty. This morning on National Public Radio (NPR) local broadcast, there was an 

indication that D.C. charter schools are having a tough time finding space to open new schools. I assume there is some excess GSA 

property in the District of Columbia. Is it possible that we could 

open up a dialogue between you and the District of Columbia government and see if there are any opportunities there that could be 

utilized? 

Mr. PROUTY. The answer is absolutely yes, although I don’t know 

the authorities and I don’t know the vacant inventory. 

Senator DURBIN. Okay. Well, let me try to work with you on that. 

Mr. PROUTY. Great. Thank you. 

Senator DURBIN. Senator Collins. 

Senator COLLINS. Thank you. Thank you, Mr. Chairman. 

JUDICIARY’S 5-YEAR COURTHOUSE PLAN

Judge, as Senator Durbin has pointed out, the administration did 

not follow the priorities set forth in the judiciary’s 5-year courthouse project plan. Had the budget reflected your plan, Salt Lake 

City would have been first on the list. Could you give us more insight into the process? Is there a back-and-forth discussion of the 

priorities with GSA, with OMB, or did the budget proposal come 

as a surprise to you? 

Judge BATAILLON. Well, the budget proposal came as a surprise 

to us. We submit the 5-year plan every year to GSA, and then it 

is up to the President to decide how the President wants to fund 

our building requirements. The stimulus bill included two courthouses, one in Bakersfield and one in Billings, Montana. And those 

were both originally slated as lease construct buildings. 

When that occurred last year, we received some signals that 

OMB was changing the way it was interpreting the A–11 circular. 

And when that happened, then when the President’s budget came 

out this year, I suppose it was somewhat of a surprise, but not too 

much of a surprise. Because apparently, we have changed the way 

we have decided to score these courthouses, and it does create 

problems as far as the 5-year construction plan is concerned. 

We have always done a 5-year construction plan. That plan is 

based on the priorities set by the judiciary. We score these courthouses, and we have rescored these courthouses, and now we even 
207 

have a new method of scoring courthouses to make sure that the 

needs of the judiciary, in order to administer justice appropriately, 

are met. And that is why they give the 5-year plan. 

By taking these two projects off of the lease construction line, if 

you will, or execution plan, it creates a problem about how we 

prioritize our courthouses. And it really puts these two projects in 

jeopardy because we have already set the 5-year plan, and the conference won’t meet again until September to determine whether we 

can incorporate these. So it is very problematic for us. 

Senator COLLINS. Mr. Prouty, this doesn’t make much sense to 

me. I would understand if the GSA or OMB said we have x amount 

to spend, and we are going to go down the list until that is spent. 

But it doesn’t make sense to me that the priorities are different 

than those established by the Judicial Conference. 

MIAMI FBI OFFICE

Let me ask you about another line item in the construction budget, which is almost as much as it would cost to build the courthouse that is so high on the Judicial Conference list. The budget 

request includes almost $191 million for Federal construction of a 

new Federal Bureau of Investigation (FBI) field office in Miami. 

Prior to this request, the project was originally planned as a lease 

construct project, which is obviously far lower cost. 

What criteria, what objective criteria led GSA to decide to request this funding for the Miami FBI field office at a time—at this 

time as opposed to other projects that are urgently needed? 

Mr. PROUTY. The only—first of all, I want to mention that in the 

recovery funding, we did fund the top priority, which was Austin. 

But there are competing challenges here. Both OMB and the Government Accountability Office (GAO) are concerned about the lease 

construction program. It has been our goal for a very long time to 

have few, if any, courts in leased properties because it is problematic. 

So the challenges have been to find a way to deal with those 

issues. If you look at the payback on the FBI project in Miami, over 

the 15 years of that initial lease period that it is beneficial to do 

a Government construction to the tune of $130 million. 

Senator COLLINS. But initially, the upfront cost is more to do 

construction. Correct? 

Mr. PROUTY. The payback, it is $190 million up front. You are 

right. 

Senator COLLINS. And could the FBI’s needs be met, should the 

building proceed as was originally planned as a lease construct 

project? 

Mr. PROUTY. It certainly could have been. 

Senator COLLINS. Thank you, Mr. Chairman. 

Senator DURBIN. Senator Nelson. 

Senator NELSON. Thank you, Mr. Chairman. 

Welcome, Judge Bataillon. Mr. Prouty. 

Judge BATAILLON. Senator, it is always good to see you. 

Senator NELSON. Good to see you. 

My colleagues may not know that when I was Governor, I was 

pleased and proud to recommend you for the judgeship, and I have 

been proud ever since. 
208 

Judge BATAILLON. Thank you very much, Senator. 

CONSTRUCTION PRIORITIES

Senator NELSON. One of the challenges that is obvious before us 

is that the three branches of Government have not come together 

with any common understanding or common agreement as to 

where to proceed or how to proceed. Is it possible or is it naive to 

assume that it is even possible to work with OMB to sit down and 

go through the priorities? Do we know what their priority list, 

what criteria they use to establish their priority list that is different than what you do? 

I guess first, Judge, I will ask you and then Mr. Prouty. 

Judge BATAILLON. Well, OMB communicates directly with GSA 

on these issues, and GSA, of course, has to, I assume, follow what 

OMB tells them to do as far as their scoring method under the A– 

11 circular. 

Previously, they have on small projects that the courts have been 

presenting, that scoring criteria was such that they believed that 

courthouse buildings were not special use. In other words, that 

there was no other private market for it. It wasn’t uniquely governmental. 

A courthouse has courtrooms. You could use that for a banquet 

hall. You could use that for a gathering hall. And it has office 

space, just like any other office might have, a bank or any kind of 

business. 

And so, these smaller projects generally were scored so that they 

could be a lease construct. The part that was scored as uniquely 

governmental was the marshals’ money for the holding cells. And 

so, we would always bring the money—or the marshals would bring 

the money up front for the holding cells. 

Now OMB, as we understand it, has changed their interpretation 

of the scoring and has decided that this is a special purpose building, and it ought not to be built as a lease construct. So I am sure 

the administrator can elaborate on that. 

Mr. PROUTY. There certainly is a discussion about the benefit to 

the Government and about the nature of these properties, and I am 

certainly not in the position to speak on behalf of OMB. But we, 

at GSA, would very much like to have a discussion which would 

preclude these types of discussions in the future. 

Judge BATAILLON. So would we. 

Senator NELSON. Well, it does seem that that would be part of 

the answer, to come to some sort of an agreement on whether it 

is a special use or not a special use to resolve the question about 

lease construct. And just because they have taken that position 

that it is special use doesn’t make it so. 

And hopefully—I don’t know how to facilitate that, but I wish 

you would think about what we could do to help facilitate that because I think we are as frustrated as you are when you see the lack 

of construction on a project that has been appropriated, and then 

you see the cost of construction go up. It is as frustrating in some 

ways as seeing cost overruns. It just takes more Treasury dollars 

to be able to complete at some point. 

If you are putting together another 5-year courthouse project 

plan, do you have any idea how long it might take for the Judicial 
209 

Conference to come up with another 5-year plan? And if you do 

come up with it, can you come up with it assuming the lease construct under one assumption and then no lease construct under another assumption? 

Judge BATAILLON. We can come up with another 5-year construction plan, and the 5-year plan is a priority on how to spend the 

Federal Buildings Fund money. If it is a lease construct, then it 

doesn’t come out of that pot of money and is just like leasing any 

other office space, except that GSA makes a contract with a developer. And so, we haven’t put those buildings on the 5-year plan for 

a number of reasons. 

One is because we have acute court needs, administration needs 

like in Yuma, and we want to get the building built as quickly as 

we can, and it is a small project and so we can deliver it. 

But as far as the 5-year plan, we have a particularly difficult 

problem. In 2004, through 2004 and 2006, we had a moratorium on 

any construction because of the budget problems that we encountered in 2004 and had to lay off people, as a matter of fact, in order 

to meet our budget constraints. So we did a moratorium. 

And when we did the moratorium, there were 15 courts that had 

some appropriation from Congress, and so we left those on the 5- 

year plan. And the 35 that didn’t have some appropriation we 

pushed off of the 5-year plan, and now we are reevaluating all of 

those courts in what we call an asset management process. 

So we have frozen the 13 to 15 courts that were on the original 

5-year plan, and now we are trying to bring on other courts on the 

5-year plan, and meshing those two groups of folks is getting to be 

very problematic. 

And then if we throw Yuma into the mix or Lancaster into the 

mix or some other lease construct projects that we are talking into 

the mix, we have just created a quagmire for the judiciary. But to 

answer your question, we are smart folks, and if you tell us that 

we have to do 5-year—put these programs on the 5-year plan, we 

will do the best we can to do it. 

Senator NELSON. Well, I am not telling to you to. I am just asking if you can. It is perhaps over my head to try to require that. 

But it seemed to me that it might be one of the ways to proceed. 

Judge BATAILLON. Well, it is not that you would require it. I 

think it is basically OMB saying that they won’t accept the lease 

construct process, and GSA communicating that to us, and so then 

we will have to take a different approach. 

But it is a Gordian knot. And I go off the committee in October, 

and I will be happy to do it then. 

Senator NELSON. Well, on the way out, will you rule them in contempt? 

Judge BATAILLON. I will try. 

Senator NELSON. Thank you. Thanks to both of you. 

Senator DURBIN. Senator Bennett. 

Senator BENNETT. Thank you very much, Mr. Chairman. I appreciate the opportunity to be here with the subcommittee. 

Judge Bataillon, I couldn’t have written your testimony better 

than you wrote it. 

Judge BATAILLON. Thank you very much. 
210 

SALT LAKE CITY COURTHOUSE

Senator BENNETT. And the chairman, of course, has highlighted 

the fact Salt Lake City first went on the list in 1998. Is that correct? 

Judge BATAILLON. Right. 

Senator BENNETT. So it is even older than—— 

Judge BATAILLON. It has been on the list for 9 years. 

Senator BENNETT. Yes. And I would like to—I can’t appropriately 

give you the full letter because the last paragraph of the letter 

says, ‘‘The specific weaknesses in building security highlighted by 

this inspection should be treated as sensitive information and 

should not be released to the public.’’ 

But this is a letter from the senior inspector of the U.S. Marshals 

Service just this month, having gone through the Salt Lake City 

courthouse and looked at the various security problems that are 

there. 

Judge BATAILLON. Right. 

Senator BENNETT. Is it your understanding that this project is, 

to take a term that has been vastly overused here in the Congress 

in the last 6 months, shovel ready? 

Judge BATAILLON. It is absolutely shovel ready. We have a site, 

and I am sure you have been to the site and seen the chain-link 

fence that is around it. We moved the Masonic Temple and a local 

pub in order to get this place, and now we have vacant property 

in Salt Lake, and it is ready to go. 

We have designs. In fact, I have talked to Members of the House 

and the Senate, and it is a model of appropriateness and efficiency 

for the judiciary, and it needs to be built. 

Senator BENNETT. As I say, I couldn’t do this any better than you 

have done for me. 

Judge BATAILLON. Thank you very much. 

Senator BENNETT. Mr. Prouty, I would be ungrateful if I didn’t 

acknowledge how helpful you have been over the years, as we have 

wrestled with this problem. And your office has always been available to mine, and you have always been very helpful. 

Now we have been in touch with Alan Camp, who is the project 

manager in your Denver office, and he has informed my staff that 

the building prices are at their lowest point in 3 years. And if funding is not received in the 2010 budget, there is the possibility that 

costs will escalate, and the Salt Lake courthouse currently is projected to come in right under budget. Is that your understanding 

as well? 

Mr. PROUTY. We are seeing—we are testing the market. We are 

obviously—we do a lot of research in the market. And now with all 

of the recovery funds, we think we are seeing and we anticipate the 

projects will come in less than they were. So I think the markets 

are decreasing. The extent of that we are not sure. 

But you are right. The Salt Lake City project, if it were bid 

today, would certainly come in within budget. 

Senator BENNETT. Thank you very much. 

Mr. Chairman, I have laid out my case, and I have had a lot of 

help from your two witnesses, and I am now completely at your 

mercy. 
211 

Senator DURBIN. I have been waiting for this for so long. 

Senator BENNETT. Thank you very much for allowing me to participate. 

Senator DURBIN. Well, I am glad that you came by, Senator Bennett. You are always welcome here. 

Senator Collins, do you have any additional questions? 

Senator COLLINS. Mr. Chairman, I would just like to submit for 

the record, with your consent, a follow-up letter from the chief 

judge. 

Actually, I take it back. It is from the Judicial Conference of the 

United States. It is a letter from James Duff that expresses disappointment that the budget does not fund any of the projects on 

the 5-year plan and talks about the impact on the judicial process 

where courthouses are out of space, as well as the critical security 

deficiencies. 

I think it strengthens the case that our witness has made today 

on behalf of the judiciary and strengthens the case that Senator 

Bennett has made as well. 

Thank you, Mr. Chairman. 

Senator DURBIN. Without objection, it will be made part of the 

record if you would like it to be. Would you? 

Senator COLLINS. Yes, please. 

Senator DURBIN. Okay. 

[The information follows:] 

JUDICIAL CONFERENCE OF THE UNITED STATES, 

Washington, DC, June 9, 2009. 

Honorable RICHARD J. DURBIN, 

Chairman, Subcommittee on Financial Services and General Government, Committee 

on Appropriations, United States Senate, Washington, DC 20510. 

Honorable SUSAN COLLINS, 

Ranking Member, Subcommittee on Financial Services and General Government, 

Committee on Appropriations, United States Senate, Washington, DC 20510. 

DEAR CHAIRMAN DURBIN AND SENATOR COLLINS: On April 1, 2009, I sent a letter 

on behalf of the Judicial Conference of the United States, transmitting the Judicial 

Conference-approved Five-Year Courthouse Construction Plan for Fiscal Years 

2010–2014 to this Subcommittee, the Office of Management and Budget, and the 

General Services Administration (GSA). An advance copy of the Plan was also provided to GSA earlier in the year for its use in developing the fiscal year 2010 Federal Buildings Fund budget request. 

At the time of my letter, we did not know which, if any, projects would be included in the President’s 2010 Budget Request. We were disappointed to learn that 

funding was not requested for any of the projects on the Five-Year Plan. If these 

projects are not funded in fiscal year 2010, we are concerned that all projects in 

2010 and subsequent years will be delayed at least another year—seriously impacting the judicial process where courthouses are already out of space, and critical security deficiencies currently exist. These projects are ranked in priority order, and 

several are ‘‘shovel-ready’’ with contractors in place and construction ready to begin. 

I have enclosed another copy of our Five-Year Courthouse Construction Plan for 

Fiscal Year 2010–2014 and appreciate any consideration you can give to our courthouse construction needs. If you have any questions, please do not hesitate to contact me. 

Sincerely, 

JAMES C. DUFF, 

Secretary. 

Enclosure 
212 

FIVE-YEAR COURTHOUSE PROJECT PLAN FOR FISCAL YEARS 2010–2014 APPROVED BY THE 

JUDICIAL CONFERENCE OF THE UNITED STATES—MARCH 17, 2009 

[Estimated dollars in millions] 

Cost Score 

Est. Net 

Annual 

Rent 

FISCAL YEAR 2010 

Austin, TX ........................................................................................... Add’l. S&D/C .......... $116.1 82.0 $6.5 

Salt Lake City, UT ............................................................................... Add’l D/C ............... $211.0 67.9 $11.4 

Savannah, GA ..................................................................................... Add’l. D .................. $7.9 61.3 $3.5 

San Antonio, TX .................................................................................. Add’l. D .................. $4.0 61.3 $9.2 

Mobile, AL ........................................................................................... Add’l. S&D/C .......... $190.3 59.8 $4.7 

Total ...................................................................................... ................................ $529.3 .............. $35.4 

FISCAL YEAR 2011 

Nashville, TN ....................................................................................... Add’l. S&D/C .......... $183.9 67.3 $7.0 

Savannah, GA ..................................................................................... C ............................ $95.5 61.3 $3.5 

San Jose, CA ....................................................................................... Add’l. S .................. $38.6 54.5 $9.4 

Greenbelt, MD ..................................................................................... S&D ........................ $14.0 53.8 $1.6 

Total ...................................................................................... ................................ $332.0 .............. $21.5 

FISCAL YEAR 2012 

San Antonio, TX .................................................................................. C ............................ $142.2 61.3 $9.2 

Charlotte, NC ...................................................................................... C ............................ $126.4 58.5 $7.1 

Greenville, SC ..................................................................................... C ............................ $79.1 58.1 $4.1 

Harrisburg, PA .................................................................................... C ............................ $57.3 56.8 $5.4 

San Jose, CA ....................................................................................... D ............................ $17.2 54.5 $9.4 

Total ...................................................................................... ................................ $422.2 .............. $35.2 

FISCAL YEAR 2013 

Norfolk, VA .......................................................................................... C ............................ $104.7 57.4 $5.1 

Anniston, AL ........................................................................................ C ............................ $20.4 57.1 $1.1 

Toledo, OH ........................................................................................... C ............................ $109.3 54.4 $5.9 

Greenbelt, MD ..................................................................................... C ............................ $170.0 53.8 $1.6 

Total ...................................................................................... ................................ $404.4 .............. $13.8 

FISCAL YEAR 2014 

San Jose, CA ....................................................................................... C ............................ $223.9 54.5 $9.4 

S=Site; D=Design; C=Construction; Addl.=Additional. 

All cost estimates subject to final verification with GSA. 

ENERGY EFFICIENCY IN BUILDINGS

Senator DURBIN. Can I switch off courthouses for a very quick 

observation and question, Administrator Prouty? 

I recently was invited to tour what was formerly known as Sears 

Tower in Chicago. It is now known as Willis Tower. And it was 

built 35 years ago and I think still is the tallest building in the 

United States. And maybe it has been eclipsed overseas by some 

other building, but it is certainly a dominant feature on the Chicago skyline. 

And the management company brought me in to show me what their plans were. And their plans involve about a $300 million investment in making this 35-year-old building energy efficient. It 

turns out when it was built 35 years ago, no one paid any attention 
213 

to the basics. They have 16,000 single-pane windows in the Sears 

Tower, for example. 

And if you can imagine a heating and air-conditioning system 

that is ancient by today’s modern standards, and it costs a fortune, 

125 elevators and all of these things. They have decided that it is 

economical for them to invest $300 million in energy savings and 

that it will be paid back rather promptly. 

And that, of course, means replacing the windows, maybe even 

repainting the building, putting wind turbines on every roof, adding solar panels, creating new heating and air-conditioning unit, 

actually creating a co-generation opportunity with 125 elevators, 

which with the friction they create can be generating electricity. 

They think that this building can become an energy producer to 

the point where they can build a hotel next door and use the energy off the old Sears Tower to sustain a building next to it. 

I think of that in terms of your responsibility with a lot of buildings even older, and pollution coming off of them every day. Someone estimates 60 percent of our pollution comes off of our structures as opposed to what we drive. And I am wondering, as you get 

into this decisionmaking about the future of GSA buildings, what 

calculations are you making that may parallel what I found at the 

Sears Tower? 

Mr. PROUTY. I think we are in the same category. I was just 

going to say that we wished we had buildings so young as 35 years 

old. Our buildings are a lot older, a lot more inefficient. 

There are a lot of really good things that are happening right 

now. The technology is improving to the point that you are getting 

a payback that causes these all to pay out in reasonable amounts 

of time. 

Also what we are seeing is green buildings in the market per- form better. We also know with the $4.5 billion that we have been 

given, that we are going to drive that industry. So we absolutely 

agree. We are looking for every innovative approach we possibly 

can. We are using solar. We are using wind. We are doing windows. We are doing insulation. We are doing improved technology 

in all the systems. So we agree we are learning more every day. 

I am not an expert. We happen to have an expert with us. 

Senator DURBIN. How do you stay in front of it on the technology? For example, it appeared at first blush the window replacement would be some at least double-paned insulated windows, and 

then it turns out there are other windows coming on the scene with 

film that allows in the sunlight at certain times of the year—the 

winter, when you want it—and shields the building, inside the 

building parts of the year when you don’t want it. 

And this really just seems to be coming so quickly. How do you 

evaluate these technologies when you are about to make massive 

investments? 

Mr. PROUTY. Yes, we are tied to the industry. We have a green 

building program. Kevin Kampschroer leads that program. He is— 

he meets with them all the time. In many cases, we are leading 

that industry. So, as you say, it is a very dynamic world. It is 

changing every day. But the good news is we have $4.5 billion, 

which causes us to be able to test out some of these new technologies. 
214 

Senator DURBIN. At the risk of a commercial announcement, I 

have discovered a company that just bought a facility in Chicago 

called Serious Materials. It is out of California. And they have production facilities in several different places, and they are doing the 

window replacement on the Empire State Building with these new 

filmed windows. And so, I am going to promote them in the hopes 

it means more jobs in Chicago, a place that I am proud to represent. 

Thank you very much. 

Do you have anything further? 

Well, thanks a lot for your testimony, Mr. Prouty. 

Mr. PROUTY. Thank you very much. 

Senator DURBIN. And Judge Bataillon, thank you for coming and 

giving us an insight into this constitutional clash that we have over 

the construction of courthouses. Thanks a lot. 

Judge BATAILLON. Thank you very much. Thank you. 

ADDITIONAL COMMITTEE QUESTIONS

Senator DURBIN. At this point, we are going to recess the subcommittee and tell you that there will be some written questions 

coming your way. Hope that you can respond to them on a timely 

basis and maybe by—we will leave the record open until Wednesday, June 24 at noon. 

[The following questions were not asked at the hearing, but were 

submitted to the Administration for response subsequent to the 

hearing:] 

QUESTIONS SUBMITTED TO PAUL F. PROUTY

QUESTIONS SUBMITTED BY SENATOR RICHARD J. DURBIN

RECOVERY ACT IMPLEMENTATION

Question. As part of the Recovery Act, GSA received $5.5 billion, of which $4.5 

billion was designated for converting GSA facilities to High-Performance Green 

Buildings. The Act states that not less than $5 billion of Recovery Act funds must 

be obligated by the end of fiscal year 2010. GSA has identified 43 buildings for ‘‘full 

and partial building modernizations’’ at an estimated total cost of approximately 

$3.1 billion. GSA has also identified 194 buildings for ‘‘Limited Scope projects’’ at 

a cost of approximately $800,000,000. In addition, the Recovery Act funds an additional $1 billion in construction projects. This is a significant increase in workload 

as compared with previous years, and recent press reports suggest that there may 

be as many as 150 vacancies for contracting officers at GSA and shortages in other 

critical personnel areas. 

Given the volume of projects to be undertaken by GSA and the amount of funds 

to be obligated in fiscal year 2010, how can you assure the subcommittee that GSA 

will be able to responsibly obligate $5 billion or more by the end of fiscal year 2010? 

Answer. To ensure that we responsibly obligate $5 billion or more by fiscal year 

2010, GSA has established a centralized program management office (PMO) within 

the Public Buildings Service (PBS) to oversee and manage recovery activities. The 

PMO is a small, cohesive, National Office staffed with high performing project managers and subject matter experts who are supported by contract/consultant resources. 

The PMO will: manage Recovery Act tracking and reporting efforts; support regional offices by providing contracts, subject matter experts, legal expertise, audit 

functions, workload/staff modeling, tools, and troubleshooting of program and project 

challenges; interface with stakeholders, including Congress and tenant Federal 

agencies; ensure that cost, schedule, and scope are completed as promised; identify 

resource needs and shift resources to accommodate changing program requirements; 

and establish a quality review plan to define and assess the key GSA information 

systems that may contain information required for full Recovery reporting and con-
215 

tinually monitor and review the information required for compliance with Recovery 

Act reporting requirements. 

GSA’s PBS has enhanced the reporting capabilities of its project tracking database to incorporate additional project milestones into the Variance Tracking Report, 

a management tool for monitoring and tracking project progress. This report also 

serves as an early warning tool so management can identify projects that are starting to deviate from the plan and promptly implement corrective activities. 

The PMO is undertaking regular and ongoing activities with the Office of Inspector General to ensure effective and efficient program execution, including pre-award 

audits and ongoing dialogue. 

GSA has implemented additional management controls and oversight mechanisms 

to ensure effective and efficient execution of recovery activities. For guidance, we 

are drawing on Agency-wide existing management controls, which are based on 

OMB Circular A–123, Management’s Responsibility for Internal Control; the Federal 

Managers’ Financial Integrity Act (FMFIA); OMB Circular A–127 Financial Management Systems; and the Federal Financial Management Improvement Act 

(FFMIA). GSA’s internal control reviews are conducted for Agency program components to ensure that all significant risks are identified, tested, evaluated, and mitigated in a timely and effective manner. 

Question. Does GSA currently have sufficient staff to handle these projects? 

Answer. GSA is currently using several approaches to ensure there are sufficient 

resources to manage Recovery Act projects. Our approaches include deploying our 

experienced personnel to Recovery Act projects and backfilling with temporary hires 

as well as ‘‘industry hires’’ whose limited terms sunset with the expiration of the 

Recovery initiative. This solution fulfills our short-term need for a larger workforce 

without encumbering our long-term personnel goals. These industry hires are recruited from the ailing design, construction, and construction management industries. 

GSA is also hiring contractors to support GSA in such areas as data tracking and 

reporting, reviews of scopes, schedules and budgets, energy performance reviews, design services, construction contracting, technical expertise, and project management. 

GSA will continue to evaluate our resource needs on an ongoing basis, to determine where we have gaps and the best means to fill those gaps, including recruitment, contract staff, and redeployment of current staff. We are addressing resource 

requirements for accomplishing Recovery Act projects as well as our existing workload. We have sought approval from OPM to utilize various hiring authorities and 

are establishing national contract vehicles to supplement the workforce. 

Question. What is the optimal number of FTEs (GSA contracting officers, project 

managers, and support staff) needed to ensure that GSA will be able to award contracts for the 237 green building ‘‘modernization or limited scope’’ projects and the 

$1 billion worth of new Recovery Act construction projects in a timely manner? 

Answer. GSA has conducted a series of workforce analyses to determine the resources needed to deliver Recovery projects. It was estimated that approximately 

232 Government FTE and contractor positions are required in procurement, realty, 

architecture, engineering, project management, and program analysis to expeditiously and fully support the projects and programs tied to the Recovery Act. GSA 

will be re-directing existing resources, as well as hiring temporary resources, to 

meet this workload demand. 

Question. How does the optimal number compare to the actual staffing level? 

Answer. The optimal number of combined Government FTE and contractor positions is approximately 232 positions. To achieve this staffing level, PBS has redeployed current staff, recruited new hires, and procured contractor support to address 

resource requirements for accomplishing Recovery Act projects as well as our existing ongoing workload. We are on track to achieve this goal. 

Question. With respect to contract oversight, what is the optimal number of FTEs 

needed to ensure that these projects are appropriately monitored and contractors 

are delivering the products and services on time and at the proper cost? 

Answer. The optimal number of positions estimated above includes contract oversight resource needs. The 232 positions include managers and analysts who are 

dedicated to monitoring contractor performance and ensuring that projects are delivered in compliance with Recovery Act funding and GSA requirements, on-time and 

at the proper cost. 

Question. How does GSA plan to measure the environmental benefits of the Green 

Building projects in a quantifiable way? 

Answer. We are improving energy performance on a large scale with our full and 

partial building modernization projects and in specific ways with our limited scope 

projects. In both types of projects, we expect energy savings from new building controls and adjustments; lighting replacements; new roofs and windows: and building 
216 

mechanical system upgrades. We are performing detailed surveys of each building 

to quantify the potential for energy savings. Once the surveys have been completed 

and the baselines identified, we will be able to estimate the energy consumption reductions for the building specific projects. 

Question. How does GSA plan to measure the number of jobs created by the 

projects? 

Answer. GSA will not prepare independent estimates of jobs created by our Recovery Act projects. Instead, we will support the Administration’s efforts to collect job 

data directly from recipients of Federal contract awards and their sub-recipients. 

GSA has included provisions in our Recovery Act contracts consistent with interim 

Federal Acquisition Regulation (FAR) clause 52.204–11. This FAR clause requires 

recipients of Federal contract awards to submit information required by Section 

1512 of the Recovery Act through the www.FederalReporting.gov website. 

Question. What the basic distinction between a ‘‘partial building modernization’’ 

and a ‘‘limited scope project? 

Answer. Generally, full and partial building modernizations adopt a ‘‘whole building approach’’ and include repairs and renovations to multiple building systems in 

order to improve energy- and water-efficiency of the entire facility. Building systems, in this case, include Heating, Ventilation, and Air Conditioning (HVAC), 

building envelope, or lighting. Limited scope projects focus on installing a specific 

green technology (such as intelligent lighting, or ENERGY STAR roofs) or addressing a single building system. 

Examples of repairs and renovations included in full and partial modernization 

projects include: 

—Adding thicker insulation than required by the newest energy codes in climates 

where it makes sense; 

—Installing variable frequency drives to reduce energy and extend the life of mechanical equipment; 

—Converting parking structure lighting to LED (light-emitting diode), which dramatically lowers energy consumption, improves safety and visibility and reduces 

maintenance as LEDs can last two to three times as long as typical parking lot 

lights; 

—Retrofitting or replacing less efficient windows; and 

—Specifying dual flush toilets and waterless or low water urinals to save water 

and reduce demand on aging city sewer systems. 

Examples of limited scope improvements include: 

—Installing intelligent lighting systems that provide daylight and provide controls 

for occupants to adjust for ambient light versus task light; 

—Replacing flat roofs with ENERGY STAR membranes; integrated photovoltaic 

panels bonded to the membrane; or planted roofs. These options offer benefits 

ranging from increasing the life of the roof, to producing energy and to reducing 

the ‘‘heat island’’ effect of a black roof; and 

—Accelerating the installation of advanced meters—required under the Energy 

Policy Act to be completed by 2012. Advanced meters enable us to better manage buildings by instantaneously providing information on a building’s energy 

use and encouraging immediate operational changes. 

Question. What will be GSA’s approach to prioritizing among the 43 ‘‘full and Partial Modernization Projects’’ for implementation? Among the 194 ‘‘limited scope’’ 

projects? 

Answer. GSA’s priorities for ‘‘Full and Partial Modernization’’ and green ‘‘limited 

scope’’ projects are based on the purpose of the Recovery Act: (1) Stimulate the 

American economy by spending money quickly; and (2) Improve the environmental 

performance of Federal assets, particularly reducing our dependence on carbonbased fuels. 

Within these broad objectives, each class of project is prioritized based on the following criteria: 

Full and Partial Building Modernization projects: 

—High-performance features concentrating on energy conservation and renewable 

energy generation. 

—Speed of construction start (job creation). 

—Execution Risk (ensuring that the projects will not fail due to unforeseen conditions). 

—Facility Condition. The Facility Condition Index is a standard real estate industry index that reflects the cost of the repair and alteration backlog of a particular building relative to the building’s replacement value. 

—Improving Asset Utilization. 

—Return on Investment. 

—Avoiding Lease Costs. 
217 

—Historic Significance. 

Limited Scope projects are prioritized based on energy performance (beginning 

with the worst performing buildings) and informed by existing physical condition 

surveys: 

—Projects are initially prioritized based on Energy Use Intensity: Btus/Gross 

Square Foot. 

—This list is refined, based on input from Regions on specific building conditions 

and operations. 

—Preference is given to projects in descending order of: energy conservation, return, or high-performance improvement. 

No project is on our list if it does not deliver a positive return on investment. 

UNDERUTILIZED OR EXCESS FEDERAL PROPERTY

Question. Underutilized or excess federal property is a significant problem that 

puts the government at significant risk for lost dollars and missed opportunities. 

GAO reported in May 2007 that GSA reported 258 buildings, with 13.8 million rentable square feet, as excess property. In order to help other agencies better serve the 

public by meeting—at best value—their needs for real property such as federal 

buildings and to meet its goal of exemplary management of buildings, GSA should 

reduce its excess and underutilized property. 

What strategy will GSA employ to help the federal government reduce its excess 

and underutilized property? 

Answer. GSA is responsible for managing the utilization and disposal of Federal 

excess and surplus real property government-wide, and we have a comprehensive 

strategy for promoting the effective use of Federal real property assets. 

GSA Properties.—GSA has over 1,000 properties in our portfolio, making the disposal of underutilized real property a considerable task. GSA works together with 

partner Federal agencies, State and local governments, nonprofit organizations, 

business groups, and citizens, to ensure that we create a lasting, positive impact on 

communities by making valuable government real estate available for numerous 

public purposes. Properties that are not conveyed to eligible recipients for a public 

purpose are sold by competitive bid to private individuals. 

In fiscal year 2008, GSA disposed of 13 of our own properties, valued at approximately $58.5 million. These disposals provided revenues of $56 million for the Federal Buildings Fund (FBF). 

Other Federal Agencies.—GSA supports the Administration’s goals of disposing of 

unneeded real property and reducing Federal spending by providing a variety of 

asset management and disposal services to other landholding Federal agencies. GSA 

assists those agencies in developing asset management plans and strategies, in accordance with Executive Order 13327, ‘‘Federal Real Property Asset Management’’, 

and provides a variety of asset utilization and disposal services, including: Understanding the role of each asset in supporting agency mission objectives; examining 

current and future utilization alternatives; collecting and organizing title, environmental, historical and cultural information; and identifying real estate and community issues affecting the property. 

In fiscal year 2008, GSA disposed of 235 properties valued at approximately 

$192.2 million for other Federal agencies. GSA also conducted 26 targeted asset reviews to help agencies identify underutilized real property assets and improve their 

compliance with E.O. 13327. 

PROJECTS REQUESTED FOR FISCAL YEAR 2010

Question. The 2009 Omnibus Appropriations Act required the fiscal year 2010 

budget submission to include 5-year plans for Federal Building and Land port-ofentry projects. However, these plans have not been furnished to the Subcommittee. 

Why were these plans not included in the Budget submission? When will they be 

provided? 

Answer The 5-year capital plans required by the fiscal year 2009 Omnibus cannot 

be completed without input from many different customer Federal agencies. Our 

customers’ long-term requirements and GSA’s needs have changed as a result of the 

substantial new funds provided in the Recovery Act. The complexities created by the 

Recovery funding—as well as the increased workload that it placed on Federal capital planning staff—made it difficult to prepare a 5-year forecast of capital investment needs in time to include it in the fiscal year 2010 budget submission. 

The required plans will be submitted as soon as they are coordinated. GSA will 

include the plans in future budget requests. 
218 

REPAIR BACKLOGS

Question. Restoration, repair, and maintenance backlogs in federal facilities are 

significant and reflect the federal government’s ineffective stewardship over its valuable and historic portfolio of real property assets. As part of its 2008 financial statement, GSA reported about $7.3 billion in capital repair and alteration work items 

that had not been addressed by ongoing projects. 

To what extent, if any, will the funding provided by the American Recovery and 

Reinvestment Act address these needs? 

Answer. GSA expects Recovery Act funds to reduce the backlog of traditional Re- pairs and Alterations (R&A) needs by $1 to $1.5 billion. Of the $4.5 billion of ARRA 

funds directed towards High-Performance Green Buildings, almost two-thirds has 

been dedicated to energy improvements and greening initiatives, and the remainder 

will directly address the R&A backlog. The $1.05 billion provided for Federal buildings and LPOE projects will be used for New Construction, and will not have a direct impact on our repair and alterations liabilities. 

Question. What action is GSA taking to ensure that recently constructed and recently renovated properties are maintained so the situation of allowing facilities to 

deteriorate does not continue? 

Answer. GSA strives to maintain a portfolio of assets that are in ‘‘Good’’ condition, 

meaning needed repairs are less than 10 percent of the asset’s functional replacement cost. GSA maintains the condition of these core assets through strategic reinvestment throughout the life of the asset. Asset condition is evaluated and monitored annually, through a series of asset management diagnostic tests. When repair 

and alteration needs are identified, such repairs are addressed through the minor 

repairs and alterations program. Recently constructed and recently renovated properties have few, if any, repair and alteration needs. 

GSA has made progress in improving the condition of its portfolio of assets 

through strategic management of existing assets, and Recovery Act funding provided for repair, modernization, and green initiatives. For example, 50 U.N. Plaza 

in San Francisco, CA, had been mostly vacant, and Recovery Act funding will allow 

this historic asset to be fully utilized again. However, despite the investments of the 

Recovery Act, GSA continues to face challenges from maintaining an aging building 

portfolio. The Recovery Act is expected to reduce GSA’s R&A backlog by approximately $1 to $1.5 billion. 

QUESTION SUBMITTED BY SENATOR MARY L. LANDRIEU

CUSTOMS HOUSE

Question. The New Orleans Customs House is a magnificent historic structure located on the edge of the French Quarter that dates back to 1848. During Katrina, 

its roof failed, and the building suffered significant water damage. Since that time, 

GSA and Customs have dedicated funding to repair the building, and it is scheduled 

for re-occupancy in the spring of 2010. The Customs House is the only National Historic Landmark building in GSA’s Southwest Region, which is based in Fort Worth, 

Texas. This subcommittee included language in the previous year’s appropriations 

report that mentioned the building by name and underscored its significance to the 

local community. Section 307 of the Stafford Act and GSA Policy Number 2851.5 

both require that preference for reconstruction work following a major disaster be 

given to locally-based firms. However, there are no Louisiana firms under contract 

to perform work on the Customs House. 

Will you and the Chief Architect of GSA work with my office to ensure that the 

agency complies with the Stafford Act and follows its own policy on Gulf Coast reconstruction projects, by allowing locally-based Louisiana firms to participate in the 

restoration of the Customs House? 

Answer. Yes, GSA will work with Senator Landrieu’s office to address any questions on the restoration of the New Orleans Customs House. 

Phase I of the New Orleans Customs House repair and alteration is for Hurricane 

Katrina reconstruction, and as such is governed by the Stafford Act. The designbuild contract has been awarded to a local business: Carl E. Woodward, LLC, a New 

Orleans-based firm. The Phase I design firm is Waggonner & Ball Architects, also 

of New Orleans. As of July 2009, $36 million has been awarded. 95 percent of that 

amount, or approximately $34 million, has been awarded to Louisiana-based subcontractors. 

Phase II of the Customs House restoration does not involve any work covered by 

the Stafford Act, such as debris clearance, supply distribution, or reconstruction 

work. Nevertheless, GSA has awarded 35 percent of the design contract to 
219 

Waggonner & Ball Architects of New Orleans. The remainder of the Phase II design 

contract was awarded to a design firm that, while not locally-based, had extensive 

prior experience working on the Customs House, and was able to present a fair and 

reasonable price for the remaining design work. The construction contract for Phase 

II repair and alteration is anticipated to be awarded during or near January 2010. 

GSA is encouraging organizations, firms, and individuals residing or doing business 

primarily in New Orleans to submit proposals for the final portion of the Customs 

House restoration work, and is considering holding a local business workshop on the 

subject during autumn 2009. 

Re-occupancy of the Customs House is scheduled for Summer 2011. 

QUESTIONS SUBMITTED BY SENATOR SUSAN COLLINS

Question. It seems like the $4.5 billion provided for converting GSA facilities to 

High-Performance Green Buildings will create a great deal of demand for ‘‘green’’ 

building products and technologies, such as LED lighting and solar roofing materials. 

Is the domestic market for these materials strong enough to meet these needs? 

Answer. GSA is investigating the capacity of American manufactures to provide 

products, particularly in the energy efficiency sector, to be installed and used in 

GSA’s Recovery projects. GSA is using the services of a major construction management firm with close ties to the construction industry to analyze product requirements and project schedules. We are also using information already collected by the 

Department of Energy in this analysis. As part of this effort, GSA plans to manage 

project schedules and by extension, product orders, to level demand for specific manufactured products and materials. 

Question. Will all of these materials come from American manufacturers? 

Answer. The Recovery Act generally requires Federal agencies to utilize iron, 

steel, and manufactured goods produced in the United States for Recovery projects. 

GSA is asking the American manufacturing community to help meet its goal of ‘‘on 

time, on budget, on green.’’ Although specific requirements vary by product type and 

project, GSA strives to use American-made goods to the greatest extent possible on 

all Recovery Act projects. 

Question. Will GSA take any additional or extra steps to ensure that local, small 

businesses can compete to provide ‘‘green’’ products or services? 

Answer. GSA’s Recovery Act projects provide many opportunities for small businesses: 

—GSA has planned over 200 high-performance green building limited scope 

projects, which range in size from $114,000 to $107,000,000, and together total 

just over $800 million. 

—Other opportunities include an additional $296 million for small projects across 

the country. 

—Opportunities also exist in support service contracts, such as acquisition and 

project management support. 

GSA will support small businesses through the use of new small business setasides where adequate competition and competitive pricing can be achieved. 

GSA is also preparing a list of Indefinite Delivery, Indefinite Quantity (IDIQ) contract holders: This list will be made publicly available to assist small businesses in 

obtaining sub-contracts with existing GSA contractors. All bid opportunities will be 

advertising on www.FedBizOpps.gov. 

GSA is hosting partnering events that provide opportunities for small vendors to 

present qualifications and form relationships with prime contractors. We have also 

developed a communication network through small business associations, to provide 

information to vendors across the nation. 

GSA remains committed to negotiating aggressive small business subcontracting 

plans with our prime contractors for large design and construction contracts. As appropriate, GSA will publish prime contractor contact information online 

Question. GSA’s lack of responsiveness to this Committee and to the Committee 

on Homeland Security and Governmental Affairs is very problematic. As you know, 

both Committees have oversight over GSA’s policies and activities, and are responsible for ensuring that GSA is using Federal funds effectively. Inquiries to GSA— 

particularly questions relating to the Public Buildings Service and construction 

projects—take a very long time to generate responses, and sometimes are never answered. 

GSA frequently takes months to prepare responses to formal letters. Are you 

aware that this is a problem for GSA? Can you identify steps that you will take 

to improve this situation and ensure that GSA responds to Congressional inquir-
220 

ies—formal and informal—in a timely manner? If not, will you agree that this is 

a problem and will you commit to taking immediate steps to improve this situation? 

Answer. GSA is aware of the problem and we are currently analyzing our organizational structure and internal processes to correct this issue. The Public Buildings 

Service (PBS) has merged its legislative and correspondence offices into one office 

that reports directly to the PBS Chief of Staff. We have analyzed the correspondence 

process within PBS and are testing a new process starting July 30, 2009. We believe 

the new procedures will streamline the correspondence process within PBS and reduce the overall time it takes to return letters. In fact, PBS is aiming to reduce response time within PBS from months to 7 business days. This would include receiving the letter, vetting the request, researching the answer, drafting a response, and 

obtaining proper internal clearance for the draft response, to ensure we have properly answered the letter. 

Question. The Fiscal Year 2009 Omnibus Appropriations Act includes separate 

provisions directing GSA to provide both a 5-year plan for Federal buildings and a 

5-year plan for land ports of entry in fiscal year 2010 Congressional Budget Justification materials. GSA did not provide these plans in their budget justification 

materials and has yet to provide them to the Committee. 

If these plans are not available, what is the basis for GSA’s fiscal year 2010 request for Federal building construction and land ports of entry? How can this Committee be certain that the projects included in your request are the best or most 

pressing needs for Federal construction? 

Answer. GSA’s fiscal year 2010 request for New Construction projects concentrates on space consolidation efforts, for the Food and Drug Administration and 

the Federal Bureau of Investigation, and for mission-critical requirements that cannot be easily met in leased space. 

Our customers’ long-term requirements and GSA’s needs have changed as a result 

of the substantial new funds provided in the Recovery Act. However, the Recovery 

Act plan was based on shovel-ready projects, and a large number of high-priority 

needs remain that were not ‘‘shovel-ready’’ at the time the Recovery Act plan was 

prepared. 

The required plans will be submitted as soon as they are coordinated. GSA will 

include the plans, as required, in future budget submissions. 

Question. Although GSA has not provided 5-year plans for Federal buildings or 

Land Ports of Entry, this Committee does have the 5-year courthouse plan of the 

Judiciary. But neither of the courthouses in GSA’s request are on that list. The 

projects on the Judiciary’s list are scored and ranked by fiscal year. 

In developing the fiscal year 2010 budget request, why did GSA not follow the 

priorities set out in the Judiciary’s Five-Year Courthouse Plan? 

Answer. The funding provided by the Recovery Act allowed GSA to fund a large 

program of Courthouse requirements in fiscal year 2009 and fiscal year 2010; this 

freed up funds to meet the needs in Lancaster and Yuma with Federal construction. 

Our Recovery Act project plan includes 6 Courthouse New Construction projects, 

including the Austin Courthouse ($116 million), which is the highest priority Courthouse to be identified by Judiciary in their Five-Year Plan. The Recovery Act project 

plan also includes funds for repair and alteration work on more than 110 Courthouses. 

Question. What objective criteria led GSA to select Lancaster, Pennsylvania, and 

Yuma, Arizona, over the projects on the Judiciary’s list? 

Answer. These projects were originally identified as potential lease construction 

projects. Both OMB and GAO have been closely reviewing lease construction scenarios and have determined that it is often not in the best interest of the Federal 

Government and the taxpayer. In this case, GSA performed a 30-year present value 

life cycle cost comparison between Federal construction and leasing. The analysis 

considered both the government’s equity and its capital and operating costs in each 

alternative to determine the lowest net costs expressed in present value terms for 

a given amount of space. The inherently governmental nature and long term requirement of these courthouses make Federal construction a financially responsible 

solution. A lease construction project would involve annual above-market rent outlays from the government over the life of the lease without any benefit of residual 

value at the end of the lease. The life-cycle cost analysis supports Federal construction as the best value to the taxpayer. 

The Courthouse project in Yuma, AZ was originally proposed as a lease construction project because funding was not expected to be available to meet the Judiciary’s 

requirements with Federal construction. GSA was also working with the Courts to 

develop a potential lease construction project in Lancaster, Pennsylvania. If funding 

were provided through the 2010 Appropriations, both projects would be converted 
221 

to Federal construction, which would allow for a government-owned solution and 

save taxpayer money. 

Question. GSA seems to have an inability or unwillingness to appropriately address the needs of local communities when planning and executing Federal construction projects. For example, this is apparent in GSA’s dealings with the Madawaska, 

Maine community. 

Does GSA have a formal process for collecting public input on construction 

projects? 

Answer. At GSA, we take pride in our work with communities when planning and 

executing Federal construction projects. Large or complex development projects 

often engender competing views on community impacts. GSA conducts formal and 

informal communications with local communities throughout all stages of the design 

and construction process for new construction projects. 

During the planning stage of a project, GSA utilizes the process set forth by the 

National Environmental Policy Act (NEPA) to solicit public involvement and input 

from residents, business owners, local and state officials, and affected agencies. GSA 

typically hosts a public meeting to hear local concerns and provide contact information for those who want to comment directly to the agency. GSA takes into consideration issues raised by the public at these meetings or in writing to determine and 

update the scope of the prospectus development study. NEPA documentation is 

made available to local communities as it is developed. GSA then evaluates and responds to those comments as a part of our NEPA process. 

Additionally, GSA holds community open house meetings and hosts stakeholder 

meetings at key stages during project design. For example, GSA held a stakeholders’ 

meeting for the Madawaska Land Port of Entry on March 31 of this year. Nearby 

businesses (Fraser Paper and Montreal, Maine, and Atlantic Railway, Inc.), Town 

of Madawaska officials, Congressional delegation representatives, and the facility’s 

future tenant, the Department of Homeland Security’s U.S. Customs and Border 

Protection, were invited to attend. The GSA design team presented an electronic 

building information model (BIM) showing the new port and incorporating a 4 dimensional (time visualization) demonstration of how traffic will flow through the 

new port. 

Question. Does GSA perform an objective review of citizen concerns, and notify the 

community of GSA’s decision in a timely manner? 

Answer. GSA performs an objective review of citizen concerns for Federal construction projects. GSA immediately responds to oral questions received during open 

houses and stakeholder meetings, and addresses written comments submitted 

through the Agency’s NEPA review. In the case of Madewaska, GSA thoroughly reviewed and responded to community concerns, questions and comments. Once substantive comments were addressed, GSA notified the community of how it evaluated 

and responded to comments in its final EIS. 

The timeliness of the GSA’s responses can be best demonstrated by example. For 

the Madawaska Land Port of Entry, the Draft EIS was made available to the public 

on August 8, 2006. The public comment period started on August 3, 2006 and ended 

on September 22, 2006. GSA also hosted an open house on August 17, 2006, where 

14 attendees offered oral comments and GSA received ten written comments. GSA 

received a total of 75 pages of public concerns and comments regarding its Draft 

EIS, including verbal and written comments. GSA objectively reviewed these comments and then responded accordingly in the final EIS, which was published in December 2006. 

Question. Approximately how many data centers does the Federal Government 

own? Approximately how many square feet of data center space does the federal 

government occupy in government owned facilities and contractor owned facilities? 

Answer. The Office of Management and Budget is currently gathering Government-wide information on data centers. Once we receive the updated information, 

we will be in a better position to answer these questions. We expect to provide the 

Committee with the answers by October 15, 2009. 

Question. What risk does the continued proliferation of federal data centers 

present to the federal budget and our nation’s energy consumption? 

Answer. The proliferation of Federal data centers will increase energy consumption in order to support the facilities’ environment control systems and information 

technology systems. Additional data centers, as historically constructed, would increase overall costs to the Federal government for construction and operation and 

maintenance, and not take advantage of modern concepts such as cloud computing 

and virtualization that can reduce IT cost, energy consumption and lower the cost 

of government operations. Future data centers should be built with a well-coordinated strategy that increases capacity and utilizes modern concepts such as green 

building, and other efficiencies that would otherwise not be realized. 
222 

Question. Is GSA actively exploring how it can be a singular provider of data processing and storage capability to a large portion of the rest of the Federal Government? 

Answer. Yes, GSA is currently preparing a business case analysis to determine 

the viability of providing multi-tenant government-owned data centers that offer a 

fully acceptable risk mitigated data survivability solution to all Federal entities. 

To date, this analysis has focused on ensuring that Federal data centers provide 

adequate protection for our nation’s most critical information and network infrastructures. 

Question. What role can intra-data center and inter-data center virtualization 

play in facilitating federal data center consolidation? 

Answer. These activities will reduce the footprint of information technology tremendously, through the provisioning of technology resources, and will assist in the 

reduction of Federal energy consumption. Data center virtualization will be one vehicle to realizing the cost savings and efficiencies proposed in this area by this Administration. 

Question. What challenges exist to GSA and other agencies on the statutory and 

regulatory levels to achieving a more consolidated federal IT infrastructure? 

Answer. We are currently gathering Government-wide information on data centers. Once we receive the updated information, we will be in a better position to answer these questions. We expect to provide the Committee with the answers by October 15, 2009. 

Question. What are some examples of excellence within the federal government 

with regard to pushing the consolidation agenda forward? 

Answer. We are currently gathering Government-wide information on data centers. Once we receive the updated information, we will be in a better position to answer these questions. We expect to provide the Committee with the answers by October 15, 2009. 

QUESTION SUBMITTED TO JOSEPH F. BATAILLON

QUESTION SUBMITTED BY SENATOR SUSAN COLLINS

Question. GSA will be spending $1.5 billion of American Recovery and Reinvestment Act (Stimulus) funds on facilities in which the Judiciary is a tenant. Do you 

believe the projects that have been identified reflect the Judiciary’s highest priority 

needs? 

Answer. The Judiciary’s top space priority is the additional money needed to build 

the Los Angeles project. We were hopeful that stimulus funding was going to be provided to fund the estimated shortfall for the Los Angeles project that was authorized 

by the House and Senate. Thereafter, the Judiciary’s space priorities are set forth 

in the attached Five-Year Courthouse Project Plan for Fiscal Years 2010–2014 (FiveYear Plan). Only one courthouse that was on the Five-Year Plan, Austin, Texas, was 

included in the stimulus legislation ($116 million). The Judiciary recognizes and is 

appreciative of the fact that of the $4.5 billion appropriated for green buildings, we 

will receive almost $1.3 billion of that money for repair and alteration projects in 

132 buildings where the Judiciary is a tenant. In addition, two projects (Billings, 

Montana and Bakersfield, California) which the Judiciary and GSA had initially determined could best be provided through lease-construct are now funded as federal 

construction projects through the stimulus legislation. The Judiciary’s highest priority space needs, however, are reflected in the Five-Year Plan. 

FIVE-YEAR COURTHOUSE PROJECT PLAN FOR FISCAL YEARS 2010–2014 APPROVED BY THE 

JUDICIAL CONFERENCE OF THE UNITED STATES—MARCH 17, 2009 

[Estimated dollars in millions] 

Cost Score 

Est. Net 

Annual 

Rent 

FISCAL YEAR 2010 

Austin, TX ........................................................................................... Add’l. S&D/C .......... $116.1 82.0 $6.5 

Salt Lake City, UT ............................................................................... Add’l D/C ............... $211.0 67.9 $11.4 

Savannah, GA ..................................................................................... Add’l. D .................. $7.9 61.3 $3.5 

San Antonio, TX .................................................................................. Add’l. D .................. $4.0 61.3 $9.2 

Mobile, AL ........................................................................................... Add’l. S&D/C .......... $190.3 59.8 $4.7 
223 

FIVE-YEAR COURTHOUSE PROJECT PLAN FOR FISCAL YEARS 2010–2014 APPROVED BY THE 

JUDICIAL CONFERENCE OF THE UNITED STATES—MARCH 17, 2009—Continued 

[Estimated dollars in millions] 

Cost Score 

Est. Net 

Annual 

Rent 

Total ...................................................................................... ................................ $529.3 .............. $35.4 

FISCAL YEAR 2011 

Nashville, TN ....................................................................................... Add’l. S&D/C .......... $183.9 67.3 $7.0 

Savannah, GA ..................................................................................... C ............................ $95.5 61.3 $3.5 

San Jose, CA ....................................................................................... Add’l. S .................. $38.6 54.5 $9.4 

Greenbelt, MD ..................................................................................... S&D ........................ $14.0 53.8 $1.6 

Total ...................................................................................... ................................ $332.0 .............. $21.5 

FISCAL YEAR 2012 

San Antonio, TX .................................................................................. C ............................ $142.2 61.3 $9.2 

Charlotte, NC ...................................................................................... C ............................ $126.4 58.5 $7.1 

Greenville, SC ..................................................................................... C ............................ $79.1 58.1 $4.1 

Harrisburg, PA .................................................................................... C ............................ $57.3 56.8 $5.4 

San Jose, CA ....................................................................................... D ............................ $17.2 54.5 $9.4 

Total ...................................................................................... ................................ $422.2 .............. $35.2 

FISCAL YEAR 2013 

Norfolk, VA .......................................................................................... C ............................ $104.7 57.4 $5.1 

Anniston, AL ........................................................................................ C ............................ $20.4 57.1 $1.1 

Toledo, OH ........................................................................................... C ............................ $109.3 54.4 $5.9 

Greenbelt, MD ..................................................................................... C ............................ $170.0 53.8 $1.6 

Total ...................................................................................... ................................ $404.4 .............. $13.8 

FISCAL YEAR 2014 

San Jose, CA ....................................................................................... C ............................ $223.9 54.5 $9.4 

S=Site; D=Design; C=Construction; Addl.=Additional. 

All cost estimates subject to final verification with GSA. 

CONCLUSION OF HEARINGS

Senator DURBIN. So that is about it for today, and the subcommittee is going to stand recessed. 

Thank you very much. 

[Whereupon, at 4:53 p.m., Tuesday, June 16, the hearings were 

concluded, and the subcommittee was recessed, to reconvene subject to the call of the Chair.] 

(225) 

MATERIAL SUBMITTED SUBSEQUENT TO THE 

HEARINGS 

[CLERK’S NOTE.—The following testimony was received by the 

Subcommittee on Financial Services and General Government for 

inclusion in the record.] 

PREPARED STATEMENT OF THE NATIONAL COALITION FOR HISTORY

The National Coalition for History (NCH) is a consortium of over 60 organizations 

that advocates and educates on federal legislative and regulatory issues affecting 

historians, archivists, political scientists, teachers, and other stakeholders. As researchers and conservators of American history and culture we care deeply about 

the programs and activities of the National Archives and Records Administration 

(NARA) and the National Historical Publications and Records Commission 

(NHPRC). Thank you for the opportunity to submit our views on the agency’s proposed fiscal year 2010 budget. 

We want to thank you Mr. Chairman, and all of the members of the subcommittee, for their strong support of NARA’s budget in fiscal year 2009. Despite 

tight budget constraints, you were able to provide NARA with increased funding. 

We especially want to express our appreciation for the additional funding that was 

included for the second consecutive fiscal year to hire additional archival staff. 

Congress continues to face enormous fiscal challenges in crafting the federal budget for fiscal year 2010. However, we are encouraged that NARA would see a $7.6 

million increase in funding under President’s Obama’s proposed fiscal year 2010 

budget. The overall funding level of $466 million reflects the Administration’s strong 

commitment to NARA’s mission as steward of our Nation’s documentary heritage. 

However, there are specific priorities that we feel must be addressed at NARA. 

National Historical Publications and Records Commission (NHPRC) 

We appreciate the Subcommittee’s strong support for the NHPRC in the fiscal 

year 2009 budget. Your actions not only saved the NHPRC from elimination, but 

also provided $9.25 million for grants, a $1.75 million increase from fiscal year 2008. 

This is the closest the NHPRC has come since fiscal year 2004 to receiving its fully 

authorized amount of $10 million. 

While we are grateful that the Obama Administration has recommended funding 

the NHPRC grants programs at the $10 million level, this macro number does not 

tell the whole story. 

NARA’s ‘‘2010 Performance Budget—Congressional Justification’’ recommends apportioning the $10 million in funding amongst three program areas. The Founding 

Fathers Online initiative would receive $4.5 million. The traditional core programs 

of the NHPRC of publishing historical records of key individuals and movements in 

documentary editions would receive $2 million. In addition, the archives preservation, access, and digitization grants that go mainly to assist states in their archival 

programs would receive $3.5 million. 

In 2008, Congress enacted the ‘‘Presidential Historical Records Preservation Act 

of 2008’’ (Public Law 110–404). In addition to authorizing the Archivist to enter into 

contractual agreements to put the Founding Fathers Papers projects online, the law 

creates two new grant programs that could potentially compete for already scarce 

NHPRC funds. 

The law authorized ‘‘Grants for Presidential Centers of Historical Excellence’’ to 

facilitate the preservation of historical records related to any former president who 

does not have an archival depository administered by NARA under the Presidential 

Libraries Act. The law also authorizes the creation of a national database for 

records of servitude, emancipation, and post-Civil War Reconstruction and allows 

the NHPRC to make grants to preserve these records. 

Given all of these additional responsibilities placed on the NHPRC, we feel that 

the priorities put forth by the Administration amount to nothing more than per-
226 

forming triage on a grossly overburdened agency. It is certainly within the prerogative of the Administration to suggest how the $10 million be spent. However, the 

final decision rests with the Congress which appropriates the funds and makes its 

priorities known through bill language and committee reports. 

The NHPRC is a 15-member body chaired by the Archivist of the United States 

that is comprised of representatives of the three branches of the Federal Government. In addition, the NHPRC includes six members representing professional associations of archivists, historians, documentary editors, and records administrators 

who are chosen based on their extensive expertise in their respective fields. 

Congress created the NHPRC, and its predecessor the National Historical Publications Commission, in 1934 to make precisely the kind of resource allocation decisions the Administration proposes in its fiscal year 2010 budget request. Congress 

should leave these funding decisions to those with the professional expertise to determine priorities, not to bureaucrats at the Office of Management and Budget who 

sought throughout the Bush administration to eliminate the program altogether. 

The NHPRC’s $10 million annual authorization is expiring this fiscal year, and 

this amount has not been increased since fiscal year 1997. Even with an authorization, the NHPRC has constantly been threatened and inflation has seriously eroded 

its funding level in constant dollars. We urge the Administration and the Congress 

to support the passage of legislation to reauthorize the NHPRC at an annual level 

of $20 million for fiscal years 2010–2014. 

Operating Expenses (OE) 

The President’s fiscal year 2010 request includes $339.8 million for NARA’s operating expenses budget. This reflects a $12.5 million increase over fiscal year 2009. 

The fiscal year 2010 budget operating expenses program budget includes $1 million to hire an additional 12 Full-Time Equivalent (FTE) archival staff. We are 

happy to see that the President’s request continues the initiative your subcommittee 

began 2 fiscal years ago to provide NARA with additional funding to hire new staff 

and to ensure that research hours at NARA facilities are maintained. 

For fiscal year 2010, the budget requests $4.2 million and 27 FTE to implement 

two new mandates assigned to NARA’s portfolio. 

The budget requests $1.4 million and 6 FTE to staff and operate NARA’s Office 

of Government Information Services (OGIS). The OGIS will serve as the Freedom 

of Information Act (FOIA) ombudsman for the federal government as authorized by 

the OPEN Government Act of 2007 (Public Law 110–175). We are happy to see that 

the battles that were fought with the Bush administration over funding the office 

and locating it within NARA are finally over. 

The OE budget also includes $1.9 million and 9 FTE to staff and operate the Controlled Unclassified Information (CUI) Office. We hope that the Archivist will play 

a key role within the administration in the development of the forthcoming government-wide CUI policy. The addition of the Office of Government Information Services (OGIS) and the CUI offices at NARA, as provided for in the President’s fiscal 

year 2010 budget, will strengthen the Archivist’s authority in ensuring appropriate 

open access to public information. 

Electronic Records Archives (ERA) 

The long-delayed Electronic Records Archives (ERA) is an essential tool for the 

NARA of today and tomorrow. Mandatory use of the ERA by all federal agencies 

is currently scheduled to begin in January 2011. Without this system NARA will 

be unable to manage the exponentially expanding volume of electronic records. Effective management of federal records will improve the performance of our government, save tax dollars, and ensure current and future generations will have access 

to our nation’s history. 

We believe that the Electronic Records Archive program merits the $18.5 million 

in increased funding proposed by the President in his fiscal year 2010 budget. However, we continue to share the concerns that members of this Subcommittee and the 

Government Accountability Office have expressed about the ERA program remaining on schedule and budget. This program is vital not just to NARA but also to the 

entire federal government and the historical and archival communities. We are confident that this Subcommittee will continue its vigorous oversight of the ERA program. One of the major challenges facing a new Archivist of the United States will 

be to ensure that the ERA comes fully online as currently scheduled in January 

2011, when use of the system will be mandatory for all agencies. 

We are concerned that, despite NARA’s past assurances to the contrary, the Bush 

administration’s electronic records will not be fully ingested until this autumn. 

Along with many in Congress, NCH expressed concerns throughout 2008 that the 

hastily-constructed Executive Office of the President (EOP) system that NARA had 
227 

built parallel to the ERA might not be capable of rapidly ingesting all of the Bush 

electronic records beginning on January 20, 2009. We hope that Congress will continue to monitor this situation and hold NARA accountable for completing this 

project expeditiously. 

Repairs and Restoration 

The bill provides $27.5 million for repairs and restoration. This amount includes 

$17.5 million for necessary expenses related to the repair and renovation of the 

Franklin D. Roosevelt Presidential Library in Hyde Park, NY, which NARA has listed as its top capital improvement priority. The remaining $10 million will be used 

to fund repairs and restorations to 16 NARA-owned facilities. NCH is pleased that 

the President’s budget request continues to fund the much needed repairs at the 

FDR Library, the oldest in the presidential library system. 

Congress last year made a strong statement that the costs associated with the 

construction and maintenance of presidential libraries have been spiraling out of 

control. Congress enacted a law (Public Law 110–404) increasing the endowment 

percentage requirement for presidential library foundations for the cost of land, construction, and installing equipment at these facilities from 40 percent to 60 percent. 

Unfortunately, we have seen earmarks for the maintenance of specific presidential 

libraries tacked on to NARA’s annual appropriation at the expense of NARA’s core 

mission. NARA must now provide Congress annually with a 10-year capital improvement plan for the Presidential Library System. NARA should ensure this plan 

is based on demonstrated needs, not outside political pressure. 

Thank you again for the opportunity to present our views on these issues of vital 

concern to the historical and archival communities. 

(i) 

LIST OF WITNESSES, COMMUNICATIONS, AND 

PREPARED STATEMENTS 

Page 

Bataillon, The Honorable Joseph F., Chief Judge, U.S. District Court for 

the District of Nebraska; Chair, Space and Facilities Committee, Judicial 

Conference of the United States ......................................................................... 191 

Prepared Statement of ..................................................................................... 201 

Question Submitted to ..................................................................................... 222 

Statement of ...................................................................................................... 199 

Bond, Senator Christopher S., U.S. Senator From Missouri: 

Prepared Statement of ..................................................................................... 73 

Questions Submitted by............................................................................... 116, 158 

Statement of ...................................................................................................... 72 

Collins, Senator Susan, U.S. Senator From Maine: 

Prepared Statements of ................................................................................... 5, 170 

Questions Submitted by...................................... 37, 67, 112, 154, 185, 219, 222 

Statements of...................................................................................................... 4, 69 

Durbin, Senator Richard J., U.S. Senator From Illinois: 

Opening Statements of .................................................................................. 69, 161 

Prepared Statement of ..................................................................................... 2 

Questions Submitted by............................................... 35, 57, 103, 150, 175, 214 

Statement of ...................................................................................................... 1 

Geithner, Hon. Timothy F., Secretary, Office of the Secretary, Department 

of the Treasury ..................................................................................................... 69 

Summary Statement of .................................................................................... 74 

Prepared Statement of ..................................................................................... 75 

Gensler, Hon. Gary, Chairman, Commodity Futures Trading Commission ....... 43 

Prepared Statement of ..................................................................................... 45 

IRS Oversight Board, Prepared Statement of the ................................................ 140 

Investment Company Institute, Prepared Statement of the ................................ 40 

Kelley, Colleen M., National President, National Treasury Employees Union, 

Prepared Statement of ......................................................................................... 146 

Landrieu, Senator Mary L., U.S. Senator From Louisiana, Questions Submitted by .......................................................................................................... 181, 218 

Lautenberg, Senator Frank R., U.S. Senator From New Jersey: 

Question Submitted by ..................................................................................... 153 

Statement of ...................................................................................................... 71 

Mills, Hon. Karen G., Administrator, Small Business Administration ............... 161 

Prepared Statement of ..................................................................................... 165 

Summary Statement of .................................................................................... 162 

National Coalition for History, Prepared Statement of the ................................. 225 

Nelson, Senator Ben, U.S. Senator From Nebraska: 

Questions Submitted by........................................................................ 37, 111, 154 

Statement of ...................................................................................................... 71 

Prouty, Hon. Paul F. Acting Administrator, General Services Administration ........................................................................................................................ 191 

Prepared Statement of ..................................................................................... 193 

Questions Submitted to .................................................................................... 214 
Page

ii 

Schapiro, Hon. Mary L., Chairman, Securities and Exchange Commission ....... 1 

Prepared Statement of ..................................................................................... 8 

Shulman, Douglas H., Commissioner, Internal Revenue Service, Department 

of the Treasury ..................................................................................................... 123 

Opening Statement of ...................................................................................... 123 

Prepared Statement of ..................................................................................... 125 

Tester, Senator Jon, U.S. Senator From Montana, Statement of ........................ 72 
(iii) 

SUBJECT INDEX 

COMMODITY FUTURES TRADING COMMISSION 

Page 

Additional Committee Questions ............................................................................ 57 

Adequacy of Funding to Permit Pay Parity ........................................................... 58 

Derivatives: 

Market Regulatory Reform .............................................................................. 59 

Regulation......................................................................................................... 53, 55 

Enforcement: 

Actions to Preserve Market Integrity and Protect Market Users ................ 60 

Penalties: Amount, Recovery and Deterrence ................................................ 54 

Index Traders ........................................................................................................... 51 

International ............................................................................................................ 56 

Memorandum of Understanding Between CFTC and SEC .................................. 60 

Merger ...................................................................................................................... 52

Most Serious Management Challenges Identified by Inspector General ............ 57 

Performance Goals/Measuring Outcomes .............................................................. 63 

Speculation ............................................................................................................... 50 

Staffing ..................................................................................................................... 48 

Student Loan Repayment ....................................................................................... 49 

Underfunding ........................................................................................................... 50 

DEPARTMENT OF THE TREASURY 

INTERNAL REVENUE SERVICE

A Firm Foundation Upon Which to Build ............................................................. 125 

Additional Committee Questions ............................................................................ 149 

Business Systems Modernization....................................................................... 137, 158 

Customer Account Data Engine ............................................................................. 138 

Deterrent Effect of Enforcement Initiatives .......................................................... 151 

Electronic Filing—Staffing Shifts ........................................................................... 151 

Enforcement......................................................................................................... 147, 158 

Explanation of Budget Activities ............................................................................ 128 

Fiscal Year 2010: 

Budget Adjustments ......................................................................................... 130 

IRS Budget Recommendations ........................................................................ 140 

Human Capital Crisis ............................................................................................. 146 

IRS Fiscal Year 2010 Budget Request ................................................................... 146 

Implementation of Tax Gap Strategy .................................................................... 160 

Improve Tax Administration and Other Miscellaneous Proposals ...................... 133 

Increasing Complexity of Tax Administration ...................................................... 147 

Information Technology Security ........................................................................... 139 

International Activity and the Tax Gap ................................................................ 137 

Major Challenges ..................................................................................................... 146 

Measuring Return on Investment: New Initiatives .............................................. 150 

Mistakes on Returns ............................................................................................... 133 

Performance on Toll-Free Phone Lines .................................................................. 134 

Phishing and Data Protection ................................................................................. 135 

Private Debt Collection ........................................................................................... 159 

Refund Anticipation Loans ..................................................................................... 134 

Regulation of Preparers ...................................................................................... 133, 137 

Section 1203 ............................................................................................................. 149 

Tax Gap....................................................................................................... 136, 147, 159 

Taxpayer Service ..................................................................................................... 148 
Page

iv 

The Administration’s Fiscal Year 2010 Budget Request Funds Key Priorities .. 127 

OFFICE OF THE SECRETARY

Additional Committee Questions ............................................................................ 102 

Alcohol and Tobacco Tax and Trade Bureau (TTB) .............................................. 108 

Auto Rescue .............................................................................................................. 120 

Automobile: 

Dealership Terminations ................................................................................. 94 

Industry ............................................................................................................. 88 

Capital Magnet Fund .............................................................................................. 105 

Committee on Foreign Investment (CFIUS) ......................................................... 103 

Community Development Financial Institutions (CDFI) Fund ........................... 104 

Credit Card Interchange Fees ................................................................................ 92 

Departmental Offices ............................................................................................... 103 

Executive Compensation ......................................................................................... 84 

Extension of Troubled Asset Relief Program ......................................................... 90 

Failed Banking Institutions .................................................................................... 86 

Federal Deficits ........................................................................................................ 96 

Financial: 

Crimes Enforcement Network (FinCEN) ........................................................ 106 

Product Safety Commission Proposal ............................................................. 98 

Regulatory Reform .................................................................................... 89, 95, 97 

Mortgage Foreclosure .............................................................................................. 80 

Office of Foreign Assets Control (OFAC) ............................................................... 104 

Protectionism ........................................................................................................... 119 

Redesigning the Tax System for Fairness and Efficiency .................................... 78 

Reengaging with the World on Economic Issues .................................................. 80 

Reforming Government Sponsored Enterprises .................................................... 102 

Regulatory Reform .............................................................................................. 100, 117 

Repairing and Reforming the Financial System ................................................... 77 

Repayment of TARP Funds .................................................................................... 119 

Repayments Under the Troubled Asset Relief Program ...................................... 92 

Social and Economic Missions ................................................................................ 118 

Staffing of the Troubled Asset Relief Program ..................................................... 93 

Stress Tests .............................................................................................................. 118 

And Economic Recovery ................................................................................... 101 

Termination of Automobile Dealerships ................................................................ 96 

Toxic Assets ........................................................................................................... 87, 116 

Transparency of the Troubled Asset Relief Program ............................................ 91 

Treasury Inspector General .................................................................................... 108 

Treasury’s Key Priorities ........................................................................................ 76 

Troubled Asset Relief Program (TARP)............................................................... 82, 109 

Reserve Fund .................................................................................................... 90 

Usury Cap ................................................................................................................ 99 

GENERAL SERVICES ADMINISTRATION 

Additional Committee Questions ............................................................................ 214 

American Recovery and Reinvestment Act ............................................................ 197 

Construction Priorities ............................................................................................ 208 

Cost Containment .................................................................................................... 202 

Customs House ........................................................................................................ 218 

Differing Construction Priorities ............................................................................ 204 

Energy Efficiency in Buildings ............................................................................... 212 

Energy-Efficient Federal Motor Vehicle Fleet Procurement ................................ 198 

Federal: 

Acquisition Service ........................................................................................... 196 

Buildings Fund—Recovery Act ........................................................................ 197 

Fiscal Year 2010 Budget Request .......................................................................... 194 

Five-Year Courthouse Project Plan Process .......................................................... 202 

GSA Federal Buildings Fund 2010 Budget Request ............................................. 203 

Judiciary’s 5-Year Courthouse Plan ....................................................................... 206 

Lease-Construction Projects .................................................................................... 203 

Los Angeles Courthouse .......................................................................................... 205 

Miami FBI Office ..................................................................................................... 207 

Operating Appropriation Request .......................................................................... 195 

Projects Requested for Fiscal Year 2010 ............................................................... 217 
Page

v 

Public Buildings Service ......................................................................................... 194 

Recovery Act Implementation ................................................................................. 214 

Repair Backlogs ....................................................................................................... 218 

Salt Lake City Courthouse ...................................................................................... 210 

San Diego Courthouse ............................................................................................. 205 

Summary Statement ............................................................................................... 199 

Underutilized or Excess Federal Property ............................................................. 217 

SECURITIES AND EXCHANGE COMMISSION 

Additional Committee Questions ............................................................................ 34 

Addressing Resource Constraints ........................................................................... 23 

Budget and Workforce of the SEC ......................................................................... 17 

Combating Abusive Short-Selling ........................................................................... 11 

Consumer Protection ............................................................................................... 33 

Corporate Governance ............................................................................................. 24 

Credit Rating Agencies ............................................................................................ 24 

Enforcement of the Securities Laws ....................................................................... 28 

Expediting Fair Funds Disbursements .................................................................. 35 

Fee Collections by and Funding of the SEC .......................................................... 30 

Filling Regulatory Gaps .......................................................................................... 11 

Improving: 

Money Market and Mutual Fund Regulation ................................................ 12 

Transparency and Investor Protection ........................................................... 10 

Investor Protection and Education ......................................................................... 20 

Regulation of: 

Derivatives ........................................................................................................ 31 

Large Investment Banks .................................................................................. 26 

Short Selling ..................................................................................................... 29 

Reinvigorating SEC Enforcement ........................................................................... 9 

Resources Needed for SEC’s Mission ..................................................................... 7 

Restoring Investor Confidence ................................................................................ 22 

Role of a Systemic Risk Regulator ......................................................................... 27 

Rule 151A, Issued January 16, 2009 ..................................................................... 37 

SEC: 

Resources ........................................................................................................... 13 

Rulemaking Agenda ......................................................................................... 7 

Staying on the Cutting Edge of Technology .......................................................... 35 

Strengthening: 

Examination and Oversight ............................................................................. 10 

Shareholder Rights ........................................................................................... 12 

SMALL BUSINESS ADMINISTRATION 

Additional Committee Questions ............................................................................ 175 

American Reinvestment and Recovery Act ............................................................ 171 

Dealer Floor Plan Financing Program ................................................................... 172 

Disaster .................................................................................................................... 182 

Loans ................................................................................................................. 180 

Employee Training .................................................................................................. 169 

Entrepreneurial Development Initiative: 

Business Clusters ............................................................................................. 179 

Veterans’ Businesses ........................................................................................ 179 

‘‘SWAT’’ Teams ................................................................................................. 179 

Federal: 

And State Technology Program ....................................................................... 181 

Contracting ....................................................................................................... 180 

Lender Oversight................................................................................................. 174, 177 

Liquidity of SBA Loans ........................................................................................... 176 

Microloan Program: 

Expanding Microloan Access ........................................................................... 178 

Fiscal Year 2010 Request ................................................................................ 178 

Office of Technology ................................................................................................. 184 

President Obama’s Small Business Recovery Plan ............................................... 183 

Recovery Act: 

American Recovery Capital Loans .................................................................. 176 

Impact on Small Business Lending ................................................................ 175 

SBA Contracting Programs ..................................................................................... 184 
Page

vi 

7(a) Loan Guaranty Program .................................................................................. 182 

Small Business: 

Access to Credit ................................................................................................ 171 

Clusters ............................................................................................................. 175 

Contracting ....................................................................................................... 173 

Development Centers................................................................................... 168, 171 

Subsidizing 7(a) Loans in Fiscal Year 2010 .......................................................... 177 

Women’s Business Centers ..................................................................................... 182 

Women-Owned Business Rule ................................................................................ 181 

Æ