[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2017
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HEARINGS
BEFORE A
SUBCOMMITTEE OF THE
COMMITTEE ON APPROPRIATIONS
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
_______________
SUBCOMMITTEE ON FINANCIAL SERVICES AND GENERAL GOVERNMENT
ANDER CRENSHAW, Florida, Chairman
TOM GRAVES, Georgia JOSE E. SERRANO, New York
KEVIN YODER, Kansas MIKE QUIGLEY, Illinois
STEVE WOMACK, Arkansas CHAKA FATTAH, Pennsylvania
JAIME HERRERA BEUTLER, Washington SANFORD D. BISHOP, Jr., Georgia
MARK E. AMODEI, Nevada
E. SCOTT RIGELL, Virginia
NOTE: Under Committee Rules, Mr. Rogers, as Chairman of the Full Committee, and Mrs. Lowey, as Ranking
Minority Member of the Full Committee, are authorized to sit as Members of all Subcommittees.
Winnie Chang, Kelly Hitchcock, Ariana Sarar,
Marybeth Nassif, and Amy Cushing,
Subcommittee Staff
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PART 6
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Internal Revenue Service..............
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Office of Management and Budget.......
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Securities and Exchange Commission....
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Department of the Treasury............
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U.S. GOVERNMENT PUBLISHING OFFICE
21-682 WASHINGTON : 2016
COMMITTEE ON APPROPRIATIONS
----------
HAROLD ROGERS, Kentucky, Chairman
RODNEY P. FRELINGHUYSEN, New Jersey NITA M. LOWEY, New York
ROBERT B. ADERHOLT, Alabama MARCY KAPTUR, Ohio
KAY GRANGER, Texas PETER J. VISCLOSKY, Indiana
MICHAEL K. SIMPSON, Idaho JOSE E. SERRANO, New York
JOHN ABNEY CULBERSON, Texas ROSA L. DeLAURO, Connecticut
ANDER CRENSHAW, Florida DAVID E. PRICE, North Carolina
JOHN R. CARTER, Texas LUCILLE ROYBAL-ALLARD, California
KEN CALVERT, California SAM FARR, California
TOM COLE, Oklahoma CHAKA FATTAH, Pennsylvania
MARIO DIAZ-BALART, Florida SANFORD D. BISHOP, Jr., Georgia
CHARLES W. DENT, Pennsylvania BARBARA LEE, California
TOM GRAVES, Georgia MICHAEL M. HONDA, California
KEVIN YODER, Kansas BETTY McCOLLUM, Minnesota
STEVE WOMACK, Arkansas STEVE ISRAEL, New York
JEFF FORTENBERRY, Nebraska TIM RYAN, Ohio
THOMAS J. ROONEY, Florida C. A. DUTCH RUPPERSBERGER, Maryland
CHARLES J. FLEISCHMANN, Tennessee DEBBIE WASSERMAN SCHULTZ, Florida
JAIME HERRERA BEUTLER, Washington HENRY CUELLAR, Texas
DAVID P. JOYCE, Ohio CHELLIE PINGREE, Maine
DAVID G. VALADAO, California MIKE QUIGLEY, Illinois
ANDY HARRIS, Maryland DEREK KILMER, Washington
MARTHA ROBY, Alabama
MARK E. AMODEI, Nevada
CHRIS STEWART, Utah
E. SCOTT RIGELL, Virginia
DAVID W. JOLLY, Florida
DAVID YOUNG, Iowa
EVAN H. JENKINS, West Virginia
STEVEN M. PALAZZO, Mississippi
William E. Smith, Clerk and Staff Director
(ii)
FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2017
______________ --
Thursday, February 11, 2016.
INTERNAL REVENUE SERVICE
WITNESS
HON. JOHN KOSKINEN, COMMISSIONER, INTERNAL REVENUE
SERVICE
Mr. Crenshaw. Well, good morning, everyone. The hearing
will come to order.
This is the subcommittee's first hearing of the year. So
welcome to all our returning members. Glad to have you back.
And always appreciate your attention to these important issues
that we face here in the subcommittee.
Today we are going to hear from the Internal Revenue
Service Commissioner, John Koskinen.
Welcome, Commissioner. We appreciate you taking the time to
be with us today, and especially since the budget was released
so recently. Thank you for being here.
As a matter of housekeeping, we are going to follow the 5-
minute rule that we did last year. Members are going to be
recognized in order of seniority, those that were here when the
meeting started, and the latecomers will be recognized in order
of their arrival, and we will go back and forth from side to
side. And if everyone will try to keep their questions and
comments to 5 minutes, then everybody will have a chance to be
heard.
Now, over the past 5 years, the IRS budget request, in my
view, has been a little bit unrealistic, a little bit
excessive, because it has averaged $1.6 billion, or 14 percent,
above the last year's enacted level. And the IRS hasn't
received either a dollar or a percentage increase of that
magnitude over the past 20 years, so history would not seem to
be in your favor.
Now, this year's request is not quite as excessive. For
2017, the IRS is requesting $12.3 billion. That is $1 billion,
or a 9.3 percent increase, over last year. However, less than
20 percent of the budget increase is for taxpayer services,
strengthening cybersecurity, and eliminating identity theft.
This committee believes that these three activities should be a
top priority of the IRS and they should be funded accordingly.
In addition, the budget before us today removes some of the
good government provisions that cure what we believe ails the
IRS, such as reviewing the appropriateness of the videos that
are made, complying with the Federal Records Act, guarding
against excessive conference spending, upholding the
confidentiality of taxpayer information, and prohibiting the
targeting of taxpayers based on their ideological beliefs.
Now, Commissioner, last year, we asked you to show Congress
and all Americans that it is no longer going to be business as
usual at the IRS. So sometimes it is hard for us to take
seriously this budget request when the IRS again asks for an
unrealistically high amount that doesn't make customer service
a priority and fails to adopt some of the good government
reforms that we added on this committee last year.
Moreover, the IRS has fallen short of its mission to
provide top-quality tax services and fairness to all. For far
too long, too many calls into the IRS are either abandoned,
they are dropped, or they are met with a busy signal.
Inexcusably, the last tax season, only 37 percent of all the
calls were answered by IRS. Telephone wait times just about
tripled since 2010, and the inventory of tax-related identity
theft cases rose nearly 150 percent since 2014.
So for the past 2 years, I have asked this agency to make
customer service a priority. And each year we learn that
customer service diminishes. Now, you may argue it is because
the IRS budget has been cut, and I might argue that it is
because the IRS chooses to spend its funds on other areas, like
the Affordable Care Act, bonuses, and conferences. But
nevertheless, Congress included $290 million in the omnibus for
the IRS to answer the phone, to improve fraud detection, and
cybersecurity, and we expect to see results.
Recent cyber attacks on the Federal Government and private
businesses have all of us worried about identity theft,
especially when it comes to filing taxes. Later today the
Oversight and Government Reform Committee is going to hold a
hearing with your chief technology officer on last week's IRS
hardware failure and the destruction of an IRS hard drive
despite a court preservation order to preserve its contents.
Now, I look forward to hearing from you today on how the
agency is providing taxpayers with both privacy and assistance.
Along the lines of fairness, public confidence in the IRS
was deeply betrayed when it came to light that the IRS was
using inappropriate criteria for selecting tax-exempt
applications for extra scrutiny. And so the omnibus took a
major step toward restoring public confidence in the IRS by
including a new provision that prohibits the IRS from using its
funds to revise regulations for the 501(c)(4) organizations.
This committee would also caution the IRS against wading
into further controversy, such as when you proposed draft
regulations that would put charities or 501(c)(3) organizations
in the position of collecting and reporting Social Security
numbers of their donors to the IRS. Members of this committee,
other members, including myself, questioned the need for this,
and we are glad to see the IRS formally withdraw the proposed
rule. We don't want to see the IRS take any steps backwards.
Now, with the budget release this past Tuesday, I look
forward to hearing from you how the 2017 plan is going to
modernize and transform your organization into one that is more
customer service oriented, which stresses integrity and
fairness to all. From what I have been able to observe, past
funding cuts have clearly motivated the IRS to deliver more
service online and increase automation, and every organization
ought to constantly strive for greater efficiency. But these
changes are meaningless without objective measures to evaluate
their effectiveness.
So I would encourage you to report back quantifiable
results to the committee and to members to accommodate
taxpayers. We want to make sure that you also deal with folks
that maybe aren't as technologically advanced as others.
But let me close on a positive note, Commissioner. Let me
thank you for your personal dedication to the success of the
ABLE Act. Some of you all know that was the major reform to
individuals with disabilities, first time in 25 years, allows
individuals with disabilities, autism, Down syndrome, to set up
a tax-free savings account as long as they use those proceeds
for qualified expenses. And that is going to give peace of mind
to a lot of families. It is going to allow individuals with
disabilities to achieve their full potential.
And right now, 37 States have enacted some sort of ABLE Act
legislation. I am happy to report that my home State, Florida,
has a State mandate to have it up and running by July 1 of this
year, and it wouldn't have happened without your commitment and
the commitment of the IRS to get those regulations out, make
them understandable, simple. So we thank you for that, on
behalf of millions of individuals with disabilities around the
country. Thank you for that.
So now, I want to turn to Mr. Serrano for any opening
statement he might make.
Mr. Serrano. Thank you, Mr. Chairman. And I thank you for
your cooperation and your support of all members of the
committee. I am one who believes that, notwithstanding the
omnibus situation that we always have at the end of the year,
it is not this committee that causes that. Although, it is this
committee where some members--not on this committee--would like
to put so many riders on the bill that make it difficult then
for the bill on the floor and otherwise. But maybe this year we
can convince them that they want to go home earlier and it is
better not to have riders on it.
This is our first subcommittee hearing of the year, and I
look forward to working with you once again. We have a number
of important hearings planned, including with some folks who
our friends on the Budget Committee don't feel like meeting
with. So I look forward to moving forward with our process.
Today, I would like also to welcome our Commissioner back
before the subcommittee. He took over the helm of the Internal
Revenue Service during a very difficult time in the agency's
history, and I believe he has done a strong job of righting the
ship and making sure that the employees there are focused on
their mission.
That said, there is only so much the Commissioner can do
without sufficient resources, and that is where this
subcommittee comes in. While we were able to increase funding
for the IRS by $290 million above the fiscal year 2015 level,
compared to the deep cuts suffered by the agency in previous
years, this increase is insufficient.
Last year, numerous nonpartisan reports--from the Taxpayer
Advocate to the Treasury Inspector General for Tax
Administration to the Center on Budget and Policy Priorities--
noted the negative impact that budget cuts have had on taxpayer
services and dollars collected.
The omnibus funding increase was a downpayment on the
necessary investments needed for the IRS to succeed, and I
believe that more investment is needed to help reverse these
declines.
That is why I support the fiscal year 2017 budget request
proposed by the President. It includes a significant increase
over last year's level and is spread across several
initiatives, from improving taxpayer service to the continued
implementation of the Affordable Care Act.
Much of this increase is devoted to the core mission of the
agency: helping ensure that Americans can file their taxes in a
timely and accurate manner and ensuring that those who attempt
to cheat the Federal Government are caught and punished. In my
view, much of this increase should be acceptable to both sides
of the aisle.
Last year, we reached consensus that the IRS needed further
investment in order to collect the revenue owed to our country
and to ensure that everyone plays by the same rules. I hope we
follow the same bipartisanship spirit this year.
Before I conclude, I do want to express my concern over
language that was added to the surface transportation bill, the
FAST Act, last year requiring the IRS to use private debt
collection agencies. We have seen in the past that this is a
waste of taxpayer money and that requiring private entities to
take on essential government function leads to confusion and
abuse.
I strongly opposed these efforts in the past, and it is my
expectation that no private debt collection program should take
place without sufficient safeguards in place. And if those
safeguards cannot be found, then I expect the program will not
move forward.
I hope you will be able to discuss this issue and we will
all be able to discuss this issue in more detail today.
And I must say, Mr. Chairman, in closing that we have had
this discussion before in this committee, both under your
chairmanship, my chairmanship, and at other times, Mrs.
Emerson, and the consensus throughout the years has been that
these debt collectors in many cases abuse and mistreat people
rather than collect the debt they are supposed to collect. So
it is something we should be very careful about when we deal
with it.
Commissioner, welcome back, and I look forward to your
testimony.
Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you, Mr. Serrano.
I would like to now recognize Mr. Rogers, who is chairman
of the full committee, for any opening statement he might like
to make.
Chairman Rogers. Mr. Chairman, thank you for recognizing
me.
Mr. Commissioner, welcome back to the committee.
Since fiscal year 2011, this committee has pared back IRS'
astronomically high budget requests on a bipartisan basis. This
is largely a result of this committee's concerted effort to
reduce discretionary spending government-wide, justifiable
concern over the implementation of ObamaCare and the Foreign
Account Tax Compliance Act, and multiple objectionable
management decisions at the agency; for example, targeting
certain groups based on their ideological beliefs and
destroying documents. It is therefore surprising to see that
the fiscal year 2017 budget request is $12.3 billion, a 9.3
percent increase over the enacted level of 2016.
There are a number of issues with this request that you
have made of us. Three in particular stand out.
First, the bipartisan budget agreement does not allow for a
discretionary cap adjustment for the IRS. As you know, this
would require a statutory change outside the jurisdiction of
this committee, a legislative change that has been rejected by
both the House and Senate Budget Committees for the previous 5
years.
If the activities funded by the discretionary cap
adjustment are important to the administration, then you ought
to operate within the amount allowed under the Bipartisan
Budget Agreement. The IRS needs to prioritize spending like
every other Federal agency.
Second, this Congress has repeatedly rejected additional
funding for the implementation of ObamaCare. I am concerned, as
are my colleagues, that the IRS, through CMS, made billions in
payments to insurance companies without the approval of
Congress.
The courts, of course, will be the final arbiter of that
issue, but I can say without doubt at this time that this
committee has never appropriated a single penny to permit the
administration to make any Section 1402 offset program
payments.
Finally, I am disappointed that the IRS requests to
eliminate the three administrative provisions that have been
enacted on a bipartisan basis for several years. Since the IRS
targeting and spending scandals, appropriation bills have
included prohibitions against targeting U.S. citizens for
exercising their First Amendment rights, targeting groups for
regulatory scrutiny based on their ideological beliefs, and
making videos without advance approval. We are dealing with the
taxpayers' money, and these provisions lay out what most people
would consider commonsense policies.
Mr. Commissioner, we are glad to have you with us today.
This committee takes seriously our role in overseeing the
budget and policies of the IRS, and I appreciate your continued
engagement with us.
This is the first hearing of this subcommittee for the
year. It is also the first hearing of the entire committee for
the year. We will have over 100 of these types of hearings
among the 12 subcommittees, trying to oversee the spending of
the Federal Government and trying to cut waste, fraud, and
abuse, as we go.
So, Mr. Commissioner, thank you for being here.
I yield back.
Mr. Crenshaw. Thank you.
Commissioner, I would like to now recognize you. If you
could keep your oral presentation to about 5 minutes, that will
give us more time for questions. And your entire statement will
be included in the record. So the floor is yours.
Mr. Koskinen. Thank you. I will do my best.
Chairman Rogers, Chairman Crenshaw, Ranking Member Serrano,
members of the subcommittee, thank you for the opportunity to
discuss the IRS budget and current operations.
I want to begin by thanking you for the $290 million in
additional funding for fiscal year 2016. These funds were
specifically designated for improving taxpayer service,
strengthening cybersecurity, and expanding our efforts against
identity theft. It is the first time in 6 years the IRS has
received significant additional funding. It is a major step in
the right direction, and I can assure the Congress and this
committee we will use these resources wisely and efficiently.
But the IRS is still under significant financial
constraints. Even with the additional $290 million, our budget
for 2016 is still about $900 million below where it was in
2010. As a result, we have had no choice but to continue the
exception-only hiring policy that began in fiscal year 2011,
that leaves us unable to replace most employees we lose through
the year through attrition. In fact, we expect the IRS
workforce to continue to shrink by another 2,000 to 3,000 full-
time employees this year, for a total loss of more than 17,000
employees since 2010.
We recognize the importance of spending taxpayer dollars
wisely, and we will continue working to find efficiencies in
our operations. But a fact that often gets overlooked is the
U.S. is much more efficient in its tax collection than most
other countries. The average OECD member country spends $8.87
to collect $1,000 of revenue, while the U.S. spends only $4.70,
about half. And so, I believe, it is important to understand
that we already are one of the most efficient tax
administrations in the world.
The IRS is also continuing to strengthen our operations as
we move forward. In that regard, we have addressed a number of
management problems that developed in the past, including all
of the issues that Chairman Crenshaw mentioned. We have dealt
with all of those. Those problems are not going to recur again.
And in particular, in the tax-exempt area, of concern to
all of us, we welcomed the Senate Finance Committee's
bipartisan report issued in August. And in addition to having
accepted all of the IG's recommendations made 3 years ago in
its report, we accepted, and have virtually completed, the
implementation of all of the recommendations of the Senate
Finance Committee bipartisan report, including the
recommendations in the majority report and the recommendations
in the minority report.
In developing our funding request for fiscal year 2017, we
felt it was important to be as specific as possible in
describing our priorities and the cost of each one. So while
the President's 2017 budget for the IRS requests a total
increase of about a billion dollars, we have broken that down
into 15 separate initiatives. We believe this will give
Congress a good sense of how we intend to spend any increase in
funding we might receive.
And, I think equally important, we are prepared to be held
accountable for achieving the goals related to each initiative.
Let me briefly highlight some of the major areas covered by
these initiatives.
First, taxpayer service. The additional funding will help
us improve service delivered through traditional channels, and
allow us to continue modernizing the services we offer, to help
transform the taxpayer experience.
Second, stolen identity refund fraud. The additional
funding will allow us to keep investing in resources and tools
to stay ahead of criminals who continue to become more
sophisticated in stealing identities and filing false refunds.
Third, our core enforcement programs. With this additional
funding, we would, for example, be able to increase audits and
collections. This increase is critical because the ongoing
decline in enforcement activities we have seen in the last
several years has translated into, literally, billions of
dollars of lost revenue for the government.
Fourth, the Affordable Care Act. We have no choice but to
implement it. It is a statutory mandate, and we must continue
to invest in IT infrastructure to support implementation of the
ACA's most tax-related provisions. I would point out that for
the past 4 years, the IRS has received almost no funding for
this implementation, and we have had to use over $1 billion of
resources needed for other critical IT functions in order to
meet our statutory obligations under the ACA.
And fifth, electronic records management. Although we have
been making progress in preserving and protecting emails and
other electronic records, we need to continue making
improvements so we can respond faster and completely to legal
and congressional inquiries, as well as FOIA requests.
While providing adequate funding in these and other areas
is critical, Congress can also help us by passing legislation
to improve tax administration. In that regard, the President's
2017 budget request contains a number of legislative proposals
I would urge Congress to approve.
They include renewing streamlined critical pay authority,
allowing us to expand the matching program for taxpayer
identification numbers, granting us authority to require
minimum qualifications for paid tax preparers, and expanding
the electronic filing requirements for businesses.
This concludes my statement, Mr. Chairman. I would be happy
to answer any questions you have.
[The information follows:]
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Mr. Crenshaw. Well, thank you very much.
And let me start with a couple of questions. You know, you
mentioned your goals. We have talked about the fact that $290
million of additional appropriations came to you for those
three areas: customer service, fraud detection, and better
dealing with cybersecurity. And you outlined how you plan to
use that in the sense of having some broad goals.
Let's begin by telling us specifically what do you plan to
do. Because one of the things, it is great to have goals, but
they need to be implemented. And tell us specifically how are
you going to deal with customer service. Are people going to
still wait on the telephone? How are you going to deal with
that?
How are you going to implement that goal of making sure
that you are detecting fraud, taxpayer fraud? Because right
now, customer service is at an all-time low and tax fraud is
rising every year. Give us a couple of specific ways that you
are going to try to implement those goals in those three areas.
Mr. Koskinen. I am delighted to explain. We have given this
Committee a detailed spending plan, but our goal is your goal,
and that is not only to spend the money, but see the results.
As I have said all along, you ought to be able to tell what you
get for what you pay.
In taxpayer service, we will spend, of the $290 million,
about $178 million specifically to improve taxpayer service.
Mr. Crenshaw. How are you going to do that?
Mr. Koskinen. And we are going to do that, by hiring up to
1,000 new temporary and seasonal people. We hire several
thousand every year, 8,000 to 10,000, to staff the call
centers, to staff our walk-in centers, to deal with all the
correspondence. It takes us a little while to get them hired,
but already the results are in. We have about 25 million
returns already filed, and the level of taxpayer service has
already gone up.
Our goal for the filing season is to have taxpayer service
move from the 37 percent, 40 percent area into the low 60
percent area. It won't be where we think it needs to be,
because the $290 million was out of a request, last year, for
an additional $700 million in those three areas.
Part of the reason we have more requests for additional
funding for taxpayer service in the 2017 budget is that we
think the level of service ought to be at 80 percent; 80
percent of people ought to get through, inside 2 to 5 minutes,
to somebody they need to talk to.
Specifically, the thousand people, the additional
adjustment of resources, will allow us this year, we think, to
have a taxpayer level of service in the low 60 percent. Our
goal would be to try to get to 70 percent. But if we have the
additional funding in 2017, we could get to 80 percent.
Mr. Crenshaw. Twenty percent of that new money was going to
go for customer service, right?
Mr. Koskinen. Virtually half of it now. Of the $290
million, $178 million.
Mr. Crenshaw. That is good. So that is a big priority,
right?
Mr. Koskinen. Yes. Well over half of the money will be on
taxpayer service.
Mr. Crenshaw. Tell us about----
Mr. Koskinen. Cybersecurity.
Mr. Crenshaw. And before that, just identity theft.
Mr. Koskinen. Identity theft. As I have said in my
testimony, we called together, almost a year ago, the CEOs of
the major tax preparers, the software developers, the payroll
providers, as well as the State tax administrators. And I told
them when they came together--it was the first time we had ever
had that kind of a summit--that the goal was not for me to tell
them what to do, or the IRS to tell them what to do. The goal
was to create a true partnership, because we cannot deal with
identity theft, any one of those groups, by ourselves. We need
to actually work in concert with the private sector, with the
States.
And we have had remarkable success. We have virtually the
entire tax ecosystem, as it were, working with us to share
information, to spot suspicious patterns of refund filing. We
have also worked with them to establish minimum standards of
authentication. When taxpayers use their services, as one of
the CEOs said, ``You need--the IRS--to set a standard.'' And I
said: I am happy to set that standard, as long as you define it
so it works for you.
The net result of that is that we have 20 different data
elements that we now have, that we didn't have before. We are
sharing information on a regular basis. We have been able to
actually move forward in such a way that the private sector
leaders move from requesting, to almost demanding, that we make
the partnership permanent, because it has been so effective for
them, for the States, and us.
Mr. Crenshaw. How much did we lose--do you know the latest
number--in terms of tax identity theft? One time there was like
$9 billion. What is that number today?
Mr. Koskinen. In 2013, the GAO number in review with us was
about $5 billion. We think we have it down, but it is still a
significant number. We think this year--we already see--we have
been able, thanks to having found some money ourselves, to get
our filters to work better. Part of the way we caught the
attack that took place in the last couple weeks was improved
detection capacity.
And what we would do with the $95 million we are devoting
to cybersecurity, out of the $290 million, and we have specific
additional resources we are providing that we will share with
you, is we hope we will be able to finally begin to catch up
with, if not get ahead of, the criminals.
One of the ways we measure that is the percentage of
suspicious returns and refunds we are able to stop. We already
have stopped 300,000 suspicious returns just in the front end
of this filing season, many of which we would not have been
able to stop before. So it is the IT monitoring. It is being
able to segregate our systems to be able to determine what is
going on.
In the most recent attack, as we stopped one attack, we
could watch it moving. As I said yesterday, one of the things
people don't realize is we are all in this battle, and that is
why I brought the private sector in. We get pinged or probed a
million times a day, a number that is hard and mind-boggling to
think of.
We are dealing with increasingly sophisticated organized
crime syndicates around the world, attacking not only us, but
attacking private sector companies and banks. Banks in the
financial sectors are part of the security summit that we have
put together, and we are working with them regularly.
Mr. Crenshaw. Great. Well, thank you for that.
Let me go now to Mr. Serrano.
Thank you, sir.
Mr. Serrano. Thank you, Mr. Chairman.
We know that we were able to agree on an increase last year
for the IRS, and that was a good thing. I hope we can continue
it. But there are many people who still feel that it is 19
percent below the fiscal year 2010 funding level.
So my question is, what do you believe the long-term
impacts of these cuts the IRS has experienced since 2010 will
be? And how does your request for this year begin to repair the
damage done by these cuts?
Mr. Koskinen. We have tried to explain that, ultimately,
the government functions on voluntary tax compliance. We
collect over $3 trillion a year, the vast majority of it
voluntarily.
People participate voluntarily, first, because they think
the system is fair. So one of the advantages of the Foreign
Account Tax Compliance Act isn't just the money we will
collect, it is that the person in Des Moines or Ashland,
Kentucky, when they write their check, will feel rich people
aren't getting away with something, hiding their money in
Switzerland. That is no longer possible.
People also do it because they know we have information.
And while we try to work very hard with taxpayers trying to be
compliant, if you are trying to cut corners or cheat, they know
if we have got the information, we are not going to be pleased
with that, and we will track you down.
Taxpayer service is an element of compliance. In other
words, I have always thought enforcement and taxpayer services
are two sides of the compliance coin. So we need to provide
appropriate taxpayer service. We need to make it as easy as
possible for people to figure out what to do if they owe, and
how to pay it. We need to be able to do that, for those who
wish, online. Most people don't want to call us. They would
like to get the information and just file.
On the other hand, enforcement is important. It is not so
much the $50 billion to $60 billion we collect with the
enforcement funding, although that is significant money,
obviously; it is that, again, people feel that, if I didn't
pay, somebody would come and collect. And therefore, if the
enforcement activities begin to decline, and people over the
water cooler at their country clubs are saying, ``Well, you
know, I did this and nobody called me'' or I got away with
that, it is corrosive to compliance.
Simply leading into this year, we have 5,000 fewer revenue
agents, officers, and criminal investigators. At the end of
this year, we will have 6,500 fewer. The fewer people we have,
the fewer audits we do. The audit coverage rate has gone from
1.1 percent to 0.6 percent.
So we estimate on the numbers--and again, we are happy to
share those performance measures--that, it is costing the
government $4 billion to $5 billion lost every year. And I
guess it is the audits and the cases that we cannot pursue
because we do not have enough people to do that.
We lose money on the one hand, but we also undercut--at
some point risk undercutting--the voluntary compliance system
if people think that the enforcement mechanism in the IRS is
being constrained, underfunded, and no longer effective.
Mr. Serrano. Let me ask you something. I have been here a
bunch of years, and so have these other gentlemen, except for
those two guys over there, the young ones. On one hand, you
present a picture that I believe in, an agency that does its
work and gets respect from most of the American people. And yet
you have some Members of Congress, a large number, who have
always seen the IRS as a problem. If they could get rid of it,
I don't know who would collect the taxes, but they would be
very happy.
Briefly, because I know my time is running out, why do you
think the difference of opinion? Obviously, it would be easy to
say it is a political statement. But there is no real political
gain in saying let's not collect taxes, although nobody wants
to pay taxes. So why the difference?
Mr. Koskinen. I think, around the world, tax collectors are
not the world's most popular group. Many people ask me: Why did
you take this job?
It is important, I think, ultimately for people to
understand tax collection is a critical function of government.
Not only do we collect 93 percent of the money that funds the
programs everyone else supports, but we deal with virtually
every American. We, in the last year, had 150 million
individuals file tax returns.
And that is why I agree with the Chairman: taxpayer service
is a critical issue. It is why I was as concerned, more
concerned probably, than most people about the relatively
abysmal level of service last year. Taxpayers deserve, and need
to be able to get, service properly. When you call us, you
should be able to get through, you should be able to get
somebody knowledgeable, well-trained, able to answer your
question.
As Justice Holmes said a long time ago, taxes are the price
we pay for democracy. Basically, without the funding, the
government can't function, whether it is defense, whether it is
Social Security, whatever it is.
We have an obligation. I take Chairman Rogers' point and
Chairman Crenshaw's point, that we have an obligation, not only
to provide effective service and appropriate service and
appropriate collection activities, but we have an obligation
for taxpayers to feel they are going to get treated fairly.
That it doesn't matter who they voted for, what party they
belong to, what organization they support.
And as I have said, people need to understand--because even
with the low coverage rate we will still do a million audits
this year--they need to understand when they hear from us, it
is because of something in their return. And if somebody else
had that same issue, subject to resource constraints, they
would hear from us as well.
One of the things I have taken on, and I think the concerns
have been appropriate, it is critical for us to ensure that we
restore whatever trust has been lost in the ability of this
agency to function as a tax administration agency, without any
agendas beyond that, treating everyone fairly.
Most importantly, one of the things I have been trying to
stress is, we spend a phenomenal amount of time trying to help
taxpayers. I know we have an image of, well, you know, we knock
on the door, we are chasing you for money. We spend a
phenomenal amount of time on assistance.
And as I have said, if you are trying to be compliant, you
don't have to call somebody on late night TV to deal with us.
You can call us. We will try to figure out. If you are having
trouble making a payment, we have online installment
agreements, we have offers in compromise. Our goal is to have
people be compliant when they are trying to be compliant.
Mr. Crenshaw. Thank you.
Mr. Serrano. Thank you.
Mr. Crenshaw. Mr. Rogers.
Chairman Rogers. Thank you, Mr. Chairman.
A recently released GAO study on the 2015 tax filing season
highlights just how bad customer service has become at the IRS.
That report found that roughly only one-third of taxpayers who
called the IRS for assistance had their calls answered. One-
third. Two-thirds did not get an answer. The report also showed
that call wait times have more than tripled in just the last 5
years.
Because of multiple poor management decisions at IRS, the
budget has been either cut or held flat since 2010. Blame for
long phone wait times and the decline in customer service is
often placed on these budget cuts. However, nothing in the
Financial Services appropriations bill explicitly reduces
funding for customer service. To the contrary, funding for
customer services was increased in fiscal year 2014 and fiscal
year 2016.
Under your leadership at IRS, funding has been prioritized
for implementation of ObamaCare and the Foreign Account Tax
Compliance Act, and your customers, the U.S. taxpayers, have
paid the price.
Since our committee has increased funding specifically for
taxpayer services in recent years, how do you explain the
continuing decline in customer service, which you, yourself,
have admitted as abysmal?
Mr. Koskinen. I testified 2 years ago, shortly after I
became the IRS Commissioner, and noted, in fact, at my
confirmation hearing 2\1/2\ years ago, this agency does
statutory mandates. The chairman has talked about our efforts.
With no funding, we have a number of statutory mandates.
Unfunded or not, we do them. We have taken the ABLE Act
seriously. We take all of the statutory mandates seriously,
including private debt collection. When the Congress gives us a
requirement, we do it. It is the highest priority.
So Congress, as I noted in my testimony, has underfunded us
for the Affordable Care Act. That does not remove the statutory
mandate we have to implement the act. We have to implement the
Foreign Account Tax Compliance Act. We have no choice.
So when no funding is provided for those, we have to find
the funding somewhere else. And as I said 2 years ago, at the
continued level of underfunding, the things that were going to
suffer were going to be enforcement, taxpayer service, and,
ultimately, information technology.
The $900 million that we did not get for information
technology, for funding the unfunded mandates, had to come from
other IT projects. We do not replace and install every patch
that we get. We get thousands of security patches and upgrades.
They all take time and money and effort. We have to prioritize,
which we can do----
Chairman Rogers. But have you taken money from customer
services to do these other?
Mr. Koskinen. No. We have actually, if you look at it, the
only thing we have taken from customer service from last year
is we have spent fewer user fees there. We have never been
fully funded in the last 3 or 4 years for customer service. We
have been using our user fees, which normally would help us
with unfunded mandates, to support taxpayer service. Last year
we provided user fees to taxpayer service, but we did not have
enough user fees, as in prior years. We had to spend them
elsewhere.
Chairman Rogers. Stay on track here with me a minute.
Mr. Koskinen. Pardon?
Chairman Rogers. Stay on track here a minute.
Mr. Koskinen. I am saying, we spent----
Chairman Rogers. No, no, no. Let me ask you a question.
Mr. Koskinen. Good.
Chairman Rogers. We increased customer services funding in
fiscal year 2014 and for 2016. Nothing in this bill, these
bills, reduced funding for customer service. If service is so
bad, as GAO says it is, and we have funded customer service,
you say that you have had to use moneys from all over to fund
these other mandates, our question is, the mandate we want you
to have is to serve the public, and you are not doing that,
according to GAO.
Mr. Koskinen. We share that goal. The budget process, when
you look only at the appropriation, ignores--and we have drawn
this to the attention to your staff as well as the Committee--
that we have $250 million to $300 million of user fees we
collect every year historically. I am sorry, we have $250
million to $300 million----
Chairman Rogers. Go ahead.
Mr. Koskinen. We have $250 million to $300 million of user
fees that historically have been used for unfunded mandates,
other expenditures. Because the appropriation for taxpayer
service has not been fulsome, we have historically devoted a
lot of those user fees to taxpayer service.
The appropriated amount, you are exactly right, went up by
several million dollars. But what we were not able to do last
year was put the same amount of user fees into taxpayer
services. We ended up spending $100 million less of user fees--
and we made that very clear, your staff understands that--on
taxpayer service, because those user fees had to be spent to
fill the other holes in our budget.
We have the same problem this year. At the end of this
year, our balance of user fees will be at the lowest level in
the last 15 or 20 years.
Chairman Rogers. But how can you defend yourself against
GAO's determination that only one-third of taxpayers who called
the IRS even got their call answered? Only a third of them.
Two-thirds never got an answer.
Mr. Koskinen. That is right, and one of the reasons we
appreciate the Congress' additional funding this year. And we
are spending the vast majority of it, over half of it, on
taxpayer services. We couldn't agree more.
Two years ago, when our level of service was at a higher
level, I noted that if the budget continued to be cut, we were
going to see lower enforcement, lower taxpayer service, and
threats to IT.
So the Committee's actions, and the Congress' action, by
giving us the $290 million, I think, is a significant step
forward. As I say, we expect taxpayer service to be
significantly better this year. It won't be at the level we
want it to be because the funding of $290 million doesn't fill
all of the gaps that the $700 million in additional requests
last year, for those three areas, would have done. But it will
be noticeably different.
I think Chairman Crenshaw is right. If you give us the
money, we should be able to show you the results. And my hope
is, as taxpayer service gets better this year, the Committee
will understand, if more money is provided there, and we don't
take it out of someplace else, the service level will
ultimately get to a point that 80 percent of people will get
through in less than 5 minutes.
It is the goal. We used to be able to do that. Before the
budget cuts there were days in the mid-2000s when that was the
level.
But I couldn't agree with you more, and we agree with the
GAO. We have, ourselves, been noting, as you note, and
describing it as unacceptable to continue to run at that level
of taxpayer service.
Chairman Rogers. Well, the report also showed that call
wait times have more than tripled----
Mr. Koskinen. Exactly.
Chairman Rogers [continuing]. In the last 5 years. Tripled.
Mr. Koskinen. And in the last 5 years, the budget has gone
down every year.
Chairman Rogers. And we have increased your funding for
customer services.
Mr. Koskinen. I have told you. We have spent, the year
before that, $150 million to $200 million in user fees on
taxpayer service, because it is a priority. Last year, with the
additional significant budget cuts, we could not do that. We
could only put $50 million of user fees in. So taxpayer service
last year, the funding went down by $100 million because of the
budget cuts.
But I would stress, we totally agree with you. It is unfair
to taxpayers. It is not the way the government ought to
operate.
And the wait times are as bad as the so-called courtesy
disconnects. You should be able, when you call us, to get
through in less than 5 minutes. We won't quite meet the 5-
minute deadline this year because, again, we don't have the
resources. The increase is significant, but not sufficient. But
you will see a noticeable improvement. The Practitioner
Priority Line will be better for the first time in several
years.
It is a high priority for us. I couldn't agree with you
more.
Chairman Rogers. Well, we want to see the statistics to see
whether it is coming or going, better or worse.
Mr. Koskinen. If it doesn't go, you have a legitimate
point, we should be held accountable. If we are going to spend
$178 million of taxpayer dollars on taxpayer services, the
services should significantly improve, and we are happy to
track that with you.
Chairman Rogers. Would you be able to give this
subcommittee a status report on how you are doing with that in,
say, a couple of months?
Mr. Koskinen. I could give you a status report right now.
As I say, we have had----
Chairman Rogers. I am interested in how you are going to
change things.
Mr. Koskinen. No, no, the status report. The number I have
is 25 million returns have been filed, all but a million of
them electronically. And while we are still at the front end,
the level of service has gone up to 71 percent. So 71 percent
of people, as a result of our ability, thanks to your funding,
have moved in.
Now, we won't be able to sustain that because we are about
to get far more calls the rest of the filing season. But our
goal, and we said that in our plan to you, we should be held,
measured to, during the filing season this year, going from
that 37, 40 percent to the low 60s. Our level of service for
the filing season should be 62 percent.
For the year--because we had 3 months before we got the
bill and were running at a really crummy level--our expectation
is that we will be in the 47 to 50 percent rate, which is
significantly better than the 37 percent.
Chairman Rogers. Well, what I want to know, and I want you
to report to us on April 15----
Mr. Koskinen. I will be here.
Chairman Rogers [continuing] I want you to report to us on
the percentage of people whose calls get through.
Mr. Koskinen. Yes.
Chairman Rogers. And how much you have reduced the wait
times for those who call.
Mr. Koskinen. Those are exactly the right measures, and I
will be happy to report those.
[The information follows:]
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Chairman Rogers. Gotcha. Thank you.
Mr. Crenshaw. Thank you, Mr. Chairman.
And, Commissioner, you hear this over and over again from
this committee, you get $11 billion, and you have got a lot of
things to do, just like we all have got a lot of things to do,
and it is all about priority. And what the message is, it seems
like the most important priority ought to be customer service.
And I think the criticism is, from time to time, money goes to
other places that don't seem to be as important as customer
service.
So I think you are getting the message that we would say--
sometimes people say: Well, the way the Federal Government
works is when they cut their budgets, they find the place that
creates more pain to the average citizen and then everybody
thinks they need more money.
So I think you got the message that we just want you to
make sure that you make this a priority. That is all we have
got to say.
Mr. Bishop.
Mr. Serrano. Mr. Chairman, I noticed that you said he gets
$11 billion. That is what he is asking for.
Mr. Crenshaw. No, he is asking for $12 billion.
Mr. Serrano. Oh, okay. Just checking to see if you were
committing yourself to the $11 billion.
Mr. Crenshaw. No, that is last year.
Mr. Koskinen. You are very careful.
Mr. Crenshaw. Mr. Bishop, please.
Mr. Bishop. Thank you very much, Mr. Chairman.
And thank you, Mr. Koskinen, for being here.
I have been listening to this discussion, but I know that
your fiscal year 2017 budget request proposes to restore more
than $807 million in cuts to the IRS that have occurred over
the past few years. The cuts, once counting for inflation,
currently fund your agency at levels comparable to 1998, I am
told.
You have indicated that personnel accounts for nearly 75
percent of your budget and that these cuts have contributed to
the loss of 13,000 people due to normal attrition, reduction in
forces, and agency hiring freezes. This loss has translated
into fewer personnel conducting audits, which you have said,
and tax enforcement, fewer employees answering the phones to
respond to taxpayer inquiries, longer wait times.
As a result, you have indicated that we have suffered a
degradation of taxpayer services and a loss of billions of
dollars in enforcement revenue. I am told that for the 2006 tax
year, that there was a $450 billion gross tax gap. That is the
difference between taxes owed and taxes voluntarily paid on
time. That would be a substantial contribution toward reduction
of the deficit and also providing the additional resources that
the Internal Revenue Service needs to collect the money that is
needed to fund the government.
It seems to me that the cuts over the past 5 years have
really worked to sort of cut off your nose to spite your face,
in terms of being able to fund our government.
And so while customer service is vitally important--and I
hear it from my constituents day in and day out when they have
to deal with the IRS and can't get through--if you get this
restoration, are you going to be able to collect that money, to
decrease that $450 billion gross tax gap, so that the
government gets what it is entitled to get under existing law
without raising tax rates, what is actually owed?
Mr. Koskinen. Perhaps a way to put this in context for
everyone is the President's request for 2017 would get us to
the level--forget about inflation--where we were 7 years ago,
2010. I don't think there is any other major agency of the
government that presently is asking, in 2017, simply to be
restored to 2010's level.
Since 2010, we have 10 million more taxpayers. We have the
aforementioned Affordable Care Act, Foreign Account Tax
Compliance Act, the Health Coverage Tax Credit, private debt
collection act, and other unfunded mandates we are dealing
with, with a budget that is not anywhere near where we were 6
years ago, in 2010. The 2017 billion extra would take us back
to where we were in 2010.
So over 7 years, we would have been held flat. And yet, in
the meantime, if we can get that program integrity cap money,
the enforcement revenues, net of the expenses over a 10-year
period in the budget, are projected to generate, to the
government, a net of $46 billion more revenue, far exceeding
the billion dollars that is in that budget, and would be every
year.
So, again, I would stress when we talk about this budget,
it is another billion dollars, that would take us back to where
we were in 2010.
I would also stress, again, we need to be efficient. We
need to consolidate our space, we need to make sure that we are
not printing anything more than we have to, that we are using
our people efficiently.
But you have to understand, France, Germany, England,
Canada, and Australia all spend twice as much as we do to
collect their revenues. We are already far more efficient as a
tax collection agency than anyone else.
I agree we should be as efficient as we can be. But the
image that somehow $11 billion, or even $12 billion, is a lot
of money and we must be able to do everything with it doesn't
correspond with the reality. It is clear to us taxpayer service
is a priority, but statutory mandates are also a priority.
Running the filing season every year is a priority.
Mr. Bishop. Mr. Koskinen, I have got 24 seconds left.
Mr. Koskinen. Sorry.
Mr. Bishop. Bottom line is that Congress has required and
the population increases has required that you do more with
less. And that has contributed and is a contributing factor, I
would take it, to the fact that customer service is poor and we
have got that tax deficit, that tax gap.
Mr. Koskinen. That is correct. And we are doing, as I said,
much more with much less. There is a limit to what you can do
with less, and we are well beyond that limit.
Mr. Bishop. Thank you, sir. My time has expired.
Mr. Koskinen. Thank you. Sorry to use so much of your time.
Mr. Crenshaw. Thank you very much.
Let's go now to Mr. Graves.
Mr. Graves. Commissioner, good morning. I hear your
arguments, and I want to applaud you for doing more with less.
I remind the committee that we are nearly $20 trillion in debt.
Over the last 6 years, we have been able to cut nearly $200
billion from discretionary spending, but there is more to do.
But I understand your request. I do.
And so just to go back to last year, we had a conversation
about fraud, and my memory, if it is correct, is that around
$5.8 billion was reported in fraudulent tax refunds being sent
to criminals and not to the taxpayers that were owed them. That
is about half of your budget request.
And so the easiest way to get to your budget request would
probably be to continue your efforts to eliminate that fraud. I
think that would help all of us.
And so I want to thank you for the summit that you had and
bringing all the stakeholders in. It sounds like it was very
productive. I would like to learn more about that, and
hopefully we will hear a little bit more about that today.
But it sounded like it was more about the individual
preparers that had been defrauded through identity theft or
some other mechanism--that seemed to be the focus. Was there
any type of focus on fraud related to the electronic
identification numbers, the filing identification numbers the
industry uses for authentication purposes, to check and make
sure that there is not fraud occurring from the non-individual
filing perspective?
Mr. Koskinen. No. We are dealing with very sophisticated
criminals. One of our concerns is, as we get better at dealing
with individual fraud, and particularly with the Congress'
approval for us to get W-2s earlier so we can match data, we
now have criminals forming false corporations and creating
false W-2s that look like they are real W-2s. So there is a
business fraud issue.
One of the issues we talked about, again, with our partners
is, as we get better at detecting fraud, the next place
criminals go is to the tax preparers. So there will be more and
more private sector companies in the tax system who are being
attacked, because if you can get into a preparer's system, you
then have all of that information and you can file false
refunds.
The goal of all of this activity, as far as we are
concerned, as opposed to whatever they are doing with
everything else they have got, is to file false returns and get
false refunds. We think that by being able to share this
information in real time, because of investments we made we
have improved. It used to be our filters could be adjusted once
a year. We have a very antiquated system. We can now adjust
those filters in real time. We can adjust them as a result of
the information we get from preparers, from States.
The issues we have had with the recent bot attack, we have
immediately been able to share, thanks to the partnership, all
of those Social Security numbers with State revenue agencies
around the country. We have been able to share all of those
with all of our private sector partners.
So we think it is going to be a more formidable battle----
Mr. Graves. So you have ability to verify and authenticate
the EFIN of these preparers?
Mr. Koskinen. One of the issues we have is, again, looking
at authentication for every way people get into our system. We
are satisfied on the installment agreements, for instance, if
you are trying to pay us, it is unlikely you are a criminal.
The criminals don't pay us, they try to get the money.
On the other hand, we are looking at everybody who has
access to our system--preparers, mortgage companies, others--
because they are all vehicles and venues that if we can stop
people here, they will simply come in other ways.
I would stress the bottom line is, we are making progress.
We will never end this battle. The criminal syndicates we are
dealing well are too well funded, too creative, and too
desperate. Somebody asked me: When will you be done? And I
said: The minute you think you are done is when you are going
to be done. You can never think that you are finished.
So we have spent a lot of time--and the funding you have
given us will improve that--trying to make sure that, to the
extent we can, we are getting ahead of it.
What we would do with the additional funding in the 2017
budget is be proactive. Thus far, even with our partners, up
until recently, we have been reactive. There is a probe here,
and we push back. We find a problem here, and we solve it.
We have a potential, and, again, with this partnership,
with all of their security people, to come together and
actually start to get ahead of the game. Instead of responding
to where the attacks are coming from, beginning to protect
ourselves against where we think the next attacks will come
from.
Mr. Graves. All right. And as I close, Mr. Chairman, let me
just point out that the industry is lawfully doing what they
are expected to do, and that is filing returns to the best of
their ability.
Mr. Koskinen. Right.
Mr. Graves. And so, as we said last year, and I believe the
Commissioner supports this, we don't need to put undue
regulations on an industry that is clearly trying to assist the
Commissioner and the agency, and are doing as much as they can
do with the information that is being provided to them. It is
up to the agency to determine and verify the validity of the
data being received.
And then lastly, let me point out, it is nice to hear for
the record that we have one agency that is just trying to get
back to a 2010 funding level, and that demonstrates the good
work of this committee and what we have been doing over the
last couple years and how tough it has been.
But thanks for doing more with less.
Mr. Koskinen. Happy to hear that.
And I would just stress, your point, in our work with the
private sector, as I have told them, it is a partnership. So we
are not telling them to do anything. What we are doing is
jointly figuring out, OK, what can we do together.
So when they said, well, they need a standard, obviously,
because they don't want to have a competitive disadvantage if
it is a little harder to get into one than the other, and as I
have said, it has been our approach, OK, we will work with you
on developing it. But it will be their standard. And I think
that is why it has been such a productive relationship.
Mr. Crenshaw. Thank you.
Mr. Quigley.
Mr. Quigley. Thank you, Mr. Chairman.
Thank you, Commissioner.
The phone scammers, I have heard the tapes actually played
of people posing as IRS agents and scaring the hell out of
people when they call them and tell them: If you don't do this
right now or wire money to us to pay these back taxes, someone
will be knocking at your door, you will be arrested. A real
horror story in my district, in my State, and I know you know
across the country.
I would love to hear what you are doing about that, but
particularly because as we go forward with private sector
collectors, the possibilities that people believe that these
people are real become more evident and I think it actually
complicates that problem.
Mr. Koskinen. I have been dismayed by the persistence of
the scam. For the last 2 years, every press conference I have
done, I have mentioned we put out a Dirty Dozen every year. The
highest priority has been to warn people against phone scams.
Basically, 2 years ago when I started I said: If you are
surprised to be hearing from us, you are probably not hearing
from us, because we don't call you first. We actually send you
letters. You will get several communications from us before you
get a call. We work with the IG. We have been working on
criminal prosecutions of people we catch.
What is concerning to me is I get news clips every day, and
virtually every day there are very good news reports warning
people, whether it is on television or print news media, across
the country. And it is amazing the number of people who still
get that call and they just say: Well, I am going to have to
deal with it. A lot of times they are older people. A lot of
times they are immigrants.
One of the things we are trying to get people to understand
is, if you hear from the IRS, we will never threaten you. We
will never tell you that you are going to go to jail the next
day, you are going to lose your house. We will never tell you
to make a payment to a debit card or to a bank account.
We are committed, and I am personally committed, that on
the private debt collection, we are going to do everything we
can to make it work. I don't want anybody to think we are slow-
rolling it.
Mr. Quigley. Excuse me, how will they differentiate
themselves, besides the precorrespondence?
Mr. Koskinen. The big challenge we have is that--we are
designing the program and the training--we will send a letter
to the taxpayer saying: We have turned your account over to a
specific company. Part of the contractual relationship is the
company will then send a letter to the taxpayer saying: We have
been given your account by the IRS and you will be hearing from
us.
That, we think, will help. It won't solve the problem. We
are then trying to get ahead of the world. We know the
criminals will now try to figure out how do they send letters
that look a lot like our letters, use the same letterheads, say
the same thing. So we are going to work.
We have a bidders conference coming up at the end of this
month, again, with the private sector, to say: ``Okay, we have
got this problem. We didn't have it the last two times we tried
private debt collectors. How can we jointly figure out how to
deal with that problem?'' Because it won't do them any good if
they call and get hung up on because people say these are more
scammers.
Again, I don't think we are going to have the only answer,
and we are going to work with the potential contractors. One of
the big issues will be how can we buffer their work from all of
the efforts we are all making to try to get people not to
respond to the phone scams.
Mr. Quigley. You state the obvious. Hopefully, the letters
will differentiate themselves: We are not going to call you and
threaten you, we are not going to call you and demand you debit
right away, we are not going to call. It has got to go into
those specifics.
Mr. Koskinen. Yes. And we are trying in our public
relations campaign to tell people just that.
The bottom line is, if we can just get the public to
understand, ``If you are going to pay your taxes, you write the
check to the U.S. Treasury and you mail it,'' and get people
not to go down to the bank and make a debit card deposit today,
not to make it to somebody's bank account. And nobody is under
the threat of, if they don't do it, in 24 hours something
terrible is going to happen.
Mr. Quigley. Thank you.
I yield back.
Mr. Crenshaw. Thank you.
Mr. Yoder.
Mr. Yoder. Thank you, Mr. Chairman.
Commissioner, good to have you this morning. Thanks for
your testimony.
I noted the very interesting dialogue that you have had
this morning with members about how to collect the taxes that
are due and owed, and how complex that is, and how challenging
that is. Certainly Chairman Rogers made very clear his
frustration that we all have with customer service and
challenges that I think you recognize are a problem well and
you have stated you are working on.
You made a statement that really resonated with me, which
was you said we will never win this battle, that it is sort of
a never-ending problem, and you just have to do as good as you
can.
And I think the reason we are having this problem and why
we will never win this battle is because we are looking at it
the wrong way. You are looking at it, and this committee looks
at it, from a revenue solution answer, and I think the problem
is within the Tax Code itself and the tax system we have set up
in America.
With 70,000 pages, the complexities that exist, Americans
are frustrated with the Tax Code. There are people that don't
pay their taxes, that find loopholes. And most Americans want
to see a Tax Code that is flatter and fairer, in both political
parties.
Maybe one of the things that unifies the country is that
they want to see what happens if the IRS changes. And I think
that makes your job very difficult. And I don't think there is
enough money we can throw at the problem. The problem is
changing the way we do business at the IRS, changing our Tax
Code.
And I note that you spend $11 billion. You would like a
billion dollars more. I am sure you would be willing to spend
even more than that, if we would give it to you, because you
would try to use it to collect more taxes.
Americans spend more than that. I mean, by some estimates
they spend $37 billion annually complying with the Tax Code. So
you are spending $11 billion and Americans are spending 3.24
billion hours complying, and that adds up to 369,000 years
annually. And just think about a country when we are trying to
create jobs, we are trying to create opportunity, that would
not be the country that our Founders designed that they would
expect that this is where we would be.
And if you look at the changes we have made to the Tax Code
with ObamaCare additions and the various laws that get passed
in this country every year, that has added up to a point where
you have got a J curve in terms of just dramatic increase in
responsibilities we have placed on you to the point where your
point is we will never win this battle. And I think it is
precisely because we are going about the battle the wrong way.
If we had a simpler and fairer Tax Code, you would get
higher compliance rates, people would know where their tax
revenue is going, and they ultimately would be more willing to
comply themselves, and your collection efforts would be less
costly.
So that brings me to some of the things we can do
immediately that might help bring about some of those changes.
One of the things my constituents hate more than anything is
fraud, waste, and abuse in government. Nobody likes that.
And I bring our attention back to the earned income tax
credit issue that we have discussed before. And I would
highlight again for the committee the roughly 25 percent error
rate, which is astounding. I don't know that there are very
many government programs that have that high of a fraud or
error rate, to the tune of maybe $15 billion to $20 billion
annually. We spend $30 billion researching cures at the NIH,
every disease known to man, we are spending $30 billion, and we
are wasting $15 billion to $20 billion on paying earned income
tax credits to people that don't deserve them.
So it is particularly concerning. And I would just like to
ask, I guess, where we are on that issue, what progress we are
making, and in particular, what solutions Congress can bring or
you can bring towards resolving this? Can you highlight any
disparities, in particular, of improper payments made by self-
preparers versus third-party providers? And do you believe that
you need additional authority granted by Congress to impose due
diligence penalties on self-preparers in addition to
enforcement and audit powers that you have now?
Mr. Koskinen. I am going to try to get all that done in a 1
minute and 20 seconds.
Mr. Yoder. Fair enough.
Mr. Koskinen. But let me start by saying, as I have
testified from the start, this is one of the major challenges
we have. It is a program a lot of people support. Most people
seem to support it. It is for the working poor. And the error
rates, and the amount of money going improperly just need to be
fixed.
We appreciated your responding to our request to get W-2s
earlier. Next year, we will get them in January. As a result of
our partnership, we have volunteers who have provided us with
20 million W-2s already this year, and that allows us to
double-check, when somebody files, their income, to the extent
W-2 income is reported. Next year, also the Congress has said
that refunds will be held until February 15 to give us more
time to check, and that will be helpful.
[Clerk's Note. In the above paragraph, the IRS is referring
to section 201 of the PATH Act, which was enacted as part of
the Consolidated Appropriations Act for 2016 (P.L. 114-113).
More specifically, 201(a) (earlier W-2s) and 201(b) (delayed
EITC refunds).]
The corollary to that, what we need, is to have what we are
now calling, because we are trying to keep it narrow,
``correction procedures for specific errors.'' For instance, we
are going to work with Social Security to get their
identification when people report that they have reported to us
the wrong Social Security earnings for the EITC.
When we see an error like that, that is from a reliable
database, we can't make the change. We actually have to audit
that person. We have to send them letters. We already do over
400,000 EITC audits. So it is clear we can't just audit our way
out of the problem.
If we have the ability, as we have in some instances to
correct math errors, when we have a reliable database, to make
the change, taxpayer can still say, ``Hey, you know, I have got
a concern.'' They have the right to come in and disagree. But
if we can make those changes without having to audit, we think
we could cut down improper payments significantly.
One of the reasons we are talking about, and requesting,
the ability to require minimum standards for preparers is not
to create a regulatory regime. We had the program before.
People know what it would look like, since we did it 4 or 5
years ago. It simply requires some minimum testing of preparers
so that they know something about the Tax Code.
A significant number of errors are made in good faith. The
statute is very complicated. So if somebody wanted to simplify
the statute, that might be OK too. But it is basically
preparers, if they have had no training or education, having a
difficult time tracking their way through it. So that is what
we have in mind for the minimum standards.
We won't drive crooks out of business. There are
criminals--a small, very small percent of preparers--who are,
in fact, advertising: Come with us, we will get you a big
refund. Those people we prosecute as we go.
But if we could get the W-2s earlier, the correction
procedure for specific errors would go away. We think the W-2s
by themselves will help us make a dent in this problem as we go
forward.
To address the question of the due diligence, we have been
running pilots, we have been looking at it. Preparers have due
diligence questions. The questions are helpful. We have built
them into the software. We are working again with the software
providers and the preparers to try to figure out what is the
reasonable level of due diligence they should have.
Their point is, in the preparers that are preparing--back
to the minimum standards--EITC returns, they have a very high
error rate. What is also happening, though, is as we get more
focused on preparers, then marginal preparers prepare the
return and don't sign it. So it looks like it is self-prepared,
but it has actually been prepared by a preparer. So we are
trying to warn people don't do that, because you may lose your
refund if it is a crook.
One of the things we are doing, as actually the Omnibus
bill suggested--maybe even required, but I thought it was a
good suggestion. I pulled together everybody in the IRS that
knows anything about this. They suggested a kind of a summit on
EITC.
And we are going to do that. We are going to bring
preparers, we are going to bring recipients, we will bring
people from outside the government, as well as inside the
government, to try to sit down, and, again, not tell people
what to do, but to try to say: ``Okay, what is the common view
here as to what needs to be done?'' If there are statutory
changes in the program that would help, we would get back to
you.
We know on the enforcement side, if we have the things I
have just talked about, particularly the correction procedure,
that would help.
We have this duality. We have to make sure everybody
eligible knows about EITC, like the ABLE Act. We say, ``here is
your program,'' and at the same time we are trying to make sure
people get the right amount.
So we will hold that summit, which may turn out to be a
series of meetings, and get back to you on that as well. I had
four or five things that I was worried about when I started.
This was one of the five.
Mr. Yoder. Thanks, Commissioner.
Mr. Crenshaw. Thank you.
Just a quick question. You mentioned that identity theft
costs $5 billion or $6 billion a year. What are the latest
numbers on how much the earned income tax credit error rate
costs?
Mr. Koskinen. The earned income tax credit fluctuates. The
error rate has always been in the 22 to 25 percent error. It
goes up and down each year.
Mr. Crenshaw. What is that in real numbers? At one time it
was $19 billion. Do you know what is the latest?
Mr. Koskinen. I don't remember it being high, but the
number has floated again, depending on which year it is,
between $14 billion and $17 billion. Whatever it is, it is a
number--well, again it is like everything. We will never get it
to zero, because it is complicated and people will file----
Mr. Crenshaw. That is a lot of money.
Mr. Koskinen. We ought to be able to get it under $10
billion. I mean, you could say $5 billion to $7 billion. If we
could just get it under $10 billion.
Mr. Crenshaw. It would be nice.
Mr. Rigell.
Mr. Rigell. Thank you, Mr. Chairman.
And, Commissioner, thank you for being here today and for
your testimony.
It has been my experience here in 5 years of service in the
House that so often in these hearings it is not too surprising
that Republicans, we really focus on really reducing spending,
and often times my Democratic colleagues are making the case
for the other side of things.
Just for the business background, when I try to assess and
work through that, because I am a fiscal conservative and I am
deeply, deeply troubled by us being $19 trillion in debt, I
think really it is a fundamental threat to our country. And we
are all in this together, Republicans, Democrats, those who are
fed up with both parties. From coast to coast, we are all in
this together.
So as it relates to the IRS, an evaluation of the request
that you have made and just some of the comments that have
already been made today, I try to look at this, as best I can,
from an objective standpoint and trying to assess performance,
and indeed your performance. That is part of what we do here.
So performance over time is something that I always look
for in evaluating a business unit or something like that. It is
difficult for me to at least easily--I know you would be very
good to come by and explain this to me. I have met with you
privately before and you have always been responsive.
That said, if you could incorporate into your summaries, at
least I would ask for performance over time, that is the
efficiency numbers that you are using, the cost per thousand
collected. And also, because I know that it is not just cost
per thousand that we are looking for and that you should be
evaluated on, but also, and importantly, the quality on a range
of different metrics there.
So with all that said, is your cost per thousand, according
to your own data, is it increasing, decreasing, or staying the
same?
Mr. Koskinen. At this point, we have become more efficient.
Not to overstate it, but we really are, by far, the most
efficient tax administration in the world.
We do think, and we measure it, and we are happy to share
those measures, on taxpayer service, for instance, as we have
had more taxpayers and less funding, we have had a decline in
performance. And it is of concern to all of us, and it is an
appropriate measure.
Over time we just look at it in gross. We are spending a
billion dollars less than we did 6 years ago, even with the
increase, and we are processing 10 million more taxpayers. So,
obviously, we are processing significantly more taxpayers with
less funding. There is a problem, at some point, in terms of at
what point do you lose effectiveness.
Mr. Rigell. Well, let's talk about that just for a moment.
I remember from my econ class a long, long time ago, when
marginal costs and marginal revenue are equal, you have
maximized profit.
Now, let me say right up front, I know this is not a
business, we are not in the profit business. But this idea of
optimizing the right amount of tax collection, not more than is
owed, but not less than is owed, that is the optimum.
So does your budget reflect, are you saying, could you make
the argument that if you got the budget request that you had
asked for, that that is the optimum? I mean, that is, if you
start to spend more than that, you are going to actually maybe
collect less than it cost you to collect it?
Mr. Koskinen. I don't know where that curve will go. I can
guarantee you, as I said earlier, just with the funding in the
program integrity cap--and I understand that is always an issue
as to where it fits in this budget--but just for the increased
enforcement arm over time, our estimate is the net gain to the
government would be $46 billion.
So you are right. We are not a business, but we have a
businesslike aspect to us because we are the accounts
receivable, the collection arm of the business. If you are in a
business, we are the revenue generator, and then you have the
expenditures and all of the programs, wherever you are going to
spend them.
So part of my concern is that, as I said, I spent 20 years
in the private sector running large, troubled businesses. I
never met anybody who said: I think I will starve my revenue
arm to see how they do.
But on the other hand, your point is, everybody looks at
them and says: But I want that revenue arm to be efficient. I
am not just going to throw money at it.
Mr. Rigell. There you go.
Now, I have got about 30 seconds, and let me just close
with this. I just wanted to share with my Democratic
colleagues, the ranking member and others, every line of our
budget needs to be given scrutiny, and including the IRS. And
this is just part of being prudent and doing right by the
taxpayer, all of us.
But what is driving our fiscal situation overwhelmingly is
our failure collectively to responsibly reform mandatory
spending. And I just want to close with that, because that is
really what has got to be done. I know it is outside the scope
of this hearing, but we have got as an institution to address
that thoughtfully, because that essentially is what is driving
us in our fiscal situation.
Thank you for your service, and thank you for your
testimony today.
I thank the chairman, as well, and I yield back.
Mr. Crenshaw. Thank you, sir.
Mr. Amodei.
Mr. Amodei. Thanks, Mr. Chairman.
Good morning, Commissioner.
Mr. Koskinen. Good morning.
Mr. Amodei. To the extent that Mr. Crenshaw is going to
endeavor to manage my 5 minutes, please don't be offended if I
endeavor to manage the time you take in your answers.
I want to talk to you about a specific instance, and the
issue is process related. And we have heard a lot about
taxpayer service, and I am gratified by that.
Taxpayer gets a designation for alternative energy purposes
that says he is an alternative fuel refiner. It turns out he
files under that, it is wrong, for whatever reason, you don't
qualify for that. Receives advice from the IRS that you are an
alternative fuel blender.
OK. Goes forward under that. New IRS agent: Oops, you are
not one of those either. Refund, blah, blah, blah, blah, blah.
Goes into your appeals process, fast track mediation,
mediates, IRS folks on the other side, come to an agreement,
don't know what the agreement was. And your folks on the other
side of the mediation say: Hey, we are not in power to sign off
on this.
So the mediator calls the person who is and gets an
affirmative: We will do that deal. OK, whatever it was. Then
they get a call back the next week saying, from somebody else
above, whoever he talked to on the phone: We are not doing that
deal.
And so I am sitting here in the face of things like it is a
critical function of the government, taxpayer service is a
critical function. Now, these aren't folks who are trying to
run away from you. They are embracing your system and your
dispute resolution system. They are entitled to knowledgeable,
well-trained, able to provide effective and appropriate
service. You can call us, not some late night talk show person,
have people compliant when they are trying to be compliant,
treat them fairly.
It is no news to anybody in here you are a Yale-trained
lawyer, and I respect that. I know that is probably the only
school you could get into with your minimal educational
requirements. But don't worry, I couldn't even get in there, so
you are doing better than me.
But I look at all this stuff and I say: Hey, I am not
expecting your folks to be perfect, they make mistakes. And
maybe if it was just one of these things in a single case it
would be like, well--and I don't know if you have been briefed
on it, because your folks have been into my office at one point
in time a while back.
But I am sitting here in terms of basic fairness, in the
context of all this stuff where we are talking about we want
people to reach out to us, we want to provide the best possible
service. And I am not saying, therefore, they shouldn't have to
pay the tax or they shouldn't have to do this or that.
But the process of a system where people have embraced your
system at every point they could, thought that they went
through your fast track mediation program, not yours, but the
Service's, and they come away with not the first disappointment
in terms of, oh, you are really not that, but the second one
says: Oh, by the way, that deal we did, we have decided we are
not doing that, even though you had somebody who ostensibly was
in the course and scope of their employment in the appeals
process that said we will do that.
It is something that deeply troubles me in terms of those
folks who are coming to you for resolution as opposed to those
who we have been talking about that are trying to scam you, run
away from you, cheat you, lie, and steal.
So I say all that to say this: I would really appreciate,
and my request is, since we are not going to accomplish it
during our little 5-minute speed dating session here, I would
like the appropriate folks from your office--I don't know if it
is still under litigation or not, although I can tell you the
company was 28 employees when this all started and now I think
there are 4, because it is a business thing and those decisions
had consequences--I need somebody to come in and say: Listen,
Taxpayer Bill of Rights, Code of Federal Regulations,
Administrative Procedure Act, are we exempt from something
where if we say we are going to saw off on something in
mediation, that it is really like, well, don't take that to the
bank yet, because it came as a complete shock not only to these
folks, but to the mediator who had never seen it before.
And so I want to hear what the other side of the story is a
little bit. But in terms of general process moving forward
beyond this case, it is like, hey, if I am coming to you and
trying to be compliant and you guys have made mistakes, then we
still need to go forward, tax law still needs to be enforced.
But there ought to be a lane for, OK, let's figure out how
he get to where we need to get here short of, hey, sorry we
made a mistake, but that doesn't change it, you have got fines,
penalties, and blah, blah, because you weren't really entitled
to be treated that way. Oh, and by the way, the appeals process
really isn't going to help you, even though you thought you had
a deal.
Will you please come by and see me? I am not a high
maintenance guy. You have only been by twice in 5 years. I
don't abuse you. If I say please?
Mr. Koskinen. As you can imagine, our golden rule is: ``The
Commissioner does not get involved in any individual case.'' We
can't talk about cases publicly. We are delighted to talk about
it with you. But the Commissioners basically, historically,
have not gotten involved in individual cases. But I take the
point. I think the point you raise----
Mr. Amodei. The point is a process point. I am not asking
you to come talk about this case. I want to know the process
that says that is OK.
Mr. Koskinen. The process, I am happy to come talk to you
about. I am happy to because the process is designed to be
fair, it is designed to work with people who are trying to be
compliant. We do, literally, millions of installment agreements
and other agreements.
When the system doesn't function appropriately there are
lanes for appeals. We have a Taxpayer Advocate, who I strongly
support, who can do that. There are ways.
But, again, people ought not to have to go through the maze
to the extent we can avoid it. We ought to be able to come to
closure.
Mr. Amodei. So is that a yes, your folks will be by?
Mr. Koskinen. Yes, I will come, I will be happy to come by.
Mr. Amodei. Thank you very much.
Thank you, Mr. Chairman.
Mr. Koskinen. But just for the record, I would note, we
will be talking about process, not a particular case, because I
can't talk about a case.
Mr. Amodei. Absolutely.
Mr. Koskinen. Fine.
Mr. Crenshaw. And, Mr. Amodei, if you would like another 5-
minute speed date, if you just sit quietly for a couple of
minutes you will have that opportunity. So we will have another
round.
Just what I would like to know is, I mentioned in my
opening statement that you had this hardware failure, and I
think that there is a hearing today on that. Tell us a little
about how that happened. I think there was a destruction of one
of the hard drives. Plus the problem, I guess, the breakdown.
How did that happen? And how does that affect folks that are
filing their tax returns?
Mr. Koskinen. This is when we went down for 24 hours.
Mr. Crenshaw. And then the destruction of that hard drive.
Mr. Koskinen. Two separate issues.
Mr. Crenshaw. OK.
Mr. Koskinen. So the first is the systems failure. We do
our processing in Martinsburg, West Virginia, and then we have
a backup site, alternate site that we go back and forth to, in
Memphis. We have redundancies within those systems.
This was a hardware failure and we are still working with
the vendors to figure out exactly why, but a simple voltage
regulator failed. There is a backup voltage regulator. When
they were fixing the first voltage regulator, the outside
contractor, the backup failed again.
We normally would have, if the system were going to be down
for any period of time, moved to Memphis, which we do about
every 6 months or so just so we have a disaster recovery. But
that doesn't automatically take up. It takes us 24 to 36 hours
to get that system up.
We decided, and it turned out to be right, that we could
get the system back up inside of the 24 hours, so it would go
faster and we would be more secure in terms of not losing data
going back up in Martinsburg.
So the hardware has fixed, the system is up. It happened,
again, about 3 years ago in a different mechanical failure. It
reminds all of us filing season is simple if you are just
filing and it all goes well, and last year we didn't have any
of these issues. But we are running a complicated system to
process and collect the data on 150 million taxpayers, and we
are always at risk that some part of the system, just like your
computer, is going to one day decide, ``Okay, I am just not
going to function again.'' That is why we have the backups in
Martinsburg.
Part of the reason, when people say, ``Well, gee, you have
a big system,'' is because we have to have the backup. If we
had a lightning strike, a fire, whatever it was in Martinsburg,
we have to be able to continue processing. So we have a
redundant system with people sitting in Memphis and it moves
back and forth for that reason.
But we were delighted that we were able to be down less
than 24 hours and that we were able to get back up and that
there was no corruption of the data. It was a hardware failure.
The system just stopped. So you are worried about----
Mr. Crenshaw. There was no corruption of the data and it
just kind of slows things down for----
Mr. Koskinen. So we basically were down for a little less
than 24 hours.
Mr. Crenshaw. Just put you behind that.
Mr. Koskinen. And so it turns out for taxpayers, the
submitters are able to just simply hold--we have 17
transmitters that collect all of this--and they just hold the
returns until we are open again. So most taxpayers, of the 25
million filing, never saw anything. They just filed. For all
they knew, the system had gone through in that 24 hours.
Mr. Crenshaw. How about the destruction of that hard drive?
Evidently there was an order to preserve the contents.
Mr. Koskinen. I would first note it wasn't a court order.
It was part of a FOIA issue in a major case we have that got a
lot of visibility. We had a FOIA case filed. So we, on our own,
put out what is called a litigation hold. We said, OK,
everything related to this FOIA request we need to preserve. It
is part of major litigation. So, the FOIA was a kind of an end
run. Can we get stuff in discovery out of FOIA that we won't
get directly through the court?
The hard drive in question belonged to an employee who had
left in the summer of 2014, the end of July. The FOIA request
was filed and the litigation hold was put in place in the end
of the year.
What happened was that we have 3,000, 3,500 people leaving
every year. When they leave we clean their computers. They have
to turn everything in, and then to protect taxpayer data as a
general matter, if there is nothing else going on, we clean
those hard drives and computers and then recycle them, or
destroy them if they are old. And we collect those.
In this case, the computer and the hard drive were
separated. The hard drive was designated, along with a lot of
others, to, in fact, be recycled and destroyed.
As luck would have it, in October, it went to the holding
area where they are all collected. When the litigation hold
went on, it went on to all existing employees. It didn't go to
this hard drive, which was on the way to being recycled.
Fortunately, we had, in another FOIA case, taken the data
off that hard drive. So we have the data, but we didn't
discover that. We advised the court in the major litigation
that in the FOIA case, it appeared we had lost that data
because the Justice Department, whoever handled it, felt, and
we agreed, that we ought to let them know.
But we kept investigating and pursuing it and then
discovered that we had, in another case, pulled the data off
the hard drive. So as has been said, as a guy said, I would
rather be lucky than good.
What we decided to do is have me simply issue an order we
are not going to sanitize, as it is called, or wipe any hard
drive. We have been saving all of our disaster recovery backup
tapes for the last 3 years. So they are there. And if need be,
we could go into those to get data, if we hadn't found the data
otherwise.
But we decided that, while we are trying to fix the system
so we don't rely on getting data off hard drives, we are going
to save every hard drive. And beyond that, what we are going to
do as people leave, is we will copy the data off that hard
drive into an electronic area. And if there is a litigation
hold, we will actually now, instead of just sending
notification to the employees, send it to their managers. And
the managers, when an employee leaves, will have to check:
``Have you checked to see if there is a litigation hold?'' So,
we will have a belts and spenders approach, I hope, going
forward.
By the end of this year, we hope that we will be able to be
in a situation where all of the data off every hard drive as
people leave will be collected into, in effect, an electronic
area.
One of the requests in the 2017 budget is for $17 million
to $19 million to allow us to have a modernized e-discovery
system. When you ask for data, instead of this clunky system we
use now which takes forever, we would be able to go into that
database, pull all of the relevant documents, and give them to
you virtually overnight as we go.
But in the meantime, nobody is wiping anything, or
collecting the data off of it and saving it, and we have made
even more complicated responses to a litigation hold. So while
we didn't lose this data, it did seem to me that we just can't
afford that question while we are moving to kind of a modern
document recovery and retention system. I just don't want to
hear anymore of these: It got stuck in----
Mr. Crenshaw. In a minute, I would like you to talk more
about this whole modernization. You just hear over and over
again that somehow IRS needs to kind of transform itself,
modernize itself. A lot of that has to do with technology. We
will save that for a minute.
But Mr. Serrano, and then Mr. Amodei after that.
Mr. Serrano. Thank you.
Well, that is the first thing I wanted to talk about, the
IRS ``future state'' plan. The concern that some people have is
that you may be making or your agency may be making these
decisions based on false assumptions--one, for instance, that
the budgets will remain in place, and that is a battle we have
every day.
And secondly, that you will be, and I am not trying to be
sarcastic, you will be the first agency in the history of the
U.S. Government to be up to date on technology. It seems that
we have never had that. Ever since I got on Appropriations we
have been--had dealt with fiscal year 2000, where the world was
going to come to an end; didn't come to an end. But still every
month it seems an agency is falling behind on its IT.
So what are you doing to prepare for the fact that what you
are dealing with now in terms of your plan may be obsolete by
tomorrow?
Mr. Koskinen. Well, IT presents that challenge. That as you
go forward, if you just stand still you are falling farther
behind because the IT is getting more modernized. We now talk
about cloud storage and a lot of things nobody thought of 5 or
7 years ago.
We are, as I say, not at that level of risk in the sense
that we are not trying to go to the moon. We are just trying to
catch up where financial institutions are now, and then evolve
with them in terms of the taxpayer experience.
So the budget issue is always appropriate. People need to
make sure we are spending the money appropriately. We need to
make sure we are spending the money appropriately. But, again,
as shown, if we can move, in response to taxpayers' requests,
to more and more information online, make it more available to
them, it will free up our call centers and our Taxpayer
Assistance Centers to people who want to be there.
The ``Where is My Refund?'' application is a good example.
Last year, 235 million hits were made on that app online. It
allows you to figure out the status of your refund. We don't
have 235 million taxpayers. As I keep saying, some people just
love to push the button. But this year already we have had 95
million hits.
Now, even if that is only 10 million or 20 million
taxpayers, in the old days they used to call to find out,
``Where is my refund? I filed my return. What has happened?''
So we moved all of those calls online.
Now, if we don't get funding going forward the app--except
for our concern about operation and maintenance--the app will
be there. And so the more people we can move online, the more
efficient we will become, the better the taxpayer service will
become.
What is at risk in terms of future budgeting--and we hope
to present this committee with more details about what the line
of sight over the next 3 to 5 years will look like with
particular building blocks and how much they cost--is simply
that we will go slower than we would like. So, for instance,
the apps that are up about online installment agreements,
online payment agreements, online payments, all are building
toward taxpayers being able to have an online, secure account
with us. If we stopped today, we would have apps that work for
limited applications, but people would still have to call us
for other issues.
It is important to recognize two things about this. One is
there will always be taxpayers who aren't comfortable with the
digital economy, or basically don't want to use it. I always
use my mother-in-law, until she hears me. For years we didn't
try to get her to do email. She refuses. She wants to talk to
somebody. She picks up the phone.
Last year, 86 percent of people filed electronically, which
meant 14 percent, over 20 million taxpayers, gave us paper
returns. And as far as we are concerned, if that is what they
want to do, that is fine.
So in the future, there will be people who could use the
app who will call us, and that is fine. What we are trying to
do is get people off the phone who didn't want to be there in
the first place.
But your point about it in terms of upkeep is we have two
challenges, and the committee knows this. The committee has
been very good about our modernization program, and we have
made significant progress as a result of the funding provided
by Congress. And we give you reports about that, and I am
trying to make the reports more readable, so as you see what
you are buying.
Once we get a system up and running, we have to sustain it.
Our operations and maintenance budget has not necessarily grown
with that. Our budget for 2017 asks for $95 million for
maintenance of all of these systems. So when we get a hardware
failure like the 24-hour shutdown, we have the systems to fix
it, and hopefully we modernize enough that we have fewer of
those breakdowns as we go forward.
It is a package. It is complicated. The system is
complicated. IT is complicated. What we are trying to do with
this ``future state'' is not look at it from the standpoint of
the IRS, look at it from the standpoint of taxpayers, again,
taxpayer service. How do we make the taxpayer experience as
improved and as efficient as we can for them, recognizing we
don't want to leave anybody behind, so if they don't want to
participate in the online digital stuff, that is fine? But I
think that helps.
And then, if we can, for the Committee, be clear about
exactly--and that is where we started in this budget, trying to
be very specific about the initiative so you could see what you
are getting for what you pay for. My goal is that then we could
have performance measures, you could look at it every year and
say: How are we doing? You put in that system.
One of the systems we put in this year, for instance,
allows us to monitor our system better, which is how we caught
the bot attack, which in previous years we never would have
caught.
So we need to be in an ongoing dialogue with you about
specifically what are we buying, and why, and what is going to
make a difference.
Mr. Crenshaw. Thank you.
Now for another speed date from Mr. Amodei. Take your time.
Mr. Koskinen. I would like the record to note I didn't use
any of his last 5 minutes.
Mr. Crenshaw. That is right. And he can have some of my
next 5 minutes if he wants them.
Mr. Amodei. Thanks for the generosity on both gentlemen's
parts. And I am sure that if I don't already, I will soon
regret referring to the phrase as speed dating in 5 minutes.
Nonetheless, I will stand by it.
Commissioner, in the highway trust fund provision that was
passed last year, there were some things in there which
strengthened your ability to collect tax debt. And I believe
one of the provisions was, hey, we want you to do some stuff
within 90 days, and we want you to look at using private
collection folks, they are already approved by the Treasury.
And I am looking at something here that says last month you
said you didn't think you would meet the deadline for
implementing that program, and I guess that deadline refers to
the 90 days.
Mr. Koskinen. Right.
Mr. Amodei. So I am looking through your statement talking
about all the initiatives in terms of Treasury-approved folks,
that sort of thing, although it is not clear to me that that
was part of it, but I think some people assumed it was. And you
are talking about additional funding to strengthen enforcement
programs and the ability to handle 30,000 more addition debt
collection cases.
I guess my first question is, I am assuming you are not
going to meet the 90 days, when do you expect to meet that if
that assumption is correct? And what do you attribute the delay
to?
Mr. Koskinen. Let's work backward. The delay is that, even
just in a standard procurement, 90 days would be the shortest
time in which we could do it, if we had a program up and
running and it was simply a question of buying off the
schedule.
So my commitment is within that 90 days, to give Congress a
timeline as to when we are going to implement the private debt
collection. As I said earlier, my goal is to make sure we do
everything we can to make it work well, including dealing with
the phone scams issue.
We have a bidders conference scheduled this month which
will be within the 90 days, again to get their participation
with us in designing this program. We have to set up an IT
system from scratch, again an unfunded mandate. We just keep
collecting these. We have to design an IT system to take the
cases that, under the statute, go to debt collectors, send
those to the debt collectors, make sure they have a secure
system to protect the taxpayer data.
They then have to process those cases, have a secure way of
giving us back the information case by case as to what happened
to it so we can monitor and collect that, monitor their
performance, and be able to report on how it runs.
So our goal, although the timeline is still being
finalized, and I do want to get it back to the Congress in the
90 days, is we will have a bidders conference now. Our goal is
to have the procurement done and the program designed, with all
of the training that goes into it for the debt collectors, so
that they know exactly how this is going to work, the
development of the protections for taxpayers, the letters. Our
goal would be to have that procurement done before the year is
out. But we will have that timeline, we will get it to you.
My concern is, I don't want to put it together quickly and
then have it be a problem, and then people say: ``Well, you
really knew that was going to be a problem and that is your way
of killing the program.'' I have no intention of killing the
program. If we can make it work, my view is that would be fine.
But it is complicated because you are taking people and having
them perform quasi-government functions. You have got to make
sure the data is protected. You have got to make sure that they
are trained appropriately, and that we have an agreement with
them this is, in fact, what they are going to go do.
Mr. Amodei. So use of the language already used by the
Department of Treasury, which I assume would have some of those
same concerns since you are collecting on behalf of the
government, really wasn't helpful to you.
Mr. Koskinen. No, no. It is very helpful to us. We are
going to use that. The bidders coming to that conference are
the people on that list. It is very helpful to us. It would
take us much longer if we had to go to the broader GSA list.
That list has four companies, the GSA list has 63.
So it was very helpful. The focus is there. The reason we
can have this bidders conference and get going is because you
made it easier.
Mr. Amodei. In the remaining minute of our speed date, how
would you describe this in terms of your priorities for how you
are transitioning the Service? And I will tell you the context,
to be fair. It is like when I look at this thing that says,
hey, we get more money, we can process 30,000 more collection
cases, I am assuming that that is an in-house thing, not a
private debt collection thing.
Mr. Koskinen. Exactly.
Mr. Amodei. So the question comes, how would you describe
this as one of your priorities in terms of compliance?
Mr. Koskinen. Like all statutory mandates, it is a high
priority. The highest priorities we have, we have got to run
filing season, because that is $3 trillion we collect. The next
highest priority is to implement statutory mandates. And we do
those as quickly as we can.
Again, since I have been here we have accumulated a number
of statutory mandates; none of them have come with any funding.
That doesn't give us an excuse for not doing it. It may slow us
down in some places. But we have an obligation to do them. We
have an obligation to make them work, and we have an obligation
to keep you advised as to what the timeline is and how the
program is going.
Mr. Amodei. Thank you.
Thank you, Mr. Chairman. Since it is a school night, I
yield back. I will be dating no further.
Mr. Crenshaw. You are on a roll. You want to keep going?
Mr. Koskinen. And I am not taking that as a sign of
rejection that he gave up on the relationship here.
Mr. Amodei. Since I have never had anybody say, ``I wish
you would have talked longer,'' I think I will stick with that.
Mr. Crenshaw. Thank you very much.
Just real quick, how much money, how much revenue did we
collect last year?
Mr. Koskinen. We collected a little over $3 trillion. $3.1
trillion. I think is the number.
Mr. Crenshaw. When is the last time we collected $3
trillion?
Mr. Koskinen. I think we probably collected, the year
before, $3 trillion. Basically it grows incrementally.
Mr. Crenshaw. So would you say this last year that you
collected more than you had ever collected before?
Mr. Koskinen. I think our collections from our enforcement
activity, with the revenue agents, are starting to go down. But
as a general matter, the compliance rate continues and our
collection rate, overall compliance rate, goes steady.
My concern is, a decline of 1 percent in that compliance
rate is going to cost us $30 billion a year, so that we have to
worry about taxpayer service, we have to worry about
enforcement. Because the number that we collect on our
enforcement activity, the $50 billion to $60 billion, is real
money. But what it is doing is reinforcing voluntary
compliance.
The number I have tried to get everybody to focus on is,
what is the compliance rate? And if it starts to decline, the
numbers you are talking about dwarf everything else we have
talked about here today.
Mr. Crenshaw. The enforcement collections, do they go up
and down?
Mr. Koskinen. We do a lot of enforcement collections by
just our automatic collection process. We automatically find
mistakes in returns and we communicate with people by paper, as
I said. We send out 200 million notices a year. So the vast
amount of our collection is done that way, and that stays
fairly steady.
Our problem is, to the extent people write back and
disagree, then we have an audit. And our limited ability to
audit starts to run down, and that is where the decline in
revenue agents and officers, which we are now tracking
separately, goes down.
Somebody asked about revenues. Say the average revenue
agent generates between $1.5 million and $1.8 million a year.
So on the incremental basis it is why we say, if we could
restore the agents and officers, we can guarantee you we would
give you more money back, by far, than you gave us for that
purpose.
But otherwise the voluntary compliance system has continued
running appropriately and effectively. My concern is, I just
don't want to do anything that jeopardizes that.
Mr. Crenshaw. I would just encourage you, this is like
priorities in terms of customer service. I mean, you know where
the revenue comes from, and I would think those, you would want
to make that a priority. If you only have so much money, you
have to decide where you are going to spend it.
Mr. Koskinen. We do that.
Mr. Crenshaw. And I think you are doing that to a certain
extent. But that really is the bottom line on any kind of
agency.
I am bothered sometimes when I hear you say: Well, if we
just had a little more money we would have collected more
revenue. If you listen to GAO, they will tell you: You give us
an extra dollar and we will save you $69. And I always say:
What if we gave you a trillion dollars, would you save $69
trillion? And I know you are not saying that, but just keep
that in mind.
Mr. Koskinen. I agree.
Mr. Crenshaw. We collect more revenue with less dollars,
but make sure we are spending our money in the right places to
keep that collection going.
Mr. Koskinen. And the advantage of having this discussion
in the face of 6 years of decline, until this year, is that we
can track the number of cases, collection cases we are not
pursuing where we know there is money owed. So it is not the
theoretical. ``There is an unlimited amount of money out
there.'' There is not an unlimited amount of money. The tax
gap, actually, you couldn't collect all of that.
But at this point you can talk to the heads of our Criminal
Investigators or Wage and Investment, Small Business people,
and they will tell you, without revenue agents and officers,
the rate of examination is going down. But more importantly, as
we have collection cases, we are just going after fewer of
them.
I have talked to over 20,000 IRS employees personally. And
when you talk to them, their concern is that--the revenue
agents particularly--is that they know the money is there and
they just don't have the time and the people to get it. And as
we shrink--and we will shrink more this year--there is going to
be less of that.
I am not saying we would have collected a billion billions,
but we have committed that if you funded the enforcement, we
would get you $46 billion net over the next 10 years.
Mr. Crenshaw. I understand that. I would just encourage you
to, if you know that is there, then you ought to find money in
other places. That seems to be an important function, and if
you do that more efficiently you will get the money.
Mr. Koskinen. Well, yes, but you have to understand, on
enforcement, the easiest thing to do we would just take rich
people and big spenders, because that is where the biggest
differentials are. The minute we don't provide audits across
the entire income spectrum, preparers are very smart and they
have large numbers of clients, they can see, because they know
which clients they are hearing from, they will notice. And the
minute we are not providing oversight, even though it is at a
lower rate, in a particular area of the economic range, that is
where you are going to see the next frauds. And the bulk of
money is collected from the bulk of people in the middle of the
bubble.
Mr. Crenshaw. I just want to encourage you to make that a
priority. You have a lot of money, you spend it in a lot of
different places, and I know everything is important, but some
are more important.
Mr. Koskinen. I would say we don't have a lot of money. We
have a lot of money from the standpoint of any individual. In
terms of how the operation of the agency goes, we do not have a
lot of money. We have $900 million less than we had 6 years
ago.
Mr. Crenshaw. And you are collecting more revenue.
Mr. Koskinen. Right. Our customer service has not been good
and we are losing $5 billion a year on the revenue we know is
out there.
Mr. Crenshaw. But it is more than you had 5 years ago.
Mr. Koskinen. And the $900 million, as always, nobody has
ever disagreed, costs you about four to five times as much in
lost revenue.
I think it is appropriate to look at performance, and we
are a businesslike operation with the accounts receivable of
the government. And so to underfund the accounts receivable,
when you know there are accounts out there you should be
collecting, doesn't seem to me to be the most sensible way to
run the business.
Mr. Crenshaw. No, but I guess you could argue, if you
collect more revenue with less money, then maybe if you had
even less money you would collect even more revenue. But I
think there are other factors, we all agree, that go into that.
Mr. Koskinen. And I guess my bottom line--because I only
have another one of these years and then I am going to run out
of my tenure--my bottom line concern is that when we have
undercut the effectiveness of the Agency, you won't see it
immediately, we won't see a 1 percent decline.
Mr. Crenshaw. We don't want to see that happen. I am with
you 100 percent.
Mr. Koskinen. OK, but we are getting very close to the
edge, if we are not over it.
Mr. Crenshaw. OK. Mr. Serrano has a parting comment.
Mr. Serrano. There is the temptation to say that if we are
collecting more money, then the President Obama economy is
strong. But I won't do that. You will tell me it is just that
taxes are higher and we will get into that back and forth.
Quick statement, and then you could comment on it if you
wish. It is not in the form of a question. But I am still not
convinced, I have never been convinced, about the private debt
collectors. I don't like them. It makes me nervous. And I know
it can be abused. These folks get a bounty. A bounty means that
you go hard to make sure you collect and how you treat people.
I am one of those Members of Congress, and there are more
than we think, it is just that they don't say it out loud, who
has great respect for government employees, government workers.
I have great respect, for instance, for the people who sit
behind us.
If the American people knew the average age of the people
who run Congress behind the scenes, behind the work that we do,
they would be very grateful and know that the country--the last
time I looked the country is still the greatest country on
Earth, and there are a lot of young people involved in running
it on a daily basis, at least running the Senate and the House.
But I worry, and I hope that as time goes on and this
begins to be developed that you keep us informed on whether or
not I was wrong or I was right on the fact that there will be
abuse, and that it is better to have people who are on the
payroll now, people who have been around a while, collecting
that debt, rather than having people who don't have the
government as their sense or center point, but rather just
collecting the dollars.
And that is my statement. If it's a question and you want
to comment on it, it is up to you.
Mr. Koskinen. It is an important statement. It has been
controversial. We have tried private debt collection a couple
times in the past, and it hasn't turned out to be efficient or
effective.
It is not our role to second-guess that decision. And that
is why I want to make it clear we are committed. It is a
statutory mandate. We should take this program. We are
committed to doing everything we can to make it work. We want
to protect taxpayers. We want to make sure that we don't build
in problems for them, which is one of the reasons I can't just
go out and say, ``Go collect debt,'' because I have a lot of
things we have to do around it.
But we really do want to make sure that we do everything we
can to make it work, because it needs a fair shake. And we are
documenting with the IG, as well, all of the steps we are
taking. We have tried to learn from what happened before, and
if there were issues that we could have improved on the last
couple times, I said we need to do that.
Because if it works, that would be fine and we would have a
fair choice at it. If it doesn't work, we will have done
everything we can to make it work, and then everybody will be
able to decide, OK, we had a fair test of it, we worked hard,
and it didn't work.
Our goal is to make it work. We recognize the issues around
it. But the Congress has said you should do this, and our
response to what the Congress tells us to do is we do
everything we can to do it as quickly as we can.
Mr. Crenshaw. Thank you.
Mr. Amodei, do you have anything further?
Mr. Amodei. Thank you, Mr. Chairman. I guess I am going to
be staying out past my curfew today.
I appreciate the comments of my colleague who is the
ranking member in that. There are a couple of things going on
here where you are, although some days I am sure you feel like
it, are not held to a perfection standard. Government employees
make mistakes from time to time.
So to hold this thing, I am not sure that is what is being
attempted, but to hold the concept of this statutory mandate,
which was signed by the President, so for anybody with a C or
above, in government it is like, well, that kind of makes it
the law of the land at the moment. To hold that to a perfection
standard, I can tell you right now, you are going to be
disappointed, because there are human beings involved. That is
like holding Members of Congress to a perfection standard,
members of executive agencies to a perfection standard, and all
that.
But in the context of the testimony that I believe is
absolutely accurate from the Commissioner, that we have a very
large amount of money that is due to the government,
legitimately, that, quite frankly, isn't collected, to explore
this as a possibility, and especially with your testimony, Mr.
Commissioner, that we want to try to give it every fair chance
and do it right, so we are going to report back within the 90
days or whatever, it is like OK. And if it fails, then that is
fine.
But I think sweeping generalizations in terms of it can
only be done by your employees or it should never be done in
another context are things that, quite frankly, aren't open. If
it falls on its face, then that will become evident. I
appreciate the fact that you want to cover yourself, to say we
put all the gas in the tank it could hold and it didn't get
there, or if it does get there it is like, OK, this is part of
it.
But to take a tool that is in the box and not try to use it
and leave it in the box, I think is one of the reasons that
gets us all criticism in government, whether it is the
executive branch or the legislative branch.
So I look forward to hearing what you folks have done in 90
days with those already-working-for-the-government folks and
then how the program proceeds. And, hopefully, you will pick
folks that don't make as many mistakes as those of us in
government do, and that will be a rousing success. And if they
do make as many mistakes as those of us in government, then we
will deal with what comes.
Thank you. I yield back.
Mr. Serrano. Mr. Chairman, if I may?
Mr. Crenshaw. Yes.
Mr. Serrano. Because the gentleman made a very interesting
point.
Your comment would be perfect if we had never tried this
before. We have tried it and it hasn't worked. The experience
has not been a good experience.
And that is my concern, that there are some people heck
bent on making this part of how government collects money. And
the experience we have had in the past was not good. We had
complaints about people being harassed, we had complaints about
people going to the door really as, I hate to say it, as bounty
hunters.
So I just have a certain respect for people who understand
what the parameters of their behavior are in government. But I
understand your point, and your point would be extremely well
taken if we have never tried this before.
Mr. Crenshaw. Maybe it will work this time.
But we thank you for being here today, for your time, and
are really encouraged to hear some of the efforts you are
making in terms of customer service, in terms of modernization.
It is a tough job. But we thank you for your service, and we
thank you for your testimony today.
This hearing is adjourned.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Tuesday, February 23, 2016.
OFFICE OF MANAGEMENT AND BUDGET
WITNESS
HON. SHAUN DONOVAN, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET
Mr. Crenshaw. Well, good afternoon, everybody.
This hearing will come to order.
Today, we will hear from the OMB Director, Shaun Donovan,
who has the dubious distinction of submitting for the first
time in our Nation's history a $4 trillion budget.
This record level of spending corresponds with a record
level of revenue; however, it still isn't enough to balance the
budget. So another $600 billion is added to the Federal debt,
which, in gross terms, now exceeds $20 trillion for the first
time. It took 233 years to incur the first $10 trillion in
debt, and it took only 8 short years to incur the next $10
trillion in debt.
Now, the only way to retire the Federal debt is for
spending as a percentage of GDP to be lower than its historical
average and for revenue as a percentage of GDP to be higher
than its historical revenue. The budget before us, however,
projects that both spending and revenue as a percentage of GDP
will remain above their historical average through 2026. In
other words, this budget is a permanent source of debt.
As a percentage of GDP, gross debt hovers around 105
percent. Now, that is a level that has not been seen or
tolerated since the end of World War II. And I think we would
all be a little afraid if the country became acclimated to this
level of debt.
So make no mistake, it is an economic burden that threatens
the living standards of future generations. As such, I am
disappointed that the administration's final budget request to
Congress did not propose any substantive entitlement reforms to
prevent any further intergenerational inequity, let alone not
one substantial entitlement reform in the last 8 years. Back in
2000, there was talk about retiring the Federal debt by 2013,
and now the Federal debt has eclipsed our GDP.
Now, the Office of Management and Budget has the great
responsibility of constructing a budget that reflects the
President's vision for our country. And because of this
responsibility, I believe OMB has an even greater
responsibility to be judicious and deliberate with its own
budget request. And so, today, I hope not only to have an
informative discussion about OMB's appropriations request but
also to dive into some of the important policies and
assumptions included in the President's overall request.
For fiscal year 2017, OMB is requesting a 6-percent
increase over last year's level. That is just a little bit
under $101 million. In addition, the budget requests a
significant increase for OMB's IT account, at 17 percent over
last year.
Now, I appreciate the strides the administration has made
to improve the use of IT resources all across the government to
increase efficiency, to reduce waste, and identify savings.
However, at a time where our Nation is incurring significant
debt for generations to come, I think OMB should be exercising
even greater fiscal restraint.
And may I remind the Director that when the President first
took office in 2008 OMB received $78 million. Therefore, I
believe your agency, again, has a greater duty to lead by
example and to live within the means of your own budget.
I would also like to discuss the role OMB has in
strengthening Federal cybersecurity and the steps the Federal
Government is taking to prevent the kind of IT failure we saw
with the breaches of OPM's background security and personnel
database. More and more, we are seeing threats to our national
security via cyber attacks on our networks and operating
systems. OMB's role in guiding and coordinating cyber policy is
very, very important.
Today, I hope we can talk about the Department of Labor's
proposed fiduciary standard rule. As you know, last month, the
Department of Labor submitted its rule to redefine fiduciary
standards to OMB for its mandatory review. I will have some
questions about this because OMB has the critical task of
reviewing all the Federal regulations to ensure all proposed
regulations keep pace with modern technology, promote the
changing needs of society, and avoid duplicative and
inconsistent policies.
I believe the Department of Labor's rule will significantly
harm low- and middle-income investors seeking financial advice
regarding their retirement and will cause unintended
consequences to many Americans' IRA accounts by limiting their
access to investment advice provided to many small account
holders. At a time when many Americans lack adequate retirement
savings, we should be empowering families to save more for
retirement by preserving access to all forms of affordable
investment advice.
And, finally, I want to talk some today about the
administration's inadequate proposal to fund the Army Corps of
Engineers. I am very disappointed the administration chose to
ignore the importance of our Nation's ports and waterways. As
we move toward larger post-Panamax ships, ensuring that ports
are dredged deep enough to handle these larger ships is
essential to secure America's place in a global competitive
market.
For instance, in Jacksonville, Florida, my home district,
JAXPORT, our local port, is a major economic driver in the
community. JAXPORT supports more than 132,000 jobs and has an
economic impact of about $27 billion in the northeast Florida
region. And, unfortunately, the President's budget not only cut
the Army Corps of Engineers' funding by 22 percent, but it
doesn't fund a single new deep draft navigation project.
In order to modernize our Federal navigation channels, we
need a budget that reflects the needs of our Nation's ports.
And so I am hoping to hear from you, Director, today on why the
administration woefully underfunded the Army Corps of Engineers
and about the decision to fund only one new start project in
the 2017 budget request.
But, again, I want to thank you, Director Donovan, for
taking the time to be with us today, and I look forward to your
testimony.
And now I would like to turn to the ranking member, Mr.
Serrano, for any opening remarks he might have.
Mr. Serrano. Thank you, Mr. Chairman.
I want you to know that you just cost me a dollar. I bet
someone that you would say something positive about the budget,
and I didn't hear it. Maybe I skipped it.
Mr. Crenshaw. Yeah, I said something nice about the IT
stuff.
Mr. Serrano. Yes, you did. Yes, you did.
Thank you, Chairman Crenshaw. I would like to join you in
welcoming Shaun Donovan, Director of the Office of Management
and Budget, to this hearing.
Today's hearing serves a dual purpose: We will of course
discuss OMB's specific budget request for this year and delve
into the new initiatives that will help coordinate government-
wide responses to pressing issues. But we will also delve into
the budget request as a whole and how OMB has helped to put
together a coherent and cohesive product that reflects our
Nation's values and addresses its needs.
That secondary role is especially important for this year's
context, because this year our majority colleagues on the
Budget Committee have taken the unprecedented step of refusing
to invite Director Donovan to testify on the administration's
budget. I think that decision is unwise at best.
With that in mind, I want to commend Chairman Crenshaw for
his decision to hold a hearing today. I think it speaks well of
the Appropriations Committee's more bipartisan nature. Although
we may have differences of opinion about what our policy
priorities should be, I am glad to know that the chairman
believes that we should hear all sides of the debate.
And I am very serious and sincere about that, Mr. Chairman.
And I think it is especially necessary to hear what
Director Donovan has to say about the fiscal year 2017 budget.
So I believe that the President's request, prepared with
your counsel, creates a strategic plan that strengthens our
economy and invests in working families by improving access to
early and higher education as well as affordable health care,
investing in our infrastructure, and partnering with local
communities and businesses to create good-paying jobs and
affordable housing. I commend OMB for your role in these
efforts.
There is also much to discuss in OMB's request, as well,
which totals $100.7 million in fiscal year 2017. This includes
a relatively small increase of $5.7 million to help ensure you
have the personnel and the tools necessary to meet these
numerous responsibilities.
It is important to note that, out of the requested
increase, $2.4 million are for unavoidable costs, such as
salary increases, higher rental costs, and IT contractor
support. The other $3.3 million would help OMB restore a
portion of previous staff cuts at a time when OMB has taken on
numerous new responsibilities mandated by Congress. OMB's
current staffing levels are 7 percent below 2010 levels and
would still be 5 percent below 2010 levels even if OMB receives
its full 2017 funding request. We need to make sure that OMB
has the resources necessary to do its job.
I am also interested in hearing about the implementation of
the Cybersecurity National Action Plan and OMB's role in
developing and coordinating Federal IT cybersecurity strategy
and policy. I hope we will have a chance to discuss all these
issues in further detail today.
Thank you for your service and for appearing before this
subcommittee. I look forward to hearing about your priorities
for 2017.
And I thank you, Mr. Chairman.
Mr. Crenshaw. Thank you.
I would like now to yield to Mr. Rogers, who is the
chairman of the full committee, for any opening statement he
might like to make.
Chairman Rogers. Thank you, Mr. Chairman.
Director Donovan, we are pleased to have you with us to
discuss the President's fiscal year 2017 request for OMB as
well as some recurring themes in the overall request.
This marks the eighth and final budget request under the
Obama administration, which you have been a part of from the
very beginning. While we may not agree on everything, I have
enjoyed working with you over the years and appreciate your
service to the country.
For fiscal year 2017, as has been said, you have requested
$100.7 million, which is about $5.7 million over fiscal year
2016. These additional funds are proposed to hire more staff,
raise pay and benefits, and for increases in rental and IT
costs.
As you know, we are in very tight fiscal times, so any
request for additional dollars is met with extra scrutiny in
this committee. That is our job.
Your relatively small agency plays a critical role in
overseeing the administration of the entire executive branch,
and it is important that this committee assess the strength of
the President's budget request as a whole.
As you are aware, in December, Congress and the President
came to an agreement that set budget caps for fiscal year 2016
and 2017. So I am disappointed, not surprised, that this year's
budget request seeks at every turn to circumvent the terms and
the spirit of that agreement.
Year after year, this committee has rejected the
administration's attempts to evade statutory discretionary
spending caps by proposing new and unrealistic programs on the
mandatory side of the ledger. And yet, here again, this budget,
which you helped draft, shifts tens of billions of dollars from
discretionary funding over to mandatory.
If we were to blindly follow the President down this path,
by 2020 our country would spend more money on interest payments
on the national debt than we would on protecting and defending
our Nation. Instead of proposing real solutions to help get our
Nation's fiscal house in order, the President has chosen only
to exacerbate the problem.
And while I have sadly come to expect the budget request to
be a political document, this year I am especially disappointed
in two proposals in particular.
First, despite bipartisan efforts in the past several years
to increase funding for medical research, this budget opts
instead to politicize the issue, proposing the $1 billion
Cancer MoonShot through mandatory spending, outside the terms
of the balanced budget agreement and outside the scope of this
committee's jurisdiction.
The same goes for the proposal related to our Nation's
deadly opioid epidemic. Our country loses over 100 lives a day
to heroin and prescription drug overdoses. That is over 100
families every day that lose a son, a daughter, a father due to
this tragic scourge.
And don't mishear me. I have enjoyed working in a
bipartisan fashion with the administration, with a number of
dedicated individuals to curb the tide of abuse, to help save
those lives and those families. I believe we have made some
real progress, and I do not question their commitment.
However, when we receive a $1 billion proposal in mandatory
funding to address this pressing problem, I do have to question
the sincerity and seriousness of the request. It is
unquestionable that funding for NIH and for treatment and law
enforcement to fight against drug abuse are important,
admirable goals that we all share on a bipartisan basis. But
here we have to make tough choices and prioritize, and this
budget request is completely devoid of that leadership. Again,
I am not surprised, but I am truly disappointed.
And let's move on now to the global Zika virus emergency.
The committee has received the President's supplemental
appropriations request for Zika. We are reviewing it carefully.
But I am disappointed you didn't take our committee's
recommendation to use unobligated Ebola and other disease funds
for the immediate response to Zika, which we offered to
backfill as needed in the fiscal year 2017 bills.
I think you will eventually regret that decision. The
supplemental you have requested will take time, will probably
get mired in controversy, and will likely attract many requests
for additional emergency funding.
We gave you a quick and easy path. You have chosen a much
more difficult one that will only slow the response to Zika.
And I am sorry you didn't take our advice and our permission to
use those funds for Ebola and the other diseases for this
immediate pending problem with Zika.
I look forward to discussing these issues with you further
during the question-and-answer part of the hearing, and I want
to thank you for being here and for your work.
I yield back.
Mr. Crenshaw. Thank you.
And now, Director Donovan, we will turn to you for your
testimony. If you could keep it in the 5-minute range, that
will allow more time for questions. And your full statement
will be made part of the record. So the floor is yours.
Mr. Donovan. Thank you.
Chairman Rogers, thank you for joining us today.
Chairman Crenshaw, Ranking Member Serrano, and all the
members of the subcommittee, thank you for the opportunity to
present the President's 2017 budget request for the Office of
Management and Budget.
I want to first thank this subcommittee and the full
committee for its work on the 2016 omnibus and the Bipartisan
Budget Act of 2015. Together, we came together to avoid harmful
sequestration cuts and enacted a spending bill that provided
critical funding for both our defense and nondefense
priorities.
The President's 2017 budget builds off the achievements we
secured for 2016 and adheres to the funding levels authorized
in the BBA. And we look forward to working with Congress to
continue the progress we have made in moving the appropriations
process back to regular order.
I also want to thank you for your support of OMB. Over the
last 3 years, you have provided OMB with resources to halt the
furloughs and staffing losses that threatened our ability to
maintain the high standard of quality that we hold ourselves to
and that Congress rightly expects from OMB. Restoring capacity
allows us to deliver more value for taxpayers through improved
program management, smarter regulations, and more identified
opportunities for savings.
Under the President's leadership, we have turned around our
economy and created 14 million jobs; the unemployment rate has
fallen below 5 percent for the first time in almost 8 years;
nearly 18 million people have gained health coverage as the ACA
has taken effect; and we have dramatically cut our deficit by
almost three-quarters.
The President's 2017 budget will help continue this
economic and fiscal progress. It shows that investments in
growth and opportunity are compatible with putting the Nation's
finances on a strong and sustainable path. And it lifts
sequestration in future years so that we continue to invest in
our economic future and our national security and replaces the
savings by closing tax loopholes, reforming tax expenditures,
and with smart spending reforms.
The budget shows that the President and our administration
remain focused on meeting our greatest challenges not only for
the year ahead but for decades to come, making critical
investments that will accelerate the pace of innovation, give
everyone a fair shot at opportunity and economic security, and
advance our national security and global leadership.
The President's request for OMB is $100.7 million, which
will be used to support the staff we brought on board in 2015
to address our historically low staffing levels, as well as
enable us to hire an additional 10 full-time equivalents. Our
2017 request supports the staffing levels we need to more
effectively oversee program management and funding, including
identifying opportunities for budgetary savings across more
than 100 agencies and departments throughout the Federal
Government.
OMB's request will also enable us to continue to play a
central role in executing the President's management agenda.
The additional resources will let OMB ramp up promising efforts
and build on progress in a number of key areas. But I would
like to specifically highlight our investments in supporting
smarter IT delivery and stronger cybersecurity across
government.
OMB is requesting $35 million for Information Technology
Oversight and Reform, or ITOR, to support the use of data,
analytics, and digital services to improve the effectiveness
and security of government services.
The requested resources will help scale up particularly
promising efforts like the U.S. Digital Service, which has
already saved agencies millions of dollars and assisted with
many of our toughest digital challenges. The 2017 request
expands the central USDS team at OMB to work on additional
projects and supports standing up Digital Service teams at 25
agencies across the government.
The ITOR fund also supports OMB's work on enhancing Federal
cybersecurity. Strengthening the cybersecurity of Federal
networks, systems, and data is one of the most important
challenges we face as a Nation. To address these challenges,
the President created a Cybersecurity National Action Plan that
takes near-term actions and puts in place a long-term strategy
to enhance cybersecurity awareness and protections. OMB will
use ITOR resources to work with Federal agencies to implement
these actions and to support timely and effective responses to
cyber incidents.
Our efforts to help deliver a smarter, more innovative, and
more accountable government extend to our regulatory
responsibilities as well. The administration is committed to an
approach to regulation that promises economic growth,
competitiveness, and innovation, while protecting the health,
welfare, and safety of Americans.
We continue to make significant progress on the
retrospective review of existing regulations, eliminating and
streamlining regulations to reduce burden and cost. Since 2010,
agency retrospective reviews have detailed hundreds of
initiatives that will reduce costs, saving more than $22
billion in the near term.
The responsibilities I have described here are in addition
to our work with agencies to prepare and execute the Federal
budget. And while some people think only about OMB's efforts on
behalf of the President's budget, members of this subcommittee
know that OMB works with Congress every day to provide
information and analysis and to respond to contingencies and
unforeseen circumstances.
I want to close by thanking you again for the opportunity
to testify today. It is a particular honor for me to serve at
OMB, given the critical role it plays and the talented
individuals who work there.
Supporting OMB and the work we do to make government
perform better for the American public will continue to be a
smart and necessary investment, and I look forward to
continuing to work closely with this subcommittee to that end.
Thank you. I look forward to your questions.
[The information follows:]
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Mr. Crenshaw. Well, thank you.
Let me ask you about your budget request of a little over
$100 million. You got an increase last year. You are asking for
a 6-percent increase this year.
As I understand it, your role is to say to the agencies
what you ought to be asking money for and not spending
yourself. I mean, you oversee the overall budget, and that is
why I said earlier I think you have a particular responsibility
in terms of fiscal restraint.
I know when I was chairman of the Legislative Branch
Subcommittee of this full committee, I cut the Members' office
accounts by 10 percent. It was a tough decision, but I thought
we ought to lead by example. And if you look over the last 5
years, the budget of the House of Representatives has gone down
by 16 percent.
And so when you ask for a 6-percent increase, I look at the
request, and I think last year part of that increase was going
to go for 25 new staffers and now, for 2017, another 10 new
staff positions. Can you tell me how many of the 25 from last
year's appropriation have been hired?
Mr. Donovan. We have fully hired to the staffing levels
that you have provided in prior years.
And I think it is important to recognize, there is a
significant piece of this--of the $5.7 million increase, $2.4
million will go just to inflationary increases that we have,
whether staff, benefits, rent, those types of things.
I think it is critical for us to execute the additional
responsibilities that we have been given, many of them by
statute. I was very pleased that we reached a bipartisan
agreement in the transportation bill last year, for example, to
step up our efforts to streamline infrastructure permitting
across the country. I think a very strong bipartisan effort
there. We are bringing on some new staff to implement that
effort. That is a good example.
Mr. Crenshaw. So the 25 that we funded last year, they have
all been hired?
Mr. Donovan. That is correct.
Mr. Crenshaw. Okay.
Mr. Donovan. That is correct.
Mr. Crenshaw. And then you need 10 more for next year, and
you have roles for them to play.
Mr. Donovan. Absolutely. And, again, the DATA Act is
another good example, a bipartisan effort that we need to bring
on staff for. And, obviously, cybersecurity is an area where I
think we can all agree.
I think one of the most important points I can make about
this is that I think in all of these different areas we can
demonstrate that the staff that we are bringing on are
achieving substantial savings across the Federal Government,
whether it is the Digital Service----
Mr. Crenshaw. I gotcha.
Mr. Donovan [continuing]. Which is saving hundreds of
millions of dollars----
Mr. Crenshaw. You hired that first 25 pretty quick. And,
you know, if you have the money to do it, you did it, and that
is good.
Mr. Donovan. We have saved $3.5 billion in IT acquisition
costs through the reforms that we have made. So the leverage on
these staff, we think--and it is important that we show you the
return on investment for those staff.
Mr. Crenshaw. Gotcha.
Let me ask you a quick question about some of the work you
do when you oversee all the different regulations that come
before you. And, in particular, I mentioned in my opening
statement the Department of Labor and the fiduciary standard.
As you know, we had this conversation last year, I believe
the SEC, which we oversee and fund here, has the primary
responsibility to look at our economy and make sure that things
are safe and stable. And it seems like they would be the
appropriate people to make a rule or regulation about fiduciary
standards. In fact, when we asked Mary Jo White at the hearing,
she said they are working on a rule to do that.
It seems like the Department of Labor has kind of just
ignored everybody's input to say, you know, let's not
duplicate, let's not make things overlap, and yet they just
keep going, and keep going. They have heard from the Department
of Treasury, they have heard from the different appropriators,
different subcommittees, full committees.
And I guess the question is, if they are just going to kind
of keep moving--then they come to you, and you have to
ultimately review that. And my understanding is that you are
going to expedite that review, and there might be a final rule
sometime in April.
And so the question becomes, do you sit down and do a
comprehensive cost-benefit analysis to make sure that--we all
want to help investors. We all understand that with the stock
market there are certain risks involved. So we want to help,
but we don't want to help in a way that cuts off people's
access to investment advice.
So before you kind of finalize that rule, do you do a cost-
benefit analysis?
Mr. Donovan. Absolutely.
And let me just say at the outset, we do have, as you just
noted, this rule under review at this point. So I am limited in
what I can say on the specifics of the rule. But, generally
speaking, it is one of our most important duties to ensure that
cost-benefit analysis is done correctly and effectively, and we
take the time necessary to ensure that that is done.
Also one of our most important duties is to ensure that
there is interagency review of regulations. In this case, it is
the Department of Labor's statutory authorities that they are
putting into effect through the rule, but one of our jobs is to
make sure that there is a strong interagency review of these
rules before they are finalized.
Mr. Crenshaw. So can you assure us that there is not going
to be duplication or inconsistencies if you have a rule by the
SEC and a rule by Department of Labor?
Mr. Donovan. What I can assure you is that we are going to
do everything we can to minimize those. SEC is obviously an
independent agency, so, while we consult with them, we don't
have direct oversight over their rulemaking. But I can assure
you that we will do everything we can to ensure that
coordination.
Mr. Crenshaw. And how do you go about making sure this
proposed rule isn't going to have unintended consequences, and
actually limit people's access, not adversely affect
particularly some of the low- and middle-income Americans? How
do you go about the process to make that determination?
Mr. Donovan. Well, one of the critical things that we do--
and this is through an open, transparent process of meetings
and comments that come into rules. I believe there were
thousands of comments that were received and evaluated,
hundreds of meetings that took place in the review of the rule.
And so that is, obviously, the best possible way to have an
open, transparent process that makes sure that concerns about
any particular rule are incorporated.
Mr. Crenshaw. And I guess you know there have been a lot of
concerns--anytime you have a comment period, some people like
it, some people don't--but there have been a lot of concerns
raised, and not on a partisan basis, kind of across the board,
people are just concerned that you don't overdo the regulation
to really harm the people you are trying to help. So I just
hope that you will continue to keep that in mind.
And, again, when we have the SEC Chairman before us, we
will ask her how she's doing on her rule. Because, again, we
don't want to see the inconsistencies, duplication that just
create even more confusion.
Mr. Donovan. Well, again, I am not going to comment
directly on the rule. I will say that Secretary Perez has made
clear they are doing everything they can to streamline and
simplify the rule while still maintaining the bedrock principle
of a fair standard of protection for investors.
Mr. Crenshaw. Can you tell us whether or not you are
expediting the rule and when the final rule might be available?
Or is that something you are not supposed to comment on?
Mr. Donovan. Even if I could tell you, I wouldn't know
exactly when we would be finished here. What I can tell you is
we are giving it a full interagency review, as I described.
Mr. Crenshaw. Thank you very much.
Mr. Serrano.
Mr. Serrano. Thank you, Mr. Chairman.
You have touched on it somewhat, but I want you to expand
on it. You know, we have been in a certain kind of mood in the
last few years--actually, more than a few years--of cutting,
cutting, cutting the budget. And some Members feel that if we
cut the budget, that is fine; that is what we were elected to
do. But some of us feel that what made our country great was
investing in our country also, investing in infrastructure,
investing in education.
So how does the President's budget deal with those issues?
And is it possible, do you think, at all in this climate--and I
know this is more a political question than anything else--for
any President to make Congress happy in terms of investing and
at the same time not making them totally angry on spending?
Mr. Donovan. Well, I think you have hit on a core issue
that we grappled with in the budget. But I will say that I
think what we really did here was to build on a bipartisan
precedent that we have seen now twice, with the Murray-Ryan
agreement and then with the Bipartisan Budget Act last year.
And that is basically to recognize that sequestration, which I
would really describe, in many cases, as mindless austerity,
cutting just simply straight across the budget without
reflecting, really, which are the critical investments--that,
on a bipartisan basis, we came together last year to invest
more on the discretionary side of the budget, but we offset it
with both revenue increases and smart spending cuts on the
mandatory side of the budget.
And that is exactly the model that we have been taking up
in the President's budget. Not only are we living within the
caps that were part of that budget deal, which provide
substantial relief on the discretionary side for critical
investments, many of which you described, but we also achieved
$2.9 trillion in deficit reduction over the 10-year window
through taking a look at where we can close loopholes on the
tax side, where we can make smart spending reductions. We have
$375 billion in healthcare savings over the 10-year window.
So we really think that is the right model, and it is a
model that has been bipartisan that we have followed.
But what we can't do is continue to cut the very things
that will help us make the investments that are going to grow
our economy, whether it is the research and development that is
so critical to keeping our innovation edge that we have over
other countries, whether it is investing from the very youngest
age in our kids, like we did with Head Start in the bipartisan
agreement last year and we continue this year in our budget, in
education and training and so many other areas that are
critical to our short-term but also our long-term success.
Mr. Serrano. I am glad that we are discussing that
approach, Mr. Chairman, because one of my concerns and the way
I always say it is, you know, somewhere right now in this
country, in many places, there is a man and a woman somewhere
in a lab, or a couple of men and women in a lab, in white coats
working either on the next Velcro or perhaps finding a cure for
cancer or the common cold. And we sometimes feel, it looks to
me, like we are willing to even cut those areas, you know, that
make us grow.
Do you think we are reaching at all that dangerous point?
Or do you think that the bipartisan agreements we have had or
some of the changing in tone that we have seen at times in the
last couple years, which some people forget about--it hasn't
all been rancor and discord at times--that we can get to a
point where we don't jeopardize the investments we have to make
in the future of the country?
Mr. Donovan. Well, I am hopeful, if we can not continue the
model that we had of 3 or 4 years ago, between shutdown and the
other manufactured crises that really hurt our economy, hurt
confidence of individual families across the country and our
businesses, but follow the model we had last fall, I think we
really can make progress on these issues.
Because I think there is broad recognition that
discretionary spending is not where our fiscal challenges are,
that, actually, we are investing too little on the
discretionary side, even with the substantial increase that we
got in this budget deal, which we lived by in our budget, and
that, really, where our fiscal challenges are are more on the
revenue and on the mandatory side of the budget, particularly
around health care. And that is something that we have made a
lot of progress on, bringing down our healthcare costs.
Mr. Serrano. Mr. Chairman, one quick question. And this is
a question that I run the risk that anybody under 30 in the
audience will leave here shaking their head and saying, ``How
dumb can he be?''
But can we reach a point where the IT equipment we buy
doesn't become obsolete 6 months later? Is that our ability to
purchase improperly, or is it just that technology changes so
quickly that we can't keep up?
Mr. Donovan. Well, no----
Mr. Serrano. Because it seems that all the years I have
been on Appropriations--I mean, there was the fiscal year 2000
where we thought we were going to all die and the country was
going to go down the drain. But since then, one of the issues
is how we pour money at times--pour money, honestly--you're
hearing a Democrat say that--into IT and then, a year later,
the department or that agency is saying it is obsolete.
Mr. Donovan. Yeah.
Mr. Serrano. Is there any way to deal with that?
Mr. Donovan. Part of this is, clearly, the technology
changes quickly. But the fact is, historically, the government
has taken an approach that dramatically exacerbated that
problem. A lot of this is in how we procure information
technology, whether that is the individual devices that we use
or how we procure software services.
And so two critical things that we are doing that we are
making a great deal of progress on: One is we are moving
aggressively to what we call category management. Instead of
having literally thousands of different contracts across the
Federal Government for laptops, for desktops, for handheld
devices, we are going to a very small number of government-wide
contracts.
As we started to implement that late last year in IT and
particularly in devices, we saw a 50-percent decline in prices
very quickly. How can that be, you say? Because, for example,
right now, if you were going to bid on a contract, you have to
look at potentially thousands of different contracts in
different agencies with many, many different types of
configurations. Instead, if we go to saying simply, let's
choose three, four, five different configurations of a desktop
or a laptop and make that the standard, we can actually
dramatically improve the efficiency for the contractors
themselves of doing business with us and bring the prices down.
And we have started to see that.
On software procurement, which is a little more
complicated, we have moved to what we call an agile system. It
basically used to be that we would buy giant IT systems all at
once, kind of in a big bang, and, by the time you get 4 years
down the road, realize you are above budget, behind schedule,
it is too late to be able to make changes and adjustments.
Instead, what we are doing is buying, just like the private
sector does, much more incrementally. And that is also really
starting to make a difference.
I saw this, frankly, at HUD. When I came in, I had a giant
financial services project that was above budget, behind
schedule. And I came to OMB--this is the role that OMB can
play. I came to OMB; they said, you know what, Treasury has
actually got a system that is very similar. And so we moved to
what we call shared services where HUD now does all its
financial transactions through its system at Treasury. Much
more cost-effective.
And so those are the kind of techniques that, even if
technology changes quickly, it allows us to be much more agile
and responsive to keep up with those changes.
Mr. Serrano. Thank you.
Thank you, Mr. Chairman.
Mr. Crenshaw. Just real quick, do you have a number, like,
how much money the Federal Government spends every year across
the board on IT?
Mr. Donovan. Roughly $90 billion.
Mr. Crenshaw. That is all?
Mr. Rogers.
Chairman Rogers. Mr. Director, let's talk about debt. We
owe over $19 trillion, growing uncontrollably, several
trillions of it during this administration.
People out there are frightened, frustrated, mad,
misunderstanding what is happening. And when I try to tell
them, look, we have cut discretionary spending in the last 5
years by over $175 billion, and yet the debt continues to zoom.
Why? Because of mandatory spending, entitlement spending--out
of control.
When I first came here, we appropriated two-thirds of
Federal spending. Today it is one-third. Two-thirds is now
mandatory, automatic. If you qualify for a certain program, the
money comes out of the Treasury. It doesn't go through this
committee. We have no oversight.
If we continue at this pace, as I said in my opening
statement, soon the debt interest is going to exceed what we
spend for national defense, among other things. So it is a real
crisis, in my judgment.
Of the $4 trillion in Federal spending that is going to
take place next year, we are only appropriating $100 billion,
and it is out of control. And yet this budget that the
administration is proposing would increase mandatory funding by
some $60 billion, either currently funded under discretionary
or new money that should be funded as discretionary.
[Clerk's note.--Chairman Rogers corrects the $100 billion
as $1 trillion later in the record.]
Knowing that we have a mandatory spending problem that is
crowding everything else out, the President chooses to ignore
that problem and, frankly, only make it worse. He plans to pay
for much of this new funding through imaginary fees and taxes
that obviously aren't going to happen.
With the President having been in office now over 7 years,
we still haven't seen a credible plan to tackle this out-of-
control entitlement spending and debt. He has almost 11 months
left in office. Can we see any hope that he will make a good-
faith effort with the Congress to help strengthen and preserve
critical entitlement programs and yet have some kind of a check
on the rapid growth of the entitlement sector?
Mr. Donovan. So, Chairman, let me begin by agreeing with
your fundamental premise that discretionary spending is
actually a place that we have cut and I think cut too far, and
that was the basis of the bipartisan deal we reached last year.
And I want to thank you for your leadership on getting to, I
thought, a very effective compromise on the omnibus at the end
of last year.
Where I want to disagree with you is that, in fact, since
the President has come into office, we have made substantial
progress not just on our short-run deficits, which are down by
roughly 75 percent--we have had the fastest sustained deficit
reduction since the end of World War II--but we have also made
substantial progress on our medium- and long-run deficit and
debt as well.
And the reason for that is because healthcare spending, as
you know, is the single most important challenge that we have
on the mandatory spending side. It outweighs all other
programs. And, in fact, that is one of the reasons why the
President immediately, on coming into office, focused on this
issue. And since he came into office, we have actually seen the
slowest healthcare cost growth in 50 years.
And, in fact, if you just take 1 year, the year 2020, since
the Affordable Care Act was passed, CBO--these are not our
numbers--CBO projects that we are going to spend $185 billion
less in 2020 on Medicare and Medicaid combined.
So we have made real progress. And what we are proposing in
our budget is to continue that progress. We have $375 billion
of further healthcare savings that we are proposing. And as we
saw with the doc fix legislation that got done about a year
ago, we think there are many areas where we can make bipartisan
progress to make further progress on those entitlements.
But I would also say that the President believes that we
need to take a balanced approach. And the fact is we have
wasteful spending on the Tax Code side of our budget as well
and that we need to aggressively look at those areas as well.
And our budget does that.
But even with the added $2.9 trillion of deficit reduction
that we achieve in this budget, if you add that to the $4.5
trillion of deficit reduction that we have achieved since 2011,
even if his budget was enacted tomorrow, we would still have
more than 50 percent of the deficit reduction of that $7.4
trillion that comes from spending cuts.
So we think we have a real record of looking hard not just
at the discretionary side but the mandatory side. But we also
need to look at the tax side.
Mr. Rogers. What was the amount of debt when he took
office?
Mr. Donovan. As a share of the economy and the
projections----
Mr. Rogers. No, as a real number.
Mr. Donovan. I don't have those numbers in front of me.
But, again, the right way to look at this problem----
Mr. Rogers. It was only about $14 trillion. Now it is over
$19 trillion.
Mr. Donovan. Well, what I----
Mr. Rogers. How can you say that you have cut the debt?
Mr. Donovan. What I can say is that, as a share of the
economy, we have brought down the deficits dramatically. If you
look at our budget proposal, it would take the critical step of
stabilizing and then bringing down our debt as a share of our
economy. That is the critical test that economists apply to it.
And I will say, compared to the current status quo, we
achieved that $2.9 trillion of deficit reduction in our budget,
which achieves that key fiscal goal.
Mr. Rogers. Let me make a correction. I think I said a
moment ago something wrong, when I said that of the $4 trillion
we are going to spend next year, I said $100 billion. It is $1
trillion of that is what we appropriate.
The rest is mandatory and growing out of control. And yet
your budget proposes roughly $60 billion more mandatory
spending from discretionary. It should be going the other way.
Mr. Donovan. Expected mandatory spending has gone down
substantially since the President came into office, primarily
because of the healthcare savings that we have achieved. The
projections of debt and deficits today----
Mr. Rogers. How did we get from a debt of $14 trillion when
he took office to over $19 trillion now? That is not a
reduction; that is a huge increase.
Mr. Donovan. Not compared to the expectations when he came
into office. If you look at CBO's numbers when the President
came into office, we have substantially reduced expected
deficit and debt.
Mr. Rogers. Can you take expectations to the bank?
Mr. Donovan. All I can do and all the President can do is
make changes, propose changes, working with Congress, that
change our path, our fiscal path.
Mr. Rogers. The bottom----
Mr. Donovan. And we have done a substantial amount to
improve the fiscal path of this country, particularly through
reductions in healthcare spending, since the President came
into office.
Mr. Rogers. But in spite of all of that, the debt has gone
up dramatically since the President came into office.
Mr. Donovan. The President inherited deficits that were at
almost 10 percent of our economy, and he has brought them down
to well below 3 percent. That is the fastest deficit reduction
we have seen since World War II.
Mr. Rogers. Well, bottom line, bottom line, the public
doesn't understand cutting expectations. The public sees that
we owe $19 trillion and growing like a weed, all the while the
administration adds more mandatory spending to the debt so that
the appropriations process, the people's way of oversight, is
thwarted. Because mandatories, as you well know, rely upon
formulas and qualifications for programs that automatically
come out of the Treasury without it being appropriated. And
that is where I think we are on a real, real bad track.
Mr. Donovan. Well, Mr. Chairman, where I think we can agree
is exactly the leadership you and the committee provided last
year, that finding ways to reduce mandatory spending in smart
ways, which was part of the budget agreement that was reached
last year, is the right way to go while we continue to make the
critical investments on the discretionary side that we need.
Mr. Rogers. Thank you.
Mr. Crenshaw. Thank you.
We have been joined by the ranking member of the full
committee, Mrs. Lowey. And so I am going to recognize her to
either make an opening statement and/or ask a question or a
combination thereof.
Mrs. Lowey. Well, my good friend the chairman is so very
generous. I really appreciate your welcome here to this
distinguished committee. And I appreciate you and my good
friend Mr. Serrano holding this important hearing.
And I would like to join you in welcoming Director Donovan.
Thank you for being here today.
And thank you for your gracious welcome, Mr. Chairman.
Mr. Serrano. I can't take all this.
Mrs. Lowey. Welcome.
Mr. Donovan. Thank you.
Mrs. Lowey. With the 2-year bipartisan agreement we reached
at the end of last year and Speaker Ryan's focus on regular
order, most of us were optimistic that this year's
appropriations process would be smoother than the prior years'.
Yet Speaker Ryan, I understand, is entertaining cutting
entitlements through appropriation bills instead of through
authorizing committees. And Budget Committee Republicans broke
with decorum and did not invite you to testify on the
President's budget request. This is very surprising to me.
At this time, it is unclear whether House Republicans will
even offer a budget of their own. At least the Appropriations
Committee is doing its job, and I am very happy to work with
the chairman in doing the job. And I am glad to have you here
today.
Mr. Donovan. Thank you.
Mrs. Lowey. Director Donovan, do you know the last time a
sitting OMB Director was not asked to testify before the Budget
Committee?
Mr. Donovan. To my knowledge, Ranking Member, that has
never happened before since the Budget Committees were created.
And I will say, despite any personal feelings, I think the
most important issue is that I was disappointed because we did
make--and I said this before you arrived, and I want to
compliment you directly for the bipartisan work, both on the
bipartisan budget agreement and on the omnibus in December. But
it felt like we made a lot of progress toward reestablishing
regular order in doing that and creating this 2-year framework
and getting a good agreement, a good compromise last year. And
I was disappointed that I wasn't able to testify. My hope is
that we can continue the progress toward regular order as we go
forward.
Mrs. Lowey. And I know because Chairman Rogers and I would
like to have regular order and move forward with regular order.
So, Mr. Donovan, Mr. Director, had you been invited to
testify before the Budget Committee, are there particular areas
of Federal investment that would spur the economy, enhance our
national security, provide groundbreaking biomedical
breakthroughs that you would have discussed? If so, I am happy
to let you speak to those investments now.
Mr. Donovan. Thank you.
I would really highlight three key areas, and these were
areas that the President highlighted as major challenges for
the country going forward.
First, we have to invest to maintain our leadership as the
most innovative economy on Earth. And one particular area that
he highlighted was the investment in renewable energy. R&D for
that is a critical place where we can put people to work, grow
the jobs of the future. But an area that I know is near and
dear to your heart, as well, is on biomedical research and a
substantial increase in investment that we are proposing as
part of the Cancer Moonshot, along with a range of other areas
of investment as well.
The second big area is where we need to invest to grow
opportunity to give everybody a fair shot in the country. One
of the most important advances I think we won in the omnibus
was a major increase in Head Start to get kids started at the
very earliest stages. Our budget proposes more than a $400
million increase there, which would take us to more than half
of Head Start children in full day, full year programs around
the country, which has been shown to be a critical advance.
But also a great bipartisan victory in replacing the No
Child Left Behind Act. And I think there is a significant set
of places that we could invest, and that the budget does, on
the education side, on training and apprenticeships.
One other area that I would point out to really try to
modernize the safety net that we have for workers is our wage
insurance proposal as part of a broader effort to modernize
unemployment insurance around the country. We think that is a
critical area where we could make bipartisan progress,
encourage people to get back to work even more quickly.
So those are two, and then the third is national security.
The budget invests more than $2 billion in additional resources
to take the fight to ISIL; substantial increases to make sure
that our European partners are reassured that we are going to
stand in the way of Russia's aggressive actions in Europe and
beyond. Third, the cybersecurity proposal that we have already
started to talk about is a major national security threat that
we need to do more on, and the budget proposes a more-than-one-
third increase, $19 billion in total, for our fight to improve
cybersecurity.
Mrs. Lowey. In looking at President Obama's final budget
proposal, I see that it would reduce the Federal deficit to
$503 billion in fiscal year 2017, down from the current fiscal
year.
In fact, since 2009, under President Obama's leadership,
Federal deficits have fallen by nearly three-quarters, the most
rapid sustained deficit reduction just after World War II. The
annual deficit in 2015 fell to 2.5 percent of the gross
domestic product, the lowest level since 2007 and well below
the average of the last 40 years.
You have mentioned that the budget stays within last year's
budget agreement and, as a result, has caused some tough
choices. Can you describe the effect of some of these choices
on the discretionary side of the budget?
Mr. Donovan. Absolutely.
So the structure of the bipartisan budget agreement
relieved about 90 percent of sequester on the nondefense side
of the budget but only about 60 percent in 2017. So 90 percent
in 2016; about 60 percent in 2017. Essentially, discretionary
funding is about flat in our budget from 2016.
And what that means is, as you well know, if you look at
areas like veterans health care where there are inflationary
increases that happen each year, Section 8 vouchers I am very
familiar with, and a range of other programs where simply
serving the same number of people requires an inflationary
increase, what that means is, when you have flat funding, you
are going to have much more pressure on other discretionary
accounts.
And so there are a range of areas where we had to make
tough decisions, whether it is in low-income heating
assistance, the LIHEAP program; CDBG; State-paid leave
assistance. There are a number of areas where we would have
wanted to do more, but, through the compromise that was
reached, we decided that we should honor the deal that was
reached last year and stick to those caps despite those tough
choices.
Mrs. Lowey. Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you.
Mrs. Lowey. I appreciate your time.
Mr. Crenshaw. Now we will turn to Mr. Womack.
Mr. Womack. Thank you.
I want to pick up--before I go to a couple of my prepared
questions, I want to go back and pick up on Chairman Rogers'
discussion on the mandatory side.
So, since we didn't have a presentation, Director Donovan,
before the Budget Committee, on which I proudly serve, maybe we
could go back and just revisit some numbers in response to his
questions.
One, what does the gross Federal debt of the U.S.
Government balloon to in the 10-year window?
Mr. Donovan. Actually, it declines from about 76 percent of
GDP down to----
Mr. Womack. So let me stop you. Just a minute.
Mr. Donovan. It declines from----
Mr. Womack. I have very limited time. I have very limited
time, Director.
So only in Washington and only from the Office of
Management and Budget could we see the gross Federal debt go
from $19 trillion today to--and let me help you with the
number; it is fresh on my mind--even with $3 trillion worth of
tax increases, $26 trillion in the 10-year window. Now, forget
the percentage of the economy. In many respects, that is kind
of a fairytale around here. But only here can we go from $19
trillion in gross Federal debt to $26 trillion and somebody in
this administration talk about how it is going down.
So let me ask you this. What is the net interest on the
debt based on the projections of interest rates, if there is
such a thing, over the 10-year window? Today it is, in round
numbers, $225 billion or $230 billion a year. So what does it
go to in the 10-year window, Mr. Director?
Mr. Donovan. I don't have those numbers in front of me.
Mr. Womack. Well, let me help you with the number. Even
with tax increases, it balloons to more than $700 billion a
year.
What do we spend on national defense? With OCO----
Mr. Crenshaw. About $600 billion.
Mr. Womack. $500-and-some-odd billion, plus some OCO money.
So let's just round it to $600 billion.
In the budget that was presented to this Congress by this
President, we were going to take the net interest on the debt
from an alarming rate of $225 billion or $230 billion today to
nearly $800 billion in the 10-year window. And if you take out
tax increases, it is nearly a trillion dollars of interest.
How can you sit here with a straight face and tell this
committee in response to questions about what we know to be the
true drivers of the deficits and the debt in this country--
mandatory spending--that this President has done anything but
lead on how we are going to get our arms around this
phenomenon? How can you sit here and say that?
Mr. Donovan. Congressman, you don't have to take my word
for it. If you look at CBO's numbers, if you look at the
broad----
Mr. Womack. These are CBO's numbers I am looking at.
Mr. Donovan. And CBO's numbers will show you that, relative
to where we were 4 or 5 years ago, they will tell you we expect
to spend $185 billion less on Medicare and Medicaid in 2020
than we did just 4 or 5 years ago. Relative to current law, our
budget shows $2.9 trillion of deficit reduction.
And so we are making real progress on the most important
driver of mandatory spending. We have the lowest healthcare
cost growth than we have had in 50 years. And that is why,
despite the politics around the Affordable Care Act, the
President focused on health care as one of the most important
drivers, if not the most important, of our mandatory
challenges. And we have made real progress on that front.
Mr. Womack. All right. I am glad you mentioned health care,
because I agree with you that it is the principal driver of the
deficits and the debt as we now know it.
So at about what year--and I know you have looked at these
numbers. At about what year, based on 18 percent of GDP in
average revenues--that is about what we see, 18, plus or
minus--at what year is there no money left for discretionary
spending at all, no money at all for this committee to
appropriate? At what year does that happen because mandatory
programs consume all of it?
Mr. Donovan. Congressman, one of the things that we all
have to recognize----
Mr. Womack. What year?
Mr. Donovan [continuing]. Leave aside the politics----
Mr. Womack. What year?
Mr. Donovan [continuing]. Is that we have a demographic
challenge in this country, with the retirement of the baby
boomers, that is going to require us to pay attention to these
mandatory challenges but also to look at the revenue side. If
we want to keep our promises to seniors, we are going to have
to look not just at mandatory spending but also to close tax
loopholes, to look at wasteful spending on the tax side of the
ledger as well.
Mr. Womack. I know that the President wants to raise a lot
of taxes. What I find incomprehensible as a Member of
Congress--because I sat with my colleagues on the floor of that
House when the President gave his State of the Union address
and talked for 70 minutes, and not one time did he dedicate any
leadership from that podium on what we are going to try to do
to get our arms around the mandatory spending that is
bankrupting this country.
That is the kind of leadership that I think we should
expect out of the President, and that is leadership that I
think is lacking in the budget proposal.
Mr. Donovan. What I can certainly tell you is he showed a
lot of leadership in pushing healthcare reform that is
accelerating the cost reductions that we have seen. It is
universally recognized, as you have just agreed, that
healthcare spending is the most important driver of the costs
on those sides, and we have made remarkable progress in the
last 4 to 5 years.
So I think it is a completely unfair characterization that
we have not focused on entitlements. And, in fact, we have made
remarkable progress compared to any benchmark when the
President came----
Mr. Womack. We are probably not going to agree on that one.
And I yield back my time.
Mr. Crenshaw. Thank you.
We will have time for another round of questions, but now
let's turn to Mr. Quigley.
Mr. Quigley. Thank you, Mr. Chairman.
Mr. Chairman, I can't help it. I wasn't going to get into
this, but let me put this on a different picture and put it in
the proper perspective. Simpson-Bowles, I believe, really only
had one major vote on the House side, and that was Cooper-
LaTourette, as I recall, and I was one of 38 Members of the
House to vote for that. So the debt, the deficit, these are
things that I am concerned about and put my vote on the line
toward that end.
But let me just put the perspective, I think, what you are
trying to get to is, as you relate to the deficit as it relates
to GDP, I think what you are saying is, if a household of
$25,000 annual income has $5,000 in debt, that is a whole lot
different, a debt of $5,000, than it is a $50,000 income a
year, correct? Is this what you are alluding to?
Mr. Donovan. This is the way we look at mortgages, we look
at personal finances: What share of people's income do they
dedicate toward their debt? And that is exactly the way we look
at it for the economy.
Mr. Quigley. And one last point on this. I am sure you
don't have this--able to answer now, but since people are
asking you for specific numbers--and if you don't have it,
maybe you can get it to us. The total debt we have right now,
could you tell us what percentage of that debt comes from the
Iraq war and the tax cuts that came with it at the same time?
Mr. Donovan. I don't have an exact number. What I can tell
you is a sizable portion when the President came into office. I
would also say----
Mr. Quigley. I would like to know what percentage is----
Mr. Donovan. Well, that we have reduced spending in OCO, in
the war account, by over $100 billion a year since the
President came into office because he was able to keep his
promises to end the ground wars in Iraq and Afghanistan.
Mr. Quigley. And I appreciate that. But at some point if
you would get to us the raw numbers----
Mr. Donovan. Absolutely.
[The information follows:]
Debt Impact of the Iraq War and 2001/2003 Tax Cuts
OMB does not separately track the comulative impact of individual
legislative action on debt. However, the cumulative effects of the 2001
and 2003 tax cuts, along with spending for Iraq war and related
activities, are clearly substantial. The Congressioal Budget Office
maintained a cumulative tally of the changes in its January 2001
projection of a surplus of $5.6 trillion surplus over the 10-year
period 2002-2011 (see https://www.cbo.gov/sites/default/files/112th-
congress-2011-2012/reports/06-07-ChangesSince2001Baseline/pdf).
Mr. Quigley [continuing]. Of how much we owe now, how much
of that--now and as time goes on, what percentage of that will
be from the expenses of invading Iraq and completing that war
and the tax cuts that went. Because what I recall, in World War
II we went to war and we recognized that wars are expensive and
we raised taxes.
On a less pleasant note, let me talk about something
locally in Illinois. Flooding is a regional issue. In the
Chicagoland area, it is a bipartisan issue. I talk to my
Republican colleagues and those that serve with me in the
region.
One of the big solutions to that was the McCook reservoirs,
supported on a bipartisan basis. Got funded from the
administration for 3 straight years. We are concerned about
spending money; had a three-to-one benefit-cost ratio, not just
Chicago but 36 suburbs. Would have had 1.5 million structures,
5 million people. And the amount of damage we already had
before these were completed is staggering.
Unfortunately, Assistant Secretary of the Army (civil
works) Ms. Darcy omitted this in the 2017 funding for stage 2
under the extraordinary mistaken belief that stage 2 is related
to water pollution control instead of the fact that it is for
flood control, fully authorized and documented in the Corps'
system as such. The project is being recommended by the Corps
for flood protection.
At some point, as Senator Durbin and I have been talking
about, but, again, on a bipartisan basis, we need your help to
try to include these resources in the fiscal year 2017 workplan
for the Corps of Engineers in that area.
Mr. Donovan. Well, I understand your concern about this. We
did include----
Mr. Quigley. Concern is you stubbed your toe. This is a
broken foot.
Mr. Donovan. I am sorry if I understated it.
Mr. Quigley. Yeah.
Mr. Donovan. But we did include $5 million in the 2016
workplan, which is part of a substantial contribution we made
to completing phase 1. I am glad that we are able to keep that
commitment to the first phase, but I understand that you are
focused on how we get phase 2 funded.
Mr. Quigley. Right. So this will be one of many
conversations, and more and more animated, because, with all
due respect, we need your help to try to find a way to put
these resources in the workplan for the Corps of Engineers. And
I believe that Ms. Darcy will be around Friday, and we will
have an animated conversation with her at that time, as well.
But the fact is we need your help. Funding the first 3
years and then leaving it hanging there isn't particularly
helpful.
Mr. Donovan. Understood.
Mr. Quigley. Thank you.
Mr. Crenshaw. Thank you.
Mr. Graves.
Mr. Graves. Mr. Donovan, good to see you.
Mr. Donovan. And you.
Mr. Graves. I am going to change topics briefly for a
moment, but, first, I am excited to hear the enthusiastic
support of the President's budget by Mr. Quigley and the
ranking member. I hope to see them introduce that and put their
name on it and cosponsor it and advocate for it and debate it
on the floor so we can see where all Members of the House stand
on that budget.
But thinking about the President's budget, thinking about
Mr. Womack's comments and the chairman's comments, the American
people and particularly those in the 14th District of Georgia
are just mad. They are frustrated. They do not trust this
government. They do not trust in any kind of responsibility for
financial management, for reducing the debt. They hear the
comments, such as yours just now, of, ``oh, well, the debt's
going to go down over time in relation to something else,''
when, actually, the number is going up over time. They see
that. They know that.
And it is that frustration you are seeing all throughout
the country right now in the Presidential election. And, quite
frankly, I am glad that they are expressing this frustration
and this anger because I am hoping somebody will listen. And we
are soon to find out who is going to be listening.
But an area they know they can control and they know they
can manage is their own personal finances. They don't think
anybody can do anything with this place up here, and, for the
most part, I think they are right. But someplace where they do
have direct control and access is their own personal finances,
their own debt reduction, their own savings for retirement.
And that leads me to the fiduciary rule that you and I
spoke of last year, and you mentioned it briefly today, about
the economic analysis. And I know the terms you used earlier
today were the same as last year, in that you cannot speak
directly on the rule because the rule is being evaluated.
But as to the economic analysis, has there been one
completed, a cost-benefit analysis? And if so, what did it
indicate?
Mr. Donovan. So the cost-benefit analysis is obviously
completed as part of finalization of a rule. So we do not have
a final cost-benefit analysis that I can speak to.
What I can say is that the Council of Economic Advisers
looked at this issue more broadly and identified that consumers
lose about $17 billion a year over bad advice on investment
products. So there clearly is a major impact directly to
families, the families that you are talking about, from bad
advice.
Mr. Graves. So the $17 billion, I believe that is the far
end of the scale. It is a very wide range--it is an extremely
wide range of numbers.
Is that an analysis that you are basing your economic
analysis off of? Or is yours an independent analysis taking
into consideration potentially other analyses that may disagree
with the $17 billion or the $8 billion number?
Mr. Donovan. Again, I can't speak directly to OIRA's
because we have not completed the rulemaking. But, generally
speaking, we look at a broad range of sources of information,
not just the Council of Economic Advisers.
Mr. Graves. Speaking of the one you did reference, so I
assume you have knowledge of it, that $17 billion of savings,
how is it achieved? How does a consumer achieve a savings?
Mr. Donovan. Actually, I think it was a cost. And so the
savings would be achieved if a consumer is protected from
getting bad advice or gets better advice.
Mr. Graves. How, though? The mechanism of their--you say
it's a cost. So if they don't incur that cost, I am going to
suggest it is a savings. How are they saving $17 billion,
specifically?
Mr. Donovan. If I understand the question, it would be
through getting advice that would allow them to make better
investment decisions.
Mr. Graves. Is the assumption that there would be the same
number of investors post-fiduciary-rule versus pre-fiduciary-
rule in that analysis?
Mr. Donovan. I guess I would want to look back at that
analysis before I answer that question. I am not sure.
Mr. Graves. I understand.
Well, my concern--and I will close, Mr. Chairman--is that,
while this rule may have some intention, we don't know whether
it is good, or not, intention. It has some intention.
The question truly should be how does this impact the
overall consumer, who in my district is working hard every day
just to try to slog through this economy that the President, in
previous spending and irresponsibility, has created for them to
struggle through, with their families.
But they want to get ahead. They want a fair shot. They
want to be able to save. They want to be able to invest. My
concern is that this rule is a barrier to them, that instead of
being able to save a little money and meet with somebody in
their town that they know, that they go to church with, that
they shop with, that they see locally that offers them advice,
now they are going to be pushed more towards an interface that
is impersonal, and maybe it is a computer interface, Internet
interface, whatever it might be, but something that is less
accessible, which creates a deterrent, which creates less
savings and less preparation for retirement.
So I would be very interested in the analysis and whether
or not it makes the assumption that you will have the same, if
not more, investors in the future after the rule, or will you
have less investors. Because it is going to be one of those
options there.
So thank you, Mr. Chairman.
Mr. Crenshaw. I think what he is asking is what areas of
the market failure led the administration to propose this rule.
I mean, if you think about that, it sounds like one of those
solutions looking for a problem. But you think that through.
Let's turn now to Mr. Yoder.
Mr. Yoder. Thank you, Mr. Chairman.
Director Donovan, welcome to the committee.
Mr. Donovan. Thank you.
Mr. Womack. Director, you are a good man, I like you, we
have had conversations in the past. But your attempts to
sugarcoat this budget and its projections for the future on
behalf of the administration that I know you work for is just a
sad abdication of responsibility for the challenges we are
facing as a country.
Chairman Rogers, my colleagues Mr. Womack, Mr. Graves, and
others have really laid out some very specific concerns. And
what we have gotten into is a debate, which we see all the time
in Washington, D.C., about historical discussions about who is
wrong and who is right, and we have really no optimism for
where we are going for the future.
So I want to take our conversation to what we can do to
work together to solve some of these problems going forward,
because where we are headed is not a rosy situation.
Now, when you look at where we have come from, the $10
trillion to $20 trillion, that is a huge deficit increase--or
huge debt increase, and no one gets a pat on the back for that.
We know that if we had adopted every one of the President's
budgets, our government would be 20 percentage larger today.
And so we know that we have reduced a bad situation to not
as bad as it could have been. And maybe that may be the motto
of what is going on in Washington these days, is things could
be worse. But things need to get a whole lot better, and I know
you know that. And I know that you know this budget doesn't
really pass the smell test.
When you look at what is driving the costs--and we have had
this discussion, sort of a straw man from the ranking member
about mindless austerity, manufactured crisis--you both had
that conversation. I mean, what the House has tried to do is to
really shed light on and be honest with the American people
about where we are going. And when you look at automatic
spending, you look at the pie charts, you know, in 1965 it was
34 percent, in 2015 it is 68 percent, it is headed to 78
percent. Mr. Womack asked when it would be 100 percent. We
don't know the answer to that, but it is really bad, and it is
crowding out investment.
So I really pushed hard in the last budget to increase the
President's budget request on NIH from $1 billion up to $2
billion. I sent a letter with a bunch of my colleagues, many
folks here, to try to get to $3 billion, and we can't get there
because the White House has other priorities or because we are
being crowded out by mandatory spending.
I have a 3-year-old daughter--I am sorry--a 2-year-old
daughter, a 3-month-old daughter. We all have children, we all
have grandchildren, people that we are worried about. And I
guess my questions for you are: As we go forward, what do we
tell them? And when can we tell our children that the American
budget will be balanced if we adopt the President's budget
submission?
Mr. Donovan. Well, I guess I would disagree with you that I
haven't been talking about forward-looking proposals here. I
talked specifically about a broad set of things the President's
budget does on healthcare reform. Let me take another. In
fact----
Mr. Yoder. I understand. I understand, Director. I just
have a little bit of time here, and so I have some specific
questions that I just want to get to the heart of it. And we
are going to get into a debate about semantics. And what I
want----
Mr. Donovan. What you can tell your daughter----
Mr. Yoder. But I want to know, when can we tell our
children that the American Government will run in the black
based upon the President's budget submission? It is a pretty
simple question, and you are a very smart man. I know you know
the answer to this. What is that date?
Mr. Donovan. I think what you should tell your daughter is
that this country is facing a significant demographic challenge
with the retirement of the baby boom, that we need to keep our
promises to those retirees, and----
Mr. Yoder. Well, let's get to that question.
Mr. Donovan. If I could just----
Mr. Yoder. Sure.
Mr. Donovan. You asked a question.
One of the most important things about that is that we are
now facing a world where, instead of having over three workers
for every retiree, we are going to have about two and a half--
--
Mr. Yoder. I am probably going to agree with you on a lot
of the root causes, Director.
Mr. Donovan. Immigration reform--immigration reform is
actually an area where I think we could reach a bipartisan
agreement. It will help us not only grow our economy, it would
reduce the deficit by a trillion dollars----
Mr. Yoder. So my child asks me when is the budget going to
balance and I say what?
Mr. Donovan. What I would tell her is that we need to do
exactly the kinds of things that we are proposing to do.
Mr. Yoder. So I wouldn't tell her--I would not tell her--
what is the answer to the question, Director? When does the
budget--when does America run a budget in the black?
Mr. Donovan. I am trying to answer your----
Mr. Yoder. I know, but when is your projection? Give me a
date. When will the American budget be in the black again?
Mr. Donovan. We----
Mr. Yoder. Based upon the President's budget request, which
lays out all of his requests--this is his vision for the
future, it is your vision for the future. On what date certain
can we tell the American people, if we adopt your policies
wholeheartedly, the $3.5 trillion in tax increases, if we adopt
all of that--because you have already asked for trillions in
new taxes--if we adopt it as is----
Mr. Donovan. I think----
Mr. Yoder [continuing]. When do we go in the black?
Mr. Donovan. Please don't mischaracterize our budget. We
proposed a budget that has $2.9 trillion in deficit reduction,
that in the 10-year window stabilizes debt and starts to bring
it down, compared to a current path that we are on where debt
would increase substantially as a share of the economy. Those
are the critical tests that the President has laid out for
fiscal stability, and we meet those tests.
Mr. Yoder. Mr. Chairman, I will submit to the Director, who
I have a lot of respect for, this is why people get frustrated
with Washington, because we can't ever get straight answers to
straight questions.
I have other questions on here in terms of Medicare. You
mentioned that. When are IPAB cuts going to start with
Medicare?
Mr. Donovan. That will be----
Mr. Yoder. Because the CMS says next year. Is that still
your position, that the way to fix retirement benefits through
ObamaCare that you are talking about so much as the key to
these healthcare situations, that--what is the date certain
when I can tell my 104-year-old grandmother that her Medicare
benefits would be cut under the IPAB?
Mr. Donovan. Well, first of all, CMS will make a final
decision this year. But you are also deeply mischaracterizing
the way the IPAB works. All of those changes are presented to
Congress and voted on by Congress. And so----
Mr. Yoder. When will the government, when will CMS make
recommendations? And how much will they be----
Mr. Donovan. We expect----
Mr. Yoder [continuing]. Regarding how much of Medicare----
Mr. Donovan. We expect it to be later this year----
Mr. Yoder. OK.
Mr. Donovan [continuing]. In the next few months.
Mr. Yoder. Mr. Chairman, I will just conclude by saying
this is why I think Americans are frustrated that we can't get
straight answers to these questions.
We are not making the kind of progress we need to make. We
are leaving a legacy of debt and despair for the next
generation. Director Donovan knows it; the President knows it.
And they are shutting down and going to be gone in a year, and
we are going to be here left with fixing the situation. And our
kids and grandkids, ultimately, after Director Donovan is gone
and I am gone, we both know they are going to be left picking
up this leftover expense.
And it is embarrassing, and we ought to work at it to
seriously fix it and not get into a semantical debate about
shaving off, of increases, and we were going to build something
and we didn't build it so we are going to count that as a cut.
It is a lot of Washington talk, and we all know how this works.
The reality is the debt is growing to an unsustainable
level, and we are going to saddle our kids and grandkids with
it. And I just hope and pray that this administration--the
President has political capital left--that maybe he will come
to the table and we can actually work together so we can answer
that question: This is the date certain we will go in the
black, and this is when we will actually solve this problem.
And until then, we are going to have these conversations that
ultimately get us nowhere.
I yield back, Mr. Chairman.
Mr. Crenshaw. Thank you.
Now we will turn to Mr. Rigell.
Mr. Rigell. Thank you, Mr. Chairman.
And, Mr. Donovan, I thank you for being here today.
Mr. Donovan. Thank you.
Mr. Rigell. And I want to give you credit right from the
start. I think you are trying to do the best you can. OK? That
said, the differences between your assessment of our situation
and, indeed, the President's assessment of our situation and my
own and what I see in my colleagues, the differences are
profound, and they are fundamental.
I had the opportunity to meet with the President--it was a
few years ago, and it was just for a few minutes. But in those
few minutes that I had the opportunity to speak to him, I went
right at this issue of our fiscal situation. Above all else, it
is what concerns me.
And I would just associate myself with the remarks of my
colleagues. We didn't meet beforehand to understand where we
were coming from on a line of questioning, but it resonates
with me, the alarm that they are expressing.
And in the Nation's capital, I think hyperbole is used
oftentimes, and the word ``crisis'' is used on just about
everything, but I am submitting to you that we do, indeed, have
a fiscal crisis. I don't believe that your testimony here today
reflects the crisis we are in. I don't think the President's
words reflect the crisis that we are in.
In fact, I associate myself with what Mr. Womack said. I
walked out of the State of the Union, and I just thought, it is
like he is just completely unaware of where we are headed
financially. Interest rates can only go one way, right? Which
way? Up. $130 billion for each 100 basis points, 1-point
increase. That is hardly reflected in all of this. I look at
the President's schedule, what he talks about when he is in
public. It is like fiscal Orwellian speak.
You know, I have been a businessperson all of my life and
dealt with budgets. And I look at your own testimony, Mr.
Donovan. Look, page 1, bottom paragraph--and I know you know
the difference between the debt and the deficit, but listen to
this sentence. ``The 2017 budget continues this progress. It
shows''--OK. You talk about that we are proud of the
President's budget, that it meets the test of fiscal
sustainability--listen to this part--``and putting debt on a
declining path through 2025.''
Does the President's budget put debt on a declining path
through 2025?
Mr. Donovan. Yes, it does.
Mr. Rigell. No, it does not. As a percent of the GDP, it
doesn't.
And, by the way, I agree with you on that point. Everything
ought to be evaluated in terms of percent of GDP--revenue,
expenditures, the debt as a percent of GDP.
But words matter, Mr. Donovan. I would expect that you of
all people would understand the difference here. You said you
are putting the debt on a declining balance through 2025.
Mr. Donovan. A declining path as a share of the economy.
Mr. Rigell. No, it is--no. No. Debt is increasing.
Mr. Donovan. As a share----
Mr. Rigell. We need to be precise----
Mr. Donovan. As a share of the economy----
Mr. Rigell. Oh, is that what you--that is not what it says.
Look, this isn't a matter of semantics. I get the difference.
Listen, I am in favor of evaluating things of the percent of
GDP.
Mr. Donovan. Every serious economist who looks at this
issue looks at debt----
Mr. Rigell. You are misunderstanding the point I am making.
Mr. Donovan [continuing]. Deficits as a share of the
economy.
Mr. Rigell. No. On that point, Mr. Donovan--please. You are
a smart guy. I am not trying to talk down to you. I think we
are trying--the thing is we only have 5 minutes. It goes just
like that.
On that point, I am in agreement with you. I really believe
everything ought to be evaluated as a percent of GDP. That is
how every lender does this. That is how I ran my business. It
is your ability to repay. And that is a percent of--whatever it
is, your business cash flow or whatever. On that point, we are
in agreement.
I am saying that, even in your written testimony, you said,
we are putting debt on a declining path. Now, if I was putting
my business on a path of declining debt, that means I am paying
down my debt.
The reason I bring this to your attention is because, when
I hear the President speak--and, indeed, it is kind of embedded
in your own testimony here--it is a bit Orwellian. And what I
mean by that is that you are not dealing with reality, the
stark and harsh and troubling reality of our fiscal situation.
The President references in extremis point of deficits, and
he says, ``I brought them down.'' He doesn't go on to say,
``But they are still way too high.'' That is what leadership
is.
And, look----
Mr. Donovan. Deficits today are below the 40-year average
of deficits.
Mr. Rigell. Well, no, see, the challenge that--see, this
Orwellian speak here--and, look, I still associate myself--
there is a fundamental difference between this side and that
side. And, frankly, we are right on this. We are calling
attention to our fiscal situation. You are not expressing any
real concern about where we are headed.
Mr. Donovan. I don't----
Mr. Rigell. I will tell you----
Mr. Donovan. I don't think that is accurate. I have talked
a lot about the progress that we have made but also more that
we need to do on----
Mr. Rigell. You know, the President is not fighting for
this. He didn't say hardly a word about it in the State of
Union speech, hardly a word. That is not leadership.
Mr. Donovan. He talked about----
Mr. Rigell. And the clock is ticking on his administration.
The clock is ticking on our country.
Mr. Serrano. Mr. Chairman, is this a contest of
interruptions?
Mr. Rigell. No, I am sorry. Listen, I don't mean to raise
my voice. And I appreciate the ranking member----
Mr. Serrano. Well, you are, sir, raising your voice. And we
have given very little respect to the Director today.
Mr. Rigell. No, he is----
Mr. Serrano. I have been on this committee a long, long
time, and I have never seen anyone come before us treated the
way he has been treated today.
And the last time I saw--I read the Constitution and the
Appropriations Committee manuals. It says that the President
proposes and we dispose. So how can it be that a President is
drumming up the debt when we pass bills that pay for programs
in this country? So we don't have a dictatorship, and I think
it is time we realize we don't have a dictatorship. We are
either all guilty or no one is guilty.
Mr. Rigell. Mr. Chairman, may I just have 30 seconds?
Mr. Crenshaw. Certainly. And that doesn't count against
your time.
Mr. Rigell. OK.
Mr. Crenshaw. And if you feel like talking loud, that is--I
don't think the Director----
Mr. Rigell. And I just--I thank the----
Mr. Crenshaw. And I can talk loud too.
Mr. Rigell. And I respect the ranking member.
And, look, it is an honor to be on this committee. And I
simply want to say, look, we are fellow Americans trying to get
this right. And I have problems with my own party. The
Americans for Tax Reform pledge is mathematically indefensible.
I am simply submitting to you, Mr. Donovan, that part of
leadership, and I think the fundamental part of it, is the
proper assessment of the current situation and the trajectory,
the direction we are going.
My concern here today is not something I have contrived. I
know these hearings are so often thought of as theater. I am
not saying I care any more than you about our fiscal situation.
But it keeps me up at night, and, frankly, I wish it didn't--I
didn't think about this as much as I do.
But when we get on the flip side of debt and we are there,
we are there, 200 basis points, 2 full interests--2 points
going up, which is frankly within reason, $260 billion. And to
the ranking member's point, my own party has contributed to
this situation. I didn't like it when I was told to go out
shopping when we got into wars. I wanted somebody to tell me
how I needed to sacrifice. I never heard that.
But I have taken enough time, and I thank the chairman for
his extension of time, and I thank the ranking member for his
comment, and I thank you for your testimony today.
Mr. Donovan. Thank you.
Mr. Rigell. Thank you.
Mr. Crenshaw. And just for the record, Mr. Rigell always
talks pretty loud.
Mr. Rigell. I didn't know that.
Mr. Donovan. And I am from New York, so I am OK.
Mr. Rigell. Thank you.
Mr. Crenshaw. We will have time. We will have time. I hope
you all stick around. We will have another round of questions,
but let me interrupt that for a second.
I will say, as I have said in opening statement, Director,
people look and they see it took 233 years to get to the point
where we are $10 trillion, that is our national debt. And then
they can look and see, the last 8 years, we added $10 trillion
to our debt. I mean, those are things that people understand.
And I think we are all trying to figure out a way forward--that
is not good place to be.
But let me ask you two quick questions about the budget. As
I mentioned in my opening statement, you cut the Corps of
Engineers by 22 percent. And as I pointed out, too, that most
of the cargo internationally goes through our ports. We have
these post-Panamax ships. They are bigger, they draw more, and
so our ports need to deepen their waterways to compete
internationally.
And so I guess the question is, why did the administration
propose a 22-percent reduction over the Army Corps' last year's
budget? And why is there a reduction of $800 million or about
40 percent for these construction accounts? And those are the
ones that fund our ports. So can you tell us what went into
your thinking?
Mr. Donovan. Look, this is--I think it was Ranking Member
Lowey asked earlier about tough decisions we had to make in the
budget. Given that it was basically flat from 2016, there were
a series of places where we needed to find reductions, and this
was one of the places that we went.
On the construction point, the operations and maintenance
account for the Corps is more fixed, if you will, because they
have to take care of a set of assets that are there, so it
tends to be the construction account that suffers the most in
those cases.
So this is something where--you know, you and I have met a
number of times about Jacksonville and the focus on it. We were
able to get to six new starts in 2016, which was an unusually
high level. And we have allocated those to the highest-return
projects.
But, as you well know, there are far more projects. And our
hope is that, not only we can do more directly, but we are also
working, as you and I have discussed, on ways to make sure that
private resources are coming in and supporting the construction
of those; and we think there is a lot of opportunity given
exactly the competitive advantage that you have talked about
post-Panamax, and there is a lot of ways to bring private
capital into these projects as well.
Mr. Crenshaw. So the one new start this year, six last
year, one this year, is this just kind of a matter of priority
in terms of not enough money to go around?
Mr. Donovan. That was the single most important----
Mr. Crenshaw. What are the criteria--what do you look at
when you decide what makes a new start? What do you look for?
Like, on that one new start you suggest, what went into your
thinking to make that decision?
Mr. Donovan. Really, it is working with the Army Corps, its
cost-benefit analysis. So, in every case, the traditional
starts that we did were over two and a half, cost-benefit
ratio, so--actually, two and a half, benefits to cost. And so
they showed a dramatically high level of return relative to
other projects.
Mr. Crenshaw. Gotcha.
And switching gears real quick, some agencies of the
Federal Government get funded through mandatory appropriations,
they are not subject to review by the full Appropriations
Committee, like, I guess, the OCC and this new agency, the
CFPB.
And I wonder, how vigorously does OMB look at those budgets
that aren't annually reviewed by the Approps Committee? Do you
look at those?
Mr. Donovan. We spend an enormous amount of time on that.
Let me just give you a few examples.
I have already talked about the $375 billion in healthcare
savings that we are proposing in the budget. That is obviously
all on the mandatory side. We have a total of about 117
different cuts, reductions, that we do----
Mr. Crenshaw. Have you ever cut some of those mandatory--
well, like, let's talk about the CFPB because that is kind of
what I was focusing on.
They get a check from the Fed for $600 million. They were
set up purposefully outside our appropriations process. But
somebody did an independent performance audit for the CFPB, and
they recommended that the Bureau expand transparency of their
funding and expenditures.
Now, do you think that is a good analysis? Some of these
that are funded mandatorily, do you think they ought to be a
little more open and transparent?
Mr. Donovan. Well, CFPB is an independent agency. It is
different from the vast majority of programs on the mandatory
side.
Mr. Crenshaw. So you never look at that one?
Mr. Donovan. We don't have authority----
Mr. Crenshaw. OK.
Mr. Donovan [continuing]. Over CFPB's budget. We do look at
mandatory spending broadly in a range of areas----
Mr. Crenshaw. And when you do, do you look at their
transparency of their funding and their expenditures, even
though we----
Mr. Donovan. Absolutely.
Mr. Crenshaw [continuing]. Don't, because we are not
allowed to. Even though CFPB is not one of those. I guess OCC
might be.
Mr. Donovan. And we think that transparency is actually a
very important tool in trying to keep costs down. Drug prices
is an area where we actually have some innovative proposals in
our budget this year to create more transparency, which we
think can help to control drugs costs.
Mr. Crenshaw. But the CFPB is not one of those agencies
that is funded outside of the appropriations process that you
oversee----
Mr. Donovan. It is funded, as you said correctly, as most
financial regulators are, through the----
Mr. Crenshaw. And that is not an area that you oversee?
Mr. Donovan. It is not an area we oversee directly.
Mr. Crenshaw. OK. Well, thank you.
Let's go now to Mr. Serrano, quietly.
Mr. Serrano. Thank you, Mr. Chairman.
My concern, Mr. Chairman, is probably more about the
process and who we are. We are appropriators. And the
Appropriations Committee has a reputation, a reputation that in
the 1990s became a dirty thought, that people could actually
debate and then go have a beer after the debate. That is the
essence of our democracy. That is who we are as a country.
There are many countries throughout the world where people
disagree, and they try to shoot each other after the
disagreement.
But lately--maybe it is because it is an election year--
lately, we have decided that President Obama is the worst
President in the history of the country, he has done nothing,
and his people do nothing, and that they just drive up the
debt, and they drive up the debt, and they drive up the debt.
You know, we are a country, Mr. Chairman, that does worry
about the senior citizen who doesn't have something to eat, and
that costs money. We are a country who cares about a child
going to school and has laws about a child going to school, and
that costs money.
We are a country that does try, not as much as I would like
to, you are hearing this from a liberal, try to take care of
our veterans to the best of our ability, although liberals
usually, like me, say don't go to war and when they come home,
give them whatever they need, give them everything. If it was
up to me, they would get a house, a car, education, everything,
just for putting on the uniform. And if they are not citizens
and they go to war, the minute they put on the uniform, they
become citizens. That is how much I respect our veterans.
But I think we have got to understand that we have a
process here. And we can't just blame one person. So he
proposes a budget that we don't like. That is why there is a
guy over in the Senate running for President who wants to shut
the government every day, because he doesn't like that budget.
That is his right to do so. But let's not make it sound like we
don't play a role.
I have voted for budgets that spend money. I have proposed
budgets that spend money. But I think it is a disservice by us
as a group--and I am not picking on anybody--as a group to
forget that you and I were that close to voting on the same
bill 2 years ago until somebody in the Senate gave away a piece
that even you were not interested in giving away; and that last
year, we all voted for a bill that we weren't crazy about, but
we knew we had to keep the government open and keep it working.
So all I am saying is probably something that nobody will
pay attention to, is that he is a public servant, I am a public
servant, we are all public servants. We don't get selected. We
don't get picked. We come and we beg people, be it at a legion
hall, be it at a foreign wars place, be it in front of a subway
station in the Bronx, New York, we beg people to vote for us. I
will be doing that pretty soon. My primary is in June, and I
will do it again for the 20-something time in my life, to ask
them to do that. But we have got to be a little more respectful
of each other and a little more respectful of the process.
I will close with this thought. The worst word you hear
these days is ``gridlock.'' Gridlock. Gridlock may be democracy
working. We didn't come here to agree on everything. We came
here to present our positions. In China, the budget is always
on time. In China, the budget is always on time. Is that the
system we want?
And so rather than ask a question, I just hope that we face
this year understanding what it is, and we know what it is, and
we are trying to elect somebody President, and you folks are
trying to elect somebody else President. I hope your nominee is
that guy from New York, that will be a good thing. But, you
know, we still have a good thing going in this country, and we
shouldn't make it sound like the country stinks.
In fact, I will close with this thought. There is a
gentleman running for President who says: Let's make America
great again. You know what my answer is? America is great, we
just need more people to share in its greatness. That is my
philosophy. If I went around saying America is not great, I
will probably be run out of time. It is great. It is the
greatest country under God's heaven. And we should preserve it
by starting off and understanding what our role is and what we
have to do to make it right.
And one last point. If we can get into debt looking for
weapons of mass destruction that were never there, then we
certainly can spend some money on education and on housing and
so on.
And by the way, I found the weapons of mass destruction.
They are called failing schools in some cases. They are called
senior citizens who can't pay their rent. Those are the weapons
that could destroy us, not the ones we are looking for.
I am sorry for the preaching, but maybe when you are not--I
don't know, maybe when you are born in a territory, maybe when
you are born slightly outside the boundaries, you realize how
lucky you are to be in this country and how lucky you are to be
a Member of Congress. And I feel like that every day.
Thank you, Mr. Chairman.
Mr. Crenshaw. Well, thank you, Mr. Serrano. And I think we
all feel like we are lucky to be Americans. And I think we all
know that government needs money to provide services. But
sometimes we have to be efficient and we have to make hard
choices. And I am sure there are a couple more questions. And
my observation is, we have worked together, and the Director
knows there is disagreement on a lot of different issues,
whether it is talking about the budget or whether it is talking
about the fence or whatever.
So I hope nobody is kind of--one of the problems in today's
world sometimes is when people disagree, they tend to demonize
the person they disagree with. And I don't hear any of that
today. And I don't think that is a good thing. So I think we
have had a spirited discussion. We will keep on having a
spirited discussion.
So I will recognize Mr. Womack. If he would like to be
recognized.
Mr. Womack. I concur with the chairman, and I have an
enormous amount of respect for the ranking member. We have had
a lot of discussions, disagree on baseball and many other
things. And I have an enormous amount of respect for Shaun
Donovan, and I want the record to reflect that. I think the
conversation we are having is healthy, and the country needs
more of it.
I wasn't around politics in the 1960s when two-thirds of
the Federal budget was the kind of government that we speak of
here today. Mrs. Lowey talked very articulately about
investment of the Federal dollar in projects that stimulate
growth and development in our country, what we are doing in our
harbors and in our waterways, building roads and bridges. Those
are the kinds of things--I was a mayor--these are the kinds of
things that the Federal Government does that helps give us a
basis for economic development that creates jobs and
opportunity for a lot of people.
I just know today that the percentage of money out of our
Federal budget that is dedicated to discretionary spending, the
government as we know it, is getting thinner and thinner, and
it is putting a lot of pressure on these things, including
national security, and that gives me a great deal of concern.
And when I pressed the Director about the date that all of
our money goes to mandatory spending, it is somewhere out
around 2030, 2035, in that timeframe, which is not very far
away, and we have to be addressing these issues.
So, Mr. Donovan, thanks for your patience over the last
several minutes. I am sure you were beginning to wonder if your
presence was even needed any longer. But I want to go back to a
couple of things and seek your input.
I want to go to paperwork reduction, because we know the
regulatory burdens facing our country today are pretty intense,
and I know what the PRA was designed to do. I am concerned a
little bit that Federal agencies are using the generic
clearances process to avoid the requirements of the Paperwork
Reduction Act, as you know, enacted to minimize information
collection burdens, maximize quality of information collected.
While OMB has recognized that in certain instances a
Federal agency should not have to comply with the PRA's full
requirements, these instances are limited. They consist of
situations where there is a need for multiple similar low-
burden collections that do not raise substantive or policy
issues or specifics of each collection cannot be determined
until shortly before the data are to be collected.
OMB has provided three examples in which generic clearance
is appropriate: customer satisfaction surveys, focus group
testing, and Web site usability surveys. Even though generic
clearances are not allowed for collections that raise
substantive or policy issues, I understand that CFPB, as an
example, has used generic clearance process to collect data on
topics that it intends to issue rules on. For example,
overdraft.
Is it appropriate for an agency to collect information
under a generic clearance process that will be used as part of
its rulemaking?
Mr. Donovan. So, first, I would just say again, CFPB is not
under our--power, and we do consult with them, but we cannot
direct them, and they do not need to follow, generally, our
rulemaking guidelines. So in this specific case, I don't think
it is my place to determine what is appropriate for CFPB. But I
would be happy, if there are other areas where you are
concerned about this, I would be happy to look at it and
suggest whether or not we think it violates those--our
guidelines.
Mr. Womack. OK. Well, let me ask, maybe not for the benefit
of the CFPB, which is kind of the driver of this particular
question, but what steps does OMB take to prevent agencies
within your jurisdiction from abusing the generic clearance
process?
Mr. Donovan. So I would say we have a couple different
ways. We do pursue regular review of the processes that they
are taking. There are also a number of outside agencies that
will look at, whether it is the IGs or otherwise, that will
look at these kinds of processes.
The other thing that we are doing proactively is our
regulatory look-back effort, which I mentioned we have achieved
over $22 billion in savings. A significant share of that
savings does come from paperwork reduction.
So I think it is important that we not just be enforcing
our standards, but also working with agencies to find
proactively new ways that they can reduce documentation. Truck
drivers, for example, we have a major rule at DOT we did last
year that changes their reporting that dramatically lowered
their costs there because of paperwork reduction.
Mr. Womack. Is the Paperwork Reduction Act having the
desired effects? Could it be enhanced? Could it be better?
Mr. Donovan. I do think--and this is really what the
guidance that you are referring--you just referred to tries to
get at--as with many things in government, we need to make sure
that they are modernized to keep up with technology. And so we
do see increasing use of customer satisfaction surveys and
other things as critical to figuring out whether we are being
effective as government, whether we are doing a good job.
And I think the Paperwork Reduction Act wasn't created at a
time when many of those processes existed, and so we do feel
like--and we have tried it within our own guidance--I think it
is worth having a discussion about whether there are some
statutory changes that might be useful to try to modernize what
it does.
And I think in cases we may be missing things. I have seen
a lot of cases where the Paperwork Reduction is actually
creating more paperwork, frankly, than it is reducing because
of modern technology.
Mr. Womack. I thank the Director.
I have one other question, Mr. Chairman, that I am not
going to ask. I will submit it for the record. A lot of
attention has been given to the fiduciary rule, and I do have a
question regarding it, but I will submit it for the record so
as to be respectful of everyone's time.
Mr. Womack. I thank the gentleman for his work, his
testimony today, and also for his previous work at HUD. Thank
you so much for having a good, spirited, and constructive
debate today. Thank you so much.
Mr. Donovan. Thank you.
Mr. Womack. I yield back.
Mr. Crenshaw. Thank you.
Mr. Graves is recognized.
Mr. Graves. Thank you, Mr. Chairman.
And I want to share my respect for the ranking member, Mr.
Serrano, and greatly appreciate your reflections a minute ago.
To Mr. Donovan, who has the unfortunate opportunity to be
the first hearing after a district work period, what you have
sensed today is in no disrespect for you or what you have
presented to us. It is more of a reflection of what our jobs
are, and that is to be the voices of our constituencies.
Coming back from a district work period, that is what we
hear, and that is what you have heard expressed today. I
understand that we are the voice of our constituencies, and
obviously, today, you are the voice of the administration. So
it is two very different roles there for each of us. So thank
you for your patience as we have expressed our frustration
after we have sensed the pulse of our districts.
But just on a different matter, I know you are a member of
the National Ocean Council, if I could just ask you a question
or two as it relates to that.
Can you just help us as a committee understand, in terms of
funds and personnel, how is that requested or how much is
requested in the President's budget, fiscal year 2017, as well
as maybe historically, how many resources have been allocated
through dollars and personnel since its formation?
Mr. Donovan. To be frank, I don't have that information at
hand right now. I would be happy to follow up and get you more
details on that following the hearing.
[The information follows:]
The National Ocean Policy (NOP) is helping to ensure that the many
Federal agencies involved in ocean management work together to reduce
duplication and red tape and use taxpayer dollars more efficiently.
Because NOP work is consistent with other existing agency missions and
authorizations and is interwoven with base agency programs, it is not
possible to separate work done to further the NOP from existing agency
activities. As such, OMB does not track NOP funds and FTE across
agencies.
For information on total Federal ocean and coastal spending across
agencies, not specific to the NOP, please see the 2015 Federal Oceans
and Coastal Activities Report (https://www.whitehouse.gov/sites/
default/files/microsites/ostp/FOCAR%202012-2015.pdf).
Mr. Graves. OK. If you could that would be great. Maybe
also include any of the annual reports that should be publicly
available over the last couple of years for the committee.
Mr. Donovan. Yes.
Mr. Graves. And with that, Mr. Chairman, that is all I
have.
Mr. Crenshaw. Thank you.
Mr. Yoder.
Mr. Yoder. Thank you, Mr. Chairman.
Mr. Director, three quick topics, see what we can do here
in 5 minutes.
The first one deals with the gas tax, increase in the
President's budget. The President told students in Georgetown
University in 2011 that rising prices at the pump affect
everybody, workers, farmers, truck drivers, restaurant owners,
students who are lucky enough to have a car. The President
himself said a $10 rise in oil prices translated to a 25
percent rise in gasoline prices.
Given the challenges that working people face already and
the expense that they have from their Federal Government, I
believe there is this challenge with trickle-down government,
where all these taxes and regulations ultimately hit working
people in my district the hardest, the folks at the poverty
line, the people struggling to get by, and the Clean Power Plan
is one of them.
In terms of this gas tax increase, explain to me why, given
the challenges hard-working Americans are facing, why the
President chose this time to put a gas tax burden on Americans.
Mr. Donovan. Well, first of all, this is a tax that goes
across oil, not just gasoline----
Mr. Yoder. Fair enough.
Mr. Donovan [continuing]. On oil companies directly when it
is produced at the wellhead.
But I think, more importantly, we should also be focused on
the burdens on families and communities that our infrastructure
and the state of that infrastructure is producing. And so
whether it is the hours that families spend caught in
congestion, whether their inability to get to jobs or schools,
we need to do something to make sure we accelerate our
investment, not just in infrastructure, but smart
infrastructure as well.
Traditionally, this has been a bipartisan issue. We did
reach a bipartisan 6-year bill last year. But there is more
that we can do. And investing in the infrastructure of the
future, whether it is driverless cars or a broad range of other
areas, the research and development that we need on
transportation, we think that those costs on families need to
be recognized as well.
Mr. Yoder. In 2008, Joshua Bolten, chief of staff to then
President George Bush, issued a memorandum on May 9 to the
heads of executive departments and agencies, as well as the
Administrator of the Office of Information and Regulatory
Affairs, to encourage them to resist the historical tendency of
administrations to increase regulatory activity in their final
months. Later, Bolten noted ``that we did not intentionally jam
or burden our successors.''
My question for you is, does the White House intend to
issue such a similar memo along the lines taken by the chief of
staff to George Bush in 2008. And at that point, of course, he
didn't know if the next President was going to be a Democrat or
Republican. They just said let's not jam everyone up with tons
of regulations. What is your position? What is the
administration's position on that?
Mr. Donovan. In fact, not just are we considering it,
Howard Shelanski has issued a memo to agencies to try to lay
out the fact that we will enforce very consistent standards on
rulemaking throughout the end of the administration and to
encourage agencies to finish their work as quickly as possible
and to make sure that they are prioritizing so that we don't
have a substantial unusual amount of rulemaking.
Mr. Yoder. Great. Appreciate that, continuing that
tradition.
Finally, I will ask you about the deeming rule. I know that
is something that is under consideration at the OMB. FDA
submitted the final set of regulations to OMB. OMB has a 90-day
period to review and it can extend for another 30 days. We have
currently passed that 120-day mark. So I want to ask you about
that.
And then I wonder if you have taken into account the
regulatory burden in terms of the expense of implementing all
of that when you have tens of thousands of cigars and vapor
products, and not just brand name products, but each different
variation in flavor and size and consent.
And I guess, so, one, can you clarify where we are in the
process? We are past the 180-day review. When do you think you
will actually have a result on that?
And then wouldn't it be less costly and easier to implement
and ultimately be, I think, more effective for the FDA to move
a date forward for the newly deemed products and specifically
set standards for vapor products? Because every single one of
them have been made after the deeming date that FDA came up
with. So it seems like we are putting an unfair burden on my
constituents who utilize those products and maybe overwhelming
for the FDA.
Mr. Donovan. So given that this is a rule we currently have
under review, I can't speak to the specifics, the merits of the
rule. It has been under review, as you say accurately, beyond
the 90-day period. As I said earlier, we will take the time it
takes to resolve rules, to make sure that we get cost-benefit
analysis done correctly and accurately. And I expect that we
will finalize soon, but I can't give you a specific timeline on
that, given that we are still under review.
Mr. Yoder. All right. Well, as you are engaging in the
review, those would be thoughts that you might want to take
into consideration. I know you have had plenty of comments, and
the FDA has as well, and I am assuming those are the types of
things you are wrestling with.
Mr. Donovan. I can assure you those are exactly the kinds
of issues that we look at.
Mr. Yoder. We appreciate your thoughts on that. Thank you.
Mr. Crenshaw. Thank you.
Mr. Serrano, do you have any closing comments?
Mr. Serrano. No. Just to thank the chairman and thank the
members of the committee for this hearing. It was spirited,
that is a good thing.
And thank you, sir, for your service to our country and for
making New York look good all the time. Thank you.
Mr. Donovan. Thank you.
Mr. Crenshaw. And I would just add my words of thanks to
your commitment to public service, and we appreciate you being
here today. That is what the legislative process is all about,
a give-and-take. And just appreciate your spirit and the hard
job that you have. So we look forward to continuing to work
with you as best we can to make this a better place for all of
us.
Mr. Donovan. Thank you.
Mr. Crenshaw. Thank you very much.
Mr. Donovan. Thank you for having me.
Mr. Crenshaw. Thank you. This hearing is
adjourned.**************************************
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Tuesday, March 22, 2016.
SECURITIES AND EXCHANGE
COMMISSION
WITNESS
HON. MARY JO WHITE, CHAIR, SECURITIES AND EXCHANGE
COMMISSION
Mr. Crenshaw. The hearing will come to order. The ranking
member. Mr. Serrano, has tweeted that the meeting will start
11:00 promptly, and I know people are anxiously reading his
tweet at this point, so we will start.
This is the final hearing of our subcommittee, so I want to
welcome our witness, the Securities and Exchange Commission
Chair, Mary Jo White. Thank you for being here today. We always
enjoy having you before our subcommittee. I know the
subcommittee members look forward to having a good exchange
with you.
The SEC plays a critical role in protecting investors,
encouraging capital formation, and maintaining fair and
efficient markets, just as buyers and sellers expect the U.S.
markets to be fair and efficient, the regulator who oversees
them is expected to be fair and efficient as well. For fiscal
year 2017, the SEC is requesting $1.781 billion, which is $176
million, or an 11 percent increase over fiscal year 2016.
While the SEC is a fee-funded agency, congressional
oversight over the Commission is essential in holding the SEC
accountable in fulfilling its mission, and making sure that it
is responsive to the markets and investors, as well as
congressional concerns.
I look forward to discussing your request, and why the
Commission believes it needs these additional fundings. For the
past 3 years, the Committee has set aside resources within the
overall SEC funding amount to fully fund the Division of
Economic and Risk Analysis, the so-called DERA. In that time,
the funds this Committee provided have given DERA the ability
to grow by almost 50 positions, including 16 PhD economists.
And I happen to believe that cost-benefit analysis of SEC
rulemakings is very, very informative, and I support the work
that DERA does to educate the Commission about the macro, as
well as the micro, economic effects of SEC rulemakings. So, I
want to express my support for other DERA functions, such as
developing risk-based models for the Commission's inspections
and enforcement divisions.
In addition to your duties as chair of the SEC, you are
also a member of the Financial Stability and Oversight Council,
the so-called FSOC, and I know we discussed this a bit last
year, but the designation process for systemically important
financial institutions, SIFIs, still is a concern for me.
Although FSOC has adopted some transparency measures since
we last spoke, I am not sure that they go far enough. In
addition, I still believe the current designation process is
not flexible enough. Entities should be given the opportunity
to address systemic risk before being designated. FSOC's
success should be measured by how it mitigates systemic risk,
not by the number of institutions it designates.
Another issue that we discussed last year was liquidity in
the markets, especially in the fixed income markets. As I am
sure you know, the fiscal year 2016 omnibus required DERA to
report back to the committee within one year of enactment, on
the combined impact of the Volcker rule, Basel III, and other
financial regulations, and the impact they have had on access
to capital for consumers, investors, businesses, and on market
liquidity.
I continue to have concerns that the cumulative effect of
these layers of regulations has adversely impacted overall
market conditions and market liquidity. So, I look forward to
reading the report and discussing with you today what the SEC
is doing to address this issue.
The 2016 omnibus also included a provision which prohibits
the SEC from finalizing, issuing, or implementing any rule or
order regarding the disclosure of political contributions in
the SEC filings. I believe Congress has been very clear on this
issue. However, I understand that there are some who believe
the SEC is still able to work on a potential rule without
actually finalizing that rule. Let me just caution you against
this interpretation.
I think the Commission has a lot of work to do, including
Congressionally mandated work that is more important than
advancing a policy that Congress has never actually required,
and in fact, has plainly rejected in statute.
On a bipartisan note, last month, the House passed H.R.
3784, that is called the SEC Small Business Advocate Act. Mr.
Quigley and I were sponsors of the bill, and I hope the Senate
takes up this legislation soon, because small businesses are on
the forefront of job creation and technology innovation. The
SEC's Small Business Advocate Act establishes an Office of the
Advocate for Small Business Capital Formation, and the Small
Business Capital Formation Advisory Committee, to assist small
businesses and small businesses' investors with any problems
that they may have with the Commission, identify difficulties
small businesses have in securing access to capital, including
unique challenges for minority and women-owned businesses,
analyzing the potential impact of SEC regulations on small
businesses, and propose changes to SEC regulations which would
better promote the interests and needs of small businesses and
their investors.
I am interested to hear from you, Chair White, on how the
SEC is currently making small businesses and small businesses'
capital formation a priority, and any thoughts you might have
on this bipartisan legislation.
The SEC should be one of the leaders in helping further
grow our economy, while at the same time keeping our markets
fair and orderly. That is an important responsibility, and I
know that you take it very seriously. We thank you for the work
that you do, and the staff for the work that they do. We look
forward to your testimony today, but first, I am going to turn
to Mr. Serrano, the ranking member, for any comments he might
make.
Mr. Serrano. Thank you, Mr. Chairman. Crenshaw and Quigley?
Was I out that day?
Mr. Quigley. Yes.
Mr. Serrano. Yes? OK, thank you. Thank you, Chairman
Crenshaw. I join you in welcoming Chair White back before our
subcommittee. It is a pleasure to see you once again as you
come to testify about the fiscal year 2017 budget request for
the Securities and Exchange Commission. Your budget request for
this fiscal year is quite reasonable, in my opinion, given the
large and growing oversight role that you are expected to
undertake.
With so many new responsibilities, not just from Dodd-
Frank, but also the JOBS Act, we could argue that you should be
requesting even more funding than you are. Your total budget
request is dwarfed by most big banks, I.T. investments. So,
despite recent increases, you are always fighting an uphill
battle with fewer resources that are needed to do the job.
Last year, we succeeded in increasing the SEC's budget
level to $1.6 billion, which has allowed you to at least not
lose ground. Your fiscal year 2017 request asked for a further
increase of more than $100 million to a total of $1.781
billion. This will help increase your enforcement capacity,
your ability to conduct oversight, and examinations of
regulated entities, and your ability to protect consumers.
Although the financial meltdown of 2007 and 2008 fades in
the memories of some people, it remains foremost in my mind. At
that time, we had regulatory agencies that were negligent in
their duties to protect consumers and cut back on abusive
practices. And we all paid dearly for that. People lost their
retirement incomes. They lost their savings. And the American
people were forced to bail out actors who had taken unnecessary
and harmful risks that undermined our economic system.
That is why a strong and vigilant SEC is vital to
protecting not just those who invest in the financial markets,
but the American people as a whole. As we found out several
years ago, guaranteeing that you have the resources to ensure
fair and open financial markets is key to every American's
economic security. Dodd-Frank gave you significant new tools
and oversight abilities, and it is up to this subcommittee to
make sure you are able to carry out the intent of that law.
I do also want to mention another part of this equation
that threatens to undermine the system of safeguards and
protections provided by the SEC and other financial regulators.
As in previous years, last year's House and Senate
appropriations bills contained numerous riders that are both
unnecessary and procedurally flawed. These riders opened up
loopholes in Dodd-Frank, and undermined the ability of the SEC
to do its job.
Before I close, Chair White, I just want to thank you for
your dedication to this agency, and to this Nation. You have a
tough job to do, and hopefully, this subcommittee makes it
easier rather than more difficult. I know you are a fellow
Yankees fan, and since baseball season will soon be underway, I
am sure I will see you in the Bronx soon. Thank you, Mr.
Chairman, and thank you, Chairman White.
Mr. Crenshaw. Thank you. Now, we will turn to Chair White
for your opening statement. If you could keep it in the range
of 5 minutes, that will give us plenty of time to answer
questions.
So, the floor is yours.
Ms. White. Thank you. Chairman Crenshaw, Ranking Member
Serrano, and members of the subcommittee, thank you for
inviting me to testify in support of the President's fiscal
year 2017 budget for the Securities and Exchange Commission. I
appreciate the opportunity to discuss with you why the funding
of the agency at a level of $1.781 billion is critically needed
to enable the agency to fulfill its important responsibilities
to investors, our markets, and companies seeking to raise
capital to fuel innovation and economic growth.
The SEC has made great strides in recent years to
strengthen its operations and programs, adopting strong
measures, and bringing important enforcement actions to protect
investors and our markets. We do not want this progress to
stall, because we fall short in the funding necessary to
maintain our positive trajectory in fulfilling our mission.
On the rulemaking and policy fronts, we finished our JOBS
Act mandates in 2015 with the adoption of both Regulation A
Plus and Regulation Crowdfunding, and are nearing completion of
all of our Dodd-Frank mandates. We also advanced other key
rules and comprehensive initiatives in mission-critical areas.
Beyond the specific rulemakings, the SEC has, for example,
continued its review of equity and fixed income market
structure issues, advanced its disclosure effectiveness review
to improve the public company disclosure regime for investors
and companies, and undertaken the modernization and enhancement
of our regulatory regime for asset managers.
The Commission also continued in 2015 to hold securities
law violators accountable in record numbers, with record
recovery orders, in all market strata, and in a number of
cutting edge, first-of-their-kind enforcement cases.
Systemic enhancements in the SEC's national examination
program, including increased recruitment of industry experts,
the augmentation of data analytics, and enhanced training have
led to a more effective and efficient program. We are,
throughout the agency, increasingly harnessing technology to
better identify risks, uncover frauds, sift through large
volumes of data, inform policy making, and streamline
operations.
While these achievements clearly evidence a stronger and
more efficient agency, significant work and challenges remain
if we are to be successful in executing the SEC's broad
mandates and responsibilities. Currently, the SEC is charged
with overseeing approximately 27,000 market participants, as
well as 18 national securities exchanges, the PCAOB, FINRA, the
MSRB, SIPC, and the FASB. In addition, the SEC is responsible
for selectively reviewing the disclosures and financial
statements of over 9,100 reporting companies.
Since 2001, the markets and registrants we oversee have
grown exponentially in size and complexity, with the trading
volume and the equity markets tripling--nearly tripling, to $70
trillion, and the assets under management of registered
advisers more than tripling, from approximately $21.5 trillion
to about $66.8 trillion. At the same time, as the ranking
member alluded to, the annual budgets for I.T. alone, for some
of our largest registrants, are reported to be up to $10
billion, more than five times the SEC's entire budget.
The SEC's responsibilities have also dramatically increased
in recent years, with new duties or expanded jurisdiction over
securities-based derivatives, hedge, and other private fund
advisers, credit rating agencies, municipal advisors, and
clearing agencies, in addition to the responsibility to
implement and oversee an entirely new crowdfunding regime.
The SEC greatly appreciates the confidence that Congress
and this subcommittee have placed in us in recent appropriation
cycles, and we are seeking that support this year. The
requested level for fiscal year 2017, which has been carefully
thought through and targeted, will permit the agency to hire an
additional 250 staff in critical core areas, and continue to
improve our information technology. Specifically, the SEC's
budget for 2017 seeks to increase examination coverage of
investment advisors, where current funding enables the agency
to examine only 10 percent of the approximately 12,000
registered investment advisors; further leverage cutting edge
technology; protect investors by expanding our enforcement
program's investigative capacities, including in new, complex
areas, and to strengthen our ability to successfully litigate
against wrongdoers; further bolster the SEC's economic and risk
analysis functions; and hire market and other experts to enable
the SEC to fulfill its expanded rulemaking and oversight
responsibilities. The funding we are seeking is imperative to
protecting investors, and to meeting the challenges of today's
markets and the SEC's expanded responsibilities.
As the Chairman alluded to, the SEC's funding is deficit-
neutral, so that any amount appropriated to the agency will be
offset by modest transaction fees, and therefore, will not
impact the deficit or the funding available for other agencies.
Our appropriation also does not count against the fiscal 2016,
or fiscal year 2017 caps in the Bipartisan Budget Act of 2015.
I hope and believe that we have shown ourselves to be good
stewards of the funds we have been appropriated, and we will
continue to be.
So, I look forward to working with the subcommittee to
provide the SEC with the resources it needs to fulfill its
critical mission, and I thank you again for the support you
have shown the agency. I would be happy to answer your
questions.
[The statement of Ms. White follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Crenshaw. Well, thank you very much. We will start the
questions now, and we will try to observe the 5 minute rule,
though there will be some members coming and going--there are
other hearings going on at this very moment. Some are right
across the hall; some are right down the hall.
But let me start by just asking you about your budget this
year, a requested increase of $176 million. And I mentioned
that is an 11 percent increase over last year. Last year, you
received a $105 million of an increase, which is $281 million
over 2 years. But from 2015 to 2016, there was $51 million in
carryover. I wonder how that happened, and how that works when
you also have access to a reserve fund that was set up under
Dodd-Frank. Just talk about the funding over the last 2 years,
and that $51 million. How does that occur, and what do you plan
to do with that $51 million?
Ms. White. I think you are referring to carryover balances,
and I think we spoke about this last year. The SEC, unlike, a
number of other Federal agencies have what are called no-year
funds, so that we are allowed to carryover funds that we have
not spent during the particular appropriations cycle. It allows
for better financial planning and smarter hiring. You do not
want to be rushed to hire the wrong experts, or enter into the
wrong contracts because you have got an artificial deadline. In
the last several years, the carryover balances have actually
come down. Some of those balances are also attributable to de-
obligating funds on completed contracts. So, again, that is
good financial management.
We take into account those carryover balances when we make
our request for the subsequent year. You cannot estimate
precisely what you are going to have in a given year and it
depends on when we get our appropriation as well. Obviously, if
we get it late in the year then that puts more pressure on us
to spend by the end of that year. But fortunately, because of
the no-year funds, we are able to spend it smartly, wisely, and
be good stewards of the funds that Congress appropriates for
us.
Mr. Crenshaw. I got you. And last year, you received a $105
million increase, but it was less than you requested. I think
$117 million less than that. So, when you do not get as much as
you ask for, how do you prioritize--of that $105, what will
your--I know you have done a lot of work in enforcement
investigations. But when you do not have as much as you had
requested, tell us a little bit about how the priorities were
with the money you did receive, including from last year.
Ms. White. Basically, what we try to do--and obviously, it
makes a difference what our most pressing needs are in a given
appropriations cycle. For example, last year and this year, one
of our very high priorities is to try to increase the number of
examiners we have to examine that investment advisor space we
have talked about for at least our last two or three hearings,
to strengthen enforcement.
We align the priorities we sought the funding for, and then
make separate judgments based on the reduced amount that we
receive. We essentially allocated through a very thorough
process those positions to best meet the priorities that were
contained in our budget request.
So, a number of them went, indeed, to I.A., investment
advisor examiners. A number went to Enforcement. A number
obviously went to the Division of Economic and Risk Analysis. A
number went to--I wish it was a bigger number, but a number
also went to hiring more market experts, as we outlined, as
well as to the extent that the money was available it went to
continue the technology projects that are so critical to us.
You mentioned the reserve fund. We have used, at the SEC,
the reserve fund set up by Dodd-Frank, as you indicated, for
the long-term mission critical I.T. projects that are so
essential to us. I think we had $25 million of that rescinded
last year, so we had to deal with, less money than we really
needed last year. But again, we try to do smart budgeting after
we get our appropriation, as well as before, when we make our
request.
Mr. Crenshaw. Got it. You mentioned DERA, and I mentioned
in my opening statement that we have carved out money for that
division. We think that is important in terms of understanding
the cost-benefit analysis, and I want to get you to comment on
that. How has that worked out? I mean, has that been helpful,
across the board, in assisting what you do?
Ms. White. Well, certainly, I would say that yes, and I
have said before that I think DERA is one of the great success
stories of the SEC. I very much appreciate the support that we
have gotten through the appropriations process for DERA. It is
also our fastest growing division. And they essentially, in
addition to cost-benefit analysis on our rulemakings, also do
what I would call substantive, original research on our
rulemaking. They are able to do that, as not only we have
gotten more positions, more economists, but have really built
the infrastructure for them to be able to do their work.
So they get involved earlier in the rulemakings. You will
see, often now, their own studies, their own original research
is actually put into the public comment file and arena for
people to comment on.
And so, that has really come a long way, and you cannot
overstate its importance to the quality of our rulemaking. They
also are, now, in the last couple of years at least--maybe a
little longer than that, really--and increasingly so,
integrated into the entire agency. They are the ones who
primarily manage our big data, structured and unstructured, not
only for themselves and their research, but for the other
divisions to help them do their job much better.
They are also the ones that have really designed and
conceived of and work with the other divisions on these data
analytics that we have talked about throughout our budget
requests and in prior hearings so that Enforcement and our exam
staff is better able to identify high-risk areas. Where do we
go to examine? Where is this suspicious activity that we need
to go and look at more deeply? They are really doing, I think,
fantastic work at the agency.
Mr. Crenshaw. Well, thank you. I am glad to hear that. One
of the things that we asked last year in the omnibus bill is
for them to do a study, and report back to us because I think
there is some concern that there is an awful lot of regulation.
I mentioned in my opening statement that you have Basel III,
and this, that, lots of regulations. And there is some concern
among folks that there layers of regulations have impacted the
liquidity of the markets.
So, we ask for a report to see what they would have to say,
and I am looking forward to reading that report, but do you
think some of those regulations--if there is a lack of
liquidity, was that an unintended consequence, or do you think
that was part of the plan in cooling down the economy, or
heating it up, based on your view of what happened in 2008?
Ms. White. Unintended consequences, is something all the
regulators must be focused on, at all times, and certainly,
with respect to the enormous amount of rulemaking that has been
done since the crisis that also applies. And all of the
rulemakings we do at the SEC are looked at through that lens. I
guess I would say two things about this.
Liquidity is enormously important to the functioning in our
markets, our economy, and to growth. So, it is an enormously
important set of issues, I would say, that all the regulators,
certainly the SEC, are focused on. Determining whether you have
a reduction in liquidity, to what extent, and if so, what the
causes are, I think any economist will tell you, whether they
are in DERA or they are elsewhere, is extraordinarily
difficult. We have, for example, with our fellow banking
regulators, and I think the CFTC, reported quarterly to the
House of Financial Services Committee, on whether we can
determine whether the Volcker Rule has had a negative impact on
the corporate bond--the liquidity in the corporate bond
markets.
And, thus far, clearly the conclusion is we cannot say that
it has had an impact. So, it is enormously important to study
and enormously important to try to figure it out, just what you
are dealing with, looking for unintended consequences, if you
find them. And if they are negative, doing something about
them.
I did see--and I am glad to see the academic community
getting into this issue. A fairly recent study that was
presented, or is to be presented at one of our DERA
conferences, I think a British Columbia study really looked
precisely at this question of the combined regulations, but
more specifically, even the impact of the Volcker Rule on
liquidity.
That particular study determined that it has not had a
negative impact on liquidity, and indeed, you see liquidity
deteriorating right after the crisis, but you do not see blips
up after regulators have been put into place. Obviously, there
will be more studies coming forth, as there should be. So, it
is enormously important to stay on top of.
Mr. Crenshaw. So, it is a concern, and it sounds to me like
you all have looked at that from time and time, and I think
this study will give us even more information about that. Do
you ever talk about what is the appropriate liquidity level? I
mean, you cannot really pin that down, but it is something you
all talk about as you look at the markets?
Ms. White. Yes, no question about it. Obviously, you have
other objectives you are trying to achieve as well that you are
balancing from time to time with regulations with liquidity.
But it is enormously important all the time to look at that.
Mr. Crenshaw. Got it. OK. Now, let's turn to Mr. Serrano.
Mr. Serrano. Thank you, Mr. Chairman. Chair White, the
President's budget request of $1.781 billion, an increase of
about six percent for fiscal year 2016, will support 250 new
positions. You are requesting 52 new positions in enforcement,
127 in compliance, four in corporate finance, and seven each in
trading and markets, and investment management.
Please explain what functions these will serve, and why
they are needed. And also, as a follow-up, what would happen if
you did not get these positions?
Ms. White. Well, starting with the exam positions, I think
we have requested 127, about, I think, 105 or 107 of those
would actually go to that investor advisor space, which we have
talked about before, where we have resources only to examine
about 10 percent a year, which obviously creates a very
significant investor protection issue. So, you know, that is
what--primarily we would use those for.
We would also use the examiners in other spaces, as well
such as our oversight responsibilities over the exchanges, the
SROs and broker dealers. Enforcement: I cannot overstate the
importance of strong enforcement, particularly in these markets
as they get faster, more complex. We need market experts, and
we need people who know how to use these data analytics and
apply them smartly.
We are charging more individuals now in our Enforcement
program, which I think is very important to stronger
deterrence. That means, or at least, this would be my theory of
why that means we have had more trials recently, so a dozen of
those positions in Enforcement would be devoted to bolstering
our litigation unit--our trial unit in the office.
And then, I think 24 of the positions really spread over
DERA, Corporation Finance, Trading and Market, and Investment
Management would be for market oversight, and just as our
responsibilities are diverse and expansive, different ones of
these hires would be used in order to be able to cover those
responsibilities as best we can.
And so, if we were not to get these positions, you
essentially would see a deterioration in every one of those
priorities that we outlined in our budget request. We would be
examining less, therefore subjecting investors to much more
risk. We would not be enforcing as we should be. We could not
try the cases that we need to try and prevail in, in order to
send a strong deterrent message. We have new responsibilities
under Dodd-Frank and the JOBS Act, and we have to oversee the
new crowdfunding regime. We have examiners devoted to the
Volcker Rule.
So, it is really spread out among, and I think smartly, the
priorities and the responsibilities that we have. And if we
were not to get the funding we need, we would clearly be
compromising our mission, compromising the markets, and
compromising investor protection.
Mr. Serrano. Well, I am glad to hear that you used the word
enforcement because I keep telling this story, but it cannot be
told enough. Some years ago, this agency--you were not there,
came to the subcommittee and actually said, ``We do not need
any more money. We are fine.'' And we later found out why. They
were not enforcing anything, and only history will tell what
role they played in that 2007/2008 fiasco.
Let me take you, very quickly, to Puerto Rico, which is not
a bad place to take anyone. Puerto Rico is in the midst of an
economic crisis that is so bad it really is becoming a
humanitarian one. Your investment management division is urging
funds, especially those with exposure to Puerto Rico, set to
monitor, to continually update their disclosure based on the
risk associated with their investments. Can you talk a little
about that and any other role the SEC may have in what is
unfolding in Puerto Rico?
Ms. White. Yes. I think the guidance update that you are
referring to really is to make sure that investors are looking
out for risks they may face--losses they may face that are due
to market events. And obviously, and sadly and tragically, what
is going on in Puerto Rico creates those, in some situations.
So, it is really a prudent set of guidance for investors.
In terms of the SEC's role in the underlying crisis, beyond
attending to investors and holdings in funds, which really the
guidance goes to, we do not have a direct role in that,
although as a member of FSOC, I clearly am in discussions about
that with Secretary Lew and the FSOC members who are--and
particularly Secretary Lew, as you know, is very, very focused
on the core of that crisis. We also coordinate with our fellow
financial regulators, just in terms of impacts and possible
impacts not only on investors--direct investors, but in the
broader markets.
Mr. Serrano. Thank you. Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you. I am going to turn now to Mr.
Graves, and then Mr. Quigley, but I wanted to note that we have
been joined by the ranking member of the full committee, Mrs.
Lowey, and she will be here to ask a question or two along the
way. So, welcome. Mr. Graves.
Mr. Graves. Thank you, Mr. Chairman. Chair White, good to
see you again. I know many of the members of this subcommittee
have raised concerns related to the DOL and SEC fiduciary
rulemaking, so I want to talk about that just a minute.
It was brought up with Director Donovan a few weeks ago, as
we all met. And there was an area that we feel like has just
been ignored a little bit too much, and its implications of the
rule, we feel like impact hardworking constituents that we all
represent, including hardworking Georgians that I do. Chairman
Johnson in the Senate produced a report on the problems with
the Department's rule, and he published it on February 24th,
and Mr. Chairman, I would like that submitted for the record,
for the committee.
And that is a 40 page report, so I do not expect everybody
to go through it right now, but there is one area I wanted to
focus on, and I am going to quote the report. It says,
``Despite public assurances that that the Labor Department has
collaborated with the SEC, emails between a Labor Department
employee and an SEC expert revealed discord between the
agencies about the rulemaking.'' And the report goes on, with a
senior SEC official stating concerns about reduced pricing
options, rising cost, and limited access to retirement advice,
particularly for retail investors--in other words, our
constituency.
[The information follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Graves. Twenty-six some odd items of concern were
raised by your career staff relating to the substantive content
of the rule, with Labor failing to resolve all of these issues.
And I think, as we all know, many of your staff, being career
staff, are considered experts in what they do, and we hope that
the appointees know the issues as well. But the folks that have
dedicated their careers are those that we hope we can trust to
take ``just the facts'' positions.
So, Chair White, does it concern you as much as it concerns
me, and I know others on this panel that Labor seemingly
ignored the concerns of your own career professional staff that
they have raised, and have not addressed them? Of your staff,
or of this committee, who have raised the very similar and same
concerns also?
Ms. White. I cannot comment on the specific report and the
exchanges back and forth, but I can say what I have said
before, which is that the staff of the SEC did provide
substantial technical assistance to the Department of Labor,
including bringing our perspective, the staff's perspective,
and expertise on the broker-dealer model, including on, at
least, their views about possible impacts as various
permutations of a rule.
The Department of Labor also, in their notice and comment
period, asked about those issues. Obviously, we have not seen
the final rule yet, but I think--what I have also said about my
own view for doing a fiduciary duty--uniform fiduciary duty in
the SEC space is that it is not an easy task, and if we ended
up at the end of the day really depriving particularly retail
investors of reliable, reasonably priced advice, then I would
consider us to have failed in our purpose.
But at the end of the day, we are independent agencies, and
the Department of Labor does have responsibility for the very
important ERISA space. And I think, perhaps, the particular
exchange you are referring to occurred in maybe 2012. I cannot
really add to what that meant or did not--I think that was on
the prior proposal, though.
Mr. Graves. OK. Well, thank you, and we appreciate what
your staff has provided and expert advice that they provide.
And I think it is in all of our interests to make sure that all
of our constituents have the most options available to them to
invest wisely and affordably, and not options removed. And our
concern is that this rule will remove many of those options,
and if not remove them, make them more expensive, or put
barriers in place in which people will not seek those options.
And we believe it is just wiser to be investing in their future
and in their retirement, and we want to make sure all those
options are available, and can be made with individuals in
their communities that they trust that might just be in
downtown Main Street. So, thank you, Chair.
Mr. Crenshaw. And just on that, as I understand it, Dodd-
Frank specifically said, your agency was mandated to study the
issue, and to propose a rule. Do you have any idea why the
Administration has supported the DOL moving ahead of you?
Ms. White. First, I think what Dodd-Frank did was to say--
it mandated a study, which the staff did--it was a very good
study--and gave the SEC the authority, if it decided to, to
proceed with a uniform fiduciary duty for broker-dealers and
investment advisers under Section 913 of that Act.
Again, the initial Department of Labor proposal was in
2010. They do have responsibility for the ERISA space, and even
as we sit here today, there are--our broker-dealers which are
subject to some Department of Labor regulations, and vice
versa. So, I mean, there is a bit of overlap in those spaces
before.
Mr. Crenshaw. But, is the SEC going to look into developing
their own rule?
Ms. White. Without question, and I think I said, some time
ago that my own view, after really extensive study--and the
agency has been studying this for a lot of years, and I
certainly spent a lot of time since I have been Chair; my
conclusion is the SEC should proceed under 913 to do a uniform
fiduciary duty for broker-dealers and investment advisers.
Mr. Crenshaw. And who is going to figure out how to
harmonize the two rules?
Ms. White. Well, you try to make them at least compatible,
if you can. The coordination, obviously, with fellow
regulators, where we have overlapping jurisdiction, is
enormously important. We have it in the Title VII, over-the-
counter derivative spaces, with not only the CFTC, but foreign
regulators. But again, I want to be clear. I think this is very
hard and not quick to do this well.
Mr. Crenshaw. Got it. Thank you. Mr. Quigley.
Mr. Quigley. Thank you, Mr. Chairman. Welcome, Chair White.
It was nice for Chairman Crenshaw to reference the Small
Business Advocate Act. I am sure you are aware of it, and the
fact that the House passed it on a bipartisan basis. I only
assume the Senate will take it up. Can you tell us your stance
on moving forward with this, and designating a small business
advocate at the SEC?
Ms. White. Again, we have not taken a position on the
particular bill. I think we may have provided some technical
assistance on it. I mean, look, there is no question--and this
is true at the--certainly, true at the SEC, throughout the SEC,
how important small businesses are, and that their different
needs and different models be attended to very closely.
We have a small and emerging business advisory committee
that I reinstituted shortly after I got to the Commission. We
have in our Division of Corporation Finance an Office of Small
Business Policy. They advise on all of our rulemakings, with
the lens of small businesses, and comment on that. I think they
responded to maybe 1,700 separate inquiries from small
businesses, you know, last year.
So, we are extraordinarily focused on that, with a lot of
expertise. In terms of having a small business advocate, the
thing that I would worry about with that--because it is
certainly good in concept; I think we all agree that we want to
do everything we can for small businesses--is not to fragment
the efforts that are carried out on behalf of small businesses,
and certainly, that is true at the SEC. And we really have that
concentrated, in a way, where there is a lot of expertise and a
lot of work that goes on regarding small businesses. So,
however the bill might develop, I would not want to lose that.
Mr. Quigley. Let me reference another point. A recent study
conducted by researchers at the University of Chicago and the
University of Minnesota--seven percent of all active financial
advisors have been disciplined for misconduct or fraud. The
study also found that the advisors who have engaged in
misconduct, of those, 38 percent are repeat offenders. I am
sure you are aware of the concerns about these things. Are you
aware of these studies, and what is the SEC currently doing,
proposing to prevent financial fraud like this, especially for
repeat offenders?
Ms. White. I am aware of the study. I have actually read it
quickly. I have not read it with the care that I will in the
next week or two. This is an area that I think is enormously
important, because whether it is a broker-dealer or it is an
investment advisor, if they are not serving their clients
honestly, fairly, and I would say, in the best interests of the
client, that is a big problem.
And one of the things that we have done at the SEC in
particular--this is long before the study, is that we have a
broker-dealer task force. And we have, in our OCIE exam area, a
priority to really look for these repeat offenders, and
frankly, look very closely at the firms where they tend to end
up again.
In other words, I think one of the things the study
referenced was not only do you have problems in the past with
some of these advisors--and I think they are brokers. I think
the study is on brokers, really. But they show up again at
another firm, and they show up again at another firm.
So, our focus has been--FINRA tends to deal with registered
representatives individually--not always, but certainly to a
great degree. But we are really focused on the firms--where
they seem to be residing.
We have one particular initiative, where we are looking at
churning by brokers throughout various firms in order to try to
crack down on that. So, it is an enormously important area.
Mr. Quigley. I mean, how much of this is resources?
Ms. White. Some of it is resources. You cannot get away
from that. I mean, you cannot get away from that, because in
the broker-dealer space--we have been talking about the
investment advisor space--but in the broker-dealer space, FINRA
does today about 80 percent of the examinations of broker-
dealers.
That is really firms and individual brokers. But that does
not really take into account all their various offices--branch
offices, which are not examined with that kind of frequency.
They do about 50 percent a year, which is better than 10
percent a year, in the investment advisory space.
But I think we cannot do enough. I mean, I think our
techniques are better. I think our data analytics are better.
We are identifying those patterns. And as I said, for the last
two or three years, at least, we have been very focused on this
at the SEC, really trying to identify where those brokers are
going and getting them out of the industry.
Mr. Quigley. I thank you for your service. Thank you, Mr.
Chairman.
Mr. Crenshaw. Thank you. Mr. Amodei.
Mr. Amodei. Thank you, Mr. Chairman. Madam Chair, to the
extent that the chairman is going to manage my time, please do
not be offended if I endeavor to manage yours. I will try to be
crisp with my questions. And so, with that in mind, initially,
I know that you folks have been working on an update for
Industry Guide 7, which provides guidance for mining companies
to report the value of mineral resources and reserves. The
present stuff, that is 34 years old, is inconsistent with
international reporting requirements. Could I have a point of
contact in your staff, just to get an update on where that
stands?
Ms. White. Yes. I would call Keith Higgins who is the
Director of our Division of Corporation Finance.
Mr. Amodei. Great. Thank you very much. I want to go back a
minute for the Department of Labor stuff. And I guess we will
call this under the heading of Intermurals. Obviously, you will
be able to tell from my question that I think your jurisdiction
is unquestioned. I understand there is an issue there with
ERISA and some of that stuff. But I am concerned, when you
speak earlier about unintended consequences, and I hear you
when you say, ``Listen, it is hard and it is not quick.''
But I think, ultimately, under Dodd-Frank, the section that
you mentioned in your earlier testimony, there is in fact
mandatory language under the Standard of Conduct stuff that
says--it is under other matters, but it is under the Standard
of Conduct section. Says that ``The Commission shall examine
and appropriate, promulgate rules prohibiting or restricting
certain practices, conflicts of interest,'' blah, blah, blah.
There is also, I believe, a Supreme Court case out there
that is not specific to the SEC, but generally says, ``Hey,
when Congress acts later in time, and specifically, that takes
precedence over earlier acts, in terms of regulating that sort
of stuff.'' So, I guess I am concerned about unintended
consequences.
Clearly, the 800-pound gorilla issue in the room is, is DOL
going to have one rule? Is SEC going to have another? Can you
give me any comfort on how--on what you think your jurisdiction
is ultimately when you get through this process, and how that
is going to work, if it is, in conjunction with DOL?
Ms. White. Well, I think there is no question, certainly,
at least since Section 913 of Dodd-Frank was passed, that the
SEC has the authority--not the mandate, but the authority--to
impose a uniform fiduciary duty on broker-dealers and
investment advisors. It also provides certain parameters if the
Commission decides to go forward.
And again, as I am urged to say more often than I do, I am
one member of the Commission, even though the Chair--and so,
this is a Commission decision. But, I believe the SEC should
exercise that authority to go forward.
But that is, again, not a quick and easy process. And it is
not up to me alone as to whether or what the parameters of that
rulemaking would be, although 913 sets some parameters. Were we
to go forward--in terms of your question on consistency--
assuming that there was a Department of Labor rule that
preceded ours that overlapped, we would continue to talk about
coordination and making our rules and the regime as compatible
as possible. But they are not--they do not always land
identically. And that is something that is--you try to make
them land identically, if you can. But we are separate agencies
with separate statutory mandates.
Mr. Amodei. Time frame?
Ms. White. For us? I cannot say that----
Mr. Amodei. I mean, you have got some decisions, I know, to
make, but it is like, so----
Ms. White. I cannot give you a time frame, other than to
say again what I have said before, that it is complicated and
not fast by any means. And where it stands right now is
essentially that the--you know, the staff's parameters of
recommendation are being discussed with my fellow
commissioners.
Mr. Amodei. OK. I guess, final question is: So, if DOL
comes out with a standard before you folks get through your
process, you are going to enforce their standard?
Ms. White. Again, they have some enforcement authority on
their own. I mean, our enforcement authority is under the
Federal securities laws. So we do not enforce the Labor
Department rules per se. Obviously, again, the conduct can
overlap with our jurisdiction. So it is not, as easy a
situation as maybe my initial response would imply. But we
enforce the Federal securities laws and our rules.
Mr. Amodei. Well, and I appreciate that. I am just saying
that you talking to the committee saying, ``It is not easy as
you might think,'' I get that. But the other problem is,
somebody who is now the subject of an investigation based on
whose rule it is and who is interpreting what is even less
easy, if you will, than--I would much rather be the regulator
than the person who finds out, ``I thought I was in good shape
with the SEC, but now I got the DOL bird swooping in on me, and
we were compliance folks.''
Ms. White. And I think that is why we try, in all of our
spaces where we overlap, and it is not just the Department of
Labor, to be as consistent as we can. I will say again, though,
that we have had parallel rules and do have parallel rules now
that are not totally consistent. And we do our best to give
guidance and clarity. But they are not identical and they do
overlap.
Mr. Amodei. Thank you. Thank you, Mr. Chairman. I yield.
Mr. Crenshaw. Thank you. And I think we will have time for
another round of questions. But now let me turn to Mrs. Lowey
for either a statement or a question, or both.
Mrs. Lowey. Well, thank you very much, Mr. Chairman. I
appreciate your leadership and I do want to say how fortunate
we are to have a chair who is so experienced. Your years and
years of experience have contributed to your outstanding
management of this very difficult agency. We thank you very
much.
When I look at the numbers, the markets you are policing
have a lot of new registrants--more than 2,300 private funded
advisors have registered with the SEC since the effective date
of Dodd-Frank, and more than 800 municipal advisors are
expected to be registered in 2017. In the next two years, the
number of new registrants are expected to be subject to
examination, including swap execution facilities, security-
based swap data, repository swap dealers, crowdfunding portals.
How do you prioritize examinations, given how large your
existing portfolio is? How much larger will it become with all
of these new registrants? How many of those do you anticipate
being able to examine?
How can investors have confidence that everything is being
done to prevent another meltdown when so few of these entities
are being examined? And will your budget request help build
that confidence?
Ms. White. The budget request will help. I think there is
no question that the SEC is a significantly under-resourced
agency, despite the increases--which we are very appreciative
of, that we have gotten in the last few years--to do the job we
have been given to do.
I would say that unequivocally, even before we were given
the additional responsibilities under Dodd-Frank and the JOBS
Act. And your reference to the private fund advisors, which
includes hedge fund advisors and municipal advisors, and the
securities-based swap dealers who will be registered and come
online; those are all add-ons, to our responsibilities.
And so, there is in our request this year a request for,
really, limited positions for those that will come online. But
clearly, there will be a gap there. What do we do about that?
And we try to make as smart a use of the resources that we
have. I certainly come in and try to be as eloquent as I can,
for more resources, so I can do the job.
But we try to do more risk-based identification of where to
go. We do desk reviews of data. When we got the private fund
advisors, initially we did presence exams, which were more
limited exams. But at least we had our arms around and a boot
or two on the ground. But in order to carry out our investor
protection mission, we need significantly more resources in all
those spaces.
Mrs. Lowey. I think it is important for my colleagues to
note that in 2015, the work of your division of enforcement
resulted in a record amount of sanctions--$4.2 billion. A
record 507 standalone actions were filed, as were an additional
300 follow-on proceedings in delinquent filing cases. If you
could share with us, what trends have you noticed in securities
fraud? Are they just getting smarter? How will your budget
request help you spot fraud and take action against those who
perpetrate it?
Ms. White. Yes, the markets we have to police are getting
smarter, more complex, bigger, faster all the time. One of the
ways that we try to meet that challenge is through smarter use
of the data analytics that we have been talking about. We have
a software tool, for example, called Artemis that actually was
developed in-house, that basically allows us to identify
insider trading--suspicious patterns, at least--among traders.
You do not have to wait for an event and then look behind that
and see who traded.
But it is also a budget issue. I am very proud of the
record in enforcement. I mean, not just the numbers, which I
think are very impressive, but the kinds of cases and how
complex they are. But if you think about, where is the value-
add when you are thinking about how much to fund an agency,
enforcement alone last year obtained orders for returning $4.2
billion. Our request here is $1.7 billion. And think of all the
other value-add that the SEC provides.
So, what are we seeing in terms of trends beyond just more
and more complex? I think the complex financial instruments
area is one, which clearly requires market experts. Again, we
seek those in our budget request. More data analytics to
analyze and identify those pyramid schemes and financial
reporting frauds, which is also a place for more market experts
and more data analytics. When I said we thought out and tried
to target our budget request--you will see, that is among who
we have asked for.
Mrs. Lowey. That is very helpful. And lastly, in fiscal
year 2015, this committee asked for an update on the SEC's
efforts to modernize corporate disclosure requirements,
including cyber security. You informed us that in March 2014,
the Commission held a roundtable to discuss cyber security in
furtherance of the Commission's efforts to better inform
itself, the marketplace, fellow agencies, and the private
sector.
I would be interested to know what lessons you learned from
that roundtable. Should companies that file with the SEC be
required to disclose cyber-attacks, to engage with the private
sector in other ways on cyber security? And I just want to say,
Mr. Chairman, I remember years ago--when Ray Kelly was NYPD
police commissioner, they were always behind the ball, because
corporations were afraid their stock prices would go down if
they admitted that they lost $7 billion or whatever in a cyber-
attack. I would love to know where you stand on these issues.
Ms. White. Yes. First of all, I do not think there is any
greater risk that the financial sector, and really beyond the
financial sector, faces than cyber risks. And that is private
sector, the government, our spaces as well.
In terms of disclosure by public companies, and obviously,
we are just talking about public companies, the SEC did do
guidance to companies some time ago, really alerting them to
the range of issues that would require disclosure if there is
an attack, or simply the risk, to their business. If that is
material, they must disclose it. We look at the disclosures
every year in our annual reviews.
But we also are focused with our fellow agencies and the
private sector on this really much deeper, broader risk than
the SEC's jurisdiction really reaches to. We pay a lot of
attention with respect to our registrants. And again, our
examiners have gone out really ahead of the curve, I think; and
good for them in going out and looking for cyber preparedness
at investment advisors and broker-dealers, and then publishing,
obviously not by name and chapter, but really, publicizing
observations to that population what to look for, how to
enhance what your system is, what are the best practices out
there. We continue to have that as an exam priority.
We also, in our Trading and Markets Division and Investment
Management Division, meet with our registrants, talk to them
all the time about preparedness for the cyber-attacks that are
going to come and how to report, and whether to report. But a
lot of this has to go on a broader scale than even where the
SEC can function. And it has got to be private sector,
government, Department of Homeland Security, the Treasury
Department. And we are very active in those inter-agency groups
as well.
Mrs. Lowey. Thank you, Mr. Chairman. I just want to say in
conclusion, because we sit on many of the same subcommittees
that cyber security is such a huge threat. In my discussions
with many of these public companies and some large private
companies, they all have their own systems in place.
So, how we all coordinate, how much disclosure--so we can
learn from what has happened--there are so many issues involved
here. And I appreciate you are right in the middle of it. I
thank you, Mr. Chairman.
Mr. Crenshaw. Thank you. Mr. Yoder, and then Mr. Bishop.
Mr. Yoder. Thank you, Mr. Chairman. Madam Chair, good to
see you again. Thanks for your service. There is a pending rule
before the Commission that would increase the number of firms
that have to register with FINRA. I am hearing from market
participants that the rule, as drafted, while well-intentioned,
is overly broad. It would require some firms to register with
FINRA with little regulatory benefit that could be achieved
otherwise. I know you are studying that.
As you know, this committee is responsible for oversight of
your budget, which is why we are here today, of course. But it
got me thinking, who is responsible for oversight of the FINRA
budget? The rulemaking, by definition, will increase their
budget, increase their oversight. How can this committee be
sure that they are using the resources effectively,
efficiently, and not creating undue burdens on certain parts of
the market?
Ms. White. Well, the SEC does have oversight
responsibilities over FINRA as an SRO. And we exercise that
authority, including exam authority. But it is a membership
organization, basically. I think you are talking about the 15b9
proposal, I think.
Mr. Yoder. 15b9, yes.
Ms. White. Yes. The 15b9. Yes. And I think that is one
where it is a proposal, and we are in the comment period now.
And so, we will certainly be considering all those comments
very carefully and including the costs as well. And so, FINRA,
many, if not most, if not nearly all of their rules have to be
approved by the SEC. So that is a check. That is a safeguard,
too.
Mr. Yoder. And in terms of those dollars, you feel like the
oversight that you are in charge of, that you can appropriately
know that their budget grows, that we have, I guess, the
understanding that that is being handled appropriately? How can
we, as a Congress, do our oversight duty and trusting in your
leadership, of course, but----
Ms. White. One of the things that has been a focus since I
have arrived as Chair of the SEC in 2013, is that I think we do
need to enhance the oversight that we do at the SEC. Obviously,
Congress has its, you know, separate responsibilities.
One of the things that we are trying to do in order to get
greater coverage of these investment advisors I keep talking
about, in terms of examinations, is also very soon to actually
transition some of our broker-dealer resources to the
investment advisor space. And that is because, in part, FINRA
really does 80 percent of those broker examinations. But that
means that we need to up our oversight over FINRA, if that is
the move that we are going to make. And I think just in
general, we are looking to enhance our oversight as well.
Mr. Yoder. Well, I appreciate that. And I appreciate your
studying the 15b9 rule and making sure you are finding that
right balance and not over-regulating to where we do not
actually receive the benefit, but cost folks that do not need
to be registered and would do probably more harm than good. So,
I appreciate your leadership there.
I want to ask you about the 30e-3 rule on printing. It
sounds like the structure of the rule is getting a bit
complicated. And I know that you have been studying this for
some time, too. The process is pretty simple today. There are
some concerns, I hear, from market participants, that replacing
it with a series of steps might actually make it more
complicated. And now even supporters of the rule are concerned
about that as well. Where are you in that rulemaking process?
And does it make more sense just to step back and start over
rather than pushing the rule as it is now, in terms of the
complication?
Ms. White. Well, we have gotten a lot of comments on this
aspect of the rule. And we are studying them very carefully. We
will proceed, obviously. We do not hesitate, if it is called
for, to re-propose something if that seems to make sense. I am
not suggesting we are at that juncture now, but we are
certainly seriously studying the range of the issues that have
been brought to our attention and that we are aware of, from
our own work.
Mr. Yoder. OK. And then the ranking member brought up the
topic of cyber security. And I wanted to associate myself with
her remarks and then I wanted to just talk about your internal
control.
So, certainly one thing is external threats. You know, I
had a chance to deal--your counterpart with the CFTC was in the
Ag Committee recently, which I serve on as well. And we talked
about the Reg T rules. And there are concerns that I have heard
from market participants that they might put their source code
in the hands of CFTC, and nefarious actors, either within or
without, could somehow release that. And that is sort of their
secret sauce, so to speak.
You know, in light of the potential harm for data being
released, internally, what are your internal controls that
would help assure the committee that any of that sensitive data
that might get into the hands of the SEC would not be released
or somehow not be compromised?
Ms. White. I think there is no more important an issue--I
mean, we have to be able to regulate, but we also have to give
the requisite assurances that can be given that we will be able
to safeguard that very sensitive information. I think this
particular budget request, just to bring it back to the budget
for a second, requests $14.7 million to enhance our internal
security system. And this is really coming up with us in a
number of places, but including our proposals in the asset
management space, where we are asking for additional
information.
And one of the issues we are dealing with there is not only
making sure we are enhancing our systems, which we are very,
very focused on, but also how much can we say about how we are
enhancing in order to give assurance and a confidence level. I
mean, it is a bit of a balance, because you do not want to be
too detailed about that, or you are giving a roadmap, right?
So, that is one of the things. But I think we need to be able
to get ourselves to a place where we can say more than we may
have in the past about that.
Mr. Yoder. I appreciate your leadership there, and I think,
you know, the SEC, as well as the CFTC, they ultimately cross
paths with a lot of sensitive information that could
compromise, you know, entities that they regulate. And so, the
importance that you place on that, I think, is critical to, you
know, maintaining that information. So, I appreciate it. Thank
you. Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you. Mr. Bishop, and then Mr. Womack.
Mr. Bishop. Thank you very much, Mr. Chairman. Thank you,
Ms. White. According to a 2013 GAO report, which was three
years ago, minorities accounted for only 19 percent of
management positions in the financial industry, and even worse,
minority women accounted for only 13 and a half percent. Can
you tell me what steps the SEC has taken to improve this
drastic disparity and what are the current stats? Hopefully
they are improved. And tell me what steps you think Congress
could take to give you additional tools to increase minority
participation?
Ms. White. I think there are at least two spaces to talk
about there. One is within the industry in the private sector
and our registrants and there, we, together with a number of
our other financial regulators under Section 342 of Dodd-Frank,
have focused on our registrants, focusing on the diversity of
their staffing, among other things. In terms of our own agency,
we basically look in three areas--our own staffing that we
have.
Obviously, I have mentioned the registrants. We also have a
certain amount of--not huge amounts--but amounts that are
meaningful of contracting dollars. And so, one of the things
that our OMWI office really focuses on, and has made a lot of
progress in, is to make sure that minority and women-owned
businesses know how to, ask to get in the procurement process,
in order to be able to at least bid for or compete for those
contract dollars. And we have had a lot of success there. We
have challenges at the SEC, certainly, with respect to the
number of minorities and women in our most senior positions,
and we are very focused on that in terms of taking specific
measures.
We have seen some improvement there, but we remain very
much focused on that. But I think it is a public and private
sector set of issues, not easy ones to solve, but I think we
have to remain very focused on them and I think we have to use
all the tools at our disposal.
Mr. Bishop. Anything that we could do to help you in that
regard?
Ms. White. Budget? No, I mean, I do not mean to make light
of this at all, because I do not, because I consider this
enormously important. I think we are right now, at least at the
SEC, kind of midstream in really seeing how some of our
initiatives are working, some of our outreach is working. We
have expanded----
Mr. Bishop. I was going to ask you about recruitment.
Ms. White. Yes, and in recruitment, that is one of the
areas where, again, I think we have really made great progress,
and I forget the number of outreach events that we did this
past year. But it exceeds 150 or something, and it is in the
right places with the right people at them. And I think I would
like to see how successful those initiatives are before I would
suggest what might be helpful from Congress.
Mr. Bishop. OK. Let me change gears a second and follow on
Mrs. Lowey's question. According to your budget request, the
SEC has never examined approximately 40 percent of all
registered investment advisors. With the growing number of
registered advisors, which you claim has been an increase of
nearly 35 percent over the last decade, how do you plan to
address the shortfall without impacting investigation of at-
risk advisors?
Ms. White. We have had, for the last 2 years, what is
called our never-before examined initiative. And that really
looks at registrants that have registered with us in the past 3
years, in order to ensure that we are at least covering that
space.
We also do something as simple as this. It is a bit of a
variant of our presence exam for the private fund advisors,
which is to call up every registrant and just sort of say, Here
are the rules. Here we are. We are present. Obviously, that is
not boots on the ground. That is not a thorough exam. But it is
more presence. And so, in every year we are devoting the
resources we think are wise to making sure that we are at least
covering as much of that space in one way or another as we can.
Mr. Bishop. OK. Last week, the SEC approved for the first
time, a lender to use funds from public investors to back loans
for small businesses. This crowd lending is an innovative
financial product established for the JOBS Act of 2012.
The company approved under Regulation A plans to initially
offer the loans to veteran small business owners as an
alternative to high-interest payday lenders. Allowing crowd
lending is a positive development that could expand
opportunities for small business owners and it is especially
encouraging to me to see that veterans will be the first to
utilize this. What other steps is the SEC taking to encourage
liquidity for small businesses?
Ms. White. Where we pass on issues like that is in our
Regulation A space and our more traditional role of reviewing
filings to make sure that the right disclosures are given,
basically.
Among the things that we are looking at in terms of small
business and small business liquidity, is that we are doing--it
begins I think in October--the tick size pilot you may have
heard about to see what the data shows about increasing
secondary liquidity for smaller businesses. We continue to look
at venture exchanges as possibly a way--I mean, we have
approved venture exchanges before, but look at different
variations of venture exchanges to see whether we cannot
increase liquidity for small businesses. The crowdfunding
mechanism, which becomes effective in May, is also a way to
raise money.
Obviously, you have got to attend, after you raise money to
the liquidity that needs to follow for investors. But we really
are spending an awful lot of time on that issue for small
businesses.
Mr. Bishop. Thank you, and I think my time has expired.
Mr. Crenshaw. Thank you. Mr. Womack.
Mr. Womack. Thank you, Mr. Chairman. Chairman White, always
great to see you. Thank you for your service. Last year, when
you were with us, I spoke briefly to market structure,
particularly when it came to errors or glitches such as the
``flash crash,'' which was then addressed through the working
groups established by both the Depository Trust and Clearing
Corporation and the New York Stock Exchange.
If I recall, you touched on the regulation SCI, but it is
my understanding that industry group suggestions may have been
more comprehensive. I would like to follow up by seeing if we
could get the list that I had previously requested, noting
which of these recommended changes by the DTCC and the Stock
Exchange have been implemented by the SEC, and why or why not,
if that is possible.
Ms. White. It is possible, if we have that information. I
will say that after our session last year, basically the staffs
followed up with each other to try to identify precisely the
space that you were intending for us to respond to. And we did
respond as we thought the question was put. But I had a sense
that there might be something else that we had not responded
to.
Mr. Womack. Let's have a staff-to-staff follow-up.
Ms. White. Yes, absolutely. Absolutely.
Mr. Womack. I appreciate that, still focusing on structure,
particularly the National market system planned governance. You
may know that there is a discussion draft in the House put
forward by my colleague from Virginia, Mr. Hurt.
This legislation would install broker-dealer representation
on the operating committees of the National market system plan,
such as a consolidated audit trail, tick size pilot, and so on.
What would be the downside of having broader industry
participation in the development and operation of these
critical market utilities?
Ms. White. That is an issue that we have in our Equity
Market Structure Advisory Committee and four subcommittees
including an NMS subcommittee. And among the issues that the
committee looks at, our staff is looking at, are those
governance questions. I cannot get ahead of that analysis to
give a view until I have gotten the full input. But it is an
issue that we are very focused on.
Mr. Womack. Yeah, and then, just a parting comment. In your
testimony, you note that volume and equity markets have
drastically changed over the years, but so have other major
aspects, such as exchanges moving from not-for-profit and
member-owned-for-profit, and publicly-traded. This would seem
to emphasize needs for reform, yet countering the exchange
evolution, it is often cited that indirect participation in NMS
governances available through advisory committee membership.
With that said, I would note that advisory committee
members are most often given little actual voice, citing among
other things, the fact that much meaningful business is done in
executive sessions, from which, I know you are aware, advisory
members are excluded. I believe that the SEC has the ability to
positively affect this governance structure already, separate
from broad reforms. But if need be, Congress, of course, will
continue to weigh in. So, thank you very much for your
testimony and again for your service. And Chairman, I yield
back.
Mr. Crenshaw. Thank you. We have time for another question
or two. I will start. You and I talked, I think last year,
about FSOC. And I mentioned you are a member of FSOC. It is a
relatively new agency. One of my concerns has always been the
transparency involved in the designations. I think it is fair
to say if there are systemically important financial
institutions, and they are designated as such, they have
additional burdens, et cetera. It seemed initially that the
goal was to designate institutions as opposed to mitigate the
risk involved with institutions.
And so my first question is: Would you agree with me that
it would be more important to mitigate the risk to our system
and that you ought to judge the success of that by the
mitigation of risk as opposed to the number of designations
that are made?
Ms. White. I think you want to basically look at the most
meaningful metric. The mission of FSOC is to identify and
address risks to the financial stability in the financial
system that are found. One tool is obviously the designation
tool.
Mr. Crenshaw. Let me ask you about the designations. There
is some question that it seems like the big banks all got
designated. Is that based on their size or based on their
activity?
Ms. White. That was largely, I think, it was before my
time. But I think that is largely a size designation for them.
But if you actually look at the number of designations
certainly outside the banking context, there have not been that
many, but I think your point is very well taken, nevertheless.
I think FSOC is sensitive to that. Certainly I am, and I think
other members are too, which is to be as transparent as one can
be, in terms of the particular factors that may have driven a
particular decision to designate.
Now, as I think we discussed before, that I think it is
often a business model. So, it is not like you can kind of
change this piece and you would not be considered under the
analysis systemically important, but I think the more one can
advise as to what those factors are. I mean, the idea is not to
have the systemic risk in the system, right? And so, whatever
tools or information FSOC and others can give to bring that
about is what we should be doing.
Mr. Crenshaw. I do not know if you are familiar, but last
year at our full committee markup, I offered an amendment that
I wanted to be sure everybody on the committee got to look at
and discuss, and it was kind of an off-ramp, a way for
companies to de-risk prior to designation, particularly the
non-banks, the asset managers, or insurance companies. It did
not preclude FSOC from designating them, but it gave them an
opportunity to be notified. Here is a problem with your
business model. Can you tell us how you might cure it?
And still, if FSOC felt like that did not solve the
problem, did not mitigate the risk enough, the designation
could still occur. That seems like a commonsense, reasonable
approach. I am wondering if that would simply add some
flexibility, because again, the goal is not just to--and I know
there have not been that many designations--but the goal is not
to go out and find people to designate them. The goal is to
keep our financial system safe, secure, orderly, et cetera. So,
did you see that language? And what are your thoughts about
that kind of flexibility?
Ms. White. Well, I think I did see that language. It has
been a while since I looked at it, so I should put that caveat
in. And there is increased engagement, certainly, between FSOC
staff, and the companies that are being looked at. So there is
an awful lot of dialogue back and forth. We have obviously had
a number--not a big number--but a number of designations now,
including non-banks where the reasoning is quite detailed,
actually, publicly, and then even more detailed in what is
provided to the companies.
And companies are clearly free at any time prior to
designation to change their business model, and then they would
be analyzed as they were presenting to FSOC as they were
considering them as changed. And so, I would hope if that was
realistic--again, a lot of these are so intertwined in terms of
the factors that lead to designation that it is not a simple
``gee, if you were not doing that, or you did less of that you
would not be systemically risky or you would not be
systemically important.''
But I certainly think that exchange of information ought to
occur. And I think more of it is occurring now, actually. We
also have the off-ramp or the review anyway. It is not an off-
ramp, but as I said, it is not called an off-ramp, but it is
the annual review of each entity that is designated to
determine whether or not they should remain designated.
So, if there have been changes since the designation, and
frankly that occurs even if the company does not seek it. So,
that is an automatic review. We have done that only for 2 years
now. I think this is the second year. And I think it is getting
more exacting and becoming a better process.
Mr. Crenshaw. Well, it is good to hear the process is
becoming a little more transparent. Particularly when you get
into the question of whether the designation is based on size
or based on activities. When you move away from large banks,
like asset managers, for instance, they are very large, but in
terms of their activity, you can argue about how much systemic
risk occurs when you are managing somebody else's money.
But, I think we will continue to have that dialogue,
because as you point out, even at the end, to say if maybe we
mitigated enough risk, they do not need to be designated
specifically anymore, but at the front end, it might be
appropriate to give more understanding to what the activities
are, what the size is, before that designation occurs. So, I am
encouraged to hear your thoughts on that. Mr. Serrano, do you
have a question?
Mr. Serrano. Yes, I do. Thank you. Chairman White, I want
to bring you back to this issue of Puerto Rico, because in the
26 years that I have been here, I have never seen all the years
focus in on something so quickly on both sides of the aisle and
both Houses to try to deal with what they know has become a
humanitarian issue. With that in mind, I am going to call an
original co-sponsor of the Puerto Rico Investor Protection Act,
which would terminate the exemption of companies located in the
U.S. territory from coverage by the Investment Company
Protection Act of 2015. And we thank you for your technical
assistance that you gave us on putting that bill together.
Could you please speak to the effect of the bill and how it
can help the situation there? Now, I realize, as you have told
us before, you are not directly involved, but this one is about
investors. And so, you might be more involved with that.
Ms. White. Yes, this one is, I mean, at least in some
aspects. Again, the Commission has not taken a formal position
on the bill. But I think I have discussed my views on at least
aspects of this publicly, which is that I think that exemption
was born in another time and a different situation, where you
based the exemption from the Investment Company Act.
And the requirement was, I think in part, based on the
theory that the government did not have the resources or the
ability to travel to the territories, including Puerto Rico, to
do what they needed to do. So, I think it is a loophole. I
think it ought to be plugged.
Mr. Serrano. Just for the record, you know, the
territories, and you do not see it more clearly and evident
than in this committee, usually the attitude with the
territories is whatever is left over. And I have stories, I
tell you, that would make people laugh if they were not sad.
That one is sad, that they did not think they could travel to
the territories or whatever, so they did not include the
territories--you know, American citizens.
I remember in front of me the FCC once, I asked them how
come there is no satellite radio in Puerto Rico yet. They have
it now. They said the satellite will get there. And I thought
the whole essence of a satellite is it can get anywhere. So I
said, ``Borrow one from the CIA, and you will be able to get
there and elsewhere.'' So, now they have it, and some people
like me and some people do not like me, you know, terrestrial
radio.
But let me ask you something. You have so many new
responsibilities now, and one of them that always keeps coming
up--and I know you have been asked this, but I just want to
stay on it because it is important to me, and it is important
to a lot of people--are you really keeping up fully at this
point in the I.T. area? Because it seems to me, and I do not
think this will ever end, I mean, it does not end in our own
offices.
I mean, we buy equipment in our offices and the staff
celebrates the fact they have all this new equipment, and a
year later, the equipment is not that good anymore compared to
other agencies. So, the banks out there have much better stuff
and you have better equipment. What can we do about that, other
than keep pumping money? And I am against pumping money. I do
not want to sound like a Republican, but----
Ms. White. It clearly is, you know, there is a significant
resources component, right, of this? We talked about the $10
billion a year on the I.T. budget alone of some of our largest
registrants. So there is no question about that, but it is also
a matter of expertise and attracting that expertise and keeping
that expertise at the government agencies.
And so, we are never going to be able to pay those experts
as much as the private sector can pay them. But one of the
heartening things that I have found since being at the SEC,
particularly in the I.T. area and this applies to our
economists as well, is how attracted they are--you have to pay
them enough, which is a challenge--to coming to the SEC for
public service, number one.
Number two is that they have access to data they find,
particularly in the case of the economists, fascinating that
they do not have outside because we, obviously, have access to
some data that the public does not have. And so, you will see
in our request, I say it over and over again how much more we
are seeking out market experts and quants and other kinds of
technical experts. But it is a real challenge. I mean, you are
always playing catch up even with all the resources you can
imagine, right? You must have the resources.
But it is also the talent and the people that both know how
to use your tech systems but also to design them. I mentioned
the Artemis software application, which has been tremendous. It
has produced a number of important insider trading cases and
was actually developed in-house. So it was not a big resources
issue. It was a brain issue; right?
Mr. Serrano. You know, and one of the things that I have
noticed, Mr. Chairman, is that what she is talking about is
really so true. We have young people in this country--not that
I am knocking the experts who have been around a while--young
people that are really whizzes when it comes to technology, and
we have not found a way in government to attract them, to bring
them in. You know, government is not something they understand.
I remember that I either sarcastically or very profoundly
during the Obamacare roll out that created some problems, I
said, ``Why do you not just go to a college dorm? It will be
resolved in a half an hour, if you get some of those kids in
here.'' And I think that we are missing a disconnect in this
country between the fact that we have a younger generation that
understands technology well, that comes up with incredible
inventions that they later sell for $1 billion to someone, you
know, and we rely only on what we think we know. I have no
problems at my office hiring someone who is 24 and say, ``Fix
that computer,'' because I know they know how to. And I think
that that might sound simplistic, but I think it is something
that we are missing and we--so I am glad to hear you say what
you said.
And lastly, let me just follow up on something Mr. Bishop
said, and then I will let you go for my part. There have been
some questions recently about whether investors have enough
information on the composition of the boards of publicly-traded
companies. Numerous letters have been sent to you asking that
the SEC act to require to disclose--disclosure of more
information pertaining to the diversity of boards. Do you think
that more needs to be done in this area and, if so, what sort
of timeline is the SEC looking at?
Ms. White. I spoke about this I think in late January
where, basically, I share the concerns, at least some of the
concerns that have been expressed. The SEC has a rule now and
has for a number of years of requiring companies, if their
nominating committees have a diversity policy to say what it
is, how they use it, how they monitor it for effectiveness and
so forth.
But there is also a fairly recent GAO study that shows how
few companies have been disclosing anything in that space. The
current SEC rule does not define diversity, and so one of the
things that is urged is that we at least include in the
definition of diversity race and gender and ethnicity, along
with the other kinds of skill sets and experience that may
figure into diversity when a nominating committee is deciding
how to optimize their board.
And so, I have directed the Division of Corporation Finance
to both look at the disclosures that have occurred over time
with an eye to my concerns that we may need to provide more
information to investors to make it useful, in terms of
information about, gender and race and ethnicity.
There are a number of issues as there are with anything in
this. What you do, for example, with board members who may not
wish to have that disclosed. But I think it is something that--
my personal view is we should proceed on it and I am quite
focused on it both in terms of reaching that conclusion on my
part and then, if so, to moving it along.
Mr. Serrano. Well, I want to take this opportunity, Chair
White, in closing, to thank you for your service, you know.
November is coming soon so we do not know where we are all
going to be after November. But I want to thank you, and I want
to ask you a personal favor on behalf of everybody.
It is a personal favor, and that is to try to continue to
do what you have done, to put the SEC as that watchdog, that
detective, that cop on the beat, that we need so that the Wall
Street fiasco does not come back. If you put it on its road, it
may be difficult for some people to undo it in the future,
although some will try to go back to the days when we did not
care what Wall Street was doing. Let's just try to get it on
the road and I know you are the person to do it. Thank you.
Ms. White. Thank you.
Mr. Crenshaw. Mr. Bishop is recognized.
Mr. Bishop. Thank you very much. Let's talk about flash
crashes. In August of last year, fears of a slowdown in China's
market prompted volatility in U.S. markets. Some investors were
surprised to discover that ETFs were trading at much lower
prices than their underlying investments on the morning of
August 24. Parts of this resulted from delays in opening stocks
and U.S. markets, while ETFs were immediately available for
trading.
Additionally, the flash crash, like others before it, has
been partially blamed on the application of automated
investment tools on a large scale, without a sufficient
safeguard against panic selling. While the flash crash of
August 24th, 2015, was nowhere near the turmoil experienced in
the flash crash of May 6th, 2010, it demonstrates that stock
markets are still susceptible to human and computer errors and
are largely unpredictable. What is the SEC doing to prevent
flash crashes and their artificial instability in the U.S.
stock markets?
Ms. White. Quite a bit, and we have done quite a bit. I
guess I would first say that I think what happened on August 24
was a--sort of unwelcome, mini-stress test. But I actually
think that it showed the resilience of our critical market
infrastructure.
I would take issue with saying it was a flash crash, sort
of compounded by various kinds of errors. Having said that,
however, clearly, it was a significant set of phenomena. The
staff actually put out a research note on this in late last
year. It was really very, very useful data and analytics.
We also have requested certain information from the
exchanges and other participants on that day to see what
measures should be taken to deal with some of the phenomenon
that did occur. And among the issues obviously that are, under
the microscope, so to speak, are the limit up/limit down rules
that were put in after the flash crash in 2010. How do they
operate? Market circuit breakers were actually not triggered
but, clearly, limit ups/limit downs were particularly in
certain ETFs, and you did have the phenomenon that you note in
terms of underlying values departing from share value.
And so, there have been some adjustments already made, I
think, in terms of the price collars and the size of the price
collars. But there are other issues under consideration to try
to make sure that the issues that did occur there, that really
did not reflect fundamental values, at least fast enough of the
stocks, the ETFs, are dealt with. And so I think you will see
some measures taken in response to that. And we look at this
all the time.
Our SCI rule that we talked about earlier is meant to
increase the resiliency of our critical market infrastructures.
When an incident does occur, it is reported to the SEC sooner
rather than later so we can take action. So we are constantly
dealing with issues like that, and with a great deal of
seriousness. You want to optimize the markets, in terms of
their functioning, as well as making sure they are reflecting
fundamental value for investors and also serving the companies
that seek to raise capital.
Mr. Bishop. Thank you.
Mr. Crenshaw. Well thank you, Chair White. We want to thank
you for your service. I think everyone on this subcommittee
appreciates the work you are doing. It is a big job, lots of
responsibility, and we know how seriously you take that. So
thank you for that, and we look forward to continuing to work
with you so that you have the resources to do your job. So,
thank you very much. This meeting is adjourned.
Ms. White. Thank you very much.
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Wednesday, March 16, 2016.
DEPARTMENT OF THE TREASURY
WITNESS
HON. JACOB J. LEW, SECRETARY, DEPARTMENT OF THE TREASURY
Mr. Crenshaw. Well, if everybody is ready, we will get
started. This hearing will come to order. Good morning. I would
like to welcome our witness, Secretary Jack Lew, Secretary of
the Treasury.
Today, we look forward to discussing the Department's own
budget request, as well as, some of the assumptions and
policies included in the President's overall request for fiscal
year 2017.
Last month, we had a very loud discussion with OMB Director
Shaun Donovan about the debt generated by the President's
budget. While there is more than one way to measure the size
and the effect of debt on the economy, in the simplest terms,
the President's budget spends more than it takes in, and that
results in more debt.
This debt is an economic burden that must be repaid by our
grandchildren and their grandchildren because the President's
final budget does not address the unavoidable question of how
to distribute the economic cost of an aging population across
the generations.
The Federal debt, in gross terms, exceeds $20 trillion for
the first time in our Nation's history. It took 233 years to
get to this first $10 trillion in debt, and it only took 8
years to get to the next $10 trillion. And because of this, Mr.
Secretary, I wanted you to think back to your first tenure as
the OMB director, when you predicted that the United States
would be debt free by 2013.
Now, obviously, a lot has changed since then, but the
formula for retiring debt has not. Spending as a percentage of
GDP must be lower than its historical average, and revenue as a
percentage of GDP must be higher than its historical average.
The budget before us, however, projects that both spending and
revenue, as a percentage of GDP, will remain above the
historical averages through 2026. In other words, this budget
is a permanent source of debt.
Growing along with the debt is Treasury's own budget
request for the fiscal year 2017. The Treasury Department is
requesting a massive 12 percent increase, including $1 billion,
or a 9 percent increase for the IRS. Instead of making some
tough choices, it seems that Treasury proposes unrealistic
increases, budget gimmicks, and new mandatory spending.
I believe the IRS request is unrealistic. They have not
received either a dollar or a percentage increase of that
magnitude in the last 20 years. The IRS request assumes a
discretionary cap adjustment that the budget committees have
rejected for 5 consecutive years.
In addition, the Treasury seeks to spend an additional $8.5
billion outside of the appropriations process. The request also
proposes a new cybersecurity enhancement account to the tune of
$110 million. Without a doubt, cyber threats are real and they
are serious, and the committee has been continually supportive
of funding for cybersecurity as a part of the agency's annual
budget request. However, I would caution the administration
against the temptation to create an endless number of new
accounts across government spending, and calling that a
cybersecurity plan in order to get new funding for an old
problem.
Make no mistake, we must harden our Nation's information
technology infrastructure, but it should be done with a
critical eye. New programs with new names aren't going to solve
the Federal Government's perpetually out-of-date, over budget,
behind schedule, information technology.
I hope, with further discussion today, we can find some
common ground to work on together. As you know, a matter of
great interest to me, and concern to me, is the Financial
Stability Oversight Council's process for designating
systemically important financial institutions and, in
particular, nonbanks.
Following up on our conversation from last year, I hope we
can shed some light on how FSOC has improved transparency with
regard to entities under consideration for SIFI designation as
we adopted last year.
Another issue that was important, I would like to bring to
your attention, is that in the 2016 Omnibus, we required the
SEC's division of economic and risk analysis to report back to
this committee within a year of enactment on the combined
impact of the Volcker rule, Basel III, and other financial
regulations, what kind of impact they have had on access to
capital for consumers, investors, and businesses, and the
impact on market liquidity.
I look forward to reading that report later this year, but
in the meantime, I hope we can talk a little bit about how you
will work with the SEC economists, if and when asked. I have
serious concerns that the cumulative effect, of these layers of
regulations, have resulted in an alarming lack of liquidity in
U.S. markets, particularly in fixed income markets.
I believe we need to continue to monitor this issue
closely, and I look forward to discussing these concerns with
you today.
And finally, let me say one thing about the Omnibus last
year. We included an additional $5 million for Treasury's
Alcohol and Tobacco Tax and Trade Bureau. That was to expedite
the label and formula processing. And I believe that by
appropriating these funds for the Bureau, we can help countless
small businesses that depend on the Treasury for approval of
their labels and formulas to get their products to market.
Mr. Secretary, I hope this funding makes it clear that this
is a priority for Congress. I know it is a priority of our full
committee's chairman, and I hope the Department will assist the
Bureau in accomplishing their mission.
So again, I want to thank you for taking the time to meet
with us, Secretary Lew. I look forward to your testimony, but
first let me turn to the ranking member, Mr. Serrano, for any
opening statement he might make.
Mr. Serrano. Thank you, Mr. Chairman. And I would like to
join you once again in welcoming Secretary Lew before the
subcommittee to discuss the Department's budget request for
fiscal year 2017.
The Treasury Department plays a broad and important role in
guiding our economy, ensuring a fair Federal tax code, managing
our Nation's finances, promoting economic opportunity, and
conducting important international activities. You provide
assistance and leadership in a number of diverse roles, and I
thank you for all your efforts.
One area where your continued leadership is desperately
needed is on the island of Puerto Rico. The Treasury Department
has been playing a leading role in helping to address the
fiscal and economic crisis on the island. Last year's Omnibus
bill included language allowing Treasury to provide technical
assistance to Puerto Rico to help it work on ways to balance
its books and improve its economy.
While this is a good step, and I hope we will discuss it
today, it is clear that more needs to be done by Congress on
this issue. The humanitarian toll this is taking on American
citizens is truly appalling. The Speaker has committed to
action, and I expect him to keep his word.
Let me just mention that again, Mr. Chairman, because
unfortunately, there are too many Members of Congress and the
American people who don't know that everyone who was born in
Puerto Rico is an American citizen.
A significant contributor to the island's fiscal woes is
its continued inequitable treatment under numerous provisions
of both the Federal tax code and the Federal grant programs.
Your budget request proposes to remedy one of these issues by
creating a mandatory funding stream that would essentially
allow working families in Puerto Rico to receive the Earned
Income Tax Credit, something that no one living on the island
is currently eligible for. I commend you for this proposal and
believe it will provide some relief for families on the island.
Beyond this vital issue, your fiscal year 2017 budget
request includes new funding for the Community Development
Financial Institutions fund. The CDFI fund has helped entities
invest billions of dollars in economically underserved areas,
including, in my district in the Bronx. I commend you for a new
initiative proposed within this program this year, the small
dollar loan, which will help reduce reliance on the payday
lenders. Access to mainstream financial services is a serious
problem in the Bronx and elsewhere, so I think this new effort
is a great program and a great potential.
Now, as I have said to you privately and publicly, this
CDFI is a great program, and to strengthen it is really going
in the right direction. Your budget request also builds on last
year's increases for the IRS providing for further investment
and to try and better address enforcement and service
priorities.
Although I am pleased that we were able to get a
significant increase for the agency, the IRS has still lost
thousands of employees over the past several years, and its
budget is still 19 percent below fiscal year 2010. These
reductions have made it significantly more difficult for the
agency to help those with questions and to go after tax cheats.
Your budget request helps restore capacity at the IRS, which is
important in ensuring the fiscal health of our Nation.
Lastly, I do, also want, to mention the Department's
central role in reforming our policies towards Cuba. Treasury
issued new travel regulations yesterday in advance of the
President's trip there, and I hope we will get a chance to
discuss these further.
The impact of your Department's policies, in all of these
areas, show just how central the Treasury Department is to our
Nation's economy, our government's fiscal health, and our
communities' economic opportunities. I think the Department has
done a great job in all of these areas in the past 8 years, and
I want to commend you, Secretary Lew, for a job well done over
the past 3.
If I had the ability to keep people around for the next
administration, you would be at the top of my list for many,
many reasons, but I didn't win any of the primaries, so I am
not involved in this.
But I just want to finish up by saying you have been a
great friend of the Commonwealth of Puerto Rico, and any, any
help that you can continue to lend, because it is sad, and it
is sad that the public is not aware of what is happening, and
as you know, anything that happens in Puerto Rico affects Wall
Street, affects New York, affects the United States, where
there are 5 million Puerto Ricans living, and they are part of
who we are. They are part of the system.
I was born there, as you know, and the most important point
to me is that the suffering is affecting veterans in Puerto
Rico at the veterans' hospitals and elsewhere. And at the
minimum, we should stick to our word that we never turn our
back on veterans, and those veterans in Puerto Rico are as much
veterans as they are anywhere else in the country.
So I thank you for your help to the whole island and
especially to the veterans. Thank you. Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you. And our chairman of the full
committee, Mr. Rogers, is en route, and when he arrives, if he
wants to make an opening statement, we will recognize him.
But right now, Mr. Secretary, we recognize you for your
opening statement. If you could keep your remarks in the
neighborhood of 5 minutes and you can submit your full
statement for the record, but please proceed.
Secretary Lew. Thank you very much, Chairman Crenshaw,
Ranking Member Serrano, members of the committee. I appreciate
this opportunity to testify on the Treasury's 2017 budget
request.
Thank you for the kind words, Congressman Serrano, but as I
hope you can understand, I look forward 10 months from now
living full-time in the Bronx again.
Since my testimony last year, our economy has continued its
record breaking streak of private sector job creation, which
has reached 6 consecutive years, and 14.3 million jobs. Over
the last 2 years, we have experienced the strongest job
creation since the late 1990s. At 4.9 percent, the unemployment
rate is half of its 2009 peak, and we continue on a sound
fiscal path from fiscal year 2009 to 2015. The deficit as a
share of gross domestic product (GDP) fell by almost three-
quarters from roughly 10 percent to 2-and-a-half percent.
And Mr. Chairman, I appreciate your comments about the
performance of the budget during the years that I was OMB
director in the 1990s, and I did, in 2001, project a surplus of
over $5 trillion for the upcoming 10-year period. Obviously
policies changed after that, and when I came back to the Office
of Management and Budget (OMB), it was a very different
situation because the money had been spent on things like tax
cuts, and new benefits, and wars, and then we had a financial
crisis. What this administration has done is put our country
back on a path of fiscal responsibility, and I look forward to
having a chance to discuss that.
The passage of the Omnibus spending bill in December has
helped really build on the momentum in our economy now. It has
really contributed to economic growth, and it has also helped
us rebuild our international leadership. The agreement, I think
in another way, demonstrates that we still have the capacity of
finding common ground on difficult issues. It lays the
foundation for addressing some of our long-term challenges, but
there is a lot of work that still remains, and that is why this
year's budget includes critical investments in both our
domestic and national security programs.
Treasury's 2017 budget makes investments in cybersecurity
and infrastructure and financial intelligence activities,
including efforts that are directed at ISIL. It also includes
strategic investments in the IRS so that the agency can return
to providing the level of customer service and privacy
protection that Americans expect and deserve. It is important
to investments in America's small businesses, in distressed
communities, to help grow the economy and ensure that all
Americans benefit from growth.
Finally, the 2017 Treasury budget makes a number of
investments to support the ability of both our domestic and
international offices to further Treasury's mission.
Cybersecurity is an urgent challenge facing the country and
the Treasury Department. Our budget proposes a new $110 million
department-wide cybersecurity investment account to enhance
information technology (IT) management across our bureaus and
improve our ability to protect against, and respond to, cyber
threats.
The proposed investments will enhance electronic
authentication procedures for access to Treasury digital
services, expand existing security systems on internal networks
and public websites, and safeguard data across the Department.
The fiscal year 2017 budget also includes strategic
investments in the Internal Revenue Service (IRS) to improve
service to tens of millions of taxpayers, to reduce the deficit
through more effective tax administration, and to provide
privacy protections that Americans expect and deserve.
I appreciate the increase provided by Congress in fiscal
year 2016, but as many of you are aware, the IRS remains
severely underfunded. Despite its crucial role and growing
responsibilities, the IRS budget is nearly $1 billion lower
than it was in fiscal year 2010, while the volume of income tax
return filings has increased by nearly 7 percent. Budget
reductions at the IRS cost the country billions of dollars each
year in lost revenue, contribute to inadequate customer service
for taxpayers, and leave necessary cybersecurity protections
underfunded.
A sustained deterioration in taxpayer service, combined
with diminished enforcement capacity, could create serious
long-term risks for the U.S. tax system. Our request provides a
$530 million increase above the 2016 enacted levels. With these
investments, the IRS will increase staffing for traditional
taxpayer services, improve the quality of assistance available
to taxpayers, who call the IRS, and bolster defenses against
stolen identity refund fraud.
In fiscal year 2015, full year telephone level of service
plunged to just 38 percent. With the additional funding that we
received in 2016, we expect to reach 47 percent this year, and
with full funding in the 2017 budget, we could bring that level
back to 70 percent.
The budget also invests in new IT architecture that will
enable the IRS to continue to modernize and secure its online
services, and provide taxpayers with an experience comparable
to what they have come to expect from financial institutions.
Treasury's request also proposes an additional $515 million
increase through a program integrity cap adjustment, to
increase enforcement of current tax laws, investigate
transnational organized crime, root out abusive tax schemes,
and enforce the Foreign Account Tax Compliance Act (FATCA).
These targeted investments are expected to return roughly
$6 to the government for every $1 invested and reduce the
deficit by $46 billion over a 10-year budget window. In fiscal
year 2017, Treasury outlined key investments in evidence-based
programs that will support America's small businesses, working
families, and distressed communities.
I would like to focus on one in particular. I share the
concerns that Congressman Serrano raised with regard to Puerto
Rico. I very much appreciate the committee's inclusion of
technical assistance authority for Puerto Rico in last year's
funding bill, but more does need to be done. Puerto Rico's
economy continues to suffer. Its unemployment remains above 12
percent. Its debt is unsustainable, and out migration continues
to accelerate.
The administration has proposed a comprehensive plan to
address Puerto Rico's financial challenges, and we encourage
Congress to act with the haste that this crisis requires with
legislation that will allow financial restructuring along with
new oversight, neither of which cost any taxpayer dollars.
The budget also proposes a $600 million annual allotment
index to inflation to create a refundable locally administered
Earned Income Tax Credit for residents of Puerto Rico. Unlike
Americans living in the 50 States and the District of Columbia,
residents of Puerto Rico are not eligible for the Earned Income
Tax Credit (EITC), and it would increase employment in Puerto
Rico's formal economy, as well as improve the Commonwealth's
tax compliance and tax revenue.
Finally, the fiscal year 2017 Treasury budget makes a
number of investments to support the ability in both our
domestic and international offices to further Treasury's
mission. While not under this subcommittee's particular
jurisdiction, I want to highlight Treasury's international
programs budget request. It provides a cost-effective way to
promote international financial stability and to continue U.S.
leadership in international development, advance national
security, and expand export markets for American businesses.
In closing, I want to take the opportunity to thank the
talented team of public servants at the Treasury Department. I
am proud to represent them here today, and on behalf of these
hard working men and women, I want to say how much we
appreciate the continued support of this committee.
Thank you very much, and I look forward to your questions.
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Mr. Crenshaw. Well, thank you, sir. And we will start with
the questions, and we will observe the 5-minute rule if we can,
just so we can have everybody ask a series of questions. And I
think we will have time for another round after that.
But let me start, Mr. Secretary. I mentioned in my opening
statement about this new agency called FSOC, which you are the
chairman of, and as you and I talked last year about one of my
concerns that there is not a lot of transparency in this whole
designation process, and I think your point last year was,
well, it is really--it is kind of a binary decision. We either
designate somebody or we don't designate somebody.
And I guess the question becomes, isn't it more important
to mitigate the risk than it is to simply designate someone.
And so this subcommittee, last year, adopted some language that
I proposed to say, before you go out and designate someone, you
would maybe let them know what FSOC thought the potential
problem was, give them an opportunity to understand what the
problem is, and give them an opportunity to actually derisk or
cure that problem, and still, FSOC would have the final
authority as to whether to designate that institution as a SIFI
or not.
And particularly in terms of nonbanks. It is
understandable, more so, in the big banks, the Too Big to Fail
concept, I think that is what gave rise to this whole SIFI
designation, but when you get into nonbanks, life insurance
companies, or asset managers, this lack of transparency is
still a concern, I think, to me and to this subcommittee.
So talk a little bit about that. I mean, isn't it more
important? We want to have an economy, we want to have capital
markets that are safe and secure, and that is more important,
mitigating the risk there than simply designating people either
SIFI or not a SIFI. Wouldn't you agree that that really is the
goal?
Secretary Lew. Mr. Chairman, the goal of FSOC is to keep an
eye on risks to financial stability and to, when necessary,
designate firms for a level of scrutiny that is appropriate to
the level of risk that they present.
Since we talked last year about this, and we have had some
conversations in the middle, we have actually taken steps to
provide more information earlier in the process to entities
that are being reviewed. We have very intense back and forth
conversations with them. They know exactly what the analysis
is. They present a lot of information, and there are not dozens
or hundreds of nonbank designations.
There is less than 10, and they are firms that are very
large firms. They are amongst the largest financial
institutions in the world. And I think we ought to remember
that the financial crisis didn't begin exclusively in regulated
banks. It actually had its roots, in part, in some nonbank
financial institutions like AIG, which was designated early on
in the process.
We have gone through the process listening and learning as
we go along. I think we have been very prudent and made only a
very small number of designations, because this is not an
authority that should be seen as potentially a risk to small
institutions that do not present the kind of financial
stability risks that FSOC was meant to keep an eye on.
I am happy to continue the conversation. Obviously, FSOC is
still a young organization. I think it has performed very well
and very prudently, and I think we are in a better place today
because we have more visibility into these very significant
institutions that are now scheduled to be reviewed in an
appropriate way.
Mr. Crenshaw. You mentioned that you are having those
conversations, and particularly, in terms of the nonbanks, and
there was, I know life insurance companies have been
designated. There was some concern that some of the asset
managers, and the question would become, what risk they posed
overall, in terms of there are other people's money that is
being invested. They don't seem to pose the same kind of risk,
but if you are having those kinds of conversations, do you
agree that the language we added last year, does that make
sense that as you move forward in these discussions, that you
would come to a point where you would give credence to that
language to say we will sit down with you, if you are having
those discussions.
And if these are areas of concern, I want to make you
aware, Mr. Institution, of those concerns, give you an
opportunity to look at them and say, maybe we can help mitigate
that risk, and if so, does that make sense to have that kind of
process so that before you just designate them, you at least
let them know--it sounds like you are trying to do that now.
Secretary Lew. Yeah, that----
Mr. Crenshaw. But why not codify that so that it gives them
some--I guess some comfort, that they are just not going to
wake up one morning and somebody says, well, you are now a
SIFI?
Secretary Lew. So I think the way the process works, there
is a great deal of visibility into what the analysis is, and in
each of the firms that have been designated, the issues are
core to what the businesses are. So it is not as if they are
small kind of bolt-on businesses that if you sold this small
business, it would change the fundamental shape of the firm.
I do not think that there is a mystery as to why the firms
were designated. Some firms may choose to restructure their
business activity because it is in their business interest to
do so. We already have seen one of the designated firms, though
they have made the case that it is not at all because of a
desire to get out of the SIFI designations, but because of a
core business decision, to separate, become a manufacturing
company, not a financial services company. That will be
reviewed by FSOC fully and transparently to the company in the
next year's review, if those transactions go forward.
So I do not think there is a lack of transparency or lack
of information. What I think we do have to be careful about is
creating more procedural hoops and potential delays. It is
roughly a 4-year process from the beginning to the end for a
designation.
I think that a financial crisis does not give you 10 or 20
years of warning. I think we have a process that is very
deliberative, very thoughtful, very iterative, and interactive
with the parties that are being reviewed, and I would be very
cautious before putting any overlay of new procedural
requirements that become the basis for delay or prolonging the
process.
There is one party that has challenged the designation in
court. That will be resolved by a court. That is how the law
was set up, and the court will decide. But I think to add
additional procedural hoops would frankly put us at risk of
missing a target for designation when it is timely to prevent a
problem.
As I said in my initial response, it is not like there are
dozens or hundreds of firms that are on the edge of being
designated. This has been used very judiciously for only the
very largest firms, and it is a very long process that permits
a great deal of visibility by the party that ultimately is
subject to review.
Mr. Crenshaw. Well, it seems like then, we tend to agree,
that it gives you, both FSOC and the institution, an
opportunity to mitigate that risk. Now, it sounds to me like
that is what you would like to see happen. You may not want to
write that down, but that is what you are doing today, and
again, it is important to mitigate risk, not just to designate.
You would say, look, if you can mitigate the risk, that is
probably better than just getting designated and staying there
forever, which brings up another question, just very briefly.
After somebody has been designated a SIFI, is there any way
to get undesignated a SIFI?
Secretary Lew. Yeah.
Mr. Crenshaw. Because once again, it seems to me, from your
standpoint, as the regulator, what you would want to do is to
say if there is some risk involved, we want to tell you about
it, we will designate you, but we would really rather you
mitigate the risk and not be designated, and so I wonder, will
there ever be a way to get undesignated if all the mitigation
takes place and the risk has gone away?
Secretary Lew. There is an annual review of each
designation based on submissions made by the designated firm,
and that is a real review, so----
Mr. Crenshaw. Has anybody ever been undesignated?
Secretary Lew. No one has been undesignated, but I think
that there is a full understanding that if there is a material
change in the business plan, then the basis for being reviewed
and for the designation being reviewed is very real. We have
not seen something come up for review where there has been a
significant change in the business plan. I anticipate that that
may well happen in the coming period of time.
It is not our job to decide what the size of the firm
should be. That is a business decision the firm makes. If their
level of risk goes down, on review, and they don't meet the
threshold, that is a basis for deciding the designation should
not go forward.
So we do not start out with a desire to have more firms
designated. We start out with the mission mandated by the act,
for us to look at whether there are significant risks to the
financial stability, and if so, to make the appropriate
designations.
I think that it has been used in a very cautious way, and
it is something that we can be proud that we have now created
the ability to see what is going on at firms that are large and
have that kind of systemic impact. If firms change their
business plan and they are no longer presenting that kind of a
profile, we would review it and make a different judgment, but
that is really--that is the process.
It exists, and I don't know whether it will be in my
tenure, because we are in the last year, but I have full
expectation that if there is a major change of business plan,
it would be reviewed, and that determination could go one way
or the other.
Mr. Crenshaw. I am encouraged to hear that I think when
FSOC got created and you became the chairman, nobody knew
exactly what was going to happen. And I think some of the early
indications, early actions were that all you can do is say yes
or no, and now it sounds to me like there is an evolution of a
process, and we are just trying to help bring that along. And
if the proposal is to write that down, that doesn't get in the
way of the overall regulation. We hope we can move in that
direction. So thank you for that.
And now I would like to turn to Mr. Serrano.
Mr. Serrano. Thank you, Mr. Chairman. To your surprise, I
actually understood that argument. It got a little interesting
for awhile. I thought we were talking about designating minor
league ballplayers back to Triple A or something.
But Mr. Secretary, let me bring you back to what, you know,
is taking so much time, and rightfully so, in my community,
both in New York and in the Commonwealth of Puerto Rico. In
trying to help in the omnibus bill, we gave some technical
assistance language, including economic forecasting, budgeting,
cash management, spending controls, information technology
upgrades, multiyear fiscal planning, revenue, and expenditure
projections, improving tax collections, and grant management.
What are you doing with that new authority? What progress
has been made? And is there any new authority the
administration needs and is looking for?
Secretary Lew. Congressman, as you know, before that
authority----
Mr. Serrano. And I want to take this opportunity again to
thank you for all you have done. You have understood and, I
think, you have made many, in the administration, understand
the importance of not letting one of the territories fall
apart. In the past, I can tell you as an appropriator, and this
chairman happens to be very good at it, and the full committee
chairman in helping us, but the territories are seen as
something else.
This morning I was watching one of the major stations, and
they are saying, well, Hillary has won this, and Trump has won
that, and Bernie has won that, of course, we are not counting
the territories. I say, well, why not, they have delegates,
too, and they gave delegates to the candidates, and that is
part of the attitude. We never count the territories.
Secretary Lew. Congressman, my view, and the view of the
President is that we are talking about what happens to 3-and-a-
half million American citizens, many of whom are veterans, many
of whom have served their country, all of whom deserve the same
attention that Americans living on the mainland do, and that is
how I have approached it, in terms of what resources we put
into dealing with it.
Before the law was passed, we were working closely with
Puerto Rico for quite a period of time, informally advising
them, but doing it within the limits of what we could do with
an authority that did not give us the ability to provide them,
kind of in-place technical advisers. I think that was helpful
to them, but frankly, they had a need for more.
Since the law was enacted, we have assigned technical
advisers, the kinds of people that we use in our international
programs in the Office of Technical Assistance who are very
skilled at going into a government, seeing where problems are,
helping to design solutions, train people to do the work, and
then leave, and leave in place an infrastructure that is
stronger.
As I travel around the world, I cannot tell you how much
praise I hear for the work that those folks do. Now, Puerto
Rico is part of our country, so this is not an international
program. We did not have the authority to send people into a
subdivision of the United States. The law gave us that ability.
We now have a team there that is working on a range of issues,
including revenue collection, including keeping their books in
a way that is more straightforward, and we are looking for
opportunities of how to expand it.
In general, these are small teams. You know, you go to a
foreign country and we will have 2 or 3 people there, and they
do an enormous amount of work. This is something we are
dedicating the resources that we need, and we will find the
people as the needs expand.
I have a lot of confidence that we will do good
constructive work, but I do not want to suggest that technical
assistance alone can solve the problem. There is a deep problem
in Puerto Rico right now, which is one of insolvency. There is
more debt than the Commonwealth can repay. The Commonwealth's
budget is heavily burdened by debt payments and healthcare
payments, and that is why the proposals we made on Medicaid
reimbursement are so important.
The time-critical issue right now is that in May and July,
Puerto Rico faces very large bond payments, which they do not
appear to us to be able to meet. Action needs to be taken in a
timely way, so that in the May, June, July period, we do not
see a disorderly unwinding of Puerto Rico. Not only will that
endanger the well-being of 3.5 million Americans, but it puts
at risk all the bondholders who will not benefit if the island
does not have money to pay back their obligations.
So an orderly workout process, with an oversight authority,
is critically important. I appreciate the Speaker's commitment
to have action taken in the first quarter of the year. We have
been working closely with everyone on this, but the time to act
is now.
Mr. Serrano. Well, you personally answered one of my other
questions, which was, within which you are allowed to tell me
in public, what you are allowed to tell us in public, what role
are you playing in the Speaker's promise, which we know he will
hold and keep, to have something ready by the end of March, or
the beginning of April?
Secretary Lew. Well, since the end of last year, we have
provided technical assistance to any committee of Congress that
was looking to deal with the problem, the crisis in Puerto
Rico. I just have to say, the crisis is not a future one. It is
a present one. Right now schools are closing, hospital wings
are closing, millions of people are looking at whether they can
leave the island. It is at a rate that is not sustainable. The
economy will just be destroyed if people leave at the rate that
they are leaving, and we are providing technical support.
We cannot write the law. The committees will have to write
the law. I certainly hope that the process leads, in the next
weeks, to the kind of process that all stakeholders can trust
as being fair. We have never advocated a one-size-fits-all
approach. We understand that there are different interests that
have to be balanced, but it has to be informed by legislation
because there is no structure for the orderly restructuring of
Puerto Rico's debt.
It does not have bankruptcy protection. There is nothing in
the contracts that provides for it. This would go through the
courts, and it would take 5 or 10 years to be resolved, and in
that time, Puerto Rico's economy would just be destroyed.
Mr. Serrano. Mr. Chairman, just in closing, am I to gather,
from your information, from what you told us, that there is a
sense of urgency on the part of many Members of Congress, some
who, perhaps in the past, were not engaged with Puerto Rico in
any way, that this is an important issue that has to be dealt
with?
Secretary Lew. I have to say, Congressman, having talked to
probably over 100 Members of Congress, since November, on
Puerto Rico, the level of urgency that I perceive today is much
broader on both sides of the aisle. There is an understanding
that these May and June payments are just not manageable.
Obviously, the challenge is getting through the congressional
process with something that can get bipartisan support. I hope
that that can be achieved within the next few weeks.
Mr. Serrano. Thank you. Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you. Mr. Yoder is recognized.
Mr. Yoder. Thank you, Mr. Chairman. Mr. Secretary, welcome
to the committee. I appreciate your testimony. I certainly
appreciated the dialogue you were having with the chairman
regarding SIFIs, in particular, mutual funds. And I think the
point that, you know, I would like to associate myself with
comments the chairman made and just add to that. You know you
hold, Mr. Secretary, and you know, government regulators hold
the power.
Over 90 million Americans have funds invested in mutual
funds. If you have got a pension or a 401(k), this could affect
you, and it is a pretty significant impact on a lot of folks'
retirements. Wall Street Journal wrote last year that it could
have a 25 percent reduction of your ultimate retirement
benefits. I mean, that is huge, to knock down someone's
retirement benefits by 25 percent. And you also end up making
those mutual funds, which many of us believe aren't banks and
aren't going to cause a meltdown, you make them now back up
other SIFIs that might actually cause a problem. Now those
mutual funds are potentially at risk.
So I think one could argue, Mr. Secretary, that you could
actually make our constituents' retirement accounts more at
risk, not only less, and so I just want to reiterate that.
Secretary Lew. Congressman, if I could just----
Mr. Yoder. Yeah, please.
Secretary Lew [continuing]. Respond quickly.
Mr. Yoder. Real quickly.
Secretary Lew. We have been working on asset managers for
quite a while now in FSOC. We started out by reviewing
individual firms. We made the decision that what we really
needed to do was look at activities that presented risk. We are
continuing that. The Securities and Exchange Commission (SEC)
has some draft rules out. Our analysis is obviously going to
take cognizance of the work that the SEC is doing.
But the questions that we have to ask are: Is the migration
of enormous amounts of financial resources into whether it is,
mutual funds, or hedge funds, or other kinds of nontraditional
financial institutions, creating the kinds of risks that could
lead to real financial stability questions? That is the
question we are asking.
Mr. Yoder. And I think that is a very appropriate question
to ask, and I think many, Wall Street Journal and others, have
analyzed that and said the answer is no, and that actually by
burdening 90 million Americans with these new regulations, and
capital requirements, potentially, you actually lessen their
retirement outcomes. Right, so that is a cost that they are
going to bear if you go forward because----
Secretary Lew. The financial crisis was not good for
people's----
Mr. Yoder. Well, but--
Secretary Lew [continuing] Retirement accounts.
Mr. Yoder. Right, but----
Secretary Lew. And that is probably----
Mr. Yoder. But punishing people----
Secretary Lew. And that is what we have to try to avoid.
Mr. Yoder. But punishing people that weren't part of it,
you know, our----
Secretary Lew. We are not trying to punish anyone----
Mr. Yoder. Well, it would be----
Secretary Lew. We are trying to make sure they do not get
punished----
Mr. Yoder. Well, if you punish my constituents by making
them have to back up other risky transactions, and their
transactions aren't risky, you put them in that same pool, now
90 million Americans, their retirement accounts are at risk
because they are backing up other SIFIs, number one, and number
two, the capital requirements then, according to the Wall
Street Journal, could reduce their net retirement benefits by
25 percent, so we can agree to disagree, but I want----
Secretary Lew. We do not have a plan, so it is not like----
Mr. Yoder. I understand. I understand.
Secretary Lew [continuing]. I am sitting here advocating
something. The question is when we have to ask----
Mr. Yoder. Too many other things to make sure you are
taking in consideration.
Secretary Lew. Yeah.
Mr. Yoder. OK. Mr. Secretary, it is my understanding the
Treasury Department has failed to comply with the House
Financial Services Committee's May 11, 2015, subpoena for
records pertaining to the administration's debt ceiling
contingency plan, which records were first requested in
December 2013, and the House Financial Services' Too Big to
Fail investigation first requested in June 2013.
It is my understanding the Treasury Department has also
failed to comply with several of the Financial Services
Committee's information requests, including those pertaining to
FSOC designation processes.
Is the Treasury Department withholding subpoenaed and
requested records from the Financial Services Committee?
Secretary Lew. There are conversations going on now, as
there always are, when there are subpoenas' between counsel,
and they are trying to work through these issues.
Mr. Yoder. So Mr. Secretary, you have not denied that you
are withholding documents, and so will you----
Secretary Lew. No, I said we are engaged in a process with
the committee.
Mr. Yoder. Will you commit to our committee, to this
Financial Services Committee today to promptly producing all
the subpoenaed requested records?
Secretary Lew. As always, there are questions of what is
appropriate, and that is what the counsels are working through.
Mr. Yoder. So you won't commit to producing all the
documents?
Secretary Lew. Well, we only commit to doing what is
appropriate.
Mr. Yoder. Well, part of the requirement is that the
committee's request require, either your counsel to either
certify that you produced all the records located, or after
conducting a search, reasonably calculated to locate all
responsive records, have you and your counsel made the required
certification?
Secretary Lew. I will have to check with counsel where we
are right now in the process.
Mr. Yoder. Do you as Secretary, do you intend to ever
certify completion?
Secretary Lew. Congressman, there are conversations going
on now, as they always do, when there are requests like this,
and when there are subpoenas. I am not going to answer a
hypothetical. We hope----
Mr. Yoder. That is a very direct question. Will you ever
respond to the Financial Services Committee subpoena?
Secretary Lew. Well, we have discussions going on.
Mr. Yoder. I understand there is discussion. We are having
a discussion right now.
Secretary Lew. Right.
Mr. Yoder. And I am asking you a direct question.
Secretary Lew. The outcome----
Mr. Yoder. Can you tell this committee will you comply?
Secretary Lew. Based on the outcome of those conversations,
we will take appropriate actions.
Mr. Yoder. So you won't tell us whether you will comply.
Secretary Lew. Well, I----
Mr. Yoder. Even if you are not going to comply, you still
certify--I mean, when does this end? When will you resolve this
issue? I mean, this has been going on since 2015. Some of these
requests are 2013.
It is very hard for the House and the administration to
work together if we can't get cooperation in responding to
congressional subpoenas.
Secretary Lew. Yeah. And that is why----
Mr. Yoder. It is very frustrating to the process. It breaks
down trust and the ability to do our jobs.
Secretary Lew. The appropriate place for that conversation
to take place is where it is taking place. We are trying to
resolve these issues. I certainly am hopeful that we will be
able to resolve them. I just cannot respond to a hypothetical.
Mr. Yoder. Well, they are not hypotheticals. They are
direct questions. I wish, on behalf of the Financial Services
Committee and our efforts, to understand these issues, that you
would comply with these subpoenas and do so in a timely fashion
so we can do our job, and I appreciate your testimony. Thank
you, Mr. Chairman.
Mr. Crenshaw. And I think you know, we expect you to do
this, and we appreciate it.
Mr. Quigley.
Mr. Quigley. Thank you, Mr. Chairman. Welcome, Secretary
Lew.
Secretary Lew. Good to be here.
Mr. Quigley. Deep breath. In January, Secretary Kerry said
that--he indicated that if Iran is found to be funding
terrorism, they are, quote, ``going to have a problem in the
U.S. Congress.'' Can you provide an update on Iran's current
terror finance apparatus and speak to what the Treasury is
doing to monitor and follow up with sanctions on Iran?
Secretary Lew. So, Congressman, we, as you know, have
continued to maintain all the non-nuclear sanctions, even after
Iran complied with the nuclear agreement, so the sanctions on
terrorism, the sanctions on regional destabilization, the
sanctions on human rights violations remain in effect.
Treasury has the responsibility to implement many of those
sanctions, and we have continued to review, in each area, to
identify and designate parties. We have designated a number of
parties involved with Hezbollah. We are continuing to look at
these activities. As we build a record that warrants
designation, we will continue to take actions.
The nuclear agreement was very important. It set back
Iran's development of a nuclear weapons program, and I think,
has greatly added to the security of both the United States and
the world. But Iran still engages in very malign activities,
including support of terrorists. We will continue to find the
places where we have the ability to take action.
I would just note that even when the most severe nuclear
sanctions were in place, it was very difficult to stop the flow
of all money to terrorists and to regional destabilization, and
we are going to continue to work on it as we did before.
Mr. Quigley. Yeah, I mean, can you evaluate, to the extent
you can publicly, the agency's ability to monitor this? It is a
complicated world. Iran is elusive.
Secretary Lew. Well, look, we have an excellent group of
intelligence analysts and investigators who, I think, do just
an incredibly good job. They punch way above their weight. They
are broadly respected in the national security community for
that. They can only operate based on information that they have
access to.
It is hard information to get. It requires a cooperation
with our broader intelligence community, which is very good,
very strong, and people work day and night and weekends. They
are committed. There is a passion in our team.
Mr. Quigley. I assume that after the Iran deal, and the
first level of compliance, that there was a lot more work to be
done, given the anticipation. It wasn't as much money as most
had said that was going to be released or made available
because it was tied up in so many other things, but are you
gauging more activity after this compliance in effect, that
resources, or more resources, are available to Iran?
Secretary Lew. Well, actually very little of the money has
flowed back to Iran at this point. It is something that we hear
from both Iran and other countries about, that banks around the
world are being very slow to respond to requests for money that
is freed up. So the pace has not been a rapid one.
The amount, as you noted, is much smaller than the kind of
headline number because there is only about $58 billion of the
roughly $100 billion that is theoretically available that could
go back to Iran, because it is tied up overseas in ways that it
cannot be released. Iran's own estimate is more like $30
billion than $50 billion, and very little of that has flowed
back at this point.
They have enormous domestic needs in Iran. When they talk
about resuming oil production at historic levels, they are
going to have to spend a huge amount of money rebuilding their
infrastructure for them to get back even close to old levels of
production. They have been withholding salaries in sensitive
areas like military salaries because they have been strapped
for cash.
All evidence we have is that they are still under enormous
financial stress. So I think, that the first dollars that go
back, there are going to be a lot of domestic demands, so the
money will not just flow into malign purposes. But I have to go
back to what I said. Even when they were under the most severe
nuclear sanctions, they were still finding resources to put in
to support terrorism and regional destabilization, so I do not
think we can assume that is going to stop, but I do not think
it is going to grow to a level that is materially different
than where it was, and we are going to do our level best to
shut down the way the money flows to support terrorism as we
have been doing over time.
Mr. Quigley. Very good. Thank you. My time is expired.
Thank you, Mr. Chairman. Thank you, Mr. Lew.
Mr. Crenshaw. Before we turn to Mr. Amodei, we have been
joined by the chairman of the full committee, Mr. Rogers, and I
would like to ask him if he would like to make a statement.
Mr. Rogers. Thank you, Mr. Chairman. I apologize for being
late. We have got simultaneous hearings going on with these
subcommittees, and I just left one across the hall.
Mr. Secretary, it is good to see you. It is good to have
you here, and I apologize, Mr. Chairman, again for running late
here.
Treasury's budget, perhaps more than any other agency,
should be viewed through the lens of the President's entire
budget request and the state of our Nation's economy. As has
been highlighted in recent months, deficit reduction and the
reduction of our national debt is critical to our long-term
economic and national security interests. The annual deficit
reached a high water mark at $1.4 trillion in fiscal year 2009,
has since fallen to under $439 billion in fiscal year 2015,
largely, I might say, due to the hard work of this committee
and this Congress.
Since 2009, we worked to reduce discretionary spending by
around $195 billion. Of note, mandatory outlays, including debt
interest, has continued to increase significantly during the
same time period. If we want to continue to reduce our deficit
and chart a course for long-term economic security, we have got
to get the mandatory side of the ledger under control.
The President's 2017 budget request proposes an increase of
$2.5 trillion in Federal spending and $3.4 trillion in tax
increases over the next decade. Unfortunately, once again,
there is sadly no leadership in addressing the challenges
associated with ballooning mandatory spending.
If we were to blindly follow the President down this path,
by 2020, our country would spend more money on interest
payments on the national debt than we would on protecting and
defending our Nation. This threatens to squeeze out all of the
worthwhile programs that many of our constituents care for,
from transportation projects and medical research, to housing
assistance, and homeland security.
Mr. Secretary, I hope that you can shed some light on the
administration plans to address what, I think, is a looming
crisis.
The 2017 budget request for Treasury is $13.1 billion. That
is a $1.2 billion increase over current levels. The majority of
that proposed increase would be utilized by the IRS to
implement Obamacare and the Foreign Account Tax Compliance Act
for program increases and relies on a discretionary cap
adjustment. There are a number of issues with this request, but
two, in particular, stand out.
First, the bipartisan budget agreement does not allow for a
discretionary cap adjustment for the IRS. As you know, that
would require a statutory change outside the jurisdiction of
this committee that has been rejected by both the House and
Senate Budget Committees for 5 consecutive years.
If the activities funded by the discretionary cap
adjustment are important to the administration, then they
should operate within the amount allowed under the bipartisan
budget agreement. Mr. Secretary, the IRS needs to prioritize
its spending like every other Federal agency.
Second, I am very disappointed to see that the IRS budget
proposal eliminates three administrative provisions that have
been enacted on a bipartisan basis for several years. Since the
IRS targeting and spending scandals, appropriations bills have
included prohibitions against targeting U.S. citizens for
exercising their First Amendment rights, targeting groups for
regulatory scrutiny based on their ideological beliefs, and
making videos without advance approval. We are dealing with
taxpayers' dollars here, and these provisions lay out what most
people would consider commonsense policies.
Finally, let me end my remarks, Mr. Chairman, on a positive
note, by thanking you for maintaining the $5 million increase
Congress provided last year to the Alcohol and Tobacco Tax and
Trade Bureau, as you mentioned, I think, in your earlier
statements. This relatively small office at Treasury does great
work on behalf of the many distilleries in my State and around
the country which support a booming industry nationwide. This
additional funding will help reduce the average processing time
of distilled spirits' labeling applications.
So Mr. Secretary, it is good to have you here. Thank you
for being here.
Mr. Crenshaw. Thank you, Chairman Rogers. And now let's
turn to Mr. Amodei, and after that Mr. Rigell.
Mr. Amodei. Thanks, Mr. Chairman.
Mr. Secretary, I want to talk with you just for a minute
about the health of community banks and CFPB and all that other
sort of stuff. We have never met, so you have no reason to be
familiar, but I represent the part of Nevada that isn't Las
Vegas, which translates to pretty rural neck of the woods,
which translates to community banks, small credit unions, kind
of an important part of our financial infrastructure.
And I have got some information here that indicates that
after the passage of Dodd-Frank, we have had a pretty rapid
decline in the number of community banks in the country and
that some of this is attributed to the actions of CFPB, which
hasn't, as you know better than I do, the folks that are on
that, interesting groups of folks, but I am looking at a study
here that is by the Harvard Kennedy School, the ``State and
Fate of Community Banking,'' which was February of last year
that it came out and talks about some of the things they
attribute it to. And a lot of it, a lot of the stress they
attribute in the industry is to a regulatory one-size-fits-all
policy, if you will, that is centered in CFPB.
And so you are saying, well, OK, so they are not in touch
or whatever, what is the problem, that sort of thing, but yet
when you look at the information, in the report and who it is
attributed to, community banks have lost market share at a rate
double that before the bureau's existence. Information is in
the Harvard Kennedy study. The study is based on data provided
by the FDIC whose chairman sits on FSOC. According to CFPB
itself, community banks are, quote: A lifeline to hard working
families paying for education, unexpected medical bills, and
homes.
The loss of FSOC voting board, Federal Reserve Board of
Governors, the loss of community banks could result in total
loss of credit in some rural and small markets.
And I will just do one more: Interpersonal relationships
are the backbone of community bank lending, according to all of
the above authorities, and CFPB promulgates one-size-fits-all
rules that remove the flexibility for community banks and
credit unions to use judgment and work with their neighbors on
lending. They do this, and this is, I think, the important
part, in spite of the fact that community bank default rates
hover around 3 percent, as opposed to larger bank rates of 10
percent.
And so I am sitting here trying to process all this, and it
is like--I guess first question is--I mean, when FSOC talks
about significant economic harm and you talk about what has
happened with community banks, even if you say, well, they are
consolidating, it is OK. It is like, hey, that is a trend that
for those of us who care about small banking available, and
other than the major financial centers, that appears to be
going on without concern by the institutions that are below
you. Tell me, how am I wrong in that analysis?
Secretary Lew. Congressman, we share the view that
community banks are very important to our communities, and I
think the history here goes back before the financial crisis.
There had been a pattern of consolidation beginning, and it has
continued. Some of it has to do with the structure of the
industry.
I think if you look at the whole range of prudential
regulators, they have each taken a view that there should not
be a one-size-fits-all approach, that where there are
differences that are material because of size, there ought to
be a recognition of that, and the flexibility that is built
into many of the statutes should be exercised.
I think that when it gets to issues of consumer protection,
some of them are not size specific. I mean, to the extent that
there is a clear way to put into plain English what a mortgage
looks like so people know what they are signing, it is not a
big or a small bank issue.
The capital requirements for small banks, community banks
are not the same as they are for large institutions, and we
have been open to ideas like having less frequent reviews of
smaller banks because we do understand that there are
differences.
I have to say, in all candor, that there are a lot of large
financial institutions that kind of present themselves as if
they are community banks, and they are not. There have been
proposals, for example, to change the threshold for enhanced
prudential standards to $500 billion. That is not a small bank,
and I think you know that. So we have to be really talking
about small banks when we are talking about community banks.
Mr. Amodei. Thank you for that. And I apologize for not
managing your time the same way the chairman is getting ready
to manage mine.
So where I would like to end it, if I might, Mr. Chairman,
is just to say I would like the ability to return to you
outside of the committee process and say, here are some
examples of what we think----
Secretary Lew. Sure.
Mr. Amodei [continuing]. And some of it may be just
communications between CFPB and the others, and kind of get
your response to those.
Secretary Lew. I would be happy to respond.
Mr. Amodei. Thank you very much, Mr. Chairman. I yield
back.
Mr. Crenshaw. Thank you.
Mr. Rigell.
Mr. Rigell. Thank you, Mr. Chairman.
And, Secretary Lew, thank you for being here and for your
testimony today.
I appreciate Chairman Rogers bringing up, though, our
overall fiscal condition. It caused me to seek this office
about 6\1/2\, 7\1/2\ years ago, my first, because of my concern
about our fiscal trajectory and our condition. And that is what
I want to discuss with you briefly here.
Let me first say that I believe that both sides have
contributed to this. I think the evidence is pretty clear on
that. As a fiscal conservative and as a Republican, I believe
that we fought for this a lot harder, though, and I want to
walk through that just a little bit.
If I look at where we are on this growth, about 6 years of
growth, our economy is cyclical, we are probably due for some
type of correction here in the future. And then interest rates,
I am convinced, can only go one way, they can only go up.
And all of this is really troubling to me. I think the
consequences of us not addressing this are far more severe
than, I think, most leaders in Washington. And I don't say that
with any hubris, like I have got some special insight into it.
In fact, I hope I am wrong on all of this. But the evidence, I
think, doesn't point to that.
Here is a quote by then Senator Obama in 2006: ``America
has a debt problem and a failure of leadership.'' I mention
that because I am mindful of the feeling that I had when I left
the State of the Union address not long ago, and I thought
about what he didn't say. He didn't really address our fiscal
situation. I think he has failed to grasp our fiscal situation.
I don't say that in a partisan way. He is my President right
now, right, and I was really disappointed in my President. I
don't think history is going to be kind to us.
And I am going to give you time to respond to this and
maybe you can tell me: Congressman Rigell, it is not as bad as
you think it is. I am not sure how you can work through that,
though, because every trend is going the wrong direction. And I
am convinced that your administration, the administration, and
I would respectfully submit that you as the Secretary of the
Treasury have a duty to raise the alarm level here and put more
a sense of urgency about this.
And I want to give you some time to respond. And thank you
for being here.
Secretary Lew. Congressman, I think the economy is in far
better shape than you have just described. I think that we are
seeing very strong consumer demand, we are seeing housing come
back, we are seeing job growth at very sustained, strong
levels.
We have a lot more work to do, but when it comes to our
fiscal condition, you cannot compare where we are today to
where we were 7 years ago, when we had a financial crisis and a
recession driving the deficit, after a period of just building
it up through policy decisions, and we have reduced the deficit
from 10 to 2.5 percent of GDP.
Mr. Rigell. Let me say this. And I only cut you off because
our time is so limited. Every administration official that has
testified here, at least the ones that I have heard, there is
always a backward looking--and, look, let's just say I--let's
just even say hypothetically--I don't--let's just say I agree
with that. What I am not seeing is this really fighting for
mandatory spending reform. It is just not happening. It just
isn't.
Secretary Lew. So, Congressman, if you look at the
trajectory under our budget, even under the baseline for the
next 10 years, we have restored stability to a situation that
was out of control.
There is much more policy that needs to be discussed. It is
not all mandatory spending. There are tax issues as well. We
have done a lot to reduce the deficit. We have reduced
discretionary spending. We have solved some of the tax
problems, though not all of them. While I know we do not agree
on the Affordable Care Act, through the Affordable Care Act we
reduced spending on healthcare programs.
So we have done a lot over these 7 years. We now have a
foundation to work together. If we could get into a space for a
bipartisan conversation like we had in the 1990s, perhaps we
can make more progress----
Mr. Rigell. Well, part of this, the President has got to
lead and make the case with every American that for us to get
out of this, that there has to be the thoughtful and
substantive reform on the mandatory side. I have not seen it.
Look, I had an opportunity to speak to him once privately.
I did. He said: Scott, what is on your mind? I said: Mr.
President, we are not doing enough on this, we are not doing
right by our children. And he is not fighting for it. I just
haven't seen it.
And I know that the clock is ticking on the
administration's time, but I would implore you, just as a
fellow American, to make this case, because if we don't, we get
on the flip side of debt, and we are about there right now, and
then your lender starts telling you what to do.
I thank you. And out of respect for my chairman, I think I
will yield back.
But thank you, Mr. Chairman.
Secretary Lew. If I can just take 30 seconds.
Mr. Crenshaw. Please.
Secretary Lew. I have spent most of my professional life
trying to point this country in the right direction on a fiscal
path. I presided over three surplus budgets. No other living
budget director, no past budget director can say that. I
understand the importance in the right time of having a
balanced budget.
Right now if you asked me what is the most critical thing
for the economic future of this country, it would be getting a
bipartisan consensus on things like building infrastructure,
dealing with immigration reform, doing the things that would
build the foundation of our economy. Those are immediate
pressing needs. I actually think we have some time to deal with
these other issues.
Certainly there is more work to do on the entitlement side,
there is more work to do on the tax side. I think we have gone
too far on the appropriations side. It was meant to trigger
action on the other issues. It has incrementally had that
effect. That is how we got an agreement last year and 2 years
ago.
So I think if you look at where we have come over the last
5 years, in pieces we have put together many of the elements of
what was once called a grand bargain. We have more work to do.
We do have more work to do. But I think we are in a very strong
place going forward.
Mr. Rigell. I thank you for your testimony.
And I thank the chairman for giving you that extra time.
Thank you.
Secretary Lew. Thank you.
Mr. Crenshaw. Thank you.
And now I would like to recognize Ms. Herrera Beutler.
And we are glad to see you back, your smiling face.
She has been dealing with some family health issues.
And we welcome you. And please proceed.
Ms. Herrera Beutler. Thank you, Mr. Chairman. It is good to
be back. And everything is going well at home. So it is
exciting to get to come back and be a part of this hearing this
morning, although I will tell you, some of these issues seem
like repeats, like a little bit like Groundhog Day. I am going
to switch gears a little bit and see if I can't break myself
out of the Groundhog Day feel.
Thank you, Mr. Secretary, for coming. A number of my
colleagues have written you and Ambassador Froman about
concerns relating to the data localization provisions of TPP
that exclude the financial services industry, and I know you
have commented on this. I understand you are working with the
Trade Representative and regulators in the industry on the
issue, and I just wanted to see if you could update the
committee on where your efforts are.
Secretary Lew. I am happy to.
Data localization is something that as a general principle
we have opposed in trade agreements. In things like electronic
payments, I put an enormous effort into making sure there were
not data localization provisions, because it was pure and
simple a trade barrier. It was either making it more expensive
for a firm from the United States to do business there or it
was a way to create local jobs, but it was not appropriate.
In the case of financial services and prudential
regulation, there is a very difficult issue, and it is one that
I think there is a reason to be cautious on. That is, that
prudential regulators need access to information in a timely
way, and our experience has been that there have been moments,
particularly in moments of crisis, when prudential regulators
could not get the information they needed from international
sources.
Because we have a principled position that data
localization in general is bad, we are working to see if there
is a way to thread this needle to make sure that the prudential
concerns can be addressed without having it become something
that could become a real problem for financial services
companies.
It is a hard needle to thread. The regulators are focused
on it. We are trying to find a pathway there. And I have put a
fair amount of my own effort into trying to make sure that it
is taken very seriously.
Ms. Herrera Beutler. So you think we could be somewhat
close to reaching----
Secretary Lew. So, first we have to separate TPP from some
kind of future policy. TPP is locked, and what you can do to
change TPP, obviously, is very limited. There is the
possibility of having some kind of side agreement, but I do not
want to exaggerate what can be done with the 11 countries in
TPP.
We are looking to see is there something, particularly
going forward, that would inform future discussions on things
like the Transatlantic Trade and Investment Partnership (TTIP)
and any other binational trade agreements, and that is where
the vast number of countries would come into play.
It is a complicated issue, so I am going to be cautious
rather than being overly optimistic. But I can tell you that I
have gotten the attention of all the regulators, they are
looking at this, they are trying to find a way to thread the
needle, and we are going to do the very best we can to work it
through.
Ms. Herrera Beutler. Good. Thank you.
Switching again, recognizing the importance of protecting
the financial services sector from cyber attack, which is a
tall task. Do you agree there should be a coordinated approach
among the regulatory agencies and key stakeholders to
cybersecurity regulation across the financial services sector?
Because what we are seeing is siloed efforts, everybody's
coming up with their own solution, and with technology that is
not going to work. So I would like your comment on that.
Secretary Lew. Well, I actually do not think that it is
true that they are all coming up with their own solution. There
has been a broad embrace of the National Institute of Standards
and Technology (NIST) standards as being best practice, and
there is a lot of coordination and discussion not to have
conflicting standards.
I think where the question comes up is each prudential
regulator has its own supervisory approach, and how you take
the standards and apply them in a supervisory context is
something that is historically a challenge to coordinate,
because each has slightly different parameters.
There are conversations going on to try and do as much as
can be done to deconflict there. I have asked my deputy
secretary, Sarah Bloom Raskin, to take the lead for Treasury
coordinating the cyber issues across the Department. She has
put an enormous amount of time and energy into working both
within the Department, where we have very substantial concerns,
but also across the regulatory community. We get very senior-
level participation in these coordinating meetings, and we now
have legislation that gives us the ability to work more with
the community outside the private sector.
So it is a concern that we share. I cannot tell you that
there will be no differences between how different prudential
regulators do their oversight of banks, but there is very much
an attempt to get best practices.
Ms. Herrera Beutler. So it seems like you are saying that
they are going to approach it from a different side from the
oversight position, not that they are going to talk about
creating their own standards. Is that the clarification?
Secretary Lew. That is certainly where the goal is, to have
as close to single standards as possible. We do not get to
impose on prudential regulators their standards. It is really
what they do by reference to a single standard like the NIST
standard.
Ms. Herrera Beutler. Got it. Got it.
Secretary Lew. It is a serious question, and I appreciate
it.
Ms. Herrera Beutler. I think some of my challenges is we
have heard, like, whether it is futures trading or whether it
is the standards--we have heard talk of different actual
standards, not we are going to approach the way we administer
it differently. And as you can imagine, it is hard enough in
industry, but if the Federal Government can't within one agency
have the same standards, we're going to have challenges.
Secretary Lew. Part of the challenge is there is not a one-
size-fits-all approach, because different platforms have
different characteristics and requirements. So I think there
will be inherent differences. The question is, do they all
reference back to the same kind of core principles, which I
believe they do, and if they do not, we need to keep working on
it.
There will be differences. Securities and banks have
different systems because they do different things. So I do not
want to suggest that we would have some arbitrary one-size-
fits-all approach, that would not make sense. But the goal is
to have as little conflict as possible.
Ms. Herrera Beutler. Thank you. I yield back.
Mr. Crenshaw. Thank you.
Mr. Graves.
Mr. Graves. Thank you, Mr. Chairman.
Mr. Secretary, good to see you. Thank you for appearing
before us. We are always grateful for your thoughtful and
thought-provoking responses each and every time.
I have about six questions. Most of them are very redundant
and I suspect your responses may be redundant as well, but that
is OK. I think it is important for the record.
Following up on Mr. Yoder's thoughts as well and our role
as providing some accountability and assisting the Financial
Services Committee as well in some of their responsibilities,
could you just answer for us, why are you withholding
subpoenaed internal Treasury records pertaining to the
administration's debt ceiling contingency plans?
Secretary Lew. So, again, as I responded earlier, we have
conversations going on with the committee, our counsel and
their counsel, and we are continuing to hope to resolve these
issues.
Mr. Graves. Thank you. And then the same, why are you
withholding subpoenaed records pertaining to the Financial
Services Committee's ``Too Big to Jail'' investigation?
Secretary Lew. So I do not want to pretend to be deeply
familiar with every request. I have to get back to you on that.
Mr. Graves. OK.
Secretary Lew. I mean, our general approach is always to
work with the committee and try and find an appropriate
accommodation. But I will check on that.
[The information follows:]
Treasury is committed to working with Congress, including
the House Financial Services Committee to provide the
information needed to fulfill its oversight role. We have been
working with the Financial Services Committee for several
months to understand and accommodate its priorities related to
its inquiry into criminal prosecutions of large financial
institutions. We have made responsive documents available to
the Committee.
Mr. Graves. OK. Thank you. And very similar, why are you
withholding the records the committee has requested pertaining
to the processes the FSOC uses to designate and de-designate
nonbank financial institutions as systematically important
financial institutions?
Secretary Lew. Well, obviously, I have testified widely on
the subject, including here this morning, and we work with the
committees to try and provide appropriate information.
Mr. Graves. Thank you. And then one other. On what legal
basis--and this is maybe just sort of bringing it to an end--
what legal basis are you withholding these records from the
Financial Services Committee?
Secretary Lew. So I am really going to have to just say we
are leaving these discussions to the appropriate conversation
between lawyers.
Mr. Graves. Understand. And then one other related. On what
legal basis of withholding the subpoenaed records relating to
the $5 billion in unlawful payments to insurance companies that
has been requested by the Ways and Means Committee?
Secretary Lew. I am sorry. I did not understand that last
question.
Mr. Graves. On what legal basis have you been withholding
subpoenaed request of records relating to the $5 billion in
unlawful payments to insurance companies as requested by the
Ways and Means Committee 1 year ago?
Secretary Lew. So, Congressman, all of these requests are
going through a process where lawyers are working through them.
I will have to check on that specific request. I have not
looked at it recently.
[The information follows:]
Treasury is committed to working with Congress, including
the House Committee on Ways and Means, to provide the
information needed to fulfill its oversight role. We have been
working with the Ways and Means Committee for several months to
understand and accommodate its priorities related to its
inquiry into the cost-sharing reduction payments. We have made,
and will continue to make over the next few months, responsive
documents available to the Committee.
Mr. Graves. Understand. And I just had a duty to ask those
questions.
Secretary Lew. Yeah.
Mr. Graves. And I know you have a response there and a duty
to respond as you have. And I guess for this committee's sake,
just trying to help us understand, what are the consequences of
noncompliance or nonresponse to a subpoenaed request by
standing committees of the House of Representatives?
Secretary Lew. Well, look, I have always endeavored in my
many decades of doing this to try and be responsive and to
reach an accommodation that gives committees material that is
appropriate. There are some materials that are not appropriate
to be provided, for a variety of reasons. It depends on what
the particular material is. So that is why I am avoiding giving
an answer that would be very general.
Mr. Graves. But is there a consequence to the agency, to
you as Secretary or to the agency if you just choose never to
respond? And this is a fair question.
Secretary Lew. I think congressional oversight is an
important function. We endeavor to provide appropriate
information to support congressional oversight and we certainly
look for a relationship of comity with the committees that we
deal with. So we always endeavor to work through these issues.
Sometimes there is a request for information that is not
appropriate to provide, and we have in the past always been
able to work through those issues. Obviously, Congress has some
remedies of its own, and then there are issues of privilege
that can sometimes be invoked. But it always depends on the
circumstances, so there is not a general answer.
Mr. Graves. Understand. And so just let me point out to the
committee here that many of these subpoenaed requests of
records have been 1 year, 2 year, if not almost 3 years in the
waiting from the Secretary and his associates, and the
discussions, I guess, have been ongoing for that long as well.
But one of the remedies to this as a committee, I would
hope, is that we take this into consideration, that duly
elected and appointed committees of the House of
Representatives have rightfully asked for records and have been
denied those, because discussions are ongoing. But as we
consider the request by the Secretary, I hope we take that into
consideration.
Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you.
Now I would like to turn to Chairman Rogers for a question
or two.
Mr. Rogers. Mr. Secretary, since we divided off Secret
Service into Homeland Security, does your Department retain any
concerns about counterfeiting or is that solely with the Secret
Service?
Secretary Lew. We have very much direct responsibility. We
and the Fed together work on the design of our currency to make
sure that it is as difficult as possible to counterfeit. That
is where the technology comes in. We work with the Secret
Service, who do the principal investigation when there are
counterfeiting events. I think it is at the highest level of
importance that we maintain the integrity of our currency and
we put all the attention that it requires into it.
Mr. Rogers. Well, I should ask this of the Secret Service,
and I will, but I was recently, last week, in Peru, the
counterfeiting capital of the world, I am told.
Secretary Lew. I wish there were only one.
Mr. Rogers. But anyway, it is apparently wholesale big time
there. We have only got one person there that I am told to work
with the Peruvian Government to try to stop it. But could you
check into that?
Secretary Lew. I would be happy to, Mr. Chairman.
Obviously, when the Secret Service was under the Treasury
Department we had more direct accountability for their
resources and they would do the investigations.
I can tell you that we are trying to stay ahead of
counterfeiters. As we look at the next generation of currency,
we are looking at new kinds of technology that will make it
even harder to counterfeit. We obviously are going to have to
stay a step ahead, because it is a world where counterfeiters
are out there.
Mr. Rogers. Well, Peru apparently is the real hot spot, and
I hope that you could work with Secret Service to get some more
effort going there with the people----
Secretary Lew. I will follow up on that.
[The information follows:]
The U.S. Secret Service is responsible for enforcing U.S.
counterfeiting laws, please direct your questions to the U.S.
Secret Service's Office of Government and Public Affairs. U.S.
Secret Service, Office of Government and Public Affairs, 245
Murray Ln., Washington, DC 20223, 202-406-5708.
Mr. Rogers. Thank you.
Quickly, Bitcoin. The Office of Terrorism Financing and
Intelligence within your Department is the only Federal agency
solely devoted to tracking and disrupting of the financial
means of our enemies for the purpose of ultimately defeating
them, and the head of that office said last year: ``What keeps
me up at night when I am thinking about digital currency, the
real threats out there these days, we are thinking a lot about
ISIS.''
And the use of digital currencies, Bitcoin, to be used by
groups like ISIS seems to me to be a real threat. It is an
unregulated form of online currency, circumvents the
traditional banking system. Is it on the government's radar
since it could serve as an ideal placeholder for terrorist
assets and provide a way for terrorists to exchange money?
The Bitcoin website, Bitcoin.org, describes the ease with
which anyone can send and receive virtual funds. I quote it:
``Sending bitcoins across borders is as easy as sending them
across the street. There are no banks to make you wait 3
business days, no extra fees for making an international
transfer, and no special limitations on the minimum or maximum
amount you can send.''
It is the first worldwide decentralized currency, can be
sent person to person without any third-party involvement, and
can be used by groups like ISIS to spread their evil worldwide.
What do you think about it?
Secretary Lew. So, Congressman, we obviously are looking at
many ways that ISIL will get money and we are trying to shut
down every path that we can identify.
Let me take a more general approach to the question of
Bitcoin. It is in that area of financial technology that
captures people's imagination because it has the possibility of
creating easier ways to do business in the future. We have from
the start said that we do not want to be anti-technology. The
things that will create the right platforms for the 21st
century will come out of disruptively changing ideas.
On the other hand, we have to hold a new system, a new
platform like Bitcoin to the same standards we hold traditional
financial products. We track cash because cash can be used
anonymously to support illegal or malign activities. Our
Financial Crimes Enforcement Network (FinCEN), which is part of
the Office of Terrorism and Financial Intelligence (TFI), right
from the beginning laid out criteria that we need to keep an
eye on what is going on in Bitcoin that is fully consistent
with the way we approach both formal banking and cash.
It is challenging, and I am not going to suggest that there
are not threats there. There are real threats there. But our
team is on top of it and, I think, very much looking to see
what do we need to do to make sure that it does not become a
funding stream to support bad actors.
With regard to ISIL, we have taken dramatic actions to try
and shut down formal banking in areas that they control,
working with the Government of Iraq. We have taken military
action to set back their ability to generate revenue through
oil development and shipping. We have worked to shut down the
flow of salaries into territories they control.
So we are doing everything we can. They are stressed. You
can see it in the fact that they are having trouble paying
their soldiers. But that is not good enough. We have to keep at
it until we really dial back their ability to promote the kind
of terror that they are all about.
Mr. Rogers. Well, you are exactly right. And your
Department is the leading edge of that effort on the financial
strangulation of these organizations. So we wish you well and
urge you on.
Secretary Lew. Thank you. We, in just December, had a
meeting at the U.N. Security Council, the first time in the
history of the Security Council that finance ministers met in
the Security Council. I chaired the meeting, because it was our
Presidency, and we unanimously passed a resolution to treat
ISIL the same way we treat Al Qaeda and to get the whole world
to say they are going to cooperate.
A lot of countries do not have the kind of resources that
we have in TFI. One of the things we have to do is help them
build that, and our technology assistance and technical
assistance program and working with international organizations
to do that is part of what this is about.
Mr. Rogers. Thank you.
Secretary Lew. Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you, Mr. Chairman.
We have got a few minutes left. I have a couple more
questions. I think Mr. Serrano might, too.
So let me ask you, Mr. Secretary I mentioned in my opening
statement my concern about the lack-of-liquidity in the
economy. After the crisis, an awful lot of new rules and
regulations were put into effect, and I have always had a
concern that they might somehow impact this liquidity issue
that deals with our economy. A lot of other people have that
same concern. Just recently, I think, a couple of members of
the Fed said they believe there is a linkage between the post-
crisis regulatory framework and liquidity.
So my first question is, do you think that was by design or
do you think that was an unintended consequence?
Secretary Lew. Well, first, I want to go back to first
principles. I am not sure that the linkage is as clear as some
people have argued that it is. We are at a time of an
inflection point, in many ways, in the economy. We are leaving
a period of historically low interest rates and low volatility.
We are seeing markets evolve in a way that there are more and
more nontraditional and electronic participants in the market
with huge volumes. We have also seen corporate bond issuance
surge in recent years, and there has been quite rapid growth of
the asset management industry. So there is a lot changing in
the financial landscape.
Now, on top of that, we have had new regulatory
requirements put in place, and I have said before that we will
continue to look at whether there are unintended consequences
there. I think that many have jumped prematurely to a
conclusion that that is the case.
I will give you an example. When there was the round trip
on October 15, a year and a half ago, where the market went up
and down very quickly, for weeks people were saying that was a
result of liquidity caused by regulation.
We went back and did very careful analysis. We had all the
different regulators who had different pieces of visibility
work together, and that is not the conclusion that you reach
when you study the data. You see that there were very dramatic
moves in high-frequency trading that had a distorting effect.
You are seeing things happen, which I do not have the full
explanation for, but in asset management funds closing
positions at the end of the day algorithmically.
So there is a lot going on.
What we have done through financial reform is we have put a
foundation that is solid underneath our financial system. So
right now when you have a period like January and February with
volatile markets, there was a lot of confidence in the
integrity of the U.S. financial system. That is of enormous
benefit.
So we have to keep an eye on whether there is spillover
effect. To the extent that there is a lack of liquidity for
high-risk products, that is different than if there is a more
general liquidity issue for prime corporate----
Mr. Crenshaw. Because that is really what I am talking
about, wild market fluctuations. You hear Mr. Amodei talk about
the community banks going out of business.
Most people, maybe not everybody, but if you got people in
the Fed saying: Look, I think there is a linkage here when you
have got all this new regulation, and clearly there is a little
bit of lack of liquidity just in everyday business startups,
things like that. And you might say: Well, I don't see the
linkage and I don't----
Secretary Lew. There are also different ways of defining
liquidity.
Mr. Crenshaw. And that is what I was going to ask you,
because if you don't think that that really is impacting,
maybe--you said you have done some studies. As I mentioned in
my opening statement, we asked the SEC to do a study, and they
might coordinate with you, but it would be interesting to see
what the results of a more formal study would produce in terms
of lack of liquidity. So you would say, A, I am not sure that
there is a linkage, and, B, then you would certainly say----
Secretary Lew. I am not dismissing the question.
Mr. Crenshaw. No, but you don't think anybody sat in a room
and said: Look, if we do all these new regulations, we can take
some of the liquidity out of the market. Nobody thought----
Secretary Lew. No. I think it was a general proposition
that was the case. There were some things during the pre-crisis
period, one could argue there was too much liquidity in some
high-risk markets, there was overleverage. But that is not what
you are asking about.
Mr. Crenshaw. No, no. When you all sit down and talk about
liquidity, what would you argue is the right mix of liquidity?
Secretary Lew. So, look, I think that in terms of markets,
the question is can you match up buyers and sellers in real
time for securities, for stocks and bonds.
Mr. Crenshaw. But also in business startups, small banks,
all the lending, it seems to me you hear a lot that these
community banks are all going out of business, big banks are
getting bigger, but it is harder and harder for somebody to go
start a business or buy a home. It seems to me that has some
sort of impact, and maybe that is at a lower level than you
look at.
Secretary Lew. No, we look very much particularly at home
ownership. I have said many times that the credit box shrunk
more than regulators meant for it to. You look at what banks
are doing, they are not operating at the outer limits of what
regulators think is a comfortable place to lend. You look at
the FICO scores for loans, they are too high, where you kind of
gap out and you cannot get mortgages.
The Federal Housing Administration (FHA) is looking at some
things that they can do to try and provide some clarity there.
I believe they may have even put out something this week.
So those issues are very much in our focus. That is
different than a broad question of market liquidity. So it is
important to define what it is, which piece you are talking
about.
Mr. Crenshaw. I am glad to hear you say that--it would seem
fairly obvious--that you are concerned about liquidity in the
market.
Secretary Lew. I think creditworthy individuals and
businesses should have access to credit.
Mr. Crenshaw. Exactly. I think we all want to say we want
reasonable regulation, but we want to be careful that if too
much regulation creates problems, then we want to be sensitive
to that. Not enough regulation also creates problems. There is
a balance somewhere.
Secretary Lew. There are some issues that have arisen in
terms of how legal matters are resolved, the aftermath and the
derisking that is taking place in the financial sector, where
we are seeing financial businesses withdraw from areas that
they are just deciding are not worth being in because they see
risk and they do not see a lot of benefit.
We are putting a lot of attention into that, frankly,
whether it is individuals in the United States or countries
that we want to have commercial relationships with the United
States. We are not in a better place if people and countries
are cut out of the formal financial system, but firms do have
to have an idea of what do they need to do to comply reasonably
with all of the standards that are out there. That is something
we are putting a great deal of effort into in our last year.
Mr. Crenshaw. Thank you. Thank you.
Mr. Serrano.
Mr. Serrano. Thank you.
Mr. Secretary, the President's announcements on Cuba and
Cuba travel have been met with great support from a lot of
people, and I am happy to see that the outcry we all expected
from 10 years ago didn't take place.
What have you seen as changes affecting what you have to
do? What needs to be done still? And can you talk to us about
the new announcement that was made just yesterday?
Secretary Lew. Congressman, we have as recently as
yesterday taken a series of actions to try, within the fairly
tight boundaries of law, to open up more contact between the
American people and the Cuban people, to create a basis for
driving change in Cuba by having the influence that we have
when people get to know us and our values and our standards.
Yesterday, we eased up on some travel restrictions, we
eased up on some financing restrictions. We have done
everything consistent with the laws that, as I say,
circumscribe how much we can do. So I would not describe where
we are as normal commercial relations, normal in any way.
We are seeing an increase in activity. That is a good
thing. I believe that if you look at the history of the last 50
years, it has not worked, cutting Cuba off has not worked. It
has put us at odds with most countries in our own hemisphere
and it has left the Cuban people cut off.
The most positive thing we can do is demonstrate by our
example what it is our values are, to have the freedom of
business and the freedom of ideas start seeping into a system
that has not seen that kind of freedom.
So I do not think there is a disagreement between us and
those who oppose our policies on the fact that there is a need
for change in Cuba. There is a difference in what we think are
the effective means to accomplish that. I think the history
does prove that the path we have taken has not worked.
We believe the path that we are embarked on now, subject to
the limitations of an embargo and the Libertad Act and all
kinds of restrictions, is going to help. With changes of law,
it could be done in a much more normal way.
Mr. Serrano. I am trying to remember who it was, and I
can't at this moment, but someone before this committee told us
that the biggest change they saw was when the President went to
Latin America and he was meeting with a group of leaders from
Latin America. Was that you that told us that?
Secretary Lew. Well, I may have. It happened to him.
Mr. Serrano. The point was how excited they were.
Secretary Lew. It happened to him. It happens to me on a
regular basis when I interact with my counterparts from Latin
America. This has been an issue where they have had to be at
odds with us, and they are not at odds with us, as much or even
at all, because of the changes. I think it is a good thing for
the U.S. to be a leader in our hemisphere, and part of being a
leader is figuring out how to address issues like this.
There is a lot that needs to change in Cuba, so nothing
about this policy embraces practices that need to change. It is
really a question of what is the most effective way to
accomplish that change, and I think our leadership role in the
world and the Western Hemisphere is very important as well.
Mr. Serrano. One last question. One of my favorite programs
is the CDFI program, and we notice that you asked for a
relatively small increase compared with some of the other
numbers that we have discussed today. I hope we are not putting
them at risk in any way, because that is an agency that has
been very effective in my community. It has a lot of fans on
both sides of the aisle.
Secretary Lew. Urban and rural.
Mr. Serrano. Yeah.
Secretary Lew. Yeah. I am a big fan of the CDFI program. I
feel like I was present at the creation in the 1990s. I have
tried to in my period of time at Treasury nurture it and help
it to grow. We have tried to be responsive in areas like the
Bank Enterprise Award Program and request the funding level for
that important program. I think we have requested a level of
funding that will give CDFI the ability to grow and to do well.
Something that we did last year that is very important is
we worked to have credit unions qualify as CDFIs, tremendously
expanding the base of institutions that are eligible for
participation.
As I have traveled around the country and visited CDFIs,
one of the things that has been striking to me is that it is
not just the direct activities that we fund. We create anchors
to bring together a variety of Federal services, local
services, to coordinate an economic development engine in a
community to help young people find training and jobs. You have
to have an anchor, and in a lot of these communities the CDFI-
funded organization can be that anchor.
Mr. Serrano. Well, they have done a great job.
And let me just in closing say that this will be the last
time you come before us, I think, in an official capacity. We
will keep talking on different issues and working on Puerto
Rico and so on. I want to thank you for your service.
Secretary Lew. Thank you, Congressman.
Mr. Serrano. And like I said, I didn't win any primaries
for President, so I can't reappoint you. I would have loved to
do that. And if you come back to the Bronx, as you have stated
before, we welcome you again as always. That is your home?
Secretary Lew. I vote in the Bronx, I pay taxes in the
Bronx, I look forward to living there again.
Mr. Serrano. OK. Thank you.
Mr. Crenshaw. Thank you.
Mr. Yoder has another question or two.
Mr. Yoder. Thank you, Mr. Chairman.
Mr. Secretary, Treasury and other agencies recently put out
a broad request for information on the changing structure of
the market for U.S. Treasury securities. This comes on the
heels of a joint report on the October 2014 flash rally and
numerous public discussions on the changing profile of the
market in terms of participants and overall structure.
Are the particular areas within the market where Treasury
is particularly focused concerned that either new structures or
new participants may be impacting the overall efficiency and
liquidity of this important and unique market?
Secretary Lew. Yeah. Thank you for the question. I, while
you were out, addressed it, so I apologize for repeating.
But if you look at the report we did on October 15 and the
request for information, it outlines the kinds of questions
that we have. These are questions. We do not have certainty
about what the answers are. And it is quite an important
process.
What we have seen is a change in where the level of
activity is by kind of firm, kind of activity. The amount of
activity that is algorithmically generated, high-frequency
trading, for example, it is a very large part of the market.
We are also seeing that funds that move large amounts of
securities have activities at the open of the day, the close of
the day, that have patterns that seem to be having potentially
some impact.
This is important to understand, because this is the
plumbing of our financial markets. If the system is changing,
we have to ask, whether the things that we have done in the
past to make sure you maintain an orderly market and liquidity
are appropriate and working.
So we do not start out with an idea that there is
something, like, bad that needs to be addressed. We start out
with a very complicated evolution of our financial markets that
needs to be fully understood. I think Treasury has a
responsibility for driving that kind of questioning, which is
why we have the request for information out there. I very much
look forward to the responses to it.
This is not a case where we are starting out with an answer
and looking for a record to support it. This is saying we have
now observed a lot of things that suggest there has been
dramatic change in the structure of the market. We need to
understand that in order to know how to respond.
Mr. Yoder. I appreciate your answer.
I would be remiss if I didn't take a moment to talk about
the budget a little bit. I know there has been extensive
testimony and we have differences as parties about this, but
numbers are numbers.
Do you know what the projected debt is under the current
budget projections for the next decade, in additional debt?
Secretary Lew. I have not added it up, but I know that we
have reduced the growth rate of the debt for 3 quarters.
Mr. Yoder. I respect that. I know. And we have a debate
about what we have done.
Secretary Lew. We can get back to you with the answer.
[The information follows:]
In its Mid-Session Review of the FY 2017 Budget released on
July 15, 2016, the Office of Management and Budget projected
that debt subject to the statutory limitation would increase
from $19.4 trillion at the end of FY 2016 to $26.7 trillion at
the end of FY 2026, an increase of $7.4 trillion over the next
decade. (Ref: Mid-Session Review of the FY 2017 Budget, Table
S-11, page 61) Note: As of August 15, 2016, actual debt subject
to limit was $19.386 trillion.
Mr. Yoder. Yeah. I mean, just a basic, you are the
Secretary of the Treasury, what is the projected debt over the
next 10 years? I know you know this answer.
Secretary Lew. I walk around with a lot of numbers in my
head.
Mr. Yoder. You don't know the answer to that question?
Secretary Lew. I do not have the number in my head----
Mr. Yoder. Come on.
Secretary Lew. I know that we have reduced the annual
accumulation of debt to a level that is----
Mr. Yoder. With all due respect, Mr. Secretary, I know that
is the sort of company answer and I respect that that is what
you have got to go with, but I just--I want to have a
discussion.
Secretary Lew. It has the virtue of being true.
Mr. Yoder. I want to have a discussion about where we are
going, not a debate about the past.
Secretary Lew. There is no doubt that the debt will
continue to----
Mr. Yoder. Our projection, I think your projection, since
you are not coming forth with it, the debt is going to continue
to grow. You agree with that, right?
Secretary Lew. It definitely grows and----
Mr. Yoder. Would you say $7 or $8 trillion over the next
decade?
Secretary Lew. Obviously, GDP is very large and growing. So
if your debt as a percentage of GDP is even flat, it is going
to grow by a large number.
Mr. Yoder. Fair discussion.
Secretary Lew. The question is, what is it as a percentage
of GDP that is sustainable?
Mr. Yoder. Right. So do you know that answer?
Secretary Lew. It stays in the 70s, which is higher than it
was, but it is not at a record level. And we have long-term
challenges ahead of us. But we are not looking at it breaking
through a level that is a crisis level.
Mr. Yoder. And I appreciate that you know the debt-to-GDP
ratio, but you don't know the total debt number.
Going forward, I think we have concerns about the solvency
of Medicare. Your own folks, the Medicare trustees, have
concerns about the solvency of Medicare, and I know we are
going to talk about how we have made it better, and we have in
some regards.
Secretary Lew. We have more work to do.
Mr. Yoder. But we have more work to do.
Secretary Lew. Absolutely.
Mr. Yoder. You know, 10,000 seniors retire every day. My
grandmother is 104, right. We have longevity. These are great
things.
Secretary Lew. I wish her a healthy and long life.
Mr. Yoder. Thank you very much. I will pass that on to her.
Thank you. One hundred five in June.
But the question, I guess, for you, I will just give you 30
seconds here, you oversaw a balanced budget in the 1990s,
Republican House and Senate, Democratic President, you have
bipartisan workings together on that. If you could balance this
budget over the next 10 years, what would you recommend?
Secretary Lew. Well, I think that the time to balance the
budget is not now, because I think we have----
Mr. Yoder. I mean, over the next 10 years, over the future.
Secretary Lew. Yeah. There is a reason that we did not
present a balanced budget in the 10-year window. Coming out of
the deep, deep recession, we have other much more immediate
challenges that I think would help our economy if we dealt
with. If you gave me a choice of balancing the budget or
rebuilding our infrastructure, it is a more immediate challenge
to rebuild our infrastructure.
The ability of our economy to meet the needs of the 21st
century is going to be undermined if we do not do that. We have
a bit of time to deal with entitlement spending and to deal
with taxes in a bipartisan way.
Look, I have been part of bipartisan budget deals over a
period of four decades. The right way to do this is through a
bipartisan conversation where we agree on the need to protect
senior citizens, where we agree on the need to have a fair and
more simple tax system, and where we have an honest discussion
about what the tradeoffs are.
The last few years have not given rise to the kind of grand
bargain, but over a period of years we have taken incremental
steps that have gotten us a long way there. We went a little
too hard on discretionary spending. I thought so at the time.
Now I think things like the budget agreement put some mandatory
savings in to back out some of the discretionary savings.
We did the Affordable Care Act, which did reduce our
healthcare spending dramatically, and we did raise taxes, which
we thought was necessary, on the people who were most able to
pay.
That does not mean we have did it all, but we have done a
lot over the last 7 years, and I think there is more to do. I
hope that my successor is able to work in an environment where
there can be the kind of bipartisan discussion that, frankly, I
have tried very hard to foster and have enjoyed being part of
in the past.
Mr. Yoder. Well, I think invariably this conversation, when
we had the OMB Director in as well, turns to a discussion about
what the administration has done. And I think Congress and the
administration both have an obligation to engage in adult
conversations, and you outlined the premise by which that would
occur in terms of bipartisan discussions, protecting Medicare
for seniors, reforming and flattening out this tax code. I
mean, the principles are there.
And I just throw out for the sake of conversation, it is
March, we have about a year. I would love to see the
administration lead those efforts and see while you are
Secretary and while we are here working under the current
framework, why not try to address some of these long-term
problems now. Because I think you agree that the longer we wait
to address them, the harder they will be and the more difficult
it will be for your successor and for ours. And so we just--I
have got young girls, we all have children.
Secretary Lew. I have young grandchildren.
Mr. Yoder. Yeah. So I think you should be--I mean, I know
you are as concerned about this as we are, and so I just offer
that I am ready to engage, I think we are all ready to engage.
We would love to.
Secretary Lew. I have always been ready to engage.
I would say that on the tax side, if we could figure out a
way to work together to stop inversions, that is something that
the American people are offended by on the Democratic and the
Republican side alike. We find it wrong, and we know how to
stop it. I hope we can at least come together on that.
Mr. Yoder. Thank you, Mr. Chairman.
Mr. Serrano. Mr. Chairman.
Mr. Crenshaw. Yeah. We can fix the tax code. That is the
way we will stop it, right?
Go ahead. I have a question, but you have a comment?
Mr. Serrano. Just a quick comment. I really respect the
gentleman's comments about balancing the budget. I think that
is so important and something everybody wants and so on and so
forth.
The Secretary has made it clear that sometimes you get into
a little debt by building highways and you create a million
jobs at the same time, and it is something you should look at.
But I have been around here long enough to remember when we
cut taxes when we weren't supposed to cut taxes and when we got
into a war we weren't supposed to get into. We had a surplus
and then we blew the money away, along with a lot of our
respect throughout the world. We are still looking for those
weapons of mass destruction, but they cost billions of dollars.
So I think if we learn anything from that it is to be
careful about the future, protect our country, try to give the
working class people in this country less of a tax burden. But
we made some serious mistakes at that time, and we are all
guilty of it. We cut taxes when we shouldn't have and we threw
away a surplus on a war that we shouldn't have been involved
in.
And now we hear the gentleman speak honestly, but I think
we have to revisit that every so often to remember how we got
into this mess.
Thank you.
Mr. Crenshaw. Let me ask one final question, Mr. Secretary,
about mandatory spending, because I know, your agency has a lot
of bureaus that are funded through mandatory funding that are
outside the appropriations process. And I understand, that
FSOC, which we have talked a lot about, are going to have a 23
percent increase in their budget. And so I wanted to ask you
why you think that is.
But in a broader sense, I read a report that said this new
Consumer Financial Protection Bureau had an independent
performance audit and it was recommended that the CFPB expand
their transparency of their funding and expenditures, which
kind of brings up that broader question about these agencies
that aren't under the appropriations process: how much scrutiny
goes into those budgets? For instance, it used to be the OMB
Director.
I wonder in those days how much attention did you pay or
does the OMB today pay to some of those agencies that are
funded outside the appropriations process. What kind of
critical review do they get? Can you talk a little bit about
that? Because I think that is a concern to everybody.
For instance, that 23 percent increase, you say, well, tell
us about that. But in general, since they are not under the
process that the public sees with every other agency, are you
comfortable with the amount of scrutiny they get before they
spend the dollars that they spend even though they are
mandatory?
Secretary Lew. Congressman, with regard to FSOC and OFR,
they are funded through the Financial Research Fund, which was
established as part of Dodd-Frank as a permanent source of
funding. As part of each budget cycle, OFR and FSOC provide the
public with detailed information that justifies planned
expenditures during the upcoming year. The Financial Research
Fund is subject to appropriate internal controls and has been
subject to periodic audits.
I think it is important to have these independent
regulatory activities funded the way they are funded. That has
been a tradition with bank regulators. And I also think it is
important that they provide the public with detailed
information that shows how they are using the money. We would
look forward to working with you to make sure that that
happens.
Mr. Crenshaw. Great. Well, thank you very much. And I
think--Mr. Graves has no more questions.
Again, I want to thank you personally for your long career
in government. Not that you are going away, I know you are
going to the Bronx, you may come back. But thank you for your
service to the country. Thank you for working with us. And we
look forward to continuing to work together to make things
better in this country.
Secretary Lew. Thank you, Mr. Chairman.
Mr. Crenshaw. So, again, thank you so much.
Secretary Lew. And thank you for the cooperative way that
you have worked with the Treasury Department to start meeting
some of these very important needs.
Mr. Crenshaw. Thank you.
This meeting is adjourned.
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W I T N E S S E S
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Donovan, Shaun................................................... 61
Koskinen, John................................................... 1
Lew, Hon. J. J................................................... 309
White, M. J...................................................... 183