FROM THE OFFICE OF PUBLIC AFFAIRS

Mr. Chairman, Senator Campbell, and members of the Committee, I appreciate this opportunity to discuss Treasury's FY2003 budget request.

As you know, Treasury plays a crucial role in the core functions of government, and serves as tax administrator, revenue collector, law enforcer, financial manager, as well as leading policymaker for tax policy, banking policy and international and domestic economic policy.

For FY2003, we are proposing a performance budget that will enable Treasury to continue to provide the American public with both the service and program reliability it expects and deserves. I have challenged each of my bureaus to carefully examine their operations to achieve improved effectiveness in business practices. I expect that Treasury can realize reasonable savings from this type of review through reviewing programmatic efforts on a continual basis and reducing or removing those producing little or no value.

Our budget request totals $16.654 billion for all operations. Taking into account the offset from the proposed $250 million dedicated toward Customs commercial operations, our program level totals $16.903 billion, compared to $16.5 billion appropriated in FY 2002, and $14.8 billion in FY 2001.

Mr. Chairman, the budget request includes the impact of proposed legislation for retirement and health costs for federal employees and I will speak to that proposal later in my statement. However, I do want to note that the budget presents for the Committee the comparative information on this proposal for prior fiscal years, in order to not materially affect the real changes being proposed and reviewed by the Committee for FY 2003.

We have provided the Committee with a detailed breakdown and justification for Treasury's FY 2003 budget request. I would like to take the opportunity today to highlight four important areas of focus for FY 2003.

Treasury's FY 2003 budget recognizes the importance of, and provides adequate and appropriate funding for, the following:

1. Protecting our Nation from Terrorists and Terrorist Activity
2. Stewarding Change through Technological Improvement
3. Improving Customer Service & Compliance at the Internal Revenue Service
4. Achieving the President's Management Agenda

   FIRST, in light of the recent events concerning terrorism in the U. S., I would like to discuss Treasury's role in protecting our Nation from terrorists and terrorist activity.

   The tragic events of September 11, 2001 sparked a Nation-wide effort to prevent and combat terrorism. Treasury has been at the forefront of these efforts with all of its law enforcement bureaus participating in counter-terrorism functions, including internal bureau and agency security and ensuring the continuity of operations. We bear the responsibility of protecting the Nation on three fronts:

   1. At its borders;
   2. In the banks; and
   3. At home.

In FY 2002, Treasury received $683 million in additional counter-terrorism funding through the Emergency Supplemental. In the proposed FY 2003 budget, the follow-on costs associated with the funding provided in FY 2002 have been estimated in the amount of $518 million.

Following the attacks of September 11th, the border threat level was raised from Alert Level 4 (normal operations) to the highest level, Alert Level 1 (Code Red). The Customs Service, our Nation's first line of defense at 301 ports of entry into the Nation, has made the fight against terrorism its number one priority. In response to this heightened state of alert, Customs has hired additional personnel to staff our borders and seaports, and has engaged members of the National Guard to increase security around our Nation's borders.

Customs received almost $400 million in new FY 2002 appropriations for addressing homeland security matters (in addition to $65 million provided through separate presidential releases). Of this amount, $235 million is being used for a combination of personnel and new equipment in ports of entry on the northern border and at critical seaports, along with selected investments on the southern land border.

Customs has set out an expenditure plan for this funding for Congressional review that responds to both short and long-term security concerns. The recurring cost of labor-intensive efforts will be coupled with technology investments that will increase efficiencies and enhance the level and degree of scrutiny for various ports of entry.

The FY 2003 proposal for the U.S. Customs Service includes $365 million to fund counter-terrorism efforts in the second year, continuing to focus principally on Northern Border and Marine Port security efforts, but also addressing other areas of vulnerability, such as: international money laundering, security infrastructure, southwest border staffing, and funding for the backup of commercial data facilities. Ports of Entry (POE) have been identified as main entry points for terrorists as well as the most likely avenue for them to introduce implements of terror into the country. The danger this presents has become a focus for the FY 2003 request.

In FY 2003, Customs will add 626 new positions, in addition to the 1,075 positions allocated in FY 2002, to vulnerable locations on the northern and southern land borders, and in seaports with the highest volume of containerized cargo. They will counter the terrorist threat while facilitating legitimate trade and travel.

The FY 2003 request also includes a large complement of inspection and targeting technology (including a modest research component), a further expansion of the Advance Passenger Information System (APIS) to real-time processing capability, and technology to expedite the passage of goods imported by highly trusted entities.

Finally, low volume Ports of Entry would be protected through "hardening" measures including physical barriers, sensors and monitoring devices to prevent and detect unauthorized crossings. Customs serves as the lead agency for Operations Green Quest and Shield America. These multi-agency task forces are dedicated to: (1) identifying, disrupting, and dismantling terrorist financing sources and systems, and (2) ensuring that munitions and sensitive U.S. technologies are not unlawfully exported into the hands of terrorists. The FY 2003 budget supports and maintains these critical task forces.

Treasury's Financial Crimes Enforcement Network (FinCEN), along with the Office of Foreign Assets Control (OFAC), lead the Nation's war against global terrorism financing.

In his November 7th address at Treasury, President Bush proclaimed that "the first strike in the war against terror targeted the terrorists' financial support." Following the attacks, FinCEN and OFAC were able to identify and stymie numerous supporters of the Al Qaida and other terrorist organizations by freezing $34 million in terrorist assets and working with allies overseas to freeze over $45 million. Funding levels proposed for FY 2003 will better enable FinCEN to sustain and maintain these activities.

The United States Secret Service is the only federal government entity charged with the challenging mission of protecting the President and foreign dignitaries. In response to increasing homeland security threats, the Secret Service has been assigned new protectees and has seen significant workload increases in its protective functions. The FY 2003 budget provides funding to enable the Secret Service to meet its protective requirements, including funding for travel, overtime, and follow-on costs associated with Special Agents and Uniformed Division Officers hired in FY 2002.

Around the world, firearms and explosives are the most frequent tools of terrorist attacks. The Bureau of Alcohol, Tobacco and Firearms is charged with enforcing Federal laws relating to commerce in, and the criminal misuse of, firearms and explosives, and ATF's authority and technical expertise is an integral component in fighting the Nation's war against terrorism. Through the awareness that terrorists need funds to operate, ATF has found that illegal commerce in alcohol and tobacco products serve as attractive and lucrative sources for generating funds for illegal activities.

As new law enforcement officials are being recruited and hired to fulfill the various positions critical to the Nation's war on terrorism, training for these individuals to perform their duties in a safe and highly proficient manner has become an immediate necessity. The Federal Law Enforcement Training Center (FLETC) serves as the Federal government's leading provider of law enforcement training. FLETC currently provides training for 74 Federal Partner Organizations, and also for state, local and international law enforcement organizations on a reimbursable basis. Training is provided in the most cost-effective manner by taking advantage of economies of scale available only from a consolidated law enforcement training organization. The FY 2003 request provides funding to maintain current levels prior to the September 11^th terrorist attacks, while also providing additional funding to support the training of new agents hired as a result of the attacks.

SECOND, the FY 2003 budget is Treasury's continuing commitment to stewarding change through technological improvement. This effort entails modernizing two of Treasury's mission-critical technological systems.

The budget continues critical support for the IRS computer modernization. The Internal Revenue Service is committed to providing excellent customer service and takes pride in the integrity of their systems. As a result, they are continually making improvements in operations efficiency and performance by adopting best business practices and state-of-the-art technology.

The IRS is replacing its antiquated computer system with an information technology capacity that is appropriate for the new century. Modernizing the agency's technology will enable it to deliver on its pledge to provide better customer service for all.

The Business Systems Modernization effort was begun not just to keep up with modern systems, but also because it was a necessity due to the fundamentally deficient nature of the IRS core data systems. The Master File system, on which all taxpayer accounts reside, is based on outdated 1960s technology.

It is important, if the agency is to provide quick and reliable service to its customers, to continue the ongoing shift to modern standards of technology by adopting a new architecture. As this is the project's fourth year, much has been achieved, but the process is still incomplete.

This multi-year endeavor is providing IRS with the technological tools and revamped business processes needed to deliver first class customer service to American taxpayers and to ensure that compliance programs are administered efficiently and fairly.

FY 2002 and FY 2003 are key transition years for IRS Modernization efforts, as the foundation of our Nation's tax system is being replaced, building a bridge to providing interactive and improved customer service.

The Department's FY 2003 budget provides $450 million for the continuation of effort in re-engineering business processes and developing new business systems to replace their antiquated and obsolete system. This amount is $58 million above the FY 2002 enacted level of $392 million, and $378 million above the FY 2001 enacted level of $72 million.

The budget also continues important investments initiated for the Customs modernization effort. Illegitimate trade and contraband trafficking have been of the utmost concern to the Department, the Administration, the Congress and the American public. This concern was heightened due to the tragic events of September 11th, and increased pressure has been placed on the Customs Service to inspect all cargo entering and exiting the United States.

The strains on our Customs Service are growing increasingly severe every day. Since the Customs Modernization Act was passed in 1993, the value of exports has grown by 36 percent while the value of imports has risen by 51 percent. The agency is required to cope with this sharp rise in input and export volumes with the same outdated technology it had when the Act was passed.

Customs is not alone in having to work with antiquated technology. We believe we are on the right track in our efforts to modernize IRS technology and we have learned a great deal from this experience. Given the critical role of Customs in handling enormous volumes of goods and in combating drug and other types of trafficking, it is important that they are equipped with the best tools available to fulfill these goals.

In FY 2003, the Customs Service expects to process 27 million formal trade entries. Customs is dedicated to replacing the outdated and unreliable Automated Commercial System (ACS), which has been subject to an increasing number of system outages, with the Automated Commercial Environment (ACE). The replacement system will enable Customs to adopt a paperless, account-based process for importers. FY 2003 marks the third year of funding for this modernization effort.

Besides trade facilitation and compliance, ACE will play an integral role, in conjunction with other targeting and inspection tools, in assisting Customs with the evaluation of high-risk cargo for possible contraband as it passes the Nation's borders.

The Department's FY 2003 proposal provides for: (1) additional investments in the automation modernization program to further develop and migrate to the Automated Commercial Environment ($307.5 million), as well as continued funding for a government-wide trade data interface through the International Trade Data System ($5.4 million); and (3) sufficient funding to maintain the existing Automated Commercial System while modernization efforts are underway.

THIRD, our FY 2003 budget request addresses the improvement of customer service and compliance at the Internal Revenue Service. This has been of significant concern to the Committee and the Department, and the Internal Revenue Service has been making great strides for improvement in this area.

To achieve its mission of "providing America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all," the IRS has realized that organizational improvements and increased employee satisfaction lead to improved customer satisfaction. As a result, strategic objectives focus not only on the taxpayer, but also on the improvement of the bureau as a whole.

Under the leadership of Commissioner Rossotti, the IRS has already made impressive progress towards providing a more responsive and effective service to its customers. But there is still more to accomplish. An inefficient tax system imposes costs on all. The longer it takes to implement improvements, the greater the cost to the consumer and the economy.

The IRS is well down the road towards modernizing its organizational structure and computer systems. Although the IRS has no intention of returning to its peak employment, recognizing that real productivity has made the agency more effective and efficient, modest staffing increases, along with improvements from systems modernization are needed to provide the best service in both compliance and customer service areas.

This is the ideal moment to re-engineer the agency to serve all Americans by providing the most effective, up-to-date service possible. We must not allow this opportunity to pass us by.

During its strategic planning and budget process, the IRS identified $260 million in requirements to improve processing, customer service and compliance across its organization as part of its tax administration responsibilities.

Using a combination of strategic redeployment of staff and identification of labor savings programs, the IRS has been able to internally redirect $158 million from existing resources to focus on customer service, compliance and workload requirements.

The FY 2003 request seeks additional funding for the remaining requirement of $102 million needed to meet this mission-critical goal. The request supports efforts that are already underway to improve customer service and compliance operations. Re-engineering and Quality Improvement projects and programs are focusing on redesigning internal processes, policies and

procedures. These additional resources, in addition to the redirected resources discussed earlier, will be realized by the American taxpayer through the following improvements:

• Providing additional assistance and forms, schedules and new return types to its e-file website in order to meet the Congressional goal of having 80% of all returns filed electronically;
• Through effective implementation of the e-file and e-services programs, the IRS will save more than 500 FTE to be redirected to assist in achieving other parts of this initiative.
• Hiring of lower-cost employees to handle the submission processing growth anticipated increase from new tax returns filed, reducing the number of high cost employees needed for compliance during filing season;
• Increasing the level of telephone service to taxpayers with respect to tax law inquiries;
• Providing almost instant access to return at Customer service sites, assisting staff in providing top-quality customer service to business taxpayers.

The FOURTH, and overriding area of focus for this year's request, addresses Treasury's role in becoming a results-driven organization, consistent with the President's Management Reform Agenda. Although it may referred to as the President's Management Agenda, the concept of the agenda is very similar to the types of results this Committee is concerned with.

The Agenda's five areas of emphasis are:

• Strategic Management of Human Capital;
• Expanded Electronic Government;
• Improved Financial Performance;
• Budget and Performance Integration; and
• Competitive Sourcing.

Only through the delicate balance of all five Presidential Management Initiatives can an organization achieve true world class performance.

In working to achieve world-class status, the Department emphasizes the importance of leadership, accountability, excellence, people, trust and integrity, and improving the work environment. In addition, as the principal custodian of the revenue collected and debt issued on behalf of the Federal Government, the Department strives to demonstrate fiscal stewardship of each congressionally authorized dollar by linking investments with specific, measurable results.

Presidential Management Initiative 1: Strategic Management of Human Capital

Treasury's most valuable and strategic asset is its employees, who are responsible for carrying out the Department's vast array of duties which affect the lives of every American citizen. Without employees, the Department would be unable to meet the obligations placed on it by the American public. I have reemphasized the importance of my employees and have made every effort to ensure that each employee is (1) used to their full potential, (2) working in a safe and positive environment, and (3) providing value-added work to the organization.

I have emphasized that organizations known for excellence are built on a foundation of dignity and respect for its employees. The Department is focused on evaluating its work and processes so that each and every employee feels that their work is meaningful and contributes to the mission and objectives of the organization. In addition, because job satisfaction is a number one priority for many employees, I am dedicated to creating a work culture of performance, challenge, meaning, and dignity, while providing employees with flexibility to balance their work and personal lives. Examples of this flexibility include tele-work and flexiplace programs, alternative work schedules, and offering family-sensitive benefits.

In order to implement this Presidential Management Initiative, the Department is continually reassessing its human resource strategies and support systems to strengthen the quality of both its workforce and its management.

In the aftermath of September 11, 2001, an increasing number of Americans have become eager to consider service opportunities in government. It is imperative that the Department exploits this opportunity and is able to recruit the best and brightest. As a result, innovative approaches to recruit high-caliber candidates into mission-critical positions are underway.

A broad variety of private industries have experienced a direct correlation between employee satisfaction and customer satisfaction. Similarly, I believe that high levels of employee satisfaction within the portfolio of Treasury employees will lead to enhanced service provided to its citizens, thus yielding higher customer satisfaction from both stakeholders and service users.

Presidential Management Initiative 2: Expanded Electronic Government

In addition to the strategic management of human capital, the use and improvement of information technology will assist the Department in providing solutions to common challenges facing all areas of the Department. The benefits of these improvements will not only improve the effectiveness of Treasury operations, but they will also produce tangible benefits for the American public.

Treasury is currently in the process of reviewing its IT portfolio for adherence to common standards, and updating and maintaining cost-benefit analyses for new and ongoing systems. This will yield an integrated comprehensive enterprise architecture at the Department level that saves money and reduces the cycle time of major products.

For example, the Internal Revenue Service continues to work towards the Congressional goal of having 80% of all tax and information returns filed electronically by 2007. As this method of tax filing becomes more popular, the IRS has reduced processing costs significantly per document, with less input errors and reduced handling time and storage costs as well.

Working with the Internal Revenue Service, the Bureau of Alcohol, Tobacco and Firearms continues to operate systems that electronically capture revenue and allow forms to be electronically submitted for tobacco taxation collection.

In efforts to streamline human resources applications, HR Connect, which is currently operational in six Treasury bureaus, serves as a single, integrated automated environment for human resource operations across all Treasury bureaus. When fully operational, HR Connect will replace the 90+ legacy stand-alone human resources systems that currently exist. HR Connect will provide standardized information and will facilitate results-driven decision-making.

As a highly visible agency, Treasury maintains websites that are among the most frequently accessed, and are therefore tailored to the specific needs of its customer base - citizens, businesses and other government agencies. The following are examples of Treasury bureau websites that were created with the customer in mind, while improving the cost effectiveness of Treasury:

The U.S. Mint offers a large portion of their services, resources and products through the Internet. Recognized as one of the top 30 "e-tailers" in the Nation in FY 2000, the Mint's Web sales exceeded $109 million and their return on investment has reached 20%.

Working closely with the Financial Management Service, Mellon Bank, MasterCard and IBM, the Bureau of Public Debt now sells U.S. Savings Bonds to the public on a 24/7 basis over the Internet. Within the first ten months of its operation, the Savings Bond Connection generated $63 million in bond sales, resulting in a 180% return on investment.

Presidential Management Initiative 3: Improved Financial Management

Treasury has the responsibility of principal custodian of the revenue collected and debt issued on behalf of the Federal Government. To improve financial performance and expand electronic government, it is imperative that the Department implement modern financial management systems that are capable of providing timely, accurate and reliable information.

In recognizing that real-time information is much more valuable than information that is five months old, I have challenged each of the bureaus to improve their reporting capabilities by moving to a 3-day, monthly closing of their books by no later than July 3, 2002.

Once all bureaus are implementing a 3-day, monthly close, they will be able to submit better financial data for consolidated reporting to bureau and Department. This will enable bureau and Department management to make results driven decisions, instead of spending the majority of time aggregating the data.

This will also contribute to increased employee job satisfaction by showing employees that the work they do contributes to the overall decision-making process.

Bureaus are also in the process of conducting internal risk assessments focusing on payment controls, determining and investigating those areas that contain the most potential risk for improper payments. These assessments will result in improved operational performance, which will contribute to improved customer service.

Presidential Management Initiative 4: Budget and Performance Integration

Integrating performance information into the budget decision-making process allows agencies to more directly focus their resource decisions on strategies and programs that produce desired results. This effort has been evolving and ongoing for the past six years. The following are examples of Departmental improvements in this area:

• Bureaus have submitted performance information along with their budget requests to the Department for several years. The Department is moving to target better use of this information, lining up resources, performance data and metrics to become a more effective decision-making tool for the bureau, the Department, OMB and Congress, as senior officials are better able to make resource decisions based on the performance of programs and initiatives.
• Work continues on presenting bureau measures, which address key activities using balanced, results-oriented performance measures, and on improving the quality of this data.

Presidential Management Initiative 5: Competitive Sourcing

Treasury continues its efforts in competitive sourcing, utilizing contractors whenever necessary to meet its goals. Expanded steps are underway with each bureau, to enhance competitive sourcing knowledge sharing, and knowledge management Department-wide so that necessary sourcing competitions can begin as soon as possible.

The Department is committed to evaluating the merits of its internal efforts, by understanding competitive sourcing options - migrating to those outsourced options when it makes sense for the American people based on cost and value, while retaining those specific mission areas that are inherently governmental. A number of the Department's bureaus rely heavily on the private sector.

• The Bureau of Alcohol, Tobacco and Firearms employs a broad array of contractors to support its mission, and integrates in-house solutions with outsourced vendors. This allows ATF's leadership team to focus on their core deliverables and mission-oriented goals.
• At the Financial Management Service, contractors are involved in 41% of the total management support functions.
• The U.S. Mint contracted out 26% of its operating expenses in FY 2000. These contractors performed not only administrative tasks, but were also responsible for other functions at the Mint such as advertising, public relations, printing, numismatic order processing, telemarketing services, and custodial and facilities management operations. During late FY 2001 and early FY 2002, the U.S. Mint built a strategic plan that ensures its employee focus on those critical areas of performance.
• They have leveraged the actual business execution of their operations using contractors, while their core employee base provides leadership, direction and critical business efforts.
• IRS and the Department will study the possibilities of outsourcing some aspects of the collection process.

Mr. Chairman, our budget includes the impact of proposed legislation for the full funding of certain federal employee retirement and health costs. Because Treasury has the third largest agency financial impact with the implementation of this proposal, I'd like to provide the some additional background for the Committee. The President's FY 2003 Budget corrects a long-standing understatement of the true cost of thousands of government programs. For some time, the accruing charge of costs associated with the Federal Employee Retirement System (FERS) and Military Retirement System (MRS), and a portion of the old Civil Service Retirement System (CSRS), have been allocated to the affected salary and expense accounts, and the remainder (a portion of CSRS, other small retirement systems, and all civilian and military retiree health benefits) has been charged to central accounts. The President's Budget presents the amounts associated with shifting this cost from central accounts to affected program accounts, starting in FY 2003, predicated on the enactment of authorization legislation. By shifting this cost to the affected salary and expense accounts, budget choices for program managers and budget decision-makers will not distorted by inaccurate cost information. The proposal does not increase or lower total budget outlays or alter the surplus/deficit, since the higher payments will be offset by receipts in the pension and health funds. This change in treatment of costs is the first in a series of steps that will be taken to ensure that the full annual cost of resources used -- including support services, capital assets and hazardous waste -- is charged properly in the budget presentation.

Mr. Chairman, let me conclude on a personal note. Since becoming Treasury Secretary last year, I have been deeply impressed by the intelligence, professionalism and dedication of the people with whom I have worked, and together, we are working to making this Department a model for management and service to the American people. I hope the Committee shares my confidence in the uses that are being made of taxpayer's funds. In that spirit, I ask that you approve our FY 2003 budget request to support the work of the Treasury Department in fulfilling its wide range of responsibilities in serving the American people. I look forward to working with you, Mr. Chairman, as well as members of the Committee and your staff, to come up with a budget that maximizes Treasury's resources in the best interest of the American people and our country. Thank you again for giving me the opportunity to meet with you and personally present the Department's budget. I am willing to answer any questions the Committee may have concerning the Department's FY 2003 budget.