can to longer sustain the growth in the intelligence business and we will have to scale back a little bit. what we don't want to do is go back to the 1990's where you go into an event like 9/11 not having a full scope of information that you could have. so our argument is intelligence isn't a lux ary any more. it is a necessity. good intelligence means you avoid trouble. host: comments? guest: i agree with mike. we were not ready for 9/11. for republicans and democrats, they cut the intelligence committee after the berlin wall came down. we didn't identify or understand the danger of al qaeda. now we have to reevaluate and we have reevaluated. we are spending a tremendous amount of money and we have to make sure our job is oversight and to make sure that the money we are spending is used the

right way. i also sat on the appropriations committee and there are prioriti priorities. one thing of the costs are in the area of technology. i represent n.s.a. there is a lot of technology and we always have to keep,with other countries that are using technology against us. we have to stay ahead of the curve. another issue is space. one of the main reasons we are the most powerful country in the in the world and have freedom and liberty is because we control the skies. when sputnik came out years ago the concern was russia with control the skies. we put a man on the moon and as a result of research that put us on a level that we were experts in the field and continue to be but we're starting to slip. china is budget money into improve their military and space program. they are going to go to the moon

again and talking about partnering with russia. satellites help us take pictures and a lot of what we do. we have to be prepared. i don't know what the gentleman was talking about, we are working with people and continue to spend money. we take this seriously and we have experts who give us information and we make decisions on budgeting and policy. host: this is not the direct purview but in the event of terrorist attack one thing this country has not done is build a first responders system. we have seen the broadband prupl to allow agencies to talk to each other. why are we not further along? >> i think there was disagreement of who owns it and how we should distribute it. i believe the first responder community should have a first bite at that apple and we have

to change on the broadband to give tell the ability to have abscess. they need the bandwidth to do what they have to do. i think there have been disagreements about how we do it and how we get it moving. host: are you happy about that? guest: no. i think it is taking too long and we will have to get better at it. budget constraints in the states and local municipalities is adding to the frustration. it is an investment and that is probably going to take longer than we need. it has gotten been it was. it is not where it needs to be. host: baltimore city, maryland. republican. caller: hello. one thing i would like to find out is dutch change his mind about the dream act. i know this is a little bit off,

but it has to do with maryland. right now in maryland they are trying to bring that back. they don't want to check on the illega illegals. as you can tell, i'm not from this country and i came the legal way. he said something before about the border with mexico and drugs. one of the biggest problems is not just the drugs, it is the illegals coming in. i know, being from that area, some people say there are a lot of people trying to come in through the border and all you have to do is listen to the way they speak. some are very quiet and don't want to say anything because they don't know spanish. guest: immigration is clearly an issue we have to deal with. we need to protect our borders. we have to deal with the issue

of illegal immigration, no question. i feel very strongly we need to use our resources to not only deal with the issues we talked about with mexico but have a plan. with respect to the dream act, you have a situation where you have illegal immigrants and they have children in the united states or come to the united states when they were young. we have to find formulas to start to make a difference as it relates to immigration. this was a situation that would give an incentive for the children to go to college or the military that would be a requirement to have them come to citizenship. we have these individuals that are out there and they could be productive americans paying taxes. but immigration has to be dealt with. wove it come together and start taking the next step to develop formulas to solve the problem. if you are here illegally you are committing a crime.

if we took every police officer in this country and had them deal with the issue of immigration they would not be able to handle the people here illegally but also it with take them away from the jobs they are doing in crime, rape, burglary and whatever. so it is an issue we have not dealt with. host: dennis lane asks on twitter please ask if corporations are collecting information that is turned over to the government that is prohibited for the government to collect on their own? guest: there is no information that is collected anywhere that doesn't have due process attached to it. you have to have due process to get any information. as an f.b.i. agent if i wanted to find out who rented a car and fill the blank of a car rental corporation i would have to show,with a subpoena. it is no different with any type of information. host: including the telephone

companies and phone calls you make? guest: if you are going to collect information you need a subpoena to do it. if the government is compelling somebody to do something they have to have a subpoena or a court order. host: next caller is abdullah watching in minneapolis. independent. caller: thank you so much. my question is about home grown terrorists. and the role islam plays when incidents of terrorism happens. first of all, i would like to state that i'm a muslim and i'm very much embarrassed and affected by what these evil guys do anywhere around the world, including the united states. however, when you watch tv and

incidents of terrorism are discussed, you will find that people are painting all of us with a broad brush and blaming islam on it or -- and when you go to airports, you are easily picked on from the line. when people hear your accent or suspect you of being a muslim you are easily picked on. i would like to know what the chairman and ranking member think of this. host: michigan has a big arab american community so there are concerns about that. guest: we don't have any concerns about an arab american community in michigan. we are proud of the contributions they make. when we talk about home grown, our biggest concern on home

grown terrorism is radicalization. what we hope to do is involve imams from all over the country in starting to speak out and help those muslims who are being radicalized and pull them back to the faith of peace. our problem is that the people who understand american culture is using the things he knows about american culture to get into the heads of the individuals and pull them through a radicalization process that leads them to be willing to commit acts of violence. the way we stop that in the united states is have cooperation from muslims and communities and arab communities and we have a lot of christian arabs in michigan as well. that community needs to help law enforcement identify individuals who are going through this process and stand up more often

than they do to speak against what is this radicalization process. guest: clearly home grown terrorism is a great concern. it is very difficult from and it intelligence point of view when you have an individual, american individual who has been radicalized. how this is occurring and what our information shows is that the internet, the social network, is where a lot of this occurs. the one has been attempted to make this happen. as far as the issue of problems with the muslim community and the fact they have been discriminated against, it is unfortunate the acts of a few affect everyone. the best way to do this is develop relationships with the communities and individuals and working with the leadership in the muslim community to say that

the koran doesn't say you want to kill people. so we have to be aware of the home grown terrorists and that is where the community itself and other people, if they see an individual that looks as if he or she is going the wrong way and could try to be a suicide bomber, we need help from americans also. host: another question of preservation of rights. the person says why did the n.s.a. put fiber y's at every major switching station in the u.s.? guest: if you are compelling someone to get information you have to have the third-party adjudication. there is no instance where you don't have to have it. host: so the n.s.a. is not

spying on all information. guest: they have to do it through a court order or a subpoena. guest: and there are systems of checks and balances. we have systems, we have congress, inspector generals. there is -- we also have the justice department that oversees these. host: i want to show a statement from yesterday. >> i want to welcome dutch ruppersberger as the new ranking member. he has a solid record and he will serve the committee and country well. dutch is also a friend. i look forward to working with him to foster the bipartisan energy to lead the committee to our oversight responsibilities and to keep america safe. guest: dutch wants us to run that again. host: i wanted to play that because i have seen two

interviews where you emphasize this bipartisanship and you don't want the committee to be political. will you talk about those themes and why they are important and how you want to run things? . when the committee was founded in the 1970's it was supposed to be a quiet, thoughtful committee that dealt with the very difficult decisions and policies and over sigsight responsibilit. the 17 agencies that we have that are supposed to collect information to keep america safe. it is a huge responsibility. most of the issues that we deal with should be bipartisan if n nonpa partisan -- in nonpartisan. it has become highly charged and political and i think it has done a disservice to america's oversight of the intelligence community. if they don't take the committee seriously they are going to do

things that they should not be doing. it is our job to make sure they don't do that. by the way, if they need resources to do the job they need to do we are supposed to be there. so we have had a lot of conversations about this. there are going to be times when we disagree and policy issues where we disagree and we will do that in a way that is respectful and civil and we are going to move on to the next set of issues. that is our pledge to even other and our responsibility to be that interface between america and americans to do the business of the intelligence community that they can't see and know about. host: and have concerns about. guest: absolutely. and they should have concerns. host: let me ask you, congress is getting a rap for how partisan it has become. we see it on a regular basis. do you think members can check those feelings? guest: we better have. the stakes are too high.

this is one thing we should have learned the last election. people are sick and tired of the partisan politics that were occurring in congress. this committee is a committee that is very important because we are dealing with national security and people's civil rights and talking about a lot of money. when you talk about space and cyber security and everything. i think that chairman rogers and i both have had experience in law enforcement. we tease about it because i tell him that i was the prosecutor and you were the f.b.i. act and the prosecutor is supposed to control and yet he reminds me he is now the majority so he is going to win most of the votes. notwithstanding that, we have committed to each other we are going to disagree on issues. i know people on my side have issues with the patriot act. we will debate them and hopefully come to a conclusion in the best interest of our country. if you look at what has happened on the committee and it has gotten way too political, we

have not been able to pass a budget in six years. that is inexcusable. we are supposed to be the experts. we are having the hearings. we are supposed to over ssee al the agencies that deal in intelligence. we have not been able to agree on a budget or get one passed. that means the appropriators make the final decision. that is inexcusable. i feel strongly about working together. we will work together. a lot of what we do in life is about relationships and trust. we have committed to make sure this is a bipartisan committee that will do the best we can to protect our country. host: we have a tweet. not only does national security have to be bipartisan it has to listen to opposing voices. do you intend to bring critics of the agency before the committee? guest: we have. there are a lot of members who are critics of the agencies. both dutch and i have been critical of the agencies when we think they are wrong.

our job is not to be shells for the agency. we have done no service to them if we do that. but we've people come in who have problems and concerns with the agencies. as we said over time and as we have said individually to the agency directors, we are going to be critical when we ned to be. we will be supportive where we can be. our job is not to be yes men to the community. if we do that, i think both of us would consider that a failure. they don't do everything right and when they do we will be there. host: our last call is sullivan, missou missouri. mark. caller: i just turned down my phone. host: go ahead. caller: thanks for c-span. host: we have a bad questiconne. caller: first of all the two

leaders you have there, about every other word out of their mouth is 9/11. why don't they bring up the 1993 bombing of the world traede center where the p.b.i. supplied the truck and bomb they switched for a real bomb that blew them up. they killed six u.s. citizens. host: another person concerned about conspiracy. guest: that is almost impossible to answer a question like that. as a former f. pwfplt eufpb.i. e the oath to protect the united states and the constitution. for some thought that the u.s. government will kill its own citizens to promote anything is wrong. there was a trial and conviction in the 1993 bombing of the world trade center. the blind sheik went to jail and some of his associates. that has been debunk pwued wher

somebody went to jail. host: thank you both for being here. i know you will be doing much of your work behind closed doors but i will invite you to come back from time to time. it is an important way to talk to the public.

north carolina republican congressman patrick mchenry said wednesday that the era of the bailout is over. but that congress must not turn a blind eye or a def year to the state and local governments. these remarks came during this hearing of the house oversight and government reform subcommittee that he chaired. witnesses dhaka the fiscal condition of the states and municipalities. this is just under two hours. >> financial-services and fell out of the private and public programs. i will begin by making a in opening statement. i appreciate the witness is being here and taking the opportunity to be here. today's hearing is an

opportunity to discuss growing concerns over the potential fiscal crisis looming for states and municipalities. over the past three years, we have seen a culture arise where every institution claimed it was too big to fail. and all too eager president and compliant converse kept putting taxpayers on the hook for trillions of dollars. our deficit has reached an all-time high end of the debt is crippling our economy. now we received about government policy and yet another way. state and municipal governments who are preparing for the aggregate budget shortfalls totaling roughly 125 billion this year are struggling under a trillion dollar burden of unfunded pension liabilities, plummeting tax revenues and unforgiving bond market but we must understand the magnitude of this problem to avoid the reactionary ad hoc decision making that fuelled the federal action of the 2008 financial

crisis. this is not about one analyst. this is about the looming fiscal crisis in the states and municipalities and the lack of transparency in their pension obligations. let's be clear about this, the perfect storm is brewing. already state and municipal governments are coming to washington patting hands expecting a federal bailout like so many others. but the era of the bailout is over. that does not mean, however, congress must turn a blind eye or a death a year to the crisis unfolding in state and local government. the beauty of federalism lies in the fact the national government doesn't tell the states how to manage their own affairs at least ideally. the burden of federalism is that when one state or all 50 states are in a crisis we must work together to solve them for the good of the country. since 1990 state and local government spending has

increased roughly 70% faster than inflation. the vast majority of the state now find themselves in the fiscal straitjacket caused primarily by the looming burden of paying out trillions of dollars in lucrative public-sector pension public-sector union pensions and health care benefits and the expense of taxpayers. for the last three years funding from the stimulus act has masked the severity of the state's fiscal challenges. in fact, there was $140 billion in transfers from the federal government to the states included in the stimulus. states now say that the money would help them -- more money would help them through their current rough patch. the reality, however, is that the money states received from the stimulus has in many ways made them more soft. a lot of the funding comes with, quote, maintenance of effort requirements that force the states to keep funding programs after the federal funding dries up this year.

more money from washington with just delay the day of reckoning and only further complicate state fiscal situations. besides, we don't have any more money. and beyond that, the simple fact is that the government has outgrown our capacity to pay for it. there will be severe consequences for not changing the course. young teachers for shuttle college ready to give back to their communities will be told that the school districts cannot provide them with reasonable retirement benefits because they are cash strapped to pay for the benefits of others aren't. firefighters some policemen and other public servants using the reali their jobs offer no promise of rising standards of living for their family. or benefits. simply offer a different career path. in the end people will recognize that their government has failed them. but not only that, they believe the government is actively hurt

them. while we have the opportunity to change that, we are responsible to try. this is why we are here today, to come to a better understanding of the crisis of the state and local government level, to assess its causes and to consider available solutions. with that in mind, this hearing on the intended to shed light on how the states arrived at the current -- how the states the right to the current predicament, what is the current extent of the fiscal distress, and what needs to be done in terms of the available solutions. my friend and colleague from california, representative devin nunes has a proposal the would require greater transparency at the point of the most urgent concern, the pension problem. i've been happy to work with him on this legislation and i look forward to hearing from both sides on any and all possible solutions, and that's why we have this great panel here today. let there be no mistake though,

much is required to get our fiscal house in order not just at the state and local levels, but here in washington, d.c.. reckless spending fueled by the bottomless bargaining and a guarantee by endless bailouts is an unsustainable course. with that, i now in and recognize him drinking member mr. quigley for five minutes. >> thank you for holding this timely hearing and for your post as chairman. the record should reflect you and your staff been extraordinarily accommodating and cordial to myself and my staff. obviously the issues are too important to decide us in any light, and i also thank you come any time i take complimenting you shouldn't count against my time. [laughter] i want to thank the witnesses

from testifying today. and i agree, in a sense it's not about wiltz or bankruptcy, because i don't think either one of those options can work or is optimal. but as you know, i'm from illinois, and you don't need to tell me about how that its finances are and how critical these issues are. illinois has gone through decades of bad financial decision making under both democrats and republicans. illinois now has 8 billion-dollar backlog of payments, and a deepening $136 billion hole in the system leading the penchant left spend 50% funded. should be no surprise the rating agencies have downgraded the illinois bond several times in the past 12 months. last year the illinois bond carried the worst credit risk of any u.s. state and only slightly less risky than the bonds from iraq. according to the civic federation, this that rating was costing illinois tax payers

$551 million extra in interest payments and the total debt service of illinois is expected to increase by 33% between now and the year 2017. the only way that illinois is able to climb out from the bottom rung is to raise the state income taxes a whopping 66%, and out, no one wanted. this tax increase brought the illinois bond rating of and reduced cost but only by a tax cut to be contesting those on the the illinois payers. they have to redo the pension system and also have to reform the whole way of doing business, which is left retiree is vulnerable and the tax payers on the hook. as the professor said of harvard shrinking the endowment after the 90's boom, a lesson for all of us. people forgot the story of joseph and genesis during the seven had good years he saved.

illinois didn't save for the seven years and now it has to deal with the consequences. that said, what's going on in illinois, not necessarily what is going on everywhere else. true, most states have run up large deficits due to a collapse in tax revenues during the recession, with short-term fiscal problem will improve our economy gets going again. the real problem is an actuarial problem unique to 68 states including illinois which suffer from long term structural imbalances. corporates rising health costs, underfunded pension plans and poor financial management and some of these pension plans took a particularly bad right now because of the collapse in the value of the pension assets. but even an appreciation of asset value will leave several pension plans under funded. the municipal bond market is now responding to a legitimate concern about the long-term structural imbalances in the 68 states.

but i believe we would be correct to distinguish these bad cementing from the other 40 some states that have been relatively well managed and only have tendering deficits. that is why a one-size-fits-all approach like bankruptcy for states could do more harm than good. what we have to avoid is any rash action that would contribute new risk factors to the bond market. state and local governments across the country need to continue building roads and bridges and we don't want to make the financing any more expensive than it already is, so we need to be crystal clear that although there are natural to become national interests at stake it must be in the state government to reform themselves. and the reform sooner than later. a default on payments would make it obscenely expensive for all states to borrow. taxpayers would bear the brunt of the costs either through higher taxes or reduced public services and move towards austerity. mr. chairman, i don't want the illinois problem or a new jersey problem to become a national

problem. these states have to institute common sense reforms to shore up their finances. at the same time, the government's mission matters and the successful reform will ensure the get the pensions the firm through the years of service. all we need is the political will to get it done. i look forward to hearing from our witnesses on this matter and the discussions of the next possible steps. thank you. i yield back. >> thank you, mr. quigley. you have been wonderful to work with. and we certainly appreciate that. this certainly isn't a shirts versus skins or republican versus democrat issue. i think trying to get to the understanding of the death of the problem is certainly behooves both parties and the american people and they have a right to know. i want to begin before we introduce the panel we have the mission statement of the oversight committee and at the chairman's request i would like to read that for all that are here today. we exist to secure to fundamental principles. first, americans have the right

to know that the money washington takes from them is well spent. second, americans deserve an efficient and effective government that works for them. our duty on the oversight and government reform committee is to protect these rights. our solemn responsibilities to hold government accountable to the taxpayers the cost tax payers have a right to know what they get from their government. we will work tirelessly to the tirelessly partnering with watchdogs to deliver the facts to the american people and bring genuine reform to the federal bureaucracy. this is the mission statement. this is the mission of the oversight government reform committee. with that in mind i would like to introduce today's panel. nicole gelinas is the freedom trust fellow at the manhattan institute and contributing editor of the city paper. gelinas rights and urban economics and finance municipal and corporate finance business issues. she's a chartered financial

analyst -- charter and older and member of the new york society of securities analysts. the most recent book after the fall season capitalism from wall street and washington was about the financial crisis of 2008 and in november 2009. david arthur skeel is a professor of corporate law at the university of pennsylvania law school. he's the author of the board room published in 2005 and debt's to mannion, the history of bankruptcy law in america, published in 2001 as well as numerous articles and other publications. eileen norcross is a research fellow with the social change project and lead researcher on the state and local public policy project. per work focuses on questions of how societies sustain prosperity and the world civil society plays in supporting economic resiliency. her areas of research include

fiscal federalism and institutions, state and local governments and economic development. iris lav is a senior advisor with of the center on budget and policy priorities to the prior to joining the center, she was a sissy director of public policy for the american federation of state, county and municipal employees and senior associate at a consulting firm. thank you for being here today. members will have seven days to submit opening statements for the record. it is the policy of this committee all witnesses be sworn in before they testify. will you please rise and raise your right hands. do you solemnly swear that testimony you're about to give this committee will be the truth, the whole truth and nothing but the truth? thank you. the record will reflect that all answered in the affirmative. thank you. we will certainly begin.

ms. gelinas, with you. you will have five minutes to get your opening statement. when one minute is remaining the yellow light will come up. if you could summarize your opening statements, everyone has that for the record and we will begin with you. >> yes, good morning german mchenry -- >> bring the microphone closer. >> good morning chairman mchenry, ranking member quigley, members of the subcommittee. thank you for inviting me to testify today on this important topic. congress is right to worry about the choice between bailing out states and watching as the risk repudiating their longer-term obligations to the bondholders and other creditors including union members. the good news is that congress can still act to avoid this difficult choice. the bad news is that a state bankruptcy statute is not going to be the answer. sometimes arriving at a solution

means eliminating the batt solutions. so i will talk for a few moments about why state bankruptcy is not the answer and talk for mike remaining moments about what are some of the answers. proponents of a bankruptcy statutes for states say that special interests have taken over the state budgeting process, that there is no prospect of states getting their long-term pension obligation, health care obligations to retirees and debt obligations under control absent an external force outside the state political process. proponents believe that this could be the external force. in this scenario, states could threaten bankruptcy to reign concessions from the creditors particularly labor unions changing future pension benefits, health care benefits and the like. bondholders would be worried about this prospect would force the states to do this before they get into a crisis situation. as a practical matter the, bankruptcy is unlikely to help states solve their fiscal problems, and actually it would add new problems.

one reason is how states have structured their bond obligations. when many people think of money that the state owes, they think of the state's general obligation bond, bonds against which the state has pledged its full faith and credit to pay back its debt. states do not issue only general obligation bonds. the issue bonds through hundreds of public authorities. new york state, flexible, owes nearly $80 billion in debt, only about $3.5 billion of that store general-obligation debt. the remainder is throw hundreds of these public authorities, special purpose vehicles and so forth. each of these authorities is its own corporation. it's not an agency or an arm of the state. it has its own board of directors and its own bond holders, its own legal and contractual agreements which not only bond holders that employees and retirees. there is no practical way for a state to pull all of this debt

together along with pension and health care obligations hand over to a judge and pared back, at least not without violating thousands of pre-existing covenant contracts with bondholders and steve laws. and this gets to congressman quigley's point that the congressman made in his opening statement. changing the rules, mitigating would affect not only states that have gotten themselves into trouble with their own decisions, such as new york, california, illinois, new jersey, but also states that are not running these long-term deficits. introducing a bankruptcy statute would force bondholders to all states to question the legal regime. it would take many months to sort the uncertainty during those months is quite likely the states would have to pay more on their debt. another practical problem with bankruptcy is that states are not like corporations where one person can be authorized to speak for the state.

in a corporate bankruptcy you have a ceo, an agent of the ceo and a small board of directors all speaking as one. and state bankruptcy hundreds of state lawmakers could not give their power to a governor to speak in one voice. bankruptcy would not eclipse the normal process ease of democracy. you would still have hundreds of lawmakers speak in different voices before a judge. no way for a judge to simply take over this process of democracy and solve the state's obligations from on high. another problem is that states do not owe pension benefits for the most part. states administer pension benefits on behalf of local government, cities, towns and school districts. so bankruptcy for the states would not take care of pension obligations. municipalities can do that through changes in the state law. it requires changes in the state law. but municipalities can already declared bankruptcy if that is a

way for them to deal with their pension obligations. so this does not add a benefit to the municipalities to zero pension and health care benefits. what are some of the other solutions the congress can look to to help states and municipalities pay back their benefits? one thing is making sure to the states that the congress understands the states already have the tools to deal with these things themselves. states can change the laws that govern pensions. states can change the law that govern contracts, health care benefits. they do not need to look to the congress to do this for them and with that, i will conclude my opening remarks. thank you. >> thank you, ms. gelinas. mr. skeel? >> it's a great honor to appear before you, and i am tempted to say everything that michael just said, not exactly that, but i will make one comment at the outset, and that is we have lots of experience dealing with complicated bankruptcy.

so the fact that it's a multitude of entities isn't news in the bankruptcy context. and i'd be happy to address questions about that or either the other issues that were just raised if folks are interested. currently, if the state's financial crisis spirals of control, we really only have two options. the first is that a state might simply default on some of its obligations declaring itself unable to pay. the second option is for the federal government to bail out one or more of the states as it failed financial institutions like a bear stearns, fannie mae, freddie mac and ag during the recent financial crisis. i believe that both of these alternatives are deeply problematic and that congress should enact a bankruptcy law with the state's not as a first resort, but it's an absolute last resort in the event that everything else fails. the claim that we don't need a

bankruptcy law for states strikes me as a little bit like saying there's no need for a fire department because most homeowners have never had fires in their houses and this one starts the homeowner can probably started before the crisis gets out of control. each of these things is true but we still need fire departments for the case when a fire does burn out of control. my major discussion i would like to make three simple points. first, bankruptcy would provide several enormously important benefits that we don't have in the absence of bankruptcy. second, it is constitutionally permissible in case you all are concerned about that as well as you should be. third, the wall could be tailored to address any particular concerns you might have about things like it being too easy for a state to file for bankruptcy law being too harsh for particular kinds of

constituencies. so let me say to the extent i have time a brief word about each. first, the benefits that bankruptcy would provide for a troubled state. one of the main benefits bankruptcy would provide is a way to restructure some kind of obligations that probably can't be restructured outside of bankruptcy, and that would include pensions, the limits on what can be done with engines of sight of bankruptcy. i would include bonds in that category as well. the other huge benefit of bankruptcy is if is necessary as an absolute last resort is it brings everybody to the table. we don't just have one or two constituencies that get singled out to make sacrifices. we get everybody to the table and we ask how can we distribute the sacrifices so that it makes sense and we can put our finances on a fiscally sustainable course. my second point is bankruptcy is

fully constitutional even with respect to the states. all that needs to be done there there are genuine state sovereignty concerns and they can be honored so long as we make sure that bankruptcy law is written what entirely voluntary meaning a state couldn't be thrown into bankruptcy against its will and the bankruptcy law would also need to ensure the state decision, a government decision making functions were not interfered with. all of these are things we already do with respect to municipal bankruptcy. the law can be tailored to deal with any concerns you all may have hit a lot of the discussions of the state bankruptcy seems to assume there's only one possible state bankruptcy law we could have, and it's been a require us to kind everything down to zero. that's not the case. if you are worried about states

being too anxious to title for bankruptcy that there will be strategic use of bankruptcy that is not a serious worry. you have to put entrance requirements on bankruptcy. we already do this with municipal bankruptcy. if you're bored with the bond markets that they will be concerned because they are afraid the bonds are going to be written down to zero you put restrictions as a prerequisite to doing anything. we can tailor the bankruptcy law to address any concerns we have. bankruptcy isn't a perfect solution. it would be messy. it's an absolute last resort, but it's better than the author of last resort which are states simply defaulting on their obligations or federal bailout. >> thank you, mr. skeel. ms. norcross? >> chairman mchenry, remember

quigley and members of the subcommittee, thank you for inviting me to testify on this important topic. the recent recession exposed several longstanding problems in state budgets that have left unaddressed the underlying causes for the short term budget gaps and including public-sector pension benefits and the rising cost of health care are certain to worsen the state's prospects for stability and economic growth. those reforms to the states can mitigate the worst while meeting their promises to the employees and taxpayers. the recent downturn is only one cause for the recent state budget gaps. state and local spending has gone faster than the state's own source revenues and the private economy over the past several decades. the fastest-growing area of state budgets its medicaid to the states of avoid issuing deficit in part to the federal fund and an increasing reliance on debt finance, and in some cases by deferring their contributions to pension systems, not funding health care benefits or borrowing to make pension payments. these techniques help states

shall balance, growth spending and tuck the cost of the future. without any changes, gao anticipates state and local governments will require an annual and sustained reduction in spending of 12.3% or and he equivalent increase in revenues between 2009 and to 2,058 to close the projected 9.9 trillion fiscal gap. in addition, state and local governments save a large funding gap in the pension systems to a government report the unfunded liability for state and local tensions at 1 trillion, but economists estimate closer to 3.5 trillion. according to the government accounting standards, the discount rate used to value plan liabilities media east of the assets are expected to return when invested. an average of 8% annually. this violates economic theory, which says the value of a life devotee is independent from how it is financed. choosing the discount rate requires matching that rage with what is being valued. in this case, the public-sector

pension which is safe, a government guarantee, investments should be matched with a rate that reflects that safety, such as the yield on treasury bonds. currently at 4%. the circular logic of the government pension accounting standards has had several consequences for pension funding. it has led to the undervaluing of the pension promises and the amount necessary to be set aside to fund the promise. plans have been encouraged to increase more investment risk, including increasing the risk exposure after the recent market downturn to make up losses. union leaders and politicians negotiations in the 1990's when the market was booming often boosted benefit formulas because plans looked overvalued on paper. governments have also has mentioned deferred payments to the system and issue bonds. when our plan is likely to run out of assets? economist joshua raúl of northwestern university estimates of the generous assumption the state's own assumption of the 8% annual

return on pension assets that by the decade's end, eight states will run out of assets to pay their beneficiaries. illinois will require 11 billion annually beginning in 2019 in this scenario, new jersey will require 10 billion annually in 2021. phyllis dire scenarios offered by the center for retirement research at boston college to remain funded by 2014, illinois would require 13% of its budget to ensure fund solvency, new jersey would require 125% of its budget. this requires choices the states of to date of making. other economists and after recent reduced equally dire scenarios. as the doctor. but ultimately i stress it is incumbent upon state governors and treasurers to ask actor race to stress test the pension systems under a range of assumptions. i believe the biggest impact the federal government can have in helping the states is in the area of medicaid form and mandate relief. for state pensions, i have two

recommendations: first conference. and accurate accounting. the government must stress test the pension systems and model the cash flows to determine what would be needed to set aside to pay these promises. these scenarios should include the risk for a discount rate as recommended by economists. the imf and assumption should be made available to the public. second, stabilize public-sector pension systems. there to pay what has been promised while minimizing the burden on taxpayers, states should consider freezing or reducing the cost-of-living adjustment and the current defined benefit plans. increasing the retirement age, increasing contributions from workers, and importantly, close the defined benefit plan and move workers to defined contribution plans. the last reform would allow workers more flexibility, shift the risk away from taxpayers and and the political and fiscal manipulation of the worker benefits, which turned what was the best to be a safe investment for the public sector workers into a gamble for both employees and taxpayers. accurate accounting will enable the states to move the tree tops necessary today and to delay

would insure the big problem turns into a crisis by decade's end. thank you. i look forward to your questions. >> thank you, ms. norcross. ms. lav? >> mr. chairman, mr. quigley, members of the committee, thank you for the invitation to appear before you today. i believe that predictions that states throughout the country will have to bail out localities or that the federal government will have to bail out the states, there substantially exaggerated. and i think they are producing unnecessary alarm among policymakers and the public at large. i would like to on tinkle these claims to the about cyclical issues bonds and pensions. first cyclical issue. states are projecting a large operating deficits as you said about $125 billion for the 2012 fiscal year which begins in july in most states. unemployment remains high. revenues remain below the pre-recession levels, and there is rising demand for public

services due to the weak economy and growing population figure one, please. moreover, the fiscal relief provided to the american recovery reinvestment act of 2009 is ending. that's not mind. that's someone else's? okay. it has been enormously helpful in allowing states to avert potential budget cuts and tax increases. states have used the fiscal relief to cover about one-third of their budget shortfalls to the current fiscal year. but only about 6 billion will be available for next year covering less than 5% of these shortfalls as difficult and painful as the choices are, states and localities will balance the upcoming budgets to the budget cuts, tax increases and use of the reserve funds. that's what they do. remember it is a cyclical problem the will strengthen the size as the economy continues to

recover and state revenue continue to grow. second bond, so, there is no credible evidence of a bubble or crisis in state and local bonds. we could go to figure three, please. first, interest payments on state and local bonds of soared just 45% of current state and local expenditures. no more than they did in the 1970's. and the historical default rates since 1970 through several recessions has been about one-third of 1%. finally, there's no large increase in bond issuance, nor their exotic securities that hide the underlying value of the assets against which the bonds are issued as was the case with this of prime mortgage bond. third pensions which of course is a little more complicated. there are shortfalls as we have said in pension funding for future state and local retirees. states will have to address them over the next decade or so. figure four, please.

pensions are fully funded in 2000 before the last two recessions using standard accounting. the recession's reduce the value of assets and some jurisdictions didn't make the required deposits. so as was mentioned, the center for the retirement research at boston college finds the states and localities have about $700 billion of unfunded light of these. that implies to have to increase the contributions on average over the next 30 years from about 3.8% of the budget to 5% of the budget. it is on average, it's not illinois. with the changes to pension plans could reduce the cost and 3.8% to 5% is not a crisis. the major controversy is over whether these traditional accounting standards are appropriate and that 3 trillion-dollar number which comes from economists who measure future costs assuming a brisk breeze of return such as in the treasury bonds about 4%. figure five, please.

pension funds to invest in a diversified security. the average historical rate of return has been about 8% as you can see on the chart. it may or may not be a little low were going forward, but it's quite unlikely to be just 4%. so there are 3 trillion-dollar numbers as a construct it doesn't represent the amount the pension funds have to invest to meet the obligation. the seats in trouble are basically those that skip their payment. to summarize, cyclical problems are serious but role of the as the economy improves. on the bond market is not in danger of experiencing the widespread default, and pensions need attention but most cases are not in crisis. i see no need for federal intervention in these areas. states do not want or need the power to declare bankruptcy. nor is there a need as mr. nunes has suggested for federal legislation to require states and localities to report their pensions on a riskless rate as

the conditions for issuing tax-exempt bond. i should note there's a process going on in the government accounting standards board to reform already going on two years to reform the way the pensions are reported and put all states reporting on the same basis which would be transparency improvement so you could see what's going on and to have a reasonable actuarial message for reporting. and mr. nunes proposal would short circuit that. thank you. >> thank you, ms. lav. i appreciate that, and we will begin the questioning with the vice chair of the subcommittee of the hampshire. >> thank you mr. chairman and each of you for testifying before us today. i have a couple of questions for each of you, going to try to be quick. first with ms. lav. you had stated that there is no pending or looming crisis of the moment. i guess the first question i would have is how would you define the crisis of what we are seeing with the states and their

obligation requirements of the levels that they are at? how would you define a crisis? >> i would define a crisis as something the states have no way of digging themselves out of. they have many tools and which to do this. so if you have to raise your pension contributions from 3.8% of expenditures to 5% of expenditures you could probably a comedy that within the budget particularly after the economy recovered and certainly the cyclical deficits. states are finding ways to close the cyclical deficits. we don't appreciate a lot of the budget cuts the states are making which are harming low-income people and residents, but that's what they do. states have balanced budget requirements and that is what they do. they manage their finances. >> i think the concern that all i and others share is that as the states, quote, manage their finances their spending and extraordinarily high your amount of money percentage wise of borrowing dollars to get us through these, quote, lean or

challenging economic times. my state of the hampshire has done that and new jersey has done that to pay expenses which is not -- these are good accounting standard practices were it's just not good business standards of practice. so, and i don't know that you had a chance to touch upon it in your verbal remarks, but i know in your written remarks to talk about the gasby standards. my concern is at some point there is this potential of states wanting to come to the federal government for a comical, bailout because of what they define as an economic challenge that they are having. i would argue something a little bit different. any responsible governor, a legislature or administrator should be anticipating these challenges, and it doesn't appear that that has been done in a responsible way. so, you understand your point, but can you speak to those

states that are borrowing money he essentially to pay for ongoing expenses? and i'm not even talking about stimulus money they receive, i'm just talking about borrowing money very few seats borrow for operating expenses, like illinois has borrowed a number of time to make the pension contribution which is very bad practice. by and large, states borrow money for infrastructure, and you don't see it in the data, any substantial run-up in borrowing as a percentage of gross state product we have a chart their that i provided some information to you and the height by testimony some graphics on some state-by-state information on that. you don't see any of run-up in borrowing. it isn't a good practice for states to borrow to pay for their operating expenses. the chaparral for infrastructure because that is what makes sense to do economically. so we don't approve of borrowing for our operating expenses, and usually in the longer paper that i refer to in my written testimony, we do have the whole

last section that does suggest states to have, as i believe was referred to in illinois, some structural deficits and mismatch between the expenditures and other revenues and part of that -- and they do need to take some steps to fix those mismatches. there's no question about it. ..

i want toe explain this by way of analogy, and it's important. it formed decades of policy within the pension systems i believe we're seeing the results of that today, and the analogy is this. the reason you can't choose a discount rate based on what you think your assets return to value the liability is if consider you have a mortgage and you have, let's say, a mutual fund, your broker says i think you're going to return 10 pakistani annually on your -- 10% annually on mortgage funds, you can't slice your mortgage in half. you don't get a different statement based on that. what that logic produced, and yeah, in the 80s, these funds

looked fine, but they undervalued the promise. they expect the rate of return will be taking care of the necessary contributions that they should be making to fund the system, and number two, when plans are overfunded on paper, it's led some states to grant generous benefit enhancements without the math. in new jersey in 2001, the state granted a 9% benefit increase and didn't figure out how much it would cost them. that's what the governor is working on now. it violates another principle which is you can secure an investment with a high risk stream of investments, and in the shorm, you realize more volatility in your investments, and yet, that promise is due within 15 years, so they are basically trying to secure a guaranteed payout with a high risk investment, and that's the thought logic. josh in his paper uses the 8%

discount rate, and even if we grant you that, funds run out of assets with 3% revenue groaft by the end of the decade. new jersey released a paper on new reports on friday using the 8.25 discount rate saying we have 12 years in the plan. i hope those comments help. >> i thank you for your testimony. the gentleman's timics pyred. he is referred to the full committee ranks member, and mr. cummings, you're recognized for 5 minutes. >> i thank you, and the ranking member and thank you for working in a bipartisan way to address the problem. it's interesting after listening to the vice chairman of our subcommittee speaking just a moment ago, i find it interesting that the national governor's association that is republican and the democratic governors through their chairman and vice chairman said this on

february 4, 2011, "allowing states to declare bankruptcy is not an authority any state leader asked for nor would like likely use. states are sovereign entities where trust is elected to their public leaders and a bankruptcy court is better able to overcome political differences, restore fiscal stability, and manage finances of a state. these are false and serve to threaten the local finances." do you agree with the governors that the state bankruptcy proposal threatens the fabric of state and local financing? be brief. i have several questions. >> yes, i agree. states have all the tools they need to manage their finances. occasionally one state doesn't, but they have the tools they need. >> and what would you recommend as to how those states might

improve their fiscal situations? >> i think, you know, there are many ways that states can improve their fiscal situations. they can move to taking a longer term look. many only look one or two years ahead. they can improve their revenue systems and be sure their revenues match with their expenditures. they can have processes in place where they, you know, there are consequences of skipping a pension contribution which has caused a lot of problems we're talking about today. there are many things they can do to make it clearer to them and to policy makers and the public about their own situations and allow some oversight, but i think states, themselves, have the ability to do that, and that this recession has been so very long and so very deep that some of the flaws, you know, have become apparent that it's not going to be forever, and i think they

will adjust their revenues and their expenditures to manage these problems. >> you know, house budget committee chair, paul ryan, and the republicans propose cutting the federal budget domestic discretionary, nonmilitary, nonsecurity spending approximately $40 billion this year and much more in the future. wouldn't this significantly worsen the state of the government's problems? this is not a gift to the state. >> no, it's not a gift, but a penalty for the states basically. it is about a third of nonsecurity spending, and mr. ryan wants to cut the grants that flow to state and local governments. we don't have the exact number, but somewhere between, i don't know exactly to it, but $10-$13 billion the states have to scamble on top of their existing

deficits because of the cuts. >> isn't most underfunding of state pensions due to recent dramatic declines that hurt investment portfolios of almost all american investors including hedge funds, regular working people, and regular lawmakers here and staff workers here's today given the recent recovery, market upturn and projected future gains, don't you agree with the analysis expecting future long term gains equally over the next 30 years to smooth out today's current problems. the reason i raise this, and any of y'all can answer this, is when the storm is over, i don't want to see situations where our employees, by the way, a lot of them are working in this room today, may have lost or their pensions are now going to the state. state pensions have been diminished. sphaits come out of -- states come out of recovery, and

because some states be able to make pension payments on time, and keep in mind, the employees, they have to pay; right? >> right. >> they have to pay. okay, so, i mean, one of my concerns is when the storm is over, then these folks have been locked out of a lot of money that they were due, so, i mean, starting with you, and maybe some of the others have a comment on that. >> yeah. obviously the improvement in the economy and market have a lot to do with improving the outlook of pensions overtime, and the -- and for most states not providing retroactive payments or had not skipped payments in the past will be fine. the vast majority of states will be fine when and as that occurs. i say the only reason workers lose the benefits they are promised is because the investments are treated as a gamble rather than secured the they way should have been secured. they were misvalued and the

investment strategies are not appropriate for the plans. i share the view that, you know, what's been promised has been promised. people worked for this and cricketed for it. i also comment that every state and local pension system has something different going on. we know about the worse funded plans, but i would caution that paper is important. he's saying, okay, i grant you 8% returns, and there's a timetable of if there's no change to policy, these plans will run out of assets. >> thank you, ms. norcross. >> thank you very much, mr. chairman. >> i appreciate that. if i could call up slide number one. this is a representation of the difference between indplaition of the 1950 baseline. the blue line would be private spending increases since 1950 to now versus state and local government spending increases in

the red line. private spending has increased five times, but local and state government spending increased 10 times. it's not a question of a funding short fall. it's a spending problem. would you concur with that, ms. norcross? >> that's a big part of it, yes. >> okay. now, in terms of the discussion about public pensions, understanding the magnitude of the problem is one thing we want to understand here today. if it's nullble, what -- you mentioned in your testimony a funding shortfall. is there a range -- is there an agreement on public pensions? >> well, thank you, chairperson. there's not an agreement that a rough range would be $700 billion to $3 trillion. that's a large range. this involves predicting things that are very difficult, really

impossible to predict. you have to predict the performance not only of the u.s. stock market, but a global equity and bond markets. you have to predict the course of future inflation and also predict how long people and their survivors are going to live. >> do you concur with that range? >> yes. well, under a range of assumptions, yes. >> what would -- >> meaning the $700 billion is under the current assumptions of the 8% discount rate range. that's why i'm advocating for stress testing the pensions and granting economists how they would value the plan. >> okay. what is the upward end? >> $3.5 trillion. >> okay. now, to this point, is there a -- under current government accounting standards, is it sufficient? do we have enough transparency in understanding the underfunded liabilities of the state and

local government pensions? >> no, it's not sufficient. i would advocate asking the states and large municipalities to report the assumptions -- report the liabilities under a range of assumptions, report it under a lower, what used to be called a risk-free rate, maybe 3% annual return recorded under the 8% return if they'd like to continue to do that and allow investors to make up their mind. i don't think there's a big -- there's a problem with disclosure, but it's not the biggest problem because investors can do their own calculations on the liabilities. we've seen dr. law and others do it on their own, and if investors don't like what's recorded, they can invest in the debt. we should have more disclosure. the problem is that we don't understand the magnitude of the issue. it's getting the political will within states to change state constitutions which govern pension benefits for future

workers, people who have not been hired, change state laws governing collective bargaining in health care and so forth. >> would you concur with that, ms. norcross? >> i agree. >> well, that's simple enough. [laughter] it's reasonable. are the government accounting standards for pensions similar or dissimilar to what public companies are required to disclose? ms. norcross? >> they are a little different in private sector. they use close to a risk-free rate, and they are valuable, but they are different from public sector plans. >> do you want to add anything to that? >> no. >> wow, this is going smoothly. in terms of ms. norcross, in your testimony, you discuss that state spending grew faster than states own revenue sources in 47 states from ?erch to 2000 --

1997 two sweven. you know -- 2007. you know, to this point, can you explain the danger of states reporting budgetary imbalances using federal funds and debts to found these expenditures? >> i think that just highlights the pie and what's in the pie. you have state's own source revenue, federal funds debt, and other. a deficit, if you just consider what a state support ises on its own, that can be papered over if you then sort of discount they get federal funds which can stimulate sometimes greater spending or causes the state to raise taxes to support the spending and also the rising debt. while debt is not a large portion of budgets, we've seen tech kneeings recently where states dump a trust fund bond to replace it and use that to balance the budget. maybe not bonding directly, but they are. >> to that point, have states

changed the nature of what they use bonds for? the nature rather than building a road, are they changing it to plug a pension fund problem? has that changed? >> we have seen more bonding. the definition of capital can be flexible. >> thank you for your testimony. my time expired, and now mr. qigly, the ranking member is recognized for 5 minutes. >> thank you, mr. chairman. corvee the problems we've -- so far the problems we've seen with the particular ten states in probably seem to be self-contained. i'd like to ask any one of you if you can what the potential systemic risks are. what the last crisis taught us is everything is interconnected in terms of the market or what have you. if there is a big hiccup, and there are threats with the states defaulting or having

another problem missing payments and so forth. the impact on other states, the impact on bond ratings, and also the bond market itself, so while they may be only 8 to 10 states, what are the impacts on the rest of the states? >> jumping on that quickly. i think the risk of con they gent is much less severe than 2008 with the financial institutions. i think the bond markets know the difference between the states that are in real trouble and the states that are not. >> do you think their investors do? >> i do, i do. i think we have to have some confidence in the ability of the markets to make those distinctions. that's my first point. my second point would be that a lot of the problem with the financial institutions was hot money. it was that they depended really heavily on sport term -- short term financing which was subject to immediate

withdrawal. states are not subject to financing that's going to disappear instabilitily. there's tax revenues coming in. they are likely to continue borrowing. it's a very different kind of crisis. >> it's possible to panic markets in the shorm. >> the first time -- >> you violated our rules. [laughter] >> sorry about that, but you can in the long run, i mean, people realize what the fundamentals are, and you can see that there's beginning to be some improvements in that market now that that has been sort of put to rest, so i think that there are distinctions among states. you know, the last time a state defaulted was in the great depression, and even in the great depression, only one state, arkansas, defaulted. only four cities or counties have actually defaulted since 1970. we're talking, you know, i don't

think we're going to have a major default crisis. i think that there will be ways, you know, you're going to have smaller districts and some revenue bonds that were tied to the housing bubble and so forth that are going to have trouble paying and those districts are going to have problems and the states will probably step in as in pennsylvania stepped in in harrisburg and sort that out, but i don't see a scenario of faults. >> if i may add to that, one issue that risks courting a bond market crisis would be changing the statute to allow for federal bankruptcy because if i am a bondholder, for example, take new york metropolitan transportation authority, entity with $30 billion worth of debt, a long list of covenants,

including a state law that says as long as the bonds are outstanding, this entity will not declare bankruptcy. that's what new york lawmakers determined under the democratic process. if there's any question there's a new federal statute that would somehow supersede that or this idea that you could take away promises made to these bondholders to give to bondholders or unions at another state entity, this risk would take many months to sort out. i would also add maybe not the potential for an acute crisis that we saw in september 2008, but the potential for the risk of losses at banks where you don't need a default for the market value of these securities to decline. you've got more than $200 billion of municipal debt in banks, similar amount in insurance funds, and if banks worry that the value of these securities have declined, they may pull back on lending to the rest of the economy, again, not

a crisis or a panic, but it makes the recovery more difficult. the question is what are you get r from making it more difficult? you're not getting much benefit because states have the tools to fibbing the problems. >> can i just add one brief response? that is this is all assuming that the statings wouldn't -- states wouldn't default on the bonds. the question we have to ask is what are the possibilities? one possibility is no bankruptcy. they simply default completely. >> let me ask another question of ms. norcross. you talk about the rate of return and you advocate for reducing it to what you judge is a much more realistic figure. the same sort of question, a quick shift from perhaps 8.25 to 8 to 4 would have to have some impact, pretty dramatic in a fiscal point of view in how much the contributions would be

increased, but also, within, again the market that looks at this. would you see this being done through a slower period of time, an adjustment period, or how would you see that work? >> i agree with what was said. you have to grant a range of assumptions, but the liability is a liability, so simply targeting a rate that makes it look a little bit better only masks over, you know, the underlying reality of what's owed. also, if you're paying this out over 15 years, my concern is that in cases like illinois where they are going to take on more risk in their investment strategy to make up for what was loss, so that's why i caution that. >> thank you. i thank the ranking member. member of new york, recognized for 5 minutes. >> thank you, and i thank the chairman and ranking member for organizing this important hearing and all the panelists for their thoughtful testimony. i would like to gain a deeper understanding of the magnitude

of the challenge, and i'd first like to ask ms. norcross to qualify it and expand on a segment in this testimony where you stated that states and localities devote 3.8% of their operating budgets to pension funding. first, i'd like to know where you got this number from, and is this an accepted number universally, and if that, in fact, is the correct number, based on this number, how can you suggest that public pension costs are the large costs of the state and local financial problems? as we know, we are just digging our way out from the great recession that impacted our entire country, and there's many costs there, but could you comment first, ms. norcross?

>> i believe that's the figure from the leishamanell paper. that's what states are contributing on average. that's all plans. she averages with the uta rate, you have to raise that to 5% on average. >> that is correct. we worked with the boston college people using our expertise on state and local finance to help them come up with that figure. >> how can you suggest this is the cause of local and state financial problems if the contribution is just 3.8%? >> it isn't. it isn't the cost, i mean, it is -- pension contributions come from general funds, and the big deficit numbers is $125 billion that you hear about is a general fund number, but pension contributions, neither pension contributions or interest on bonds are the major component of that, the ma senior component of

the deaf -- major company that the deficit states have with medicaid, health care, and education and so forth, so that's why i said, you know, it's not a crisis to raise from 3.8% to 5% in the way that state and local budgets are put together. you know, you can do that over time. it's not a big crisis, and, you know, there's a lot of -- all this talk about rate, that's one way to look at the, you know, the paper says you have to go to 9% which would be a big problem if you use the riskless rates, but there's a distinction between the liabilities and how much you have to deposit to make the pension whole, and i would, you know, say those are two different things. >> the riskless rate that a number of you testified on, i'd like clarification from it. is it true that this rate is

different from what the private sector plans use? is it different? >> private sector pension plans admit they have a little more risk because a company can go bankrupt. they use the corporate bond rate to reflect the risk. it's higher than the riskless rate. it's 5.5 or 6%. >> why should it be a different rate for public pensions and private pensions? >> because private pensions have to be more conservative. a private company can go out of business, and then they dump their liabilities for their pensions on the public benefit guarantee corporation, so the federal government doesn't have to bailout the private corporation and pay those pension liabilities and insists it uses a more conservative rate. a public entity is not going out of business, and the public entity has taxing power and can adjust taxes and expenditures if it's going to be an ongoing

entity. you know, there's gao reports and other observers, and most people who look at this say you do not need string gent standardses for public entities like private. >> would they increased the perceived pension short falls? >> yes, substantially. >> and how would it increase it? >> well, because, you know, 60% of pension assets come from return on assets coming from investment income. if you're going to say you're only going to get 4% on that investment income and you're projecting that 30 years into the future, you make up a much larger whole that you have to fill -- hole that you have to fill. if you say you're getting 4%, and you continue to invest in equities, you're saying something that's not true, and you're sort of saying you have so overfund the pension in the front end because you say it's 4%, but if you get 7%, you'll

have more in it, and, you know, that will be even -- i hate to say it, but you'll end up with more temptation for an overfilled pension fund to not have consistent contributions every year. it's much more realistic to say what you're going to gain and consistently contribute to the amount you need rather than having a feast or father and famine. >> my time expired. anyone else want to comment on that? >> i just want to add, if i may, the logic behind that discount rate again has to do with the safety or risk of what you value. a private sector plan reflects risks involved about a company going out of business. a public company says 100% you get paid. you have 15 years of obligations getting due. >> i could comment on pension

liabilities. the reason why they don't show up as much at the state level is because these are the responsibility of the local governments. they are set by state law, but paid by the locality. for example, new york city will pay about $8.5 billion in pension obligations this year. there's a much bigger problem at the local level rather than state level. >> thank you. >> my figures were state and local. >> thank you. mr. quigley is recognized. >> thank you. i ask unanimous consent to enter in an order. >> so ordered. >> thank you, mr. chairman, and ranking member for holding this hearing. there's an article by jeb bush and newt gingrich in the "local and state governments".

it's important to keep things simp. it's my understanding that almost 80% of mew nit pal bonds are held -- municipal bonds are held -- >> the tax exempt bonds, yeah. >> the individuals, yeah, and what most investors hate is a nasty surprise, a downside surprise, so in markets that function well, you have transparency and a heads up oncoming bad news. people are usually less alarmed. i want to ask questions about the transparency of the markets. what are we missing today comparing these obligations between states that would enable an individual investor to better evaluate the investments. it's my understanding that they get packaged in bond funds, but

you don't want to bond fund to be harmed either, so what are we missing in terms of transparency in the states? >> are you asking me? with respect to bonds, i don't think there's anything missing. i think the bond raters have a great deal of information about the states and the financial analysts and follow them very closely, and so, you know, i'm not aware of anybody complaining about the transparency of bonds among the states. moody just put out a new kind of analysis where they added or gathered the outstanding bond debt and pension obligations. you can look at it in one place. i think that's a good thing. you know, with respect to pension obligations, i think there is a problem of not being able to look at state by state

basis. >> exactly what are those problems? >> they use different standards and they are standards are are pretty arcane. states can choose which ones they want. i mentioned at the beginning of this hearing, that the governmental accounting standards board is close to issuing a new standard that no longer will allow that and will require -- >> then after gsa has a new standards there will be an apples to apple comparison? >> yes. >> all the panelists agree with that? >> i believe that's so. >> so this is pending. it's about to happen, and it doesn't require legislation? >> i might clarify. it's a rule that is going to require them to use the abo versus the tbo or are you referring to 25? working on the discount rule, but i don't think they solved

that problem. >> yeah, i mean, they're working both together. i don't know what they're going to call. >> so, in the next few months we will have greater come come parrability with the states to compare with the states involved. >> that is my understanding. of course, they haven't put out the final rule yet, but they are working on it. >> are all the panelists hopeful about this? >> i know they are looking at it. i'm hopeful. they took all the comments, had a draft rule in september, and they are far down. line. i think it's appropriate because all the stake holders had a chance to comment. it's not something that's imposed. i mean, various people object to various parts of the rule, but it's going to be a standard rule, and it's better than the one we have. >> does the manhattan institute and pennsylvania university law school concur in this? >> i'm not following that that closely.

>> i will as well. i have no prediction on how they will come out. >> uh-huh. you mentioned earlier rating agency's analysis. they don't have the rating power they had prior to crisis. are the rating agencies on top of the developments in and between the states and municipalities? >> i think they are. there are rating agencies and a whole host of other financial analysts out there that specialize in looking that are not the rating agencies which i agree have lost creditability, but those who looked at this and have specialists who spend, you know, all their time looking at state and local finance, and i mean, i think they have a pretty good handle on what's going on, and to the one, and i cite that in my report that they are staying there is no major chance of a contagious default. you know, if there's a couple extra defaults are likely to be

in non, you know, in small things like suer districts and now other areas. >> i see my time ceo pyred. thank you, mr. chairman. >> i thank the gentleman, and if it's okay with the panel, we have a opportunity for a second round of questions if there's no pressing concerns this morning, and so with that, i'd like to ask myself for five minutes. so, the definition of default is to fail, to fulfill a contract or duty to pay or make good, so if we look at default in the bond market, does the bond market define that narrowly which is to make good on your payment to me or as, can we as policymakers, define it more broadly? that is, fair to fulfill an

obligation to the people you're serving, failure to pension holders for instance, and not being able to pay pension holders, or could it be not making good, so you have to sell a city or state assets in order to pay bondholders which is an interesting piece here. beyond that is federal policymakers, are we making the matters worse through our transfer payments to the states? there's been some point of reference in testimony here today that that is, in fact, the case. ms. norcross, your testimony includes discussion on this. in the tune of hundreds of billions of dollars a year, there's federal transfers to the state, and there's also federal mandates on the states that's cost drivers to governments. can you touch on this and implications for the bond

markets, and indebtedness to the taxpayers. >> the most well-known effort is with medicaid requirements on the states. there are many other grants and aide that are handed out to the state that occasionally come with maintenances effort requirements or encourage that government to need to raise taxes to support the spending. i don't know if i answered your question. >> you did. now, there are certain states that are in different fiscal situations, and i know some research has been done on this, and so, you know, does that -- the difficulty of policymakers to balance the budget, does that have a bearing on their credit rating? serge it does one would -- serge it does -- certainly is does. there's obviously the dormitory authority or a road authority. does that have a bearing, the

state revenue sources whether or not they are sustainable? can you touch on that? >> sure, it does. without saying whether the rating agencies are right or wrong on the broad issues or narrow credit, the rating agencies do have a good understanding that each bond is different even at state levels, so california, for example, is set very clearly paying debt service on general obligation bonds. this is one of two top priorities for the state that even if the state of california has massive deficits, they pay the bonds first before anything else. rating agencies look at that, see the structure of the law and precedence, and that goes into the analysis. other states, it may not be as high a priority, but it is a high priority in every state, and then when you look at things like bonds that are tax secured where the state has said we

pledge this sales tax to pay bonds before we use the sales tax for anything else. that's actually higher than an general obligation fond. that's a aaa rating because of that. you have to look at each of the repayment streams, a big character of the state, the willingness of the state to pay the debt, and sometimes, frankly, the willingness the state makes bad decisions. we saw in illinois the state raise taxes to give comfort to the bondholders, so trying to get more market discipline in getting the bondholders to care more about the fundamentals, it doesn't necessarily get you a good long term decision for the state if their response to the state is to raise taxes. it may make the long term situation worse, not better. >> well, certainly appreciate that. in today's "wall street journal" there's a story about this hearing. they reference california borrows billions of dollars each year to cover seasonal short

falls in its cash flows. illinois is proposing to issue an $8.7 billion debt restructuring bond to pay past due bills and a $3.7 billion bond to make required pension contributions to its pension system. there's a larger discussion here about whether these states will be able to afford higher interest rates on these bonds selling the end of quantitative easing and the impacts that will have on the pension fund gaps. i could just ask the panel to make comments on that briefly and would like to hear your testimony. >> higher interest rates are internal a risk not only having to do with the fundamentals of the municipal bond market but how do investors feel. if bonds go up, it's likely municipal bond rates go up at the same time. >> i'll just add that those

effects are likely, and already are disproportioned born by the states that are in big trouble. california's interest rate is much higher than other state interest rates. that's what we would expect, and i think in the long run, that's what we want, that's what we want the bond markets to be doing. >> i concur with what professor skeel said. >> i distinguish the different twinges. california and a few other states issue revenue an anticipation notes. they pay them back in the same year. it's just changing the timing of their borrowing whereas the illinois bonds borrow for operating expenses which is a big distinction. of course, the expenses will go up. as i showed, the total interest on bonds are depending on the sources used to calculate only

4%-5% of state and local expenditures. again, this is not something that will break the bank if it goes up to 6% of expenditures. it's on the margin, they'll have to accommodate it, but it won't break the bank. >> thank you. mr. quigley is recognized for five minutes. >> again, thank you for participating in this. it's a good first step for the committee on an important issue. before i ask you, i guess my last question, the thoughts for local governments, state and local governments, is from my point of view, the mission matters. we often hear so much that, you know, people don't like government, but when it comes to local government, when they call 9-1-1, they want a fireman or an ambulance or a police officer to respond, and they want to know that when they cross a bridge, it's safe. so much of local government

strikes so close to home. the wheels hit the streets, and so what we're talking about today is so important because the poor financial management can put all those things at risk. beyond the financial management dealing with pensions and so forth, it's really the notion that governments need to look at themselves and reinvent themselves. i'm not just speaking as a congressman, but i was a commissioner for 10 years. all local governments need to reinvent themselves and streamline not because they don't matter, but because they matter very, very much. there's a lot at stake here. i want to commend the panelists on one exception. you didn't mention the bond names. it's a big thing the public wants to know. to what extent will there be

significant defaults or significant bond defaults in the year 2011 or 2012? >> well, i don't think there'll be a city or county that defaults. i think there's defaults in special districts and revenue bonds for which -- for example, you know, in florida there were bonds issued for suers in a development that never got built because the housing bubble burst. well, there's no way, you know, you can't pay back those bonds because there's no suer revenue coming in. there's those kinds of things around the country that are going to be a bit of a problem and that could be defaults or restructuring. i mean, as the chairman said, the term "default" is used in a number of ways. i used it you don't make interest payments on the bonds,

not that you find it with some other way, but, again, there always are projects that go bad in a bad economy, but i don't think there will be any major large city or county that defaults. you know, # there are -- you know, there are, and i think by and large that even for smaller ones that the states will step in, and, you know, we got a control board now in nassau county new york. there will be control boardses to help those in trouble and figure out a plan to work their fanses out. >> i'll just add, i also don't think there will be hundreds of defaults, but i think it's important to keep in mind we don't know. probably 50 states will survive, but if only 48 states survive the current crisis, we're in trouble, and i think we

really need to plan for that. we need to plan for surprises in a way that in 2008 we had not planned for surprises. >> as a democratic people in each state, we don't have to wait for the bond markets to make common sense decisions today. we know state by state and for the nation as a whole, we have to control our health care costs, employees and others as well, retiree pension liabilities. these are all things if we don't get a handle on them, we will not be building or repairing roads, bridges, transit because we are paying the growing retiree costs. these are things we can fix today. we shouldn't and don't have to wait for bond markets to tell us what to do that we should be doing already. >> i would concur with what ms. gelanis said.

>> thank you, and i yield back. mr. cooper is recognized for five minutes. >> thank you. i want to thank you for this hearing. if i'm an individual bondholder today or a local taxpayer who is thinking about buying some bonds, what's the easiest way for me to find on the web or another source the credit status, credit rating, financial soundness of the entity in which i am investing or living? >> bonds have a lot of information about the finances of a state or the locality. i mean, it depends. >> a per speck toc is a long legal document. that's why for a consumer who maybe is at the brocker's office saying i want a tax free bond, tell me what to buy. how do you find that information? how do you know if you're in a credit-worthy jurisdiction or

not? this is the information age. is there a website you can go to in smalltown, usa? >> i think it's difficult. you have to piece together information, but all of the brokerages publish reports or put out reports on individual bonds. certainly, if you go to a broke r, you can get that information. to asemil it together -- assemble it yourself is difficult. >> that's why most people do rely on brokers and financial advisers rather than make their own decisions at least for information. it depends on what kind of a bond it is, you know, so you may be wanting to know about the possibility of the -- are the tolls, you know, going to pay back the bond on this highway or it may be full credit in which case you need to have some sense

about the budget of the entity and it's long term process. >> when it was said earlier individual citizens can take it upon themselves to get ahead of the bond market and anticipate bad practices, it's very difficult to do that. you really have to be a student of this to understand what's going on. >> right. i think people, you know, just like, you know, i go to a lawyer, i go to a doctor, not everybody is a finance person, so they have to go to a finance person. >> it's my understanding some of the brokerage houses are affiliated with investment banks that underwrite the bonds, and they have an interest in making the bonds look good. >> they may be the case, but there's not a lot of ways that an individual can investigate, you know, most towns have their budgets on the websites. i can find them, but they may not tell you everything you want to know. >> we can compare almost

everything else in life through easily accessible websites. these important financial strums, why can't we get an easy handle on these in >> there's 80,000 jurisdictions in the united states that issue bonds. it's really quite a large undertaking and one that maybe somebody would want to undertake, but it would be a big deal. >> when people buy a bond fund with a few bad apples in it, how do you tell what's in your bond fund? with the housing fund, they bundled credit, and it tainted the whole package. >> that was really -- those were kind of what people call sliced and diced securities. >> that's not being done with bonds today? >> no, never, not done. >> the bond funds without

endorsing or not endorsing them, there is at least something there unlike with something like a collateralized debt obligation built on mortgage bonds built on more mortgage bonds. some of these things were rated aaa and ended up being worth literally nothing. i don't see how that would be the case here even if we did see small scale municipal end projects default that it's hard to conceive waking up and having a aaa fund being worth nothing. however, i think your other point is very important that individuals own these bonds, but they don't own them directly. they own them through money markets, $300 billion worth of state and local debt in money market funds, and there's an issue here of financial intermediation and the dealer's responsibility that these are the large investment banks, they run the funds, hold holdings on

their own, and if we haven't succeeded in financial discipline into these firms that still believe, in many cases, they are too big to fail, they are not worried about state and local debts because they think congress will bail out them, and not the states. >> would any of you invest today in the bond fund with higher tax free interest rates projects funds in nevada, california, florida? would you put your life savings or pension punned -- fund in a fund like that because it is so difficult to find out the merits of each individual project? >> i would be careful, but i certainly wouldn't steer away from the market. >> i asked about project funds. >> well, you have to look -- >> that would be the most likely to have problems. >> you'd have to look at the project, and certainly -- >> apparently that's almost

impossible to do unless you're a bond lawyer and willing to read 200 pages per contract. >> if you're going to invest in a particular project -- >> but that wouldn't be a bond fund with projects. it seems to me we're not giving consumers and individual investors enough information here that's accessible. my time is up. i appreciate the chairman's patience. >> i appreciate the line of questioning. if the panel wants to go through the question which was would you invest in state municipal bond funds, you, yourself, yes or no or maybe. if you want to answer that, that would be great. >> i think there's a very real problem with trust and people's trust in the financial try and trusting their financial advisers and the managers of the bond fund, and that issue is not going away any time soon. >> i would ask my financial

planner. [laughter] i've never actually invested in municipal bonds. it's not my style of investing. >> okay. thank you. i thank the gentleman from tennessee with the line of questioning, and with that to mr. walsh of tennessee. >> thank you, mr. chairman, and thank you for holding such an important hearing. like the ranking member, i'm from illinois as well. illinois is a mess. we all know that. no way is the federal government going to bailout my state. our constituents won't allow it. i feel like i left the movie right before the good part, and i'm sure the case was being made that bankruptcy suspect feasible, -- isn't feasible. bankruptcy isn't feasible. let me just start with a real quick round-rob inquestion. give me your 20-second solution so i can walk out of here with that take away. we're not going to bail you

out. bankruptcy is not feasible. what are the states going to do? hop and give a quick one to that. go ahead. >> well, i think voters in many states are doing the right thing. there's new governors from both parties starting to address what do we do about pensions for future employees and medicaid costs? certainly congress can help with that. these are questions for voters and state questioning their own lawmakers to change state laws. some ways the system is working. >> i guess my question if there's no bailout from us and bankruptcies are not feasible, the state is falling off the cliff. let's imagine one is literally going to fall off a cliff. we can change laws to impact things in the future, but what do you do for the state that's fallen off the cliff mr. skeel?

>> we need a bankruptcy regime in place to deal with precisely that problem. that's the only problem we need bankruptcy for. i'll add one thing to that. i agree that states are doing the right thing, and i hope the optimism we heard today is correct that most of them can muddle their way through, but some measures are tougher than others. for instance, pension reform in a state while there's a lot of debate in illinois about what can and cannot be done right now, but many states it requires a constitutional change, and that's unrealistic. some of the options are more feasible than others. >> your state's falling off a cliff, what do you do? >> close the define benefit plan and pay out what's been accumulated. >> i think states can use their normal processes of dealing with taxes and expenditures to set themselves on a right path.

illinois has a particularly deep hole. i've been writing about illinois' problems for 25 years of its fiscal mismanagement. i'm innative from chicago, but it's -- but it can, you know, it just needs to do those things it needs to do to get out of it and to get and bring itself balance, and it has the tools, it just needs to use them. >> thank you, in my remaining time, one question about market risk. bill gross who manages penco, one the largest funds in the country, he stated a negative or low interest rate for an extended period of time is the most devilish of tools. it's saying the fed's interest rates lowing them helps states while harming those who worked hard and saved money. ms. norcross, quickly, in

effect, the fed is enabling debtors to reduce their debt on the backs of those that saved money; is that right? >> i would hesitate to say that right now, but -- >> ms. gelanis? >> there's complacency. states and cities borrowed at low rates, but really for two decades now. if rates go up including, you know, possibly way off, you have to get used to way different environments very quickly. >> could you argue the fed's quantitative program is in effect and had an affect? >> this is a bailout for those who owe money. states and mew municipalities are not the biggest proportioned benefit of this, but it helped them. >> do you concur? >> i concur. >> thank you.

mr. chairman, i yield back. thank you. >> thank you. ms. burkel from new york. >> thank you, mr. chairman, and thank you for hosting this very important meeting and coming from new york state, this is a concern. we have had a number of hearings today and i apologize for being in and out, but i appreciate your time this morning. the first question. -- the first question i want to ask is regarding the money paid to the states. do you think that that was a way the states were sort of putting the states off, they didn't have to really face the issues head on, and so it actually delayed, and now the states have to reckon with the situation, and that's a question for anyone. >> i'm happy to respond to that. when that money came out in 2009, we would have seen it cover about a third of the state's deficit, and in that

year, we would have seen very sharp cuts in education and health care. we would have seen millions of people losing their health insurance and the states were poised to cut people and we would have seen, you know, many, many more layoffs of teachers and other public employees which would, in fact, have potentially delayed recovery. ..

something of a growth path than they did in the death of the recession which would have been damaging to the economy. >> now it seems to me those decisions they should have made a year ago and got their fiscal house in order it appears the stimulus delayed reckoning the reality of the situation. >> i agree. there is some case for some of the stimulus money going to states but there's no question in my mind to lead the restructuring. >> there was a missed opportunity in that congress might have considered saying to the states we will give you a dollar today and 2009 if you

take steps to cut your future liabilities by a dollar ten years from now, fix the health care medicaid cost, give them the operating they need not use it as leverage to work on the long-term problems and that is something that is not done. >> i would add to that some of the stimulus expanded the spending and is leading to cuts meeting to be taken today and the states, virginia and new jersey. >> i would like to ask another question. mr. skeel regarding the possibility of bankruptcy and the states to pursue financial district, if in fact they did declare bankruptcy would that affect the ability of healthier states that kept its fiscal house in order and now they are going to be impacted by someone else's state who did not? >> i think the impact would be

very limited as i was saying a few minutes ago. the market has the ability to extinguish between stints in good physical shape and are not. it's really like the big banks in 2008 which were really connected to each other, had the same kind of assets, the same problems, this these really are independent. so i think a state that's in good physical health would be able to continue to borrow just fine. >> thank you. i think in your opening statement you probably address that and if you would like to in the few seconds address address the issue as well. >> i would respectfully disagree. markets can distinguish among states but they cannot do it instantaneously or even in a few weeks or months. so changing fell law in this way really sweeping away half a century's worth of precedent it would take a long time for the markets to a trust and healthy states would suffer during that time frame as well.

>> can i just say one last remark and that is when you look at countries that have run into trouble, argentina for instance this as proper as you can get, it is remarkable how quickly they can go back to the market, but i believe the market's response a lot more quickly than people tend to think. >> thank you. i yield back. >> thank you so much for your line of questioning, and i've got just three more questions i want to pose to the panelists that is all right with you all. you know, if you look at the public sector employees unions versus private sector employee union, the public-sector unions now account for more than private-sector unions. interesting crossover we've had in the last two years. and on average, public-sector

workers make $14 more per hour and total compensation wages and benefits than their private-sector counterparts. ms. gelinas, you have written about this i know but if you could testify and say here today it seems to me public-sector employees and private-sector employees are living into separate economies or the ramifications of that and what is the root cause of that disparity? >> i should be clear that it differs from state to state police and states particularly the northeastern states, illinois, california offer much greater power to the employees to collectively bargain their benefits or are commensurately much higher. looking, generalizing the problem it would not be so much the wages at is it is the benefits because these are open-ended liabilities states and localities are taking on. right now they are uncontrolled

cell one aspect is getting them under control is to start to switch new civilian employees a good start in to 401k plants just as the private sector. if you're getting rid of an open-ended liability for the state in the future. the same with health care benefits and municipalities, certainly not all of them, workers do not pay a share or anywhere near the share of their old health care benefits that private sector workers pay asking workers to pay for their own health care in the do much to help states and cities with these liabilities. >> see you mentioned switching from the defined benefit plan to the 401k which most federal employees have. for instance, just as a for instance, that's one policy change that the states could enact.

what are the prescriptions the federal government can take action over to help stem the tide now we see coming? ms. lav talked about the revenue and the stimulus funds sort of relieved the states of the burden of lay off workers that you would guess school boards right now with a loss of the stimulus funds you're having hundreds of people show up at the school board meetings because they are talking about layoffs. so what i believe and what i think a lot of the folks salles is the day is coming when the stimulus funds run out, and rather than realizing it two years ago making changes, they are having to do it now. one of the things here in congress what policy changes can we make to help stem this crisis

and i will pose the for everyone. ms. gelinas, sorry. >> one area it may be straightforward for congress to help states is in medicaid because this is not in issue congress would be telling states you have to change your pension plan and the way you govern yourself. medicaid is currently a program that encourages the states to spend more because when states spend more sometimes it gets more than a dollar back from washington gradually changing medicaid into a block grant program where you offer a set amount of money, increases on the set formula and states are encouraged to innovate and cut costs within that and reward them for cutting costs rather than raising costs this would approach of a big chunk of the costs current and future.

is the obvious place to do that. the limits on what you all can do as the pensions and that sort for the sovereignty of reasons. some places where there is already federal funding are the places that look first. >> i concur medicaid and other areas, k-12 education or whether mandates that increase the pressure on states. >> i don't think -- on the areas we're talking about today there is any need as a set for the federal intervention. i would -- >> other nomani? >> i'm not asking for the extension of the stimulus. it was unfortunate that it was designed so the economy will be recovered, and the revenue are still below the 2008 levels, so of course the end of the stimulus states were not able to get back to where they were. so, you know, helping the economy is not much you can do to help the economy either

necessarily. so, but with respect to vindicate, i think that, you know, you can easily talk about a block grant. but medicaid is more efficient in many ways than private insurance for individual match for health conditions. so i think the best thing would be to figure out how to control the rate of growth of health care costs in the economy. all of the scary numbers that ms. norcross engender driven by the rate of growth of health care costs. if health care costs continue to grow faster than gdp, states are going to have trouble coping with that, so will federal government. it's a major driver of the deficit dealing with out of control. >> final question, and this is something i intend to ask future panels of well. we will have a series of hearings about the fiscal crisis the state level and the ramifications of not addressing it. and this is the opening of it and we wanted to hear from

informed individuals to start this process. but i would like for you all to if you could ask you on the spot but on the future as well to tell us who we should hear from next, bond market participants, credit rating agencies, pension holders, unions -- just, you know, if you could, tell me one, two, three people or entities we should hear from. ms. lav, we will just go right down the line. >> yeah, there was a pretty good list right now, financial analysts. there are some that have a good handle on this i could suggest a few and send it to you. and of course unions have a major stake in this and we should hear from them. and i mean i think you also should listen to the governor's. >> ms. norcross? >> that is a good list to start with and also to consider the calling of those who are involved in education finance and financing of their policy

areas. >> i would just add i think you all should talk to pension lawyers because these are both economic and legal. but you need to see the whole picture. islamic all of those people and i would also suggest speaking with infrastructure people because of the states have to grow the private sector can't create jobs when we hit infrastructure so how can this be extended to the cost of the congressmen and their own money into the biggest bank for the buck and infrastructure and help grow the state's civil liabilities can be better controlled from that end as well. >> thank you. and i certainly appreciate your testimony. appreciate the opportunity to hear from you. thank you for your time and for spending the morning with us. thanks so much. this meeting is adjourned.

[inaudible conversations]

at this capitol hill hearing to the national oil spill

commissioner terry garcia urged congress to restore the gulf of mexico's ecosystem. he appeared with fellow commissioner and former deepwater horizon commander admiral admiral allen. the commission released its final report last month calling for changes in the oil and gas industry of rations and the role of government regulators. this is two hours and 20 minutes. >> good morning. the joint subcommittee hearing will come to order. this is the first meeting of the subcommitt subcommittee of the coast guard maritime transportation i want to welcome all of our members and congratulate mr. larsen onoa bhe selection astu ranking membm am an't tell you how thrilled ii am that you have that position.n we have a long time working hava relationship. we are going to be off to ang t great start and i think it'sea going to be a great sessionn wod working together and i certainly look forward to working with alo of the members of the committee.

the subcommittee on the coast guard maritime transportation is joint hearing today with a subcommittee on the resources guard commandant and national incident for the oil spill. unpreceeepwater horn ill size andand duration. it lost a tremendousdous naturad economic disaster on its weight. the joint coast guard and part of interior investigation into the cause of the explosion and sinking of the deepwater horizon as well as the failure of the blowout preventer to contain the spill is still ongoing. the subcommittee will examine the findings of these officials investigation once it is complete. while we await findings of the investigation, the commission on the bp deepwater horizon oil spell as well as the report of the national incident commander

has helped highlight significant questions regarding the best methods for the industry and the federal government to use to prevent and respond to future oil missiles to read this hearing provides the subcommittee with the opportunity to hear recommendations of the commission and the national incident commander on the changes needed to the federal law and regulation to help reduce the likelihood of a similar event happening in the future. i'm concerned with the findings of the commission and the national incident commander that officials tall levels of government work and familiar with the national contingency plan. our nation's 42-year-old blueprint for how to respond to oil skills. but i am particularly alarmed that the senior leaders of the department of homeland security were either unaware or simply misunderstood how the plan functions. i am troubled that the failure of the leadership to recognize and accept and follow the plans

and that slowed the command and the control and the days after this bill undermined public confidence and the government and may have impeded their three sons. but this begs the larger issue of the subcommittee has been concerned but since the coaxed guard was transferred to the department of homeland security, and that is the department does not understand nor appreciate the traditional missions of the coast guard. something we've talked about, something we will worry about, and unfortunately something we see happening. while critically important for security accounts for only 20% of the coast guard does on a daily basis, the remaining 80% our traditional missions like oil spill response. these missions require the department leadership to understand that the need to commit adequate resources and attention as well as participate fully in preparedness activities. unfortunately, that wasn't the case with the bp deepwater horizon insipid. nearly 20 years ago the oil act

of 1990 was created and was a national framework for preventing and responding to the oil spills in u.s. waters. since the passage of the act there have been significant changes in the offshore production storage and transportation of petroleum products and with these changes the requirements to respond to potential incidents have grown more complex. this bill demonstrates that we may need to reexamine the requirements under the current law to ensure they are applicable to the present day operations. finally, i would be remiss if i didn't take this opportunity to remember the 11 transocean members who were lost as a result of this tragedy and to express my sympathy to their families, friends and co-workers with that i would like to yieldñ to the ranking member mr. larson for any comments you may have. >> thank you, mr. chairman, and i as well excited to be a ranking member and working with

you. we do have a good working relationship last several years in congress and look forward to working on them here in the coast guard maritime said commission with you. thanks. i want to thank for conducting a joint subcommittee hearing and welcome the opportunity to discuss the recommendations today. today the message is clear. undertaking deepwater drilling requires a deeper understanding of the risks that accompany the benefits of the deep water drilling. now that we have these recommendations in hand, congress should ask our policieú offered a rigorous safeguard workers, they benefit the economy and protect the environment. to many lives are at stake and to many jobs are at risk for the congress to feel to act. if we cannot cap the offshore resources in a way that protect lives and the environment there will be pressure to restrict the resources. the would be devastating to the maritime industry and the jobs that support the economy as a whole. we also need to have the federal agencies with adequate resources to prevent another tragedy such as this from happening again an

respond, should we have to respond. i would welcome admiral ellen to the subcommittee and appreciate your willingness to serve as commandant of the coast guard as well as the commander of the response effort even fall in your retirement. i look for to you and your observations and recommendations. the deepwater horizon oil still is a human and environmental disaster of unprecedented proportions. as the representative islanders and how devastating oil skills would be to the coastal region. and i want to do everything we can possible to prevent oil spills from any source is occurring in liberia of the country or any other area of the country. e commission report today demonstrates we have a long way to go to prevent similar disasters from occurring again. unfortunately congress is proposing cuts and the muscle and bone of investments needed for growth and to protect our environment. if nothing else, the bp still shows the need for the more robust public capacity to respond quickly and safely to ú oil spells and that's reflected in the report. the public depends on the agencies to ensure the safety of

deepwater drilling and the safety of the men and women who work on these platforms @ is both improve regulation is both necessary and how bp and implements the safety measures during the drilling and ensuring effective meaningful response plants once the bill occurs. so in fact some of the stills fall on the federal government. no one is suggesting we eliminate offer to our coast given what we know now about the risk of the drilling we shouldo put pieces in place to ensure the highest level of safety.fet. the report reveals what many off us expected to learn about this bill refers to the federal government oversight of offshor.

it didn't do the job. second the federal agencies and the industry were inadequate to effectively stalled contract, contain and clean up the spill of the magnitude. there, we learned that the jones act that protects and supports the domestic maritime industry was not a hindrance to the federal government response of the environmental calamity and we will hear this leader and i know that the commission report and admiral allen will concur. i proposed last year along with many other subcommittees may 19 hearing on the split the country take a step back to ensure that any future offshore drilling in the gulf of mexico lives up to claims of safety and reliability to get anything, the commission's report only confirms my -- reaffirms my commissions but i look forward to evaluating the commission's recommendations in the expect our witnesses this morning will provide additional insight on these points. congress responded with the oil pollution act. now 22 years later the bp still

demonstrates the need to amend and strengthen that act. @ i stand ready to work with the german lobiondo and with our ranking ú democratic member congressman rahall and with mr. bishop and the other members of the committee in shaping legislation to strengthen the nation's oil spill response and prevention law. mr. chairman, the deepwater horizon still exposed the risks and cost of energy production and alter continental shelf. @ we have before us an opportunity to make unnecessary course correction in our production of offshore energy. i urge we not let the current debate on the federal government or the regulations toward us ú from making the necessary investments to ensure the offshore drilling can be done safely, efficiently and with minimal harm to our environment and to the workers who work on the platforms in the gulf. thank you, mr. chairman. >> thank you, mr. larsen. i would now like to yield to the chairman gibbs of the water resources subcommittee and environment for his statement. >> thank you, mr. chairman, and i look forward to working on the

transportation committee and also the chair of the water resource environment as we work to improve our infrastructure and also oversight in this agency to work on the infrastructure in dealing with water. there are two federal laws that relate to oil spill is like the one in the gulf mexico last year. the oil pollution act and the clean water act. the oil pollution act of 1990 was largely enacted in response to the exxon valdez spill oil spill and improved the nation's ability to prevent and respond to the oil spills. under opa, the coast guard takes the lead in organizing federal oil skill responses and prevention efforts and tidal waters, while the epa is responsible for coordinating efforts in the long title and inland waters. opa authorized the use of the oil spill liability trust fund, which is capitalized by a per barrel tax paid by the oil industry and penalties paid by the responsible parties. that trust fund is used to pay for the cost of responding to and removing oil spills.

the second flaw is the clean water act, which is the principal federal statute for protecting navigable waters and shorelines from pollution. specifically, section 311 of the clean water act addresses pollution from oil and hazardous substances releases providing the epa and the coast guard of 40 to establish a program for preventing presenting for and responding to the speed and spills occur in the navigable waters of the united states. the act clearly establishes the responsibility of the federal government, states and maritime transportation industry and i carry out cleanup restoration and rehabilitation of the natural resources that were damaged as a result of the oil spill. weigel the pp oil skill was a monumental disaster and caused the tragic loss of 11 dedicated oil field workers we must ensure we do not use this as a catalyst to halt or hinder domestic energy production.

rather, the nation requires a safe, secure domestic supply of energy product now more than ever. the national commission on the bp deepwater horizon oil still has studied this recent oil spa and made several recommendations regarding the federal response. many of the proposals by the commission or worth careful review and consideration as we move forward. thank you, mr. chairman. i look for to the testimony of witnesses. >> thank you, mr. gibbs. i would like to yield to ranking member bishop for his statement. >> thank you, mr. chairman. thank you for holding this important hearing to review the recommendations of the commission on the bp deepwater horizon oil spill and offshore drilling. mr. chairman, in the last congress this committee held a series of hearings in the aftermath of the bp deepwater harbor is a disaster to investigate what went on. what actions are being undertaken by bp and other responsible parties to stop the ongoing flow of oil and restore

the lives and livelihood of those impacted by this bill and what measures were necessary to restore the gulf coast ecosystem. these hearings also focus on what efforts need to be undertaken by the federal agencies and the congress to ensure a similar preventable disaster could not occur in the future. last year members of the subcommittee on the water resources and the coast guard were called to similar joint hearing on the subcommittee's of the subcommittees on the tenth anniversary of the oil pollution act of 1990 and the warnings given by federal agencies and other stakeholders that our nation was rapidly becoming a prepared to address future oil skills. specifically, witnesses testified about the than growing concern that the technologies to extract, process and transport oil will well outpacing the development of technology to quickly and safely control and clean up potential oil spills. over the intervening years, our subcommittees also received testimony from representatives of the coast guard that currently liability limits for

both vessels and facilities such as the deepwater horizon were falling desperately behind the levels necessary to adequately address a worst-case release of oil. unfortunately, this committee didn't heed the warnings given to it over a decade ago, and this nation grew complacent the future oil disaster was unlikely to occur again. fast-forward ten years, and unfortunately our complacency proved wrong. in the summer of 2010, our nation was again faced with a massive oil spill, although this time the relief wasn't from the ground of a ship, but from a seemingly limitless release of oil directly from the sea floor. again the questions arose on how this could have happened, why it was taking so long to stop the flow of oil, and whether this tragedy that resulted in 11 lives lost and impact countless families along the gulf coast should have been prevented. mr. chairman in the days following the deepwater horizon disaster this committee took aggressive action to understand what happened and what changes were needed to take to prevent a

similar disaster in the future to read this committee drafted and moved legislation to address many of the shortcomings identified in the aftermath of the deepwater horizon disaster. this legislation reported from this committee by a voice vote was later combined with proposals from our colleagues on the natural resources committee under the than leadership of the new ranking member mr. rahall and was passed by the house in early summer. unfortunately, no further action was taken on that bill. however, it was the beginning of the new congress, we had the opportunity to start anew. today, mr. chairman, we will hear testimony from representatives from president obama's national commission. in my opinion, we shouldn't be surprised by the findings of the commission to the likely causes of the deepwater horizon disaster or the systemic failures of the oil industry that contributed to this incident. many of these findings are consistent with what we heard during hearings before this committee in the last congress. similarly, many of the statutory and administrative changes

recommended by the commission are consistent with those included in both this committee's bill and the consolidated land, energy and clich resources act of 2010, were the clear act that was approved by the house last year. mr. chairman, in my view, the prudent choice is for this committee to once again move legislation to address the warnings raised by this commission and other stakeholders on the very real threat of future oil still disasters. while some of the recommendations of the commission can be addressed administratively, we all know that several critical issues, such as the currently inadequate liability and financial responsibility limit and issues related to maritime safety can only be addressed by the congress. preventing the next exxon valdez or deepwater horizon is far too important to allow complacency to take over again. as noted by one of the witnesses last congress, we cannot lack the months that have passed without a massive oil still give us a false sense of security that everything is fine. we must recognize the vulnerabilities remain and take

decisive action to address the recommendations made by this commission this year. thank you mr. chairman. i yelled back. >> thank you mr. bishop. i would like to recognize mr. rahall, the ranking member of the full committee. >> thank you. i commend you and ranking member larsen for conducting this hearing today. we will hear from the presidential commission examining the deepwater disaster and the retired admiral thad allen regarding additions for ensuring the offshore gas development in the u.s. is far safer now and in the future and that the devastation of the deepwater horizon is not repeated. certainly want to commend our witnesses, you and in particular admiral allen and the commission called people for presenting our government at all levels for the around the clock work they did and for the country and for trying to ensure the safety and return to the wellbeing of so many of our citizens. while the round-the-clock television of zero oil spewing

into the gulf long since faded to black the urgency we felt to take the steps necessary to minimize the likelihood that it happen again should not fade with the coverage. this truly cannot become a case of out of sight out of mind. we cannot forget the 11 good man but lost their lives and families that lost their income when the fishing grounds were shut down and tourists canceled their visits to the gulf. we cannot forget the environmental and economic impacts of this bill but will last long after the oil can be seen floating on the surface of the sea. yet, in the weeks since the commission released its broad range of recommendations to the reforms and business practices, regulatory oversight and broad policy concerns, we've heard an outcry of the nation from those who claim that it is too soon to take action. that we must wait until every aspect of every investigation has been completed, that we do not need to wait to know that we were not prepared for this type of blowout, that our ability to

clean up oil spills is woefully inadequate, that regulators were too cozy with the industry and that a $70 million cap on liability is too small. that is why in my for our capacity of natural resources' chairman to which mr. bishop has referred, i did lead the house and writing to passage the clean air act last summer that legislation but have provided for a major overhaul of offshore jeweling operations and regulations. decreasing the chances that another blowout what happened in the future and making sure we could do a better job of containing one this it did. many of my friends who voted against the bill argued we shouldn't act until the presidential commission had completed its work. well, the recommendations are now before us. and again and again, they urge us to do the exact same things we did in the clear act. recently been introduced a new bill to implement all the commission recommendations, but again, we are told by some that we need to wait.

but we cannot wait. the commission itself said, and i quote, an action runs the risk of real cost and more lost lives and brought damage to the regional economy and its long-term viability and further tens of billions of dollars of avoidable cleanup costs, and of quote. we should not wait to reform the ranks of inspectors who are supposed to be keeping an eye on the and not playing around with industry operators in the gulf. we cannot wait to reform the walls of the government continent, response and clean up spills or to improve the technologies that these activities rely upon. nor should we wait to improve safety and environmental protection provisions that will ensure the long-term sustainability of this industry as well as the other industries could coexist in the gulf and other areas of the country where offshore energy development

continues. we have a responsibility. we have a responsibility to the families of those that lost loved ones in the gulf, lost business is in the aftermath of this disaster and to the american people. we need to act on these recommendations. restore the economy and the ecosystems of the goals and make sure that offshore drilling is done in an efficient and safe manner. no one should have to risk their lives to earn a livelihood. thank you, mr. chairman. >> thank you, mr. rahall. we are going to -- we will entertain brief opening statements from members if they so choose. i will try to limit them to three minutes if you can do that in less than that i would appreciate it. so we can get to the meat of the hearing. are there -- >> thank you, chairman lobiondo and ranking member gibbs and senator bishop for holding the center this hearing. welcome, admiral allen. it's good to see you, sir, and

thank you for your service top# the country. well. in light of the difficulties our country has faced attempting to cap the bp oil still, it's imperative that we increase our ability to prevent future spill# and expand the country's capability to respond contain a oil spell in order to prevent another regionwide catastrophe. immense technical difficulties involved in capping the bp deepwater blowout, i am hopeful we can apply the lessons learned from the bp oil stelle and never again have 87 days of the oil spewing into the water and have a government bureaucracy repeat (kcovery in the extremep situation.p/ in closing, i would just like tj extend my sympathy and concern for the american families on the gulf coast that have suffered mightily from the effects of the bp oil still, but also becausea of the loss of jobs to the h+0,ú&ú0" k

mr. cummings, a former chair of the committee, and i want to publicly thank you for your work and your cooperation over the last couple of sessions andast s welcome your remarks. >> thank you very much congratulationshe on the chairmanshipsubcommitteed and maritime transportation subcommittee on what resources to congressmen lobiondo and congressman gibbs and ranking to examine recommendations of the to commit to thank the doctor, president of the university of missiles alliance and mr. terry garcia for the service on the national commission on the bpç deepwater horizon. further i take a moment to thank admiral thad allen for his

service on managing the deepwater horizon incident and of course service as the commandant of the coast guard. it's good to have the admiral appear before us today. during a 111th congress as the chairman of the coast guard subcommittee, i convened a subcommittee hearing to examine the vessel operations in the exclusive economic zone and the infrastructure convened to separate hearings to examine the deepwater horizon accident and i traveled to the gulf and had the opportunity to observe the operations in the macondo site at the macondo site several times. and i appreciate the thoroughness of the commission report and the fault fullness of the commission's recommendations. last year under the leadership of the then chairman rahall and the reforms with which the commission is calling for today including increasing the offshore responding to the issues we

examine the coast guard subcommittee, this legislation would also have required all of vessels involved in the resource development in the eec owned by the u.s. citizens who would pay u.s. taxes. the legislation will also have required such vessels to be crewed by u.s. citizens, a further, to help those in the8 claim processing system. the legislation include the provision of i offered that would have reduced from 90 days to 45 days they have to settle be presented for the life of the trust fund. act is a kind of strong that our law and regulations are equal to the risk and the offshore drilling. my belief is only reconfirmed by

recommendations. and i look forward to our testimony and thank the witnesses for being with us and for that mr. chairman i yield back. i&h" use cord extra point. congressman richardson. >> thank you mr. chairman for having this joint hearing this morning and also our ranking members, and i would like to thank our distinguished witnesses here today for helping us as we progress through this difficult tragedy for this country. i asked to speak because i have a kind of unique role in addition to being on t transportation, i was also a time chair of the emergency

communications preparedness fun with the homeland securityrity committee, so i actually visitet the guhelf several times to osev observe the progress from the e multiplea areas.se i within those visits there werewd like to acknowledge.:z the millions of gallons of crude oil that was streaming into the? shores. but i think when we look at the observations i made a report myself of that i want to underscore the large challenges that the response teams face an the lessons taught to be learned in the aftermath of thisz catastrophe. for example, the failure of the? confusion about the number of booms and skimmers that werex? located and where they needed to be placed. the confusion surrounding the chain of command was exacerbated by the number of governorñ?: agencies that comprised the unified response.

and moreover, the magnitude of the disaster rendered many of the federal government agencies contingency plans almost inoperable. i represent california's 37 congressional district. we have offshore drilling in my district, and i am concerned about what happened there and how it can happen again.> finally, i brought forth legislation securing health for the ocean resources and its environment act called the shor act. one, to look at improving the the spill response and account team and prevention capacity. number two, better to find the coordination between the federal, state and local response is. and i am disturbed to say that the same problems we had with her can katrina didn't seem toz? be resolved in our response of federal, state and local elected officials. to clarify the existingñ? authority to receive funds from the oil spill liability trustj fund, to double the amount that coast guards may receive each year with a percentage dedicate towards its oil spill research

and development. to mandate the improvements and the frequency and quality of th? coast guard safety inspections and certification requirements, to require prompt posting by th coast guard unified command of oil spill incident plansñ publicly utilizing all resources not depending upon cable tv to tell the message and finally, to strengthen the coastal state still planning and response. i plan on free introducing this legislation, but more importantly i am also veryn thankful for the report that all of you did, and we look forward to working together. i yield back. 64, congressman miller? >> thank you, chairman, and with all deference sitting next to a great marine, duncan hunter, and my dad was a marine and my son-in-law is a marina and my dad was in the air force, hats off to the coast guard and i'm looking forward to hearing admiral adel to -- admiral allan. i just want to echo what has

been said. just a quick point mr. chairman in regard to the jones act, which is i think it's right to becoming up in the witnesses' testimony and i sure there will be some questions about that today i personally believe it's the jones act is a jury critical component of america's maritime heritage, and during this tragic incident in the gulf, the jones act suffered from an unfortunate misguided on true media campaign against the jones act and they were singing the jones act hindered cleanup efforts and created a lot of the confusion in the gulf and actually looking through the admiral's testimony in regards to the applications of the jones act there was a misperception that the jones act and he did the use for the deepwater horizon response operations and in reality the jones act had no impact on the operation and just one other quick quote from the of reports that we all have in front of us. we did not reject because of the

jones act restrictions. these restrictions didn't even come into place for the vast majority of the vessel's operating because they acted not as foreign vessels from loading or unloading oil more than 3 miles off the coast and when the act did apply, the national incident commander of your staff granted waivers and exemptions when requested. so i would point that out and i think this hearing is a great way to explore everything that happened in the gulf and in particular set to rest a lot of misperceptions many people in the country and the globe found out that the jones act as we see now i had no negative impact to read again, thanks for calling this hearing, mr. chairman. >> thank you. the gentle lady from hawaii. >> thank you. odd, too, would like to thank the coast guard for everything they do. they are a major part of our response teams in hawaii. and i also would like to echo the sentiments of congress when

miller and her explanations of the impact of the jones act and the misinformation that a rose above the jones act as a result the bp disaster. what strikes me about the commission's report moving on to that is that this disaster could have been prevented, and the companies that were involved in certain things of commissions and omissions that we really need to ensure never happens again, and as far as i am concerned there should be some major accountability by these companies and the follow-up of the disaster. and so, what i'd like to see the committee do is move forward and support the recommendations of the commission. with that, i yield back. >> we have the gentleman from coastal louisiana who wants to say something. mr. landrieu, there you are. okay. >> thank you, mr. chairman and chairman gibbs for calling the hearing today.

..7=g ranking members of state to the accident that happened on april 28, 2010, was an economic environmental human tragedy that cannot be minimized or forgotten now with the images of the accident have stopped playing out on the news. as the representative of the coastal louisiana, the macondo incident is seen in every corner of the district. gz0,000 men and women in my district either work or are affected by both the commercialá fishing industry and the wheel and gas industry and while the shrimpers oysterman our fishermen are doing the best to return to work my neighbors >> every day we fail to utilize our own energy resources in the gulf of mexico and it's a day

america is held captive by ongoing crisises in the middle east, the turmoil in the rest of the world, and i wish the commission's report would have addressed the economic impacts of this moratorium. i'm also concerned with the commission's recommendations to increase the liability cap in financial responsibility requirements. make no mistake. i don't believe this should cause damage in the economy. however, i also believe that small oil and gas producers have a role to play in the gulf of mexico. in any action which drives these producers away will ultimately hurt this nation. i'm confident that a system can be implemented that violates the health of the gulf while still ensures drillers are not pushed out the industry. more broadly than the recommendations, i disagree with the commission's stance that the entire offshore industry can be

characterized by mistakes or failures that happened on april 20th that have been more than 50,000 wells drilled in the gulf of mexico, 3200 in deep water. of these wells, macondo was the first major incident. i believe we should keep in mind, and i agree with the commission's report that we should keep in mind the safety of the men and women who apply their trade in the gulf of mexico. with that, i yield back the balance of my time. >> thank you mr. landreu. >> i appreciate the chance to serve with you on this committee and look forward to working with you. i look forward to the testimony from the distinguishes membered of the commission here on this bp deepwater horizon spill. the spill was for 86 days, a human and economic environmental disaster.

it's unparalleled in our country's history, but it was foreseeable and preventable. thanks to the swift response of admiral allen, the administration, and recovery workers in the gulf, negative impacts were reduced, but still great. as a result of the work performed by this commission, we have a better understanding why this spill occurred and how to prevent similar tragedies in the future. the valdez taught us some things, but that was about environmental damage. there were not a loss of lives. in this situation, we're dealing with the loss of human lives. we lost 11 individuals on that rig, and we owe it to those individuals and to the thousands of americans who risk their lives every day to heed the warnings and fry to prevent future -- try to prevent future tragedies by looking at the recommendations and passing them. there are tens of thousands of

people in the gulf area who had livelihoods devastated, den we owe it to them as well, but mainly those who lost life. if you don't fix history, you're doomed to repeat it. if there are people who die in the future and we didn't do anything to protect those workers, their blood will be on our hands. there are improve. -- there are improvements that no longer protect the health and well being of the people and economy. i lope the congress will heed the warn signs, respond with legislation that will save live the in the future as well as the economies. i thank the witnesses for their work in safeguarding the people in our environment, and i look forward to hearing their testimony in looking forward to try to see american vessels in the future are safer, and they they are american vessels, and not necessarily ones flagged in

the marshall islands. >> thank you. any other members we missed who wanted to have a few opening remarks? seeing none, we'll now go to our witnesses, and our witnesses today include two members of the national commission on the bp deepwater horizon oil spill and offshore drilling. dr. donald boesch is environmental of science joined by fell loy commissioner jerri garcia, the executive vice president for the mission programs for the geographic national society. thank you, and please proceed. >> [inaudible] >> could you put your mike on, i think? >> mr. chairman, and members of the subcommittees, thank you for giving me and my colleague, jerry garcia a chance to testify. it's an honor to present the findings regarding the explosion and spill as well as

recommendations in u.s. policy concerning offshore drilling. as innative of louisiana and having lived through the difficult decade of the 80s, i understand the importance of the oil and gas industry in the local economy and the nation's energy supply. anyone from the region understands the need to maintain a thriveing industry. it was deeply personal to me to witness the damage done to the coast and wetland and communities as a result of the spill. in may of last year, president obama created our commission and asked us to determine the causes of the deepwater horizon disaster, evaluate the response, and advise the nation about future energy exploitation that could take place responsibly. as you know, on january 11, exactly one month from today, we released our final report.

as chairman bob graham noted, our report was submitted on time and under budget. our final report offers suggestions add the administration, congress, and history to improve safety of drilling and substantially reduce the risk of something like this happening again. today, however, i want to focus my opening remarks on the equally important portion of our recommendations, ways to improve the government's oil spill response and containment capabilities. in their response to the deepwater horizon, let's face it, both the government and the industry fell short. although many responders acted quickly, and in some cases heroically, and admiral allen provided effective and valuable leadership during this response, the commission concluded that neither bp nor the federal government was adequately prepared to respond to a spill

of this magnitude and complexity. there was a failure to coordinate effectively with state and local governments and the lack of information concerning what response measures would be most effective. in addition, neither the industry nor the federal government has invest the in the research and development needed to have spill response and technology. much of the technology was the same used in the exxon valdez spill years earlier. at the outset of the spill, the industry was able to control the flow of oil from the well, and neither the government or the industry had sufficient expertise to determine at the rate of which oil was flowing. the lack of accurate knowledge impeded the efforts to determine the appropriate control technology and cap it quickly. all of needs factors together made for a long response effort that at least in the early stages did not meet the standard of what the law presently requires. in our report, the commission

makes a number of recommendations to approve response and containment. among the recommendations, first, the department of interior consults with agencies should develop a rigorous set of requirements for industry response plans and require companies to submit containment plans as well as oil response plans. second, epa should involve state and local governments to significant players in the spill response planning. congress should provide mandatory response for research and development. industries should fund a private organization to develop, adopt, and enforce the standards of excellence to ensure improvement in equipment for large scale response and containment and rescue, and finally, the federal government should ensure that it has the needed expertise to oversea these industry containment efforts. commission's effort the are far reaching in this area.

there's a role for congress for sure in improving capabilities. there's a role for congress also in conducting oversight as our government takes these actions. i'll conclude my remarks by noting the drilling offshore is inherently risky, the risk will never be reduced to 0, but as a nation, we can take concrete steps to reduce the chances of a another macondo blowout. that improves our ability to respond if this were to occur again. the commission feels these steps are necessary to the people of the gulf who deserve to know their government and industry are doing so. thank you for this opportunity. you have our written testimony and our report for the record. thank you. >> good morning, mr. chairman, members of the subcommittee. thank you for giving us this opportunity to testify concerning the findings and recommendations of the national commission on the bp deepwater

horizon oil spill and offshore drilling. any severe catastrophe of significance like the explosion of the macondo well and the oil spill in the gulf of mexico strains public confidence, fosters widespread concern and anxiety, and creates an urgent need for candid explanation, but it can also create an opportunity to bring renewed focus to challenges. as tragic as this was, it can play a positive role in the valuable ecosystem. i'd like to focus remarks on the commission's recommendations for the restoration of the gulf of mexico. as a result of the deepwater horizon spill, over 170 million gallons of oil went into the gulf with some portion remaining in the ocean and settling on the floor. before the highly visible damage is caused by the spill became clear, many crucial gulf resources,