Segment 2 Of 2     Previous Hearing Segment(1)

SPEAKERS       CONTENTS       INSERTS    
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EPA GRANTS MANAGEMENT

Thursday, November 4, 1999
House of Representatives, Subcommittee on Oversight, Investigations and
Emergency Management, Committee on Transportation and Infrastructure,
Washington, D.C.

    The subcommittee met, pursuant to call, at 2:07 p.m., in Room 2167, Rayburn House Office Building, Hon. Tillie K. Fowler [chairwoman of the subcommittee] Presiding.
    Mrs. FOWLER. The meeting will come to order. The subcommittee will come to order.
    Today's hearing will be the first in a series of hearings designed to assess the adequacy of grants management and oversight at the Environmental Protection Agency. EPA's mission includes protecting the health and welfare of the American people by safeguarding the natural environment. That's a monumental task. It means, among other things, that EPA is responsible for keeping our water safe to drink, our air healthy to breathe, and reducing pollution in our lakes, rivers and along our coastlines.
    Congress recently appropriated $7.6 billion to the EPA to enable the agency to meet this challenge in fiscal year 2000. This figure is $63 million more than the President's request. As in the recent past, more than half this money, over $3.8 billion, will be released by the agency in the form of grants. The vast majority of these grants are for programs under the jurisdiction of this committee, including the Clean Water State Revolving Loan Fund. This committee is, and continues to, be a strong advocate for these grant programs.
    I want there to be no misunderstanding. We support these grant programs, but these programs do support very critical national needs, and they have been instrumental around this country in reducing the pollution that threatens our health and natural resources.
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    The committee's support of these grants and the large amounts spent on them require us to take a close look at how these grants are being managed. Each year EPA spends approximately $3.7 billion in grants. The question is, 'What are we getting for our money?' Are we getting cleaner air and cleaner water? The disturbing answer that we will hear today is,'We don't know sometimes what we are getting.'
    There is strong evidence that EPA is not fulfilling its obligation to monitor and oversee what is happening to its grants. In fiscal year 1996, EPA's Inspector General released a report exposing serious mismanagement of grant funds; and for each subsequent fiscal year, EPA has identified grants oversight as a material weakness. It is the opinion of the Inspector General that some recipients have wasted the taxpayers' money and, at times, EPA is not getting what it has paid for.
    In fact, problems seem to occur throughout the whole grant process. These problems include incomplete grant application reviews, incomplete review of payment requests, and little follow-up to ensure that required audits were performed.
    The EPA Inspector General and GAO identified all of these conditions and more in the recent past. To its credit, EPA has adequately responded to these individual cases once they are uncovered. But EPA should not be relying on the auditors to do its grants oversight. You cannot audit your way to effective grant oversight. EPA managers are ultimately responsible for overseeing this money. Every dollar we waste means the American people are losing out on a cleaner environment.
    Today we will try to determine exactly how widespread and serious these problems are. I look forward to hearing from all of the witnesses on the subject of grants management of EPA, and I now would like to recognize Mr. Traficant, the Ranking Member, for an opening statement.
    Mr. TRAFICANT. Thank you very much. I ask unanimous consent that my lengthy statement be incorporated into the record and that I will just make some brief remarks.
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    I think even the EPA has acknowledged the fact that there have been some problems, and I think they're beginning to work on those problems. From all the information we have, Mr. Diaz has been a breath of fresh air and has a lot of confidence that those things will happen, but I have a couple of disturbing issues that cross my pumpkin, Madam Chairwoman.
    One was a 1997 EPA award—and keep in mind my district, although all those steel mills are now closed, could really use some of these grants, as could many other decimated industrial communities. There's a 1997 EPA award to market an electric bicycle in China. The bicycle, to boot, was being made in Taiwan. Now, unless I'm wrong here, our taxpayers gave a grant to—forget the genesis of this company business, who it was, what it was—to market an electric bicycle in China being built in Taiwan. I want an answer to that when the time comes because I want to know what's going on.
    There's also another one that caught my attention, and this was a wind energy assessment grant in China. I understand there are great concerns but, for the life of me, I'm trying to figure out what's going on here. So I will have a number of questions, and I'd ask that my complete statement be placed in the record.
    Thank you, Madam Chairwoman.
    Mrs. FOWLER. Thank you, Mr. Traficant.
    [The statement of Mr. Traficant follows:]

    [insert here]

    Mrs. FOWLER. I believe with no other members here—I know some others are coming later this afternoon.
    I do want to alert all of our witnesses that it appears we're going to be having votes every 30 minutes. So we will move as quickly as possible. When we do have votes, we'll stop, vote, and run back. That's the joy sometimes of the voting procedure, so I do apologize for that.
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    The chair will now call the witnesses for the first panel: Ms. Nikki Tinsley from the Environmental Protection Agency. Ms. Tinsley holds the position of Inspector General at the agency. I believe you have with you, Ms. Tinsley, Ms. Lisa White and Mr. Carl Jannetti.
    Ms. TINSLEY. Lisa White and Carl Jannetti. Behind me I have Lisa Karpf. And I have to credit these three people primarily with my testimony, and also they've done a great deal of the work that we'll talk about today.
    Mrs. FOWLER. It's standard procedure for the subcommittee to swear in all witnesses. So, if Ms. White and Mr. Jannetti will also be speaking, would you please stand and raise your right hand and we can swear you in.
    [Witnesses sworn.]
    Mrs. FOWLER. We as if you could summarize your testimony in 5 minutes and we have this little light system down there, as you know. Without objection, your full written statement will be included in the record.
    Ms. Tinsley, you may proceed.

TESTIMONY OF NIKKI L. TINSLEY, INSPECTOR GENERAL, ENVIRONMENTAL PROTECTION AGENCY, ACCOMPANIED BY LISA WHITE, CARL JANNETTI AND LISA KARPF

    Ms. TINSLEY. Thank you. Good afternoon. I'm pleased to have the opportunity to tell you about EPA's administration of assistance agreements.
    As you mentioned, the assistance agreements are the primary vehicle through which EPA delivers environmental and public health protection. EPA awards approximately $4 billion annually in assistance agreements to States, local and tribal governments, universities and others. These represent more than half of the Agency's budget.
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    In July 1996, the previous IG testified about EPA's assistance agreements. At that time, our audits showed that recipients did not provide the products and services specified in the agreements and that EPA needed to improve its assistance agreement oversight.
    Today I'm going to discuss more recent audits and our plans for the future. Unfortunately, we've found some of the problems described in our 1996 testimony in our more recent audits. EPA was not adequately managing grants, and grantees were not providing agreed-upon products for services. On another front, EPA inappropriately asked grantees to perform activities that were the Agency's responsibility.
    We did a series of audits of Clean Air Act grants to States. These large grants to prevent and control air pollution amount to $160 million annually. We looked at activities in seven States, four EPA regions, and EPA headquarters. Significant aspects of State work were substandard, including inspections, reporting, and enforcement. EPA regions did not clearly communicate expectations to States, nor did they monitor State performance. As a result, EPA did not know the extent of air pollution problems and was unable to take action on those problems.
    We did a series of audits of smaller grantees to see how successful they were in delivering products and services. We found that EPA headquarters lacked controls to prevent paying twice for the same work. A headquarters office and a regional office awarded environmental justice grants with identical work plans to the same recipient. The grantee wrote to both offices questioning the work plans. Neither office responded, neither office monitored grantee performance, and neither office received the product that it expected.
    We found that EPA does not always compare grantee plans with their performance. It's difficult to improve environmental program delivery without such comparisons.
    In an audit of $4.6 million in training grants, we found that EPA did not always know the cost to train students or how many students were trained. To provide similar training, one grantee received $1,400 per student. Another grantee received $1,000 per student. Another grantee received $500 a student. A grantee who planned to train 175 students trained only 51, escalating its cost to $3,400 a student.
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    We found patterns of poor EPA oversight and poor grantee performance. When EPA does not monitor performance, public benefits are often diminished. A grantee who completed only 25 percent of the work proposed in the grant received all of the $750,000 awarded. Five years ago we had looked at that same grantee, and we found that again that grantee performed inadequately. At that time, it received $1.6 million.
    Another problem which EPA must correct is its long-standing practice of awarding grants when it should have contracted for work. Federal law requires agencies to contract for goods and services which benefit the Agency. Under a grant for air research and training, EPA directed the grantee to hire an individual to perform inspections that were the Agency's responsibility. The grantee did not consider this work appropriate and advised EPA that his organization would not be responsible for inspection results.
    The audits I've just discussed demonstrate that EPA limits its ability to deliver environmental results when it fails to adequately administer assistance agreements. EPA has completed some actions to address the problems I've described today. Other actions are ongoing. In future work we'll evaluate the effectiveness of some of these corrective actions, but EPA must evaluate its own actions as well.
    Over the past few years, our grant audits have focused on individual States, regions, programs, or grantees. Our future audits will focus on cross-cutting national issues to determine if systemic problems exist in EPA's grants administration.
    In our future audits, we'll determine whether grantees are delivering promised products and services while effectively managing funds, whether government laws and regulations are adhered to, whether EPA officials are held accountable for effective grants administration, and, most important, whether grant program results contribute to environmental goals. We'll work with the Agency to develop solutions to any problems we might identify.
    Delivery of environmental and human health outcomes through assistance agreements is critical to the success of EPA programs. Our office is committed to helping the Agency and to helping Congress ensure that the $4 billion awarded annually is producing its intended environmental and public health benefits.
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    Mrs. FOWLER. Thank you. I commend you. You ended even before the light changed.
    We want to thank you for the good work that you have been doing in this, Ms. Tinsley, and your staff, because I've been reading some of these reports and the staff has, too.
    I think what we're going to do is go ahead and ask some questions and run over at the last minute to vote.
    Mr. TRAFICANT. Madam chairwoman, I ask unanimous consent that the statement of our Ranking Member, Mr. Oberstar, be included in this record.
    Mrs. FOWLER. Without objection, so ordered.
    [The statement of Mr. Oberstar follows:]

    [insert here]

    Ms. Tinsley, it appears, in surveying the record, we spent about $11 billion on these EPA grants over the last 3 years. Do you know what we're really getting for this money? Can you tell? Have you been able to document it?
    Ms. TINSLEY. Our work, as I mentioned, has just looked at some pieces of it, and that's really the reason for our future work. We're going to try and do some systematic things. Certainly the revolving funds which you've mentioned, we do a lot of work in that area, and we're comfortable that that fund is set up to perpetuate itself as it was intended. We're concerned about some of the other programs, the air work which I mentioned, and EPA has done a lot to address the problems we identified in the air program. We've found similar problems in things like RCRA and in some of our water grant work.
    But at this point I can't tell you for sure that everything is or everything is not working.
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    Mrs. FOWLER. What kind of time line are you looking at for your new plan on how you address these issues?
    Ms. TINSLEY. We've done a series of these plans in different parts of the Agency programs, and usually we try and complete our plans in about a 3-year cycle, although grants are going to be something, because of the extent of the work in that area, that we'll always be looking at. At this point, the systemic look at the systems is really important.
    Mrs. FOWLER. But that would not be completed then for 3 years?
    Ms. TINSLEY. Right. We'll just have a series of ongoing audits that address different aspects of those issues that I mentioned.
    Mrs. FOWLER. I guess my concern would be, because these problems have been ongoing, as documented by your office, and don't seem to be getting corrected, that we're going to have another 3 years of problems. Because one of the things, it appears, is EPA holding grant managers accountable. You just cited in your testimony a grantee that 5 years ago had a problem, and they're giving them more money, and they still aren't doing it. So, do you see any consequences that poor grant managers are facing? Is EPA holding these poor grant managers accountable in any way? Have you found that out?
    Ms. TINSLEY. Our information does not show that there's a lot of accountability, but I think Mr. Diaz needs to respond to that question.
    Mrs. FOWLER. We'll ask that also there. But I worry in 3 years we'll have another $11 billion—with a -B—spent on grants, that if they continue to be, with the problems you've been addressing, some of this money won't be spent well. I worry about waiting that time.
    Has EPA been making an effort to really beef up its training of grant managers and has this really been effective? I know that is one of the things you've been suggesting is the training. Do you see that being done and is it being done in an efficient manner?
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    Ms. TINSLEY. EPA does a significant amount of training. They may have even completed most of the training they had planned. Our office has helped by addressing students during those classes. I think the important thing from an accountability standpoint that you mentioned is, now that people are trained, we need to make sure that they perform those functions that they've been trained in.
    Mrs. FOWLER. My last question to you would be what would you suggest that the single most important step that EPA management could take at this time to improve its grant management?
    Ms. TINSLEY. I think the accountability piece that you mentioned would probably be the piece that makes a difference.
    Mrs. FOWLER. Hold those grant managers more accountable.
    I would like to move to my ranking member, Mr. Traficant.
    Mr. TRAFICANT. Madam Chairwoman, I ask unanimous consent that my questions be submitted in writing and answered in detail and spread across the record.
    Mrs. FOWLER. Without objection, so ordered.
    What I think we will do is go for this vote and then come back. And, Ms. Tinsley, I know, so as not to hold the three of you up, I think any further questions we have I'll submit in writing also so that you won't have to hang around after this. And then we can go ahead and start with Panel II.
    But I want to thank you and your staff for the very good work that you have been doing and are continuing to do because it's been very helpful to us, as I know it is to the EPA. Because that's the whole role of inspector generals for every department and agency within this government--to make us work better and more efficiently and effectively and to be accountable. And you've certainly been doing a very good job. So keep up the good work.
    We look forward to working with you on this because this is just the first hearing in a series we'll be having. So, not to hold you up now while we go vote, we'll go ahead and recess for just 10 minutes, and we'll come back. But we'll be done with the first panel, and we'll go on to the second panel then. Thank you very much.
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    Ms. TINSLEY. Thank you.
    [recess.]
     Mrs. FOWLER. The subcommittee will come back to order.
    We do have agreement from the other side that we can go ahead and proceed. Some of the members are on their way, but not to hold you up and knowing we are going to have another vote in about 30 minutes we want to at least try to keep this proceeding going.
    I now call the witnesses for the second panel. I hope I can do this right.
    First, we have Dr. Ashutosh Deshmukh from Pennsylvania State University. Dr. Deshmukh is a professor of accounting and an expert on management fraud. And next we have Mr. Arthur Blinci who is from the Nonprofit Risk Management Center. Mr. Blinci is on the board of directors of the Center and a risk management expert.
    As with the first panel, we will swear in the witnesses. So if you would please stand and raise your right hand.
    [Witnesses sworn.]
    Mrs. FOWLER. Please be seated.
    Again, we ask that you summarize your testimony in 5 minutes; and, without objection, your full written statement will be included in the record.
TESTIMONY OF DR. ASHUTOSH V. DESHMUKH, ASSOCIATE PROFESSOR OF ACCOUNTING, PENNSYLVANIA STATE UNIVERSITY AT ERIE; AND ARTHUR F. BLINCI, MEMBER, BOARD OF DIRECTORS, NONPROFIT RISK MANAGEMENT CENTER

    Mrs. FOWLER. I understand, Doctor, that you go by Dr. Ash; is that correct?
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    Dr. DESHMUKH. Yes.
    Mrs. FOWLER. Thank you. Dr. Ash, you may proceed.
    Dr. DESHMUKH. Thank you for inviting me to testify today on the problem of potential fraud, waste, and abuse in grants awarded by the Environmental Protection Agency.
    I have been asked to provide estimates of fraud, waste, and abuse in EPA's grants program. The cumulative dollar value of EPA grants for fiscal years 1995 through 1998 is about $9.84 billion. As per my analysis, the cumulative estimates for the potential fraud, waste, and abuse for these 4 years range from $590.40 million at the lower end and $1.180 billion at the higher end.
    The assessment of fraud, waste, and abuse in the commercial or governmental sector is a complex task. There are few studies that deal with estimating fraud, waste, and abuse. The estimates derived concerning fraud, waste, and abuse are soft, based on various simplifying assumptions and can be interpreted differently for the following reasons: One, it is difficult to define fraud, waste, and abuse precisely. Two, fraud, waste, and abuse are covert activities. Perpetrators are not likely to publicize their successes. And, three, the nature of fraud, waste, and abuse changes when economy and technology changes.
    Similar problems occur in my efforts to estimate fraud, waste, and abuse in EPA grants management. I will briefly describe my assumptions and conclusions.
    The Association of Certified Fraud Examiners comprehensively surveyed occupational fraud and abuse. This survey states that fraud and abuse costs organizations approximately 6 percent of total revenues. The victimized organizations represent 12 industry groups, including government.
    I deem 6 percent as the lower end estimate for the potential fraud, waste, and abuse in the EPA grants for the following reasons:
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    One, the 6 percent estimate of the Association of Certified Fraud Examiners is for fraud and abuse. However, in the EPA managed grants we include waste as a factor.
    Two, an analysis of EPA grants oversight indicates that, -A, the EPA Office of Inspector General during fiscal years 1996 and 1997 acknowledged oversight of assistance agreements as a material weakness; -B, EPA's on-site reviews and desk reviews during fiscal years 1997 and 1998 account for 2 percent of the total number of grantees; -C, in the case of nonprofit grantees, the outreach activities do not exceed 20 percent of the recipient organizations.
    The upper end of the potential fraud, waste, and abuse may be considered to be 12 percent in the EPA grants program. This conclusion, however, derives from an analysis of a very limited number of EPA Office of Inspector General reports. This analysis indicates that 13.5 percent of total costs were questioned costs in the audits done by the Office of Inspector General. These audits are assumed to be comprehensive and successful in discovering almost 100 percent fraud, waste, and abuse; and the grantee organizations are assumed to be high-risk organizations. The descriptions of questioned costs could qualify as fraud, waste, and abuse. Thus, a high-end estimate of potential fraud, waste, and abuse can be taken as approximately 12 percent.
    Any framework for grants oversight should answer the following questions: One, what is the extent of fraud, waste, and abuse in the system? Two, how should we contain fraud, waste, and abuse at a minimal level since we cannot totally eliminate them? And, three, what is the most economical way to achieve our objective?
    I have attempted to answer the first question. Estimates concerning fraud, waste, and abuse, however, will always be just that, estimates. Numbers derived in this testimony are illustrative only. A more complete estimate can be obtained only by further research.
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    The incidence of fraud, waste, and abuse cannot ever be fully discerned through surveys, audits, or analyses. This testimony only highlights the possibilities for fraud, waste, and abuse in the EPA grants, and the analysis presented is not the only way to approach the problem. I only wish to draw attention to the potential for fraud, waste, and abuse in the grants awarded by the EPA.
    This concludes my formal statement. I would be pleased to answer any questions you or the subcommittee members might have.
    Mrs. FOWLER. Thank you, Dr. Ash.
    Mr. Blinci, if you would proceed with your testimony, and then we'll go to questions. Thank you.
    Mr. BLINCI. Good afternoon, Madam Chairman and members of the committee. It's my pleasure this afternoon to represent the Nonprofit Risk Management Center to address the issue on why internal controls are an important aspect in the operation of all nonprofit organizations in the United States.
    We daily depend on the nonprofit sector to provide key community services for our families and society. It's estimated that there are over 1 million diverse different types of nonprofit organizations and these make up approximately 6 percent of all organizations in the United States.
    One of the key characteristics of a nonprofit organization is its reliance on volunteerism to accomplish the mission of the organization. It is estimated that over 109 million individuals in the United States volunteer their services to the nonprofit sector.
    Another interesting characteristic of the nonprofit sector is its dependence on third party revenue sources. And when you depend on a third party revenue source, it raises a higher expectation of trust that these funds be used in an appropriate manner. This means that accountability standards and standards for care must be found throughout the nonprofit sector.
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    It is my understanding that in 1998 the EPA awarded 994 grants to the nonprofit sector valued at over $230 million. This is truly a small percentage of the $3.8 billion awarded. However, I'm sure that each of these grant dollars was a significant help to the nonprofit who received them, and proper oversight of these funds on the part of the nonprofit sector is essential.
    In order to make sure that the oversight is in place, we must understand what causes fraud and embezzlement, and it's really a very simple prescription of crime equals opportunity and motivation.
    In the nonprofit sector, we find the opportunity is there because, quite often, too much trust is invested in key individuals. There's inadequate staffing to separate accounting duties appropriately. It's too easy to have access to cash. It's, in many cases, a place where there is a lack of either organized financial reporting or a lack of audits, and apathy and denial that fraud or embezzlement could happen within their organization.
    The motivation of what makes people inappropriately use funds is the same in both the nonprofit and the corporate sector. They understand there's a lack of internal controls. They have personal financial challenges. They rationalize that they aren't stealing money or misusing money. They're just going to borrow it. They feel that, since they volunteer, they're just trying to make restitution for the services that they're providing.
    Because of this, key internal controls at the nonprofit level is essential. Too much trust in individuals should be recognized before grants are issued. A review of the separation of duties in the accounting systems should be evaluated, making sure that proper authorizations for expenditures are given, that the organization does produce timely financial reports, that these reports are reviewed by the nonprofit board, and that annual audits are conducted.
    It's interesting that nonprofit boards must have a clear understanding of the restrictions that may be placed upon them if they receive a grant in the first place because, all too often, they may become overdependent on this type of funding. They need to ask the question, are we really looking to forward the nonprofit's mission or are we just trying to get additional funds, and then try to figure out how to maintain those funds.
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    We believe that, to achieve this, we must have a two-way effort on the part of the nonprofit grantee and the grantor of the funding. A clear understanding must be in place for the expectations and regulations that are going to be required. They need to understand what are the implications of the grants that they're about to receive and, on the grantor's part, they need to review the management systems that these organizations have in place and then agree on the benchmarks that will be required. We do believe that it's reasonable to request this.
    It's estimated that over $3 billion a year is lost in fraud and embezzlement here in the United States, and we know that nonprofits can make a difference if they have strong internal controls. We know that an effective system will achieve the nonprofit's mission of serving their community.
    On behalf of the Center, we would like to thank the members of this committee for the invitation, and we will continue our role to educate the nonprofit sector on the importance of having internal controls.
    Mrs. FOWLER. Thank you, Mr. Blinci.
    I want to thank both of you.
    I think we'll go ahead and start some questions so maybe we can get through before we have to run over to vote.
    Dr. Ash, your estimate of waste, fraud and abuse being possibly as high as 12 percent is troubling in light of your review of EPA grants. What action do you think that EPA management should be taking to reduce waste, fraud, and abuse? I know you said it could be anywhere from 6 to 12 percent. Any of that is fairly troubling.
    Dr. DESHMUKH. I think that any effort to cut fraud, waste, and abuse should start with the basic question, what is the extent of the problem? When I was approached to make an estimate, I was very surprised to learn that there is no estimate about existing fraud, waste, and abuse. If we do not know the estimate, then we do not know what amount of resources that should be devoted to fraud, waste, and abuse; and we also don't know what actions should be employed to cut fraud, waste, and abuse. That, I think should be the starting point.
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    Apart from that, there are certain areas that deserve some consideration and that might be already under way in the EPA audit ordered by the Inspector General.
    One is to develop a screening mechanism for the grantees. If you have a good screening mechanism for giving out grants, maybe you will get capable and resourceful grantees who will develop and deliver work.
    Two, you can also look at the auditing techniques that are geared toward detecting fraud, waste, and abuse. There is considerable research being done in this area, and some of it can be adopted to the work being done by EPA, and you can employ techniques that will discover fraud, waste, and abuse.
    Another suggestion, the third one, would be to develop a comprehensive database of grants where fraud, waste, and abuse was spotted; and this database should include what type of persons are involved, what type of organizations are involved, and what percentage of grant funding was lost. And that might give you some idea about fraud, risk, and abuse.
    And also it might help—the fourth suggestion would be to make the consequences of fraud, waste, and abuse known to grantees. That might also help.
    Mrs. FOWLER. Same thing as the Inspector General said, consequences are important. Accountability is important.
    When you talked about your first step, pre-award screening, are there any particular steps that you could recommend that should be included in the pre-award screening process?
    Dr. DESHMUKH. I won't be able to recommend a particular step since the EPA projects are so specific, but the area of risk assessment has been getting a lot of attention in the public accounting area regarding what audits you should accept. And they look at the reputation of the client, history of the client, the quality of internal controls, and that tells you whether the client should be audited and whether the relationship will be mutually profitable.
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    In the case of EPA grants, you can look at the history of the grantee, for example, the quality of internal controls, and some of those issues can be treated as pre-screening mechanisms, but it's difficult to give a specific list of factors right now.
    Mrs. FOWLER. Just one other question for you, Dr. Ash.
    As we know, audit and oversight resources are always in short supply. Is it feasible for EPA management to develop many more rigorous bases for overseeing its grantees--perhaps by using some type of statistical sampling methods?
    Dr. DESHMUKH. Statistical sampling methods will be certainly useful.
    Actually, there are two ways to approach the problem. One is to use statistical sampling to perform audits, the individual audits of grantees. There are several studies of statistical sampling. Research has shown that statistical sampling methods are generally more effective than judgmental sampling. There are also some statistical sampling methods like discovery sampling which are geared toward discovering fraud. You can adopt these individual fraud audits to discover fraud, waste, and abuse.
    A second approach will be to treat the entire grantee population as one big pool and then select grantees randomly based on statistical principles and totally audit those grantees for fraud, waste, and abuse. Then, you can project those results to the population and you can get a good handle on what kind of fraud, waste, and abuse exists in the system.
    Another area will be, again, fraud auditing, where a lot of research has been done by the Association of Certified Fraud Examiners and the Big 5 accounting firms. Some of those techniques can be applied to the audits by EPA.
    Mrs. FOWLER. Thank you.
    Mr. Blinci, what are some risk reduction strategies and techniques that the EPA and its grantees could employ now to manage risk more effectively? As you have been working with the non-profit sector, do you see some of these things being used by the EPA?
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    Mr. BLINCI. I believe that the EPA, especially for grants that are going to be under the $300,000 level where there is not the audit oversight, should carefully screen the nonprofit organizations who are going to receive it. I think in the application process they should be required to submit copies of audited financial statements so that the EPA could review an audited statement before they ever grant money to them.
    Another area that would be a financial screen is, 'How dependent is that nonprofit organization going to be on the grant that's received?' What portion of its operating budget is coming from this grant? Will they become dependent on it? That I think would be a question that, if that flag was raised, you would then want to start quizzing them deeper as to whether you achieve the purpose, can you comply with the record keeping if this is going to be your major portion of funding.
    Mrs. FOWLER. Well, for one thing, I agree with you. I'm very concerned about these grants that are under $300,000 and not audited; therefore, they mount up if you multiply them by the numbers that you give. If these grantees are trying to establish some better internal controls and ways to provide better statements to the EPA, should the cost of establishing those internal controls by the grantee be passed on to the government?
    Mr. BLINCI. I would think that you shouldn't necessarily have to pass them on to anyone. Because the non-profit organization has a limited amount of funding to begin with, and they need to have the internal controls in place, whether or not they were to receive a grant. And so that really should be a cost of the non-profit organization, and there are ways that you can put in separation of duties, even if you have a small staff, by using board members to perform certain oversight functions or even volunteers to provide some of the separation of duty functions that are critical to having a strong system of internal controls.
    Mrs. FOWLER. If they don't have them, then they shouldn't be getting the grant?
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    Mr. BLINCI. Correct.
    Mrs. FOWLER. Do you see a discernible difference in how grantees at the Federal level are monitored versus those grantees who are receiving private sector funding? Because I know the non-profits you work with receive funding from these different sources and should Federal grantees be treated any differently?
    Mr. BLINCI. I don't really believe so. Because it's all trust, money that is being given in trust with restrictions. And that's why I said in my testimony that both sides of the equation must have a clear understanding of what are the responsibilities, what are the expectations, and then they should be able to comply with that. Whether it's coming from a private foundation or the Federal Government really shouldn't make any difference.
    Ms. FOWLER. I agree.
    Just one last comment really. I just want to make sure this is clarified here. And I was concerned, Dr. Ash, in reading your statement that if you take the 6 percent to 12 percent estimate of waste, fraud, and abuse that could be occurring in these EPA grants, then the potential that we are losing through these grants over the last 4 years is anywhere from almost $600 million to over a billion dollars. That money has not been spent wisely, whether it's been lost through fraud, through waste, or abuse, and could have been used for other purposes for a better environment. Am I correct in that?
    Dr. DESHMUKH. Right.
    Mrs. FOWLER. That's something we will take up at the next panel we'll be addressing. Because those are dollars in today's tight budgets that we need to make sure are accounted for and are being used to improve our environment rather than being misused by some of these grantees. So I appreciate the work you put in that.
    I want to thank both of the witnesses for your testimony.
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    Let me just make sure—Mr. Terry, I was getting ready to go vote. Do you have any questions you might want to have for Dr. Ash or Mr. Blinci?
    Mr. TERRY. No. Thank you.
    Mrs. FOWLER. Thank you for coming. I want to thank both of you for the work you have done on this and for your testimony.
    We will have some written questions also to send to you. I know Mr. Traficant had some others, and some of the rest of us might. If you could just answer those for the record, we would appreciate it.
    Thank you again, because you've helped us tremendously with the work you've done. We look forward to continuing working with you. Thank you very much.
    We'll do a brief recess of the subcommittee while I run and vote, and then we'll come back in session in a few minutes. Thank you. We'll have the third panel then.
    [recess.]
    Mrs. FOWLER. The subcommittee will come back to order, and the good news is the last two votes of this series were called off. So I think we'll have uninterrupted time to get through this panel. So that's good news for all of us.
    We can now call up the witnesses for the third panel, and at first I would like to recognize Mr. Lee Terry, who is the vice chair of the panel. Mr. Terry, do you have any type of opening statement you wanted to make?
    Mr. TERRY. No.
    Mrs. FOWLER. Thank you for being with us this afternoon.
    Mr. Romulo Diaz, Jr., from the Environmental Protection Agency. Mr. Diaz holds the position of Assistant Administrator for Administration and Resources Management at EPA, and with you I gather is Mr. Gary Katz?
    Mr. DIAZ. That's correct.
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    Mrs. FOWLER. As you both know, it is standard procedure of this subcommittee to swear in all witnesses, so if you could stand and raise your right hand.
    [witnesses sworn.]
    Mrs. FOWLER. Thank you.
    As you have heard while sitting here, we ask if you could summarize your testimony in 5 minutes; and without objection your full written statements will be included in the record.
    Mr. Diaz, you may proceed.

TESTIMONY OF ROMULO L. DIAZ, JR., ASSISTANT ADMINISTRATOR FOR ADMINISTRATION AND RESOURCES MANAGEMENT, U.S. ENVIRONMENTAL PROTECTION AGENCY, ACCOMPANIED BY GARY KATZ, ACTING DIRECTOR, OFFICE OF GRANTS AND DEBARMENT

    Mr. DIAZ. Thank you, Madam Chairman and members of the subcommittee. I am Romulo L. Diaz, Jr., EPA Assistant Administrator for Administration and Resources Management. I am accompanied today by Gary Katz, Acting Director of the Office of Grants and Debarment.
    At my confirmation hearing in July, 1998, I committed to improving management of programs administered by my office, including grants programs, which now average about $3.7 billion annually, and I am committed to working with the Congress to achieve this goal. So I am pleased to be here today to discuss the actions EPA has taken to improve the management and oversight of grants and to ensure that taxpayer dollars are spent wisely.
    In 1995, the Agency's Inspector General issued an audit report that highlighted two systemic weaknesses in the management of EPA's assistance programs: post-award management of grants by both Grants Management Officers and Project Officers, and the backlog of grant closeouts.
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    EPA has moved aggressively to make improvements in grants management. We have retained the label ''material weakness'' in order to keep us focused on continued improvement in this area. In July, 1996, for example, EPA had a backlog of almost 20,000 grants awaiting closeout. By the end of September, 1999, we had reduced this backlog by 97 percent, and we are on target to completely eliminate the backlog by July, 2000.
    We have implemented the following improvements in pre-award management:
    EPA developed a training program for Project Officers, which includes guidance on pre-award practices and procedures, as well as the Project Officer's role in post-award management. Over 4,400 EPA staff have been trained to date, which is now a requirement for being a Project Officer.
    Also, a grantee assistance—compliance assistance initiative was begun in 1998 by Grant Management Offices, which helps prospective applicants gain a better understanding of their responsibilities up front. During fiscal year 1999, nearly 700 prospective grant applicants participated in pre-award technical workshops.
    The Agency has also taken more steps to improve post-award management and oversight by establishing clear policies and performance expectations for Grant Specialists and Project Officers. In addition, EPA has developed guidance on monitoring techniques and criteria for deciding which grantees should receive on-site visits or be referred to the IG for audit.
    Management effectiveness reviews are conducted by senior resource officials in program and regional offices. These self-assessments are designed to assure that these offices, which manage the technical and programmatic aspects of Agency grants, have a strategy in place to manage grants properly and to identify potential vulnerabilities.
    In addition, my staff conducts detailed assessments of Grant Management Offices, which oversee the administrative aspects of Agency grants. These management oversight reviews examine grant files, operational procedures, communication strategies and the analysis of pre-award budgets, for example.
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    EPA has made dramatic progress in closing out grants. The closeout process includes determining that the project has been completed in accordance with the negotiated statement of work, that applicable administrative requirements have been met, and that the financial aspects of the agreement are reconciled.
    The Agency has developed a comprehensive integrated grants management system to fully automate the grant process from pre-awards to closeouts.
    In a pilot study of the new system, States found that the burden was reduced, data accuracy was improved, and planning time was enhanced. By January 1 of next year, all grant awards will be made using this new system as we work toward full deployment.
    Despite significant progress, we continue to search for opportunities to further strengthen grants management.
    One of the areas we are examining is how to identify types of grantees most likely to be at risk for problems. I have committed to working closely with the Inspector General to explore this issue jointly.
    As you can see, we have been waiting—we've been working for a systemic review—.
    Pardon me. As you can see, we have not been waiting for a systemic review by the Inspector General. I hold my managers accountable now. For the first time, we have at headquarters a management accountability plan, and we have now expanded that effort to the regions.
    In closing, EPA has taken many positive steps to make systemic improvements to the management of its 9,000 active grants. I appreciate the opportunity to address your areas of concern and would be pleased to respond to any questions at this time.
    Mrs. FOWLER. Thank you.
    Mr. Katz, you don't have a statement, great.
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    I want to thank you for this testimony. I know you didn't take office until July of 1998, and you had a daunting task before you that you have been working diligently to try to solve, and I know we got a letter from you today to Mr. Traficant and myself that answers some of the questions that we had had, but I just have a few others.
    One of my concerns, in reading the letter, was that it indicated that over the last 2 years not a single EPA employee had been formally disciplined for poor grant oversight, and so I didn't understand how the Inspector General can provide many examples of poor oversight, some in the last 2 years. And the Agency continues to report grant management problems, and, you know, I understand how you define this material weakness, but yet not a single employee has been held accountable for poor grant management. And as we heard the Inspector General say, as we heard Dr. Ash say, accountability consequences are the only way to prevent these dollars from being wasted or used for other purposes.
    Could you explain why no one's been formally disciplined for poor grant management or held accountable over these last 2 years?
    Mr. DIAZ. Thank you, Madam Chairman. If I may just explain my response for the record. I did not intend to say that no one had been formally disciplined. What I attempted to say was that, in fact, our policy with regard to discipline and the use of written, formal letters of reprimand, which was the subject of the incoming letter to the Agency, is that we will not include those types of formal, written reprimand letters in a file more than 2 years. I cannot confirm, given our policy, whether in fact we had formally disciplined but might have removed in the last 2 years those letters.
    Needless to say, however, I think that this is an issue where we need to be looking at the particulars of an individual circumstance where there might have been a concern about the oversight related to a grant. What we heard about earlier today I think from the Agency's Inspector General is that we're talking about a handful of audits in the context of an active grants caseload of 9,000 at the Agency. I am not trying to say that in every one of those instances there may not be some follow-up action, but it is an issue that needs to be looked at in the circumstances of a particular case because the employees certainly have rights, and we want to be mindful of those as well.
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    Mrs. FOWLER. We agree. But to read from your letter, it said that in the time period dating from October, 1997, to the present there were no grant-related reprimands on file for EPA personnel. I mean, that's just reprimands, that's not dismissal. That is just reprimands.
    So over this 2-year period when there were definitely some problems, major problems with some grants, there seems to have not even been any paperwork done on reprimands, that this needed to be done better, whatever, and that's what caused some great concerns. Because you will never get it better, as hard as you are trying, if employees don't think they're going to be held responsible and accountable.
    And, is part of what you are doing going to be moving towards more accountability by employees, so that 2 years from now, if these types of problems still continue we wouldn't find zero in the files as far as employee accountability?
    Mr. DIAZ. I can't—I can't tell you 2 years from now what we're going to find in the employee files, but I will tell you this. I think accountability not only has to be related to those folks in my own organization for whom I have established clear accountability principles, but I think they have to be expanded to the entire Agency. I think one of the earlier witnesses, Mr. Blinci, indicated it has to be a two-way street. Expectations as between the Agency and the grantee have to be clear. I think we need to be clear with respect to the responsibilities of Project Officers who do not report to me directly, but we have tried already to make that clear.
    I signed out the post-award monitoring policy of the Agency earlier this year which applies to all of our Project Officers. We certainly try to clarify their responsibilities in training efforts. We want to make sure that they are personally made aware of their responsibilities as stewards of these resources that the U.S. taxpayers have made available to the Agency and we get the kind of environmental results that this subcommittee and the American taxpayers expect of us.
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    So I am fully committed to ensuring that our accountability mechanisms expand throughout the Agency and apply to all those who are involved in the grants process, and I would be happy to work with the subcommittee and continually inform you of our efforts in that regard.
    Mrs. FOWLER. We would be interested in that. Because I agree with the Inspector General right here that the only way to solve this problem is to have accountability and consequences. Because human nature is human nature. If you think you're not going to be held accountable, then you're not going to try quite as hard sometimes. So we would like to work with you on that.
    I just have one or two other questions before I turn it over to Mr. Traficant.
    I have an ad that's an interesting ad which is one of many you can find on the Internet, and it says, 'Free cash, government grants, never repay,' you know,' up to $25,000 to $500,000 available immediately, any purpose, never repay, I'll show you the money.' And then it says right here, there are some questions, and one of them is, 'after I receive my grant can I change my mind about the use of the funds? The answer is, yes, there is no law stating you have to use the grant for the original purpose you apply for. Once you receive your grant it is your money to do with as you please.'
    This isn't an EPA ad. This is one of many that are on the Internet, people trying to get people to get money from the government. They still view us as Santa Claus. Are you aware of any EPA grant that you can use for some purpose other than what the grantee originally applied for?
    Mr. DIAZ. There is only—well, if I may, Madam Chairman, that kind of ad is, as I understand it, absolutely erroneous and illegal. When we award a grant at the Environmental Protection Agency, part of our pre-award process is to negotiate the statement of work which essentially is our contract, if you will. I use that in a nonspecific way, because I know grants are different from contracts, but that's essentially our understanding of what we are going to get for the taxpayer dollar in developing a public benefit.
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    So certainly that does not reflect my understanding of what a grant recipient is to do and the kind of flexibility he or she has to use that money.
    Having said that, we do have a category of grants, which you may be familiar with, the performance partnership grants, which is intended to provide greater flexibility to States and tribal governments in connection with their use for purposes other than the original source of the funding would allow and contemplate.
    Mrs. FOWLER. Those are different from the majority of the grants you award to individuals and to nonprofits, et cetera. So as far as those go, they're supposed to be used for the purpose of which they were given. So let us assume if a grantee, they all go through all this process, they get an EPA grant and then they start using the money for some other purpose such as lobbying for something or paying off a mortgage or whatever. What is the best way, I would assume, to catch whether they are not using these funds for the original purpose--to visit their office and look at their files? Would that be probably the best way?
    Mr. DIAZ. I don't know if that's the best way, but it is certainly a way. A way certainly would be to expect periodic, as we do, periodic progress reports of the kind of products that we are expecting from the grantee, and if we are not getting those kind of progress reports and the kind of milestones met that we anticipate under the grant, it seems to me that's a signal that something is not working.
    We have, in terms of our grantee compliance assistance program, which began just last year and I think is already being utilized quite widely by our Grant Management Officers, and I would like to expand that formally to our Project Officers within the Agency as well. But with respect to the grantee technical compliance assistance program, what we're really trying to do is up front give people a sense of what their responsibilities are during the course of the grant to review and monitor their progress which could be done through telephone calls, desk audits or desk reviews, as we call them. It could be an on-site visit which could be either of an in-depth evaluative nature or it could be to provide in-depth technical assistance. But I do agree with you that the actual on-site visit is important. It's an area that we're stressing much more now than we have in the past.
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    Mrs. FOWLER. Then, in practice, do you know sort of how often EPA employees do actually examine a grantee's files for unallowable costs?
    Mr. DIAZ. Well, in terms of examining files on-site, last year when we established the grantee technical assistance program, for the first time the Grants Management Officers established goals in connection with the number of the on-site visits that they would make. The numbers that I have for fiscal 1999 indicate that we did something on the order of 144 on-site visits by the Grant Management Officers. We are—do not in that particular number count the on-site visits by Project Officers which are already encouraged, particularly in instances where we think that may be appropriate, and that's an area where I think we want to do much more as well.
    Mrs. FOWLER. Okay. So the Grant Management Officers conducted 145 on-site visits.
    Mr. DIAZ. One hundred forty-four, yes, ma'am.
    Mrs. FOWLER. When a Grant Management Officer goes, is part of that visit then looking at the files, reviewing the books, et cetera, that is automatically part of every visit?
    Mr. DIAZ. Well, there are two types of on-site visits. One is technical assistance to give them in-depth technical assistance based upon the particular systems they have in place, the help they may need. The other is the evaluative.
    Mrs. FOWLER. Okay. So not all of these 144 then would have been evaluative?
    Mr. DIAZ. They would not have all been evaluative. The evaluative on-site visits, we're talking about 84 that took place in fiscal 1999 and 60 that were of an in-depth, technical assistance nature. That does not mean that even in the technical assistance visit we would not have reviewed their files. That would be a likely candidate to review.
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    Mrs. FOWLER. But just looking at 84 evaluative visits in fiscal year 1999, that's out of how many recipients, out of how many grantees?
    Mr. DIAZ. We generally have, in terms of grantees right now active, we have 9,000 in the Agency. In terms of the annual awarding of grants, we have in fact a pie chart, if I might just ask that it be put up, that we average about 8,800 award transactions. These are funding transactions. These are not new grants.
    Mrs. FOWLER. So roughly out of, you know, say 8,500, let us pick a round number, 8,500 grants, only 84 had on-site evaluative visits last year?
    Mr. DIAZ. By the Grant Management Officers, and that was the first full year of this new program which we intend to expand this year. We've set larger goals, and it does not include the Project Officers who number a great number more than the Grant Management Officers, and we want to include them in our numbers in the future, and they're going to be reporting those to us quarterly.
    Mrs. FOWLER. How many Grant Management Officers do you have for the EPA?
    Mr. DIAZ. We have trained over 4,400, but in terms of the ones who are currently registered within the system, this is information we just provided to the subcommittee staff, we had—our database shows we have approximately 3,100 Project Officers who are trained and registered at the Agency. In terms of active Project Officers in fiscal 1999, our numbers indicate 2,170 are actively involved in managing EPA grants.
    Mrs. FOWLER. So you've got—and I know there's a difference between a Grant Management Officer and a Project Officer, correct?
    Mr. DIAZ. That's correct.
    Mrs. FOWLER. So out of the 4,400 Grant Management Officers, you have got about 1,724 that are trained to do this? You gave me a figure a minute ago of 4,400 Grant Management Officers.
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    Mr. DIAZ. Four thousand four hundred Project Officers have been trained to date as part of our new efforts to emphasize pre- and post-award activities of the Project Officers. Of the Project Officers that currently are actively engaged in managing grants at the Agency, we have 2,170 in our database for fiscal 1999. In addition to those Project Officers who manage the technical and programmatic aspects of grants at the Agency, we had approximately 172 Grant Management Officers in addition to the Project Officers. Grant Management Officers manage the business and administrative aspects associated with grants.
    Mrs. FOWLER. I guess my concern is, we've got over 2,000, let us say, trained and only 84 evaluative visits were done. I don't know what they're doing, but one of the things they need to be doing is getting out more in the field. Because I think some of these problems will be picked up on when you've got between 8,000 and 9,000 grantees and 1 percent are being checked, and they know the chances of their being checked are greatly reduced. Consider the message that sends—because you're just looking at the reports they send in to you. They control it, rather than you.
    I am concerned, and I know you're trying to correct this. I would hope you have got some goals for substantially increasing the percentage of evaluative on-site visits because I think the message that sends to grantees is a positive one, that they are going to be physically evaluated, and that follow-up will be done, and it seems you do have enough employees who could be doing more than they are as far as getting out and doing these on-site visits.
    Mr. DIAZ. Madam Chairman, could I just follow up very quickly? And that is to say, in terms of the goals we have set for the Grants Management Officers, which we have just recently tested for the first time, I totally agree with you that we want to increase those goals, and you have my commitment to do that.
    In terms of goals associated with the Project Officers, for which we have not previously set goals but we know that they are doing on-site visits, it is my intention to work with the program offices to set those goals and to be responsive to that concern.
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    Mrs. FOWLER. Well, that would be helpful because they're the backbone of your whole program.
    You know, if the Project Officers and the Grant Management Officers are doing their job, then the Inspector General won't have very much to report on. So I hope we can move forward with this because that caused me great concern when I saw those small percentages.
    Not wanting to steal my ranking member's thunder, even though I had this press release about the electric bicycles, I'm going to let Mr. Traficant, since he mentioned that in his opening statement, pursue that.
    Mr. Traficant, I'll defer to you right now.
    Mr. TRAFICANT. Thank you, Madam Chairwoman, but before I do that, I want to reinforce in more of a statement than anything else the concerns of our chairwoman here.
    Nine thousand grantees, 144 on-site visits, just again for the record.
    There's one area of concern that I have in some of your testimony and some of the things that I have been able to ascertain from trying to get a snapshot review of inspection in the audits that have taken place. This whole animal called self-certification, self-certification by grant recipients or by program officers, and this is all a factor in what we call ensuring compliance, and I, for the life of me, in light of the findings that you had, am trying to fathom how self-certification is going to ensure compliance. Briefly.
    Mr. DIAZ. Well, I don't think it fully ensures compliance, and it's not intended to do so. The certifications are to—let's take the one with respect to lobbying—to make sure that our grantees understand that they have a responsibility not to use Federal funds for lobbying or for advocacy associated with particular grants or contracts. That's a matter of Federal law. It's a matter of cost principles across the government, and any of those costs are not only not allowable under the cost principles that we apply but, in addition to that, potentially subject the grant recipient to legal penalties.
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    So what I don't want to leave you with, Congressman Traficant, is a sense that the self-certifications alone are going to do the job. We do review, for example, the allowable costs of the grantees. We require that the grantees, if they engage, just to use the example of lobbying, they have to actually notify of us even any cost that they have incurred even with respect to their nonFederal funds for lobbying. We review in advance of the award any costs to determine whether categories might be unallowable. We review those as we monitor progress in particular grants, and it is a part of the review in terms of the closeout process to make sure that the costs are allowable, and, if not, they will be disallowed.
    And that I think is part of the process of making the self-certification work. I personally wouldn't say that self-certification alone is intended to be the tool to get us to where I think you and I would want us to go.
    Mr. TRAFICANT. But that's why I asked. Because 9,000 grantees and only 144 on-site visits and their self-certification, it doesn't add up to me, and I think the words of the chairwoman make a lot of sense, but I think that's an area of compliance that can be more buoyed up with more aggressive visits. Just a statement.
    Now, I want to ask you, and I know you're new, and we've heard many encouraging things, and I hope that they bear fruit, those encouraging things. I think they will. I think your record is impeccable. I think some of the things you've put in place now are being reviewed very favorably by those who are monitoring some of these issues that we're concerned with here. But now this takes me back to that grant for the electric bicycles that were made in Taiwan, and I think it was made to China, about $200,000. Are you familiar with the grant?
    Mr. DIAZ. I have just become familiar with it, Mr. Traficant. My understanding is that it was I believe a $20,000 grant. It was made to a California manufacturing firm which is trying to export technology, in this case electric bike technology. It is part of our programmatic responsibility of the Agency's Office of International Activities. It is part of that office's strategic plan for international activities, and it is intended to help prevent pollution by the use of alternative technologies, such as electric bikes in China.
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    Mr. TRAFICANT. Well, that's all fine and good, Mr. Diaz, but why didn't they make the bikes in California?
    Mr. DIAZ. That, Mr. Traficant, I cannot confirm or indicate that I have the facts on that now, but I will certainly provide them for the record.
    Mr. TRAFICANT. Well, our facts have it that the bicycles were built in Taiwan, and we make this measure because we've limited dollars here, and there are a lot of American firms and groups that apply for grants and for some reason or another they're not given the priority maybe we think as Members of Congress they should get, and then we hear about some of these abstract situations, and it quite frankly frosts us pretty good. So we're hoping that under your leadership and your able support there and Mr. Katz that these type of international matters will not be as prominent.
    Madam Chairwoman, I have a number of questions I would like to submit to Mr. Diaz in writing, and I would like them answered in full. Thank you.
    Mrs. FOWLER. Thank you, Mr. Traficant.
    Mr. Terry.
    Mr. TERRY. My questions are rather elementary. I'll start with this comment as a preface.
    Well, when I read this press release, I have the same emotional reaction that I think all of us up here have which is I can't believe this is allowed to happen. And I listened to your statement, and, gee, it sounds like the EPA says, geez, yeah, you know, we're here to stop pollution worldwide. Why should this offend anybody?
    At least that's how I interpret it. Because somewhere in here is the truth. I really am offended that we used $25,000 of taxpayers' money for this type of a project of selling electric motors in China. And so one of the—I have two basic questions. Since there's evidently a silo or a category for pollution control internationally, how many other categories—how many categories exist, if I can use—I don't know what your technical verbiage is. I'm learning bureaucratese as I go along here, since I am new to Congress, but what type of silos or categories are there? Are there 10, a hundred or a thousand different categories of which there can be applicants for EPA grants?
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    Mr. DIAZ. I believe you're referring to, Congressman, the grant of categories that we have that would normally be listed within the catalog of Federal assistance programs, and my understanding is that of the ones listed in the Federal catalog that 66 currently are active grant categories from the Environmental Protection Agency.
    Mr. TERRY. So there are 66 separate categories, and international pollution control is obviously one of the categories since that's the justification for the grant to this California company that brokers, in essence, electric bicycles to China. That goes into the next question then, and this goes into your opening statement and you hinted on it that you're adopting a new process now of better screening the applications as they come in. So my question is, could you be more specific in what that new process is or how it's evolving? And if you want to use it in the context of this, knowing that there are several people up here that seem to think that this grant is wrong, of which I'm one. Would these new screening procedures in any way rule out this type or catch these types of applications in what I personally feel has wasted $25,000 of the taxpayers' money?
    Mr. DIAZ. Congressman, let me see if I can respond in this fashion. The authority for the particular grant of $20,000 to a California firm by the name of ZAP, Z-A-P, Power Systems was authorized in terms of our legal authority which is a requirement for every grant which is made by any Federal Agency, was made under the Clean Air Act, the Clean Water Act, the Solid Waste Disposal Act and the National Environmental Policy Act. As I also indicated, it is a part of the strategic plan of the Office of International Activities.
    This is a grant situation that I only became aware of today. I'd be happy to provide additional information, but I think here, if I may, Congressman, I think here the point I would want to get out, if I may, on the record, is that what we are trying to do is to relate our environmental priorities in terms of clean air, which does not respect borders, and the desire to provide economic stimulation to a technology firm in California which is manufacturing and has the capability to explore technology know-how abroad and to provide us with a high-paying, skilled technology workforce here in the country.
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    So off the top of my head, looking at a $20,000 grant to a U.S. firm to keep those folks employed in California in a technology-related area and knowing that it achieves an environmental result, off the top of my head, it doesn't seem unreasonable at all, but I'd be happy to look into the matter further.
    Mr. TRAFICANT. Would the gentleman yield for a second, Mr. Terry?
    Mr. TERRY. Sure. If you have better luck eliciting an answer.
    Mr. TRAFICANT. I want to talk to you about EPA grant number R824739, wind energy assessment in China, for $159,972. This project seeks to facilitate and accelerate the large-scale use of wind energy technologies which bring power to low centers in remote areas in the People's Republic of China, conduct of wind mapping, site-specific monitoring technology, blah, blah, blah, blah. This isn't $20,000, and this didn't go to a company in California. This was $160,000.
    Now, if the Congress of the United States, and I don't want to take too much of Mr. Terry's time, has now become aware of categories of grants that are being made to the benefit of the People's Republic of China, I don't know anybody over there that's paying any taxes into this, and that's the trouble we have. Can you comment on how many there are, and has anybody ever reviewed the international activity and the dollar volume that is going outside of our country?
    Thank you, Mr. Terry.
    Mr. DIAZ. Mr. Congressman, I do not know any of the facts about the particular grant that you mentioned. I am happy to find that information for you. I would simply refer to the chart, and if we don't have—if we haven't already done that, I would appreciate if we could give the members of the subcommittee and the staff the one-page-size pie charts, which would make it easier for them to take a look at those numbers.
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    But if you look at the pie chart associated with our grant recipient categories, you will see that about 89 percent of our grants over a 5-year period were to State, local and tribal governments. But the point I wanted to make in terms of the dollars, you will see the other category, which is 1 percent, which includes individuals such as the fellowships, includes foreign governments, I think it's about .2 percent, and all of the other kinds of international activities that you have mentioned.
    I'm happy to provide you with greater detail for the record, both with respect to our international grants as well as the one you raised, Congressman Traficant, in particular.
    Mr. TERRY. Tillie, can I just follow up?
    Mrs. FOWLER. Uh-huh.
    Mr. TERRY. Mr. Diaz, I am sorry if I put you in a position, awkward position of having to defend a grant that was let before your time there, but you had mentioned that through your new management that you're implementing these new procedures, and I hope to interject not legal considerations but simply common-sense considerations which may, you know, have some type of review process, that may be or you judge it with some type of competitive nature. I don't know what those standards are.
    I was asking you if you could set out, and I like to use examples when I talk, so I was leading you into using this as an example of how under these new procedures you're adopting at the front end of how you let these grants. So I think you—I didn't want to press you on this. I just wanted to let you use something that we're in unanimity of thinking is absurd and how will this be caught with new procedures. And if you could submit that for the record, my time is way gone.
    Mr. DIAZ. And I am happy to do so, Congressman.
    Mrs. FOWLER. Thank you, Mr. Terry.
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    [The information received follows:]

    [insert here]

    Mrs. FOWLER. Mr. Doolittle.
    Mr. DOOLITTLE. Thank you, Madam Chairman.
    Mr. Diaz, what proportion of EPA's grants are awarded on a competitive basis?
    Mr. DIAZ. Our review of the grants that we have issued in the last 5 years indicate that approximately one-half of the nonState, local and tribal grants had been awarded competitively. That's the 11 percent remainder after you take out the 89 percent which go to State, local and tribal governments, and about half of those are competitive. Most of those are related to research-type grants, but there are others as well.
    Mr. DOOLITTLE. In terms of dollars, I guess the 11 percent that we're talking about in nonState, local and Federal would be about how many dollars?
    Mr. DIAZ. In terms of dollars, and I'm just doing a quick calculation off the top of my head—.
    Mr. DOOLITTLE. Around $800 million?
    Mr. DIAZ. Pardon?
    Mr. DOOLITTLE. $800 million?
    Mr. DIAZ. No. I would think it would be we're talking about—about $150 million approximately.
    Mr. DOOLITTLE. $150 million?
    Mr. DIAZ. Noncompetitive awards of grants.
    Mr. DOOLITTLE. Oh, all right. I see what you're doing. About half your budget does go to grants, right?
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    Mr. DIAZ. That's correct.
    Mr. DOOLITTLE. And the figures I've got for your budget are about $7.6 billion?
    Mr. DIAZ. For fiscal year 2000, that's correct, Congressman.
    Mr. DOOLITTLE. So of that, what did you say, it was 150 something million then, represents the 11 percent.
    Mr. DIAZ. I'm not a mathematician, but that's roughly the number.
    Mr. DOOLITTLE. But only half of those are competitively awarded?
    Mr. DIAZ. No. That is the amount that I've calculated dollarwise on average that would not be competitively awarded. Eleven percent is the remainder associated with those that do not go to State, local and tribal governments, and about half of that 11 percent or about $150 million from a quick calculation would not be competitively awarded. Federal grants in the Cooperative Assistance Act essentially recommends—suggests but does not require competition for a grant, and these are instances where the noncompetitive award has been found to be appropriate, and that's about $150 million on an annual basis.
    Mr. DOOLITTLE. Doesn't it—it strikes me as odd that there's so much money available that we can just award it noncompetitively. I mean, normally, there's demand for these kinds of things. What would be the rationale for not having a competitive grant award? And I acknowledge occasionally maybe there's need for an exception, but wouldn't that be the ordinary proper procedure? I think you indicate that's what is really recommended as the policy but not required. So why is so much of it going noncompetitively, just in terms of absolute dollars?
    Mr. DIAZ. Yes, Congressman, I understand the question.
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    We're talking about perhaps $150 million out of $3.7 billion. And with respect to that number, among the things I would believe would justify, in generic terms, a noncompetitive award would be an instance, for example, where you have a particular need for a certain unique capability in a grantee. It may not exist generally in the community. That could be with respect to a unique product or a technology, and I could imagine in that situation you would want to potentially award the grant directly to that particular grantee through a noncompetitive process which otherwise is going to cost other folks money when that unique capability may not be met by others.
    I also know that there are instances when I look at our grants situation, those that are going to institutions of higher education, which in fiscal year 1998, if I recall correctly, was about $163 million awarded by the Agency, 97 percent of those went to majority institutions. About 1.5 percent went to Hispanic-serving institutions, and about the same percentage went to historically black colleges and universities. It seems to me that sometimes, even when you try to do it right through competition, the outcomes may not be those that would be supportive of other social policy objectives.
    So I believe there are circumstances when it would be appropriate certainly to award a grant noncompetitively, and I'm sure there are other instances, and I'd be happy to supply you with some of those examples for the record.
    Mr. DOOLITTLE. Well, I would appreciate that.

    Let me just ask you, as an administrator, is it your belief that the percentage of noncompetitively awarded grants ought to be substantially reduced?
    Mr. DIAZ. I don't know that I have been able to come to a conclusion on that point personally, I'll be very honest with you. I have discussed it with the Agency's Inspector General, particularly in the context of which types of grants might be more vulnerable to fraud, waste or abuse, would require additional monitoring and oversight, and we haven't really been able—she and I, as we have talked on a number of occasions, have not really been able to identify particular risk categories. I think when you have noncompetitive grants it only makes sense for us to look at that as a situation which would warrant, for example, an on-site review or greater oversight to make sure that those moneys are being used wisely.
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    Mr. DOOLITTLE. Is there greater oversight of the noncompetitively awarded grants?
    Mr. DIAZ. What we have done as a matter of policy, and this is a policy which just only went into effect this year, was to indicate instances where we believe that greater oversight and monitoring, particularly on-site monitoring, should take place, and among the instances that we indicated would be areas of where we had litigation, lobbying concerns, competition, et cetera. So we have a list of criteria, and certainly noncompetition would be one of those.
    Mr. DOOLITTLE. Madam Chairman, can I have another minute or so?
    Mrs. FOWLER. If Mr. Isakson agrees, that's fine.
    Mr. DOOLITTLE. Okay, I'll hurry here.
    On your Web site, Mr. Diaz, the EPA's environmental education grant Web site, there's an explanation that the EPA has about $3 million per year for the grants program. Anyway, it explains that—$3 million? I thought it was $3 billion. Anyway, it mentions the figure $5,000 dollars, and it says your likelihood of getting your project awarded is significantly greater if it's $5,000 or less at the regional level or $75,000 or less at the headquarters level.
    I guess those numbers must have some significance. I just wondered if you could comment on that. Does that mean if it's less than those amounts it's not going to get the full-blown review and it's one of the reasons that your chances will increase? Or what is the purpose of those numbers?
    Mr. DIAZ. I'm not aware of any threshold that relates to a dollar figure such as you mentioned that would indicate a greater or lesser opportunity to be successful as a grant applicant. I believe the office that you're referring to, the Office of Environmental Education, which has a very small budget—.
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    Mr. DOOLITTLE. It is that, yes, it is that office.
    Mr. DIAZ. —has a responsibility for educational and outreach activities in support of environmental and public health programs. My understanding, subject to check, and I'd be happy to provide that confirmation for the record, but my understanding is that most of their grant awards are done so competitively.
    Mr. DOOLITTLE. Are what?
    Mr. DIAZ. They are done competitively, as a norm.
    Mr. DOOLITTLE. Well, you just take my word for it, that's—I understand that it says that on the Web site, that the, quote, likelihood the EPA will award funds for your project increases significantly if you request $5,000 or less from the EPA regional office or $75,000 from the EPA headquarters, end of quote. Would you check back on that, please?
    Mr. DIAZ. I would be happy to do so, sir.
    [The information received follows:]

    [insert here]

    Mr. DOOLITTLE. Thank you, Madam chairman.
    Mrs. FOWLER. Thank you, Mr. Doolittle.
    Mr. Isakson.
    Mr. ISAKSON. First of all, I want you to pass on a compliment to Administrator Browner and anybody else who should get it, but I would like to thank the Agency for the recent waiver it granted in the Atlanta, Georgia, for the Atlantic Steel Revitalization Project from the Federal EPA restrictions on clean air. We appreciate that.
    And that leads to my second statement which I'd like to get into for a minute. I think we have the opportunity—I know we do in our area, and I sense from conversations I've had with people in St. Louis, Congressmen from St. Louis and other areas that are on the threshold of air quality difficulties and losing Federal highway funds and construction, we have a window of opportunity to become—for the EPA to become less of a perceived enemy of the development community and communities that are trying to grow and more of a partner. And I think the demonstration—the reason I thank you for the waiver is that sent a great signal to an area that's grappling with growth and clean air, and I would hope—I guess my statement really is that I would hope that the Agency would continue to look to opportunities to reward communities through the waiver process when they are moving in the right direction.
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    My experience with the application, particularly with regard to clean air, is that sometimes the restrictions actually retard the ability to correct the problem because they are so absolute. But when communities are willing to change habits that in turn will reduce and lower tonnage of pollutants, less ozone problems, things like that, to get from point A to point B, it's very important to have a not flexibility, not a wink of the eye, not a nod, but cooperation in that process. Those are extremely restrictive prohibitions that I think deserve the opportunity when the communities are moving in the right direction to move forward. That's number one.
    Number two, I would ask your folks to take a look, which you probably already have, at the GRTA Agency that was created in Georgia recently. In the moneys that you allot, the 90 percent that goes to State and local government agencies, I think also, as you're putting out, I guess you do these grants on RFPs. Do you get requests for proposals, the competitive ones?
    Mr. DIAZ. That's correct.
    Mr. ISAKSON. Okay. I would really offer—and you may do this. If you don't, I think you should look for States and localities who are doing innovative ways of changing governmental practices as it deals with transportation approval, roads, alternative transportation and things of that nature.
    One of the difficulties that we had in going from point A to point B in Georgia after establishing in effect a superauthority over local governments with regard to expanding roads, which you can imagine is a very controversial thing, then had to deal with the start-up funding for that Agency to actually in turn take its authority to become a player, we had to get that money out of Federal DOT through congested and mitigation money.
    So what I am getting to is that the Agency, if money that was otherwise going to China was out there competitively for localities to help fund movements that are taking them in the right direction—because clean air is not an event, it's a process. It doesn't pollute all of a sudden one day. It's years of inattention. And it doesn't clean up all of a sudden in one day.
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    And I guess I'm doing all the talking, not asking any questions. So I'd like to ask one question.
    Mr. DIAZ. Might I respond?
    Mrs. FOWLER. Yes, please, respond in any way.
    Mr. DIAZ. Thank you, Congressman, for your compliment which I will definitely pass on to Administrator Browner.
    I think it's very clear in this administration, and Carol Browner has been absolutely articulate about this, that you don't have to make decisions in favor of either the environment or the economy. I think you can do both.
    We are trying to support innovation, to achieve the environmental outcomes that I think benefit all Americans. And the type of project that you refer to, which we call one of our project excel opportunities, is where we are trying to encourage innovation and not look at it in sort of the old Federal bureaucrat approach, and I consider myself one of those bureaucrats as well, but not to look at it in the old paradigm way but really to look at what are the environmental outcomes that we're looking for. And if we're getting better outcomes we ought to be encouraging innovation and flexibility to get to where we want to go.
    In connection with your second point about being more flexible and perhaps less rigorous, I sometimes feel a little bit—.
    Mr. ISAKSON. Only in return for movement in the right direction.
    Mr. DIAZ. Okay. I understand that point, certainly agree with it, but I just want you to be aware that I have been trying very much in the time that I have been at the Agency to try to balance what I see as my financial stewardship responsibilities with that customer service, that desire for innovation and an outcome-based approach to the way we deal with management at the Agency. I very much appreciate your support for that, for that approach.
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    And I think you were going to ask a question.
    Mr. ISAKSON. If the Chairman will allow me to ask that last question. I don't know, I am asking this question because a lot of times we ask questions we know the answers to. I want you to understand, I don't know the answer to this, and you may not know the answer. I would love to have the answer.
    It's my understanding that the current measurement under clean air standards, and in this case I'll use the specific example as they apply to Atlanta, are based on a Harvard University study that is not available to the public. And my question is, A, why would the study that regulations are based on, that, in fact, can impose severe difficulties not be public? That's one question. Would you answer that question first?
    Mr. DIAZ. Well, I don't know about this particular study, but I think you're getting at the issue of research data and when is it appropriate to make it available to the public such as a Freedom of Information Act request and when is it not. Certainly at the request of the Congress the Office of Management and Budget is currently engaged in trying to come up with a common approach at the interagency level that would respond to this new direction. There are concerns, I know, in connection with environmental data expressed by others in the regulated community and, indeed, Members of Congress about when are the data good enough to be released, and in some cases we don't know what these data were developed for and how they might be interpreted by others.
    Having said that, we are working aggressively within the Environmental Protection Agency to respond to the congressional intent that we would make research data with some safeguards in instances where the information might be proprietary, confidential business information, but we are working against a 6-month deadline to develop an approach and to implement it through a regulatory change at EPA so that the public would have access to research data as appropriate, as it comes out of this interagency process over the next few months.
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    Mr. ISAKSON. Well, I appreciate the answer. Because the question was not meant to be of a negative bent at all, but it's very difficult, particularly when you are an elected representative in an area and all of a sudden you have the type of events we've had in the area, where you can't answer certain questions or you are rejected on your mitigation plans or your containment plan, which we have been twice. We're going to be right by March of next year, I can assure you, but it's very helpful to have the database upon which the judgments are being made here by the Agency that you're trying to comply with. That's why I asked the question.
    And if I find out that I'm way off base as far as the Harvard study, please let me know and apologize to all these people, but if I am, let me know what information we can reasonably get on those. I'd appreciate it very much.
    Mr. DIAZ. I am sure you are not far off base, but I'll be very happy to respond for the record on that issue, sir.
    Mr. ISAKSON. Thank you, Chairman Fowler.
    Mrs. FOWLER. Thank you, Mr. Isakson.
    I just have a couple of follow-up questions to make sure we get these for the record.
    In relationship to several of the questions you had from committee members and myself about the grants to China, et cetera, and this Office of International Activities, what I'd like to get for the record, and if you have it with you now, fine, but what is the budget of that office? How many grants did they award in fiscal year 1999 and fiscal year 1998?
    Let's just look at the last 2 years. What was the dollar value of those grants and to whom did they go?
    Because I think we have some concerns here about cleaning up our air versus cleaning up some other country's air, and I think there is some definite interest in this subcommittee as to the operations of that particular office within EPA because we're not aware of some of these.
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    And I just was given—the Internet is wonderful, but November the 2nd this week, ZAP, that makes this famous bicycle, is now available exclusively through F.A.O. Schwarz, so they obviously don't need our money, and they've now been commissioned by Lucasfilm to do their vehicle for the Star Wars thing, too. So I don't think they're really in a lot of need for EPA help, and that's going to purposes for which we didn't intend.
    The other question I have, just to make sure we get this for the record, because the questions that we have sent you that we have just received answers back today, one that was not provided in there and I just want to make sure we get it—it concerned me a little bit that it wasn't readily available. Because my question was, what percentage of unused grant funds had been returned to the EPA in fiscal years 1997, 1998, and 1999? Has anybody given us any money back? Are they spending it all or are they saying, you know, thanks, we didn't need but $80,000 of that hundred thousand dollars?
    So if that's not available now, I definitely would like that for the record, too, so we could keep track of that, also.
    Mr. DIAZ. Thank you, Madam Chairman. If I could just simply reiterate, having looked at my background material, that in terms of foreign recipients of EPA grants on an analyzed basis, it is indeed .2 of 1 percent.
    Mrs. FOWLER. But that percentage is of $4.5 billion in grants. So I want to know—that sounds like a small percentage, and then you start talking about in dollar figures.
    Mr. DIAZ. And that is approximately $7.7 million on an annual basis, but I will get you the information specifically with regard to the Office of International Activities as you requested.
    In terms of the amount of funds that have been deobligated, we have come up with some preliminary information. I want to double-check these numbers before I supply them to you, so if I might do that for the record I'd be happy to do so.
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    Mrs. FOWLER. Do any other members of the subcommittee have any questions at this time? I know you will have several that are going to be submitted for the record.
    And I want to thank you, Mr. Diaz, for your expert testimony, for the good work you are doing, because, as I said, you undertook a tremendous task when you took this on. I was tremendously surprised when I started learning this information, and so you are dealing with it.
    While the hearing is concluded, I just want to make the point that this oversight effort is just beginning, that the process for managing these EPA grants, it has been very obvious today, is a very large and complex system. And while there is a significant amount of money at stake, billions per year, I am concerned that we may not be cleaning up the environment as fast as we should be. Because when we've got a $20,000 grant for selling bikes in Thailand, $160,000—rather, in China, $160,000 for helping wind power in China, that's that much less we have to clean up air in Atlanta or to clean up the Chesapeake Bay in our own country.
    Another disturbing thing I learned today was really how little we know about the grants we are awarding. You might expect EPA's complicated grants process to at least provide a lot of data on grants management, because, as we've been talking about, after all grants officers are supposed to be making phone calls, documenting information and going through checklists all the time, and, unfortunately, in the past, the other seems to have been true.
    So I am committing this subcommittee, as I know you are committed to, we're committed to a persistent, long-term effort to dig into the issue to resolve the concerns that we've had and to work with you on this because I know you're working to resolve it also. So maybe we can work together.
    This is not, I want to make clear, any attack on the EPA. We expect to work very closely with you as we get to the bottom of these concerns, because I think you share some of them, as evidenced by some of the changes you have been making. And I assume that the administrator and every employee right down the line shares our goal, which is getting the most out of every taxpayer grant dollar that is going out there.
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    What this is by this subcommittee is an attack on waste. It's an effort to improve human health and our environment. You know, we get criticized sometimes by the EPA for providing inadequate funds for priority programs, but just imagine the additional funding that could be provided if even Dr. Ash's low-end estimate is correct, an extra $600 million over the last 4 years. That's enough to restore tens of thousands of acres of wetlands or clean up a score of Superfund sites rather than have it go to waste, fraud or abuse.
    So every dollar that goes to pad a consultant's bloated salary is a dollar less for cleaning up our air and water. Every dollar that winds its way through this complicated system of grantees and subgrantees, so it's whittled down to nothing by administrative costs, is a dollar less for saving our beaches and estuaries.
    So we as a subcommittee are obligated to pursue these issues, and especially you know after we have learned and what we've heard today, we're going to continue. So we look forward to working with you and with the Agency and other committees in Congress as we start down this long road. And all the panels that were here today I know expect follow-up questions, but again, I want to thank you for your good efforts and work, and we, as I say, look forward to working with you.
    I want to thank the members of the subcommittee.
    The meeting of the subcommittee—.
    Mr. DIAZ. Madam Chairman.
    Mrs. FOWLER. Oh, yes, Mr. Diaz.
    Mr. DIAZ. I apologize, if I could just say very quickly, I am very convinced that we have gotten the kind of outcomes that you indicated in your opening statement you and other Members of Congress were looking for. I think we do have the cleanest air and water in a generation. I think we have the kind of outcomes we're looking for on cleanups in terms of Superfund sites, et cetera.
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    I think you and I and the members of the subcommittee totally agree that we all should be working toward ensuring that taxpayer dollars are spent wisely. I welcome the opportunity to work with the subcommittee and you, Madam Chairman.
    I will be happy to supply the information for the record you've requested already. I'd like to also supply the information specifically associated with our grantee compliance assistance program because there are many other kinds of efforts that we have under way to improve grantee performance that we didn't talk about today, and I would like to make sure that that also is brought to your attention.
    But thank you very much.
    Mrs. FOWLER. Thank you so much. I thank the members of the subcommittee. Thank you, Mr. Katz, also.
    The meeting is adjourned.
     [Whereupon, at 4:23 p.m., the subcommittee was adjourned.]

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