U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

92–511 PDF 2003

THE SBA FY 2004 BUDGET

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

WASHINGTON, DC, FEBRUARY 26, 2003

Serial No. 108–9

Printed for the use of the Committee on Small Business

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house

COMMITTEE ON SMALL BUSINESS 

DONALD A. MANZULLO, Illinois, Chairman 

ROSCOE BARTLETT, Maryland, Vice 

Chairman 

SUE KELLY, New York 

STEVE CHABOT, Ohio 

PATRICK J. TOOMEY, Pennsylvania 

JIM DEMINT, South Carolina 

SAM GRAVES, Missouri 

EDWARD SCHROCK, Virginia 

TODD AKIN, Missouri 

SHELLEY MOORE CAPITO, West Virginia 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

TRENT FRANKS, Arizona 

JIM GERLACH, Pennsylvania 

JEB BRADLEY, New Hampshire 

BOB BEAUPREZ, Colorado 

CHRIS CHOCOLA, Indiana 

STEVE KING, Iowa 

THADDEUS MCCOTTER, Michigan 

NYDIA VELA ́ ZQUEZ, New York 

JUANITA MILLENDER-MCDONALD, 

California 

TOM UDALL, New Mexico 

FRANK BALLANCE, North Carolina 

DONNA CHRISTENSEN, Virgin Islands 

DANNY DAVIS, Illinois 

CHARLES GONZALEZ, Texas 

GRACE NAPOLITANO, California 

ANI ́BAL ACEVEDO-VILA ́ , Puerto Rico 

ED CASE, Hawaii 

MADELEINE BORDALLO, Guam 

DENISE MAJETTE, Georgia 

JIM MARSHALL, Georgia 

MICHAEL MICHAUD, Maine 

LINDA SA ́ NCHEZ, California 

ENI FALEOMAVAEGA, American Samoa 

BRAD MILLER, North Carolina 

J. MATTHEW SZYMANSKI, Chief of Staff and Chief Counsel 

PHIL ESKELAND, Policy Director 

MICHAEL DAY, Minority Staff Director

(II) 

C O N T E N T S 

WITNESSES

Page 

Barreto, Hon. Hector, Administrator, SBA ............................................................ 4

Wilkinson, Anthony R., National Ass’n of Gov’t Guaranteed Lenders ................ 24

Wilson, Donald T., Association of Small Business Development Centers ........... 26

Gast, Zach, Association for Enterprise Opportunity ............................................. 27

Mercer, Lee W., National Ass’n of Small Business Investment Companies ....... 29

Crawford, Christopher, National Ass’n of Development Companies ................... 31

APPENDIX

Opening statements: 

Manzullo, Hon. Donald A. ................................................................................ 40

Velazquez, Hon. Nydia M. ............................................................................... 43

Prepared statements: 

Barreto, Hector ................................................................................................. 46

Wilkinson, Anthony .......................................................................................... 52

Wilson, Donald T. ............................................................................................. 57

Gast, Zach ......................................................................................................... 64

Crawford, Christopher ..................................................................................... 67

Mercer, Lee ....................................................................................................... 74

Budget Views and Estimates Letter 80

(III) 

(1)

HEARING ON SMALL BUSINESS ADMINISTRATION’S FISCAL YEAR 2004 BUDGET REQUEST 

Wednesday, February 26, 2003

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

Washington, D.C. 

The Committee met, pursuant to call, at 2:25 p.m., in Room 

2360, Rayburn House Office Building, Hon. Donald A. Manzullo 

[chair of the Committee] presiding. 

Present: Representatives Manzullo, Bartlett, Velazquez, 

Ballance, Beauprez, Christian-Christensen, Davis, Graves, Majette, 

Marshall, Michaud, Napolitano, and Ryan. 

Chairman MANZULLO. Good afternoon. I would like to welcome 

everybody to the Committee’s first hearing for the 108th Congress. 

The President has developed a clear small business agenda, one 

that I fully endorse. I believe that one additional component must 

be added to the President’s agenda: America cannot maintain economic security as a post manufacturing society. The government 

must find ways to ensure and restore a stable manufacturing base 

to America. This will be my number one priority in this Congress, 

not just getting Americans back to work, but getting Americans 

back to work in jobs where they actually make a tangible good. 

Only with a strong manufacturing base can we truly ensure economic security for today and our posterity. 

This is not a new priority, but rather returns the Committee to 

the reason it was founded, to ensure that America in time of war 

had a small sound business industrial base. It is within this context that, on examining the SBA budget, to determine whether it 

has the resources needed to assist America’s entrepreneurs, particularly if they wish to start or expand manufacturing enterprises. 

One way to do this is by ensuring adequate access to capital. Let 

my make it clear for the record, I do not want a repeat of the problems that occurred with the 7(a) loans in the 504 program. 

The conference report of the FY 2003 appropriations states, 

quote: ‘‘Conferees direct the SBA to develop similar more accurate 

econometric models during this fiscal year for use in other SBA 

loan and financing programs, especially the 504 program.’’. 

That is a directive from Congress to get this resolved. I completely agree with the directives of the conferees, and expect the 

SBA to make the development of the econometric model for the 504 

loan program by October 1st of 2003 one of its top priorities. I believe the SBA can be the vehicle to help all of America’s entreVerDate 0ct 09 2002 10:06 Mar 17, 2004 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 G:\HEARINGS\92511.TXT NANCY
2

preneurs, including those that wish to get their hands dirty on the 

shop floor. 

I look forward to working with the President and the administration to enhance our small business industrial base. I recognize the 

ranking member of our committee, the distinguished gentlelady 

from New York for her opening statement. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Regardless of the rhetoric, the fiscal year 2004 budget request for 

the Small Business Administration is as inadequate as the previous three this committee has seen during President Bush’s tenure. The $800 billion level is well below the 4 percent increase for 

government-wide spending that President Bush touted when he released his budget this month. Given our new reality and the budgetary constraints we face, we must prioritize spending to ensure 

critical items are funded, like homeland security and the war 

against terrorism. But let me ask this question: What is the point 

of having international security if we do not have economic security 

here at home? This budget not only fails to provide for our Nation’s 

economic security, but it also, I believe, would lead to greater economic insecurity in America. 

If our economy is to rebound, it will be critical that small businesses, which create half of all new jobs, get the assistance they 

need. Sadly, this budget fails our Nation’s entrepreneurs. First and 

foremost, it shortchanges small businesses by billions of dollars in 

lending opportunities. It is through this infusion of capital that 

small businesses expand as they purchase equipment or start new 

ventures, both of which create jobs and lead to economic growth. 

While there is still much talk by the President and some in Congress about a tax break to supply such a capital infusion, the reality is that much of the President’s plan will have no effect and 

may even harm small business. That is why the SBA loan programs which provide 40 percent of all small business lending—

long-term lending are so important. This budget continues the SBA 

trend of underfunding its flagship loan program, the 7(a), by $3 billion. It also cuts the Microloan Program in half. 

Small businesses will not only fail to get the capital they need, 

but the President’s budget only partially solves the miscalculation 

of the subsidy rate for the 7(a) program which has taxed both lenders and borrowers by over $1.5 billion, and does nothing to correct 

the subsidy rate problem in the 504 program. This means borrowers who use the program will pay an additional $15,000 over 

the life of the loan. That is the difference between hiring a parttime employee and a full-time employee, providing health care benefits, or purchasing new equipment. 

Even worse, it imposes new taxes under the SBIC program with 

additional fees on the participating securities program. For an administration that pushes tax cuts to continue these type of policies 

and then propose yet another tax on small business is backwards. 

The proposed budget steals lending opportunities as well as Federal contracting ones away from small business by failing to open 

up the $220 billion marketplace to small enterprise. 

For the last 2 years, the Federal Government has not met a single one of its small business goals. This has cost small businesses 

over $12 billion. While there has been a lot of tough talk by the 

3

administration about cracking down of contract bundling and holding agencies accountable, this budget provides insufficient funding 

for procurement center representatives, the front line of defense in 

enforcing failure contracting laws. It provides funds for 47 PCRs, 

not even one per State, leaving several critical procurement centers 

across the country unstaffed. Little money is available for travel. 

It is one thing to think someone can do more with less and another 

to think anyone can make something out of nothing. That is exactly 

what this budget does. 

As President Bush has made compassionate conservatism his 

motto, this budget continues the administration’s policy of completely turning its back on low income and minority communities. 

Just like in the past, the proposed budget fails to request funding 

for prime business link one-stop capital shops. All programs that 

target these areas. Given the deep cuts to the Microloan Program 

and the administration’s failure to get the new markets venture 

capital program off the ground, this budget sends the message to 

low income communities that they must go it alone. 

Mr. Chairman, my assessment of this budget is simple: It is inadequate. It underfunds critical small business loan programs. It 

fails to provide contracting for small business, and it leaves our low 

income and minority communities behind. If our economy is to turn 

around any time soon, it will be through small business growth, 

growth that will, in part, rely on SBA programs. 

Clearly, this budget does not match the administration’s rhetoric 

of being pro small business. Given the current recession, it concerns me that the most important driver of our economy, small 

business, will suffer at the hands of the administration’s budget. 

Small businesses cannot work their magic on our economy without 

the proper tools which this budget fails to provide them. 

I look forward to hearing from the witnesses, and I yield back 

the balance of my time. Thank you. 

Chairman MANZULLO. Thank you very much. 

The way we will work the witnesses is Mr. Barreto will go first, 

and then the members of the Committee will have the opportunity 

to ask questions. And then when the other witnesses give their testimony, Mr. Barreto has advised that he will stick around as long 

as he can to be able to listen to the testimony direct from the witnesses. 

It is my great pleasure to introduce to you Hector Barreto, who 

has done nothing less than a fabulous job as the head of the SBA. 

He came into this job because of a desire in his heart to grow small 

businesses, not just a political appointment, not just a halfway 

house look for another job in the Federal Government, but a real 

desire to help out the small businesses. 

I wonder—I know he is always a happy person. He would be 

much happier if he didn’t have to worry about the OMB. And because we know what you would do with that budget, Mr. Barreto, 

if it were up to you and you wouldn’t have to worry about the confines of the budgetary process. We look forward to your testimony 

and thank you for being with us. 

4

STATEMENT OF HON. HECTOR BARRETO, ADMINISTRATOR, 

UNITED STATES SMALL BUSINESS ADMINISTRATION 

Mr. BARRETO. Thank you very much, Mr. Chairman, Ranking 

Member Velazquez, and members of the Committee. Thank you for 

inviting me here today to discuss the President’s budget request for 

the U.S. Small Business Administration for fiscal year 2004. President Bush understands the vital role that America’s small businesses play in creating opportunities. He also recognizes that as we 

look toward economic recovery, small businesses play a leading 

role, and that in such times it is small businesses that account for 

virtually all new jobs. 

Therefore, to support this vital sector of the American economy, 

the President has designed a small business agenda that bolsters 

small business and creates an environment in which entrepreneurship can flourish. This agenda includes broad tax relief aimed at 

boosting small business growth, providing small businesses with 

information they need to succeed, ensuring full access to government contracting opportunities, and tearing down regulatory barriers to job creation for small business by giving them a voice in 

the complex and confusing regulatory process. 

The President’s plan for economic growth and job creation would 

provide relief for small businesses in the form of reduced marginal 

tax rates while increasing the amount that can be written off as 

expenses for equipment purchases from $25,000 to $75,000, encouraging them to buy technology, machinery, and other equipment 

they need to expand and create new jobs. 

And finally, the President has responded to the calls heard 

throughout the country to permanently repeal the estate tax and 

allow small business owners the opportunity to pass along the 

fruits of their life’s work to their heirs without being forced to sell 

the family business to pay the tax bill. 

Beyond the need for tax relief, SBA is leading the charge to implement President Bush’s small business agenda. To do this, the 

agency is focusing on three strategic programmatic goals designed 

to create more jobs. First, SBA is championing small business interests by minimizing the regulatory burden, providing them with 

easily accessible information about how to comply with regulations, 

and working to ensure that the regulatory process treats small 

business fairly. 

Secondly, SBA is continuing its efforts to empower entrepreneurs. The agency is working to increase the opportunity for entrepreneurs to start and grow a business by providing increased access to capital and information, technical assistance and counseling, as well as increased access to procurement opportunities. 

Thirdly, the SBA is continuing to play a vital role in helping 

businesses and families recover from disasters. Through its disaster assistance program, SBA provides speedy and customerfriendly assistance to restore homes and businesses to their predisaster conditions. 

Mr. Chairman, when I appeared before you last year, I testified 

about a number of challenges facing the SBA in its efforts to retain 

its relevance. Today, I am pleased to report to you that this administration has met those challenges and has significant accomplishments to report to you. I testified that for fiscal year 2004, SBA 

5

would use an improved model to calculate the subsidy rate for the 

7(a) loan guarantee program. The 2004 budget request uses such 

an econometric model. Working with the Office of Federal Housing 

Enterprise Oversight, we have developed and implemented a more 

accurate subsidy rate calculation model. Using this revised model 

for fiscal year 2004, SBA has been able to dramatically reduce the 

7(a) program subsidy rate from 1.76 percent as proposed for fiscal 

year 2003 to 1.02 percent. The administration is requesting $94.86 

million for the 7(a) program, which, using the improved subsidy 

rate calculations, will provide a program level of $9.3 billion. 

The new model will enable SBA to allocate its resources more effectively, determine program risk more precisely, and increase its 

ability to target loans to aspiring entrepreneurs who could not obtain financing without a government guarantee. It also improves 

the government’s ability to forecast loan performance by taking 

into account a wide range of economic factors. 

I also testified that SBA needed to change the way it delivers 

services to its customers, America’s small businesses. Today, we 

are poised to implement our transformation efforts with a three 

district pilot project. Many throughout the agency have worked 

long and hard to ensure the success of SBA’s transformation efforts 

and have addressed each and every concern raised by congressional 

partners in formulating this plan. I will discuss SBA’s budget request for transformation later in my testimony. 

Last year, I also testified on the need to improve oversight of the 

lending partners since the SBA has taken the steps necessary for 

a more modern oversight system. To assist with this effort, SBA 

contracted with KPMG Consulting, and last June they provided 

recommendations as to how to proceed with developing a loan monitoring system that meets both SBAs and Congress’s need for lender oversight. In undertaking these actions, this administration has 

addressed the challenge of modernizing LMS by using the private 

sector, where the experts in this area are, rather than developing 

a separate and more costly system. 

Now, I respectfully ask for your support of the President’s fiscal 

year 2004 budget request for the SBA. The President’s plan proposes a total fiscal year 2004 appropriation of $797.9 million, and 

maintains the spending level proposed for the fiscal year 2003. It 

is about 4 percent larger than the budget for fiscal year 2002 and 

would provide substantial levels of credit, capital, and procurement, and entrepreneurial development assistance to small businesses. This fiscally sound budget would provide more than $20.8 

billion in small business loans, loan guarantees, and venture capital, and more than $760 million in new disaster loan funds for victims of natural disasters. It includes funding for $9.3 billion in 

guaranteed loans under the 7(a) program as well as more than 

$115 million for the agency’s technical assistance programs. 

Thus far, in fiscal year 2003, operating under a series of continuing resolutions while dealing with the effects of lowered fees on 

7(a) loans as a result of legislation passed last year, SBA has instituted a cap of $500,000 per 7(a) loan. This effective management 

tool has produced interesting results. By creating an emphasis on 

smaller loans within the program, we have been able to leverage 

our resources to provide an increased number of loans to our mergVerDate 0ct 09 2002 10:06 Mar 17, 2004 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 G:\HEARINGS\92511.TXT NANCY
6

ing markets. This has allowed SBA to be ahead of its 7(a) lending 

goals in every category for 2003, including 35 percent a head to 

women-owned businesses; 65 percent a head to African American 

businesses; 39 percent a head to Hispanic-owned businesses; and 

31 percent a head to veteran-owned businesses. 

Now that Congress has enacted both the fiscal year 2003 appropriation for SBA as well as legislation allowing for the use of the 

econometric model for calculating the subsidy rate for the 7(a) program in fiscal year 2003, SBA has removed the cap on 7(a) loans. 

We will, however, continue to promote smaller loans. We will also 

promote smaller loans by expanding the lending program to allow 

as many as 1,500 of America’s more than 10,000 credit unions to 

join our network of lenders. 

This represents a potential increase of some 30 percent in the 

overall number of storefronts through which entrepreneurs, particularly those requiring smaller loans, can seek capital for their 

businesses while allowing SBA to reach more communities, a greater number of entrepreneurs, and a more diverse pool of prospective 

and existing small business men and women, the budget request 

which will also allow SBA to provide $4.5 billion in loans through 

the 504 certified development company program with no cost to 

taxpayers. The 504 program, which was established to increase 

small businesses’ access to real estate and other long-term fixed 

asset funding has always had a program goal of job creation. 

SBA recognizes the need to increase small businesses’ access to 

504 loans, and will implement steps in 2004 to accomplish this 

goal. This budget request includes $8.8 million to continue implementation of SBA’s transformation efforts. I have spoken with 

many of you personally about the importance of transformation to 

SBA’s future success. These efforts are crucial to the agency’s continued relevance in its second half century. To better meet the 

needs of our customers, SBA will shift field office efforts from back 

office functions, such as loan purchases and some liquidation functions, to more direct relationships with customers and resource 

partners. We will evaluate the results of these pilot programs and 

incrementally expand the successful practices to more offices until 

all of SBA has been transformed. We anticipate that the pilots will 

begin in this fiscal year 2003, and will continue through fiscal year 

2005. The budget request includes $16.5 million, which includes all 

sums necessary for the transformation plan to support the agency’s 

execution of the President’s management agenda which emphasizes 

better management of the Federal government through five areas: 

Human capital, competitive sourcing, E-government, integrations of 

budgets with performance, and improved financial management. 

SBA requests $2.3 million to modernize and streamline business 

processes to reduce cost and to improve customer service. Additionally, we are asking for $1.7 million to support SBA’s information 

technology infrastructure. 

SBAs fiscal year 2004 budget request includes level funding for 

entrepreneurial development programs, SCORE, and SBDC, WBC, 

and BIC networks. 

It is often said that access to information is the key to small 

business success. The budget request includes continued funding 

for the agency’s disaster assistance program, and SBA works closeVerDate 0ct 09 2002 10:06 Mar 17, 2004 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 G:\HEARINGS\92511.TXT NANCY
7

ly with the Federal Emergency Management Agency to assist those 

small businesses and individuals directly affected by disasters such 

as tornadoes, floods, and hurricanes to get them back on their feet 

in times of trouble when they most need government assistance. 

Mr. Chairman, I want to take a moment to recognize the heroic 

efforts of the employees of the SBA’s Office of Disaster Assistance 

who, through the unprecedented nationwide expansion of the agency’s economic injury disaster loan program, were instrumental in 

delivering $1.1 billion in loans to those directly impacted by the 

September 11th events. I want to, again, extend my heartfelt 

thanks to the employees of SBA without whose dedication and 

their compassion SBA would not have been able to deliver these 

services. And I commend you, too, Mr. Chairman for your strong 

leadership on this as well. 

Mr. Chairman, as I have noted earlier, SBA celebrates its 50th 

anniversary this year. On August 1st, SBA will honor that anniversary with a ceremony in Abilene, Kansas, the birthplace of President Dwight D. Eisenhower, who signed into law on that very day 

50 years earlier the Small Business Act, the legislation authorizing 

the creation of SBA. 

All of us at SBA are proud of the agency’s legacy of achievement. 

Many businesses with household names today, Staples, Winnebago, 

Callaway Golf, Outback Steakhouse, but also other important entities such as Black Enterprise Magazine and Juanita’s Foods in Los 

Angeles all have received SBA assistance in their formative stages. 

Our challenge is to find the next generation of those companies and 

to make sure that those entrepreneurs have access to our programs 

and services so they too can become success stories. 

We are proud of what we have accomplished over the past year. 

And while we take pride in our achievements, we are not going to 

rest on our laurels. We continue to look ahead, and SBA’s fiscal 

year 2004 request offers an opportunity for us to work together 

with you to ensure that SBA continues to assist small businesses 

into the next half century. 

We ask for your support for this budget. We thank you for the 

opportunity to appear before you today. And we would be happy to 

answer any of your questions. Thank you. 

[Mr. Baretto’s statement may be found in the appendix.] 

Chairman MANZULLO. Thank you. I just have one question. In 

your letter to me, or to Congressman Frank Wolf on February 15th 

of 2002, in the continuing interest we have had on not using the 

504 program as a cash cow to generate funds over and above what 

is necessary to run the program. You wrote to Mr. Wolf and said: 

For the 504 program, SBA is working on an interim calculation 

method for the FY 2004 similar to the 7(a) program which was successful in dropping the subsidy rate. 

First of all, thank you for working with us. I think this committee has been working to get the 7(a) rate down for 7 years. I 

hope it doesn’t take 504 years of work to get it down, get the 504 

down. But I appreciate your lifting the caps so the 7(a) is back up 

to a million dollars again, and which is really great news. 

But that was in your letter of February 15th of 2002, to get a 

new 504 econometric calculation. Then the President’s budget 

wants to put it off until 2005–2006, which is interesting because 

8

it recognizes there is a problem but puts the fix off for 2 years. And 

then Congress, in the language quoted in the opening statement 

where it says, quote: ‘‘the conferees direct the SBA to develop similar more accurate econometric models during the fiscal year for use 

in the SBA loan and financing programs, especially 504, effective 

October 1st of 2003.’’ . 

So I guess the question is, are you going to follow your own advice in your February 15th letter of 2002, the President’s directive 

in the budget for 2005, or the mandate of Congress to have it done 

by October 1st of 2003? How do you like that question? 

Mr. BARRETO. A multiple choice question. 

Chairman MANZULLO. You understand the nature of the question, of course? 

Mr. BARRETO. Yes, sir. Thank you very much for that question. 

And I understand the challenges that there have been with our 

subsidy rates. I can understand the frustration of many of our 

lending partners, of many of our small businesses with regards to 

what they feel is a subsidy rate that doesn’t really reflect what is 

actually happening. And we are very gratified that we were able 

to make such progress working together with this oversight committee to get that subsidy rate down this year. And I want to let 

you know that we are already working on getting a new econometric model study going as soon as possible. The work is already 

beginning right now to take a look at that 504 subsidy rate, to take 

a look at our disaster subsidy rate and to take a look at the SBIC 

subsidy rate. We think that we need to look at all of those. And 

no, I don’t think that it is going to take 504 years. We are putting 

it on a fast track. It is our intention to be able to get that out as 

soon as possible. It is one of our top priorities in capital access this 

year, and we believe that we are going to be able to make some 

very good progress in short order in that area. I know how important that is to you. 

Chairman MANZULLO. Does that mean October 1st of 2003? 

Mr. BARRETO. As soon as it is able to happen. As you know, what 

we do is that we outsource the study to economists outside of our 

agency. Last year, we worked with OFHEO, and we were able to 

make very good progress. This year we may be working with another entity. And again, we think that we will be able to make 

some progress very quickly. It is our intention to be able to get it 

done as soon as possible. So, yes, that would be our desire. The 

only reason that I hesitate is because since we are not the ones 

that are doing the econometric modeling, we need to work very 

closely with the partners that will be doing that modeling and 

make sure that we are making this progress as quickly as we have 

in the past. 

Chairman MANZULLO. So you are not going to do OFHEO? You 

are going to somebody else? 

Mr. BARRETO. Yes, sir. 

Chairman MANZULLO. Why is that? 

Mr. BARRETO. I believe that there is another agency that actually 

is better suited to do the modeling on the 504 and some of the 

other programs that I mentioned. I will be more than happy to provide all the background with regards to what we are doing right 

now in outsourcing that econometric model. But again, it is our inVerDate 0ct 09 2002 10:06 Mar 17, 2004 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 G:\HEARINGS\92511.TXT NANCY
9

tention to make progress very quickly. We know that that is very 

important to the Committee. 

Ms. VELAZQUEZ. Mr. Chairman, would you yield? 

Chairman MANZULLO. Yes. 

Ms. VELAZQUEZ. So will you have it done by fiscal year 2006? 

That is what it says. That is what the budgets call for. 

Mr. BARRETO. It is our intention to get that done much sooner 

than that. Obviously, if we can get it done this year, we are going 

to try to get it done this year. And again, the only hesitation I have 

is that the commitment is absolutely there, we know it is important, we know there is a big demand and desire for this to be done. 

We will need to work again with the economists who will be doing 

a new econometric model. 

Chairman MANZULLO. You know, Will Rogers had something to 

say about economists, and I want to repeat it. But small businesses, Mr. Barreto, are not going to suffer because a bunch of 

economists get together and say what if this and what if that. But 

are you telling us that you are going to do all the new econometric 

models and all the other programs at the same time? 

Mr. BARRETO. Yes. 

Chairman MANZULLO. Well, I think the better practice is to get 

the 504 done before the other ones. If there has been any time—

I mean, I will bring them in here next week at another hearing, 

I have done that before, and we can have a lockdown and we will 

make sure that we get the work done. But I am very much concerned that there is another agency involved plus all the models 

that are being done at the same time. 

Mr. BARRETO. And I appreciate that comment and I will 

prioritize the 504 program. I think it is very important. I think 

there are a lot of small businesses that could take advantage of 

that 504 program, and that will be the priority. 

Chairman MANZULLO. I just want to assure you that if it is not 

done by October 1st of 2003, you are going to have a very angry 

chairman and ranking minority member with an accountability 

session here for that. 

We are going to have to go vote. And then how many votes are 

there? There are two votes? There are a couple of votes and then 

we will come back. And I presume other members have questions 

of Mr. Barreto. Would that be correct? That is right. You haven’t 

had your shot at it yet. Okay. 

All right. We are going to adjourn here for about—well, until the 

votes are done. Probably about a half an hour. 

[Recess.] 

Chairman MANZULLO. If we could call the committee to order. 

Ms. Velazquez. 

Ms. VELAZQUEZ. Thank you. Mr. Barreto, you state in your testimony how this budget is a 4 percent increase over fiscal year 2002, 

which, in reality, you are actually requesting virtually the same 

funding as last year. Also, when you remove the $21 million for 

this questionable workforce transformation, there is actually a decrease of 2.1 compared to fiscal year 2003. Is that not correct? 

Mr. BARRETO. Well, first of all, thank you for that question. And 

when we look at the total budget, as you said, we do have it as an 

increase. And when we talk about workforce transformation, we 

10

are really talking about SBA transformation. It is not just employees; it is our ability to be able to make sure that all of our offices 

are much more effective in helping small businesses in all of our 

programs. 

Ms. VELAZQUEZ. But you are not providing any additional money 

for SBA programs; right? 

Mr. BARRETO. In some cases our programs are staying level. 

They are staying level, in an environment where many agencies 

are having decreases or programs being eliminated completely. 

Ms. VELAZQUEZ. But every press release that I have seen and everything that I have read says that there is an increase, while the 

only increase I see here is for salaries and expenses and this $28 

million for questionable—for whatever transformation, workforce 

transformation. But not for any of the SBA programs that are tailored and designed to help small business. 

Mr. BARRETO. The thing, as you know, Mrs. Velazquez, and I appreciate the intent of the question——. 

Ms. VELAZQUEZ. We will never agree on that one and I have 

other questions and concerns. 

Mr. BARRETO. Okay. 

Ms. VELAZQUEZ. The agency faces challenges now more than 

ever. And to highlight just a few I am going to mention, your budget says no solution would be provided for the 504 subsidy rate problem for 3 years. Your workforce transformation plan is unclear. The 

Women’s Procurement Program has yet to be implemented. There 

is no enforcement of Federal agency small business contracting efforts. 

As we look at the SBA reauthorization this year, can you please 

justify for this Committee why we should give you a blank check 

by reauthorizing the agency for 3 years instead of 1 year? 

Mr. BARRETO. Well, if I could take each of those points by themselves, as we have talked about before, I understand that this Committee has struggled with things like the subsidy rate for more 

than 10 years. We knew that when we first came on board this was 

going to be a very important issue for our relationship with this 

Committee. And in a very short period of time, we have been able 

to fix the problem with regards to the subsidy rate on the 7(A) program. 

I also mentioned in my previous comment, it is our intention to 

also fix the problem on the subsidy rate that we have on 504, and 

also on some of the other programs, disaster and SBSC. 

Ms. VELAZQUEZ. And that will be done by when? 

Mr. BARRETO. It is our intention as soon as possible. We would 

like to finish it this year. What I hope is as we discussed last year, 

when we made the commitment, I think there was a lot of question 

of whether we would be able to fix the 7(a) subsidy rate and do it 

as quickly as we did. I think a lot of people expected that this 

would not be something that would be done until 2004. We have 

a new 7(a) subsidy rate for 2003. That is significant progress. And 

we are very gratified by that. We also believe that we can make 

significant progress on these others. 

Ms. VELAZQUEZ. Mr. Barreto, the administration requests no 

funding for PRIME and BusinessLINK, and every year Congress 

appropriates money for this program. When is this administration 

11

going to get it that these programs have a lot of support in Congress? Why do you come back year after year and do not request 

any money for those programs? 

Mr. BARRETO. We agree that technical assistance and education 

is vital. In fact, it is really the place that we touch the most small 

businesses. Last year, we were able to help 1.5 million small businesses through education and technical assistance. 

However, we also believe that some of the programs are duplicative, and so it is important for us to make sure that when a small 

business comes to us, oftentimes they do not know that we have 

1,100 small business development centers they do not think——. 

Ms. VELAZQUEZ. It seems to me, administrator, that there is a 

disconnect between what you think is important and what we 

members and appropriators think that is important. These programs have been designed to help low-income minority communities. What kind of message are we sending to them? 

Mr. BARRETO. We are very dedicated to low-income minority communities. 

Ms. VELAZQUEZ. That is why you are requesting money for these 

programs? 

Mr. BARRETO. Those communities benefit from many of our programs. They do not just benefit from one, they benefit from small 

business development centers, they benefit from 12,000 retired executives in SCORE. They benefit from women——. 

Ms. VELAZQUEZ. Those programs are totally different and they 

provide different services. These programs were designed particularly to help this sector of our economy. And again I remind you 

that the face of small business is changing in America. 

Mr. BARRETO. I agree. 

Ms. VELAZQUEZ. And you cannot come and lecture us about how 

important small businesses are and exclude the one segment that 

is the fastest growing sector of our economy. 

Mr. BARRETO. I would never intend to lecture this Committee. I 

promise you I will not do that. What I do want to do is let you 

know what the actual results and are what is happening right now 

year to date in 03 is our lending in all of those upon communities 

is up significantly. 40 percent up in Hispanic community, 67 percent in African American community, 35 percent in women owned 

community accident 33 percent in Asian community. 23 percent in 

Native American community. That is the fastest growing segment 

of small business. That is the changing face of small business in 

the country. And so we are gratified that many more of those small 

businesses now are not only getting access to capital, they are getting technical assistance, they are getting many opportunities. And 

part of is it is that they are starting to understand and become 

educated about the whole menu that the SBA provides. 

Ms. VELAZQUEZ. The talk about minority loans in your testimony 

you said loans to minorities were ahead of your internal goals. But 

as of a percentage of your portfolio, what has been the change from 

fiscal year 01, 02, and 03? 

Mr. BARRETO. Well, I would be more than happy to provide 

you——. 

Ms. VELAZQUEZ. I have the answer right here because you come 

here and you throw numbers at us that sound wonderful and beauVerDate 0ct 09 2002 10:06 Mar 17, 2004 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 G:\HEARINGS\92511.TXT NANCY
12

tiful. But I can tell you that it has remained exactly the same: 30 

percent. Fiscal year 2001, fiscal year 2002, and 2003. 

Mr. BARRETO. Obviously, we are not finished with fiscal year 

2003, and that is where we are seeing this marked improvement. 

Ms. VELAZQUEZ. What happened to fiscal year 2001 and 2002? 

They remained the same. So do not come and cook the books and 

tell us that the numbers are ahead of the goals that you established. 

Chairman MANZULLO. I would ask that you allow the administrator to answer the questions. 

Mr. BARRETO. Thank you, Mr. Chairman. The number that I was 

quoting, Ms. Velazquez, is not with regards to a comparison of 2001 

and 2002, and 2003. They are year-to-date 2003 numbers. Right 

now in 2003, this fiscal year we are ahead in all of those categories 

by those percentages. It is our intention to maintain that level of 

lending in those communities. And I don’t think it happens by accident. I think a lot of the things that we have done to streamline 

our programs, to communicate our programs, to outreach to those 

communities is what is helping us achieve those numbers. We are 

very proud of those numbers but we can do better and we will. 

Ms. VELAZQUEZ. The percentage is the same, these, of your numbers. These are not my numbers. 

In the omnibus appropriation bill, the appropriators chastised 

SBA for using schemes to fund the program and directed the Agency to halt this practice. The recent budget submission for 2003 cuts 

$3 billion in loans from the program, a 25 percent cut. How can the 

agency, given the appropriator—what the appropriators told you, 

justify this inadequate funding? 

Mr. BARRETO. I am not exactly clear where that number comes 

from. I will tell you that our numbers show that in fiscal year 2001, 

we did $9.1 billion in 7(a) loans. In fiscal year 2002, we did $9.4 

billion in 7(a) loans. In fiscal year 2003, we believe that we will do 

$9.4 billion in 7(a) loans. And in 2004, the monies that we have 

asked for budget authority should yield us an approximate level 

that we have been experiencing over the last 4 years, about $9.3 

billion. 

Ms. VELAZQUEZ. Tony, would you please bring some clarification 

here? 

Chairman MANZULLO. What I would like to do is keep the order 

here and allow the other members to ask questions to Mr. Barreto 

under the 5 minute rule. You have taken up 12 minutes. 

Ms. VELAZQUEZ. Would you please allow Mr. Tony Wilkinson to 

answer that? Because apparently there is a disparity here. 

Chairman MANZULLO. Do any of the members here have any 

questions of Mr. Barreto that you wanted you do have questions? 

All right. Let Mr. Wilkinson clear up that issue, whatever it is, and 

then we will let the other members ask questions of Mr. Barreto. 

Mr. WILKINSON. Just in terms of loan volume we did $9.4 billion 

last year in regular 7(a) but in addition to that in a special program called STAR we well an additional $1.7 billion. In fiscal 2002 

the total net loans in the 7(a) program was $11.1 billion. In fiscal 

year 2003 year to date combines 7(a) and STAR 7(a) together we 

are ahead of last year’s pace. 

Chairman MANZULLO. Dr. Christian-Christensen. 

13

Mrs. CHRISTENSEN. Thank you, Mr. Chairman. Welcome to the 

panelists. Welcome, again, Mr. Barreto. I have a different sort of 

question on a 504 program before I ask about disaster loans. One 

of the budget goals of the 504 program is to increase the number 

of 504 intermediaries. How do you plan to accomplishing that? 

Mr. BARRETO. Thank you very much for that question. We think 

that that is very important. We are right now, as you may know, 

seeking comment from the industry. One of the things that we 

would like to see is to expand the number of 504 lenders in this 

country. We believe having additional competition in these markets 

have been very, very important and we have received a lot of requests from areas all across the country to open up 504 in those 

areas. And so we are attempting to do that. 

Obviously, we need to wait for the end of the comment period to 

come back, but it is our intention to be able to move forward and 

to allow more competition and more providers of the 504 loan. As 

you know, the 504 program can be a very important program for 

small business. It is also a program that unfortunately we have not 

fully maximized. At end of every year we usually have budget authority left. And so we think it would be a very effective development for us if we had more 504 providers around the country and 

we hope to get that accomplished this year as well. 

Mrs. CHRISTENSEN. Okay. There are probably some follow-up 

questions to that, but I want to get into the disaster loan while I 

still have some time. 

You know we have gone over this several times. And we are still 

having a lot of difficulty. Let me start out with this. When disaster 

loans are sold, do you give the purchaser any notice or guidelines 

that these loans are different and should not be viewed as conventional loans? 

Mr. BARRETO. Well, absolutely. In the actual loan documents, 

there is actually language there that states that a loan can be sold. 

One of the things that is very important is that even though that 

loan may be sold, the terms of that loan cannot be changed by the 

future purchaser of that loan. So in other words, if somebody has 

a 4 percent loan over 30 years and they are making payments, 

even if that loan is sold, somebody else cannot say now you are 

going to pay a higher rate of interest, you will pay for a shorter 

period of years. 

Mrs. CHRISTENSEN. We understand that those things do not 

change, but you know in practice how the SBA dealt with the loans 

has changed with the financial institution. 

When the mission of that program is to assist the borrower to return to pre-disaster conditions, and that seems to come in conflict 

with the profit-driven mission of a financial institution. So even 

though the hard rules and regulations governing that loan do not 

change, a lot of how those loans are administered do change. 

In the case of my district, those loans—most of the loans came 

in before the loan sale started, so they did not know that their 

loans were going to be sold. 

And but now, when they are sold, do you give the purchaser notice that they are going to be sold? 

Mr. BARRETO. We do. There is a letter that goes out 3 months 

before that loan is sold letting them know that this loan is going 

14

to be included in a loan sale. Now one of the things that we have 

said is that if somebody has extraordinary circumstances, maybe a 

change in status, something serious has happened, they can call us 

up and talk to us and make a case for why that loan should not 

be included in an asset sale. So we have the flexibility, we have 

the flexibility before that loan gets included in that loan sale that 

if we needed to treat that loan differently, we would be able to do 

that. So we are trying to be much more sensitive and improve the 

communication, because I think that is vital. 

I would also say just my last point, and I want to let you follow 

up, we have truly done a lot of disaster loans and we have done 

some loan sales. But we have not gotten a huge volume of complaints or people saying that they have been mistreated. 

Now, the ones that we have gotten are very important to us and 

obviously very vocal, and so we want to make sure that we are sensitive to that and we respond to that. But I don’t think that we 

have had a huge issue with this at this point. 

Mrs. CHRISTENSEN. You mentioned the disaster loans made as a 

result of 9/11. Do you anticipate extending any special treatment 

to the loans or would you provide—did you provide any special instructions to the financial entities around those loans compared to 

the other loans that you have sold? 

Mr. BARRETO. We have already. 

Mrs. CHRISTENSEN. You haven’t sold those? 

Mr. BARRETO. We haven’t sold those loans, but we are being very 

sensitive to those loans that we made after September 11th. In 

some cases, people could not make payments right away, and we 

did require payments right away. We do want to be sensitive to 

that. As you know, Congresswoman, we are not currently planning 

any asset sales at this time. It does not mean that we will not at 

some future time. We want to be very practical and judicious. We 

understand that there has to be a balance here. There has to be 

a balance of the people that has gotten those loans and there also 

has to be a balance to make sure that when we can do loan sales 

effectively and we can return taxpayer money back to the Treasury 

so that we can operate more effectively ourselves as an agency and 

help more small businesses that we do that as well. 

Chairman MANZULLO. Mr. Marshall? Mr. Michaud? 

Mr. MICHAUD. Thank you, Mr. Chairman. Mr. Barreto, I want to 

talk a little bit about the disaster assistance. I notice you mentioned it a couple of times in your speech. Talking about tornadoes, 

floods, hurricanes. What does your agency do with economic disaster? Back in my district, there are two paper mills that have 

been shut down. They employ over 1,100 employees. In one community they pay 70 percent of the tax base. The school and the students in the senior class do not know whether they are going to be 

able to graduate because there is no money to fund the schools, 

particularly with 70 percent of the tax base threatened. 

You go 30 miles north, another mill shut down last December. 

30 miles south another mill in Chapter 11. A lot of it deals with 

manufacturing. We do have an economic disaster. 

What does SBA do to help stabilize these type of communities because it is having a devastating effect on the small businesses in 

the communities. And we are seeing small business after small 

15

business now closing because of the rippling effect because of the 

large anchor in the community. 

Mr. BARRETO. Thank you, Congressman. You are absolutely right. You know, half of that $1.1 billion that we did after 9/11 was 

economic and disaster loans. I would say it was probably more than 

that. And those were loans that actually happened outside of the 

declared disaster area in New York City. And we have very specific 

guidelines as to when we can provide disaster loans both direct disaster loans for people who have had their business damaged by a 

tornado or earthquake or a terrorist act. We also help homeowners 

and renters as well. 

But in some cases and we saw that in 9/11, there are also businesses that haven’t had physical damage but have had economic 

damage and we have been able to help them as well. For us this 

has to be declared a disaster. And the definitions for our disaster 

program are usually some extraordinary, either a natural disaster 

or something that was through no fault of anyone, a terrorist attack or something of that nature, and we can help. 

However, I am very concerned about those small businesses in 

your area that have been affected and I want to make sure that 

we reach out to them and they are working with our district offices 

there. There may be programs that we can offer them right now 

that they are not aware of. Obviously we have a number of loan 

programs from small loans to venture capital. We have all kinds 

of training and education programs. There are procurement programs as well. So there are opportunities for those small businesses. 

Mr. MICHAUD. I haven’t seen that assistance up in my area and 

part of the reason why these businesses are failing, at least around 

two of the mills anyway, is because of our trade policies which are 

killing us but also because of September 11th where businesses 

have cut back dramatically on their advertising and therefore we 

have seen a dramatic shift. 

And also part of it is because the Federal Government is not 

doing their procurement the way they should. Thirty miles down 

the road from where I used to work is a mill that makes recycled 

copying paper and I have seen as I go through Federal buildings 

paper bought from Canada, which I think is a crying shame. I 

guess my second question is is it possible that through the 

BusinessLINK program that small businesses might be able to 

hook up with larger businesses in other areas to open up new markets for them? 

Mr. BARRETO. I think there are a number of different opportunities. We have had a number of different mentor protege-type programs that can help small businesses joint venture with a larger 

business, and we would be glad to work with you and those businesses that were effected and introduce them to some of those opportunities. 

One of the things that we are doing right now that I am excited 

about is that we are doing procurement matchmaking sessions all 

across this country this year. We have already done two where we 

identified 3,000 small business appointments for small businesses, 

$3 billion in potential contract opportunities, and we have 12 more 

planned this year across this country. 

16

We are having the next one in Florida next week, and we have 

businesses traveling from 12 States to go to this business matchmaking session. It is our way of bringing businesses that actually 

have capability and capacity and matching them up with people 

who have demand who are buying things. And then no guarantees, 

but what we know that happens is that when those small businesses get together with those buyers, business takes place. And 

we have already seen that happen already in those two that we are 

having. But we would be glad to reach out and work with you. And 

if we need to customize something that will work for some of those 

mills that are struggling right now. 

Mr. MICHAUD. You still did not answer my questions. Somebody 

mentioned the BusinessLINK program. It was my understanding 

that SBA did not ask for any funding in fiscal year 2004, and that 

is one of the programs that they can use. Why haven’t you asked 

for any funding in 2004? 

Mr. BARRETO. As I said, there are a number of programs that we 

felt that other programs could also help them with. We have some 

programs that are very similar in nature and there is some duplication and some repetition. Sometimes those programs are not requested funding for an upcoming year. But as I said, we are still 

doing mentor-protege and helping small businesses match up with 

big businesses so they can get contracts. 

Chairman MANZULLO. Mr. Michaud if you want to see me after 

the hearing, the U.S. American—the American Canadian parliamentary exchange will take place in Canada the weekend of May 

16th and 17th. You should be on that delegation. Talk to me about 

it. 

Mr. Bartlett? 

Mr. BARTLETT. Thank you very much. I have a large paper mill 

in my district in one of the three counties, two of them really in 

Appalachia. This is Westvaco, and they hire 2,700 people. They 

never have to advertise because they have a waiting list of 2,000 

people that would like to have a job there. They pay 50 percent 

more than the other employers in the county can pay. This is really 

a depressed area until fairly recently. We had 14 percent unemployment there. The head of the National Guard up there told me 

several years ago that nearly half of the young men in his guard 

unit up there were unemployed. 

And just about 2 or 3 years ago, the EPA decided they were 

going to put these people out of business. They have a tough 

enough time competing with paper from overseas. But now the 

EPA was coming after them for infractions of rules. It was like, you 

know, you are hauled into court and the judge says we are going 

to fine you for going through a stop sign and you say, gee, the stop 

sign wasn’t there yesterday but the judge says, yes, it is now. So 

we will fine you for not stopping at it yesterday. 

This is the kind of thing they are being changed with. What can 

Small Business do to help in a situation like this? By the way, you 

can’t even smell them when you get near it. I am familiar with 

paper mills through the south and you know before you see the 

town, you can smell the town. You can’t smell it there. They are 

a great corporate citizen. They have great support from the citizens 

there. They have bent over backwards to run a really clean mill. 

17

They are located in both West Virginia, they make the pulp in 

West Virginia and they pump it across the river to the mill which 

is in Maryland. What can your organization do to help in a case 

like this? 

Last year we had about a $400 billion trade deficit. We do not 

need our regulators in this country moving more jobs overseas so 

that next year our trade deficit is bigger. Can you stand up and 

point at this and say this is crazy and keep yelling that it is crazy 

until somebody does something about it? 

Mr. BARRETO. I think you are right. And there are many small 

businesses that come to us all the time and tell us how much they 

are paying to for regulations that maybe do not make any sense 

anymore. And that is one of the reasons why the SBA has two very 

important programs. We have the Office of Advocacy, which really 

deals with small businesses before regulations go into place. But 

we also have another very important office that is called the Office 

of the National Ombudsman. The Office of the National Ombudsman helps those small businesses when they are dealing with Federal agencies, especially when they feel that they are being treated 

unfairly and improperly. 

Both of those agencies, those are both major programs in our organization, can be very helpful to a whole class of businesses or individual businesses. In fact, one of the things that the national ombudsman does is that when he hears about issues like this, he can 

even plan regulatory hearings in the area and bring all of the 

stakeholders together and take testimony and actually report that 

back to the powers that be in those Federal agencies, and obviously 

to our administration. 

Also of that is available to constituents in all of your districts, 

but especially when there are businesses that are being hurt right 

now and have no place to turn, especially when they are dealing 

with a major Federal agency. We have heard this many, many 

times before, and that is what they are there for and we would be 

glad to help you any way we can. 

Mr. BARTLETT. Do you need additional legislation so that you can 

be more effective in this area? Because they have been bedeviled 

by this suit for several years. It was started under the previous administration. I have encouraged this administration to come in as 

a friend of the court saying this is crazy, trying to put a good company out of business in this country so their jobs go overseas. 

Mr. BARRETO. Well, as I said, that is one of the things that our 

Office of Advocacy takes a very close look at. 

Mr. BARTLETT. Present legislation is adequate? 

Mr. BARRETO. Again, I think it depends on the specifics of the 

case and what that regulation is intended to do. I would tell you 

that most of our small businesses think that we have too much regulation right now. We did a study that shows that every small 

business in America could pay $8,000 per employee just complying 

with current Federal regulation. I think it depends on the situation. I would be more than glad to get information to you and have 

our folks back in advocacy and ombudsman follow up on that. 

Mr. BARTLETT. Several years ago we had a major drought in 

Maryland, and our government people came in to help and one of 

the farmers made a point and said: I am drowning in 10 feet of 

18

water now—talking about his debt—and you want to make it 11 

feet deep? This is not what our farmers needed was another loan. 

They have lots of equity in their farmland and the bankers are 

happy to loan them money. And you heard the joke about the farmer who won the million dollar lottery and they asked him what he 

was going to do and he said: I guess I will keep on farming until 

it is gone. 

Do we have any programs that will help in an emergency like 

this? If they do not get a grant they are going to be out of business 

and that is one more family farm that is gone. Another loan will 

not help them, they are drowning in loans. 

Mr. BARRETO. I would be more than happy to follow up on that. 

That is probably something that would be part of the Department 

of Agriculture. We currently do not have very much of grant authority. We do not do very many grants in our agency. But there 

are agencies that are very focused on this. Again, the Department 

of Agriculture is one of those agencies, and we would be more than 

glad to follow up with them and find out what they might be able 

to do to help in a situation like this. 

Mr. BARTLETT. Thank you, Mr. Chairman. In cases like this, 

somebody needs to be there to help. 

Chairman MANZULLO. Well, but unfortunately, Mr. Barreto can’t 

be in all these situations. This is Small Business and that is the 

Department of Agriculture. 

Mr. BARTLETT. Well, farmers are small business. 

Chairman MANZULLO. I understand. If Mr. Barreto were in 

change, we would get a lot more things done in this government. 

I am convinced of that. 

Mr. Davis. 

Mr. DAVIS. Thank you, Mr. Chairman. Let me thank you and the 

members. This Committee is so interesting that I got a waiver so 

I could remain on it. 

Mr. Barreto, and you may have answered the question because 

I have been out for most of the hearing, BusinessLINK activity—

and there was a little comment about it—what is actually the status? Do we really have any BusinessLINK activity that we are 

going to be funding in the budget? 

Mr. BARRETO. You are asking about the 2004 budget? 

Mr. DAVIS. Yes. 

Mr. BARRETO. I don’t believe that we right now have any plans 

right now to ask for any funds in the BusinessLINK program. It 

has been a program that, as the Congresswoman has said, is 

very—there are companies that are very appreciative of it and feel 

very strongly about it, but as we have said, we feel that there are 

some programs that we have that are duplicate, and I have where 

we can help some of those small businesses with some of the other 

technical assistance and education that we currently provide 

through many of our other resources. 

Mr. DAVIS. Could you maybe share what some of those are? 

Mr. BARRETO. As I mentioned, the place that we help the most 

small businesses is in this area of education and technical assistance. We are able to do incredible things. Last year we helped more 

than 1.5 million small businesses in the United States through a 

whole host of technical assistance and education programs. ObviVerDate 0ct 09 2002 10:06 Mar 17, 2004 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 G:\HEARINGS\92511.TXT NANCY
19

ously led by the small business development centers, of which we 

have basically in every State in the Union. There are thousands of 

people that work at SBDCs that can provide any kind of technical 

assistance to small businesses, everything from how do you put a 

business plan together to how do you go about getting government 

contracting. How do I put a loan package together? We also have 

12,000 retired executives that volunteer their time every single 

year. We have experts in every field. I wish I had twice as many 

of these retired executives. Many of them have the expertise because they worked for large companies. 

Of course we have business information centers throughout the 

United States. We have women business centers as well throughout 

the United States. And so as I said, many times small businesses 

are not aware of all of those tools that we have that can provide 

them this kind of information, this kind of help, this kind of linking 

together. Obviously this is something that our government contracting and business development department is very focused in 

on as well. 

Mr. DAVIS. I had an excellent opportunity the other day, as a 

matter of fact, where we had some retired executives who had been 

very instrumental and very helpful. And as a matter of fact, we 

even gave them some, you know, some awards and things like that. 

Is there any—many small businesses are having difficulty getting access to capital. I mean, needing a few additional dollars in 

order to market, to do business. Are there any activities that you 

would recommend that a small business can find money from? 

Mr. BARRETO. Well, I think there are many, many activities. One 

of the things that somebody reminded me is that SBA is the largest 

backer of small business loans, but one of the things that we, I 

think, have been partly able to assist is that there are many, many 

new resources for small businesses. Not only through banks and 

non-bank lenders, but there are a whole host of providers of access 

to capital now. We take our role very, very seriously. In fact, one 

thing that I mentioned before we are on track to have the best year 

in our history with regards to small business loans. We think that 

we will do more than 60,000 small business loans just in the 7(a) 

program. And the thing that is very exciting to us, Congressman, 

is that we are getting our average loan size down. When I first 

came into the agency the average loan size was $230,000. Inc. Magazine reported that the majority of small businesses in the United 

States are capitalized with $50,000 or less. 

So the fact that we have been able to get those average loan size 

down does not mean that we will not do big loans because we will, 

and those are important as well. But it means that we will touch 

more small businesses, especially in the emerging markets, which 

are fastest growing segment of business in the United States. 

I don’t have to tell you that 15 percent of all businesses in the 

United States are minority-owned businesses or 40 percent of the 

total are women-owned businesses and those are the fastest growing segments in the United States. 

So I think there are tremendous opportunities. We are excited 

about what we are going to be able to do for those small businesses 

this year, and obviously we want to continue to facilitate opportuniVerDate 0ct 09 2002 10:06 Mar 17, 2004 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 G:\HEARINGS\92511.TXT NANCY
20

ties and continue to enroll and encourage others to help small businesses as well. 

Chairman MANZULLO. Congresswoman Majette. 

Ms. MAJETTE. Thank you, Mr. Chairman. Thank you, Mr. 

Barreto, for being here this afternoon. I am pleased to be a part 

of the Small Business Committee. I sought a waiver to be able to 

join this Committee and I am excited about working with you and 

the other members of the Committee to make sure that we are 

properly serving almost half of all of the working Americans who 

are employed and who run small businesses. 

Obviously, I do not have to tell you that small businesses are 

truly the backbone of our economy. I represent the fourth district 

of Georgia, which is a growing and thriving suburban community 

just east of Atlanta in the State of Georgia. Almost 98 percent of 

the State’s almost 200,000 businesses have fewer than 500 employees and these companies employ about 44 percent of the state’s private sector workforce. So obviously it is a very important part of 

our economy. 

We have been seeing a great growth in the numbers of minority 

and women business owners, particularly in my district. And I am 

formerly a small business owner myself, having been a partner in 

a small law firm and also before eventually running for Congress, 

I was an administrative law judge in the workers’ compensation 

board in Georgia. And so I think I have a very unique perspective 

to bring to this arena. 

I would like to get to the point, and I guess you want me to do 

that same thing. I have reviewed the SBA budget request for 2004, 

and it appears that the budget is substantially unchanged from 

last year. And there still appears to be little or no funding for programs that are targeted at helping low-income communities and 

minority businesses. Particularly with respect to government contracts and women-owned businesses, the SBA has still not met its 

goal of having 5 percent of the contracts awarded to women-owned 

businesses. 

Part of the problem may be that the SBA has not implemented 

its women’s procurement program and thereby costing womenowned businesses millions of dollars in lost opportunities. What is 

the office of contract assistance for business owners doing to ensure 

that the 5 percent statutory goal for women business owners is 

achieved? 

Mr. BARRETO. Thank you very much for the question, and I am 

looking forward to working with you. I have a great background 

and I know you will be a great contributor to this Committee. 

Women-owned businesses are vitally important, as I mentioned before. Right now, 40 percent of all of the businesses are womenowned businesses. I have had a lot of time, especially recently, to 

meet with leaders and the organizations that represent some of the 

largest associations of women business owners in the country. 

I spoke with NAWBO, the National Association for Women Business Owners, just a couple of weeks ago. I just got back yesterday, 

I was in Florida, speaking to a business woman’s conference in 

Florida. It is a conference that is done every year by Office Depot, 

very exciting and some incredible businesswomen. I am also speaking to the Women’s President Organization this week. This is not 

21

an afterthought or something that we spent some time on. This is 

something in the forefront of our thinking and we will measure 

ourselves by the results that we get from these business owners, 

and what they tell us is that they are not concerned about the process, they are—what they are concerned about is getting tangible results. What they want is more access to contracts. They want more 

opportunity. They tell us all the time, we will do the rest, we just 

need to be able to get in. And that is one of the things that we have 

really tried to attempt to do with a lot of this procurement matchmaking that we are doing this year. I said last year that it was 

very important for us to grow the pie of opportunity for those businesswomen. And not only with the government, but also with the 

private sector. 

These events that we are doing all across the country are really 

going to help us to do that. With regards to the women’s reg, this 

is also something that is very important. What we realized when 

we first came in is that the reg that was currently being offered 

had a study that was not comprehensive enough. It was a study 

that we did not believe that would pass the scrutiny of a court attempt against it. And that concerned us because if we are go to 

have a regulation, we want to make sure that we have all of the 

ammunition and background that we need so that it will sustain 

that kind of a challenge. What we have done is that we are now 

in the process of outsourcing a contract to an expert that can help 

us to determine what needs to be in that study, what is a comprehensive study that will pass all constitutional muster. And we 

are right now in the process of getting that contract, and we will 

be moving forward with this very expeditiously this year. 

However, having said that, we are by no means going to be delayed in actually providing some of those tangible results that 

women business owners are so urgently seeking from us. 

Chairman MANZULLO. I will recognize the Ranking Minority 

member for 5 more minutes with the administrator, and then we 

will get on with the rest of the testimony. So I set the clock. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. I really appreciate it. 

Mr. Barreto, in answering the question of Ms. Majette, you said 

that how important the women’s sector is for our economy. And yet 

you failed in terms of the women’s procurement goal. And then in 

2000 we reenacted the women’s procurement program and last year 

you came before us and gave the same excuse that you are giving 

us. And in the Small Business regulatory agenda there is nowhere 

that you can find about the women’s procurement program. When 

do you intend to implement it? 

Mr. BARRETO. As you know, one of the challenges that we have 

had is that we have been on a continuing resolution for quite some 

time now. We finally have gotten our 2003 appropriation. It was 

impossible for us to move forward with a number of different initiatives that we had planned without knowing what kind of resources 

that we would have to work with. 

Now that the continuing resolution is over and we have our 

budget, we are able to move forward. Again, what we are doing is 

making sure that we have the right study, the right substance of 

a study that needs to be done so that there is no challenge to that 

rule. 

22

Ms. VELAZQUEZ. But how did you intend to proceed with it when 

you do not include it in the budget? It is not here. So what that 

is telling me is that you have no intention of implementing the 

women’s procurement program? It is not in the budget. It is not in 

the regs that you put out, the list. 

Mr. BARRETO. What we have to do before we are able to ask for 

resources is that we have to know what we are going to be asking 

for. The purpose of this contractor is to be able to help us to put 

together what is going to be necessary for us to get that done. And 

that is the work that is taking place right now. But it would be imprudent for us to ask for an amount of money that we were not 

sure that we were going to need, or even if it was going to be the 

accurate amount. 

Ms. VELAZQUEZ. Is the program going to be up and running this 

year? 

Mr. BARRETO. I don’t know. It depends on what comes back from 

the contractor that we have hired. We think that he should be—

or the company should be able to finish their work very quickly, 

but I am not sure exactly what that final recommendation is going 

to be yet. 

Ms. MAJETTE. Will the gentlewoman from New York yield? 

Ms. VELAZQUEZ. Sure. 

Ms. MAJETTE. Mr. Barreto I would like to offer my services as 

a former trial court judge having served for 10 years. One of the 

reasons that I resigned from the bench and wanted to come and 

that I am here in Congress is to assist in the process in that legislative process, policy-making process. And bring the perspective of 

someone who has the experience of making sense out of rules and 

regulations, and so I offer my assistance for free in terms of trying 

to move that process forward and helping you come up with the 

kind of program that will withstand judicial scrutiny. 

Ms. VELAZQUEZ. Good luck. 

Mr. BARRETO. We would like to work with you, and obviously we 

will make sure that we are communicating and letting you know 

what work that our contractor is doing with regards to helping us 

with this study as well. 

Ms. MAJETTE. I would like to be involved in that process as it is 

going forward. 

Ms. VELAZQUEZ. Reclaiming my time. Is the firm that you hired 

to do the study, is that a small firm? 

Mr. BARRETO. I believe it is a small business. 

Ms. VELAZQUEZ. You believe? I would love if you had a straight 

answer and that answer should be yes. 

Mr. BARRETO. I do not want to give you an incorrect answer. I 

will be happy to find out all the particulars of the company. It is 

always our intention when we have a procurement to choose a 

small business, a minority business, or a woman-owned business. 

Ms. VELAZQUEZ. One of the priorities that you stressed today for 

the agency is to make more small loans; correct? 

Mr. BARRETO. That is correct. 

Ms. VELAZQUEZ. That is why you are asking—you cut the 

Microloan Program by half? 

Mr. BARRETO. Well, one of the things that has been happening, 

it is an incredible thing. Last year we made some changes to our 

23

SBA Express program and what we are finding is that 13 percent 

of all of the SBA Express loans are actually smaller loans. So there 

are also many small loans that are coming out, not just out of the 

Microloan Program, but also programs like the SBA Express program. It was very interesting in 2002, there were about $17 million 

of microloans that were done but those loans were actually leverage and created $35 million of small loans to small businesses so 

we think that has been a very effective program. 

One of our big concerns was that when we looked at our portfolio 

last year, 87 percent of our loans were actually loans under 

$500,000, and 13 percent of the portfolio was absorbing 51 percent 

of the budget authority, and that concerned us, and that is why we 

have made such a strong push to do smaller loans. And the other 

reason we have done smaller loans as well is that we found out 

that small loans create more jobs. It actually, the Department of 

Labor did a study that showed that for every small loan, $14,000 

would create a job of a small loan. Whereas it would take $153,000 

of a larger loan to create the same jobs. 

And so that is one of the reasons that we spent so much time 

focusing on not only streamlining our programs but creating more 

outreach so we can do more of those small loans. 

Chairman MANZULLO. Thank you, Ms. Velazquez. 

Ms. VELAZQUEZ. Thank you for not answering my questions. 

Chairman MANZULLO. Well, if you would like Mr. Barreto to answer a question in writing. 

Ms. VELAZQUEZ. Yes, please, I have a lot of other issues, Mr. 

Barreto, and I hope and I expect for those questions to be answered 

in a timely manner. 

Mr. BARRETO. I promise they will be. 

Ms. VELAZQUEZ. The way that your staff is responding to our requests? 

Mr. BARRETO. We will answer posthaste. 

Ms. VELAZQUEZ. It is so questionable. 

Chairman MANZULLO. All right. Okay. You have been here for 2 

hours. It is always good to see you. 

Mr. BARRETO. Thank you so much. 

Chairman MANZULLO. You can sense the frustration as many of 

us have had our districts that have just been destroyed by job loss 

and manufacturing, and it is written over the faces of many of the 

members here. You have done an excellent job. You can only do so 

much. You are not the President of the United States. But I just 

want to thank you for your patience. Thank you for working with 

us. Look forward to the new 504 econometric model being adopted 

by October 1st of this year. And if you would like to stick around 

and listen you are welcomed, but otherwise you are excused. 

Mr. BARRETO. I want to thank you very much, Mr. Chairman, 

and Ranking Member Velazquez, I look forward to working with 

this Committee. And you are absolutely right, there are small businesses all around this country that need us more than ever now. 

And so it is at times like this that we really need to work closely 

together. I appreciate the support that this Committee has given 

me. I appreciate the support that this panel has give the SBA and 

the small business community. And I also appreciate your warm 

words and support. And I very much look forward to having the 

24

best year in our history working together. Thank you very much 

for the opportunity to be here today. 

Chairman MANZULLO. Thank you, Mr. Barreto. 

Mr. Wilkinson, you are up for the next 5 minutes, and we will 

proceed with your testimony. 

STATEMENT OF ANTHONY R. WILKINSON, PRESIDENT, NATIONAL ASSOCIATION OF GOVERNMENT GUARANTEED 

LENDERS 

Mr. WILKINSON. Thank you, Mr. Chairman. Before I cover anything else, for the record I want to thank Chairman Manzullo, 

Ranking Member Velazquez and the other members of this Committee for your efforts in preventing the 7(a) program from being 

a disaster. The President’s budget request for 2003 only asked for 

$4.85 billion, or less than half of this year’s loan demand. This 

Committee, however, led the budget fight on two fronts. First, to 

obtain passage of legislation, S. 141, which will change arcane 

budget law and allow the immediate use of a new econometric 

model to estimate subsidy rates. This will immediately reduce the 

subsidy rate by 41 percent and increase lending authority by approximately $3.4 billion. 

Mr. WILKINSON. Second, to reprogram STAR money which other- wise would have lapsed. This action will add about another $1 billion to this year’s level and hopefully more, hopefully another $1 

billion to a billion and a half, depending on OMB’s action in applying the econometric to STAR loan approvals earlier this fiscal year, 

an action that you, Chairman Manzullo, described as the only reasonable interpretation of Senate bill 141. Small business borrowers 

are deeply indebted to all of you for these efforts, and I thank you 

on their behalf and on behalf of the NAGGL membership who delivers the 7(a) program. 

As we have discussed today, the SBA has developed a new econometric model for estimating defaults that reportedly leads to a 

more accurate subsidy estimate. NAGGL has not been briefed by 

the SBA or OMB on the new model, so we cannot offer an opinion 

about the model. What we can say is that the results of the new 

calculation are much more reasonable than before. 

One purpose of the Federal Credit Reform Act is to measure accurately the cost of Federal programs. NAGGL is hopeful that the 

new model being used by SBA does just that. We look forward to 

a full briefing on the new model. We are hopeful that the SBA will 

show that, had the model been used on previous loan cohorts, it 

would have proved to be much more predictive that the old model 

and that the results are ones that this Committee and that program participants would have determined to be reasonable. In our 

view, the subsidy rate is still probably a little bit too high, but at 

least it is much more reasonable than before. 

I want to offer preliminary congratulations to SBA for the development of the econometric model. It appears to be a giant step in 

the right direction. I know that many worked long and hard on the 

development of the model, and I look forward to being able to offer 

unqualified congratulations in the near future. 

The administration’s budget request for fiscal year 2004 for the 

7(a) program has requested only a $9.3 billion program level in 

25

7(a). This would be more than 25 percent below our projected level 

of demand. Small businesses continue to need access to long-term 

capital. NAGGL requests your support of sufficient appropriations 

to fund a $12.5 billion 7(a) program for fiscal year 2004. 

Loan volume for the current fiscal year is running ahead of last 

year’s pace, even though a $500,000 loan cap has been in place. 

Given the nature of our economy, we believe that the increase in 

borrower demand will continue into fiscal year 2004. The administration’s proposed program level of $9.3 billion will be insufficient 

to meet borrower demand. With you support of a twelve and a half 

7(a) program in fiscal year 2004, we can hopefully avoid the need 

to put loan size caps in place again. 

As also has been mentioned today, at the start of the current fiscal year SBA implemented credit rationing by instituting a 

$500,000 maximum loan cap. This cap was put in place due to a 

combination of an inflated subsidy rate and an inadequate budget 

request. While some borrowers who needed loans greater than 

500,000 were accommodated through the STAR program, others 

were directed to the 504 program or did not get the financing their 

business operation needed. But now even the STAR program has 

expired. 

Mr. Chairman, I know you are all too familiar with Reeden 

Heavy Hauling of Woodstock, Illinois. That company is reportedly 

in credit limbo because their operation has needed more than 

$500,000 and they did not qualify for the 504 program. 

Chairman MANZULLO. But it is going now back a million dollars. 

Mr. WILKINSON. It is going back. 

Chairman MANZULLO. And it is retroactive. So that should help 

them. 

Mr. WILKINSON. It will help them get their loan now, but there 

have been many, many businesses across the country that have 

been caught in that same credit limbo. But you are correct, thanks 

to the enactment of H.J.Res. 2 and Senate Bill 141, and now that 

the loan size caps have been removed, borrowers like Reeden can 

get the loans their operations need. But to avoid this same situation next year, we need support for a $12.5 million program level. 

If we start a $9.3 billion program as the President has requested, 

I don’t see any choice but the agency to put loan size caps right 

back in place next October 1st. 

The next issue we wanted to cover was the fact that larger loans 

subsidize the cost of smaller loans, and this is done in two ways. 

First, larger loans pay more fees than do the smaller loans. Loans 

above $150,000 pay, on average, three times the rate of smaller 

loans of 150,000 or less. Second, longer term loans have a substantially lower default rate and thus a lower cost. 

Season loan data from SBA shows that the average default rate 

for loans with a greater than a 15-year maturity is one-half of that 

of loans with maturity of 7 years or less. Thus, this Committee 

should be aware that the administration’s policy of encouraging 

smaller loans and discouraging larger loans will increase the subsidy rate. This will then necessitate larger appropriations or higher 

user fees or both. 

Chairman MANZULLO. Well, the red light is on, Mr. Wilkinson. 

26

Mr. WILKINSON. One last thing, and I am finished. As you urged 

on the floor debate on SB 141, Mr. Chairman, we hope that Senate 

Bill 141 is applied to the STAR loans that have been approved this 

year. That did not come up in the administrator’s testimony. Clearly, STAR loans are 7(a) loans. We hope they get rescored using the 

econometric model and we free up that additional money for this 

year. 

Thank you. 

Chairman MANZULLO. Thank you. 

Mr. Wilson. 

STATEMENT OF DONALD T. WILSON, PRESIDENT, 

ASSOCIATION OF SMALL BUSINESS DEVELOPMENT CENTERS 

Mr. WILSON. Thank you, Mr. Chairman. I very much appreciate 

the opportunity to appear before. 

Chairman MANZULLO. Can you put the mike close to you? 

Mr. WILSON. Thank you, Mr. Chairman and Ms. Velazquez and 

members of the Committee, for inviting the ASBDC to testify on 

the President’s 2004 SBA budget. 

We will be celebrating the 50th anniversary of SBA very shortly. 

It should be a time of celebration. For small businesses in this 

country, it is not a time of celebration. Small businesses are closing. Bankruptcies are up dramatically. 

Two years ago, I testified before this Committee and said if business assistance programs were not better funded, the bankruptcy 

rate would skyrocket. In your State, Mr. Chairman, small business 

bankruptcies are up 21 percent; and in Ms. Velazquez’s they are 

up 24 percent. 

President Bush 2 years ago in his State of the Union message 

said far more eloquently than I could ever say and more succinctly: 

Help for small business means jobs for Americans. Obviously, the 

people who write his budget were tuned in to another channel that 

night. 

I heard Congressman Michaud talk about the small businesses 

suffering in his district. His State is one of about 14 where the 

SBDC has been level funded for 8 years in a row. The past 2 years 

after the President made those remarks was the worst job creation 

24-month period since President Eisenhower was in office. When I 

had the privilege of working on the Hill and working for small 

businesses with Congressman Marks and Congressman Broyhill 

and Congressman Ridge, the SBA budget was about two and sixtenths of one percent of the budget. It is now four-one hundredths 

of one percent of the budget. That is unconscionable. 

We talk the talk. We say they represent 99 percent of employers. 

We say they generate 52 percent of the GDP. We say they provide 

70 percent of the jobs. It was estimated during the last recession 

big business lost two million jobs, small business gained ten million. It is estimated that, right now, small businesses are creating 

100 percent of the net new jobs. And look at job creation. If it 

weren’t for them, where would unemployment be? Eight point six 

million Americans unemployed, most of that in the last 2 years. 

This budget is disastrous for small business. The issue is we say 

we don’t have the resources. The economy is down. We are on the 

face of a war. At the height of the Vietnam war, Mr. Chairman, 

27

four-tenths of one percent of the budget. We are at peace today, 

four-one hundredths. 

I was looking at some budget documents sent over by OMB. SBA 

is an asterisk. If you are not five-one hundredth percent of the 

budget, you don’t even warrant a number. You are an asterisk. 

What are we saying to the men and women who create jobs in this 

country? We are saying you are an asterisk. You are unimportant. 

Now, I understand the issue of the tight budget situation. The 

tight budget situation is because we don’t have anybody working, 

and nobody is working because small businesses are not creating 

jobs. 

I hear level funding. Go look at the number for management and 

technical assistance in the last 2 years. It is probably off 27 percent. Congress generously gave us more than the President asked 

for for 2003, and they come right back and propose to cut us another million dollars, and they are cutting others. I talk with the 

Women’s Business Center and you talk about duplication. Yes, 

Women’s Business Centers do much of what we do. It says we 

serve 1.25 million people. SBDC serve 1.5 alone. But, all combined, 

what percentage are we serving? A minuscule amount. 

The VA called me the other day and said we had a veteran, a 

disabled veteran who went to your SBDC at Temple University. 

Five-week waiting list. 

Twenty-four States, Mr. Chairman, were severely cut as a result 

of the census. Your State, Ms. Velazquez’s State, Ohio, Indiana, 

Michigan. Look at their employment rates. 

Mr. Chairman, for a heartland State like yours, you can understand this metaphor. Perhaps Ms. Velazquez doesn’t. We are eating 

our seed corn. This is a program that brings money into the Treasury. By every measure it pays back the Treasury at least two to 

three dollars for every dollar it spends. If you double the size of 

this program, you would get twice that amount back to the Treasury; and the bean counters and the green eyeshade crowd at OMB 

do not understand the concept of profit centers that we teach our 

small business people every day. 

Chairman MANZULLO. Mr. Wilson, your time has expired. And I 

agree with you with the dudes over at OMB. 

[Mr. Wilson’s statement may be found in the appendix.] 

Chairman MANZULLO. Mr. Gast. 

STATEMENT OF ZACH GAST, POLICY AND RESEARCH 

MANAGER, ASSOCIATION FOR ENTERPRISE OPPORTUNITY 

Mr. GAST. Thank you, Mr. Chairman, Ranking Member Velazquez, and members of the Committee for the opportunity to testify 

before you today. My name is Zach Gast, and I serve as Policy and 

Research Manager for the Association for Enterprise Opportunity. 

We represent more than 450 microenterprise development organizations around the country. 

AEO has three policy priorities within the SBA budget this year. 

AEO would like to see the SBA Microloan Program funded at $25 

million for lending and technical assistance, PRIME funded at $15 

million, and the Women’s Business Centers program funded at 

$14.5 million. I will expand on these requests later in my testiVerDate 0ct 09 2002 10:06 Mar 17, 2004 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 G:\HEARINGS\92511.TXT NANCY
28

mony, but first I would like to talk a little bit about microenterprise and what it is. 

I heard a lot of the members of the committees talk about mom 

and pop shops and the help they needed. That is microenterprise. 

We are small businesses of five or fewer employees with initial capital needs of $35,000 or less. Many microentrepreneurs are low-income, women, minorities, or other individuals who may face other 

challenges to business success. For example, both the Microloan 

Program and Women’s Business Centers predominantly serve minorities, and PRIME is by statute required to serve more than 50 

percent very low-income clients. 

Locally-based microenterprise development programs provide 

credit, training, and technical assistance to microentrepreneurs to 

help them succeed. Microenterprise technical assistance is typically 

more intensive to meet the specific needs of our target market. As 

an industry, we define a client not as someone who receives a service but as someone who receives 10 or more hours of service. 

Conventional sources of business credit such as bank financing 

are often beyond the reach of our clients. The SBA Microloan Program continues to solve this problem by funding community-based 

intermediaries to help entrepreneurs gain access to credit. To date, 

Microloan intermediaries have made nearly $190 million in loans. 

The administrator quoted $14,000 as the loan size to create a job. 

Our average loan size is $15,000. $190 million in loans. These 

loans have resulted in the creation and retention of more than 

47,000 jobs. 

As with many entrepreneurs, Microloan borrowers require specialized technical assistance to grow their businesses. The 

Microloan Program meets this need by providing limited assistance 

to borrowers in becoming credit ready and more extensive assistance once they have received microloans. 

The $15 million that Microloan received in 2003 represented a 

$2.5 million cut. That, however, will not be the true impact on the 

provision of services. There is a regulation that ties technical assistance grants to the percentage of microloans outstanding from 

the SBA. As that grows, the technical assistance grants grow 

smaller. They have already been cut by 40 percent last year. The 

$2.5 million that was just cut will cut that even farther, and the 

President’s budget does nothing to increase that but only exacerbates the problem. 

But technical assistance is also important for those entrepreneurs that do not need or want loans. Debt is not always the 

answer to business success. PRIME provides grants to microenterprise development organizations to offer training and technical assistance to entrepreneurs regardless of whether they seek access to 

capital, and 90 percent of our clients do not seek access to capital 

at the time. Governing legislation stipulates that 50 percent of 

PRIME funds be used to support training and technical assistance 

for very low-income entrepreneurs. We have a 5-year study by the 

Aspen Institute that shows these entrepreneurs have highly favorable outcomes in household income and assets, business income 

and assets, and reduced reliance on Federal benefits. These programs are a net benefit to the government. 

29

PRIME is authorized to receive $15 million a year. Last year’s $5 million funding level will continue to underfund the program 

which has experienced incredible demand from low-income entrepreneurs. 

Much as the SBDCs can’t serve everyone they need to, we can’t 

either. The administration’s lack of support for the program—they 

have continued to recommend that it not be funded—is disheartening. AEO strongly encourages Congress to increase funding in 

the coming year. 

Finally, the SBA’s Office of Women’s Business Ownership is the 

only Federal office that specifically targets women business entrepreneurs. Last year alone, Women’s Business Centers provided consulting, training, and technical assistance to more than 80,000 

women. The $12 million contained in the administration’s budget 

is insufficient to meet the needs of women entrepreneurs and is not 

level funding. They actually received 12.5 last year. 

Finally, I would like to share a face to all this. In 1997, Deborah 

Pierce, who lives in Calumet Park, Illinois, was facing a divorce 

and working 2 days a week at $10 an hour. Confronted with the 

need to now support herself, she approached the Women’s Self-Employment Project in Chicago. She enrolled in their entrepreneurial 

training program and started up a full-service child development 

center now serving 75 children with a growing waiting list and 

glowing reputation in the community. The Children’s Depot Play 

Station, which is her business, now employs six additional individuals and has annual revenue of nearly a quarter of a million dollars—starting from zero. And she has recently received a microloan 

to expand her business. The future is certainly bright for this 

amazing woman. 

I thank you for this opportunity. 

[Mr. Gast’s statement may be found in the appendix.] 

Chairman MANZULLO. Mr. Mercer. 

STATEMENT OF LEE W. MERCER, PRESIDENT, NATIONAL 

ASSOCIATION OF SMALL BUSINESS INVESTMENT COMPANIES 

Mr. MERCER. Thank you, Mr. Chairman and ranking member 

Velazquez. My name is Lee Mercer, and I appreciate the opportunity to be here today to discuss the President’s budget proposal 

for the SBIC program. I appear on behalf of the National Association of Small Business Investment Companies and the SBIC industry. 

We actually urge that the President’s budget for the SBIC pro- gram be approved as submitted. The budget would make $4 billion 

in participating security leverage and $3 billion in debenture leverage available to SBICs for investing, together with their required 

private capital, in U.S. small businesses. 

SBICs are a very important part of the national economic recovery that we hopefully are about. SBA estimates that currently 

SBICs account for 60 percent for all venture capital investments—

by number of investments, not by dollars. For comparison, in 1997, 

the number was 38 percent. The increase is likely to continue to 

grow in the face of the substantial and continuing contraction in 

overall venture capital. To illustrate, the number of all annual venture capital investment transactions has dropped by 60 percent 

30

since the high watermark of fiscal year 2000, but the number of 

SBIC investment transactions has dropped just 14 percent over the 

same period. The data underscores the important countercyclical 

nature of the SBIC program and the role it will play in our national economic recovery. 

As has been the case for some years, the fiscal year 2004 budget 

provides that the leverage will require no appropriation to establish the subsidy reserves required by the Budget Act. Rather, the 

budget provides the leverage subsidy reserves will be supported 

100 percent by various fees, interest, and profit shares paid to the 

government by the two types of SBICs. 

For the debenture program, no change in the law will be required to implement the budget. Section 303(b) of the Small Business Investment Act imposes an interest rate fee of not to exceed 

1 percent per annum on applicable leverage. For the debenture fiscal year 2004 authority, that rate required to maintain the zero 

subsidy rate will be 0.855 percent per annum, down slightly from 

the current rate of 0.887 percent. 

Section 303(g)(2) of the Act provides the counterpart for the participating security program. This section provides that the 

prioritized payment rate, the variable rate, is not to exceed 1.38 

percent per annum. For fiscal year 2004 leverage authority, the required rate will be 1.454 percent per annum. That is 0.074 percent 

greater than the current statutory authority. Thus, for implementation of the President’s budget, there must be a change in the law 

increasing that authority by a minimum at least of 7.4 basis points. 

That translates to 7.4 cents per $100 of leverage as an annual rate 

increase. 

The reason for the increase in the participating security program 

has nothing to do with loss assumption. It has to do with, actually, 

the falling in the Treasury rate. There is a direct correlation—the 

rates that participating securities SBICs pay their profit share to 

the government, profitable share, goes down as the rate goes down. 

Therefore, in a counterintuitive situation, the actual prioritized 

payment rate or the interest portion has to go up slightly to counterbalance the falling of the profit share that participating security 

SBICs will pay the government. 

The increase is well within the ability of SBICs to pay, given the 

market conditions, and we urge the Committee to support it. 

The importance of the SBIC program cannot be overstated. The 

$2.7 billion in venture capital invested in fiscal year 2002 was 

down 40 percent from the year before, but the number of companies financed was only down 12 percent, 1,979 from the previous 

2,254. Those companies employ over 300,000 employees. 

SBICs continue to be a significant source of venture capital for 

new businesses, with 48 percent of fiscal year 2002 investments 

made to companies less than 3 years old. They are particularly important for low- and moderate-income businesses. 

Chairman MANZULLO. We are on the red cue. 

Mr. MERCER. I see that. I will sum up right now. 

Twenty-seven percent of all investments went to LMI companies. 

To sum up, we believe the President’s budget will help the SBIC 

program continue to do its job. We look forward to working with 

you on implementing the budget, on reauthorization, and we urge 

31

you to continue to support our UBTI proposal which is in my written testimony and which I urge be included in whole in the record. 

[Mr. Mercer’s statement may be found in the appendix.] 

Chairman MANZULLO. It is too bad that Mr. Barreto wasn’t here 

to hear somebody say that he liked his budget. Thank you, Mr. 

Mercer. 

Mr. Crawford, I look forward to your testimony. 

STATEMENT OF CHRISTOPHER CRAWFORD, EXECUTIVE DIRECTOR, NATIONAL ASSOCIATION OF DEVELOPMENT COMPANIES 

Mr. CRAWFORD. Thank you. Good afternoon. My name is Chris 

Crawford, and I am pleased to comment on the SBA’s budget request. 

I ask that my written statement be entered into the record of 

this hearing. 

Chairman MANZULLO. All of the written statements of the witnesses and the statements of any members that wish to put them 

into the record will be admitted without objection. 

Mr. CRAWFORD. Thank you, Mr. Chairman. 

First, I want to thank the Chairman and the ranking member for 

your support in the 2003 spending bill by demanding that SBA implement the improved 504 subsidy model quickly. The budget reveals plans to further delay our subsidy model, as you have already 

noted. We believe that the cost of this in the year fiscal year 2005 

will be $100 million in excess fees over the 20-year span of the 

loans. 

NADCO’s members and first mortgage partners provided more 

than $6 billion in long-term capital to job-creating small businesses 

last year. SBA requests $4.5 billion in loan authority for 504. We 

asked for $5 billion. Our loan demand is up 25 percent year to 

date, and we are concerned that tight bank credit will push demand even higher. This increased ceiling will cost the taxpayer 

nothing since we require no subsidy. 

We appreciate the administration’s decrease in our borrower fee 

for 2004. This change may seem small, but it will result in millions 

of dollars saved for thousands of small businesses. 

However, our concerns continue about both the default and the 

recovery estimates SBA uses to calculate our program fees. The 7.5 

percent default rate is higher than historical reality. The 17 percent recovery forecast seems disconnected from the successes of 

both the asset sale and the 504 liquidation pilot created by this 

Committee. Each of these programs have demonstrated recovery 

rates of over 45 percent, so we cannot understand how SBA can 

project a rate of 17 percent in net recoveries. 

504 was reviewed during 2002 by OMB using their Performance 

Assessment Rating Tool, or PART. I believe that some of their conclusions are completely wrong. 

First, OMB says that 504 and 7(a) duplicate each other by providing long-term fixed asset lending. In fact, the two programs are 

fundamentally different as to congressional purpose and financing 

structure. 504 involves long-term fixed rate financing, and our 

goals are community economic development and job creation. 504 

32

provides low down payment terms to help borrowers conserve operating cash. 

Austin Westrand in Byron, Illinois, used 504 to save 200 jobs in 

a town of 2,000. American Building Supply of the Bronx, New 

York, needed 504 to save four jobs and create 31 new jobs. Neither 

borrower could qualify or obtain either a 7(a)or a regular bank 

loan. Clearly, 504 and 7(a) are very different, which seems obvious 

to everyone but this administration. 

Second, the OMB PART states that 504 has not demonstrated 

adequate progress in achieving its long-term goals. The Small Business Investment Act of 1958 makes clear that the congressional 

purpose and intended goals for 504 are economic development, community growth, and job creation. 

Let me share SBA’s own 504 statistics: Over one million jobs cre- ated or retained since 1996; over $42 billion in long-term capital 

provided to small businesses; over 45,000 jobs are businesses assisted; and nearly 50 percent of our projects go to assist minority, 

women, veterans, and rural business borrowers. 

I am astounded at OMB’s blindness to 504’s long record of success, and I urge you to reject this PART analysis by reauthorizing 

this program. 

Mr. Chairman, America needs 504’s job-creating abilities more 

than ever. 504 needs your help in and the leadership of Administrator Barreto. My industry wants to open our window to Wall 

Street to more businesses. We have given SBA many recommendations over the years that could expand this program substantially. 

Now is the time to implement those improvements and bring our 

program out of the bureaucratic shadows that it sits in today. 

Please help us grow 504 and create more jobs for our economy. 

Thank you, Mr. Chairman. 

[Mr. Crawford’s statement may be found in the appendix.] 

Chairman MANZULLO. Well, thank you very much. 

You know, we are all talking here about a credit crunch. We 

have a company back home that spun off from Ingersoll. Ingersoll 

Milling Machine Company and their associated subsidiaries was 

about 3,000 employees. They are now 200. You talk about a hit in 

the manufacturing sector. 

But in Ingersoll’s production line—these are the lines on which 

you put a block for an engine, for example. As the production line 

group at Ingersoll was suffering along with the rest of the company, a constituent said, here is an opportunity to go in there to 

buy that off and to treat it as a sole company to try to reconstruct 

it. 

He went to 10 banks and venture capital firms. They all turned 

him down. The loan was too much for the SBA. It was several million dollars. You know where he got his loan? From the Chinese. 

So he has some Chinese investors that salvaged a company in 

Rockford, Illinois, that provides 100 jobs building these huge machines for lines, and that company has over 200 subcontractors. 

I am just sitting here thinking, you know, we talk about jobs 

going to China and now we have got foreign direct investment from 

China to the United States because the lending industries—and I 

am not critical of the SBA programs because this is much greater; 

it is a several million dollar loan—but the lending industries which 

33

this year have astounding profit, the bank’s profits are up about a 

third, over 35 percent over last year’s across the board, banks are 

making a tremendous amount of money, and yet we are seeing 

such a credit restriction going on—and I am sure you are too, Mrs. 

Velazquez. Can you imagine, this 100-year-old Rockford firm has to 

go to the Chinese to get capital? Because they saw an opportunity 

for long-term investment, because these lines are extremely important, and they ended up with—it is a part of American monies but 

mostly Chinese money. 

I don’t know how to turn this thing on its head. Every morning 

I get up and I find out that there are more manufacturing jobs that 

are fleeing. And simply trying to get a handle, it is as if we are 

wearing a sweater and a thread came loose at the sleeve and it 

continues to unravel and we can’t stop the hemorrhaging. 

But one of the things that we are going to be asking you to do 

in this reauthorization bill that Mr. Pinellas is working on for the 

SBA is going to have a heavy emphasis on manufacturing. Washington doesn’t get it. The policymakers here think that these two 

million manufacturing jobs are coming back, and they aren’t. They 

are leaving. I could lose entire cities back home. Cities, Angkor, a 

little manufacturing facility. So we fight continually with the Federal government. 

I want to tell you something. We are going to stop this bleeding, 

and we are going to stop the hypocrisy, the Federal government 

talking about investments and jobs while at the same time taking 

procurement contracts and giving them to foreign countries. Got 

into a big fight with Northrop Grummann. They are making one 

of the American portions of the Joint Strike Force fighter under 

subcontract from Lockheed Martin. 

I mention this publicly because it is only when I brought it up 

public that things perhaps may turn it around at Northrop 

Grummann. We noticed that they had been looking for a manufacturing company to drill precision holes for the Joint Strike Force 

fighter. This is the NATO fighter. It is seven Europeans countries 

in the consortium plus the United States. 

For the U.S. component, Northrop Grummann let out four contracts to the Europeans. Now this is U.S. taxpayers’ dollars for the 

U.S. portion of that fighter saying that we are going to go to the 

Europeans. And instead of giving a contract to Ingersoll Milling in 

Rockford, Illinois, it went to the Spaniards. 

As I talked to one of the vice presidents from Northrop 

Grummann. We had a very interesting meeting. He said, there is 

not an American company capable of drilling the precision holes 

necessary for the Joint Strike Force fighter; and I turned to him 

and I said, you don’t know what the hell you are talking about. I 

said, you had better get to Rockford, Illinois, and you take a look 

at 100 years of quality engineering in the old Swedish tradition of 

the people who are known as the tool and die center of the world, 

the last vestiges of artistry in metal left in this country. 

They came. And it is very interesting, because the people who 

had said that Ingersoll couldn’t build a machine to drill holes for 

an airplane was also building a very similar machine for Lockheed 

Martin, their major contractor on another project. 

34

That is the extent of disconnect in this country. I turned to the 

Northrop Grummann lobbyist who was there; and I said, I want to 

tell you right now, if you let out another contract to a foreign company and you destroy American jobs, you are going to have hell to 

pay. And the Speaker joined in that. The Speaker had been in a 

meeting with the president of Northrop Grummann just a few 

weeks before that and said, stop giving those contracts to the Europeans and give them to the American firms. 

It is going to stop. You guys are going to have a part of it, because we are going to revitalize remanufacturing in this country. 

Otherwise, we are going to be dead. We have got no place to go. 

My people are desperate. When the factories close and there is 

nothing left in America and all the service jobs, GE—if your refrigerator is broken and you call for service, it gets picked up in India. 

Fleeing to Ireland, India. You know, where is the sense? Isn’t anybody going to wake up in this country and say if all these jobs flee, 

who is going to be here to buy the stuff they are making overseas? 

So get involved. We are going to be in a big fight this Congress. 

We have to take on everybody, but it is worth it because we have 

to salvage these jobs. 

Mrs. Velazquez. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Mr. Wilkinson, I know that you have to leave soon, so I need to 

ask you two questions. For the record, do you think that the President’s budget request for the 7(a) loan program is adequate? 

Mr. WILKINSON. No, ma’am. The budget request is for $9.3 billion. We did 11.1 last year, and year to date we are already ahead 

of that pace. We even had a $500,000 loan cap in place for the first 

4 or 5 months of this fiscal year. 

Ms. VELAZQUEZ. How short is it? 

Mr. WILKINSON. It is going to be at least $3 to $3.2 billion in loan 

authority, which would be about $35 million in additional appropriations that will be needed. 

Ms. VELAZQUEZ. Thank you. And given your experiences with the 

nightmare created by the subsidy rate situation, what advice do 

you have for the SBIC industry as the SBA launches into fixing its 

subsidy rate? 

Mr. WILKINSON. Well, first of all, I wish Mr. Mercer luck. Be prepared for a good long fight. 

The one thing I would say is, to get the information you want, 

you are going to have to be very specific in the way you ask a question. OMB in the past was not terribly forthcoming with information. So you have got to ask the right question to get the right answer. 

Ms. VELAZQUEZ. Thank you. 

Mr. Crawford, in this year’s budget, the administration seemed 

to make the claim that there is no difference between the loan programs. Could you please comment on this or express your views? 

Mr. CRAWFORD. Yes, ma’am. Thank you. 

Well, it is very clear that the programs are extremely different. 

The 7(a) program in our view is set up to help distressed businesses that can’t qualify for regular bank financing. I mean, Tony 

can speak to that better than I can. 

35

Our program was established with the 501 program in 1958 and 

subsequently modified by several additions by this Congress to 

focus on job creation. Our one mission is job creation. I have got 

to ask myself the question, why do they want to conceivably deauthorize a program that creates jobs? And that is our one mission, 

community and economic development. We make long-term loans, 

fixed rate loans, low cash down. We do the things that the banks—

maybe they can do, maybe they can’t. We do them every day. 

Ms. VELAZQUEZ. Thank you, Mr. Crawford. 

Mr. Gast, we keep hearing from the administration that PRIME 

is duplicative of other SBA programs. Without taking anything 

away from the other programs, would you please explain to us why 

PRIME is different from SCORE, SBDCs, microloans, and the 

Women’s Business Centers. 

Mr. GAST. Sure. I am sure all the members of the Committee are 

aware that small businesses are extremely diverse. It takes a different type of service to work with someone who might be extremely skilled in a particular area like carpentry, like light manufacturing but may have no knowledge of business who wants to 

strike out, start their own business, and create jobs. 

That is what we specialize in. We specialize in building businesses from the ground up. We will spend 10 or 15 hours because 

that is the level of effort it takes to build these businesses. And 

what we found is it is not only cost effective, it is cost efficient. It 

is the right way to do it because the end benefit works. 

Ms. VELAZQUEZ. Thank you. 

Mr. Wilkinson, we heard from Mr. Barreto their interest and 

focus in terms of increasing the amount of small business loans, 

and yet they cut the funding level for the Microloan Program. 

Mr. WILKINSON. That does seem a little odd that they would do 

that. If they really want small loans, I think they would fund both. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Chairman MANZULLO. Mr. Bartlett. 

Mr. BARTLETT. I am sorry, I was called away and couldn’t hear 

your testimony. 

Let me ask you one question that may help us more than any 

other question I could ask you to understand your concerns and 

what we ought to be doing. Had you been on the panel—let me ask 

each of you to tell us, had you been up here, what question would 

you have asked Mr. Barreto or what observation might you have 

made for Mr. Barreto’s benefit? If we could just go down the line 

quickly and tell us that one question or that one observation. 

Mr. WILKINSON. The big question would be why the 7(a) program 

was not adequately funded. Their 9.3 level is significantly insufficient for next year. We are on pace to do between 11 and a half 

and $12 billion this year, and we think we need a $12.5 billion program next year. 

Mr. BARTLETT. Thank you. 

Mr. WILSON. Mr. Chairman, I think the major question is to ask 

why the budget does not compare to the rhetoric. There is a dramatic decrease in the funding for management assistance programs 

at a time when the need is the greatest. SBA knows—OMB has the 

data—that an investment in management and training assistance 

programs returns a positive return to the Treasury, and yet they 

36

say there is not enough money. Small business people understand 

that when you invest in a profit center, you are going to get more 

than you put into it. We have demonstrated year after year that 

the rate of return is two to one, three to one and better. 

Now if I am making a budget, and I do every year for my organization, I understand where you put your money. You put your 

money into things that are making you money. Right now, everybody is concerned about the size of the deficit. The reason we have 

a deficit is that people are not working. And all of these programs 

that you hear up—that you have heard from create jobs. The data 

is overwhelming, where the jobs come from and who helps them 

create jobs, and yet this administration—unfortunately, it has been 

going on for a number of years, declining amounts to these job creation programs that provide a positive rate of return to the Treasury. 

Mr. BARTLETT. Mr. Gast. 

Mr. GAST. That answer just stole my thunder. How you can cut 

these programs that are doing just that, providing a positive rate 

of return, particularly completely eliminating programs that focus 

on very low-income people and minorities where sometimes there 

is the greatest return to be gained. 

Mr. MERCER. My question would relate to the availability of capital. In the economic conditions we are in right now, the banks 

have pulled back so that non-SBA-related loans have contracted 

significantly. Obviously, we are happy with our section of the budget, but SBICs, when they invest in a company, as you know, there 

is going to be more senior debt required for that company to grow. 

And to the extent that the senior debt that is represented by some 

of the other programs, whether it is 7(a) or 504 that would be senior to SBIC financing, to the extent that data is not available, 

sometimes an SBIC literally cannot make the investment. If it 

can’t see where the senior debt is coming from, there is no ability 

to finance the company. 

Mr. CRAWFORD. I would like to know why the administration 

wanted to sacrifice $100 million of borrower income to save one 

year of subsidy on the econometric model. 

Mr. BARTLETT. Sorry you couldn’t have been up here to ask the 

questions. Next time, prompt us so we will ask them for you. 

Thank you very much, Mr. Chairman. 

Chairman MANZULLO. If we had had time in the way we run our 

hearings here, you would have had an opportunity to ask the questions of Mr. Barreto. We got interfered with the voting, plus we 

had a really good turnout of people here with a lot of good questions. 

I want to thank you all for coming. We have a lot of work ahead 

to do. 

There are some bright spots out there. I was with the 504 people. 

Chris, was it yesterday? I just happened to be at the wrong hotel. 

But I made it. I made it on time. It was the wrong Marriott over 

in Crystal City. But we were hearing some—you know, when times 

get tough, Americans always put their ingenuity to work. 

There are four—two furniture factories closed up shop in 

Vermont, and the 504 people stepped in, and now they are about—

I just talked to Bernie Sanders on this. There are about 20 of the 

37

former employees there that have formed this wholly-owned company. And is it Middlebury College in Vermont? And Middlebury 

College has stepped in. I don’t want to say it is a partnership or 

a consortium, but they are adding their business knowledge and 

know-how. So this little town is fighting back to regain some of 

those manufacturing jobs. 

You know, I think that is what we are going to have to do. It 

is going to have to take some new type of thinking—perhaps that 

is the appropriate word—in order to revitalize the businesses that 

have been wiped out. 

I know you guys have marvelous backgrounds. One of the things 

I would like to do is to invite Mr. Barreto in a very informal setting 

with the people from the industry—because he is really good at 

this. He is extremely bright, and he really wants to help out—and 

come up with some new models on how these businesses could be 

helped out. 

Let me give you an example. You know, the Economic Development Administration comes in and they can provide some infrastructure, et cetera. Somewhere along the line maybe somebody 

ought to take a look at whether or not there could be some type 

of program to help offset communities that want to give a tax incentive to keep a business operational, but because of the impact 

it has on the base for funding the schools it becomes very difficult 

to do that. What I am saying is that we are going to have to think 

differently in the way companies do business, the whole idea of employee-owned businesses, the guys and ladies that are left behind 

when the industries close being able to come together. 

Perhaps there should be a different type of tax structure in areas 

that are severely impacted by manufacturing losses. Perhaps there 

should be a way that they could operate their business as a co-op 

and be not—you know, be a for-profit but in a cooperative method 

which would be in a special taxing bracket. 

I don’t know the answer to it, except that we are going to have 

to think very, very differently than we have in the past because of 

these new models that have to be invented. 

Lee, did you have a comment? 

Mr. MERCER. No, I just want to tell you, there is some forwardlooking confidence in manufacturing. Over the past 5 years, SBICs 

just in the direct NAICS codes have invested an average each year 

of about 30 to 32 percent of all—in dollars have gone to manufacturing companies. Then if you add indirect and related NAICS 

codes, you are probably talking somewhere around 33 percent. So 

there is—so the money managers are betting on some of these 

young manufacturing companies being able to find a new way to 

do the business. 

Chairman MANZULLO. Well, what Austin Westrand did in Byron, 

they make a custom trailer leg. They make the only round trailer 

leg. You know the big 18-wheelers where you have to jack it up? 

Everyone makes a square one. They make a round one, and they 

are exporting those to Mexico, and soon they are going to be exporting those to China. This is a union shop, but they found a market in there somewhere. 

Because 504 is long-term, looks at increasing jobs in a community and is very much interested in economic development. The 

38

studies go on to determine the market in a very intensive way. 

What we are doing back home is we formed a consortium with 

Northern Illinois University and a manufacturing council to bring 

together the best minds in the area to take a look at the whack 

that we are getting hit with in the fastener industry, the tool and 

die industry, and the molding industry, and to try to assess how 

we can do it. 

For example, a lot of U.S. manufacturers have moved overseas. 

And Matt Szymanski, who is the chief of staff of our Small Business Committee, is going back to China for the sixth time in 13 

months with two manufacturers from the district I represent and 

two manufacturers from the Speaker’s district—our districts touch. 

One is a mirror image of the other, and he is being wiped out also 

in manufacturing jobs—and we have had to turn to Chinese companies—Chinese companies—because they are taking the long view of 

what is going on in America and, as chairman of the American Chinese Interparliamentary Exchange, meeting with my counterparts. 

Chinese understand that their recovery depends upon the U.S. 

recovery. They have a workforce of 450 million people. It grows by 

10 million each year. They need 7 percent increase in GDP just to 

stay even. 

But what the Chinese are telling us is that if American manufacturers continue to pull out and continue with the loss of jobs in 

America, there won’t be anybody in America left with high-paying 

enough jobs to buy the stuff that is being made in China. So the 

Chinese are looking very long range, and the American companies 

aren’t. 

So what we are trying to do with the American companies involved in manufacturing overseas is to get them at the minimum 

to still use U.S. molds and use tools and dies that can be easily 

serviced in China and around the world. So that is part of——. 

You know, it is amazing where you have to go to try to turn the 

corner on this. When we were in China in January, we were in 

Shenzhen at the invitation of Wal-Mart. Wal-Mart came to me and 

said, Chairman, could you help us export more U.S. products? And, 

also, could you find more U.S. products to be sold in the American 

stores? American Wal-Mart stores. 

It just sucked all the air out of me. I said, these people understand. Wal-Mart has about 2,300 stores in the United States. Half 

are in small towns. Those small towns have as an anchor an industry, and Wal-Mart is smart enough to realize that if that industry 

gets wiped out, half of their stores are going to be in dire distress 

because the jobs will have left. 

So it is a—you know, this thing is very difficult to get our arms 

around it, but I think it can be done. And we are asking American 

companies to simply step up. I mean, Emerson moved everything 

to China. Everything. All their manufacturing, their sales force, 

their research, everything went to China. But at least Emerson can 

still use American molders for part of their manufacturing. 

Just some of the things to think about. In our hearings that we 

are going to have on manufacturing, we are going to be bringing 

in people to talk about the change in nature of corporate responsibility. I am not talking about a social program here. We are going 

to try to—we are inviting Warren Buffett to come. Warren Buffett, 

39

a major shareholder in Coke. Coke has stopped making estimates 

or making comment on quarterly earning estimates. Pepsi-Cola 

stopped. The new president and CEO of AT&T stopped it. The 

stock fell 22 percent the next day. But we are seeing corporate executives stepping up to the plate and saying that because the longest range plan in America is only 3 months, this is disaster to 

America’s companies, especially the small businesses which are the 

subs and the sub-subs of the larger ones. 

I talked to a professor from Harvard Business School yesterday, 

wrote an astounding article on ethics in the Harvard Business 

Journal. She was astonished that we had read it. And we invited 

her to come and testify, also. What she does is she has a flow chart 

on the thinking process for what a corporation should go through, 

and she makes the one statement: Is it ethical? The first statement 

is, well, obviously, is it legal? And then from there, if it is legal—

obviously, then you—if it is not legal, you stop. If it is legal, the 

next question is: Does it enhance shareholder value? But she 

doesn’t stop there. And that is where most Americans stop. Because she goes to another level that says: If it enhances shareholder value, is it ethical? In other words, does the impact on the 

consumers, the environment, the workforce, the supplier offset the 

increase in shareholder value? It is astounding. 

Then we hope to bring in a fellow by the name of Allen Kennedy 

who wrote a book called The End of Shareholder Value, written in 

1999, where he talks about this race to increase the value of stock, 

and the next 30 days—the next 90 days will lead to overinflation 

of the stock, disaster in the market, and nothing but greed taking 

place. Because when long-range planning is gone, there is nothing 

to build upon, and you will find the collapse of our industries. 

So it is going to be a lot of fun. I look forward to your work in 

it. We will be tasking you with a tremendous amount of responsibility to help us in these models. 

This hearing is adjourned. 

[Whereupon, at 5:14 p.m., the Committee was adjourned.]

40


92511.001
41


92511.002
42


92511.003
43


92511.004
44


92511.005
45


92511.006
46


92511.007
47


92511.008
48


92511.009
49


92511.010
50


92511.011
51


92511.012
52


92511.013
53


92511.014
54


92511.015
55


92511.016
56


92511.017
57


92511.018
58


92511.019
59


92511.020
60


92511.021
61


92511.022
62


92511.023
63


92511.024
64


92511.025
65


92511.026
66


92511.027
67


92511.028
68


92511.029
69


92511.030
70


92511.031
71


92511.032
72


92511.033
73


92511.034
74


92511.035
75


92511.036
76


92511.037
77


92511.038
78


92511.039
79


92511.040
80


92511.041
81


92511.042
82


92511.043
83


92511.044
84


92511.045
85


92511.046
86


92511.047
87


92511.048
88


92511.049
89

Æ


92511.050