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21–350 PDF 2005

S. HRG. 109–47

THE PRESIDENT’S FY 2006 BUDGET REQUEST FOR

THE SMALL BUSINESS ADMINISTRATION

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS

AND ENTREPRENEURSHIP

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

FEBRUARY 17, 2005

Printed for the use of the Committee on Small Business and Entrepreneurship

(

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

(II)

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

OLYMPIA J. SNOWE, Maine, Chair

JOHN F. KERRY, Massachusetts, Ranking Member

CHRISTOPHER S. BOND, Missouri

CONRAD BURNS, Montana

GEORGE ALLEN, Virginia

NORMAN COLEMAN, Minnesota

JOHN THUNE, South Dakota

JOHNNY ISAKSON, Georgia

DAVIE VITTER, Louisiana

MICHAEL ENZI, Wyoming

JOHN CORNYN, Texas

CARL LEVIN, Michigan

TOM HARKIN, Iowa

JOSEPH I. LIEBERMAN, Connecticut

MARY LANDRIEU, Louisiana

MARIA CANTWELL, Washington

EVAN BAYH, Indiana

MARK PRYOR, Arkansas

WESTON J. COULAM, Staff Director

PATRICIA R. FORBES, Democratic Staff Director and Chief Counsel

(III)

CONTENTS

Page

OPENING STATEMENTS

Snowe, The Honorable Olympia J., Chair, Committee on Small Business

and Entrepreneurship, and a United States Senator from Maine ................... 1

Kerry, The Honorable John F., a United States Senator from Massachusetts .. 4

Pryor, The Honorable Mark, a United States Senator from Arkansas ............... 8

Talent, The Honorable James M., a United States Senator from Missouri ....... 15

Coleman, The Honorable Norman, a United States Senator from Minnesota ... 16

Thune, The Honorable John, a United States Senator from South Dakota ....... 31

TESTIMONY

Barreto, The Honorable Hector V., Administrator, U.S. Small Business

Administration, Washington, DC ........................................................................ 8

Coit, David, Managing Director, North Atlantic Capital, on behalf of the

National Association of Small Business Investment Companies, Portland,

ME ......................................................................................................................... 36

Betancourt, Daniel, Member, Board of Directors for the Association for

Enterprise Opportunity; President and CEO, Community First Fund,

Lancaster PA ........................................................................................................ 48

Massaua, John R., State Director, Maine Small Business Development

Center; Member of the Board of Directors, Association of the Small

Business Centers, Portland, ME ......................................................................... 52

Tuvin, Edward ‘‘Eddie,’’ First Vice President, Community South bank on

behalf of the National Association of Government Guaranteed Lenders,

Inc., Bethesda, MD ............................................................................................... 66

Sands, Patricia, Owner, Spill-Guard, LLC, Arlington, VA ................................... 75

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Barreto, The Honorable Hector V:

Testimony .......................................................................................................... 8

Prepared Statement ......................................................................................... 11

Fiscal Year 2006 Budget Request for the U.S. SBA ...................................... 90

SBA’s FY2006 Legislative Package ................................................................. 93

SBA’s Responses to Post Hearing Questions from Chair Snowe .................. 110

SBA Responses to Post Hearing Questions from Ranking Member Kerry .. 148

Betancourt, Daniel:

Testimony .......................................................................................................... 48

Prepared Statement ......................................................................................... 50

Microloan Borrowers Attending Hearing ....................................................... 109

Coit, David:

Testimony .......................................................................................................... 36

Prepared Statement ......................................................................................... 38

Kerry, The Honorable John F.:

Opening Statement ........................................................................................... 4

Prepared Statement ......................................................................................... 222

Post Hearing Questions for The Honorable Hector V. Barreto .................... 148

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Page

——continued.

Massaua, John R.:

Testimony .......................................................................................................... 52

Prepared Statement ......................................................................................... 53

Pryor, The Honorable Mark:

Opening Statement ........................................................................................... 8

Sands, Patricia:

Testimony .......................................................................................................... 75

Prepared Statement ......................................................................................... 78

Snowe, The Honorable Olympia J.:

Opening Statement ........................................................................................... 1

Post Hearing Questions for The Honorable Hector V. Barreto .................... 110

Talent, The Honorable Jim:

Opening Statement ........................................................................................... 15

Tuvin, Edward ‘‘Eddie’’:

Testimony .......................................................................................................... 66

Prepared Statement ......................................................................................... 68

COMMENTS FOR THE RECORD

Crawford, Christopher L., NADCO, Prepared Statement .................................... 200

Jahn, Chris, Contract Services Administration:

Prepared Statement ......................................................................................... 206

Strategic Alliance Memorandum with the U.S. Small Business

Administration and CSA .............................................................................. 209

Golden, Ellen, Association of Women’s Business Centers, Prepared Statement 213

Kerry, The Honorable John F.:

Letter from Senator Kerry to Senate Committee on Appropriations,

Subcommittee on Commerce, Justice, State and the Judiciary ................ 229

Letter to Senator Kerry from The Women’s Economic Self-Sufficiency

Team .............................................................................................................. 240

Letter to Senator Kerry from The Wesst Corp. ............................................. 236

Letter to Senator Kerry from The Pennsylvania Women’s Center .............. 238

Letter to Senator Kerry from the Kansas Women’s Center .......................... 241

Letter to Senator Kerry from The National Women’s Business Council ..... 242

Letter to Senator Kerry from The Minority Business Summit Committee . 245

Letter and Prepared Statement from The Association for Small Business

in Technology ................................................................................................ 247

Mazza, Pamela, Piero, Mazza and Pargament, PLLC, Comments for the

Record ................................................................................................................... 250

Neese, Terry, Women Impacting Public Policy, Prepared Statement ................. 255

Newlan, Ronald S., HUBZone Contractors National Council, Letter with

Comments for the Record .................................................................................... 261

Snowe, The Honorable Olympia:

Letter to Senator Snowe from The Southern Good Faith Fund ................... 239

Varney, Simon, Maine Institute of Technology, Letter with Comments for

the Record ............................................................................................................. 263

Weeks, Julie R., National Women’s Business Council, Letter with Comments

for the Record ....................................................................................................... 265

Yancey, W. Kenneth, SCORE, Prepared Statement ............................................. 271

(1)

THE PRESIDENT’S FISCAL YEAR 2006

BUDGET REQUEST FOR THE

SMALL BUSINESS ADMINISTRATION

THURSDAY, FEBRUARY 17, 2005,

UNITED STATES SENATE,

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP,

Washington, DC.

The committee met, pursuant to notice, at 10:01 a.m., in room

SR–428A, Russell Senate Office Building, the Honorable Olympia

J. Snowe, Chair of the Committee, presiding.

Present: Senators Snowe, Coleman, Thune, Kerry, and Pryor.

OPENING STATEMENT OF HON. OLYMPIA J. SNOWE, CHAIR,

SENATE COMMITTEE ON SMALL BUSINESS AND

ENTREPRENEURSHIP, AND A UNITED STATES SENATOR

FROM MAINE

Chair SNOWE. The hearing will come to order.

Good morning, and I want to welcome everybody to today’s hearing on SBA’s budget proposal for fiscal year 2006.

I am very pleased to join the Ranking Member, Senator Kerry,

in being here today to hear from Administrator Barreto. We want

to welcome you, Administrator Barreto. We thank you for your advocacy and leadership on behalf of small businesses throughout

America, and we appreciate your willingness to testify here today

on SBA’s proposed priorities for the coming year.

We will also be hearing from representatives of the small business community, as well, in the second panel.

In his State of the Union speech, President Bush said we live in

a country where dreams are born. Nowhere is that more evident

than in America’s 25 million small businesses, entrepreneurs who

have certainly taken risks and persevered through difficult times

to fuel the engines of America’s economy. Small business has propelled our Nation’s economic growth, producing over 50 percent of

the GDP and creating three-quarters of all new jobs in America.

The Small Business Administration has long been a critical partner in that success, with lending and technical assistance programs

that have helped to create or retain nearly 4.5 million jobs since

1999. That number continues to grow each year. I think that is an

illustration of the success of many of the small business programs

that I am sure you are all familiar with. But I think that that does

underscore the value of the Small Business Administration programs.

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Against that backdrop of achievement, the SBA’s budget regrettably has been drastically reduced by 36 percent over the past 5

years, which is illustrated again in this second chart, just to show

you the magnitude of the decline over the last 5 years with respect

to appropriations.

When you consider that SBA’s budget represents less 3/100ths of

a percent of the total Federal budget, there should be no doubt the

time has come to end these unwarranted cuts and instead invest

in a strong future of economic vitality.

As Chair of this Committee for the second consecutive year, I am

deeply concerned about the SBA’s budget. The Administration’s

proposed $592 million represents a 13 percent decrease from the

Agency’s 2005 request and a 26 percent decrease from the 2004 request.

The SBA has a clear record of success, and yet inexplicably it is

juxtaposed with endless budget cuts. This morning I will be listening very carefully and intently in analyzing the SBA’s request by

both the Administrator and the subsequent witnesses on the second panel. We will have an obligation to not only maintain, but to

strengthen the SBA’s proven core loan and assistance program,

again illustrated in the third chart—we are into charts this morning and the SBA’s lending program. But again, it demonstrates the

value of these programs and the success with the number of loans

that have been issued in the last several years.

The SBA’s financing program, which is a crucial source of financing for small businesses, has never been more in demand with both

the 7(a) and the 504 programs delivering measurable results. The

numbers from fiscal year 2004 spell out that indisputable success

of the 7(a) program, providing over $13.5 billion in loans to help

small businesses to help create 132,603 new jobs, overall retaining

538,658 jobs. As you can see over here on this chart in the different

programs with 504, 7(a), the SBIC, the Microloan surety, the comparisons. But I think it illustrates the point.

The 504 program, I hope everybody can see it, $4 billion to support the creation of 86,847 jobs all combined, to retain jobs as well

as those created, and you see 152,287 jobs.

So again I think it is an example of the extent of these programs

and why we ought to be building on and strengthening these programs, rather than undercutting them.

In addition, the SBIC program invested more than $2.8 billion in

small businesses in 2004, creating over 78,000 new jobs. I am hopeful that we can successfully restructure the SBIC program this

year to ensure a strong track record continues well into the future.

For the next generation of small businesses, it is also critical

that the SBA’s financing reaches out to aspiring entrepreneurs.

And that is why, in addition to helping established small businesses, Congress wisely determined that the SBA should aid new

and fledgling small businesses with the Microloan program. When

this program was zeroed out last year I, and several of my colleagues, worked hard and successfully to restore $17 million in the

appropriations for this program in the 2005 budget. Once again, I

strongly disagree with the Administration’s ill-considered request

to eliminate the Microloan program.

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What we are talking about is a small and efficient, cost-effective

program that stacks up very well on a jobs per dollar comparison

to larger SBA programs. Consider, for example, that in 2004, according to the SBA, the 7(a) program created and retained one job

for every $23,600 in loans. The 504 program created and retained

one job for every $26,043 in loans. And the Microloan program created or retained one job for every $3,608 in loans.

In my own State of Maine, Microloans actually created and retained one job for every $3,700 in loans, according to SBA’s numbers. The point is a little seed money goes a long way when the

hunger for economic opportunity is high.

So I believe it is clear that we should be supporting programs

that foster job growth, especially in States like Maine, rural States

that have been hard hit by manufacturing job losses and require

that additional economic stimulus.

Moving to contracting, I commend President Bush and the SBA

for proposing an increase in the Government contracting and business development budget by over $4 million. But with regard to the

new PCR proposals, I am concerned that with the proposed hiring

of only six new procurement center representatives the Agency’s

ePCR initiative will not adequately police contract bundling services.

This is especially significant because the PCRs are the SBA’s

competition Ambassadors, the sole watchdogs for the interest of

small contractors.

Moreover, many SBA procurement initiatives such as the 8(a)

and the 7(j) programs appear to suffer from performance and management deficiencies. We have seen a consistent failure to achieve

HUBZone statutory goals and the SBA’s proposal to fold the

HUBZone budget into the SBA’s general budget only make matters

worse.

In addition, the SBA is proposing for a second year to zero out

two technology grant programs, Rural Outreach and the Federal

and State Partnership. These programs leverage the infrastructure

of State technology agencies and non-profit research incubators to

increase the geographic diversity and competitiveness of small hitech firms for States such as Maine, which have comparatively

lower participation in Federal R&D efforts.

At a time when business magazines are reporting that China,

our key competitor, is aggressively expanding its technological

base, ending this private/public partnership seems exactly like a

move in the wrong direction.

I am similarly dismayed with the proposed funding freeze for

SBA’s resource partners, despite the fact that these programs surpass the SBA’s goals, assisting almost 1.5 million startup and existing small businesses. In fact, the Small Business Development

Center program alone served over 725,000 clients and helped create or retain over 168,000 jobs in fiscal year 2003. Similarly, the

SBA’s Women Business Center programs, with its unique training

and counseling, helped to create and retain over 6,500 jobs in fiscal

year 2003.

So clearly, results from these funding freezes are lost opportunities for entrepreneurs and would-be employees.

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The SBA freezes also extend to the veterans business program.

I believe that decision is not only unwise, but also uniquely illtimed, as over 193,000 Guard and Reservists have been deployed

since September 2001. An estimated 37 percent of those

servicemembers work for small businesses or are self-employed,

and many of them are accepting risk and financial hardships in

order to answer the call to duty.

So I think it is essential that the veterans business program is

adequately funded with the necessary resources to offer targeted

assistance to veteran-owned small businesses.

With that, Mr. Administrator, I look forward to hearing your testimony, and from those who will be participating in the second

panel to offer their views and perspectives, because clearly we have

to do everything that we can to strengthen and maintain these

very successful programs.

The point of my opening statement here this morning is to demonstrate and reinforce the fact that these programs have worked

exceptionally well and we need to do more to strengthen and

buildupon the resiliency and the outcomes that they have been able

to achieve for so little money, that would help so many parts of

America that are not experiencing the kind of economic growth

that some parts of the country are enjoying. And certainly that is

true of rural America.

So with that, I turn to the Ranking Member, Senator Kerry.

STATEMENT OF HON. JOHN F. KERRY,

A UNITED STATES SENATOR FROM MASSACHUSETTS

Senator KERRY. Thank you very much, Madame Chair.

First of all, let me say that I think that is a very important

statement that you just made. I think it is a very fair, even gentle,

assessment of where we find ourselves. And I welcome the non-partisan and I think thoughtful assessments on what the small business interests are and where we ought to be going. I think the

Chair has accurately put her finger on a number of different concerns and I share many of those concerns and I will talk about

them in a minute.

First, if I may as a point of personal privilege, I would like to

just take a moment to say to all of the Members of the Committee

that we are losing for retirement one of the really superb staff

members in the U.S. Senate.

Patty Forbes has worked at this Committee for a long period of

time. She has worked in the SBA. I cannot think of many people

who have contributed as selflessly, as competently and in as wonderfully a bipartisan fashion as she has.

I think Senators on both sides of the aisle have grown to respect

her expertise, her commitment to small business, her unfailing devotion to duty, if you will, the way in which she has always welcomed people from every walk of life on every issue and tried to

find the compromise, tried to find the middle ground to make

things work.

I think this Committee has been blessed to have her. And I just

want to say, for my own part, how grateful I am for her service.

I think we all thank her.

[Applause.]

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Senator KERRY. Madame Chair, I would like to submit letters

and my full testimony for the record, as well as some testimony

from other folks.

Chair SNOWE. Without objection, so ordered.

Senator KERRY. Thank you very much.

It is hard to know where exactly to begin. I know that an Administrator is put in a position of carrying out the will of an administration. There are budget chiefs and the President himself and others who will dictate what will happen. So I am going to try to recognize that as I direct comments at you, Mr. Administrator, and at

the Administration. I do not want to slay the messenger, so to

speak.

But I have to say that this budget is just really disturbing. Just

look at the fundamentals that the Chair has put up there. I have

spent 22 years here now. I spent a lot of those years on this Committee. Our job is to try to help small business. Our job is to try

to create jobs in America. This is not a partisan Committee. This

is probably one of the least—this and the Intelligence Committee—

are the two least partisan committees in the Senate. We exist for

the purpose of helping 98 percent of the businesses in America to

be able to create jobs and to grow America. There are some timehonored, proven ways in which we do that.

The success stories of lending programs by the SBA, those companies that have been successful, have themselves repaid the Nation in taxes and salaries paid many times more than the budget

of the SBA. There is no debit here that has to be made up somehow.

And yet you are cutting. You are undoing and destroying programs that work. You are destroying them, the morale of the Agency as well. You may assert otherwise, but we know otherwise.

The fact is, in the small business community, people are really

struggling to be able to make things work.

The Administration, in 4 years and a bit now, has yet to create

one new net job in America. One new net job. And it is small business that creates those jobs.

I would think you guys would be trying to find ways to grab

whatever you can and go out there and excite innovation and incubation in small business.

I know you come in here and you are going to say to us, as you

did in the House and elsewhere, that you have this rosy scenario.

You are doing more with less. You are saving taxpayer money, zero

funding for loans and so forth. But the fact is you have shifted

costs to borrowers and lenders through higher fees. And those higher fees put loans out of reach for the neediest small business borrowers in America. A lot of us in this room understand that the

SBA is now taking credit for things that Congress did, that rescued

the SBA, like the 7(a) running out of money and bringing people

together. There is a long story here of biting off your nose to spite

your face.

The SBA’s plan to save money by zero funding its largest loan

programs, you have admitted two key facts about the plan. No. 1,

it only works because you have shifted cost to the borrowers and

lenders through the higher fees. And second, we are going to have

people who testify and you can talk to small business people, and

6

they will tell you how much harder it is to get that kind of lending,

which is what this is for.

I do not believe the proposed program levels are adequate to

meet the likely demand for these loans. And that demand, in my

judgment, is essential to responding to America’s need to create

jobs here in this country and to incubate.

In addition, I disagree with the proposals to eliminate the

Microloan program and the SBA participating securities program.

Each of them serve a financing gap in the marketplace and that

is why we are here. I know there are some who ideologically resist

the notion that the Government ought to do anything with respect

to marketplace. But history has proven over 220-plus years that

intervention is often necessary. We have the Federal Reserve. We

have the various lending programs. We have a commerce clause.

We have certain rules that we have to play by and there are certain regulations and interventions that are necessary to leverage

behavior.

Those particular financing mechanisms provide for a gap in the

marketplace, which is why this Committee, in bipartisan, non-ideological fashion, helped put them there in the first place. We all

know that traditional lending institutions and venture capitalists

often look for the fastest return on investment or the safest return

on investment or a combination of the two and that does not always work for some kind of options.

When I was Lieutenant Governor, I sat on the board of something called the Massachusetts Technology Development Corporation. We actually funded the companies that fell through the gaps.

The minute they began to take off and turn successful, we got the

heck out of it because we did not want the Government involved.

But we put big companies on the big board in New York that otherwise would not have gotten there. Jobs were created and people became successful and it more than paid for itself. Why we turn away

from these obvious success stories is absolutely beyond me. And I

think the Administration’s budget is shortsighted with respect to

the economy.

In the Microloan program, in all the years since its inception in

1992, there have been only one or two defaults. It creates jobs at

a bargain rate, less than $4,000 a job versus the $33,000 of the

SBA’s other programs. And it meets the SBA’s goals of more

startups. Why are we not building it instead of reducing it?

The 7(a) Community Express program, while a good program for

more established small businesses, is not a substitute for the

Microloan program. Your budget for this year, just like last year,

continues your assault on entrepreneurial development programs

that help low-income, minority, home-based, rural and women entrepreneurs.

I oppose the cuts to these programs. I am particularly concerned

about what you are doing to the Women’s Business Center and

PRIME programs. The PRIME program has no substitute. You

have praised it, Mr. Administrator. You have talked about how important it is. I could quote you here. ‘‘It has no substitute and it

helps a sector of our economy that needs it the most.’’

With regard to the Women’s Business Center program, you have

repeatedly said that you are not going to support sustainability

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grants which allow the most experienced and productive centers to

continue receiving matching funding. That program has enjoyed

strong bipartisan and bicameral support, including Chairwoman

Snowe, Senator Talent when he chaired the House Small Business

Committee, and most of the Members of this Committee. But you

are going in the opposite direction.

Repeated requests from the women’s business community and

strong support from many of us in Congress have kept this program going. But last year’s extension, which passed as part of the

Appropriations Bill, only funded the program through fiscal year

2005. And without a new authorization about 60 percent of the

Women’s Business Centers are going to be forced to close. Is that

a good idea?

Madame Chairwoman, I am deeply concerned with the Administration’s ongoing strategy that limits transparency and reduces the

oversight authority of this Committee by removing program funding from line items in the budget and incorporating them into the

operating budgets of managing offices, which given the experience

we have been through, is a way of saying we are in for trouble

down the road.

I am especially concerned with the elimination of the line item

for advocacy research and the lack of independence that would result from such a transfer of budget authority.

So I thank you, Madame Chairwoman, for having this hearing.

I might add, on the association health plans, here we come again.

No bigger issue did I run into across the country than health care.

That is America’s crisis, not Social Security. Social Security is a

problem. It is a problem that we can deal with, and we will deal

with it, just as we have the past.

The crisis is health care. And the President and the Small Business Administration ought to be leading on it. Of all of the people

in the world to be leading on something, small business. It is small

business people who cannot provide their care. They are the ones

being crushed under the costs of health care.

And the Congressional Budget Office has said that the association health plans will raise the cost of doing business for four out

of five of the premiums that are paid. That is the CBO. It is nonpartisan. It is just an assessment of what is going to happen. Four

out of five small business workers and their families’ premiums are

likely to go up under that plan.

We have a plan where premiums could go down. With a reinsurance plan, you could actually stopgap costs for all businesses in

America. You could lower the premiums for everyone in America

and begin to get a breathing spell and reduce costs in the country.

But you have to make a different set of choices than this Administration is willing to make.

So I am disappointed by the budget. I know that is not going to

come as a surprise to you, but it is not a partisan disappointment.

It is not prompted by anything to do with ideology. It is practical.

It is based on sound experience of this Committee. It is based on

what we know works. It is based on good business practices. And

most importantly, it is based on the pleas and needs of small business people all across this country, whether they are Republicans,

Independents or Democrats.

8

I think your budget is out of touch with them and with the needs

of the country, and I regret that.

So I look forward to the hearing and we will see what we can

do to try to cobble something together that makes sense.

Chair SNOWE. I thank you, Senator Kerry.

Senator Pryor.

STATEMENT OF HON. MARK PRYOR,

A UNITED STATES SENATOR FROM ARKANSAS

Senator PRYOR. Thank you, Madame Chair, and thanks for having this hearing today. You and Senator Kerry both have shown

great leadership on this issue in the past and continue to do so. I

look forward to hearing from our witnesses. Thank you.

Chair SNOWE. You have heard us for 20 minutes. Begin.

STATEMENT OF HON. HECTOR V. BARRETO, ADMINISTRATOR,

U.S. SMALL BUSINESS ADMINISTRATION

Administrator BARRETO. Thank you, Chair Snowe and Senator

Kerry and Members of the Committee. Thank you for inviting me

here today to discuss the President’s budget request for the SBA

for fiscal year 2006.

The past year was not without its challenges for SBA. We faced

several critical issues and we worked together to reach agreements

that benefited both America’s small businesses and America’s taxpayers. When 7(a) loan demand exceeded its budget authority, SBA

and this Committee were able to come together with our lending

industry partners to provide an additional $3 billion in lending authority for the 7(a) program. This allowed the Agency to lift the

loan caps and guarantee a record $12.7 billion in small business

loans in fiscal year 2004.

At the beginning of fiscal year 2005, SBA began operating the

7(a) program at a zero subsidy rate. This trial period showed that

a zero subsidy would not hinder access or delivery of the 7(a) program. As a result, again the SBA and the Committee and the lending industry came together to craft legislation that ensured longterm stability in the program.

Since October the 1st, SBA has guaranteed $4.7 billion in loans

and our lending partners have showed renewed support for the program. In addition, we are making more loans than ever to minorities, women and veterans.

Last, SBA’s programs under the Small Business Act had not

been reauthorized in over 4 years and the Agency and this Committee seemed to be deadlocked in the negotiating process. However, persistence and diligence in pursuit to this goal produced a

compromise 2-year SBA reauthorization, which the 108th Congress

approved. This compromise was part of the fiscal year 2005 Omnibus Appropriations Act and I thank you for your support of SBA’s

efforts to become more efficient. This legislation allows the Agency

to better serve small businesses at less cost.

Our fiscal year 2006 budget submission reflects a continued commitment to that goal. Last year I stressed to you that SBA’s goal

was to do more with less. I know that in Washington, DC. it is difficult to imagine supporting a program without continually increasing its budget, but SBA has proven it can be done. Since I became

9

SBA Administrator in 2001, the Agency’s annual appropriation has

decreased, yet SBA’s programs have reached more and more American entrepreneurs year after year.

Last year was a great example of this kind of success at the SBA. The Agency provided $21.3 billion in loan guarantees and related

financing to nearly 88,000 small businesses. SBA’s core infrastructure of technical assistance programs, our SBDCs, our SCORE, our

Women Business Centers and district offices provided their services

to record numbers of small businesses in fiscal year 2004.

SBA’s Entrepreneurial Development Programs provide expertise

and guidance to entrepreneurs who have the drive and the idea,

but need a little help putting all of that together in a working business plan. SBA’s continued support of the Federal Government’s

statutory commitment to provide a fair share of contracting dollars

to small businesses. Small businesses received a record number of

Federal contracts in fiscal year 2003, $65.5 billion, and exceeded

the 23 percent Government-wide goal.

SBA has also been innovative in creating contracting opportunities for small businesses. For example, the Business Matchmaking

Program has given small businesses around the Nation a better opportunity to obtain Government and private contracts by introducing them to procurement officials who otherwise would be very

difficult to meet. This allows small firms to learn about and bid on

procurement opportunities in their areas of expertise. As a result,

$29 million in Federal and private contracts have been awarded so

far.

SBA has been active in other areas of contracting, as well. I am

proud of the hard work done to implement the provisions of PL

108–183 in record time, providing contracting officers with a powerful tool to award contracts to those who have given so much to

our country, service disabled veterans. In December, the Agency

implemented a new policy to more accurately monitor contract

awards when a small business is purchased or merged with a larger business. The new policy requires a business to recertify itself

as small when Federal contracts are transferred to it, in order to

be continued to be counted as a small business contract.

For years to come, victims of the worst hurricane season on

record will remember how SBA helped them get back on their feet.

During fiscal year 2004, the SBA’s Disaster Program provided more

than $884 million in low-interest loans to over 28,000 homeowners

and businesses. The supplemental appropriations allowed SBA to

increase these numbers to over 100,000 loans for up to $4 billion.

This will enable the local economies to recover as quickly as possible.

President Bush understands the vital role that America’s small

business play in creating opportunities. He also recognizes that

small business generate two-thirds of all of the new private-sector

jobs. The President’s plan for economic growth and job creation,

along with his small business agenda, has been successful in creating an environment in which entrepreneurship can flourish.

Health care continues to be one of the largest burdens our small

businesses must bear. Time and again, as I meet with the entrepreneurs around the Nation, they talk to me about the cost of

health insurance. And it is only getting worse. We will continue to

10

support the use of health savings accounts and urge Congress to

pass association health plans.

We also plan to make the President’s tax proposals permanent,

which will help small businesses and their employees keep more of

what they earn and reinvest that money in their families and their

businesses. Recognizing these successes, we look forward to the future with renewed dedication to serving America’s small businesses

in a financially responsible manner.

Now I would like to lay out the specifics of fiscal year 2006 budget request. SBA’s total request is for $592.9 million. This request

provides for a strong active SBA that can effectively and efficiently

meet the demands of its customers, America’s entrepreneurs, while

minimizing the cost to the taxpayers. Through improved management and program reforms, SBA will better serve small businesses.

SBA requests $16.5 billion in lending authority for its 7(a) loan

program. This record amount of lending authority will provide the

loans small businesses need in a timely manner and without disruption due to the stability of the zero subsidy rate policy. This request will also give SBA the authority to provide $5.5 billion in

loans through the 504 Certified Development Company Program,

also at no cost to the taxpayers.

SBA continues to support venture capital for small businesses.

SBA requests $3 billion in authority for the SBIC Debenture Program. For 50 years this program has provided venture capital for

success stories such as Nike, Intel, Calloway Golf, and many others. However, we are not proposing to reinstate the Participating

Securities Program at this time. In 10 years of operations, this program has resulted in reestimated losses of $2.7 billion to taxpayers.

And that kind of result is unacceptable.

Through more flexible budget structure, SBA is seeking increased efficiency and quality of services. The request proposes that

the Agency work through its Nationwide infrastructure of Women

Business Centers, veterans outreach centers, SCORE chapters,

Small Business Development Centers and district offices.

This budget also includes continued funding for the Agency’s Disaster Program. As you are aware, the SBA is a major part of the

Government’s mechanism to help disaster victims get back on their

feet.

Some of the heaviest burdens borne by small businesses in America are the result of unnecessary Federal regulation and red tape.

That is why I am pleased that the SBA’s budget includes $9.1 million for the Office of Advocacy. This funding will allow advocacy to

fulfill its mission.

In his February 2 State of the Union address, the President underscored the need to restrain spending in order to sustain our economic prosperity. As part of this restraint, it is important that total

discretionary and non-security spending be held to levels proposed

in the fiscal year 2006 budget.

The budget savings and reforms in the budget are important

components of achieving the President’s goal of cutting the budget

deficit in half by 2009 and we urge the Congress to support these

reforms. The fiscal year 2006 budget includes more than 150 reductions, reforms and terminations in non-defense discretionary proVerDate 03-FEB-2003 09:59 Jul 05, 2005 Jkt 021350 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 D:\DOCS\21350.TXT SSC1 PsN: SSC1
11

grams of which two affect SBA. These are the Microloan and SBIC

Participating Securities Programs.

SBA must be forward thinking. We must anticipate changes in

the marketplace and adjust our programs based on the realities of

today’s small business environment. SBA’s fiscal year 2006 request

is good for America’s small businesses and taxpayers and I ask for

your support for our fiscal year 2006 budget request.

Thank you again for the opportunity to appear here today. I am

happy to answer any of your questions.

[The prepared statement of Administrator Barreto follows:]

PREPARED STATEMENT OF HECTOR V. BARRETO, ADMINISTRATOR,

U.S. SMALL BUSINESS ADMINISTRATION

Madam Chair, Ranking Member Kerry 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 (SBA) for Fiscal Year (FY) 2006.

As the Committee is aware, the past year was not without its share of challenges

for the SBA. However, I am proud to say that last year was also one of great success

for both the Administration and the Senate Small Business and Entrepreneurship

Committee. We were faced with several critical issues, but we were never able to

work together and reach agreement in ways that proved beneficial to both America’s

small businesses and America’s taxpayers.

In FY 2004, when the 7(a) loan program’s demand exceeded its budget authority,

the SRA and the Committee were able to come together, and with the assistance

of our partners in the lending industry, to provide an additional $3 billion in lending

for the 7(a) program, at no additional expense to the taxpayers. This allowed the

Agency to lift the loan caps and operate the program at full capacity for the remainder of FY 2004. As a result, the Agency guaranteed a record $12.7 billion in small

business loans in FY 2004.

At the beginning of Fiscal Year 2005, under the continuing resolution, the SBA

began operating the 7(a) program at a zero subsidy rate. This ‘‘trial period’’ showed

that a zero subsidy rate would hinder access to and delivery of the 7(a) program,

As a result, the SBA, the Committee, and the lending industry came together to

craft legislation that allowed the program to operate without appropriations from

Congress and ensure long-term stability in the program.

This change significantly reduced the potential for future progam disruptions and

uncertainties, and allowed the Agency to reduce its budgetary needs while continuing to service America’s small businesses.

I know some have expressed concern that the resumption of the 2002 fee levels

would harm small businesses. However, since October 1, SBA has guaranteed over

$4.4 billion in loans, an increase of over 11 percent over last year, and our leading

partners have shown renewed support for the program. In addition, we are making

more loans than ever to minorities, women and veterans.

At this time last year, the SBA’s programs under the Small Business Act hadn’t

been reauthorized in over 4 years, and the Agency and the Committee seemed to

be deadlocked in the negotiating process. However, persistence and deligence in pursuit of this goal of reauthorization finally produced a compromise in the form of a

two-year SBA reauthorization that passed at the end of the 108th Congress.

Chair Snowe, I would like to compliment you and your staff on ensuring that this

legislative compromise was included as part of the FY 2005 Omnibus Appropriations

Act and for your support of SBA’s efforts to become more efficient. This legislation

allows the Agency to better serve more small businesses at less cost. Our FY 2006

budget submission reflects a continued commitment to that goal. Small business

customeers are taxpayers and understand the need to cut unnecessary costs and

keep up with an ever-changing marketplace.

Last year, I stressed to you that SBA’s goal was to do more with less. I know that

in Washington, DC, it is difficult to imagine strongly supporting a program without

continually increasing its budget, but SBA has proven that it can be done.

Since I became SBA Administrator in 2001, the Agency’s annual appropriation

has continued to decrease, yet SBA’s programs have reached more and more American entrepreneuers year after year.

Last year was a great example of this kind of success at the SBA. The Agency

provided $21.3 billion in loan guarantees and related financing for approximately

87,800 small businesses in FY 2004; these being record levels.

12

Out of that $21.3 billion, nearly one-third went to women-owned and minorityowned businesses, which is more than any prior year; over $500 million went to African Americans; approximately $2.8 billion went to women; over $1.2 billion went

to Hispanics; and over $115 million went to the Native American community. These

figures represent the Administration’s continued commitment to ensuring that the

SBA’s loan programs truly serve those small businesses that would otherwise have

a difficult time accessing capital from the lending world. I am proud of the successes

documents by these efforts.

Our administrative transformation efforts have also produced similar results. As

this Committee knows, the Agency has been going through a transformation process

designed to realign some of its dated infrastructure to meet the changing face of the

21st century business world. The needs of the SBA’s customers remain paramount,

and modernizing and realigning the Agency’s human capital resources, operations,

and organizational structure to match those needs is crucial to the Agency’s continued relevance. Last year, the SBA began consolidating administrative servicing

functions, allowing field office staff to work more closely with their clients in the

small business community. The Agency’s field offices are using technology, outreach,

marketing, and customer relationship management to better meet small business

needs. Through these modernization efforts, more SBA employees will be in more

locations, providing direct assistance to the small business community at a lower

cost.

The SBA has also been effective in streamlining processes on the loan finance

management side of the organization. Currently, over half of SBA’s 7(a) loans are

made through SBAExpress, which is processed electronically in a 36-hour timeframe. Centralization has reduced the 7(a) program guarantee and purchase liquidations timeline to an average of less than 45 days. The 504 program reduced loan

application processing time to just two days, five times faster than the prior national average of ten business days. These dramatic improvements directly affect

the SBA’s partner lenders, and ultimately, the Agency’s customers, America’s small

business owners.

SBA’s core infracture of technical assistance programs—SBCDs, SCORE, WBCs,

and district offices—provided their services to record numbers of small businesses

in FY 2004. SBA’s Entrepreneurial Development programs provide much-needed expertise and guidance to those entrepreneurs who have the drive and the idea, but

may need a little help putting all of that into a working business plan.

The SBA also continued its mission to support the Administration in meeting its

statutory commitment to provide a fair share of contracting dollars to small businesses. Small businesses received a record number of Federal contract dollars in FY

2003—$65.5 billion—and exceeded the 23 percent government-wide goal. I am also

proud to say the Federal contracting dollars increased for women-owned businesses,

8(a), SDB, HUBZone and Service-disabled veteran-owned firms. In FY 2004, the

SBA provided procurement assistance to over 37,000 small businesses.

The SBA has also been innovative in creating additional contracting opportunities

for small businesses. For example, the Business Matchmaking program has given

small businesses around the Nation a better opportunity to obtain government and

private contracts by introducing them to procurement officials who otherwise would

be very difficult to meet. The program’s goal is stimulate jobs and growth for small

businesses by taking advantage of opportunities that are normally confined to distinct geographical areas such as the Washington, DC area or a city where a major

corporation is located. Since the program started 2 years ago, 23,000 one-on-one appointments between small business owners the Federal and corporate procurement

officials have been conducted. The program has allowed small firms to learn about

and bid on procurement opportunities in their areas of expertise. As a result, $29

million in Federal and private contracts have been awarded. More than 50 percent

of the small businesses that have received contracts through this initiative are

women-owned or minority-owned businesses.

SBA has been proactive in other areas of contracting as well. I am proud of the

hard work done by my staff last year to implement the provisions of P.L. 108–183

in record time, providing contracting officers with a powerful tool to award contracts

to those who have given so much to our country; service-disabled veterans.

Additionally, the Agency recently published a rule clarifying the responsibilities

of prime contractors and giving contracting officers a tool to ensure that small business subcontractors are treated fairly when doing work on Federal contracts—an

issue plaguing many small businesses. In December, the Agency also implemented

a new policy that enables the Federal Government to more accurately monitor contract dollars awarded to small business concerns that are subsequently purchased

by large business concerns. The new policy requires a business to recertify itself as

13

small when a change-of-name or novation agreement has been executed if the contract is to continue being counted as a small business contract.

In the past year, the SBA has moved to a completely automated electronic application process for both the 8(a) and Small Disadvantaged Business (SDB) Programs.

As a result, the average time to process an 8(a) application has fallen from over 100

days to 45 days, and for SDB, the drop is from 110 days to 40 days. Consequently,

time and government resources are being used more efficiently, and at the same

time, better customer service is being given to small businesses.

While I am always more than pleased to talk about the active role that the Agency plays in the small business world, I really couldn’t be more proud of the humanitarian assistance provided by SBA’s Office of Disaster Assistance.

For years to come, people will remember the tremendous work the SBA did in

2004 to help disaster victims recover from the worst hurricane season on record.

During FY 2004, the SBA Disaster Assistance program approved low-interest loans

to over 28,500 homeowners and businesses grossing over $884 million. The supplemental appropriations allow the Agency to increase these numbers to over 100,000

loans for up to $4 billion. The direct public benefit of these SBA loans is that the

businesses and local economies in disaster areas will be able to recover much more

quickly than would have otherwise.

While we can enjoy the successes of the last year, we must continue to look towards the future with renewed dedication to serving America’s small businesses in

a financially responsible manner. In fact, the disaster Assistance program has

begun its transformation to electronic processing, simplifying the process for disaster victims and providing them with faster responses while reducing costs to administer the program.

President Bush understands the vital role that America’s small businesses play

in creating opportunities. He also recognizes that following times of economic downturn, small businesses play a leading role in economic recovery, and that it is small

businesses that generate approximately two-thirds of all new private sector jobs.

The President’s plan for economic growth and job creation, along with his Small

Business Agenda, has been successful in creating an environment in which entrepreneurship can flourish.

Health care continues to be one of the largest burdens our small businesses must

bear. Time and again, as I meet with entrepreneurs around the Nation, they talk

to me about the cost of health insurance, and it is only getting worse. We also plan

to make the President’s tax proposals permanent to help small businesses and their

employees keep more of what they earn to re-invest that money in their families

and their businesses.

Finally, we want to help the President repair the Social Security system. Some

people have claimed that the system is not in need of repair, that the crisis is fifty

years away, but I believe it is our responsibility to those in their teens and twenties

now to fix the program for their future rather than waiting until the problem becomes acute and unmanageable. I also believe that acting now is the best and fairest way to craft a solution that will not result in unfair costs on small business employers and employees or benefits cuts to those who have paid into the system in

good faith. It is time for us to take the 800-pound gorilla out of the picture and remove its unwelcome presence from the plans and futures of small business owners

and their employees who are paying the taxes that feed it.

Now, I’d like to lay out the specifics of our FY 2006 budget request. The SBA’s

total budget request is $592.9 million. This budget request provides for a strong, active SBA that can effectively and efficiently meet the demands of its customers,

America’s small business entrepreneurs, while minimizing the cost to the American

taxpayer. Through improved management and program reforms, the SBA will better

serve America’s small businesses.

The SBA requests $16.5 billion in lending authority for its 7(a) loan program—

a $500 million increase over the enacted level for FY 2005 and almost a 25 percent

increase over FY 2004 levels. The 7(a) subsidy rate for FY 2006 remains at zero,

meaning the 7(a) program can guarantee $16.5 billion in small business loans without requiring a taxpayer subsidy.

This Budget Request will give SBA the authority to provide $5.5 billion in loans—

also a $500 million increase over the FY 2005 enacted level—through its 504 Certified Development Company (CDC) program with no cost to the taxpayers. The 504

program, which was established to increase small businesses’ access to real estate

and other long-term fixed asset financing, continues to have job creation as an important program goal. The SBA is continuing to take steps to increase small businesses’ access to 504 loans by increasing competition among CDCs and streamlining

the application process.

14

SBA is asking for $3 billion in debenture authority for the Small Business Investment Company (SBIC) program. This program has continued to operate with expectations, providing benefits to recipient firms and with financial projections. The Administration’s budget does not propose reinstating the SBIC Participating Securities

program in 2006. In ten years of operations this program has resulted in re-estimated losses of $2.7 billion, $1.7 billion of which are realized cash losses.

I am continuing my advocacy for greated efficiency and more and better quality

of services to small businesses by consolidating delivery of services to small businesses through the Agency’s core non-credit programs. As we discussed last year,

SBA does not need restrictive line-items placed in its budget in order for the Agency

to reach more small businesses.

The HUBZone program is an excellent example of this. In FY 2004 and FY 2005, Congress mandated that the SBA spend $2 million on the HUBZone program. Congress expanded access to this program in the recent SBA reauthorization bill. While

SBA is not asking for a special line item, the SBA fully intends to support this program from within our Salaries and Expenses account. As you can see from the

Agency’s FY 2006 budget, SBA plans to provide $7.3 million in support for the

HUBZone program, providing resources that keep the program strong without hampering our ability to meet challenges and serve all of our customers’ needs.

Further, SBA is working to enhance the HUBZone program and its other government contracting programs through monitoring and assessing the effectiveness in

reaching their target audience. Results of this analysis will help SBA better use its

resources in reaching these businesses. Through the Business Matchmaking Initiative, SBA will put more small businesses in touch with procurement officers at all

levels of government and those at-large businesses. The one-on-one meetings facilitated through these events provide small business owners with an opportunity to

speak directly with the decisionmakers.

SBA will also be working more closely with other Federal agencies, ensuring that

their contracting practices maximize opportunities for small businesses while still

providing a good deal for the taxpayer. Through EPCR and the ESRS systems, the

SBA will have more tools to monitor prime and subcontracts to ensure small businesses are given adequate opportunities to contract with the Federal Government.

The SBA also believes it can provide a full range of technical assistance more effectively by using its core national delivery programs. The Budget Request proposes

that the Agency work through its primary infrastructure of 104 Women’s Business

Centers, 4 Veterans Outreach Centers, 389 SCORE chapters, 1163 SBDCs, and 68

district offices. They can reach more customers and offer higher levels of service to

targeted constituencies and, by eliminating the duplication and bureaucracy that is

inevitably created by a large number of smaller programs, they can do it far more

effectively.

The Budget Request also includes continues funding for the Agency’s Disaster

Loan Program. The SBA works very closely with the Federal Emergency Management Agency to assist those small businesses and individuals directly affected by

disasters such as tornadoes, floods and hurricanes. As you are aware, the SBA is

a major part of the government’s mechanism to help disaster victims get back on

their feet.

As the Committee is well aware, some of the heaviest burdens borne by small

businesses in America are the result of unnecessary Federal regulation and red

tape. That is why I am pleased that SBA’s budget includes $9.1 million for the Office of Advocacy. This funding will allow Advocacy to fully staff its regional operations; to continue training Federal agencies on how to comply with the Regulatory

Flexibility Act; and to research, document, and report to Congress on small business

matters.

In FY 2006, the Office of Advocacy expects to same small business $5.6 billion

in potential regulatory costs. Madam Chair, that is a substantial amount of savings

for America’s entrepreneurs.

Another crucial area where the SBA continues to make progress is in lender oversight. Since the Loan and Lender Monitoring Systems (L/LMS) became operational

in 2003, it has provided the SBA and the Federal Government with an exceptional

level of oversight of SBA’s guaranteed-loan program operations. L/LMS is a riskbased approach to oversight that provides the Agency with greater insight into

SBA’s lenders. It is more streamlined and efficient, allowing us to better deploy our

resources to those areas where the SBA has the greatest exposure while being less

intrusive to the lenders.

Specifically, L/LMS has improved SBA’s lender oversight by directly increasing

our loan portfolio and lender monitoring capability. The result is SBA’s first database confining future credit risk analysis with past performance. L/LMS also enables the SBA to use historical business loan level data when assessing risk levels.

15

The impact of L/LMS has been profound. For example, in previous years, the Kansas City Review Branch and District Offices reviewed most of the SBA’s lenders.

Preferred 7(a) lenders were reviewed onsite every year and other lenders were reviewed once every three years. L/LMS now provides non-disruptive off-site monitoring capabilities that consider both the performance and credit risk of every loan

the lender makes and funds.

The SBA is committed to continuously reassessing and improving the potential

impact of L/LMS for the Agency and its customers. We are constantly evaluating

new ways in which we can improve our own operations to meet the full potential

of L/LMS.

All of us at the SBA are quite proud of the Agency’s legacy of achievement. Many

of today’s most successful businesses received SBA assistance in their formative

stages. Who knows which of tomorrow’s industry leaders are today receiving their

7(a) or 504 loans, their Government contracting opportunities, or their counseling

through the SBA’s programs and services?

However, we at the SBA cannot rest on our laurels. We must be forward-thinking,

anticipate changes in the marketplace, and adjust our programs based on the realities of today’s small business environment.

The SBA’s FY 2006 request is good for America’s small businesses and American

taxpayers. If offers an opportunity for us to work together with our Congressional

partners to ensure that the SBA continues to assist small businesses. We ask for

your support for our Budget Request. Thank you for the opportunity to appear

today. I am happy to answer your questions.

Chair SNOWE. Thank you, Administrator Barreto.

Before we turn to questions, I am going to recognize Senator Talent from Missouri. He is not a member of this Committee, but he

has been a longtime advocate for small business and previously

served in the House as Chair of the Small Business Committee.

So I certainly welcome his presence here today and, most importantly, his testimony and his input.

Senator Talent.

STATEMENT OF HON. JAMES M. TALENT,

A UNITED STATES SENATOR FROM MISSOURI

Senator TALENT. I appreciate that very much. I want to thank

the Chair and the Ranking Member, first of all, for letting me testify and then sandwiching me in after the Administrator. I appreciate the Administrator’s indulgence before he takes questions.

I wanted to testify just very briefly, Madame Chair, because I

feel so strongly about the importance of sustaining the SBA’s Participating Security SBIC Program. It is, as the Chair knows and

the Ranking Member knows, it is the only equity investment program the Government sponsors in the SBA. The other programs

are all loan programs, good programs, but now ones that directly

provide capital.

Anybody who talks to small business a lot knows that the shortage of investment capital, either to get started or to grow, is one

of the big problems that they confront.

We know about this program in Missouri. Of $8.9 billion in participating security investments since the program began in 1994,

approximately $135 million have been invested in Missouri. Those

investments netted an estimated 3,750 jobs and over $641 million

in portfolio company revenue.

The example I always use because it has relevance to my family

is the Build-A-Bear Company. Between 1998 and 2001, two SBICs

invested $13.2 million in Build-A-Bear Workshop. It is a retail and

Internet business. For those who do not have daughters or granddaughters and therefore may not know about this, Build-A-Bear

16

Workshop is a retail and Internet business that provides a place

for people of all ages to make and name their unique bear or other

stuffed creation. The first store opened in St. Louis in 1997. Now

the company operates 170 stores in 40 States and Canada. It is

opening a store in Sheffield, England. It has gone from 30 employees to 4,000 employees. Madame Chair, it would not have happened if not for the SBIC Participating Investment Program.

I know there are problems and the Government is incurring

losses. We are coming out of a recession and whenever we do, as

the Chair and the Ranking Member knows, we have to look and

refine these equity investments as well as the loan programs. And

we certainly need to do that. I also agree that we need to get to

a zero subsidy rate for the program. I think we can do that.

But what I would ask the Committee to consider and the Administrator to consider and to do is to work with the SBICs in restructuring the program to come up with a zero subsidy rate, but in a

way that allows the program to continue. I think we can do that.

I hope that the Administrator will consider that. And I hope those

at OMB will consider that, as well. I know they have never really

had confidence in this program, but I can tell you it works.

Again, thank you. I am not going to interrupt the hearing any

longer, but I thank you, Madame Chair, for permitting me to testify.

Chair SNOWE. Thank you, Senator Talent.

Your points are well taken and we appreciate the expertise you

have brought to this matter, because this is a crucial area for venture capital for small businesses. You are absolutely right. We have

to find a way to address this problem.

STATEMENT OF HON. NORMAN COLEMAN,

A UNITED STATES SENATOR FROM MINNESOTA

Senator COLEMAN. Madame Chair, before Senator Talent leaves,

I want to associate myself with his comments. We face the same

situation in Minnesota. We understand some of the difficulties.

But we are really faced with what I call a ‘‘perfect storm.’’ We

went into recession. These are the companies that were hit by that.

But I think we can look back at what some of the challenges are.

We can get to the zero subsidy rate.

So I commend my colleague from Missouri and let him know that

I stand in full support of what he has to say and look forward to

working with Administrator Barreto.

By the way, thank you for your leadership. Thank you for doing

an outstanding job. I have always enjoyed the relationship. I think

this is an opportunity where we can build something that is worthwhile for all of us.

Chair SNOWE. Thank you, Senator Coleman. Thank you, Senator

Talent.

Administrator Barreto, let me begin. Obviously you have heard

bipartisan disappointment expressed on the direction of some of

these programs. We understand the economic vise that you are certainly in, in trying to develop as part of the overall Federal budget.

It is obviously multiple challenges.

17

But I also think in that process, as I have always had in advocating a balanced budget, you have to be discerning about what ultimately are the priorities for the Federal Government.

I happen to think, whether I were Chair of this Committee or

not, that we ought to be investing in small business programs because they give you the biggest bang for the buck. It is where job

creation is happening in America. If it were not for small business,

it would not be happening. Those are the clear and discernible

facts.

I think that is the challenge here today, what we can do to reverse that direction. It may well be that under your leadership,

that in spite all of those cuts that you have had to endure within

these programs, you have managed to make sure that they are

moving in the right direction in terms of job creation.

The question is how low can you go before you do harm? That

is the problem, when you see a 36 percent decline over the last 5

years and yet we have managed to create, as I showed in the chart,

4.5 million jobs since 2001, 3.2 million with these appropriations

and these types of decreases. But when you are talking about

eliminating programs like the Microloan program for example, or

the PRIME program, folding in HUBZone, another program that I

think should meet its statutory goal, we have to figure that one

out, as well, level fund the non-credit programs like SCORE and

Women’s Business Centers, veterans outreach centers, for four consecutive years ultimately it does harm.

In an economy that is disparate, depending on where you live in

America, and I can cite that chapter and verse representing the

State of Maine. It has a disparate economy. It is a rural economy.

We are here to figure out how we are going to fuse America to be

one, rural and urban, so that everybody has the ability to enjoy the

economic opportunities this country can afford.

And so while we have had all this great growth in certain parts

of the country, it is not happening all over. The one unifier, in my

estimation, happens to be small business. That is the unifying factor. I do not want to see rural economies withering up. Even in my

State, when we see what is happening, turning back their governments because they cannot afford to run them in small towns. That

is happening in many parts of America. Small business can be the

key to all of that.

That is my concern. We ought to be looking at well, you know,

in the overall Federal Government, the macro budget, what are

some key programs? It is amazing what these programs do and

what they generate for job growth. I am not so sure all of our colleagues know that in the United States Senate, as much as we

have tried to give that message. We should be doing more of this.

We should not be moving in the direction of cut, cut, cut because

ultimately it is going to have a multiplying effect in the wrong direction. We are charting a different course than we should be

charting for these programs.

Second, we are demanding on high fees, which gets me to my

next point. It is on the 7(a) program. You are going to see a 118

percent increase in the last 3 years in the 7(a) program. Now, I understand that it is being reestimated. The subsidy rate, was reestimated. Now it is a third lower, so it was calculated so much higher

18

last year. We need to find out exactly why that happened, frankly,

because ultimately the lenders and small businesses are paying

that fee. If it was disproportionately high and it was erroneously

calculated, then we better find out why.

But that is the problem. That is what we are depending upon

now. Getting the zero subsidies, getting higher fees. I know you

have asked for a fee for the secondary market, to have that authority in case you wanted to use it. That is another issue.

But that is what we are dealing with here. So I do not see how

that moves us in the right direction to help all of America, because

I think we need to help all of America. I think small business is

the key to rejuvenating a lot of economies. We have got mom and

pop operations that can develop and nurture that otherwise would

not get the money from the conventional lender.

So I would like to have you start with how we can move in a different direction, understanding our concerns so that terminating

these programs that are job creators or reducing them is moving

exactly in the wrong direction.

We should be doing more. And if it is doing so great, we ought

to be building upon that. I do not know of any other programs that

get this kind of return on investment.

Administrator BARRETO. Thank you, Senator. I agree with what

you said.

But I want to put it in a little bit of perspective. We are doing

more every single year. Over the last 3 years we have literally doubled the number of loans that we do and the dollar amount. And

we have done it in every single community. Our loans to minorities

were up again for the fourth straight year. Loans to minorities

were a third of all of our loans. We are doing more loans to womenowned businesses, veteran-owned businesses.

And it is happening for a variety of reasons. It is happening because of some of the structural changes that we have made to the

way that we run our programs and how we interface with our partners. It has also happened because the economy has gotten better

and more small businesses are optimistic of their future. And it has

happened because we have become better partners to our lenders.

I would like to read you something, very briefly. This was a

quote from Anthony Wilkinson, the Chief Executive of NAGGL, the

National Association of Guaranteed Lenders. He said that the

bankers have concerns about the higher fees, but they are not

nearly as bad as a cap or a shut-down. He said the overriding priority for lenders is guaranteeing a smoothly run program. He said

the 2006 budget does that. He says the good news is that we have

a program that is open and is not capped. He is a leader of the National trade association.

Also, today we got some great news. It was U.S. Bank, and I will

read you a quote from their executive. They have agreed to pay all

of the fees for the small business lenders. They have made a business decision. They are going to pay all of these fees and I think

this is going to make them very competitive.

He said: ‘‘To the best of our knowledge, a fees-paid loan initiative

has never been attempted before, but we have already received a

great response from both of our U.S. Bank partners as well as our

external referral sources.’’

19

The point is that these loans and the way that they are structured is good business for our lenders. That is why more lenders

are joining the program. That is why we are making more loans.

That is why every community is benefiting.

I brought some charts with me, as well, Senator. And as you see

here, this will give you an idea of the stair step growth that we

have seen in every community. Minority loans, represented by the

yellow bar, is what we did last year. This is what we are tracking

so far this year. And I have broken it down into every community,

African-American, Hispanic, women, veteran. We have never

reached so many as we are today.

Chair SNOWE. I do not doubt it, but we could do more. And that

is what is puzzling about this request. Because, for example, Women’s Business Center, we have the sustainability centers. We have

49. We have made great strides with that program, great investments. And now there is no funding for the sustainability centers.

I think that that is unfortunate that this budget does not reflect

that. That is one example.

Getting back to the 7(a) program increase, it may well be that

there are lenders who can absorb those costs and do it that way.

But again, it is going to be done on an ad hoc basis. We now rely

on all programs in terms of being zero subsidy, high rates, high

fees. At what point is that going to be discriminating against those

businesses who simply cannot do it, our entrepreneurs?

Because we are changing it in a way that is going to exclude

many from participating in these programs. I think that is a problem. I understand the budgetary constraints and the challenges

here. But I think that these fees are going to have varying effects,

depending on where you are in America and who you are and what

the options are. That is my concern.

When you calculated this by a third less over the last few months

and the 7(a) fee ultimately, and now it is going higher next year,

and then proposing a fee for the secondary market, I mean that is

all cumulative. That is not going to invite participation and growth

in these programs that have been working so well.

Administrator BARRETO. One of the things I know there was a

concern was about the fees late last year when we were dealing

with this. And some of the folks were saying to us it is going to

draw people out of the program and they are going to do less loans.

Last year was the best year in our history. This year we are up

in our 7(a) loan portfolio, up 28 percent. We are up 16 percent in

our 504 loan portfolio. We are up 57 percent in loans to AfricanAmericans, 16 percent to Hispanics. We are up 51 percent in loans

to women. The fastest growing segment of our small business loans

are those loans under $35,000 that are reaching those emerging

markets.

So we have not seen the drop off. And primarily I believe a lot

of it has to do with the fact that our lenders have told us many

times before they need consistency. They need a higher lending

level.

When we first started, Senator, we were doing about $9.5 billion

in the 7(a) loan program. This year we may do $16 billion. In a

short 3 years that budget authority is expanded. And that is really

the bottom line for a lot of these small businesses. They want to

20

know that they can access the program. They want to know that

there is not going to be any caps on the program. And they want

to know that there will be enough budget authority to meet that

demand. And that is what we are accomplishing right now.

Chair SNOWE. I well remember the 7(a). In fact, we indicated at

the time that it was underestimated by the Administration on that

particular question. And the cap and shut down occurred because

there was an underestimation of the demand for that program by

far.

Administrator BARRETO. And also because of the continuing resolution, the fact that every year for the last 3 years at the beginning

of our fiscal year we are on a continuing resolution. That put tremendous pressure on us. That is why we ran out of money. We will

not have that problem anymore because we are a zero subsidy rate

program. So we will not have those kinds of situations every time

our fiscal year starts.

Chair SNOWE. A couple of points. First of all, the Senate did do

its reauthorization. It was the House who failed to do that last

year, which was regrettable, frankly, because it put us in the situation it did with the continuing resolution and having to include all

that language in there. And frankly, especially with the decisions

that were being made by the Appropriations Committee in the 7(a)

program, that put small business at a disadvantage. We passed it

unanimously early-on in the process last year. So regrettably, we

were not able to accomplish that overall.

Finally, I think we need to analyze exactly what the effect is

across this country regionally, in terms of who is participating and

who is benefiting. Because I do believe that that is an issue. I think

small business and these programs can do so much to expand the

economic growth in parts of the country that otherwise are not benefiting. I think that is truly—what we ought to be doing is maximizing our investments in this program.

If this is working so well, then why are we moving in the opposite direction in terms of the level of appropriations? That is the

issue here. Frankly, it is mystifying. We ought to be discerning

enough to figure it out. And this is one where it is pretty apparent.

Administrator BARRETO. I agree with you, Senator. One of the

key things, I think, to remember—and I think you mentioned it before in your comments—in our key programs we have really maintained level funding. The differentiation, from these large budgets

in the past, is that we needed an appropriation to fund our 7(a)

program. We saved almost $100 million right there.

This year we are also not asking for as much in our disaster program because we received funding through a supplemental. Obviously, our budget submission is not going to include Congressional

initiatives.

So there are some differences, but none of those differences are

going to impact our ability to accomplish our mission this year.

This year, we will have the best year in our history. And next year

we will have a better year than we will have this year because of

what this budget represents.

Chair SNOWE. I appreciate that.

Senator Kerry.

Senator KERRY. Madame Chair, thank you.

21

I apologize ahead of time because I am going to have to step out

after these questions. But I want to—let me start by making the

point, Mr. Administrator, that there is some revisionism going on

here and there is a certain amount of credit taking on your behalf

that belies the record of what you sought and what you wanted to

do.

The fact is that you requested $12.5 billion. That was the Administration request. We put it up to $16 million. You are sitting here

taking credit for a whole bunch of loans that you did not want to

make. That is number one.

Number two, the funding mechanism that you put in place with

these higher fees was opposed by the U.S. Chamber of Commerce.

It was opposed by the ABA, by Women Impacting Public Policy, by

most of the groups involved in this lending or whose members need

the loans. The only reason they accepted it finally was not because

they thought it was going to do a better job for lending and growing the program the way the Chairwoman has said, but because

they thought there would be no program at all.

If you think that is great management and leadership, that is

your choice. I do not, and I do not think the Chairwoman does either.

The issue here is why we are not taking success and building on

it. Dell is the last computer manufacturer left in this company.

They used to do TVs and radios. We are struggling as to where the

job base is going to be in America.

I come back to my opening comment, which is, you ought to be

exciting that entrepreneurship. You say we are making more loans.

It is somewhat over your resistance that you are making more

loans and we are glad you are making more loans, but you are not

making as many loans as you could be, and they are more expensive than they ought to be. And you are not reaching some of the

targeted audience that you should be.

Those are the standards here, not are you doing more. But are

we doing what we ought to be doing, and are we reaching the people that we are seeking to reach.

I will give you an example. The Office of Advocacy recently reported that 44 firms received over $2 billion in Federal contracts

in fiscal year 2002, but were misreported as small. These were not

small firms. My question is: Does your $65 billion reported to have

gone to small firms in 2003 stand up to the same test for accuracy

that was applied to the 2002 achievement? Are they small?

Administrator BARRETO. You are referring to the——

Senator KERRY. Are you sure the $65 billion went to small firms

as it did not, as we saw in 2002 contracting?

Administrator BARRETO. First of all, let me take one step back.

I do not wish to take credit for all of the great things that are happening in the small business community. I think that credit belongs to our partners, our lenders, our resource providers and the

small businesses themselves. Our job is to be able——

Senator KERRY. But you are. You are sitting here and saying we

are making more loans. You did not want to make more loans. Congress gave you the power to make more loans.

22

Administrator BARRETO. I am saying the SBA, through our programs and our resource partners, is making more loans. Those are

just the facts. That is what we are doing right now.

I would also say that what we have tried to do when we analyze

what to ask for, is see what we have done in the past. Last year

we did $12.7 billion. This year we think we can do closer to $16

billion. Next year we are raising it to $16.5 billion.

With regards to these businesses that you reference, sometimes

what is happening with these small businesses is they get a contract and then over time they grow and they go outside of the size

standard. That is a good thing. We want those small businesses to

be successful. Sometimes they are so successful that they merge

with another enterprise and now obviously that would not be considered a small business.

Before the Advocacy study came out——

Senator KERRY. That is not what I am talking about.

Administrator BARRETO. Those are the cases that when we have

gone back and reviewed them, most of the cases fall into those categories. This is not a wholesale practice of large businesses taking

contracts from small businesses. I do believe that most of that

$65.5 billion went to small businesses. We do not have a large

amount of data representing that these contracts are going to large

businesses.

By the way, that is why we put out a regulation last year that

is novation rule. When these small business contracts are being

transferred to larger enterprises, it is their responsibility to recertify again. So that will take care of a lot of the issues that were

dealt with in the advocacy study.

One of the best ways to police this are the small businesses

themselves. When they are going after a contract and they are a

small business and they realize somebody else got that contract,

believe me, they are going to let us know and they are going to petition that contract be overturned.

So we do not see this as something that is happening on a wide

basis.

Senator KERRY. I hope not, obviously. When you see such problems, such as the accounting for the 7(a) loan program’s subsidy

rate, which was 70 percent out of whack, where you overcharged

some $42 million to small businesses just on that, would you consider that efficient?

Administrator BARRETO. You are referring to the subsidy rate

calculation?

Senator KERRY. Yes, the subsidy rate calculation.

Administrator BARRETO. One of the things that obviously we

have been tasked with, that this Committee asked us to look at,

was the subsidy rate this problem has been something that has

been dogging this program for years. We have steadily made

progress in reducing that subsidy rate down to zero. Obviously, the

subsidy rate is not static. It depends on what is happening in the

portfolio. As new information comes, sometimes we are able to

lower that. Sometimes it is going to raise a little bit.

Senator KERRY. We went through this model. We have had this

discussion over the years about the modeling and how you set it.

I think a lot of people have made constructive suggestions.

23

Administrator BARRETO. GAO has verified it, Ernst & Young has

verified. A number of different entities have reviewed this modeling

and said that it is appropriate for what it is that we are trying to

accomplish.

Senator KERRY. So you think a 70 percent error rate is acceptable?

Administrator BARRETO. I am not sure it is a 70 percent error

rate. But one of the things that happens with these programs is

that if they are not operating efficiently, the people who participate

in them vote with their feet. The lenders will not make these loans.

Small businesses will not seek these loans. And we have not seen

that to be the case.

Senator KERRY. You get the gist of my point. I do not want to

go back and forth with you and I know you are going to defend it.

But I do not think 70 percent is acceptable. And I think we ought

to try to find a way to narrow that down. It ought to be the error

to your side, not to theirs. That is number one.

Administrator BARRETO. I agree.

Senator KERRY. Let me get back to something else. This is the

second year in a row that you want to try to eliminate the Microlending program. Now, some of the justifications that you give for

that actually make sense. When you say you want to serve more

women and minorities compared to other programs and so forth.

The problem is it is filled with contradictions.

Compared to other programs, proportionately you say they do already get more than any other program. You say you want to reach

the underserved areas. But currently 40 percent of Microloans go

to rural business. You say you want to reach more startups. Currently 40 percent of all Microloans go to startups and they exceed

the SBA’s goal.

So your goals are contradicted by the realities of what is already

happening, number one.

Number two, you say that the SBA Microloan program can be

substituted for by the Community Express program. But that program does not loan to startups, only established businesses. So you

have eliminated a whole category right up front. You say you want

jobs created and the SBA’s Microloan program creates jobs for

$3,500, as I mentioned, versus a much larger amount. The program

is so well designed with its loan loss reserve and technical assistance program that a spokesperson from the SBA said in a recent

article in the Wall Street Journal that the Mircroloan program has

a ‘‘minuscule’’ default rate, ‘‘miniscule.’’ And I mentioned the one

or two defaults earlier.

So how, given these problems, do you justify moving off into this

arena, where you cannot do the things that it does today and does

successfully? I do not understand that.

Administrator BARRETO. And obviously we talked about this last

year, as well, and nothing that has changed over the last year has

really changed from our perspective. Last year we did 2,425

Microloans, those under $35,000 in the United States.

At the same time, we did 24,000 loans under $35,000 in the SBA

Express program. Many of those were in the Community Express

program, which also provides training to them. In addition, there

are 600 lenders, non-Government microlenders in the United

24

States, that do a much better job at this than we do, reach many

more people.

In fact, I would agree with you that the Microloan program has

created a market for many other private sector entities to be making these same types of loans to these same types of communities.

Senator KERRY. That does not address the startup issue and it

does not address the rural issue.

Administrator BARRETO. Again, a third of those loans that are

made inside of the SBA Express program are going to emerging

markets, are going to minority communities, are being made out in

the rural communities.

Senator KERRY. Established businesses.

Administrator BARRETO. And many of those are new businesses,

very new businesses in the minority communities, for example. The

thing for us is it costs us a lot of money to make a Microloan. It

costs us a dollar for every dollar that we put out. Last year we put

out $33 million in the Microloan program and at the same time we

put out $375 million of these smaller loans in the 7(a) program.

Three years ago we were not making many small loans. The av- erage loan size at the SBA in 2001 was almost a $250,000. And a

lot of those small businesses came to us and said look, I need to

be able to get these small loans. We need to do it across the board,

not just in the Microloan program. That is where we made a lot

of those changes to the SBA Express program.

Senator KERRY. This committee, I think, began the whole effort

to try to reach those lower level years ago, long before you came

here. So the Committee has been long pushing for Microlending

and smaller lending and so forth. What is happening is I think you

are going to shut out a very important market for these kinds of

startups, which runs contrary, incidentally, to the whole value system about work and work ethic which we are trying to instill in

certain communities.

Administrator BARRETO. The Community Express program does

do the startups. That is part of the 7(a) portfolio. The SBA Express

will be dealing with a little bit more established companies, but

Community Express will do startup loans.

Senator KERRY. I am just being shown, this is apparently from

a 7(a) Community Express Lender questionnaire on small business

lending which says: Can I use this loan to buy a business or start

a new business? And the answer the Community Express Lender

put out is: No, at this time all of our business loans are meant for

existing businesses.

So I would just ask that this be put in the record.

Chair SNOWE. Without objection.

Senator KERRY. We can figure it out as we go forward.

Madame Chair, I have gone on longer than I should, but I would

like to ask permission to have the record extended and to submit

some questions in writing.

Chair SNOWE. It will be extended, without objection.

Senator PRYOR. Senator PRYOR. Thank you, Madame Chair.

Let me, if I may, follow up on a couple of points that the Chair

made a few moments ago. The first thing that she talked about is

how small business is really where the action is in our economy.

25

That is particularly true in my State. When you look at Arkansas,

basically the backbone of my State’s economy is agriculture and

small business. When we look at job creation and job growth, even

though we have a lot of great Fortune 500 companies in Arkansas,

small business really is where the action is. So small business is

something that I think we are all concerned about for our own reasons and our own perspectives.

The other thing that she mentioned is the Women’s Business

Centers program, and I would like to ask you about that. During

the last 10 years, the centers generated an estimated economic impact of $500 million. Do you agree with that figure, $500 million?

Administrator BARRETO. I have seen some figures that relate to

that. I am not sure what the methodology they use or how they

track that, but I have seen some numbers showing that.

Senator PRYOR. Somewhere around $500 million?

Administrator BARRETO. I believe so.

Senator PRYOR. You ought to know what that is because you are

changing the program. With an investment of only $37 million over

a 10-year time period there was a $500 million return on that investment. In other words, a $500 million economic impact. That

seems to be a pretty good return on investment. Would did you

agree with that?

Administrator BARRETO. We totally agree with that.

Senator PRYOR. Again, not to dwell too much on my State of Arkansas, but just recently this week there was an announcement

that once again a small plant in a small town is going to lay off

its entire workforce and close the plant. About 200 jobs will be

going away.

But when you look at the Women’s Business Centers and the activity that they have been able to generate in a small State like

mine; I think that about 3,400 people have participated in the program, 300 businesses have been started or expanded and 500 jobs

have been created; there has been a large impact. All this activity

may have been in small communities, small businesses, but overall

it has had a large impact on my State and I am sure it has had

a similar impact around the Nation, as well.

My question to you is how you justify cutting funding for this

program when it has created such sustainable jobs and sustainable

businesses?

Administrator BARRETO. Thank you for that question, Senator.

Let me first say that we agree with you, Women Business Centers are critically important. The purpose of Women Business Center Program is to provide these grants to non-profit organizations

for them to start these Women Business Centers and help the

women businesses in their area. And they have done a good job to

do that.

But the way that the program was envisioned is this was supposed to happen for 5 years. After 5 years these organizations

would be self-sufficient. The problem that we have had is there are

many areas around the country, in rural States like Arkansas and

many urban centers that do not have Women Business Centers because they cannot get them because there is not enough money.

26

The intention of Women’s Business Centers was to provide these

groups and these communities a hand up, not a handout, a hand

up. This was not supposed to be a static entitlement program.

The centers that are doing very well are centers that have been

around for a few years. They are associated with a Chamber of

Commerce or another business association and are also raising

monies from other areas. These centers are not SBA centers. These

centers belong to those communities. They belong to those organizations. We want to help them be successful.

So what we are basically suggesting is that we go back to what

the original purpose of the program is. Los Angeles just got their

first Women’s Business Center, a city that has probably the most

small businesses, the most women small businesses of any place in

the United States, until recently could not even have a Women’s

Business Center. So those are the kind of opportunities that we

want to address.

We think Women Business Centers are very important. We want

to grow new Women Business Centers around the country.

Senator PRYOR. But there again, let us get back to what you said

a few moments ago. They have worked well.

Administrator BARRETO. Yes, they do, they work very well.

Senator PRYOR. So why change it?

Administrator BARRETO. Because the original purpose of the program was to be a 5-year grant. That is the original purpose of the

program. So what we want to do is help those Women’s Business

Centers be successful over that 5 years so they can become independent. The most successful ones are.

Please remember that the Women Business Centers do not receive all of their funding from the SBA. They leverage that. Our

most successful examples of technical assistant providers, the

SBDCs, the SCORE, the Women Business Centers, leverage those

investments. And that is how they become successful. That is what

we want Women’s Business Centers to do.

Senator PRYOR. Let me go back to another one of Senator

Snowe’s questions to you that you did not answer, and that is if

the programs are working so well why cut their funding?

With her you gave a lot of background and you end up losing everybody. Again, why are you cutting funding for programs that are

working so well?

Administrator BARRETO. What we are doing is we are investing

our resources in programs that are working well and that is shown

by the numbers. Numbers are a stubborn thing. We are training

more people than ever before. We are doing more loans to women.

We are doing more contracting. We have doubled the number of

loans that we have done over the last few years. We are reaching

every community in the United States.

That is the bottom line for a business, you look at those success

statistics. For us, we are doing more in every area. Again, what the

SBA does is we facilitate these programs and these opportunities.

We work with many other resource partners. We are not the only

ones that do these programs.

But what we do is very unique and not just anybody can do that.

That is why I think that we have been successful over the last couple of years.

27

Senator PRYOR. Answer her question and mine. Why are you cutting funding for programs that work?

Administrator BARRETO. Senator, with all due respect, you would

have to be specific as to which program you are referring to, and

then I would be able to answer that question.

Senator PRYOR. There is a long list of programs. Just pick one.

Administrator BARRETO. I will answer any question you would

like me to answer, Senator.

Senator PRYOR. Let us look at the Women’s Business Centers.

Why are you cutting funding for this program?

Administrator BARRETO. The original purpose of the program

was for it to be a 5-year program. We want those Women’s Business Centers to be successful and we want to create new Women’s

Business Centers in areas that are not served right now.

There are many, many women’s groups and women centers that

come to us all the time, saying we would like a Women Business

Center in our area. And oftentimes we have to say no, we cannot

fund a Women Business Center because we do not have the resources to do that.

These changes that we are making to Women’s Business Centers

will allow us to do that, to start identifying new opportunities and

make those Women Business Centers successful. We want to work

with them in the early years so that they do not get to year five

and then come back and say we are not going to make it without

your funding.

Again, remember, these are not our Women Business Centers.

These centers belong to those communities.

Senator PRYOR. I think we are plowing the same ground over and

over, and I guess I am not satisfied with your answer. But I have

been handed a long list of programs that have been zeroed out.

Just zeroed out. Not changed, but zeroed out.

Administrator BARRETO. Again, it would depend on what program you are referring to. One of the things that we did, and it

was referenced in the earlier testimony, is that we have asked for

resources, for example, in our Office of advocacy, in the Office of

the Ombudsman, in the 7(j) Technical Assistance program, in the

HUBZone programs, in the USEAC programs, in the Native American outreach.

But is not represented by a line item. In fact, we, as has been

customary over the years, spend much more on those programs

than is actually reflected in a specific line item.

Senator PRYOR. For example, the PRIME program. You have

taken that funding from $5 million to zero. Why are you doing

that? Has PRIME not worked well?

Administrator BARRETO. One of the things that has happened is

that——

Senator PRYOR. Has PRIME worked well?

Administrator BARRETO. The program is duplicative of what we

are doing, the technical assistance that we can provide to those

communities.

I have a chart here I would like to show you. One of the

strengths of the SBA is the fact that we have one of the widest networks of any agency or any Government department. This map

right here reflects all of the resource providers that we have in the

28

United States. They are in every State, in every major metropolitan area. We believe that we can continue doing the job with the

current network that we have.

So on programs that we feel are duplicative, yes, we are not

going to ask for funding and we are going to continue to fulfill that

mission inside of the network that we currently have. We spend

hundreds of millions of dollars on this network. We want to make

sure that it is being fully utilized.

The good news is that it is being fully utilized. Three years ago,

the SBA counseled and trained through all of its resource providers

about 1.5 million small businesses in the United States. Last year

we did 2.5 million, and it has been level funding in those programs.

In other words, those programs are more productive now than

ever before. And we believe they are going to continue being more

productive.

Senator PRYOR. Madame Chair, I think I am overstaying my welcome. Thank you so much.

Chair SNOWE. Thank you, Senator Pryor, I appreciate it.

Senator Coleman.

Senator COLEMAN. Thank you, Madame Chair, and thank you,

Administrator Barreto.

I presume we could get into debates about specific programs. But

I hope, and I am confident we have common vision in the fundamental importance of small business and growing it in this country. I have a much more optimistic view of the nature of the American economy than some of our colleagues. But we have seen a lot

of job growth in the last year, close to 3 million new jobs since

March of 2003. But is about small business.

A Republican Congress did not build the economy, and Alan

Greenspan did not build the economy, big Government did not

build the economy. It is American entrepreneurs. And so the things

that we can do to support their efforts are important.

As we have this discussion, I do hope and I want to put in the

record, that we do not forget that it is things like bonus depreciation and increased expensing and cutting regulation and a whole

range of other things that are shackles around small business. And

as we release those shackles, as we make capital more available,

it is a lot better than loan programs. The programs are important,

and I am going to talk about some. But I hope we do not forget

the fundamental importance of those kind of structural things, tax

rates, opportunities to reinvest capital, regulation, et cetera, that

have an impact on what we talk about.

I do share, and I have listened to your explanation about Microlending. I do not care what you call it, but I do think it is important, particularly the startup issue. I think it is actually a world

model. I have traveled around in Africa and they do Microlending

programs today. And so I just hope that we reflect upon the importance of this concept. What you have to deal with is the efficiencies

of the operation. You can do 10 times the number of loans in SBA

Express, but there is something very important about Microlending, very important about startups, the folks who cannot get it.

So we need to continue this conversation. I actually think it

sends the wrong signal, the wrong message when we talk about

29

getting rid of the Microlending program, even though you can come

back justify certain things with numbers.

But I think that message out there is also important and perception is important. And so I hope that we kind of keep that in mind.

Let me just turn to another issue. We have a lot of small businessmen and women who are in the National Guard and the Reserve. And they are increasingly being stressed today for longer periods of deployment. I just got back from Iraq a couple of weeks ago

and I talked to folks. How are you taking care of your family?

Are we doing anything within the SBA to deal with the changing

circumstances of so many American men and women who find

themselves through the Guard, through the Reserve on these extended periods of deployment?

Administrator BARRETO. Yes, sir, Senator and thank you very

much for that question.

We have done a lot over the last couple of years. One of the

things that we started a couple of years ago you might remember

is the Military Reservist Economic Injury Disaster Loan. It was so

long of a title that we shortened it to Mr. EIDL. That was easier

for us to remember.

These were low interest loans to folks that had been deployed

and owned a business. They could actually even go to individuals

who did not own the business, but maybe had a key employee in

that company deployed.

What we also have done is made sure that as all of the military

personnel are coming back, that they get a package of information

from the SBA on all of the different things that we can do. Not just

these Economic Injury Disaster Loans, but where Veteran Small

Business Development Centers are that we fund.

There are a number of different other programs of which they

can take advantage. Obviously, something very important happened last year, and that was the signing of legislation that created

a 3 percent Federal contracting goal for service-disabled veterans.

So we are going to work very hard to make sure that those folks

that have paid the highest price to this country also have assistance from the SBA at their time of need when they come back.

We are doing a number of different things from the procurement

side like business matchmaking to actually plug them into real opportunities. So this is a very important issue for us. I have a National Advisory Committee of Veterans that report to me on a regular basis. I meet with them. We work very closely with the Veterans Department also looking for opportunities to get the word out

there.

Veterans are no different than other small businesses. A lot of

times they do not know what they do not know and it is not their

fault. It is our responsibility to reach out to them and make sure

that we inform them, so they can take advantage of all the opportunities that we can bring to bear on their behalf.

Senator COLEMAN. I appreciate that because the world has

changed for certainly the Guard and Reserve folks in the last couple of years. So what we did 4 years ago is an entirely different

circumstance.

So I appreciate the focus and I would urge you to keep that attention and make sure that we are doing what needs be done for

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those folks who are putting themselves on the line and sacrificing

for us.

One last question. In one of the exchanges you talked about the

HUBZone program. Can you give me—that is an area of concern

for me, particularly effectiveness in rural areas. Can you help me

understand a little bit what changes you are making and how that

is going to make the program easier to use and effective, particularly in rural areas?

Administrator BARRETO. Sure. As you are probably aware, there

are some changes that are coming to fruition. We are going to be

able to allow more small businesses, especially in those rural areas

and Native American communities to apply for the HUBZone. We

are doing a mapping process right now to get that information out.

That should be done by the end of April.

But we are trying to make it easier for small business to participate in the HUBZone program, as well. We have seen a large

growth of HUBZone firms over the last couple of years, as more information goes out, as we continue to simplify the process of people

registering so that they do not have to submit a phone book of

forms to us, all of those things are helping.

We are going to be doing a lot of information sharing with communities. We work very closely with the HUBZone organization, for

example, and participate in their events. They participate in all of

our events. So we think that this is another tool that small businesses can use to access Federal procurement.

In fact, a lot of times we find that small businesses are participating in several different programs. They may be a small disadvantaged business, and 8(a) firm, a HUBZone firm, and participating in our procurement activities as well. That is really, we

think is a very good situation. It just gives them more bites at the

apple, if you will, and surrounds them with more tools.

Senator COLEMAN. I appreciate it.

A last comment then, just to reiterate what by colleague from

Missouri, Senator Talent, raised on the Participating Security Program. I hope that the Administration will work with the Committee and work with small business to see what we can do to find

a solution to help continue this program. I think it is important.

Thank you.

Thank you, Madame Chair.

Chair SNOWE. Thank you, Senator Coleman. Senator Coleman

makes an important point on Microloans because under USAID, we

provide, at least in 2002, $170 million for foreign microenterprises.

So it is true, it is a worldwide tool to develop small businesses in

underdeveloped countries.

So clearly, it is very difficult to send a message of somehow

eliminating this program for $15 million when we are doing it

worldwide in foreign countries at $170 million.

Senator Thune, welcome to the Committee. It is nice to have you

as a Member of the Committee.

STATEMENT OF HON. JOHN THUNE,

A UNITED STATES SENATOR FROM SOUTH DAKOTA

Senator THUNE. Thank you, Madame Chair and other Members

of the Small Business Committee. I want to take a moment and

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thank you for the opportunity to serve on this important committee.

Small businesses are the backbone of our economy in South Dakota, as well as the Nation. And whether it is a farming operation

in a small town like Oneida, South Dakota, or a machine shop in

Sioux Falls, small businesses do create the majority of jobs in my

home State of South Dakota.

In fact, 97 percent of employer firms in South Dakota are small

firms. South Dakota has also seen the number of women-owned

businesses grow at a rapid rate. Between 1997 and 2004 it is estimated the number of women-owned firms in South Dakota increased by 26 percent. Employment grew by 109 percent, and sales

increased by 211 percent.

So we have got a great story to tell there. And I think what is

important is that here in Washington we need to do those things

to ensure that these small businesses have an environment in

which they can thrive and prosper. I believe that includes reducing

the burden of taxation, regulation, litigation facing small businesses today. It is clear that these burdens raise the cost of doing

business substantially and, in turn, make it harder for small businesses to grow and create new jobs.

Serving on this Committee is a unique honor for me since I have

previously worked at the Small Business Administration during

the Reagan Administration. And so I look forward very much to

being involved with the issues that affect the Agency.

I would like to thank Administrator Barreto for his willingness

to come down here and to present the President’s budget proposal

today. The SBA is guaranteeing a record number of loans and helping more small businesses than ever. So I want to say thank you

and give credit where credit is due in that regard.

The President’s budget proposal is, as I like to say, the starting

point and not the ending point. And we are going to have a lot to

say before this process is concluded.

I am not going to get down into the weeds of the individual programs, but I look forward to working with you, Madame Chair, as

well as with our colleagues on the Committee and in the Senate,

to ensure that we have a budget that although will be tight and

tough, addresses the important priorities of small businesses

around this country and allows the Agency to continue to perform

its duties and its services at a high level.

Just by way of a question, if nothing else, I am curious to know

in your experience, Administrator Barreto, having been there for

some time now and obviously traveled the country and visited with

a lot of small businesses—I do that on a fairly regular basis in my

State as well, tour businesses, ask them what their issues are,

what things can we in Washington do either for you or what things

can we not do to you, I guess may be a better way to phrase it

sometimes with some of the small businesses.

But what do you see today as the biggest barrier to small businesses? What is it that you hear out there that, in terms of allowing these businesses to grow and create jobs and expand the economy in this country. What is that barrier?

And then perhaps maybe just to expand upon that a little bit

with respect to what the Agency is doing and realizing that you are

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somewhat limited in the tools that you have at your disposal to address those barriers.

Administrator BARRETO. Thank you, Senator.

There are a number of different issues. I have spent a lot of time

as SBA Administrator working with small businesses directly. I

learned a long time ago that you learn a lot more when you listen

to your customers than when you talk at them. They will tell you

everything that they need to be successful. So we have done a lot

of that. I have traveled every part of this country, met with countless small business groups.

You have hit a couple of areas that are critically important.

Small businesses will say to us a lot of times look, the programs

are great, we like the programs, they are great. But if I am not in

business it does not matter.

So the things that this Committee has worked on in the past

with us I think have been very, very instrumental. Sometimes I do

not think that we give enough credit to what this Committee and

the Administration working together have already accomplished.

The tax relief policy was huge. A lot of people did not understand

that 80 percent of the benefit of the tax package went to small

businesses. It saved them $75 billion. A lot of small businesses told

us they could tell exactly when their business turned around. It

was exactly when that tax package went into effect.

Now what they are asking us to do is make it permanent. They

are saying that now that business is starting to turn around,

please do not make these things go away. Do not take away our

deductibility, that $100,000 that afforded them the opportunity to

buy equipment and inventory and technology that they were not

buying before. So tax relief is hugely important.

We referenced regulatory relief. Since this Administration has

been in place we have saved small business something on the order

of $80 billion simply by allowing them to comply with Federal regulation in a more streamlined manner or eliminating redundancies.

Those are huge, especially for a small business.

Senator Kerry mentioned earlier the importance of health care.

And we totally agree. That is their No. 1 problem, their No. 1 criticism, because they get double-digit increases every year. They cannot pass those costs onto their customers. They are the only group,

and they know it, that does not have access to health care. If you

work for a corporation, if you are a member of your union, if you

are a Government employee like me, you have got health care. If

you are a small business, good luck. Most Americans that do not

have health insurance either work for a small business or have a

spouse that works for a small business.

We started dealing with this last year with health savings accounts. That is a tool that they can use to lower their health insurance premiums. It does not solve the health insurance crisis in

America. We need to expand health savings accounts, provide more

incentives, more tax credits.

We are very hopeful, and I know that we have all spoken about

this many times, that we can deal with association health plans for

the first time. It has not been dealt with in the Senate, and many

of you know—and you dealt with this Senator Thune when you

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were a Congressman. The House has voted on association health

plans twice, but the Senate has not taken it up yet.

Small businesses are desperate for any kind of relief that they

can get in this area. Their attitude is let us try this. If it does not

work, we can always go back to what we had before, which was

nothing. We believe that could lower their health insurance premiums 25 percent. 25 percent to their bottom line. It is like giving

a small business a 25 percent raise just by helping them deal with

health care. So that is a critical issue.

We need to do something about tort reform, eliminate frivolous

lawsuits. A lot of small businesses are put out of business because

they are having to fight lawsuits that should not been brought in

the first place. It is not saying eliminate all lawsuits, but those

that are frivolous, those that get shopped around and really affect

small businesses.

We need to open up new markets for small businesses. That is

why the things that we are doing with regards to international

trade are so important. We talk a lot about 97 percent or 98 percent of all businesses in the United States are small businesses.

Well, 98 percent of all exporters are small businesses, too, but they

only represent 30 percent of all the trade that is going on.

All of those issues we have worked very closely with this Committee and SBA has taken a leadership position on this, too, advocating these issues on behalf of small businesses.

Small businesses said to us in the beginning look, we appreciate

everything that you do for us, but we need a voice at the table. We

do not feel like sometimes folks in Washington understand what we

are dealing with here. And now, working with the Senate and the

work that we have been able to accomplish in the Administration,

I think that they are starting to understand that they do have a

voice at this table. This is a very important voice and we are going

to continue listening to it and doing something about these issues

that critically impact small businesses everywhere in the United

States.

Senator THUNE. Thank you. Madame Chair, I am sure my time

has expired. Thank you.

Chair SNOWE. Thank you, Senator Thune. I appreciate your comments and your presence here on the Committee.

Speaking of the health care issue, that will be the next hearing

and focus of this Committee. In fact, I introduced association

health plans yesterday with nine other cosponsors. It is a bipartisan bill. And hopefully we can pave the way for enactment of this

legislation this year.

You are right, the House has passed it on two or three occasions

previously, but we have been unable to do so in the Senate. So I

think we really have to take away a lot of the myths about that

legislation and what it actually does and deal with the facts. Hopefully, we can encompass that in the final analysis.

I will release you very shortly here. I just want to make a couple

of points on some of these issues.

Let me just say I hope that we are able to have a conversation

and discussion on some of these issues that I know have been proposed in the budget, but obviously are concerns to Members of this

Committee. I know the Microloan program has worked very well

34

throughout this country. I really do think it needs to be preserved

as an independent entity within the Small Business Administration

budget.

I am just concerned that they will not be served by the 7(a) Community Express program. In fact, I do not know if you happened

to see a Wall Street Journal article that appeared last week about

a man who used unusual collateral for the program, which was his

prosthetic leg, which was an amazing story. Under the Microloan

program you can end up using unusual collateral. Fortunately, they

did not take it and they just obviously issued him the loan.

But the point is here it is for those who are not able to qualify

for traditional lending programs because of their history or whatever the case is, but certainly have something to offer in the small

business arena. So I hope that we can work through that.

Also, under the 7(a) lending program, you have to have a prior

history of about one to 3 years. That is another part of the problem,

as well, in merging those programs. Hopefully these other programs would take care of it. I really would like to preserve it at

least for the 2,400 who have applied for the program.

Finally, on the SBICs, we can discuss this whole issue. I will

hear from the subsequent panel regarding the Participating Securities. There is no leverage budget projections in the 2006 budget.

Again, last year the Administration requested $4 billion for this

program. This year it is zero. There is a big disparity between $4

billion and zero. What would account for that change?

Administrator BARRETO. $2.7 billion in estimated losses.

Chair SNOWE. I know, but I do believe there is a way of working

through some of those issues because as Senator Talent was indicating, it is one of the very few venture capital—it is the only one

for small business in the final analysis. I understand your concerns. We do not want it to be a money loser.

Administrator BARRETO. Senator, I want to assure you we made $4 billion in commitments last year. We still have an existing SBIC

program. There are 400 firms that currently participate in that

program. We have asked for money for the debenture side of it, so

we believe that we are going to be able to continue putting venture

capital through that side of the program. And obviously we will

continue working closely with this Committee and the industry to

find any solutions that may be out there for us on this program.

Chair SNOWE. Also, what Senator Coleman referred to in the veterans business programs, as well. 37 percent of the Guard is now

either employed or are small business owners who are participating, who have been activated. This is the largest activation

since World War II. I think we have to move in the direction of

helping them.

This program has been level-funded for 4 years now at $750,000.

I think we need to work on that, as well.

And Senator Bond would not be happy if I did not raise

HUBZones. So again, is there not a way of accomplishing the statutory goal? We have done that for the 8(a) program and you have

spent three times as much on the 8(a) program and met and exceeded those expectations.

Administrator BARRETO. We are working very hard on it. Obviously, the percentage of procurement in the HUBZone program has

35

gone up. We are dedicating a significant amount of resources to the

HUBZone program this year, through our GCBD budget that will

be part of the salaries and expense budget. And will continue exploring every way that we can grow that program. It is an important program. We are committed to it. As I said before, it is another tool in the tool chest for small businesses to access Federal

procurement.

Chair SNOWE. It certainly is. In fact, in the moratorium and redesignations again, I know for Worcester County in Northern

Maine, which has been hard hit with base closings and so on and

is still recovering, it is so important because some of those business

entering that program have yet to utilize the benefits of that program. So I do think that that moratorium is essential as well.

In any event there are a number of issues that it is clear we have

to work through. Senate Thune said it well, this is the beginning

of the process, and not the end. So I appreciate it and I appreciate

your willingness to be here today and for your cooperation. We will

be discussing health care, without question, indisputably. We need

to get that done for the small business community.

Administrator BARRETO. Thank you very much.

Chair SNOWE. Thank you, Administrator Barreto.

Administrator BARRETO. Chair Snowe, Senator Coleman, Senator

Thune, and all Members of the Committee, I appreciate the opportunity be here and I look forward to working closely with you this

year.

Chair SNOWE. Absolutely. Thank you.

Let us proceed with the second panel.

Our second panel this morning represents the small business

community on several key issues that are reflected in the SBA’s

2006 budget and legislative proposals.

First, we will hear from David Coit, former Chairman of the National Association of Small Business Investment Companies, and

Managing Director of a highly successful SBIC firm North Atlantic

Capital, who happens to be based in Portland, Maine.

Also testifying is Daniel Betancourt, who is representing the Association for Enterprise Opportunities. He is a member of the

Board of Directors and is also President and CEO of the Community First Fund of Lancaster, Pennsylvania.

Next on the panel is John Massaua, who will testify in his capacity as member of the Board of Directors, the Association of Small

Business Development Centers. John is also a State Director of

Maine’s Small Business Development Centers. It is great to have

you all here.

Patricia Sands is here representing the Association for Women’s

Business Center. Patricia is the owner of Spill-Guard, LLC and has

participated in the SBA’s Women’s Business Center program.

Finally, testifying on the SBA 7(a) Guaranteed Lending program

is Edward Tuvin, who is First Vice President of the Community

South Bank based in Tennessee.

I thank all of you for being here today, for traveling great distances from North and South. We are delighted to have your input.

And now that you have heard from the Administrator, you might

want to respond to some of those issues that will help to be clarifying or otherwise. But I do appreciate it.

36

If each of you would summarize your testimony within 5 minutes

and then we can have questions and answers.

Mr. Coit, thank you for being here.

STATEMENT OF DAVID COIT, MANAGING DIRECTOR OF

NORTH ATLANTIC CAPITAL ON BEHALF OF THE NATIONAL

ASSOCIATION OF SMALL BUSINESS INVESTMENT

COMPANIES

Mr. COIT. Thank you, Madame Chair and Committee Members.

I am here representing the National Association of Small Business Investment Companies. I am the immediate past Chair of

NASBIC. I am still on the Executive Committee. As you know, Senator, I spent a lot of time here in Washington last year working

on the Participating Securities program.

My other job, as you said, is running North Atlantic Capital Corporation. It is in Portland, Maine. We invest $2 million to $5 million. We are a Participating Securities SBIC. We invest in companies from Maine to Virginia to Western New York State, and very

much feel that we do serve an underserved sector of the venture

capital industry. We serve underserved geographic markets that

you noted like in Maine, Western Massachusetts, Western New

York State. We invest in manufacturing companies, which is the

sector that is often not invested in or actively invested in by the

broader venture capital community. We invest in amounts which

are typically well below the average of the National industry.

One of the points I want to make and leave you with today is

that the SBIC industry, particularly the Participating Securities industry which is at risk, is filling a need that is not otherwise met

by the broader industry. We know the program has some problems

and we worked very hard last year to try to solve some of those

problems. I think if we continue the effort this year, we might be

able to have some success.

We were actually pleased to see that the Administration supported the SBIC Debenture Program, at the $3 billion level. As Administrator Barreto said, that program has been around for a long

time and is quite successful and has been successful over the years.

I think it is important to note, though, that in its 46-year history

that program itself has had problems so the fact that the Participating Securities program may be having some issues today does

not mean it is time to scrap it. The debenture program, which I

think everybody recognizes is extremely successful, has gone

through its own bumps in the road and corrective measures have

been taken. Today it is an extremely successful program. So we

were very pleased to see that the Administration continued to support that program.

We were equally unhappy and concerned that there was no support for the Participating Securities program going forward. This

program does represent half of the investing that is done by the

SBIC industry. It was designed specifically to address the equity

gap that exists. I do take very strong exception to Administrator

Barreto characterizing the Debenture Program as filling that need.

In fact, the Participating Securities Program was created 10 years

ago because the Debenture Program specifically did not meet the

37

equity needs of small business. It is designed to support subordinated loans for mature companies which have positive cash-flow.

So I want to be on the record that the debenture program does

not meet the needs that we are talking about and it is something

that we all need to work on.

Senator Snowe, you have visited a couple of our companies, even

in your home town, Diamond Phoenix Corporation and Elmet Corporation. I do not really have time today to go into the long and

wonderful stories of these two companies.

But just as an overview, these were two companies that North

Atlantic invested in—actually, in the case of Elmet, four SBICs invested in it—which probably would not exist today in Lewiston,

Maine, which had a great history back in the days of shoemaking

and textiles and is still suffering to some degree to come into the

modern economy. Here are two manufacturing companies which

have transformed themselves with SBIC funding from old world

economies to now addressing some very current world marketplaces. Both of them are growing and very successful. So they are

two very strong examples. We are on record at SBA, the histories

of those companies are on the SBA Website. It is very good examples of underserved markets both geographically and in terms of

size and in terms of industry. They have been supported by the

Participating Securities Program.

Finally, I would be remiss in saying that having spent so much

time here last year I was not very disappointed in the process. I

think the industry worked well with your staff and the staff of the

House Committee on Small Business. We crafted legislation that

we thought made great sense. We worked with the private sector,

both people who invest SBIC money and people who invest in

SBICs. And I think we came up with a very elegant solution last

year. Unfortunately, it did not pass the Credit Reform Act standards. The problem that the CRA issue was brought forth to us by

OMB very late in the process.

I hope this year that with the help of your staff and the industry

we can get the Administration engaged in a more active dialog so

that we do not waste a lot of time because your staff spent a lot

of great time. Unfortunately last year was wasted, but hopefully we

can complete the job this year.

Thank you. I look forward to your questions.

[The prepared statement of Mr. Coit follows:]

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Chair SNOWE. Thank you, very much.

Mr. Betancourt.

STATEMENT OF DANIEL BETANCOURT, MEMBER OF THE

BOARD OF DIRECTORS FOR THE ASSOCIATION FOR

ENTERPRISE OPPORTUNITY AND PRESIDENT AND CEO OF

THE COMMUNITY FIRST FUND

Mr. BETANCOURT. Thank you, Senator Snowe.

Thank you for the opportunity to speak about the 2006 budget.

I am Dan Betancourt, as you mentioned, and I work for Community First Fund and we are a microlender. We cover a 10-county

area in Central Pennsylvania. We also have a Women’s Business

Center.

I also am a member of AEO, the Association for Enterprise Opportunity, and we have over 500 microenterprise organizations

across the U.S., so I am wearing that hat today.

Obviously, we are not in agreement with the cuts in the Microlending program, the TA program, and the PRIME program.

I think that the Administrator, when he talked about the Community Express and other programs that were to reach the markets that we are talking about, obviously I strongly disagree with

that and I am going to talk about that.

Just briefly, the areas of credit, the geography that that program

covers, the market that it serves, the lack of startups, and those

areas I am going to talk about briefly here.

In terms of the individuals that are not served, the private sector, the banks that is, the 7(a), and the Community Express are

really unable to reach the borrowers that we talk about or that we

try to reach. Specifically, 40 percent of the microlending loans, as

you mentioned, come from rural areas; less than 6 percent are

being serviced by the Community Express. These are facts.

In terms of the geography, the top Community Express lenders

represent 72 percent of all Community Express loans. That it is obviously not reaching a lot of the areas of the country.

Senator, in your State alone, zero loans were done for Community Express in the last 5 years and about 260 Microloans were

done in your State in the last 5 years, just for the record.

Chair SNOWE. Do you have those figures Nationally? Those are

interesting figures to have state-by-state because that is very important.

Mr. BETANCOURT. About 21,000 loans were done, but we know

that many of those loans, Community Express, were done on the

East Coast and West Coast. There are a lot of areas of the country

that are just not covered because the majority of those Community

Express loans were done by 72 percent—72 percent of the Community Express loans were done by just a few lenders. That is a fact.

Credit is another issue that the Microloan program really does

a nice job at. Many of our clients have credit scores of less than

550. You will not even get a mortgage, in many cases, a conventional mortgage, if you have less than 600. So I think the Community Express Program states itself, in its literature, if you have bad

credit you do not qualify for the loan. It is just very difficult.

And the reason for that, and I think if you look at the Microloan

program, is the technical assistance portion. We spend a lot of

49

time, a lot of hands-on. We do have some folks that have bankruptcy and some difficulty, but we help them get back on track.

The other thing is the default rate is less than 1 percent. How

does that work? It is all the time that we spend with them.

As already mentioned, our startups in terms of Microloans, over

40 percent of our clients are startups whereas less than 25 percent

from the Community Express are startups. In fact, it is commonly

known that you need at least 1 year in terms of Community Express. At least about 40 percent of our borrowers do not even have

a year. Again, helping them with their business plan and doing all

those extra things to get on track.

Demographically, 50 percent of our clients are people of color, 60

percent are women. In urban areas, over 90 percent, at least in

Community First Fund’s case, are people of color.

I do want to introduce two entrepreneurs here today. The first

one is Terry Wade. Terry runs a personal care business. Very briefly about Terry, she actually did apply for Community Express recently after receiving at least one Microloan and was turned down.

I do have a letter indicating that; and this is not uncommon. We

have many micro borrowers coming back. We are the minor

leagues. We are preparing these borrowers. Eventually we think

they will get there, but they are just not there yet. Terry is doing

a nice job in her business. Thank you, Terry.

Also, I do want to introduce Kekelwa Dall. She runs a health

care business and is also a Microloan borrower. Thank you,

Kekelwa.

These are just two examples of the many, many, many borrowers.

Chair SNOWE. I noticed they are women-owned, too.

Mr. BETANCOURT. I just want to say finally, that we hope that

you will help us preserve the Microloan program, the $20 million,

the $17 million for the TA—which is very important—and the $5

million for PRIME. I just want to note that the PRIME, we are

only able to use that program in 16 States. It was eliminated in

many of the States, just so you know.

Thank you.

[The prepared statement of Mr. Betancourt follows:]

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Chair SNOWE. Thank you.

John Massaua, welcome.

STATEMENT OF JOHN R. MASSAUA, STATE DIRECTOR OF THE

MAINE SMALL BUSINESS DEVELOPMENT CENTER AND A

MEMBER OF THE BOARD OF DIRECTORS FOR THE

ASSOCIATION OF SMALL BUSINESS DEVELOPMENT

CENTERS

Mr. MASSAUA. Thank you.

I speak today on behalf of not only the Maine Small Business Development Centers, but also the 63 State, regional and territorial

SBDCs.

With me here today is Don Wilson, President of the ASBDC and

Jody Keenan, the State Director for the Virginia SBDC.

Madame Chair, I provided to the Committee 22 pages of written

testimony, but frankly it boils down to this. Let me get right to the

point. The SBDC program is in severe financial stress, especially

in the big flat States like Maine. Unless an appropriation of $109

million can be achieved, which essentially brings the program to

1998 level dollars, more downsizing will take place and SBDCs capacity will continue to diminish.

For example, in Maine, we will need to lay off two counselors, 18

percent of our capacity. And in Massachusetts, three counselors

will be laid off and a center director’s position, currently open, will

remain vacant.

For the first time last fiscal year, SBDC counseling hours Nationally declined by some 94,000 hours or 6 percent. This is a trend

that is beginning to show within reasonable expectancy that the

SBA goal has for us is impossible to meet.

We must act upon this if we are to continue helping small busi- nesses in Maine and across the country. $109 million lets us get

even with 1998 in Maine. It will increase our funding only by

$100,000, not even enough to maintain the two counselors. We will

probably lose one even if we do get the $109 million unless we are

able to find some other sources.

In the States that lost a percentage of population because of the

census, they will get back only to 2001 dollars with a $109-million

appropriation.

Demand for SBDC services continue to rise. The SBDCs, despite

reduced capacity, serviced 6 percent more clients in 2004 than in

2003, but with less hours per client, which if you ask any counselor

in Maine suggest less of a chance for the client to succeed. It takes

seven to 15 hours to service a client to have a chance for success.

And if it is a tech-based company, it takes 30 to 50 hours to service

that client.

We cannot be the revolving door for the SBA. We need to be able

to serve all of our clients properly, like the 40 percent who are

women-owned nationally—47 percent in Maine—the 31 percent

who are African-American, Hispanic and Asian-American and the

over 9 percent who are veterans nationally—12 percent in Maine.

The principles of reasonable expectancy dictate the law of diminishing returns. We are at the fulcrum point. We cannot get blood

from a stone. If we are to succeed we must add more funds into

the SBDC program.

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Madame Chair, this SBA budget is essentially abandoning rural

America. And for that matter, the inner cities of America. The

budget proposed and many of the programs it seeks to eliminate

are going to cause that. As Mark Lapping from USM’s Muskie

Schools would put it, they—the Government—are making rural

and inner city America peripheral to the mainstream.

In Maine we have the fastest growing rate of poverty, along with

Arkansas and Mississippi. Our per capita income is 9 percent

below that of the United States and 25 percent below New England

as a region. We are faced with the prospects of two base closings

and the potential downsizing of Bath Ironworks. Who is going to

help these folks if that happens? Who will provide the leadership,

the advocacy and the service to Maine to build entrepreneurship’s

business that enabled five out of 100 to be significant in size to replace the job loss that continues in Maine and across America, especially manufacturing?

The fact is that despite the supposedly positive economic numbers, we still are short 700,000 jobs in the private sector.

Madame Chair, there is so much I want to say, but I am constrained by the time. We need the Microloan program to help those

who find access to capital the most difficult. Do not be fooled by

SBA’s characterization that it can be replaced by Community Express. Community Express is merely a credit card program and we

know how bad credit cards are for small businesses, as counselors.

We need to fund the FAST program again so we can engage

small business in the future with meaningful tech commercialization. We need to put a stop to the SBA’s attempts to break a program that is not broke by their desire to recompete SBDCs and

take them away from university-based programming.

We need to work on creative ways to help the Women’s Business

Center program in order to be able to assist them in growing that

program, not downsize it in the method that they want to do it. And we need the $109 million, and I know it is a tough budget

year and tough decisions have to be faced. But I suggest the first

place to look is to get part of the $109 million out of the SBA’s

budget because they use almost $16 million to manage the current

$88 million program. As a professional manager, if I had to use 18

percent to manage my program, I would probably get my head cut

off.

Finally, I would like to remind Madame Chair that an independent study has verified for the last studied year, 2002, SBDC

returned to the Federal Treasury $211 million for the investment

Congress made in the SBDC program. That is about 2.5 times return on investment, a number Bill Gates or Warren Buffet, or even

the Office of Management and Budget, could only wish for in their

dreams.

Thank you, Madame Chair.

[The prepared statement of Mr. Massaua follows:]

STATEMENT OF JOHN R. MASSAUA, STATE DIRECTOR, MAINE SMALL BUSINESS

DEVELOPMENT CENTERS AND BOARD MEMBER, ASSOCIATION OF SMALL BUSINESS

DEVELOPMENT CENTERS

Chairperson Snowe, Ranking Member Kerry, and Members of the Senate Committee on Small Business and Entrepreneurship; I am John Massaua, State Director

for the Maine Small Business Development Centers, an SBA partnership program

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with the State of Maine and other stakeholders, contractors and allies, administered

by and at the—University of Southern Maine. I also serve on the Board of Directors

of the Association of Small Business Development Centers (ASBDC). The Maine

SBDC has 11 Service Centers and 25 Outreach Offices throughout the State of

Maine. ASBDC’s members are the sixty-three State, Regional and Territorial Small

Business Development Center programs comprising America’s Small Business Development Center Network. SBDC programs are located in all fifty-states, the District of Columbia, Puerto Rico, the Virgin Islands, Guam and American Samoa. The

SBDC network is the Federal Government’s largest small business management and

technical-assistance program with over 1,000 service centers nationwide serving

more clients than all other Federal management and technical assistance programs

combined.

Madame Chair, I would like to thank you and the Senate Small Business Committee on behalf of ASBDC, and the nearly 6,000 dedicated men and women who

are a part of America’s Small Business Development Center Network, for inviting

me to testify at this important hearing on the Administration’s fiscal year 2006

budget for the U.S. Small Business Administration. With me today is Donald Wilson, President of the Association of Small Business Development Centers. We commend the committee, Madame Chair, for holding a formal public hearing on the Administrations budget request for the SBA for fiscal year 2006. It is important to look

at the Administrations budget figures for the SBA in light of the current economy

and the needs of the small business sector. We should also look at those numbers

in light of historical trends in budget support for the small business sector of the

nations economy.

I would also like to take a moment Madame Chair to thank you, Ranking Member

Kerry and the members of this committee for all of your efforts on behalf of small

business throughout the 108th Congress. In particular Madame Chair, we would

like to thank you and Ranking Member Kerry for your efforts along with your counterparts in the House for the role you all played in securing passage of the SBA

reauthorization bill in the last days of the 108th Congress. We are deeply grateful

for including in that important legislation the long needed confidentiality protections for SBDC clients nationwide.

We would also like to thank you Madame Chair for your and Senator Kerry’s efforts to try and stabilize the SBA’s 7(a) loan program. The agreement worked out

will apparently avoid a repeat of the catastrophe that occurred in December 2003

when SBA effectively shut down the 7(a) program.

On a personal note, I want to thank you Madame Chair for your participation at

home, in Maine, in understanding and advocating for small business, especially at

the recent opening pf the joint Eastern Maine Community College—Maine SBDC

Business Resource Center in Bangor. We were particularly delighted with your public comments about the importance and impact of the Maine SBDC in the context

of the same for the entire national network. Thank you.

I would like at this time to direct the Committee’s attention to the state of the

nations and in particular Maine’s economy, the Administrations proposed SBA

budget for fiscal year 2006, and the contribution of the nations small business sector

to our overall economy. I will then focus my remaining remarks on the Administrations proposed funding for the SBDC national program and proposed 2005 legislation by the SBA.

The Bureau of Economic Analysis at the Department of Commerce reported late

last month that the nations Real Gross Domestic Product increased by 4.4 percent

in 2004. This compared to a 3 percent increase in 2003. It was also the best increase

since 1999. However, the fourth quarter increase was at an annualized rate of 3.1

percent. This was the smallest quarterly increase all year and the lowest since the

first quarter of 2003. We are grateful that the economy has continued to expand for

the third year in a row. Congress needs to allocate Federal resources in such a way

as to maximize the chances of keeping the current expansion going.

The Federal Government must allocate resources in a way that will help insure

that we increase the number of job opportunities for those being laid off as many

large corporations continue to downsize and as corporate mergers increase. December 2004 was the busiest December in history for mergers and acquisitions, according to Thomson Financial. We need look no further than the merger of SBC and

AT&T or Gillette and Procter and Gamble to see the impact that corporate mergers

have on jobs as already evidenced in Maine by the creation through merger of

Unum/Provident. The P & G/Gillette merger is expected to result in a loss of 6,000

jobs. The merger of SBC and AT&T is expected to result in the loss of 13,000 jobs.

And we are not expected to know for a while what the job losses will be from the

merger of Sears and Kmart or Citicorp and J. P. Morgan. We can be relatively confident that the layoffs will be substantial. And it is not just mergers that are resultVerDate 03-FEB-2003 09:59 Jul 05, 2005 Jkt 021350 PO 00000 Frm 00058 Fmt 6633 Sfmt 6621 D:\DOCS\21350.TXT SSC1 PsN: SSC1
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ing in substantial job loss. In mid-December, Delphi, the nations largest auto parts

maker announced it was cutting 3,000 U.S. jobs. Who will create the new jobs to

compensate for the job losses I have just described? We will look to small businesses

for new job creation just as we have for the last decade or more. The question is,

will there be enough new small businesses being formed and existing small businesses expanding to generate the nearly 160,000 new jobs we need every month

simply to provide jobs for new workers seeking to enter the workforce? That will

depend in part on whether the government modifies the discouraging and counterproductive downward trend in the real level of resources as well as the downward

trend in the percentage of Federal resources allocated to assist small businesses.

Correspondingly in Maine, economic conditions continue to be stressed as the legacy pulp and paper, timber, textile and shoe industries continue to decline rapidly.

The threat of downsizing of Bath Iron Works and the possible closure of navy bases

in Brunswick and Portsmouth loom large for the future of Maine’s economy. 4.7 percent of Maine’s workforce remains unemployed, a seasonally adjusted near constant

statistic for all of calendar 2004. This relatively flat employment level overall masks

a well-known trend that over the past 4 years, Maine has lost over 17,000 manufacturing jobs. In two of our State’s poorest counties, Piscataquis and Washington, employment declined by 1 percent, scary when one considers their 2004 average unemployment rates equaled 6.5 percent and 8.6 percent, respectively. Additionally,

Maine’s Per Capita Income varies widely from approximately $24,000 in Piscataquis

County to approximately $35,000 in Cumberland County, well below regional levels

by 25 percent and 8 to 9 percent below the U.S. across all states.

Notwithstanding a relatively flat unemployment rate, Maine is an impoverished

state, no stranger to poverty, especially in sparsely populated counties. For generations, families have survived by working the land, fishing and lobstering, and laboring in factories and mills. According to the Portland Press Herald, steady job losses,

persistent population drops and factory closings have made it tougher for families

in many Maine towns to survive. Maine leads the country with the fastest growing

poverty rate, tied with Arkansas and Mississippi; poverty-related enrollment in

Medicaid rose from 24,100 to 48,400 from 1997 to 2002, with the biggest jump from

2000 to 2001, when enrollment doubled, according to the Kaiser Family Foundation;

Federal dollars for rural rental assistance have declined as need rises: in 1993,

Maine received $22.7 million and in 2002, $17.9 million. Federal dollars for rural

home construction fell during the same time period, as did Federal spending on Section 8 vouchers, another source for rental assistance, and many of the state’s Section 8 housing vouchers—a primary source of rental assistance for poor people—

were frozen for most of 2003, because of overwhelming demand, according to housing officials; the Maine State Housing Authority turned away hundreds of families

needing help to pay rent; communities in sparsely populated counties are as well

struggling to keep their professionals, dentists, and doctors: for example, 4,000 people remain on a waiting list at Penobscot Community Health Center to see a dentist. Since 1993, credit outstanding as a percent of disposable income has risen

sharply from 15 percent to well over 21 percent. Not surprisingly, bankruptcy filings

have also surged. Growth in installment credit has outpaced income growth in 8 of

10 years. And in addition to bankruptcy filings, another indicator of the number of

people in Maine who are living on the edge is the number of people on food stamps;

this figure has been growing since 2000 and is now near 1993’s (last recession) peak.

The need for Maine to look to a vision of small business and entrepreneurship

has never been greater. As well for our nation, the troubles in Maine—rising poverty and persistent job loss—mirror a national trend spreading across the Great

Plains, Appalachia, Wyoming and other states with sprawling tracts of undeveloped

land far from metropolitan areas. ‘‘It’s important to understand what Maine is witnessing, clearly other places are experiencing,’’ according to Mark Lapping, a professor of planning and community development at our University of Southern

Maine’s Muskie School of Public Service. Maine, along with other rural states, suffers from neglect. ‘‘The economy and much of society has made rural America peripheral to the mainstream,’’ Lapping asserts. ‘‘Government and the business world

are increasingly discounting families and businesses’’ in rural areas, ‘‘considering

them not necessary.’’

However, notwithstanding Lapping’s observation, increasingly small business and

entrepreneurship are being seen as solutions to Maine and others’ economic difficulties. There is growing understanding that economic development strategies founded

primarily on business recruitment are not in rural America’s best interests and that

there needs to be a greater emphasis on homegrown development, according to a

2004 jointly published report from the W. K. Kellogg Foundation and the Corporation for Enterprise Development. The report points out that many observers see entrepreneurship as being a critical, if not major piece of rural economic development

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and that there is a compelling argument that creating an entrepreneurial climate

where all kinds -of entrepreneurs can succeed, lays the groundwork for the five out

of 100 small businesses that evolve into the fast-growing drivers of the national

economy. The report goes on to say that entrepreneur-focused: systems thinking is

required to align the plethora of training, technical assistance, and financing programs to meet the variety of needs of entrepreneurs and their different levels of

education, skills, and maturity. Thinking, as Madame Chair and the Committee

knows, that has been led by America’s Small Business Development Center Network

for the past twenty-five years.

It seems it’s just not rural entrepreneurship that is important, fostering the creation of entry-level businesses . . . is crucial to the revitalization of poor, urban

neighborhoods, according to a study issued by the Center for Urban Entrepreneurship (CUE) at the Pioneer Institute for Public Policy Research. The Institute points

out that businesses started by inner-city residents tend to have a more lasting commitment to their communities. Moreover, as these businesses grow, they are more

likely to hire local residents and spur further local business development. CUE asserts business ownership can also be a path to wealth creation for low-income individuals and their families; it can enable residents of distressed urban areas to share

in the benefits of revitalization, rather than become victims of gentrification: Who

will help these rural and inner-city businesses grow but for a proven network of

technical assistance service providers, America’s Small Business Development Center Network, given the proper resources?

Now, taking a serious look at the nations overall jobs picture, 2004 was the first

year since 1999 that saw job growth in every single month, and it was also the first

year since 2000 that the jobless rate declined. The nations unemployment rate in

January of 2004 was 5.6 percent. The jobless rate last month fell to 5.2 percent. On

the surface, that would be very encouraging news. However, it would appear that

the decline in the unemployment rate was primarily due to a fall in the Labor Force

Participation Rate (LFPR) from 66.0 percent to 65.8 percent. This represents the

lowest Labor Force Participation Rate since May 1988. The LFPR is currently 1.5

percentage points below its most recent peak of 67.3 percent achieved in April 2000.

In other words, the unemployment rate declined last month because hundreds of

thousands of Americans, gave up looking for work in January. Specifically, unemployment fell because the labor force fell by 224,000, while employment grew by

only 85,000.

The number of jobs created since the last recession ended in November 2001 has

been the lowest of any economic recovery in the United States since World War II.

The total number of jobs in the economy last month was only 62,000 more than existed in March of 2001. Currently private sector employment remains approximately

700,000 jobs below what it was in March 2001. Government entities may be creating

new jobs but the private sector is not. Private sector employment in January was

0.6 percent below what it was 46 months ago. This is a particularly disturbing statistic. Overall, we have fewer people employed today than the President’s Council

of Economic Advisors predicted in January of 2002 that the Nation would have in

January of 2003.

Clearly, this has been an unusual recovery. Virtually every prediction in recent

years relating to job growth has been missed. When the President’s tax package was

approved, the Council of Economic Advisors (CEA) projected 5.5 million new jobs

would be created from July 2003 through the end of 2004. As of December 31 of

2004, it became apparent that those projections would fall short by nearly 3 million

jobs. Fortunately, 2.2 million jobs were added during this past year, thereby bringing the year-end employment levels to 132.3 million employed.

In January, manufacturing employment, (which we know is of particular concern

to you Madame Chair in your capacity as Co-Chair of the Senate Manufacturing

Taskforce) declined by 25,000 jobs. That is the fifth consecutive monthly decline in

factory jobs. From March 1 through August of 2004 the economy created 85,000 new

manufacturing, jobs. From September 1,2004 to February 1, 2005 the manufacturing sector has lost 61,000 jobs.

This loss of manufacturing jobs is taking its toll on the Maine’s economy. Like

the U.S., Global markets have battered Maine, but even more so. By the early

1990’s, Maine’s decline in manufacturing employment started accelerating. While

the U.S. has lost 25–30 percent of its manufacturing jobs from peak to trough,

Maine has lost closer to 50 percent. This is of particular concern because it hits

Maine’s rural areas the hardest as these rural places have the highest concentration

and dependence on industrial jobs. York and Sagadahoc are also vulnerable, particularly with the BRAC process restarting. As Maine loses manufacturing jobs, they

are being replaced by lower paying jobs with fewer benefits. The percent of jobs in

57

Maine that pay a livable wage has been stuck at approximately 66 percent for 8

years; far below Maine’s desired benchmark of 85 percent.

The national economic data which we have seen coming from the Department of

Commerce and the Department of Labor continue to give mixed signals about the

future of the economy, as well those from the Maine State Planning Office. We are

relatively confident that the overall economy will continue to expand throughout fiscal year 2005 but at a slower pace than in fiscal year 2004. The real economic issue

that faces us all is job creation. Can this economy produce the number of jobs necessary to provide older Americans caught by downsizing and young Americans graduating from high school and college with the employment opportunities they must

have to provide for themselves and their families? Can we create enough jobs to ensure that consumer spending will continue to drive economic growth? What will be

the impact of higher interest rates on housing starts, consumer spending and in

turn job creation?

The robust growth of 2004 is not likely to be repeated. Consumer spending will

likely be unable to continue to fuel growth if inflation increases, wages remain relatively stagnant, and energy prices increase. Private sector job creation will be uncertain if we do not pay more attention to the well-being of our nations small businesses. One measure of whether we are paying attention is resource allocation. Resources for SBA have declined roughly 40 percent since 2000. This budget continues

that downward spiral. ASBDC believes the economy has paid a price over the last

4 years as resources for management and technical assistance to small business

owners and aspiring entrepreneurs has declined, certainly in real dollar terms.

Administrator Barreto has done what he could with what he has. Nevertheless,

his field staff is strained, his resource partners are strained and small business

owners are not getting the depth of service and adequate access to services that

they need and deserve in light of the fact that over 40 percent of Treasury receipts

come from small businesses.

Neither the SBDC national network nor I is unmindful of what is occurring in

the world and the responsibilities throughout the world that our Nation is trying

to meet. We recognize that we are fighting a worldwide war against terrorism and

that we are engaged in Nation building in Iraq, and Afghanistan. We fully appreciate that Nation building does not come cheap and that we must provide for our

troops abroad.

We understand that to meet these new worldwide obligations requires resources.

That is why we have voiced concern about the lag time of this recovery in comparison to earlier post recession recoveries, the slow growth in business startups and

the slow growth in employment. These factors have contributed to a decline in

Treasury receipts in 3 of the last 4 years. If there is not robust activity in the entrepreneurial sector, job creation will suffer, consumers will have less to spend, government will spend more on public assistance programs and we will have to borrow

more to meet our obligations as we have for the past 4 years.

We are concerned that continued erosion of overall SBA resources is having an

adverse impact on the small business sector of the economy. The key to lowering

the deficit is economic growth stimulated by entrepreneurial activity and job formation. We cannot expect to stimulate job growth if we do not assist small businesses

that are struggling to survive or grow. And I hope we will always be mindful that

small businesses create roughly 70 percent of the new jobs in our economy and 53

percent of our nations Gross Domestic Product.

As to the specific recommended funding for the SBDC program, I am sure there

was a collective sigh of relief at every SBDC nationwide when it was learned that

the President’s budget recommended $88 million for the SBDC program for fiscal

year 2006. We would appear ungrateful if we did not acknowledge that, in actual

dollar terms, the SBDC program has been recommended for the same level of funding that the White House proposed last year. And that recommendation comes at

a time when hundreds of programs are being eliminated or are being cut. And we

are, indeed, grateful.

However, this committee and your colleagues in the Senate and House should understand that years of level funding are gnawing at the very marrow of the SBDC

national program, seriously impacting its ability to help the 23 million small businesses in this country, whether they are manufacturing concerns with 500 employees or a mother operating a home-based business to help her family get by.

And our government’s obligations abroad in terms of Nation building and in terms

of the war on terror are creating major problems for thousands of small businesses

here at home. When our Nation sends National Guard and Reserve Units abroad,

as it understandably must do, it is sending abroad many owners and key employees

of small businesses. What do we say to the men and women who return after serving in uniform in Iraq and Afghanistan to find the business they owned or the busiVerDate 03-FEB-2003 09:59 Jul 05, 2005 Jkt 021350 PO 00000 Frm 00061 Fmt 6633 Sfmt 6621 D:\DOCS\21350.TXT SSC1 PsN: SSC1
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ness that employed them no longer open for business? Additional resources are desperately needed to enable SBDCs to assist small businesses impacted by the call up

of owners and key employees to active duty service in the Guard and Reserve.

And where are the SBDC resources to assist the tens of thousands of new immigrants particularly in the Hispanic community who are seeking to start a new business so that they too can enjoy the American dream?

I mentioned earlier the growing number of jobs lost to downsizing and mergers.

These realities in the economy have resulted in an ever-increasing number of Americans over 50 in the unemployment lines. A recent article in USA Today focused on

new research that shows 5.6 million workers age 50 and older are now self-employed, a 23 percent jump from 1990. As a result of corporate downsizing and mergers, tens of thousands of workers over 50 have faced loss of employment in recent

years. Many of these workers, after months of unsuccessfully searching for new employment, turn to self-employment. And where are they to find the necessary training to develop the wide range of skills required to run a small business successfully?

Many of them are turning to their local SBDC. Where are the resources to enable

SBDCs to serve what the Rand Corporations research for the AARP says will be

an ever-increasing number of baby boomers turning to self-employment to sustain

their families in 2005, 2006 and beyond?

Dr. Graham at the Office of Information and Regulatory Affairs at the White

House and Small Business Advocate Tom Sullivan are doing a remarkable job in

their efforts to slow the ever-growing regulatory burden on America’s small businesses. Their efforts have resulted in billions in regulatory compliance cost savings.

But the number of new regulations grew substantially in 2003 and 2004. Where are

the resources needed to enable SBDCs to assist millions of small businesses, your

constituents, who are struggling to understand and comply with the ever-growing

regulatory burden on small businesses?

Recognizing your concerns Madame Chair with the State of manufacturing in the

U.S., ASBDC commissioned Dr. James Chrisman of Mississippi State University

last summer to analyze the impact of SBDC services on SBDC long-term counseling

clients who were manufacturers. Dr. Chrisman completed that study in September

of 2004. Dr. Chrisman estimates that SBDC long-term counseling clients who received services in 2002 generated 9,251 new jobs during 2002 and 2003. Based on

client assessments, Dr. Chrisman estimates that as a result of SBDCS counseling,

185,321 manufacturing jobs were saved in 2002 and 2003. Dr. Chrisman further estimates that SBDC 2002 long-term counseling clients who were manufacturers generated an increase in tax revenues of $58 million of which $34.8 million went into

the Federal Treasury. And those manufacturing firms who received long-term counseling represented a little less than 12 per cent of SBDC long-term counseling clients in 2002. With the continued difficulties facing American manufacturing, where

are the additional resources that SBDCS will need to address the growing needs of

our nation’s small manufacturers?

The more comprehensive 2004 economic impact study of all SBDC long-term counseling clients conducted by Dr. Chrisman, reported that SBDC long-term counseling

clients generated 56,258 new jobs in 2003 as compared to 46,688 new jobs created

by SBDC long-term counseling clients in 2001. The 2004 Chrisman Study also reported that an additional 59,489 jobs were saved in 2003 as a result of SBDC longterm counseling compared to 34,215 jobs saved in 2001. The 2004 Chrisman Study

reveals that the average change of employment rate for SBDC established business

clients was a positive 10.2 percent—over twenty-five times the rate of the average

U.S. business. The average change in sales for an SBDC long-term counseling client

was 17 percent compared to 2 percent for the average U.S. firm. Nearly 53 percent

of SBDC pre-venture clients who received long-term counseling (five hours or more)

during 2002, actually started new businesses during 2002 and 2003.

The same Chrisman Study points out in Maine:

• A job is created or saved by Maine SBDC business assisted clients every . . .

9 hours.

• $10,000 in new sales are generated by Maine SBDC business assisted clients

every . . . 64 minutes.

• $25,000 in financing is obtained by Maine SBDC business assisted clients every

. . . 17 hours.

Existing business owners score Maine SBDC Counselors 4.3 out of 5 on knowledge

and expertise.

• 92.1 percent of existing business owners would recommend Maine SBDC services to other business owners.

Despite the positive numbers reported by Chrisman, there is one very disturbing

piece of data in the most recent SBDC productivity numbers. For the first time in

recent years the average hours per counseling client declined as overall counseling

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hours declined. This decline in the overall number of counseling hours occurred in

the face of an increase in the overall number of counseling clients. We believe this

is primarily due to the fact that the SBDC national network has experienced a reduction in the number of counselors available nationwide to serve an expanding

number of clients seeking counseling services. The reduction in available counselors

is clearly due to a decline in available Federal financial resources in actual and real

dollar terms in recent years.

For example, SBDC programs in low population states such as Madame Chair’s

State of Maine, Senator Enzi’s State of Wyoming, Senator Burns’ State of Montana,

or Senator Thune’s State of South Dakota (which get base grants of $500,000) have

had no increase in Federal funding since 1998. Inflation alone has eroded their ability to serve their state’s small businesses. To have the purchasing power that they

had in fiscal year 1998, low population states would each need grants of $603,000

in fiscal year 2006.

SBDCs in many larger population states experienced severe cuts as a result of the

2000 census. Many of these states now have some of the highest unemployment levels in the nation. Madame Chair, the SBDC program in Senator Bond’s State of

Missouri under the President’s recently proposed fiscal year 2006 budget would receive $61,000 less in actual dollars in fiscal year 2006 than it did in fiscal year 2001.

The SBDC program in Senator Kerry’s State of Massachusetts would receive

$132,000 less in fiscal year 2006 than it did in fiscal year 2001. The SBDC program

in Senator Bayh’s State of Indiana would receive $60,000 less in fiscal year 2006

than it did in fiscal year 2001. The SBDC program in Senator Levin’s State of

Michigan would receive nearly $130,000 less in fiscal year 2006 than it did in fiscal

year 2001, Senator Vitter and Senator Landrieu’s State of Louisiana would receive

$91,000 less in fiscal year 2006 than it did in fiscal year 2001, Senator Coleman’s

State of Minnesota would receive $13,000 less in fiscal year 2006 than it did in fiscal year 2001 and Senator Lieberman’s State of Connecticut would receive $100,000

less in fiscal year 2006 than it did in fiscal year 2001 and Senator Pryor’s State

of Arkansas would receive $42,000 less in fiscal year 2006 than it did in fiscal year

2001. And these numbers reflect actual dollars with no adjustment for inflation.

To provide SBDCs in low population states with sufficient funds to restore their

purchasing power to fiscal year 1998 levels and to restore states impacted by the

census to the actual funding levels of fiscal year 2001 would require an appropriation for SBDCs in fiscal year 2006 of $109 million, still well below the programs

authorized level of $135 million. Madame Chair, Senator Kerry, Honorable Members

of the Committee, on behalf of America’s small businesses, we respectfully ask for

an appropriation of $109 million for the SBDC program.

If that level of appropriation cannot be accommodated, then no one on this committee should be surprised when SBDC counselors in their State are laid off or service centers are closed. And no one should be surprised when counseling hours per

client decline again in fiscal year 2006. Reduced hours per client results in reduced

economic impact. And many of our counselors believe that maximum economic impact is attained when clients receive between 5 and 12 hours of counseling. It is

impossible for the SBDC program to give an increasing number of clients the attention they need and deserve with the level of decline in resources that has occurred

since 1998 as I have outlined above.

Think of this decline in hours of consulting per client in terms of your own health

care. What if you were experiencing a variety of concerning health symptoms and

went to your family practitioner or internist seeking medical attention? Suppose the

doctor came into the examining room, looked at you briefly without a meaningful

discussion with you of your symptoms, without ascertaining whether you were running a fever, without checking your blood pressure, without a urinalysis or blood

test and then prescribed a treatment regimen. I seriously question whether you

would make a return visit to that particular physician or have any confidence that

his or her prescribed regimen would do much to improve your health. That is the

type of reduced service and response that many SBDC clients may have to expect

in the future if demand for SBDC services continues to increase and resources continue to decline. And when the quality of services declines, the beneficial economic

impact of our consulting services, that is increased client sales, increased job creation and increased revenues to State and Federal treasuries will likely decline.

Madame Chair, in Maine this year, we would have had to reduce staff if it were

not for a State assisted CDBG allocation of some 200K that enabled our SBDC to

maintain level staffing. The prospect of a CDBG grant for next year is slim to none

and we are staring in the face of an 18 percent reduction of counseling staff, come

next January, should we not get the resources needed.

The latest SBA figures for the SBDC national program show that SBDC counseling cases and training attendees combined increased from 685,000 in fiscal year

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2003 to nearly 726,000 in fiscal year 2004. Training attendees increased from

408,000 in 2003 to nearly 446,000 in 2004. These figures clearly demonstrate that

America’s small business owners and aspiring entrepreneurs are aware that they

need management and technical assistance to enhance their likelihood of business

success. They are increasingly seeking that assistance from the experienced, capable, and dedicated men and women who are consultants and trainers in America’s

Small Business Development Center Network. In Maine, nearly 3000 nascent entrepreneurs and existing business owners sought one-on-one business, assistance in

Calendar 2004 with a similar number in attendance at 180 Maine SBDC sponsored

workshops, notwithstanding yet another similar amount served with SBA termed

information transfers. Clearly, in Maine and nationally demand is enormous.

Looking even closer at the SBDC client base, SBA’s latest figures show that in

2004, 40 percent of SBDC counseling clients nationwide were women (in Maine: 47

percent). SBDCs serve more women than all other Federal management and technical assistance programs combined. And the increase in entrepreneurial activity

among women is dramatic. Entrepreneurial activity is also rapidly increasing among

minorities. Seventeen percent of SBDC clients are African American, over 10 percent are Hispanic and 4 percent are Asian-Americans. Over 9 percent of SBDC

counseling clients are self-identified veterans (in Maine: 12 percent). Sixteen percent

of our counseling clients were engaged in retail. Thirty-eight percent were engaged

in service, 8 percent were engaged in manufacturing (in Maine 12.4 percent), 3 percent were engaged in wholesale, and 4 percent were engaged in construction. Fortyfour percent of our training seminar attendees were women, twenty-four percent

were minorities and 7 percent were self-identified veterans.

And these SBDC clients and firms are not simply statistics. They are our neighbors, our relatives and our fellow church congregants, who have children in our children’s schools and businesses in our communities. They are individuals like Mark

Awalt of JSI Store Fixtures in Milo, Maine, Susan Giguire of Care & Comfort in

Waterville, Maine (recognized by the SBA as 1 of 15 nationally acclaimed Women

Entrepreneurs), and Martin Grohman of the tech-savvy company Correct Building

Products in Biddeford, Maine, makers of CorrectDeck; and Christine Henriques with

her partners, Gabe Linden and Jason Mark, of Gravity Switch, a multimedia development firm in Northampton, Massachusetts; and Mark Hanudel of R & H Quality

Refractory Service, Inc who was the 2004 SBA Small Business person of the year

from Sulphur, Louisiana; Merrie and Tom Ellsberry and their mobile document

shredding business in Cheyenne, Wyoming; Dawn and Rod Nimtz and their Cracked

Egg Omelette Shoppe in Bay City, Michigan; and thousands and thousands of others. These men and women from all types of communities, educational backgrounds,

ethnicity, etc., are building and growing companies. And the companies they are

building and growing are providing work for others in their communities. Those

workers and the companies that employ them are paying local, State and Federal

taxes. And the tax revenues resulting from the increased economic activity of SBDC

clients exceeds the Federal outlays for the SBDC program. The 2004 Chrisman

Study of SBDC long-term clients who received assistance in 2002 found that the incremental performance improvements of these clients resulted in $210. 3 million in

additional tax revenues from established businesses and $264.8 million from preventure clients who started new businesses. This amounted to a total of approximately $475.1 million in additional tax revenues of which $211.6 million went to

the Federal Government and $263.5 million went to the states. In Maine the report

shows that $2.00 is returned to Maine the very next year through State tax revenues for each State dollar invested in the Maine SBDC every year, and $2.60 is returned through Federal tax revenues to the U.S. for each Federal dollar invested.

Madame Chair, very shortly now, you will be submitting a letter to the Senate

Budget Committee regarding the needs of programs under this committees jurisdiction. In his inaugural address last month, the President told the Nation he wanted

to enhance opportunities for business ownership. We share his vision of an opportunity society. But just as opportunities are foreclosed for millions of young people

who drop out of school or do not attain education past high school, so are opportunities lost to millions of small business owners or aspiring entrepreneurs if they cannot access resources that will enable them to manage their businesses effectively

and profitably or start a new business.

We believe that if the SBDC program is to meet the growing needs of women, minorities, baby boomers, and small manufacturers, or businesses impacted by National Guard and Reserve call-ups; the SBDC program must have additional resources. To restore states like Missouri, Massachusetts, Michigan, Indiana, Minnesota, Louisiana, etc., to the actual dollar funding they had in fiscal year 2000 and

to restore low population states like Maine, Montana, Wyoming and South Dakota

to the real dollar funding they had in 1998 will require an appropriation of $109

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million. We trust, Madame Chair, that when you write to the Chairman of the Senate Budget Committee on which you serve, that your recommendation will take into

account the real needs of this nation’s small business sector for management and

technical assistance. We hope you will consider asking the Budget Committee to include in the budget a level of funding for the program that will begin to restore the

real loss of resources that this program has experienced over the last 8 years. We

hope you will encourage the Budget Committee to take into account that the job creation and increased sales that the SBDC program helps to generate for its small

business clients, in turn generates tens of millions more in revenues for the Treasury than the program receives from the Treasury. We hope that when you write

your letter, you will recall the President telling the Congress in his State of the

Union address that ‘‘small business is the path of advancement, especially for

women and minorities.’’ We hope that you will ask for a $109 million for the SBDC

program.

Additionally Madame Chair, we are concerned with the elimination of SBA’s

FAST program, which a number of SBDC’s directly or indirectly participate in as

to assist new technology related business with the process of commercialization of

products. In Maine, the Maine SBDC through its tech-focus program, the Maine

Small Business & Technology Development Centers (Maine SBTDC), works in partnership with the Maine Technology Institute (MTI) to drive the vitality, competitiveness and clustering of tech-based small businesses across Maine. Funding through

FAST enables MTI along with its partners, such as the Maine SBTDC, to create

a statewide entrepreneurship network, facilitating access to business expertise, markets and capital. Maine currently has a strong commercialization-assistance program with funding accessed from fiscal year 2004. The FAST award accounts for

$95,000, with $157,000 in matching State funds. An ROP award worth $49,000,

with $25,000 in matching State funds, adds to the overall budget. The integration

of these awards helps MTI and the Maine SBDTC achieve management efficiencies

in the development, promotion, execution and performance-measurement of highquality commercialization services. Similarly, other states are able to mobilize resources for tech-commercialization using FAST dollars as a basis for composition of

meaningful results-oriented activities such as the following currently in Maine,

which include: • Improving the quantity and quality of SBIR proposals to Federal agencies.— Since the inception of Maine’s SBIR technical-assistance program in 1997, SBIR investment in the State has increased steadily, growing from $1.5 million in 1997 to

more than $4 million last year. Similarly, the number of SBIR projects awarded to

Maine firms has grown from five in 1997 to 23 in 2004. For 2005, Maine will commit

more than 2,700 hours of outreach and consulting time to businesses submitting

SBIR proposals. The organization anticipates that this assistance will return approximately 30 awards and an investment in Maine of $6 million.

• Producing an intensive 10-week series of commercialization workshops.—The

workshop series cultivates the marketing and sales of tech-based products and services developed by Maine entrepreneurs. Designed to promote interaction within a

small group, the workshops provide hands-on and practical knowledge to support goto-market activities. The series challenges firms to think strategically and analytically while facilitating exploitation of the business opportunity. Since inception of

the series in 2002, 40 firms have completed the coursework. This year’s series, starting in the spring, will feature increased use of the Internet. Live ‘‘web streaming’’

will encourage participation by firms in rural areas, and on-line ‘‘threaded’’ discussions will enable a continuing exchange of ideas outside the physical workshop.

• Growing small businesses with the Maine Tech Trackers.—Maine Tech Trackers

are Maine’s volunteer technology business advisors. Motivated by an interest in

playing a role in Maine’s economic development, Tech Trackers provide short-term

and targeted assistance to MTI/SBTDC portfolio companies. Recruited statewide,

Trackers are entrepreneurs, senior managers in large firms, and venture capitalists.

They volunteer a small portion of their time to help technology business clients

overcome specific business challenges, including accounting, engineering tests for

patent applications, and business valuation for the purposes of a sale. In their role

as mentors, they support small businesses by providing encouragement, critique and

advice.

We believe the elimination of the FAST appropriation to be imprudent in the face

of lost manufacturing jobs discussed earlier. According to the Council for Competitiveness, ‘‘Innovation fosters the new ideas, technologies, and processes that lead to

better jobs, higher wages and a higher standard of living. For advanced industrial

nations no longer able to compete on cost, the capacity to innovate is the most critical element in sustaining competitiveness. The United States stands apart from the

rest of the world in its record of sustained innovation over decades, across indusVerDate 03-FEB-2003 09:59 Jul 05, 2005 Jkt 021350 PO 00000 Frm 00065 Fmt 6633 Sfmt 6621 D:\DOCS\21350.TXT SSC1 PsN: SSC1
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tries, and through economic cycles. But the United States now finds itself at a potential inflection point—facing new realities that pose significant challenges to our

global innovation leadership. How the United States responds to these realities is

critically important and is the goal of the National Innovation Initiative.’’ Elimination of FAST funding appears to fly directly in the face of this initiative, as outlined in a very recent report, entitled Innovate America, published by the Council.

The Administrations budget also seeks to eliminate the SBA Micro-loan program—30 percent of micro-loan borrowers are African American, 11 percent are Hispanic, 37 percent are women, and 30 to 40 percent are rural. Needless-to-say, our

concern is that access to capital will be severely limited to our Nation’s underprivileged, and even though the SBA claims it is being replaced by the Community Express program, that method of business capital access is little more than ‘‘credit

card’’ debt, fraught with all the dangers of that type of business or, for that matter,

personal financing. I know it is of particular import to Maine.

We ask that the Committee consider working toward restoration of FAST and the

SBA Micro-loan Program.

Finally Madame Chair, we want to call your attention to proposed fiscal year 2006

legislation by the SBA, Title II: Entrepreneurial Development—Sec. 201: Small Business Development Center Competition, which proposes authorization of outside competition based on performance (FY 2005) as allegedly to improve performance results and provide a more cost effective and responsive SBDC program. We ask you,

Senator Kerry and the Committee to vehemently oppose this needless change.

With all due respect, to our partner, the, SBA, we believe such a legislative

change would far from improve performance overall, or in any way, improve results,

or possibly suggest a more cost-effective methodology for the SBDC program, quite

the contrary. Frankly, the Agency has numerous tools at its disposal to manage the

SBDC program including program reviews, financial audits, diversity audits, DCbased program managers, locally-based project officers and district directors, client

surveys, annual work plan negotiation, statistical measurement, generally additional state oversight because of matching requirements, most importantly ASBDC

peer review accreditation, and, if necessary, protocol to re-bid an individual program

when all fails. We suggest if that is not enough to assure outstanding performance

results than perhaps Congress has been placing false trust in the Agency’s ability

to manage. We certainly hope not.

This year, the ASBDC celebrate twenty-five years of serving America’s small business community: twenty-five years of continuous improvement, twenty-five years of

helping small businesses succeed, and twenty-five years of proven results. As the

members of this Committee know, the SBDC program is a program that works exceptionally well in Maine and in states throughout the country. It is a program with

a proven track record of creating new businesses, jobs, sales and economic development by leveraging Federal, State, university, regional and private resources. It

makes no sense for the SBA to propose changes to the SBDC program that will

weaken its ability to fulfill its mission.

We believe hidden in this SBA suggested legislation, the SBA is again proposing

to repeal the law’s requirement that applicants to host SBDC networks must be institutions of higher learning. SBA would make any non-profit organization eligible

to apply for an SBDC grant, regardless of whether it had any expertise in entrepreneurship or the delivery of management and technical assistance to small businesses. We believe such would severely damage the SBDC program.

Institutions of higher learning bring academic pedigree and stability to State

SBDC networks, because such institutions are built on solid financial and community foundations. In addition, institutions of higher learning help to ensure the quality and educational mission of a state’s SBDC services to small business owners and

aspiring entrepreneurs. The University of Southern Maine (USM) was an original

pilot project participant in the creation of the forerunner to today’s SBDC program

and since has an over twenty-five year history of successfully assisting Maine’s

small businesses. Throughout those years, the University in collaboration with

Maine’s SBA District Office and Maine Department of Economic and Community

Development has nurtured and leveraged the Maine SBDC program to be a statewide motivating force in developing the entrepreneurial spirit of Maine people.

USM is proud of its more than 25-year role as the administrative unit for the

Maine SBDC. Moreover, hosting SBDC provides opportunities for an ongoing, mutually beneficial relationship with the USM School of Business, its Center for Entrepreneurship and business research centers, and other campus entities that can create real-world solutions to business issues while complementing the University’s

mission of cultivating partnerships in support of the region’s economic and social development.

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The SBA’s proposed legislative changes come at a time when Institutions of Higher Education’s importance in economic development strategies are at an all time

high. Witness: • ‘‘In Cleveland’s heyday, . . . proximity to water or rail mattered a lot. Today,

proximity to a university campus matters a lot.’’ (Tim Ferguson, Forbes) • In his new book, ‘‘The Rise of the Creative Class’’, Richard Florida refers to colleges and universities as ‘‘. . . a huge potential source of competitive advantage.’’

And he says that colleges and universities are today ‘‘. . . a basic infrastructure

component . . . and far more important than traditional infrastructures such as

‘‘. . . the canals, railroads and freeway systems of past epochs . . .’’ • States such as Georgia have recognized the fundamental role of higher education so clearly that its former Governor, now U.S. Senator Zell Miller, publicly declared that higher education was the infrastructure of Georgia’s new economy. • ‘‘Much of the burden of transforming Mississippi’s economy will fall squarely

upon the capable shoulders of the state’s economic developers and our higher education system.’’ (Economic Development through Higher Education, a report from the

Mc Coy Working Group). • ‘‘A strong partnership with government, business, and higher education is critical to overcome the challenges of the transition to the new global, knowledge-based

economy. There are increasing expectations from legislative and executive leadership in the State that the University of North Carolina assume a more direct, active

role in economic development. . . . In its growing role in economic development,

UNC is building on a strong record of service and support for communities and entrepreneurs, including those in rural areas . . . Seventeen Small Business and

Technology Development Centers play a key role in entrepreneurial development, offering services to existing businesses and industries and supporting strategic economic development initiatives.’’ (The Role of the University in Economic Development, The University of North Carolina Board of Governors Long Range Plan 2004–

2009)

An SBDC program that is supported by an institution of higher learning like the

USM or UNC or UMass or Wharton for that matter, benefits from both the resources and the high standards of that institution typical to standards set by accreditation bodies, actively engaged trustees and in the case of public institutions, the

rigors of legislative scrutiny. Most institutions of higher learning have business

schools that contribute the expertise of faculty, business student interns, academic

crossover, MBA students, Centers for Family Business and/or Entrepreneurship and

other resources. SBDC programs are, as a matter of course and design, educational

programs; as such, it is only logical that institutions of higher learning should host

them. It makes no sense, as the SBA seems to be proposing, to solicit SBDC grant

applications from non-profit organizations that have no background or expertise in

providing entrepreneurship, management and technical assistance to small businesses. And even if some non-profits do have some limited experience in these areas,

their focus is usually limited; they cannot possibly bring the broad prospective that

institutions like the University of Southern Maine bring to the responsibilities associated with facilitating economic progress through small business creation, growth

and development.

In Maine, we do use some community and/or community development corporations

as sub-hosts, but it is well documented in the SBA that such requires very keen

oversight, can only operate effectively on a regional basis within the State, and need

the overarching infrastructure of State support and University contractual oversight

to be effective. And it is only since this State director has taken charge that there

is consistency of program. To expect that any one of them could operate on a statewide basis is wishful thinking. In fact, the Women’s Business Center, now administered by a CDC, has entered into a strategic alliance with the SBDC, as to garner

systems, efficiencies, professional development and statewide outreach.

SBDC business management assistance counselors are qualified small business

professionals who have diverse educational and business experience. Many hold

MBA’s and have owned and operated their own businesses. Often they bring diverse

corporate experience to bear on seeking solutions for small business, especially in

the areas of marketing, management and operations. Each counselor is required to

participate in a professional development program, which administers core competency standards, personal professional development plans and counselor certification for SBDC personnel. Additionally ASBDC professional development is mandatory for many SBDC programs.

Three years ago, Maine Small Business Development Centers received the Margaret Chase Smith Maine State Quality Award. This award recognizes organizations

for performance excellence, based on criteria corresponding to the Malcolm Baldrige

National Quality Award. The criteria for the award examine a wide range of qualiVerDate 03-FEB-2003 09:59 Jul 05, 2005 Jkt 021350 PO 00000 Frm 00067 Fmt 6633 Sfmt 6621 D:\DOCS\21350.TXT SSC1 PsN: SSC1
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ties, from leadership to business results, and evaluate how well an organization’s

systems support its goals and objectives. Last year, the Maine SBDC underwent its

peer accreditation review—perhaps the toughest management review, I have undergone as a professional manager. It too is based on Baldrige criteria and it takes seriously the idea of pass or fail in its process of review with the opportunity for nonaccreditation and loss of SBA funding to occur.

This track record of quality within staff and the organization as outlined in the

preceding two paragraphs has been honed with time and in the context of a University with a 125-year-old tradition of public service. Not to seek ways to build on such

consistency and context in my opinion is risible on the part of the SBA.

Additionally, the SBA’s request to require SBDC grants to be re-competed every

5 years would discourage institutions such as the University of Southern Maine

from participating in the SBDC program, because such institutions would not want

to invest significant matching resources in a program that might be available to

them for only a short period of time. For example, in the past 5 years, the University of Southern Maine has invested nearly $550,000 in the Maine SBDC and over.

1 million dollars in cost share for the privilege of administering the Maine SBDC.

In all likelihood, such an investment would not have been made if the potential to

lose the program because of what possibly could be construed as politics, even marginally existed.

Moreover, requiring host institutions to re-compete for SBDC grants every 5 years

would not add to the accountability or quality of SBDC programs. Under current

law, the SBA can already revoke an SBDC grant if the grant recipient is underperforming, and under current law the SBDC program is already required to have

an accreditation program, that ensures quality among grant recipients. Accreditation, more than any SBA scrutiny, is a most productive mechanism for continuous

improvement of the SBDC program because it is done in the context of constructive

criticism and is absent any political influence, but rather reflects the goals of the

ASBDC, the SBA and the states to assure the Congress it is getting what it is paying for.

In addition, SBDC hosts in every State undergo reviews by SBA auditors every

2 years; and as well, they receive regular program, audits from SBA project directors, and also must supply titanic amounts of information, often duplicative, to the

SBA. It is inherently unfair, absent a showing of mismanagement or wrongdoing,

to pull a grant from a host institution that has made a significant contribution of

resources to a program in the form of matching funds, in-kind contributions, training and development and other resources. There simply is no way the momentum

it takes in organizational development, resource development, and relationship management, etc. should be broken for the sake of supposed competition. If there is improvement to be made, let a progressive system take care to define objectives and

have the SBA and SBDC hosting organizations and other important stakeholders

work together to get it done. When and where and if there is a failure in the system,

let the accreditation process handily solve the problem through methods already

available for assuring consistency and success of individual SBDC programs.

Notwithstanding all of the above, the SBA by way of its yearly program announcement insists the SBDCs through a negotiated process develop, annually the extent

to which SBDC statutory and program duties are to be delivered to address the

needs of states’ small business communities. In doing so, SBDCs and their

partnering organizations must ensure that statutory and regulatory duties are met.

SBDCs then annually operate under an annual plan, approved by the SBA, to provide ongoing small business assistance, and thereby must employ their best efforts

to ensure that economic development and technical assistance services are available,

as defined by statue, to all small business populations where critical success factors

apply, including but not limited to SBA’s special emphasis groups: Minority-, Veteran-, Women-owned (ex: Native Americans, Hispanic Americans, Black American,

Reservists, Women, etc.). It seems to me the SBA has ample opportunity to reasonably define their wants and needs for any SBDC program within such a vehicle and

that within one which already exists.

Members of the Committee, the Maine SBDC is a partnership program that combines the resources of the Federal Government, the Maine Department of Economic

and Community Development, the University of Southern Maine, and leading economic and community development organizations. For 27 years the Maine SBDC

has provided comprehensive business management assistance, training and information services to Maine’s micro-, small-, and now technology-based business communities. The effectiveness of this partnership, and the delivery of services to Maine’s

small businesses, depends on good faith, stability and cooperation among the partners. This partnership, and the resources that each of these partners brings to the

SBDC program, more than likely State participation, could be destroyed by the

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SBA’s proposal to recompete SBDC grants every 5 years. It simply makes no sense.

It takes from 6 to 8 years for a counselor in New England to progress from rookie

to seasoned even with the rigorous hiring requirements we place on the position.

The SBDC network values longevity as do the people who are part of it, many with

over 10 years experience who simply wouldn’t stay around if they knew their benefits and or retirement could be jeopardized every 5 years; they simply are too good

and generally too entrepreneurial to deal with the kind of bureaucracy re-competing

could bring. Ernesto Sirolli, the renowned author and principal of enterprise facilitation, suggests good business counselors to be somewhat gray haired and having been

there and done it. If you subscribe to his theory (and I see myself as a living example, having over thirty years of business experience including that of a Founding

Officer of Staples), these folks want to concentrate on the person of the client and

not the pottage. Please let them.

Let’s not forget our State partners either. In Maine, the State puts in nearly

500,000 dollars additional cash over and above the 250,000 dollars cash required by

the SBA; the in-kind is well provided for as well; and additional cash and leverage

come from a myriad of partners. These partners including the SBA and the State

all are working together in a coordinated fashion with an understanding that both

State and Federal needs have to be met in coordination with one another. One-sided

control is yesterday’s theory. A statewide newspaper article excerpted below demonstrates collaborative realities in Maine:

Maine Small Business Development Centers serve thousands of small business

owners each year through. one-on-one business counseling and comprehensive

training programs. Most Maine SBDC services are offered at no cost to clients

and delivered by a team of highly qualified professionals who bring entrepreneurial experience, advanced business education, and corporate know-how to

their role in advising small businesses. Maine SBDC is frequently asked how it

is able to provide the level of service it does at little or no cost to its clients, who

have often invested every financial resource they have into their businesses. The

answer is collaboration.

By working in partnership with business assistance service providers throughout the State, the Maine SBDC can give clients access to the best talent and resources available. In addition to funding from SBA, the State of Maine, and the

University of Southern Maine, the Maine SBDC is fortunate to have many longstanding partnerships. Maine SBDC services to small businesses get a boost

from collaborative relationships such as those with Maine Technology Institute,

Market Development Center, Maine Women Work & Community, and others

whom support customized services for specific industries and/or communities.

Through effective collaboration with many organizations that serve small business, and coordinated missions including those of other SBA funded partners,

the Maine SBDC fosters the entrepreneurial spirit upon which the future of the

State’s economy depends. (MaineBiz)

As the members of the Committee know, all is not always rosy with the small

business sector. The small business sector’s need for management and technical assistance is greater than ever as America looks to it to fuel job growth. And so, it

is more important than ever that the Committee reject SBA’s proposed legislative

changes to the SBDC program—such that they would weaken the SBDC network’s

ability to serve America’s small business owners and aspiring entrepreneurs.

As Madame Chair knows, Maine’s economy is based on small business. More than

98 of Maine businesses employ fewer than 100 employees and more than 92 percent

employ fewer than 20 employees. The services that the Maine SBDC provides to aspiring and current business owners are clearly critical to the success of Maine’s

economy. These services should not be put in jeopardy to serve the interests of the

bureaucracy that administers the SBDC grants in Washington, DC.

The national SBDC network, including the Maine SBDC, has a proven record of

creating jobs and generating growth for America’s small businesses as outlined in

previous testimony. With such a record of accomplishment, both in Maine and

across the nation, there is no justification for the SBA’s proposal to radically restructure and put at risk the effectiveness of America’s Small Business Development

Center Network.

Chair Snowe, we sincerely appreciate your strong support for the Maine SBDC

and America’s Small Business Development Network; I urge you, Senator Kerry and

the members of this Committee to reject the SBA’s SBDC legislative proposal. Rather, I ask that the Committee focus on ways to enhance entrepreneurial development

in our great country by building on the success of the SBDC program and by developing improvement activities through increased funding, collaboration and qualityVerDate 03-FEB-2003 09:59 Jul 05, 2005 Jkt 021350 PO 00000 Frm 00069 Fmt 6633 Sfmt 6621 D:\DOCS\21350.TXT SSC1 PsN: SSC1
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related legislative activities to help get and keep America’s economy moving forward

with small business at the core as it has been and continues to be!

Thank you again for allowing me to appear before the committee today. It has

been an honor and a privilege. At this time, I will be glad to respond to any questions that you, Madame Chair, or other members of the committee may have.

Chair SNOWE. Thank you, John.

Well, you give us a good idea—not about the head. That is an

interesting point, in terms of administrative costs. That is something we certainly should look at.

I appreciate your views and the startling numbers regarding

Maine. That is something we have known, how difficult the economic environment is, but compounded with all the other challenges as well. So I thank you.

Mr. Tuvin.

STATEMENT OF EDWARD ‘‘EDDIE’’ TUVIN, FIRST VICE

PRESIDENT OF COMMUNITY SOUTH BANK ON BEHALF OF

THE NATIONAL ASSOCIATION OF GOVERNMENT

GUARANTEED LENDERS

Mr. TUVIN. Thank you, Madame Chairwoman.

I am Eddie Tuvin, First Vice President with Community South

SBA lending. We are an active SBA lender with lending operations

all along the Eastern seaboard and a member of the National Association of Government Guaranteed Lenders, a trade association for

lenders and other participants who make about 80 percent of the

Small Business Administration Section 7(a) loans.

Commonly called the SBA’s flagship program, the 7(a) program

has proven to be an excellent public-private sector partnership, in

my opinion probably the best in the world. Over the last decade,

the SBA has approved roughly 500,000 loans for approximately

$100 billion. We thank the Committee for the opportunity to provide NAGGL’s written testimony on the SBA fiscal year 2006 budget request and other current issues facing the SBA 7(a) program.

And Madame Chair, I would like to submit my testimony for the

record.

Chair SNOWE. Without objection, so ordered. And we will do that

for all the other panelists, as well.

Mr. TUVIN. Madame Chair, we concur with your thinking and

your perception and views of how the SBA 7(a) actually operates

and what the fiscal year 2006 budget might do and recognize this

in connection with Ranking Member Kerry’s comments earlier.

With that, I would like to present five points that we are focusing on and then I will move into the comments that we would like

to make relative to these five points.

First of all, we support at least a $17 billion program for fiscal

year 2006.

Second, we feel that a thorough review of the 7(a) credit subsidy

model and the changes in fiscal year 2006 program estimates

should be made.

Third, we support the reinstatement of piggyback or combination

loans through legislation, if necessary.

Fourth, we support the establishment of what is known as a National PLP Lender Approval to eliminate these lenders going back

and forth from State to State trying to get PLP, which we thought

was a great program at the SBA when they delegated more authorVerDate 03-FEB-2003 09:59 Jul 05, 2005 Jkt 021350 PO 00000 Frm 00070 Fmt 6633 Sfmt 6601 D:\DOCS\21350.TXT SSC1 PsN: SSC1
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ity outside of their offices and became more efficient. We think

there is another level for that.

And finally, fifth, we oppose granting SBA the authority to levy

an unneeded secondary market fee.

Last year at this time representatives testified about the many

challenges facing the 7(a) program and many of us here today met

with staff to work through the issues. Thanks to the efforts of the

Small Business Committees and the SBA officials, the problem was

resolved and fiscal year 2004 lending set records for both numbers

of loans originated and dollars loaned.

Fiscal year 2005 is also off to a record start, with almost $3.6 billion lent in the first fiscal quarter alone. As part of the compromise

worked out at the end of the 108th Congress, the 7(a) program received $16 billion in lending authority for fiscal year 2005, which

should be sufficient to meet the lending needs.

The Administration has requested a $16.5 billion program level

in fiscal year 2006. Fiscal year 2004 usage was about $13.5 billion

and some forecast that all $16 billion of available lending authority

will be used this fiscal year. Given the growth rate in the program,

we would request that the Committee support at least a $17 billion

program. This would match the authorization level passed in the

Omnibus Appropriations Bill that was in December 2004 and will

probably lessen the risk of future program caps or restrictions.

About the fees. From the start of fiscal year 2004 to fiscal year

2006 we heard testimony earlier that the increases were 118 percent, if the increase proposed is put into effect. The latest increase

would be within the compromise worked out in the 108th Congress.

The trend of higher and higher feeds needs really to be reversed.

It is disturbing that months after a compromise deal was established that we are back talking about the issue again.

In addition, the Administration reports in table 8 of the Federal

Credit Supplement to the fiscal year 2006 budget, page 54, that the

subsidy rate established for fiscal year 2004 was excessive. The

original rate for fiscal year 2004 was 0.78. It has now been reestimated and reduced, as we discussed, to 0.24.

Now the Administration is recognizing the fee increases, which

they demanded in the start of fiscal year 2005 be imposed upon the

lenders and borrowers to lower the subsidy rate to zero, should actually lower the rate to a substantially negative number. We believe that given the downward subsidy reestimate for fiscal year

2004, the subsidy rate should have actually declined in fiscal year

2006, resulting in a lower lender fee.

We encourage the Committee to ask the Administration, as we

heard the the Committee request earlier, for a thorough explanation of the changes made in the subsidy and reestimate models.

The Administration also is requesting authority to charge lenders

a fee for loans sold in the secondary market. The fiscal year 2006

budget, in table 6, does not provide any income from a proposed

fee. So thus, the proposed fee must be zero and is unnecessary.

With that, I rest my comments, I thank you, and would be willing to answer any questions that you have.

[The prepared statement of Mr. Tuvin follows:]

68

STATEMENT OF THE NATIONAL ASSOCIATION OF GOVERNMENT

GUARANTEED LENDERS, INC.

The National Association of Government Guaranteed Lenders, Inc. (NAGGL) is a

trade association for lenders and other participants who make approximately 80

percent of the Small Business Administration (SBA) section 7(a) loans. Commonly

called SBA’s ‘‘flagship’’ program, the 7(a) program has proven to be an excellent

public/private sector partnership. Over the last decade, the SBA has approved

roughly 500,000 loans for approximately $100 billion. We thank the Committee for

the opportunity to provide written testimony on the SBA fiscal year 2006 budget

request and other current issues facing the SBA 7(a) program community.

ONE YEAR LATER

Last year at this time, the 7(a) lending program was in the middle of a crisis.

Lack of adequate funding at the start of fiscal year 2004 led to a variety of problems, including an unprecedented ‘‘lending holiday’’ and subsequent program caps

and limitations. Thanks to the efforts of the Small Business Committees and SBA

Officials, that problem was resolved and fiscal year 2004 lending set records for both

numbers and dollars loaned. Fiscal year 2005 is also off to a record pace, with almost $3.6 billion lent in the first fiscal quarter. As part of the compromise worked

out at the end of the 108th Congress, the 7(a) program received $16 billion in lending authority for fiscal year 2005, which should be sufficient to meet the net lending

demands of small businesses.

STATISTICS

The SBA loan programs are the largest source of long-term capital for small business in this country. Based upon bank ‘‘call’’ reports, the SBA Office of Advocacy

reports there are $485 billion in outstanding small business loans. From FDIC data,

only about 20 percent of those loans (approximately $95 billion) have an original

maturity over 3 years. The average original maturity of an SBA 7(a) loan is about

14 years, and the SBA 504 average is even longer. The balance of the outstanding

7(a) portfolio is approximately $40 billion or a significant percentage of all outstanding long-term small business loans. Small businesses rely upon the SBA 7(a)

program to be a major source of long-term debt capital.

FY 2006 BUDGET

FY 2006 LOAN DEMAND

The Administration has requested a $16.5 billion program level in fiscal year

2006. Fiscal year 2004 usage was approximately $13.5 billion, and some forecast

that all $16 billion of available lending authority will be used this fiscal year. Given

the growth rate in the program, NAGGL requests that this Committee support at

least a $17 billion program for fiscal year 2006. A $17 billion program would match

the authorization level passed in the Omnibus Appropriation bill in December 2004,

and would lessen the risk of future program caps or restrictions.

MORE FEES

From the start of fiscal year 2004 to the start of fiscal year 2006, lender fees will

have increased 116 percent if the increase proposed in the fiscal year 2006 budget

is put into effect. Although the latest increase would be within the compromise

worked out in the 108th Congress, the trend of higher and higher fees must be reversed.

It is disturbing that the 7(a) program faces further fee increases considering that

the compromise deal establishing fee levels was signed into law just 2 short months

ago. In addition, the Administration reports, in table 8 of the Federal Credit Supplement to the fiscal year 2006 Budget (on page 54), that the subsidy rate established

for fiscal year 2004 was excessive. The original subsidy rate for fiscal year 2004 was

0.78 percent, but this has now been reestimated and reduced to 0.24 percent. Thus

the Administration is now recognizing that the fee increases which they demanded

be imposed upon lenders and borrowers to lower the subsidy rate to zero should

have actually lowered the rate to a substantially negative number. We believe that

given the downward subsidy re-estimate for fiscal year 2004, the subsidy rate

should have actually declined in fiscal year 2006, resulting in a lowering of the lender fee.

NAGGL encourages this Committee to ask the Administration for a thorough explanation of the changes made in the subsidy and re-estimate models.

69

SECONDARY MARKET FEE

The Administration also is requesting authority to charge lenders a fee for loans

sold in the secondary market. In the fiscal year 2006 budget, in Table 6 on page

23, the Administration does not provide any income from a proposed fee. Thus the

proposed fee must be zero and is unnecessary.

NAGGL is opposed to granting the authority to impose secondary market fee for

several reasons. First, the SBA has not documented a need for such a fee. The secondary market and the master reserve fund have operated smoothly and efficiently

for some 20 years. What variables has the Administration used to calculate a subsidy rate for this program? The Administration took some administrative actions

last year. What impact did those changes have on the subsidy rate? What other administrative changes could be made so that charging an additional fee could be

avoided? Until these and other questions have been answered and there has been

a full disclosure of the subsidy rate calculation, NAGGL opposes granting SBA the

authority to charge this additional fee.

NATIONAL PLP AUTHORITY

As part of the compromise reached in December, a national Preferred Lenders

Program or PLP should have been included in the legislation. Today, lenders who

lend in multiple districts spend an inordinate amount of resources dealing with the

multitude of district offices in establishing or renewing their PLP status. The new

program would have established guidelines for the SBA to grant national PLP status to those lenders meeting the benchmarks. Unfortunately, due to a clerical error,

the provisions were not included in the final legislative package, which was enacted

as Division K of the Omnibus Appropriations Act (P.L. 108–447). NAGGL requests

that this provision be included in the near future in any appropriate legislative

package, particularly in any technical corrections bill, which SBA has said it will

submit.

PIGGYBACK RESTRICTION STILL IN PLACE

A lender generally utilizes the 7(a) program because an applicant has a credit deficiency or needs a longer term loan than could be provided without the 7(a) program. In other instances an applicant has a need that is larger than the maximum

loan size allowed under the 7(a) program. To accommodate this higher financing

need, a lender historically has utilized a piggyback structure or a combination loan

to meet the borrowers’ financing needs.

For example, assume an applicant needs to borrow $2.5 million, or $500,000 more

than the 7(a) limit. A lender could have provided a $500,000 conventional loan in

a first lien position, and a $2,000,000 SBA 7(a) loan in second lien position. Unfortunately, however, SBA administratively prohibits the use of piggyback financing and

the statutory provisions permitting combination loans expired at the end of fiscal

year 2004. Thus the financing needs in excess of the 7(a) program limit cannot be

met.

Ironically, this piggyback or combination loan structure is similar to the loan

structure provided in the SBA 504 program, with two key differences. With a 504

loan the SBA has 100 percent of the credit risk on the second mortgage loan. With

a 7(a) loan, under the piggyback structure, the originating private sector 7(a) lender

has at least a 25 percent pro-rata share of the second lien loan, and thus the lender

is sharing in the credit risk. The second difference is that the government collects

substantially more fees on a 7(a) loan than it does a 504 loan.

NAGGL has met with Administration officials, and subsequently submitted a proposal to them to reinstate piggyback lending. We are awaiting a response.

With the piggyback prohibition, many applicants have no solution to their need

to find larger loan packages. We request that this Committee work with the Administration to reinstate the use of piggyback loans so that lenders again would have

a vehicle to serve those small businesses that need larger loan packages.

CONCLUSION

In conclusion, NAGGL requests that this Committee:

1. Support at least a $17 billion program for fiscal year 2006;

2. Conduct a thorough review of the 7(a) credit subsidy model changes in the fiscal year 2006 program estimate;

3. Support the reinstatement of piggyback or combination loans, through legislation if necessary;

4. Support the establishment of a National PLP Lender approval and renewal

process through legislation; and

70

5. Oppose granting SBA the authority to levy an unneeded secondary market fee.

Thank you for the opportunity to submit our written testimony.

71

72

73

74

75

Chair SNOWE. Thank you, Mr. Tuvin. Thank you.

I know, Mr. Betancourt, you have to leave at noon, so I will

quickly get to you in a couple of questions. You have a plane to

catch.

Ms. Sands.

STATEMENT OF PATRICIA SANDS, OWNER OF SPILL-GUARD

AND PARTICIPANT OF THE SBA’S WOMEN’S BUSINESS

CENTER PROGRAM

Ms. SANDS. Good morning, Madame Chairwoman Snowe.

Chair SNOWE. Who by the way is the only small business owner

here; right? Welcome. Now you can tell us the practical applications of all of this.

Ms. SANDS. Thank you for inviting me to speak about my business in regard to the Women’s Business Center of Northern Virginia.

I am Patricia Sands, the CEO of Spill-Guard. Spill-Guard is a

one-member, women-owned, home-based LLC that is located in Arlington, Virginia. My product is Spill-Guard male urinal and my

storefront is the Internet. It is the only hands-free male urinal on

the market that tests 500 percent improved over typical products.

I am proud to say that Spill-Guard is American-made and produced

in Leominster, Massachusetts.

I am sure you are wondering why a person would design a urinal

and no doubt it was an unusual endeavor for a low-income mother

of three.

My product and business idea came from seeing a need in my

life. In the years past, I cared for severely ill family members. As

a military war widow, I cared not only for my husband, but also

for my father that had a 10-year stroke recovery. I did not know

it at the time, but I was gathering great market research in the

field of incontinence. I know the patient, the problems, the cost and

the exhaustion of caregivers.

From this bank of experience as a caregiver and my training in

design, I put my mind to the task of exploring a more stable urinal.

With several paper mache prototypes and revisions, the design

came together quite quickly.

However, the patent, the engineering, the manufacturing and the

distribution has taken 5 years to be at the startup. It has taken

all of my efforts and funds. I believe in it for I know it will help

others.

My family knows that this seemingly insignificant product has

the ability to enhance the health of the patient by drastically reducing the incidence of urine spills and bed sores. Right now that

product choices for severely ill patients are limited to typical urinals, adult diapers and internal and external catheters. There is no

product like mine on the market for price and performance.

Spill-Guard will lower the labor and material costs for facilities.

And yes, this product will benefit Medicare with the baby boomer

generation entering their golden years. For example, incontinence

is the No. 1 reason for admission into a nursing home. The fact is,

this one simple product can positively impact an $11 billion a year

industry in the U.S. and $175 billion worldwide, according to the

S&P.

76

But it is not enough to have a good idea. I am a middle-aged

woman with a low-income and an art degree and that is strike

three in the business world. That is why I am here before you

today. I took classes with the Women’s Business Center of Northern Virginia and with sustained advice and services, I wrote a business plan and learned the basic skills on how to structure the future of my business.

I have had to readjust my plan almost on a monthly basis. What

I thought would unfold did not, characteristic of most entrepreneurial adventures. With the Women Business Center of Northern

Virginia, I have had magnificent professionals that have helped me

make wise choices and new plans.

For example, last year I had a series of crushing events that

could have ended my business. The largest event was I was not notified of my factory in New Hampshire closing without honoring my

purchase orders. I lost all of my customers. Yet, with encouragement planning, I kept going.

Right after the move to the new molder, it was apparent that my

mold needed a modification. This modification was both costly in

time and money and I was wondering about the feasibility of my

business and the endless string of delays and costs.

Once again I turned to the Women’s Business Center of Northern

Virginia and discussed options. Within a short time period we came

up with a workable strategy to recover from this upset and unexpected cost. And the Women’s Business Center did not stop there

as a source of report. I received a do not give up, you are almost

there from the entire staff. As you can tell, I value their expertise,

but their friendship as well.

The caliber of their classes and expertise brought credibility to

my venture. Spill-Guard has won many awards. Spill-Guard was

awarded the Business Plan of the Year Award, the Rising Star

Award, and the Most Valuable Player for Microenterprise. My business and my association with the Women’s Business Center has

been documented in such distinguished publications as the Chronicle of Philanthropy.

The reason I am here today is because of their continued support. They are committed to my success. And when you are associated with so many people that want you to succeed, you are already a winner.

Where is my business now? It is shipping. After a year of delays

and setbacks, my product started shipping in July. I have had 100

percent outstanding customer satisfaction. Yet I had a problem. I

lacked the marketing budget due to the cost of modifications and

several kids that required food. I knew I needed to find another

way to get the sales moving.

To view my competition, I went to MedTrade. MedTrade is a National products convention in Orlando. At first I was overwhelmed

by the size and cash-flow of my competitors. But after I caught my

breath, I visited each of them and realized I had no competition.

I clearly had the better product. What I needed was to attach an

engine to my business and associate with a distributor.

I then approached McKesson Surgical and Medical in Richmond,

Virginia. Without hesitation, I was offered a distribution agreement. The product managers knew instantly the benefit of my deVerDate 03-FEB-2003 09:59 Jul 05, 2005 Jkt 021350 PO 00000 Frm 00080 Fmt 6633 Sfmt 6601 D:\DOCS\21350.TXT SSC1 PsN: SSC1
77

sign. Can you imagine the feeling of taking an idea from a paper

mache model to the board room of a Fortune 16 company for health

care and they say yes? It is the American dream all over again.

And it does not end there. McKesson has indicated they want to

deepen our association with the dialog of a private label for this

and other products that will follow.

You can be assured I will stay in touch with the Women’s Business Center of Northern Virginia, as well as my lawyer, for each

step that is unfolding. I am excited about the future and still

watching my step. Truly, I am at a critical point and no one is

more aware of the fact than I am.

I plan on moving ahead and am expecting this product to bring

in steady revenue with my association with McKesson. I am in

their catalog and I am stocking their warehouses at this time. But

it is a leap of faith.

For example, in working with a small business, an industry giant

like McKesson needs to be sensitive and pay on the agreed 30-day

net in order for my company to build. I have no doubt that they

will honor their word, as I pick my associations carefully. But as

the owner, I will bare my soul here and tell you what I am facing.

The shipping alone for this small order could be close to $10,000.

And there are no deep pockets behind me ready to save the day.

Another concern is keeping my design safe from other businesses

that would attempt to prey on my small business status and infringe on my patent as I gain in the marketplace. Again, it is a critical time to manage the risk and plan the growth.

In fact, I am utilizing the Women’s Business Center again to

plan for this growth and have started a dialog for a potential second short-term loan. You see, the Women’s Business Center is not

only able to give invaluable information and support for startup,

but their expertise lends itself to the second stage of development

and planning.

As recently as last week I met with an expert there that is counseling me through the steps of 8(a) small disadvantaged business

certification. Is a daunting and detailed task that we are breaking

into sections. She is troubleshooting my data and advising me on

how to proceed for I fully understand the benefit in leveling the

playing field to sell products to the Federal Government.

As you can imagine, as a military widow, my preferred customer

will be the Veterans Administration. I want Spill-Guard available

and affordable to those who truly needed. I would say to any listening, I would be grateful to any connections, introductions or suggestions you might have to make this happen with haste.

I am an example of the positive impact of the Women’s Business

Center program. It is imperative that this service, support and program be available to others. The American people need affordable

training to be able to learn new skills. I did not have the luxury

of time and money to pursue an MBA. But I needed the skills to

go to the next level and pursue my idea.

Why is this important? Historically, ideas and innovation come

from small businesses. The strength and backbone of America is

with its small business. Jobs are created through small business.

It is worth investing in.

78

Worried about the deficit? No. Worry about the drain of untrained and unemployed workforce in the future. The cost in so

many directions will be high if we do not pull our center and get

our grass roots economy growing again. Our presence is being felt

around the world, but will our children have the freedom and opportunity to thrive here?

Think about it. Only in America could a low-income widow with

three kids have the nerve and the opportunity to find a place in

the billion-dollar medical field. The decisions you make in the Senate and the Government at large impact those opportunities.

True, I am not there yet. I have many turns to make and pitfalls

to avoid. But I made it to the marketplace. I have no doubt that

I will move from a low-income status to paying a whole lot of taxes

because I am wealthy.

This can happen with other potential businesses as well, if we

continue to support the Women’s Business Center. Over and over

again we have heard concerns about the economy, concerns about

our labor force not having skills, concerns about the takeover of big

business and concerns about jobs leaving our country. They are

valid concerns. How can we build a solid business structure here

with our foundation in another country? We cannot. It will fall. We

have to invest in growing our businesses and strength here.

In conclusion, it is exciting to hear a good story about your nextdoor neighbor trying to forge ahead. It is the American dream unfolding again. Right now, I am being watched and lifted up as an

example to thousands of kids and low-income people. They see it

can still be done. I hope to be in a position to help others in the

future and give back what has been so generously given to me. It

is a ripple effect.

Funding the Small Business Administration programs like the

Women’s Business Center of Northern Virginia is like planting

seeds for the future growth of our country. It is a small investment

in comparison to the whole of our budget that reaps great and positive returns. With the funding being cut, I am afraid you will hear

fewer success stories in the future. Maybe it is time for America

to revise its business plan. It is not too late.

Thank you for inviting me here. I am honored to be in your presence and have the opportunity to express my thoughts. I know I

speak for all the American people in thank you for your fine service

and powerful decisions that keep America strong.

[The prepared statement for Ms. Sands follows:]

STATEMENT OF PATRICIA SANDS, OWNER OF SPILL-GUARD, ARLINGTON, VIRGINIA

Good Morning, Madame Chairwoman Snowe, Ranking Member Kerry, and distinguished Members of this Committee. Thank you for inviting me to speak about my

business in regard to my association with the Women’s Business Center of Northern

Virginia. I am Patricia Sands, the CEO of Spill-Guard. Spill-Guard is a one member,

woman-owned, home-based LLC that is located in Arlington, Virginia. My product

is Spill-Guard Male Urinal and my storefront is the Internet. It is the only handsfree male urinal on the market that tests 500 percent improved over typical products. I am proud to say Spill-Guard is American made and produced in Leominster,

Massachusetts.

No doubt, it was an unusual endeavor for a low-income mother of 3. My product

and business idea came about from seeing a need in my life. In the years past, I

cared for my severely ill family members. As a military war widow I cared not only

for my husband, but also for my Father that had a 10-year recovery from a stroke.

I did not know it at the time, but in caring for them; I also was gathering great

79

market research in the field of incontinence. I know the patient, the problems, the

cost and the exhaustion of the caregivers.

From this bank of experience as a caregiver and my training in design, I put my

mind to the task of exploring how to create a more stable male urinal. With several

paper mache prototypes and revisions . . . the design came together quite quickly.

However, the patent, the engineering, the manufacturing and the distribution has

taken almost 5 years to be just at the startup phase! It has taken all my efforts

and funds. I believe in it, I know it will help others. My family knows that this

seemingly insignificant product has the ability to enhance the health of the patient

by drastically reducing the incidence of urine spills and bedsores. Right now, the

product choices for a severely ill patient are limited to typical urinals, adult diapers

and internal and external catheters. There is no product like mine on the market

for price and performance. Spill-Guard will lower the labor and material costs to the

facilities. Yes, this product will benefit Medicare with the growing baby boomer generation entering their golden years. For example, incontinence is the No. 1 reason

for admission into a nursing home. Spill-Guard can assist in keeping a patient in

his own home longer by effectively managing his care with dignity. The fact is, this

one simple product can positively impact an $11 billion a year industry in the U.S.

. . . $175 billion worldwide according to S & P.

But it is not enough to have a great idea. I am a middle-aged woman with a low

income and an art degree . . . that is strike three in the business world! I needed

a plan and I needed business skills. That is why I am here before you today. I took

classes with the Women’s Business Center of Northern Virginia. With the sustained

advice and services of the Women Business Center of Northern Virginia, I wrote a

business plan and learned the basic skills on how to structure the future of my business. I have had to readjust and change my plan almost on a monthly basis. What

I thought would unfold . . . did not; characteristic of all entrepreneurial ventures.

With the Women’s Business Center of Northern Virginia, I had magnificent professionals that helped me make wise choices and new plans.

For example, last year I had a series of crushing events that could have ended

my business. The largest event was that I was not notified of my factory in New

Hampshire closing without honoring my purchase orders. I lost all my customers at

that time. Yet, with encouragement and planning I kept going. Right after the move

to the new molder, it was apparent that my mold needed a modification. This modification was both costly both in time and money.

Truly, I was wondering about the feasibility of my business and whether the

seemingly endless string of delays and costs would ever end. Once again I turned

to the Women’s Business Center of Northern Virginia and we discussed options.

Within a short period of time, we came up with a workable strategy to recover from

this upset and address any unexpected costs. And, the WBC didn’t stop there, as

another source of support, I received a ‘‘Don’t give up . . . you are almost there,’’

from the entire staff of the Women’s Business Center. As you can tell, I value not

only their expertise, but their friendship as well.

The caliber of their classes and expertise bring credibility to the venture. SpillGuard has won many awards. Spill-Guard was awarded the Business Plan of the

Year Award, the Rising Star Award and the Most Valuable Player for Micro Enterprise Award. My business and association with the Women’s Business Center has

been documented in such distinguished publications such as the Chronicle of Philanthropy. The reason I am here today is because of the continued support of the Women’s Business Center. They are committed to my success. When you are associated

with so many people that want you to succeed . . . you are already a winner.

Where is my business now? Shipping! After a year of delays and setbacks, my

product started shipping last July. I have had 100 percent outstanding customer

satisfaction. Yet, I had a problem. I lacked the marketing budget due to the cost

of the modifications and several kids that required shoes and food etc. I knew I

needed to find another way to get the sales moving. To view my competition, I went

to MedTrade. It is the national medical products convention in Orlando. At first I

was overwhelmed by the size and cash-flow of my competitors. After I caught my

breath . . . I visited each of my competitors and realized I have NO competition.

I clearly had the better product. What I needed was to attach an engine to my business and associate with a distributor. I then approached McKesson Medical Surgical

in Richmond, Virginia. Without hesitation, I was offered a distribution agreement.

The product managers knew instantly the benefit of my design. Can you imagine

the feeling of taking an idea from a paper mache model to the boardroom of a Fortune 500 Company and they say . . . YES! It is the American dream all over again.

It doesn’t end there. McKesson has indicated they want to deepen our association

and begin a dialog about the creation of a private label for this and my other products that will follow. You can be assured that I stay in touch with The Women’s

80

Business Center of Northern Virginia as well as my lawyer for each step that is unfolding. I am excited about the future and am still closely watching my step . . .

so l don’t fall. I have come too far. Truly, I am at a critical point and no one is more

aware of that fact than I am.

I plan on moving ahead and expecting this product to bring steady revenue with

my association with McKesson. I am in their catalog and will be stocking their

warehouses at this time. It is a leap of faith of sorts. For example, in working with

a small business, an industry giant like McKesson needs to be sensitive and pay

on the agreed 30-day net in order for my company to build. I have no doubt that

they will honor their word. But as the owner, I will bare my soul here as an example of what I am facing in the near future . . . the shipping ALONE for this order

could be close to 10K. There are no deep pockets behind me ready to save the day.

Again, this is a critical time to manage the risk and plan the growth for my business.

In fact, I am utilizing the Women’s Business Center again to plan for this growth

and start a dialog for a potential second short-term loan. You see the Women Business Center is not only able to give invaluable information and support to a startup

business, but their expertise lends itself to the second stage of development and

planning. As recently as last week, I met with an expert there that is counseling

me thorough the steps of applying for 8a and Small Disadvantaged Business certification. It is a daunting detailed task that we are breaking into sections. She is troubleshooting my data and advising me on how to proceed. I fully understand the benefit in leveling the playing field to sell products to the Federal Government. As you

can imagine, as a military widow, my preferred customer will be the Veterans Administration. I want Spill-Guard available and affordable to those that truly need

it. I would say to those listening, that I would be grateful to any connections, introductions or suggestions you might have to make this process happen with haste. I

am very grateful that so much of our government works to serve the public good.

I am an example of the positive impact of the funding of the Women’s Business

Center program. It is imperative that this service, support and program be available

to others. The American people need affordable training to be able to learn new

skills. I did not have the luxury of time and money to pursue an MBA. But I needed

the skills to go to the next level and pursue my idea. Ideas and innovation comes

from small business. The strength and backbone of America is with its small businesses. Jobs are created through small business. It is worth investing in. Worried

about the deficit? No—worry about the drain of an untrained and unemployed work

force in the future. The cost in so many directions will be high if we don’t pull center and get our grass roots economy growing strong again. Our presence is being

felt around the world, but will our children have freedom and opportunity to thrive

HERE?

Think about it . . . only in American could a low-income widow with 3 kids have

the nerve and the opportunity to find a place in the billion-dollar medical products

field. The decisions you make in the Senate and government at large impact the opportunities given to its tax paying citizens. True, I am not there yet—I have many

turns to make and pitfalls to avoid . . . but I made it to the marketplace and I am

being taken darn seriously. I have no doubt that I will move from low-income status

to paying a whole lot of taxes because I am wealthy! This can happen with other

potential businesses as well if we continue to support the Women Business Center

program. Over and over again we have heard concerns voiced over the economy, concerns about our labor force not having skills, concerns about the takeover of big

businesses and concerns about jobs leaving our country. These are valid concerns.

How can we build a solid business structure here with our foundation in another

country? We can’t. It will fall. We have to invest in growing our own businesses and

strengths here.

In conclusion, it is exciting to hear a good story about your next-door neighbor

trying to forge ahead . . . isn’t it? It is the American dream unfolding again. Right

now, I am being watched and lifted up as an example to thousands of kids and lowincome people. They see it can STILL be done. I hope to be in a position to help

others in the future myself and give back what has been so generously given to me.

It is a ripple effect. Funding the Small Business Administration programs like the

Women’s Business Center of Northern Virginia is like planting seeds for future

growth of our country. It is a small investment in comparison to the whole of our

budget that will reap great and positive returns. With the funding being cut I am

afraid you will hear fewer success stories in the future. Maybe it is time for America

to revise ITS business plan? It is not too late.

Thank you for inviting me here today. I am honored to be in your presence and

to have the opportunity to express my thoughts. I know I speak for all the American

81

people in thanking you for your fine service and your powerful decisions that will

keep America strong.

I am happy to answer any questions you may have.

Chair SNOWE. Thank you, Ms. Sands. That is certainly a powerful statement and a powerful example.

[Applause.]

Chair SNOWE. American ingenuity and courage, as well.

Ms. SANDS. Thank you.

Chair SNOWE. No, thank you for a fine example. I wish the Administrator had the opportunity to hear your testimony. We will

send it over to him and we will make connections for you. It is the

least we can do.

Mr. Betancourt, I know you have to leave.

Mr. BETANCOURT. I would be happy to stay until 1:00, just so you

know. There is no rush.

Chair SNOWE. I will start with you, in case you have to leave.

On the Microloan program, I think it is important to clarify some

of the issues that were raised here. We know the 7(a) Community

Express program will not serve to fill that vacuum without the

Microloan program. Do we agree on that? Based on the statistics

that you have given, what did you say, how many States does it

operate in? There are very few lenders. There are zero in Maine,

for example, a small business State.

Mr. BETANCOURT. Rural is one big issue. It is obvious it is not

achieving its objective in the rural areas. Less than 6 percent are

reaching rural areas.

Chair SNOWE. There is less than 6 percent rural areas at a time

when rural areas desperately need support.

Mr. MASSAUA. Senator, if I may, he is looking for the number,

one of the problems with Community Express as it is supposed to

provide some technical assistance. However, most of the banks

want the technical assistance providers, like the SBDC or the

Women’s Business Center, to indemnify them of anything. That is

an impossibility.

Mr. BETANCOURT. It is 5.7 percent in rural areas for Community

Express.

Chair SNOWE. It is clear that the 2,400-plus participants in the

Microloan program are not going to be able to be served, for example, by the 7(a) Community Express program. Obviously, I gather

there are different criteria too, as well. These are people who are

probably not going to be able to be eligible with conventional lenders are they? It is more difficult to qualify for borrowing.

Mr. BETANCOURT. It is more difficult to qualify for 7(a). The credit is an issue. If you look at the application process, there is no

technical assistance other than helping you with the application. If

you are a business owner, like she mentioned over here, if you need

help with a business plan, that is not going to happen. You just

will not get the application. We are talking about two different borrowers.

Chair SNOWE. I gather that. If you are saying only 5.7 percent

serves rural areas and 40 percent of Microloans go to rural areas,

then obviously it is a totally different goal.

Mr. BETANCOURT. I think where the statistics do not show it for

Community Express is that they will tell you that they do X

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amount of loans under $35,000 in the thousands. And it is true.

But they are still not reaching Microloan borrowers. You can do

loans under $35,000, but these are not startups. These are not

rural areas. These are not folks with credit. These are not people

of color. It is a totally different borrower. It is pretty clear.

Chair SNOWE. I know he mentioned that it is duplicative with

the Microloan program, but they are both going to be eliminated

in that budget.

[Laughter.]

Chair SNOWE. There will not be any duplication there.

Mr. BETANCOURT. Let us talk about PRIME for the moment. One

of the issues that we are talking about in Microloan is access to

capital. PRIME is providing access to training. Especially, very

low-income borrowers.

It is great to have—in-lending, because we are a microlender, but

there are a lot of folks that may not need lending, because lending

is not the end goal necessary; the end goal is helping them have

a stronger business through technical assistance. And that is what

PRIME does. The fact that they restricted it last year just to 16

States, and our organization, AEO, opposed. They crippled that

program and now they want to eliminate it.

Chair SNOWE. Mr. Coit, tell me about the SBIC. You mentioned

the Participating Securities and it is obvious from the budget recommending—as you said in your testimony, closing the negotiations on this issue, at least that has been the proposal—not to

move forward because they have not provided any leverage within

the budget for Participating Securities.

What would be the impact of all of that for small businesses?

Where will the disparity and the equity gap that you referred to

occur, do you think? Would it be more pronounced in rural America

or anywhere as a result of not having access to this venture capital?

Mr. COIT. Yes. The simple answer is probably rural America, the

smaller size investments, the gap between angel investors, and the

rest of the institutional venture capital industry. There really is a

gap in there in terms of the size of investments. And by industry.

There are just some industries that the venture capital industry

does not finance. I think the statistics are particularly strong for

manufacturing and consumer and retailing. So those gaps would

exist.

Chair SNOWE. You were mentioning in your testimony that you

thought, at least estimated, that it would require about $80 million

on the part of SBA between 2006 and 2010?

Mr. COIT. No.

Chair SNOWE. For leverage? For leverage in the Participating Securities? You did not give an estimate?

Mr. COIT. Oh, for the existing licensees, yes.

Chair SNOWE. For the existing licensees.

Mr. COIT. That is a separate problem that the existing licensees

who really built their business plans around having access to leverage, that has not been authorized either. So that is a problem for

existing licensees.

Chair SNOWE. I understand, there are two issues there.

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Mr. COIT. Just to get back to your earlier question, we are concerned to have a more specific answer for your question about this

equity gap. And we have hired the Tuck Center for Private Equity

and Entrepreneurship and they are working, actually in part with

SBA, to try to come up with some more statistical data that actually defines the gap. As part of my written testimony I submitted

a letter from NVCA—this is the National Venture Capital Association—making a very strong case for the SBIC program. This is a

letter to the President of the United States saying that this gap exists.

So there is no argument from the rest of the industry about the

gap. There is the need for some specificity and we are going to try

to be more specific and more quantitative in our analysis and hope

to have that report to you by March.

Chair SNOWE. That would be great. We will be looking forward

to it. I think it is important to illustrate. I think so often talking

in numbers, there is no question that many of these programs have

worked well, as the Administrator has indicated. But we are sort

of moving in the wrong direction in terms of the trend.

But more than that is that we have not looked at how many

more can be served. We are looking at how many we are serving,

but what is the need, especially in rural America. And I get back

to that.

I know I represent a rural State, but so much of America is

rural. And even, as you mentioned, the urban areas. We need to

do something more than just sort of have a benign approach to

this. So many rural economies, so many economies, are suffering in

America. We are going to have to serve as a catalyst.

So it seems to me that we ought to be infusing those programs

that work well. It does not make sense to me. These numbers

sound large. They are great. They are wonderful. I would like to

be able to compare it to what would be the capacity to do more and

want we could do more to serve a lot more of America than we are

doing now because we are moving in a contrary direction.

It is counterintuitive in my view. If it is working well, why are

we cutting it? Especially with the need. There is a great need in

America. Everybody loves those macroeconomic numbers, but my

eyes glaze over because it does not tell the story for all of the individual areas of America. That is true overall, but there is so many

parts of America, and I know that is true in Maine, as John was

just describing, is the fact that many areas are suffering and they

need help.

These are the programs that help. Look at the HUBZone. They

want to fold that into something else. And that helps an economically distressed area in my State in Northern Maine that did suffer

from base closings. This is not the time to be pulling the rug out

from underneath them.

So in any event, that is what this is all about. I do not know why

we are putting the reins on a program rather than not allowing it

to foster more growth. That is the issue here.

So that would be very useful if we could show regionally how

many areas are being underserved.

I think to see it on a map, to see what areas are not being served

that otherwise would be served, the SBIC, for example, how it is

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has been able to help those areas that otherwise would be overlooked and there is nothing available for them.

I think is crucial to this debate, it is central, because it is so easy

to get into all these big numbers and percentages. It gets lost

about, well, who is not being served? I think we will see the enormity of the problem. Especially in so many parts of the country

that are not participating in this economic growth.

Mr. COIT. We will certainly make sure that the Tuck study addresses that issue.

Chair SNOWE. I think it would be very important. If there is any

way of doing it and calculating it, it would be very helpful.

Ms. Sands, you certainly are an eloquent example of the value

of the Women’s Business Center. You are referring to the Northern

Virginia Women’s Business Center which is in the sustainability

mode, which is to say that, according to the budget that we just

were presented from the Administration, that that would essentially be zeroed out. They would have to find alternative funding.

That is one of the issues because as you heard the Administrator,

he wanted to talk about creating new centers. And I think that

that is important, to create new centers across America.

By the same token, for the last 9 years we have made enormous

investments in these 49 centers that we would like to continue and

ensure they can.

Obviously, just listening to your story, you depended on that center at various points during your trial and error process of being

a women business owner. So they could have been there 1 year, but

gone another time, and you might not have had the opportunity to

have the benefit of their help and support at a key moment in time.

Ms. SANDS. That is correct. That is correct.

I understand he was saying the model was 5 years, but I think

that needs to be revised because the program is working and there

are people like me that are depending on centers just like that.

And to eliminate it and create it in another area would take so

much effort that it would just completely leave a huge community

of business owners in Northern Virginia without services and programs.

I agree new centers need to open, but I definitely would keep the

existing ones where they are.

Chair SNOWE. What was your time period from the time you

started until now? How long have you been a business owner? You

started Spill-Guard, for example.

Ms. SANDS. I started the provisional patent in 2000. I incorporated in 2003, LLC. So it is been a 5-year almost process, fourand-a-half year process. And it has been a long one.

The Women’s Business Center made me look credible to large

companies. I was not just a widow with three kids. I definitely had

a good firm plan and it was just enough to get me in the door.

Chair SNOWE. It is amazing with what you had to deal with personally, and also having your children, to muster the wherewithal

to also start your own business. That is a lot of perseverance.

I congratulate you. Just the enormity of your personal challenges, your family challenges, the loss of your husband. That is remarkable. I certainly applaud you. I am very impressed by your

story. Thank you for your contribution here today. We want to help

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you and we will continue to do that and have you work with my

staff.

Ms. SANDS. Wonderful. Thank you. I appreciate it.

Chair SNOWE. Mr. Tuvin, in the 7(a) program, you heard the Administrator this morning. I think one of the surprises recently was

about the fact they recalculated the subsidy rate for the fee that

now we find is just a third of what it was originally. You are absolutely right, now we are calculating a higher fee for the future,

based on the miscalculation?

Mr. TUVIN. We are waiting for SBA to provide for us sort of a

cross-walk that they promised us, just to tell us what it is all

about, so that we can compare what 2005 is going to look in comparison to 2006 and why they seem to feel this is necessary.

Chair SNOWE. You saw the chart that I had up there on the 118

percent over the last 3 years. It seems to me that is the trend they

are embracing, more fees, zero subsidy rates. I think it really does

point to the fact that it is going to create the haves and have-nots

in the business community, in the small business community because there are a lot of businesses that may not be able to do it

or be eligible because of paying for these high rates and the lenders

and so on.

It could have, I think, a counter-impact. That seems to be the

trend among all of these programs as we have seen with the zero

subsidy rate and the higher fees. Obviously it is a greater dependency.

Mr. TUVIN. I concur, that there does not seem to be common

sense associated with the decision process of how they are thinking

and the direction that they are moving with the program. It is a

unique program. It is not filled by other private lending needs in

the marketplace. And the demand is obvious. Just basic economics

tells us that there is a supply and demand. There is a huge demand for it and it is way more than what we are providing in the

first place.

Chair SNOWE. They underestimated the demand last year, which

I and others told them as well, that they were underestimating the

demand of the 7(a). And they did, by 33 percent, last year.

Mr. TUVIN. I was here. I heard you try to give them more money.

They did not want it.

Chair SNOWE. They did not want it. That is right. They did not

want it. I asked them that question, very directly, that they were

just underestimating the demand. And they did not. We went

through all of those travails, regrettably, and the small business

community and the lenders really felt the brunt of that.

So, with all the suspensions and everything for the whole appropriations process, it was just really regrettable because it clearly

could have been avoided. So I think that now we have to be concerned about the accuracy of these fees and how they are calculated and what they are calculating for the future.

Mr. TUVIN. Please. We are looking forward to seeing what they

have to say and hoping that we can regain the trust of the marketplace and some of the credibility that was lost from the whipsaw

motions of the programs opening and closing and changing and so

on. That would really help us in the marketplace.

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Chair SNOWE. That is a good point, too, in terms of confidence

and credibility in the community. That is a very good point.

Mr. TUVIN. I would be good and interested in this report, not

only from a geographic context of where these loans are benefiting

or where there are gaps, but also by industry as well. Because, as

you know, the programs that are provided through the SBA do not

only provide reasonable access to capital on reasonable terms, but

in fact, long-term capital that would not otherwise be available.

And to the extent that a person starting a business does not see

conventional debt offerings, which—you know, conventional lenders

and banks take money in on short-term deposits so they tend to

loan out on short-term loans and bullets and these sorts of structures, which we consider to be ineligible and unreasonable under

SBA provisions. So that what we are really concerned about is

where the gaps are filled. And there are a lot of places where the

SBA loan programs fill gaps. These people come to me. They have

been turned down before. I am the one in the field. They did not

come to me because they had five other options. They came down

because they have been all over the country, in some cases, looking

for loans they could not get elsewhere.

Chair SNOWE. Good point. That is exactly right and that is the

purpose. That is a very good point. That is exactly right. Otherwise, you were mentioning about China—that is the other thing.

We are in a competitive world, I guess John was mentioning that,

when you are talking about these research programs, the technology research programs that we have, the STTR and the innovation research in the competitive world that we live in, we have to

be trying to nurture that base, as well.

You are right, it fills a need that otherwise would not be filled.

That is the interest of Government. that is why we have the Small

Business Administration. It fills that need a way that cannot be

done solely in the private sector. So you have this public-private

partnership to make it work.

It is undeniable. The need is there and the demand. The question

is to what extent we can get them to fulfill that because I think

it would help the entire Nation’s economy. It would, no doubt, especially manufacturing jobs.

I mentioned Maine. We have lost 18,000 jobs almost in the last

4 years. It is been devastating. China is a giant in the marketplace

and it has dwarfed a lot of our manufacturing industries, as we

know with the trade deficit. So it clearly is ever more important.

It does not take a lot to make these programs work, and work well.

Mr. TUVIN. It is a lot of common sense.

Chair SNOWE. That is the problem, too much common sense on

Capitol Hill. It does not compute.

John, just some final questions. You made very good points and

it is really critical for the SBDC program where you are saying

level funding of $88 million simply is not going to work because inflation has eroded your ability to do the work.

Mr. MASSAUA. It will not work. We have been able to maintain

our clients increasingly. I suspect when we do our research this

year, we are probably not going to see the corresponding economic

development because the push on SBA is to get people in, get peoVerDate 03-FEB-2003 09:59 Jul 05, 2005 Jkt 021350 PO 00000 Frm 00090 Fmt 6633 Sfmt 6601 D:\DOCS\21350.TXT SSC1 PsN: SSC1
87

ple in, see more numbers. Where our push is to get economic impact, create jobs, get capital formation.

With a decline in hours across the country, which is the beginning of the trend which will continue to happen if we cannot get

enough dollars. Centers are closing, and we are going to see an adverse effect very readily in the economic numbers.

Chair SNOWE. You were saying that generally you would serve

clients 7 to 15 hours?

Mr. MASSAUA. For the clients that we typically see economic success with, it takes 7 to 15 hours of intensive counseling with them.

Chair SNOWE. What is that reduced to now, or at least what do

you anticipate?

Mr. MASSAUA. What it would be reduced to, if we are trying to

keep the same client numbers in, we are down below 5 hours on

average, 3 hours. That is not enough time. In many cases, it is just

an hour. ‘‘Here it is, thank you very much.’’ We just cannot do that.

And where we are working with technology companies, where

there is patent and intellectual property, it typically takes 30 to 50

hours of intensive counseling.

We just need to be able to reach a common sense of funding—

if you will—which is why we are only asking to put us back where

we were in 1998.

Chair SNOWE. To have that purchasing power, as I understand it, in 1998 you essentially need grants of $603,000?

Mr. MASSAUA. We would need $603,000 to have 1998 purchasing

power.

Chair SNOWE. So $109 million is what you are calculating now?

Mr. MASSAUA. It is what we need for the SBDC program Nation- wide to get the big flat States to the $600,000, which is 1998. Otherwise, we will have to cut the program.

Chair SNOWE. So that is going to reduce the number of hours, reduce the number of people you are going to serve and counsel,

which is important to the success?

Mr. MASSAUA. It is extremely important in Maine because where

do you cut? The size of the State is huge.

Chair SNOWE. I know. Exactly. It gets back to this whole dichotomy in America or in any event, and all the stories that have been

written about rural America in general and the outlying or urban

areas. What the case is, there is a huge need. What better way to

serve it?

Also, in helping even with the income gap in America. That is

the other part of it is helping people to have better paying jobs or

income. Many people are self-employed. They have gone that route

when they have lost their jobs with companies, which many people

have had to do in Maine. We know that. People take their own—

as you have, Ms. Sands—take your destiny in your own hands and

said I have an idea and I am going to go with it. So it is important

to all of us to make sure that can happen.

Does anybody else have anything to say? I have heard your comments and I think they are well taken. We will continue this discussion, obviously.

I truly appreciate all of your input and insights. I thank you for

your time in traveling here today. I truly appreciate it. I thank you

all for joining us.

88

The Committee is going to continue to work with SBA with all

of you who represent the small business community to make sure

that we rightfully apply the appropriate amount of money to these

programs that have served our Nation’s small businesses so well.

I thank you for all the great work that you do. It is extraordinary.

The record for this hearing will remain open for an additional 2

weeks, until noon on March 3. In addition, any written questions

for Administrator Barreto must be submitted to the Committee by

noon on February 24 and we will forward them to Mr. Barreto for

written responses.

Again, thank you all for joining us here this morning.

This hearing is adjourned.

[Whereupon, at 12:35 p.m., the hearing was adjourned.]

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