U.S. GOVERNMENT PRINTING OFFICE

64–731 CC WASHINGTON : 2000

S. HRG. 106–543

THE PRESIDENT’S FISCAL YEAR 2001

BUDGET REQUEST FOR THE

SMALL BUSINESS ADMINISTRATION

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS

UNITED STATES SENATE

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

FEBRUARY 24, 2000

(

Printed for the Committee on Small Business

For sale by the Superintendent of Documents, Congressional Office

U.S. Government Printing Office, Washington, DC 20402

COMMITTEE ON SMALL BUSINESS

ONE HUNDRED SIXTH CONGRESS

CHRISTOPHER S. BOND, Missouri, Chairman

CONRAD BURNS, Montana

PAUL COVERDELL, Georgia

ROBERT F. BENNETT, Utah

OLYMPIA J. SNOWE, Maine

MICHAEL ENZI, Wyoming

PETER G. FITZGERALD, Illinois

MIKE CRAPO, Idaho

GEORGE V. VOINOVICH, Ohio

SPENCER ABRAHAM, Michigan

JOHN F. KERRY, Massachusetts

CARL LEVIN, Michigan

TOM HARKIN, Iowa

JOSEPH I. LIEBERMAN, Connecticut

PAUL D. WELLSTONE, Minnesota

MAX CLELAND, Georgia

MARY LANDRIEU, Louisiana

JOHN EDWARDS, North Carolina

EMILIA DISANTO, Staff Director

PAUL COOKSEY, Chief Counsel

PATRICIA R. FORBES, Democratic Staff Director and Chief Counsel

(II)

CONTENTS

OPENING STATEMENTS

Page

Bond, The Honorable Christopher S., Chairman, Committee on Small Business, and a United States Senator from Missouri ............................................. 1

Kerry, The Honorable John F., Ranking Member, Committee on Small Business, and a United States Senator from Massachusetts .................................. 9

Wellstone, The Honorable Paul, a United States Senator from Minnesota ....... 19

WITNESS TESTIMONY

Alvarez, The Honorable Aida, Administrator, Small Business Administration,

Washington, D.C.; accompanied by Charles D. Tansey, Associate Deputy

Administrator for Capital Access, Small Business Administration; Kris

Marcy, Chief Operating Officer, Small Business Administration; Russell

Orban, Assistant Chief Counsel for Advocacy, Small Business Administration; and James Ballentine, Associate Deputy Administrator for Government Contracting and Minority Enterprise Development, Small Business

Administration ..................................................................................................... 20

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Alvarez, The Honorable Aida

Testimony .......................................................................................................... 20

Prepared statement .......................................................................................... 28

Responses to post-hearing questions posed by Senator Bond ....................... 52

Responses to post-hearing questions posed by Senator Cochran ................. 89

Responses to post-hearing questions posed by Senator Kerry ...................... 91

Bond, The Honorable Christopher S.

Opening statement ........................................................................................... 1

Letter from GAO to Chairman Bond dated February 24, 2000 .................... 5

Post-hearing questions posed to Ms. Alvarez and subsequent responses .... 52

Cochran, The Honorable Thad

Post-hearing questions posed to Ms. Alvarez and subsequent responses .... 89

Kerry, The Honorable John F.

Opening statement ........................................................................................... 9

Prepared statement and attachments ............................................................ 13

Post-hearing questions posed to Ms. Alvarez and subsequent responses .... 91

Levin, The Honorable Carl

Opening statement ........................................................................................... 18

Wellstone, The Honorable Paul

Opening statement ........................................................................................... 19

COMMENTS FOR THE RECORD

Bond Market Association, Washington, D.C., statement and attachment .......... 141

Rubin, Julia Sass, New Markets Venture Capital Consultant & Doctoral

Candidate, Harvard Business School, Cambridge, Massachusetts, statement ...................................................................................................................... 146

(III)

(1)

THE PRESIDENT’S FISCAL YEAR 2001

BUDGET REQUEST FOR THE SMALL

BUSINESS ADMINISTRATION

THURSDAY, FEBRUARY 24, 2000

UNITED STATES SENATE,

COMMITTEE ON SMALL BUSINESS,

Washington, D.C.

The Committee met, pursuant to notice, at 9:05 a.m., in room

SR–428A, Russell Senate Office Building, the Honorable Christopher S. Bond (Chairman of the Committee) presiding.

Present: Senators Bond, Kerry, and Wellstone.

OPENING STATEMENT OF THE HONORABLE CHRISTOPHER S.

BOND, CHAIRMAN, SENATE COMMITTEE ON SMALL BUSINESS, ANDA UNITED STATES SENATOR FROM MISSOURI

Chairman BOND. Good morning. The Senate Committee on Small

Business will come to order. We are very pleased to welcome SBA

Administrator Aida Alvarez who will be testifying this morning as

we focus on ‘‘The President’s Fiscal Year 2001 Budget Request for

the Small Business Administration.’’

I have been advised by minority staff that my good friend and

colleague, Senator Kerry, is probably caught in traffic somewhere

so we will give him the metropolitan excuse and go ahead without

him. We are delighted that Senator Wellstone has joined us.

This hearing, for everyone’s information, is being web cast, which

means that audio and video is being broadcast live on the Internet.

I join in welcoming all our viewers who have logged on this morning. We appreciate your joining us through the marvels of modern

technology.

This is the beginning of my sixth year as Chairman of the Committee on Small Business. During this time, small businesses

throughout the United States have demonstrated daily why they

are recognized as the backbone of our Nation’s economy. Year in

and year out, thousands of new businesses are started, many growing very rapidly, creating jobs, new investments, and hope and

dreams for families everywhere.

The energy exuded from a vibrant small business is contagious.

Once caught up in the entrepreneurial spirit, it is very hard to let

go. It is no wonder that delegations from all over the world are

studying the success of small business in the United States. I find

as I travel around the world they want to know what the secret

is for having a strong SME—or a small- and medium-size enterprise part of the economy. I tell them, for the most part it is getting

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Government out of the way. But there are certain areas in which

Government can be a very positive force.

As we focus our attention on the Small Business Administration

and its budget for FY 2001, it is helpful to reflect on the successes

of the Agency. The foundation of the Agency rests on its credit and

management assistance programs. During the past decade, we

have experienced enormous growth in the 7(a), the 504, the

Microloan and the SBIC programs. Tens of billions of SBA-guaranteed dollars have been loaned or invested in small businesses. The

SBDC and SCORE programs have allowed the SBA to deliver management assistance and counseling to millions of small business

owners and budding entrepreneurs.

The Administration’s budget request has proposed ambitious

plans for various new initiatives. I am pleased the President’s plan

counts the HUBZone program as part of the New Markets Program. As many of you know, the HUBZone program was created

and approved by this Committee and the Congress and signed into

law by the President in 1997. The SBA did not begin implementation of the HUBZone program until March 1999 and is now requesting $5 million to expand its staff and outreach efforts to promote the program.

I urge the SBA to take advantage of its excellent resource partners to increase opportunities for potential HUBZone small businesses. For example, there must be at least 1,000 centers and subcenters in the SBDC program, and I would like to see the SBDCs

more active in distributing information about the program. I would

hope that the SBA HUBZone office could provide each SBDC location with information about the HUBZone program that would be

provided to small businesses that are seeking help.

Senator Kerry and Senator Wellstone each have a bill pending

before the Committee addressing the community development venture capital proposals. In addition, SBA officials recently provided

the Committee staff with a briefing promoting this initiative.

The SBA attempted to explain why the current SBIC program

was not reaching all those companies that needed venture capital

and singled out San Jose, California, as a community in need of

help from the New Market Venture Capital program. The SBA

stated that investments made by SBICs in San Jose had not helped

the local economy but were really focused on promoting the growth

of ‘‘dot.com’’ businesses in the high tech Silicon Valley. Let me take

a moment to review the San Jose situation.

Over the past 3 years, SBICs made 98 investments totaling $67

million in 37 small businesses within the San Jose city limits.

SBIC investments are creating jobs and generating more spending

in San Jose. But somehow, the SBA has determined that these

SBIC investments and these new jobs are not helping the local

economy. This is counterintuitive. If we could get the same kind of

investment in my home town of Mexico, Missouri, we would be extremely happy to have the kinds of problems that San Jose is facing. I assure you, we could deal with them.

The SBA’s fiscal year 2001 budget request also sets forth very

ambitious plans to (1) expand its core programs and (2) transform

the Agency to meet the challenges of the 21st century. The SBA

must surpass many hurdles to make this transition a success. At

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the same time that the SBA is attempting this reinvention, it

wants to roll out new programs that require increases in both staffing and budget.

Based on what has been presented to the Committee to date, I

have serious reservations about encouraging the Agency’s plan to

expand its core programs, while transforming itself to meet the

challenge of the 21st century, while at the same time introducing

new initiatives.

As we discuss the future of the SBA, I cannot ignore the impact

this proliferation of new programs could have on the core programs

of the SBA. Congress has approved substantial budget increases for

the Agency in recent years. However, I have received reports from

the SBA that offices supporting key technological SBA programs

are underfunded or understaffed. As the SBA shifts its responsibilities to meet the demands of the 2lst century, I am concerned that

the human capital tools may not be available.

In other words, I have no doubt that the SBA has a vision for

its future. What I am concerned about is that the Agency lacks a

formal written strategy to achieve its vision while ensuring that its

core missions are operating efficiently, effectively, and economically.

Let me dissect this concern for a moment beginning with the

SBA’s core missions and the programs it wishes to expand. Such

expansion does not happen without growing pains and change,

which can be difficult on a large organization. In addition, we have

to be honest, the SBA core programs are not operating flawlessly.

As you are aware, during the past year the Committee received reports critical of the SBA’s performance in a number of core mission

areas.

No. 1, GAO issued a report critical of the SBIR program. No. 2,

the Inspector General prepared an audit critical of the 7(a) program. No. 3, the Farm Credit Administration report on the SBLC

program was critical of SBA’s management of the program. No. 4,

while the SBA’s auditor gave the Agency an unqualified opinion for

its fiscal year 1998 financial statements, the auditor cited three

material weaknesses, which call into question the SBA’s internal

controls designed to reduce the risks in its operations.

Welcome, Senator Kerry. I already explained to them that you

had problems in traffic. Does that work?

Senator KERRY. Well, it is as good as anything.

[Laughter.]

Chairman BOND. All right, that will work. Close enough for Government work.

Three years ago, many of us were enthusiastic about the prospects for an SBA computer system that could monitor its loan programs and the lenders that participate in the program. We wanted

to assist the SBA in meeting the challenges of the 21st century. As

the Agency turned over many loan activities to its lending partners, it would finally have the resources to oversee the lenders.

In the past 3 years, Congress has appropriated $24 million for

the so-called Loan Monitoring System. Development of this computer system is critical for the future operations and success of the

Agency. However, planning for the first iteration has not been completed.

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Just yesterday, I have received a letter from the General Accounting Office about the status of ongoing planning for the Loan

Monitoring System. GAO confirms the SBA’s failure to meet its

own deadlines. After 3 years, the initial planning phase is not yet

complete despite the fact that the SBA has advised the Committee

that it is anxious to implement the system.

The GAO letter is a good status report of the Loan Monitoring

System development, and I encourage my colleagues on the Committee to review it. If there is no objection, I will include the GAO

letter in the hearing record. I trust that you all have received a

copy of this letter.

[The letter follows:]

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Chairman BOND. The changes confronting the SBA today are

enormous just to expand core programs and meet the challenges of

the 21st century through, among other things, a new Loan Monitoring System. With these two challenges in hand, I hope we will

hear from you, Madam Administrator, about how the Agency intends to address its ‘‘Human Capital’’ issue related to these two

challenges at the same time it proposes rolling out a plethora of

new programs.

I recognize and commend your commitment to small business,

Administrator Alvarez, but I do remain concerned with the SBA’s

ability to expand its core programs which are not operating optimally now, to transform itself to meet the challenges of the 21st

century, and to initiate a series of new programs all at the same

time.

I learned a long time ago that it is not very wise to build a house

on wet cement. You have to let the cement dry and set before you

build on it. That is what I am concerned that may not happen here.

Let us make sure that our core programs are operating really well.

I do not want to see anymore critical audits or reports or evaluations. Let’s get the Loan Monitoring System off the ground. Then

we can turn our attention to new programs.

Before calling on the Administrator for her testimony, I welcome

the Committee’s Ranking Member, my good friend from Massachusetts, Senator Kerry, to make his opening comments.

Senator.

OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY,

RANKING MEMBER, SENATE COMMITTEE ON SMALL BUSINESS, AND A UNITED STATES SENATOR FROM MASSACHUSETTS

Senator KERRY. Mr. Chairman, thank you. Thank you very

much. I do apologize for being late. Senator Levin is not here nor

Senator Lieberman. We were down at the State Department at a

meeting, and I appreciate your indulgence. And there was some

traffic between here and there.

[Laughter.]

Senator KERRY. Administrator Alvarez, thank you for joining us

today. We are delighted to welcome you back here to the Committee. In my judgment, you have sent the Congress a good budget.

I think the growing demand for the SBA’s programs is a reflection

of the effectiveness in the way in which those programs are being

administered. And also a reflection of the prosperity in the country—the roll that we are on, and the increased opportunity that

has been created.

I think your budget is realistic, and I think it is appropriate, not

just with respect to the existing programs, but the new programs.

I think we may obviously have some differences here, and I hope

we can work through them because I do not think it is that provocative, or that challenging, to be honest with you.

I think it is a smart budget. First of all, it eliminates the controversial funding mechanisms for the disaster loan program and

the Small Business Development Centers that have been a bone of

contention in the past between appropriators in Democratic and

Republican Administrations. I think this important change will set

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the tone for more a favorable appropriations process and allow the

Agency to focus on the mission of helping small business owners

who cannot access traditional capital or training programs.

Perhaps it comes as no surprise that I do support the new markets component of the budget, and I want to just say a few words

about that. There is $52 million in here for the New Markets Venture Capital Program, and I think if you examine what has been

happening in certain parts of the country—Massachusetts happens

to be one of them—you would see the power of venture capital.

This is not a special kick for us in any sense, because we have done

very well. We are one of the financial centers of the country. We

have more private capital managed in Boston than any other place

in the world, and it is reflected in the venture capital efforts that

are taking place there now. Likewise, California, Texas, Florida.

Different States have fared better than others. And many States—

Senator Wellstone’s State—and other States are all increasingly

witnessing the power of this technology revolution, of globalization,

and of venture capital and the impact that it is having on small

businesses.

We know that when you have a strategically-targeted effort combined with appropriate management assistance, we really have the

potential to organize and improve the economic infrastructure of

our poorest communities. It has to be a matter of conscience. I cannot believe it is not, to Republican and Democrat alike, that at this

time of remarkable growth in the Nation. There are pockets that

just do not share in our strong economy at the proper rate or sometimes at all.

Now, if ever there was a moment for this country to use the

power of capitalism effectively, in an enlightened way, to reach into

some of these communities, it is now. If you cannot do it now, how

are you going to do it if we are in a downturn, the budget is being

squeezed, and we are reducing or having to cut and we do not have

the surplus? Countless business scholars—I would ask a little indulgence on the light, if I can.

Chairman BOND. I went over by 30 or 40 seconds, so you can go

as long as you want.

Senator KERRY. I do appreciate that.

Senator WELLSTONE. Senator Kerry, don’t you believe him for a

moment.

Senator KERRY. You did not hear what he said; I can have as

long as I want.

Senator WELLSTONE. I cannot wait for my time.

[Laughter.]

Senator KERRY. Let me just share with you very quickly, Mr.

Chairman. Two of our respected business scholars, William

Bygrave and Jeffrey Timmons at the Harvard Business School and

Babson College said that venture capital is really responsible for

having driven the success of the country over the last 20, 30 years.

All of us understand that the reason we are holding inflation down

and the reason we are growing at the rate we are growing, is principally because of the productivity increases that are coming by virtue of technology.

Second, Michael Porter at the Harvard Business School has written extensively on competitiveness, and he said that ‘‘. . . inner citVerDate 11-MAY-2000 10:31 Sep 19, 2000 Jkt 065977 PO 00000 Frm 00014 Fmt 6633 Sfmt 6602 E:\HEARINGS\64731 pfrm04 PsN: 64731
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ies are the largest underserved market in America, with many tens

of billions of dollars of unmet consumer and business demand.’’

Third—final point—rural areas in this country are grossly under- invested. In 1998, of the $59 million in true low- and moderateincome investments made by SBICs—meaning those investments

less than $1 million made in low- and moderate-income areas—less

than $1.1 million out of that total went to rural areas. So, under

the Community Development and Venture Capital Act legislation

that I introduced last September, many rural areas would qualify

as low- and moderate-income communities eligible for Community

Development Venture Capital investments.

I would submit for the record, Mr. Chairman, maps of Montana

and Georgia that speak volumes about the need for investment in

those rural areas.

Chairman BOND. Without objection, they will be included.

Senator KERRY. Thank you, Mr. Chairman. We have seen that

the existing venture capital program of the Small Business Administration, the Small Business Investment Company program, has

really proven to be one of the most successful private-public partnerships that we have in the country. Over the life of the program

SBICs have generated $26.6 billion in 12,000 financings of highgrowth small businesses. And over the past 5 years, since the participating securities program was initiated, $131 million in profit

has been returned to the Treasury of the United States.

It simply makes sense to continue that, expand that program to

reach these other communities. These results really need to be

spread throughout the country, and I hope that when we reauthorize on March 21, we can put this venture capital program to use

around the country.

Now, let me just say very quickly, I am glad to see that the funding request for e-commerce initiatives has also increased, Madam

Administrator, to $5 million. I think it is a modest investment compared to the value of the e-commerce market. It is estimated that

every single day 90 million people now are using the Internet

around the world. And it is increasing every day. For the past 5

or 10 years there has been just a stunning shift that all of us are

still trying to catch up to in this kind of business.

Wearing my Commerce Committee hat, I have been meeting with

a lot of the CEOs across the country. Yesterday, for instance, with

Mike Armstrong at AT&T, one of our most established companies,

they are scrambling to keep up with and get ahead of this new

curve. And the impact for small business in terms of B2B, business-to-business opportunities, is where most people say most of

the gain is going to come. It is just extraordinary.

So I think we need to stay ahead of that curve. I am also pleased

about your $1.5 million for the Office of Advocacy. Last year Senator Bond and I wrote a letter to the appropriators requesting $2.5

million, and there was unanimous consent at the roundtable on advocacy last year that the office needs an increase. So I am glad we

are doing that.

There are other efforts I would laud here, but rather than chew

up our time, I would ask unanimous consent to have the full text

pleased in the record.

Chairman BOND. Without objection, it will be.

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Senator KERRY. Thank you, Mr. Chairman. Let me just close by

saying, I want to emphasize that the SBA’s loan and investment

programs are an extraordinary bargain. The taxpayers leverage

their money in a remarkably effective way to help thousands of

small businesses every year fuel the economy. In the 7(a) program,

taxpayers spend $1.24 for every $100 lent to business owners, and

we have seen extraordinary successes of companies like Ben & Jerry’s and Winnebago, as some examples of the program’s effectiveness.

In the SBIC participating securities program, we spend $1.31 for every $100 leveraged for investment. Again, companies like Staples, Callaway Golf, Federal Express, Apple Computers. These are

all stellar examples of this kind of investment.

With the 504 program, we do not spend a penny to lend or to leverage. The program is funded through fees. So I think we have

done a great job of pulling a bipartisan consensus here together.

My hope is we will be able to do that again with community development capital. I hope, Mr. Chairman, that we can get all of the

subjects contained in this one hearing. It is a little unusual to try

to do this all at one hearing. I am willing to try to do it. But I

would hope that if we have some subjects that somehow are not

adequately explained, we reserve the right to revisit it before we

mark up so that issues will get a proper hearing if there is some

sense that there is contention about them, or we do not have the

ability to move forward. I thank the Chair.

[The prepared statement and attachments of Senator Kerry follow:]

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Chairman BOND. Thank you.

Senator KERRY. Now one just quick thing. Senator Levin specifically asked me if I would read his statement—just 1 page.

OPENING STATEMENT OF SENATOR CARL LEVIN, A UNITED

STATES SENATOR FROM MICHIGAN, AS READ BY SENATOR

JOHN KERRY

Senator KERRY. He says, ‘‘Mr. Chairman, I apologize that conflicting hearings make it impossible for me to participate in this

morning’s hearing. A program of particular interest to me is the

SBIR program. I hope we can reauthorize that important research

and innovation program as soon as possible.

As part of that reauthorization, I appreciate the Chairman’s

working with me to draft legislation to create an outreach program

to increase participation in the SBIR program that will be available

to all States. I hope to incorporate my volunteer mentoring idea

into this outreach proposal. Mentoring provides an excellent complement to outreach. Through outreach we would let more small,

high-technology companies know about the SBIR program, and

through mentoring we would help them improve their odds of

achieving success.

The SBA also has a proposal to improve the SBIR program that

I hope we can work on together.’’

Chairman BOND. Thank you very much, Senator Kerry. We appreciate Senator Levin being with us by statement.

Senator KERRY. Finally, I ask unanimous consent that a statement by Julia Sass Rubin on New Market Venture Capital be

placed in the record.

Chairman BOND. Without objection, I would be happy to do so.

[The statement of Ms. Rubin is in the COMMENTS FOR THE

RECORD.]

Chairman BOND. I might just add, on the many subjects that we

have before us today, we noticed the conflict in hearings and the

difficulty in making sure that we have a full membership of the

Committee together. That is why last year we began the roundtable process. The roundtables have gone into great detail in going

through the various specific areas of SBA activity.

I have found, and the staff has found, these to be extremely helpful. Senator Kerry and I have attended parts of them. A number

of our colleagues, I am afraid, have not fully appreciated the importance of this. I am going to join with Senator Kerry and urge all

of our colleagues to make sure that staff is present for the roundtable meetings. We know the pressures of the Senate schedule, and

we all serve on at least two A committees that have hearings at

the same time so we cannot be here. But I would hope that staff

for all Committee Members would make it a point to attend the

roundtable meetings.

For the effective functioning of the Committee, it is important

that we at least have staff participation, because in a Roundtable

there is a lot more information than we can cover than in a hearing. But as you will note today, there are three Members for what

we had hoped would be one big markup with as many Members attending as possible. So I share your concern, but we need to make

sure we have all the Committee Members involved.

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With that, let me turn—for his lengthy opening statement—to

my colleague from Minnesota, Senator Wellstone, who has up to a

whole 5 minutes, if you want it.

OPENING STATEMENT OF THE HONORABLE PAUL

WELLSTONE, A UNITED STATES SENATOR FROM MINNESOTA

Senator WELLSTONE. Mr. Chairman, I promise to keep my remarks under an hour.

[Laughter.]

Chairman BOND. Senator Wellstone, I would say you have been

one of the most faithful Members in attending all the hearings and

we do appreciate your participation. You have been a very important contributing Member of the Committee.

Senator WELLSTONE. I appreciate your gracious remarks.

Let me welcome Administrator Alvarez. Let me say that I think

it is a good budget. I am glad that you maintain and build the

funding for some core programs. The 7(a) and 504 programs have

been tremendously successful in our State of Minnesota. Ed Dahm

runs a great operation. We have a terrific working relationship between the small business community and the SBA office and I

want you to know that.

The other thing you do is you find some room for some creative

solutions to deal with communities, as Senator Kerry said, that

have been left behind. In some ways it has been an uneven recovery and it is painful to see the economy booming while at the same

time there are literally communities that do not share in this prosperity, and I appreciate that focus.

Let me in particular focus on one program, and that is the request for funding for the New Markets Program. As you know, Mr.

Chairman, 2 years ago as a part of the Small Business Programs

Restructuring and Reform Act of 1998, I had a proposal that was

in there, and the Committee supported it, which was called the

Community Development Venture Capital Demonstration Program.

That program was passed by this Committee, later on by the full

Senate, but we did not get it done in the House.

I reintroduced that legislation last year because I think my proposal and the New Markets Venture Capital initiative complement

each other. In fact, Senator Kerry has been good enough to include

my legislation as a part of his overall initiative, and I am very

pleased with that.

I think what I need to do today is to say that I hope we can work

together. I heard the Chairman’s remarks, have respect for what

he said. I want to put myself on record that I certainly will have

an amendment here in Committee to add this Community Development Venture Capital Act to the SBA Reauthorization bill. Or if

Senator Kerry introduces his bill as an amendment, then that

would be the effort, and I would prefer to join really with my colleague from Massachusetts. But I think, Mr. Chairman, that as

Senator Kerry said, we ought to be able to work this out. I really

do not think the differences are that great.

To just highlight one of those, I agree with what you said about

these roundtable discussions. On May 18 of last year we had a

roundtable discussion on SBA equity programs, and we had a great

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ments made from folks like Don Christenson at SBA, Julia Sass

Rubins at Harvard University, in support of these proposals that

I am talking about.

Plus we had folks that are out there doing this kind of work

right now, Nick Smith with Northeast Ventures in Minnesota, Ray

Moncrief of Kentucky Highlands, and Elyse Cherry in Boston. They

were very supportive of this initiative. I also would recommend

that our colleagues be sure to read, at least get their staffs to read

the record and look at that discussion because it was, I think, very

important.

Finally, I would commend you, Administrator Alvarez, for the increased funding for the Microloan program, and also the technical

assistance. I think that the doubling of funding in both areas is justified because what we find out in Minnesota, it is a heart and soul

program. Some of these Microloan businesses are just fabulous. I

mean, so inspiring. But the one thing that happens quite often is

without the technical assistance they do not succeed. I think the

two go hand in hand, and I think you are right on target.

I want to note one request in this budget that has not been men- tioned, Mr. Chairman, and that is the request for $3 million out

of the proposed $85 million small business development center to

establish a Native American small business development center

network. This network would focus on providing the assistance to

Indian reservations, the training, the counseling, the technical assistance.

I think we really need to get out there in Indian country. I come

from a State with a significant presence of Native Americans and

I think that proposal is right on target. I am also a member of the

Select Committee on Indian Affairs and I just want to indicate to

you my strong support.

I think I stayed under 5 minutes, Mr. Chairman.

Chairman BOND. Thank you very much, Senator Wellstone. Now

we turn to Administrator Alvarez. Welcome.

THE HONORABLE AIDA ALVAREZ, ADMINISTRATOR, SMALL

BUSINESS ADMINISTRATION, WASHINGTON, D.C.; ACCOMPANIED BY CHARLES D. TANSEY, ASSOCIATE DEPUTY ADMINISTRATOR FOR CAPITAL ACCESS; KRIS MARCY, CHIEF

OPERATING OFFICER, SMALL BUSINESS ADMINISTRATION;

RUSSELL ORBAN, ASSISTANT CHIEF COUNSEL FOR ADVOCACY; AND JAMES BALLENTINE, ASSOCIATE DEPUTY ADMINISTRATOR FOR GOVERNMENT CONTRACTING AND MINORITY ENTERPRISE DEVELOPMENT, SMALL BUSINESS ADMINISTRATION

Ms. ALVAREZ. Thank you very much. Good morning, Mr. Chairman, Senator Kerry, Senator Wellstone.

I appreciate the opportunity to testify here today on behalf of the

SBA’s fiscal year 2001 budget. Before I begin, I want to say, Senator Bond, that I do believe many of the concerns you raise are actually addressed in my testimony, and obviously, I would be happy

to discuss them. I do have one concern that is not addressed in my

testimony and that is the GAO letter that you mentioned. You said

you received it yesterday. I have not seen this letter. I understand

that GAO sent a draft, unsigned letter to the SBA which, as I said,

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I haven’t seen and I request that the Committee hold the record

open for the SBA to fully respond to the letter. I would like our letter to also be a part of the record of the hearing.

[The letter appears in Exhibit 2 of the APPENDIX.]

Chairman BOND. Without objection, that will be. We asked them

for a quick status report and they had advised us they had received

a response from your Agency just as a partial update on it.

Ms. ALVAREZ. I would appreciate that.

Chairman BOND. They apparently have had some discussion with

officials in there but obviously you are welcome to submit a more

extensive statement since this is an ongoing program, so, we will

be happy to have further comments on it.

Ms. ALVAREZ. Thank you very much.

And also with regard to our modernization effort, I will in my

testimony address the progress we have made, which has been significant. We did have a meeting yesterday. My Deputy met with

senior GAO auditors and, frankly, I am surprised to hear your

statement because we have made enormous progress working with

them every step of the way as well as with the IG. And, at the

meeting yesterday, they underscored the progress we were making.

So, again, it is something that we can revisit, and I do discuss it

in my testimony.

Senator Kerry and Senator Wellstone, you have made a very

compelling case for the New Markets Initiative, which is actually

a bipartisan effort. I know that you mentioned the HUBZone program is a part of the New Markets Initiative because the thinking,

the objectives of the HUBZones program is totally consistent with

what we are trying to accomplish with new markets. And I know

that Speaker Hastert has been working with the President on behalf of a New Markets Initiative.

Senator Kerry has introduced a bill which I believe does include

Senator Wellstone’s proposal, and I am pleased to say that I was

just informed yesterday that on the House side Congresswoman

Valazquez, working with Jim Talent and Peter King and a number

of other members from both sides of the aisle are prepared to

present shortly their version of the New Markets Initiative.

So, I really hope that we can work together. I think there is a

recognition across the Congress that this is an opportune moment

to address unmet needs and we feel that it is the role of the SBA,

always has been, to address the gaps and not be satisfied with our

success to date but continue to indentify new frontiers, new areas,

like these new markets, where we can make a difference.

With respect to our new budget, it has to be put, I think, in context—and Senator Bond, you, and the other Senators as well, addressed the fact that this is a booming economy and, in fact, so

much of this economic expansion is actually being fueled by small

businesses; 25 million in the United States, which is 5 million more

than in 1990 and the most ever in this country. There has been tremendous growth, for example, among Hispanic-owned businesses,

African-American-owned and Asian-American-owned businesses.

The number of women-owned businesses has doubled to nearly 9

million and they are now generating over $3 trillion in revenues.

The biggest job creators in this country are small businesses.

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To keep pace with that growth and also to help America’s disaster victims, I am requesting a budget for the fiscal year 2001 of

a little more than a billion dollars. This budget would fund record

levels of loan and venture capital assistance. It would expand management and technical assistance for America’s small businesses

and it would also allow us to continue our mission of assisting disaster victims. Last year we approved 36,000 loans a for a little

more than $900 million, which helped retain—our loans to businesses—helped to retain 35,000 jobs. And this year we are requesting full funding for our disaster program, which is $296 million, up

from $276 million.

As I mentioned, our budget request would fund record levels of

lending and venture capital. Let me just address our needs in the

area of our loan programs. In fiscal year 1999, the SBA guaranteed

50,000 loans and approximately one-third of those loans, 7(a) loans,

went to startup firms less than 24 months old. That is very important to help the most vulnerable and the most promising of small

businesses. We have, since 1992, more than doubled our lending to

minority-owned businesses, while tripling our lending to womenowned businesses. We are addressing a very important need in the

area of equity capital and in 1999 our Small Business Investment

Companies accounted for over half of all the institutional-venture

capital transactions in the United States; an estimated $4.2 billion.

And I think that is a remarkable success for that program. For our core programs we are requesting $274 million to deliver more than $20 billion of credit, venture capital, and technical assistance, up from $17 billion this past year. It includes an $11.5

billion program level for the 7(a) program, up from $9.8; $3.75 billion in 504, with a reduced guarantee fee for the fourth year in a

row; $60 million, a doubling for the microloan program; $45 million

for microloan technical assistance; and we propose a $2.5 billion

program level for the SBICs. We expect this investment to attract

an additional $1.25 billion in private capital. With 3.75 billion in

new SBA-leveraged funding, plus their on-hand private capital, we

are looking to hopefully see $4.5 billion in investments in fiscal

year 2001.

And, as you mentioned, Senator Kerry, the SBIC participating

security program is producing returns; $131 million to the Treasury as a taxpayer’s share of their profits.

I think to really appreciate the success of the SBA in assisting

small businesses, we need to take a step back and look at the big

picture. Since 1992, the SBA has backed more than $71 billion in

small business loans and venture capital, which is more than in

the previous 25 years combined. This is an amazing success story

and it is no wonder that representatives from countries around the

world are flocking to the SBA asking us, ‘‘How do you do it?’’ This

is clearly because small business is the engine of the economy and

the role that the SBA plays is critical as a catalyst and a facilitator

of this success.

In the area of procurement, small businesses achieved a 22.4 percent share of the procurement goal and obviously, Mr. Chairman,

we have talked about this, our goal is 23 percent and we are working to make sure that that is what happens. Last year we were

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gram, HUBZone program. I am proud to say that nearly 900 businesses are now certified as HUBZone firms. We are requesting $5

million, up from $2 million, to continue to develop HUBZone contracting.

SBA’s Office of Advocacy has done a fine job, especially in showing Federal agencies how to achieve their policy objectives without

placing an undue burden on small businesses. Their research and

database is a national resource and we are requesting an increase

of $400,000 to $1.5 million.

In his State of the Union address, President Clinton repeated his

belief, which we have heard repeated here today, that more must

be done to extend the benefits of today’s economy to our inner cities, our poor, rural areas and Native American reservations. As I

said, I am pleased to see the bipartisan support. When I met with

Congressman Hal Rogers the other day he said to me, ‘‘You know,

this New Markets Venture Capital program will help my district.’’

He recognizes the role that this venture capital program will have

in rural communities. And, so, I think there is a lot of enthusiasm

for the possibilities here.

I want to talk a little bit about what it is going to take to fund

this program and why it is worth the investment. To establish the

New Markets Venture Capital companies we request $21.6 million,

which would support a program level of $150 million. We are also

requesting $30 million for the technical assistance component,

again, it is the small-sized equity investments plus the technical

assistance that are the key to the long-term success of the new

markets businesses. We arrived at the cost of this program by

using the most conservative assumptions possible. We believe having studied other of our programs, which started out with a higher

cost, that it is just a matter of time before the cost of that program

will go down. We want to make sure that we are very safe in how

we approach the program. I do think that the long-term benefits

are impressive.

You mentioned the success that we have had in San Jose with

our Small Business Investment Company program. We are very

proud of the fact that investments are being made in San Jose.

Some of those investments came about because we developed lowand moderate-income debentures, which we saw as another way to

give incentives to those venture companies to make these investments. The fact of the matter is that our SBICs are for the most

part profit-oriented, as is appropriate. But when we are talking

about New Market Venture Capital companies, we are talking

about companies that will not so much be profit-oriented as mission-driven. The kinds of investments that New Market Venture

Capital companies will make are really going to be quite different

from those that our SBICs are making, whether it is in San Jose

or elsewhere.

Here is what the picture looks like right now for these smaller

type of investments that we are proposing in the New Markets program. Right now there are virtually no institutional sources of equity-type capital in these distressed communities. We are talking

about distressed communities. San Jose has distressed neighborhoods, but, for the most part, I wouldn’t characterize it all as distressed. Nationwide the community development venture capital

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industry consists of essentially 25 firms with about $157 million

under management. Out of these 25 firms only 14 of these funds

are capitalized at $5 million or more, which we believe is the absolute minimum for economic viability. Our own analysis of these

community development venture capital companies indicates that

one direct job is created for each $10,000–$15,000 equity investment. On this basis, $51.7 million should generate between 13,300

and 20,000 direct jobs at a cost of between $2,600 and $4,000 each.

If the indirect jobs are included, the cost is even less.

We believe that this investment in new markets will ultimately

pay off in a big way. These investments will not only create capital

for those businesses but will generate employment in places that

are suffering now from a lack of jobs, very consistent with the objectives of the HUBZone program.

The SBA is requesting funding for other New Markets Initiatives

as well; the PRIME program, which was passed last year and

signed by the President at the end of the session of Congress.

Again, this is a program focused on technical assistance, $15 million to build the capacity of the micro-enterprise industry, generally. We believe that this is a very good complement to our new

market strategy. Our new market strategy is clearly focused on

newer, smaller businesses, first-time entrepreneurs located in communities that have been overlooked. They need not only the money,

they need the technical assistance to make it. Then $6.6 million for BusinessLINC. We have already had a successful sort of kickoff of BusinessLINC which is a way in which big

businesses work hand-in-hand with small businesses. Senator

Kerry mentioned AT&T. There are many big companies that can

play a great role in working with small businesses.

Native American communities, Senator Wellstone mentioned Native Americans. The figures for Native Americans are really shocking. Many reservations, have between 40 and 60 percent unemployment rates; 53 percent of Indian homes on reservations do not have

a telephone. These are the kinds of needs we are trying to address

with a budget that proposes $5.75 million for Small Business Development Centers, for BusinessLINC and for Tribal Business Information Centers.

You spoke extensively about the area of safety and soundness

and human resources management and modernization, areas where

we have spent considerable time and effort to continue to make

progress and keep pace with the needs. We feel very confident that

as our core programs have grown, which has been in response to

the overall growth of small businesses and the economy, we have

actually become more sophisticated than ever in addressing safety

and soundness and loan monitoring concerns.

Let me just briefly outline the steps that we have been taking

to ensure that we can combine our interest in sustaining this unprecedented growth by increased funding for our core programs as

well as identifying the new markets and penetrating there.

In fiscal year 1999 we instituted a safety and soundness examination for the Agency’s Small Business Lending Companies and

examined all 14 companies. This had never happened before. This

was the first time. We are already on to the second round of reviews, which we expect to complete in September. The issues and

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deficiencies that were raised in the first round, for the most part,

have already been addressed by the institutions.

We have also established, as you know because we advised you

when we were about to do this, the Office of Lender Oversight, and

we have a risk management committee, again, a first at the SBA.

We have completed our first full cycle of reviews for participants

in the Agency’s Preferred Lender Program and we expect to complete a second round of reviews by April. Again, this is something

that has not occurred before.

We also are requesting an increase in funding for the Inspector General to $14.3 million. We have worked hand-in-hand with them

every step of the way on these initiatives and we support their

need for funding to continue to review, audit, and provide oversight

of SBA’s programs and services.

Our core program for small business counseling and technical assistance, the Small Business Development Centers, helped more

than a million entrepreneurs in fiscal year 1999 alone. I am very

pleased to say that for fiscal year 2001 we are proposing full funding of $88 million for the SBDCs, and as Senator Wellstone said,

$3 million to fund an SBDC network for the Native American communities. We think this is a step in the right direction, part of the

New Markets Initiative.

For SCORE we propose $5 million, up from $3.5 million. SCORE

is doing a great job. They are doing on-line, interactive counseling

with small businesses. To meet the growing demand of today’s

women entrepreneurs, SBA’s Women Business Centers have more

than tripled in 3 years, growing from 18 funded centers to 59, including 25 new centers in fiscal year 1999, lots of activity, lots of

work with women. We request $12 million up from $9 million this

year, to expand the network to more than 80 sites. Our goal is to

have at least one Center in each State.

SBA requests $10 million to maintain our existing One-Stop Capital Shops and to open new ones in Empowerment Zones. Empowerment Zones, as you know, are located in HUBZones and they

also include our targeted new markets communities.

Veterans, we are very pleased that we are asking for $4 million

to support initiatives to assist veterans in their entrepreneurial

activities, particularly, service-disabled veterans. 7(j) technical assistance, which is a program that really is important to assist particularly minority-owned businesses to enhance their business development and executive education, we are asking for $5 million.

Senator Levin, in his letter, addressed the needs in the area of

technological small businesses through the Small Business Innovation Research program, SBIR. We have been helping these small

businesses get to a point, Phase III we call it, where they have

fully developed their federally-funded products but they lack the

necessary capital to market and commercialize the technology.

Phase III funding would provide grant dollars to assist them to

make that transition into the commercial market place. We request

$15 million in grants for fiscal year 2001 to fund the first year of

a 3-year SBIR Phase III pilot program which would commercialize

the R&D effort of small, high-tech businesses.

Mr. Chairman, our focus is on the success of our small business

customers, as it should be; however, I would like to brag a little

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bit about the success of this small agency. SBA’s workforce and the

way we deliver programs have changed dramatically over the past

decade. Since 1990, our loan portfolio has grown from $17.5 billion

to about $50 billion. At the same time the number of our employees

has decreased 22 percent, from 4,000 in fiscal year 1990 to about

3,100 now.

We have involved the private sector where it made sense, contracting out or delegating activities that could be performed more

effectively elsewhere. This transition has allowed us to downsize as

well as to use staff strategically for marketing, more complicated

financial transactions, and loan monitoring, for example, and it has

involved training and retraining, which is part of our human resources management. We do have written plans that address the

training and retraining needs and, in fact, we have a record of

some of the types of training that our senior managers, middlelevel managers, people in the field have already received in order

to make this transition. We would be happy to share that with you.

All of this has been accomplished while keeping our fiscal house

in order. We are proud to report a clean opinion in fiscal year 1998

in our financial audit report, which is the highest rating a Federal

entity can receive. This was the third year in a row the SBA attained this rating, and we also expect to obtain a clean opinion

when our 1999 report is issued on time next week.

We have laid out an aggressive agenda to improve our internal management and infrastructure. You mentioned $24 million. And

$13 million for systems modernization and lender oversight, risk

management activities; $7 million for information technology infrastructure support; $4 million to train and transition our workforce.

We have spent 21⁄2 years developing plans as required by law

which require that we have very detailed plans that outline stepby-step what we will do before we acquire any systems, which is

the reason why we haven’t done some of this yet. But we have completed those plans working with GAO and with various committees.

I am happy to say that we have almost completed the first part of

Phase I of our modernization effort. That will be completed and implemented this summer.

For the first time this summer the majority of loan transactions

will be processed electronically by the SBA. This will represent 69

percent of our loans and 79 percent of our loan dollars. Not only

will this create enormous ease and efficiency in a paperless transaction, it will also allow us for the first time to collect data electronically that we have never been able to collect before, which will

help us with lender oversight and loan monitoring.

Senator Kerry mentioned e-commerce, $5 million, and our budget

includes, I think, a modest amount to ensure not only that we provide even more of our services electronically—we have 6 million

hits a week on our web site. We are doing electronic counseling—

we also want to ensure that small businesses can participate in the

opportunities created by e-commerce.

We want to build on the success of the Y2K outreach initiative

which, thanks to your help and that of your colleagues, allowed us

to hold 1,300 workshops on Y2K which were attended by 1.1 million small businesses. These are all small businesses engaged in

the topic of technology as it affects their businesses. There is a

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need and an interest, we want to build on that, we don’t want to

lose the momentum. The e-commerce, the $5 million request, will

help us continue that effort.

So, in conclusion——

Chairman BOND. Madam Administrator, I was just going to say

we have been a little generous with the 10-minute light. Unfortunately, Senator Kerry and I both have competing meetings and

hearings. The Murphy’s Law, which said, if anything can go wrong,

it will go wrong, was a gross overstatement and optimistic assessment of Senate schedules. We would be delighted to have your full

comments that you have submitted for the record, and I would like

to give Senator Kerry an opportunity to ask any questions before

he has to leave.

Ms. ALVAREZ. Absolutely.

[The prepared statement of Ms. Alvarez follows:]

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Senator KERRY. Mr. Chairman, thank you very much.

I really do apologize.

Ms. ALVAREZ. No, that is OK. I had hoped to answer a lot of the

questions that might be raised in the course of the testimony. That

is why I took a little longer.

Senator KERRY. I would like to ask permission to submit any additional questions in writing.

Chairman BOND. I will be submitting some and, of course, all

Members of the Committee, and we will advise the staff, are invited to submit any questions for the record. Questions will have

to be ready tomorrow. And then we would like to have your responses in a week, if that is possible.

Ms. ALVAREZ. Sure.

Senator KERRY. Madam Administrator, can you share with us

quickly the 7(a) policy and program implications of prepayments?

Ms. ALVAREZ. Well, I actually would like Charles Tansey to address that because that is an area on which we have had many,

many discussions.

Senator KERRY. Sure.

Mr. TANSEY. I am Charles Tansey. I am the associate deputy administrator for Capital Access.

Chairman BOND. Welcome, Mr. Tansey.

Mr. TANSEY. Thank you.

We have not included this in our legislative package but it is a

very serious issue that has been brought before us. The issue became a major one, I think, in the last year or year-and-a-half primarily having to do with long-term 7(a) loans of 15 years or more.

There is quite a bit of prepayment activity in the secondary market. Our sense is that from a mission standpoint this may conflict

to some degree with the idea of us being a gap lender, but the flip

side of it is that prepayments are causing a tremendous amount of

anxiety in the secondary market and reducing, thereby, the

attractiveness of that market and the possibility of additional 7(a)

activity and availability of the 7(a) program for people who participate in it.

So, I think right now what we are doing is we are reviewing the

issue, and we are neutral on it.

Chairman BOND. We would like the guidance that your Agency

can provide.

Ms. ALVAREZ. Good. We would be happy to do that.

Senator KERRY. Just quickly, on the New Markets Initiative. You

addressed that significantly, Madam Administrator, but I just want

to clarify. In your statement you mentioned that in 1999 the SBICs

averaged less than $1 million per investment and other venture

capital firms averaged $6.2 million. But I just wanted to point out

that that average $1 million represents all SBIC investments, debt

and equity, without looking at a target area.

Ms. ALVAREZ. That is right.

Senator KERRY. So, if you break it out in target area, investments of $1 million or less in low- and moderate-income areas, you

actually wind up with, I think, only about $66 million out of the

total $4.2 billion of SBIC investments last year. Is that accurate?

I mean, do you agree with that?

Ms. ALVAREZ. That is right.

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It is still a modest amount and it is why we think that New Markets Venture Capital fund will allow us to make smaller equity investments in communities that just haven’t been reached.

Senator KERRY. Good. And I don’t disagree with the Chairman’s

notion that—I mean, it is good to get a sense of how this gels with

the other programs. I think we obviously ought to have that sense

as we try to approach it.

Finally, in terms of verbal questions right now, given that the

PRIME program is authorized for FY 2000, what are your plans

with respect to funding and beginning implementation this fiscal

year?

Ms. ALVAREZ. We have several funding concerns. One is for the

7(a) loan program where we had requested enough funding for

$10.5 billion, and we did not receive that. And of course, it appears,

fortunately and unfortunately, that our projections of $10.5 billion

were on target. So we are looking to find ways to make up the difference for 7(a) as well as for PRIME, and for the veterans program

for this year.

We have been talking on a daily basis about strategies for doing

that within our existing budget. We hope to have an answer for you

very shortly.

Senator KERRY. That would be great. Obviously, it is still up in

the air a little bit.

Ms. ALVAREZ. A little bit, but we have some options that we are

looking at.

Senator KERRY. Good. That would be helpful.

Thank you very much.

Ms. ALVAREZ. Thank you.

Senator KERRY. And thank you, Mr. Chairman, for your courtesy,

and we will submit a few questions for the record, but not many.

Chairman BOND. Thank you very much, Senator Kerry. I had

discussed with Senator Kerry my interest in getting the GAO to

undertake a review of the economic stimulus programs that would

be related to, and either complementary to or overlap the New

Markets Program. I want to make sure that we take advantage of

this opportunity but not reinvent any wheels. We have enough

wheels running around here without reinventing new ones. I want

to get a sense from GAO as to where we stand.

Let me go back to the Loan Monitoring System. I think we have

a chart somewhere. I always have to have a chart.

[The chart follows:]

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Chairman BOND. As best we understand, this is from what we

have learned from the SBA and the GAO, the status of the mandated actions. I gather the target completion dates were back in

August, and in some cases some of these steps are still in draft

form. Several of the final products came out a week ago, and I

think seven of them just came out last week; several of them are

still in draft.

What is your projection on when you are going to finish your

work on the mandated actions?

Ms. ALVAREZ. First of all, as I said, this is very complex stuff.

Chairman BOND. We understand that. That is why we——

Ms. ALVAREZ. We talk about, for example, Phase I. I mentioned

before that by this summer we intend to do 79 percent of our loan

dollars, transactions will be handled electronically, which is something we have never done before. That is a significant breakthrough.

We are also working very closely with disaster to make sure that

these disaster loans are all done electronically, which will actually

result in some, I think, significant savings for that program.

I would like to ask Kris Marcy, who is our Chief Operating Officer, who has been working day and night on this project, because

it is very complex. It cuts across all these departments as well as

our outside partners. She has also, by the way, been going to different offices in the field and having meetings and training sessions with our folks around the country.

Chairman BOND. We would be happy to welcome her. I might

say, the GAO has advised us that there is an excellent working relationship and it seems that it has worked well together, but there

are many hurdles ahead. Ms. Marcy, we would welcome your comments on this.

Ms. MARCY. It is nice to be here. We have worked very closely

with the General Accounting Office, and frankly, many of the staff

members in this room. We have done that both at their request

and, frankly, many times we have offered and asked to come up to

review our progress.

This is enormously complicated. It involves all our programs. You

have a chart here that is, I think, a very accurate representation.

We saw it yesterday for the first time but we have no problem with

the accuracy of this chart. You will note that this is only for Phase

I, and we are also actively engaged in Phase II as we speak, which

is critical for our financial statements, our core accounting. It has

many relationships to Phase I and the loan accounting system, and

it includes the disaster program.

So we have got an awful lot of activity underway. We think we

have made enormous progress and we could not have done it without the help of the staffs and the General Accounting Office.

Up there you have eight planning steps that were articulated in

the Reauthorization Act of 1997. These are steps to design a good

quality system to avoid risk. Of the steps that you have there, you

have 17 work products in the middle column. I believe 14 are

shown as final, 3 are still in draft. And to get to that 17 we have

28 separate contract deliverables. It has been exhausting.

But a word about this collaborative process. The way this

works—because beauty is in the eye of the beholder—we will not

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say that we are finished, final, 100 percent perfect by ourselves.

We do this in collaboration with the General Accounting Office and

also with your staff. And many, many times when we submit a

product as draft we are asked to make adjustments or revisions,

and we do that willingly. So you will see these things go back and

forth many times.

While we would love to have a chart that says everything is final

and it was done a year ago, that is just not the nature of this program unfortunately. We do think, all said and done though, that

we are ready to begin iteration one, Phase I. We think it is absolutely critical that we do that so that we get the critical loan information that we need.

Chairman BOND. I think you have made the point that I am trying to make in my initial presentation, that this is a major, ongoing

program. You have spent $24 million so far on it. There was a request for an additional $13 million for 2001.

Ms. MARCY. We are much more conservative than that. We have

received appropriations of $24 million to date through 2000. The

way this works is that we get even one more level of review; so before we can spend the appropriations we do need to submit a

spending plan to the appropriating committees. We have received

acknowledgement to spend $16 million of the $24 million. Of that,

we spent $3.2 million of the 1998 appropriations and $3.6 million

of the 1999 appropriations. So we have spent about $7 million of

the $24 million in appropriations thus far.

Chairman BOND. So you still have $16 million that has been ap- propriated and not approved? And you have asked for another $13

million, or is this just a request to OK the remaining $16 million?

Ms. MARCY. This is not easy. We have about $9 million which is

sitting in an organization called FEDSIM at GSA that basically allows us to put technology money aside, obligated to them so that

we can use it and draw it down as we need to. So we have that

in the bank, if you will.

For the 2001 budget, as the Administrator said in her testimony,

we have requested not $8 million as we have in the prior 3 fiscal

years, but $13 million. And of course, that will be subject to lots

of review.

Chairman BOND. Is that on top of the $24 million?

Ms. MARCY. Yes, Sir, it is.

Chairman BOND. So that brings it to $37 million. You are at $8

million now and——

Ms. MARCY. We have spent about $7 million now. We have $24

million appropriated.

Chairman BOND. You are $7 million toward completion of a $37

million project.

Ms. MARCY. Yes, Sir.

Ms. ALVAREZ. I think you can appreciate, Senator, that the budget process works on a year-to-year basis. But when you do a complete overhaul of a system you have to think in multiple years.

Chairman BOND. That is my point.

Ms. ALVAREZ. And there are times when, particularly as you are

working out a detailed plan you need to keep the money in reserve,

because when you spend it, you are going to spend substantial

amounts of money and you will not have time at that point to start

44

a process of soliciting funds if you want to move quickly. So that

is why some of this money is in the FEDSIM account.

Chairman BOND. I do not challenge that. That is what I understand. I just want to lay out the picture and make sure that I understand, and my colleagues understand, how much work there is

yet to be done on this program. That is the point. I appreciate that,

and we would probably have a follow-up question or two on those

things just so we can see where it stands.

Ms. ALVAREZ. Absolutely.

Chairman BOND. We will look forward to having your comments

on this. We are very interested, and I have some people on my staff

who even understand what is going on, and they too will be communicating with you on it.

Ms. MARCY. We are well aware of that. Thank you.

Chairman BOND. Thank you very much. Let me jump over to the

Office of Advocacy which is of great concern to all Members of this

Committee and certainly to our friends in the small business community. The 2001 budget request includes 47 FTEs. How many

staff does the Office of Advocacy have on board at this time?

Ms. ALVAREZ. Is Jere Glover or Kay here?

Chairman BOND. I hope Jere is out working.

Ms. ALVAREZ. Russ, do you know the answer to this question? Sit

down, Russ, and introduce yourself.

Chairman BOND. Please identify yourself for the record.

Mr. ORBAN. I am Russ Orban from the Office of Advocacy. Jere

Glover is working this morning and I am sorry about that—real

sorry he is not here.

[Laughter.]

Chairman BOND. How many FTEs do you have on board now?

Mr. ORBAN. I believe we have 47 on board.

Chairman BOND. Madam Administrator, since 1993 the Office of

Advocacy staffing appears to us to have dropped dramatically even

though the duties of the office were expanded under the Red Tape

Reduction Act and the Regulatory Flexibility Act, SBREFA as it is

known. Why has that gone down, and is 47 enough to cover the increased requests that are being placed upon this office?

Ms. ALVAREZ. You can imagine I have had a number of conversations with Jere Glover about this topic and what I have said to

Jere is, everybody is taking a hit.

Chairman BOND. How much of a hit did they take? From 1993,

what was their level in the past?

Ms. ALVAREZ. I am looking here, in 1996 it says here the staff—

Russ, do you want to articulate this?

Chairman BOND. Where were we in 1993, and what has the

trend been since 1993?

Mr. ORBAN. In 1993 we had, I believe, 62 FTEs and that has

gone down now to an authorized level of 50, and I think there are

47 that are currently on board.

[Mr. Orban subsequently submitted the following:]

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ALVAREZ. This year, Mr. Chairman, we are looking to reduce our

staffing overall at the SBA by 146 positions.

Chairman BOND. What percent is that of your total employment?

How many employees——

Ms. ALVAREZ. It is about a 5 percent reduction from last year.

We recognize that in order to implement some of the newer programs and to support HUBZones and other programs we are going

to have to increase by about 86 in fiscal year 2001, which will still

give us a net reduction in employees from last year. So it is part

of this process of managing our human resources and evolving.

With respect to the Office of Advocacy, we have a process where

we are managing every single office in terms of their requests, and

we need to evaluate the relative sensitivity of the functions being

performed. We would love to give Jere more people. We would also

love to give Charles Tansey more people. And I can go across the

board with all of our managers and I could make a compelling case,

as they could, for why these are very important functions.

Chairman BOND. As I said, this is something that I think the

Committee on a bipartisan basis supports very strongly. We expect

them to carry a much heavier workload, now that we do have

under SBREFA the means to enforce the Regulatory Flexibility

Act, which we did not have. And if my rough mathematical calculations are close, it is a 20 percent cut, come down from 62 to 50,

and we are just concerned, will 47 people be able to do the job?

Ms. ALVAREZ. I have encouraged Jere, as I have others, to the

extent that the work can be done using outside consultants and

specialists, which would be a one-time cost, it would not increase

our FTEs, I am supportive; fully supportive. So I ask people to

think in terms of projects where we can add people to complete the

project and peel them off so that we do not have to carry them.

Chairman BOND. We will follow up on that and I thank you very

much, Russ, for joining us.

Let me turn very briefly to the HUBZone program. Did the Federal agencies meet the fiscal year 1999 goal of channeling 1 percent

of Federal procurement dollars to HUBZones, and what is the

progress toward the 2000 goal of 1.5 percent? Welcome, and if you

would identify yourself for the record.

Mr. BALLENTINE. Thank you very much. Mr. Chairman, my name

is James Ballentine, Associate Deputy Administrator, Government

Contracting and Minority Enterprise Development. As you mentioned in your statement, we launched the program on March 22

of last year. We anticipate in the 1999 fiscal year, although we

have not received the full data, that we will not meet the 1 percent.

The 1.5 percent is a lofty goal, but we are feeling very good about

the HUBZone program. We have more businesses coming to the

program and we feel that we will get fairly close, although it is a

new program.

Chairman BOND. Do you have any figures on how many

HUBZone contracts have been finalized to date this year?

Mr. BALLENTINE. We do not have final numbers. We will have

those actually next week which we will share with the Committee.

[As of June 1, 2000, the requested information was not provided

by the SBA.]

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Chairman BOND. Good. Thank you. I might ask, is the SBA currently planning to adopt any order of preference that would direct

either the HUBZone or the 8(a) program to take precedence over

the other?

Ms. ALVAREZ. Mr. Chairman, nearly 2 years ago SBA adopted an

order of preference after following the regular process for comment.

So that order of preference has been in effect since June 11, 1998.

Chairman BOND. What was that order of preference?

Ms. ALVAREZ. It was an order of preference which did give preference to the 8(a) businesses. That came about as a result of consultation with many Members of Congress, and we will share with

you some of the letters that were exchanged that manifest the concern of a number of members that HUBZones not harm the 8(a)

program.

I believe that our experience to date, and this to some degree is

anecdotal because we do not have the final numbers, is that the

HUBZone program has benefited both 8(a) and non-8(a) businesses,

which is what we hoped would happen.

Chairman BOND. That is the point. But we crafted that legislation, I wrote that legislation, I negotiated that legislation both

within the Congress on a bipartisan basis and with the Administration and the legislation was clear that neither program was to be

given preference over the other. That was the legislation we drafted and that was the legislation that was signed into law. Not for

a preference of one over the other, but that they should work together. Now let me ask, you requested $45 million for technical assist- ance for approximately 8,000 Microloan borrowers and $30 million

in technical assistance for the New Markets Venture Capital program, but only $5 million for technical assistance under the 7(j)

program to cover about 6,000 8(a) firms plus HUBZones. Does that

not seem a little out of whack?

Ms. ALVAREZ. No, because we are talking about different kinds

of technical assistance, different needs for different entrepreneurs.

Frankly, we would like to have asked for more money for the 7(j)

program, but we are trying to work with our previous history and

slowly build more support. We are also taking some new directions

in the 7(j) program which we think will be effective in helping

these minority-owned businesses. Maybe James would like to comment.

Mr. BALLENTINE. As the Administrator mentioned, we are taking

a new direction with the 7(j) program. In this current fiscal year

we received $3.6 million. We are requesting $5 million to implement some of the changes that we hope to put in place for fiscal

year 2000 and fiscal year 2001, in fact. And hopefully we can build

the program enough to demonstrate that it is a worthy enough program to receive increased funding in the outyears.

Chairman BOND. I would just say that you have requested $30

million in technical assistance for a new program that is not even

going yet and only $5 million for the targeted programs that are

authorized, that we expect the SBA to act on. I find it stunning

that six times as much money would be requested for technical assistance for a program that is not even authorized. So we are going

to work on that problem in the budget process.

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How much of the $5 million requested in the budget—have you

allocated for the HUBZone or the 8(a) program, and what percentage of the assistance that you had in the past went to the two programs?

Ms. ALVAREZ. You are talking about 7(j) monies?

Chairman BOND. 7(j), yes.

Ms. ALVAREZ. I do not think we have made those kinds of distinctions. The businesses that benefit from the 7(j) program by and

large are much more sophisticated than a micro-enterprise. The

micro-enterprises require a different kind of technical assistance

with different providers. We have turned to universities, for example, to be the principal source, the Dartmouth Business School of

Education for these 8(a) and small, disadvantaged businesses. So

there are just different needs for different levels of sophistication.

With newer startup micro-enterprises it is going to be more costly. It is more labor intensive. It is just a different kind of training.

Chairman BOND. I understood that your new market programs

bring in big businesses to communities and——

Ms. ALVAREZ. We are looking through BusinessLINC to hopefully

establish——

Chairman BOND [continuing]. Bringing in sophisticated——

Ms. ALVAREZ [continuing]. Establish some mentoring and

partnering relations with small businesses. Again, you do not expect a big business to take under its wing a tiny business. They

are more likely to work with—we saw an example of the type of

benefits right here in Washington. A small company based in

Southeast Washington that hires some folks who were from welfare

and they make mops. And as a result of a partnering relationship

with Giant supermarkets they were able to grow their business because they ended up with contracts to any number of Giant supermarkets. They are still a small business, but that is a much more

sophisticated company in some respects than the ones we are talking about in the micro-arena.

Chairman BOND. I am just saying that if you are bringing in established businesses under the new markets, to give them six times

as much technical assistance as you give the small businesses and

the 7(j) program and the HUBZones and 8(a) just does not make

any sense to me. I will be happy to have your explanation and any

further follow-up. We are going to pursue that along with a number

of other problem areas. As I mentioned to Senator Kerry, I want

to make sure that I get a review from GAO how these subjects are

working.

Unfortunately, I have three more hearings to participate in this

morning, and since my other colleagues seem to have opted not to

present their questions in person we will hold the record open. We

thank you, Madam Administrator——

Ms. ALVAREZ. Thank you, Senator.

Chairman BOND [continuing]. For your participation and the

good working relationship that we have. We will get all of these

questions to you tomorrow and ask that you to return your responses in a week.

There being no further business to come before the Committee,

it is hereby adjourned. Thank you.

[Whereupon, at 10:27 a.m., the Committee was adjourned.]

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