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28-985 PDF 2006

S. HRG. 109–578

NOMINATION OF STEVEN C. PRESTON TO BE

ADMINISTRATOR OF THE SMALL BUSINESS

ADMINISTRATION

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS AND

ENTREPRENEURSHIP

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

JUNE 21, 2006

Printed for 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

OLYMPIA J. SNOWE, Maine, Chair

CHRISTOPHER S. BOND, Missouri

CONRAD BURNS, Montana

GEORGE ALLEN, Virginia

NORMAN COLEMAN, Minnesota

JOHN THUNE, South Dakota

JOHNNY ISAKSON, Georgia

DAVID VITTER, Louisiana

MICHAEL B. ENZI, Wyoming

JOHN CORNYN, Texas

JOHN F. KERRY, Massachusetts

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

NAOMI BAUM, Democratic Staff Director

(III)

CONTENTS

OPENING STATEMENTS

Page

Bond, The Honorable Christopher S., a United States Senator from Missouri . 1

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

and Entrepreneurship, and a United States Senator from Maine ................... 6

Kerry, The Honorable John F., a United States Senator from Massachusetts .. 16

Coleman, The Honorable Norm, a United States Senator from Minnesota ....... 18

Vitter, The Honorable David, a United States Senator from Louisiana ............. 23

Durbin, The Honorable Richard J., a United States Senator from Illinois ........ 23

WITNESSES

Preston, Steven C., nominee to be Administrator of the Small Business

Administration ..................................................................................................... 24

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Allen, George

Prepared statement .......................................................................................... 90

Bond, The Honorable Christopher S.

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

Prepared statement .......................................................................................... 3

Letter from Deputy Director for Extramural Research, NIH to the Director, Natural Resources and Environment, GAO re: SBA’s eligibility

rules for Small Business Innovation Research (SBIR) .............................. 4

Coleman, The Honorable Norm

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

Prepared statement .......................................................................................... 20

Durbin, The Honorable Richard J.

Opening statement ........................................................................................... 23

Kerry, The Honorable John F.

Opening statement ........................................................................................... 16

Landrieu, Mary L.

Prepared statement .......................................................................................... 93

Preston, Steven C.

Testimony .......................................................................................................... 24

Prepared statement .......................................................................................... 27

Response to written questions submitted by:

Hon. George Allen ..................................................................................... 30

Hon. John Cornyn ..................................................................................... 32

Hon. Mary L. Landrieu ............................................................................. 33

Hon. John F. Kerry ................................................................................... 37

Endorsement Letters:

Steven VanDenberg, President/CEO VVV Corporation ................................ 49

Steven Arcieri, President Arcieri & Associates .............................................. 50

Daniel Kenary, President and Co-Founder, The Harpoon Brewery ............. 53

Association of Graphic Communications ........................................................ 55

National Association of Federal Credit Unions (NAFCU) ............................ 56

NFIB praises Steve Preston’s appointment as SBA Abministrator ............. 57

U.S. Chamber of Commerce press statement ................................................. 58

Credit Union National Association (CUNA) ................................................... 59

Carpet and Rug Institute of America ............................................................. 60

Herbert Hess, President and CEO North America Management Company 61

Luis Iza of Iza Brothers, Inc ............................................................................ 63

Page

IV

—Continued

James N. Hallene, Capital Concepts Holdings, LLC ..................................... 64

Charles P. McCarsker, Patriot Capital, L.P ................................................... 65

Illinois Delegation, U.S. House of Representatives ....................................... 66

R. Bruce Josten, Government Affairs ............................................................. 68

Trevor Price, Nature Technologies, Inc .......................................................... 69

Michael Isakson, Service Master Clean .......................................................... 71

Congressman Harold Ford, Jr., U.S. House of Representatives ................... 72

Daniel A. Mica, Credit Union National Association ...................................... 73

Snowe, The Honorable Olymphia J.

Opening statement ........................................................................................... 6

Prepared Statement ......................................................................................... 10

Vitter, The Honorable David

Opening statement ........................................................................................... 23

(1)

NOMINATION OF STEVEN C. PRESTON TO BE

ADMINISTRATOR OF THE SMALL BUSINESS

ADMINISTRATION

WEDNESDAY, JUNE 21, 2006

U.S. SENATE, COMMITTEE ON SMALL BUSINESS & ENTREPRENEURSHIP, WASHINGTON, DC.

The Committee met, pursuant to notice, at 10:30 a.m., in room

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

Snowe (Chair of the Committee) presiding.

Present: Senators Snowe, Bond, Coleman, Thune, Isakson, Vitter,

Kerry, and Pryor.

Senator SNOWE. The hearing will come to order and before I give

my opening statement I am going to turn to Senator Bond who was

the former Chair of this Committee and provided outstanding leadership on behalf of the small business community throughout

America. I know he has a very tight schedule this morning with

so many conflicts, so I would like to turn to him before I give my

opening statement.

OPENING STATEMENT OF THE HONORABLE CHRISTOPHER S.

BOND, A UNITED STATES SENATOR FROM MISSOURI

Senator BOND. Thank you very much, Madam Chair. It is great

to be back and see lots of old friends again and I thank you so

much for allowing me to go out of order, because I do have a bunch

of things backed up today as we all do. I have a longer statement

for the record which I will relieve you of hearing, however, I do

want to say that I have had the pleasure of meeting Mr. Preston

and talking with him over 2 weeks ago and I have received numerous letters of support saying what a good choice he is, and I believe

that he will do an excellent job as the new Administrator.

He has had 25 years experience in leadership at ServiceMaster,

First Data, and Lehman Brothers, and I think this is going to give

him the necessary business and financial knowledge and skills to

really do something for the small business community that is still

the driving force and the generator of new jobs in the economy. We

do not need Government control, but where Government can assist

through the SBA, I think it is a vital role and the people who commented to me about Mr. Preston say he has a reputation as a sensible, results-oriented leader with a high level of integrity and determination to work tirelessly. So I am strongly supportive of him

and I hope this Committee will report him out and then we will

get him confirmed quickly to get him on the job, because I have

something I would like to ask of him.

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On June 16th the Deputy Director for extramural research at the

National Institutes of Health sent a letter to the Director of Natural Resources and the Environment at the GAO regarding the

SBA eligibility rules for small business innovation research. This

is something that concerns me a great deal because we have heard

from too many people in the biotech area and other areas, that the

rules of the SBA are unnecessarily restrictive. And that letter

states that the rules for grants are unduly restrictive and still exclude some business concerns that may contribute to important

medical research, particularly in the biotech sector. NIH believes

the impact of current eligibility rules presents a significant roadblock in our technology development pipeline and ultimately in the

speed in which important products to improve health are brought

to the market.

I will leave a full copy of the letter for the record and ask that

Mr. Preston, when you have an opportunity to review it, that you

review the letter and the suggested remedies that they have and

that you notify this Committee because this is something we have

been working on for a long time. Madam Chair, thank you very

much for your time. I really appreciate the consideration.

[The prepared statement of Senator Bond and the information referred to follows:]

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Senator SNOWE. I thank you Senator Bond and I appreciate your

comments and we will include your entire statement and the letters and follow-up information in the record without objection.

Thank you.

OPENING STATEMENT OF THE HONORABLE OLYMPIA J.

SNOWE, CHAIR, SENATE COMMITTEE ON SMALL BUSINESS,

AND A UNITED STATES SENATOR FROM MAINE

Senator SNOWE. Mr. Preston, I want to welcome you and your

wife Molly to the Committee on Small Business and Entrepreneurship, and I also want to thank Senator Kerry for working with me

to arrange this nomination hearing this morning so that we can

move expeditiously to provide the leadership at the Small Business

Administration at a crucial time. We intend to work closely as a

Committee with the SBA in the upcoming months as we move forward with the reauthorization process of the SBA programs.

In every Presidential Administration it can be remarkably difficult to attract the best and the brightest to serve in important

Government jobs and we are very pleased that Mr. Preston is making a sacrifice by leaving his business and his profession for the opportunity to lead the Small Business Administration, which is certainly a vital component of economic growth in America.

Certainly the numbers speak for themselves when you know that

small businesses represent 99.7 percent of all employer firms, employ half the private sector employees in the country, as well as

generating two thirds of all net new jobs that are created in America on an annual basis. So our Nation of small businesses deserve

a true champion—one who is a megaphone for small businesses

and reflects the deep and unwavering commitment to the success

of America’s 25 million small businesses.

The next Administrator will be assuming enormous challenges

that the agency has faced especially in the areas regarding the

SBA’s disaster response. The SBA’s response to Hurricanes Katrina

and Rita was subpar, leaving some disaster victims waiting 3

months or more for loans to be processed. This Committee consistently demanded more effective relief in hiring additional employees

to process loans and coordinating with local resource partners. Significantly, the SBA waited 2 months before taking action when it

should have been the moment for the SBA to shine and showcase

its’ abilities to contribute substantially to the rebuilding.

Certainly the SBA was the lifeblood in the reconstruction of the

economic infrastructure in the Gulf region. Now, while over 99 percent of all the applications have been resolved and over $10 billion

in loans approved 10 months later, it is deeply disturbing that only

20.52 percent of the money has been disbursed. If the disaster victims do not receive the vital disaster loan funding, the rebuilding

of the Gulf Coast region cannot continue and it certainly cannot be

sustained.

Looking forward it is essential that SBA collectively develop a

comprehensive and flexible disaster plan, find a remedy for every

problem that prevented or delayed the agency’s front-line employees working in the disaster zone from aiding victims and be aggressive in responding to future disasters to assist America’s small

businesses and disaster victims.

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It is also essential that the next SBA Administrator is fully committed to supporting the agency’s mission ‘‘to assist, counsel, and

protect the interests of small business’’. Given the clear importance

of small businesses to maintaining a strong and vibrant economy,

strong leadership is clearly required at the SBA to advocate for the

innovators and risk takers of the Nation.

While the challenges affecting the SBA are significant, we are

confronted with new beginnings—a chance to improve and revitalize the Small Business Administration and its programs and

confirm a new administrator. We must take advantage of the opportunity to build a new vision through the rebirth of the Small

Business Administration.

For example, since 1999, the SBA has helped to create or retain

over 5 million jobs. While this is a tremendous contribution to our

economy, we must collectively ask how we can improve the SBA to

assist more businesses, to create more jobs and eliminate the many

roadblocks entrepreneurs face.

Yet, for Fiscal Year 2007, I am truly disappointed by the Administration’s weak budget proposal of $634 million. The SBA has continued a dangerous trend of reducing its budget by an astounding

37 percent since 1999. Moreover, it concerns me that the SBA

failed to include the agency it has helped to create and retain over

the last year. Needless to say, this does not recognize the tremendous investment that SBA has been able to return on investment

and has not obviously been amplified in any respect. This is especially true when you consider the SBA’s return on investment

versus the agency’s budget that is less than 3/100 of 1 percent of

the total Federal budget.

With the uncertainly in the economy, the problems facing small

businesses are substantial and the SBA unquestionably must be at

the forefront in providing the financial and business development

tools for the success of entrepreneurs and small businesses across

the United States.

In 2005, the SBA programs disbursed record-breaking totals of

loans to small businesses, both in the number of loans and total

dollar value provided to small businesses. During the last fiscal

year, the SBA guaranteed over $24 billion in loans and venture

capital for small businesses, the highest level of capital ever provided. SBA loan and investment programs have produced success

story after success story, which included founding the Intel, Staples, America Online, Federal Express, Outback Steakhouse, Ben &

Jerry’s, Callaway Golf, as well as thousands of other successful

businesses.

In April, I chaired a hearing that will lead to reauthorization of

the SBA’s finance and entrepreneurial development programs. The

next SBA Administrator will be an integral part of that process. I

hope the reauthorization will lead to a renewed SBA that is completely dedicated to fostering small business ownership in America

and, if confirmed, I look forward to working closely with you, Mr.

Preston, in this effort.

The Administrator of the SBA has the ability to be not only a

spokesperson, but also an advocate for small businesses and their

issues.

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In Maine and throughout the country, small business owners

have repeatedly told me that their primary concern is the cost of

health insurance. This crisis is real and an undue burden on entrepreneurs throughout America and requires bold solutions. We have

been working on small business health insurance plans, but regrettably, we have not been able to resolve that issue on the floor of

the U.S. Senate—hopefully, we can at some point, before we adjourn this session and also the tax incentives to provide employers

with small firms with quality health insurance at an affordable

cost.

Mr. Preston, I know you understand our tax code is overly complicated and time-consuming, and it certainly is expensive for all

Americans, and most especially for our Nation’s small businesses.

Despite the fact that small businesses are the real job creators for

our nation’s economy, the current tax system places an entirely unreasonable burden on them as they seek to satisfy their tax obligations. The Administrator of the SBA can weigh in on these issues

to promote solutions that benefit small businesses.

The SBA Administrator must also uncover, monitor and correct

managerial mistakes, avoid lax implementation of laws, and prevent the waste, fraud, and abuse of taxpayer funds. If confirmed,

this will require your urgent attention as well.

Looking at access to capital, I hope, Mr. Preston, that you will

join this Committee in rejecting any attempt to charge additional

fees on small businesses in the 7(a), 504, and SBIC programs. The

SBA has proposed a fee increase on small businesses to raise $7

million in revenue, which will be used for the SBA’s administrative

costs. Increasing fees paid by small businesses is not the way for

the Administration to be balancing the budget. These small businesses are already paying fees and taxes to fund the Agency and

it is unacceptable to make it more costly for them to access financing. There are already zero subsidy programs and they have already paid their price and now they are imposing additional fees

and costs to small businesses to access the lifeblood of SBA programs that are so important to spurring economic growth in America.

We have seen what can happen without vigilant and precise

leadership which was epitomized by the December 2005 SBA Inspector General’s report that found eligibility could still not be determined for 85 percent of the September 11th STAR loans reviewed. The SBA must do everything possible to prevent a similar

bureaucratic fiasco.

Similarly, given recent discoveries of small businesses losing

prime contracting opportunities to large businesses due to poor

oversight of contracting laws, it is absolutely essential for the next

SBA Administrator to guarantee that 23 percent of the Federal

contracts are given to small businesses, which is required by law.

For an incoming SBA Administrator, these are only a few of the

challenges and problems that must be managed successfully. And

certainly I know we have had this discussion, Mr. Preston, on a variety of these issues, but I really do think that there are a wide

array of challenges facing you as an SBA Administrator; first and

foremost, the disaster loans and the response to the Gulf region

and the hurricanes last fall and the onset of another hurricane seaVerDate 11-MAY-2000 08:25 Oct 18, 2006 Jkt 028985 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 C:\DOCS\28985.TXT DianeA PsN: DianeA
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son. We have a lot of issues that we are going to have to reconcile

above and beyond the budgetary and the authorization issues questions that I think have undercut significantly these programs that

have tremendous value, not just to small businesses, but to America.

So, I am looking forward to working with you and appreciate

your energy and your sincerity and enthusiasm for moving forward

on these questions, and obviously we will explore them further

with you in this hearing. With that I will turn to the Ranking

Member of this Committee, Senator Kerry.

[The prepared statement of Senator Snowe follows:]

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OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY, A

UNITED SENATOR FROM MASSACHUSETTS

Senator KERRY. Thank you very much, Chair Snowe. I appreciate

your comments and want to thank you and your staff for working

with us as always on this nomination and on other issues. We look

forward to continuing to work in a bipartisan fashion on this and

othe Committee-related issues that come before us. Senator Durbin

is here; sometimes he’s the one who sits up here and hears the

opening statements from the other side, or provides them. I will try

to keep my statement brief, because I know he is busy and we

want to get to the matter ahead.

I think the Chair has made a very important and comprehensive

statement that really reinforces what we talked about when we

met with Mr. Preston. There really is a bipartisan consensus here

on this Committee. There are not a lot of labels by either party attached to most of our concerns. Our work is about small business

and many of the businesses in America are small, and most of the

big businesses started in a garage or in the back seat of a car or

some similar placewhere.

Mr. Preston, we welcome you here today. We are glad you are

willing to take on this difficult task, made difficult not just because

of the issues, but frankly made difficult because of some of the internal struggles you will face within the Administration. We welcome your wife here and we are delighted she is prepared to share

with you this public effort.

We have talked about a number of the issues facing the new

Adminstration and I just would like to run through a few of these

issues publicly today. I certainly look forward to hearing in a little

greater detail how you plan to do a number of things if confirmed.

Mr. Preston, you are a serious nominee and I think you are an

impressive nominee compared to some we have seen who come

from a more political background. I welcome your nomination. I

think you bring terrific business acumen. You bring a wealth of

management experience to an agency that is woefully in need of

real, solid management.

Chair Snowe talked about the disaster loan program. Everybody

on this Committee, though they are not all here today, shares an

enormous concern about the oversight of Federal contracting and

the disaster program. Here we have seen the SBA falter badly. Ten

months since Hurricane Katrina and the delays in getting victims

the loan money they badly need, as the Chair mentioned, is critical.

I am not going to spend much time on that.

Deep budget cuts have taken place—37 percent—the deepest experienced by any Federal agency in this Administration, and they

have left key programs understaffed. Efforts to eliminate key programs, like the Micro-Loan program, the PRIME and the New Markets Venture Capital program, have undermined access to capital

and business counseling for small businesses, especially the smallest of firms who are most in need.

The morale at the SBA is frankly at an all-time low—it is certainly as low as it has been at anytime in the 21 years I have been

on this Committee, and capable employees have moved on. There

is a great deal to be done to invigorate this Agency. I am confident

from our conversation that you intend to be an aggressive advocate

17

for small business. I hope you will be true to that intention. There

has been too much politics and too little effort at marshaling a bipartisan consensus to help make good things happen. My sense is

you do not come to this appointment with a political agenda and

I urge you to trust your instincts to do the right thing on behalf

of small business.

This Agency needs to live up to its full potential; with the investment and counseling and intervention capacity that it has, it can

make a huge difference in people’s lives all across the country, particularly with this amazing transition that is taking place with

globalization. Americans are increasingly becoming involved with

startup cottage industry type efforts, and the SBA can play a role

in this transition.

It is also important that you fight for a realistic budget. Every

Member of this Committee is exasperated from seeing these budgets that are driven by OMB and frankly, by a lack of commitment

and respect for the SBA. It is clear that there is an ideological disbelief in what the SBA does and that this Administration is content

to watch it wither on the vine. As the SBA is choked of funding,

the SBA Administrator has spent his time traveling around the

country, advocating administrative proposals that often do not reflect the real needs of small business.

What small businesses really need is an Administrator who will

consider the impact of budget cuts on small businesses and disaster

victims, who will vigorously fight for a budget that fully funds SBA

programs against budgets that propose unprecedented administrative fees on small business loans. When you raise fees that high,

you make it difficult for this agency to do what it was set up to

do, which is to help provide a cushion for some of the lending that

will not happen normally in the private sector. As fees continue to

increase, the loans become comparable to those in the private sector. By raising the fees, we are eliminating the differential that is

at the fundamental purpose of the Agency itself.

Small businesses also need you to be a watchdog when it comes

to Federal contracting, a point I made privately during our meeting. The record of the last few years is just plain appalling. There

has been an overstating of Federal small business contracting numbers that is dishonest. The SBA has closed its office dedicated to

veteran’s contracting, which is hard for me to believe when we

have so many veterans coming back from Iraq and Afghanistan.

Implementation of the Women’s Contracting Program continues to

be delayed. It has been delayed now for 6 years. The SBA IG reports and the GAO reports reveal a real pattern of neglect, a pernicious pattern of neglect when it comes to SBA’s oversight of Federal contracting to assure fair access to small firms.

I hear it all over the country when I meet with small firms. They

keep telling us that they are getting squeezed out, that contracts

are either bundled for large firms or they go to a firm that did not

really qualify. Report after report indicates that the SBA needs

more staff to oversee Federal contracting. When this Committee requests accurate data on small business contracting numbers, it is

rebuffed.

Contracting oversight is a serious problem and I would like a

commitment from you today, sir, to press for better data and be

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willing to acknowledge that the Agency has got to step up and provide greater oversight. Above all, what we really are asking is that

you do not to come back here and repeat the mantra of the last few

years, which is that the SBA finds it possible to do more with less.

For a year or so that may have been true, but at some point, and

I believe we have reached that point, it is just not possible. The

mantra is worn out. Small Business Development Centers have

had to reduce services. Many have waiting lists for small businesses just to meet with a counselor. Some of our womens’ business

centers are on the verge of shutting down, and lending to minorities has been generally flat or has gone down, particularly dollars

loaned to African-Americans and women.

The SBA has a unique role to play in fostering entrepreneurship,

and I am confident you will be confirmed. As I said, we welcome

the strengths you bring to this job. In the 21 years that I have been

on this Committee, I have never seen the SBA in as great a state

of crisis and disarray as it is today.

My final comment is this: Whatever that ideology is that has

been driving this starvation policy, it is misplaced. The Chair listed

a number of the businesses that have been successful and started

with small business lending, and chief among them are companies

like Intel, FedEx, Callaway Golf, and so forth. The entire budget

of the SBA, pre-cuts, has been paid many times over by the taxes

paid by the companies they have loaned to that have been successful. It is so shortsighted, particularly in this new globalized marketplace that entrepreneurs are trying to compete in. You know a

lot about that. So we welcome you. We look forward to your service

and we hope to have, frankly, a different era in the 2 years that

remain of this Administration, to really see the SBA turn the curve

and do what it is capable of doing. Thank you.

Senator SNOWE. Thank you, Senator Kerry. You can see there is

a lengthy agenda awaiting you, Mr. Preston.

Senator Coleman, do you care to make any remarks?

OPENING STATEMENT OF THE HONORABLE NORM COLEMAN,

A UNITED STATES SENATOR FROM MINNESOTA

Senator COLEMAN. With respect to the Assistant Democratic

Leader, I will keep my remarks very brief and ask that they be

submitted for the record.

Just two observations: One to Chairman Snowe, what you articulated about the importance of an advocate, about the importance of

a champion and that is all very clear. And then I think it is clear

that Katrina was not one of the shining moments of the SBA and

the hurricane season is on us again. Let us learn from our experience.

I have a deep concern about the micro-loan program; we tout it

internationally that this is a great thing, yet at home we are continually rebuffing efforts to get rid of it. It is important and we

need to continue moving forward in that regard.

And last, we have a special concern about rural development.

Rural small business is important and I would hope that you would

explore this in further questioning, that we do not kind of turn a

blind eye to some of the needs and opportunities in the rural communities. With that I look forward to supporting this nomination

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and I appreciate your commitment to serve and the skills you

bring, but there are certainly challenges ahead and we need to

work together to resolve them. Thank you.

[The prepared statement of Senator Coleman follows:]

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Senator SNOWE. Senator Vitter.

OPENING STATEMENT OF THE HONORABLE DAVID VITTER, A

UNITED STATES SENATOR FROM LOUISIANA

Senator VITTER. Thank you, Madam Chair. I will be very brief

as well. Obviously coming from Louisiana, my primary concern

with regard to this nomination to the SBA is disaster response. Mr.

Preston and I had a very good meeting focused primarily on that

and I was quite frankly very impressed by his ideas, what he said

with regard to that, and with regard to management and reform

of the Agency overall. I thank you, Mr. Preston, for really exhibiting a very real eagerness to have a very hands-on management

approach—really personally get your hands around these management issues which have been so frustrating, particularly through

Hurricanes Katrina and Rita. I very much look forward to working

with you in that effort of really getting your hands around these

management issues, both disaster response and all other aspects of

making the SBA fully effective. Thank you, Madam Chair.

Senator SNOWE. Thank you very much, Senator. Now we welcome our colleague, Senator Durbin, who is here to introduce our

nominee Steven Preston, and who is a resident of Hinsdale, Illinois.

I welcome you, Senator Durbin, and any comments you care to

make in introducing Mr. Preston.

STATEMENT OF THE HONORABLE RICHARD J. DURBIN, A

UNITED STATES SENATOR FROM ILLINOIS

Senator DURBIN. Senator Kerry, Senator Coleman, Senator Vitter

and Madam Chair, thank you for the opportunity to introduce

Steve Preston to the Small Business Committee.

When a tornado struck in my hometown of Springfield, Illinois

earlier this year, in fact, two tornados in about a 3-week period, I

saw first hand how crucial it was that the Small Business Administration respond with disaster relief loans quickly and efficiently.

Particularly as we approach another hurricane season, I am sure

Senator Vitter can speak to this issue better than any of us, it is

essential that the SBA remains ready and able to help on an emergency basis.

The SBA needs the best leadership to meet its goals of helping

as many entrepreneurs as possible in my home State of Illinois and

across the Nation, to help this country grow more jobs as quickly

as possible. Second, to provide disaster loans to businesses and

communities when they need them.

Thirty years ago, Madam Chairman, to confess my conflict of interest here, I applied for and received an SBA loan to open a little

restaurant in Springfield, Illinois. It never made franchise status,

but it survived for 5 years and it did because the SBA believed in

us and gave us our chance. My story can be repeated thousands if

not millions of times over across the United States.

Steve Preston comes before you today with the right experience

to lead this critical Agency at this moment in history. He graduated from two great Illinois schools, first from Northwestern University and then an MBA from the University of Chicago. He has

worked as an investment banker on Wall Street before returning

to Illinois to become Executive Vice President of ServiceMaster,

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based in Downers Grove outside of Chicago, one of the most respected corporations.

Steve has spent nearly his whole career bringing effective management to business operations, and we need his organizational expertise at the SBA now more than ever and your opening statements demonstrate that. We need an Administration, with Steve’s

leadership, that will help America’s small business entrepreneurs

to continue to create good jobs in our Nation.

Finally, let me say to Mr. Preston, what you have heard this

morning from Chairman Snowe, as well as Ranking Member Kerry

and others, makes it clear that this Committee and our commitment to small business are bipartisan, and we are dedicated to promoting ownership and entrepreneurship without a political agenda.

I am confident this Committee will give you a fair hearing, I believe they will support your nomination and I hope that they will

become a valuable partner as you do your important work at the

SBA. Thank you, Madam Chair.

Senator SNOWE. Thank you very much, Senator Durbin, for your

comments.

Rule 3 of our Committee requires that the witness during a confirmation hearing has to give testimony under oath, so would you

please stand and raise your right hand.

[Witness sworn.]

Senator SNOWE. I would like to welcome you to the Committee,

Mr. Preston, and would you care to introduce your family members

who are here, I know your wife, Molly, is here. I understand you

had a wedding anniversary on Monday; is that true?

Mr. PRESTON. That is true.

Senator SNOWE. See, no better way to spend your anniversary.

STATEMENT OF STEVEN C. PRESTON, NOMINEE TO BE

ADMINISTRATOR, SMALL BUSINESS ADMINISTRATION

Mr. PRESTON. I would like to thank you, Chair Snowe, Ranking

Member Kerry and the Members of the Committee on Small Business and Entrepreneurship for meeting with me today. I would also

like to thank all of you who met with me or whose staff met with

me. Those meetings were very beneficial to me in understanding

your perspectives on how to increase the impact that the SBA has

had on the constituencies it serves. I would also like to thank

President Bush for nominating me to this position and the many

legislators, trade organizations and individuals who have been kind

enough to endorse my nomination. Finally, I would like to thank

Senator Durbin for his kind introduction and his support.

Many of you have asked why I would like to be a candidate for

this position. Very simply, I believe in the value of public service

and would like the opportunity to serve in a capacity that is relevant, that I am passionate about, and that draws on the competencies I have developed over almost 25 years in financial and

operational leadership positions.

It is easy to get excited about serving small businesses. Small

businesses help drive our economy, transform communities, create

jobs, and enable people to realize their dreams. It is through small

business that we see innovation thrive and grow to become companies like the two that you mentioned, Senator Kerry, FedEx and

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Callaway Golf who have received SBA support. Small businesses

take risks that others just will not take, because they have a vison

and because that every dollar that they put into that business will

be matched with $10 of sweat equity.

Small businesses are often the first to venture into neighborhoods needing renewal or rebuilding. In recent conversations with

a Member of this Committee, I recalled a striking example of that

in New Orleans when I visited there this past spring and spent

several hours touring the devastation down there. After leaving the

Lower Ninth Ward and seeing almost no activity whatsoever for

miles, we came upon one conspicuous anomaly—a small independent grocery store, freshly painted white, with sparkling windows and a bright sign out front. Several people were at work

scrubbing the sidewalks in front, stocking the shelves and cleaning

the floor, apparently in preparation for a re-opening. As I looked

at the empty houses all along this lonely sight, I could not help but

wonder who would come to shop, would the venture be successful,

and how much of the owners’ lives were invested in that store.

During the same trip I was also fortunate to hear from several

small business owners about the challenges they have in trying to

claw their way back to viability and a number of them are relying

on the SBA to help them in that process.

Some of you have wondered about my experience with small

business. I have been in the middle of small business activity my

entire professional life. I have worked with investors in the portfolio companies on strategic and operational issues. I have worked

as investment banker with successful small businesses who are

now big enough to tap the capital markets. I have worked with

small business owners in a major franchise network to become

more effective through training and funding and business support.

In some ways, I think the most impactful experiences I have had

have been in rolling up my sleeves to advise friends and family

members on the issues that they face everyday as small business

owners.

As a result, I have seen firsthand how small businesses evolve

from an idea, to a fledgling operation, to a sustainable enterprise,

to a growing force and I understand the type of support they need

each step of the way. I have also witnessed what happens when a

small business person with an idea and all the energy in the world

to pursue it, lacks funding, lacks training, and lacks good advice

and that is an opportunity lost for all of us.

I have listened to the stories of small business people who seek

more affordable health care, who are confounded by a regulatory

environment the disproportionately burdens small business, and

who would sell goods and services to the Federal Government, but

are so daunted by the difficulty and cost in becoming qualified to

do so that they just give up. I know how important it is for them

to have a strong advocate.

In addition to my commitment to small business, I believe my

background is well suited to lead the SBA because it is deep in finance strategy and operational change, with experience investment

banker, treasurer of a major financial and technology services organization, and later as the Chief Financial Officer and Leader of

Operational Change at a company with about 40,000 employees,

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multiple operating units and thousands of locations. I hope to bring

relevant competencies to the SBA.

If I am confirmed, I will be taking on the leadership of a large

organization with thousands of employees, millions of customers

and billions of dollars in financial risk. The SBA is like a big business that serves the needs of small businesses and it is an organization that requires sophisticated financial management, operational responsiveness, and a customer service culture among the

workforce. None of this happens by accident. It requires dogged

focus to move the ball forward each and every day.

I also believe that to be an effective leader, one needs to paint

a compelling vision and be a tenacious champion of the vision, willing to be outspoken and lead on principle. In addition, my leadership style promotes respect, openness, honesty, accountability, and

collaboration. If I am confirmed, I plan to work hard to drive these

operating principles into the organization and to be a visible advocate for the interests of small business.

Finally, and very importantly if I am confirmed, I look forward

to having a close and open relationship with the Members of this

Committee, with its’ staff and to building and enduring relationship between the Agency and the Congress. This relationship,

which I believe can be a collaboration, will be vitally important in

realizing the opportunities before us.

So thank you once again Chair Snowe, Ranking Member Kerry

and other Members of the Committee for your openness, for your

honesty throughout the process, and I would welcome your questions at this time.

[The prepared statement of Mr. Preston follows:]

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Senator SNOWE. Thank you, Mr. Preston. We appreciate your

statement and the last point that you made with respect to communication and collaboration are key ingredients, I think, they are

critical to the success of the Agency. That is one of the things that

we try to impart in working with the Agency is to work together

on the issues. We are all moving in the same direction—we would

like to move in the same direction as you have heard here today.

The wide-ranging concerns that exist with the failure of the SBA

to prominently elevate these programs and be an advocate for these

programs that have been so instrumental to the success of economic growth in this country and a single greatest contributor to

job growth in America.

So, there are a wide array of challenges and as I said earlier,

there is a lengthy agenda awaiting you. You have already been

down to the Gulf, you understand the dimensions of the problems

where SBA failed to respond in a very quick, expeditious, and efficient way. I will not go through chapter and verse as we did in the

conversation that we had in respect to what went wrong. Suffice

it to say, that it was an unprecedented event that required an unprecedented response. This was SBA’s moment to shine and to

showcase all it could provide in one critical dimension of rebuilding

the economy in the Gulf region.

So, with that, tell me, in hearing all the challenges you have

heard today and obviously through your discussions with Members

of this Committee, how do you intend to begin your leadership with

the Agency and where will you begin, what first will you do?

Mr. PRESTON. Thank you for your question. I think there are a

couple of things; I know disaster assistance is job No. 1. I was fortunate enough to speak with Senator Vitter and Landrieu, as you

have mentioned, I have been down there and I know it is absolutely critical that we serve the needs of those Americans in their

dire time of need effectively and responsively.

Senator, I heard a comment a little earlier about some earlier

issues—I was across the street from the World Trade Center in

1993 when the first terrorist bomb went off, and I have lived in

many parts of this country that suffer from tornados, so I feel like

this is something that is very important to me. What I need to do

is dig very deep in understanding the issues behind this problem.

The process of making a disaster loan is multi-faceted and has

steps all along the way and it is a classic opportunity to dig deep

with good business solutions.

I also know from the limited conversations I have had with people at the Small Business Administration that a lot of work has

been done on the technology side and otherwise, but I really need

to get in there and kick the tires. I also need to understand, and

we all do, whether or not the private sector can be effective in helping us out, because there are situations—we have heard many situations where the SBA has done well. Senator Durbin mentioned a

situation in Illinois. I have heard from other people on the Committee where they did do well. This obviously is a type of disaster

we need to be prepared for and we need a plan in place and we

need to be able to accommodate all kinds of disasters. So this is

job No. 1.

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The other thing I would like to say is very quickly after coming

through the door, if I am confirmed, I need to get out on a listening

tour. I need to spend time with our employees, the employee morale issue is gravely concerning to me. The SBA is a service organization, it has got a terrific mission and we need to have an employee base that is driven by that mission every day to fulfill the

needs of those customers, and that is tough to do with low morale.

So I have got to get out there and talk to the employees. I have

got to get out there and listen to the people we serve. I have got

to spend time with people on your staffs to really build a picture

to make sure that we are effective. And I would like to say in noting that, I think 90 percent of the good ideas in how to improve

an organization are generally out there, they just need to be captured and crystalized.

Finally, I think I need to get deep into some of those pragmatic

evaluations and understand where they are effective and where

they are not and how we can bring good solutions to them.

Senator SNOWE. I appreciate that because obviously this is an

agenda that is laden with some serious concerns and serious issues.

When we receive reports that list all the agencies, SBA is basically

in last place when it comes to the level of morale. Frankly, I think

it gets back to the original issues that many of us raised, and Senator Kerry as well, and that is the undercutting of so many of these

prime programs and resources. Granted there are agencies that can

do more with less, but how much less? When you are really handicapped by shortages of resources and personnel, and as we say on

the front lines in a disaster area as large and as great as in the

Gulf region that went on for months on end, that is seriously troubling at a time which this Agency should have been at the forefront

and should have been able to move immediately to weigh in to provide that front level and that front line support to rebuilding the

economic infrastructure.

Can you tell this Committee what, in your views, what corrective

actions could take place with respect to how to respond and how

we complete this process in the Gulf region? From here on out,

what should the Agency be doing to fix this as efficiently and as

quickly as possible. Since we are only at 20 percent of disbursed

loans, which never should have happened, there is so much lag

time involved in all of this, it was just no sense of urgency given

the level and depth of the disaster in the Gulf region, and yet they

just did not step up to the plate quickly and for many months there

was hesitation and procrastination.

Mr. PRESTON. When I was down in the Gulf I had a chance to

speak with several business owners who were in the process of getting disaster loans. It was very helpful for me to see firsthand what

their stories were and the issues they had. What I understand of

the disaster lending process, it is a multi-step process which involves, reaching out to people, bringing them in, taking them

though a credit approval process, taking them through a closing

process, taking them through a disbursement process and any stepline. That way, there are multiple steps within each one of those

and there is an opportunity for a failure point. It is a highly complex set of business processes.

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So I think we need to get very deep operationally to understand

exactly whether there are failure points along that way, whether

those processes can be redesigned, whether we can leverage the

private sector in some way to accelerate the process along the way.

With respect to the disbursement side specifically, I think I will

need to understand much more deeply what the root causes are

there. I know some of them may be within the SBA process, some

of them might be outside the SBA with respect to people getting

insurance or building permits.

When I look at that I wonder, cannot we be helpful in understanding what those problems are outside the SBA in working to

help the people in need even if it is collaborating with other agencies or other people in the private sector? So, my view is I need to

get very deep very quickly and work with the people and get this

along the way of becoming a much more effective process.

The other thing I would like to say Senator, is the process has

to be sized for a lot of different kinds of events and I think it is

important that we think about something like Katrina as being a

surge event, where you have just a tremendously dramatic need

and it is almost like an emergency plan in place that you have. We

have to look at what we can do at different levels of activity and

how we perform up to standard at those different levels.

Senator SNOWE. I appreciate that and one of your first duties

when you are confirmed is having to deliver a report to Congress

on how SBA intends to respond to having a disaster response in

place for the 2006 hurricane season as well.

Senator Kerry.

Senator KERRY. Mr. Preston, some concerns have been raised by

members of the small business community that given your history

with ServiceMaster and ServiceMaster’s history with the Committee itself and the Comp/Demo program, that you may find yourself in a perceived conflict of interest when you are confirmed with

regard to the SBA policy on franchises. There is now a proposal in

the Manzullo reauthorization Bill out of the House, which changes

the definition of a franchise with respect to the Small Business Act.

That provision gives the Administrator pretty broad discretion. I

am wondering, should you be confirmed, if you see a need to recuse

yourself from situations such as that where there may be a perceived sense of conflict of interest.

Mr. PRESTON. First of all, let me just say, Senator, that if I am

confirmed, when I walk through that door I am the chief advocate

of small business, period. I have no concern about whether or not

I will be able to fully advocate on their behalf. I think it would be

very important for me when these types of issues come up, to seek

the advice of conflict counsel. But in terms of my commitment to

the small business cause, it will be unwavering.

Senator KERRY. Well, what is your view then, about this issue of

franchises? For years franchises that tend to be wholly owned and

have significant support structures from the very large corporate

entities with significant flow of capital have not been considered

small businesses. Do you see anything that merits the notion that

all of a sudden they should be qualified for SBA assistance? Should

they be defined as small businesses?

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Mr. PRESTON. I think there are a lot of flavors of franchises and

there are a lot of different ownership structures, Senator. My experience has been that the franchise organization I am associated

with, almost entirely enables them to become prime contractors in

any situation, even if we are helping them out in a business situation. So I think I would need to take into consideration the structure of those entities and specific intent of those laws.

Senator KERRY. What would guide you as you do that? What

would your concern be with respect to whether or not franchises

should qualify as small businesses?

Mr. PRESTON. My concern would be whether or not it truly fosters the small business community and small business growth.

Senator KERRY. Would the concern extend beyond that to a

longer list of criteria about what kind of financial support structure

they may have, what the nature of the franchise is—and I do not

disagree with you, there are different kinds of franchises in principle. Would you be guarded about this concept?

Mr. PRESTON. I think we would have to take all those issues into

consideration and I am not especially close to the legislation you

are discussing; I know it is relatively recent. But certainly I would

feel the need to get very deep in understanding those relationships.

Senator KERRY. Did you play any role yourself personally as Vice

President of ServiceMaster with respect to formulation of

ServiceMaster’s history and the comp/demo program?

Mr. PRESTON. No, I really learned about comp/demo in the process of this nomination, and have been briefed on it to some degree

since then.

Senator KERRY. So that is not a policy that you have personally

developed and/or taken a position on with respect to any public advocacy?

Mr. PRESTON. I would say even further, Senator, it is not even

something that I was aware of or understood until recently.

Senator KERRY. Good. I assume you will look carefully at this

question of any perceived conflict of interest with respect to franchising issues?

Mr. PRESTON. Yes.

Senator KERRY. Commit to the Committee that that is an advice

from counsel that you will seek?

Mr. PRESTON. Are you commenting on a potential recusal on my

part or conflict of interest?

Senator KERRY. Yes.

Mr. PRESTON. I would need to seek the advice of counsel on

whether or not to recuse myself and would certainly need to abide

by that advice.

Senator KERRY. Also ServiceMaster has a history with the Committee of lobbying to put an end to small business set-asides in industries such as landscaping and pest control in the Defense Department comp/demo program. What is your position on

ServiceMaster’s efforts to include those industries in a small business demonstration program?

Mr. PRESTON. Once again, this is for the part and parcel of the

issue that I became aware of in the process of my nomination. I do

not fully understand the potential impact of that change in the setaside requirements on small business, and what I would like to do

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is understand it more fully. I know that—my understanding is

there are a lot of different views on the impact of that legislation

on small business, but frankly, I do not feel like I have the depth

of understanding or the data to understand really what the impact

is at this point.

Senator KERRY. You cannot tell us at this point whether or not

you would support the small business community in its efforts to

end the program? The Small Business Committee, as a whole, is

seeking to do that. Since you are going to be an advocate for the

small business community, are you going to stand with them on

that effort, which is contrary to what ServiceMaster did?

Mr. PRESTON. I would absolutely seek the input of the small

business community on any legislative issue and work hard to understand their needs and view myself as their chief advocate. Once

again, I do not view any history that I have had as being contrary

to the interests of small business and in fact, it has given me a

gateway to understand their needs and concerns.

Senator KERRY. With respect to contracting, one of the most egregious failures of recent years at the SBA is the failure to insure

that agencies are meeting their contracting goals. The SBA is supposed to be a watchdog in that effort. IG reports reinforce the need

for more staffing, and last year’s IG report indicated that a significant amount of small business contracts went to large firms and

not small businesses. So my question to you is, under your leadership, do you commit to meeting what are already deemed to be,

both by Congress and the executive branch, reasonable goals for

underserved communities?

Mr. PRESTON. Yes, and let me comment on your question. I think

if there is inappropriate activity occurring anywhere in here, it is

unacceptable. I want to thank you all for confirming the IG and I

think that group is going to be a very important partner of mine

in insuring that the operations of the SBA are moving forward effectively. I know it is our job to work with the other agencies to

meet their contracting goals and my view is we have tools available

to us to help them do that and it is our job to help them as fully

as we can to meet those goals.

Senator KERRY. I see a vote has started, so I am going to end

my questioning. I understand we will have until Friday of this

week to submit questions in writing?

Senator SNOWE. Yes.

Senator KERRY. Thank you Chair Snowe.

Senator SNOWE. Recognizing Senator Coleman.

Senator COLEMAN. Thank you, Madam Chair.

Mr. Preston and I talked a little bit about the micro-lending program and this Committee has expressed very strong support for

that program in the past, the Administration keeps coming back

with wanting to cut the program. Can you give me your general

views on micro-lending?

Mr. PRESTON. The micro-lending industry overall is absolutely

critical for serving the tier of businesses that do not have access

to capital otherwise. It is a tier of businesses that serve a vital role

in the economy. In fact, as an aside, we see micro-lending taking

hold in developing economies and a way to drive them forward. So

it is an absolutely vital capital source. I also know that the market

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for small loans in the private sector has grown dramatically over

the number of years and the SBA provides small business loans

through a number of its programs. I absolutely believe in the value

of small business loans. I understand that this issue with respect

to the micro-loan program at the SBA has been a concern for many

members in the Committee, and I would absolutely look forward to

digging in more deeply if I am confirmed.

Senator COLEMAN. What we need you to do here is have the courage and strength to go back to OMB and one, clearly express the

views of the Committee. We would try to express it personally, but

you are in a position where you have to articulate the Administration’s position, we understand that, but this is one where I would

hope that you would go back and consistently keep in mind the

Committee’s strong support for micro-lending.

I serve on foreign relations—these are the programs we tout

internationally. This is one of the great opportunities for development in Africa, and Latin America, and Asia. I would just hope

that the message that is coming from this Committee is loud and

clear, and though I understand the responsibility for presenting the

Administration’s positions, I think there is also responsibility that

you need to go back and not to simply meekly accept it, but to articulate what their concerns are.

Let me just say a little bit about rural development. Can you

give me a little sense—have you given much thought to what the

SBA—what more they can do, what role they play in rural development. Oftentimes rural communities are struggling, regional incentives are very strong, the SBA can play a vital role. There is a lot

going on now and with the use of technology in rural communities,

things we are seeing with ethanol and the possibilities of developing there, biotechnology, etc., I think there is a real role for SBA

here and I would like to get your sense, or have you given much

thought to the rural aspect of it and how you would further develop

it.

Mr. PRESTON. Senator, as you know I grew up in Wisconsin, my

parents live in a town of about 1,500 people and a fact that you

did not see on my resume is I was the treasurer of the Future

Farmer’s of America in high school. So rural America is sort of an

important part of my roots. One of the things that I think is most

exciting about the opportunities the SBA can bring to people is the

opportunity both to work with people in both urban and rural settings where there is a dramatic need for businesses, a dramatic

need for job creation, and to do so in innovative ways. I was encouraged when I spoke with Senator Burns about a business in his

home State called Printing for Less. One of the things that struck

me about it was, here is a business in rural America that has been

enabled through the Internet and through the advancement of the

logistic industry.

So even while we are seeing transition in rural areas that is impacting in the negative ways, I think the business infrastructure

in our economy is available to help them in very positive ways to

transform. And I would very much look forward to spending time

with you and people in your home State and a number of people

on this Committee who have very strong rural interests, to understand how we can be more effective in serving rural communities.

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Senator COLEMAN. I share that optimism. I share that sense of

possibility. There is opportunity out there, but SBA can and must

be a part of it. I look forward to working with you on that. Thank

you.

Mr. PRESTON. Thank you.

Senator SNOWE. Senator Vitter.

Senator VITTER. Thank you, Madam Chair.

Mr. Preston, going back to disaster loans and disaster recovery,

will you be completely open to new and significant roles possibly

for local private financial institutions, particularly in a surge situation like Katrina and Rita clearly are, to not only help administer

the program but conceivably maybe even be direct lenders with a

guarantee versus SBA being direct lenders?

Mr. PRESTON. Senator, I really think we need to be open to all

possibilities and the bigger the disaster I think the more creative

we have to be in serving the needs of disaster victims. I know that

you have spent a tremendous amount of time with people in Louisiana dealing with this issue. I would very much look forward to

spending time with you and the people that you think understand

this issue the best in crafting the right solutions for the disaster

recovery effort. So this is something I care very deeply about and

as you and I discussed, I intend to spend a very significant amount

of my time in addressing the issue.

Senator VITTER. Great. I am also very interested in the small

business innovation research program and we touched on that

when we met. As you know right now, that program reserves 2.5

percent of R&D budgets for small business, and I quite frankly,

would like to increase that, I would personally like to double that

5 percent. As we reauthorize that program and you go into the

SBA, will you be open to that—looking at that small business innovation research program?

Mr. PRESTON. Yes, this is actually an interesting issue because

as I have come into this process, I know there are a number of

issues and concerns that people have that deal with the amount

that goes to the program, it deals with the ownership of the companies that are engaged in the program, it goes with the geographic

focus of the program. One message I have gotten very strongly

from Members of this Committee is that is something I need to

give my attention to and to help understand, really, how to serve

the needs of the business community most effectively in this program. I would look forward to spending time with you and hearing

from you in that process.

Senator VITTER. Great. And a final question for me, and this goes

back to the hurricanes and one of our biggest frustrations, at least

on this Committee, is some of the no-bid mega contracts that are

sort of thrown out there as FEMA was trying to play catch-up after

the fact and get some things done. In most of those cases, what

happened is you had multiple layers of subcontractors built up

under a huge mega contract. A good example is the Blue Roof contract, at least in Louisiana, there were so many layers of subs beneath the pond that the folks actually putting the tar on roofs—

two things were happening; one, the amount we were paying per

square to the pond was more than it takes to put a permanent roof

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on houses. Mine is not a shoddy roof, but the roof on my house was

less expensive than that square of blur tar.

Secondly, the person actually putting on the roof was getting on

order of literally 3 percent of the pond contract funds. Now it takes

something to manage a lot of subs, a big geographic area, to do paperwork, to do reports—it takes something to do that. It should not

take 97 percent of the contract price to do that.

I have introduced a bill to create a whole new model to avoid

those layers. Other Members have similar ideas to create a new

model to avoid those layers. Will you be actively engaged in that

discussion, looking at my legislation, looking at other legislation,

helping lead a discussion in the Administration because it does—

it is probably not primarily in SBA, there is a broader issue, but

it certainly impacts small business.

Mr. PRESTON. I would love to dig into that with you all. I think

that when we address this problem more broadly, we have to understand that there needs to be a mechanism in place that contemplates something very large, and I am sure in this process we

have seen people who wanted to be responsive, but their best intentions of trying to serve people—and we find ourselves in situations

like this because they are expeditious. In looking forward, I think

we need to pre-contemplate what could happen and what mechanisms need to be in place to enable the outcomes that we hope will

be there ultimately. I would look forward to spending time with

you and anybody else who is engaged in this issue because I think

it is a very important one for us to understand.

Senator VITTER. Thank you, Madam Chair.

Senator SNOWE. Thank you, Senator Vitter.

Senator Pryor.

Senator PRYOR. Thank you, Madam Chair. I just have a few

questions, I know we are on a time crunch on a vote. Large businesses that acquired small businesses before the end of 2004, according to current SBA guidelines, the small business that has

been acquired is allowed to keep their status as a small business

for up to 20 years. The IG has looked at this and they conclude

that this needs to be fixed, that there should be an annual recertification; do you agree with that recommendation?

Mr. PRESTON. Senator, I have not spent enough time with the IG

to understand the basis of the recommendation and what alternatives were looked at. I do think this is a very important issue

to the Committee, it relates to that, it relates to small businesses

that become big businesses, and it relates to other ways in which,

I guess, small businesses can get small business contracts. I know

that I will have to spend time on this issue and understanding it.

Senator PRYOR. That is an area—that whole little realm there is

an area we ought to spend some time on. Given what you know

right now about the SBA, do you see any programs that need to

be eliminated or scaled back in the SBA?

Mr. PRESTON. I come in, to a degree, with the presumption that

in large part what the SBA does, that its programmatic structure

is valid and important, so to a degree, I come in with a focus on

how to be more effective with those programs in serving the objectives. Are we reaching out to the right people? When they come in

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the door, are we treating them well and helping them, and at the

other end, are we producing the outcomes that we hope to produce?

So, I do not come in with the presumption that programmatically

we have got big issues, but I do know that I need to understand

the differences out there around these programs.

Senator PRYOR. One program that we have discussed is the

Women’s Business Centers which I think is an initiative that has

had a lot of success, but they are really starved for funding now.

It may be too early to ask you if you plan to restore that funding

or work to restore that funding, but I would strongly encourage you

to do that. Also, that raises a larger question about your intention

as it stands today, of fighting for dollars for SBA. I am convinced

that when you put Federal dollars into SBA programs that are

structured correctly and that actually work—and most of them

have great track records—that it can have a huge positive ripple

effect in the economy. So I would just like to hear your intentions

of whether you will go to bat for your Agency with OMB and the

White House to try to make sure that you have adequate funding

to get things done, that Congress wants you to get done.

Mr. PRESTON. My job, Senator, is to work very hard to deliver

this service of the SBA as effectively and fully as possible and to

the extent that that requires budgetary issues, I have to be all over

it.

Senator PRYOR. Thank you, Madam Chair.

Senator SNOWE. Thank you, Senator Pryor.

Senator Thune.

Senator THUNE. Thank you, Madam Chair. I know we have to go

vote; so I will keep this brief, but I appreciate your being here, Mr.

Preston, and entertaining the idea of public service which I think

is a very high calling. It seems to me that your past experience in

finance as a CFO will serve you very well in managing the multiple

loan programs that exist at the SBA. Of course, in recent years,

SBA is always being asked to do more with less, you know, more

loans, more disaster response, more business development assistance, all with fewer dollars. So you have a big challenge ahead of

you and we want to be helpful and work with you as much as we

can to make sure you have the resources and the manpower to undertake and serve the purpose and the mission for which SBA was

created.

I am also interested, as my colleague from Minnesota, Norm

Coleman mentioned, in what we can do to develop economic opportunity in rural areas of the country. We see increasing out-migration. There are some silver linings—I should not say silver linings,

but there are some opportunities there for economic development

particularly in the area of renewable fuels and we have seen a considerable amount of success with ethanol and bio-fuels and those

sorts of things that are creating jobs in rural areas, but we want

to continue to pursue those sorts of opportunities in order to keep

young people in rural areas of the country.

Let me just, in the interest of time, propose one question, if I

might, and if we have others I will submit them for the record as

well, Madam Chair. Some of the critics of the SBA at times voice

concern over the lack of any clear indicators for effectiveness when

it comes to loan programs currently administered beyond simply

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the number of loans approved. I am wondering if you have any

thoughts about measurements that could be taken to see how those

SBA loan programs are helping small businesses succeed and are

they helping the economy at large, are they creating jobs, are there

better ways we can measure that?

Mr. PRESTON. I have spent a lot of my time in the matrix world,

as you can probably appreciate, that is sort of what I have had for

breakfast most of my life. I think it is very important when we look

at these programs to think about the outcomes that we are generating. Once again, are we reaching the right people, are we helping

them get access to our programs, and once they get access, are we

producing the right outcomes? And many times, statistics really do

not tell you that. I have always loved the phrase from a prior chairman at the company I am with right now, he says, ‘‘Did you hear

the story about the man who drowned crossing the river with an

average depth of 3 feet?’’ You know, somehow it sounds that it is

shallow, but you have got a problem along the way potentially.

Looking at the right information and looking at the right outcomes is very important to understanding our success. Then taking

that and advocating and communicating it on behalf of the people

we serve is very important. So I understand the issue and it is

something I think I will be devoting a lot of time to if I am confirmed to this position.

Senator THUNE. I appreciate that. I think the good work that the

Agency does sometimes does not get recognized. Part of it is communication and part of it is figuring out how better to measure

some of those statistics that I think give evidence to that good

work. We look forward to working with you on that, as well, as on

focusing those programs on the outcomes, on the results that you

have mentioned and that we all want to see achieved. These programs are really impacting and making a difference in the economy, helping small businesses grow and expanding great jobs

which is what this Committee is interested in and I think it is

what the purpose of the Agency is and we welcome the opportunity

to work with you to that end.

Thank you for your willingness to serve and we anticipate and

look forward to moving your nomination forward.

Senator SNOWE. Thank you, Senator Thune. We have another

vote pending on this, and I am going to recess. I have a few more

questions, Mr. Preston, so if you can bear with us a few more moments, I will cast two votes and I will be right back.

[Recess.]

Senator SNOWE. The hearing will come back to order. I am sorry

for the interruption. I just have a few more questions about some

of the several key issues, as I mentioned in my opening statement,

concerning the lending program and the fees that had been recommended by the Administration, additional fees beyond the fact

that there are no zero subsidies and they are now recommending

in this latest budget for increased fees in 7(a) and 504.

So I would like to hear your views on how you intend to go about

it because I really see this as moving in an entirely different direction in terms of supporting the core programs that are so essential.

It seems to me it is a contradiction to, on one hand, tout SBA and

its programs, and yet on the other hand, I think moving in a direcVerDate 11-MAY-2000 08:25 Oct 18, 2006 Jkt 028985 PO 00000 Frm 00087 Fmt 6633 Sfmt 6633 C:\DOCS\28985.TXT DianeA PsN: DianeA
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tion that ultimately undercuts the value of these programs that

going to make it so much more expensive for small businesses to

access these programs.

So I see it as contradictory and counterintuitive when we should

be elevating these programs and at the very least, not imposing additional costs on the very businesses we are trying to help. So I

would like to have your views on this approach because this is entirely new. It is one thing to go to zero subsidy, but this is now

going even further, that represents additional and very expensive

costs to small businesses who want to take advantage of these SBA

programs.

Mr. PRESTON. I know that every dollar counts for the small business person and every dollar is valuable when you are looking at

paying your employees and your vendors and moving your business

forward. This is something I know I will have to spend some time

on and hear from you and other Members of the Committee on

your views, and also really understand the impact these have on

the programs. I also think much more broadly, I need to dig into

the programs to understand whether or not we are reaching

enough people, and if there are other ways that we can expand participation to programs, whether we have the right vehicles in place

to reach people, and through the program and serving their needs

and producing the outcomes on the other side.

So I look at this, Senator, as being the issue that you brought

up and additionally, I look at it as a broader issue to see how we

can serve people more effectively.

Senator SNOWE. I appreciate that and I think that you really

should examine what the impact is going to be on requiring these

additional fees. The Administration has not exactly indicated yet

how they intend to go about—who they are going to impose these

fees on, the lenders or the borrowers. That is another dimension to

this question. You have critical lending programs and to now impose these additional fees, in fact, look at the 7(a), 504 and the

SBIC programs, on the 7(a) program, the fee would be 4/100 of a

percent or about $623 per loan; the 504 the fee would be 11/100

or up to $11,000 per loan, maximum $10 million under that program, and finally, the SBIC programs 64/100 of a percent for an

average of $45,360.

So these additional burdens are over and above what small businesses already pay. They have not issued a program yet in terms

of who will be paying these fees, but again, I think in the final

analysis, someone is going to bear the cost that ultimately has an

impact on these programs and the vitality of these programs. I

think this especially conflicts with the notion that you were trying

to help people who cannot access financing elsewhere. That, I

think, even makes it more difficult and creates another barrier.

So I see it moving entirely in the opposite direction from what

we should be espousing when it comes to the three very important

core programs to the Small Business Administration. So I hope you

can examine that very carefully because as we move ahead on the

reauthorization process, it is going to be even more critical to get

your input and see if we can work through some of these issues because it is clearly not something that I intend to accept at this

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point, and I know that it is a view shared by other Members of the

Committee as well.

On the budget, and you have heard that from other Members of

the Committee, it is just that it has been consistently a declining

budget over the past 6 years to the point now it represents a 37

percent decrease from 2001. Even the disaster loan programs have

declined more than 25 percent over the past 6 years. We are seeing

not much support from the Administration in terms of reinvigorating the SBA programs where we really get more bang for the

buck. There is no question about it; the leveraging of jobs—we do

not tout the leveraging of jobs which is something I have recommended.

We need to include in the budget of the SBA, the number of jobs

that these programs create. The fact that since 1999 we have created more than 5 million jobs, is not something that we celebrate,

herald, or anything. And yet, probably very few agencies or programs are the equivalent of what the SBA has been able to generate in terms of job creation, in terms of its value in producing

a dividend for our Government and for the economy.

So I would be interested in what your views are and how you intend to look at these budgetary issues as you move forward.

Mr. PRESTON. One of the things I mentioned earlier is the importance of my getting out there on a listening tour. I need to hear

the comments of the people we serve and I need to hear the comments of the people in our field offices. These are the people on the

front line touching constituents everyday and I need to understand

the people on the Committee more deeply, because obviously, when

we look at putting together a budget and presenting it, there are

a number of aspects of that budget. It is going to be my job to deliver a budget to this Committee and to the Senate that I believe

meets the objectives of the Agency.

Senator SNOWE. In lieu of hearing your letter, if have not already

seen it, that was sent to the Senate Subcommittee on Commerce

that indicated—it was signed by all 18 Members of the Small Business Committee, reflecting our concerns with the proposed SBA

budget request that included all the cuts and imposition of fees

that I just talked about. These concerns were increasing fees to the

7(a), 504 and SBIC that I mentioned, changes to disaster loan interest rates, which I did not even get into today, but again, at a

time in which people are in desperate straights needing disaster

assistance, the Administration’s proposing increasing the interest

rate.

Elimination of the Micro-Loan program is also of interest. The

program is strongly supported in this Committee and certainly by

me, and this program is another way in which I think that should

spur economic growth and job creation, can do so much with so little and it just really works very well and very effectively. Proposed

elimination by the Administration is lower funding for the programs at the Women’s Business Center that you heard about, the

Small Business Development Centers and the Veterans’ Business

Development Program and SCORE. For the first time in 5 years,

the Administration is proposing a decrease in funding for the

SCORE program which provides invaluable assistance and counseling for thousands of small business owners across the country.

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Clearly we are moving totally in a contradictory direction, at a

time in which we should be making greater investments in programs and this kind of assistance because it creates jobs. The net

result is it creates jobs, it is definitive and we have seen the end

result of these programs. Again, we are moving in the opposite direction.

And finally, the removal of the line-item request for HUBZone

Programs and the U.S. Export Assistance Tax. The HUBZone Program, here again, is a great way of being able to utilize what—the

Federal Government already spends money on for example, on contracting programs. I know that is the main reason the staff was up

there in, I think, in December, conducting seminars on how we

could make available to small businesses, in the key areas that are

effected by high unemployment, to make available some of the

money that is available for the contracting process on which the

Federal Government spends $350 million, another way of creating

a win-win situation in areas that are adversely affected by declining economy and losing jobs.

So, I would hope you would review that letter, but most importantly, the programs and the budget requests that are made by the

Administration in this regard. This is something that we are deeply

concerned about here on the Committee.

Mr. PRESTON. Thank you. I do not have the letter, but I look forward to reading it and spending time with your staff and understanding it fully, Senator.

Senator SNOWE. I appreciate that and we will have, obviously,

further discussions regarding these budget requests. And finally, I

know that when we had flooding in Southern Maine, it really came

home again, just as in the Gulf region, that you need people on the

ground. It is so much more effective. I do not see why it makes

sense to centralize all these people in Washington, DC when they

should be out there trying to tout these programs, make them

available to small business owners and in the case of disaster, evermore critical to have field and resource people on the ground to assist them on a daily basis and make sure of the working system

to get the loans and the assistance that they desperately need at

that time.

And so again, the direction that we are moving in simply does

not make sense to me. Why we would want to centralize all of

those resources here in Washington, DC when it can do so much

more out in the field in conducting outreach to the people who obviously need the support of these programs.

Mr. PRESTON. Certainly this type of issue is one that businesses

face all the time. What can you centralize to be more effective and

efficient through better training and sort of critical mass, and at

what point do you lose sensitivity to the person you are serving by

not being physically there. One of the things that strikes me in this

regard is the SBA, as you have noted, has not only its own network, but a number of other networks that it partners with, certainly it has the ability to partner with local organizations. One of

the things that will be important for me to understand is, how do

you get those touch points out there with the people you need to

service when they need the service? And how do you be effective

in delivering at the back end? I think that this is something cerVerDate 11-MAY-2000 08:25 Oct 18, 2006 Jkt 028985 PO 00000 Frm 00090 Fmt 6633 Sfmt 6633 C:\DOCS\28985.TXT DianeA PsN: DianeA
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tainly, Senator, that I want to dig into and understand more broadly, how to be effective in those situations.

Senator SNOWE. I appreciate that and again that is something

we will follow-up with you on as well. It gets back to the issues you

raised in your opening statement about collaboration and communication. It really can work well and resolve a lot of issues and it

certainly would help to buttress the very programs of people we

want to serve. If we could be working together to the extent possible on some of these issues, I think in terms of the disaster loan

assistance, we worked mightily to move a block of legislation in the

U.S. Senate on the unanimous consent basis to help address and

mitigate the problems in the Gulf region.

One of the components of that bill was a bridge loan to assist

small businesses until they could actually get their loan. But they

needed to get started and we heard that from so many small business owners down in the region, we heard it from representatives

of the government both state and local, we heard it through testimony here during the course of our hearing, and yet we could not

get the Administration and the SBA Administrator to agree to support the bridge loan, yet they said that that was one of the things

they needed in order to bridge the gap until small business owners

could actually get the loans and get going. Yet, they would not give

support to the idea of giving bridge loans. It was an unprecedented

disaster, yet on the other hand they were not willing to seek the

tools or advocate the tools that would have been so vital to getting

the job done. And still, it is in limbo today. It is mystifying to me

because it makes so much sense, it would certainly simplify the

process and ease the burdens of the people we were trying to help.

On small business investments, the SBIC programs, this is an

area that also enjoys broad support here on the Committee. I have

introduced legislation to rebuild the participating securities dimension of the SBIC. Again, why is the SBIC program and the participating securities part of it, is so critical that it benefits, especially

the manufacturing sector, in providing venture capital, but otherwise would not be available through the conventional lending process. The program invested over $17 billion in small businesses

since 1999, so it has had the result of creating thousands of jobs.

I have introduced legislation to continue this program, to improve it, to address some of the problems that did develop over the

last few years. But what is interesting about it is, the SBA recommended in 2005 $4 billion, and then this year and next year,

zero. So it went from $4 billion to zero. Again, we were not able

to make any headway with SBA on this program and they did not

obviously, include it in their future budget of 2007. So they are

really not committed to continuing this program.

I just wanted to know if you have any opinions on the whole notion of providing venture capital to small businesses, and second,

having your commitment to work through it with the Committee

to at least see what can be done to restore this program because,

otherwise, there is a dimension of our economy when it comes to

manufacturing, that basically will not get the kind of access to capital that is so essential, and in fact, 4 percent of the funding went

to those in the manufacturing sector important to my area of the

country, and so many areas of the country. It is otherwise a sector

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of the economy that does not get help through the conventional

lending process.

Mr. PRESTON. Certainly, the venture capital industry overall,

Senator, is a critical source of capital in our economy and I think

a very important drive for both job creation and in innovation,

which was really birthed in our country. I also think that the SBIC

program probably has enabled SBIC investors to stretch harder. I

spoke with a number of people who are SBICs and I had a chance

to chat with them to ask what impact this has on your ability to

invest?

I know, as I am sure all of you have noticed and are concerned

about, the degree of loses in the existing program and that is why

there is a new proposal out there. My hope is as I dig into this,

having a background in finance and specifically having a lot of exposure to the venture capital industry, I am hopeful that I will be

able to bring some good thinking to that opportunity, but certainly

I will need to spend time with you, your staff, and other people who

are interested in advancing a new program to understand what

your views are.

Senator SNOWE. I appreciate that and certainly we will be working with you on the dimension of the issues and concerns that have

been raised here at the Committee today by myself and so many

of the Committee Members. I know that you have had a number

of letters of endorsement on behalf of your nomination and I will

include those in the record.

Mr. PRESTON. Thank you.

Senator SNOWE. Also, your resume is indeed impressive and

given your wide range of business experience, that certainly will

serve to benefit the Small Business Administration at a crucial

time and at a critical juncture in terms of the type of leadership

advocacy that it requires and necessitates to bolster one of the

most invaluable programs within our Federal Government in terms

of producing benefits for the overall economy.

So, I appreciate your testimony here today and the record will remain open until Friday, June 23rd for any additional questions

that may be presented to you and for any additional testimony and

information to be submitted for the record. So with that, this hearing is adjourned.

Mr. PRESTON. Thank you.

[Whereupon, at 12:24 p.m., the Committee was adjourned.]

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