S. HRG. 110–51

THE PRESIDENT’S FISCAL YEAR 2008 BUDGET

REQUEST FOR THE SMALL BUSINESS

ADMINISTRATION

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS

AND ENTREPRENEURSHIP

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

FEBRUARY 28, 2007

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

(

THE PRESIDENT’S FISCAL YEAR 2008 BUDGET REQUEST

FOR THE SMALL BUSINESS ADMINISTRATION

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35–303 PDF 2007

S. HRG. 110–51

THE PRESIDENT’S FISCAL YEAR 2008 BUDGET

REQUEST FOR THE SMALL BUSINESS

ADMINISTRATION

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS

AND ENTREPRENEURSHIP

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

FEBRUARY 28, 2007

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

(

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

(II)

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

JOHN F. KERRY, Massachusetts, Chairman

CARL LEVIN, Michigan

TOM HARKIN, Iowa

JOSEPH I. LIEBERMAN, Connecticut

MARY LANDRIEU, Louisiana

MARIA CANTWELL, Washington

EVAN BAYH, Indiana

MARK PRYOR, Arkansas

BENJAMIN L. CARDIN, Maryland

JON TESTER, Montana

OLYMPIA J. SNOWE, Maine

CHRISTOPHER S. BOND, Missouri

NORMAN COLEMAN, Minnesota

DAVID VITTER, Louisiana

ELIZABETH DOLE, North Carolina

JOHN THUNE, South Dakota

BOB CORKER, Tennessee

MICHAEL B. ENZI, Wyoming

JOHNNY ISAKSON, Georgia

NAOMI BAUM, Democratic Staff Director

WALLACE HSUEH, Staff Director

(III)

CONTENTS

Page

OPENING STATEMENTS

Kerry, The Honorable John F., Chairman, Committee on Small Business

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

Snowe, The Honorable Olympia J., a United States Senator from Maine ......... 4

Levin, The Honorable Carl, a United States Senator from Michigan ................. 6

Coleman, The Honorable Norm, a United States Senator from Minnesota ....... 7

Landrieu, The Honorable Mary L., a United States Senator from Louisiana .... 11

Thune, The Honorable John, a United States Senator from South Dakota ....... 16

WITNESS TESTIMONY

Preston, Steven C., Administrator, U.S. Small Business Administration,

Washington, DC ................................................................................................... 22

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Bond, The Honorable Christopher S.

Post-hearing questions posed to Steven C. Preston and subsequent

responses ....................................................................................................... 81

Coleman, The Honorable Norm

Opening statement ........................................................................................... 8

Prepared statement .......................................................................................... 9

Kerry, The Honorable John F.

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

Post-hearing questions posed to Steven C. Preston and subsequent

responses ....................................................................................................... 60

Landrieu, The Honorable Mary L.

Opening statement ........................................................................................... 11

Prepared statement .......................................................................................... 12

Post-hearing questions posed to Steven C. Preston and subsequent

responses ....................................................................................................... 84

SBA Disaster Assistance Program submitted for the record ........................ 91

Levin, The Honorable Carl

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

Prepared statement .......................................................................................... 7

Post-hearing questions posed to Steven C. Preston and subsequent

responses ....................................................................................................... 83

Preston, Steven C.

Testimony .......................................................................................................... 22

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

Responses to post-hearing questions from:

The Honorable John F. Kerry .................................................................. 60

The Honorable Christopher Bond ............................................................ 81

The Honorable Carl Levin ........................................................................ 83

The Honorable Mary L. Landrieu ............................................................ 84

The Honorable David Vitter ..................................................................... 90

Snowe, The Honorable Olympia J.

Opening statement ........................................................................................... 4

Thune, The Honorable John

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

Prepared statement .......................................................................................... 17

Page

IV

Vitter, The Honorable David

Post-hearing questions posed to Steven C. Preston and subsequent

responses ....................................................................................................... 90

COMMENTS FOR THE RECORD

Almeida, Ann Marie, president & CEO, Association of Women’s Business

Centers, statement ............................................................................................... 420

Luz, Amy McKenna, Chief executive officer, Association for Enterprise

Opportunity (AEO), statement ............................................................................ 416

Women Impacting Public Policy (WIPP), statement ............................................. 424

(1)

THE PRESIDENT’S FISCAL YEAR 2008 BUDGET

REQUEST FOR THE SMALL BUSINESS ADMINISTRATION

WEDNESDAY, FEBRUARY 28, 2007

UNITED STATES SENATE,

COMMITTEE ON SMALL BUSINESS AND

ENTREPRENEURSHIP,

Washington, DC.

The Committee met, pursuant to notice, at 10:05 a.m., in room

428–A, Russell Senate Office Building, the Honorable John F.

Kerry (Chairman of the Committee) presiding.

Present: Senators Kerry, Levin, Landrieu, Snowe, Coleman,

Thune, and Isakson.

OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY,

CHAIRMAN, COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP, AND A UNITED STATES SENATOR FROM

MASSACHUSETTS

Chairman KERRY. The Committee will come to order. Good morning. Welcome. Mr. Administrator, welcome. We are glad to have

you back here.

I am delighted to have an opportunity to take a look at the President’s funding request for the SBA for fiscal year 2008. We are

glad to have you back. We appreciate the much improved working

relationship between the SBA and the Committee and we thank

you for your personal efforts to try to help to make that happen.

I think it has made a difference and we appreciate it. I know you

are struggling with some of the boxes that the OMB and the Administration themselves put you in, so we are not here to hold you

responsible for all parts of it, but there are obviously some important issues about the SBA’s ability to be able to perform its statutory functions and also its creative goals, so we want to take a look

at that a little bit.

I am disappointed. I know there is an increase, quote, ‘‘of 5 percent overall,’’ but it nevertheless can’t mask, I think, the disappointment that all the Members of the Committee feel about the

overall funding level that has been proposed for the agency. Even

your testimony notes that the request of $464 million in new budget authority still represents more than a 30 percent decrease in

funding for the agency over the last 6 years. And while the Administration portrays this as positive, I think most of us on this Committee continue to view it as troublesome, problematic in a lot of

different ways.

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Borrowers and lenders are picking up the costs of SBA loans and

we clearly are not reaching as many businesses as there are that

need the counseling and the technical assistance to be able to

break into the mainstream, also to help them break into the very

lucrative $370 billion-a-year Federal contracting marketplace.

So while the budget adds nine procurement specialists, I think

we feel very strongly that a lot more are really needed to make a

difference. There is only one in my State of Massachusetts. That

one is supposed to cover and oversee a full $9.5 billion worth of

contracts in our State each year. That is a pretty difficult task for

one person to properly perform.

The Administration also, I think, takes some creative math to

work out its 5 percent figure. Disaster loan funding in particular

is left out. But the extra funding doesn’t go to the services, the

counseling or the contracting component of the mission of SBA, and

that is really what our businesses need. Instead, it goes to administrative expenses.

So, if you really look at the budget, which is on page 20 in Table

4, the non-credit programs got $127 million in fiscal year 2006, but

the President is proposing $106 million for fiscal year 2008. That

is a 16 percent decrease. So again, we are wrestling with this issue

in the budget, whether it gets to or doesn’t get to the fundamental

mission and tasks that we want to accomplish.

We certainly appreciate that the budget this year does not directly eliminate the SBA microloans, Mr. Administrator, but we are

troubled that, again, this is one of those sleight of hand issues. The

budget proposes to make the program self-funding, and to eliminate the complementary business counseling or technical assistance

grants, sending those borrowers to the SBA’s other counseling programs. The problem is, those programs were either cut or held flat.

So you shift the responsibilities to people who are already taxed,

and are going to be even more so with this additional responsibility.

So how do we expect the SBA to ask the SBDCs and the Women’s Business Centers to counsel these borrowers when these centers haven’t gotten additional funding to help them do that? I think

taking inflation into account, the SBDC funding is 19 percent less

today than in 2001. Now, you can quibble around the edges of that,

but the bottom line is that any way you cut it, it is less, and it is

difficult.

There is also no incentive there for the SBA’s microlenders to

make loans. They have to pay back the SBA. So why are they going

to take the financial risk if they don’t get money to counsel their

borrowers? We need to provide the funding for those loans, for the

complementary technical assistance, and for the microentrepreneurship counseling that is provided through PRIME.

I am also troubled by the effort to portray the SBA’s proposal to

back $28 billion in 7(a) and 504 loans and the SBIC debenture

deals as a capacity to lend 40 percent more. I think I am quoting

you folks. These are the same levels that were authorized last year.

So, you have the exact same lending capacity as before, especially

since nothing is being done to increase the outreach and actually

expand the lending pool to underserved communities.

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Let me say, Mr. Administrator, that it is good news to see that

the Administration wants to reduce the fees on 7(a) and 504 loans

and SBIC debenture deals. We support that. But we also would ask

why the proposal is only to lower the fees on 7(a) lenders and not

to provide some relief to the borrowers, which is something we

have continually argued here is sort of the bottom of the food

chain, if you will, and the place where you most want to see some

of that help. I am not sure how you get a fee reduction in the SBIC

debenture program and keep it at zero subsidy without having to

touch other fees, and that is something we have to take a look at.

Today, I suspect we will want to discuss a little bit of the implementation of the funding resolution for 2007. I am concerned about

a memo from OMB regarding the Administration’s interpretation of

that resolution. I would like to make sure we are clear on how Congress intended the SBA programs to be funded.

As of yesterday, we had not received the legislative package; so

I hope we can get a little bit of a sense today about what the priorities would be from that package.

Again, Mr. Administrator, I want to thank you for the efforts you

have made to work with us in an open way. I think it has been

terrific, and I am hopeful that that will extend to the SBA reauthorization process. Let me just say a quick word about it.

There really is no reason why we can’t reauthorize SBA’s programs this year, and I hope the Administration will not engage in

the practice we went through in the last few years where rolling

holds—different Senators putting a hold on, you remove one, you

get one sort of point of contention resolved, and then there is another one that appears. I think it would be more important just to

have an open give-and-take session. If we could sit down and sort

of work together, negotiate, we could find some reasonable way of

achieving an agreement. But I don’t think it is a negotiation to

come up here, have a discussion, get everybody to agree on something, and then all of a sudden the holds aren’t removed and we

continue down the same road.

The most urgent unresolved legislation remains the reform of the

SBA’s Disaster Loan Program. I know you have taken an interest

in clearing out the backlog of that. We congratulate you on that.

I think you have shown real leadership in doing that, Mr. Administrator. But there are some concerns that have been raised to me

and to others about the agency now trying to push numbers over

the quality of service for those who lost everything in Katrina and

I would like to work with you to get to the bottom of those charges

so we can obviously address those questions.

So we look forward to working with you, Mr. Administrator. I

hope that we can continue to make progress in that regard, and we

look forward to your testimony.

[Attachment to the statement of Senator Kerry follows:]

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TABLE 4.—FY 2008 Congressional Submission (Uses of Funds; Salaries & Expenses)

[Dollars in Thousands]

FY 2006

Actual

FY 2007

FY 2008

Request

FY 2008

vs.

FY 2007

Request Request Cont. Res.

Salaries & Expenses Budget:

Office Operating Budgets ............................... $62,036 $66,066 $37,317 $70,943 $4,877

Agencywide Costs ............................................ 45,644 47,279 47,624 47,870 591

Compensation & Benefits ............................... 211,125 225,655 225,655 241,811 16,156

Subtotal, Agency Operating Budget ....... 318,805 339,000 310,596 360,624 21,624

Non-Credit Programs ....................................... 127,101 106,426 119,990 106,426 0

Congressional Initiatives ................................. 89,838 0 20,000 0 0

Reimbursable Expenses .................................. 12,859 9,692 9,692 6,388 (3,304)

Total ....................................................... 548,603 455,118 460,278 473,438 18,320

Office Operating Budget Detail:

Executive Direction .......................................... 8,428 6,800 3,841 12,043 5,243

Capital Access ................................................ 13,088 10,865 6,137 17,991 7,126

Gov Contr/Business Development ................... 1,559 4,865 2,748 4,253 (612)

Entrepreneurial Development .......................... 1,304 1,992 1,125 772 (1,220)

Management and Administration ................... 10,745 10,412 5,881 9,317 (1,095)

Chief Information Officer ................................ 22,478 26,089 14,736 21,905 (4,184)

Regional and District Offices ......................... 4,434 5,043 2,849 4,662 (381)

Total ....................................................... 62,036 66,066 37,317 70,943 4,877

Senator Snowe.

OPENING STATEMENT OF THE HONORABLE OLYMPIA J.

SNOWE, A UNITED STATES SENATOR FROM MAINE

Senator SNOWE. Thank you, Mr. Chairman, and I, too, want to

welcome Administrator Preston to his first budget hearing, first

hearing since his confirmation in June. We appreciate all that you

have accomplished in your short tenure of 7 months in making

your primary mission to promote small business development

through the technical assistance, financial assistance, government

contracting programs. Also to create a more innovative approach in

renewing and in reinvigorating the agency and making it more robust because I think that that is absolutely essential, and obviously

more responsive.

There had been a number of problems across the spectrum that

I know you are coming to grips with, and most especially, as the

Chairman indicated, with respect to the disbursement of the loans

in the Gulf region. I understand that under your leadership great

strides have been made in disbursing or partially disbursing more

than 98 percent of the loans to a total of 5.1 billion. And also that

you have been traveling the country to reinvigorate the agency in

terms of the morale of the employees. I think that that is absolutely essential and pivotal to the future of the agency. So I commend you for your dedication and enthusiasm in trying to turn the

agency around.

It still mystifies me, however, and I know the Administration has

taken this approach, but I regret that you have to come before the

Committee to propose a budget that, once again, is one in a series

of declining budgets since 2000. The small business community

throughout this country has been singularly responsible for job creVerDate 11-MAY-2000 08:57 Jun 21, 2007 Jkt 035303 PO 00000 Frm 00010 Fmt 6633 Sfmt 6601 C:\DOCS\35303.TXT DianeA PsN: DianeA
5

ation, as you well know. As we heard up in Maine, and I thank you

as well for coming to Maine last week and participating in my

Small Business Manufacturing Forum. It was very beneficial to

have you there and very helpful to the small business community

and small business owners up there, and manufacturers, in particular, who have been hard hit in the globalization of this economy. To hear from you personally and firsthand, I think was very

helpful.

As we heard, some of the small business programs across the

board, whether it is 7(a), 504, the HUBZone programs, Microloan

Programs, all were very useful and instrumental. It is unfortunate

and disappointing that we have to confront, once again, a budget

request that represents a net decrease of 28 percent. Now obviously

this is a $814-million budget proposed. But when you consider the

facts in looking at the numbers, the true request is really for $464

million because it is essentially for the core programs, and that is

a 28-percent decrease from the SBA’s proposed 2007 new budget

authority. The reality is that we have a carryover of $329 million

from disaster assistance that was provided, the more of $1.7 billion

in three different supplementals that Congress enacted to address

the disasters in the Gulf region.

So in a sense, we have a budget once again that is declining, and

as I said, it is one in a series of about 7 budgets over the last 7

years. As I was looking at the numbers, frankly, when I was going

back to 2001, the SBA budget was $899 million. Today, the request

essentially for the core programs is $463 million. Then you could

add the $329 million, and that is, of course, the disaster loans. But

then again, that doesn’t do anything to rebuild the core programs

within the SBA.

That is where we are, and that is the unfortunate part. I know

in your short tenure there is probably not much within your control, in that respect. Obviously, we are going to do our part here

to transform that, as we have in the past, because I, frankly, think

it is short-sighted for the Administration to consider that the SBA

is not useful in rebuilding this economy. I mean, it is the one agency and program that really is essential and central to our job creation in this country. We get much in return and it pays great dividends and it is unfortunate we are in the position that we are

today in looking at a declining budget. It represents three-and-onehundredths of a percent of the total Federal budget, so it is mystifying to me that we are in a position to consider major reductions

once again when these programs have created or retained 5.3 million jobs since 1999.

Finally, it is what is also affected throughout the budget, and

that is reductions in the Small Business Development Centers, the

Women’s Business Centers, in the SCORE program. Also, I appreciate your efforts on the Microloan Program, which is very important, not only to Maine, but to America. It is the one way you can

nurture entrepreneurship in many of the rural economies that have

been devastated by the loss of manufacturing jobs. And this is one

way of helping to reinvigorate rural economies that have been hard

hit.

For example, in Maine, we just loss Moosehead Manufacturing,

in a very rural area, a 60-year-old furniture manufacturing comVerDate 11-MAY-2000 08:57 Jun 21, 2007 Jkt 035303 PO 00000 Frm 00011 Fmt 6633 Sfmt 6601 C:\DOCS\35303.TXT DianeA PsN: DianeA
6

pany. It has a brand name, excellent work ethic, great product, and

we have lost 90 jobs there because they cannot compete in the global economy. So we have all these resources in the SBA where the

government should consider its primary interest to support and to

increase, if anything, but not to decrease the programs.

But the Microloan Program is now become proposed by the Administration as a zero subsidy program, transferring the technical

assistance to the SBDCs, Women’s Business Centers, and SCOREs

who are already going to be experiencing reductions in those programs, as well. Now we are asking them to take on the technical

assistance requirements under the Microloan Program. Well, when

I was looking at the numbers last year, you are talking about 2,395

loans and each borrower is required to receive technical assistance,

so that is adding, I think, a great burden to all the programs that

are also going to be reduced under this proposed budget.

I think we have much work to do in that score. We are looking

forward to working with you on a number of these issues because

I think it is critically important. I also hope we can work on the

Federal contracting. We have available Federal contracts of more

than $400 billion within the Federal Government and, I think that

the SBA is absolutely the one agency that can help small business

pave the way for access to these contracts. We know the resistance

and the intransigence on the part of so many agencies to allow

small business to participate in the Federal contracting process,

another way of reinvigorating rural economies across America.

So I think we have to fix and address the regulatory loopholes

that were identified by the GAO recently as ones that allow large

contractors to essentially identify themselves as small businesses

and take advantage of the set-asides that are essentially targeted

for small businesses. So we have to make sure that we can close

those loopholes so they are not taking advantage of these set-asides

that are targeted for small businesses.

I appreciate your efforts in your short tenure, Mr. Administrator.

We have to do everything we can to make sure we can bridge this

success for small business through SBA resources and programs.

Frankly, it is not only a benefit to the small business owners in

America, it is a benefit to our Nation’s economy.

Thank you, Mr. Chairman.

Chairman KERRY. Thank you, Senator Snowe, for an important

and comprehensive statement. I think, Mr. Administrator, what

you see gives you a sense of the sort of non-partisan nature of the

comments and observations here. I think that is strongly held by

the Committee.

Normally, I would not do openings across the board, but if my

colleagues have a quick comment they want to make—Senator

Levin.

OPENING STATEMENT OF THE HONORABLE CARL LEVIN,

A UNITED STATES SENATOR FROM MICHIGAN

Senator LEVIN. Very briefly, Mr. Chairman. I want to associate

myself with the Chairman and Ranking Member’s comments. Regarding the reduction in small business budget—if you include the

disaster funding cuts since 2001, it is a 45-percent reduction in the

SBA budget. I think that is totally unacceptable and intolerable

7

given the fact that small businesses are the engine of growth in our

economy. Where I come from, they are not only the major engine

of growth, they are almost the only engine of growth in our economy, and yet we see these reductions in the budget.

That includes the impact on the Microloan Program with zero

Federal funding, proposing to fund it based on fees. To cap that

program at a lower level than the level of microloans which were

made last year, to me, makes utterly no sense.

The budget cuts the Small Business Development Centers, which

is often the first organization that the small entrepreneurs come to

for assistance with their businesses. It terminates for the fourth

year in a row the SBIR Rural Outreach Grant Program, and the

SBIR Fast Grants. It makes other significant reductions in other

parts of the budget that I will not repeat other than to say that

I am confident that we will this year do what we have done in

many years, and that is to restore the cuts, to improve the situation from the perspective of small business, for the economy as a

whole, and that means jobs for a lot of people who otherwise will

go without jobs.

I would ask, Mr. Chairman, that my entire statement be made

part of the record. I commend you and Senator Snowe for the bipartisan approach that you are taking to this, and I have confidence in you and other Members of this Committee, that we are

going to restore a number of the cuts that have been made by this

proposed budget.

Chairman KERRY. Thank you very much, Senator Levin. We appreciate your many years of experience on this Committee and I

thank you, as the Chairman of the Armed Services Committee, for

taking time to be here.

[The prepared statement of Senator Levin follows:]

STATEMENT OF SENATOR CARL LEVIN, SENATE COMMITTEE ON SMALL BUSINESS AND

ENTREPRENEURSHIP, HEARING ON SBA 2008 BUDGET, FEBRUARY 28, 2007

Small businesses have a proven track record of creating jobs even when larger

businesses may be cutting jobs. When small businesses are growing and thriving,

the overall economy is growing and thriving. I’d like to see the Federal Government

do more to give small businesses the tools they need to expand and grow, not cut

the resources available to them. It’s totally unacceptable that this Administration

has cut SBA’s budget by 45 percent since 2001, including disaster loan funding.

SBA’s Microloan program provides small loans and technical assistance to startup

and emerging businesses that conventional banks are unable to serve. Over the

years, the SBA has financed more than 23,500 Microloans worth $280 million creating more than 64,000 jobs at the cost of only about $4,400 per job. That’s a pretty

good return on investment if you ask me. I’d like to see this program grow.

At a time when the Nobel Peace prize was recently granted to an international

innovator in micro-credit we should be celebrating the fact that the United States

government runs an extremely effective microloan program out of the SBA.

Unfortunately, the Administration’s budget request fails to fund SBA’s Microloan

program for the 4th year in a row. This year the Administration proposes paying

for the Microloan program through increased costs to its lenders and at the same

time zeros out the technical assistance component of the program that was designed

to work hand in glove with the Microloan program. The technical assistance component of the program works to ensure that borrowers can actually pay back their

loans by p oviding them with business management counseling. In addition to providing no funds for the Microloan program, the budget request also proposes capping the program at $25 million. For comparison, it made $32 million in Microloans

last year.

Since one of the biggest hurdles facing small business entrepreneurs is finding the

capital to get started, expand, or just stay in business, we ought to be growing a

8

program that gets capital to the very smallest of small businesses, not zeroing out

Federal support for the program which would effectively kill the program.

I’m disappointed in other parts of SBA’s budget request as well. It continues to

eliminate all funding for the 7(a) and SBIC participating securities programs, requiring fees to support those programs. This budget also cuts funding for the Small

Business Development Centers which are often the first organization that small entrepreneurs turn to for assistance with their businesses. It would also terminate for

the 4th year in a row funding for SBIR Rural Outreach grants and SBIR FAST

grants whose purpose is to increase SBIR participation.

Fortunately, the Committee has a bipartisan history of supporting and funding

SBA’s programs even when the Administration proposes cuts. Last year this Committee passed a reauthorization bill that was not acted on by the House. That bill

included a provision I authored, the Small Business Intermediary Lending Pilot Program, that would establish a program to make patient, low-interest loans through

Community Development Corporations to small businesses that have outgrown

SBA’s Microloan program but are unable to qualify for conventional bank loans. I

hope the Committee will include this provision again as part of this year’s SBA reauthorization bill and Administrator Preston, I hope the SBA will support the provision.

Chairman KERRY. Senator Coleman.

OPENING STATEMENT OF THE HONORABLE NORM COLEMAN,

A UNITED STATES SENATOR FROM MINNESOTA

Senator COLEMAN. Thank you, Mr. Chairman. I certainly want to

get to the Administrator, so just very, very briefly, I think we are

all singing off the same page here. I thank the Administrator for

his reaching out. He was in Minnesota last year. I again applaud

you for your commitment to reaching out.

But I share and associate myself with the concerns that have

been raised. In particular, we talked about the Microloan Program.

Thanks for not eliminating it. On the other hand, the shifts in the

funding, I think are going to have a very, very negative impact on

the opportunities that are out there.

I have concerns about SBA and its role in trade and the need to

fill some positions to move that forward. SBA should be one of the

advocates for small business to participate in the global economy.

I have deep concerns about rural lending and some of the declines

that we are seeing there.

I think these are bipartisan, non-partisan levels of concern that

have been raised to make sure that the engine of growth in this

country, small business, continues to be able to do that. There is

a role for the SBA to play and the levels of funding will make it

difficult for that role to be played in the appropriate manner. So

I associate myself with the concerns that have been expressed by

my colleagues on both sides of the aisle here.

Chairman KERRY. Thank you, Senator Coleman. I appreciate it.

[The prepared statement of Senator Coleman follows:]

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Chairman KERRY. Senator Landrieu.

OPENING STATEMENT OF THE HONORABLE MARY L.

LANDRIEU, A UNITED STATES SENATOR FROM LOUISIANA

Senator LANDRIEU. Administrator Preston, I want to associate

myself with the remarks of the Chair and the Ranking Member

and again say that this Committee is united in helping you to build

a better SBA, one that works in regular times, under regular circumstances, because the small businesses of this country deserve

to have a real friend in Washington and someone that is looking

out for their interests and understands that because they are

small, they simply don’t have the resources that large companies

have, which is SBA’s role to serve as an advocate for them because

it means jobs for the country and strength to our economy.

But number two, I want to thank you for stepping in in a very

difficult situation and actually taking a job which not many people

might have wanted, given the consideration that has happened

along the Gulf Coast, where we lost 18,000 businesses in Louisiana

alone, and they look to you for their lifeline

But I want the Committee to know that while this Chairman and

Ranking Member have put together several packages with our full

support, they have yet to pass these bills because the Administration generally drags its feet on reform. I am hoping that through

your position, you can push for a better loan processing system,

which I think you will testify on today, more loss verifiers in a region when there is a disaster, better partnerships with local banks

that could process loans much more quickly in a disaster, and I

have a long list of additional priorities. But, suffice it to say, that

the cuts that are in this budget are going to make our recovery

even harder, and I will ask directly about some of these issues in

my questioning time. Thank you.

[The prepared statement of Senator Landrieu follows:]

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Chairman KERRY. Thank you very much, Senator Landrieu.

Senator Thune.

OPENING STATEMENT OF THE HONORABLE JOHN THUNE,

A UNITED STATES SENATOR FROM SOUTH DAKOTA

Senator THUNE. Thank you, Mr. Chairman, and Administrator

Preston, welcome. Thank you for your service. Of course, in my

State, most of the jobs created are created by small businesses. It

is what I think drives the economy in this country. So we do want

to make sure that we have an agency that is responsive, that is

taking the steps which it can to continue to provide credit and assistance and other ways that will help our small businesses thrive

and prosper.

There are a couple things that I think are going to be really important in the days ahead. One is making sure that we keep the

individual tax rate low, because that is the rate that a lot of small

businesses pay, and I think that is going to be important for our

small businesses.

Obviously, a big concern of mine is the cost of health care. That

is something that this Committee has attempted in the past to address and clearly a tremendous impact on small businesses, many

dropping coverage, putting more people into the ranks of the uninsured. In most cases, that is a cost issue, so I am anxious to hear

your thoughts, too, about how we can lower health care costs for

small businesses. I think that is something that we as a Congress

have to be focused on, as well, Mr. Chairman.

I would also say that in terms of my own State of South Dakota,

I won’t get into it in my opening statement, but we have a concern

with the Microloan Program. We haven’t had one issued there in

2 years. So credit availability, particularly in rural areas, is of

great concern to me, and I am also interested perhaps in your

thoughts about—as we have more veterans coming back from Iraq

and Afghanistan—about the things that we can be doing to help

them start small businesses. I know that is a role that SBA has

played in the past.

We welcome your testimony today. We look forward to partnering

with you on creating an environment out there that is conducive

to greater expansion of small businesses, hopefully the start of new

small businesses, and we can keep this economic growth and the

good things we have seen happening in our economy in the last few

years to continue to move forward.

Thank you for being here today, and Mr. Chairman, I appreciate

the chance to have the Administrator here to speak about the

budget. I understand there are some budget proposals that are

somewhat different from the ones we have seen in the past, and

I look forward to discussing those and hearing more about them.

Thank you.

Chairman KERRY. Thank you very much, Senator Thune.

[The prepared statement of Senator Thune follows:]

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Chairman KERRY. Mr. Administrator, thank you for listening to

each of our colleagues here, not as if you had much choice, but

nevertheless——

[Laughter.]

Chairman KERRY. It is important, I think, for you to get a sense

of the unanimity here, and I am confident that it has had some

kind of impression on you.

The one thing I would add, as I introduce your testimony, is that

having sat on this Committee now for a long time together with

Senator Snowe and some others here, I remember when we had a

fight about whether or not the SBA ought to be eliminated, zero

funded. I think it was in the 1980s. There was a clear ideological

notion that somehow government shouldn’t be involved in small

business initiatives. I guess I am left believing that whoever is

making the final cut on some of these choices right now is pursuing

that same course differently, sort of a starvation diet, because it is

very hard to draw a conclusion that there is a real commitment or

understanding of what Senator Snowe was talking about, about the

ways in which the SBA can actually grow the economy, leverage

jobs, help us compete, help a lot of small businesses get into the

international marketplace, and so forth. I think it is a huge missed

opportunity that is being guided by a kind of tunnel vision belief.

I don’t know who has it, or who is dictating it, but I am confident

that you don’t agree with all of it. Somehow, we have to find a way

to change that, because that starvation diet is going to reach a tipping point, if you will, of missed opportunities. So we welcome your

testimony and we look forward to seeing how we can change this.

STATEMENT OF STEVEN C. PRESTON, ADMINISTRATOR, U.S.

SMALL BUSINESS ADMINISTRATION, WASHINGTON, DC

Mr. PRESTON. Thank you very much, Mr. Chairman. I have met

all of you——

Chairman KERRY. Your microphone is not on. If you would push

the button on the bottom there——

Mr. PRESTON. That was by design.

[Laughter.]

Mr. PRESTON. Sorry. But thank you very much. I just want to

state right off the bat, I have really appreciated the sense of collaboration from so many people on this Committee—openness. I get

a sense that our staff is working very well with all of your staffs,

and I have said it many times. If any of you ever get the sense to

the contrary, please let me know, because I don’t really know any

other way to operate than with an open dialogue.

I also want to thank you so much for moving so quickly on confirming the deputy. She is terrific. She is jumping in with both feet.

She brings tremendous background to this agency. So I am thrilled

to have her on board, and I want to thank you for moving so expeditiously to get her on board.

Obviously, I share all of your commitments and comments relating to the importance of small business. We have seen enormous

job growth in this country, over 7 million new jobs over the last 3.5

years, and we know that most of those are coming from new businesses. I think our 2008 budget request reflects a continued commitment by this, certainly on my part, to America’s small busiVerDate 11-MAY-2000 08:57 Jun 21, 2007 Jkt 035303 PO 00000 Frm 00028 Fmt 6633 Sfmt 6601 C:\DOCS\35303.TXT DianeA PsN: DianeA
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nesses and that important role that they play in our economy and

in our society. I think the budget will enable us to continue serving

the small business community while also being a good steward of

taxpayer dollars.

Since coming here, I have spent a tremendous amount of time

out in the field listening to employees, to our partners, to many of

you. I reviewed a lot of the programs at the agency in order to

identify how we can build on the agency’s successes and also look

to address many areas, I think, frankly, that need improvement.

Also when I came to the agency, many of the positions we had,

critical positions, were vacant. We are making a lot of progress

building a competent team. I can’t underestimate how important

that is to all of us.

As many of you know, one of the first things I did coming in was

focus heavily on the disaster program. I got that message loud and

clear, back in June, when I sat before this body. I think we have

made a tremendous amount of progress there, once again, after

digging in with our customers, our employees, and looking deep

into our processes. We have gone from about 120,000 people—over

120,000 people in that process this summer, to just over 20,000

right now, and 98 percent of borrowers from the 2005 hurricanes

have gotten all their funds, some of their funds, or chosen not to

borrow. So we now have over $5 billion in the hands of the people

in the Gulf.

We still have a ways to go in this operation. There is no doubt

about it. The changes we have made have been pretty dramatic

and I think, frankly, when you make change like that, it uncovers

things that you didn’t know were there. I think we are beginning

to uncover policy inconsistencies, certainly a greater need for better

training and also stricter enforcement of certain standards down

there. Some of that comes to our attention through our employees,

which if you talk to our employee base, they all have my e-mail.

They frequently use it, and it is a tremendous source of input for

me. And we are working with our IG in that operation to understand any issues we might have there better, but I think it is a

much better operation than it was 6 months ago, and 6 months

from now, it will be better still.

We are applying the same kind of reforms that we instituted

down to other parts of the operation, and we are consistently starting with listening to our customers, understanding what outcomes

are trying to drive those changes. We are working very hard to ensure that we have a compliant, efficient, accountable organization,

and as I believe is always extremely critical; we need to understand

that in any service organization, your success is based on your people, and we have to ensure that we have a well-trained, high-quality, motivated workforce that is encouraged to provide input on

how to improve the agency.

Getting now to the numbers, we are requesting $464 million in

new budget authority. That is a 5 percent increase above the level

enacted in 2006 which excludes disaster and Congressional initiatives. We are asking for $329 million in carryover balances to fund

disaster, funds that we have on hand from the $1.7 billion of supplemental funding from 2006. It also includes $21 million in

reimbursables from the E-Gov gateway initiative as well as SBDC

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certifications. So all that totals $814 million in overall budget authority.

We think it will enable us to carry out our core functions, begin

a number of reforms and improvements. These resources will support a total of $28 billion in financings through 7(a), 504, and

SBIC. For the 7(a) program, we are asking for $17.5 billion in lending authority, for 504, $7.5 billion. And for the SBIC venture capital program, $3 billion.

We are also proposing to reduce fees in our primary finance programs. The 7(a) annual fee would go down 5.6 basis points, from

55 to 49.4. The 504 up-front fee is totally eliminated, 50 basis

points. And the SBIC annual fee decreases almost 19 basis points.

And then, finally, it supports a disaster loan volume of $1.064 billion.

For counseling and training, we are asking for $104 million for our resource partners, $87.1 for the SBDCs, $11.8 for Women’s

Business Centers, and $4.9 for SCORE.

In terms of our workforce, it will allow us to increase the workforce to 2,123 FTEs. That would provide 86 new positions through

2007 and 2008, which we are very excited about, and those resources will be used in part to replace attrition at the agency, but

we think it will also allow us to provide stronger loan processing

and lender oversight, which is critical with our growing loan volume, greater support for small business in our government contracting area, better training and career support, and a continuing

improvement in the automation at the agency, which I think is important not only for efficiency, but in terms of being able to get people to use our services more simply. In the financial operation, the budget includes over $4 million to

invest back into the loan operations for a system upgrade. That is

a multi-year initiative and we are really beginning to kick that one

off. For SBIC oversight, we are asking for $1.5 million to support

contract evaluation, liquidation planning, and examination of contracts. That is very important for helping us minimize the challenges we are having in the participating securities program. And

also, we would expect to see continuing improvement in our lender

oversight.

In government contracting, obviously, it is essential that we ensure small businesses have fairer access to procurement opportunities. I like to tell people it is not just a matter of fairness, it is a

matter of competitiveness. I strongly believe small businesses perform well as suppliers of goods and services. Their size makes them

flexible and innovative and often cheaper than large companies,

but it does take a little bit more work sometimes to find the right

small business, and it is our job to help people do that.

We are asking for $500,000 to help us look at processes underlying a lot of our preference programs so we can be more effective

in reaching out to small business and supporting them along the

way. We are asking to add in 2007 and 2008 nine new procurement

center representatives, which would increase the number by 16

percent. And we are working to reform the contract goaling and reporting process and redoubling our efforts, frankly, to ensure that

the Federal agencies provide accurate data on all small business

procurement so that we make sure that when we are looking at the

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data, it is the right data and it is the best representation of small

business.

On the veterans side, Senator Thune mentioned veterans. We

have requested another $500,000 to expand our veterans outreach

program. Obviously, with our current engagement in Iraq and our

presence in Afghanistan, the number of veterans returning from

active duty will continue to increase. Our Office of Veterans Business Development plans to increase its effort to educate and provide programs and services to veterans and active duty personnel

in a number of areas, including access to capital, management and

technical assistance, and procurement assistance programs to support them.

In wrapping up, on the disaster program, even though we have

made a lot of progress, we are committed to lasting reforms so that

we make sure that we are fully prepared for future disasters, whatever the size might be, and we continue to refine our processes to

do that. We are working very hard right now to develop organizational planning tools and detailed documented escalation plans that

will improve our response. Those plans will include models to rapidly forecast loan volume, resource requirements, and our coordination requirements to position the agency to respond effectively.

In 2008, we expect to implement an Internet-based electronic

loan application to enable borrowers to submit their required information quickly and accurately. That will accelerate our ability to

be responsive to them. We have also been evaluating options to assess the private sector’s skills and resources when dealing with catastrophic disaster events, and I know many of you have focused on

this issue and we look very much forward to working with you as

you consider legislation in that regard.

Finally, a very high priority of mine is to improve the work that

is being done to reach underserved markets in our country, and I

know specifically many of you have concern because some of the

programs that have been designed to do that aren’t getting the

kind of funding that they have historically. But I do believe in

areas where we see high unemployment and low wage rates, like

our rural areas and many of our inner city areas, providing effective support to new and growing small businesses can provide

much-needed jobs, economic activity, and rejuvenation to places in

our country that absolutely need it the most.

So we are doing a number of things. We are looking to broaden

lender involvement in our Community Express Program. I like to

say that adds sort of the one-two punch of capital and technical assistance, and we think there is a large opportunity for us to expand

that. We are looking right now to expand the Urban Entrepreneur

Partnership, where we partner with local inner city organizations,

primarily the Urban League, to help inner city entrepreneurs get

the support they need through the network of services available in

their area. We would like to establish seven more alternative work

sites, which will allow the agency to make itself more accessible to

rural customers. And we are hoping to expand the reach of the

Microloan Program by moving the program to zero subsidy and

hopefully expanding the amount of actual capital we put out there,

albeit we do understand it may be at a somewhat higher cost.

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So as I said before, I believe this is a sound budget. I think it

gives the SBA funds necessary to operate and oversee our core financial programs more effectively, to reengineer and improve our

government contracting programs, and to continue our work with

counseling and training partners. It will enable us to provide more

effective outreach, be easier for customers and partners to work

through better automation, and also fill very important key staff

positions in areas where we are clearly lacking the necessary manpower right now.

So thank you. Thank you for your consideration. I look forward

to addressing your questions.

Chairman KERRY. Thank you, Mr. Administrator.

[The prepared statement of Mr. Preston follows:]

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Chairman KERRY. What I am going to try to do is keep the first

round of questions limited so everybody gets a shot fairly quickly

at getting their priority questions out there. I have set a 5-minute

limit, with a little bit of flexibility, if necessary, but we will try to

get everybody in here at least in the first round.

Mr. Administrator, are the budget numbers that you are proposing to this Committee now a reflection in each category of what

you asked for from the Administration?

Mr. PRESTON. You know, Senator, I think probably we all appreciate that there is a give and take in this process, but this is the

budget that I am proposing. I think we can achieve the goals that

we have in front of us with this budget. I think——

Chairman KERRY. My question to you is, are there areas where

you sought additional funding over which you have?

Mr. PRESTON. This is a somewhat different budget than I proposed. It is what I would say, once again, after significant consideration, I think this is a budget that acknowledges the challenges we

have, gives us funding to address those, and also acknowledges, I

think, across the Federal Government the fact that we——

Chairman KERRY. I am not trying to go through the budget that

you wish you had, I just wanted to establish, and I think we have,

that it is not the budget that you would have hoped for, but it is

the one you have to put up with.

With respect to the 2007 appropriations, we passed a continuing

appropriations resolution where we said that the agencies and

their programs are to be funded at the 2006 levels. Does the SBA

plan to fund the non-credit programs at the levels provided in the

line items for $128.5 million?

Mr. PRESTON. I am not specifically familiar with the 128 number,

but I expect that that is what we would do, but I—I hope I

didn’t——

Chairman KERRY. Will you find out for certain and perhaps you

can report to us with specificity?

Mr. PRESTON. Yes.

Chairman KERRY. Do you plan to designate 41 percent of the

total Women’s Business Center funding for centers in sustainability

status?

Mr. PRESTON. Well, I think at this point, I would look forward

to working with you all on that. My understanding is sustainability

is determined Congressionally, and so what we have proposed is a

level of funding for that——

Chairman KERRY. We specifically have designated the level of

funding. My question to you is whether you plan to live up to that

41 percent.

Mr. PRESTON. Senator, I will have to get back to you on the specific percentage for sustainability.

Chairman KERRY. Have you seen them?

Mr. PRESTON. Have I seen what?

Chairman KERRY. The budget levels that we appropriated.

Mr. PRESTON. Yes, I have seen the budget levels and I know we

have a number of Women’s Business Centers graduating from the

program this year and a number of them moving from the——

Chairman KERRY. The conference agreement specifically included

language allowing Women’s Business Centers that are in sustainVerDate 11-MAY-2000 08:57 Jun 21, 2007 Jkt 035303 PO 00000 Frm 00044 Fmt 6633 Sfmt 6601 C:\DOCS\35303.TXT DianeA PsN: DianeA
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ability status to continue to receive grants and designates 41 percent of the total funding for those centers in that status.

Mr. PRESTON. You are talking about centers that are more than

10 years——

Chairman KERRY. In sustainability status.

Mr. PRESTON. I know right now, what we are proposing——

Chairman KERRY. My question to you is, do you intend to designate that funding accordingly?

Mr. PRESTON. Right now, the intention is centers that are graduating from sustainability graduate. Centers that are moving from

that first 5 years into sustainability grants move into that sustainability phase.

Chairman KERRY. That is different from, I guess, the question I

am asking for those that are in the status now, not those that will

move into it, but those that are in the status. Those that will move

into it will move into it according to the process.

Mr. PRESTON. Right.

Chairman KERRY. But those currently in it, we specifically designated 41 percent of the total WBC funding for those centers and

we are trying to make certain that they are going to be funded accordingly. It should be a yes or a no.

Mr. PRESTON. Well, if they go beyond that 5 years of sustainability status, no, they wouldn’t, which means that they will have

been out there more than 10 years.

Chairman KERRY. Well, if they are still in sustainability status,

they should qualify, shouldn’t they?

Mr. PRESTON. Senator, I will have to get back to you on the details.

Chairman KERRY. Would you please?

Mr. PRESTON. I think——

Chairman KERRY. What about the $1.5 million for the National

Veterans Business Development Corporation? Do you plan to designate that accordingly?

Mr. PRESTON. I am advised that that is not under our account,

Senator. That was not—that is not funded through the SBA, is

what I am told.

Chairman KERRY. I think the business development piece, didn’t

we put that under there? Let me just verify.

Mr. PRESTON. Are you referring to the advisory committee?

Chairman KERRY. Here it is. The conference agreement includes

$1.5 million for the National Development Corporation as proposed

by the House via transfer from Small Business Administration salaries and expenses. Well, again, this is in the conference report. It

is in the CR. It is what is the law, and I just want to make sure

we are not going to run into a struggle on it. You all can figure

that out and perhaps report back to us.

Mr. PRESTON. Right. It sounds like we need to also connect with

your staff to make sure we are talking about the same issues.

Chairman KERRY. Well, we are. For better or worse, it was designated as a transfer from SBA salaries and expenses and that is

the language of the conference report, so we will follow up on it.

Quickly, because I don’t want to abuse my time here, you mentioned the health care issue, which we had a hearing on recently.

You hear this everywhere. I am sure you haven’t traveled anyVerDate 11-MAY-2000 08:57 Jun 21, 2007 Jkt 035303 PO 00000 Frm 00045 Fmt 6633 Sfmt 6601 C:\DOCS\35303.TXT DianeA PsN: DianeA
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where in the country that small business owners aren’t talking

about the health care. You have suggested that the health association plans are the answer, which as you know, we are sort of divided a little bit in this Committee still about what is the best

manner of dealing with the adverse selection issues and other

issues that accompany that. But one thing that could be done very

quickly is we have 9 million children who are uninsured and recently the Urban Institute found that 2 million of these kids are

eligible for the SCHIP program. They are already eligible. People

whose families are self-employed or who work for small firms,

small businesses, are far less likely to be enrolled when qualified.

So SBA could team with HHS, as well as leaders in the private sector without a lot of expenditure of money and without having to

spend the money to actually inform people about this and I wonder

if you would be agreeable to posting a link on the SBA Web site

for businesses to access information and contact experts regarding

SCHIP eligibility as a way of helping people get coverage.

Mr. PRESTON. I don’t see any reason why we wouldn’t. We will

follow up with you on that.

Chairman KERRY. Would you please?

Mr. PRESTON. Yes.

Chairman KERRY. That would be terrific.

Senator Snowe.

Senator SNOWE. Thank you, Mr. Chairman.

You mentioned in your testimony that there will be $500,000 provided for the Office of Veterans Business Development, and that is

to be applauded. However, we don’t see any line item within the

budget for that. So how would there be essentially a guarantee or

assurance that that will be the case? I am reintroducing a package

of initiatives to help the National Guard and Reservists, veterans

and disabled veterans, as well, service-connected disabled veterans.

So I want to make sure this is providing this additional assistance

that would complement that package. It is not reflected in the line

item within the budget.

Mr. PRESTON. No. You know, I think when you look in the budget, we have had more line items historically. What we find, for example, in many of these areas is we have a much larger budget for

an item that has a designated line item, and HUBZone is a great

example of that. I commit to you that we will be using that

$500,000 and we are spending a lot of effort right now in working

through whether or not we can come out with a targeted loan product for veterans. I was speaking to the Network of State VA Leaders last week. We are working with them to get the message out.

A lot of this, Senator, will be used for outreach in the field to help

them get out and work with the VA and veterans locally, and we

also have added some staffing to the Office of Veterans Affairs.

Senator SNOWE. So we can be assured that that $500,000——

Mr. PRESTON. Yes.

Senator SNOWE [continuing]. Will be provided?

Mr. PRESTON. Yes.

Senator SNOWE. OK. So there is not any kind of discrepancy——

Mr. PRESTON. No, that is very important for us. It is not a lot

of money, but it will go a long way.

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Senator SNOWE. Now, you mentioned with respect to the budget

that there is a 5 percent increase. Albeit that is true from the previous year, I mean, setting aside the disaster loan money that is

carried over from the previous years from the supplementals that

were enacted by Congress, it represents a 5 percent increase, but

it doesn’t do anything to bolster or reinforce any of the existing programs, the core programs. It is all going for staffing, as I understand it. Is that correct?

Mr. PRESTON. It is going for staffing, it is going for technology,

and in some cases, it is going for outreach.

Senator SNOWE. But nothing to increase any of the core programs, which is also—I mean, that is the underlying concern essentially of the Committee because there has just been systematic reductions in all these programs. It really is a dramatic reduction in

the budget overall. I mean, if you look back to 2001 to where we

stand today, it really is stunning.

Mr. PRESTON. I do want to emphasize that it will provide us with

more support, for example, for government contracting programs in

the field, as well as the PCRs. So it will allow us to do better business development support. It will help us with lender outreach. I

agree that it doesn’t—the programs in terms of separately funded

programs like the resource partners, you are absolutely right. It is

flat funding for those.

Senator SNOWE. Well, in looking at the procurement center representatives in your budget, obviously, it is commendable that you

are increasing the numbers, and still, even with those increases,

the SBA will still be two PCRs short of its 1993 staffing level. At

that time, the Federal contracting budget was $93 billion less than

it is today. I mean, we have a $400 billion contracting budget.

In fact, I received a letter from the OMB Deputy Director, Clay

Johnson, last August and he said, we agree with you that more aggressive steps can and must be taken to increase small business access to the Federal marketplace and aggressively exploring ways to

increase the number of SBA’s procurement center representatives

in recognition of the important role that they play in implementing

the President’s contract bundling initiative.

But we are never going to be able to have a successful endeavor

in that part, if we don’t provide the kind of support necessary to

small businesses. I mean, the agencies have been intransigent,

most especially the Department of Defense. And so we are still—

I mean, to make the PCR staffing proportionate, you would have

to hire 30 additional representatives in order to accommodate

where we stand today in the overall Federal contracting process

and ensuring—and that is where we stand.

Mr. PRESTON. Yes.

Senator SNOWE. I mean, that is, unfortunately, trying to make

up for lost ground, given the dramatic reductions in all respects in

these budgets over the years.

Mr. PRESTON. Yes. I think we are working with the PCRs to give

them better tools and technologies to do—to be able to seek more

volume, to be able to support a larger workload, and to work more

effectively with the agencies in getting the right type of access to

the small businesses. I will be looking very hard at the people that

42

we add as we add them to see their productivity and how well they

enhance this whole process.

To the extent that we have capacity—obviously, we are an agency with several thousand people—to reallocate along the way, if we

see that these are very productive and very beneficial to this, we

will be looking at that, as well.

Senator SNOWE. Finally, on the Microloan Program, it is still difficult for me to understand why the Administration has been so resistant to this program. I mean, it is beneficial. These microloans

go to entrepreneurs that otherwise would not have any access to

capital whatsoever, and so essentially, we are going to be raising

their interest rates, making it more difficult for them to have access to this lending, because microlenders are not going to—they

are either going to have to raise their rates or they are not going

to bother with them at all. I think that that is regrettable given

the role that they play in our Nation’s economy, especially in rural

America.

For the small amount of money, and yet the dividends it produces, the economic benefits that it provides, it is hard to understand why there has been such difficulty within the Administration

with respect to this program. I mean, there have been $280 million

worth of loans, 23,500 microloans issued since 1991 when the program was created, creating 64,000 jobs in areas that otherwise jobs

would not be created for entrepreneurs and small businesses that

otherwise would not have access to any financing. Now we are imposing an inordinate burden on them, not to mention the fact that

it is not likely it is going to happen, and transferring the technical

assistance to other programs within the SBA that ultimately, you

know, are facing disproportionate burden of additional responsibilities with additional cuts in their funding, as well.

Mr. PRESTON. Well, first of all, I want to acknowledge that this

is a very important tier of capital in our economy, and I do agree

with that. I think this is the first time we have had anything on

the Microloan Program in the budget for a number of years. So I

would like to say we have moved to embracing the concept of

microlenders. We have seen a dramatic increase in small loans in

our other programs, but I also agree that these microlenders are

reaching people that the banks don’t, and they are important people to reach.

We are hoping to be able to bring something forward that doesn’t

provide an additional cost but still allows us to get capital in the

hands of microlenders, and the $25 million that we are seeking authorization for is a good bit more than we put out there last year.

So I think what it would enable us to do is get more money out

there, albeit there would be a higher cost, especially for microlenders that maybe rely on a greater spread here.

Now, on the TA side, I guess the way I look at it is this, we touch

about 1.5 million people in that network and we make 2,500 new

microloans a year. So the network we have in place is vast and the

microloan lenders that we have in place, it is a relatively small

community. So I am actually less concerned about the ability of our

resource partners to take on a little bit extra load because it is not

that large relative to their overall scope. And we have also done

sort of zip code overlays and we see that 94 percent of the microVerDate 11-MAY-2000 08:57 Jun 21, 2007 Jkt 035303 PO 00000 Frm 00048 Fmt 6633 Sfmt 6601 C:\DOCS\35303.TXT DianeA PsN: DianeA
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lenders have resource partners in their area. But I do have to acknowledge that there is an additional cost to it.

Senator SNOWE. Thank you.

Chairman KERRY. Thank you, Senator Snowe.

Senator Landrieu.

Senator LANDRIEU. Thank you. I have so many questions, it

would take me all morning, but I know I only have 5 minutes, so

let me just begin on a national issue which is health care for small

business. I was very disturbed this morning when I read the Metro

section of the Washington Post. I am sure that some of the Senators saw this, as well as people in the audience. This 12-year-old,

Deamonte Driver from Prince George’s County, died Sunday from

a toothache, and he had a toothache for 8 weeks and couldn’t see

a dentist because his family doesn’t have insurance. After a few

weeks, the bacteria that was in his mouth went to his brain, and

after spending weeks in a hospital, he died on Sunday.

So when Senator Kerry and Senator Snowe continue to bring up

in this Committee, year after year, the fact that there are children

in this country in which this happens to all the time, and so the

suggestion that anything that small business can do to help, I don’t

know if this young child’s mother was working, but obviously she

had no insurance. Maybe she was working, but she could have been

a small business owner that doesn’t qualify. So these issues are not

issues that we do in a haphazard or insincere way because it truly

is life and death. So anything that the SBA can do to help find a

workable solution on this issue would be appreciated.

Number two, Mr. Administrator, I finally, after 18 months, got

my hands on the SBA disaster plan. I asked for it for months following Hurricanes Katrina and Rita. We lost 18,000 businesses and

I thought if I could get at least the plan, I could help them figure

out why everybody was having so much difficulty with the SBA.

The Committee did not have this plan. This was given to me, and

you all didn’t submit it, the Committee couldn’t get it. I finally got

it shortly before the former Administrator left SBA, so I am going

to turn it in to the Chairman for the record of this Committee.

It really isn’t worth getting, however, because I just want to read

a couple of things about what our business people went through.

Just to clarify, this is the playbook in place for Katrina. This is the

disaster preparedness playbook. When you have a disaster, you are

supposed to read this to make sure that the loan that you are giving to the small business person, that just had 20 feet of water in

his business, works.

This is on page 15 of the playbook: ‘‘You must prepare all reports

and other documents in either blue or black ink. You must not use

white-out or similar materials to make corrections. Instead, you

must mark through the entries to be corrected with a single line

and reenter the corrected information. You must initial and date

all corrections.’’

And then it goes on to talk about in another section criminal arrest: ‘‘It is not in the public interest of the SBA to extend financial

assistance to individuals who are not of good character.’’ I understand that and I applaud it. The problem is, the law says if you

have been arrested, or if you are under indictment, or you have a

conviction for any criminal offense, which could be shoplifting 15

44

years ago, you are no longer entitled to a disaster loan. I mean, I

don’t know how many people in Florida or Mississippi or Alabama

or Louisiana might have been picked up or arrested when they

were 15 years old. Now they have a home worth $400,000, but they

can’t get a loan from the SBA.

Mr. Administrator, you have only been on the job a few months.

This is not your problem, but I tell you, it is our problem and it

is a serious problem. I could spend the next 10 years of my life

bringing down the Members of this Committee to the Gulf Coast.

I actually walked through New Orleans literally with the Chairman of this Committee not that long ago, Senator Kerry, and I can

say as I have said publicly, and he wouldn’t mind, he was visibly

shaken by what he saw, business after business after business in

New Orleans East. Many of these are businesses that came to us

for help. They have basically given up.

So, I am just going to submit my questions for the record, but

I tell you, we have had bills filed since Katrina and Rita. I don’t

know what else it is going to take. I don’t know how bad a storm

has to be. I don’t know how high the water has to be. I don’t know

how many people have to declare bankruptcy. Now, these are people who—I am just going to end with this—have paid taxes their

entire life, people who have risked their entire financial future to

build a business, to hire 10 people, and they are proud people. They

never ask for help. They most certainly don’t ask for charity. But

they do ask for a playbook that actually gives them a chance to

play. They don’t have that.

So I will suggest this Committee has a long way to go. I thank

the staff, the Republicans and Democrats, for trying to help, but we

clearly have a long way to go, and I am going to submit the rest

of my questions for the record.

Mr. PRESTON. Thank you, Senator. I hope that you have sensed

not only a willingness, but a dogged commitment to getting after

these issues on my part, and if you haven’t, we should talk more.

I am not familiar with the document you have, but I can promise

you that if you looked at our processes a year ago or even 7 months

ago, that would be a partial reflection of the challenge. I think we

have come a tremendously long way. I think we have a long way

to go. But I can promise you, we are in a dramatically better position than we were not that long ago, and even though we have people that we are still working through, we have worked very hard

and, we have spent thousands of man hours to improve these processes and get money into the hands of people down there.

Senator LANDRIEU. I know, but let me just say, I understand

that, but this was the playbook that was on the shelf for Katrina.

It doesn’t make sense. It is full of red tape. It is full of ridiculous

requirements. And I just finished reading a book that I am going

to recommend to everyone in the Senate called Disaster, and one

line stuck out with me. One of our Homeland Security guys resigned about 2 weeks ago. He is my hero. I am going to find out

who he is and call him and go have lunch with him. But he is

quoted in the book as saying—and he resigned in protest, and he

said, ‘‘I am resigning because you all have been taught to serve a

bureaucracy instead of serving disaster victims, and I was trained

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cause you all have been trained to serve the bureaucracy, I quit.’’

He is my hero.

Now, I am not going to quit being a Senator, but I promise you,

we are going to serve disaster victims. We need to serve people on

the normal days when the sun is shining, but when their business

is under 20 feet of water and their kids can’t go to college because

they can’t get this loan, we have a serious problem in this country

and it is intolerable.

So that is for the record, Mr. Chairman, and I hope this Committee—you have got a bill in to require them to write a better one,

and when I get it, it better be less than 10 pages.

Chairman KERRY. This is pretty—you ought to take a look at

this. I am dizzy after about 2 minutes. Without objection——

Mr. PRESTON. I do want to invite any one of you, any one of your

staffs, any one of you to come down to our disaster center, meet

with our employees. You can talk to people on the front line. I

would love to give you an introduction to the progress we are making here. But Senator, I can’t—I will take a look at this document

and I fully am aligned with your view that we need to make this

easy, streamlined, and accessible for people.

Chairman KERRY. Let me just say, this document will be made

part of the record following Senator Landrieu’s questions.

[The SBA Disaster Assistance Program submitted by Senator

Landrieu and referenced above, appears in the Appendix Material

Submitted on page 91.]

Chairman KERRY. I am going to come right over here to Senator

Coleman, but let me just say that since Katrina struck, Members

of this Committee have engaged in an arduous, long, bona fide, bipartisan effort to put together a comprehensive disaster reform bill.

Senator Snowe, Senator Landrieu, Senator Vitter, myself, all joined

in drafting a bill to provide for greater coordination between the

agencies and a faster response and improve the tools, all of this.

Eighteen months of negotiations, Mr. Administrator. Broad bipartisan support in the Congress. We reported it out of the Committee

unanimously last summer as part of the bipartisan SBA reauthorization bill. You testified in front of the House Committee that you

want a constructive ongoing dialogue and so forth, but the Administration continues to block this bill from passing the full Senate.

Now, you have also said you don’t think this may be necessary

to fix the disaster loan program, but you hear Senator Landrieu

here today. Something is necessary.

So let me just say quickly, and I want to go a bit further, will

you commit to working with the Committee in a serious way so

that we get this out of the Senate? If there is an objection, state

it publicly, not in a manner that is clandestine. That is part of

what I was talking about earlier.

Mr. PRESTON. Well, I am absolutely committed to working with

you, and I am not sure who would have ever quoted me as saying

I don’t think we need a solution here. I am very open and very honest about the challenges——

Chairman KERRY. No, I didn’t say you don’t want a solution, but

you think that legislation may not be necessary to fix the disaster

loan program.

46

Mr. PRESTON. I think my comments are taken out of context,

Senator.

Chairman KERRY. OK.

Mr. PRESTON. I think there are very important things that are

addressed in many of the different packages——

Chairman KERRY. Well, 18 months, I mean, this is making all of

us pretty frustrated, and frankly, it makes the Congress look pretty

stupid as well as the Administration.

Mr. PRESTON. Right.

Chairman KERRY. Eighteen months to respond to a disaster loan

program that clearly needs reform. It ought to be codified. And the

Administration is blocking it. Now, how is Senator Landrieu supposed to go back to people in New Orleans and say we are serious

about this?

Mr. PRESTON. Well, like I said before, I would very much look

forward to working with you all on the legislation——

Chairman KERRY. I hope we can get this done, and I am going

to push this within the Committee and see again if we can get it

out and get it done.

Senator Coleman.

Senator COLEMAN. Thank you, Mr. Chairman.

Mr. Administrator, I need a little help in understanding something, and that is in regard to rural lending. I was looking at the

statistics. From 1990 to 1999, the percentage of urban lending

versus rural in Minnesota was, for rural lending, over 50 percent

every one of those years. At the high point in 1995, 56 percent of

loans were in rural areas versus 43 percent in urban areas. In

1999, 53 to 47. Last year, close to 63 percent were urban and only

37 percent were rural, and it is a decline almost every year. I am

not sure whether this is a Minnesota problem. I presume if it were

Minnesota, in is also happening in South Dakota. I am not sure of

the reasons why. But it certainly raises a great deal of concern.

So Mr. Administrator, I would like your help in helping me understand what is going on here, whether there are factors that the

SBA believes are responsible for this. I am thinking about the

LowDoc program which has been replaced by the SBA Express.

There is some question about whether the Express Program works

as well in these communities. I don’t have the answer to this, but

I am looking at a trend here that is deeply disturbing——

Mr. PRESTON. Yes.

Senator COLEMAN [continuing]. And what I would like from you

is a commitment to better understand and figure out a way to correct it.

Mr. PRESTON. Yes. I can tell you some of what is happening, in

fact. Now, overall rural lending has gone up very dramatically, actually, more than our overall lending program. But what we are

seeing is a migration to some of these simplified products like the

Express product. As an outcome of that, we are seeing more of the

rural lending, I believe, move to big banks.

I don’t think we have an effective enough outreach to community

banks. LowDoc was a very popular program because it simplified

what they do, the paperwork with this and it gave them a nice

guarantee and they were able to process it well. The challenge was

47

it had very, very high losses. I believe some of that was challenges

we had in how we operated the program.

We are looking right now to see if there is a new program that

we should be able to roll out specifically designed to reach out to

the rural community that would be attractive to those community

banks, because I think we need to win them back.

The other thing we are doing is we continue to expand our alternative work sites—those are all in rural areas—so that we have a

better on-site presence out there. So those are just two things I

would mention in that regard.

Senator COLEMAN. So rural communities, if they face great stress

in health care delivery, in economic vitality, we need the SBA to

be a player there, and at least as I look at the data——

Mr. PRESTON. Yes.

Senator COLEMAN [continuing]. It shows some disturbing trends.

So I would appreciate your focus and attention to that.

Let me turn to the new market tax credit pilot, which is an important program. I commend the SBA for establishing the pilot. My

question is, and again, correct me if I am wrong with the data, it

is my understanding that the SBA has yet to make one loan under

this program, and so I am wondering, are there program restrictions? Are there problems? You have a great concept there, but if

it is not being used, then we have a problem.

Mr. PRESTON. Yes. I am not sure if that is still the case, Senator,

but there has not been a significant adoption of it in any case. The

way this program works is banks who have made the loans have

the ability to sell those loans to community development entities

and in that process avail themselves—the investors of those entities avail themselves of a tax credit. We are working both with

banks as well as people in the tax credit community to understand

how to get better adoption of it. It is all in the detail, which is frequently the case, and has to do with the need for an investor to

have a 7-year investment when many of these loans are a different

term. So we think there are ways that we can get better adoption,

but I think there are some technical challenges there right now.

Senator COLEMAN. Two other areas of concern in the time that

I have. One, a number of my colleagues talked about the role that

the SBA can do as an advocate for small business in trade and

trade opportunities. We deal in a global economy and small business is an important part of that. SBA has the position of Associate

Administrator for International Trade, my understanding is, and I

think it is important that we move quickly to fill this position. Is

that position still vacant?

Another position is the small business representative position at

USTR. Do you know if this position is still vacant, and can you give

me a sense, if it is, about how quickly SBA can fill it?

Mr. PRESTON. The first one is somebody who just left last week,

and we are out there with a search right now. That is a very important position. We are looking for a strong candidate there.

The second one, we have somebody designated for the USTR position and we are just working through the details.

Senator COLEMAN. OK.

Mr. PRESTON. And a very talented individual who is coming from

the agency.

48

Senator COLEMAN. My time is up. I want to again associate myself with the concerns raised by the Ranking Member in regard to

the Microloan Program. SCORE and the other programs, they are

great, but they are usually in response to folks coming to them,

and with the microloan, what you have are these institutions who

are going to be raising costs and they have been geared to reaching

out. So strictly on paper, it may look like, well, we are shifting

something over to folks who are capable of doing things, but the

whole mindset is different.

The Nobel Peace Prize is given internationally to the creator of

microloan programs. I travel all over with the Foreign Relations

Committee with the Chairman, travel around the world, and

microloans are seen as one of the great avenues of opportunity to

get capital in the marketplace, and it just seems like we keep

squeezing it here. So I appreciate that we are beginning to recognize it, but I still think that we have too many limitations on something that internationally we applaud, but domestically, we seem

to have a problem fully embracing.

Thank you, Mr. Chairman.

Chairman KERRY. Thank you very much, Senator. I think we all

agree with you about the Microloan Program.

Senator Isakson.

Senator ISAKSON. Thank you, Senator Kerry. I apologize that I

missed your testimony. I came in the middle of Senator Snowe’s

questions on microloans and I am following Norm Coleman on

microloans, so why don’t we keep talking about microloans for a

minute, because in trying to catch up and read the briefing paper

that I have here, if I am right, the last 3 years, the Administration

zeroed out the Microloan Program, is that right?

Mr. PRESTON. That is correct.

Senator ISAKSON. And this year, you are recommending not zeroing it out, but you are recommending going to a zero-subsidy program?

Mr. PRESTON. Recommending going to a zero-subsidy program

with authorization to lend up to $25 million.

Senator ISAKSON. OK, and that zero subsidy is accomplished

through the increase in fees and the change in the interest rate?

Mr. PRESTON. It is almost entirely accomplished by asking our

resource partners to provide the training and counseling services

that are now in a grant to the microlenders. It is about a $15

million——

Senator ISAKSON. That is on the technical assistance side?

Mr. PRESTON. Technical assistance side. Of that $15 million or

so, just over 1 million of it is in the interest—between $1 and $2

million is in the subsidy. So it is primarily the technical assistance

that is the cost factor.

Senator ISAKSON. So you are asking the Development Centers

and the women’s advisory groups to take over technical assistance?

Mr. PRESTON. That is correct.

Senator ISAKSON. And reduce your budgetary responsibility in

that area?

Mr. PRESTON. That is exactly right.

Senator ISAKSON. All right. What is the increase in the fees to

the microloans?

49

Mr. PRESTON. The increase in the cost to the microlender has to

do with what we lend them money at, and that would go up from

this year to next just over 2 percent. Right now, we provide them

funding at a below Treasury level——

Senator ISAKSON. Two below Treasury to 1.6 above?

Mr. PRESTON. It is about a point below Treasury to a little over

a point above.

Senator ISAKSON. But that ends up being——

Mr. PRESTON. 1.6——

Senator ISAKSON.—just under 6 percent, right?

Mr. PRESTON. Yes.

Senator ISAKSON. On the 5-year——

Mr. PRESTON. It would still be under 6 percent.

Senator ISAKSON. Which is 2.5 percent below the prime rate, or

two-thirds of the prime rate.

Mr. PRESTON. Right.

Senator ISAKSON. I came in late and I know I am getting ready

to ask for trouble. What is wrong with that? What was the negative

about that?

Mr. PRESTON. Well, it is what we are proposing, so we think it

would provide microlenders funding at a rate that is significantly

better than they could get in the private market.

Senator ISAKSON. I was in the real estate business and the housing business, I was not in the SBA business or small business, but

these microloans are designed to reach people that aren’t reached

by traditional sources, is that correct?

Mr. PRESTON. Yes, they are.

Senator ISAKSON. In fact, aren’t the only sources they have otherwise generally the B, C, and D lenders, who charge exorbitant

rates?

Mr. PRESTON. Yes, I think in some cases. I think also in some

cases the banks are increasingly getting into these markets, but

they are reaching people that other people don’t reach today.

Senator ISAKSON. So as a comparison to—I like the Microloan

Program. I was reading in here your default rate is 1 percent, is

that right?

Mr. PRESTON. The default rate is very low, yes.

Senator ISAKSON. And 50 percent, 45 percent of the beneficiaries

are women or minorities.

Mr. PRESTON. Yes.

Senator ISAKSON. I commend you for going the opposite way on

zeroing it out. Obviously, the cost of these programs to the borrower or to the microlender who passes on costs are an important

question, but I will just say from my experience, 6 percent is not

an unreasonable rate of interest at an 8.5 percent prime rate, and

if it sustains the program at a zero cost, it seems like a win-win

for the potential borrowers and for the government.

Mr. PRESTON. Thank you.

Senator ISAKSON. That is the only thing I had to say. Thank you,

Mr. Chairman.

Chairman KERRY. Thank you, Senator Isakson. We appreciate it.

We appreciate the observation.

50

I just have a few more questions. The record is going to remain

open and we are going to submit some questions in writing from

other colleagues and I will also do so.

But just following up quickly on the microloan things, since that

is the topic, I notice that the Administration as part of its economic

development program for Iraq is to use microloans. It is interesting

that they think it works there, and we are not willing to use it in

some of our communities here, so I will just make that observation

very quickly. I know it is above your pay grade as a major decision,

Mr. Administrator, but——

Mr. PRESTON. Well, I also think, Senator, there is a very well extensively developed micro lending industry here, aside from what

we fund. So micro lending is not just what we fund. There are

many microlenders in the economy outside of this program. And we

only represent a portion of their funding, as well.

Chairman KERRY. Well, there are some outside of it. I mean, I

understand that, but there is much greater demand than there is

supply, would you not agree?

Mr. PRESTON. I don’t have any demand statistics in front of me,

but the larger microlenders, I mean, go up to $1 billion in assets,

and our——

Chairman KERRY. What is the total we are putting into micro

lending through the SBA now?

Mr. PRESTON. Last year, we put roughly $18 million.

Chairman KERRY. Eighteen million?

Mr. PRESTON. Yes.

Chairman KERRY. And I believe that the Administration has suggested we need to eliminate about $20 million from micro lending?

Mr. PRESTON. Well, our authorization request is up to $25 million, so it would allow us to expand that number.

Chairman KERRY. Do you know how much we are sending to

Iraq?

Mr. PRESTON. Do I know——

Chairman KERRY. For micro lending?

Mr. PRESTON. No, I don’t.

Chairman KERRY. We are, American taxpayer dollars——

Mr. PRESTON. I don’t know.

Chairman KERRY. Two-hundred-million. Two-hundred-million for

micro lending in Iraq, and we are cutting for lending here. So I

think you can understand the frustration of Members of the Committee with respect to that.

Let me just come back to what I wanted to ask you. There was

this loan fraud issue out in Michigan and I just want to ask you

quickly, can you explain how that kind of repurchasing, the $28

million of repurchasing out of one office by one lending officer? The

SBA’s IG suggested that we examine the centralization of liquidation functions a few years ago and I think that you have described

in your testimony that the loan monitoring system is state of the

art. Where is the gap here?

Mr. PRESTON. I think it is a fairly complicated issue. The first

thing I would tell you is most of these loans were done in the 2001-

ish timeframe, so at that point, we were just beginning to institute

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matically expanded and we continue to improve the methodology

which we have to look at behavior in those portfolios.

I will say, however, though, for the most part, our lenders, the

process we have in place is to go in there, look at the quality of

their processes, provide them oversight, look at the behavior in

their portfolios, but we don’t look at every loan that they make.

They make the loan. We guarantee it. In many cases, it is an automated process.

Chairman KERRY. Have you changed the system now to respond

to that particularly?

Mr. PRESTON. Yes. The system is dramatically better than it was

back then already. What we are doing right now is, and I think any

time something like this happens, it is incumbent upon us to understand what went wrong, why it went wrong, and whether or not

we need to improve our processes as a result of it. So we are working with the IG. We are speaking with people from the FDIC——

Chairman KERRY. Are you looking beyond that sort of one

circumstance——

Mr. PRESTON. Absolutely.

Chairman KERRY [continuing]. To see whether or not there——

Mr. PRESTON. Absolutely, because it is really two things. It is understanding the quality of the portfolio and it is our role as a regulator of these entities.

Chairman KERRY. OK. Now, on the Small Business Development

Centers, they are going to get—I mean, as Senator Snowe has

raised, there is just this massive reduction. The average SBDC is

going to get approximately 19 percent less Federal funding in 2008

than it got in 2001. The effect is felt nationwide. SBDCs are closing

centers, cutting back on services. The counseling clients numbers

have decreased steadily since 2004. Counseling hours overall have

been decreasing. Are you worried about the decline in services provided by SBDCs?

Mr. PRESTON. First of all, Senator, I want to look at that data

more in detail because they have moved from tracking primarily

number of businesses counseled to long-term counseling sessions,

and so I don’t know specifically what data you are looking at, but

I would want to dig into it more and I would commit to do that

with your staff.

Chairman KERRY. I would like you to do that, and maybe you

could do that before we close this record in a couple of weeks. I

would like to have that response as part of the record.

Mr. PRESTON. OK.

Chairman KERRY. You know, SBDC clients generate $2.82 in revenue for every dollar that is spent by the U.S. Government on the

program. It sounds like a pretty good investment to me.

Mr. PRESTON. Well, they are terrific partners and they do a great

job——

Chairman KERRY. Why are we cutting it?

Mr. PRESTON. We are not their primary funding source. We provide a base level of funding and then they have the ability to expand beyond that by going to private sources or other sources. We

are actually working right now with the Women’s Business Centers

and we will be talking to the SBDCs about putting in place best

52

practices for fundraising externally and we are dedicating our staff

to help them be more effective to expand their funding sources.

Chairman KERRY. Well, again, just from a large policy point of

view, and I know you probably fought for this and I am sure you

asked for money, or I hope you did, but I just want the record to

reflect that it is unbelievably myopic to be reducing an investment

that returns greater revenue to the Federal Government. It just is

such a no-brainer that we are going in the wrong direction and, I

think, shortchanging ourselves. That brings up the last question I

want to ask, at least on the record publicly today, which is about

the agency morale.

The morale at the agency was ranked, I think, as low or the lowest or the second lowest of any agency in the government. I think

it was lowest, as a matter of fact. Where is agency morale today

and how do all these reductions continue to make your job difficult?

Mr. PRESTON. Well, I haven’t gotten a complete briefing, but you

will also find that the 2006 survey, which was as of June, will reinforce what you may have been referring to, and the 2004, as well.

I think we have made terrific strides there. We have taken a hard

look at the causes for morale, the low morale. They are very concerning to me. The last thing we want in a service organization is

low morale. We have surveyed our employees additionally. I have

spent many, many hours with people and I can comment on it now,

but I would want to spend time sharing with your staff what we

are doing.

I have to tell you, I think if you walked into any one of our offices, or you are welcome to call any district office in the SBA and

ask them if morale has changed in the last 6 months, and I would

feel very good about what you would hear.

I will also be changing the goals of the agency, and we will be

having goals in place in our district offices and the headquarters

that focus on the items that I believe are driving the low morale.

So it is something I am terribly concerned about, but I do think we

are making a lot of progress there and I appreciate your concern

on that.

Chairman KERRY. Well, we are concerned about it, and obviously

all of the questions here asked by all of the Members go to some

of the reasons for that morale problem and we are going to try to

address them in whatever ways we can here on the Committee.

Let me just correct myself. I am going to leave the record open

for 1 week because we have another hearing coming up next week

on the impact of global climate change on small business, and so

we will put you under the gun a little, but I promise not to flood

you with a lot of ridiculous, extraneous, overly burdensome requests.

Senator Snowe.

Senator SNOWE. Thank you, Mr. Chairman. Just a couple more

questions.

One on government contracting. You mention in your testimony a $500,000 request to say how to reengineer the SBA’s government

contracting and technology programs, including 8(a), HUBZone,

Small Business Disadvantaged Program, women-owned small business, and service-disabled veterans small business program. But

since 2003, the SBA Government Contracting and Development OfVerDate 11-MAY-2000 08:57 Jun 21, 2007 Jkt 035303 PO 00000 Frm 00058 Fmt 6633 Sfmt 6601 C:\DOCS\35303.TXT DianeA PsN: DianeA
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fice has been evaluating 21 different reports. The SBA Inspector

General, the GAO has issued numerous reports on the contracting

issues, issued advisory opinions, and many of the recommendations

remain unimplemented.

I don’t know if you have had a chance to review some of those

recommendations. I would recommend that you look at them very

carefully and try to initiate as many as you can. For example,

GAO’s 2004 recommendation is the SBA expedite publishing of a

best practices guide on unbundling Federal contracts. The GAO’s

and the IG’s 2005–2006 recommendation is that the SBA scrutinize

the 8(a) mentor protege program for funding by large businesses.

And the IG’s 2003 recommendation is that the SBA have sufficient

information from companies certifying themselves as small businesses.

So we have so many recommendations and proposals that have

been evaluated time and again. We know what the problems are.

I would hope that you would move aggressively on this front. Furthermore, I think what is disconcerting, and I have introduced legislation on this question, but it is still amazing to me that it is—

if SBA does not object to a contract to a large company that fronts

as a small business within 10 days, that award goes forward. I

mean, it is totally unacceptable. It is unconscionable. So we are obviously going to have to address that question.

But I think that this is an area in which I believe you should

move vigorously and aggressively to put in place as many as you

can on a regulatory basis, and we likewise will do it on a legislative

basis, because this bundling of contracts, the fronting by large businesses, we are replete with examples of how large companies have

confiscated these set-asides because they masquerade as small

businesses. So I think it is really something that we have to get

a handle on. I mean, I am just telling you, there are so many reports out there. There have been so many GAO reports, I mean, advisory opinions galore. So we ought to be able to move to implement some of those recommendations, and those that you can’t, we

will and we should.

But this is one area that should be beneficial to small businesses.

I mean, you are talking about $400 billion worth of Federal contracts. Clearly, we should reinforce this as an avenue for small

businesses to create jobs and retain jobs.

I am concerned about HUBZone programs, for example. I understand that—you mentioned in your budget that the interest in

HUBZone contracting programs has been declining among Federal

contracting officials and companies alike, and your budget further

states that Federal agencies are not using the HUBZone programs.

Here is another avenue for access to the contracting programs, and

yet it is not being utilized. It is underutilized. I know it is in my

State and it is across the country for a variety of reasons. I don’t

think we are doing sufficient outreach, frankly. I mean, you have

to assist companies to be certified as HUBZone eligible. But more

than that is agencies are lethargic when it comes to helping small

businesses and opening the doors for small businesses and the opportunities their agencies could otherwise present.

54

I think that we have to address some of the enforcement actions

that are essential in these categories. Do you have any ideas or

suggestions? Have you evaluated any of these recommendations?

Mr. PRESTON. Yes. You have rightfully acknowledged, Senator,

that there is a long list of opportunity and we have begun getting

after a number of those items. I know, for example, on the issue

with objecting within 10 days, we have already proposed that we

be able to hold our State contracts under protest, and so that is

something we have made some progress on.

We are also trying to drive a lot more transparency into this

process by getting accurate data from the agencies, ensuring that

it is right, and driving scorecards that are good, honest reflections

of their progress. We intend to make those public. I think I have

got a very good working relationship with Paul Denett, who is the

head of OFPP, and I think together, we are going to make some

good progress here. But there is a lot of good historical guidance

here and it is a long list, and I think we will make a lot of

progress, but there is a lot of work to do.

Senator SNOWE. Well, I would ask you if you would report to the

Committee on the progress that you are making in this area, because I do really think it is essential and imperative that we aggressively pursue the kind of changes that are going to make a difference in the contracting process that otherwise will not occur,

frankly.

Mr. PRESTON. Yes.

Senator SNOWE. I think that the SBA has to be the advocate and

the ombudsman in many ways for small businesses throughout the

agencies and I think the more aggressive you are and the employees within SBA, I think the more likely things will turn about with

the agencies. Otherwise, it is just the path of least resistance and

that is what is happening in many of these agencies. Either by default or otherwise, it happening. I think that that is one easy solution to helping small businesses. I mean, the $400 billion is going

to be spent, so why not benefit the entrepreneurs of America.

One other question. Our staffs traveled in October to visit the

SBA disaster processing center in Fort Worth, Texas, and tour the

facility and witness the accelerated disaster initiative that has enabled the agency to more efficiently process many of the disaster

loans, and it is certainly making progress, as I said in my opening

comments, that the agency has already disbursed under your leadership $5.2 billion of the $10.9 billion approved following the hurricanes of 2005. Why is there such a gap?

Mr. PRESTON. Yes.

Senator SNOWE. I mean, many have canceled their loans, and I

think it speaks to the question that Senator Landrieu was referring

to about the 20,000 businesses that have just sort of closed down.

Mr. PRESTON. Yes.

Senator SNOWE. Why is there a gap between those approved and

those disbursed? What is happening there?

Mr. PRESTON. I think there are a couple of reasons. First of all, you start at about $10.8 billion. I think about $7.2 billion is what

ultimately represents people that are asking for disbursements.

The difference is people who have either got insurance proceeds,

not needed all the loans, canceled for some reason. Many of those

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people are canceling because they have other resources or insurance money.

I cannot—I have to say, if a small business hasn’t gotten a loan

for a year, there is a possibility that they would have had challenges or had to get the money elsewhere. So I can’t say in good

faith that none of those people left us because they couldn’t get

their money in time. I think that was probably an issue. So being

more responsive in the future is critical to getting that money into

their hands.

But I do have to say, it is very common to have a high level of

cancellations, because legally we don’t lend where people get insurance proceeds. They get insurance proceeds along the way and then

that cancels the loan.

So we are really down to about $1.8 billion that is yet to be disbursed, and what we are finding is—that is about 22,000 people.

Almost 19,000 of those people have already begun getting money,

so they are rebuilding. They are in the process somewhere. But we

still, I have to tell you, and Senator Landrieu knows this chapter

and verse, a lot of people can’t get contractors. A lot of people can’t

afford insurance right now. There are all sorts of other impediments, and we are really down to that core that is just having a

terribly difficult time moving ahead. Thank you.

Senator SNOWE. Thank you. I appreciate it. Thank you, Mr. Administrator. I hope you will look at this program. I don’t know, has

this pamphlet been updated since—have you seen this?

Mr. PRESTON. There is a lot of progress that has been made beyond that document, but I do look forward to seeing that to make

sure that we understand what Senator Landrieu has been looking

at. Yes.

Senator SNOWE. Thank you.

Chairman KERRY. Thank you very much, Senator Snowe.

When would you report back to the Committee on what Senator

Snowe has asked on the progress?

Mr. PRESTON. On the progress on the government contracting

issues?

Chairman KERRY. Correct.

Mr. PRESTON. Let me—if you could give me a couple days to get

back to you and look at those specific items, I will give you a timeframe within 48 hours.

Chairman KERRY. Thank you. And just two quick wrap-ups. The

fiscal and transfer agent contract for servicing 7(a) loans expired

and has been extended twice. The central servicing agent contract

for the 504 loan program has expired and been extended four

times. When will the Request for Proposal for each of those be published so that bids can be submitted?

Mr. PRESTON. I don’t have a date for you right now, but I will

get that for you, also.

Chairman KERRY. If you would get back to us.

The budget does not provide funding for the SBA’s largest loan

program, and the Administration characterizes this—I am quoting

you, as savings of approximately $100 million to the taxpayer. But

the funding of this program comes from lenders and borrowers who

pay fees. They are also people who pay taxes. How do you reconcile

those statements? I mean, is it a savings to the taxpayers if it

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comes out of the taxpayers’ pocket, just a more limited group of

them? I mean, isn’t that a mischaracterization that it is, in fact,

a savings to the taxpayers? It is a savings to some taxpayers, but

it is a burden to others.

Mr. PRESTON. Senator, I think when you look at the context, look

at these fees in the context of the overall program, the cost a borrower incurs to lend money for a number of years, they are both

very—it is a very low cost relative to the overall cost of a loan

when you look at what has been subsidized historically. I would

also note that we fund over $100 million in administrative costs

that we don’t pass through. Historically, when the funding has run

out in these programs, it has been very detrimental to the banks’

ability to market them.

Chairman KERRY. What you are talking about is justifying the

rationale for doing what you are doing. I am not trying to argue

the rationale with you, I am trying to argue the characterization.

It seems to me incorrect to be claiming a savings to the taxpayer

when, in effect, the taxpayer is paying for what you are saying is

savings.

Mr. PRESTON. I think the taxpayer would fund $100 million if we

subsidize this.

Chairman KERRY. Say that again?

Mr. PRESTON. I think it is a cost to the taxpayer.

Chairman KERRY. If you are shifting that cost, the so-called savings to the taxpayer is in effect being charged off against the business and others as a fee——

Mr. PRESTON. It is a fee to cover the delinquencies in the program rather than a tax——

Chairman KERRY. But the lenders and borrowers are paying it,

correct?

Mr. PRESTON. The lenders and borrowers pay the fees that cover

the cost of the program that they are taking——

Chairman KERRY. That formerly was covered in the direct subsidy. You say that is a savings to the taxpayers. My point is it is

a savings only to some taxpayers. I just don’t think the characterization is a fair characterization.

Mr. PRESTON. Point well taken.

Chairman KERRY. I think it is cost shifting and it is something

that the Committee has been concerned about for some time, that

the very people that we are actually trying to help are in effect

being helped less than they might be, and the program is therefore

being more narrowly made available than it might be because of

the cost addition. We are not going to resolve that now, but it is

fundamental to sort of the Committee’s feeling as a whole that

these costs have been counter to what we intended and what the

program was intended for.

Mr. PRESTON. I will tell you, it is my opinion that there are many

other things we could do that would have a much greater impact

on our ability to expand our reach in these programs than a slight

reduction in the fees.

Chairman KERRY. And they will be, and we would be happy to

work on identifying those and on trying to figure out how to augment them. I mean, it would be good to do. Whatever the least cost,

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most effective way of doing it is, we are all for that. So it would

be good.

Mr. Administrator, we will leave the record open. We appreciate

your being here today.

Mr. PRESTON. Thank you very much.

Chairman KERRY. Thank you very, very much.

The Committee is adjourned.

[Whereupon, at 11:42 a.m., the Committee was adjourned.]

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APPENDIX MATERIAL SUBMITTED

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