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78–450 2002

THE PRESIDENT’S PROPOSED BUDGET FOR THE

SMALL BUSINESS ADMINISTRATION FISCAL

YEAR 2003

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

WASHINGTON, DC

FEBRUARY 13, 2002

Serial No. 107–43

(

Printed for the use of the Committee on Small Business

(II)

COMMITTEE ON SMALL BUSINESS

DONALD MANZULLO, Illinois, Chairman

LARRY COMBEST, Texas

JOEL HEFLEY, Colorado

ROSCOE G. BARTLETT, Maryland

FRANK A. LOBIONDO, NEW JERSEY

SUE W. KELLY, New York

STEVE. CHABOT, Ohio

PATRICK J. TOOMEY, Pennsylvania

JIM DEMINT, South Carolina

JOHN R. THUNE, South Dakota

MICHAEL PENCE, Indiana

MIKE FERGUSON, New Jersey

DARRELL E. ISSA, California

SAM GRAVES, Missouri

EDWARD L. SCHROCK, Virginia

GELIX J. GRUCCI, JR., New York

TODD W. AKIN, Missouri

SHELLEY MOORE CAPITO, West Virginia

BILL SHUSTER, Pennsylvania

NYDIA M. VELA ́ ZQUEZ, New York

JUANITA MILLENDER-MCDONALD,

California

DANNY K. DAVIS, Illinois

BILL PASCRELL, JR., New Jersey

DONNA M. CHRISTENSEN, Virgin Islands

ROBERT A. BRADY, Pennsylvania

TOM UDALL, New Mexico

STEPHANIE TUBBS JONES, Ohio

CHARLES A. GONZALEZ, Texas

DAVID D. PHELPS, Illinois

GRACE F. NAPOLITANO, California

BRIAN BAIRD, Washington

MARK UDALL, Colorado

JAMES R. LANGEVIN, Rhode Island

MIKE ROSS, Arkansas

BRAD CARSON, Oklahoma

ANI ́BAL ACEVEDO-VILA ́ , Puerto Rico

DOUG THOMAS, Staff Director

PHIL ESKELAND, Deputy Staff Director

MICHAEL DAY, Minority Staff Director

(III)

C O N T E N T S

Page

Hearing held on February 13, 2002 ....................................................................... 1

WITNESSES

Barreto, Hon. Hector, Administrator, U.S. Small Business Administration ...... 3

Wilkinson, Anthony, President & CEO, The National Association of Government Guaranteed Lenders ................................................................................... 16

Black, Phil, Director of Community Economic Development ............................... 18

Mercer, Lee, President, National Association of Small Business Investment

Companies ............................................................................................................ 19

Crawford, Christopher, Executive Director, National Association of Development Companies ................................................................................................... 20

Wilson, Donald, President & CEO, Association of Small Business Development Centers ........................................................................................................ 21

APPENDIX

Opening statements:

Manzullo, Hon. Donald .................................................................................... 28

Vela ́zquez, Hon. Nydia ..................................................................................... 31

Jones, Hon. Stephanie Tubbs .......................................................................... 35

Langevin, Hon. James ...................................................................................... 39

Christensen, Hon. Donna ................................................................................. 41

Udall, Hon. Tom ............................................................................................... 44

Prepared statements:

Barreto, Hon. Hector ........................................................................................ 49

Wilkinson, Anthony .......................................................................................... 62

Black, Phil ......................................................................................................... 78

Mercer, Lee ....................................................................................................... 81

Crawford, Christopher ..................................................................................... 86

Wilson, Donald .................................................................................................. 96

Additional Information:

Post hearing submission by witness Hon. Hector Barreto ............................ 106

(1)

SMALL BUSINESS ADMINISTRATION FISCAL

YEAR 2003 BUDGET REQUEST

WEDNESDAY, FEBRUARY 13, 2002

HOUSE OF REPRESENTATIVES,

COMMITTEE ON SMALL BUSINESS,

Washington, DC.

The Committee met, pursuant to call, at 2:00 p.m., in Room

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

(chair of the Committee) presiding.

Chairman MANZULLO. The Small Business Committee will come

to order. We have two panels today. The first panel is Administrator Barreto. He is going to testify. Members will be able to ask

questions. Then he will be excused. The reason you are all seated

together is that I wanted to move this because we are in the middle

of campaign finance reform votes, and we may be interrupted at

least once and probably twice.

I am going to defer to Ms. Vela ́zquez for an opening statement

and then I may give one later on. Ms. Vela ́zquez.

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman, and welcome all of

you, and Administrator Barreto, thank you for being here.

We are here today to review the administration’s priorities for

this Nation’s most vital economic enjoin: small business. I need not

remind anyone that small business is big business in America, accounting for almost half our GDP, half our jobs, and 75 percent of

all new jobs created. In a faltering economy, small businesses are

especially important to communities struggling with low growth

and high unemployment. They held us out of recession a decade

ago and into the strongest peacetime economy on record. They did

it before, and they can do it again with a little help on our part.

I would like to welcome Administrator Barreto here today, and

I personally commend you for outstanding leadership in your first

year on the job under the most trying circumstances. Speaking for

my constituents in New York, I want to thank you for your commitment to the recovery of our city. Today we see the difference your

leadership has made. I am pleased that you have prevailed on the

White House to offer a more realistic budget request for the Small

Business Administration this year.

Last year the Bush administration sent us a Draconian proposal

that cut SBA spending in half. That slash-and-burn method of accounting threatened many programs vital to supporting our Nation’s entrepreneurs. I remain concerned that while this current

budget has some positive components, it still shortchanges the fastest growing sector of American enterprise: minorities, women and

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low-income entrepreneurs. This budget forfeits our commitment to

those businesses.

The administration and OMB have proposed to zero out a number of programs dedicated to creating business opportunities and

jobs where our recent prosperity has not reached. The cuts will

eliminate the new markets program, PRIME, BusinessLINC and

the one-stop capital shops. These initiatives are dedicated to focusing financial resources on small businesses in low-income communities.

The President says he wants to create new jobs. He should support the programs doing just that in neighborhoods that need jobs

the most. But the most glaring ongoing problem facing us is the

treatment to the 7(a) program. Last year the administration tried

to kill this program outright by imposing new costs. This year they

are trying a new tact by cutting the program in half. Either way,

old or new tricks, the outcome is the same. Small business’ access

to capital is blocked.

Last year we worked in a bipartisan fashion to make the 7(a)

program more affordable for both the lender and the borrower by

reducing the cost of the program, which I might add even the CBO

said continues to overcharge lenders and borrowers by $1 billion.

This overcharging is the result of a miscalculated subsidy rate. Instead of providing an accurate subsidy rate, this administration instead chooses to play Russian roulette with the 7(a) program, and

I believe we need to be clear about just exactly what it is—it is tax,

yes, it is a tax—and what it will do to small businesses. This tax

results in $5 billion less in available capital for those businesses.

That money could be pumped into the economy through small companies to create jobs. Instead, the ongoing miscalculation means

that the field of dreams will go fallow, as $5 billion do nothing but

sit in a ledger somewhere.

I want to be clear. While the Bush administration may have inherited this problem, it is clearly your problem alone now, and

there is only one solution: Fix the subsidy rate. Members of this

Committee will tolerate nothing less. It is time that we stop using

small businesses to subsidize the United States Treasury.

Mr. Chairman, this budget request comes at a critical juncture.

While the country tries to recover from the recession, we should be

looking for every tool available to shore up the foundation of our

economy and prosperity, American small businesses and entrepreneurs.

I think this budget request goes far to recover from last year’s

damage, but much more can be done. I would like once again to

reiterate my appreciation for the administrator’s hard work and

leadership during a very difficult time, and look forward to cooperating with both Administrator Barreto and you, Mr. Chairman, to

solve the problems that face us. Thank you.

[Ms. Vela ́zquez’s statement may be found in appendix.]

Chairman MANZULLO. Thank you very much. I went over the

budget, and everything looks good, and my only comment is that

there is a problem with the subsidy rate. But for the first time in

8 years there is a continued and earnest dialogue going with OMB,

the SBA, and our office, with a trustworthy promise that the subVerDate 11-MAY-2000 06:46 May 21, 2002 Jkt 078450 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 E:\HR\OC\A450.XXX pfrm11 PsN: A450
3

sidy rate is going to be not only seriously addressed but is going

to be fixed. I look forward to your testimony.

Administrator, if the bell goes off, we will just play it by ear.

Thank you.

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

STATEMENT OF HECTOR BARRETO, ADMINISTRATOR, U.S.

SMALL BUSINESS ADMINISTRATION

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

Member Vela ́zquez, and members of the Committee, for inviting me

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

for fiscal year 2003. To paraphrase President Bush, there are no

Democratic solutions to small business issues, nor are there Republican solutions. There are only solutions. Year after year, the members of your Committee have recognized this and have consistently

reached consensus instead of conflict. America’s small businesses

are better off today as a result of your working together. I know

we can continue that tradition.

It is in this spirit that I respectfully ask for your support of the

President’s budget request of $798 million for the SBA. The President has increased the SBA’s budget to provide capital and technical assistance to small businesses and disaster victims so that

the SBA may continue making services available to those that need

them the most.

This budget reflects the President’s commitment to economic security through its support of small businesses and their creation of

new jobs. It supports the President’s role of government, a role

which is not to create wealth, but is instead to create an environment in which entrepreneurs can thrive.

Before we continue our discussion on fiscal year 2003, please permit me to take this opportunity to commend the many Federal disaster relief workers for their role after the attacks of September

11th. In the immediate aftermath of this unprecedented attack on

American soil, the SBA mobilized both its disaster and district office employees to open up some 40 temporary disaster assistance

offices in New York City and Virginia. Through the dedication of

SBA employees, we have delivered to date more than $458 million

in disaster loans nationwide; approximately $271 million in disaster loans in New York; and $9.5 million in Virginia and $177 million elsewhere throughout the country.

I am pleased to say that the SBA was on site on September 12th

and in many cases canvassed the area, door to door south of Canal

Street and beyond, distributing disaster loan applications to small

business owners. These dedicated men and women of the SBA

worked tirelessly to distribute applications, answer questions,

verify damages and process and disburse loans, placing the success

of the mission above any personal consideration. The SBA family

continues to work long hours, without seeking recognition for their

tremendous efforts.

The SBA also rolled out an unprecedented nationwide expansion

of the Economic Injury Disaster Loan program to help those small

businesses across the country that were adversely affected by the

events of September 11th. I am proud to lead an agency that employs such loyal, dedicated, and caring employees. I know you join

4

me in the sentiment and share our commitment to continuing this

important work on behalf of impacted small businessmen and

women across our country.

Having said that, I now want to address 7(a) funding. In fiscal

year 2003 for the first time in many years, the SBA and the Office

of Management and Budget worked to make the subsidy rate calculation more accurately reflect changes in the program. In furtherance of that goal, we have contracted with the Office of Federal

Housing Enterprise Oversight to create an econometric model to

determine the subsidy rate for fiscal year 2004. In the interim, our

calculation for fiscal year 2003, which weighs preferred lender

loans in proportion to participation in the program, produced a subsidy rate estimate of .88 percent. That is a 20 percent decrease.

With the requested appropriation of $85.36 million for fiscal year

2003, this would have resulted in a 9 percent increase in loan volume, producing a record level of loan authority.

However, recently passed legislation subsequently reduced the

fees paid by borrowers and lenders for a 2-year period beginning

in fiscal year 2003, resulting in a doubled subsidy rate of 1.76 percent and a 7(a) program level of $4.85 billion.

While this statutory change poses a significant challenge to the

SBA in satisfying increasing loan demand, we believe that other recent legislation will help us meet this demand. The combined budget authority for the 7(a) program in fiscal year 2002 equals a program level of $13.84 billion. Adding this amount to the fiscal year

2003 program level produces a 2-year program level with an annual average of $9.34 billion. This is consistent with historic levels.

While we anticipate a program level of $10.5 billion in fiscal year

2002, we expect a $2 billion in guarantee authority carry over from

fiscal year 2002 to support a nearly $7 billion program level in fiscal year 2003.

The current challenge creates an opportunity to examine the 7(a)

program to ensure its continued relevance in the current marketplace. One of our concerns is the relationship between the 7(a) program and the 504 Certified Development Company. 7(a) and 504

in some ways compete with each other. The 504 program, formed

specifically for job creation, provides financing for real estate and

major fixed assets.

We have determined that the 504 program is not reaching its full

potential. For example, over 40 percent of the loans provided under

7(a) are large real estate loans, many of which our 504 program

could accommodate. Steering those larger real estate loans to 504

will assist our goal of reducing the average 7(a) loan size from

roughly $244,000 per loan to a more desirable average of around

$175,000. Our aim is to increase the proportion of smaller loans,

the type of loans often the most difficult for small businesses to receive.

We are looking at ways to encourage lenders to make smaller

loans. Doing so will enable us to better provide loans to small businesses, the businesses that represent 99 percent of all employers

and 52 percent of the private work force. An Inc 500 study has

shown that a majority of the fastest growing companies started

with less than $50,000 in capital. Reducing the average loan size

in the 7(a) program will make the SBA an even greater engine in

5

creating jobs and providing for the Nation’s economic security. We

are confident that our lending partners will work with us to ensure

that more businesses which need 7(a) assistance will be able to receive it.

As with 7(a), we have contracted with OFHEO to create an econometric model for the 504 program subsidy rate. We will implement the results in fiscal year 2005, a year later than implementation for the 7(a) subsidy rate, to give us time to evaluate the results of using this model on the 7(a) program before using it on additional programs.

As we attempt to implement these and other reforms to our finance programs, we will work closely with you in Congress to ensure that these programs retain their crucial role in assisting small

businesses. In keeping with the President’s management goals, we

are restructuring the workforce at the SBA. We are investing in

the workforce now to produce future savings. This agenda includes

increased telecommuting, consolidating servicing centers to reduce

overhead and rent, and improving productivity through the use of

technology.

Managing for results, working with partners to ensure the effectiveness of programs, is another of the President’s management

goals, and I have taken steps to deal with the management issues

raised by the General Accounting Office and the Inspector General.

This budget request includes $1 million for the new Native American Economic Development program, an initiative to establish

partnerships with tribes engaged in economic development activity.

The SBA is dedicated to ensuring that all Native Americans who

seek to create, develop, and expand small businesses have full access to the necessary business development and expansion tools

available through agency programs. This program is a comprehensive initiative designed to meet specific cultural needs and result

in small business creation.

The SBA will be looking at doing away with the duplication of

programs and making our core programs more effective and efficient.

SBA will celebrate its 50th anniversary in July 2003. In its halfcentury in existence, the SBA has assisted hundreds of thousands

of businesses in their formative stages. Many of those companies

have names with which you are all quite familiar; names like Federal Express, Intel, Nike, just to name a few.

We are working hard at the SBA to make sure that the agency

retains its leadership position as it looks forward to another half

century and will continue to provide crucial assistance to the next

Federal Express or the next Intel. As I have taken a close look at

our programs and services through my first year as administrator,

I have seen what the SBA can do and what the SBA needs to do

to keep its programs in tune with the ever-changing economy.

We cannot do this alone. I know that I have spoken with some

of you individually, but I want to take this opportunity while we

are all here together to enroll you in these efforts. We have an opportunity together to look back at successes, to identify weaknesses

where they exist, and to position the SBA whereby it can assist in

creating an environment in which entrepreneurship can flourish.

6

As I mentioned at the beginning of my testimony, the SBA’s fiscal year 2003 request is a good one for small businesses and offers

a beginning point for us to work in tandem with our partners in

Congress to ensure that the SBA remains an effective, relevant

agency that provides 21st century service for the small business

community’s needs. We ask for your support for this budget.

Thank you for the opportunity to appear here today, and I will

be happy to answer any of your questions.

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

Chairman MANZULLO. Thank you, Administrator. I just have one

question. Is it your opinion that based upon moving some loans

from 7(a) to the 504, that there are sufficient resources for the demand for loans for the small businesses in America?

Mr. BARRETO. Thank you, Mr. Chairman. As I mentioned before,

we usually have a program level somewhere in the vicinity of about

$9 billion.

As I mentioned to you, we are looking at a program level this year of about $13.8 billion. We expect a loan volume level this year

of $10.5 billion. That is going to give us a carry-over of about $3.3

billion. However, because the subsidy rate will go up in fiscal year

2003, the authority that will roll over from this year to next will

be about $2 billion. That is going to get us pretty close to $7 billion

in loan volume for fiscal year 2003. We also think that we are

going to have excess authority in the 504 program which will get

us pretty close to that $9 billion level. If historic performance is a

good indicator, we should be pretty close to what we are going to

need.

Chairman MANZULLO. Ms. Vela ́zquez, did you want to start now

with your questioning or should we go vote and come back?

Ms. VELA ́ ZQUEZ. I guess that we should go vote and come back.

Chairman MANZULLO. Okay.

Ms. VELA ́ ZQUEZ. I have a lot of questions.

Chairman MANZULLO. Okay. We will be right back.

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

[Recess.]

Chairman MANZULLO. I will call the Committee back to order.

And, Ms. Vela ́zquez.

Ms. VELA ́ ZQUEZ. Mr. Barreto, I have a lot of questions on the

budget, and I want to really acknowledge the great effort that you

put into this budget and the great work that you have done in addressing the 7(a) fees and the work that we did with OMB. But

today you are sitting here in the hot seat, and I guess that I have

to ask all these questions to you, and I want for you to understand

that there are some issues that are very important to this side of

the aisle, and so let us go.

Last year you spoke before the lending industry and stated that

the subsidy rate will be cut in half. Now we get this budget that

proposes to increase the subsidy rate by 70 percent. What happened?

Mr. BARRETO. I do remember speaking at NAGGL in San Francisco, and that was a great opportunity for me to meet with our

partners, have an opportunity to meet with the board and really

introduce myself to them, and also make a commitment to our

partners. We know that we cannot do it alone. We are only as

7

strong as the partnerships that we have, and I think we have had

a very good partnership with the banking industry.

In that speech I talked about our commitment to working with

OMB on this subsidy rate. It is vital for us that the subsidy rate

be reflective of what is actually happening. You know, in my time

that I have been here, I am into my sixth month, I think we have

made some progress with OMB, but it is a process. It is a process

that we are committed to. I said in the speech that we hoped to

reduce the subsidy rate up to 50 percent. And that was something

for which we were very hopeful. And obviously when OMB is going

through their process of developing the subsidy rate, it is a very

complicated process. A lot of information goes into it. We were able

to get a reduction of 20 percent in that subsidy rate, and all things

being equal, we were anticipating a new subsidy rate of .88—— Ms. VELA ́ ZQUEZ. I am talking to you about this budget.

Mr. BARRETO. Yes. I am saying that subsidy rate we had of .88

with the budget that we submitted early on would have accommodated an authority of about $9.7 billion. With the advent of the legislation that passed at the end of the year, that lowered fees to the

borrower and the lender, with that new development, OMB raised

the subsidy rate to 1.76 percent. That is what is causing our decrease in the total amount of lending authority that we have.

Ms. VELA ́ ZQUEZ. Mr. Barreto, our responsibility here—I am sorry

that I have to interrupt you.

Mr. BARRETO. No. Please.

Ms. VELA ́ ZQUEZ. Our job is to pass legislation, and in light of the

poor record, we determined that participants were grossly overcharged, and with the passage of S. 1196, there existed a great opportunity to fix the subsidy rate, and you failed to do so. So instead

the administration decided to chop the program in half, and then

SBA had weeks and weeks to comply with this policy. And rather

than fixing the subsidy rate, you chose to cut the program in half.

Mr. BARRETO. We didn’t cut the program in half. When we submitted our budget request, it included more money than was approved in the prior year. That level would have accommodated a

budget authority for our 7(a) program of $9.7 billion.

Ms. VELA ́ ZQUEZ. Okay. Mr. Barreto, I would like for you to talk

to us a little bit about how the subsidy rate is calculated, for the

loan programs’ default rates drive the subsidy calculation. I would

like you to clarify a couple of points for the Committee regarding

defaults. It is my understanding, based on the assumption you

have provided to the Committee, that the default rate for 7(a) is

12.87. Is that correct?

Mr. BARRETO. Yes, it is. I believe the default rate has actually

gone down over time. So 12.87——

Ms. VELA ́ ZQUEZ. So for fiscal year 2000, I want to direct you to

an internal SBA memo, or document, where the expected default

rate is listed at 8.1 percent. Using a default estimate of 8.1 with

your 2003 model would in fact reduce the subsidy rate by 150 basis

points to between .25 and .3. That is a huge discrepancy, isn’t it?

That is not—and let me just finish this. Let us not limit it just to

the 7(a) program. For the 504 program, you list a default rate of

8.3, but on page 49 of the agency’s budget, you state defaults amount to about 60 to $70 million annually. This is in clear conVerDate 11-MAY-2000 06:46 May 21, 2002 Jkt 078450 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 E:\HR\OC\A450.XXX pfrm11 PsN: A450
8

trast to the figures provided by the industry that show a default

rate of less than 3 percent.

Mr. BARRETO. Congresswoman Vela ́zquez, first of all, let me say

that I have spent a lot of time with our folks talking about the subsidy rate, analyzing it, seeing what we can do better to work with

OMB so that we can reduce it. There are a lot of factors——

Ms. VELA ́ ZQUEZ. Mr. Barreto, I am sorry. Would you please answer my question? Can you please reconcile these discrepancies for

the Committee, because from where I sit, it looks like the agency

is keeping two sets of books. I want to ask you, who has ownership

over the subsidy rate, SBA or OMB?

Mr. BARRETO. We work together on that, Congresswoman, and as

you very well know, there are lots of factors that go into calculating

the subsidy rate. One of them is the default factor. The other ones

are the fees that are charged on those loans. All of those things are

factored in. And you also realize that we are talking about a lookback period of a number of years, and so all of those things factor

into the subsidy rate.

I will confess, I am not an economist, and it is one of the reasons

why we felt it was so important for us to outsource the study of

our subsidy rate to OFHEO. OFHEO is going to do very sophisticated econometric models that I think will probably enable us for

the first time to get some very, very accurate measurements.

With regards to the figures, obviously the SBA does not keep two

sets of books. We would be more than happy to provide you a complete clarification on all of the numbers that you asked for. If you

would like, I have with me today Dr. Lloyd Blanchard—we are very

fortunate to have Dr. Blanchard with us. As you know, Dr. Blanchard worked for the Office of Management and Budget, is a subsidy rate expert, and is now working for us as our Chief Operating

Officer. We are very glad to have him on board. Not only is he a

very talented manager and executive but somebody that truly understands all of the intricacies on how these subsidy rates are calculated and somebody that I think will be able to help us to make

that progress that I know you and I are both committed to.

As I said, this is a process that will continue. This subsidy rate

issue, I know, has been something that has troubled this Committee for many, many years.

Ms. VELA ́ ZQUEZ. Let me just share with you that last year at the

semiannual meeting of the 7(a) lenders, a former OMB budget examiner of SBA said that OMB first decided upon the 7(a) policy it

wants, then can cut the subsidy number to support the policy, and

this is why we have progress default numbers going into the subsidy model. So that doesn’t look like a partnership to me. They decide, OMB, the policy on 7(a), and then they cut the numbers.

Mr. BARRETO. I can’t speak to what has happened with OMB in

the past. I can speak to the relationship that we have with OMB

now. This administration has been on board for a year, and I will

tell you that when I first got on board, our folks weren’t talking

with OMB on a very consistent basis. That is completely changed.

We are working very closely with OMB, and I think that OMB

shares our interest to make sure that we have a model that is

much more reflective on the actuality of the results.

9

Ms. VELA ́ ZQUEZ. Well, I guess that—look, I know that you are

not going to answer my question. You know, you provided this— these are the numbers provided by your agency. Here you have got

12.7, and on the other one you have 8.1. These are not my numbers. So, Mr. Chairman, I guess that we have here the wrong person. We need to bring OMB, the director of OMB here, and the economic adviser, so that we can get to the bottom of this issue.

Chairman MANZULLO. I agree. I think we have got a spot 2

weeks from now, and let us bring him in. What is the date that— Doug? Two or three weeks from now was—what date is it? March

27th.

Ms. VELA ́ ZQUEZ. We will have the commissioner down here and

Mr. Lindsey.

Chairman MANZULLO. Oh, bring them all in. Let us get this

thing cleared up once and for all. If someone is cooking the books,

they can fry some cake here.

Ms. VELA ́ ZQUEZ. I haven’t finished, Mr. Chairman. Okay. Great.

Mr. Barreto, now I want to talk to you about the priority issue

you proposed in your proposed regulations that you issued on January 28th that established parity between the 8(a) program and the

HUBZone program. You and I had a meeting on this, and I made

myself very clear to you, but to be on record, it is my opinion that

you are putting something in place that is contrary to the agreement made between the House and the Senate in 1997. I am not

working on this issue today. I have been working on this issue

since I first came to this Committee, and it was because I raised

the issue with Aida Alvarez, the previous administrator. We got

into an agreement with the Senate in which it was clear that it

was not the intent of Congress to bring parity into this issue and

to put the HUBZone program and the 8(a) program on equal footing.

So in fact what you are doing with this regulation by—you are

doing something by regulation that Congress wouldn’t do in 2000.

This proposal was rejected in a bipartisan fashion, and you are also

doing something here that the courts wouldn’t do, at a time when

doors to the 8(a) program decline by half a billion dollars. And I

hope that your legal counsel is here. Is he here?

Mr. BARRETO. No, ma’am, he is not here.

Ms. VELA ́ ZQUEZ. Well, he should read the record. From fiscal year

1999 to fiscal year 2000, the numbers of 8(a) have declined by 34

percent over the past 3 years. You really couldn’t have picked a

worse time to impose something that will further harm the program, probably past the point of repair.

In your testimony, you state that many 8(a) companies are located in areas designated as a HUBZone. Well, the figures I got

from SBA tell me that less than 25 percent of 8(a) firms are eligible

as HUBZone companies, and only 17 percent of 8(a) firms are certified in the HUBZone program, far from many.

You also state in your testimony that your goal is to treat the

8(a) program and the HUBZone programs equally and not as competitors.

What you have done with your proposed regulations is the exact

opposite, creating increased competition. Given this reality, why

are you moving forward with this?

10

Mr. BARRETO. Thank you, Congresswoman Vela ́zquez, and I do

appreciate the opportunity that we had to talk about this issue last

week. First of all, I want you to know, and I know that you do

know this, that I am committed to creating contract and procurement opportunities for small business every possible way that we

can. Our intention by coming out with this clarification—and that

is the reason that we did it. There was a lot of confusion. Does

HUBZone have priority over 8(a)? Does 8(a) have a priority over

HUBZone? Which one is the program? And everything that our

general counsel has told us in reviewing the regs and the law is

that the actual clarity would be to state for the record that neither

one of those programs has a priority over each other.

Ms. VELA ́ ZQUEZ. Sir—— Chairman MANZULLO. I am going to have to interrupt at this

time. We are going to be met with the tyranny of time, and we

have a witness that is here from Oklahoma. We are going to have

one more vote, then we are going rapid fire on 20-minute votes in

a row, and before we lose all of our time here, I am going to have

to reclaim the time.

Ms. VELA ́ ZQUEZ. Mr. Chairman, this is a very important

issue—— Chairman MANZULLO. No. I understand it is important, but here

is what I am going to do. On February 27th, we are going to have

the OMB here and the SBA, whoever is in charge of size standards,

whoever you want. You let me know from OMB, and we will have

them here to clear this up.

Ms. VELA ́ ZQUEZ. This is an issue—— Mr. WILKINSON. Mr. Chairman, there is a Senate hearing also in

the morning. On the morning of the—— Chairman MANZULLO. Well, that is fine. We will do it in the

afternoon. We will be here all day. Dr. Gram has said he would

come.

Ms. VELA ́ ZQUEZ. Mr. Chairman, I—— Chairman MANZULLO. I have got to be fair to these other witnesses, Ms. Vela ́zquez. I know this is extremely important to you.

Mr. Davis, do you have any questions? We have no questions

down here. If you wanted to yield your time to Ms. Vela ́zquez, or

whatever you want to do or—wait a second. I am sorry. Mr. Bartlett had one question.

Mr. BARTLETT. Yes. Thank you very much. As you know, we are

increasingly losing our noninformation technology base to overseas.

This is becoming a national security issue. We cannot be dependent

on technologies from overseas to meet our national security interests. Some of these small business contractors—and many of them

are small business. Some of these contractors cannot remain in

business to make sure that we have an industrial base necessary

to meet our national security needs without some help. They need

help in terms of grants.

Now, this is a national security issue. How do we get you all

working with the Defense Department so that we can keep some

of these companies—one, for instance, is a small business that does

Milspec aluminum casting, almost unique in this country. A lot of

people do aluminum casting. It is not Milspec and it will not meet

the requirements of the military. He is going to be out of business

11

unless we can find a grant for him somewhere, and then the military is going to have to go overseas somewhere for Milspec aluminum castings.

We shouldn’t have to do this. It is the wrong thing for our country to be increasingly dependent on overseas firms to produce some

of these components that we use in our military systems. How can

you all work with the Defense Department to identify areas in

which you can make monies available in the form of grants rather

than contracts?

Mr. BARRETO. Thank you, Mr. Congressman. We are working

with the Defense Department, and we are aware of this issue. And

I couldn’t agree with you more. I think that there is a national security issue with regards to small business being able to compete

and have a level playing field.

One of the things we have done is have the Defense Department

over to our shop at least two or three times already. We are having

ongoing dialogue with them, and we are talking to them about a

whole host of issues. Obviously we already are doing some technology grants through our SBIR program, through our STTR program which is very important, but we need to be looking at everything we are doing with regards to contracting.

We have had some good feedback. What we are saying to the Defense Department that small business has to be part of this solution. They are the engine that drives our economy, and they need

to be part of this. And they agree.

One of the things that we are planning on doing, coming up later

this year, is we are going to have a procurement expo, if you will,

an opportunity here in Washington, D.C., which we would love for

you to participate in, we invite the whole Committee to participate

in, where we bring together buyers from the Defense Department

and match them up with small businesses on a whole variety of

issues, not just procurement. But we also want to talk about venture capital, access to capital, and technical assistance.

We think those kinds of efforts, bringing people together, facilitating relationships, will create the right kind of synergy so that

we can get more results. We are moving in that direction. We are

committed to it and any input or ideas that you would like to provide, we would be happy to receive them.

Mr. BARTLETT. If it is okay, I would like to introduce you to this

specific individual problem as an example of the kind of problem

that we face pretty much across the spectrum, of trying to keep

these real specialty small businesses in place so they can meet our

national security needs. We will interface with you directly if that

is okay.

Mr. BARRETO. Absolutely. I would be happy to receive that, Congressman.

Mr. BARTLETT. Thank you.

Mr. BARRETO. Thank you.

Mr. BARTLETT. I would like to yield the balance of my time to

Ms. Vela ́zquez.

Chairman MANZULLO. Ms. Vela ́zquez, about 3 minutes.

Ms. VELA ́ ZQUEZ. Thank you, sir. Well, I want to state for the

record that this is a very important issue for our members, and I

12

would like to request to hold a hearing on the HUBZone and 8(a)

programs.

Chairman MANZULLO. We will take a look at that. I can’t promise

it. I just gave a hearing on February 27th at which OMB will have

a witness. That is pretty good.

Ms. VELA ́ ZQUEZ. Well, you didn’t give it to me, sir. You are giving

it to small businesses who are paying, who have been overcharged,

not to me. What we need to do——

Chairman MANZULLO. Ms. Vela ́zquez, it is at your request.

Ms. VELA ́ ZQUEZ. Okay. Mr. Barreto, let us talk about the 8(a)

program again and the HUBZone programs. You just stated that

there was some confusion in terms of clarity in the language. So,

you know, I am not a lawyer, but when it comes to legal opinions

in this town particularly, we could make a joke about how many

and different opinions there are. So bring to me and clarify for this

Committee, how did you arrive at the conclusion that it was the

intent of the United States Congress to bring parity for the 8(a)

and the HUBZone programs?

Mr. BARRETO. Our general counsel provided a chronology of all

of the legislation, when it was enacted, and what the spirit of the

legislation was attempting to do. And one of the things that he

communicated to us was that we were obligated to provide a clarification on this issue. And, again, I want to state for the record,

at no time do we want to undermine the 8(a) program. The 8(a)

program is a very important program.

We know that the 8(a) program has been sliding, as you have

said, Congresswoman. We are very, very aware and focused on

that. We don’t think that it has been sliding because of HUBZone.

We think that it has been sliding because of government credit

card purchases, multiple award contracts, government-wide acquisition contracts, Federal supply schedule contracts, and, you know

as well as I do, contract bundling. All of those issues have affected

the 8(a) program.

We are tackling that issue on two fronts. First we are looking at

what we can do on each one of those so that we can stop the bleeding, if you will. The second thing that we know that we have to

do because the 8(a) program has been a great program——

Ms. VELA ́ ZQUEZ. Sir, but I am asking you, how did you arrive, or

your legal counsel, to the conclusion based on this statute? Tell me

where in the statute are you obligated to issue regulations that will

bring parity to——

Mr. BARRETO. I would be more than happy, Congresswoman, to

provide you a copy of that chronology and the legal brief that our

general counsel——

Ms. VELA ́ ZQUEZ. No. I can read your legal brief. Tell me in the

statute where do we say—where do we say that it calls for this regulation so that we bring parity into this?

Mr. BARRETO. One of the concerns—in this legal opinion that was

written, was that there was a possibility that HUBZones could give

priority over any other contracting program; i.e., 8(a). And so one

of the things the proposed rule does is let us clarify that. You

know, HUBZones does not have priority over the 8(a) program.

These programs are a parity——

13

Ms. VELA ́ ZQUEZ. Okay. Let me read for you what it says, what

the statute says. It says that notwithstanding if you are going to

apply—based upon the fact that paragraph 31(b)(2)(8) states, notwithstanding any provision of law, the contracting officer may—it

doesn’t say ‘‘shall’’—may award sole-source contracts to qualified

HUBZones. Can you explain that to me?

Mr. BARRETO. No, ma’am. I don’t have that in front of me. And,

again, when we are interfacing with our Federal procurement representatives, at no time do we say this program should get most

of the contracts. In fact, oftentimes what will happen is that the

contracting officer will make a determination based on what goals

are not being met inside of the agency. We at no time want to undermine the 8(a) program or give any signal that 8(a) contractors

need not apply—— Ms. VELA ́ ZQUEZ. Mr. Barreto—— Chairman MANZULLO. I am going to give a signal here. We have

to conclude this hearing within 40 minutes.

Ms. VELA ́ ZQUEZ. I am going to ask for a—— Chairman MANZULLO. No. I understand that, but I am going to

have to deny it at this point. I have been very generous on time.

Ms. VELA ́ ZQUEZ. I am going to ask for an extension on the comment period from 30 days to 90.

Chairman MANZULLO. Oh.

Mr. BARRETO. Ms. Vela ́zquez, I will be glad to work with you. I

will go back to our legal counsel and see where we are in this

whole process, and whatever we can do to help you—you know, I

understand the position that we took. We will be more than glad

to do that.

Chairman MANZULLO. Thank you.

Ms. VELA ́ ZQUEZ. It is your decision, Mr. Chairman.

Chairman MANZULLO. No. I am the Chairman. He is the administrator.

Ms. VELA ́ ZQUEZ. No. Mr. Administrator.

Chairman MANZULLO. He might as well be the Chairman. He has

got the power here.

Mr. Davis, do you have a couple of questions?

Mr. DAVIS. Yes, I do. Thank you very much, Mr. Chairman,

and——

Chairman MANZULLO. Can you push the mike closer to you?

Mr. DAVIS. Well, I will tell you, it generally works anywhere I

put it.

Notwithstanding your intent, all of the analysts that I have spoken with, all of the experts, all of the business groups, have pretty

much concluded that the reg that you are proposing will in fact undermine or do damage to the 8(a) program. That is their conclusion. I mean, for the last several days that is all that I have been

hearing. I mean, that is what the telephone calls that I have been

getting have been suggesting. And I know that you have indicated

to the Ranking Member that you are willing to work with that and

to look at it and try and see whether or not it can be rethought,

and I appreciate that.

Then I will go on to my next question. In all of the years that

I have been working with small businesses, especially those in lowincome and distressed communities, one of the biggest problems

14

that are always raised is the issue of access to capital. I am saying

people are wringing their hands, weeping and wailing, moaning

and groaning, gnashing of the teeth, access to capital, I mean,

that—and yet I am having difficulty understanding how we could

propose not to fund the venture capital new markets proposals and

programs that some of us have been working on now for the last

several years and felt so good when finally on the last day of the

session, the last session of Congress, they were passed, and we

were all gleeful and thought that something had been accomplished. What is the difference now as opposed to then?

Mr. BARRETO. Thank you, Congressman, for the question. I

couldn’t agree with you more. I think venture capital is very, very

important. Everything that we know about venture capital shows

that when a company receives it, their chance for success over the

future multiplies exponentially. In period of 3 years, they have 100

employees and they are well on their way.

The problem and I think that you are alluding to this—is that

venture capital hasn’t gotten to every community. I am originally

from California, and California had the benefit of receiving a lot of

venture capital, especially in Silicon Valley and other places in

California, but not every community got it. I think it is important

that we are looking at our programs, especially as it relates to venture capital.

New Markets Venture Capital was a pilot program that we implemented. We are reviewing that program right now. We are making sure that it works and that it does everything that it is supposed to do to get venture capital into those communities—not only

because it is the right thing to do, I think it is the right thing to

do—but because it is the smart thing to do.

We are also working with our general venture capital community. I saw Lee Mercer a little while ago. I had an opportunity to

address his members at their national convention, and I talked

about this issue.

Mr. DAVIS. I can agree with that, but how do you reclaim much

of distressed America if there is no special focus put on those areas

and those communities which have problems that are unique based

upon all of the things that have been happening?

For example, in my congressional district, we have lost over

120,000 manufacturing jobs in the last 30 years. One hundred and

twenty thousand. Something has to help stimulate activity in an

area like that, and so I have real difficulty.

And I will just end up with a program that doesn’t cost anything

hardly, something like BusinessLINC. I mean, you can take a little

bit of money—we have got a big announcement coming up this

month where RR Donnelly & Sons, one of the biggest corporations

around, has linked up with a small printing company, minority

company, and as a result they are going to be able to expand their

operation threefold. And so Donnelly is feeling real good about this,

but they did it on their own. I am saying they did it without any

assistance from SBA. Think of what could happen if there was

some assistance, just to link these kind of opportunities together.

It would cost minimum money, practically nothing.

Chairman MANZULLO. We are at the end of your time there. Did

you want to respond to that?

15

Mr. BARRETO. I would be happy to.

Chairman MANZULLO. Do it very shortly.

Mr. BARRETO. We still have $29 million in appropriations for fiscal year 2001 for the new markets. Obviously we will work very

closely with our new markets department to make sure that we are

doing everything that we can to make that program successful.

With regards to BusinessLINC, I agree with you. These kinds of

mentoring opportunities are invaluable, and we are committed to

that. We have a lot of programs in place that provide mentoring

type of opportunities. The SCORE program is a great example of

that, 12,000 SCORE representatives mentor small businesses every

single day, and we will continue focusing on those kinds of opportunities. I thank you for the question, Congressman.

Chairman MANZULLO. All right. If you could go ahead, and we

have got to move very quickly. The second panel. Otherwise we

won’t be able to take their testimony.

Mr. CHABOT. I know you are trying to move this along, so I will

be very brief and just ask one question for the administrator. Mr.

Barreto, in the status report on selected programs in the budget,

the assessment for performance of small business development centers, the SBDCs, is, quote, unknown. Could you elaborate on how

the performance of an SBDC is evaluated and determined?

Mr. BARRETO. Thank you very much, Congressman, and I will try

to make this brief. We have a great partnership with SBDCs.

There are over 1,000 in the country, and last year we served about

660,000 small businesses. It is the place that we touch the most

small businesses. We have a great relationship with SBDC, with

Don Wilson and his team, and we are going to continue working

with them. We ask for information on a periodic basis. At the same

time, we understand that we need to be very careful on how we ask

the information so it doesn’t violate anybody’s privacy rights.

It is our attempt to make sure that we are getting the necessary

intel, if you will, so that we can continue making the program better and serve even more small businesses, make sure that communities all across the country and every community are receiving

these very valuable services. I would be glad to provide you with

a list of all the information that we request and the reports that

we generate based on that information.

[The information may be found in appendix.]

Mr. CHABOT. I would appreciate that. Thank you. And I will yield

back the balance of my time, Mr. Chairman.

Chairman MANZULLO. Mrs. Tubbs Jones. I would like to move to

the next testimony here.

Mrs. JONES. I only have one question.

Chairman MANZULLO. That is fine, if you could make it quickly.

Mrs. JONES. I absolutely will, Mr. Chairman. And today seems

to be the day for Subcommittee hearings on budgets, and unfortunately, that is what happens.

Good afternoon, Mr. Secretary. How are you? My area of focus

is specifically on a request that I made to you previously, Mr. Secretary, with regard to credit unions having the ability to administer the 7(a) loan program. And the reason I proposed that is because in many communities across this country, there are no banking institutions who are willing to administer such small loans. I

16

made an inquiry at the last hearing we had. I sent a written letter

asking you to do it administratively, and I haven’t heard back from

you. Can you tell me why?

Mr. BARRETO. Yes. It is great to see you again, Congresswoman,

and thank you very much for the question. And I know that this

is a very important issue, something that is very near and dear.

We had a great meeting with the Federal credit unions about a

month ago, and we will provide you with a status of that meeting.

We had a very productive dialogue. I thought it was a very important conversation.

We have received requests from other credit union organizations

as well, and we are in the process of setting up those meetings.

One of the things that we are in this process of doing is a due diligence, making sure that we understand all the issues and what

ability do we have to change our processes, our regulations.

The last thing I want to say on that, Congresswoman, is that we

finally have our Associate Deputy Administrator on board. He is

here today. Ron. And Ron now is taking—— Mrs. JONES. Raise your hand, Ron, so we know what you look

like.

Mr. BARRETO. Ron is somebody that we are very happy to have,

a banker’s banker, if you will, somebody with a long history in the

financial services market. He is working on this issue now. We will

be following up with those meetings with the credit unions and will

provide you with a status report in the very near future.

Mrs. JONES. Ron, that lady in the gold suit is my legislative director. I want to have her make an appointment to come see you.

Thank you, Mr. Chairman. That is my only issue.

Chairman MANZULLO. Thank you very much, Mr. Barreto, for

your testimony. If you can join us on the 27th.

Mr. BARRETO. I would be happy to.

Chairman MANZULLO. That would be fine, but I won’t have you

join us on March 6th.

Mr. BARRETO. Thank you very much.

Chairman MANZULLO. Mr. Barreto and his wife are expecting

their third child on the 6th.

Mr. BARRETO. Thank you, Mr. Chairman. I appreciate it.

Chairman MANZULLO. Appreciate your testimony.

Mr. BARRETO. Thank you, Congresswoman Vela ́zquez.

Chairman MANZULLO. And you are excused. Thanks again.

I am going to go first with Mr. Wilkinson. I am going to limit

the testimony to 4 minutes. When you see the red light I am going

to gavel it and I am going to insist on it. You are going to stop

right in the middle of a sentence.

Chairman MANZULLO. You are up, Mr. Wilkinson.

STATEMENT OF ANTHONY R. WILKINSON, PRESIDENT AND

CHIEF EXECUTIVE OFFICER, THE NATIONAL ASSOCIATION

OF GOVERNMENT GUARANTEED LENDERS

Mr. WILKINSON. Mr. Chairman, Ms. Vela ́zquez, and the other

members of the Committee, thank you for inviting me here today

on the fiscal year 2003 budget request. I testified before this Committee in May 1997 and reported that the Office of Management

and Budget was not calculating a fair, reasonable subsidy rate.

17

Since then, NAGGL has testified every single year that OMB continues to calculate a subsidy rate far in excess of the government’s

cost to the program, and OMB has done it again in this year’s

budget.

In our written testimony for today, the chart on page 1 shows

that the Office of Management and Budget has been calculating a

subsidy rate that has led to all appropriation dollars provided since

1995, plus another $253 million, being returned to the Treasury,

and we believe that the amount that they recognize as a reestimate

is a low number and really should be higher. We anticipate that

number to grow somewhere between $1.8 billion and $2 billion.

Mr. Chairman, this is simply not fair. It is not reasonable. It is

a tax on small business and the lenders who provide 7(a) loans.

Mr. Chairman, we want to thank you for your efforts last year

to get report language in the fiscal year 2002 Treasury, Postal appropriation bill. We have appreciated the Senate requesting a GAO

review of the subsidy calculation last year and for holding a roundtable hearing last September. We appreciate the tough comments

from both sides of the aisle directing OMB to get their act together

and calculate a fair and reasonable subsidy rate. But, Mr. Chairman, they have ignored it all. Not only are users of the 7(a) program being taxed, OMB has now ignored the wishes and directives

of Congress. It is simply time for a solution.

We must find a way to make the Office of Management and

Budget accountable for the decisions that they make. Maybe we accomplish this in the fiscal year 2003 Treasury, Postal appropriation

bill. Perhaps it is the hearing we have coming up on the 27th. Perhaps it is a review of the Federal Credit Reform Act, because in

our opinion OMB has made a mockery of that act. So maybe it is

time for a change in the Federal Credit Reform Act. But clearly

something must be done to hold OMB’s feet to the fire, make them

accountable for the decisions they are making, and quit taxing

users of the 7(a) program. NAGGL stands ready to work with you,

your staff, and all the members of the Committee to come up with

a solution.

Regarding the particulars of the fiscal 2003 budget request, there

is really nothing in it for the 7(a) program even worthy of a comment. The budget is an attempt to focus the discussion away from

the subsidy rate calculation. It blames Congress for the low 2003

budget levels. It tries to pit one SBA program against another, and

lastly it does not address the long-term credit needs of small businesses.

For fiscal year 2003, NAGGL requests congressional support for

a $12 billion 7(a) program. SBA anticipates enough carry-over from

this year to fund about $2 billion worth of that demand next year.

So we need to come up with sufficient appropriations to fund an

additional $10 billion in lending for fiscal 2003 at a reported subsidy rate of 1.76 percent. That means we need to come up with

$176 million in appropriations, not the $85 million listed in their

budget request.

Now, we know that the subsidy rate is once again overestimated

because of the high default estimate in the model and that a lot

of these appropriation dollars will ultimately be returned to the

Treasury. But the SBA through its loan programs is the largest

18

single provider of long-term credit for small businesses in this

country. The SBA loan programs are needed by small business and

deserve the support of Congress and the administration.

Mr. Chairman, we need your help and the help of all the members of this Committee in getting a fair and reasonable subsidy

rate calculation, and we need your help in getting sufficient upfront appropriations to meet the credit needs of small business next

year. We stand ready to work with the Committee to achieve these

goals. Thank you for having me here today, and I will be happy to

answer any question.

Chairman MANZULLO. Thank you.

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

Chairman MANZULLO. Mr. Black.

STATEMENT OF PHIL BLACK, DIRECTOR OF COMMUNITY ECONOMIC DEVELOPMENT PEOPLE INCORPORATED OF SOUTHWEST

Mr. BLACK. Thank you, Mr. Chair and Congresswoman

Vela ́zquez. I appreciate the opportunity to present to you guys

today.

I want to talk about programs that are focused on what I would

describe as our pre-rich entrepreneurs, or Low Income Individuals

program that has benefited those that have entrepreneurial spark,

that need access to capital, but in fact they are taken for granted

in our mainstream marketplace.

I want to talk about the SBA Microloan program. I want to talk

about the PRIME program, and I want to talk about the CDFI program, as well as the program for Women’s Business Centers.

There is a concern—and around you have written testimony that

details this. We have taken cuts in 2002 in all of these programs,

and there is some concern that there is some duplication in funding

some of these programs. And I thought I would use my few minutes that I have to try to dispel some of those myths.

The CDFI program is really designed to help build institutional

capacity in many of our intermediaries, and it is not necessarily

duplicating the work of, say, our PRIME program. Our PRIME program—well, let me talk about—I do have some success stories in

here, and I know I don’t have any time to talk about those in detail. But the SBA Microloan program, we are an intermediary, and

what that means is that we borrow the money from the U.S. Small

Business Administration. We pass along no risk to the Small Business Administration. We take care of the risk on a local level, and

we take care of any losses. So the government hasn’t lost any

money. We receive a technical assistance grant with that program

to provide vital technical assistance after we make a loan to that

individual who does not have a choice to go to a bank in the mainstream marketplace, and then we hold their hand. We provide business technical assistance to them after the loan is made to mitigate

the risk of default on the loan, but more importantly to make sure

that entrepreneur is successful.

Secondly, we are a PRIME beneficiary this year, the first year

of the program. We understand the program has been cut for next

year, and what that means under the regulations of the SBA is

that if a customer who has that entrepreneurial spark but may

19

have some other barriers, who wants to make a go of having a

small business for themselves, who may be a low-income individual

and may not have a pristine credit record, is that we won’t have

any funding to provide technical assistance to help them overcome

the barriers, and most likely they will not receive a loan, so they

will be out of the mainstream marketplace without PRIME.

So there is a misunderstanding about PRIME being duplicative

with the Microloan program, and I would like to see if we could get

the facts correct today.

And the CDFI doesn’t provide any money for—it focuses on institutional capacity building, not on working with our pre-rich individuals and families that are looking to have their own small business. So, please, I want to emphasize if you will take a look at this.

Help us restore funding so we can work with this marketplace that

without SBA support, without the support from this Committee,

will in fact not receive assistance. Thank you very much.

Chairman MANZULLO. Thank you very much.

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

Chairman MANZULLO. Mr. Mercer.

STATEMENT OF LEE W. MERCER, PRESIDENT, NATIONAL

ASSOCIATION OF SMALL BUSINESS INVESTMENT COMPANIES

Mr. MERCER. Thank you, Mr. Chairman, and Ms. Vela ́zquez and

members of the Committee. I am pleased to be here on behalf of

the SBIC industry, 434 firms managing 20 billion in venture capital assets. And we are pleased to be able to say we support the

administration’s budget which will provide $4 billion in new par- ticipating security leverage and $3 billion in new debenture leverage at no appropriations cost to the government and at no increase

in fees to SBICs. So all in all, we believe the budget is a good one.

At a time when the economy needs all the new venture capital

it can get, the budget will be welcome by small businesses. All venture capital investments fell by 63 percent in 2001, from 199.6 billion to 36.6 billion. SBIC investments in contrast fell only by 3 percent. So the program is proving to be the most stable platform in

the venture capital area, and truly showing its counter cyclical nature.

That role is particularly important for younger companies seeking capital in the 250,000 to $5 million range, a range that statistics show is not met by non-SBIC venture capital firms. A full 58

percent of all fiscal year 2001 SBIC investments were in companies

less than 3 years old. The average investment was 1 million, and

the median investment sizes were much less.

Of particular interest is the fact that a full 22 percent of the dollars invested, almost $1 billion, was invested in small businesses

located in low- and moderate-income areas as defined by the government. It shows that good businesses do exist in these areas and

that the SBICs are more than willing to support them when they

are brought to their attention.

The administration’s budget will continue the growth of the SBIC

program during a difficult economic cycle. Fifty-one funds were licensed in fiscal year 2001, bringing with them a new $1.1 billion

in private capital. We hope to see a similar number of funds licensed this year with a similar amount of new private capital.

20

Regarding fund-raising, as we did last year, we asked you to help

us change the Internal Revenue Code so that we could eliminate

debenture indebtedness from the class of indebtedness characterized as acquisition indebtedness, which creates unrelated business

taxable income for tax exempt investors such as pension funds, university endowments, and charitable organizations.

These tax exempt investors provide the majority of capital that

goes into venture capital funds, and if we can eliminate that barrier for debenture funds, we believe that we can have that program

grow at a rate similar to that of the participating security program.

Finally, we applaud the administration for applying more personnel to the investment division. I testified last year that I

thought this was a very important area. And the administration

has responded. And we also hopefully look forward to a new head

of the investment division. And I spoke with Administrator Barreto

today, and he said they are proceeding as fast as they can. Thank

you very much.

Chairman MANZULLO. Thank you very much.

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

Chairman MANZULLO. Mr. Crawford.

STATEMENT OF CHRISTOPHER L. CRAWFORD, EXECUTIVE DIRECTOR, NATIONAL ASSOCIATION OF DEVELOPMENT COMPANIES

Mr. CRAWFORD. Thank you, Mr. Chairman. I would like to thank

you, Chairman Manzullo and Ranking Member Vela ́zquez, as well

as the Committee for the support of the 504 program. With your

help, the CDC loan program has gone to over $5 billion in 504

loans annually, of which 2.5 billion this year will be guaranteed by

the SBA. The remainder will be funded through private first mortgages. SBA has proposed an authorization of $4.5 billion for us this

year, and we support that level. However, the annual fee charged

each small business increases from 0.410% to 0.425%. Mr. Chairman, I am absolutely dumbfounded by this proposal to get even

more cash out of our borrowers.

The program is supposed to pay for itself through fees. It does

that and far more. Since we went to zero subsidy in 1997, we have

paid the Treasury $400 million in excess fees and interest. SBA

forecasts that we will pay almost $90 million in 2003. Even paying

fees over and above inflated cost estimates, the administration demands still more from small businesses by increasing fees. This is

truly an unwarranted tax.

These problems come from two sources. First, the estimate of

loan defaults is 8.3 percent. Attached to my statement is a chart

that shows the loan defaults for the last 12 years are nowhere near

8 percent. Amazingly, as Congresswoman Vela ́zquez pointed out,

the President’s own budget supports our estimates, not the SBA’s

forecast. Page 49 of the Budget Request and Performance Plan admits that the true defaults for 504 are $60 to $70 million annually.

This is a very accurate statement and is supported by the Bank of

New York, our trustee. On an annual volume of about $2 billion,

the real defaults are averaging 4.5 percent or even less.

Second, we see problems with their guesstimates of loan recoveries. They forecast collection of 58 cents of every dollar on deVerDate 11-MAY-2000 06:46 May 21, 2002 Jkt 078450 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 E:\HR\OC\A450.XXX pfrm11 PsN: A450
21

faulted loans. However, they will spend 38 cents to make that recovery, leaving a net recovery of only 20 cents on every dollar.

Our CDC liquidation program, which is a pilot authorized by this

Committee, averaged about 55 percent recovery. At the same time,

SBA indicates that their own recoveries through the asset sales are

at least 50 percent. Where did the money go? It didn’t go into recovery expenses. CDCs are shouldering their own costs for the

pilot. It shouldn’t have gone into the asset sales. The whole purpose of going to the asset sales is to eliminate both servicing and

recovery expenses for the agency, as many of you will recall.

Our subsidy problems have led to inflated fees and have certainly made 504 what I would characterize as nothing less than a

Treasury cash cow. Borrowers are paying hundreds of millions of

dollars in excess fees and are now told they are going to pay even

more. We strongly object to this fee, and we need your help.

I ask this Committee to get to the bottom of the administration’s

questionable assumptions. Without your intervention, I fear that

we will continue to pay these excessive fees, thank you for allowing

me to make these comments.

Chairman MANZULLO. Thank you.

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

Chairman MANZULLO. Mr. Wilson.

STATEMENT OF MR. WILSON, PRESIDENT & CEO,

ASSOCIATION OF SMALL BUSINESS DEVELOPMENT CENTERS

Mr. WILSON. Thank you, Mr. Chairman, Ranking Member

Vela ́zquez, and members of the Committee. We are appreciative of

the opportunity to come here today and comment—— Chairman MANZULLO. Could you move the mike to you, Mr. Wilson? Thank you.

Mr. WILSON [continuing]. To you on the SBA budget. I am

pleased to report to the Committee that the state of the SBDC program is relatively strong. In 2001 we saw about a 4.6 percent increase in the number of clients that we serviced, and we are up to

610,000 clients who are receiving an hour of counseling or 2 hours

of training. That does not count probably another 700,000 who are

receiving incidental help of less than an hour. Of those clients, 43

percent are women, 24 percent are minorities, 7 percent are selfdeclared as veterans.

These are 2001 numbers, Mr. Chairman. The concerning thing is

that as the economy contracted, beginning this year, the start of

this fiscal year, 24 States received severe reductions in funding,

and the ability to supply services to a small business community

that is in greater need than ever before.

The U.S. Conference of Mayors released a survey within the last

10 days indicating that 76 percent of small businesses do not anticipate hiring new employees this year. If those numbers are anywhere near accurate, we are not going to see the recovery that

some people are hoping for. Now, if that recovery doesn’t come and

if revenues continue to fall off the table, all of the programs that

this government wants to fund are not going to have the resources.

And we are pleased to see a 4 percent increase in the SBA program. And in relation to what the administration recommended for

the SBDC program last year, the $88 million is welcome. But let

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me make it perfectly clear: $88 million is a phrase that is used as

level funding. The 24 States, your State, Mr. Chairman, your State,

Ms. Vela ́zquez, that received hundreds of thousands in cuts, they

don’t view that $88 million as level funding.

Now, for 2003, if we are going to get this economy growing again,

it is not going to be big business who is going to lead this. Kaiser

went bankrupt. Kmart went bankrupt. The large firms, Fortune

500 firms in the last decade had a net decline in jobs. It is small

business who will lead us into a recovery. It will be small business

who will produce the revenues this government desperately needs.

And yet if you look at the SBA 4 percent increase, I have had several of my friends in the small business trade association community point out that salaries and expenses at SBA received a 20 percent increase. So overall, the program growth must be down. The

overall growth is 4 percent and salaries and expenses is up 20%,

then program growth has to be less than even.

One of the things that I have heard today, I have heard the administrator say that the agency and OMB aren’t talking. I hear

Ms. Vela ́zquez and others say that OMB are producing bogus numbers. Look in the budget. Look at the statement that is made about

the SBDC program. They indicate that they do not know whether

or not this program is effective. If they have such serious doubts,

why did they propose a $12 million increase from what they proposed last year. And why do they say we refuse to give data?

OMB has never asked this program for any data, and I am unaware of any data that SBA has ever asked for that we do not give

them. As the program managers of this program, we give SBA

more data, more complete data, more detailed data, more economic

impact data, than any other program. The reason why OMB has

its nose out of joint, and perhaps the middle managers at SBA also,

is because we have resisted giving them the names, addresses, and

phone numbers of our clients. And this Committee seems to agree

with us.

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

Chairman MANZULLO. Okay. Your time has expired. It is obvious

that on February 27th, it is OMB day, perhaps long overdue. And

is anybody here from OMB? They never show. But I am very distressed over the complete lack of cooperation between OMB and

Members of Congress. Whoever did this budget never asked Members of Congress about whether or not any of these programs is

worthy.

Measuring the performance of these programs has been difficult

because many factors beyond SBA assistance affects small business

sustainability and growth. Has anybody in this room asked anything about the viability of any SBA program by whoever prepared

the budget? The people that prepared the budget, maybe we should

have them here also on the 27th, but I am just getting fed up with

this disconnect that is going on.

Dr. Blanchard, will you be here on the 27th?

Mr. BLANCHARD. Are you asking me to, sir?

Chairman MANZULLO. Yes, I appreciate it. You were at OMB and

you spent a lot of time on this. But February 27th is going to be

a day of reckoning. I am tired of fighting with OMB. They are not

elected officials. They are accountable to no one. People get all over

23

us because we have to face reelection every 2 years. We ask questions. They don’t get answered. I am just tired of waiting on OMB.

So they can come here and testify on the 27th.

Any of you groups here that have any questions that you want

asked of OMB, get them into our staffs, and we will make sure that

we get those questions answered and answered sufficiently, if we

have to have a hearing that goes on all day.

Ms. Vela ́zquez.

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman, and I would like to

address my question to both Mr. Wilkinson and Mr. Crawford.

What do you think we should do to fix the subsidy rate?

Mr. WILKINSON. Thank you, Ms. Vela ́zquez. We have spent a lot

of time and effort in reviewing the subsidy calculation. Our Association has said on many different occasions that we are not going

to get hung up with what model they choose to use, but at the end

of the day, the number that they calculated should have been reasonable. The GAO report last year showed 7 or 8 different ways

that the subsidy rate could have been calculated.

Ms. VELA ́ ZQUEZ. Six.

Mr. WILKINSON. The one that had the highest subsidy rate was

the one that OMB uses. The other ones—in particular the one recommended by SBA has been rejected, so this is clearly an OMB

problem. But we are not going to get hung up on one method or

another.

I would point you back to the 1998 budget when the administrator came in at that point in time. There was money in the budget for econometric study, where they are playing that stall game

again this year. Every testimony since 1997 has said we are going

to work on the problem, we are going to work on the problem and

it is time to fix it.

We are not opposed to the current model. The model is fine. It

is the assumptions that drive the result, or as we believe, the desired result drives the assumptions that have to go into the model

so they end up with the number they want. But we are happy to

work with any kind of model as long as it is fair and reasonable,

come the end of the day.

Ms. VELA ́ ZQUEZ. Thank you, Mr. Wilkinson. Mr. Crawford.

Mr. CRAWFORD. As my written testimony indicates, the model is

just a bunch of formulas. To me it is irrelevant, although it scares

me to death to think that they are going to go to a econometric

model. And now they are going to have 5 more years, as I pointed

out in my testimony, to reset the game clock to try to get that

model right.

I don’t think we have a model issue here, I think we have a data

interpretation issue here. All you have to do is look at history. All

you have to do is look at the chart that I gave you, and you can

see that loan defaults for this program haven’t changed an iota in

12 years. We have gone from 300 million in loans to almost 2.5 billion in loans, and defaults haven’t gone up. That says to me default

rates have gone down. When they first took us off budget in 1997,

you will remember they projected our default rate at 19 percent.

My response to them was, you are smoking dope. Now it is at 8.3

percent. I think they are still smoking dope. I don’t know what to

say.

24

Ms. VELA ́ ZQUEZ. Maybe we could strike that out?

Mr. WILKINSON. It is maddening to look at real data—— Ms. VELA ́ ZQUEZ. Let us put it this way, Mr. Crawford. I guess

then maybe what we should say is that the problem is not the

model, but the numbers. And if we put garbage in, that is what we

are going to get.

Mr. WILKINSON. Yes, ma’am you are right.

Ms. VELA ́ ZQUEZ. We are going to get garbage out. Thank you.

I have another question. The administration’s solution this year

seems to have more 7(a) loans made through 504 programs. What

do you think of that?

Mr. CRAWFORD. I have no clue as to what of the 2 billion they

think they are going to move to 504 are actually eligible for 504.

To start with, we are an economic development program. We create

jobs. It is your mandate that we create jobs. I have no clue as to

how many of those projects, that his membership does match that

job creation criteria. 7(a) does hundreds of different kinds of loans.

They do refinances. We don’t do refinances. That is a legislative intent. This program was not set up to refinance real estate. So unless you are prepared to pass a whole bunch of legislation to

change 504 into a look-alike 7(a) program, I haven’t a clue as to

how they are going to move 2 billion bucks in loans to our program.

Ms. VELA ́ ZQUEZ. Maybe we need to bring the legal counsel here,

too. I have another—— Chairman MANZULLO. Could I interrupt for just a second? Dr.

Blanchard, you hadn’t answered that last question about the 504

and the 7(a). If you would feel comfortable in answering that—if

not, you don’t have to.

Mr. BLANCHARD. I would be happy to answer that, sir.

Chairman MANZULLO. Would this be okay with you, Ms.

Vela ́zquez? Nobody else has any questions on the panel, so the rest

of the time is yours.

Ms. VELA ́ ZQUEZ. Sure. Yes. Be my guest.

Chairman MANZULLO. Dr. Blanchard, do you want to have a seat

up here, sir. If you could spell the last name for the record, please.

Mr. BLANCHARD. Thank you, Mr. Chairman. Blanchard is

B–L–A–N–C–H–A–R–D.

Chairman MANZULLO. And you are the COO?

Mr. BLANCHARD. I am the chief operating officer of the SBA.

Chairman MANZULLO. Thank you for your graciousness.

Please, Ms. Vela ́zquez, did you want to ask the question again,

or do you have——

Ms. VELA ́ ZQUEZ. I guess he heard the question and he heard the

reaction of Mr. Crawford to it.

Mr. BLANCHARD. I think it is a legitimate question and I think

Mr. Crawford’s answer is a legitimate one, in that he doesn’t know

the extent to which 7(a) loans that are directed toward real estate

would satisfy the job creation criteria. This is precisely one of our

concerns with the 7(a) loan program, which is to say some of those

loans might be used for purposes for which the program was not

designed. We now have an opportunity to examine the 7(a) program in a very detailed fashion to determine the distribution of

those loans and where they are going. We have found that a very

large proportion of the 7(a) loans go for—they are very large loans,

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and undoubtedly they go for real estate and equipment. We have

also found that about 40,000 loans that are given through the 7(a)

program, 3,000 borrowers receive almost 50 percent of the loan volume. That suggests a misdistribution of lending in the 7(a) program.

Notwithstanding the comments of NAGGL, we believe that the

CDC program through the 504 can accommodate some loans that

are being made through the 7(a) program. The question really only

is what are the changes that we need to make at the margin that

will afford the CDCs and the—the CDCs that opportunity? We are

not trying to pit the Community Development Corporations against

the banking partners. All we are trying to do is respond to a shortfall in demand that some legislation passed caused.

Ms. VELA ́ ZQUEZ. Mr. Wilkinson, would you like to respond to

that?

Mr. WILKINSON. Yes, ma’am, I would. First of all, the delivery

system for the 7(a) and the 504 program are different. We have certified development companies to do the 504 program. We have

banks and nonbanks throughout the country delivering the 7(a)

program. They are different kinds of products. They have different

delivery systems. Both products are good. Both products are needed.

First of all, I would like to dispute Dr. Blanchard’s claim that

3,000 borrowers are getting more than 50 percent of the dollars. I

have an SBA report that shows 75 percent of the numbers or loans

are for $250,000 or less, and that even looking at all of the

500,000-and-over loans in the 7(a) program, they accounted for only

30 percent of the dollars, 32 percent of the dollars. So I don’t know

where that particular number came from. It is very clear to us that

a good chunk of our loans are going in the small loan category as

you would like.

And Mr. Chairman if I could, I would like to share an e-mail

with the Committee that I got from one of our members. It goes:

I realize the need and the desire for smaller loans. As an example,

our bank is committed to making smaller loans via our conventional program that uses SBA Express as a fall product. We are reducing our risk to reach a borrower that we cannot help conventionally with the use of the 50 percent guarantee that the express

product provides.

We are even developing a term product through SBA Express

with a loan credit risk scoring rate to be offered to those applicants

in low to moderate areas. But this can only be done because the

larger, more profitable SBA loans help subsidize the smaller,

riskier loans. Without the larger, more profitable loans in our portfolio, we would have to rethink why we would even want to participate with SBA in its loan programs.

Ms. VELA ́ ZQUEZ. Thank you, Mr. Wilkinson.

Mr. Black, I would like for you to explain what type of training

and technical assistance do micro enterprise practitioners provide,

and how do they differ what from other SBA programs such as

SBDC, SCORE, Women Business Development Center provide?

Mr. BLACK. Thank you. That is a very good question. We think

of a Microloan program as combining training and technical assistance and capital, and we think they are inextricably linked. And

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so under the Microloan program we only have a few dollars or a

small percentage of the funding formula can go for training. But

after we qualify them for a loan—and these are very small loans

and these are very risky loans. The primary emphasis of business

technical assistance at that juncture is hand-holding.

One is we are selfish, in that we want our entrepreneur to be

able to repay the loan and the loan that we make them and that

we have to repay the government. And secondly, more importantly,

we want the entrepreneur to be successful in their enterprise. We

have partnership agreements with the Small Business Development Center. I come from a Small Business Development Center

environment, so I understand the importance of their program. And

in many cases we have a partnership agreement with our SCORE

chapters if they are available, and they are not available in all of

our regions. So we graduate them to the Small Business Development Centers for more sophisticated technical assistance.

But a lot of our technical assistance is very fundamental, very essential, and very important to the success of these small businesses.

Ms. VELA ́ ZQUEZ. Thank you, Mr. Black. Thank you, Mr. Chairman.

Chairman MANZULLO. Dr. Christensen, did you have a question?

We have got about a minute left before we have to run to vote.

Mrs. CHRISTENSEN. No, you go ahead. I am just catching up.

Chairman MANZULLO. Okay. We have concluded our hearing. I

would like to point to page 352 of the budget of the government

dealing with the SBA. And, Dr. Blanchard, we have talked several

time in the office, and I have tremendous confidence in you, but I

would like you to find out who prepared this chart that appears on

page 352. I mean, it lists four programs for the SBA. That is the

SBIC, Disaster Loan programs, 7(a), and the Small Business Development Center. And under 7(a) it says, moderately effective explanation, ‘‘Declining defaults have improved performance.’’ We are

very much interested in knowing where that is going to lead. I

know where I want it to lead.

But also where it says Small Business Development Centers,

where it says ‘‘assessment unknown,’’ that indicates to me a complete breakdown in the communication system of the SBA. They

never asked any Members of Congress—I have two in my Congressional District, and I can tell you the tremendous work that they

do. They keep more people out of business than they do going into

new ventures so people don’t lose their homes in some risky effort.

I mean, the work they do is—it is absolutely unparalleled.

But I think it is reckless and irresponsible for the SBA to present

a budget saying that it wants to increase a program, whose assessment is listed unknown, at a rate of 41⁄2 percent. If they don’t like

it, they should eliminate it or at least sit down with Members of

Congress and the different trade groups to assess it.

I know this doesn’t please you because I know the type of person

that you are, but if you could look into that. I mean, this has to

do with improving the communications among SBA, OMB, and

Members of Congress.

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Thank you all for testifying. We have to go run and vote, and

this meeting is adjourned.

[Whereupon, at 3:50 p.m., the Committee was adjourned.]

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