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[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]

 
 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

                    U.S. GOVERNMENT PRINTING OFFICE
78-450                       WASHINGTON : 2002
____________________________________________________________________________
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                      COMMITTEE ON SMALL BUSINESS

                  DONALD MANZULLO, Illinois, Chairman
LARRY COMBEST, Texas                 NYDIA M. VELAZQUEZ, New York
JOEL HEFLEY, Colorado                JUANITA MILLENDER-McDONALD, 
ROSCOE G. BARTLETT, Maryland             California
FRANK A. LoBIONDO, New Jersey        DANNY K. DAVIS, Illinois
SUE W. KELLY, New York               BILL PASCRELL, Jr., New Jersey
STEVE. CHABOT, Ohio                  DONNA M. CHRISTENSEN, Virgin 
PATRICK J. TOOMEY, Pennsylvania          Islands
JIM DeMINT, South Carolina           ROBERT A. BRADY, Pennsylvania
JOHN R. THUNE, South Dakota          TOM UDALL, New Mexico
MICHAEL PENCE, Indiana               STEPHANIE TUBBS JONES, Ohio
MIKE FERGUSON, New Jersey            CHARLES A. GONZALEZ, Texas
DARRELL E. ISSA, California          DAVID D. PHELPS, Illinois
SAM GRAVES, Missouri                 GRACE F. NAPOLITANO, California
EDWARD L. SCHROCK, Virginia          BRIAN BAIRD, Washington
GELIX J. GRUCCI, Jr., New York       MARK UDALL, Colorado
TODD W. AKIN, Missouri               JAMES R. LANGEVIN, Rhode Island
SHELLEY MOORE CAPITO, West Virginia  MIKE ROSS, Arkansas
BILL SHUSTER, Pennsylvania           BRAD CARSON, Oklahoma
                                     ANIBAL ACEVEDO-VILA, Puerto Rico
                      Doug Thomas, Staff Director
                  Phil Eskeland, Deputy Staff Director
                  Michael Day, Minority Staff Director

                            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
    Velazquez, 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

     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. Velazquez for an opening 
statement and then I may give one later on. Ms. Velazquez.
    Ms. Velazquez. 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 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. Velazquez'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 subsidy 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 Velazquez, 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 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 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 half-century 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.
    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. Velazquez, did you want to start now 
with your questioning or should we go vote and come back?
    Ms. Velazquez. I guess that we should go vote and come 
back.
    Chairman Manzullo. Okay.
    Ms. Velazquez. 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. Velazquez.
    Ms. Velazquez. 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 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. Velazquez. 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. Velazquez. Mr. Barreto, our responsibility here--I am 
sorry that I have to interrupt you.
    Mr. Barreto. No. Please.
    Ms. Velazquez. 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. Velazquez. 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. Velazquez. 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 contrast to the figures 
provided by the industry that show a default rate of less than 
3 percent.
    Mr. Barreto. Congresswoman Velazquez, 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. Velazquez. 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 look-back 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. Velazquez. 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.
    Ms. Velazquez. 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. Velazquez. 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. Velazquez. 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. Velazquez. 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?
    Mr. Barreto. Thank you, Congresswoman Velazquez, 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. Velazquez. 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. Velazquez. 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. Velazquez. 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. Velazquez. Mr. Chairman, I----
    Chairman Manzullo. I have got to be fair to these other 
witnesses, Ms. Velazquez. 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. Velazquez, 
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 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. Velazquez.
    Chairman Manzullo. Ms. Velazquez, about 3 minutes.
    Ms. Velazquez. Thank you, sir. Well, I want to state for 
the record that this is a very important issue for our members, 
and I 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. Velazquez. 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. Velazquez, it is at your request.
    Ms. Velazquez. 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. Velazquez. 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. Velazquez. 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----
    Ms. Velazquez. 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. Velazquez. Mr. Barreto----
    Chairman Manzullo. I am going to give a signal here. We 
have to conclude this hearing within 40 minutes.
    Ms. Velazquez. 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. Velazquez. I am going to ask for an extension on the 
comment period from 30 days to 90.
    Chairman Manzullo. Oh.
    Mr. Barreto. Ms. Velazquez, 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. Velazquez. It is your decision, Mr. Chairman.
    Chairman Manzullo. No. I am the Chairman. He is the 
administrator.
    Ms. Velazquez. 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 low-income and distressed communities, one of the 
biggest problems 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?
    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 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 Velazquez.
    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. Velazquez, 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. 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 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 up-front 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 
Velazquez. 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 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. Velazquez 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 participating 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.
    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 Velazquez, 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 Velazquez 
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 defaulted 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 
Velazquez, 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 self-declared 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 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. Velazquez, 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. Velazquez 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 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. Velazquez.
    Ms. Velazquez. 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. Velazquez. 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. Velazquez. 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. Velazquez. 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.
    Ms. Velazquez. Maybe we could strike that out?
    Mr. Wilkinson. It is maddening to look at real data----
    Ms. Velazquez. 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. Velazquez. 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. Velazquez. 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. 
Velazquez? Nobody else has any questions on the panel, so the 
rest of the time is yours.
    Ms. Velazquez. 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. Velazquez, did you want to ask the question 
again, or do you have----
    Ms. Velazquez. 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, 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. Velazquez. 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. Velazquez. 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 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. Velazquez. 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 4\1/2\ 
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.
    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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
```