U.S. GOVERNMENT PRINTING OFFICE

71–189 WASHINGTON : 2001

HEARING ON REAUTHORIZATION OF THE SBA

AND THE FISCAL YEAR 2001 BUDGET REQUEST

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

WASHINGTON, DC, MARCH 1, 2000

Serial No. 106–45

Printed for the use of the Committee on Small Business

(

(II)

COMMITTEE ON SMALL BUSINESS

JAMES M. TALENT, Missouri, Chairman

LARRY COMBEST, Texas

JOEL HEFLEY, Colorado

DONALD A. MANZULLO, Illinois

ROSCOE G. BARTLETT, Maryland

FRANK A. LOBIONDO, New Jersey

SUE W. KELLY, New York

STEVEN J. CHABOT, Ohio

PHIL ENGLISH, Pennsylvania

DAVID M. MCINTOSH, Indiana

RICK HILL, Montana

JOSEPH R. PITTS, Pennsylvania

JOHN E. SWEENEY, New York

PATRICK J. TOOMEY, Pennsylvania

JIM DEMINT, South Carolina

EDWARD PEASE, Indiana

JOHN THUNE, South Dakota

MARY BONO, California

NYDIA M. VELAZQUEZ, New York

JUANITA MILLENDER-MCDONALD,

California

DANNY K. DAVIS, Illinois

CAROLYN MCCARTHY, New York

BILL PASCRELL, New Jersey

RUBEN HINOJOSA, Texas

DONNA M. CHRISTIAN-CHRISTENSEN,

Virgin Islands

ROBERT A. BRADY, Pennsylvania

TOM UDALL, New Mexico

DENNIS MOORE, Kansas

STEPHANIE TUBBS JONES, Ohio

CHARLES A. GONZALEZ, Texas

DAVID D. PHELPS, Illinois

GRACE F. NAPOLITANO, California

BRIAN BAIRD, Washington

MARK UDALL, Colorado

SHELLEY BERKLEY, Nevada

HARRY KATRICHIS, Chief Counsel

MICHAEL DAY, Minority Staff Director

(III)

CONTENTS

Page

Hearing held on March 1, 2000 .............................................................................. 1

WITNESSES

Alvarez, Aida, Administrator, U.S. Small Business Administration ................... 4

Wilkinson, Anthony R., President, National Association of Government Guaranteed Lenders ..................................................................................................... 45

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

Companies ............................................................................................................ 47

Giegel, John, Vice President for Congressional Relations, National Association

of Development Companies ................................................................................. 51

McCutchen, Woody, Executive Director, Association of Small Business Development Centers .................................................................................................... 53

Hayashi, Caroline, Association for Enterprise Opportunity ................................ 55

APPENDIX

Opening statements:

Talent, Hon. James .......................................................................................... 62

Velazquez, Hon. Nydia ..................................................................................... 64

Prepared statements:

Alvarez, Aida ..................................................................................................... 66

Wilkinson, Anthony R. ..................................................................................... 79

Mercer, Lee ....................................................................................................... 84

Giegel, John ...................................................................................................... 93

McCutchen, Woody ........................................................................................... 101

Hayashi, Caroline ............................................................................................. 107

Additional material:

Statement of the Bond Market Association .................................................... 110

Talent Letter ..................................................................................................... 115

(1)

HEARING ON REAUTHORIZATION OF THE SBA

AND THE FISCAL YEAR 2001 BUDGET REQUEST

WEDNESDAY, MARCH 1, 2000

HOUSE OF REPRESENTATIVES,

COMMITTEE ON SMALL BUSINESS,

Washington, DC.

The Committee met, pursuant to notice, at 10:00 a.m., in Room

2360, Rayburn House Office Building, Hon. James M. Talent

(chairman of the Committee) presiding.

Chairman TALENT [presiding]. If our first witness will be seated,

we will start.

Good morning. Today, the Committee is meeting to conduct its

annual ritual of considering the administration’s request for the

SBA budget. We are also going to consider our triennial ritual of

reauthorization of the SBA’s programs. I am hoping to save the

members a little time while still allowing them full in put by combining the two exercises.

I want to start by saying that, in general, I am pleased with the

budget submission for the year 2001, which means that the hearing

this year will, as far as I am concerned, have a happier tone than

it has had in some years past. I am not necessarily speaking for

my friend, the distinguished gentlelady from New York, and I have

no inside knowledge in saying that. I am just not necessarily

speaking for her.

The SBA’s budget request for 2001 is $1.06 billion. This is a

large increase over the current year’s funding—approximately $330

million. However, to be fair, a large portion of this is disaster loan

funding. Thankfully, the 2001 request for the disaster loan program is straightforward and adequate. This relieves us of a serious

bone of contention from past years’ budgets.

SBA’s request for financial programs is also, in my opinion, generally good. It requests $332 million in new subsidy budget authority, a $65 million increase over the 2000 request. Of this request,

$132 million is for administrative expenses to operate the financial

programs. That represents a small increase over the 2000 request

but a significant $38 million increase over previous appropriations.

The request for the 7(a) loan program is $142 million to provide

$11.5 billion in overall loans. I believe this is a reasonable request,

as SBA forecasting is usually accurate. I am more concerned about

this year’s loan availability. I will be interested in hearing from the

Administrator about her projections for this year.

2

The 504 Program again requires no subsidy, and I believe the

Committee joins me in supporting the authority to make the full

authorized amount of loans under this program available. However,

like other members, I would like to hear about the future of the

program and its subsidy rate.

The SBIC Program also receives an adequate request and one

the Committee supported in its letter to the Committee on the

budget. If fully funded, the SBIC Program will be able to make

over $2 billion of venture capital available to small businesses in

Fiscal Year 2001.

The Microloan Program is targeted for the most significant in- crease for 2001. It would, according to the request, jump from $29

million to $60 million in microloans. While there is no shortage of

support for this program, and the real dollar increase is only $2.5

million, there may be some question about the ability to expand

that quickly.

On the technical assistance side of the SBA’s budget request

there is both good and bad news. The good news is the Small Business Development Center Program receives an adequate though

not ample request of $85 million. There is also a $3 million request

for Native American SBDCs, an excellent proposal.

The bad news is that there is an increase in unauthorized program funding that would take too much time to list here in this

opening statement, while at the same time an elimination of funding for authorized programs, like the Drug Free Workplace Program, which the Congress approved overwhelmingly 3 years ago.

Finally, let me state my support for the request for the Office of

Inspector General. This Committee has long supported improved

funding for that Office. The only comment I might make now is

that the increase should be divided between audit and investigative

functions.

I want to thank our various witnesses. I will introduce them

when they testify. We are going to have two panels: First, Administrator Alvarez, and, second, the panel of witnesses from the small

business organizations.

Before we begin hearing the testimony, I will, as always, turn

the microphone over to my colleague, Ms. Velazquez, for any statement she may wish to make.

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

Ms. VELAZQUEZ. Thank you, Mr. Chairman. I would like to thank

the Administrator and commend her for presenting an ambitious

budget request that clearly reflects the administration’s desire and

ongoing efforts to help this Nation’s small businesses.

As we are all aware, this country is experiencing one of the

greatest economic booms in modern history. This unprecedented

growth has been fueled by the flourish of small businesses throughout this country. Today, small businesses make up 51 percent of

the gross domestic product, and contribute 47 percent of all sales

in this country. In fact, according to the Department of Labor and

the Department of Commerce, small business-dominated industries

produced an estimated 64 percent of the 2.5 million new jobs created during 1996.

With this in mind, I believe it is critical at this historic juncture

to assess where we are, how we got here, and where we need to

3

go to continue to have a strong and vibrant small business community. We have gotten where we are today based on the solid support of such established programs as 7(a), 504, 8(a), microloans,

SBR, SBIC, and SBIR. These programs, through access to capital,

opening doors for minority businesses and technology development

are the bedrock that has helped this Nation’s small businesses lead

the way into the 21st century.

The administration’s budget presents a good mix of new and existing programs. We are making improvements to the SBIR Program through Phase 3 grants that will enable small technology

firms to be more competitive in the marketplace. One priority for

Democrats has been making small loans more accessible to businesses. This can be done by increasing the guarantee on loans of

under $150,000 to 90 percent, offering small businesses the economic chance they need to exist.

Innovative new programs that show consideration for future

businesses has been unveiled in this budget, like PRIME, which

help low-income communities, and the new Veterans Program,

which will help those who have served this country.

Most importantly, the administration attempts to address what

I believe is the most pressing issue facing our Nation: The widening gap between those who have prospered from our current economic boom and those that have been left behind. For example, in

my district of Brooklyn the unemployment rate is still 10 percent.

These are good, hardworking people who today cannot afford to

start their own businesses but who want to and deserve an opportunity for economic prosperity.

That is exactly what the proposed new markets venture capital

company legislation will do. By providing equity investment and

technical assistance, businesses will have an easier time obtaining

capital or expanding their businesses in poor or underdeveloped

areas throughout the country. This is not only the right thing to

do, but it makes good business sense.

This Committee has an opportunity to make changes, new

changes that will benefit small businesses and those who are looking for economic opportunity in starting their own. Today’s hearing

will assist us in making the kinds of economic decisions that not

only will help close that widening gap but will hopefully keep us

on the right economic track for continued prosperity in the future.

I look forward to reviewing this budget in greater detail and determining what changes need to be made to better enhance small

businesses. And I thank you ladies and gentlemen who are here to

testify before the Committee today.

Thank you, Mr. Chairman.

[Ms. Velazquez’s statement may be found in the appendix.]

Chairman TALENT. I thank the gentlelady.

We will go right to panel one, and our witness in that panel is

the Honorable Aida Alvarez, the Administrator of the U.S. Small

Business Administration.

Once again, Ms. Alvarez, it is a pleasure to welcome you here.

4

STATEMENT OF AIDA ALVAREZ, ADMINISTRATOR, U.S. SMALL

BUSINESS ADMINISTRATION

Ms. ALVAREZ. Thank you so much, Mr. Chairman, Congresswoman Velazquez, and distinguished members of this Committee.

I appreciate the opportunity to appear before you here today, and

I have submitted my written testimony for the record. I would like

to make some oral remarks accompanied by charts in a moment.

But before getting to next year’s budget, Mr. Chairman, I wanted

to address your concern about the availability of loan dollars this

year, which has been our concern as well. And I would like to share

some good news. Last spring, as you know, we requested funding

to meet the demand for $10.5 billion in loans for our 7(a) Program;

however, our appropriation was only for a level of $9.8 billion in

loans. And it turns out that our projections were pretty much on

target. We now project the demand this year to be around $10.3 billion.

To address this shortfall, the President has included in his February 25th supplemental appropriation request, $7.6 million for the

SBA. Through a combination of transfers and the supplemental appropriation, we will increase the 7(a) Program level to $10.3 billion.

Our hope is that the program will continue to operate as successfully as it has through the rest of the year.

The supplemental also will enable us to transfer, and I have re- quested, $1 million to fund PRIME grants. I know there has been

a lot of concern about the funding for the Program for Investment

in Microentreprenuers this year. I have also requested a transfer

of $0.5 million to support the Veterans Corporation that was included in legislation passed last year. And in addition, we are looking into the possibility of providing free office space this year for

the corporation at the SBA. We hope that this will really get them

started. We are already halfway through this year, so we think

that this might cover their needs. And then of course we have requested $4 million for 2001.

Mr. Chairman, Congresswoman Velazquez, members of the Committee, I urge you to please support the supplemental. And of

course I would be happy to meet with you and other members of

the Committee to discuss this request and the budget itself.

There is also another bit of good news I would like to share this

morning. We were informed late yesterday that for the fourth year

in a row SBA has received a clean opinion in our financial audit

report, which is the highest rating that a Federal entity can receive. The report, I believe, provides further assurance that we are

keeping our financial house in order.

So, now, without further ado, I would like to start the discussion

of the budget and our request for just over $1 billion for the SBA

with charts that highlight why we are making this request and

what is the condition of this economy that makes it appropriate

that we request this kind of funding.

We begin with a chart that I think says it all, ‘‘It is a small business economy.’’ Congresswoman Velazquez pointed to the extent to

which the new job creation, for example, is attributed to the small

businesses in this country. I think that this chart presents the

budget in the context of this remarkable economic expansion, an

expansion that is being fueled, in large part, by small businesses.

5

You can see that the numbers just go up, up, up for our core programs, and, as I said, at the SBA I believe we want to keep doing

our part to keep this historic economic expansion going, which is

why we are submitting this request. And also we want to reach out

to those in the inner cities, poor rural areas, Native American reservations who have not been reached yet.

The climate has never been better for small business. There are

now 25 million small businesses in the United States, which is 5

million more than in 1990. And our chart reflects this amazing economic expansion. What is interesting is since 1993 we have nearly

tripled what is available for small businesses while cutting the cost

in half.

In 1993, we made available around $7.4 billion of capital and credit at a cost of $352 million. This year, in Fiscal Year 2000, we

estimate we will deliver $17 billion at a cost of $146 million, which

is less then half the cost. Our Fiscal Year 2001 budget proposes

$20 billion of support at a cost of $200 million. I think this shows

that SBA is truly a great deal for the American taxpayers.

Coupled with our desire to sustain the economic expansion while

penetrating new markets is our solid commitment to the financial

soundness of our portfolio. And I am very pleased to report that in

Fiscal Year 1999 we instituted, for the first time ever, a Safety and

Soundness Examination Program for the agency’s Small Business

Lending Companies and examined all 14 Small Business Lending

Companies. We expect to complete a second round of reviews in

September. We have established the Office of Lender Oversight and

a Risk Management Committee. We have completed our first full

cycle of reviews for participants in the agency’s Preferred Lender

Program, and we expect to complete a second round of reviews by

April.

Yes, we have enjoyed dramatic growth in our core programs, but

speaking to the issues raised by Congresswoman Velazquez, I think

we are convinced that it is not enough just to continue their

growth. SBA’s success in stimulating small business growth is

owed to its strategic investments in areas where we have identified

a gap. That is what we have historically done. And this second

chart illustrates the continuum of services and programs that we

provide and where there are still gaps that need to be addressed.

Over time, SBA’s programs have evolved to fill gaps in the marketplace. This chart shows the continuum of services that exist

today to meet a spectrum of small business needs. On the debt

side, SBA first developed the 7(a) and 504 Programs. When the

need for very small loans was identified, SBA’s Microloan Program

was established. On the equity side, Small Business Investment

Companies were established to fill the need for investments in the

range of $350,000 to $5 million.

Now, as you can see from the lighter shaded area, there is a gap

today for small businesses needing smaller equity amounts in the

range of $50,000 and up. And filling this gap is what our New Markets Venture Capital proposal is all about.

Our next chart illustrates why that——

Chairman TALENT. Ms. Alvarez, can I just interrupt for a

minute? Could you put that last chart up again?

Ms. ALVAREZ. Yes.

6

Chairman TALENT. Now, I just want to make certain that I understand, because my understanding was the New Markets Program was targeted to—was developed to target additional assistance to low-income areas. You emphasize the size of the loan.

Ms. ALVAREZ. It is an equity investment.

Chairman TALENT. Right, I am sorry. Yes, equity investment.

Ms. ALVAREZ. It is a combination of size and targeting to areas

that are underserved, significantly underserved. So, it is geographic and income-based.

Chairman TALENT. Right. So, the President’s proposal hasn’t

changed. It is still for—it is targeted for low-income neighborhoods,

but you also are talking about a size of investment.

Ms. ALVAREZ. That is right, because in fact those targeted areas,

as the next chart will show you, have a huge absence of availability

of equity investments in those geographic areas.

Chairman TALENT. Yes, and that is what I understood, and that

was my interest in the program.

Ms. ALVAREZ. You are absolutely right. That is what it is all

about.

Chairman TALENT. I am sorry about that; appreciate it.

Ms. ALVAREZ. No, no, that is good.

The following chart shows the incredible differences in availability of equity capital. For example, on the left, you have the bar

chart, which shows private venture capital firms in 1999 with assets of nearly $130 billion. Their average investment, the size

issue, in both large and small businesses is anywhere from $6 million to $10 million.

In 1999, SBA’s Small Business Investment Companies reported assets of $12.7 billion. Their investments typically range from

$350,000 to $5 million, with $1.5 million, on average. So, we filled

the gap there for smaller size investments through the SBIC Program. What is interesting is that these SBICs with one-tenth of the

capital of their larger counterparts were actually responsible for

over half the investments by institutional investors last year,

which is phenomenal. And this highly successful program has returned $131 million to the U.S. Treasury as taxpayers’ share of

profits in SBA’s Participating Security Program. So, this program

is really producing results.

Mr. Chairman, when I said that they produced half of the investments, it is because they make many, many smaller size investments, whereas there are huge investments made by the private

venture companies. It is not the dollar amount in this case; it is

the number of smaller investments.

On the very right, you see a sliver—it is practically not there—

and it shows the assets of the community development venture capital industry. These firms are most like the New Markets Venture

Capital Companies that we are proposing. That is where the gap

exists. All that is available now—it is a combination of what we are

doing with our SBIC Program and these community development

venture capital companies.

SBICs invested nearly $800 million in low- and moderate-income

areas last year. The fact is that only $66 million of that $800 million were New Market-type investments of $1 million or less. So,

what does this mean? It means that out of a universe of around

7

$140 billion of venture capital in this country, only $200 million

was available in smaller New Markets-type investments, which

went to areas that include inner cities, poor rural communities,

and Native American communities. Again, this is what the New

Markets proposal is all about.

The last chart on this topic, which speaks to this geographic

issue, is this map of targeted New Markets-type investments. What

this map illustrates is where the smaller New Markets-type investments are being made today without the New Markets Venture

Capital Program. You can see there is a lot of empty space here.

The dots show the locations of community development venture

capital companies. There are only 25 located in 16 States and the

Virgin Islands. These firms have assets of $157 million, but only

14 of the 25 have assets of over $5 million, which we consider to

be the absolute minimum for economic viability. The stars indicate

the five states where two-thirds of the smaller New Markets-type

investments were made by existing SBICs, Small Business Investment Companies. As the map indicates, even if you combined the

$66 million in comparable SBIC investments, which are concentrated in just 5 states, with the SBIC locations, you see that

there was no New Markets-type investment, zero, in 21 States.

There is a gap, and there is a vacuum that we are trying to fill

with this program.

Chairman TALENT. Just make one thing clear for me, and this

is very interesting—I am kind of glad you went to the depth on this

aspect of the budget submission—when you say the five States in

which the SBICs have made New Markets-type investments, you

are referring to investments that meet the criteria both in being a

low-income neighborhoods and of being the size that you anticipate

new markets.

Ms. ALVAREZ. Yes, correct.

Chairman TALENT. Because they have bigger investments than

that in low-income neighborhoods—— Ms. ALVAREZ. Correct.

Chairman TALENT [continuing]. But they were bigger size loans.

Ms. ALVAREZ. That is right. They were not the type of investment

that we envision for new markets.

Chairman TALENT. Okay.

Ms. ALVAREZ. The SBICs are primarily profit-driven, in contrast

to New Market Venture Capital Companies and the Community

Development Companies, which are more mission-driven. NMVCs

will provide a combination of equity financing and hands-on operational assistance, which we have called technical assistance.

The technical assistance we are talking about is an ownership on

the part of the new markets investor which results in their taking

an active role in the actual running of the company in areas of corporate finance, structuring, key executive recruitment, legal services. The New Markets Venture Capital companies will have the

resources and flexibility to ensure the long-term success of small

businesses they invest in.

To establish this New Markets Venture Capital Program we are

requesting $21.6 million, which would support a program level of

$150 million, and we are requesting $30 million for the technical

assistance component.

8

What I would like to do is take a moment to talk about this program’s return on investment. First of all, a number of people have

noted that this is an expensive program. Well, it is. It is, initially,

because we calculated the cost of this program using the most conservative assumptions. And what we are anticipating is that the

cost of the program will go down, probably significantly, as we develop experience with the program.

It is very important, I think, to look at the long-term benefits of

this program. We did an analysis of the Community Development

Venture Capital Companies where we learned that one job is created for each $10,000 to $15,000 of equity investment. Using this

as a basis for comparison, $51.7 million should generate between

13,300 and 20,000 jobs at a cost of between $2,600 and $4,000

each. That is a bargain and does not include the indirect jobs which

would make the cost even less.

So, I think that with this modest investment proposed in our

budget, we would double the amount of capital available to our distressed rural and urban communities, and we would create a phenomenal potential for jobs in areas like Brooklyn—you mentioned

a 10 percent unemployment rate—and other rural parts of the

country.

Finally, I want to conclude, with the New Markets Initiative— we are breaking new ground, which is why I took the time to explain it this way. There is another area where we are breaking new

ground, and that is in the modernization of the SBA. We are making substantial investment to really make the SBA a cutting edge

agency. And I am very enthused about the vision that we have set

out in our budget to build a new SBA. It is what I call Project

2003, because 2003 is when we expect to have completed all of this. As you know, since 1990, our loan portfolio has grown from $17.5 billion to about $50 billion. At the same time, the number of our

employees has decreased 22 percent, from 4,000 in Fiscal Year

1990 to about 3,035 right now. And that number will continue to

go down. We will have gone down by 146 employees this year.

Project 2003 continues the dramatic transformation. This chart

gives you an idea what SBA will look like in the year 2003. We expect to offer our customers online and real-time services. This will

allow us to give our customers quicker decisions on their applications and servicing requests. Internally, we will have real-time access to information and sophisticated analysis tools to make better

management decisions—services anytime, anywhere. Obviously,

SBA’s store will now be open 24 hours a day, 7 days a week. Small

businesses will be able to file applications from their offices or even

their homes.

We will do more paperless transactions with our lending partners, reducing transaction costs. This is especially important for

smaller loans that are less profitable for lenders. By this summer,

we expect to have the majority of our loan transactions to be conducted electronically. We will have the majority of our lenders basically filing and reporting to us electronically, which will be a real

difference in what information is available. We will be able to ask

for and collect data that we didn’t have in the past or we have had

it, but it hasn’t been accessible to us. This accessibility will help

us with our loan monitoring and risk management as well.

9

Coupled with our desire to sustain unprecedented growth and to

penetrate new markets is our solid commitment to maintaining the

financial soundness of our portfolio as well as the security of the

business that we conduct online. We are very sensitive to the concerns that are being raised about the security of the information.

Financial statements will be less costly and less time-consuming

to produce. Subsidy calculations will be improved in both quality

and timeliness.

Mr. Chairman, Ms. Velazquez, members of the Committee, this

budget, I believe, is a very sound budget for Fiscal Year 2001. It

fully funds the disaster programs and the Small Business Development Centers. It supports expansion of the core programs—7(a),

504, SBIC—increases microloan programs. It does all of this while

ensuring the safety and soundness of our growing portfolio and

building a modern SBA.

So, I really appreciate the opportunity to appear before you here

today, and I will be happy to take your questions. Thank you.

[Ms. Alvarez, statement may be found in the appendix.]

Chairman TALENT. All right, I will ask a few and then defer, because there is a lot of members here, and I understand some of

them have to leave. So, let me just ask a couple of mine.

Ms. Alvarez, I appreciate the efforts to support the Veterans Business Development Corporation. I would hope that $500,000

would be a beginning point and that you would be open to more

being shifted over.

Ms. ALVAREZ. Of course.

Chairman TALENT. And, you know, my enthusiasm for this is because I think it can work the way I have seen, for example, senior

centers work. I mean, I really think this model of using a little

Federal seed money to plant these centers in places where then

they leverage all these additional private-public dollars and all the

activity that the groups that want to participate is very powerful,

and I would like to get this going. So, you are not closed to doing

more than that if we can get more than that done, are you?

Ms. ALVAREZ. No. We were working within our constraints. Also,

Mr. Chairman, you know we are working in conjunction with the

Department of Veterans’ Affairs, with the Association for Small

Business Development Centers, with SCORE. We have entered into

agreements with all of them so that we can maximize and not duplicate the efforts.

Chairman TALENT. And what is the status of appointments to

the board now?

Ms. ALVAREZ. It is over at the White House, and they are vetting

the candidates right now. My understanding is if you have individual requests, they would be happy to engage you individually.

Chairman TALENT. I think what we did was we—by we, I mean

the chairman and ranking members of the relevant committees on

both sides of the Capitol sent sort of a joint list.

Ms. ALVAREZ. Yes.

Chairman TALENT. Because we are very concerned that this initial group be very savvy veterans’ advocates. And I will say for my

part—and I think the gentlelady feels the same way, because she

and I have talked of this—I am much less concerned about party

or political background than I am about just getting strong vet adVerDate 11-MAY-2000 09:32 Apr 30, 2001 Jkt 010199 PO 00000 Frm 00013 Fmt 6633 Sfmt 6602 E:\HEARINGS\71971 pfrm08 PsN: 71971
10

vocates from a wide variety of different places—some from veterans’ organizations, some with experience in business—because

we have a real chance to draw a lot of private business dollars into

this.

I hope you take a moment and make a personal call over to the

White House and say, ‘‘Let us really concentrate on getting a good

group,’’ and I think we have submitted a very good list. So, would

you be willing to do that?

Ms. ALVAREZ. Absolutely. And I noted that in fact some of the

candidates recommended were recommended by members from

both sides of the aisle.

Chairman TALENT. Yes. I know I recommended some—I mean, I

really don’t care about that. I don’t think the Committee does either, but

Ms. ALVAREZ. We have been monitoring it. At this point what

they are doing is vetting the candidates, and that is the most timeconsuming part to make sure that once they are announced they

can get started.

Chairman TALENT. Of course my wife is a veteran, and if the

President would be willing to consider her that would be fine. But

assuming that that is not going to be the case, I am very interested

in that. And let us get that. We all want that to get off on the right

foot. I know you do too.

Ms. ALVAREZ. Absolutely.

Chairman TALENT. And your personal attention would be appreciated.

Ms. ALVAREZ. Good.

Chairman TALENT. All right. I have other questions to get into,

but I know some members have to leave. So, let me go ahead and

recognize the gentlelady from New York.

Ms. VELAZQUEZ. Thank you, Mr. Chairman.

Ms. Alvarez, why are the subsidy reestimates so high for the 7(a)

Program year after year? Doesn’t this high reestimate mean the regional subsidy estimate was significantly inaccurate and that program users, both the small businesses and the lenders, are paying

fees beyond what is necessary to support the program, and instead

are paying fees and income that is simply being used to reduce the

Federal debt?

Ms. ALVAREZ. That is a very good question.

Ms. VELAZQUEZ. Yes, I know.

Ms. ALVAREZ. I will ask Greg Walter, as well, to join me on that.

The answer is that we use a very conservative approach to calculating these subsidies. We look at the life of the loan, which is over

a 14-year period, so that while one might argue that these loans

are performing very well as of recent years, we need to go back to

when they were not performing so well. And, so it is those calculations that are factored in that result in a much higher cost which

then, of course, results in a reestimate and a returning of funds to

the Treasury. That has been the practice of the OMB—it is not this

administration; every administration involved in subsidy rate calculations has used this approach as a way of protecting the taxpayer.

Greg, do you want to elaborate?

11

Mr. WALTER. Good morning. I am Greg Walter, the Deputy CFO.

I would like to just add one comment. We believe this is also a very

good reflection on the improved performance that we are seeing in

the portfolio as a result not only of the economy that allows people

to pay their loans back more frequently and incur less defaults but

also our improved attention to the portfolio management of the

agency. So, we see this as good news, and the bottom line is the

cost of the program is only about 1 percent, or $1 for every $100

we loan. This is very great news for small business, we think.

Ms. ALVAREZ. Right. As opposed to—it was $5 10 years ago.

Mr. WALTER. Less than 10.

Ms. ALVAREZ. Right, less than 10 years ago, and it is $1. So, the

cost has gone down, notwithstanding the fact that we are using a

very conservative calculation.

Ms. VELAZQUEZ. Either the Administrator or Mr. Atkins?

Ms. ALVAREZ. Greg Walter.

Ms. VELAZQUEZ. What has 7(a) defaults averaged for the last 5

years, and what is the default factor in the current year subsidy

model?

Mr. WALTER. First, you have to remember that the default history is a long time period. We have a peak and a valley. The peak

occurs usually in 3 to 5 years after the loans are disbursed. So, if

you look at loans that have been made in the last 5 years, they

haven’t really fully matured. But the evidence that we are seeing

so far is that the performance of those loans is significantly better

than the loans that were made in the previous year. And the default history right now is averaging probably in the 8 to 12 percent

range. The model that we are using for Fiscal Year 2001 still includes a subsidy default rate of about 14 percent, because it takes

into account about a 12- or 13-year historical pattern.

Ms. VELAZQUEZ. Has there been a loan underwriting any change

or is OMB requiring SBA to overestimate loan defaults?

Mr. WALTER. The process that we use for estimating defaults is

a standard acceptable practice that is used by all the Federal credit

agencies. OMB requires us to use a historical analysis as far back

as we have information. We like to try to match the time period

of the analysis with the average maturity of the portfolios. These

loans in 7(a) have a 14-year maturity, so we would like to have 14

years worth of data to do the analysis.

Ms. VELAZQUEZ. So, in essence, what you are telling me is that

the 7(a) Program is operating at a profit for the Government under

the present structure.

Ms. ALVAREZ. It is helping to reduce the deficit.

Ms. VELAZQUEZ. Ms. Alvarez, I am sure you are aware of the

troubling trend that during the nineties the number of procurement center representatives has decreased from 73 in 1993 to 55

now. Of those, half performed this function on a full-time basis. In

that same period of time, contract bundling has dramatically increased. We don’t have any stronger tool to make sure contract

bundling is done fairly than CPRs.

On August 4, 1999, your former associate, Deputy Administrator

for Government Contracting and Minority Enterprise Development,

admitted here at a hearing that the resources weren’t there to handle the problem. In your testimony before the Senate yesterday and

12

in your testimony today, you admitted that contract bundling is a

problem. Given that the agency admits there is a problem and in

light of all the new spending the agency is proposing, why has this

not been addressed in the budget submission?

Ms. ALVAREZ. This is certainly an issue that is brought before us

with some regularity. First of all, as the head of an agency, I need

to look at the overall needs of the agency and the small business

community, and we have made a commitment to fiscal discipline

and to continuing to streamline the agency.

And, so when we look at new hires, we try to make those very

strategically. We don’t want to undermine a critically important

program, and we want to be able to introduce some new ones that

meet the gaps that we identified in the presentation. Overall, we

don’t look to increase the number of employees at the SBA, and

that certainly affects our ability to hire people in any program, including the contracting program.

I think, also, overall, there has been a change in the way the procurement operates at the level of the Federal Government. Part of

the reinvention of Government was streamlining processes. The result has been that the Government is much more efficient and

much more economical in how it does its contracting, but there has

been a downside. We have fought ferociously on behalf of small

businesses to ensure that they continue to receive at this point 23

percent of all the contracts that the Federal Government lets, and

we monitor that with great vigilance.

Contract bundling has been a concern. I will ask James

Ballentine to talk about new regulations that we think will go a

long way to addressing those issues. James, you may want to address that.

I think, Congresswoman Velazquez, with the modernization of

the SBA, lots of things are going to be different in a very few years.

We are going to be able to free up people from other areas, because

we are going to be doing things electronically in a paperless way

which will reduce the need for people that we now have in the mix.

What that means is hopefully we will be able to rehire new people

or retrain in the near future but not until we have completed this

modernization. I think it would be premature.

James, would you like to comment?

Ms. VELAZQUEZ. Before he comments, Ms. Alvarez, and with all

due respect, we conducted hearings on contract bundling, and Mr.

Ballentine was here, weren’t you? Were you here?

Ms. ALVAREZ. This was before James became the ADA.

Ms. VELAZQUEZ. And my staff in the Small Business Committee

is conducting a review on Federal procurement and contract bundling. And the members on this side aisle, and I am sure on the

other side of the aisle, has always been complaining about the

problems that small businesses are facing in terms of Federal procurement and contract bundling. And you are telling me today that

there are new regulations and that it will be implemented, but if

you don’t have the people there and the staff to implement those

regulations, what good does it make?

Ms. ALVAREZ. Your point is well taken. I hear you.

Ms. VELAZQUEZ. Let me just read this for you: In Oregon and

Idaho, in the Pacific Northwest, and the entire upper middle secVerDate 11-MAY-2000 09:32 Apr 30, 2001 Jkt 010199 PO 00000 Frm 00016 Fmt 6633 Sfmt 6602 E:\HEARINGS\71971 pfrm08 PsN: 71971
13

tion of the United States—and I have a map here—from Montana

to Wisconsin and south to Kansas does not have any PCRs. The

State of Hawaii is currently serviced by the one PCR in Arizona

who has no travel dollars to Hawaii. Virginia, one of the largest

procurement dollar volume States has not PCRs. Would you be

willing to commit today to performing a national review for the

current PCR allocation and propose a plan that provides for more

equitable distribution?

Ms. ALVAREZ. Yes, I will be happy to take a look at that. I think

it is a serious situation, and I will be happy to take a look at that.

Ms. VELAZQUEZ. Thank you.

Ms. ALVAREZ. Would you like James to comment at all on the

regulations on contract bundling?

Ms. VELAZQUEZ. Sure.

Mr. BALLENTINE. Just to identify myself, I am James Ballentine,

Associate Deputy Administrator, Government Contracting Minority

Enterprise Development. We have completed the regulations at the

agency. They have completed public comment. The closing date was

December 27. We received limited comments from the small business community, and we are moving forward with the regulations.

We hope to publish the final rule on these regulations by the end

of April in hopes of putting in some really good things to control

the contract bundling situation.

Ms. VELAZQUEZ. Sure. Will you share those regulations at some

point with the members of our Committee?

Mr. BALLENTINE. Be happy to.

Ms. VELAZQUEZ. Sure. Thank you.

Ms. ALVAREZ. Thank you.

Chairman TALENT. I thank the gentlelady and could not agree

with her more about bundling. As she knows, we are developing a

bill to deal with this, and we sent it over to you last week. And

I don’t expect you to be able to comment on it now, but I really

hope that the agency will get behind us in doing this, because we

are not going to—the same situation you have in the executive

branch. The other committees of jurisdiction probably fight for

their own agency’s right, and it doesn’t help us a lot to be trying

to get some investments in small business and that sort of thing

in other areas if at the same time the Government, with its procurement practices, is just withdrawing huge amounts of contracts

that small business people would otherwise be able to compete for.

The gentlelady from New York, Ms. Kelly, I understand has no

problem with me recognizing Ms. McCarthy, because she has to go.

So, I am going to do that, and then what I will do is go back to

regular order, and I will correct that by recognizing two on this

side.

So, I will go to—Ms. McCarthy is next on the list, and so we will

just skip Ms. Kelly and go right to you, because you have to go;

is that right?

Well, I know, but—do you have time? If you want, we will just—

my understanding was that you needed——

Mrs. MCCARTHY. Fine.

Chairman TALENT. Okay. We will go right to you.

Mrs. MCCARTHY. Thank you. And thank you for your comments.

One of the things I had gone over, and I just wanted to ask you

14

if you would clarify it, last year the majority of us here were trying

to work with small businesses, especially on a drug-free workplace,

and we see that there is no money—there is not funding for this

program. Could you explain why or are you fitting into someplace

else?

Ms. ALVAREZ. What we have had over a 2-year period is $4 million, which we have been able to let about 30 grants with that

amount of money. And, actually, we are in the process now of just

getting some preliminary results from those grants. What we were

looking to do is see how effective this investment has been before

acting. It was premature for us to be asking for additional funding

when we really didn’t have any practical experience on whether

these grants were working or not. That was the rationale behind

not asking for the money this year.

Mrs. MCCARTHY. Okay. Just one other thing: On the Women’s

Business Council, I know that, basically, the committees are going

to be asking you to explain why we had budgeted $400,000, and

you are asking for $1 million to increase it. Could you explain to

us why the increase?

Ms. ALVAREZ. We are also asking for an increase in the number

of Women’s Business Centers.

Mrs. MCCARTHY. Right.

Ms. ALVAREZ. What we see is tremendous activity with women

in business and the need to correspondently respond to that activity. Women have also become involved in the contracting issue as

well. Unfortunately, women are receiving less then 3 percent of

Federal contracts right now. There is a huge concern, and we have

been working very closely with the Women’s Business Council and

with our own office to expand that.

The Council is currently funded at $600,000 and is seeking an

additional $400,000 to expand its economic network, procurement,

equity capital and research program. There is really a lack of data

and information on women in business, and really they are looking

to branch out and be more responsive to what is occurring out

there.

Mrs. MCCARTHY. Well, my whole point is I am hoping this Committee will support the increase. I think it extremely important, because working with business women on the Long Island, we know

that they are there, and we should be doing everything possible to

help them. So, I support the increase, and I am hoping the Committee here will.

Ms. ALVAREZ. Yes, and I think, for example, many states have

asked for assistance in setting up their own councils, which is

something that we would be doing with this funding. Also, there

is an interest in creating a Women’s Entrepreneurial Fellows Program. There are a number of areas where we have not had the resources to be responsive, and this program would do that. This

budget would do that.

Mrs. MCCARTHY. Thank you.

Ms. ALVAREZ. Thank you.

Chairman TALENT. Okay. I will recognize Ms. Kelly, the

gentlelady from New York.

Mrs. KELLY. Thank you, Mr. Chairman.

15

Ms. Alvarez, there are a couple of things that I was looking at. You spent a lot of your time talking about the $21 million new program and the New Markets Program.

Ms. ALVAREZ. Yes.

Mrs. KELLY. But there is about $950 million that you have asked

for in other areas, and I am interested in one particular area, and

that is the PRIME Act, which is actually already a law. That is a

$15 million program, and I would really like to know what steps

have been taken to implement the PRIME Act? What have you

done with that?

Ms. ALVAREZ. I am going to ask Charles Tansey to come up here

and join me, because he is the principal person implementing

PRIME. First of all, we are very enthusiastic about what PRIME

can do in conjunction with our microloan program.

Mrs. KELLY. But what have you done?

Ms. ALVAREZ. Charles, do you want to lay out where we are, because we have been working on regulations and setting this up.

Mr. TANSEY. Yes. Charles Tansey. I am the Associate Deputy Administrator for Capital Access. We began work on the PRIME implementation in December. We have convened several meetings of

interested parties, with a number of discussions as to how to properly interpret the intent of the bill. We have drafted regulations;

we have run it by our General Counsel. They are in circulation

within the SBA right now. We expect that they should be going

over to OMB shortly.

We hope that we will be able to make awards this year if funds

can be made available. It would be essentially a pilot this year and

we hope that we can make awards as early as August. That is our

intent at this particular point.

Mrs. KELLY. So, you intend to get the awards ready and out here

by August?

Mr. TANSEY. Yes.

Mrs. KELLY. Is that what I understand?

Mr. TANSEY. Indeed.

Mrs. KELLY. Will you keep this Committee informed of your actions with that, please?

Mr. TANSEY. Yes, indeed.

Mrs. KELLY. I also wondered when you talked about 23 percent

of the Federal contracting dollars going out, I am very interested

in how many of those contracting dollars went to women-owned

firms?

Ms. ALVAREZ. That is what I was mentioning a little bit earlier.

Less than 3 percent did, and we are alarmed by that, although,

frankly, we have been working very actively with the women’s community, the National Women’s Business Council to try to heighten

awareness, and also working within the agency structures. I actually have entered into agreements with just about every agency, to

develop a strategy targeted at increasing the number of womenowned businesses receiving contracts. So, we are pushing very hard

to get that number up. Our goal is 5 percent.

Mrs. KELLY. I recognize that, which is why I asked the question.

My question is when you are saying you are working with agencies,

are you developing a written plan for them to follow——

Ms. ALVAREZ. Yes, absolutely.

16

Mrs. KELLY [continuing]. And an awareness plan, so that every

procurement office there, including those that are involved with

our, for instance, our international people—the embassies and so

on—those people all understand that that is where we are trying

to go?

Ms. ALVAREZ. I have not only had conversations with them, but

I have in writing commitments from them, and we are monitoring

their commitments. There is a lot of good will and good intent on

the part of the agencies. It is a combination of not only ensuring

that it is a top priority for them, which I believe it is, but also

women have not been involved in this arena in the past, and developing an awareness and a desire to pursue these contracts is something that we also have to work on the outreach part.

Mrs. KELLY. Well, I think women have been in business for a

long time. I started my first business in 1963.

Ms. ALVAREZ. Right, but they haven’t been Federal contractors.

Mrs. KELLY. Well, this is true. I also want to ask you, Administrator Alvarez, about the fact that one of the major emphasis that

we have in Congress this year and past years has been the DrugFree Workplace Program, and I see there is no request in this

budget. I do not understand your total disregard for the need for

us to support drug-free workplace programs. Why is there nothing

included here?

Ms. ALVAREZ. We have $4 million. We have awarded 30 grants.

They were awarded towards the end of last year. We are in the

process now of evaluating the effectiveness of those grants. We

really had no basis, at this point, for requesting additional funding,

because it was very new, and there was no product, no outcome.

We are hoping to see how effective these grants have been in reducing the use of drugs in the workplace and go forward from

there.

Mrs. KELLY. When did you award the first drug-free grant?

Ms. ALVAREZ. It was towards the end of last year, September

17th. It was a program that took awhile to get up and running. We

were working across agencies, and I wish we had awarded them

sooner, but we just couldn’t. It was just very difficult to get everybody agreeing on things.

Mrs. KELLY. Can you explain the difference to me between the

business information centers, One Stop Capital Shops, and the assistance that is offered by the Small Business Development Centers? I would like to have you further describe how the efforts of

these sites can be coordinated. It seems to me we have a lot of different organizations out there that may be overlapping in a way.

And I also wonder how many businesses are being served by these

agencies?

Ms. ALVAREZ. We have an array of services. In fact, we have an

entire department devoted to programs that provide technical assistance, because there are different needs, in some cases specialized, and they require different programmatic responses. Our biggest program, of course, is the Small Business Development Center

Program, which is, by and large, based out of universities. The assistance received there by small businesses is in helping them develop business plans, marketing plans. They may involve one or a

few sessions, but it is not an ongoing involvement.

17

We also have SCORE volunteers, retired executives, who operate

out of various locations—sometimes out of the Small Business Development Centers, One Stop Capital Shops, et cetera.

One Stop Capital Shops are located in Empowerment Zones,

which is not where the Small Business Development Centers are

located. And One Stop Capital Shops, as the name implies, is a coordination of different agencies, local government, and community

organizations, all located in one place to be of assistance to small

businesses in those communities. We have within each One Stop

center a Business Information Center.

A Business Information Center is a collaboration between the

private sector and SBA. The private sector normally provides hardware and software packages and assistance in setting it up. We

work within the community and find the space and maybe research

assistance. The business person will come in, and we will direct

them to this library, if you will, and we will even train them on

how to use the software packages so that they can develop their

business plans. We have USEACs, which is our U.S. export assistance centers. Again, that is a coordination and collaboration across

agencies, SBA, Commerce Department, and Ex-Im Bank for the

purpose of encouraging small businesses and supporting them in

their pursuit of exporting transactions.

We have Women’s Business Centers that provide specialized support to women who often have specific circumstances in their lives

that are different from other business people. Some of them specialize in helping women who are coming off of public assistance

and welfare. Some of them specialize in helping women access venture capital where there is a huge lack of venture capital available

to women in business.

I actually have a chart here that goes through each one of our

assistance programs and outlines how it is that we help small businesses in a particular way.

Mrs. KELLY. Are these centers linked? Because we really want to

make them linked—make sure that they are linked, because the

more assistance, the better. And do your district offices administer

all these programs and oversee all these programs?

Ms. ALVAREZ. Our district offices, for example, with the Small

Business Development— Chairman TALENT. If you would yield just for a second?

Ms. ALVAREZ. Yes, sir.

Chairman TALENT. Maybe the gentlelady can make this the last

one, and then we come back later if you have more.

Mrs. KELLY. Yes.

Chairman TALENT. Okay. Go ahead.

Ms. ALVAREZ. And I would be pleased to meet with you and talk

with you in detail about this.

We have online Women Business Centers; we have SCORE counselors online across the country, obviously, providing advice and expertise wherever they are needed. I wish we could link the Small

Business Development Centers, but by law, they are meant to stay

within their states. I have repeatedly said I would like to see all

these SBDCs linked across the country so that if one has a particular expertise, it could be accessed by someone in a different

state, but apparently that is not possible right now.

18

Mrs. KELLY. Thank you very much.

I have run out of time. I do have more questions, but I, unfortunately, am one of those people who has to leave, so I hope you will

hold the record open so I can submit those questions in writing.

Chairman TALENT. Sure. Well, let us do that right now, as a

matter of fact. Without objection, we will hold the record open for

10 days.

And, also, I meant to mention, Ms. Alvarez, I would like to—I

didn’t see some of your statements regarding the NMI in your written testimony, so I would like to be certain that you include and

copies of those exhibits also for the record.

Ms. ALVAREZ. Yes, sir.

Chairman TALENT. I thank the gentlelady. Her lines of questioning was very good. I didn’t interrupt for that reason but only

because we have other members.

Now, we are going to go in this order, which is the order in

which people came: Mr. Pascrell, Mr. Phelps, Ms. ChristianChristensen, Mr. Hinojosa, Mr. Davis, Ms. Napolitano, Ms. Tubb

Jones, and Mr. Baird.

Mr. Pascrell?

Mr. PASCRELL. Thank you, Mr. Chairman. Good morning, Administrator; good to see you again. Six contracts worth $3.7 million were awarded as a result of the

HUBZone preferences in Fiscal Year 1999. Based on the numbers

that I have, figures that I have seen, this works out to be 0.002

percent of the Fiscal Year 1999 dollars rather than the goal that

we had established at 1 percent. If we are spending $2 million on

the program and there is only 3.7 in contracts to show for it, to me,

this does not seem like a very good return.

I would ask you to look very carefully at that, because I believe

that the Federal contract preferences which were associated with

the HUBZone approval is a critical program, and it can work out

very nicely. And if there are difficulties in implementing it, we

want to know about it, not before the horse is too far out of the

barn and down the road.

Coupled to that is something I want to bring to your attention.

We had a Small Business Subcommittee field hearing in my district not too long ago, and the HUBZone was one of the targets, one

of the focuses. We came up with this kind of a situation, and I

think it is pretty common: Some businesses can take advantage of

this program, but they are actually and physically across the street

from the zip code and the district which enables them not—which

would enable them to be part of the HUBZone district. I think that

this has to be reviewed, and we need to be a little bit more flexible

in who is eligible and who is not eligible. Because what this does

frequently is pit one town against another town, and I think that

that, in the long run, will have a negative effect in terms of what

we want to do. Have you heard about this, and what do you think?

Ms. ALVAREZ. I think HUBZone has the potential to be a terrific

program, and I am pleased with the results we are seeing already.

Anytime you start a brand new program with limited resources, it

takes awhile to get it set up and also to get the word out. Outreach

is a key part of any new program. And we started out with very

limited resources, two employees.

19

One of the things that we did do that took time was we decided

that we wanted to create a new program that would be consistent

with a modernized SBA. The only government contracting program

right now where we can do everything electronically is the

HUBZone Program—everything from identifying your eligibility to

applying. It is the model, and we intend to integrate the other contracting programs into that model so that in the future, whether

it is 8a or SDB it is going to be a simplified application on line.

That took 6 months to do in the first year of a program. That is

not by way of apology, but it is by way of explanation. We had $2 million, which is not a lot. We are asking for $5 million. We need to hire more people. We need to do more outreach.

In the process, again, as with any program, we have discovered

that we need more flexibility; you are absolutely right. And, so we

have been rewriting our regulations and revising them so that we

can let more folks into this program, because in the end it is going

to be really a terrific program. It is geographic and income-based,

and it is going to create jobs.

Mr. PASCRELL. How soon can we see some changes and results

of that flexibility within this program?

Ms. ALVAREZ. James, do you want to comment on where we are

with the revised regs?

Mr. BALLENTINE. Yes, Congressman, we intend to publish the revised regs at the end of April. We anticipate the revised regs being

final in July of this year.

Mr. PASCRELL. And just one final question, Mr. Chair.

What can we look for—I mean, give me some parameters in the

example that I used, for instance. I think it is a good example; this

is happening all over the place. How do we bring that community

across the street, in another zone, in another zip code to make it

eligible?

Mr. BALLENTINE. The revised regs will not address that issue.

The HUBZone Program is designed by census tracks. The census

tracks are, of course, based upon the low income housing tax credit

program administered by the Department of Housing and Urban

Development. We would have to really revise the program and

refocus the program if you are going to change these census tracks.

And that would be something that we would have to work with the

Department of Housing and Urban Development to do.

Mr. PASCRELL. Then you are not answering my question, really.

If we are going to continue to use the same basis, the same demographics, the same census tracks, or enumeration districts, whatever, we are going to come out with the same conclusion.

Ms. ALVAREZ. I think the key here, Congressman, is that

HUBZones were designed so that the principal place of business for

a company would be located in the HUBZone, because the intent

was that they would hire 35 percent of the employees from the

HUBZone, and they would generate economic activity in the

HUBZone. That is why it is hard to have flexibility around the area

of where the company is located. If the company wants to relocate

its principal place of business, they can do so. We can have some

flexibility. But otherwise we run the risk of companies who are not

in the HUBZone wanting to conduct business away from the area

where we desire to create jobs.

20

Mr. PASCRELL. That is absolutely unsatisfactory, that response.

So, what you are telling me is that you don’t intend to change the

definition of a HUBZone.

Ms. ALVAREZ. We will be happy to pursue it.

Mr. PASCRELL. Excuse me, if I may. What I am talking about is

where you have a HUBZone on one side the street—I remember

the discussion and how this got started. And on the other side of

the street, which may happen to be a suburban community, which

hires many of the very people that live in the communities and

urban areas that we are trying to help—I live in one of those areas.

But it seems to me that we are punishing the business simply because it physically is not inside that HUBZone. That, to me, divides

communities and has a philosophical negative impact upon what

we are attempting to do. In the long run, we accomplish nothing.

We are supposed to be bridge builders.

Ms. ALVAREZ. The purpose of the program is to create not only

jobs but an infrastructure in communities that may be across the

street from a suburb, but the moment you physically locate a business in an underserved community, you create the need for other

businesses to serve that business. You are right, there is a philosophical difference. The point of the program was that companies

would be locating in places where they might not ordinarily locate,

hiring people from those communities in their neighborhoods. That

was really the intent of the program.

Mr. PASCRELL. You can’t expect a business, simply because it

lives just out of the zone, to up and relocate physically, if they

could, into the HUBZone. I am talking, more important than the

example I gave, philosophically, that isn’t reality. And I tell you

this from experience, being a mayor, being a State legislator, we

ought to be working with each other.

And this divides communities. It is like what we have in New

Jersey—enterprise zones. The enterprise zone stops at Main Street.

On the other side of the street is another town as if it is a foreign

country, and it is not. Believe me it is not.

Thank you.

Ms. ALVAREZ. Thank you.

Chairman TALENT. I thank the gentleman, and I think the message perhaps for the Administrator, not to speak for the other

members, is that there are some concerns we have. I mean, I mentioned the Veterans Program, and I appreciate your response there.

And Ms. Velazquez talked about procurement assistance, and Mr.

Pascrell has talked about HUBZones. And this is a cooperative effort. I mean, I understand that you have your priorities, and most

of them I think I agree with, but we certainly want attention paid

to——

Ms. ALVAREZ. I would be very happy to pursue this. I am trying

to set out what the thinking was behind the HUBZone Program,

and we are being flexible, which is why we have new regs that are

being proposed. This is one area that is not included in that reg

process, but we can look at it and try to be as flexible as we can.

I appreciate that.

Chairman TALENT. Yes, if there are changes that are needed in

the statute for something——

21

Ms. ALVAREZ. Yes. Maybe there are changes needed in the statute, because I think—— Chairman TALENT. That would be very helpful.

Ms. ALVAREZ [continuing]. It goes beyond the regulatory process.

Chairman TALENT. It is very helpful with you having grappled

with it on a hands-on basis, to say, ‘‘Look, we have tried to do this,

and we can’t. Now we need this.’’ And that makes it much easier

for us rather than trying to anticipate. Because I would rather not

have to go to the statute if you have the regulatory authority.

Ms. Christian-Christensen is next.

Ms. CHRISTIAN-CHRISTENSEN. Thank you, Mr. Chairman.

Good morning.

Ms. ALVAREZ. How are you?

Ms. CHRISTIAN-CHRISTENSEN. Fine. I wanted to congratulate you

on your audit report and—— Ms. ALVAREZ. Thank you.

Ms. CHRISTIAN-CHRISTENSEN [continuing]. All of the other successes that you have outlined for us this morning. And thank you,

of course, for the support that you have given to my district in

many of the areas that you discussed.

We are also very interested in the New Markets Initiative.

Ms. ALVAREZ. It looks good, doesn’t it? I like it. I like it. We need

to get a camera. Sorry.

Ms. CHRISTIAN-CHRISTENSEN. That is okay. No, we like it too.

We are very interested in the New Market Initiative also, and as

you reach out to the Native American and the other rural areas,

we hope that the territories will also be given some special consideration.

I have maybe two questions. One is about farming, and the Committee has had several hearings on agricultural issues. The most

recent was regarding saving the family farm. The Fiscal Year 2001

budget submission has a component that addresses Native American-owned business technical assistance, and the Fiscal Year 2000

submission had a component that addressed veteran-owned businesses. Is the SBA looking at each one its technical assistance programs to see what kind of assistance can be provided to farmers?

Ms. ALVAREZ. Yes, we are. And Charles may want to speak to the

fact. We have been involved in rural roundtables, looking at all our

programs to see how we can adjust and be responsive to the needs

of the rural communities. We also think, for example, the New

Markets Program will be terrific for rural communities where there

is really a lack of access to equity.

So, Charles, I don’t know if you want to add something, but we

are actively pursuing a rural strategy at the SBA.

Ms. CHRISTIAN-CHRISTENSEN. Yes. And maybe in the comment

they might want to comment on a memorandum of understanding

that will allow USDA lenders to participate in the 7(a) Loan Program that is being proposed?

Mr. TANSEY. Yes. Charles Tansey, ADA Capital Access. We are

pursuing a memorandum of understanding with the USDA. The

idea was to try to build momentum back into rural areas of the

country. We have seen a distressing trend away from the use of

some of the SBA programs, particularly in states with large, rural

areas, and we want to find a way to rectify that. We have deterVerDate 11-MAY-2000 09:32 Apr 30, 2001 Jkt 010199 PO 00000 Frm 00025 Fmt 6633 Sfmt 6602 E:\HEARINGS\71971 pfrm08 PsN: 71971
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mined an effective strategy would be to work hand-in-hand with

the USDA, particularly with their intermediary lending partners,

or lenders, who are already out in rural areas where either our

lending partners don’t have a presence or our districts don’t have

presence. They could use the 7(a) Program in particular to augment their limited resources. That is the first piece of it.

There are a whole series of other things that we are looking at,

and we are trying to make adjustments for our program so that we

can build momentum in the rural areas. I think that is a general

outline. Every month we are having a rural roundtable in various

parts of the country to hear what people have to say about what

needs to be done and how we can work with other agencies in addition to USDA. We will have a report on that sometime in June or

July.

Ms. CHRISTIAN-CHRISTENSEN. Thank you for that answer.

We have several members on our Rural Business Enterprise Subcommittee that might be interested in having some of those

roundtables held in their districts, and we will share that with you.

Ms. ALVAREZ. We would be happy to pursue that.

Ms. CHRISTIAN-CHRISTENSEN. Thank you. And I have a question

also about the small, disadvantaged business. That is something

that I am very concerned about. And as of 10–1–99 if a firm is not

SBD certified, it won’t be recognized as a minority-owned business

by the Federal Government as far as procurement. And if they are

not certified, also the large prime contractor won’t get credit for

using the SBD as a supplier to meet its goals.

The application seems very complex, and I would be interested

in hearing what is being done to make this application process

easier?

Ms. ALVAREZ. I agree. We are simplifying the application. We are

actually looking to combine the 8(a) and SBD application and ultimately do it electronically.

James I don’t know if you want to comment further on that process.

Mr. BALLENTINE. We do indeed intend to simplify the application.

We agree with you, as well, that it is a complicated application,

and to some extent the 8(a) application is also very complicated. As

the Administrator mentioned, we are planning to streamline that.

We, in fact, hope to have that totally completed, cleared through

the Office of Management and Budget by the end of this month.

Ms. CHRISTIAN-CHRISTENSEN. Thanks. Let me give my colleagues

an opportunity to ask some questions. Thank you very much.

Ms. ALVAREZ. Thank you, Congresswoman.

Ms. VELAZQUEZ [presiding]. Yes, Mr. Hinojosa.

Mr. HINOJOSA. Thank you, Madam Chairman.

I am very pleased to be able to listen to the presentation that

you made as to how you anticipate SBA will look in the year 2003.

We look forward to helping you get there, and that it will indeed

be easier to create those New Market Initiatives that you talked

about and access the capital for all women and minorities to get

into business or expand their businesses. In this New Market Initiative, I know that there are some regulations that are supposed

to be published. When will they be out?

23

Ms. ALVAREZ. Well, first, we need authorizing legislation. We

have a proposal from the Senate side, and we are hoping to have

one from the House side shortly.

Mr. HINOJOSA. Do we have one?

Ms. ALVAREZ. We do have appropriations, but we don’t have the

necessary legislation.

Mr. HINOJOSA. Well, has anybody in the House of Representatives initiated that?

Ms. ALVAREZ. We have been working very closely with Congresswoman Velazquez to ensure that we will have some legislation on

the House side. She might want to comment on it.

Ms. VELAZQUEZ. There is going to be a meeting between the staff

of SBA and my staff. Once we finalize the changes that have been

made, it will be introduced probably next week.

Mr. HINOJOSA. Excellent. Those of us who have empowerment

zones, especially rural empowerment zones, are desperately waiting

for that to get started, and if you need authorization, Madam

Chair, I want to be sure that you know that I want to be part of

that. I want to help, both in being a co-sponsor and being on the

House floor to speak in favor of it.

Ms. ALVAREZ. Very good.

Mr. HINOJOSA. You and I also had a discussion at the end of last

year regarding efforts by some associations who were trying to

change the definition of a small business to be less 50 percent. And

I just want you to bring me up to date. Has it been cleared that

we are going to stay with the 51 percent, as I know I am in favor

of?

Ms. ALVAREZ. Yes. The National Minority Suppliers Development

Council was exploring redefining what constitutes a small business

from the standpoint not only of ownership but of control. I think

their intention was to make as much equity capital financing available to those businesses as possible.

We are very supportive of having more venture equity capital

available for minority-owned businesses, but we were very clear

that the law defines minority ownership as 51 percent ownership

and that we will continue to support that. It is the applicable law

with respect to all Federal programs, and we believe that it is a

way of building minority businesses by ensuring that there is 51

percent minority ownership and that there is no misrepresentation

of who really owns the company.

We have been on the record. I believe that the council did go

ahead and pass a resolution.

Ms. VELAZQUEZ. At the end of January they changed.

Ms. ALVAREZ. Yes.

Ms. VELAZQUEZ. From 51 percent.

Ms. ALVAREZ. But that does not affect the law, and it doesn’t affect our interpretation of the law. My concern was that there

shouldn’t be confusion out there. A private entity redefining what

constitutes a minority-owned business has no applicability to our

definition of what constitutes a minority-owned business. Fifty-one

percent ownership is the law.

Mr. HINOJOSA. I certainly support the law, and I think that there

are exemplary programs out there where large corporations, like

Burlington Factories, have gone in and found medium-sized busiVerDate 11-MAY-2000 09:32 Apr 30, 2001 Jkt 010199 PO 00000 Frm 00027 Fmt 6633 Sfmt 6602 E:\HEARINGS\71971 pfrm08 PsN: 71971
24

nesses and done limited liability partnerships where they buy 49

percent equity in that company and thus accomplish exactly what

the other group was trying to do by saying we needed to have it

at less than 51 percent. And there are still other large companies,

like ConAgra, that are again using that limited liability partnership example and doing it successfully with only 49 percent.

So, I think that we need to just take those exemplary programs,

highlight them throughout the country so that those medium size

or small businesses can pursue moving to expand their facilities

into some of the empowerment zones and help us create jobs in

those places that just need so much help.

Lastly, there was another one here that—on e-commerce, it

seems that when you were meeting with the folks over at the U.S.

Senate, in your testimony you said that $5 million of your budget

is to expand training, offering classes on topics like building a web

site, conducting e-commerce on the Internet, marketing your business online, and on and on. But according to the staff, they feel

that with the way this is going that the money is dedicated for

other items. What are they?

Ms. ALVAREZ. I don’t know what they would be. We had a very

successful Y2K initiative at the SBA where we conducted hundreds

of seminars and forums around the country. We estimate that

about a million small businesses came to seminars, summits, conferences that were focused on technology. And my first reaction

was let us keep the momentum going, because it is clear that there

are thousands, millions of small businesses out there who recognize

that they have to use technology to be competitive.

Part of the proposal would cover e-commerce summits around the

country, a high level of visibility for the role of e-commerce and

technology in small businesses. We are only beginning to scratch

the surface on what we can do with online classrooms and other

online activities. We know that government contracting is going to

be conducted online more and more. And, so we need to make an

investment that involves people and resources and activity to get

our small businesses prepared.

Mr. HINOJOSA. So, do you have the staff now that can go and

help us conduct an e-commerce summit in our region?

Ms. ALVAREZ. What we did was we took regional and local staff,

combined it with experts from central office, and we pulled together

the summit, and if you are interested, we would do that.

Mr. HINOJOSA. Yes, I am.

Ms. ALVAREZ. Yes.

Mr. HINOJOSA. Thank you.

Thank you, Madam Chair.

Ms. VELAZQUEZ. Thank you.

Mr. Davis.

Mr. DAVIS. Thank you very much for your testimony and your responses to the questions that have been raised.

Let me just begin by first of all commending and congratulating

your agency for the very aggressive work that it has done throughout the country especially as you have promoted the New Markets

Initiative and especially as you have responded to questions and

concerns that we have raised about contract bundling. And let me

just say I appreciate the fact that there are going to be new regulaVerDate 11-MAY-2000 09:32 Apr 30, 2001 Jkt 010199 PO 00000 Frm 00028 Fmt 6633 Sfmt 6602 E:\HEARINGS\71971 pfrm08 PsN: 71971
25

tions coming soon, although I may as well just state for the record

that as far as I am concerned looking for contract bundling to assist in the development of small businesses is like looking for light

in a dark place.

And I appreciate the fact that your agency has tried to squeeze

out some regs that might in some way prevent the further harm

that contract bundling can do for small business development, but

I think that you have been at a terrible disadvantage in trying to

implement that legislation and make it consistent with the goals

and objectives of the Small Business Administration. So, I just

want to say that——

Ms. ALVAREZ. Thank you.

Mr. DAVIS [continuing]. I appreciate the—the other concern I

have is with the New Markets Initiative. In the county in which

I live, Cook County, Illinois, which is the second largest county in

the country, 5.1 million people in our county, and in that county

only 14 percent of all loans that have been made in Cook County

have gone to low-income areas. And there are a lot of low-income

areas. As a matter of fact, in my district alone, I have over 165,000

people who live at or below the level of poverty.

And, so my question is that even with the proposed New Markets

Initiative—and I also know that many of the SBA programs have

been aggressively marketed, that people have in fact attempted to

make use of them. You have got some good staff out there. But in

spite of all that, when you look at the bottom line, the real deal

is that the resources are not getting to the people who need them.

The help is not getting to the people, in many instances, nor the

communities that really need it. Do you think that the request in

the New Markets Initiative is really enough or I am saying, should

we get things moving, will this be enough to really make a significance difference or impact throughout the country?

Ms. ALVAREZ. Thank you very much, Congressman. I think that

is a very thoughtful question. And the presentation I made on the

New Markets Venture Capital Program only highlighted a program

which is new and requires legislation, and therefore I went to some

length to explain what that was about. We actually have a much

bigger strategy to address precisely the concerns that you have

raised.

On the loan side, on the debt side, and on the technical assistance side we have focused on smaller size loans, because that is

where the greatest need is in communities that are underserved.

And to address that we have asked to double the size of the

Microloan Program. It is the reason we are very supportive of

PRIME, which will help microenterprises and the microlenders to

really serve those communities.

We have also asked for an increase in the guarantee for small

size loans. The reason is that we have seen a significant drop in

activity by our regular lenders in the smaller size loan area. When

we introduced LowDoc we had a phenomenal success with it. It had

a 90 percent guarantee attached to it. The moment we changed

that guarantee to 80 percent, we started to see the numbers fall

off, and we started to see many of the smaller lenders get out of

the program.

26

So, in response to the criticism and the concerns we have gotten

from the lending community, we are proposing a 90 percent guarantee for smaller size loans. We hope that that will encourage more

activity on the loan side. That needs to be accompanied by equity

investments. A company that would receive an equity investment

through the New Markets Venture Capital Program would be a

growth company, and so they would be much further along, for example, than a microborrower. Still, they would operate in precisely

those communities, and that kind of an investment of capital would

create jobs in those communities.

And that also gets further, I think, enhanced through the

HUBZone Program. The idea behind the HUBZone Program was,

again, locating businesses in geographically distressed communities

to create employment for folks in those communities as well as an

infrastructure. So, I think we have really a three-pronged strategy

for New Markets that cuts across lending and technical assistance,

equity investments, and contracting. We are looking at the smaller

businesses, because that is where we think that there is a lack of

capital, credit, and presence.

Mr. DAVIS. Thank you very much.

And, Mr. Chairman, I also want to commend both you and the

ranking member for looking at these issues legislatively, because I

think that in many instances we have given the Small Business

Administration mandates, but at the same time they have had

some handcuffs on. We have said, ‘‘Go out and do this, but you

have got to do it in compliance with the laws, the rules, and regulations that are established legislatively.’’

And as one who has been interacting with the Small Business

Administration in low- and moderate-income communities for about

30 years now, I am convinced that in many instances what we have

done is we have set up programs, mandates, but in many instances

the restrictions were so tight that individuals couldn’t reach the

goals that we had set for them. And I am just pleased to know that

there is a level of awareness that have us trying to address legislatively some of the impediments to the implementation of the Small

Business Administration mandate. So, I thank you very much.

Ms. VELAZQUEZ. Thank you, sir.

Chairman TALENT [presiding]. The gentleman always makes a

very good point, and this is a—there is a kind of a creative tension

that works here. And what I would just encourage the Administrator to do is where she feels she needs additional flexibility to

meet our time limits to be aggressive in letting us know that so

that we can work with her.

And conceding full marks for the difficulty of these things, we

still need to have them done. I think the point Mr. Pascrell made

about the HUBZones, the regulations should not have taken as

long as they have taken to produce. And if there is problems, we

need to work with them and get them done. And I don’t understand

the Administrator to be saying anything different than that. One

of the reasons we have these hearings and why I appreciate the

members’ participation is to flag for the Administrator areas where

we are concerned——

Ms. ALVAREZ. Yes; appreciate that.

27

Chairman TALENT [continuing]. And make sure that—because

she is very busy, and make sure that we impress upon her in a

forum which can’t be ignored, frankly, our intention to make sure

that these things are done.

Ms. Napolitano, I appreciate your patience.

Ms. NAPOLITANO. Thank you, Mr. Chair, and with this patience

I learn, because I listen more than I can speak.

Thank you very much, and I echo the sentiments of my colleagues about what I believe to be one of the best working committees to address the issue that affects us at the local level. One of

the areas that really concerns me, Ms. Alvarez is the Welfare to

Work, and you had a request in 2000 of $761,000, and you are requesting a lesser amount than last year, a decrease of $193,000.

With the enactment of the Personal Responsibility and Work Opportunity Reconciliation Act in 1996, along with the President’s

Welfare to Work Initiative, it effectively ended the current welfare

system as we all knew and loved it.

The SBA is participating in this initiative by providing training

to individuals leaving public assistance, providing technical assistance to welfare recipients who have potential to become entrepreneurs, and we have discussed this at length, and educating

small business owners on the Welfare to Work Program in order

to obtain hiring pledges from them, which is in my area the Private

Industry Council that has been doing that for a long time, and now

we are asking them to do other things, including, of course, look

at the Welfare to Work Program.

You state in your budget you have exceeded your three-year goal

for the business commitments to hire individuals participating in

this initiative. What kind of follow-up is conducted with the small

business community to determine if those commitments are honored and to determine if there are ways to improve the SBA’s efforts, realizing that specifically in California it really hasn’t begun

to hit the cap? In other words, there was a limit. That limit is just

barely becoming a reality. How do we know that we won’t be able

to need more assistance to help small business be able to take in

those Welfare to Work recipients and the training that goes along

with it?

Ms. ALVAREZ. The Welfare to Work Initiative is a very important

one that took very seriously. And I am happy to report that we

really accomplished quite a bit, which is why, at this point, we

don’t think we need additional funding.

For example, we set three-year concrete numerical goals which

we actually exceeded. We had wanted to achieve at least 200,000

commitments which meant—commitments that small businesses

would either step up to the plate and commit to hiring someone

from the public assistance rolls or we could assist an individual in

becoming an entrepreneur. We actually exceeded that goal.

Sixty-seven percent was business commitments to hire, and 33

percent was providing entrepreneurial training. We are pleased to

say that we reached 210,029 total commitments.

We produced and distributed a Welfare to Work tool kit for small

business owners. Small businesses told us that they had a shortage

of workers, and we said here is an opportunity for us to connect

the small businesses with the potential workers. That is why the

28

Welfare to Work tool kit was important, because we needed to educate them.

We launched a public service campaign which got out the word.

We entered into formal partnerships with government agencies,

trade associations, not-for-profit organizations so that we could expand the scope of what we were doing. And we certainly worked

with the private industry councils. Every single district office entered into a different kind of relationship with the PICs.

We also built a world-class Welfare to Work web site that contained the tool kit, the pledge cards, the success stories, and our

award winners. That site averages 8,000 hits a week.

We feel we did what we set out to do, and we are continuing to

leverage our resources. We felt at this point in time we were not

looking for programmatic increases, and we were just looking to

keep pace with what we have done.

But it is an important challenge, and we don’t want to be asleep

at the switch. I don’t think we are, because I think we have at the

field level internalized these objectives. They are holding events,

outreach and acting on Welfare to Work goals really as part of

their day-to-day business, which is what we wanted.

Ms. NAPOLITANO. Okay. So, you don’t think there is going to be

a demand or as high a demand possibly due to the economic viability.

Ms. ALVAREZ. I think that the economy is so strong and people

are so eager to find workers and, that is what the New Markets

Initiative is all about. It is about finding another way to give people employment and entrepreneurial opportunities, because we

don’t want people overlooked because structurally things haven’t

been set up to address those areas. The New Markets Initiative

will help a lot of folks who still fall within the Welfare to Work category.

Ms. NAPOLITANO. Now, you do work with Labor on that issue?

Ms. ALVAREZ. Yes, absolutely. I have had many conversations

with Secretary Herman, and we have formal relations with them

about this topic.

Ms. NAPOLITANO. Thank you.

The other question, of course, has to do with the Drug-Free

Workplace grants, and unfortunately we don’t hear the issue of

drug in the business being lessened. We seem to have a tremendous problem in the United States. What can you tell us about how

the program has worked? What success have you had with it, and

also what performance measures have been used to evaluate the

success of your Drug-Free Workplace Program?

Ms. ALVAREZ. First of all, we think it is a good objective, and we

are very supportive of it. It is really too soon for us to evaluate the

outcome of the program, because, as I had mentioned earlier, anytime you start up a new program, there is a process of working

across agencies that is more time consuming than I would like. Setting up processes and procedures, took us awhile, so that we didn’t

get those grants out the door until the end of the fiscal year last

year. The reports that we are getting right now are still preliminary. We would like to see what the result is of the 30 grants that

we awarded. We awarded them to not-for-profits and to Small

Business Development Centers in September of last year. So, it is

29

soon. I don’t want to be premature in telling you how they have

worked. For that reason, we didn’t pursue more funding, because

we didn’t know what the $4 million investment was yielding us,

but we do think it is a very good idea, and there is a need for it.

Ms. NAPOLITANO. Great. Well, that answers part of my question

anyway.

Another area is the National Women’s Business Council, and

while I read in here that you are requesting an increase, which

may be something that they are well deserving of, I am wondering

whether they are working with your Welfare to Work, because a

large segment of the Welfare to Work are women. To be able to

help them become the new entrepreneurs and being able to assist

the Women’s Business Council do that outreach, what is SBA recommending or what is being done in that area to bring them together to be able to promote new entrepreneurships?

Ms. ALVAREZ. I may ask Sherrye Henry. I don’t think Amy is

here. I didn’t see Amy, but if Sherrye is here, you may want to

comment on this issue, Sherrye. Sherrye runs our Office of Women’s Business Programs. And we have really tried to work across

departments and across agencies on this issue of Welfare to Work.

The National Women’s Business Council really is positioned to

play a very important role. We are seeing an explosion of womenowned businesses, which is why we are asking for an increase. Not

enough research is being done. There are topics that we are not

able to research, because we don’t have the funding; that is part

of what this will cover. We are getting requests at the State level

for us to be involved. We can’t do it without more resources. Because the States now want to set up their own councils.

There is an interest in bringing together local policymakers with

woman business owners to conduct summits, to help them really

develop legislation and regulations and other programs to support

women’s entrepreneurship. All of that requires support.

Sherrye, would you like to comment?

Ms. HENRY. Yes, I am Sherrye Henry, and I run the Women’s

Program.

I think it is important to know that our Women’s Centers—and

we have a network of about 80 around the country—work very

hard to move women off welfare. We have been very successful at

it. In fact, about 20 percent of all of our clients are welfare women,

and the number of low-income women is up in the 40 percentile.

We are very concerned already with this population.

Ms. ALVAREZ. Through the Microloan Program, for example,

more than half of our microloans are going to women, and these

are, again, low-income women, which is why we would like to double that program. It makes a huge difference if they can access a

small amount of money accompanied by technical assistance. Many

of our Women’s Business Centers are actually microlenders as well.

So, it really is an integrated strategy.

Ms. NAPOLITANO. Good. May I suggest that for any of the research that you may be wanting to ducktail with, a lot of the educational institutions—the universities and junior colleges—have

done a lot of research on the population and the business and the

impact on the economy. So, may I suggest that you bring them as

partners, because they have already done part of it if not most of

30

the research that might be able to help you, and you may be entering into some kind of agreement with them to be able to add another segment to be able to provide what you need.

Ms. ALVAREZ. I think that is good advice. In some cases, we may

be doing that already, but I think we need to expand it. Thank you.

Ms. NAPOLITANO. Thank you.

Ms. JONES. Don’t go away Sherrye. Before you leave, I want to

ask you a quick question.

Before I ask the question of you, thank you, Madam Chairman.

Chairman TALENT. The gentlelady from Ohio is recognized.

Ms. JONES. Oh, you are back. See, you leave for a few minutes.

Mr. Chairman, ranking member, Director, on behalf of the 11th

Congressional District of Ohio, thank you for the support that you

have given me in the many—in the couple programs that we tried

to do with regard to small business in the district, and I continue

to look forward to working with you.

The question I wanted to ask of you, Ms. Henry, was in Ohio the

Women’s Business Centers are in Columbus and where else?

Ms. HENRY. Well, we have a network of about seven operating

centers. They are all graduated centers, Congresswoman.

Ms. JONES. Okay.

Ms. HENRY. They have not been funded by the SBA for a number

of years now.

Ms. JONES. Okay.

Ms. HENRY. They are all eligible because of the sustainability

legislation that was enacted in the last session.

Ms. JONES. Make it plain to me, what are you telling me? You

are saying they are graduated but—— Ms. HENRY. The program was set up by the Congress to sunset.

All of the grants were at first only for 3 years, and it was extended

to 5 years, and then last session the Congress passed sustainability

legislation, which now allows SBA to recompete and refund a limited number of the network of graduated centers. We don’t have

enough money to refund all of them, but we expect to have about

12 graduated centers refunded by the 1st of June.

Ms. JONES. So, in this budget the process is done. Okay. Thank

you very much, Sherrye.

My question goes to the issue of other agencies administering

some of the loan programs and other type of programs that provide

capital for small businesses. My question is have you assessed their

success as compared to the success of SBA when SBA administered

those programs? And if you have, could you provide, at least I am

interested for my district, are they doing better, are they doing

worse, what could happen to improve it? Because very often, we do

something to improve or cut down on the administration process,

but its result is to have it not be advantageous to the small businesses themselves. I have no knowledge one way or the other, but

I think it might be a useful evaluation for SBA as well as the Committee.

Ms. ALVAREZ. First, let me say that SBA is the premiere lender

to small businesses in the United States.

Ms. JONES. Yes.

Ms. ALVAREZ. We believe just by virtue of our experience, and as

I think you saw with our presentation, as we modernize that we

31

are on the cutting edge. And our numbers, the fact that we are projecting $20 billion in overall activity, including leveraging of private capital in the year 2000, is a success story that I think can’t

be told with respect to small business anywhere else.

Charles, you may want to comment. Obviously, the Department

of Agriculture has a program that addresses small business needs

in the agricultural area; HUD has its version of our program.

Ms. JONES. Maybe my question wasn’t clear. The question I am

raising is that at some point SBA decided to allow other people to

certify a business for a loan, like banking institutions and the like.

And I am asking have you assessed whether or not, now that that

certification happens in an institution other than SBA, whether or

not there is an increase in funding for small businesses or a decrease based on the move to another agency? I didn’t mean—I

think you are doing a premiere lending operation as well, but I am

just trying—— Ms. ALVAREZ. You are speaking about the contracting. That is

not you, Charles; that is James.

Ms. JONES. I thought maybe I wasn’t clear in my question. I

apologize for that.

Ms. ALVAREZ. We have always been the agency to certify to 8(a)

eligibility, for example, and so we have tremendous experience in

that area. We still are the agency who will certify you for small,

disadvantaged business status. But in addition—oh, okay, now,

Greg hands me this note. He says, ‘‘No, she really means the

banks.’’ Ms. JONES. Yes, exactly.

Ms. ALVAREZ. So, we are not talking about small, disadvantaged

business. We are talking about PLP, preferred lenders.

Ms. JONES. Exactly. Maybe I should have used your term.

Ms. ALVAREZ. All right. We are just into this jargon here. Okay,

I am going to turn this over to Charles to talk about how the Preferred Lender Program is operating. We obviously create the standards, and we review them for compliance to ensure that they are

meeting our mission objectives as well as our policy objectives.

Charles?

Mr. TANSEY. Yes. It is a tremendously successful program. I

think about 60 percent of our total loan volume is done right now

under the PLP, the Preferred Lending Program. We do approve eligibility at this particular point, but, essentially, they are approving

the credits under their own credit criteria in light of guidance.

Ms. JONES. I understand that, and what I am asking——

Ms. ALVAREZ. Your question is are they really reaching the people who need the help.

Ms. JONES. I am just asking have you used an evaluation to determine that it is working as well as we conceptually think that it

is? And I am suggesting that maybe what we need to do is take

a look at that, and then maybe go to some of the institutions and

say, ‘‘Well, why is the rate in 1999 less than it was in 1998 when

we have an increase in businesses happening? What are you doing

to keep people from being involved in the process.’’ I hope I am

making sense.

Ms. ALVAREZ. Yes, it makes total sense.

Ms. JONES. Okay.

32

Ms. ALVAREZ. Yes. Do you want to comment?

Mr. TANSEY. We are in fact doing that. Some of the recommendations that we are putting forward right now, for example, the 90

percent guarantee, comes directly out of our discussions with banks

as to what they need to do in order to pursue the kinds of goals

that we are looking for.

Ms. JONES. I am raising the question, because in my district— I am on Banking and I also am on Small Business, because I would

like to know what the banks in my area are doing, and if they are

not doing what they ought to be doing, then I want to have an opportunity to sit down and have that discussion.

Ms. ALVAREZ. Well, they are here today. I hope you are going to

stay and ask them these questions.

Ms. JONES. I wish I were. They are not here from my district.

Ms. ALVAREZ. They are hearing it. Well, we have national representatives, and I am sure that Tony and others will be happy to

respond.

I think you are right. We are working to increase the guarantee,

because we have heard from them that that would make a difference. We have set up SBAExpress, because we heard that if they

could only use their own applications, they would be willing to accept a 50 percent guarantee, because it would make it so much

faster. That is for smaller loans, because we are focused on smaller

loans. We have the Community Express pilot in which these same

category of lenders are not only making loans but they are providing technical assistance at their own expense. We have had an

ongoing discussion with them about what they need to do to meet

the mission objectives of the SBA. And I am glad you are saying

this with them present, because we say it all the time.

Ms. JONES. I appreciate your responses.

Chairman TALENT. If the gentlelady will suspend just a second.

Mr. Wilkinson—— Ms. JONES. I am sorry.

Chairman TALENT. Oh, no, not at all. Mr. Wilkinson is here, and

unless there is an objection, I don’t mind him answering a question

or two. Ms. Tubbs Jones, you are going to have to leave, right, so

you can’t stay for the second panel?

Ms. JONES. Yes, sir, unfortunately.

Chairman TALENT. We won’t open this up to a huge—because

other members—but I am sure you don’t mind, do you, Mr.

Wilkinson, going a little ahead of time and answering a question

or two?

Mr. WILKINSON. No, I would be happy to.

One of the issues that I raised in my testimony, and it has been

discussed here today somewhat, and that is the subsidy rate estimate. And it has been our position that the overestimate of the defaults in the model has been one of the reasons contributing to

some of the changes we have had to make in the program.

If we go back to 1995 when Low Doc Program was rolled out and

the 90 percent guarantee, everything was rolling along fine. We

had to make some program changes to bring the subsidy cost of the

program down, and we moved from a 90 percent guarantee to an

80 percent guarantee, and the loan volume since then has gradually fallen off.

33

That is one of the issues we need to look at: How can we get the

subsidy rate cost down in line with the appropriations that we receive? And appropriations have been dwindling. The subsidy rate

has not fallen, so the ability for lenders to propose and implement

small loan incentives has been very difficult. And I think that is

one of the reasons why we need to keep focusing on the default estimate in the subsidy model, and we need to have a discussion, as

I pointed out in my testimony, about a subsidy rate floor. What is

the role of the Federal Government going to be in the loan programs? What level of Federal funding will we get? Because as funding goes down and the subsidy rate doesn’t move down, that means

we have got a smaller program or we have to raise fees or take

away program incentives.

Ms. JONES. And I thank you, Mr. Wilkinson for that response,

but that is the point I am trying to make: It might not be a bad

idea to take a look at that and say, ‘‘Hey, how do we adjust—not

hey—how do we adjust that to the point that we can’’—that is not

in the record, right? Strike that. Lawyers can do that. [Laughter.]

Anyway, such that we are really moving down the path of helping small business. And that is my point.

And, Mr. Chairman, Mr. Wilkinson, I thank you. My questioning

is done.

Chairman TALENT. The gentlelady raises a very good point. One

of the problems is that, and in fairness to Mr. Wilkinson who did

step up unexpectedly there, we do send a mixed message, and Congress does it, and the executive branch does it. We say we want

you to get more money to small businesses, more money to low-income neighborhoods, more money that is a riskier loan. At the

same time, we want the subsidy rate to go down, and we want the

default rate to go down, and we want you to square the circle, and

it does put them in a little bit of light, but if we don’t put them

under some pressure, we don’t again make the point that we would

like to have this done.

The gentlelady from New York had another question or two, I

think.

Ms. VELAZQUEZ. Yes. Ms. Alvarez, when the HUBZone Program

was designed, you, Former Ranking Member LaFalce, and I, we

worked very hard on ensuring that this program did not interfere

with the 8(a) Program. So, I would like for you to clarify for the

record what the order of procurement preference is for the

HUBZone.

Ms. ALVAREZ. Fine, and I will also ask James to join me here.

It has now been almost 2 years since we were engaged in discussion about creating a new program called the HUBZone Program,

Historically Underutilized Business Zones. And at the time, one of

the concerns that was foremost for the Administration as well as

for Members of Congress was what effect this would have on the

8(a) Program. Would it have a damaging effect on the 8(a) Program? That really dominated the discussion apart from the discussion about the virtues of the HUBZone Program, which are many.

We got—we had some very serious discussions, and there are letters on the record attesting to those concerns, and one letter in particular, which I wrote to, at the time, Congressman LaFalce, stressing that we would protect the 8(a) Program. We then put forth, as

34

I said, almost 2 years ago proposed regulations. In those regulations we presented an order of preference, and the order of preference had 8(a) at the top of the list, because we wanted to ensure

that 8(a) would have the first priority in terms of receiving contracts even within the context of the HUBZone Program.

We put it out for comment. We followed the appropriate process,

and, frankly, didn’t get much in the way of comment that challenged the order of preference we proposed. We went ahead and we

implemented it. And, to date, we have seen that there have been

HUBZone opportunities for 8(a) and non-8(a) firms. We think that

the order of preference protects the interests of the 8(a) Program,

of the 8(a) companies, but at the same time it makes it possible for

non-8(a) businesses to obtain HUBZone contracts. We have seen it

already; it is happening. And that is really the status right now.

The current order of preference does protect 8(a), but I don’t think

it creates any obstacles for non-8(a) businesses.

Ms. VELAZQUEZ. Yes, so that means it will not change.

Ms. ALVAREZ. We are not changing it. Someone else might decide

to change it, but we are not changing it.

Ms. VELAZQUEZ. I want to send a clear message that we worked

out a compromise, and I think it is 2 years too late for other parties

now to be challenging the order of preference, and I just want to

make it very clear that it was a compromise that was worked out

between this Committee and the Senate side.

Ms. ALVAREZ. Yes. I agree.

Chairman TALENT. I recognize the gentleman from Illinois.

Mr. DAVIS. Thank you, Mr. Chairman. I just have one other

question I would like to ask the Director.

Ms. ALVAREZ. Yes, sir.

Mr. DAVIS. In terms of technical assistance, especially to small,

emerging business enterprises, how valuable does the Department

view that?

Ms. ALVAREZ. The smaller the business, the greater the need for

technical assistance. It is the reason why technical assistance is a

significant component in the Microloan Program. It is the reason

why we are so enthusiastic about PRIME, which is totally focused

on technical assistance. It is the reason why technical assistance is

a significant component of the New Markets Venture Capital Program.

We just think that particularly with newer, smaller businesses

and in underserved communities, that it is not just about the

money. It is about helping people who have energy, ideas, willingness, giving them tools to succeed. And, so we can’t stress enough

how important the technical assistance is. We have seen the success of technical assistance nationwide with the Small Business

Development Centers, with the SCORE volunteers, with the Women’s Business Centers, with the Business Information Centers, with

One Stop Capital Shops—in each case it is really a different kind

of support for a different set of needs. There may be times when

it appears they are overlapping, but, overall, each one of these programs really targets the needs appropriate to different businesses

at the stage of their development.

35

Mr. DAVIS. Thank you very much. I understand that you have

taken the position that I like, that if you give a person a fish, they

might eat for a day——

Ms. ALVAREZ. That is right.

Mr. DAVIS [continuing]. But if you teach them how to fish, then

they can have a business for a lifetime. So, I thank you very much.

Ms. ALVAREZ. Thank you.

Chairman TALENT. Okay. I have a few more questions, and then

we can go with the next panel.

Perhaps you want to have Mr. Walter address this; I don’t know.

Ms. ALVAREZ. All right. Greg, come on up here.

Chairman TALENT. But the question that was raised initially

about the subsidy rate and how far back we go in looking at experience on defaults.

Ms. ALVAREZ. Fourteen years.

Chairman TALENT. Yes. Which I understand is the average maturity of the loans.

Ms. ALVAREZ. Correct.

Chairman TALENT. So, the idea there is that we want to go back

at least as far as it takes, on average, to dispose of loans. Is that

the theory behind it?

Ms. ALVAREZ. Yes, yes, so that we can watch the performance

throughout the life of the loan.

Chairman TALENT. And I am getting at the difference between

the agency’s views and OMB, because I think OMB is a looming

presence behind a lot of this, and I don’t like the idea of the programs this Committee oversees, which we all agree are terribly important, being used as billpayers for other parts of the Treasury,

and I will just lay it—I think that is what happens, and I think

OMB structures it that way.

Now, a lot of these loans are prepaid, aren’t they?

Mr. WALTER. That is correct, Mr. Chairman.

Chairman TALENT. Which means that, yes, maybe the average

maturity is 14 years, but that really isn’t the average in terms of

disposing the loans, because if you included the prepay, the average life of the loans is less than 14 years.

Mr. WALTER. Many of the loans we do make have maturities up

to 25 years, especially in the larger real estate-backed loans. So,

the 14 years is the average length of time a loan is outstanding.

Chairman TALENT. So, in this case, average maturity is the same

thing as average life of the loans?

Mr. WALTER. Not necessarily. It is just a mathematical average,

so it isn’t necessarily the same thing.

Chairman TALENT. Because my understanding is that the average life of the loans is less than 14 years. And if it is—in other

words, if we went to figuring it based on how far back we went

based on average life rather than on average maturity, it wouldn’t

be 14 years. And we are all in agreement that if we don’t have to

go back that far, then the subsidy rate doesn’t have to be this high,

and that frees up dollars for other things. I mean, what is your

opinion on that, either the Administrator——

Mr. WALTER. I think we would be happy to look at that and see

if there is a significant difference between the two and enter into

36

discussions with OMB and see whether there is any ability to look

at that.

Chairman TALENT. Now, if there were a difference who would

have—would you have the authority to change to average life as

opposed to average maturity on your own or would you have to get

OMB’s approval for that?

Ms. ALVAREZ. OMB.

Mr. WALTER. We would have to get OMB concurrence on that.

Chairman TALENT. I want to ask, could we change that here or

would that generate a jurisdictional problem with the Budget Committee? Yes, we have a looming presence here too, so I understand

your problem.

Ms. ALVAREZ. So, you can relate.

Chairman TALENT. I mean, let us be clear. It would be one thing

if because we were so conservative in figuring this subsidy rate we

had an extra pool of money which we put back into our programs;

that would be one thing. But it goes to the Treasury and is then

spread out all over the budget, and if you can figure out a way to

get that changed, I would be very interested in hearing, I can assure you of that.

Ms. ALVAREZ. As Greg says, it would require changing the Credit

Reform Act.

Chairman TALENT. Yes, that is unfortunately what we have been

told, although the other way to do it is just informally, between the

two of us institutionally, put OMB on the spot with the small business communities to get them to change. I mean, for example, the

90 percent default rate and I support—excuse me, the 90 percent

subsidy for certain kinds of loans, which I support, that isn’t in

strict keeping with their standards. In other words, they can deviate when there is enough pressure on them to deviate, and that is

true, isn’t it?

Ms. ALVAREZ. Well, I think that from the standpoint of judging

the safety and soundness, they judge that it will have practically

an insignificant effect raising the guarantee to 90 percent on the

cost of the program. And, so the judgment is based on the fact that

it really doesn’t have a noticeable effect on the program.

Chairman TALENT. Which I think if they would let us make that

argument, we can make that argument, I think, for a number of

these other programs. And this gets to something Ms. Tubbs Jones

was getting at. I think the experience of the agency and this Committee in overseeing these kinds of programs is greater than the

experience at OMB or Treasury or any other. I just think we do

it better. You have been living with it from the beginning. This

Committee has been living with it from the beginning, and I don’t

think we are irresponsible. I would not support a lowering of the

subsidy rate—excuse me, a—yes, a lowering of the subsidy rate to

a point where it would be risky. I don’t want to impair all the

credibility of these programs. I think they are the ones, the ones

outside this Committee and this agency, who are adjusting these

rates for their own purposes, either to make money or for whatever

other reasons are at stake.

And, so one of the reasons I was grateful to the ranking member

for making sure that we still had oversight over PRIME, because

it isn’t—to me, I don’t hesitate—I have waived jurisdiction over

37

stuff that we had jurisdiction. I want to get things done. So, where

I felt it was appropriate to do, I have done that. This is not a turf

battle. We just do this better than they do it. And I have pretty

much pursued that course pretty consistently, I think.

Would you explain to me more specifically than I now understand it what the BusinessLINC Program is?

Ms. ALVAREZ. BusinessLINC—and that is not Greg’s area——

Chairman TALENT. No. If it is all right with you, you are excused, Mr. Walter.

Ms. ALVAREZ. BusinessLINC actually falls within our New Markets Initiative. It started out, in fact it is underway right now, as

a collaboration between big business and small businesses. We

have been working with the Chamber of Commerce nationally.

They have set up branch offices in different parts of the country

to create a mentoring networking and in some cases a business relationship with smaller businesses. We think that it is proceeding

in a really promising way, but we recognize that we are going to

need some resources if we want this to take off, because at some

point we need to provide support.

The formula is big business, small business, and not-for-profit

community development organizations that help make this marriage occur. These not-for-profit organizations, these economic development organizations, can’t just sort of drop everything else

they are doing to continue to do this kind of mentoring without

some support, and we also need to develop some kind of an infrastructure to institutionalize it. That is why we need the funding for

BusinessLINC. There is a lot of support from the big business community, but we need to help it happen.

Chairman TALENT. Right. I am all for mentoring. I think, actually, mentoring is a very promising way of getting small businesses

to the point where they can participate on their own. But as you

know, this program is not authorized, and we are not even sure exactly what it is and how it operates. And I am always a little concerned when the agency requests a substantial appropriation. The

staff tells me $6.6 million on a program that isn’t authorized. So,

this is an area that we are going to want to go into more with you

and with staff to make certain that this—particularly, does the

money go to the larger businesses?

Ms. ALVAREZ. No, it doesn’t. And we didn’t seek authorization,

because we are not providing grants where we would certainly

come before the Committee for authorization. We are really going

to be allowing these organizations to compete for contracts to help

create the—mediate and create the relationship between the big

and small businesses.

Chairman TALENT. When you say these organizations——

Ms. ALVAREZ. In other words, not-for-profit organizations who

would have expertise in the business development world so to put

together the big and the small businesses and monitor and move

along these relationships.

Chairman TALENT. But they will be applying for grants, won’t

they? How else are you going to——

Ms. ALVAREZ. No, we won’t do it through grants. It will be a competitive contracting situation, which is what we do now. We have

38

the authority to do that now in most areas. That is why we

didn’t——

Chairman TALENT. So, this will be—can you give me an example

of maybe the kind of organization that would apply for this contract?

Ms. ALVAREZ. James, do you want to share some examples here?

Mr. BALLENTINE. Mr. Chairman, one of the good examples that

we often use is related to an organization that is affiliated with the

Washington Board of Trade here in D.C. It is called the Community Business Partnership Project. They launched such an initiative that we are dealing with now with BusinessLINC 2 or 3 years

ago. Today the project really works with 45 local businesses, and

they, as the Administrator said, attempt to match those businesses

that they work with, the small businesses, with their already established large businesses in the community.

As a result of these relationships that they have established in

working with both sides, the large and the small businesses, they

have created 60 jobs by just bringing these small businesses together with the large businesses for technical assistance and for

sub and prime contracting opportunities.

While SBA has many outlet points, we don’t have this type of expertise, but these economic development type organizations, such

as the Community Business Partnership Project, have this expertise. What they really need is seed money to get this started to do

this.

Chairman TALENT. I get handed a lot of notes too. So, would this

be like a community development organization might do this or a

local chamber or any of the above?

Mr. BALLENTINE. Exactly.

Chairman TALENT. And, so it sounds kind of like a grant to me.

I mean, what do you put out specs for a contract in a particular

area? You want to up this mentoring in a city or something, so you

put out specs for that city?

Mr. BALLENTINE. Exactly, under a contract.

Chairman TALENT. And then they bid for the contract.

Mr. BALLENTINE. Yes.

Chairman TALENT. So, this would be local, like in regions you

would do it. You identify regions that need——

Mr. BALLENTINE. We would identify regions, particularly those in

low- and moderate-income areas that, again, traditionally do not

have this type of investment opportunity and do not have many

large businesses working in those communities. So, we would identify areas.

Chairman TALENT. Have you got regulations about how this operates or something in writing for us to look at?

Mr. BALLENTINE. We would be happy to meet with you and your

staff as well as the staff of Ms. Velazquez to go over how we would

lay out the project.

Chairman TALENT. How much has been appropriated for this in

the past?

Mr. BALLENTINE. This is a new program.

Ms. ALVAREZ. This is brand new. This has been operating as a

voluntary initiative.

39

Chairman TALENT. Okay. So, you have done it out of existing

funds without making it—— Ms. ALVAREZ. Yes.

Chairman TALENT. Is this a separate line item this year? Is this

the reason this has come to my attention for the first time?

Ms. ALVAREZ. Yes, this is the first time. We think that there has

been enough demonstrated potential here that if we were to get

some funding, we might really have it take off.

Chairman TALENT. All right. Staff tells me you got $1.5 million

last year. Is that a separate item or was that—— Mr. BALLENTINE. We received $1.5 million, but the

BusinessLINC Initiative was linked to the New Market Venture

Capital Initiative which did need authorization. In Fiscal Year

2001, we are not seeking authorization, because we are simply not

going through the grant process.

Ms. ALVAREZ. It was a different proposal, Mr. Chairman. When

we first started this as a voluntary effort, it was conceived by

James’ predecessor, Richard Hayes, as a grant-making program, so

we sought authorization as part of the New Markets Initiative. But

when we revisited that issue, it didn’t appear to me that this needed to be a grant program, that this could be a competitive contracting situation, and so we delinked it, and now we are requesting $6.6 million.

Chairman TALENT. You delinked it from NMI.

Ms. ALVAREZ. Yes.

Chairman TALENT. Okay. Well, I just want to, just to let you

know up front, I believe in mentoring. I certainly don’t want to inhibit the agency from taking these kinds of initiatives. But, for example, I am just sitting here thinking we don’t have any standards

for measuring results or accountability or anything like that. If the

program is unauthorized and we don’t have from the agency some

set of standards that you are going to follow—— Ms. ALVAREZ. We will be happy to sit down with you and any

members of the Committee and share with you our approach, our

standards, the plan, and get your input on what makes sense.

Chairman TALENT. All right. Well, I am going to direct the staff

to do that on a quick basis, because I don’t want to hold up this

authorization bill. But I may—and I haven’t talked with the ranking member about this, but we may want to do something in this

bill on this, because you are going now to a pretty significant

amount of money. I mean, $6.6 million. We talked about some of

the needs that haven’t been met, and I want to make certain that

we know how this ducktails with other programs, what areas of the

country you are picking to go for, what the standards are for the

specs, all that sort of stuff, and we don’t really have that yet. So,

I think we are going to have to look into that.

I am told that the other services line item in your budget in- creases from $44 million to $85 million. Can you give us a summary of the items that were covered under that and why you need

an additional $40 million for that?

Ms. ALVAREZ. Greg is telling me that these are the non-credit

programs.

Mr. WALTER. Mr. Chairman, a number of the non-credit programs are not executed through grants, but we use contracts and

40

other vehicles to do that. If that is the case, then they would be

shown in the other services line instead of the grant line. So, a lot

of the increases you see there is for those non-credit programs that

you have heard us talk about today.

Chairman TALENT. Okay. Give me some examples now of what

you are talking about, so when you say non-credit—— Mr. WALTER. For instance, HUBZones is an example. We have a

specific line item for HUBZones, and to the extent funds for the

HUBZone Program are spent as a contract or things under object

class 25, as defined by OMB, they would be shown under the other

services line. So, a significant portion of the HUBZone money

would be going out in contracts to do outreach and other types of

things, so those funds would be shown under the other services

line.

Chairman TALENT. All right. Do you have a breakdown of which programs this extra $41 million is associated with so you can tell

us it is the contracts for HUBZones, it is the contracts for PRIME

or whatever it is?

Mr. WALTER. Certainly, we can provide that to you.

Chairman TALENT. Yes, I would be very interested, because, again, we are talking about a significant amount of dollars, $41

million.

So, you are saying reason having to do with how you submit your

budget, you don’t include that in the line item of the program with

which it is associated.

Mr. WALTER. There is a separate object class breakdown that is

required in the budget where you take the entire request for the

agency and break it by sub-object class. So, depending on how the

funds are spent, whether they are on compensation and benefits or

grants or other services or travel, we have to allocate them into

those various buckets. So, what you are seeing is the allocation of

the agency’s budget into that category called ‘‘Other Services.’’ Chairman TALENT. Why the reason for the big jump this year?

Mr. WALTER. Because of the increases that we are asking for in

the various programs, such as HUBZones going from $2 million to

$5 million. If the majority of that increase is in that one object

class area, you would see an increase in that category.

Chairman TALENT. Okay, I am informed that there is a $41 million increase in other services. That is what I am talking about.

But, in addition, a $40 million increase in grant subsidies and contributions. It sounds like two kinds of catch-all categories. What is

the difference between the two of them?

Mr. WALTER. That is correct. It depends on how the funds are actually spent by the agency. If we put them out in the form of a

grant, then they would be shown in the grant line. If we put them

out in the form of a contract, then they would be shown in the

other services line. So, what you are seeing in the two categories

is generally the total increase that we have shown in the budget

for the non-credit programs. For instance, the PRIME Program, the

$15 million, or the E-commerce Program. Those types of programs

would be distributed between the two object-class categories depending on how we spend the funds.

Chairman TALENT. Okay. Well, I would like that breakdown, and

we would like that expeditiously.

41

Mr. WALTER. Absolutely.

Chairman TALENT. And, also, I am told by staff, Ms. Alvarez,

that sometimes we have made requests subsequent to these hearings for information, and it has taken some time to get them to the

Committee. Now, I was not given specific instances, but figures like

three months were given to me. It took that much time to get requests answered from the agency. That strikes me as too long. I am

sure it strikes you the same way.

Ms. ALVAREZ. Yes.

Chairman TALENT. So, let us expedite information requests.

Ms. ALVAREZ. Yes, I agree, I agree.

Chairman TALENT. I don’t want to get anybody in trouble, maybe

I do. It just depends on—— Ms. ALVAREZ. We will talk later.

Chairman TALENT. Okay.

We have this markup coming up very quickly, according to the

plan, and the ranking member and I would like to bring this up

next week. So, we are going to have to move pretty quickly. We

don’t want to have to keep postponing this. But those are some

issues I think we need to address, because there is a lot of money

in those two areas I just covered.

Ms. ALVAREZ. Mr. Chairman, the overall increase in this budget is $185 million over last year. And 1 percent of that increase goes

to the disaster funding, which we are fully funding; 6 percent of the

increase goes to new programs; 14 percent of the increase is to the

existing traditional core SBA programs. So, the majority—the largest part of the increase is to our standard SBA programs and then

to disaster, and really a smaller fraction goes to the new programs.

Chairman TALENT. I made one note to myself, which I can’t find

because of all these other notes people have given me. Where is the

note about the NMI stuff I want to bring up? Don’t take my note

until I am done with it. [Laughter.]

Let me go a little bit into your presentation on NMI just to make

some points. And we, as you know, are working up that bill with

you on this.

Ms. ALVAREZ. I appreciate that.

Chairman TALENT. You made a point measuring—or it may have

been Mr. Ballentine who made this point, I don’t know—about the

number of jobs that were associated with NMI.

Ms. ALVAREZ. Yes, that is right. That was a point I made.

Chairman TALENT. Now, is it your anticipation that we would

measure performance from these NMI investments by jobs created?

And let me tell you why I would have some concern about that. We

all expect and hope and would be very pleased with job creation

from these investments in these low-income areas, and there will

undoubtedly be some.

Ms. ALVAREZ. Yes.

Chairman TALENT. I think it is a mistake to overemphasize that

going in because of all the collateral benefits that we get from

small business creation in these neighborhoods, even if there isn’t

an immediate or a very substantial impact on jobs in the neighborhoods right away. In part, just renewing, if you will, the infrastructure of those neighborhoods and having the functioning small contractor with his headquarters in that neighborhood is a tremendous

42

plus even if you don’t go out and hire right away a bunch of folks

from the neighborhoods. Obviously, we hope that happens, but it

means that when the child walks to school in the morning and is

going by the drug store, says hello to the guy—you see what I am

getting at? And, so give me your thinking on that. You are not

tying this directly to job creation.

Ms. ALVAREZ. When I made the presentation and talked about

the job creation, I used the word ‘‘long-term,’’ because in the New

Markets Venture Capital Program, you are talking about investments in growth companies but companies that will need significant involvement, hence the TA component on the part of the investor. These are companies that are already a going concern, that

are promising, but they really need expertise, hands-on management to really make them take off. And about patient capital for

these New Markets ventures, we are talking about not paying interest for a period of 5 years. We want to allow these companies

an opportunity to produce a return, and it is not going to happen

immediately. So, it would not be wise to judge the success in terms

of immediate job creation.

In studying the results produced by the community development

venture capital companies, they look at job creation ultimately as

one of the outcomes of telling the success story, and we should look

that way too.

Chairman TALENT. Yes, no question. I think—tell me if you think

we are in disagreement here. I don’t think we are.

Ms. ALVAREZ. No, I don’t think so. I totally agree with you. I

made the point, though, because if you look long-term and you look

at the investment, it really is a very modest cost to create those

jobs.

Chairman TALENT. I think that is true in the longer-term. One

of the gripes I have about the current enterprise-owned system is

that the only tax relief in there is for hiring folks from the neighborhood, which is a very good thing to do, but people don’t open

businesses to hire employees. They open businesses to eventually

make money to support themselves, and if we lose that focus, if we

go wrong—one of the tricky things about this is if you go wrong

with the focus at any point, the program can end up being ineffective.

So, as long as we are in agreement that, yes, this is a benefit we

expect to enjoy in the longer-term but it is not a criteria for performance measurement necessarily in the short-term, then we are

in agreement. I do agree totally with you that not only will it create jobs, maybe even more important, be a model for entrepreneurship for young people in that neighborhood. So, even if it doesn’t

create a job, they go start their own business then, which——

Ms. ALVAREZ. That is right, that is right.

Chairman TALENT. Now, another point you mentioned about

NMI investments and you said, okay, one of the reasons the program is expensive is that we do expect losses. I think you said that,

didn’t you?

Ms. ALVAREZ. We are using the most conservative estimates. The

analogy would be the kind of subsidy rates that we estimated for

the SBIC Program not too long ago and in the Microloan Program

where we started off using very conservative estimates, and over

43

the course, really, of a relatively short amount of time, we saw in

actual experience that we were too conservative. In fact we didn’t

require as much. And we expect that those experiences will be not

unlike what we will experience with the New Market Program.

Chairman TALENT. You said there is going to be—I think you

said it is going to be mission-driven rather than profit-driven.

Ms. ALVAREZ. Obviously, the investors will want a return on investment. This is not throwing away money, but to the extent that

they won’t expect the same kind of return that the SBIC investor

would expect, it is mission-driven. To the extent that we are talking about patient capital so that you don’t expect an immediate return but you expect it down the road, and to the extent that these

New Markets Venture Capital Companies will be located in those

communities, they will know those communities and will be investing in the well-being of the community not simply their own profit

motive. That is the distinguishing characteristic.

Chairman TALENT. No question about it. Would you agree with

me— I hope you do—that it is a very fine line we have to walk

here, because one of the—where something is investment-driven in

the sense that people expect to go in business from which the investors get a rate of return, you have a hedge against a lot of

things that you don’t want entering into that program.

Ms. ALVAREZ. Correct.

Chairman TALENT. Because once decisions are made other than

on those criteria, unless you are very careful, you start having to

declare what is the mission? Who gets the investment? And I am

not going to be here after this year, and—well, I don’t know whether you will still be in control of the agency or not—but we don’t

know what will happen a year, 2 years, how decisions will be made

if they are not made based on we expect to have a working, functioning business there that is eventually producing for the investors. Do you see what I am saying?

Ms. ALVAREZ. Absolutely.

Chairman TALENT. It isn’t so much that profit is the key. It is

that profit is a way of not letting other considerations enter into

it—who knows somebody and therefore gets the investment.

Ms. ALVAREZ. There is a profit motive, and, I don’t know if you

want to comment, Don Christensen.

Chairman TALENT. Yes, I know—this is worth a little extra time,

and I know the members have been patient, but this is an important program, and if he would like to comment, I would like to

have him comment.

Ms. ALVAREZ. These programs are meant to produce a return on

investment, and they are meant to be investments in growth companies.

Don.

Mr. CHRISTENSEN. Yes. I am Don Christensen, the Associate Administrator for Investment.

Yes, a fundamental concept of the New Markets Venture Capital

Program is that it is sustainable. If you have an investment program, to be sustainable, you have got to have a profit. Now, the

difference that the Administrator is referring to is our SBICs target

profitability of between 20 to 30 percent per year. Those profits will

not be available in the LMI areas that we are trying to address.

44

So, for those funds to be redirected toward LMI areas, there has

to be a mission component. It is what we speak of as a double bottom line, that you make a profit, but you also look at some of what

you have contributed to the community. And the contribution is, as

you pointed out, more than just employment.

One of the things we speak of is that we are trying to build

wealth in the community. The wealth is both economic, being able

to stand up and be proud of your community, to feel it is safe.

These are the things that small business can make a very significant contribution to.

Chairman TALENT. Now, the contribution to the community, isn’t

the establishment by somebody of a functioning small business in

a community that doesn’t have a good skeleton of that, that is the

contribution. We are not going to ask them, Okay, in addition to

this, you have to attend every board of alderman meeting and fight

for community policing in your area and this sort of thing. We assume they will do that, because we want their businesses to be successful, right?

Mr. CHRISTENSEN. Yes, sir.

Chairman TALENT. Okay. That is fine. I mean, I hear what you

are— if what you are saying is we are doing what all our programs

do at some level is skim below where the market might generate

on its own——

Ms. ALVAREZ. Exactly.

Chairman TALENT [continuing]. And get some others that are

slightly riskier but will be sustainable, and that is the mission you

are talking about. That is the line I think we need to walk.

Ms. ALVAREZ. And I think that word sustainable is very important, because it means that you expect something.

Mr. CHRISTENSEN. We expect earnings of the order of 8 to 10 percent per year for the new market investment.

Chairman TALENT. I want this to work. I want it to work. I don’t

want any 5 years down the road some huge—some expose on 20/

20 from the same people who are screaming now that we need to

do this, and then a few years from now they say, ‘‘Oh, it didn’t

work, so-and-so got this.’’ So, as long as your conscience of that, we

are all on the same page. We may disagree on the details, but we

are going in the same direction.

Ms. ALVAREZ. That is right.

Chairman TALENT. That is, I believe, all I have unless you have

another note to pass to me. Do you have any more notes or questions? Okay.

I thank you all. It has been a very good hearing so far, and we

have another panel.

Ms. ALVAREZ. Thank you, sir.

Chairman TALENT. Thank you, Ms. Alvarez.

Mr. DAVIS. Mr. Chairman, I have a young brother traveling with

me today. I just want him to be——

Chairman TALENT. Well, why don’t you put his name on the

record, if the gentleman wants to do that?

Mr. DAVIS. His name is Greg Creole. He is part of a program

called Talent Search, and what they are doing is growing cucumbers. [Laughter.]

45

Chairman TALENT. Well, thank the gentleman for introducing

him.

We will have the second—he looks sufficiently below the constitutional age that I don’t think the gentleman from Illinois has

any concerns from him in the short-term.

[Recess.]

Chairman TALENT. We have already had a taste from Mr.

Wilkinson, and our appetite having been wetted now, we are eager

to get onto the second panel, who all I think are veterans except

Ms. Hayashi. This is your first appearance; welcome.

Other than Ms. Hayashi these are the usual suspects. We have

rounded them up and gotten them before the Committee.

All right. Rather than introduce everybody and then reintroduce

them, we will just start off with Mr. Tony Wilkinson, who is the

president of the National Association of Government Guaranteed

Lenders.

STATEMENT OF ANTHONY R. WILKINSON, PRESIDENT, NATIONAL ASSOCIATION OF GOVERNMENT GUARANTEED

LENDERS

Mr. WILKINSON. Mr. Chairman, Ms. Velazquez, thank you for inviting us here today. We appreciate the opportunity to testify on

SBA’s budget request.

You have my written statement for the record, so in light of the

fact that we are running a little late today I am going to abbreviate

my testimony.

Chairman TALENT. Well, as to that, let me just say that this is

the only hearing we are going to have specifically for this purpose,

and I felt it important to give everybody the full opportunity. So,

whether we are late or we just had a full exposition, I think it was

necessary.

But I do appreciate you all summarizing. You all have testified

many times, so just tell us what you think is important.

Mr. WILKINSON. Sure. First, I want to thank the Committee for

your consideration and passing of H.R. 2615 last year. We look forward to that moving forward this year. As you know, that includes

a prepayment provision that we think is necessary in our program.

The Fiscal Year 2001 budget request confirms that we are incurring higher costs in this program due to prepayments. Specifically,

the subsidy rate increase is primarily the result of an increase in

the loss of fee income due to prepayments and the Treasury earnings on these fees.

Chairman TALENT. What luck have you had in convincing our

counterparts in the Senate of the need for change in that area?

Mr. WILKINSON. We continue to have dialogue. We are trying, we

are trying.

Second, I raise the issue of our funding shortfall for this year,

and we are pleased to hear today from Administrator Alvarez that

efforts are being made to address the 7(a) shortfall.

Next is the Fiscal Year 2001 budget request, and we agree with SBA that we will need $11.5 billion net for the 7(a) Program, as

we estimate that to be the demand for the program next year. We

detail our recommendations for authorized levels for 2001, 2002,

and 2003: $14.5 billion for 2001, $15 billion for 2002, $16 billion

46

for 2003. These amounts should be sufficiently above the current

budget levels to provide flexibility of the Appropriations Committee

should a change in the economy necessitate consideration of a higher level of loan guarantees without the necessity of authorizations

being changed.

I would like to thank SBA Administrator Alvarez and her staff.

We have had an excellent ongoing working relationship with her

and her staff. I don’t want the discussion of the subsidy model and

the excess—the conservative estimate of defaults in the model to

overshadow the fact that we have had an excellent, ongoing working relationship. We are pleased with the budget request; shows

that the 7(a) Program continues to perform well. The recovery rate

on defaulted loans remains high, but unfortunately the subsidy

model does include a default estimate that we continue to believe

is materially overstated.

And, so I thought I would just spend a minute on what happens—or some of the discussion that occurred this morning. I am

no expert on this entire budget package, but in looking at the budget for Fiscal Year 2001, there is a line item on the status of guaranteed loans. It shows that the outstanding balance of guaranteed

loans at the end of the 1999 was $36 billion. We did $9.5 billion

last year and roughly $9 billion each the 3 years before. So, my

simple math tells me that we have spun the entire 7(a) Program

out in 4 years.

I know that is simplistic, and that is not the right answer for the

average life of the loan, but it is a lot less than 14. It is probably

more than four, but there is a number of somewhere in between

that better reflects what is actually happening in this program.

So, I would hope that we could continue to have dialogue on the

estimate of defaults in the subsidy model. Perhaps your staff can

meet with the Budget Committee staff, a joint hearing, a letter

down to OMB, something to have a discussion about what is going

on with the default estimate.

I also heard Mr. Walter say today in his comments that they

thought the range of defaults was from 8 to 12. Yet, in the model,

they use 14.25. Why not at least the highest level of the range they

anticipate of 12. That was what I understand to be about 34 basis

points per 1 percent decrease in default estimate. That is a lot of

money to either reduce the subsidy rate so we need less appropriations or we now have some subsidy dollars to spend on small loan

incentives. So, again, I hope that we can continue to take a look

at that.

Mr. Chairman, I raised briefly, when I was up at the table earlier, the concept of a subsidy rate floor, and since we have already

gone through that once before, I won’t do it again. We would ask

that that be considered.

And I would like to close today by saying that since this will

probably be the last time I appear before you as chairman of this

Committee, I want to thank you for the leadership that you have

brought to this Committee, and I appreciate the bipartisan effort

that you and Ms. Velazquez have brought to Committee affairs.

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

Chairman TALENT. Thank you, Mr. Wilkinson. I have a lump in

my throat, I think.

47

Mr. Lee Mercer, president of the National Association of Small

Business Investment Companies.

STATEMENT OF LEE MERCER, PRESIDENT, NATIONAL

ASSOCIATION OF SMALL BUSINESS INVESTMENT COMPANIES

Mr. MERCER. Thank you, Mr. Chairman and Ms. Velazquez and

members of the Committee who will be considering the testimony.

And I would like to echo Tony’s remarks regarding appearing before you and working with you and your staff and the bipartisan

way in which this Committee has been run. It is really a model for

how legislation ought to be done, and I think you are both to be

commended.

The SBIC Program is in the best shape of its long history and

providing substantial money in equity investments and subordinated debt investments to small businesses, $4.2 billion in Fiscal

Year 1999. If you did it on a calendar year basis, $5 billion in calendar 1999. More important than just the gross number is the size

of individual investments. You heard the testimony from SBA

about the private venture capital funds investing at the rate of

about $6 million, $7 million, and even up to $10 million per deal,

per investment.

For all SBIC investments, the average is about $1.4 million, but

what is more impressive is the median. The median is only

$375,000, and for debt SBICs that are making subordinated debt

investments, the median drops down to about $181,000. So, clearly,

there are a substantial number of transactions going on at the very

lowest levels of capital necessary.

This is true. About 34 percent of all SBIC investments last year

were made in companies that had been in existence for less than

a year, and if you raise that bar to 3 years, it jumps up to over

50 percent. So, those are the companies that need—with the exception of dot.coms that burn substantial amounts of money, those are

the companies that need these smaller levels.

The other interesting note is in the technology area, SBICs probably invested about 27 percent in technology-oriented businesses,

and in the private world it is much higher of course, mainly driven

by Silicon Valley and other areas.

As far as——

Chairman TALENT. Lee—and I would encourage the ranking

member also to jump in if she wants to. Unless she has a problem,

I will keep this informal. Is that because of incentives or persuasion from the Government that your portfolio looks different? Is

that just the nature of the way this investment operates?

Mr. MERCER. No, it is just the nature of the business. What you

have, I think, in the SBIC Program more than in the strictly private funds is a couple of things working. One, SBIC managers are

always looking for a niche. They are profit-driven, so they are looking for niches. They come from probably more varied backgrounds

than perhaps some of the managers of the strictly private funds.

They end up looking at probably more Main Street businesses because of that, because of their backgrounds. Also, they are investing much smaller amounts, and that kind of drives them into more

Main Street businesses also.

48

When you are managing a $500 million fund or even a $1 billion

fund, like a private fund manager is, you are going to have to be

investing $10 million, $15 million, $20 million at a time. So, the

only way you are going to be able to put that kind of money to

work is to look for a business, typically a technology business, that

has a significant burn rate for capital in its development years. So,

those are some of the things. It is just the market dynamics that

are at work, and good ones for small business and the SBIC Program.

As far as the—does that answer the question? We can pull more

statistics if you want, but does that get at the question?

As far as the budget is concerned, we support the budget with

what we understand to be the amendment that is going to be coming from the administration. For participating securities, they have

proposed $2 billion which would cost an appropriation of $26.2 million, and that level, which is a 33 percent growth in available leverage for only a 7.8 percent increase in appropriation, we think is

well justified by the growth of the program. All participating security leverage has been used for the last 2 or 3 years. It is the program that has the steepest growth rate.

With regard to the Debenture Program, although the budget submission calls out for a positive subsidy rate of 0.78 percent, which

would require a $3.9 million appropriation to support $500 million

in debentures, SBA and OMB have now admitted that a simple

mathematical error was done. I don’t want to get into an argument

about what should be the subsidy rate formula. We are not—we

just said to them, even using your formula, it doesn’t make sense.

And they went back and checked their math, and in fact there is

no positive subsidy rate. In fact, the subsidy rate fell by over a

point, so it is a negative subsidy rate, and we understand the OMB

and the Administration will be proposing to change the law that

imposes the mandatory 1 percent interest that was imposed in

1996 to reduce that for the Debenture Program this year to 0.88

percent for the leverage that will apply in Fiscal Year 2001. And

we would support that, obviously.

So, the availability of debenture leverage next year will literally

be driven by whatever the authorization levels are that the Committee decides to insert in the language of the reauthorization bill.

As far as suggested levels for reauthorization, in my testimony

I have said for debentures $1 billion in 2001, $1.5 billion in 2002,

and $2.0 billion in 2003. For participating securities, it would be

$2.5 billion in 2001, $3.25 billion in 2002, and $4.0 billion in 2003.

For participating securities, clearly, the growth curve supports

those numbers. On the debenture side, although the utilization is

nowhere near those numbers, we feel that there will be—there are

things in play right now that may increase the likelihood that a

greater number of debenture—more debenture leverage will be

used, namely the zero coupon debentures that are not yet available

that will be available to SBICs for making investments in LMI

areas, and also the fact that last year Congress, with your leadership, passed a bill which would make the use of royalty agreements

much more attractive to SBICs. Actually, they weren’t attractive at

all, but under the new legislation they will be. SBA has yet to issue

49

their implementing regulations, but when they do, we believe we

will see more debenture use there as well.

Importantly, I would like to draw your attention to the four proposed changes to the Small Business Investment Act that we have

proposed. We have dealt with both your staffs on these, so I don’t

want to spend a lot of time on them unless you have questions of

me, but one of the changes has to do with the subsidy rate and allowing the administration to have continuing authority, like in the

504 Program, to adjust the subsidy rate when the model shows

that it goes below zero.

The other three amendments pertain to the operations of SBICs

and, more importantly, to the resources that SBA has to expend in

regulating SBICs. In the first case, we propose that SBA’s definition of long-term, which they say is a 5-year period, be reduced to

be 1 year, and this would put, for all SBICs, a definition that they

have already made for companies in LMI areas and that they proposed for their New Markets Venture Capital Program. It is really

just a recognition of the fact that in this environment, as in tax law

and accounting law, the term ‘‘long-term’’ is denoted by a period

greater than 1 year. SBA has recognized that for LMI investments,

and they should recognize it for the entire program.

The second is with respect to control of a small business that has

been invested in. SBA has a imposes a blanket prohibition on an

SBIC controlling a small company, having a controlling interest in

a small company that it invests in. It then sets out four broad exceptions. You can take control for up to 5 years where reasonably

necessary for the protection of your investment, if there has been

a material breach of the financing agreement, if there has been a

substantial change in the small businesses operations or such a

change as intended by the financing, and the SBIC and the investor group is providing a major source of the capital, or in the case

of a start-up. So, you can see that what they have done is given

four exceptions that cover almost every conceivable thing you can

think of in providing financing to a growing small business.

So, what happens? SBICs are forced to jump through hurdles to

try to comply with the exception rules, and then SBA spends an inordinate amount of time and resources when they go out to examine an SBIC to make sure that all the exceptions have been complied with, and the exceptions pretty much take up the universe.

In the Gramm, Leach, Bliley Act, that bill recognizes it, and for

the first time, under that act, banks will be able to have venture

capital funds without regard to having an SBIC license. This will

be the first time in history that has been allowed. In that act, the

way they deal with the control is they specifically say in the

Gramm, Leach, Bliley Act that the venture capital firm, the bank

venture capital firm, can take control of the small business during

the investment period. Well, SBA’s exceptions permit it for up to

5 years which is typically an investment period. So, we say that

should be changed.

And the final one is another one which is just technical in nature

which would permit SBICs to make tax distributions once during

any calendar quarter. The law right now says they can only make

it at the end of the calendar quarter. What happens is that SBICs

like to make distributions as quickly as they can in order to make

50

higher internal rates or returns for their investors. So, they make

a distribution as soon as they can in the quarter, and then they

make another tax distribution at the end of the quarter. Well, each

time they make a distribution, they have to fill out sets of forms,

and SBA has to review them. So, we think that if you change the

rule—and I think SBA would be supportive of this—it would just,

again, reduce time and effort by SBA.

Chairman TALENT. Lee, I am going to have to ask you to suspend

or we are going to miss the vote.

We will be right back.

I understand Mr. Wilkinson has to leave to catch a flight, and

neither Ms. Velazquez nor I have further questions, although we

may submit some to you in writing. So, thank you for coming,

Tony.

And we will be back in a few minutes.

[Recess.]

Chairman TALENT. Okay. Mr. Mercer, by our timing you have

been on for 30 minutes, but do you have any closing comments? I

have to say the Committee wasn’t actually in session during that

entire period of time.

Mr. MERCER. But I want you to know that I thought about it for

30 minutes, and the only thing I would close by saying is the four

suggestions we have made, at least three of them would simplify

the regulations. This guide to the SBIC Regulations is what we

publish each year for SBICs. Over 600 pages. It is the regulations,

the forms, the policies, the procedures. It is everything an SBIC

needs to know, and it is obviously a complex program. So, we think

that the changes we have suggested will take some of the complexity out.

So, I am going to stop now with just two more comments: One,

although SBA has left, I would like to commend SBA for the work

they have done in supporting the SBIC Program, sometimes without enough assets, and in terms of personnel we have been told

that Administrator Alvarez has allocated another 15 people to the

SBIC program.

Chairman TALENT. I was going to ask you about that. So, you

think that will clear up the backlog in applications?

Mr. MERCER. Well, there is obviously going to be a learning curve

and a hiring curve. Of that, Mr. Christensen has the ability to hire

5 from outside the agency, we have been told, and 10 from inside

the agency. So, there will be some lag, but for a program that has

grown over 280 percent over the last 4 or 5 years they obviously

need some new help, and I think at least we have been told that

help is on its way.

I would just like to close, in a sense, where I began and thank

you both and your staffs for taking the time to really try to understand what is an exceedingly effective but exceedingly complex program. It really is performing up to the expectations of Congress.

We think it can do more, but it is a pleasure to work with you, and

we look forward to continuing that work.

Thank you.

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

Chairman TALENT. Appreciate your comments very much, Lee.

51

Next witness is John Giegel who is the vice president for Congressional Relations at the National Association of Development

Companies.

Mr. Giegel.

STATEMENT OF JOHN GIEGEL, VICE PRESIDENT FOR CONGRESSIONAL RELATIONS, NATIONAL ASSOCIATION OF DEVELOPMENT COMPANIES

Mr. GIEGEL. Good afternoon, Mr. Chairman and Representative

Velazquez. I also want to thank the chairman and ranking member

for their bipartisan cooperation on this Committee. NADCO would

like to thank the Committee for your continued support of our 504

Program and the CDC industry, including the passage of H.R.

2614. It was another step towards the improvement and expansion

of the 504 Program to the benefit of all our small business borrowers.

It is our understanding that this bill is being considered by the

Senate Committee on Small Business at this time, and we would

strongly urge the Committee to work with the Senate to obtain

quick passage of this bill, which is crucial for the improvement of

the 504 Program.

I want to take an opportunity this morning to briefly address certain items in the SBA Fiscal Year 2001 budget. SBA has proposed

that the authorization level for the 504 Program for Fiscal Year

2000 in the amount of $3 billion to $3.75 billion. NADCO supports

this increase in the authorization ceiling for two reasons: First, we

have seen a rise in the long-term interest rates, and we have also

seen private sector lenders starting to become a little bit more conservative in their lending practices. And this may be very early in

this time frame, but there are possibilities of liquidity concerns,

credit tightening, and the increase in authorization will help 504

meet those challenges this year and in the future.

There is also a 3-year reauthorization of the Small Business Act

which provides for an authorization for the guaranty authority for

the Small Business Administration to provide financing under 504

or the CDC Program, but it restricts the maximum amount of loan

guarantees it may provide in any given year.

Historically, legislation has been enacted to provide this program

authority for 3 years. The most recent law authorized SBA to guarantee CDC debentures in the amount of $3 billion, $3.5 billion, and

$4.5 billion for each of the last respective 3 years. We certainly

agree that the next 3 years should be increased to provide debenture guaranteed levels at $3.75 billion for 2001, $4.5 billion in Fiscal Year 2000, and $5 billion in Fiscal Year 2003.

These program authorization levels are not contained in H.R.

2614, referred to the Senate last year, and we urge that they be

included in your bill as without program reauthorization, the 504

financing cannot be provided. In other words, we will be shut down

without those numbers being included.

We believe these guarantee authorities are in line with expected

program utilization, again, particularly as commercial lenders may

begin to tighten as the economy might slow down as the result of

interest rate increases.

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The SBA budget also addresses the subsidy level, and I know the

chairman is quite interested in that. SBA’s proposed budget decreases the annual fee charged for each 504 business borrower from

0.6 percent to 0.472 percent. This is an actual 21 percent decrease

for the upcoming fiscal year, and it is the fourth decrease in a row.

Now, certainly, we in the industry have always felt the subsidy

rate has been too high, but at least there has been some reflection

with the OMB subsidy calculation that the need to continue these

high rates has been reduced, and this lowered subsidy rate will in

fact result in smaller costs to our small business community.

However, the budget also talks about the industry has a concern

about the forecasts, again, contained in the budget concerning the

recovery of defaulted loans and also the number of defaulted loans.

Historically, 4 years ago, the default rate was around 18 percent,

and now it has fallen, and recoveries have also fallen except for the

last year. It reached a low of 25 percent, and now it has risen to

31 percent. This does, again, raise the question of the subsidy rate.

We in the industry, of course, and the small business community

and I believe the participating lending institutions would all agree

that the fees are probably too high. And indeed the 504 Program

is a positive contribution to the revenue, project revenue over and

above total costs.

Chairman TALENT. Let us get into that loan liquidation issue a

little bit, Mr. Giegel. I, too, am impatient for more discretion for

504 investors to be able to liquidate defaulted loans. Do you have

any idea—we had a pilot. Any idea how well it has done? I know

the report isn’t ready yet, but do you know?

Mr. GIEGEL. We have only a secondary evidence, but the—and it

is a small sample—but, clearly, the pilot liquidation study has

shown a recovery rate better than what has been projected. The

SBA budget talks about 25 percent to 31 percent. The limited sample evidence that we have not probably puts that close to 50 percent or better, and we only have—there is, obviously, recently an

asset sale as well. And while we do not have access to the final reports and the numbers, there is certainly some evidence out there

that indicates that the assets sales have resulted on 504s to be considerably higher than the recovery rates posted by OMB.

Chairman TALENT. Is anyone from the agency prepared to comment? Ms. Butler, I notice you are here. Will this report be ready

soon for our inspection? I hate to penalize people for sticking

around, but—— Ms. BUTLER. Actually, we appreciate it. We are very interested

in the outcome of this as well. I am Jane Butler. I am the Associate

Administrator for Financial Assistance.

We did issue a report on September 30 that covered the first 2

years of the pilot. Unfortunately, because of the length of time that

is required to complete liquidation actions and the pilot only included loans coming into liquidation within the 2-year period, so it

is not a complete record of the total activities on all the loans in

the pilot. We are continuing to monitor those, and we will report

to you periodically.

But what Mr. Giegel said is absolutely correct. We have seen on

both the control group, that is the liquidations handled by SBA, as

well as those liquidations handled by the CDCs, that our activities

53

show higher recoveries than what have been proven on a long-term

basis with regard to the subsidy model. So, we are continuing to

watch that program.

Chairman TALENT. Now, if this report turns out to be positive,

as preliminary results indicate, you have the authority to move it

from a pilot to just a general program where they can liquidate

their own defaults; is that correct?

Ms. BUTLER. Actually, the legislation that authorized the program did not have a sunset date, so we are continuing the pilot

with the group that was originally participating, and in the reauthorization bill passed by the House and pending at the Senate,

you would make the program permanent.

Chairman TALENT. Okay.

Ms. BUTLER. But we are continuing it without interruption.

Mr. GIEGEL. And that is a key element. We are taking, I think,

measures included in the House bill, and hopefully to be adopted

by the Senate, will make permanent both the Premiere Certified

Lending Program, which provides for a reserve by CDCs on PCLP

loans, as well as provide for making permanent the Liquidation

Pilot Program, which would include a litigation authority to, we

think, and working with the SBA, to make recoveries even better.

And I think it will be certainly positive for our consideration of the

subsidy rate as soon as we are able to let it count.

Chairman TALENT. Okay. Thank you, Ms. Butler.

Mr. GIEGEL. Well, those are the key points of my presentation.

We certainly want to thank you, Mr. Chairman, for all your efforts

and your past efforts, and all the Committee members and ranking

member and the staff for working so well over the last several

years. The bipartisan effort has made the 504 Program a better,

better program.

CDC are major stakeholders in the 504 Program, and we want

to do everything we can to ensure its long-term viability. We have

considered these recovery problems, the subsidy rate issues to be

a very serious matter, and we look forward to working with your

Committee and the SBA in reversing that trend. Only with this effort can we make the 504 fees come back to a reasonable level for

all small businesses.

Thank you.

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

Chairman TALENT. Thank you, Mr. Giegel.

Next, Mr. William McCutchen, the executive director of the Association of Small Business Development Centers. Woody, thank you

for your patience. Proceed.

STATEMENT OF WOODY McCUTCHEN, EXECUTIVE DIRECTOR,

ASSOCIATION OF SMALL BUSINESS DEVELOPMENT CENTERS

Mr. MCCUTCHEN. Thank you, Mr. Chairman and Ms. Velazquez,

and I, too, would like to thank you for this opportunity for the association to testify this morning.

I would also like to express our gratification for your leadership

of this Committee, leadership that continues an over 20-year tradition of bipartisan interest and support for the SBDC Program, a bipartisanship that has proven very productive and positive for our

program.

54

Today’s SBDC Program is truly a national delivery system. We

have got over 1,000 locations in all of the 50 States, District of Columbia, Puerto Rico, the Virgin Islands, Guam, and just recently

American Samoa. In the last 20 years, SBDCs have provided counseling and training for almost eight million existing and pre-venture clients.

We also would like the record to reflect today our appreciation

for the administration’s and Administrator Alvarez’ decision this

year to fund the program at a level of $85 million. We think it

demonstrates a new renewed awareness within the SBA of the importance of the SBDC Program and the clients we serve.

We have included a chart in our written presentation that documents the performance of the SBDC Program, performance that we

are tremendously proud of. If you look at the chart, in Fiscal Year

1999, our funding was up by less than 1 percent, but in Fiscal Year

1999, total clients—African-American clients, Hispanic clients,

women clients—were all up by at least 9 percent, up to almost 16

percent. So, the program is certainly making effective use of the

dollars that the Congress supports us with.

This morning, Mr. Chairman, we are asking that this Committee

approve and recommend to the full House that the SBDC Program

be reauthorized at $100 million in Fiscal Year 2001, $105 million

in Fiscal Year 2003, and $110 million in Fiscal Year 2003. We believe these levels of authorization are crucial if the program is to

maintain a level service capacity. Additionally, we believe that at

a minimum the SBDC Program will need an appropriation of $90

million net of earmark from section 21 funds to address the growing needs of the Nation’s exploding entrepreneurial population.

There is a crying need for vastly expanded and more comprehensive small business regulatory compliance assistance. The SBDC is

also working with the Association of Disabled Veterans and other

veterans’ groups to provide improved and expanded services to the

Nation’s veterans. The program for 2 decades now has utilized the

dollars that Congress invested to create a strong and viable infrastructure that includes over 3,400 strategic resource partners. The

SBDC Program is the only Federal small business M&TA Program

that is subject to a congressionally mandated certification program.

The ASBDC also contracts with an independent consultant for a biennial economic assessment of the long-term effects of SBDC clients.

In 1996, SBDC clients experienced sales growth at almost four

times the rate of the average U.S. business, and job creation for

SBDC clients was 1.29 compared to 0.22 jobs for average U.S. businesses. We have expressed our concerns this year regarding the

need for essentially technical changes in our funding formula, and

we have also expressed concerns regarding the need to maintain

client confidentiality that is so essential to our client relationship.

We are most appreciative that the staff of this Committee has always been available to us and extremely helpful.

In summary, Mr. Chairman, the SBDC Program is the Federal

Government’s largest and most successful small business M&TA

outreach and assistance program. The network is well positioned to

deliver an increased level of management and technical assistance

to a significantly expanded client base if the program is provided

55

the resources to do so by Congress. And we ask for this Committee’s support for the program’s reauthorization at funding levels

that will allow the program to remain innovative and meet the

needs of the Nation’s 23 million small businesses.

We want to make sure that the record reflects that the ASBDC

and SBDC network are solidly committed to helping open doors of

economic opportunity for individuals in communities and new markets. In fact, new markets are not new to the SBDCs. In 1999, 42

percent of our clients were women, 23 percent were minorities, and

almost one-fourth of our service centers are located in targeted economic revitalization areas, such as HUBZones, empowerment

zones, and enterprise communities. SBDCs are therefore well positioned to play a significant role in publicizing these important Federal initiatives.

The Congress has invested significant dollars in this program

over the last 20 years, and in return for that investment, what has

resulted is an unprecedented network, a distribution network, of

over 1,400 outlets to deliver small business services to all Americans. We think that there could be no better investment for any

small business services than in utilizing the distribution network

that Congress has already generated.

I will end my remarks with that, and I would be happy to answer any questions that you may have about our program.

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

Chairman TALENT. Thank you, Woody, Mr. McCutchen.

And our last witness is Caroline Hayashi, the Association for Enterprise Opportunity. Appreciate your patience; proceed.

STATEMENT OF CAROLINE HAYASHI, ASSOCIATION FOR

ENTERPRISE OPPORTUNITY

Ms. HAYASHI. I would like to thank the chairman of the members

of the House Small Business Committee for providing me with the

opportunity to testify before you today.

My name is Caroline, and I am a member of the Association for

Enterprise Opportunity, or AEO, and I am also the program director of the ECDC Enterprise Development Group in Arlington, Virginia. My views today represent AEO’s views as well as those of

my organization and the Association of Women’s Business Centers.

AEO was founded in 1991. It is a national organization of organizations committed to microenterprise development. They provide

over 490 organizational members with a forum, information, and a

voice to promote enterprise opportunity for people and communities

with limited access to economic resources. AEO members represent

many SBA microloan intermediaries as well as Women Business

Centers.

We all know that small businesses are the backbone of the U.S.

economy. According to the Small Business Administration’s Office

of Advocacy, small business accounts for 53 percent of all jobs.

What I am here to talk to you about today is the growing importance of the smallest firms within that group of small businesses.

These are microenterprises employing less than five employees. Despite this critical role, many microentrepreneurs have trouble accessing management assistance and the capital they need to grow

56

and start their businesses. Microenterprise development organizations are there to provide these resources to this growing market.

Over the past decade, the microenterprise development sector

has grown rapidly, reaching over 55,000 entrepreneurs in 1997. Yet

the demand for microenterprise services far exceeds the limited resources of the field.

Largely through the loan and grant funds from the SBA, the

ECDC Enterprise Development Group has provided over 150 in the

past 4 years to small businesses, totaling over $1.6 million. It has

created 320 jobs and provided management assistance to over 2,500

entrepreneurs, and I would like to add out of all those individuals

served that over 85 percent of those individuals were minorities,

over 95 percent were low- to moderate- income individuals, and

over 50 percent were women. So, again, as Mr. McCutchen noted,

when we are talking about new markets, in terms of microenterprise organizations and who we serve, we are serving the new market.

Chairman TALENT. When you talk about—excuse me—— Ms. HAYASHI. Yes.

Chairman TALENT. When you talk about the ECDC—— Ms. HAYASHI. Yes.

Chairman TALENT [continuing]. Now, help me a little bit. That

is the Association of Micro—— Ms. HAYASHI. AEO is the Association of Enterprise Opportunity,

which is the national association of Microenterprise organizations

of which we are a member.

Chairman TALENT. Okay.

Ms. HAYASHI. And I am actually the director of the ECDC Enterprise Development Group, which is a non-profit organization based

on Arlington, Virginia which provides direct microenterprise services.

Chairman TALENT. Okay. So, I am trying to get a handle on how

significant that $150 million figure is. You are one microlending

intermediary.

Ms. HAYASHI. We are one microlending institution that serves

the Washington, D.C. metropolitan area.

Chairman TALENT. I want to be clear. So, when you are talking

about an Enterprise Development Group, that is a plural group,

but you are one micro—— Ms. HAYASHI. Yes, we are one organization, one program.

Chairman TALENT. Because I thought the $150 million, actually,

if that had been a number of microlenders, would have been kind

of a small figure over 4 years.

Ms. HAYASHI. Yes, it would be very small. Actually, there is another number there of, a national number, 55,000 entrepreneurs

being served in 1997——

Chairman TALENT. Yes, a little more like it.

Ms. HAYASHI [continuing]. Which is more like it, yes.

Chairman TALENT. Okay, thank you.

Ms. HAYASHI. Sure.

ECDC assists businesses that don’t have access to capital and

other business resources elsewhere. Although these loans are very

uneconomical for non-profits to provide, these businesses promote

economic self-sufficiency through the income and jobs they create

57

and promote local economic development through the goods and

services they provide. They also help keep individuals off of welfare

and help build the local tax base.

I would like to give you an example of an entrepreneur that demonstrates the kind of impact that these kinds of small business can

have on the owner as well as the community. Ms. Kyung Hee Park

is a 40-year-old woman who 5 years ago found herself living in a

homeless shelter with her two small children. She found the opportunity through an acquaintance to start a siding and flooring business. After the first year in business, when the company did not

made a profit, her partner gave up his portion of the business.

However, she decided to continue the business to try to make a better life for her and her children.

Two years ago, Ms. Park came to ECDC to get a loan to expand

her business. Ms. Park had approached over 20 other financial institutions and was turned down partially because of credit problems she experienced while living in the homeless shelter. Since

that loan 2 years ago, she has experienced more than 500 percent.

She went from hiring 5 contractual employees to more than 20 fulltime employees. She went from doing small residential jobs to obtaining large-scale financial contracts from companies such as UHaul and has received a sub-contract for a 90-unit housing complex

through the U.S. Department of Housing and Urban Development.

SBA has been a critical resource partner for ECDC. ECDC has $1.5 million in loan funds from the SBA, which constitutes approximately half of our capital pool.

Chairman TALENT. Ms. Hayashi, how many of—I was going to

ask you, actually, to give us a particular example, so I am glad you

did on your own. Is that typical? I mean, somebody—here, she had

a working business up and going.

Ms. HAYASHI. Yes.

Chairman TALENT. But because her paper, in essence, wasn’t

good because when she had that difficulty in her life her credit

went bad, and so the bank—she didn’t even get through the front

door of the bank, right?

Ms. HAYASHI. No, she is actually a very tenacious woman, so she

did actually approach 20 other financial institutions, which not a

lot of people do either. But, yes, was pretty much immediately

turned away by—— Chairman TALENT. So, of the 150 loans that your group has

given out, how many of them are situations where the person can’t

get through the front door because of a paper problem? In other

words, you had a credit—I assume that the bank officer looks at

this, ‘‘Wait a minute. You mean to tell me you have had a bankruptcy or this credit report is bad on you. Forget it. We are not

even talking to you.’’ Is that——

Ms. HAYASHI. Is that common?

Chairman TALENT. Yes.

Ms. HAYASHI. Very common, yes. A lot of the clients we serve either have had credit problems in the past because of this kind of

life difficulty or we also have a surprising number of clients who

do not have any credit history because we also serve a number of

immigrants.

Chairman TALENT. Okay.

58

Ms. HAYASHI. And no credit, as we all know here in the U.S., is

considered to be pretty much the same as bad credit.

Chairman TALENT. Yes, because you haven’t had a history of

credit.

Ms. HAYASHI. Exactly.

Chairman TALENT. So, the bank never even gets into performance of the business in the past or profit-loss statements or the rest

of it, because they don’t even get through the front door.

Ms. HAYASHI. Pretty much not. In some cases where they are

able to get to a certain level, the business itself would probably not

be able to get funded through a bank anyway regardless of the

credit because of, for example, being a start-up, being too young of

a business.

For instance, in Kyung Hee Park’s case, although her business

was a going concern, it did not have sufficient good credit history

banks look at in order to take a risk of giving her a loan.

Chairman TALENT. Would these folks be in a situation where 50

years ago if they were in a small town what you do for them is

what the local banker might have done given—it is an overused

term—but a character loan?

Ms. HAYASHI. Exactly. In fact, I was just speaking to someone in

my office about this who remembers being on a family farm and

having that kind of bank there where the manager knew everybody

in the town, and, yes, would give loans based upon the fact that

they knew who they were, and they knew they would pay back.

Chairman TALENT. Yes, you mention George Bailey. Hey, I am

the one who brings up old movies in this hearing.

Ms. HAYASHI. That is quite a good analogy, yes.

Chairman TALENT. I would say it is very applicable, isn’t it?

Ms. HAYASHI. Yes, very good analogy.

Chairman TALENT. And often those individuals may end up being

better credit risks, because they don’t have—it is not like if they

fail they are going to get another shot at it.

Ms. HAYASHI. That is exactly what we found is this is sort of we

are working with individuals who had had a tough break in life,

things have happened to them, and this is sort of like a second

chance or in the case of immigrants sort of like of first chance type

of loan program. And we have found in our program that these individuals are normally very good credit risks. We have——

Chairman TALENT. Let me ask—jump in, because we are going

to have to run, unfortunately.

Ms. HAYASHI. Sure.

Chairman TALENT. So, I wrap up, because I don’t think I will,

unless the gentlelady wants me to, I don’t think I will bring everybody back. Are you allowed to loan to ex-convicts? And I don’t ask

this to trap you. I think——

Ms. HAYASHI. I think we are allowed to.

Chairman TALENT. But do you very often?

Ms. HAYASHI. Not that I know of.

Chairman TALENT. You don’t.

Ms. HAYASHI. We don’t——

Chairman TALENT. That is another set of people who——

59

Ms. HAYASHI. We don’t necessarily ask—we don’t ask that question in our application process, but we usually get to know quite

a bit about the person’s life through the process.

Chairman TALENT. Okay. I may go into that a little bit more

through staff.

All right. Well, go ahead and finish up.

Ms. HAYASHI. Okay. I just wanted to quickly outline five recommendations that AEO has based upon the experience of its

membership of the SBA Microloan Program.

First, we would recommend that we give successful State programs a better chance to access assistance. AEO believes that

States with successful or capable microlending intermediaries

should not be limited by an arbitrary formula which regulates how

much funding is available State-by-State. By eliminating this formula, we believe that the best programs, serving the most people,

will be able to access assistance based on need and demand and

not on geography.

Second, AEO recommends reducing confusing interest rate regulations. It is often confusing, both to program participants, as well

as to the SBA, to administer different interest rates for different

loans, which are tied to the 5-year Treasury bill interest rate. SBA

should allow for a singular interest rate buy down for all intermediaries.

Third, AEO recommends that you let local programs determine

the best forms of technical assistance. We think that it is duplicative and unnecessary for the SBA to proscribe how much technical

assistance is available before a loan and after one. This type of

micromanagement restricts program flexibility.

Chairman TALENT. You know why I bet that happens, because

we had a discussion after the first panel up here about it. Everybody who gets into this field understands how important technical

assistance is.

Ms. HAYASHI. Yes.

Chairman TALENT. None of us are comfortable that we have a

handle on what it really is, much less that we can have any kind

of accountability for it.

Ms. HAYASHI. Sure.

Chairman TALENT. So, we are in sort of a situation where we appropriate more money, we know how much—but we are also in the

back of our minds afraid that somebody will mess up someplace

and there will be some 20/20 program, and then we will all be hung

by our thumbs for the thing.

Ms. HAYASHI. Yes.

Chairman TALENT. So, I would love to get a working group of

people together to try and get a better handle on what is working,

what isn’t working, how we do this. Because it would be great—

I mean, you are absolutely correct. Really, we ought to be letting

the microlenders have greater control of what kinds of technical—

but, you see, the fear from this standpoint is what is the money

being spent on, which is a legitimate issue.

Ms. HAYASHI. If I can just speak to that for quickly. As you said,

technical assistance is critical, and as you can see from the written

testimony, for instance, in ACDC’s case, we have maintained a less

than 5 percent default rate, which is quite incredible considering

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the clientele that we are dealing with. And the way that we do that

is through what we are broadly calling technical assistance, which

is basically personal one-on-one business management—anything

from business management assistance to personal problem assistance that they need in order to make their businesses successful.

Chairman TALENT. All we need, though, is one intermediary that

uses the technical assistance to fly somebody to Paris for some

seminar. And, look, I am not saying this happens, okay? I am saying if you put yourself—you are volunteering for that, I can imagine.

So, really, if you all would understand the perspective we have

to come from up here and find ways of putting some kind of accountability measures in there that is consistent with the flexibility

for you that you need, then we have solved the problem.

If you were sitting up here, what would you put in the law to

make sure that you have some accountability while giving the flexibility you want? And I am very interested. We have got an reauthorization bill coming up. I am very interested in this, so go to

work and let us know.

Ms. HAYASHI. AEO is very interested in actually having standardized, I guess, measures for the field, and perhaps that could be

used, worked into the process to have more accountability in terms

of technical process.

Chairman TALENT. At least begin the process, if you would, and

I am going to—because we are going to have to—do you have a

question you want to submit?

Ms. VELAZQUEZ. No. I will submit.

Chairman TALENT. All right. Can you finish up in a minute.

Ms. HAYASHI. I just want to—there are just two more recommendations that AEO has. One is to raise the loan cap to represent the increases in the cost of doing business. When the initial

$25,000 maximum loan was set in 1991, as we all know, inflation

has since eroded that cap, and we would like the SBA to look at

raising that cap to reflect the cost of living increases.

Chairman TALENT. What should it be at?

Ms. HAYASHI. I don’t know if AEO has a specific amount in mind

right at this time.

Chairman TALENT. You give me a number, I was going to say

okay. [Laughter.]

Ms. HAYASHI. Someone saying to say $40,000.

All right, the last recommendation is encourage greater cooperation among microenterprise Programs. We would also like Congress

to lift the maximum allowable loan in joint ventures so that microenterprises can pair with other organizations to help to expand

their businesses beyond the microenterprise stage.

Chairman TALENT. Ms. Velazquez said 60.

Ms. HAYASHI. Okay, great. [Laughter.]

Chairman TALENT. Eighty, all right.

Ms. HAYASHI. That sounds good.

[Ms. Hayashi’s statement may be found in the appendix.]

Chairman TALENT. We have got 4 minutes, all right.

Thank you, Ms. Hayashi. I am sorry we were getting a little

punchy there at the end, but we will certainly take your recommendations under advisement.

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I appreciate everybody coming. I think I have done the house

keeping details.

The hearing is adjourned.

[The statement of the Bond Market Association is located on

page 110.]

[Whereupon, at 2:05 p.m., the Committee was adjourned.]

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