[Senate Hearing 106-543]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 106-543
 
        THE PRESIDENT'S FISCAL YEAR 2001 BUDGET REQUEST FOR THE
                     SMALL BUSINESS ADMINISTRATION

=======================================================================

                                HEARING

                               BEFORE THE

                      COMMITTEE ON SMALL BUSINESS
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 24, 2000

                                     



                                     

              Printed for the Committee on Small Business

                                 ______


                    U.S. GOVERNMENT PRINTING OFFICE
64-731 CC                   WASHINGTON : 2000
_______________________________________________________________________
   For sale by the Superintendent of Documents, Congressional Office
         U.S. Government Printing Office, Washington, DC 20402




                      COMMITTEE ON SMALL BUSINESS
                       ONE HUNDRED SIXTH CONGRESS

                              ----------                              
                CHRISTOPHER S. BOND, Missouri, Chairman
CONRAD BURNS, Montana                JOHN F. KERRY, Massachusetts
PAUL COVERDELL, Georgia              CARL LEVIN, Michigan
ROBERT F. BENNETT, Utah              TOM HARKIN, Iowa
OLYMPIA J. SNOWE, Maine              JOSEPH I. LIEBERMAN, Connecticut
MICHAEL ENZI, Wyoming                PAUL D. WELLSTONE, Minnesota
PETER G. FITZGERALD, Illinois        MAX CLELAND, Georgia
MIKE CRAPO, Idaho                    MARY LANDRIEU, Louisiana
GEORGE V. VOINOVICH, Ohio            JOHN EDWARDS, North Carolina
SPENCER ABRAHAM, Michigan
                     Emilia DiSanto, Staff Director
                      Paul Cooksey, Chief Counsel
    Patricia R. Forbes, Democratic Staff Director and Chief Counsel

                                  (ii)

  


                            C O N T E N T S

                              ----------                              

                           Opening Statements

                                                                   Page

Bond, The Honorable Christopher S., Chairman, Committee on Small 
  Business, and a United States Senator from Missouri............     1
Kerry, The Honorable John F., Ranking Member, Committee on Small 
  Business, and a United States Senator from Massachusetts.......     9
Wellstone, The Honorable Paul, a United States Senator from 
  Minnesota......................................................    19

                           Witness Testimony

Alvarez, The Honorable Aida, Administrator, Small Business 
  Administration, Washington, D.C.; accompanied by Charles D. 
  Tansey, Associate Deputy Administrator for Capital Access, 
  Small Business Administration; Kris Marcy, Chief Operating 
  Officer, Small Business Administration; Russell Orban, 
  Assistant Chief Counsel for Advocacy, Small Business 
  Administration; and James Ballentine, Associate Deputy 
  Administrator for Government Contracting and Minority 
  Enterprise Development, Small Business Administration..........    20

          Alphabetical Listing and Appendix Material Submitted

Alvarez, The Honorable Aida
    Testimony....................................................    20
    Prepared statement...........................................    28
    Responses to post-hearing questions posed by Senator Bond....    52
    Responses to post-hearing questions posed by Senator Cochran.    89
    Responses to post-hearing questions posed by Senator Kerry...    91
Bond, The Honorable Christopher S.
    Opening statement............................................     1
    Letter from GAO to Chairman Bond dated February 24, 2000.....     5
    Post-hearing questions posed to Ms. Alvarez and subsequent 
      responses..................................................    52
Cochran, The Honorable Thad
    Post-hearing questions posed to Ms. Alvarez and subsequent 
      responses..................................................    89
Kerry, The Honorable John F.
    Opening statement............................................     9
    Prepared statement and attachments...........................    13
    Post-hearing questions posed to Ms. Alvarez and subsequent 
      responses..................................................    91
Levin, The Honorable Carl
    Opening statement............................................    18
Wellstone, The Honorable Paul
    Opening statement............................................    19

                        comments for the record

Bond Market Association, Washington, D.C., statement and 
  attachment.....................................................   141
Rubin, Julia Sass, New Markets Venture Capital Consultant & 
  Doctoral Candidate, Harvard Business School, Cambridge, 
  Massachusetts, statement.......................................   146

                                 (iii)




                    THE PRESIDENT'S FISCAL YEAR 2001
                      BUDGET REQUEST FOR THE SMALL
                        BUSINESS ADMINISTRATION

                              ----------                              


                      THURSDAY, FEBRUARY 24, 2000

                              United States Senate,
                               Committee on Small Business,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 9:05 a.m., in 
room SR-428A, Russell Senate Office Building, the Honorable 
Christopher S. Bond (Chairman of the Committee) presiding.
    Present: Senators Bond, Kerry, and Wellstone.

    OPENING STATEMENT OF THE HONORABLE CHRISTOPHER S. BOND, 
   CHAIRMAN, SENATE COMMITTEE ON SMALL BUSINESS, ANDA UNITED 
                  STATES SENATOR FROM MISSOURI

    Chairman Bond. Good morning. The Senate Committee on Small 
Business will come to order. We are very pleased to welcome SBA 
Administrator Aida Alvarez who will be testifying this morning 
as we focus on ``The President's Fiscal Year 2001 Budget 
Request for the Small Business Administration.''
    I have been advised by minority staff that my good friend 
and colleague, Senator Kerry, is probably caught in traffic 
somewhere so we will give him the metropolitan excuse and go 
ahead without him. We are delighted that Senator Wellstone has 
joined us.
    This hearing, for everyone's information, is being web 
cast, which means that audio and video is being broadcast live 
on the Internet. I join in welcoming all our viewers who have 
logged on this morning. We appreciate your joining us through 
the marvels of modern technology.
    This is the beginning of my sixth year as Chairman of the 
Committee on Small Business. During this time, small businesses 
throughout the United States have demonstrated daily why they 
are recognized as the backbone of our Nation's economy. Year in 
and year out, thousands of new businesses are started, many 
growing very rapidly, creating jobs, new investments, and hope 
and dreams for families everywhere.
    The energy exuded from a vibrant small business is 
contagious. Once caught up in the entrepreneurial spirit, it is 
very hard to let go. It is no wonder that delegations from all 
over the world are studying the success of small business in 
the United States. I find as I travel around the world they 
want to know what the secret is for having a strong SME--or a 
small- and medium-size enterprise part of the economy. I tell 
them, for the most part it is getting Government out of the 
way. But there are certain areas in which Government can be a 
very positive force.
    As we focus our attention on the Small Business 
Administration and its budget for FY 2001, it is helpful to 
reflect on the successes of the Agency. The foundation of the 
Agency rests on its credit and management assistance programs. 
During the past decade, we have experienced enormous growth in 
the 7(a), the 504, the Microloan and the SBIC programs. Tens of 
billions of SBA-guaranteed dollars have been loaned or invested 
in small businesses. The SBDC and SCORE programs have allowed 
the SBA to deliver management assistance and counseling to 
millions of small business owners and budding entrepreneurs.
    The Administration's budget request has proposed ambitious 
plans for various new initiatives. I am pleased the President's 
plan counts the HUBZone program as part of the New Markets 
Program. As many of you know, the HUBZone program was created 
and approved by this Committee and the Congress and signed into 
law by the President in 1997. The SBA did not begin 
implementation of the HUBZone program until March 1999 and is 
now requesting $5 million to expand its staff and outreach 
efforts to promote the program.
    I urge the SBA to take advantage of its excellent resource 
partners to increase opportunities for potential HUBZone small 
businesses. For example, there must be at least 1,000 centers 
and sub-centers in the SBDC program, and I would like to see 
the SBDCs more active in distributing information about the 
program. I would hope that the SBA HUBZone office could provide 
each SBDC location with information about the HUBZone program 
that would be provided to small businesses that are seeking 
help.
    Senator Kerry and Senator Wellstone each have a bill 
pending before the Committee addressing the community 
development venture capital proposals. In addition, SBA 
officials recently provided the Committee staff with a briefing 
promoting this initiative.
    The SBA attempted to explain why the current SBIC program 
was not reaching all those companies that needed venture 
capital and singled out San Jose, California, as a community in 
need of help from the New Market Venture Capital program. The 
SBA stated that investments made by SBICs in San Jose had not 
helped the local economy but were really focused on promoting 
the growth of ``dot.com'' businesses in the high tech Silicon 
Valley. Let me take a moment to review the San Jose situation.
    Over the past 3 years, SBICs made 98 investments totaling 
$67 million in 37 small businesses within the San Jose city 
limits. SBIC investments are creating jobs and generating more 
spending in San Jose. But somehow, the SBA has determined that 
these SBIC investments and these new jobs are not helping the 
local economy. This is counterintuitive. If we could get the 
same kind of investment in my home town of Mexico, Missouri, we 
would be extremely happy to have the kinds of problems that San 
Jose is facing. I assure you, we could deal with them.
    The SBA's fiscal year 2001 budget request also sets forth 
very ambitious plans to (1) expand its core programs and (2) 
transform the Agency to meet the challenges of the 21st 
century. The SBA must surpass many hurdles to make this 
transition a success. At the same time that the SBA is 
attempting this reinvention, it wants to roll out new programs 
that require increases in both staffing and budget.
    Based on what has been presented to the Committee to date, 
I have serious reservations about encouraging the Agency's plan 
to expand its core programs, while transforming itself to meet 
the challenge of the 21st century, while at the same time 
introducing new initiatives.
    As we discuss the future of the SBA, I cannot ignore the 
impact this proliferation of new programs could have on the 
core programs of the SBA. Congress has approved substantial 
budget increases for the Agency in recent years. However, I 
have received reports from the SBA that offices supporting key 
technological SBA programs are underfunded or understaffed. As 
the SBA shifts its responsibilities to meet the demands of the 
2lst century, I am concerned that the human capital tools may 
not be available.
    In other words, I have no doubt that the SBA has a vision 
for its future. What I am concerned about is that the Agency 
lacks a formal written strategy to achieve its vision while 
ensuring that its core missions are operating efficiently, 
effectively, and economically.
    Let me dissect this concern for a moment beginning with the 
SBA's core missions and the programs it wishes to expand. Such 
expansion does not happen without growing pains and change, 
which can be difficult on a large organization. In addition, we 
have to be honest, the SBA core programs are not operating 
flawlessly. As you are aware, during the past year the 
Committee received reports critical of the SBA's performance in 
a number of core mission areas.
    No. 1, GAO issued a report critical of the SBIR program. 
No. 2, the Inspector General prepared an audit critical of the 
7(a) program. No. 3, the Farm Credit Administration report on 
the SBLC program was critical of SBA's management of the 
program. No. 4, while the SBA's auditor gave the Agency an 
unqualified opinion for its fiscal year 1998 financial 
statements, the auditor cited three material weaknesses, which 
call into question the SBA's internal controls designed to 
reduce the risks in its operations.
    Welcome, Senator Kerry. I already explained to them that 
you had problems in traffic. Does that work?
    Senator Kerry. Well, it is as good as anything.
    [Laughter.]
    Chairman Bond. All right, that will work. Close enough for 
Government work.
    Three years ago, many of us were enthusiastic about the 
prospects for an SBA computer system that could monitor its 
loan programs and the lenders that participate in the program. 
We wanted to assist the SBA in meeting the challenges of the 
21st century. As the Agency turned over many loan activities to 
its lending partners, it would finally have the resources to 
oversee the lenders.
    In the past 3 years, Congress has appropriated $24 million 
for the so-called Loan Monitoring System. Development of this 
computer system is critical for the future operations and 
success of the Agency. However, planning for the first 
iteration has not been completed.
    Just yesterday, I have received a letter from the General 
Accounting Office about the status of ongoing planning for the 
Loan Monitoring System. GAO confirms the SBA's failure to meet 
its own deadlines. After 3 years, the initial planning phase is 
not yet complete despite the fact that the SBA has advised the 
Committee that it is anxious to implement the system.
    The GAO letter is a good status report of the Loan 
Monitoring System development, and I encourage my colleagues on 
the Committee to review it. If there is no objection, I will 
include the GAO letter in the hearing record. I trust that you 
all have received a copy of this letter.
    [The letter follows:]

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    Chairman Bond. The changes confronting the SBA today are 
enormous just to expand core programs and meet the challenges 
of the 21st century through, among other things, a new Loan 
Monitoring System. With these two challenges in hand, I hope we 
will hear from you, Madam Administrator, about how the Agency 
intends to address its ``Human Capital'' issue related to these 
two challenges at the same time it proposes rolling out a 
plethora of new programs.
    I recognize and commend your commitment to small business, 
Administrator Alvarez, but I do remain concerned with the SBA's 
ability to expand its core programs which are not operating 
optimally now, to transform itself to meet the challenges of 
the 21st century, and to initiate a series of new programs all 
at the same time.
    I learned a long time ago that it is not very wise to build 
a house on wet cement. You have to let the cement dry and set 
before you build on it. That is what I am concerned that may 
not happen here. Let us make sure that our core programs are 
operating really well. I do not want to see anymore critical 
audits or reports or evaluations. Let's get the Loan Monitoring 
System off the ground. Then we can turn our attention to new 
programs.
    Before calling on the Administrator for her testimony, I 
welcome the Committee's Ranking Member, my good friend from 
Massachusetts, Senator Kerry, to make his opening comments.
    Senator.

   OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY, RANKING 
MEMBER, SENATE COMMITTEE ON SMALL BUSINESS, AND A UNITED STATES 
                   SENATOR FROM MASSACHUSETTS

    Senator Kerry. Mr. Chairman, thank you. Thank you very 
much. I do apologize for being late. Senator Levin is not here 
nor Senator Lieberman. We were down at the State Department at 
a meeting, and I appreciate your indulgence. And there was some 
traffic between here and there.
    [Laughter.]
    Senator Kerry. Administrator Alvarez, thank you for joining 
us today. We are delighted to welcome you back here to the 
Committee. In my judgment, you have sent the Congress a good 
budget. I think the growing demand for the SBA's programs is a 
reflection of the effectiveness in the way in which those 
programs are being administered. And also a reflection of the 
prosperity in the country--the roll that we are on, and the 
increased opportunity that has been created.
    I think your budget is realistic, and I think it is 
appropriate, not just with respect to the existing programs, 
but the new programs. I think we may obviously have some 
differences here, and I hope we can work through them because I 
do not think it is that provocative, or that challenging, to be 
honest with you.
    I think it is a smart budget. First of all, it eliminates 
the controversial funding mechanisms for the disaster loan 
program and the Small Business Development Centers that have 
been a bone of contention in the past between appropriators in 
Democratic and Republican Administrations. I think this 
important change will set the tone for more a favorable 
appropriations process and allow the Agency to focus on the 
mission of helping small business owners who cannot access 
traditional capital or training programs.
    Perhaps it comes as no surprise that I do support the new 
markets component of the budget, and I want to just say a few 
words about that. There is $52 million in here for the New 
Markets Venture Capital Program, and I think if you examine 
what has been happening in certain parts of the country--
Massachusetts happens to be one of them--you would see the 
power of venture capital. This is not a special kick for us in 
any sense, because we have done very well. We are one of the 
financial centers of the country. We have more private capital 
managed in Boston than any other place in the world, and it is 
reflected in the venture capital efforts that are taking place 
there now. Likewise, California, Texas, Florida. Different 
States have fared better than others. And many States--Senator 
Wellstone's State--and other States are all increasingly 
witnessing the power of this technology revolution, of 
globalization, and of venture capital and the impact that it is 
having on small businesses.
    We know that when you have a strategically-targeted effort 
combined with appropriate management assistance, we really have 
the potential to organize and improve the economic 
infrastructure of our poorest communities. It has to be a 
matter of conscience. I cannot believe it is not, to Republican 
and Democrat alike, that at this time of remarkable growth in 
the Nation. There are pockets that just do not share in our 
strong economy at the proper rate or sometimes at all.
    Now, if ever there was a moment for this country to use the 
power of capitalism effectively, in an enlightened way, to 
reach into some of these communities, it is now. If you cannot 
do it now, how are you going to do it if we are in a downturn, 
the budget is being squeezed, and we are reducing or having to 
cut and we do not have the surplus? Countless business 
scholars--I would ask a little indulgence on the light, if I 
can.
    Chairman Bond. I went over by 30 or 40 seconds, so you can 
go as long as you want.
    Senator Kerry. I do appreciate that.
    Senator Wellstone. Senator Kerry, don't you believe him for 
a moment.
    Senator Kerry. You did not hear what he said; I can have as 
long as I want.
    Senator Wellstone. I cannot wait for my time.
    [Laughter.]
    Senator Kerry. Let me just share with you very quickly, Mr. 
Chairman. Two of our respected business scholars, William 
Bygrave and Jeffrey Timmons at the Harvard Business School and 
Babson College said that venture capital is really responsible 
for having driven the success of the country over the last 20, 
30 years. All of us understand that the reason we are holding 
inflation down and the reason we are growing at the rate we are 
growing, is principally because of the productivity increases 
that are coming by virtue of technology.
    Second, Michael Porter at the Harvard Business School has 
written extensively on competitiveness, and he said that ``. . 
. inner cities are the largest underserved market in America, 
with many tens of billions of dollars of unmet consumer and 
business demand.''
    Third--final point--rural areas in this country are grossly 
under-invested. In 1998, of the $59 million in true low- and 
moderate-
income investments made by SBICs--meaning those investments 
less than $1 million made in low- and moderate-income areas--
less than $1.1 million out of that total went to rural areas. 
So, under the Community Development and Venture Capital Act 
legislation that I introduced last September, many rural areas 
would qualify as low- and moderate-income communities eligible 
for Community Development Venture Capital investments.
    I would submit for the record, Mr. Chairman, maps of 
Montana and Georgia that speak volumes about the need for 
investment in those rural areas.
    Chairman Bond. Without objection, they will be included.
    Senator Kerry. Thank you, Mr. Chairman. We have seen that 
the existing venture capital program of the Small Business 
Administration, the Small Business Investment Company program, 
has really proven to be one of the most successful private-
public partnerships that we have in the country. Over the life 
of the program SBICs have generated $26.6 billion in 12,000 
financings of high-growth small businesses. And over the past 5 
years, since the participating securities program was 
initiated, $131 million in profit has been returned to the 
Treasury of the United States.
    It simply makes sense to continue that, expand that program 
to reach these other communities. These results really need to 
be spread throughout the country, and I hope that when we 
reauthorize on March 21, we can put this venture capital 
program to use around the country.
    Now, let me just say very quickly, I am glad to see that 
the funding request for e-commerce initiatives has also 
increased, Madam Administrator, to $5 million. I think it is a 
modest investment compared to the value of the e-commerce 
market. It is estimated that every single day 90 million people 
now are using the Internet around the world. And it is 
increasing every day. For the past 5 or 10 years there has been 
just a stunning shift that all of us are still trying to catch 
up to in this kind of business.
    Wearing my Commerce Committee hat, I have been meeting with 
a lot of the CEOs across the country. Yesterday, for instance, 
with Mike Armstrong at AT&T, one of our most established 
companies, they are scrambling to keep up with and get ahead of 
this new curve. And the impact for small business in terms of 
B2B, business-to-business opportunities, is where most people 
say most of the gain is going to come. It is just 
extraordinary.
    So I think we need to stay ahead of that curve. I am also 
pleased about your $1.5 million for the Office of Advocacy. 
Last year Senator Bond and I wrote a letter to the 
appropriators requesting $2.5 million, and there was unanimous 
consent at the roundtable on advocacy last year that the office 
needs an increase. So I am glad we are doing that.
    There are other efforts I would laud here, but rather than 
chew up our time, I would ask unanimous consent to have the 
full text pleased in the record.
    Chairman Bond. Without objection, it will be.
    Senator Kerry. Thank you, Mr. Chairman. Let me just close 
by saying, I want to emphasize that the SBA's loan and 
investment programs are an extraordinary bargain. The taxpayers 
leverage their money in a remarkably effective way to help 
thousands of small businesses every year fuel the economy. In 
the 7(a) program, taxpayers spend $1.24 for every $100 lent to 
business owners, and we have seen extraordinary successes of 
companies like Ben & Jerry's and Winnebago, as some examples of 
the program's effectiveness.
    In the SBIC participating securities program, we spend 
$1.31 for every $100 leveraged for investment. Again, companies 
like Staples, Callaway Golf, Federal Express, Apple Computers. 
These are all stellar examples of this kind of investment.
    With the 504 program, we do not spend a penny to lend or to 
leverage. The program is funded through fees. So I think we 
have done a great job of pulling a bipartisan consensus here 
together. My hope is we will be able to do that again with 
community development capital. I hope, Mr. Chairman, that we 
can get all of the subjects contained in this one hearing. It 
is a little unusual to try to do this all at one hearing. I am 
willing to try to do it. But I would hope that if we have some 
subjects that somehow are not adequately explained, we reserve 
the right to revisit it before we mark up so that issues will 
get a proper hearing if there is some sense that there is 
contention about them, or we do not have the ability to move 
forward. I thank the Chair.
    [The prepared statement and attachments of Senator Kerry 
follow:]

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    Chairman Bond. Thank you.
    Senator Kerry. Now one just quick thing. Senator Levin 
specifically asked me if I would read his statement--just 1 
page.

   OPENING STATEMENT OF SENATOR CARL LEVIN, A UNITED STATES 
      SENATOR FROM MICHIGAN, AS READ BY SENATOR JOHN KERRY

    Senator Kerry. He says, ``Mr. Chairman, I apologize that 
conflicting hearings make it impossible for me to participate 
in this morning's hearing. A program of particular interest to 
me is the SBIR program. I hope we can reauthorize that 
important research and innovation program as soon as possible.
    As part of that reauthorization, I appreciate the 
Chairman's working with me to draft legislation to create an 
outreach program to increase participation in the SBIR program 
that will be available to all States. I hope to incorporate my 
volunteer mentoring idea into this outreach proposal. Mentoring 
provides an excellent complement to outreach. Through outreach 
we would let more small, high-technology companies know about 
the SBIR program, and through mentoring we would help them 
improve their odds of achieving success.
    The SBA also has a proposal to improve the SBIR program 
that I hope we can work on together.''
    Chairman Bond. Thank you very much, Senator Kerry. We 
appreciate Senator Levin being with us by statement.
    Senator Kerry. Finally, I ask unanimous consent that a 
statement by Julia Sass Rubin on New Market Venture Capital be 
placed in the record.
    Chairman Bond. Without objection, I would be happy to do 
so.
    [The statement of Ms. Rubin is in the Comments for the 
Record.]
    Chairman Bond. I might just add, on the many subjects that 
we have before us today, we noticed the conflict in hearings 
and the difficulty in making sure that we have a full 
membership of the Committee together. That is why last year we 
began the roundtable process. The roundtables have gone into 
great detail in going through the various specific areas of SBA 
activity.
    I have found, and the staff has found, these to be 
extremely helpful. Senator Kerry and I have attended parts of 
them. A number of our colleagues, I am afraid, have not fully 
appreciated the importance of this. I am going to join with 
Senator Kerry and urge all of our colleagues to make sure that 
staff is present for the roundtable meetings. We know the 
pressures of the Senate schedule, and we all serve on at least 
two A committees that have hearings at the same time so we 
cannot be here. But I would hope that staff for all Committee 
Members would make it a point to attend the roundtable 
meetings.
    For the effective functioning of the Committee, it is 
important that we at least have staff participation, because in 
a Roundtable there is a lot more information than we can cover 
than in a hearing. But as you will note today, there are three 
Members for what we had hoped would be one big markup with as 
many Members attending as possible. So I share your concern, 
but we need to make sure we have all the Committee Members 
involved.
    With that, let me turn--for his lengthy opening statement--
to my colleague from Minnesota, Senator Wellstone, who has up 
to a whole 5 minutes, if you want it.

  OPENING STATEMENT OF THE HONORABLE PAUL WELLSTONE, A UNITED 
                 STATES SENATOR FROM MINNESOTA

    Senator Wellstone. Mr. Chairman, I promise to keep my 
remarks under an hour.
    [Laughter.]
    Chairman Bond. Senator Wellstone, I would say you have been 
one of the most faithful Members in attending all the hearings 
and we do appreciate your participation. You have been a very 
important contributing Member of the Committee.
    Senator Wellstone. I appreciate your gracious remarks.
    Let me welcome Administrator Alvarez. Let me say that I 
think it is a good budget. I am glad that you maintain and 
build the funding for some core programs. The 7(a) and 504 
programs have been tremendously successful in our State of 
Minnesota. Ed Dahm runs a great operation. We have a terrific 
working relationship between the small business community and 
the SBA office and I want you to know that.
    The other thing you do is you find some room for some 
creative solutions to deal with communities, as Senator Kerry 
said, that have been left behind. In some ways it has been an 
uneven recovery and it is painful to see the economy booming 
while at the same time there are literally communities that do 
not share in this prosperity, and I appreciate that focus.
    Let me in particular focus on one program, and that is the 
request for funding for the New Markets Program. As you know, 
Mr. Chairman, 2 years ago as a part of the Small Business 
Programs Restructuring and Reform Act of 1998, I had a proposal 
that was in there, and the Committee supported it, which was 
called the Community Development Venture Capital Demonstration 
Program. That program was passed by this Committee, later on by 
the full Senate, but we did not get it done in the House.
    I reintroduced that legislation last year because I think 
my proposal and the New Markets Venture Capital initiative 
complement each other. In fact, Senator Kerry has been good 
enough to include my legislation as a part of his overall 
initiative, and I am very pleased with that.
    I think what I need to do today is to say that I hope we 
can work together. I heard the Chairman's remarks, have respect 
for what he said. I want to put myself on record that I 
certainly will have an amendment here in Committee to add this 
Community Development Venture Capital Act to the SBA 
Reauthorization bill. Or if Senator Kerry introduces his bill 
as an amendment, then that would be the effort, and I would 
prefer to join really with my colleague from Massachusetts. But 
I think, Mr. Chairman, that as Senator Kerry said, we ought to 
be able to work this out. I really do not think the differences 
are that great.
    To just highlight one of those, I agree with what you said 
about these roundtable discussions. On May 18 of last year we 
had a roundtable discussion on SBA equity programs, and we had 
a great 45-minute discussion and there were, I think, some 
perceptive comments made from folks like Don Christenson at 
SBA, Julia Sass Rubins at Harvard University, in support of 
these proposals that I am talking about.
    Plus we had folks that are out there doing this kind of 
work right now, Nick Smith with Northeast Ventures in 
Minnesota, Ray Moncrief of Kentucky Highlands, and Elyse Cherry 
in Boston. They were very supportive of this initiative. I also 
would recommend that our colleagues be sure to read, at least 
get their staffs to read the record and look at that discussion 
because it was, I think, very important.
    Finally, I would commend you, Administrator Alvarez, for 
the increased funding for the Microloan program, and also the 
technical assistance. I think that the doubling of funding in 
both areas is justified because what we find out in Minnesota, 
it is a heart and soul program. Some of these Microloan 
businesses are just fabulous. I mean, so inspiring. But the one 
thing that happens quite often is without the technical 
assistance they do not succeed. I think the two go hand in 
hand, and I think you are right on target.
    I want to note one request in this budget that has not been 
mentioned, Mr. Chairman, and that is the request for $3 million 
out of the proposed $85 million small business development 
center to establish a Native American small business 
development center network. This network would focus on 
providing the assistance to Indian reservations, the training, 
the counseling, the technical assistance.
    I think we really need to get out there in Indian country. 
I come from a State with a significant presence of Native 
Americans and I think that proposal is right on target. I am 
also a member of the Select Committee on Indian Affairs and I 
just want to indicate to you my strong support.
    I think I stayed under 5 minutes, Mr. Chairman.
    Chairman Bond. Thank you very much, Senator Wellstone. Now 
we turn to Administrator Alvarez. Welcome.

   THE HONORABLE AIDA ALVAREZ, ADMINISTRATOR, SMALL BUSINESS 
  ADMINISTRATION, WASHINGTON, D.C.; ACCOMPANIED BY CHARLES D. 
TANSEY, ASSOCIATE DEPUTY ADMINISTRATOR FOR CAPITAL ACCESS; KRIS 
MARCY, CHIEF OPERATING OFFICER, SMALL BUSINESS ADMINISTRATION; 
RUSSELL ORBAN, ASSISTANT CHIEF COUNSEL FOR ADVOCACY; AND JAMES 
   BALLENTINE, ASSOCIATE DEPUTY ADMINISTRATOR FOR GOVERNMENT 
CONTRACTING AND MINORITY ENTERPRISE DEVELOPMENT, SMALL BUSINESS 
                         ADMINISTRATION

    Ms. Alvarez. Thank you very much. Good morning, Mr. 
Chairman, Senator Kerry, Senator Wellstone.
    I appreciate the opportunity to testify here today on 
behalf of the SBA's fiscal year 2001 budget. Before I begin, I 
want to say, Senator Bond, that I do believe many of the 
concerns you raise are actually addressed in my testimony, and 
obviously, I would be happy to discuss them. I do have one 
concern that is not addressed in my testimony and that is the 
GAO letter that you mentioned. You said you received it 
yesterday. I have not seen this letter. I understand that GAO 
sent a draft, unsigned letter to the SBA which, as I said, I 
haven't seen and I request that the Committee hold the record 
open for the SBA to fully respond to the letter. I would like 
our letter to also be a part of the record of the hearing.
    [The letter appears in Exhibit 2 of the appendix.]
    Chairman Bond. Without objection, that will be. We asked 
them for a quick status report and they had advised us they had 
received a response from your Agency just as a partial update 
on it.
    Ms. Alvarez. I would appreciate that.
    Chairman Bond. They apparently have had some discussion 
with officials in there but obviously you are welcome to submit 
a more extensive statement since this is an ongoing program, 
so, we will be happy to have further comments on it.
    Ms. Alvarez. Thank you very much.
    And also with regard to our modernization effort, I will in 
my testimony address the progress we have made, which has been 
significant. We did have a meeting yesterday. My Deputy met 
with senior GAO auditors and, frankly, I am surprised to hear 
your statement because we have made enormous progress working 
with them every step of the way as well as with the IG. And, at 
the meeting yesterday, they underscored the progress we were 
making. So, again, it is something that we can revisit, and I 
do discuss it in my testimony.
    Senator Kerry and Senator Wellstone, you have made a very 
compelling case for the New Markets Initiative, which is 
actually a bipartisan effort. I know that you mentioned the 
HUBZone program is a part of the New Markets Initiative because 
the thinking, the objectives of the HUBZones program is totally 
consistent with what we are trying to accomplish with new 
markets. And I know that Speaker Hastert has been working with 
the President on behalf of a New Markets Initiative.
    Senator Kerry has introduced a bill which I believe does 
include Senator Wellstone's proposal, and I am pleased to say 
that I was just informed yesterday that on the House side 
Congresswoman Valazquez, working with Jim Talent and Peter King 
and a number of other members from both sides of the aisle are 
prepared to present shortly their version of the New Markets 
Initiative.
    So, I really hope that we can work together. I think there 
is a recognition across the Congress that this is an opportune 
moment to address unmet needs and we feel that it is the role 
of the SBA, always has been, to address the gaps and not be 
satisfied with our success to date but continue to indentify 
new frontiers, new areas, like these new markets, where we can 
make a difference.
    With respect to our new budget, it has to be put, I think, 
in context--and Senator Bond, you, and the other Senators as 
well, addressed the fact that this is a booming economy and, in 
fact, so much of this economic expansion is actually being 
fueled by small businesses; 25 million in the United States, 
which is 5 million more than in 1990 and the most ever in this 
country. There has been tremendous growth, for example, among 
Hispanic-owned businesses, African-American-owned and Asian-
American-owned businesses. The number of women-owned businesses 
has doubled to nearly 9 million and they are now generating 
over $3 trillion in revenues. The biggest job creators in this 
country are small businesses.
    To keep pace with that growth and also to help America's 
disaster victims, I am requesting a budget for the fiscal year 
2001 of a little more than a billion dollars. This budget would 
fund record levels of loan and venture capital assistance. It 
would expand management and technical assistance for America's 
small businesses and it would also allow us to continue our 
mission of assisting disaster victims. Last year we approved 
36,000 loans a for a little more than $900 million, which 
helped retain--our loans to businesses--helped to retain 35,000 
jobs. And this year we are requesting full funding for our 
disaster program, which is $296 million, up from $276 million.
    As I mentioned, our budget request would fund record levels 
of lending and venture capital. Let me just address our needs 
in the area of our loan programs. In fiscal year 1999, the SBA 
guaranteed 50,000 loans and approximately one-third of those 
loans, 7(a) loans, went to startup firms less than 24 months 
old. That is very important to help the most vulnerable and the 
most promising of small businesses. We have, since 1992, more 
than doubled our lending to minority-owned businesses, while 
tripling our lending to women-owned businesses. We are 
addressing a very important need in the area of equity capital 
and in 1999 our Small Business Investment Companies accounted 
for over half of all the institutional-venture capital 
transactions in the United States; an estimated $4.2 billion. 
And I think that is a remarkable success for that program.
    For our core programs we are requesting $274 million to 
deliver more than $20 billion of credit, venture capital, and 
technical assistance, up from $17 billion this past year. It 
includes an $11.5 billion program level for the 7(a) program, 
up from $9.8; $3.75 billion in 504, with a reduced guarantee 
fee for the fourth year in a row; $60 million, a doubling for 
the microloan program; $45 million for microloan technical 
assistance; and we propose a $2.5 billion program level for the 
SBICs. We expect this investment to attract an additional $1.25 
billion in private capital. With 3.75 billion in new SBA-
leveraged funding, plus their on-hand private capital, we are 
looking to hopefully see $4.5 billion in investments in fiscal 
year 2001.
    And, as you mentioned, Senator Kerry, the SBIC 
participating security program is producing returns; $131 
million to the Treasury as a taxpayer's share of their profits.
    I think to really appreciate the success of the SBA in 
assisting small businesses, we need to take a step back and 
look at the big picture. Since 1992, the SBA has backed more 
than $71 billion in small business loans and venture capital, 
which is more than in the previous 25 years combined. This is 
an amazing success story and it is no wonder that 
representatives from countries around the world are flocking to 
the SBA asking us, ``How do you do it?'' This is clearly 
because small business is the engine of the economy and the 
role that the SBA plays is critical as a catalyst and a 
facilitator of this success.
    In the area of procurement, small businesses achieved a 
22.4 percent share of the procurement goal and obviously, Mr. 
Chairman, we have talked about this, our goal is 23 percent and 
we are working to make sure that that is what happens. Last 
year we were pleased to launch the historically under-utilized 
business zone program, HUBZone program. I am proud to say that 
nearly 900 businesses are now certified as HUBZone firms. We 
are requesting $5 million, up from $2 million, to continue to 
develop HUBZone contracting.
    SBA's Office of Advocacy has done a fine job, especially in 
showing Federal agencies how to achieve their policy objectives 
without placing an undue burden on small businesses. Their 
research and database is a national resource and we are 
requesting an increase of $400,000 to $1.5 million.
    In his State of the Union address, President Clinton 
repeated his belief, which we have heard repeated here today, 
that more must be done to extend the benefits of today's 
economy to our inner cities, our poor, rural areas and Native 
American reservations. As I said, I am pleased to see the 
bipartisan support. When I met with Congressman Hal Rogers the 
other day he said to me, ``You know, this New Markets Venture 
Capital program will help my district.'' He recognizes the role 
that this venture capital program will have in rural 
communities. And, so, I think there is a lot of enthusiasm for 
the possibilities here.
    I want to talk a little bit about what it is going to take 
to fund this program and why it is worth the investment. To 
establish the New Markets Venture Capital companies we request 
$21.6 million, which would support a program level of $150 
million. We are also requesting $30 million for the technical 
assistance component, again, it is the small-sized equity 
investments plus the technical assistance that are the key to 
the long-term success of the new markets businesses. We arrived 
at the cost of this program by using the most conservative 
assumptions possible. We believe having studied other of our 
programs, which started out with a higher cost, that it is just 
a matter of time before the cost of that program will go down. 
We want to make sure that we are very safe in how we approach 
the program. I do think that the long-term benefits are 
impressive.
    You mentioned the success that we have had in San Jose with 
our Small Business Investment Company program. We are very 
proud of the fact that investments are being made in San Jose. 
Some of those investments came about because we developed low- 
and moderate-income debentures, which we saw as another way to 
give incentives to those venture companies to make these 
investments. The fact of the matter is that our SBICs are for 
the most part profit-oriented, as is appropriate. But when we 
are talking about New Market Venture Capital companies, we are 
talking about companies that will not so much be profit-
oriented as mission-driven. The kinds of investments that New 
Market Venture Capital companies will make are really going to 
be quite different from those that our SBICs are making, 
whether it is in San Jose or elsewhere.
    Here is what the picture looks like right now for these 
smaller type of investments that we are proposing in the New 
Markets program. Right now there are virtually no institutional 
sources of equity-type capital in these distressed communities. 
We are talking about distressed communities. San Jose has 
distressed neighborhoods, but, for the most part, I wouldn't 
characterize it all as distressed. Nationwide the community 
development venture capital industry consists of essentially 25 
firms with about $157 million under management. Out of these 25 
firms only 14 of these funds are capitalized at $5 million or 
more, which we believe is the absolute minimum for economic 
viability. Our own analysis of these community development 
venture capital companies indicates that one direct job is 
created for each $10,000-$15,000 equity investment. On this 
basis, $51.7 million should generate between 13,300 and 20,000 
direct jobs at a cost of between $2,600 and $4,000 each. If the 
indirect jobs are included, the cost is even less.
    We believe that this investment in new markets will 
ultimately pay off in a big way. These investments will not 
only create capital for those businesses but will generate 
employment in places that are suffering now from a lack of 
jobs, very consistent with the objectives of the HUBZone 
program.
    The SBA is requesting funding for other New Markets 
Initiatives as well; the PRIME program, which was passed last 
year and signed by the President at the end of the session of 
Congress. Again, this is a program focused on technical 
assistance, $15 million to build the capacity of the micro-
enterprise industry, generally. We believe that this is a very 
good complement to our new market strategy. Our new market 
strategy is clearly focused on newer, smaller businesses, 
first-time entrepreneurs located in communities that have been 
overlooked. They need not only the money, they need the 
technical assistance to make it.
    Then $6.6 million for BusinessLINC. We have already had a 
successful sort of kickoff of BusinessLINC which is a way in 
which big businesses work hand-in-hand with small businesses. 
Senator Kerry mentioned AT&T. There are many big companies that 
can play a great role in working with small businesses.
    Native American communities, Senator Wellstone mentioned 
Native Americans. The figures for Native Americans are really 
shocking. Many reservations, have between 40 and 60 percent 
unemployment rates; 53 percent of Indian homes on reservations 
do not have a telephone. These are the kinds of needs we are 
trying to address with a budget that proposes $5.75 million for 
Small Business Development Centers, for BusinessLINC and for 
Tribal Business Information Centers.
    You spoke extensively about the area of safety and 
soundness and human resources management and modernization, 
areas where we have spent considerable time and effort to 
continue to make progress and keep pace with the needs. We feel 
very confident that as our core programs have grown, which has 
been in response to the overall growth of small businesses and 
the economy, we have actually become more sophisticated than 
ever in addressing safety and soundness and loan monitoring 
concerns.
    Let me just briefly outline the steps that we have been 
taking to ensure that we can combine our interest in sustaining 
this unprecedented growth by increased funding for our core 
programs as well as identifying the new markets and penetrating 
there.
    In fiscal year 1999 we instituted a safety and soundness 
examination for the Agency's Small Business Lending Companies 
and examined all 14 companies. This had never happened before. 
This was the first time. We are already on to the second round 
of reviews, which we expect to complete in September. The 
issues and deficiencies that were raised in the first round, 
for the most part, have already been addressed by the 
institutions.
    We have also established, as you know because we advised 
you when we were about to do this, the Office of Lender 
Oversight, and we have a risk management committee, again, a 
first at the SBA. 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. Again, this is something that has not occurred before.
    We also are requesting an increase in funding for the 
Inspector General to $14.3 million. We have worked hand-in-hand 
with them every step of the way on these initiatives and we 
support their need for funding to continue to review, audit, 
and provide oversight of SBA's programs and services.
    Our core program for small business counseling and 
technical assistance, the Small Business Development Centers, 
helped more than a million entrepreneurs in fiscal year 1999 
alone. I am very pleased to say that for fiscal year 2001 we 
are proposing full funding of $88 million for the SBDCs, and as 
Senator Wellstone said, $3 million to fund an SBDC network for 
the Native American communities. We think this is a step in the 
right direction, part of the New Markets Initiative.
    For SCORE we propose $5 million, up from $3.5 million. 
SCORE is doing a great job. They are doing on-line, interactive 
counseling with small businesses. To meet the growing demand of 
today's women entrepreneurs, SBA's Women Business Centers have 
more than tripled in 3 years, growing from 18 funded centers to 
59, including 25 new centers in fiscal year 1999, lots of 
activity, lots of work with women. We request $12 million up 
from $9 million this year, to expand the network to more than 
80 sites. Our goal is to have at least one Center in each 
State.
    SBA requests $10 million to maintain our existing One-Stop 
Capital Shops and to open new ones in Empowerment Zones. 
Empowerment Zones, as you know, are located in HUBZones and 
they also include our targeted new markets communities.
    Veterans, we are very pleased that we are asking for $4 
million to support initiatives to assist veterans in their 
entrepreneurial 
activities, particularly, service-disabled veterans. 7(j) 
technical assistance, which is a program that really is 
important to assist particularly minority-owned businesses to 
enhance their business development and executive education, we 
are asking for $5 million.
    Senator Levin, in his letter, addressed the needs in the 
area of technological small businesses through the Small 
Business Innovation Research program, SBIR. We have been 
helping these small businesses get to a point, Phase III we 
call it, where they have fully developed their federally-funded 
products but they lack the necessary capital to market and 
commercialize the technology. Phase III funding would provide 
grant dollars to assist them to make that transition into the 
commercial market place. We request $15 million in grants for 
fiscal year 2001 to fund the first year of a 3-year SBIR Phase 
III pilot program which would commercialize the R&D effort of 
small, high-tech businesses.
    Mr. Chairman, our focus is on the success of our small 
business customers, as it should be; however, I would like to 
brag a little bit about the success of this small agency. SBA's 
workforce and the way we deliver programs have changed 
dramatically over the past decade. 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 3,100 now.
    We have involved the private sector where it made sense, 
contracting out or delegating activities that could be 
performed more effectively elsewhere. This transition has 
allowed us to downsize as well as to use staff strategically 
for marketing, more complicated financial transactions, and 
loan monitoring, for example, and it has involved training and 
retraining, which is part of our human resources management. We 
do have written plans that address the training and retraining 
needs and, in fact, we have a record of some of the types of 
training that our senior managers, middle-level managers, 
people in the field have already received in order to make this 
transition. We would be happy to share that with you.
    All of this has been accomplished while keeping our fiscal 
house in order. We are proud to report a clean opinion in 
fiscal year 1998 in our financial audit report, which is the 
highest rating a Federal entity can receive. This was the third 
year in a row the SBA attained this rating, and we also expect 
to obtain a clean opinion when our 1999 report is issued on 
time next week.
    We have laid out an aggressive agenda to improve our 
internal management and infrastructure. You mentioned $24 
million. And $13 million for systems modernization and lender 
oversight, risk management activities; $7 million for 
information technology infrastructure support; $4 million to 
train and transition our workforce. We have spent 2\1/2\ years 
developing plans as required by law which require that we have 
very detailed plans that outline step-by-step what we will do 
before we acquire any systems, which is the reason why we 
haven't done some of this yet. But we have completed those 
plans working with GAO and with various committees. I am happy 
to say that we have almost completed the first part of Phase I 
of our modernization effort. That will be completed and 
implemented this summer.
    For the first time this summer the majority of loan 
transactions will be processed electronically by the SBA. This 
will represent 69 percent of our loans and 79 percent of our 
loan dollars. Not only will this create enormous ease and 
efficiency in a paperless transaction, it will also allow us 
for the first time to collect data electronically that we have 
never been able to collect before, which will help us with 
lender oversight and loan monitoring.
    Senator Kerry mentioned e-commerce, $5 million, and our 
budget includes, I think, a modest amount to ensure not only 
that we provide even more of our services electronically--we 
have 6 million hits a week on our web site. We are doing 
electronic counseling--we also want to ensure that small 
businesses can participate in the opportunities created by e-
commerce.
    We want to build on the success of the Y2K outreach 
initiative which, thanks to your help and that of your 
colleagues, allowed us to hold 1,300 workshops on Y2K which 
were attended by 1.1 million small businesses. These are all 
small businesses engaged in the topic of technology as it 
affects their businesses. There is a need and an interest, we 
want to build on that, we don't want to lose the momentum. The 
e-commerce, the $5 million request, will help us continue that 
effort.
    So, in conclusion----
    Chairman Bond. Madam Administrator, I was just going to say 
we have been a little generous with the 10-minute light. 
Unfortunately, Senator Kerry and I both have competing meetings 
and hearings. The Murphy's Law, which said, if anything can go 
wrong, it will go wrong, was a gross overstatement and 
optimistic assessment of Senate schedules. We would be 
delighted to have your full comments that you have submitted 
for the record, and I would like to give Senator Kerry an 
opportunity to ask any questions before he has to leave.
    Ms. Alvarez. Absolutely.
    [The prepared statement of Ms. Alvarez follows:]

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    Senator Kerry. Mr. Chairman, thank you very much.
    I really do apologize.
    Ms. Alvarez. No, that is OK. I had hoped to answer a lot of 
the questions that might be raised in the course of the 
testimony. That is why I took a little longer.
    Senator Kerry. I would like to ask permission to submit any 
additional questions in writing.
    Chairman Bond. I will be submitting some and, of course, 
all Members of the Committee, and we will advise the staff, are 
invited to submit any questions for the record. Questions will 
have to be ready tomorrow. And then we would like to have your 
responses in a week, if that is possible.
    Ms. Alvarez. Sure.
    Senator Kerry. Madam Administrator, can you share with us 
quickly the 7(a) policy and program implications of 
prepayments?
    Ms. Alvarez. Well, I actually would like Charles Tansey to 
address that because that is an area on which we have had many, 
many discussions.
    Senator Kerry. Sure.
    Mr. Tansey. I am Charles Tansey. I am the associate deputy 
administrator for Capital Access.
    Chairman Bond. Welcome, Mr. Tansey.
    Mr. Tansey. Thank you.
    We have not included this in our legislative package but it 
is a very serious issue that has been brought before us. The 
issue became a major one, I think, in the last year or year-
and-a-half primarily having to do with long-term 7(a) loans of 
15 years or more. There is quite a bit of prepayment activity 
in the secondary market. Our sense is that from a mission 
standpoint this may conflict to some degree with the idea of us 
being a gap lender, but the flip side of it is that prepayments 
are causing a tremendous amount of anxiety in the secondary 
market and reducing, thereby, the attractiveness of that market 
and the possibility of additional 7(a) activity and 
availability of the 7(a) program for people who participate in 
it.
    So, I think right now what we are doing is we are reviewing 
the issue, and we are neutral on it.
    Chairman Bond. We would like the guidance that your Agency 
can provide.
    Ms. Alvarez. Good. We would be happy to do that.
    Senator Kerry. Just quickly, on the New Markets Initiative. 
You addressed that significantly, Madam Administrator, but I 
just want to clarify. In your statement you mentioned that in 
1999 the SBICs averaged less than $1 million per investment and 
other venture capital firms averaged $6.2 million. But I just 
wanted to point out that that average $1 million represents all 
SBIC investments, debt and equity, without looking at a target 
area.
    Ms. Alvarez. That is right.
    Senator Kerry. So, if you break it out in target area, 
investments of $1 million or less in low- and moderate-income 
areas, you actually wind up with, I think, only about $66 
million out of the total $4.2 billion of SBIC investments last 
year. Is that accurate? I mean, do you agree with that?
    Ms. Alvarez. That is right.
    It is still a modest amount and it is why we think that New 
Markets Venture Capital fund will allow us to make smaller 
equity investments in communities that just haven't been 
reached.
    Senator Kerry. Good. And I don't disagree with the 
Chairman's notion that--I mean, it is good to get a sense of 
how this gels with the other programs. I think we obviously 
ought to have that sense as we try to approach it.
    Finally, in terms of verbal questions right now, given that 
the PRIME program is authorized for FY 2000, what are your 
plans with respect to funding and beginning implementation this 
fiscal year?
    Ms. Alvarez. We have several funding concerns. One is for 
the 7(a) loan program where we had requested enough funding for 
$10.5 billion, and we did not receive that. And of course, it 
appears, fortunately and unfortunately, that our projections of 
$10.5 billion were on target. So we are looking to find ways to 
make up the difference for 7(a) as well as for PRIME, and for 
the veterans program for this year.
    We have been talking on a daily basis about strategies for 
doing that within our existing budget. We hope to have an 
answer for you very shortly.
    Senator Kerry. That would be great. Obviously, it is still 
up in the air a little bit.
    Ms. Alvarez. A little bit, but we have some options that we 
are looking at.
    Senator Kerry. Good. That would be helpful.
    Thank you very much.
    Ms. Alvarez. Thank you.
    Senator Kerry. And thank you, Mr. Chairman, for your 
courtesy, and we will submit a few questions for the record, 
but not many.
    Chairman Bond. Thank you very much, Senator Kerry. I had 
discussed with Senator Kerry my interest in getting the GAO to 
undertake a review of the economic stimulus programs that would 
be related to, and either complementary to or overlap the New 
Markets Program. I want to make sure that we take advantage of 
this opportunity but not reinvent any wheels. We have enough 
wheels running around here without reinventing new ones. I want 
to get a sense from GAO as to where we stand.
    Let me go back to the Loan Monitoring System. I think we 
have a chart somewhere. I always have to have a chart.
    [The chart follows:]

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    Chairman Bond. As best we understand, this is from what we 
have learned from the SBA and the GAO, the status of the 
mandated actions. I gather the target completion dates were 
back in August, and in some cases some of these steps are still 
in draft form. Several of the final products came out a week 
ago, and I think seven of them just came out last week; several 
of them are still in draft.
    What is your projection on when you are going to finish 
your work on the mandated actions?
    Ms. Alvarez. First of all, as I said, this is very complex 
stuff.
    Chairman Bond. We understand that. That is why we----
    Ms. Alvarez. We talk about, for example, Phase I. I 
mentioned before that by this summer we intend to do 79 percent 
of our loan dollars, transactions will be handled 
electronically, which is something we have never done before. 
That is a significant breakthrough.
    We are also working very closely with disaster to make sure 
that these disaster loans are all done electronically, which 
will actually result in some, I think, significant savings for 
that program.
    I would like to ask Kris Marcy, who is our Chief Operating 
Officer, who has been working day and night on this project, 
because it is very complex. It cuts across all these 
departments as well as our outside partners. She has also, by 
the way, been going to different offices in the field and 
having meetings and training sessions with our folks around the 
country.
    Chairman Bond. We would be happy to welcome her. I might 
say, the GAO has advised us that there is an excellent working 
relationship and it seems that it has worked well together, but 
there are many hurdles ahead. Ms. Marcy, we would welcome your 
comments on this.
    Ms. Marcy. It is nice to be here. We have worked very 
closely with the General Accounting Office, and frankly, many 
of the staff members in this room. We have done that both at 
their request and, frankly, many times we have offered and 
asked to come up to review our progress.
    This is enormously complicated. It involves all our 
programs. You have a chart here that is, I think, a very 
accurate representation. We saw it yesterday for the first time 
but we have no problem with the accuracy of this chart. You 
will note that this is only for Phase I, and we are also 
actively engaged in Phase II as we speak, which is critical for 
our financial statements, our core accounting. It has many 
relationships to Phase I and the loan accounting system, and it 
includes the disaster program.
    So we have got an awful lot of activity underway. We think 
we have made enormous progress and we could not have done it 
without the help of the staffs and the General Accounting 
Office.
    Up there you have eight planning steps that were 
articulated in the Reauthorization Act of 1997. These are steps 
to design a good quality system to avoid risk. Of the steps 
that you have there, you have 17 work products in the middle 
column. I believe 14 are shown as final, 3 are still in draft. 
And to get to that 17 we have 28 separate contract 
deliverables. It has been exhausting.
    But a word about this collaborative process. The way this 
works--because beauty is in the eye of the beholder--we will 
not say that we are finished, final, 100 percent perfect by 
ourselves. We do this in collaboration with the General 
Accounting Office and also with your staff. And many, many 
times when we submit a product as draft we are asked to make 
adjustments or revisions, and we do that willingly. So you will 
see these things go back and forth many times.
    While we would love to have a chart that says everything is 
final and it was done a year ago, that is just not the nature 
of this program unfortunately. We do think, all said and done 
though, that we are ready to begin iteration one, Phase I. We 
think it is absolutely critical that we do that so that we get 
the critical loan information that we need.
    Chairman Bond. I think you have made the point that I am 
trying to make in my initial presentation, that this is a 
major, ongoing program. You have spent $24 million so far on 
it. There was a request for an additional $13 million for 2001.
    Ms. Marcy. We are much more conservative than that. We have 
received appropriations of $24 million to date through 2000. 
The way this works is that we get even one more level of 
review; so before we can spend the appropriations we do need to 
submit a spending plan to the appropriating committees. We have 
received acknowledgement to spend $16 million of the $24 
million. Of that, we spent $3.2 million of the 1998 
appropriations and $3.6 million of the 1999 appropriations. So 
we have spent about $7 million of the $24 million in 
appropriations thus far.
    Chairman Bond. So you still have $16 million that has been 
appropriated and not approved? And you have asked for another 
$13 million, or is this just a request to OK the remaining $16 
million?
    Ms. Marcy. This is not easy. We have about $9 million which 
is sitting in an organization called FEDSIM at GSA that 
basically allows us to put technology money aside, obligated to 
them so that we can use it and draw it down as we need to. So 
we have that in the bank, if you will.
    For the 2001 budget, as the Administrator said in her 
testimony, we have requested not $8 million as we have in the 
prior 3 fiscal years, but $13 million. And of course, that will 
be subject to lots of review.
    Chairman Bond. Is that on top of the $24 million?
    Ms. Marcy. Yes, Sir, it is.
    Chairman Bond. So that brings it to $37 million. You are at 
$8 million now and----
    Ms. Marcy. We have spent about $7 million now. We have $24 
million appropriated.
    Chairman Bond. You are $7 million toward completion of a 
$37 million project.
    Ms. Marcy. Yes, Sir.
    Ms. Alvarez. I think you can appreciate, Senator, that the 
budget process works on a year-to-year basis. But when you do a 
complete overhaul of a system you have to think in multiple 
years.
    Chairman Bond. That is my point.
    Ms. Alvarez. And there are times when, particularly as you 
are working out a detailed plan you need to keep the money in 
reserve, because when you spend it, you are going to spend 
substantial amounts of money and you will not have time at that 
point to start a process of soliciting funds if you want to 
move quickly. So that is why some of this money is in the 
FEDSIM account.
    Chairman Bond. I do not challenge that. That is what I 
understand. I just want to lay out the picture and make sure 
that I understand, and my colleagues understand, how much work 
there is yet to be done on this program. That is the point. I 
appreciate that, and we would probably have a follow-up 
question or two on those things just so we can see where it 
stands.
    Ms. Alvarez. Absolutely.
    Chairman Bond. We will look forward to having your comments 
on this. We are very interested, and I have some people on my 
staff who even understand what is going on, and they too will 
be communicating with you on it.
    Ms. Marcy. We are well aware of that. Thank you.
    Chairman Bond. Thank you very much. Let me jump over to the 
Office of Advocacy which is of great concern to all Members of 
this Committee and certainly to our friends in the small 
business community. The 2001 budget request includes 47 FTEs. 
How many staff does the Office of Advocacy have on board at 
this time?
    Ms. Alvarez. Is Jere Glover or Kay here?
    Chairman Bond. I hope Jere is out working.
    Ms. Alvarez. Russ, do you know the answer to this question? 
Sit down, Russ, and introduce yourself.
    Chairman Bond. Please identify yourself for the record.
    Mr. Orban. I am Russ Orban from the Office of Advocacy. 
Jere Glover is working this morning and I am sorry about that--
real sorry he is not here.
    [Laughter.]
    Chairman Bond. How many FTEs do you have on board now?
    Mr. Orban. I believe we have 47 on board.
    Chairman Bond. Madam Administrator, since 1993 the Office 
of Advocacy staffing appears to us to have dropped dramatically 
even though the duties of the office were expanded under the 
Red Tape Reduction Act and the Regulatory Flexibility Act, 
SBREFA as it is known. Why has that gone down, and is 47 enough 
to cover the increased requests that are being placed upon this 
office?
    Ms. Alvarez. You can imagine I have had a number of 
conversations with Jere Glover about this topic and what I have 
said to Jere is, everybody is taking a hit.
    Chairman Bond. How much of a hit did they take? From 1993, 
what was their level in the past?
    Ms. Alvarez. I am looking here, in 1996 it says here the 
staff--Russ, do you want to articulate this?
    Chairman Bond. Where were we in 1993, and what has the 
trend been since 1993?
    Mr. Orban. In 1993 we had, I believe, 62 FTEs and that has 
gone down now to an authorized level of 50, and I think there 
are 47 that are currently on board.
    [Mr. Orban subsequently submitted the following:]

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    Alvarez. This year, Mr. Chairman, we are looking to reduce 
our staffing overall at the SBA by 146 positions.
    Chairman Bond. What percent is that of your total 
employment? How many employees----
    Ms. Alvarez. It is about a 5 percent reduction from last 
year. We recognize that in order to implement some of the newer 
programs and to support HUBZones and other programs we are 
going to have to increase by about 86 in fiscal year 2001, 
which will still give us a net reduction in employees from last 
year. So it is part of this process of managing our human 
resources and evolving.
    With respect to the Office of Advocacy, we have a process 
where we are managing every single office in terms of their 
requests, and we need to evaluate the relative sensitivity of 
the functions being performed. We would love to give Jere more 
people. We would also love to give Charles Tansey more people. 
And I can go across the board with all of our managers and I 
could make a compelling case, as they could, for why these are 
very important functions.
    Chairman Bond. As I said, this is something that I think 
the Committee on a bipartisan basis supports very strongly. We 
expect them to carry a much heavier workload, now that we do 
have under SBREFA the means to enforce the Regulatory 
Flexibility Act, which we did not have. And if my rough 
mathematical calculations are close, it is a 20 percent cut, 
come down from 62 to 50, and we are just concerned, will 47 
people be able to do the job?
    Ms. Alvarez. I have encouraged Jere, as I have others, to 
the extent that the work can be done using outside consultants 
and specialists, which would be a one-time cost, it would not 
increase our FTEs, I am supportive; fully supportive. So I ask 
people to think in terms of projects where we can add people to 
complete the project and peel them off so that we do not have 
to carry them.
    Chairman Bond. We will follow up on that and I thank you 
very much, Russ, for joining us.
    Let me turn very briefly to the HUBZone program. Did the 
Federal agencies meet the fiscal year 1999 goal of channeling 1 
percent of Federal procurement dollars to HUBZones, and what is 
the progress toward the 2000 goal of 1.5 percent? Welcome, and 
if you would identify yourself for the record.
    Mr. Ballentine. Thank you very much. Mr. Chairman, my name 
is James Ballentine, Associate Deputy Administrator, Government 
Contracting and Minority Enterprise Development. As you 
mentioned in your statement, we launched the program on March 
22 of last year. We anticipate in the 1999 fiscal year, 
although we have not received the full data, that we will not 
meet the 1 percent. The 1.5 percent is a lofty goal, but we are 
feeling very good about the HUBZone program. We have more 
businesses coming to the program and we feel that we will get 
fairly close, although it is a new program.
    Chairman Bond. Do you have any figures on how many HUBZone 
contracts have been finalized to date this year?
    Mr. Ballentine. We do not have final numbers. We will have 
those actually next week which we will share with the 
Committee.
    [As of June 1, 2000, the requested information was not 
provided by the SBA.]
    Chairman Bond. Good. Thank you. I might ask, is the SBA 
currently planning to adopt any order of preference that would 
direct either the HUBZone or the 8(a) program to take 
precedence over the other?
    Ms. Alvarez. Mr. Chairman, nearly 2 years ago SBA adopted 
an order of preference after following the regular process for 
comment. So that order of preference has been in effect since 
June 11, 1998.
    Chairman Bond. What was that order of preference?
    Ms. Alvarez. It was an order of preference which did give 
preference to the 8(a) businesses. That came about as a result 
of consultation with many Members of Congress, and we will 
share with you some of the letters that were exchanged that 
manifest the concern of a number of members that HUBZones not 
harm the 8(a) program.
    I believe that our experience to date, and this to some 
degree is anecdotal because we do not have the final numbers, 
is that the HUBZone program has benefited both 8(a) and non-
8(a) businesses, which is what we hoped would happen.
    Chairman Bond. That is the point. But we crafted that 
legislation, I wrote that legislation, I negotiated that 
legislation both within the Congress on a bipartisan basis and 
with the Administration and the legislation was clear that 
neither program was to be given preference over the other. That 
was the legislation we drafted and that was the legislation 
that was signed into law. Not for a preference of one over the 
other, but that they should work together.
    Now let me ask, you requested $45 million for technical 
assistance for approximately 8,000 Microloan borrowers and $30 
million in technical assistance for the New Markets Venture 
Capital program, but only $5 million for technical assistance 
under the 7(j) program to cover about 6,000 8(a) firms plus 
HUBZones. Does that not seem a little out of whack?
    Ms. Alvarez. No, because we are talking about different 
kinds of technical assistance, different needs for different 
entrepreneurs. Frankly, we would like to have asked for more 
money for the 7(j) program, but we are trying to work with our 
previous history and slowly build more support. We are also 
taking some new directions in the 7(j) program which we think 
will be effective in helping these minority-owned businesses. 
Maybe James would like to comment.
    Mr. Ballentine. As the Administrator mentioned, we are 
taking a new direction with the 7(j) program. In this current 
fiscal year we received $3.6 million. We are requesting $5 
million to implement some of the changes that we hope to put in 
place for fiscal year 2000 and fiscal year 2001, in fact. And 
hopefully we can build the program enough to demonstrate that 
it is a worthy enough program to receive increased funding in 
the outyears.
    Chairman Bond. I would just say that you have requested $30 
million in technical assistance for a new program that is not 
even going yet and only $5 million for the targeted programs 
that are authorized, that we expect the SBA to act on. I find 
it stunning that six times as much money would be requested for 
technical assistance for a program that is not even authorized. 
So we are going to work on that problem in the budget process.
    How much of the $5 million requested in the budget--have 
you allocated for the HUBZone or the 8(a) program, and what 
percentage of the assistance that you had in the past went to 
the two programs?
    Ms. Alvarez. You are talking about 7(j) monies?
    Chairman Bond. 7(j), yes.
    Ms. Alvarez. I do not think we have made those kinds of 
distinctions. The businesses that benefit from the 7(j) program 
by and large are much more sophisticated than a micro-
enterprise. The micro-enterprises require a different kind of 
technical assistance with different providers. We have turned 
to universities, for example, to be the principal source, the 
Dartmouth Business School of Education for these 8(a) and 
small, disadvantaged businesses. So there are just different 
needs for different levels of sophistication.
    With newer startup micro-enterprises it is going to be more 
costly. It is more labor intensive. It is just a different kind 
of training.
    Chairman Bond. I understood that your new market programs 
bring in big businesses to communities and----
    Ms. Alvarez. We are looking through BusinessLINC to 
hopefully establish----
    Chairman Bond [continuing]. Bringing in sophisticated----
    Ms. Alvarez [continuing]. Establish some mentoring and 
partnering relations with small businesses. Again, you do not 
expect a big business to take under its wing a tiny business. 
They are more likely to work with--we saw an example of the 
type of benefits right here in Washington. A small company 
based in Southeast Washington that hires some folks who were 
from welfare and they make mops. And as a result of a 
partnering relationship with Giant supermarkets they were able 
to grow their business because they ended up with contracts to 
any number of Giant supermarkets. They are still a small 
business, but that is a much more sophisticated company in some 
respects than the ones we are talking about in the micro-arena.
    Chairman Bond. I am just saying that if you are bringing in 
established businesses under the new markets, to give them six 
times as much technical assistance as you give the small 
businesses and the 7(j) program and the HUBZones and 8(a) just 
does not make any sense to me. I will be happy to have your 
explanation and any further follow-up. We are going to pursue 
that along with a number of other problem areas. As I mentioned 
to Senator Kerry, I want to make sure that I get a review from 
GAO how these subjects are working.
    Unfortunately, I have three more hearings to participate in 
this morning, and since my other colleagues seem to have opted 
not to present their questions in person we will hold the 
record open. We thank you, Madam Administrator----
    Ms. Alvarez. Thank you, Senator.
    Chairman Bond [continuing]. For your participation and the 
good working relationship that we have. We will get all of 
these questions to you tomorrow and ask that you to return your 
responses in a week.
    There being no further business to come before the 
Committee, it is hereby adjourned. Thank you.
    [Whereupon, at 10:27 a.m., the Committee was adjourned.]


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