[Senate Hearing 107-694]
[From the U.S. Government Publishing Office]
S. Hrg. 107-694
THE SBA FISCAL YEAR 2003 BUDGET
AND THE NOMINATION OF
MELANIE R. SABELHAUS TO BE
DEPUTY ADMINISTRATOR OF THE
U.S. SMALL BUSINESS ADMINISTRATION
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS
AND ENTREPRENEURSHIP
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
FEBRUARY 27, 2002
MARCH 12, 2002
__________
Printed for the Committee on Small Business and Entrepreneurship
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COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
ONE HUNDRED SEVENTH CONGRESS
----------
JOHN F. KERRY, Massachusetts, Chairman
CARL LEVIN, Michigan CHRISTOPHER S. BOND, Missouri
TOM HARKIN, Iowa CONRAD BURNS, Montana
JOSEPH I. LIEBERMAN, Connecticut ROBERT F. BENNETT, Utah
PAUL D. WELLSTONE, Minnesota OLYMPIA J. SNOWE, Maine
MAX CLELAND, Georgia MICHAEL ENZI, Wyoming
MARY LANDRIEU, Louisiana PETER G. FITZGERALD, Illinois
JOHN EDWARDS, North Carolina MIKE CRAPO, Idaho
MARIA CANTWELL, Washington GEORGE ALLEN, Virginia
JEAN CARNAHAN, Missouri JOHN ENSIGN, Nevada
Patricia R. Forbes, Democratic Staff Director and Chief Counsel
Emilia DiSanto, Republican Staff Director
Paul H. Cooksey, Republican Chief Counsel
C O N T E N T S
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Opening Statements
Page
Kerry, The Honorable John F., Chairman, Committee on Small
Business and Entrepreneurship, and a United States Senator from
Massachussetts................................................. 10
Levin, The Honorable Carl, a United States Senator from Michigan. 31
Wellstone, The Honorable Paul D., a United States Senator from
Minnesota...................................................... 25
Bond, The Honorable Christopher S., Ranking Member, Committee on
Small Business and Entrepreneurship, and a United States
Senator from Missouri.......................................... 1
Burns, The Honorable Conrad R., a United States Senator from
Montana........................................................ 16
Bennett, The Honorable Robert F., a United States Senator from
Utah........................................................... 24
Snowe, The Honorable Olympia J., a United States Senator from
Maine..........................................................
Enzi, The Honorable Michael B., a United States Senator from
Wyoming........................................................
Witness Testimony
Barreto, Hector, administrator, U.S. Small Business
Administration, Washington, D.C................................ 28
Wilkinson, Tony, president and Chief Executive Officer, NAGGL,
Washington, D.C................................................ 58
Crawford, Chris, executive director, NADCO, McLean, VA........... 80
Corbet, Alan, executive director, The Growth Opportunity
Connection, Kansas City, MO.................................... 93
Zinn, Amanda, chief executive officer, Women Entrepreneurs of
Baltimore, MD.................................................. 99
Wilson, Donald, president, Association of Small Business
Development Centers, Burke, VA................................. 104
Sabelhaus, Melanie, nominee to be deputy administrator of the
U.S. Small Business Administration, Washington, D.C............ 131
Alphabetical Listing and Additional Material Submitted
Barreto, Hector
Testimony.................................................... 28
Prepared Testimony........................................... 51
Letters for the record....................................... 202
Answers to Committee questions............................... 145
Budget Request and Performance Plan of the U.S. Small
Business Administration for fiscal year 2003............... 249
Bennett, The Honorable Robert F.
Opening statement............................................ 24
Bond, The Honorable Christopher S.
Opening statement............................................ 1
Prepared statement........................................... 3
Questions to Hector Barreto.................................. 159
Burns, The Honorable Conrad
Opening statement............................................ 16
Prepared statement........................................... 17
Corbet, Alan
Testimony.................................................... 93
Prepared testimony........................................... 95
Crawford, Chris
Testimony.................................................... 80
Prepared testimony........................................... 81
Page
Alphabetical Listing and Additional Material Submitted--Continued
Enzi, The Honorable Michael B.
Prepared statement........................................... 195
Kerry, The Honorable John F.
Opening statement............................................ 10
Prepared statement........................................... 12
Questions to Hector Barreto.................................. 146
Levin, The Honorable Carl
Opening statement............................................ 31
Prepared statement........................................... 32
Sabelhaus, Melanie
Testimony.................................................... 131
Prepared testimony........................................... 134
Bio.......................................................... 136
Wellstone, The Honorable Paul D.
Opening statement............................................ 25
Prepared statement........................................... 26
Wilkinson, Tony
Testimony.................................................... 58
Prepared testimony........................................... 60
Wilson, Donald
Testimony.................................................... 104
Prepared testimony........................................... 105
Zinn, Amanda
Testimony.................................................... 99
Prepared testimony........................................... 101
Comments for the Record
Barreto, Hector, administrator, U.S. Small Business
Administraion, Washington, D.C., letter........................ 202
Busch, Chris, Ph.D., consultant, Ronan, MT, written testimony.... 205
Cantwell, The Honorable Maria, a United States Senator from
Washington, prepared statement................................. 47
Carnahan, The Honorable Jean, a United States Senator from
Missouri, prepared statement................................... 193
Corbet, Alan, NAMSI chair, National Association of SBA Microloan
Intermediaries, Kansas City, MO, letter........................ 215
Edwards, Bill, executive director, The Association for Enterprise
Opportunity, Arlington, VA..................................... 218
Enzi, The Honorable Michael B., a United States Senator from
Wyoming, prepared statement.................................... 195
Fahrmeier, Ruth, president, The Alzheimer's Association, Central
Maryland Chapter, Timonium, MD................................. 221
Graves, Don, executive director, BusinessLINC National Coalition,
Washington, D.C., written testimony............................ 222
Guenther, Kenneth, president and CEO, Merski, Paul, chief
economist and director of Federal Tax Policy, ICBA, Washington,
D.C., letter and written testimony............................. 225
McCracken, Todd, president, National Small Business United,
Washington, D.C., letter....................................... 228
Mercer, Lee, president, National Association of Small Business
Investment Companies, Washington, D.C., written testimony...... 230
Milligan, Frank, executive director, Nantucket Historical
Association, Nantucket, MA, letter............................. 235
Newlan, Ronald, chairman, HUBZone Contractors National Council,
Washington, D.C., written testimony............................ 236
Page
Comments for the Record--Continued
Tesner, Barbara, sr. major gifts officer, University of Maryland,
Baltimore County, Baltimore, MD, letter........................ 240
Voinovich, The Honorable George, a United States Senator from
Ohio, prepared statement....................................... 200
Walton, Larry, president and chief professional officer, United
Way of Central Maryland, Baltimore, MD, letter................. 242
Wenger, Ed, president and CEO, Prospective Computer Analysts,
Inc., Garden, NY , written testimony........................... 243
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THE SBA FY 2003 BUDGET AND THE
NOMINATION OF MELANIE R. SABELHAUS
TO BE DEPUTY ADMINISTRATOR OF THE
U.S. SMALL BUSINESS ADMINISTRATION
----------
WEDNESDAY, FEBRUARY 27, 2002
United States Senate,
Committee on Small Business and Entrepreneurship,
Washington, D.C.
The Committee met, pursuant to notice, at 9 a.m., in room
428A, Russell Senate Office Building, The Honorable John F.
Kerry (Chairman of the Committee) presiding.
Present: Senators Kerry, Levin, Wellstone, Bond, Burns,
Bennett, Snowe, and Enzi.
Chairman Kerry. Good morning. Welcome, Mr. Administrator,
and my colleagues.
We have a lot to accomplish this morning and we are going
to move right to it. We start today with a hearing on the
President's budget request, and then we will move to the
nomination of Melanie Sabelhaus to be SBA Deputy Administrator.
We are going to have a vote on the floor at about 10 o'clock.
We will try to move as rapidly as we can and it may be that we
just will not get it all done before then and I will come back
afterwards.
Senator Bond has a particularly pressing schedule this
morning, so I am going to turn to him for his opening
statement.
Senator Bond.
OPENING STATEMENT OF THE HONORABLE CHRISTOPHER S. BOND, A
UNITED STATES SENATOR FROM MISSOURI
Senator Bond. Mr. Chairman, thank you very much. Mr.
Administrator, welcome. Ms. Sabelhaus, we are delighted to have
you here.
I apologize, but the vote on the Senate floor that will
start at 10 o'clock is on a very important amendment to a
measure that I drafted. So I am headed to the floor to try to
defend the compromise that I worked on with Senators Dodd and
McConnell.
The Budget for the SBA is vitally important, as is the
confirmation of Mrs. Sabelhaus to be the next SBA Deputy
Administrator. I apologize for having to leave, but we do
recognize that the Administration is off to a much better start
this year with the budget request to increase spending to $798
million, recognizing the value-added brought by the SBA to the
promotion of small business startups and expansion.
We do have some problems, however, with OMB and the
calculation of the credit subsidy rate. They promised us last
year that they recognized they had calculated too high a
default rate, too high a cost; therefore the subsidy rate was
too high, and small businesses have been paying an unintended
tax to the Federal Government.
OMB did not follow through on their assurances to the
Senate Budget Committee staff. As a result, we are left in a
position of shortfall for the 7(a) business loan program and we
would like to work with the SBA to try to get it straightened
out. Based on OMB's assurances last year, we did not press for
the additional funding we need to fulfill the expected needs of
the 7(a) program.
I want to point out that the HUBZone program does have a $2
million request. The President has recognized the value of this
program in bringing jobs and economic opportunity to
chronically poor inner cities and rural counties. It permits
the Federal Government to award prime contracts to small
businesses located in our Nation's economically distressed
cities and poor rural areas, so long as they employ at least 35
percent of their workforce from the HUBZones.
The HUBZone program produces a double bottom line. It
promotes economic development, and it provides special
contracting opportunities to small businesses willing to invest
in these areas. The implementation of the program has not kept
pace with the goals enacted in 1997. The previous
administration had little or no interest in the value the
HUBZone Program can bring to critical areas. I look forward to
working with Administrator Barreto since the President has
requested funding for the program. We will look forward to
hearing the steps that the SBA will take this year, and the
successes they will have in getting this program off to a good
start.
We do have many other important issues. I assure you that
once the battle is over on the floor today I will have some
more time to work with you on them. I appreciate, Mr. Chairman,
your allowing me to ``speak and run'', so to speak.
[The prepared statement of Senator Bond follows:]
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OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY, CHAIRMAN,
SENATE COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP, AND A
UNITED STATES SENATOR FROM MASSACHUSETTS
Chairman Kerry. Senator Bond, thank you very much. I
appreciate your continued help and cooperation and look forward
to working with you. Thank you very much.
We have two panels here. The first is representing the
Administration and the second is folks who do the day-to-day
work of assisting small businesses. I welcome you, Mr. Barreto.
Thank you for coming. I know that the first 6 months of any job
are complicated and this one has been more complicated by the
events of the last months in this country. So I appreciate your
efforts. I know the Disaster Loan Program has played a good
role in helping some folks to recover from those events.
I want to thank you for extending the comment period on the
proposed 8(a) HUBZone parity rule by 30 days. I would have
hoped it might have been extended a little bit longer. I hope
that if circumstances warrant it you might consider another 30
days or so. I am not suggesting forever, but I think that it
may prove helpful in terms of trying to get some of the comment
that we want to get.
As you know, Mr. Administrator, I support equality or
parity between the 8(a) and the HUBZone programs. That was
something that Senator Bond and I worked out very carefully and
it represented a number of years of resolution of the conflict
of views up here on the Hill, both between the House and the
Senate.
We passed that. We actually codified it and I have some
concerns over the rule. I will express them to you in writing,
and I might ask you a few questions about it today.
Let me just say on the budget overall, it is not as bad as
last year's, as Senator Bond has indicated. It is a better
budget than last year because last year did not make sense. It
was a request for $539 million last year and this year it is
$798 million. The problem still remains that on close
examination, and the Committee has engaged in some of that
examination, there are some serious hurdles with this budget
still. There are some problems. I certainly want some dialogue
about that here today.
The most significant of which is a 50 percent cut in 7(a)
loans. You hear this claim that there is a 4 percent increase
but once you go through the budget and really look at it you
see that the increase is primarily in administrative expenses
and in staffing. It does not a lot to put money out there, in
terms of help to businesses.
For instance, for the BusinessLINK, there is no funding.
That is the second year in a row. For the Small Business
Development Centers it is level funding, but if you include the
carryover funding, it is a cut. The Business Information
Centers and Women Business Centers are level funded. The
Microloan technical assistance is cut. That is the second year
in a row that has been cut. PRIME has no funding. That is the
second year in a row.
So those I think are serious concerns. Microloans got a 4
percent increase. That is obviously better than last year's 10
percent decrease but it is still a net 6 percent decrease over
where we were and it is 73.5 percent less than the authorized
level. The reason this Committee authorized that level is
because we really thought that that is what we ought to try to
get to.
The other problem is there is an increase in Microloan
funding, the 4 percent I just mentioned, but then there is a
cut in the complementary technical assistance. We on this
Committee have been struggling for a long period of time now to
link technical assistance because it is such an important part
of making the program a success.
The 7(a), as I mentioned, is actually cut in half. So every
State is going to see a 50 percent reduction in 7(a) lending,
and I think that is a very serious issue.
I am not going to go through every aspect of the budget,
but I do think there are some good parts of it. I know we are
all working with some difficult choices here, but since we have
not passed a stimulus package, since we are already spending
money in deficit, and the deficit is because of two rationales.
No. 1, ``we are at war'' and No. 2, ``we are in a recession.''
Once you have made that decision, there is no macroeconomic
difference between being in deficit $60 billion or $64 billion.
To shortcut the very things that could make up for stimulus,
not in partisan terms but just in economic terms, does not make
any sense to me. It just does not make any sense. Small
businesses need help. Those small businesses are going to kick
this economy back into gear.
So if you are prepared to spend some deficit for homeland
defense and the war, as we all are, and we were prepared to
spend almost $60 billion-plus on a stimulus that we have not
now passed, I do not know why we do not do a one-for-one here
and say at least get some of this money back into the hands of
small business. I am going to urge the Administration very
strongly to try to embrace that approach.
Let me turn to Senator Burns.
[The prepared statement of Senator Kerry follows:]
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OPENING STATEMENT OF CONRAD BURNS, A UNITED STATES SENATOR FROM
MONTANA
Senator Burns. Thank you, Mr. Chairman.
I will just put my statement in the record, Mr. Chairman,
in the sense of time. I have to go to the floor, too. I have to
defend my honor this morning, I am told.
But we have looked at the budget and we think there are
some shortcomings where I think they can be dealt with. Our
SBIR programs--I know in Gallatin Valley in Montana we started
an incubator there some 10 years ago. Small manufacturing in
the Gallatin Valley, in Bozeman, Montana, that payroll has now
replaced Montana State University. That is huge when you talk
about Montana.
It has all been because we have been very active in the
SBIR, the incubators. We have done some very innovative things.
Of course, located next to a university where you have a lot of
R&D activity, it gives rise to some opportunities that normally
we would not have.
So we will talk about this as we work our way through it. I
am going to put my statement in the record, and I appreciate
the Chairman having this hearing.
I would go on record as supporting the deputy director that
has been nominated by President Bush. I thank the Chairman.
[The prepared statement of Senator Burns follows:]
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Chairman Kerry. Thank you very much, Senator. Thank you.
Senator Bennett.
OPENING STATEMENT OF ROBERT F. BENNETT, A UNITED STATES SENATOR
FROM UTAH
Senator Bennett. Thank you very much, Mr. Chairman, for
your opening statement and concern about small business and the
importance of small business as far as the recovery of the
economy is concerned.
The interesting thing about the Chairman's position is it
has not changed with the change in Administration. The concern
about this issue was the same in the Clinton Administration as
it is in the Bush Administration, and both Chairman Kerry and
Senator Bond have been together on this position regardless of
who the president was.
I should just note that some of the banks in Utah are among
the largest 7(a) loan lenders in the country. We have a group
in Utah that is the second largest 504 loan organization in the
country. We, in Utah, do not have the Chase Manhattans and the
Citibanks headquartered there, but we have very aggressive
lenders who recognize market niche opportunities when they see
them and take advantage of the SBA programs not only for people
in Utah but, frankly, all over the country. We have Utah banks
that use these programs all over the country.
So I have not only a general view of what needs to be done
here, I have a very strong parochial interest in seeing to it
that we keep these programs as healthy as we possibly can. The
question that I raise generally, as a business man, is: What
does it cost the Government to keep these things going? Do we
not get return on the money that goes out? Does it not get
recycled? This is not money that is poured down any particular
rat hole somewhere for some program that does not work.
This is money that multiplies and you get the multiplier
effect throughout the economy. So that is why I am in support
of both of these, and I applaud the Chairman for calling the
hearing and proceeding forward today.
Chairman Kerry. Thank you very much, Senator. Thanks for
your comments, and I guess it would be appropriate for me to
say we all join in thanking your State for a spectacular
organizational effort and great, safe last 17 days of the
Olympics. It was terrific.
Senator Burns. They will need more money.
[Laughter.]
Chairman Kerry. From the exodus I saw at the airport, they
may need a lot.
Senator Bennett. If I may say so, it was a Massachusetts
citizen that led the charge.
Chairman Kerry. We know that.
Senator Bennett. You may see him again in your home State.
Chairman Kerry. We hope to, that is fine. We look forward
to it.
Senator Wellstone.
OPENING STATEMENT OF PAUL WELLSTONE, A UNITED STATES SENATOR
FROM MINNESOTA
Senator Wellstone. Thank you, Mr. Chairman.
First of all, I want to indicate my support for Melanie
Sabelhaus, who came by the office yesterday. I want to thank
the Administrator for being here.
I want to apologize for being kind of in and out. There is
a joint Veterans Committee hearing in the House that I need to
attend to.
I am going to put my full statement in the record.
Chairman Kerry. Without objection.
Senator Wellstone. Ditto to what the Chairman said about
the technical assistance, which is something that is very
important to me, on the Microloan program. I mean, the two go
together. You really need it, and I think the Administrator is
nodding his head this way. It is so important.
To me, the one thing I would say, the overall proposal
looks good, but I think the 50 percent cut in 7(a) loans is a
profound mistake. As the Administrator, and I talked to Ms.
Sabelhaus about this yesterday, I hope you will be, in whatever
ways make sense to you, outspoken and a strong advocate for
this. Especially in hard economic times. Most of the jobs in
our State, I would say to the Senator from Utah, are created by
small business. We leverage, since 1996, $1 billion in capital
through the 7(a) program.
So this, from my point of view, is a non-starter. In fact,
I think it just does not make any sense whatsoever, especially
in hard economic times. You do not want to be cutting 7(a)
loans by 50 percent.
To me, the Administration basically has got three choices
this spring. You can fully fund the 7(a) program. You can
adjust the subsidy rate, which we have talked about--the
Senator from Utah is right--for some time now, so that each
Federal dollar is stretched further and the same amount of
loans can be made with fewer dollars, which I think makes all
the sense in the world given accurate actuarial assumptions. Or
you can slash the program in half. That is what you bring to
us, and that is a profound mistake.
So we have to turn that around, Mr. Chairman, without
doubt. Actually, I think you have got the subsidy problem with
504, as well. But that is sort of a different issue, but a real
important one.
Thank you.
[The prepared statement of Senator Wellstone follows:]
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Chairman Kerry. Senator Wellstone, thank you. Your full
statement will be put in the record and I just want to express
my appreciation for your personal focus on these lending issues
for small business. You have been a terrific part of this
Committee's efforts and a great champion of them, and we
appreciate it very much.
Mr. Administrator, welcome. Glad to have you back and we
look forward to your testimony.
STATEMENT OF THE HONORABLE HECTOR V. BARRETO, JR.,
ADMINISTRATOR, U.S. SMALL BUSINESS ADMINISTRATION, WASHINGTON,
D.C.; ACCOMPANIED BY: Dr. LLOYD BLANCHARD, COO, U.S. SMALL
BUSINESS ADMINISTRATION, WASHINGTON, D.C.
Mr. Barreto. Thank you, Mr. Chairman.
I also want to acknowledge Senator Bond and his words and
Members of the Committee. Thank you for inviting me here today
to discuss the President's Budget request for the SBA for
fiscal year 2003.
To paraphrase President Bush, there are no Democratic
solutions to small business issues, nor are there Republican
solutions, there are only solutions. Year after year the
Members of your Committee have recognized this and have
consistently reached consensus instead of conflict. America's
small businesses are better off today as a result of your
working together. I know we can continue this tradition.
It is in that spirit that I respectfully ask for your
support of the President's budget request of $798 million for
the SBA. The President has increased the SBA's budget to
provide capital and technical assistance to small businesses
and disaster victims so that the SBA may continue making
services available to those who need them the most.
This budget reflects the President's commitment to economic
security through its support of small businesses and their
creation of new jobs. It supports the President's role of
Government, a role which is not to create wealth but is instead
to create an environment in which entrepreneurs can thrive.
Before we continue our discussion on fiscal year 2003,
please permit me to take this opportunity to commend the many
Federal disaster relief workers for their role after the
attacks of September 11. In the immediate aftermath of this
unprecedented attack on American soil, the SBA mobilized both
its disaster and district office employees to open up some 40
temporary disaster assistance offices in New York City and
Virginia.
Through the dedication of SBA's employees we have
delivered, as of February 25, more than $523 million in
disaster loans nationwide, approximately $295 million in
disaster loans in New York, $11 million in Virginia, and $217
million elsewhere throughout the country.
I am pleased to say that the SBA was onsite very quickly
and, in many cases, canvassed areas door to door south of Canal
Street and beyond distributing disaster loan applications to
small business owners.
These dedicated men and women of the SBA worked tireless to
distribute applications, answer questions, verify damages and
process and disburse loans, placing the success of the mission
above any personal consideration. The SBA family continues to
work long hours without seeking recognition for their
tremendous efforts.
The SBA also has rolled out an unprecedented nationwide
expansion of the Economic Injury Disaster Loans programs to
help those small businesses across the country that were
adversely affected by the events of September 11.
I am proud to lead an Agency that employs such loyal,
dedicated and caring employees. I know you join me in this
sentiment and share our commitment to continuing this important
work on behalf of the impacted small businessmen and women
across our country.
Having said that, I now want to address the 7(a) funding.
In fiscal year 2003, for the first time in many years, the SBA
and the Office of Management and Budget worked to make the
subsidy rate calculation method more accurately reflect changes
in the program. While the interim calculation produced a rate
that may not be the rate that any of us would like to see, it
shows our commitment to move to produce the most accurate
method possible.
This is not an empty commitment, as has been made in the
past. We actually have a contract with the Office of Federal
Housing and Enterprise Oversight, and work has begun on
creating an econometric model for the subsidy rate for fiscal
year 2004.
In the interim, our calculation for fiscal year 2003, which
weights preferred lender loans in proportion to participation
in the program, produced a subsidy rate estimate of .88
percent. That is a 20 percent decrease. With the requested
appropriation of $85.36 million for fiscal year 2003, this
would have resulted in a 9 percent increase in loan volume,
producing a record level of loan authority.
However, recently passed legislation subsequently reduced
the fees paid by the borrowers and the lenders for a 2-year
period beginning fiscal year 2003, resulting in a doubled
subsidy rate of 1.76 and a 7(a) program level of $4.85 billion.
While this statutory change poses a significant challenge
to the SBA in satisfying increasing loan demand, we believe
that other recent legislation will help us meet this demand.
The combined budget authority for the 7(a) program in fiscal
year 2002 equals a program level of $13.85 billion. Adding this
amount to the fiscal year 2003 program level produces a 2-year
program level with an annual average of $9.34 billion.
This is consistent with historical levels. While we
anticipate an increased program level of $10.5 billion in
fiscal year 2002, this would leave an additional $2 billion in
guarantee authority to support a nearly $7 billion program
level for fiscal year 2003.
The current challenge creates an opportunity to examine the
7(a) program to ensure its continued relevance in the
marketplace. One of our concerns is the relationship between
the 7(a) program and the 504 certified development company.
7(a) and 504, in some ways, compete with each other. The 504
program, formed specifically for job creation, provides
financing for real estate and major fixed assets. We have
determined that the 504 program is not reaching its full
potential.
For example, over 30 percent of the dollar volume of loans
provided under 7(a) are large loans of $750,000 or greater,
many of which our 504 program could accommodate. Steering those
larger real estate loans to 504 will assist our goal of
reducing the average 7(a) loan size from roughly $244,000 per
loan to a more desirable average of around $175,000.
Our aim is to increase the proportion of smaller loans, the
type of loans often the most difficult for small businesses to
receive. We are looking at ways to encourage lenders to make
smaller loans. Doing so will enable us to better provide loans
to small businesses, the businesses that represent 99 percent
of all employers and 52 percent of the private workforce.
An INC 500 study has shown that a majority of the fastest
growing companies started with less than $50,000 in capital.
Reducing the average loan size in the 7(a) program will make
the SBA an even greater engine in creating jobs and providing
for the Nation's economic security. We are confident that our
lending partners will work with us to ensure that more
businesses which need 7(a) assistance will be able to receive
it.
As with 7(a), we have contracted with OFHEO to create an
econometric model for the 504 program subsidy rate. We will
implement the results in fiscal year 2005, a year later than
implementation for the 7(a) subsidy rate to give us time to
evaluate the results of using this model on the 7(a) program
before using it in additional programs.
As we attempt to implement these and other reforms to our
finance programs, we will work closely with you and Congress to
ensure that these programs retain their crucial role in
assisting small businesses.
In keeping with the President's management goals, we are
restructuring the workforce at the SBA. We are investing in the
workforce now to produce future savings. This agenda includes
more use of telecommuting and contracting out of services, as
well as other means to reduce overhead and rent, and use of
technology to improve productivity.
Managing for results, working with partners to ensure the
effectiveness of programs, is another of the President's
management goals and I have taken steps to deal with the
management issues raised by the General Accounting Office and
the Inspector General.
This budget request includes $1 million for the new Native
American Economic Development Program, and initiative to
establish partnerships with tribes engaged in economic
development activity. The SBA is dedicated to ensuring that all
Native Americans who seek to create, develop and expand small
businesses have full access to all the necessary business
development and expansion tools available through Agency
programs. This program is comprehensive in its nature and it is
an initiative designed to meet specific cultural needs and
result in small business creation.
The SBA will be looking at doing away with the duplication
of programs, making our core programs more effective and
efficient.
The SBA will celebrate its 50th anniversary in July 2003.
In its half century in existence, the SBA has assisted hundreds
of thousands of businesses in their formative stages. Many of
those companies have names with which you here are all quite
familiar, names like Federal Express, Intel, and Nike, just to
name three.
We are working hard at the SBA to ensure that the agency
retains its leadership position as it looks forward to another
half century and will continue to provide crucial assistance to
the next Federal Express or the next Intel.
As I have taken a close look at our programs and services
throughout my first year as Administrator, I have seen what the
SBA can do and what the SBA needs to do to keep its programs in
tune with the ever changing economy. We cannot do this alone.
I know that I have spoken with some of you individually,
but I want to take this opportunity while we are all here
together to enroll you in these efforts. We have an opportunity
together to look back at successes, to identify weaknesses
where they exist, and to position the SBA whereby it can assist
in creating an environment in which entrepreneurship can
continue to flourish.
As I mentioned at the beginning of my testimony, the SBA's
fiscal year 2003 request is a good one for small businesses and
offers the beginning point for us to work in tandem with our
partners in Congress to ensure that the SBA remains an
effective, relevant agency that provides 21st century service
for the small business community's needs.
We ask for your support of this budget. I thank you for the
opportunity to appear here today, and I will be happy to answer
any of your questions.
Chairman Kerry. Thank you, Mr. Administrator.
Senator Levin has joined us. Senator, do you have any
opening statement?
OPENING STATEMENT OF THE HONORABLE CARL LEVIN,
A UNITED STATES SENATOR FROM MICHIGAN
Senator Levin. Thank you very much, Mr. Chairman. I do have
an opening statement, which I will make part of the record.
It expresses some disappointment, indeed dismay, at the
program level that has been requested for the 7(a) program in
the budget request of the Administration. I know that the
Chairman and others on this Committee have expressed similar
concerns.
The assumptions about default rates continue to be too
high, despite the study which the Chairman and Ranking Member
requested last fall. The results of that study do not justify
the continuation of the excessive assumptions about 7(a) and
other SBA loan default rates. I just hope that we will be able
to correct them under your leadership, Mr. Chairman.
I will put the rest of my statement in the record.
Chairman Kerry. Without objection the rest of your
statement will be placed in the record. Thank you, Senator
Levin.
[The prepared statement of Senator Levin follows:]
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[GRAPHIC] [TIFF OMITTED] 81910.024
Mr. Administrator, let me pick up on the 7(a) a little bit,
and maybe we can explore this, and also pick up on Senator
Bennett's comments.
On page 352 of the President's budget, you say that the
7(a) loan program is ``moderately effective''. That is your
language. You cite that decline defaults have improved
performance but lender oversight needs to be improved. A moment
ago you described to us that you want to do more smaller loans.
It strikes me that if you are going to do more smaller loans,
and lender oversight needs to be improved, with the current
situation lender oversight needs to even be more improved, but
you make no request at all for any increased oversight staff.
How do you reconcile those?
Mr. Barreto. We agree, Senator Kerry. We think that there
is an opportunity for us to be more effective than we already
have been. That is not to say that we do not think that we have
had successes with our 7(a) loan program. We do, and we are
very thankful for the history that we have had with that
program.
We have lent, in the last 10 years, something in excess of
$100 billion.
Chairman Kerry. I understand all of that and I am trying to
get at the oversight issue. If you needed lender oversight
improvements with the program as it was, and now you are going
to do more loans, how are you going to keep up with the
oversight without a request of an increase in staff?
Mr. Barreto. One of the things, as you are well aware, that
we are working on right now is our loan monitoring system. We
think that that affords us a great opportunity to do this type
of lender oversight. Obviously, we are open to any
opportunities to do a better job.
One of the things that we have had a lot of is very
productive conversation with our lenders on how we can do a
better job in sharing information so that we can both serve our
customers, which are those small businesses.
Chairman Kerry. Picking up on Senator Bennett's comments,
which I completely agree with, I do not understand this
definition moderately effective. We have got success stories
out of 7(a) that pay the entire budget of your agency. I mean,
Intel, Staples, Callaway Golf are not moderate successes.
Mr. Barreto. Absolutely, I agree with that 100 percent.
Chairman Kerry. Why do you call it moderately effective?
Mr. Barreto. It is not to infer that we have not had
successes, because we have had successes. But our goal is to
touch more of those 25 million small businesses, especially in
the emerging markets. There is an incredible opportunity for us
to touch more communities, to touch more of those small
businesses and to identify the next Intel or the next Callaway
Golf, which may come from a very different community.
So one of our goals is to expand our reach and to do more.
We think that the SBA has done a great job in leveraging our
resources, but we think that we can do better.
Chairman Kerry. Well, we agree that we could do more, and
that sort of begs the question of why not fund the program to
be able to do more? I mean, by SBA's numbers alone, 7(a) loans
created 7,000 jobs in my State last year. In Georgia it created
11,273 jobs; in Minnesota, 7,400; and across the nation almost
300,000 jobs.
But when you figure the cost of the lending program, you do
not even figure in any of those 300,000 jobs. You do not figure
in the taxes those people are paying. You do not figure in any
of the cost--I mean, this is a plus-plus, net plus program.
So to pick up on what Senator Bennett said, what is the
rationale, in a time of economic distress, when we need
stimulus, when the Administration was prepared to spend almost
$100 billion of stimulus, why cannot we find less than \1/10\th
of $1 billion to make this program more broadly reached?
Mr. Barreto. Thank you, Senator Kerry. As I mentioned in my
testimony, the original request is--well, the request is for
$85.36 million for our 7(a) loan program. This is actually an
increase on what was requested last year. With the decrease in
our subsidy rate, that would have provided a $9.7 billion
authority for loans.
The issue that we are challenged with is because of P.L.
107-100, that has caused the subsidy rate to go up and has
decreased the loan authority that we currently have. But the
intention was never to decrease the loan authority. Obviously,
we did not anticipate the effect that that legislation, that
passed at the end of the year, would have had on the original
request.
So the intention has always been to maximize what we could
do with that program. It has just been that the fact that the
subsidy rate change due to that legislation has caused that
program authority to go down.
However, having said that, I really want to make sure that
I explain that we believe that there are options. Some of the
options were described today of some of the things that we can
do. We are going to be at right around a $4.85 billion
authority, but we believe that we are going to have at least $2
billion rollover from the program this year into next year.
That is going to get us pretty close to $7 billion.
We also think that we could experience an additional $2
billion authority in our 504 program, which is going to get us
close to $9 billion.
As we talked about, or as I mentioned before, when you pull
out those larger loans, we have been averaging somewhere around
that $9 billion level. So we think that we do have some
options.
Chairman Kerry. To get to your $9 billion is a little bit
cute, if you do not mind my saying so. Because you are
including the emergency $75 million that I put into the defense
appropriations last year, which is the STAR program, which was
specifically put there to increase lending this year in the
aftermath of the terrorist attacks, not to be included by you
today as somehow meeting your mark.
So what you are doing is taking 2 years and trying to claim
that it makes you good for the 1 year. It really does not deal
with the shortfall for FY 2003. What are you doing, at this
point, to market and use the STAR program that we put into the
defense appropriations? It is not supposed to be included into
this count for next year.
Mr. Barreto. I understand that, Senator.
Chairman Kerry. No you do not, because you are using it to
say what a good job we are doing.
Mr. Barreto. I am saying that is one of the options that we
might have at our disposal.
Chairman Kerry. Let me just say to you right now, it is not
an option. OK? Let us take it off the table. It was not put
there for that purpose. It was put there because we could not
get what 63, now 64, U.S. Senators have cosponsored, which is
the emergency bill for business. We are meeting with Andy Card,
as you know I think, in a day or so to try to deal with that.
But do not start grabbing that money, which you guys did
not even put in the budget, and say we are doing a great job.
We put it there in order to be spent now, not extended over
this period of time to compensate for finding cuts in FY 2003.
Mr. Barreto. We believe that with the legislation that was
passed, it gets us to about $13.88 billion for this year. We
believe that we are only going to do about $10.58 billion. So
there will be an excess there.
But having said that, I agree that we need to do a better
job of marketing the STAR program. That is a newer opportunity,
and one of the things that we are doing is we are talking to
our lending partners. We have a meeting coming up where we are
bringing in our top 10 lending partners in the near future to
talk to them about these kinds of opportunities. Because we
think that there is a significant opportunity for small
business through the STAR program.
Chairman Kerry. Well, we need to work with you. You are
going to keep coming back to those figures. I think we need to
really sit down and hopefully we can have that discussion with
Mr. Daniels and with the Administration. It sounds like you are
sort of trapped in the place they have put you and we cannot
get you out of there today.
But I think the Committee is just unanimous in its feeling
that this is a plus-plus program. This is not, as Senator
Bennett said, something where we are wasting money. The default
rates just do not support that notion. The success stories have
many times over paid for the entire expenditure.
So it is my hope that, particularly at this moment in time,
when so many small businesses just need a tie over. I mean, you
have got all of the travel industry that has been hit so badly
across the country. The airplanes are still working below
capacity, which means that every other industry incidental to
them, and there are countless numbers of them across the
country, whether it is a restaurant or--I mean, just the dry
cleaners that used to be supported by the hotels, the people
who do the laundry, the napkins for the restaurants.
There is so much spin off here. The people who cook the
bread for the restaurants. You run down the list. The people
who come into town and have to go to the local drugstore.
There are a lot of people who have a viable business, who
are in a viable location, who have had years of good business
track record, but for whom the next months may be difficult.
That is the purpose of the SBA and of these programs to help
small businesses.
To be holding back on it is incomprehensible to me, in the
context of what makes this country tick. I mean, more than 50
percent of the jobs in this Nation are in the 99 percent of the
businesses of this Nation that are small business. You have a
unanimous Committee here, you have got a super majority of the
U.S. Senate that wants to put this additional effort into it,
and the only resistance we can see is the Administration. I am
not saying you personally, but the Administration. It does not
make sense.
Senator Bennett.
Senator Bennett. Thank you, Mr. Chairman.
I agree that Administration witnesses come here with their
instructions from the OMB. I have been an Administration
witness at one point in my life and I understand that you do
what you are told.
But let me just try to understand the issue on P.L. 107-
100. If I understand your testimony correctly, Mr.
Administrator, you are saying, ``We really would like to do
what you want to do, but P.L. 107-100 says we cannot.'' Is that
a fair summary?
Mr. Barreto. What we have stated and what we believe has
happened is when P.L. 107-100 passed, or S. 1196, it reduced
the fees by the borrowers and lenders for a 2-year period,
beginning in October 2002, causing the recently reduced subsidy
rate to double to 1.76. So that is one of the things that is
causing the issue of reduced authority for us to lend.
Senator Bennett. Yes, I understand what it did, but let me
go back to my statement and see if I have got it straight. As I
hear the conversation, you are saying, ``We would like to do
what the Committee wants us to do, but because of P.L. 107-100,
we cannot.'' Is that a fair statement or am I incorrectly
attributing motives here?
Mr. Barreto. I would just characterize it a little bit
differently, Senator. What I am saying is that our full
intention was to do a program level of about $9.7 billion. When
the budget was submitted and when it was developed, it did not
anticipate that there would have been this legislation.
That is what we are dealing with today. We are trying to
find methods that we can deal with it. We think that there are
some opportunities, especially if we focus on some smaller
loans. As I mentioned in my testimony, we think that our
average loan size is too large, especially for those small
businesses that we are trying to help.
Senator Bennett. I am with you. I understand those details,
but I want to get back to the fundamental question the Chairman
is raising, the Committee is raising. This is where we would
like to be. Are you saying you would like to be there, too, but
cannot because of this legislation? Or are you saying no, we
would not like to be there and this legislation further
complicates things?
I just want a value judgment as to where we are here.
Mr. Barreto. Obviously what is driving this is the fact
that we are dealing with a larger subsidy rate. The subsidy
rate is the issue here and I think that we have talked about
this. I know that this Committee has dealt with this issue for
many, many years.
Since we got on board last year this is an area that we
focused on, too, and I think that we are making progress on it.
I think we were able to make some progress by reducing it from
that 1.07 level down to .88. But the job is not done. We have
got to continue working together to make sure that we continue
having an accurate reflection of that subsidy rate.
One of the things that we are doing this year, Senator, is
we are outsourcing a study to develop a more accurate
econometric model. We think that is going to help us.
Senator Bennett. I applaud that because I think a more
accurate model will get you closer to where the Committee wants
to be. But if it is true, as the implication is from the
conversation, that the only difference between us is how we
work out the problems of this Public Law, and that the
Administration and the Committee want to be in the same place,
that changes the dialogue of what we talk about.
Chairman Kerry. Would the Senator yield?
Senator Bennett. Yes.
Chairman Kerry. He does not need any help, but I just want
to point something out. The subsidy was changed because people
were being overcharged $1 billion. In bipartisan House and
Senate action, we lowered that fee. That is why the subsidy is
higher; because we lowered the fee.
You, in fact, in your budget, effectively blame us as you
say--I mean, you are not saying it the same way today, but the
bottom line is you are saying you guys passed this law to lower
the fee. Yes, we did, because people were being overcharged and
we did not think they should pay that high a fee.
So your response is appropriately to raise the amount of
money you put in to make up the difference. You decided that
you did not want to do that.
So to come back to what Senator Bennett is saying, it is a
question of whether you want to do it or whether you want to
say that somehow there is a law that prevents you from doing
it. It does not prevent you; you just have to put a little more
money in there, which is what we intended.
Senator Bennett. I never met a tax cut I did not like and
this, in effect, was a tax cut. This Administration should be
happy about tax cuts. This Administration is asking for tax
cuts.
I just want to understand if, in fact, by virtue of the tax
cut, reduction of fee, call it what you will, we have created a
problem for you that you wish would go away because you want to
put as much money into the program as we want to put, let us
work on solving that problem because it seems to me that
problem is fairly easy to solve.
But if in fact you say no, we think the amount of money is
adequate regardless of the fee, then that becomes a different
question between the two of us.
I am not trying to trap you. I am just trying to understand
exactly where the Administration is vis-a-vis the Committee's
position on the issue of how big the program ought to be.
Assuming that the 7(a) program fees was not a problem, would
you want the program to be as big as the Committee wants it to
be?
Mr. Barreto. Absolutely.
Senator Bennett. OK, the I think we have got the basis for
a dialogue here of how we can maybe work this thing out.
Thank you, Mr. Chairman.
Chairman Kerry. Thank you very much, Senator.
Given that answer, Mr. Barreto, are you willing to go to
OMB and send up a budget amendment to increase the funding on
7(a)?
Mr. Barreto. Well, we are willing to work with you on any
solutions that can help more small businesses.
Chairman Kerry. That is the solution.
Mr. Barreto. I think there are a variety of things that we
could explore. We still think that we are going to get closer
to where we need to be, in terms of that lending authority. As
I mentioned, it has been averaging at about that $9 billion to
$10 billion level for a couple of years now. We believe that we
can get there.
The issue, as I also mentioned, is that we really want to
look at--this is an opportunity we see to look at the 7(a)
program and look at it in a real comprehensive way and make
sure that we are doing the job for small businesses and not
just doing business for some small businesses, especially some
of the businesses that are maybe not so small and are getting
some pretty large loans out of the 7(a) program.
Chairman Kerry. Mr. Administrator, I want to recognize
Senator Snowe here, but let me just say to you that I have been
around here 18 years now, which is not a long time compared to
some, but it is long enough to know that there is a difference
between counting a several year appropriation and doing
carryover and saying you are going to get to a level and doing
the level on the basis of 1 year.
Unless the Administration is prepared to allocate a larger
sum of money on the 1 year, and you are prepared to go out and
market this thing in a way that effectively reaches the people
who need it, we are going to be at odds. I hope we are not
going to be.
This is a bipartisan Committee, and you have learned that.
We do everything we do in a really bipartisan way. There is
just not enough time on the floor not to do that. There is not
enough ability in the Senate not to do that.
I think the Committee is really unified in believing that
this just does not have a party label. It is a question of what
is good for small business.
Now if you guys have a real difference, ideological or
philosophical or political that it does not make a difference
to small business, tell us that. But let us not do a dance
around the numbers that does not get to the problem here. The
problem is there is not enough money allocated to the 7(a)
program to do what many of us think it ought to do. Saying you
are going to get to the authorization by playing accounting
games, by sort of doing Arthur Andersen standards here or
something, is not going to help us. I do not want to do that.
Mr. Barreto. I do not either.
Chairman Kerry. That is not fair to Arthur Andersen. I take
that back. But it is just not appropriate. It really is not
appropriate.
Senator Snowe.
Senator Snowe. Thank you, Mr. Chairman and welcome, Mr.
Administrator.
I appreciate the comments that have been made on the 7(a)
program but I certainly, too, want to weigh in on this issue
because clearly the timing poses some serious ramifications.
Here we are in the midst of a declining economy and, as you
acknowledge, small businesses really have been the engine that
is driving job growth in our economy. It truly has been, even
in the last economic recoveries. I mean, small business plays a
pivotal role.
So I see this as being an inhibitor. When you are talking
about a reduction of more than 50 percent in the program, I
just do not see how it cannot have an impact on small
businesses and those who depend on this type of program. Would
you not agree?
Mr. Barreto. Absolutely. As I mentioned before, our
intention was not to decrease the size of the program. That was
never, ever the intention. We are still committed to providing
the same level of funding.
I could not agree with you more, Senator. Seventy-five
percent of the new jobs is what we think are coming out of the
small businesses, so it is too important to our economy.
On the good front, I would think that one of the things
that we have been able to do is a lot of outreach recently. We
are seeing that our loan activity is up 11 percent over a
similar period. So there is a tremendous amount of interest and
we need to continue that and work very closely with you to make
sure that we are reaching as many of those small businesses as
we can.
Senator Snowe. You know, it is interesting you note that it
may reach more businesses with these kinds of changes, but you
really do not know. Am I correct in saying that? I mean, you
are going to study the results of this program over the next 2
years. So there is no way to know what the impact is going to
be until you achieve the results.
Mr. Barreto. Right.
Senator Snowe. So if there is a problem with what you are
proposing, we will not really know for the next 2 years and we
are going to obviously feel the negative effects if it is not
working.
I would question whether or not you would reach more
businesses as a result of what you are proposing as opposed to,
I would think, fewer businesses.
Mr. Barreto. Well, one of the ways that we think that we
can reach more of those businesses is if we have an opportunity
to pull out those large real estate, large equipment loans that
are currently being done in the 7(a) program. If we have an
opportunity to shift some of those over to our 504 program,
where we have never totally maximized the loan authority that
we have there, we think that that is going to free up some
money for us to do more loans.
If we can focus in on some of those smaller loans. As I
mentioned in my opening testimony, Inc Magazine did a study
recently that says that the majority of successful startups are
capitalized with less than $50,000. Our average loan size right
now is $225,000.
So I think that we have an opportunity to focus in on some
of those smaller businesses who need that access to capital.
Senator Snowe. I think you have the cart before the horse
because you really do not know what the effect will be. And it
is a see change for the program. This is a sizeable reduction.
As Senator Kerry indicated, the point in reducing the fees
for the program was because it was a high fee. That can be an
inhibiting factor, in making the program as effective as
possible. So you have to create, as you well know, a balance in
order to make an incentive for people to participate in the
program. So that is why we reduced the fees, because we felt
that they were excessive.
So I question the timing, and also waiting 2 years to
determine whether or not this is an effective approach and one
that we should adopt. Not to mention the fact I do think it is
going to undercut the overall program.
Mr. Barreto. Again, we will not wait 2 years to determine
how we are doing with regards to our ability to reach small
businesses. Obviously, we will be communicating back regularly,
as we normally do, as to where we are at on our program.
As I told you, there is a tremendous amount of interest
right now in the SBA. Our programs are running at 11 percent.
It is hard to believe but we are getting 15 million hits a week
right now on our website, 1.5 million visitors come into our
website every day. A lot of those people that are visiting our
website are interested in how to start a business.
So we have a tremendous amount of interest and a huge
responsibility to make sure that we are doing everything that
we can to serve as many of those 25 million small businesses.
We stay committed to that mission.
Senator Snowe. Regarding outreach, can you describe to me
exactly how you intend to develop outreach efforts to private
sector partners, for example? That is important, especially in
a rural State like Maine.
Also, with respect to the Women's Business Centers, because
that is also important to both of us, the Chairman and myself.
Mr. Barreto. Absolutely. The SBA, I think, has done an
incredible job over its history of really leveraging the
resources that we have. We are not one of the largest agencies
in Government, but I think we do a very effective job by
leveraging those public/private partnerships.
One of our most successful public/private partnerships is
the relationship we have with Small Business Development
Centers. We have 1,000 Small Business Development Centers in
the country and it is a great distribution source for us to get
our information out and help small businesses. Last year I
think we helped something on the order of 660,000 small
businesses through SBDCs.
An additional 400,000 we did through SCORE, our Service
Corps of Retired Executives. Of course, one of the most
successful partnerships we have is with our banking partners.
So we have a lot of networks out there where we reach out, not
even speaking about all the relationships we have with business
organizations in every single community, and on top of that our
wide distribution force that we have with our 70 program
offices across the country. We have a presence in every single
State in the country.
So I think that we have some of the tools that we need to
be able to go out and reach as many of those small businesses,
especially in the rural areas. That is another area that we are
very focused on.
You know, on the women's business issue, we are very proud
of the work that we have done. We have 80 Women's Business
Centers. We have five that are coming online right now.
All of our programs are available to women. In fact, in the
SBDCs, we calculate that 40 percent of the businesses that are
being served are women business owners and women business
owners right now represent something a little over the order of
30 percent. So we are actually helping more women through our
SBDCs than are represented in the population on a relative
basis.
But we think that there are significant opportunities to
use those networks to reach even more of those businesses.
Senator Snowe. Will you be developing specific initiatives
to reach out to businesses, obviously the private sector,
mayors, local officials?
Mr. Barreto. Absolutely. We have an Office of Inter-
Governmental Affairs that is always working with the
legislators, with the mayors. They have been very active in all
of the conferences that have been going on, the mayors'
conference, the governors' conference. We will continue to do
that and reach out to them.
Because at the end of the day, we think that is one of the
most effective ways that we are going to be able to accomplish
our mission. I mean, nobody can do it better than the people
that are on the ground that do this every single day.
We are not going to impact a tremendous amount of small
businesses from back here in Washington, D.C. That has to be
done on the local level. So we are very committed to developing
those kinds of initiatives. Our Office of Inter-Governmental
Affairs is already working on some of those plans.
Senator Snowe. I appreciate that. Thank you, very much.
Mr. Barreto. Thank you, Senator.
Senator Snowe. Thank you, Mr. Chairman.
Chairman Kerry. Thank you very much. I might add, Mr.
Administrator, that your answers to Senator Snowe are a
wonderful argument for why the program ought to be increased. I
mean, if you are getting 15 million hits a week and 1.5 million
visits a day, and you are up 11 percent, you ought to respond
to it.
Mr. Barreto. We are working very hard to take advantage of
every opportunity.
Chairman Kerry. How about this: Would you commit to the
Committee that you will go ask the OMB for an amendment on the
budget?
Mr. Barreto. Obviously, it depends on what the amendment is
and what the details are. We will work----
Chairman Kerry. To not have a 50 percent cut, to fully fund
7(a). That is the simple request of the Committee. Do you think
it is worth doing?
Mr. Barreto. I think that that is what the President do,
fully fund the SBA 7(a) program through the request. We know
that all things being equal we would have experienced a $9.7
billion level there.
Chairman Kerry. Do you disagree that there is a 50-percent
cut in the----
Mr. Barreto. The only disagreement, Senator Kerry, is that
it was not the intention of the President or Administration to
cut----
Chairman Kerry. It may not have been the intention, but
that is the effect. Do you agree that that is the effect?
Mr. Barreto. No, I agree that it was the effect----
Chairman Kerry. Then we would ask the Administrator to make
up that difference.
Mr. Barreto. I would be glad to work with you on any ideas
or suggestions that you have for helping more small businesses.
Chairman Kerry. That is my idea, yes or no?
Mr. Barreto. The answer to the question, Senator, is I
would love to work with you on what that might look like.
Without knowing what the specific nature of it would be, I
think it would be difficult to make a firm commitment. But my
commitment is always to work with you and this Committee to
find ways that we can do things better and help more small
businesses.
Chairman Kerry. All right, I am not going to belabor it,
Mr. Administrator, but I think you--the request is pretty
straightforward, the amount of money is pretty clear. I guess
Senator Bond and I and the Committee will try very hard to get
an appropriate response out of it.
As you know, I wrote you a letter requesting an outline of
your sense of what the relationship of the Deputy Administrator
to the Administrator is. In a recent letter to you, I informed
you that the reason Congress made it a confirmable position is
effectively because we wanted someone to be there who is going
to be responsible for the day-to-day management of the agency
itself when the administrator was unavailable.
But you sort of had indicated somewhere that you thought
that you are going to divide up the country and both of you
were going to be out there doing your thing. The question was
who is going to be running the agency?
So that was really what was asked in my letter, is who runs
the agency if you and the deputy are unavailable and/or what is
the relationship going to be here?
Mr. Barreto. Thank you very much, Senator, and I appreciate
the question very much. I am very happy and excited that we are
going to have a Deputy Administrator on board, hopefully very,
very soon.
Melanie Sabelhaus is going to be a great contributor to the
SBA. She is somebody that has tremendous experience, not only
corporate experience working for large companies like IBM for
many, many years. She has a great organizational sense, a lot
of management experience. But she is also one of those small
business owners, just the way that I was, that started off with
an idea, a commitment, built something out of nothing. Built a
small business and grew it and was very, very successful with
it. So I am very excited about having her on board.
I could not agree with you more. I see it as a true
partnership. I do not believe that there will be a lot of times
when we both will be out of Washington, D.C. So when I am not
there, when I am out representing the SBA in my travels,
Melanie will be there and she will be running the Agency as an
equal partner to me when I am not there.
I think that there is a lot of opportunity for us. Never
did I want to communicate the intention that we are both going
to be traveling the country and nobody is going to be home
minding the shop.
The truth of the matter is that no matter where we are at,
we are always in contact with the office and we are always
running things, whether we are there or not. But you are right,
there is no substitution of having that presence there. I know
that when I am not there, Melanie will be there and we will
work very closely together.
But I want Melanie involved in all aspects of the agency.
She is not a specialist in terms of this is the only thing that
she is going to do. I need help with everything that we do.
You have indicated, and this Committee has indicated, we
have a big job ahead of us. We have a lot of work to do. So we
are happy to get the help and we are excited about having her
on board.
Chairman Kerry. What are you doing at this point, in terms
of increasing resources and updating the 8(a) program to make
sure that there is increased opportunity and accessibility in
that?
Mr. Barreto. Absolutely. The 8(a) program is a program that
is very important to me. Not just because it is the 8(a)
program, but because I understand how important it is for small
businesses to get contracts. When you go out and talk to small
businesses, sometimes they will tell you if I could only have
one thing, just get me more business. I will take care of
everything else myself. The 8(a) program is a great way to get
more business into the hands of small business people,
especially from emerging markets.
We have a new administrator for government contracting and
business development, another small business owner, who is
looking at those programs and really looking at it from two
fronts. One is how can we make the existing program more
successful? We are not satisfied that we have enough businesses
that participate in 8(a). We are also not satisfied that enough
of them are getting business out of the program. So we need to
look at ways that we can grow the pie of opportunity for them.
That is the only way we are going to be satisfied.
But the other thing that we are looking at is what should
the 8(a) program of the future look like? Just because we have
done something a certain way for years and years does not mean
that we cannot find better ways to do it. Simplify the access
of people coming on board. Simplify the way that we ask people
to provide us information. Facilitate more opportunities
through events and other linkages with the people who make the
buying decisions.
Also look outside the box. Maybe there are opportunities to
look at in the private sector. Most of us have private sector
experience and we know that there is a tremendous amount of
business that can come out of large Fortune 500 companies. The
interesting thing is that they are more interested now than
ever before to do this kind of business.
A very specific example is that we put together a director
of 8(a) providers to address the needs in the New York area. We
know that small business has to be the answer for rebuilding
New York and rebuilding this country. So we put together a
directory to introduce our 8(a) contractors to the folks that
are going to be buying services in the New York City area.
So we are doing a whole host of things. That is a very
important program for us and we will stay committed to building
that up and will be glad to provide you with any specific
details on the plans that we have. But we have a very ambitious
plan.
Chairman Kerry. Well good, because last year the small
business procurement goals were really not met, particularly in
the area of minority contracting. We have to understand that
those goals are not a maximum that we hope to achieve. They are
a minimum that we hope to achieve. We did not do as well as I
think many of us would have hoped last year. So I think we are
particularly concerned about that.
The SDB and negotiated 8(a) goals are really critical and
we want to make sure that those are exceeded if possible.
I would just call to your attention, I have a letter in to
you and look forward to a response on the application and
certification process for the 8(a) and the SDB programs. There
is an inequality between--you know, the HUBZone has a much
easier certification. It has an online option, whereas you get
this antiquated process for 8(a) and SDB. I think it would be
terrific if we could get--you know, we want equality in these
programs, parity. Parity is not just in the allocation. Parity
is in accessibility, execution and all of that. I think it
would be really good if we could try to upgrade that.
Mr. Barreto. Absolutely Senator. I would be happy to
receive your letter and we will definitely get a comprehensive
response on that.
I would just touch on one point, one of the things that our
ADA for Government Contracting is doing, he has a project right
now to automate the application so that it can be an online
application. They have made pretty significant process on this.
This can save a tremendous amount of time and cost to small
business people.
I have had many small businesspeople tell me once I saw the
phone book that you wanted me to return to you, I quit before I
even started. That is not what we want to do. We want to
incentivize people to participate and we think that might be a
good way to do it.
Chairman Kerry. Good. We look forward to working with you
on that.
I am going to leave the record open with respect to any
questions my colleagues may have that we will need to submit in
writing to you for about a week.
Without objection, the remarks of Senator Cantwell will be
placed in the record as if read in full.
[The prepared statement of Senator Cantwell follows:]
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Chairman Kerry. What I have to do is go vote quickly. We
will recess momentarily. We will begin with the second panel
and then Melanie Sabelhaus as soon as we get back. We will try
to expedite that if we can. I thank you very much, Mr.
Administrator.
Mr. Barreto. Thank you very much, Senator.
Chairman Kerry. I would invite you to stay if you want to.
Mr. Barreto. I will.
[Recess.]
[The prepared statement of Mr. Barreto follows:]
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Chairman Kerry. Thank you very much, folks. I apologize for
the interruption.
We will now begin with Mr. Anthony Wilkinson, president and
chief executive officer of the National Association of
Government Guaranteed Lenders; Chris Crawford, executive
director, National Association of Development Companies from
McLean, Virginia; Alan Corbet, executive director of The Growth
Opportunity Connection, Kansas City, Missouri; Amanda Zinn,
chief executive officer, Women Entrepreneurs of Baltimore; and
Don Wilson, president of the Association of Small Business
Development Centers.
Folks, we need to keep you each, if you will, to the 5-
minute limit. I must be strict about it. Your full statements
will be put in the record as if read in full, but we have a lot
to try to move through in a relatively short period of time.
Mr. Wilkinson.
STATEMENT OF ANTHONY WILKINSON, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, NATIONAL ASSOCIATION OF GOVERNMENT GUARANTEED LENDERS,
INC., STILLWATER, OKLAHOMA
Mr. Wilkinson. Mr. Chairman, thank you for having me here
today.
To begin with, I want to say thank you for all the efforts
that you and Senator Bond and the other Members of this
Committee have made over the past year. We appreciate your
recognition of the fact that 7(a) program users have been
significantly overcharged and the efforts on S. 1499, S. 1196
and the Department of Defense Appropriation bills are greatly,
greatly appreciated.
Regarding the particulars of the fiscal year 2003 budget,
it is our opinion that this budget is simply an attempt to
focus the discussion away from the subsidy rate calculation
again, blames Congress for the low fiscal year 2003 7(a)
levels, tries to put one SBA program against another, and last
and more importantly, it does not address the long-term credit
needs of small business.
Chairman Kerry. So in other words, you think it is a great
budget.
Mr. Wilkinson. For fiscal year 2003, NAGGL requests support
for a $12 billion 7(a) program. SBA anticipated enough
carryover from this year to fund about $2 billion worth of
demand next year, so we need to come up with sufficient
appropriations to fund an additional $10 billion in lending at
a reported subsidy rate of 1.76--that means we need $176
million in appropriations. Now we know that the subsidy rate is
overestimated and a lot of these appropriation dollars will
simply be returned to Treasury, but we have simply got to get
this done. Small business needs 7(a) financing next fiscal
year.
I briefly wanted to touch on a couple of things from the
Administrator's testimony. He talked about an econometric
modeling and coming up with a way to be accurate on their
subsidy calculation. We are not asking for a totally accurate
subsidy rate calculation. We are asking for something that is
simply reasonable.
He commented that the subsidy rate for fiscal year 2003 was
going to decline by 20 percent, yet OMB has been missing the
mark by over 150 percent every year on their subsidy rate
calculations. So while yes, the 20 percent decrease is
appreciated, it is nowhere close to the amount that has been
overestimated.
OMB is using a 12.87-percent default assumption in the 7(a)
model for 2003 yet table 6 of the Federal Credit Supplement
estimates defaults at 9.38. I hope somebody can explain that
difference some time. The 9.38 percent would be slightly higher
than the average defaults of 8.81 since the implementation of
credit reform and would lead to a drop in the subsidy rate by
over 100 basis points. Which means then that the fiscal year
2003 subsidy rate could be cut by more than half.
OMB has been testifying since 1997 that they were planning
to implement econometric modeling in estimating the SBA 7(a)
subsidy rate. Here we are in 2002, same thing. I am beginning
to wonder if this is simply a stalling tactic.
It is our belief that there is really not a problem with
the current model. It is a net cash flow model. The problem is
the assumptions that OMB plugs into the model. Again, I go back
to the 12.87 default assumption when they fully expect defaults
to be in the 9.38 percent range.
For the fiscal year 2003 budget, OMB clearly ignored the
directives of this Committee and the House Small Business
Committee. They have ignored the report language in Treasury
Postal Appropriations from last year. It is simply time for us
to come up with a solution. It is time for the overcharges to
stop.
They made some other proposals in the budget to move large
7(a) real estate loans into 504. Large 7(a) real estate loans
pay the highest fees of any of the loans. They pay a
disproportionately high share of all 7(a) fees. What they did
not tell you is if you move those real estate loans out of the
7(a) program that the 7(a) subsidy rate in the fiscal year 2004
budget will go up and go up substantially. We will be right
back here next year talking about the same thing because the
loans paying the highest share of fees in 7(a) would be taken
out of the program.
Without the larger loans in their portfolio to offset the
cost of making small loans, many lenders have told us they
would simply quit making SBA loans because they cannot balance
their portfolio. They need the larger loans in their portfolio
to offset the costs of making smaller loans.
Last, to highlight something that you and Senator Bennett
picked up on, this program creates jobs. There is a preliminary
report from the Bureau of Labor Statistics that shows that the
fiscal year 1998 cohort of loans has created some 200,000 jobs
already. So this program is about jobs and the Administration
should support it.
Mr. Chairman, thank you.
[The prepared statement of Mr. Wilkinson follows:]
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Chairman Kerry. Thank you very much, Mr. Wilkinson, I
appreciate it.
Mr. Crawford.
STATEMENT OF CHRIS CRAWFORD, EXECUTIVE DIRECTOR, NATIONAL
ASSOCIATION OF DEVELOPMENT COMPANIES, McLEAN, VIRGINIA
Mr. Crawford. Thank you, Mr. Chairman. I will talk only
about the budget and the subsidy right now. I would ask that
you review my written statement.
The SBA has proposed an authorization of $4.5 billion for
this year and we support that level. However, the annual fee
they propose goes from .41 to .425 percent, as you know.
Frankly, I am absolutely dumbfounded at that increase in fees
and the Administration's attempt to get more cash out of our
borrowers, far in excess of the cost of this program.
It is supposed to pay for itself and it does that, and far
more.
As you know, we have contributed $400 million in the last 5
years in negative re-estimates back to the U.S. Treasury. I
would suggest that that is on a par, if not at a rate in excess
of that being contributed by the 7(a) program.
These problems on our budget come from two sources. The
first is loan defaults, which you have already addressed in
this hearing. Ours are estimated to be 8.3 percent. I have
provided you with some graphs\1\ and some indications that, in
fact, it is far lower than that.
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\1\ Please see graphs located on pages 90-92.
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Even the President's own budget indicates that our defaults
are only running $60 to $70 million a year and at a $2 billion
program level, that is 3.5 percent, not 8.3 percent.
Second, we have serious problems with their collection
rates. They are forecasting a collection of 58 cents of every
dollar in outstanding loans that default but they are spending
38 cents to collect that 58 cents. Now that is astounding,
leaving a net recovery of only 20 cents of every dollar. I find
that amazing.
Our subsidy problems have led to inflated fees that have
made us nothing more than a Treasury cash cow. We are paying,
as I indicated, hundreds of millions of dollars in excess fees
back into the Treasury. We strongly object to this situation
and we ask this Committee for your help.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Crawford follows:]
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Chairman Kerry. That is an important couple of issues you
brought up and I appreciate it very, very much. Thank you.
Mr. Corbet, thanks for being back again.
STATEMENT OF ALAN CORBET, EXECUTIVE DIRECTOR, THE GROWTH
OPPORTUNITY CONNECTION, KANSAS CITY, MISSOURI
Mr. Corbet. Thank you, Mr. Chairman and Members of the
Committee. I am not going to read all my testimony, it has been
submitted to the record.
But I did want to say what my role is today. It is very
simple, that we need to provide the reason the Microloan
program must be funded at the levels that we proposed to OMB,
$35 million for direct loans and $35 million for technical
assistance grants or TA grants.
It is important that you understand the Microloan program.
Let us talk about the direct loan side. The program was created
in 1991 to help small business owners access capital because
the banking community was not willing to make these types of
loans. As a former banker, that is exactly right. Banks will
not make these types of loans. They are too expensive. They are
too costly.
Which brings us to the TA side and why it is so critical
that we have that to support the program. The program basically
works this way. The Federal Government makes loans to the non-
profit lenders who in turn make small loans to those
entrepreneurs that are really not bankable. Our job is to
provide the banks a customer later in time that can then become
a viable commercial customer.
What are we doing with these loans? We are making the loans
to individuals that are in the start up or early stage. They
typically are five or fewer employees. As you know, our loans,
the maximum is $35,000.
I have provided a couple of examples in our testimony of
why we are able to help the very small business owners work and
why this program is so successful.
The intensive training, technical training, and small loans
that we provide to these small businesses create business
success. The Microloan programs across the country report that
85 percent of the businesses that we make loans to are still in
operation 2 years later, which is a complete reversal of the
traditional statistics that we read about.
Critical to the program's success, obviously, is the
intensive technical assistance that we provide. Do not confuse
the technical assistance that this program provides with those
of PRIME, the SBA Women's Business Centers, Small Business
Development Centers or SCORE programs. The Microloan program
provides TA, and in fact the majority of our TA must be
provided to post-loan activities, which is obviously why we
have the success that we do.
The TA that has been provided to microlenders and their
clients has provided the results that we see today. Over 14,000
loans have been made totaling over $160 million since the
program began. That is just under $12,000 per loan. That is the
exact point, that no banker will make that kind of loan because
they cannot make any money at it. That is why the TA is
critical.
I think the most important statistic is that over 14,000
jobs have been created out of this program that we would not
have seen otherwise for small business.
During fiscal year 2001 alone, over $32 million in new
loans went out. Of that money, 52 percent went to minority-
owned businesses, 45 percent to women, and 8 percent to
veteran-owned businesses, the exact target market that we have.
The technical assistance resources are key to the program
and why we have experienced such a low loss rate, despite the
many high risk loans that we are able to make.
In fiscal year 2002, Congress approved $17.7 million for
technical assistance. This represented a $2.5 million cut from
our program. The TA grants are calculated as a percentage of
what we owe the Government. Because the program has thrived,
growing to over $112 million in debt to the Federal Government
today, this represented a 40 percent cut to our budgets.
Segments of this has been severely curtailed and actually
several organizations will probably be forced to lay off staff
this year. The importance of the TA, up to $35 million this
year, is very critical.
The present budget, again, for this year calls for $17.7
million for TA. This just is not enough money to provide the
services that we do. Let us do the math. At the end of 2001
there was $112 million in debt. To provide 25 percent technical
assistance grants, that is only $28 million. There is an
additional $23 million approved that will most likely be made
this year to Microloan borrowers, which brings us up to about
$35 million. That is just to get through the following year.
So what does this all mean? We have to have your support
for the $35 million for TA grants as well as $35 million for
direct loans so that we can maintain the Microloan program and
keep it healthy. Without it, the Federal Government's current
$112 million investment into these intermediaries is at risk if
the borrowers do not receive this TA.
We know that at least one intermediary plans to get out of
the program, return their capital to SBA. Their reason is the
program is too high of a risk to continue the program. At the
current levels, that is exactly what will continue to happen.
If funding levels proposed in the present budget is enacted,
the future of this program is absolutely in jeopardy. So on
behalf of the Nation's smallest businesses, we ask that you
support $35 million in direct loans and $35 million in TA.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Corbet follows:]
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Chairman Kerry. Thank you very much, Mr. Corbet.
Ms. Zinn.
STATEMENT OF AMANDA ZINN, CHIEF EXECUTIVE OFFICER, WOMEN
ENTREPRENEURS OF BALTIMORE, BALTIMORE, MARYLAND
Ms. Zinn. Thank you, Mr. Chairman.
I am here today representing not only my own organization,
Women Entrepreneurs of Baltimore, but I also serve on the board
of the Association of Women's Business Centers; I am the chair
of the Microenterprise Council of Maryland, which is a State-
wide microenterprise association; and I am also a member of the
Association of Enterprise Opportunity.
I would like to specifically talk about two SBA programs
today, the Women's Business Center Programs and the PRIME
program. My organization, WEB, is an awardee of both the OWBO,
Office of Women's Business Ownership, the Women's Business
Center program, as well as the PRIME program.
We are asking for the $14.5 million to be funded in the
Women's Business Center. There are several reasons for that.
The first and foremost is that women-owned business is the
fastest growing sector of all small businesses in this country.
There are 6.2 million businesses employing 9.2 million people
with $1.15 trillion in sales.
In addition to the numbers and the growth of women-owned
businesses, there recently has been a study that was published
in the Global Entrepreneurship Monitor that compared the GNP of
industrialized nations, looking at the factors about why the
GNP was different in all of these different industrialized
nations. Their finding was that entrepreneurship was the main
reasons. The factors among entrepreneurship were that women and
minorities in particular were really the driving force in
entrepreneurship.
So we are citing these global studies that are really
pointing to the importance of the continued growth and the
importance in terms of the economy that the women-owned
businesses are making, as well as minority-owned businesses.
So having said all of that, the $12 million that has been
proposed for the Women's Business Center program is
insufficient in that, combined with the current legislation, it
simply will not fund all of the existing centers, all of the
sustainability centers, and new centers. We feel it is very
important for all three of those different entities within the
Women's Business Center to be funded, because the
sustainability centers in particular are the ones that mentor
the new centers and are really the ones that have a track
record, are proven successful, and also mentor the new centers
that are coming on. Twelve million dollars will not fund all of
those centers. Only the $14.5 million will do that.
In terms of the PRIME program there has been, I understand,
a lot of people think that there is a duplication of services.
These services are not at all duplicated. The fact is that
there is a vast sea of entrepreneurs out there and they are all
representing different markets and they all have different
needs.
The PRIME program is for technical assistance specifically
for very low-income people. Ninety percent of the 3- to 4-
million microentrepreneurs in this country are non-borrowers,
so the Microloan technical assistance program is not meeting
the needs of those people. They have very specific needs as
microentrepreneurs. They need incredibly intensive services.
My organization offers a 108-hour business skills training
course, to teach the low-income microentrepreneurs to start and
be successful in business. The SBDCs and the other programs are
not that intensive and do not meet those needs.
So I would strongly suggest that, as a person who is on the
ground floor, and who is working with and understands the needs
of both women and very low-income microentrepreneurs, these
programs are very different. They are definitely serving
different needs, different market niches, and are extremely
important.
The President has zeroed out the PRIME funding in his
budget and we request that the $15 million, which is the full
authorized level, be supported to meet the needs of all of the
microentrepreneurs in this country.
The other thing that the PRIME program does that no other
program does is provide capacity building for the
microenterprise development practitioners that are helping to
start, stabilize, and expand the businesses, as well as doing
very important research on the success of these businesses and
what they need. So these funds are very much needed.
Thank you very much.
[The prepared statement of Ms. Zinn follows:]
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Chairman Kerry. Thank you very much, Ms. Zinn.
Mr. Wilson.
STATEMENT OF DONALD WILSON, PRESIDENT, ASSOCIATION OF SMALL
BUSINESS DEVELOPMENT CENTERS, BURKE, VIRGINIA
Mr. Wilson. Senator Kerry, thank you very much. On behalf
of the nearly 6,000 men and women who work every day in the
Small Business Development Center program, I want to thank you
for having us here today.
I want to especially thank you for the leadership that you
and others on this Committee have shown in the last year in
trying to get resources necessary to assist small businesses in
starting, growing, and sustaining their businesses. I speak in
direct reference to your efforts last year with the Kerry
amendment to increase the funding for the SBDC program in the
budget to $105 million, taking into account of the fact that,
as a result of the Census, 24 States were going to lose
substantial funds.
We appreciate the added funds that are in this budget as
compared to last year's that was submitted by the
Administration--and I mean that sincerely and commend
Administrator Barreto for some of his leadership and the new
attitude that is in the leadership towards the SBDC program.
But the fact of the matter is that those 24 States, with
this budget, will still be locked in. We are talking about your
State, Senator. We are talking about Senator Bond's State.
Those 24 States, many of them have very high unemployment
levels where the efforts now to start new businesses are
accelerating, as they always do. When unemployment goes up, the
efforts to start new businesses go up.
You heard the Administrator talk about the tremendous
demand that is coming to his website. The reference to the
Global Entrepreneurship Monitor. The Kaufman Foundation, the
people who did that indicated 1 in 10 Americans are trying to
start businesses. Our Christman study indicates that of our
long-term counseling clients who are pre-venture, 54 percent
actually go into business. These people start paying taxes.
The return on investment of this program is substantial and
we simply do not understand why any administration would allow
this program to continue, seeing 24 States cut it in a time of
grave, grave need.
We also commend you, Senator, for S. 1499. I believe all
but one Member of this Committee cosponsored that. I think you
are now up to 63 or 64 cosponsors.
The fact that OMB or whoever is blocking this legislation
from reaching the floor, bipartisan passed the Small Business
Committee in the House. That legislation is desperately needed.
Look at the bankruptcy rate in small businesses right now.
Millions of small businesses who are operating on credit cards
and now cannot pay off those credit cards are looking at 21
percent interest. Severe credit crunch.
S. 1499 and S. 2320 will address these problems and they
desperately need to be addressed by this Congress and this
Administration.
Thank you, Senator.
[The prepared statement of Mr. Wilson follows:]
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Chairman Kerry. Thank you, Mr. Wilson. I really appreciate
it. I appreciate the clarity and passion of all of your
testimonies.
Mr. Administrator, I appreciate that you are not at the
panel, but I really do appreciate the fact that you are here. I
think, for Ms. Sabelhaus also, whom we will confirm and we look
forward to hearing in a moment, I just think it is really
important that you are here to hear this. This is real stuff.
These are the real people who are out there. They are the
practitioners.
I wonder if any of you were asked your opinions about the
budget previously? Did any of you weigh in on the budget? Have
you met the Administrator previously?
Mr. Wilson. Yes.
Chairman Kerry. One of you has.
I think that it is important, Mr. Administrator, to really
hear this. I am going to send this testimony over to Mitch
Daniels. I am going to send it over to Andy Card. My hope is
that they will really take note of what has been put forward
here. It is not a plea for a handout. It is sort of a sound
business plan.
That is what you come out of, is business, and so does Ms.
Sabelhaus. So I think that it is really important to focus on
it.
I will not belabor it, but I do want to ask a few questions
if I can. Again, Mr. Administrator, I really do appreciate that
you are here to hear it. I think it is important, and hopefully
it will help you to go back to those folks and say, ``Look, we
have to do something about this,'' because we do.
Mr. Wilkinson, you mentioned that SBA and OMB used a
default rate assumption about 13 percent and you questioned
that a moment ago. Can you give me a little more sense of that?
I mean, have we ever been at a 13-percent default rate? Where
does that come from?
Mr. Wilkinson. Not since the implementation of credit
reform. I understand that what they do at OMB is a simple
average of default rates all the way back to 1986. As you know,
the program has changed substantially since 1986 and it is not
near what it used to be. It has improved substantially.
Chairman Kerry. I remember when we reviewed that, actually
we were outraged at what was happening, so I think we have
tightened up considerably.
Mr. Wilkinson. I have a chart from SBA that shows, starting
with 1992 which is the first year of implementation of credit
reform, defaults were at 9.2 percent and they have declined
since then. Yet we are still using that 12.87 number.
Chairman Kerry. I think it is fair to assume, in fairness
to the Administrator, that given what has happened to the
economy, there is going to be some increase. You cannot sit
there and say we are going to--I mean, that was a growing
economy. We are not now in a growing economy, and I would
assume you would have to also agree there will be some higher
rate of default.
Mr. Wilkinson. We have seen a small rise in delinquencies.
But to get to the number that is in their budget request we
would have to have 30, 40, 50 percent increase in defaults to
get to that number.
Chairman Kerry. What is the impact of that?
Mr. Wilkinson. Each 1 percent increase in the default
estimate adds between 30 and 34 basis points to the subsidy
rate. So to get down to the 9.38 that is in the credit
supplement number, again would knock off over 100 basis points
or about $100 million in appropriations for next year.
Chairman Kerry. So it is one of those baseline assumptions
that you can make that jacks up the default rate, restricting
what you are putting out and allowing you to hold on to more of
what you have got; is that correct, in the budgeting?
Mr. Wilkinson. What it does is it forces us to go seek
appropriations that really do not need to be made. We are
fighting for appropriation dollars every year that end up in
the Treasury, and that is highly inefficient.
Chairman Kerry. Fair enough. We talked about the funding
for the 7(a) funding previously with the Administrator, and you
talked for a moment about moving those larger real estate loans
to the 504 loan program and reducing the average size of the
7(a) loan. What is the impact on the program specifically?
Concomitantly, what is the impact on long term capital for
small businesses as a result of that shift?
Mr. Wilkinson. About 35 percent of 7(a) dollars are in
loans in excess of $500,000. So it is a good number. I am
looking at a 2000 report that showed about 5,500 borrowers, so
it is a significant portion of 7(a) lending that would either
disappear or be moved into another program.
Long term the impact is, in the 7(a) portfolio, that the
loans paying the highest fees are not there any more, which is
going to put a significant upward pressure on the subsidy rate
for those loans remaining. So when we come back and talk about
the fiscal year 2004 budget we are going to see a much higher
number if those 7(a) real estate loans are not there.
Chairman Kerry. You are requesting a program level of $12
billion; the Administration is at $4.85 billion?
Mr. Wilkinson. I think the Administrator said we were 11
percent ahead of last year, on pace to do about $10.5 billion
for this year. S. 1196 will encourage some additional volume in
fiscal year 2003 and that is why----
Chairman Kerry. How do you account for the increase in
demand?
Mr. Wilkinson. The lower fees will encourage lenders to
come back in the program. As you know, several lenders had
exited the program including the No. 1 volume lender in the
country back in, I believe it was 2000, 1999 or 2000, exited
the program because of the high costs of delivering this
product. So we hope some of those lenders will come back.
Chairman Kerry. Mr. Crawford, you also focused on this 504
and the increase in fees. Is there an explanation for why that
subsidy rate has gone up?
Mr. Crawford. I think it is interesting because the default
rate that they forecast actually declined from 8.4 to 8.3
percent, so it is surprising the fee increases. As we study the
subsidy model, it increases because they are decreasing their
net recovery. Last year the net recovery on our defaulted loans
was 26 percent, which was fairly bad. This year it goes down to
an abysmal 20 percent, which I find atrocious.
Chairman Kerry. Why is that?
Mr. Crawford. I do not have an explanation for that, Mr.
Chairman. You look at our loan liquidation pilot that you
authorized several years ago. We are recovering 55 percent, and
that is net of expenses. The asset sale itself, the numbers I
get out of the agency indicate they are recovering 50.2
percent. That should be net of expenses. I do not see the
connection between 50 percent or 55 percent and 20 percent. I
am sorry, I do not see it.
Chairman Kerry. We should certainly try to understand it. I
do not understand it as I sit here now. I think we should try
to figure out why that exists.
Mr. Corbet, the technical assistance piece, obviously you
have spoken thoughtfully about the link between that and loans.
Would you re-articulate, if you will, why you think the request
level for TA is so low? What is the real meaning of it in
practical terms? Give me an example, as a practitioner, of what
the impact is.
Mr. Corbet. Why they only requested it to be so low?
Chairman Kerry. Do you have an answer to why they requested
it be so low? Sure, I would be curious as to----
Mr. Corbet. I would too.
Chairman Kerry. You are curious or you have an answer?
Mr. Corbet. I would be curious as well. I am with you
there.
The TA is directly tied to the success of the program. As I
indicated in my testimony, commercial bankers will not make
these loans. That is the reason this program was created in
1991 is because bankers would not make $10,000 business loans.
I understand why. Bankers are in the business to make money,
and you cannot make money on a $10,000 loan because you have to
provide assistance to the borrower to ensure the repayment
comes back. It may be just following up, reviewing their
financial statements, to have a discussion with them, to give
them ideas of how to improve their----
Chairman Kerry. So you are saying just on a simple time
cost basis you cannot do it?
Mr. Corbet. Exactly. The TA is directly tied to the success
that we have had to date. The fact that it was cut to the
level, that it was cut this year during fiscal year 2002, we
still have not seen the effects of that yet. We know that the
intermediary lenders are most likely going to have to lay off
staff in certain parts of the country. We do not know what the
effect of that will be yet.
My biggest concern is that if we do not get that back up to
minimum levels that we will start to see loans not being paid
back to the Federal Government. That is really my biggest
concern because the success with these high risk loans is that
day-to-day assistance that we provide these borrowers. As I
indicated, the majority of the TA that are provided for the
Microloan program is for post-loan activities.
Chairman Kerry. Is it possible for somebody in the
bureaucracy to sit there and say, this just is not worth it,
what we are getting for this TA is not worth it? Could somebody
make that judgment, or is the evidence incontrovertible that it
is otherwise, that it is worth it?
Mr. Corbet. I would highly question that comment and would
not understand how they could not see that the jobs that we
have created through this program--I mentioned there was 14,000
created. There are another, I think roughly, 25,000 jobs that
were retained as a direct result of the loans that were made
through this program. So that is why I indicate that the TA has
got to be raised back up so that we could maintain the quality
of the portfolios that we have made to date.
Chairman Kerry. The difficulty is also that if you have a
loan for--the whole concept of the smaller loans and
microlending is to bring people in for whom credit is otherwise
unavailable.
Mr. Corbet. Absolutely.
Chairman Kerry. Also who do not necessarily have the skills
to qualify, et cetera. Now if the success rate of that program
is such that the net of the loans made is on the plus side, as
I believe it is, it is hard to understand in economic terms why
you would not continue to do that.
But more importantly, or equally as important, the economic
measurements we use today do not factor in the plus side
benefits of that person conceivably being off welfare rolls,
that person having gainful employment and therefore providing a
role model to family, perhaps being able to support kids in a
way that empowers those kids to do something other than wind up
in the court system, or in the streets, or on drugs, or
whatever. There are all kinds of plus sides here that we do not
measure. We do not measure any of those things in our gross
national product. We certainly do not measure them in the value
of this program.
But it seems to me when you look at so many people who are
new--many of them are new entrants to the country, but not all
of them. These are people who are certainly new entries into
the marketplace and they wind up as taxpayers, many of them
with two or three people working for them. The numbers of
stories of people who have gotten $3,000, $5,000 and opened a
store in a community that previously was dying and helped to
bring back a street in that community, and helped to provide a
storefront, and helped to provide a job where others are
suddenly on the tax rolls, are just extraordinary stories. They
are what this country is about.
So many of them have gone on not just to repay their loans
but to be viable businesses. You are in the center of that. Why
don't you share with us for a moment what this mean in
Baltimore to the community? Maybe you could give a little life
to it.
Ms. Zinn. Thank you, I would love to do that. Before I say
what it means to the community per se I would like to answer
some of the points that you bring up. Dr. John Else in Iowa has
published a study that says for every dollar that is invested
in the microenterprise development programs, $2.70 is the
return on the investment. That is a combination of taxes paid,
both increase in personal income taxes, corporate taxes,
personal property taxes, and retail sales taxes, jobs created,
savings on public welfare dollars as you mentioned.
But in addition to that, SBA itself has put out a study
that said that 60 percent of all the revenue generated by
microentrepreneurs are recirculated within the community where
that business is located. That can be compared to only 20
percent of the revenue generated by chain stores being
recirculated in that community, and 6 percent by warehouse type
stores. So this is absolutely a community development, not only
an economic development as we mentioned before with the taxes
and the jobs, but a community development benefit.
These people are filling up storefronts. They are going
into neighborhoods that most larger businesses will not go
into. They are very active in their neighborhoods in terms of
making sure that they are aware of the activities in the
neighborhood, to decrease crime. They are filling up the vacant
storefronts. They are serving as excellent role models in the
community, and they are very involved in their community to
protect their investment.
But also as you mentioned, it is very important in terms of
personal development. We are talking about serving people who,
I can tell you as one example of a woman that went through the
WEB program, she was on welfare when she came to WEB and she
had many problems with drugs and other things like that. We
helped her open a business that is a tax, bookkeeping, and
accounting business. She is now not only fully self-reliant but
she also employs other people that have been in the penal
system and in the welfare system. She employs about six other
people right now. She is a wonderful spokesperson. She is a
leader in her community. She is working actively with the kids
that are in trouble in her community, and she is very well
respected.
So we are talking about building skills. We are talking
about building personal income, building household assets. We
are talking about helping people realize all of their full
potential and be contributing citizens, neighbors, and
residents. So these programs have many numerous benefits, not
just economic but community and personal as well.
Chairman Kerry. Why is technical assistance an important
ingredient in what the Women's Business Centers do and what
PRIME does and almost equal to the access to capital itself?
Ms. Zinn. That is exactly right. As I said before, 90
percent, 3 to 4 million microentrepreneurs in this country do
not borrow money. A lot of them are risk averse. A lot of them
just do not choose to go that path. So what we are able to do
through our very intensive services of training and one-on-one
technical assistance is teach them the skills that they need
and give them the support systems that they need that they are
able to start and sustain these buildings.
We work very closely with the Microloan program and we,
actually for the people that do get Microloans, we will refer
them there. So we have done a lot of the upfront work to help
people not only get Microloan programs, but in cases where it
is practical, loans from traditional lending institutions.
So we have numerous stories about people who feel that they
have come into our center and said that this is the first time
as a woman they have really felt not intimidated, and respected
enough to be able to pursue this dream of starting their
business when they are not in competition with males or other
people. So these services are extremely important to them and
many have said they would not have been able to do it without
them.
Chairman Kerry. Mr. Wilson, with respect to the SBDCs you
have asserted that the $88 million is simply not enough to run
them this year. Can you give us a little more information about
why that is so?
Mr. Wilson. I would be delighted to, Senator. This program
has had minimal growth for a number of years. From 1994 until
1999 you had 40 States who had absolutely no increase in
funding for a 5-year period.
Chairman Kerry. Forty?
Mr. Wilson. Yes. Today you have a number of States, the
less populated States, New Hampshire, Montana, Wyoming, about
15 of those have been level funded now at $500,000. If this
budget goes through they will be stuck at that level for 5
years. You have States like your State that took $125,000 cut
in 2002. Pennsylvania took nearly $400,000. Senator Levin took
probably close to $300,000. New York close to $300,000. These
are the cuts they took in 2002 because of the census and they
will be locked in those.
Please understand, these States did not lose population.
They did not lose small businesses. They just did not grow as
fast as the national average of 13.2 percent. So we do not have
any decline in demand. The demand, in fact as the Administrator
noted to you, the number of people wanting to start businesses,
the people coming to our web sites, the people knocking on our
doors, we have in many of our centers a 45-day waiting list for
counseling. That is intolerable if you are small business on
the verge of going under.
The return to the Treasury--one of the things that
obviously OMB never calculates is that you are saving someone
from being on welfare or unemployment or food stamps or
whatever it may be. That is never calculated in how they figure
out the return on investment for this program. The Christman
studies and others indicate that our program returns 3 to 4
percent. Every dollar that the Federal Government spends in
this program leverages at least another two in virtually every
single, solitary State. We cannot even get a dollar unless we
match it.
The crisis that we are facing right now is that small
businesses--at the height of this economy, you can manage a
business and be profitable. You can manage to get by. But if
you are not managing it well in hard times you are going to go
under, and you are putting thousands of workers out of work.
You talk about real life stories. I was at a major
conference with adults with disabilities who are interested in
entrepreneurship, a gentleman came up and talked about how this
program changed his life. Out in Michigan when they do an
awards ceremony for outstanding entrepreneurs, 12 regions of
that State--and I would estimate to you that eight of those
people, many of them having been unemployed or on welfare or
whatever, stood up and literally with tears in their eyes, and
their families there, and their State senators there, and so
forth said, this program changed my life.
The amount of dollars is almost insignificant. My testimony
notes that small business, Senator, as you well know--and the
numbers just came out--we have gone up from 51 percent to 52
percent of the GDP. The IRS says small business sends in 44
percent of the revenues in this country. We create 75 percent
of the new jobs, and we give SBA \4/100\ths of 1 percent of
this budget? There is something wrong with the allocation of
resources there, Senator.
Chairman Kerry. What do you say, Mr. Wilson--and I
appreciate your comments very much--but let me play devil's
advocate. You are an articulate spokesperson. What happens when
somebody philosophically sits in an office in Washington with
their hands on this budget who does not believe necessarily
that Government ought to do that? You know, when the
marketplace gets tough, that is when tough businessmen get
going. Those who are not, may not survive, and that is the law
of the marketplace. How do you respond to those that say, this
is not the role of Government?
Mr. Wilson. I think the small businesses that have paid
taxes into this country for years feel that they are owed
something by their Government. I am not saying a handout. I am
saying a help in hard times.
I look at other programs, we have dozens of them and they
are all beneficial, and I am not arguing with any of them. I
realize the difficulties that the budget folks in the
Administration have in setting a budget. But you look at the
fact we have 2.2 million farmers in this country; about 25
million in small businesses. Without batting an eye we
allocated $22 billion to the farm program.
Chairman Kerry. We just passed a bill allocating $75
billion.
Mr. Wilson. I am not arguing that--we need to ensure for
national security and every reason that we have food and fiber.
But all of the programs that this Government is trying to do,
all ships will rise if the entrepreneurial community in this
country is rising and creating jobs.
Everyone understands that one of the major reasons we have
the deficit we do is the economy has slowed down, and people
are being laid off, and people who were paying taxes into this
Treasury no longer are, and people who were paying taxes are
now drawing food stamps or welfare or whatever it may be. If
those people are not put back to work, that downward trend in
revenues is going to continue affecting every program that you
try to work with, Senator. The only way to get those dollars
going up again is to put those people back to work, and all the
data says small businesses generate 75 percent of the jobs, so
why would not we focus resources on that sector of the economy?
Chairman Kerry. With respect to the SBDCs, the budget that
we were given is pretty tough on the notion that Congress
passed legislation prohibiting SBA from collecting client level
information, and that data is necessary to monitor the impact
of SBA resources and hold program managers accountable for
results. Are we not able to get adequate information from SBDCs
in order to be able to measure their performance?
Mr. Wilson. Senator, I regret to say to you that that
information is incredibly misleading, in fact if not outright
false. I know of no request by SBA or OMB that SBDCs have ever
refused to provide data. We provide more data in more ways than
any management and technical assistance program that this
Government, whether it is SBA, Commerce, or wherever. We have
always cooperated.
What they are referring to is we have been reluctant,
Senator, because of the strong feeling of our clients, because
of the fact that we have given them a 641 counseling form that
says, your vital information will be kept confidential. The
only thing that we have ever been reluctant to give is the
names and addresses of our clients. Everything else they have
ever asked for we have always complied, and I believe the
Administrator would back us up on that.
Chairman Kerry. I thank you very much. I thank all of you.
We are, regrettably, running up against a time wall here. I am
most appreciative of your testimony and I am quite confident
the Administrator is pleased that he has been able to hear some
of this. I am sure it will empower him to hopefully advocate
even more strongly on your behalf. So thank you for taking time
to be here with us. It has been very helpful.
Thank you.
Mr. Wilson. Thank you, Mr. Chairman, very much.
Chairman Kerry. If I could call the Administrator back for
the purpose of introducing Ms. Sabelhaus. You have been very
patient but I do think, Ms. Sabelhaus, this has probably been a
helpful session. I am delighted to welcome you to the
Committee. I thank you for taking a moment to meet with me and
I apologize that it was at the last minute. I just
unfortunately ran into the proverbial time crunch.
But I welcome you. On a personal level, I know you have
worked with some interests that I have been involved with, and
my wife, and we have friends in common. We are delighted to
welcome you to this new enterprise.
Without further adieu, Mr. Administrator, we thank you for
your patience this morning.
Mr. Barreto. Thank you, Mr. Chairman. It has been a
pleasure to be here this morning and listen to the great
comments that I have heard tonight. We are fortunate to have so
many passionate, articulate advocates on behalf of small
business. I share their passion and I share their commitment,
as I know that you do as well.
Today is a very good day for the SBA because we are going
to be meeting and talking and hopefully confirming our new
Deputy Administrator. I could not help but think, as I was
hearing the comments, of how perfect Melanie Sabelhaus is as
the Deputy Administrator. She is one of those businesses that
really has experienced the American dream. She will talk about
that in her remarks.
She is one of those individuals that not only has
experienced a life that has been challenging, but has also had
so many great successes in her life. She is one of those
individuals that is a visionary, and had a dream and pursued
that dream, and was capitalized with a very small amount of
money, as are many of the businesses that we represent and that
we talk about. So today truly is a very good day for the SBA.
It gives me great pleasure to introduce Mrs. Melanie
Sabelhaus, the President's nominee for Deputy Administrator of
the U.S. Small Business Administration. Her vast and wide-
ranging experience will make her a valuable asset to the SBA's
management team. Her experience as an executive with IBM will
contribute greatly in our efforts to develop the SBA that is
responding to the changing needs of small business.
But more importantly, her experience as a successful
entrepreneur will contribute greatly in the day-to-day
management of the SBA. She knows what it takes to make a small
business succeed: meeting a payroll, having people depend on
you. I am really looking forward to Melanie's confirmation and
the opportunity to work with her.
She is somebody who will help me to do as the President
says, to create an environment where small business people are
willing to take risks, where small business people are willing
to make an investment, where people are heralded for their
entrepreneurial ability, and they are celebrated. That is
really the role of Government, to create that kind of
environment. I know that you are committed to doing that. We
are committed at the SBA, and with Melanie Sabelhaus we will
truly have a partner to enable us to do that.
So without any further adieu I turn it over to Melanie. I
thank you so much for agreeing to serve this great country and
to serve the great community that is small business in America.
Thank you, Senator.
Chairman Kerry. Thank you very much, Mr. Administrator.
[The prepared statement of Mr. Barreto follows:]
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Chairman Kerry. Ms. Sabelhaus, welcome.
TESTIMONY OF MELANIE R. SABELHAUS, NOMINATED TO BE DEPUTY
ADMINISTRATOR FOR THE U.S. SMALL BUSINESS ADMINISTRATION
Ms. Sabelhaus. Thank you very much. Thank you, Hector.
Good morning, Mr. Chairman, Senator Bond, and Distinguished
Members of this Committee. I am honored to appear before you
today as the President's nominee for Deputy Administrator of
the U.S. Small Business Administration. This is truly an
amazing moment for me.
I am very enthusiastic about this opportunity to serve at
the SBA. I have experienced what many entrepreneurs are
searching for, and that is living the American dream, turning
idea into a prosperous business while employing people in my
community. It was a thrill of a lifetime. Now I have this
incredible opportunity to work with entrepreneurs around the
country to help them turn their visions into reality.
Throughout my journey in business I have always been
surrounded by a very close, supportive family and loyal,
dedicated friends many of whom are here today. These are the
most important people in my life. They have shared my vision
and they have served as my sounding board for years. I would
like to thank them for coming today.
My. husband Bob who is my best friend in the world and my
advisor in my life. He is here alone with my son Bobby who came
in from Los Angeles. Bobby has always made me very proud of
him. My daughter Alexa is unable to join us as she is in the
middle of mid-terms at Boston University, but hopefully she is
watching the webcast today because I just slipped her that
information. She is certainly here in my heart as are my
parents, Nick and Millicent Radlick ages 90 and 88--I have got
some good genes in my family--who are truly the wind beneath my
wings.
I grew up in Cleveland, Ohio, and I was the only child of a
steelworker and a homemaker; my role models in my life. They
worked very hard for their communities and their family. My
father was a councilman for 30 years. He was president of his
local union, Steelworkers Union 188, for 29 years, and the
backbone of the Serbian Orthodox church. My parents taught me
early on that hard work, dedication, high moral values, and
passion are the keys to one's life mission. It is important to
give back everything you can to your community. They taught me
to dream big, to become whatever I wanted to be. They wanted me
to have everything that they did not.
I graduated from public high school in a class of 1,000
students as a class officer, then earned a bachelors of science
degree at Ohio University in Athens, Ohio. It was at Ohio
University that I met my husband Bob. He was the busboy in my
sorority house, and I knew he had potential right off the bat.
Ms. Sabelhaus. We married right after college and we have
been dreaming and----
Chairman Kerry. Good strategy.
[Laughter.]
Ms. Sabelhaus. We have always dreamed together and our
drive has been as a team as we turned all of this into reality.
Mr. Chairman, I had the great opportunity of working for I
think one of the finest corporations in the world, and that is
the IBM Corporation. It provided me with excellent management
training. I held various management positions for IBM and had
the opportunity to help develop an entrepreneurial venture
called the IBM Product Center which consisted of retail stores
that sold directly to the consumer. This opportunity gave me
firsthand experience on building a business from the ground up.
I continued to work for IBM throughout the United States,
moving several times with Bob as he was relocated and promoted
in a financial service company. With every relocation our
family would be put up in a hotel for several months. Even
though we were in New York at the Plaza Hotel for 2 months, it
was still not very cost effective, and it was very
inconvenient. Personally, it did not work for the family.
Experiencing this time after time exposed me to a need in
the marketplace that I thought I could fill with my own
business. With Bob's encouragement I started Exclusive Interim
Properties, Limited, literally in my own backyard. We provided
totally furnished properties, condominiums, townhomes,
apartments, homes, to relocated executives, people on temporary
assignments, professional athletes, the movie industry, anyone
who needed short term housing. They were turnkey. Everything
was included.
It was because of my IBM marketing training, it really
provided me with the foundation for my business to get started
and to grow it and allow the concept to take off. My company
had offices in Baltimore and Washington, D.C. We employed 75
people, including sales professionals, accounting,
administrative, personnel, and housekeepers. At one point when
quality was an issue in housekeeping I ended up finding the
head housekeeper from the White House under the Reagan
Administration. She ended up working for me and she took me to
the next level of quality. So that was my background with the
White House.
But with 650 furnished units my company generated $10
million in revenue and we started with $15,000. Truly, it was
probably the greatest job of my life, building that small
business. My highly motivated employees were passionate about
what their jobs were, whether it was selling, cleaning units,
whatever it might be, and their efforts were key to making
Exclusive Interim Properties successful. We all engaged in
community activities, networking. We felt very strongly about
giving back.
I discovered that several other entrepreneurs around the
country were doing exactly what I was doing. So four of us
gathered together, decided to consolidate, and we became Bridge
Street Accommodations. We went public with an IPO in 1997. I
became vice president of global sales and I was involved in
acquisitions in London and Canada until I retired in 1998.
For the past 3\1/2\ years I have been dedicated to my
community, including raising money for charitable institutions,
and focusing on women's and children's issues, both of which
are passions of mine. I would like to help lead the way for
women entrepreneurs. There are currently an estimated 6.2
million majority-owned, privately-held, women-owned businesses
in the United States. They account for 28 percent of all the
privately-held firms. These firms generated $1.5 trillion in
private sales and employ 9.2 million workers. These firms are
growing at twice the rate of all U.S. firms, and this is just
the tip of the iceberg.
If I am confirmed I will take all that I have learned over
this long 32 years of business experience and help any small
business I can to succeed in this country. I am excited about
the prospect of working closely with you, the President's
Administration, and my agency partners. I hope you will allow
me to have this opportunity. I will gladly answer any questions
you have relating to my confirmation. I thank the President for
his confidence in me and I thank this Committee for its time
and effort on my behalf. I have to truly remark, this is
probably one of the most humbling experiences in my life.
Thank you.
[The prepared statement of Ms. Sabelhaus follows:]
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Chairman Kerry. Thank you very, very much, Ms. Sabelhaus.
The nomination itself should be the humbling experience. We
hope your appearance here is not humbling at all. We want you
to enjoy it. We are delighted to welcome your family and your
friends, and particularly your husband who--I do not know why I
did not think of that, busboy at a sorority. I have heard it
all now.
[Laughter.]
Chairman Kerry. We are delighted to have you here and I am
thrilled to hear that your daughter is up in Massachusetts and
I hope she is enjoying B.U. It is a great institution.
Ms. Sabelhaus. She loves it.
Chairman Kerry. Let me ask you, if I may, a few pro forma
questions that we need to ask of all nominees. First of all, is
there any interest which you have had to divest yourself of or
any kind of conflict that has appeared that you have needed to
deal with in order to assume these responsibilities?
Ms. Sabelhaus. None.
Chairman Kerry. Is there any that you could imagine in
terms of any interests that you have at this point in time that
might conflict of any of the responsibilities of the job?
Ms. Sabelhaus. No, sir.
Chairman Kerry. Do you agree, without any reservation, to
respond to any request to testify before any duly constituted
Committee of the Congress if requested to do so, and also to
direct your employees to do so if a request came?
Ms. Sabelhaus. Absolutely.
Chairman Kerry. Likewise, do you agree to respond to any
inquiries made by any of the duly constituted Committees were
they to communicate to you and to request information, that you
would make that information available?
Ms. Sabelhaus. Yes.
Chairman Kerry. Thank you very much. You heard the
testimony of the previous panel and you have heard the concerns
of the Committee today, and I think your experience is a
terrific one. That really is the American dream. But you said
something in the course of your testimony that really struck me
which was, it was my experience at IBM that really helped me
prepare for this. Obviously you have heard a number of people
here testifying about a lot of folks who do not have experience
at IBM who want to start a business. Was your $15,000 privately
raised or contributed?
Ms. Sabelhaus. Yes, privately.
Chairman Kerry. A lot of folks who do not have that access
either, who need that sort of start. I wonder just in view of
what you heard and understanding these responsibilities, what
is it that you hope--what is your goal here? When you finish
this job, whenever that might be, what would you like to look
back and say, ``This is what we accomplished?''
Ms. Sabelhaus. Very honestly, when I was asked if I would
be interested in this opportunity I said, ``If I take a job
like this I want to truly make a difference.'' When I look at
the team that we have at the SBA, and I have to comment, I
think Hector and I are going to be a fabulous team, and the
entire group at the SBA quite frankly surprised me: highly
motivated, dedicated, running great operations. I look at this
as a partnership.
But when I look at all the different outreach programs, and
there is many. You can begin with, No. 1, when we just listen
to the SBDCs, when you listen to the SBICs and you look at the
outreach and what we are doing to help people who do not have
the means, did not have the education perhaps that I had, this
is so important, to mentor them, to teach them, to educate
them, to lead the way, be the example. We have so much of that
available today at the SBA.
I think what is also important is we have got to teach them
how to gain the access to capital. They need to know how to do
that. As we were just talking about earlier, many do not even
utilize it. It is critical.
So my role, I firmly believe, will be to get involved,
asking small businesses, listening to them, what is it that you
want; what do you need? Then I will respond, working with
Hector and the entire team. But there is a great organization
at the SBA. We have to utilize it to its maximum, and I intend
to do everything I can to help make that possible in all
aspects.
Chairman Kerry. Have you had a chance to familiarize
yourself at all with the SBA's fiscal year 2000 report and
performance plan? Are you familiar with that? Under the
Government Performance and Results Act there is a performance
plan that is required. You have not had a chance to--
Ms. Sabelhaus. I am familiar with it; not in depth. But I
think that it is an excellent idea. In the public sector,
obviously this is what we use to give definition to what the
job is, what your goals and objectives are, and then of course
to look at what the results are.
Chairman Kerry. I would like you to take a look at that. I
have to leave the record open for a few days for my colleagues
who may or may not want to submit some questions. In the course
of that you might just give us a sense of how you think, and
perhaps in some discussion with the Administrator you might be
able to move forward on that. I do not want to tie us up with
it now necessarily. Unfortunately we are running over time in
terms of other obligations. So I am sure you will be sad to
hear we are going to truncate this.
As you know, and there was some discussion of this earlier,
SBA has proposed rules that are going to change the
relationship between the 8(a) business development program and
the HUBZone program which Senator Bond and I co-sponsored
together. I do not know if you have had a chance to familiarize
yourself with those two programs but I hope you would make it a
top priority and perhaps you might share with us your sense of
at least how you approach that.
There has been a decline particularly felt by the minority
community as a consequence of what is going on. One of the
great efforts of this country is obviously to try to maximize
the full opportunity by taking the least advantaged segments of
our community, if you will, and providing opportunity, and it
pays off in a hundred different ways. Could you just share a
sense with us of how you might approach the 8(a) and SDB firms
and their program?
Ms. Sabelhaus. The first thing when I think about 8(a) I
think of probably one of the best ways for small business to
grow is to have the Federal Government as a customer. I knew
that at IBM. It was huge for us, absolutely huge. The 8(a)
program is the backbone, absolutely, of Government contracting,
and it is the oldest program. I am very proud to hear that, it
is 30-years-old.
But today when you look at this program you look at it and
you say, ``All right, what are the good things about it, what
are the things we need to fix?'' First of all, everyone says it
has got to be quicker and faster. Again, that is dealing with
individuals that could be women, minorities, underutilized
areas. We have to review it and we have to fix it.
I know that we have right now a group that is looking at
the process so that we can improve it. I cannot get into
details with you but I am aware that we are working hard to do
that. We have to. It has got to be an accessible program and it
has to be one that we can get results on it, and I am committed
to working with the Administrator and with you all to make that
happen.
Chairman Kerry. We will look forward to that. We look
forward to working with you on it. It is a very important
program. We have not met our small business procurement goals
and we need to.
Likewise, you heard the folks who were here at the table
earlier, only one has met the Administrator.
Mr. Barreto. Actually, I think I have met with, at least by
phone or in person with all of them. But we always look forward
to having more meetings and to----
Chairman Kerry. Let me ask you this. We do not want
meetings for the sake of meetings. I think those are the bane
of all of our existence. But I do think outreach is important
and I would like to ask from you a commitment that you will
reach out to these practitioners, to these working elements of
the SBA community and to try to be as inclusive as we can in
the budget formulation process and in the implementation. I
think it will eliminate just a huge number of headaches for all
of us.
There is nothing we would like more in this Committee than
to take 5 minutes to be able to say to you, ``This is a
terrific budget and we look forward to implementing it, end of
issue''. Hopefully we can get there. It would be good.
Ms. Sabelhaus, as you know we are just waiting for some
final documentation, I think, that is supposed to come in. As
soon as we can get that I want to try to schedule a vote on
your nomination. So the sooner we can tie up those loose ends
we are prepared to proceed forward as rapidly as we can. Do you
have a sense of when we could have that or when we might?
Ms. Sabelhaus. That was submitted last night so right now
it is in your hands.
Chairman Kerry. Good. That is super.
You yourself have been terrific in your involvement in
philanthropic efforts and taking the fruits of your labor and
turning them into other kinds of public good. I know you are
particularly sensitive to women-owned business possibilities.
Could you just share with us any special plans or initiatives
you might have for the Office of Women's Business Ownership?
Ms. Sabelhaus. I am very interested in the aspect, the way
we are dealing right now in the field with taking women from
welfare to work. I had never heard that phrase before, but I
think it is fantastic. To listen to the results that were
reviewed today is evidence of the strength of this program.
I would like to also look at women that are in business
that need to move to the next level. Those women that need a
great marketing plan, that need to understand global marketing.
I would like to be able to work with our centers, and I know we
have the availability, and collaborate. If someone is at a big
center, we need to send them to the SBDC for a marketing plan.
But I would like to get hands-on. I would like to be out
talking to these centers specifically about women's issues,
being sure that they are trained and knowledgeable, and in
addition to that, our district offices, because to me that is
where the rubber meets the road. That is where we are reaching
out within these communities and we have got lots of district
offices.
But I would like to help women move to the next level. Give
them their start and then keep them moving: mentoring,
knowledge, development.
Chairman Kerry. Ms. Sabelhaus, you are an energized,
articulate addition to this team and we welcome that. I look
forward very much to working with you. As I said, we will try
to expedite this as rapidly as possible, and I thank you for
your patience. I thank your family and friends and your husband
for spending time here and being supportive. We look forward to
it.
We stand adjourned. Thank you.
[Whereupon, at 11:37 a.m., the Committee was adjourned.]
MARKUP
----------
TUESDAY, MARCH 12, 2002
United States Senate,
Committee on Small Business and Entrepreneurship,
Washington, D.C.
The Committee met, pursuant to notice, at 11:20 a.m., in
room S-216, U.S. Capitol Building, The Honorable John F. Kerry,
Chairman of the Committee, presiding.
Present: Senators Kerry, Levin, Harkin, Wellstone, Cleland,
Landrieu, Cantwell, Carnahan, Bond, Burns, Bennett, Snowe,
Enzi, Fitzgerald, Crapo, Allen, and Ensign.
Chairman Kerry. The Small Business Committee is convened
for the purpose of voting out the nomination of Melanie R.
Sabelhaus to be Deputy Administrator at the Small Business
Administration. The clerk will call the roll.
The Clerk. Mr. Levin.
Senator Levin. Aye.
The Clerk. Mr. Levin, aye.
Mr. Harkin.
Senator Harkin. Aye.
The Clerk. Mr. Harkin, aye.
Mr. Lieberman.
Chairman Kerry. Aye by proxy.
The Clerk. Mr. Lieberman, aye by proxy.
Mr. Wellstone.
Senator Wellstone. Aye.
The Clerk. Mr. Wellstone, aye.
Mr. Cleland.
Senator Cleland. Aye.
The Clerk. Mr. Cleland, aye.
Ms. Landrieu.
Senator Landrieu. Aye.
The Clerk. Ms. Landrieu, aye.
Mr. Edwards.
Chairman Kerry. Aye by proxy.
The Clerk. Mr. Edwards, aye by proxy.
Ms. Cantwell.
Senator Cantwell. Aye.
The Clerk. Ms. Cantwell, aye.
Mrs. Carnahan.
Senator Carnahan. Aye.
The Clerk. Mrs. Carnahan, aye.
Mr. Bond.
Senator Bond. Aye.
The Clerk. Mr. Bond, aye.
Mr. Burns.
Senator Burns. Aye.
The Clerk. Mr. Burns, aye.
Mr. Bennett.
Senator Bennett. Aye.
The Clerk. Mr. Bennett, aye.
Ms. Snowe.
Senator Snowe. Aye.
The Clerk. Ms. Snowe, aye.
Mr. Enzi.
Senator Enzi. Aye.
The Clerk. Mr. Enzi, aye.
Mr. Fitzgerald.
Senator Fitzgerald. Aye.
The Clerk. Mr. Fitzgerald, aye.
Mr. Crapo.
Senator Crapo. Aye.
The Clerk. Mr. Crapo, aye.
Mr. Allen.
Senator Allen. Aye.
The Clerk. Mr. Allen, aye.
Mr. Ensign.
Senator Ensign. Aye.
The Clerk. Mr. Ensign, aye.
Mr. Chairman.
Chairman Kerry. Aye.
The Clerk. Mr. Chairman, aye.
Nineteen ayes, zero nays.
Chairman Kerry. Thank you very much.
[Whereupon, at 11:25 a.m., the Committee was adjourned.]
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Attachment A for Question 11
on Pages 6-7 of SBA's Responses
(* Retained in Committee Files)
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