[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

                              ----------                              

                           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


                                     
[GRAPHIC] [TIFF OMITTED] 81910.001



                     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] 81910.023
    
    [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.
---------------------------------------------------------------------------
    \1\ Please see graphs located on pages 90-92.
---------------------------------------------------------------------------
    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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