[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



 
                        THE SBA FY 2004 BUDGET
=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                   WASHINGTON, DC, FEBRUARY 26, 2003

                               __________

                            Serial No. 108-9

                               __________

         Printed for the use of the Committee on Small Business


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                      COMMITTEE ON SMALL BUSINESS

                 DONALD A. MANZULLO, Illinois, Chairman

ROSCOE BARTLETT, Maryland, Vice      NYDIA VELAZQUEZ, New York
Chairman                             JUANITA MILLENDER-McDONALD,
SUE KELLY, New York                    California
STEVE CHABOT, Ohio                   TOM UDALL, New Mexico
PATRICK J. TOOMEY, Pennsylvania      FRANK BALLANCE, North Carolina
JIM DeMINT, South Carolina           DONNA CHRISTENSEN, Virgin Islands
SAM GRAVES, Missouri                 DANNY DAVIS, Illinois
EDWARD SCHROCK, Virginia             CHARLES GONZALEZ, Texas
TODD AKIN, Missouri                  GRACE NAPOLITANO, California
SHELLEY MOORE CAPITO, West Virginia  ANIBAL ACEVEDO-VILA, Puerto Rico
BILL SHUSTER, Pennsylvania           ED CASE, Hawaii
MARILYN MUSGRAVE, Colorado           MADELEINE BORDALLO, Guam
TRENT FRANKS, Arizona                DENISE MAJETTE, Georgia
JIM GERLACH, Pennsylvania            JIM MARSHALL, Georgia
JEB BRADLEY, New Hampshire           MICHAEL MICHAUD, Maine
BOB BEAUPREZ, Colorado               LINDA SANCHEZ, California
CHRIS CHOCOLA, Indiana               ENI FALEOMAVAEGA, American Samoa
STEVE KING, Iowa                     BRAD MILLER, North Carolina
THADDEUS McCOTTER, Michigan

         J. Matthew Szymanski, Chief of Staff and Chief Counsel
                     Phil Eskeland, Policy Director
                  Michael Day, Minority Staff Director

                                  (ii)















                            C O N T E N T S

                              ----------                              

                               Witnesses

                                                                   Page
Barreto, Hon. Hector, Administrator, SBA.........................     4
Wilkinson, Anthony R., National Ass'n of Gov't Guaranteed Lenders    24
Wilson, Donald T., Association of Small Business Development 
  Centers........................................................    26
Gast, Zach, Association for Enterprise Opportunity...............    27
Mercer, Lee W., National Ass'n of Small Business Investment 
  Companies......................................................    29
Crawford, Christopher, National Ass'n of Development Companies...    31

                                Appendix

Opening statements:
    Manzullo, Hon. Donald A......................................    40
    Velazquez, Hon. Nydia M......................................    43
Prepared statements:
    Barreto, Hector..............................................    46
    Wilkinson, Anthony...........................................    52
    Wilson, Donald T.............................................    57
    Gast, Zach...................................................    64
    Crawford, Christopher........................................    67
    Mercer, Lee..................................................    74
Budget Views and Estimates Letter                                    80

                                 (iii)














  HEARING ON SMALL BUSINESS ADMINISTRATION'S FISCAL YEAR 2004 BUDGET 
                                REQUEST

                              ----------                              


                      Wednesday, February 26, 2003

                  House of Representatives,
                       Committee on Small Business,
                                                   Washington, D.C.
    The Committee met, pursuant to call, at 2:25 p.m., in Room 
2360, Rayburn House Office Building, Hon. Donald A. Manzullo 
[chair of the Committee] presiding.
    Present: Representatives Manzullo, Bartlett, Velazquez, 
Ballance, Beauprez, Christian-Christensen, Davis, Graves, 
Majette, Marshall, Michaud, Napolitano, and Ryan.
    Chairman Manzullo. Good afternoon. I would like to welcome 
everybody to the Committee's first hearing for the 108th 
Congress. The President has developed a clear small business 
agenda, one that I fully endorse. I believe that one additional 
component must be added to the President's agenda: America 
cannot maintain economic security as a post manufacturing 
society. The government must find ways to ensure and restore a 
stable manufacturing base to America. This will be my number 
one priority in this Congress, not just getting Americans back 
to work, but getting Americans back to work in jobs where they 
actually make a tangible good. Only with a strong manufacturing 
base can we truly ensure economic security for today and our 
posterity.
    This is not a new priority, but rather returns the 
Committee to the reason it was founded, to ensure that America 
in time of war had a small sound business industrial base. It 
is within this context that, on examining the SBA budget, to 
determine whether it has the resources needed to assist 
America's entrepreneurs, particularly if they wish to start or 
expand manufacturing enterprises. One way to do this is by 
ensuring adequate access to capital. Let my make it clear for 
the record, I do not want a repeat of the problems that 
occurred with the 7(a) loans in the 504 program.
    The conference report of the FY 2003 appropriations states, 
quote: ``Conferees direct the SBA to develop similar more 
accurate econometric models during this fiscal year for use in 
other SBA loan and financing programs, especially the 504 
program.''.
    That is a directive from Congress to get this resolved. I 
completely agree with the directives of the conferees, and 
expect the SBA to make the development of the econometric model 
for the 504 loan program by October 1st of 2003 one of its top 
priorities. I believe the SBA can be the vehicle to help all of 
America's entrepreneurs, including those that wish to get their 
hands dirty on the shop floor.
    I look forward to working with the President and the 
administration to enhance our small business industrial base. I 
recognize the ranking member of our committee, the 
distinguished gentlelady from New York for her opening 
statement.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Regardless of the rhetoric, the fiscal year 2004 budget 
request for the Small Business Administration is as inadequate 
as the previous three this committee has seen during President 
Bush's tenure. The $800 billion level is well below the 4 
percent increase for government-wide spending that President 
Bush touted when he released his budget this month. Given our 
new reality and the budgetary constraints we face, we must 
prioritize spending to ensure critical items are funded, like 
homeland security and the war against terrorism. But let me ask 
this question: What is the point of having international 
security if we do not have economic security here at home? This 
budget not only fails to provide for our Nation's economic 
security, but it also, I believe, would lead to greater 
economic insecurity in America.
    If our economy is to rebound, it will be critical that 
small businesses, which create half of all new jobs, get the 
assistance they need. Sadly, this budget fails our Nation's 
entrepreneurs. First and foremost, it shortchanges small 
businesses by billions of dollars in lending opportunities. It 
is through this infusion of capital that small businesses 
expand as they purchase equipment or start new ventures, both 
of which create jobs and lead to economic growth.
    While there is still much talk by the President and some in 
Congress about a tax break to supply such a capital infusion, 
the reality is that much of the President's plan will have no 
effect and may even harm small business. That is why the SBA 
loan programs which provide 40 percent of all small business 
lending--long-term lending are so important. This budget 
continues the SBA trend of underfunding its flagship loan 
program, the 7(a), by $3 billion. It also cuts the Microloan 
Program in half.
    Small businesses will not only fail to get the capital they 
need, but the President's budget only partially solves the 
miscalculation of the subsidy rate for the 7(a) program which 
has taxed both lenders and borrowers by over $1.5 billion, and 
does nothing to correct the subsidy rate problem in the 504 
program. This means borrowers who use the program will pay an 
additional $15,000 over the life of the loan. That is the 
difference between hiring a part-time employee and a full-time 
employee, providing health care benefits, or purchasing new 
equipment.
    Even worse, it imposes new taxes under the SBIC program 
with additional fees on the participating securities program. 
For an administration that pushes tax cuts to continue these 
type of policies and then propose yet another tax on small 
business is backwards. The proposed budget steals lending 
opportunities as well as Federal contracting ones away from 
small business by failing to open up the $220 billion 
marketplace to small enterprise.
    For the last 2 years, the Federal Government has not met a 
single one of its small business goals. This has cost small 
businesses over $12 billion. While there has been a lot of 
tough talk by the administration about cracking down of 
contract bundling and holding agencies accountable, this budget 
provides insufficient funding for procurement center 
representatives, the front line of defense in enforcing failure 
contracting laws. It provides funds for 47 PCRs, not even one 
per State, leaving several critical procurement centers across 
the country unstaffed. Little money is available for travel. It 
is one thing to think someone can do more with less and another 
to think anyone can make something out of nothing. That is 
exactly what this budget does.
    As President Bush has made compassionate conservatism his 
motto, this budget continues the administration's policy of 
completely turning its back on low income and minority 
communities. Just like in the past, the proposed budget fails 
to request funding for prime business link one-stop capital 
shops. All programs that target these areas. Given the deep 
cuts to the Microloan Program and the administration's failure 
to get the new markets venture capital program off the ground, 
this budget sends the message to low income communities that 
they must go it alone.
    Mr. Chairman, my assessment of this budget is simple: It is 
inadequate. It underfunds critical small business loan 
programs. It fails to provide contracting for small business, 
and it leaves our low income and minority communities behind. 
If our economy is to turn around any time soon, it will be 
through small business growth, growth that will, in part, rely 
on SBA programs.
    Clearly, this budget does not match the administration's 
rhetoric of being pro small business. Given the current 
recession, it concerns me that the most important driver of our 
economy, small business, will suffer at the hands of the 
administration's budget. Small businesses cannot work their 
magic on our economy without the proper tools which this budget 
fails to provide them.
    I look forward to hearing from the witnesses, and I yield 
back the balance of my time. Thank you.
    Chairman Manzullo. Thank you very much.
    The way we will work the witnesses is Mr. Barreto will go 
first, and then the members of the Committee will have the 
opportunity to ask questions. And then when the other witnesses 
give their testimony, Mr. Barreto has advised that he will 
stick around as long as he can to be able to listen to the 
testimony direct from the witnesses.
    It is my great pleasure to introduce to you Hector Barreto, 
who has done nothing less than a fabulous job as the head of 
the SBA. He came into this job because of a desire in his heart 
to grow small businesses, not just a political appointment, not 
just a halfway house look for another job in the Federal 
Government, but a real desire to help out the small businesses.
    I wonder--I know he is always a happy person. He would be 
much happier if he didn't have to worry about the OMB. And 
because we know what you would do with that budget, Mr. 
Barreto, if it were up to you and you wouldn't have to worry 
about the confines of the budgetary process. We look forward to 
your testimony and thank you for being with us.

STATEMENT OF HON. HECTOR BARRETO, ADMINISTRATOR, UNITED STATES 
                 SMALL BUSINESS ADMINISTRATION

    Mr. Barreto. Thank you very much, Mr. Chairman, Ranking 
Member Velazquez, and members of the Committee. Thank you for 
inviting me here today to discuss the President's budget 
request for the U.S. Small Business Administration for fiscal 
year 2004. President Bush understands the vital role that 
America's small businesses play in creating opportunities. He 
also recognizes that as we look toward economic recovery, small 
businesses play a leading role, and that in such times it is 
small businesses that account for virtually all new jobs.
    Therefore, to support this vital sector of the American 
economy, the President has designed a small business agenda 
that bolsters small business and creates an environment in 
which entrepreneurship can flourish. This agenda includes broad 
tax relief aimed at boosting small business growth, providing 
small businesses with information they need to succeed, 
ensuring full access to government contracting opportunities, 
and tearing down regulatory barriers to job creation for small 
business by giving them a voice in the complex and confusing 
regulatory process.
    The President's plan for economic growth and job creation 
would provide relief for small businesses in the form of 
reduced marginal tax rates while increasing the amount that can 
be written off as expenses for equipment purchases from $25,000 
to $75,000, encouraging them to buy technology, machinery, and 
other equipment they need to expand and create new jobs.
    And finally, the President has responded to the calls heard 
throughout the country to permanently repeal the estate tax and 
allow small business owners the opportunity to pass along the 
fruits of their life's work to their heirs without being forced 
to sell the family business to pay the tax bill.
    Beyond the need for tax relief, SBA is leading the charge 
to implement President Bush's small business agenda. To do 
this, the agency is focusing on three strategic programmatic 
goals designed to create more jobs. First, SBA is championing 
small business interests by minimizing the regulatory burden, 
providing them with easily accessible information about how to 
comply with regulations, and working to ensure that the 
regulatory process treats small business fairly.
    Secondly, SBA is continuing its efforts to empower 
entrepreneurs. The agency is working to increase the 
opportunity for entrepreneurs to start and grow a business by 
providing increased access to capital and information, 
technical assistance and counseling, as well as increased 
access to procurement opportunities.
    Thirdly, the SBA is continuing to play a vital role in 
helping businesses and families recover from disasters. Through 
its disaster assistance program, SBA provides speedy and 
customer-friendly assistance to restore homes and businesses to 
their pre-disaster conditions.
    Mr. Chairman, when I appeared before you last year, I 
testified about a number of challenges facing the SBA in its 
efforts to retain its relevance. Today, I am pleased to report 
to you that this administration has met those challenges and 
has significant accomplishments to report to you. I testified 
that for fiscal year 2004, SBA would use an improved model to 
calculate the subsidy rate for the 7(a) loan guarantee program. 
The 2004 budget request uses such an econometric model. Working 
with the Office of Federal Housing Enterprise Oversight, we 
have developed and implemented a more accurate subsidy rate 
calculation model. Using this revised model for fiscal year 
2004, SBA has been able to dramatically reduce the 7(a) program 
subsidy rate from 1.76 percent as proposed for fiscal year 2003 
to 1.02 percent. The administration is requesting $94.86 
million for the 7(a) program, which, using the improved subsidy 
rate calculations, will provide a program level of $9.3 
billion.
    The new model will enable SBA to allocate its resources 
more effectively, determine program risk more precisely, and 
increase its ability to target loans to aspiring entrepreneurs 
who could not obtain financing without a government guarantee. 
It also improves the government's ability to forecast loan 
performance by taking into account a wide range of economic 
factors.
    I also testified that SBA needed to change the way it 
delivers services to its customers, America's small businesses. 
Today, we are poised to implement our transformation efforts 
with a three district pilot project. Many throughout the agency 
have worked long and hard to ensure the success of SBA's 
transformation efforts and have addressed each and every 
concern raised by congressional partners in formulating this 
plan. I will discuss SBA's budget request for transformation 
later in my testimony.
    Last year, I also testified on the need to improve 
oversight of the lending partners since the SBA has taken the 
steps necessary for a more modern oversight system. To assist 
with this effort, SBA contracted with KPMG Consulting, and last 
June they provided recommendations as to how to proceed with 
developing a loan monitoring system that meets both SBAs and 
Congress's need for lender oversight. In undertaking these 
actions, this administration has addressed the challenge of 
modernizing LMS by using the private sector, where the experts 
in this area are, rather than developing a separate and more 
costly system.
    Now, I respectfully ask for your support of the President's 
fiscal year 2004 budget request for the SBA. The President's 
plan proposes a total fiscal year 2004 appropriation of $797.9 
million, and maintains the spending level proposed for the 
fiscal year 2003. It is about 4 percent larger than the budget 
for fiscal year 2002 and would provide substantial levels of 
credit, capital, and procurement, and entrepreneurial 
development assistance to small businesses. This fiscally sound 
budget would provide more than $20.8 billion in small business 
loans, loan guarantees, and venture capital, and more than $760 
million in new disaster loan funds for victims of natural 
disasters. It includes funding for $9.3 billion in guaranteed 
loans under the 7(a) program as well as more than $115 million 
for the agency's technical assistance programs.
    Thus far, in fiscal year 2003, operating under a series of 
continuing resolutions while dealing with the effects of 
lowered fees on 7(a) loans as a result of legislation passed 
last year, SBA has instituted a cap of $500,000 per 7(a) loan. 
This effective management tool has produced interesting 
results. By creating an emphasis on smaller loans within the 
program, we have been able to leverage our resources to provide 
an increased number of loans to our merging markets. This has 
allowed SBA to be ahead of its 7(a) lending goals in every 
category for 2003, including 35 percent a head to women-owned 
businesses; 65 percent a head to African American businesses; 
39 percent a head to Hispanic-owned businesses; and 31 percent 
a head to veteran-owned businesses.
    Now that Congress has enacted both the fiscal year 2003 
appropriation for SBA as well as legislation allowing for the 
use of the econometric model for calculating the subsidy rate 
for the 7(a) program in fiscal year 2003, SBA has removed the 
cap on 7(a) loans. We will, however, continue to promote 
smaller loans. We will also promote smaller loans by expanding 
the lending program to allow as many as 1,500 of America's more 
than 10,000 credit unions to join our network of lenders.
    This represents a potential increase of some 30 percent in 
the overall number of storefronts through which entrepreneurs, 
particularly those requiring smaller loans, can seek capital 
for their businesses while allowing SBA to reach more 
communities, a greater number of entrepreneurs, and a more 
diverse pool of prospective and existing small business men and 
women, the budget request which will also allow SBA to provide 
$4.5 billion in loans through the 504 certified development 
company program with no cost to taxpayers. The 504 program, 
which was established to increase small businesses' access to 
real estate and other long-term fixed asset funding has always 
had a program goal of job creation.
    SBA recognizes the need to increase small businesses' 
access to 504 loans, and will implement steps in 2004 to 
accomplish this goal. This budget request includes $8.8 million 
to continue implementation of SBA's transformation efforts. I 
have spoken with many of you personally about the importance of 
transformation to SBA's future success. These efforts are 
crucial to the agency's continued relevance in its second half 
century. To better meet the needs of our customers, SBA will 
shift field office efforts from back office functions, such as 
loan purchases and some liquidation functions, to more direct 
relationships with customers and resource partners. We will 
evaluate the results of these pilot programs and incrementally 
expand the successful practices to more offices until all of 
SBA has been transformed. We anticipate that the pilots will 
begin in this fiscal year 2003, and will continue through 
fiscal year 2005. The budget request includes $16.5 million, 
which includes all sums necessary for the transformation plan 
to support the agency's execution of the President's management 
agenda which emphasizes better management of the Federal 
government through five areas: Human capital, competitive 
sourcing, E-government, integrations of budgets with 
performance, and improved financial management. SBA requests 
$2.3 million to modernize and streamline business processes to 
reduce cost and to improve customer service. Additionally, we 
are asking for $1.7 million to support SBA's information 
technology infrastructure.
    SBAs fiscal year 2004 budget request includes level funding 
for entrepreneurial development programs, SCORE, and SBDC, WBC, 
and BIC networks.
    It is often said that access to information is the key to 
small business success. The budget request includes continued 
funding for the agency's disaster assistance program, and SBA 
works closely with the Federal Emergency Management Agency to 
assist those small businesses and individuals directly affected 
by disasters such as tornadoes, floods, and hurricanes to get 
them back on their feet in times of trouble when they most need 
government assistance.
    Mr. Chairman, I want to take a moment to recognize the 
heroic efforts of the employees of the SBA's Office of Disaster 
Assistance who, through the unprecedented nationwide expansion 
of the agency's economic injury disaster loan program, were 
instrumental in delivering $1.1 billion in loans to those 
directly impacted by the September 11th events. I want to, 
again, extend my heartfelt thanks to the employees of SBA 
without whose dedication and their compassion SBA would not 
have been able to deliver these services. And I commend you, 
too, Mr. Chairman for your strong leadership on this as well.
    Mr. Chairman, as I have noted earlier, SBA celebrates its 
50th anniversary this year. On August 1st, SBA will honor that 
anniversary with a ceremony in Abilene, Kansas, the birthplace 
of President Dwight D. Eisenhower, who signed into law on that 
very day 50 years earlier the Small Business Act, the 
legislation authorizing the creation of SBA.
    All of us at SBA are proud of the agency's legacy of 
achievement. Many businesses with household names today, 
Staples, Winnebago, Callaway Golf, Outback Steakhouse, but also 
other important entities such as Black Enterprise Magazine and 
Juanita's Foods in Los Angeles all have received SBA assistance 
in their formative stages. Our challenge is to find the next 
generation of those companies and to make sure that those 
entrepreneurs have access to our programs and services so they 
too can become success stories.
    We are proud of what we have accomplished over the past 
year. And while we take pride in our achievements, we are not 
going to rest on our laurels. We continue to look ahead, and 
SBA's fiscal year 2004 request offers an opportunity for us to 
work together with you to ensure that SBA continues to assist 
small businesses into the next half century.
    We ask for your support for this budget. We thank you for 
the opportunity to appear before you today. And we would be 
happy to answer any of your questions. Thank you.
    [Mr. Baretto's statement may be found in the appendix.]
    Chairman Manzullo. Thank you. I just have one question. In 
your letter to me, or to Congressman Frank Wolf on February 
15th of 2002, in the continuing interest we have had on not 
using the 504 program as a cash cow to generate funds over and 
above what is necessary to run the program. You wrote to Mr. 
Wolf and said: For the 504 program, SBA is working on an 
interim calculation method for the FY 2004 similar to the 7(a) 
program which was successful in dropping the subsidy rate.
    First of all, thank you for working with us. I think this 
committee has been working to get the 7(a) rate down for 7 
years. I hope it doesn't take 504 years of work to get it down, 
get the 504 down. But I appreciate your lifting the caps so the 
7(a) is back up to a million dollars again, and which is really 
great news.
    But that was in your letter of February 15th of 2002, to 
get a new 504 econometric calculation. Then the President's 
budget wants to put it off until 2005-2006, which is 
interesting because it recognizes there is a problem but puts 
the fix off for 2 years. And then Congress, in the language 
quoted in the opening statement where it says, quote: ``the 
conferees direct the SBA to develop similar more accurate 
econometric models during the fiscal year for use in the SBA 
loan and financing programs, especially 504, effective October 
1st of 2003.'' .
    So I guess the question is, are you going to follow your 
own advice in your February 15th letter of 2002, the 
President's directive in the budget for 2005, or the mandate of 
Congress to have it done by October 1st of 2003? How do you 
like that question?
    Mr. Barreto. A multiple choice question.
    Chairman Manzullo. You understand the nature of the 
question, of course?
    Mr. Barreto. Yes, sir. Thank you very much for that 
question. And I understand the challenges that there have been 
with our subsidy rates. I can understand the frustration of 
many of our lending partners, of many of our small businesses 
with regards to what they feel is a subsidy rate that doesn't 
really reflect what is actually happening. And we are very 
gratified that we were able to make such progress working 
together with this oversight committee to get that subsidy rate 
down this year. And I want to let you know that we are already 
working on getting a new econometric model study going as soon 
as possible. The work is already beginning right now to take a 
look at that 504 subsidy rate, to take a look at our disaster 
subsidy rate and to take a look at the SBIC subsidy rate. We 
think that we need to look at all of those. And no, I don't 
think that it is going to take 504 years. We are putting it on 
a fast track. It is our intention to be able to get that out as 
soon as possible. It is one of our top priorities in capital 
access this year, and we believe that we are going to be able 
to make some very good progress in short order in that area. I 
know how important that is to you.
    Chairman Manzullo. Does that mean October 1st of 2003?
    Mr. Barreto. As soon as it is able to happen. As you know, 
what we do is that we outsource the study to economists outside 
of our agency. Last year, we worked with OFHEO, and we were 
able to make very good progress. This year we may be working 
with another entity. And again, we think that we will be able 
to make some progress very quickly. It is our intention to be 
able to get it done as soon as possible. So, yes, that would be 
our desire. The only reason that I hesitate is because since we 
are not the ones that are doing the econometric modeling, we 
need to work very closely with the partners that will be doing 
that modeling and make sure that we are making this progress as 
quickly as we have in the past.
    Chairman Manzullo. So you are not going to do OFHEO? You 
are going to somebody else?
    Mr. Barreto. Yes, sir.
    Chairman Manzullo. Why is that?
    Mr. Barreto. I believe that there is another agency that 
actually is better suited to do the modeling on the 504 and 
some of the other programs that I mentioned. I will be more 
than happy to provide all the background with regards to what 
we are doing right now in outsourcing that econometric model. 
But again, it is our intention to make progress very quickly. 
We know that that is very important to the Committee.
    Ms. Velazquez. Mr. Chairman, would you yield?
    Chairman Manzullo. Yes.
    Ms. Velazquez. So will you have it done by fiscal year 
2006? That is what it says. That is what the budgets call for.
    Mr. Barreto. It is our intention to get that done much 
sooner than that. Obviously, if we can get it done this year, 
we are going to try to get it done this year. And again, the 
only hesitation I have is that the commitment is absolutely 
there, we know it is important, we know there is a big demand 
and desire for this to be done. We will need to work again with 
the economists who will be doing a new econometric model.
    Chairman Manzullo. You know, Will Rogers had something to 
say about economists, and I want to repeat it. But small 
businesses, Mr. Barreto, are not going to suffer because a 
bunch of economists get together and say what if this and what 
if that. But are you telling us that you are going to do all 
the new econometric models and all the other programs at the 
same time?
    Mr. Barreto. Yes.
    Chairman Manzullo. Well, I think the better practice is to 
get the 504 done before the other ones. If there has been any 
time--I mean, I will bring them in here next week at another 
hearing, I have done that before, and we can have a lockdown 
and we will make sure that we get the work done. But I am very 
much concerned that there is another agency involved plus all 
the models that are being done at the same time.
    Mr. Barreto. And I appreciate that comment and I will 
prioritize the 504 program. I think it is very important. I 
think there are a lot of small businesses that could take 
advantage of that 504 program, and that will be the priority.
    Chairman Manzullo. I just want to assure you that if it is 
not done by October 1st of 2003, you are going to have a very 
angry chairman and ranking minority member with an 
accountability session here for that.
    We are going to have to go vote. And then how many votes 
are there? There are two votes? There are a couple of votes and 
then we will come back. And I presume other members have 
questions of Mr. Barreto. Would that be correct? That is right. 
You haven't had your shot at it yet. Okay.
    All right. We are going to adjourn here for about--well, 
until the votes are done. Probably about a half an hour.
     [Recess.]
    Chairman Manzullo. If we could call the committee to order.
    Ms. Velazquez.
    Ms. Velazquez. Thank you. Mr. Barreto, you state in your 
testimony how this budget is a 4 percent increase over fiscal 
year 2002, which, in reality, you are actually requesting 
virtually the same funding as last year. Also, when you remove 
the $21 million for this questionable workforce transformation, 
there is actually a decrease of 2.1 compared to fiscal year 
2003. Is that not correct?
    Mr. Barreto. Well, first of all, thank you for that 
question. And when we look at the total budget, as you said, we 
do have it as an increase. And when we talk about workforce 
transformation, we are really talking about SBA transformation. 
It is not just employees; it is our ability to be able to make 
sure that all of our offices are much more effective in helping 
small businesses in all of our programs.
    Ms. Velazquez. But you are not providing any additional 
money for SBA programs; right?
    Mr. Barreto. In some cases our programs are staying level. 
They are staying level, in an environment where many agencies 
are having decreases or programs being eliminated completely.
    Ms. Velazquez. But every press release that I have seen and 
everything that I have read says that there is an increase, 
while the only increase I see here is for salaries and expenses 
and this $28 million for questionable--for whatever 
transformation, workforce transformation. But not for any of 
the SBA programs that are tailored and designed to help small 
business.
    Mr. Barreto. The thing, as you know, Mrs. Velazquez, and I 
appreciate the intent of the question----.
    Ms. Velazquez. We will never agree on that one and I have 
other questions and concerns.
    Mr. Barreto. Okay.
    Ms. Velazquez. The agency faces challenges now more than 
ever. And to highlight just a few I am going to mention, your 
budget says no solution would be provided for the 504 subsidy 
rate problem for 3 years. Your workforce transformation plan is 
unclear. The Women's Procurement Program has yet to be 
implemented. There is no enforcement of Federal agency small 
business contracting efforts.
    As we look at the SBA reauthorization this year, can you 
please justify for this Committee why we should give you a 
blank check by reauthorizing the agency for 3 years instead of 
1 year?
    Mr. Barreto. Well, if I could take each of those points by 
themselves, as we have talked about before, I understand that 
this Committee has struggled with things like the subsidy rate 
for more than 10 years. We knew that when we first came on 
board this was going to be a very important issue for our 
relationship with this Committee. And in a very short period of 
time, we have been able to fix the problem with regards to the 
subsidy rate on the 7(A) program.
    I also mentioned in my previous comment, it is our 
intention to also fix the problem on the subsidy rate that we 
have on 504, and also on some of the other programs, disaster 
and SBSC.
    Ms. Velazquez. And that will be done by when?
    Mr. Barreto. It is our intention as soon as possible. We 
would like to finish it this year. What I hope is as we 
discussed last year, when we made the commitment, I think there 
was a lot of question of whether we would be able to fix the 
7(a) subsidy rate and do it as quickly as we did. I think a lot 
of people expected that this would not be something that would 
be done until 2004. We have a new 7(a) subsidy rate for 2003. 
That is significant progress. And we are very gratified by 
that. We also believe that we can make significant progress on 
these others.
    Ms. Velazquez. Mr. Barreto, the administration requests no 
funding for PRIME and BusinessLINK, and every year Congress 
appropriates money for this program. When is this 
administration going to get it that these programs have a lot 
of support in Congress? Why do you come back year after year 
and do not request any money for those programs?
    Mr. Barreto. We agree that technical assistance and 
education is vital. In fact, it is really the place that we 
touch the most small businesses. Last year, we were able to 
help 1.5 million small businesses through education and 
technical assistance.
    However, we also believe that some of the programs are 
duplicative, and so it is important for us to make sure that 
when a small business comes to us, oftentimes they do not know 
that we have 1,100 small business development centers they do 
not think----.
    Ms. Velazquez. It seems to me, administrator, that there is 
a disconnect between what you think is important and what we 
members and appropriators think that is important. These 
programs have been designed to help low-income minority 
communities. What kind of message are we sending to them?
    Mr. Barreto. We are very dedicated to low-income minority 
communities.
    Ms. Velazquez. That is why you are requesting money for 
these programs?
    Mr. Barreto. Those communities benefit from many of our 
programs. They do not just benefit from one, they benefit from 
small business development centers, they benefit from 12,000 
retired executives in SCORE. They benefit from women----.
    Ms. Velazquez. Those programs are totally different and 
they provide different services. These programs were designed 
particularly to help this sector of our economy. And again I 
remind you that the face of small business is changing in 
America.
    Mr. Barreto. I agree.
    Ms. Velazquez. And you cannot come and lecture us about how 
important small businesses are and exclude the one segment that 
is the fastest growing sector of our economy.
    Mr. Barreto. I would never intend to lecture this 
Committee. I promise you I will not do that. What I do want to 
do is let you know what the actual results and are what is 
happening right now year to date in 03 is our lending in all of 
those upon communities is up significantly. 40 percent up in 
Hispanic community, 67 percent in African American community, 
35 percent in women owned community accident 33 percent in 
Asian community. 23 percent in Native American community. That 
is the fastest growing segment of small business. That is the 
changing face of small business in the country. And so we are 
gratified that many more of those small businesses now are not 
only getting access to capital, they are getting technical 
assistance, they are getting many opportunities. And part of is 
it is that they are starting to understand and become educated 
about the whole menu that the SBA provides.
    Ms. Velazquez. The talk about minority loans in your 
testimony you said loans to minorities were ahead of your 
internal goals. But as of a percentage of your portfolio, what 
has been the change from fiscal year 01, 02, and 03?
    Mr. Barreto. Well, I would be more than happy to provide 
you----.
    Ms. Velazquez. I have the answer right here because you 
come here and you throw numbers at us that sound wonderful and 
beautiful. But I can tell you that it has remained exactly the 
same: 30 percent. Fiscal year 2001, fiscal year 2002, and 2003.
    Mr. Barreto. Obviously, we are not finished with fiscal 
year 2003, and that is where we are seeing this marked 
improvement.
    Ms. Velazquez. What happened to fiscal year 2001 and 2002? 
They remained the same. So do not come and cook the books and 
tell us that the numbers are ahead of the goals that you 
established.
    Chairman Manzullo. I would ask that you allow the 
administrator to answer the questions.
    Mr. Barreto. Thank you, Mr. Chairman. The number that I was 
quoting, Ms. Velazquez, is not with regards to a comparison of 
2001 and 2002, and 2003. They are year-to-date 2003 numbers. 
Right now in 2003, this fiscal year we are ahead in all of 
those categories by those percentages. It is our intention to 
maintain that level of lending in those communities. And I 
don't think it happens by accident. I think a lot of the things 
that we have done to streamline our programs, to communicate 
our programs, to outreach to those communities is what is 
helping us achieve those numbers. We are very proud of those 
numbers but we can do better and we will.
    Ms. Velazquez. The percentage is the same, these, of your 
numbers. These are not my numbers.
    In the omnibus appropriation bill, the appropriators 
chastised SBA for using schemes to fund the program and 
directed the Agency to halt this practice. The recent budget 
submission for 2003 cuts $3 billion in loans from the program, 
a 25 percent cut. How can the agency, given the appropriator--
what the appropriators told you, justify this inadequate 
funding?
    Mr. Barreto. I am not exactly clear where that number comes 
from. I will tell you that our numbers show that in fiscal year 
2001, we did $9.1 billion in 7(a) loans. In fiscal year 2002, 
we did $9.4 billion in 7(a) loans. In fiscal year 2003, we 
believe that we will do $9.4 billion in 7(a) loans. And in 
2004, the monies that we have asked for budget authority should 
yield us an approximate level that we have been experiencing 
over the last 4 years, about $9.3 billion.
    Ms. Velazquez. Tony, would you please bring some 
clarification here?
    Chairman Manzullo. What I would like to do is keep the 
order here and allow the other members to ask questions to Mr. 
Barreto under the 5 minute rule. You have taken up 12 minutes.
    Ms. Velazquez. Would you please allow Mr. Tony Wilkinson to 
answer that? Because apparently there is a disparity here.
    Chairman Manzullo. Do any of the members here have any 
questions of Mr. Barreto that you wanted you do have questions? 
All right. Let Mr. Wilkinson clear up that issue, whatever it 
is, and then we will let the other members ask questions of Mr. 
Barreto.
    Mr. Wilkinson. Just in terms of loan volume we did $9.4 
billion last year in regular 7(a) but in addition to that in a 
special program called STAR we well an additional $1.7 billion. 
In fiscal 2002 the total net loans in the 7(a) program was 
$11.1 billion. In fiscal year 2003 year to date combines 7(a) 
and STAR 7(a) together we are ahead of last year's pace.
    Chairman Manzullo. Dr. Christian-Christensen.
    Mrs. Christensen. Thank you, Mr. Chairman. Welcome to the 
panelists. Welcome, again, Mr. Barreto. I have a different sort 
of question on a 504 program before I ask about disaster loans. 
One of the budget goals of the 504 program is to increase the 
number of 504 intermediaries. How do you plan to accomplishing 
that?
    Mr. Barreto. Thank you very much for that question. We 
think that that is very important. We are right now, as you may 
know, seeking comment from the industry. One of the things that 
we would like to see is to expand the number of 504 lenders in 
this country. We believe having additional competition in these 
markets have been very, very important and we have received a 
lot of requests from areas all across the country to open up 
504 in those areas. And so we are attempting to do that.
    Obviously, we need to wait for the end of the comment 
period to come back, but it is our intention to be able to move 
forward and to allow more competition and more providers of the 
504 loan. As you know, the 504 program can be a very important 
program for small business. It is also a program that 
unfortunately we have not fully maximized. At end of every year 
we usually have budget authority left. And so we think it would 
be a very effective development for us if we had more 504 
providers around the country and we hope to get that 
accomplished this year as well.
    Mrs. Christensen. Okay. There are probably some follow-up 
questions to that, but I want to get into the disaster loan 
while I still have some time.
    You know we have gone over this several times. And we are 
still having a lot of difficulty. Let me start out with this. 
When disaster loans are sold, do you give the purchaser any 
notice or guidelines that these loans are different and should 
not be viewed as conventional loans?
    Mr. Barreto. Well, absolutely. In the actual loan 
documents, there is actually language there that states that a 
loan can be sold. One of the things that is very important is 
that even though that loan may be sold, the terms of that loan 
cannot be changed by the future purchaser of that loan. So in 
other words, if somebody has a 4 percent loan over 30 years and 
they are making payments, even if that loan is sold, somebody 
else cannot say now you are going to pay a higher rate of 
interest, you will pay for a shorter period of years.
    Mrs. Christensen. We understand that those things do not 
change, but you know in practice how the SBA dealt with the 
loans has changed with the financial institution.
    When the mission of that program is to assist the borrower 
to return to pre-disaster conditions, and that seems to come in 
conflict with the profit-driven mission of a financial 
institution. So even though the hard rules and regulations 
governing that loan do not change, a lot of how those loans are 
administered do change.
    In the case of my district, those loans--most of the loans 
came in before the loan sale started, so they did not know that 
their loans were going to be sold.
    And but now, when they are sold, do you give the purchaser 
notice that they are going to be sold?
    Mr. Barreto. We do. There is a letter that goes out 3 
months before that loan is sold letting them know that this 
loan is going to be included in a loan sale. Now one of the 
things that we have said is that if somebody has extraordinary 
circumstances, maybe a change in status, something serious has 
happened, they can call us up and talk to us and make a case 
for why that loan should not be included in an asset sale. So 
we have the flexibility, we have the flexibility before that 
loan gets included in that loan sale that if we needed to treat 
that loan differently, we would be able to do that. So we are 
trying to be much more sensitive and improve the communication, 
because I think that is vital.
    I would also say just my last point, and I want to let you 
follow up, we have truly done a lot of disaster loans and we 
have done some loan sales. But we have not gotten a huge volume 
of complaints or people saying that they have been mistreated.
    Now, the ones that we have gotten are very important to us 
and obviously very vocal, and so we want to make sure that we 
are sensitive to that and we respond to that. But I don't think 
that we have had a huge issue with this at this point.
    Mrs. Christensen. You mentioned the disaster loans made as 
a result of 9/11. Do you anticipate extending any special 
treatment to the loans or would you provide--did you provide 
any special instructions to the financial entities around those 
loans compared to the other loans that you have sold?
    Mr. Barreto. We have already.
    Mrs. Christensen. You haven't sold those?
    Mr. Barreto. We haven't sold those loans, but we are being 
very sensitive to those loans that we made after September 
11th. In some cases, people could not make payments right away, 
and we did require payments right away. We do want to be 
sensitive to that. As you know, Congresswoman, we are not 
currently planning any asset sales at this time. It does not 
mean that we will not at some future time. We want to be very 
practical and judicious. We understand that there has to be a 
balance here. There has to be a balance of the people that has 
gotten those loans and there also has to be a balance to make 
sure that when we can do loan sales effectively and we can 
return taxpayer money back to the Treasury so that we can 
operate more effectively ourselves as an agency and help more 
small businesses that we do that as well.
    Chairman Manzullo. Mr. Marshall? Mr. Michaud?
    Mr. Michaud. Thank you, Mr. Chairman. Mr. Barreto, I want 
to talk a little bit about the disaster assistance. I notice 
you mentioned it a couple of times in your speech. Talking 
about tornadoes, floods, hurricanes. What does your agency do 
with economic disaster? Back in my district, there are two 
paper mills that have been shut down. They employ over 1,100 
employees. In one community they pay 70 percent of the tax 
base. The school and the students in the senior class do not 
know whether they are going to be able to graduate because 
there is no money to fund the schools, particularly with 70 
percent of the tax base threatened.
    You go 30 miles north, another mill shut down last 
December. 30 miles south another mill in Chapter 11. A lot of 
it deals with manufacturing. We do have an economic disaster.
    What does SBA do to help stabilize these type of 
communities because it is having a devastating effect on the 
small businesses in the communities. And we are seeing small 
business after small business now closing because of the 
rippling effect because of the large anchor in the community.
    Mr. Barreto. Thank you, Congressman. You are absolutely 
right. You know, half of that $1.1 billion that we did after 9/
11 was economic and disaster loans. I would say it was probably 
more than that. And those were loans that actually happened 
outside of the declared disaster area in New York City. And we 
have very specific guidelines as to when we can provide 
disaster loans both direct disaster loans for people who have 
had their business damaged by a tornado or earthquake or a 
terrorist act. We also help homeowners and renters as well.
    But in some cases and we saw that in 9/11, there are also 
businesses that haven't had physical damage but have had 
economic damage and we have been able to help them as well. For 
us this has to be declared a disaster. And the definitions for 
our disaster program are usually some extraordinary, either a 
natural disaster or something that was through no fault of 
anyone, a terrorist attack or something of that nature, and we 
can help.
    However, I am very concerned about those small businesses 
in your area that have been affected and I want to make sure 
that we reach out to them and they are working with our 
district offices there. There may be programs that we can offer 
them right now that they are not aware of. Obviously we have a 
number of loan programs from small loans to venture capital. We 
have all kinds of training and education programs. There are 
procurement programs as well. So there are opportunities for 
those small businesses.
    Mr. Michaud. I haven't seen that assistance up in my area 
and part of the reason why these businesses are failing, at 
least around two of the mills anyway, is because of our trade 
policies which are killing us but also because of September 
11th where businesses have cut back dramatically on their 
advertising and therefore we have seen a dramatic shift.
    And also part of it is because the Federal Government is 
not doing their procurement the way they should. Thirty miles 
down the road from where I used to work is a mill that makes 
recycled copying paper and I have seen as I go through Federal 
buildings paper bought from Canada, which I think is a crying 
shame. I guess my second question is is it possible that 
through the BusinessLINK program that small businesses might be 
able to hook up with larger businesses in other areas to open 
up new markets for them?
    Mr. Barreto. I think there are a number of different 
opportunities. We have had a number of different mentor 
protege-type programs that can help small businesses joint 
venture with a larger business, and we would be glad to work 
with you and those businesses that were effected and introduce 
them to some of those opportunities.
    One of the things that we are doing right now that I am 
excited about is that we are doing procurement matchmaking 
sessions all across this country this year. We have already 
done two where we identified 3,000 small business appointments 
for small businesses, $3 billion in potential contract 
opportunities, and we have 12 more planned this year across 
this country.
    We are having the next one in Florida next week, and we 
have businesses traveling from 12 States to go to this business 
matchmaking session. It is our way of bringing businesses that 
actually have capability and capacity and matching them up with 
people who have demand who are buying things. And then no 
guarantees, but what we know that happens is that when those 
small businesses get together with those buyers, business takes 
place. And we have already seen that happen already in those 
two that we are having. But we would be glad to reach out and 
work with you. And if we need to customize something that will 
work for some of those mills that are struggling right now.
    Mr. Michaud. You still did not answer my questions. 
Somebody mentioned the BusinessLINK program. It was my 
understanding that SBA did not ask for any funding in fiscal 
year 2004, and that is one of the programs that they can use. 
Why haven't you asked for any funding in 2004?
    Mr. Barreto. As I said, there are a number of programs that 
we felt that other programs could also help them with. We have 
some programs that are very similar in nature and there is some 
duplication and some repetition. Sometimes those programs are 
not requested funding for an upcoming year. But as I said, we 
are still doing mentor-protege and helping small businesses 
match up with big businesses so they can get contracts.
    Chairman Manzullo. Mr. Michaud if you want to see me after 
the hearing, the U.S. American--the American Canadian 
parliamentary exchange will take place in Canada the weekend of 
May 16th and 17th. You should be on that delegation. Talk to me 
about it.
    Mr. Bartlett?
    Mr. Bartlett. Thank you very much. I have a large paper 
mill in my district in one of the three counties, two of them 
really in Appalachia. This is Westvaco, and they hire 2,700 
people. They never have to advertise because they have a 
waiting list of 2,000 people that would like to have a job 
there. They pay 50 percent more than the other employers in the 
county can pay. This is really a depressed area until fairly 
recently. We had 14 percent unemployment there. The head of the 
National Guard up there told me several years ago that nearly 
half of the young men in his guard unit up there were 
unemployed.
    And just about 2 or 3 years ago, the EPA decided they were 
going to put these people out of business. They have a tough 
enough time competing with paper from overseas. But now the EPA 
was coming after them for infractions of rules. It was like, 
you know, you are hauled into court and the judge says we are 
going to fine you for going through a stop sign and you say, 
gee, the stop sign wasn't there yesterday but the judge says, 
yes, it is now. So we will fine you for not stopping at it 
yesterday.
    This is the kind of thing they are being changed with. What 
can Small Business do to help in a situation like this? By the 
way, you can't even smell them when you get near it. I am 
familiar with paper mills through the south and you know before 
you see the town, you can smell the town. You can't smell it 
there. They are a great corporate citizen. They have great 
support from the citizens there. They have bent over backwards 
to run a really clean mill. They are located in both West 
Virginia, they make the pulp in West Virginia and they pump it 
across the river to the mill which is in Maryland. What can 
your organization do to help in a case like this?
    Last year we had about a $400 billion trade deficit. We do 
not need our regulators in this country moving more jobs 
overseas so that next year our trade deficit is bigger. Can you 
stand up and point at this and say this is crazy and keep 
yelling that it is crazy until somebody does something about 
it?
    Mr. Barreto. I think you are right. And there are many 
small businesses that come to us all the time and tell us how 
much they are paying to for regulations that maybe do not make 
any sense anymore. And that is one of the reasons why the SBA 
has two very important programs. We have the Office of 
Advocacy, which really deals with small businesses before 
regulations go into place. But we also have another very 
important office that is called the Office of the National 
Ombudsman. The Office of the National Ombudsman helps those 
small businesses when they are dealing with Federal agencies, 
especially when they feel that they are being treated unfairly 
and improperly.
    Both of those agencies, those are both major programs in 
our organization, can be very helpful to a whole class of 
businesses or individual businesses. In fact, one of the things 
that the national ombudsman does is that when he hears about 
issues like this, he can even plan regulatory hearings in the 
area and bring all of the stakeholders together and take 
testimony and actually report that back to the powers that be 
in those Federal agencies, and obviously to our administration.
    Also of that is available to constituents in all of your 
districts, but especially when there are businesses that are 
being hurt right now and have no place to turn, especially when 
they are dealing with a major Federal agency. We have heard 
this many, many times before, and that is what they are there 
for and we would be glad to help you any way we can.
    Mr. Bartlett. Do you need additional legislation so that 
you can be more effective in this area? Because they have been 
bedeviled by this suit for several years. It was started under 
the previous administration. I have encouraged this 
administration to come in as a friend of the court saying this 
is crazy, trying to put a good company out of business in this 
country so their jobs go overseas.
    Mr. Barreto. Well, as I said, that is one of the things 
that our Office of Advocacy takes a very close look at.
    Mr. Bartlett. Present legislation is adequate?
    Mr. Barreto. Again, I think it depends on the specifics of 
the case and what that regulation is intended to do. I would 
tell you that most of our small businesses think that we have 
too much regulation right now. We did a study that shows that 
every small business in America could pay $8,000 per employee 
just complying with current Federal regulation. I think it 
depends on the situation. I would be more than glad to get 
information to you and have our folks back in advocacy and 
ombudsman follow up on that.
    Mr. Bartlett. Several years ago we had a major drought in 
Maryland, and our government people came in to help and one of 
the farmers made a point and said: I am drowning in 10 feet of 
water now--talking about his debt--and you want to make it 11 
feet deep? This is not what our farmers needed was another 
loan. They have lots of equity in their farmland and the 
bankers are happy to loan them money. And you heard the joke 
about the farmer who won the million dollar lottery and they 
asked him what he was going to do and he said: I guess I will 
keep on farming until it is gone.
    Do we have any programs that will help in an emergency like 
this? If they do not get a grant they are going to be out of 
business and that is one more family farm that is gone. Another 
loan will not help them, they are drowning in loans.
    Mr. Barreto. I would be more than happy to follow up on 
that. That is probably something that would be part of the 
Department of Agriculture. We currently do not have very much 
of grant authority. We do not do very many grants in our 
agency. But there are agencies that are very focused on this. 
Again, the Department of Agriculture is one of those agencies, 
and we would be more than glad to follow up with them and find 
out what they might be able to do to help in a situation like 
this.
    Mr. Bartlett. Thank you, Mr. Chairman. In cases like this, 
somebody needs to be there to help.
    Chairman Manzullo. Well, but unfortunately, Mr. Barreto 
can't be in all these situations. This is Small Business and 
that is the Department of Agriculture.
    Mr. Bartlett. Well, farmers are small business.
    Chairman Manzullo. I understand. If Mr. Barreto were in 
change, we would get a lot more things done in this government. 
I am convinced of that.
    Mr. Davis.
    Mr. Davis. Thank you, Mr. Chairman. Let me thank you and 
the members. This Committee is so interesting that I got a 
waiver so I could remain on it.
    Mr. Barreto, and you may have answered the question because 
I have been out for most of the hearing, BusinessLINK 
activity--and there was a little comment about it--what is 
actually the status? Do we really have any BusinessLINK 
activity that we are going to be funding in the budget?
    Mr. Barreto. You are asking about the 2004 budget?
    Mr. Davis. Yes.
    Mr. Barreto. I don't believe that we right now have any 
plans right now to ask for any funds in the BusinessLINK 
program. It has been a program that, as the Congresswoman has 
said, is very--there are companies that are very appreciative 
of it and feel very strongly about it, but as we have said, we 
feel that there are some programs that we have that are 
duplicate, and I have where we can help some of those small 
businesses with some of the other technical assistance and 
education that we currently provide through many of our other 
resources.
    Mr. Davis. Could you maybe share what some of those are?
    Mr. Barreto. As I mentioned, the place that we help the 
most small businesses is in this area of education and 
technical assistance. We are able to do incredible things. Last 
year we helped more than 1.5 million small businesses in the 
United States through a whole host of technical assistance and 
education programs. Obviously led by the small business 
development centers, of which we have basically in every State 
in the Union. There are thousands of people that work at SBDCs 
that can provide any kind of technical assistance to small 
businesses, everything from how do you put a business plan 
together to how do you go about getting government contracting. 
How do I put a loan package together? We also have 12,000 
retired executives that volunteer their time every single year. 
We have experts in every field. I wish I had twice as many of 
these retired executives. Many of them have the expertise 
because they worked for large companies.
    Of course we have business information centers throughout 
the United States. We have women business centers as well 
throughout the United States. And so as I said, many times 
small businesses are not aware of all of those tools that we 
have that can provide them this kind of information, this kind 
of help, this kind of linking together. Obviously this is 
something that our government contracting and business 
development department is very focused in on as well.
    Mr. Davis. I had an excellent opportunity the other day, as 
a matter of fact, where we had some retired executives who had 
been very instrumental and very helpful. And as a matter of 
fact, we even gave them some, you know, some awards and things 
like that.
    Is there any--many small businesses are having difficulty 
getting access to capital. I mean, needing a few additional 
dollars in order to market, to do business. Are there any 
activities that you would recommend that a small business can 
find money from?
    Mr. Barreto. Well, I think there are many, many activities. 
One of the things that somebody reminded me is that SBA is the 
largest backer of small business loans, but one of the things 
that we, I think, have been partly able to assist is that there 
are many, many new resources for small businesses. Not only 
through banks and non-bank lenders, but there are a whole host 
of providers of access to capital now. We take our role very, 
very seriously. In fact, one thing that I mentioned before we 
are on track to have the best year in our history with regards 
to small business loans. We think that we will do more than 
60,000 small business loans just in the 7(a) program. And the 
thing that is very exciting to us, Congressman, is that we are 
getting our average loan size down. When I first came into the 
agency the average loan size was $230,000. Inc. Magazine 
reported that the majority of small businesses in the United 
States are capitalized with $50,000 or less.
    So the fact that we have been able to get those average 
loan size down does not mean that we will not do big loans 
because we will, and those are important as well. But it means 
that we will touch more small businesses, especially in the 
emerging markets, which are fastest growing segment of business 
in the United States.
    I don't have to tell you that 15 percent of all businesses 
in the United States are minority-owned businesses or 40 
percent of the total are women-owned businesses and those are 
the fastest growing segments in the United States.
    So I think there are tremendous opportunities. We are 
excited about what we are going to be able to do for those 
small businesses this year, and obviously we want to continue 
to facilitate opportunities and continue to enroll and 
encourage others to help small businesses as well.
    Chairman Manzullo. Congresswoman Majette.
    Ms. Majette. Thank you, Mr. Chairman. Thank you, Mr. 
Barreto, for being here this afternoon. I am pleased to be a 
part of the Small Business Committee. I sought a waiver to be 
able to join this Committee and I am excited about working with 
you and the other members of the Committee to make sure that we 
are properly serving almost half of all of the working 
Americans who are employed and who run small businesses.
    Obviously, I do not have to tell you that small businesses 
are truly the backbone of our economy. I represent the fourth 
district of Georgia, which is a growing and thriving suburban 
community just east of Atlanta in the State of Georgia. Almost 
98 percent of the State's almost 200,000 businesses have fewer 
than 500 employees and these companies employ about 44 percent 
of the state's private sector workforce. So obviously it is a 
very important part of our economy.
    We have been seeing a great growth in the numbers of 
minority and women business owners, particularly in my 
district. And I am formerly a small business owner myself, 
having been a partner in a small law firm and also before 
eventually running for Congress, I was an administrative law 
judge in the workers' compensation board in Georgia. And so I 
think I have a very unique perspective to bring to this arena.
    I would like to get to the point, and I guess you want me 
to do that same thing. I have reviewed the SBA budget request 
for 2004, and it appears that the budget is substantially 
unchanged from last year. And there still appears to be little 
or no funding for programs that are targeted at helping low-
income communities and minority businesses. Particularly with 
respect to government contracts and women-owned businesses, the 
SBA has still not met its goal of having 5 percent of the 
contracts awarded to women-owned businesses.
    Part of the problem may be that the SBA has not implemented 
its women's procurement program and thereby costing women-owned 
businesses millions of dollars in lost opportunities. What is 
the office of contract assistance for business owners doing to 
ensure that the 5 percent statutory goal for women business 
owners is achieved?
    Mr. Barreto. Thank you very much for the question, and I am 
looking forward to working with you. I have a great background 
and I know you will be a great contributor to this Committee. 
Women-owned businesses are vitally important, as I mentioned 
before. Right now, 40 percent of all of the businesses are 
women-owned businesses. I have had a lot of time, especially 
recently, to meet with leaders and the organizations that 
represent some of the largest associations of women business 
owners in the country.
    I spoke with NAWBO, the National Association for Women 
Business Owners, just a couple of weeks ago. I just got back 
yesterday, I was in Florida, speaking to a business woman's 
conference in Florida. It is a conference that is done every 
year by Office Depot, very exciting and some incredible 
businesswomen. I am also speaking to the Women's President 
Organization this week. This is not an afterthought or 
something that we spent some time on. This is something in the 
forefront of our thinking and we will measure ourselves by the 
results that we get from these business owners, and what they 
tell us is that they are not concerned about the process, they 
are--what they are concerned about is getting tangible results. 
What they want is more access to contracts. They want more 
opportunity. They tell us all the time, we will do the rest, we 
just need to be able to get in. And that is one of the things 
that we have really tried to attempt to do with a lot of this 
procurement matchmaking that we are doing this year. I said 
last year that it was very important for us to grow the pie of 
opportunity for those businesswomen. And not only with the 
government, but also with the private sector.
    These events that we are doing all across the country are 
really going to help us to do that. With regards to the women's 
reg, this is also something that is very important. What we 
realized when we first came in is that the reg that was 
currently being offered had a study that was not comprehensive 
enough. It was a study that we did not believe that would pass 
the scrutiny of a court attempt against it. And that concerned 
us because if we are go to have a regulation, we want to make 
sure that we have all of the ammunition and background that we 
need so that it will sustain that kind of a challenge. What we 
have done is that we are now in the process of outsourcing a 
contract to an expert that can help us to determine what needs 
to be in that study, what is a comprehensive study that will 
pass all constitutional muster. And we are right now in the 
process of getting that contract, and we will be moving forward 
with this very expeditiously this year.
    However, having said that, we are by no means going to be 
delayed in actually providing some of those tangible results 
that women business owners are so urgently seeking from us.
    Chairman Manzullo. I will recognize the Ranking Minority 
member for 5 more minutes with the administrator, and then we 
will get on with the rest of the testimony. So I set the clock.
    Ms. Velazquez. Thank you, Mr. Chairman. I really appreciate 
it. Mr. Barreto, in answering the question of Ms. Majette, you 
said that how important the women's sector is for our economy. 
And yet you failed in terms of the women's procurement goal. 
And then in 2000 we reenacted the women's procurement program 
and last year you came before us and gave the same excuse that 
you are giving us. And in the Small Business regulatory agenda 
there is nowhere that you can find about the women's 
procurement program. When do you intend to implement it?
    Mr. Barreto. As you know, one of the challenges that we 
have had is that we have been on a continuing resolution for 
quite some time now. We finally have gotten our 2003 
appropriation. It was impossible for us to move forward with a 
number of different initiatives that we had planned without 
knowing what kind of resources that we would have to work with.
    Now that the continuing resolution is over and we have our 
budget, we are able to move forward. Again, what we are doing 
is making sure that we have the right study, the right 
substance of a study that needs to be done so that there is no 
challenge to that rule.
    Ms. Velazquez. But how did you intend to proceed with it 
when you do not include it in the budget? It is not here. So 
what that is telling me is that you have no intention of 
implementing the women's procurement program? It is not in the 
budget. It is not in the regs that you put out, the list.
    Mr. Barreto. What we have to do before we are able to ask 
for resources is that we have to know what we are going to be 
asking for. The purpose of this contractor is to be able to 
help us to put together what is going to be necessary for us to 
get that done. And that is the work that is taking place right 
now. But it would be imprudent for us to ask for an amount of 
money that we were not sure that we were going to need, or even 
if it was going to be the accurate amount.
    Ms. Velazquez. Is the program going to be up and running 
this year?
    Mr. Barreto. I don't know. It depends on what comes back 
from the contractor that we have hired. We think that he should 
be--or the company should be able to finish their work very 
quickly, but I am not sure exactly what that final 
recommendation is going to be yet.
    Ms. Majette. Will the gentlewoman from New York yield?
    Ms. Velazquez. Sure.
    Ms. Majette. Mr. Barreto I would like to offer my services 
as a former trial court judge having served for 10 years. One 
of the reasons that I resigned from the bench and wanted to 
come and that I am here in Congress is to assist in the process 
in that legislative process, policy-making process. And bring 
the perspective of someone who has the experience of making 
sense out of rules and regulations, and so I offer my 
assistance for free in terms of trying to move that process 
forward and helping you come up with the kind of program that 
will withstand judicial scrutiny.
    Ms. Velazquez. Good luck.
    Mr. Barreto. We would like to work with you, and obviously 
we will make sure that we are communicating and letting you 
know what work that our contractor is doing with regards to 
helping us with this study as well.
    Ms. Majette. I would like to be involved in that process as 
it is going forward.
    Ms. Velazquez. Reclaiming my time. Is the firm that you 
hired to do the study, is that a small firm?
    Mr. Barreto. I believe it is a small business.
    Ms. Velazquez. You believe? I would love if you had a 
straight answer and that answer should be yes.
    Mr. Barreto. I do not want to give you an incorrect answer. 
I will be happy to find out all the particulars of the company. 
It is always our intention when we have a procurement to choose 
a small business, a minority business, or a woman-owned 
business.
    Ms. Velazquez. One of the priorities that you stressed 
today for the agency is to make more small loans; correct?
    Mr. Barreto. That is correct.
    Ms. Velazquez. That is why you are asking--you cut the 
Microloan Program by half?
    Mr. Barreto. Well, one of the things that has been 
happening, it is an incredible thing. Last year we made some 
changes to our SBA Express program and what we are finding is 
that 13 percent of all of the SBA Express loans are actually 
smaller loans. So there are also many small loans that are 
coming out, not just out of the Microloan Program, but also 
programs like the SBA Express program. It was very interesting 
in 2002, there were about $17 million of microloans that were 
done but those loans were actually leverage and created $35 
million of small loans to small businesses so we think that has 
been a very effective program.
    One of our big concerns was that when we looked at our 
portfolio last year, 87 percent of our loans were actually 
loans under $500,000, and 13 percent of the portfolio was 
absorbing 51 percent of the budget authority, and that 
concerned us, and that is why we have made such a strong push 
to do smaller loans. And the other reason we have done smaller 
loans as well is that we found out that small loans create more 
jobs. It actually, the Department of Labor did a study that 
showed that for every small loan, $14,000 would create a job of 
a small loan. Whereas it would take $153,000 of a larger loan 
to create the same jobs.
    And so that is one of the reasons that we spent so much 
time focusing on not only streamlining our programs but 
creating more outreach so we can do more of those small loans.
    Chairman Manzullo. Thank you, Ms. Velazquez.
    Ms. Velazquez. Thank you for not answering my questions.
    Chairman Manzullo. Well, if you would like Mr. Barreto to 
answer a question in writing.
    Ms. Velazquez. Yes, please, I have a lot of other issues, 
Mr. Barreto, and I hope and I expect for those questions to be 
answered in a timely manner.
    Mr. Barreto. I promise they will be.
    Ms. Velazquez. The way that your staff is responding to our 
requests?
    Mr. Barreto. We will answer posthaste.
    Ms. Velazquez. It is so questionable.
    Chairman Manzullo. All right. Okay. You have been here for 
2 hours. It is always good to see you.
    Mr. Barreto. Thank you so much.
    Chairman Manzullo. You can sense the frustration as many of 
us have had our districts that have just been destroyed by job 
loss and manufacturing, and it is written over the faces of 
many of the members here. You have done an excellent job. You 
can only do so much. You are not the President of the United 
States. But I just want to thank you for your patience. Thank 
you for working with us. Look forward to the new 504 
econometric model being adopted by October 1st of this year. 
And if you would like to stick around and listen you are 
welcomed, but otherwise you are excused.
    Mr. Barreto. I want to thank you very much, Mr. Chairman, 
and Ranking Member Velazquez, I look forward to working with 
this Committee. And you are absolutely right, there are small 
businesses all around this country that need us more than ever 
now. And so it is at times like this that we really need to 
work closely together. I appreciate the support that this 
Committee has given me. I appreciate the support that this 
panel has give the SBA and the small business community. And I 
also appreciate your warm words and support. And I very much 
look forward to having the best year in our history working 
together. Thank you very much for the opportunity to be here 
today.
    Chairman Manzullo. Thank you, Mr. Barreto.
    Mr. Wilkinson, you are up for the next 5 minutes, and we 
will proceed with your testimony.

    STATEMENT OF ANTHONY R. WILKINSON, PRESIDENT, NATIONAL 
          ASSOCIATION OF GOVERNMENT GUARANTEED LENDERS

    Mr. Wilkinson. Thank you, Mr. Chairman. Before I cover 
anything else, for the record I want to thank Chairman 
Manzullo, Ranking Member Velazquez and the other members of 
this Committee for your efforts in preventing the 7(a) program 
from being a disaster. The President's budget request for 2003 
only asked for $4.85 billion, or less than half of this year's 
loan demand. This Committee, however, led the budget fight on 
two fronts. First, to obtain passage of legislation, S. 141, 
which will change arcane budget law and allow the immediate use 
of a new econometric model to estimate subsidy rates. This will 
immediately reduce the subsidy rate by 41 percent and increase 
lending authority by approximately $3.4 billion.
    Mr. Wilkinson. Second, to reprogram STAR money which 
otherwise would have lapsed. This action will add about another 
$1 billion to this year's level and hopefully more, hopefully 
another $1 billion to a billion and a half, depending on OMB's 
action in applying the econometric to STAR loan approvals 
earlier this fiscal year, an action that you, Chairman 
Manzullo, described as the only reasonable interpretation of 
Senate bill 141. Small business borrowers are deeply indebted 
to all of you for these efforts, and I thank you on their 
behalf and on behalf of the NAGGL membership who delivers the 
7(a) program.
    As we have discussed today, the SBA has developed a new 
econometric model for estimating defaults that reportedly leads 
to a more accurate subsidy estimate. NAGGL has not been briefed 
by the SBA or OMB on the new model, so we cannot offer an 
opinion about the model. What we can say is that the results of 
the new calculation are much more reasonable than before.
    One purpose of the Federal Credit Reform Act is to measure 
accurately the cost of Federal programs. NAGGL is hopeful that 
the new model being used by SBA does just that. We look forward 
to a full briefing on the new model. We are hopeful that the 
SBA will show that, had the model been used on previous loan 
cohorts, it would have proved to be much more predictive that 
the old model and that the results are ones that this Committee 
and that program participants would have determined to be 
reasonable. In our view, the subsidy rate is still probably a 
little bit too high, but at least it is much more reasonable 
than before.
    I want to offer preliminary congratulations to SBA for the 
development of the econometric model. It appears to be a giant 
step in the right direction. I know that many worked long and 
hard on the development of the model, and I look forward to 
being able to offer unqualified congratulations in the near 
future.
    The administration's budget request for fiscal year 2004 
for the 7(a) program has requested only a $9.3 billion program 
level in 7(a). This would be more than 25 percent below our 
projected level of demand. Small businesses continue to need 
access to long-term capital. NAGGL requests your support of 
sufficient appropriations to fund a $12.5 billion 7(a) program 
for fiscal year 2004.
    Loan volume for the current fiscal year is running ahead of 
last year's pace, even though a $500,000 loan cap has been in 
place. Given the nature of our economy, we believe that the 
increase in borrower demand will continue into fiscal year 
2004. The administration's proposed program level of $9.3 
billion will be insufficient to meet borrower demand. With you 
support of a twelve and a half 7(a) program in fiscal year 
2004, we can hopefully avoid the need to put loan size caps in 
place again.
    As also has been mentioned today, at the start of the 
current fiscal year SBA implemented credit rationing by 
instituting a $500,000 maximum loan cap. This cap was put in 
place due to a combination of an inflated subsidy rate and an 
inadequate budget request. While some borrowers who needed 
loans greater than 500,000 were accommodated through the STAR 
program, others were directed to the 504 program or did not get 
the financing their business operation needed. But now even the 
STAR program has expired.
    Mr. Chairman, I know you are all too familiar with Reeden 
Heavy Hauling of Woodstock, Illinois. That company is 
reportedly in credit limbo because their operation has needed 
more than $500,000 and they did not qualify for the 504 
program.
    Chairman Manzullo. But it is going now back a million 
dollars.
    Mr. Wilkinson. It is going back.
    Chairman Manzullo. And it is retroactive. So that should 
help them.
    Mr. Wilkinson. It will help them get their loan now, but 
there have been many, many businesses across the country that 
have been caught in that same credit limbo. But you are 
correct, thanks to the enactment of H.J.Res. 2 and Senate Bill 
141, and now that the loan size caps have been removed, 
borrowers like Reeden can get the loans their operations need. 
But to avoid this same situation next year, we need support for 
a $12.5 million program level. If we start a $9.3 billion 
program as the President has requested, I don't see any choice 
but the agency to put loan size caps right back in place next 
October 1st.
    The next issue we wanted to cover was the fact that larger 
loans subsidize the cost of smaller loans, and this is done in 
two ways. First, larger loans pay more fees than do the smaller 
loans. Loans above $150,000 pay, on average, three times the 
rate of smaller loans of 150,000 or less. Second, longer term 
loans have a substantially lower default rate and thus a lower 
cost.
    Season loan data from SBA shows that the average default 
rate for loans with a greater than a 15-year maturity is one-
half of that of loans with maturity of 7 years or less. Thus, 
this Committee should be aware that the administration's policy 
of encouraging smaller loans and discouraging larger loans will 
increase the subsidy rate. This will then necessitate larger 
appropriations or higher user fees or both.
    Chairman Manzullo. Well, the red light is on, Mr. 
Wilkinson.
    Mr. Wilkinson. One last thing, and I am finished. As you 
urged on the floor debate on SB 141, Mr. Chairman, we hope that 
Senate Bill 141 is applied to the STAR loans that have been 
approved this year. That did not come up in the administrator's 
testimony. Clearly, STAR loans are 7(a) loans. We hope they get 
rescored using the econometric model and we free up that 
additional money for this year.
    Thank you.
    Chairman Manzullo. Thank you.
    Mr. Wilson.

STATEMENT OF DONALD T. WILSON, PRESIDENT, ASSOCIATION OF SMALL 
                  BUSINESS DEVELOPMENT CENTERS

    Mr. Wilson. Thank you, Mr. Chairman. I very much appreciate 
the opportunity to appear before.
    Chairman Manzullo. Can you put the mike close to you?
    Mr. Wilson. Thank you, Mr. Chairman and Ms. Velazquez and 
members of the Committee, for inviting the ASBDC to testify on 
the President's 2004 SBA budget.
    We will be celebrating the 50th anniversary of SBA very 
shortly. It should be a time of celebration. For small 
businesses in this country, it is not a time of celebration. 
Small businesses are closing. Bankruptcies are up dramatically.
    Two years ago, I testified before this Committee and said 
if business assistance programs were not better funded, the 
bankruptcy rate would skyrocket. In your State, Mr. Chairman, 
small business bankruptcies are up 21 percent; and in Ms. 
Velazquez's they are up 24 percent.
    President Bush 2 years ago in his State of the Union 
message said far more eloquently than I could ever say and more 
succinctly: Help for small business means jobs for Americans. 
Obviously, the people who write his budget were tuned in to 
another channel that night.
    I heard Congressman Michaud talk about the small businesses 
suffering in his district. His State is one of about 14 where 
the SBDC has been level funded for 8 years in a row. The past 2 
years after the President made those remarks was the worst job 
creation 24-month period since President Eisenhower was in 
office. When I had the privilege of working on the Hill and 
working for small businesses with Congressman Marks and 
Congressman Broyhill and Congressman Ridge, the SBA budget was 
about two and six-tenths of one percent of the budget. It is 
now four-one hundredths of one percent of the budget. That is 
unconscionable.
    We talk the talk. We say they represent 99 percent of 
employers. We say they generate 52 percent of the GDP. We say 
they provide 70 percent of the jobs. It was estimated during 
the last recession big business lost two million jobs, small 
business gained ten million. It is estimated that, right now, 
small businesses are creating 100 percent of the net new jobs. 
And look at job creation. If it weren't for them, where would 
unemployment be? Eight point six million Americans unemployed, 
most of that in the last 2 years.
    This budget is disastrous for small business. The issue is 
we say we don't have the resources. The economy is down. We are 
on the face of a war. At the height of the Vietnam war, Mr. 
Chairman, four-tenths of one percent of the budget. We are at 
peace today, four-one hundredths.
    I was looking at some budget documents sent over by OMB. 
SBA is an asterisk. If you are not five-one hundredth percent 
of the budget, you don't even warrant a number. You are an 
asterisk. What are we saying to the men and women who create 
jobs in this country? We are saying you are an asterisk. You 
are unimportant.
    Now, I understand the issue of the tight budget situation. 
The tight budget situation is because we don't have anybody 
working, and nobody is working because small businesses are not 
creating jobs.
    I hear level funding. Go look at the number for management 
and technical assistance in the last 2 years. It is probably 
off 27 percent. Congress generously gave us more than the 
President asked for for 2003, and they come right back and 
propose to cut us another million dollars, and they are cutting 
others. I talk with the Women's Business Center and you talk 
about duplication. Yes, Women's Business Centers do much of 
what we do. It says we serve 1.25 million people. SBDC serve 
1.5 alone. But, all combined, what percentage are we serving? A 
minuscule amount.
    The VA called me the other day and said we had a veteran, a 
disabled veteran who went to your SBDC at Temple University. 
Five-week waiting list.
    Twenty-four States, Mr. Chairman, were severely cut as a 
result of the census. Your State, Ms. Velazquez's State, Ohio, 
Indiana, Michigan. Look at their employment rates.
    Mr. Chairman, for a heartland State like yours, you can 
understand this metaphor. Perhaps Ms. Velazquez doesn't. We are 
eating our seed corn. This is a program that brings money into 
the Treasury. By every measure it pays back the Treasury at 
least two to three dollars for every dollar it spends. If you 
double the size of this program, you would get twice that 
amount back to the Treasury; and the bean counters and the 
green eyeshade crowd at OMB do not understand the concept of 
profit centers that we teach our small business people every 
day.
    Chairman Manzullo. Mr. Wilson, your time has expired. And I 
agree with you with the dudes over at OMB.
    [Mr. Wilson's statement may be found in the appendix.]
    Chairman Manzullo. Mr. Gast.

     STATEMENT OF ZACH GAST, POLICY AND RESEARCH MANAGER, 
             ASSOCIATION FOR ENTERPRISE OPPORTUNITY

    Mr. Gast. Thank you, Mr. Chairman, Ranking Member 
Velazquez, and members of the Committee for the opportunity to 
testify before you today. My name is Zach Gast, and I serve as 
Policy and Research Manager for the Association for Enterprise 
Opportunity. We represent more than 450 microenterprise 
development organizations around the country.
    AEO has three policy priorities within the SBA budget this 
year. AEO would like to see the SBA Microloan Program funded at 
$25 million for lending and technical assistance, PRIME funded 
at $15 million, and the Women's Business Centers program funded 
at $14.5 million. I will expand on these requests later in my 
testimony, but first I would like to talk a little bit about 
microenterprise and what it is.
    I heard a lot of the members of the committees talk about 
mom and pop shops and the help they needed. That is 
microenterprise. We are small businesses of five or fewer 
employees with initial capital needs of $35,000 or less. Many 
microentrepreneurs are low-income, women, minorities, or other 
individuals who may face other challenges to business success. 
For example, both the Microloan Program and Women's Business 
Centers predominantly serve minorities, and PRIME is by statute 
required to serve more than 50 percent very low-income clients.
    Locally-based microenterprise development programs provide 
credit, training, and technical assistance to 
microentrepreneurs to help them succeed. Microenterprise 
technical assistance is typically more intensive to meet the 
specific needs of our target market. As an industry, we define 
a client not as someone who receives a service but as someone 
who receives 10 or more hours of service.
    Conventional sources of business credit such as bank 
financing are often beyond the reach of our clients. The SBA 
Microloan Program continues to solve this problem by funding 
community-based intermediaries to help entrepreneurs gain 
access to credit. To date, Microloan intermediaries have made 
nearly $190 million in loans. The administrator quoted $14,000 
as the loan size to create a job. Our average loan size is 
$15,000. $190 million in loans. These loans have resulted in 
the creation and retention of more than 47,000 jobs.
    As with many entrepreneurs, Microloan borrowers require 
specialized technical assistance to grow their businesses. The 
Microloan Program meets this need by providing limited 
assistance to borrowers in becoming credit ready and more 
extensive assistance once they have received microloans.
    The $15 million that Microloan received in 2003 represented 
a $2.5 million cut. That, however, will not be the true impact 
on the provision of services. There is a regulation that ties 
technical assistance grants to the percentage of microloans 
outstanding from the SBA. As that grows, the technical 
assistance grants grow smaller. They have already been cut by 
40 percent last year. The $2.5 million that was just cut will 
cut that even farther, and the President's budget does nothing 
to increase that but only exacerbates the problem.
    But technical assistance is also important for those 
entrepreneurs that do not need or want loans. Debt is not 
always the answer to business success. PRIME provides grants to 
microenterprise development organizations to offer training and 
technical assistance to entrepreneurs regardless of whether 
they seek access to capital, and 90 percent of our clients do 
not seek access to capital at the time. Governing legislation 
stipulates that 50 percent of PRIME funds be used to support 
training and technical assistance for very low-income 
entrepreneurs. We have a 5-year study by the Aspen Institute 
that shows these entrepreneurs have highly favorable outcomes 
in household income and assets, business income and assets, and 
reduced reliance on Federal benefits. These programs are a net 
benefit to the government.
    PRIME is authorized to receive $15 million a year. Last 
year's $5 million funding level will continue to underfund the 
program which has experienced incredible demand from low-income 
entrepreneurs.
    Much as the SBDCs can't serve everyone they need to, we 
can't either. The administration's lack of support for the 
program--they have continued to recommend that it not be 
funded--is disheartening. AEO strongly encourages Congress to 
increase funding in the coming year.
    Finally, the SBA's Office of Women's Business Ownership is 
the only Federal office that specifically targets women 
business entrepreneurs. Last year alone, Women's Business 
Centers provided consulting, training, and technical assistance 
to more than 80,000 women. The $12 million contained in the 
administration's budget is insufficient to meet the needs of 
women entrepreneurs and is not level funding. They actually 
received 12.5 last year.
    Finally, I would like to share a face to all this. In 1997, 
Deborah Pierce, who lives in Calumet Park, Illinois, was facing 
a divorce and working 2 days a week at $10 an hour. Confronted 
with the need to now support herself, she approached the 
Women's Self-Employment Project in Chicago. She enrolled in 
their entrepreneurial training program and started up a full-
service child development center now serving 75 children with a 
growing waiting list and glowing reputation in the community. 
The Children's Depot Play Station, which is her business, now 
employs six additional individuals and has annual revenue of 
nearly a quarter of a million dollars--starting from zero. And 
she has recently received a microloan to expand her business. 
The future is certainly bright for this amazing woman.
    I thank you for this opportunity.
    [Mr. Gast's statement may be found in the appendix.]
    Chairman Manzullo. Mr. Mercer.

STATEMENT OF LEE W. MERCER, PRESIDENT, NATIONAL ASSOCIATION OF 
              SMALL BUSINESS INVESTMENT COMPANIES

    Mr. Mercer. Thank you, Mr. Chairman and ranking member 
Velazquez. My name is Lee Mercer, and I appreciate the 
opportunity to be here today to discuss the President's budget 
proposal for the SBIC program. I appear on behalf of the 
National Association of Small Business Investment Companies and 
the SBIC industry.
    We actually urge that the President's budget for the SBIC 
program be approved as submitted. The budget would make $4 
billion in participating security leverage and $3 billion in 
debenture leverage available to SBICs for investing, together 
with their required private capital, in U.S. small businesses.
    SBICs are a very important part of the national economic 
recovery that we hopefully are about. SBA estimates that 
currently SBICs account for 60 percent for all venture capital 
investments--by number of investments, not by dollars. For 
comparison, in 1997, the number was 38 percent. The increase is 
likely to continue to grow in the face of the substantial and 
continuing contraction in overall venture capital. To 
illustrate, the number of all annual venture capital investment 
transactions has dropped by 60 percent since the high watermark 
of fiscal year 2000, but the number of SBIC investment 
transactions has dropped just 14 percent over the same period. 
The data underscores the important countercyclical nature of 
the SBIC program and the role it will play in our national 
economic recovery.
    As has been the case for some years, the fiscal year 2004 
budget provides that the leverage will require no appropriation 
to establish the subsidy reserves required by the Budget Act. 
Rather, the budget provides the leverage subsidy reserves will 
be supported 100 percent by various fees, interest, and profit 
shares paid to the government by the two types of SBICs.
    For the debenture program, no change in the law will be 
required to implement the budget. Section 303(b) of the Small 
Business Investment Act imposes an interest rate fee of not to 
exceed 1 percent per annum on applicable leverage. For the 
debenture fiscal year 2004 authority, that rate required to 
maintain the zero subsidy rate will be 0.855 percent per annum, 
down slightly from the current rate of 0.887 percent.
    Section 303(g)(2) of the Act provides the counterpart for 
the participating security program. This section provides that 
the prioritized payment rate, the variable rate, is not to 
exceed 1.38 percent per annum. For fiscal year 2004 leverage 
authority, the required rate will be 1.454 percent per annum. 
That is 0.074 percent greater than the current statutory 
authority. Thus, for implementation of the President's budget, 
there must be a change in the law increasing that authority by 
a minimum at least of 7.4 basis points. That translates to 7.4 
cents per $100 of leverage as an annual rate increase.
    The reason for the increase in the participating security 
program has nothing to do with loss assumption. It has to do 
with, actually, the falling in the Treasury rate. There is a 
direct correlation--the rates that participating securities 
SBICs pay their profit share to the government, profitable 
share, goes down as the rate goes down. Therefore, in a 
counterintuitive situation, the actual prioritized payment rate 
or the interest portion has to go up slightly to counterbalance 
the falling of the profit share that participating security 
SBICs will pay the government.
    The increase is well within the ability of SBICs to pay, 
given the market conditions, and we urge the Committee to 
support it.
    The importance of the SBIC program cannot be overstated. 
The $2.7 billion in venture capital invested in fiscal year 
2002 was down 40 percent from the year before, but the number 
of companies financed was only down 12 percent, 1,979 from the 
previous 2,254. Those companies employ over 300,000 employees.
    SBICs continue to be a significant source of venture 
capital for new businesses, with 48 percent of fiscal year 2002 
investments made to companies less than 3 years old. They are 
particularly important for low- and moderate-income businesses.
    Chairman Manzullo. We are on the red cue.
    Mr. Mercer. I see that. I will sum up right now.
    Twenty-seven percent of all investments went to LMI 
companies.
    To sum up, we believe the President's budget will help the 
SBIC program continue to do its job. We look forward to working 
with you on implementing the budget, on reauthorization, and we 
urge you to continue to support our UBTI proposal which is in 
my written testimony and which I urge be included in whole in 
the record.
    [Mr. Mercer's statement may be found in the appendix.]
    Chairman Manzullo. It is too bad that Mr. Barreto wasn't 
here to hear somebody say that he liked his budget. Thank you, 
Mr. Mercer.
    Mr. Crawford, I look forward to your testimony.

STATEMENT OF CHRISTOPHER CRAWFORD, EXECUTIVE DIRECTOR, NATIONAL 
              ASSOCIATION OF DEVELOPMENT COMPANIES

    Mr. Crawford. Thank you. Good afternoon. My name is Chris 
Crawford, and I am pleased to comment on the SBA's budget 
request.
    I ask that my written statement be entered into the record 
of this hearing.
    Chairman Manzullo. All of the written statements of the 
witnesses and the statements of any members that wish to put 
them into the record will be admitted without objection.
    Mr. Crawford. Thank you, Mr. Chairman.
    First, I want to thank the Chairman and the ranking member 
for your support in the 2003 spending bill by demanding that 
SBA implement the improved 504 subsidy model quickly. The 
budget reveals plans to further delay our subsidy model, as you 
have already noted. We believe that the cost of this in the 
year fiscal year 2005 will be $100 million in excess fees over 
the 20-year span of the loans.
    NADCO's members and first mortgage partners provided more 
than $6 billion in long-term capital to job-creating small 
businesses last year. SBA requests $4.5 billion in loan 
authority for 504. We asked for $5 billion. Our loan demand is 
up 25 percent year to date, and we are concerned that tight 
bank credit will push demand even higher. This increased 
ceiling will cost the taxpayer nothing since we require no 
subsidy.
    We appreciate the administration's decrease in our borrower 
fee for 2004. This change may seem small, but it will result in 
millions of dollars saved for thousands of small businesses.
    However, our concerns continue about both the default and 
the recovery estimates SBA uses to calculate our program fees. 
The 7.5 percent default rate is higher than historical reality. 
The 17 percent recovery forecast seems disconnected from the 
successes of both the asset sale and the 504 liquidation pilot 
created by this Committee. Each of these programs have 
demonstrated recovery rates of over 45 percent, so we cannot 
understand how SBA can project a rate of 17 percent in net 
recoveries.
    504 was reviewed during 2002 by OMB using their Performance 
Assessment Rating Tool, or PART. I believe that some of their 
conclusions are completely wrong.
    First, OMB says that 504 and 7(a) duplicate each other by 
providing long-term fixed asset lending. In fact, the two 
programs are fundamentally different as to congressional 
purpose and financing structure. 504 involves long-term fixed 
rate financing, and our goals are community economic 
development and job creation. 504 provides low down payment 
terms to help borrowers conserve operating cash.
    Austin Westrand in Byron, Illinois, used 504 to save 200 
jobs in a town of 2,000. American Building Supply of the Bronx, 
New York, needed 504 to save four jobs and create 31 new jobs. 
Neither borrower could qualify or obtain either a 7(a)or a 
regular bank loan. Clearly, 504 and 7(a) are very different, 
which seems obvious to everyone but this administration.
    Second, the OMB PART states that 504 has not demonstrated 
adequate progress in achieving its long-term goals. The Small 
Business Investment Act of 1958 makes clear that the 
congressional purpose and intended goals for 504 are economic 
development, community growth, and job creation.
    Let me share SBA's own 504 statistics: Over one million 
jobs created or retained since 1996; over $42 billion in long-
term capital provided to small businesses; over 45,000 jobs are 
businesses assisted; and nearly 50 percent of our projects go 
to assist minority, women, veterans, and rural business 
borrowers.
    I am astounded at OMB's blindness to 504's long record of 
success, and I urge you to reject this PART analysis by 
reauthorizing this program.
    Mr. Chairman, America needs 504's job-creating abilities 
more than ever. 504 needs your help in and the leadership of 
Administrator Barreto. My industry wants to open our window to 
Wall Street to more businesses. We have given SBA many 
recommendations over the years that could expand this program 
substantially. Now is the time to implement those improvements 
and bring our program out of the bureaucratic shadows that it 
sits in today. Please help us grow 504 and create more jobs for 
our economy.
    Thank you, Mr. Chairman.
    [Mr. Crawford's statement may be found in the appendix.]
    Chairman Manzullo. Well, thank you very much.
    You know, we are all talking here about a credit crunch. We 
have a company back home that spun off from Ingersoll. 
Ingersoll Milling Machine Company and their associated 
subsidiaries was about 3,000 employees. They are now 200. You 
talk about a hit in the manufacturing sector.
    But in Ingersoll's production line--these are the lines on 
which you put a block for an engine, for example. As the 
production line group at Ingersoll was suffering along with the 
rest of the company, a constituent said, here is an opportunity 
to go in there to buy that off and to treat it as a sole 
company to try to reconstruct it.
    He went to 10 banks and venture capital firms. They all 
turned him down. The loan was too much for the SBA. It was 
several million dollars. You know where he got his loan? From 
the Chinese. So he has some Chinese investors that salvaged a 
company in Rockford, Illinois, that provides 100 jobs building 
these huge machines for lines, and that company has over 200 
subcontractors.
    I am just sitting here thinking, you know, we talk about 
jobs going to China and now we have got foreign direct 
investment from China to the United States because the lending 
industries--and I am not critical of the SBA programs because 
this is much greater; it is a several million dollar loan--but 
the lending industries which this year have astounding profit, 
the bank's profits are up about a third, over 35 percent over 
last year's across the board, banks are making a tremendous 
amount of money, and yet we are seeing such a credit 
restriction going on--and I am sure you are too, Mrs. 
Velazquez. Can you imagine, this 100-year-old Rockford firm has 
to go to the Chinese to get capital? Because they saw an 
opportunity for long-term investment, because these lines are 
extremely important, and they ended up with--it is a part of 
American monies but mostly Chinese money.
    I don't know how to turn this thing on its head. Every 
morning I get up and I find out that there are more 
manufacturing jobs that are fleeing. And simply trying to get a 
handle, it is as if we are wearing a sweater and a thread came 
loose at the sleeve and it continues to unravel and we can't 
stop the hemorrhaging.
    But one of the things that we are going to be asking you to 
do in this reauthorization bill that Mr. Pinellas is working on 
for the SBA is going to have a heavy emphasis on manufacturing. 
Washington doesn't get it. The policymakers here think that 
these two million manufacturing jobs are coming back, and they 
aren't. They are leaving. I could lose entire cities back home. 
Cities, Angkor, a little manufacturing facility. So we fight 
continually with the Federal government.
    I want to tell you something. We are going to stop this 
bleeding, and we are going to stop the hypocrisy, the Federal 
government talking about investments and jobs while at the same 
time taking procurement contracts and giving them to foreign 
countries. Got into a big fight with Northrop Grummann. They 
are making one of the American portions of the Joint Strike 
Force fighter under subcontract from Lockheed Martin.
    I mention this publicly because it is only when I brought 
it up public that things perhaps may turn it around at Northrop 
Grummann. We noticed that they had been looking for a 
manufacturing company to drill precision holes for the Joint 
Strike Force fighter. This is the NATO fighter. It is seven 
Europeans countries in the consortium plus the United States.
    For the U.S. component, Northrop Grummann let out four 
contracts to the Europeans. Now this is U.S. taxpayers' dollars 
for the U.S. portion of that fighter saying that we are going 
to go to the Europeans. And instead of giving a contract to 
Ingersoll Milling in Rockford, Illinois, it went to the 
Spaniards.
    As I talked to one of the vice presidents from Northrop 
Grummann. We had a very interesting meeting. He said, there is 
not an American company capable of drilling the precision holes 
necessary for the Joint Strike Force fighter; and I turned to 
him and I said, you don't know what the hell you are talking 
about. I said, you had better get to Rockford, Illinois, and 
you take a look at 100 years of quality engineering in the old 
Swedish tradition of the people who are known as the tool and 
die center of the world, the last vestiges of artistry in metal 
left in this country.
    They came. And it is very interesting, because the people 
who had said that Ingersoll couldn't build a machine to drill 
holes for an airplane was also building a very similar machine 
for Lockheed Martin, their major contractor on another project.
    That is the extent of disconnect in this country. I turned 
to the Northrop Grummann lobbyist who was there; and I said, I 
want to tell you right now, if you let out another contract to 
a foreign company and you destroy American jobs, you are going 
to have hell to pay. And the Speaker joined in that. The 
Speaker had been in a meeting with the president of Northrop 
Grummann just a few weeks before that and said, stop giving 
those contracts to the Europeans and give them to the American 
firms.
    It is going to stop. You guys are going to have a part of 
it, because we are going to revitalize remanufacturing in this 
country. Otherwise, we are going to be dead. We have got no 
place to go. My people are desperate. When the factories close 
and there is nothing left in America and all the service jobs, 
GE--if your refrigerator is broken and you call for service, it 
gets picked up in India. Fleeing to Ireland, India. You know, 
where is the sense? Isn't anybody going to wake up in this 
country and say if all these jobs flee, who is going to be here 
to buy the stuff they are making overseas?
    So get involved. We are going to be in a big fight this 
Congress. We have to take on everybody, but it is worth it 
because we have to salvage these jobs.
    Mrs. Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Wilkinson, I know that you have to leave soon, so I 
need to ask you two questions. For the record, do you think 
that the President's budget request for the 7(a) loan program 
is adequate?
    Mr. Wilkinson. No, ma'am. The budget request is for $9.3 
billion. We did 11.1 last year, and year to date we are already 
ahead of that pace. We even had a $500,000 loan cap in place 
for the first 4 or 5 months of this fiscal year.
    Ms. Velazquez. How short is it?
    Mr. Wilkinson. It is going to be at least $3 to $3.2 
billion in loan authority, which would be about $35 million in 
additional appropriations that will be needed.
    Ms. Velazquez. Thank you. And given your experiences with 
the nightmare created by the subsidy rate situation, what 
advice do you have for the SBIC industry as the SBA launches 
into fixing its subsidy rate?
    Mr. Wilkinson. Well, first of all, I wish Mr. Mercer luck. 
Be prepared for a good long fight.
    The one thing I would say is, to get the information you 
want, you are going to have to be very specific in the way you 
ask a question. OMB in the past was not terribly forthcoming 
with information. So you have got to ask the right question to 
get the right answer.
    Ms. Velazquez. Thank you.
    Mr. Crawford, in this year's budget, the administration 
seemed to make the claim that there is no difference between 
the loan programs. Could you please comment on this or express 
your views?
    Mr. Crawford. Yes, ma'am. Thank you.
    Well, it is very clear that the programs are extremely 
different. The 7(a) program in our view is set up to help 
distressed businesses that can't qualify for regular bank 
financing. I mean, Tony can speak to that better than I can.
    Our program was established with the 501 program in 1958 
and subsequently modified by several additions by this Congress 
to focus on job creation. Our one mission is job creation. I 
have got to ask myself the question, why do they want to 
conceivably deauthorize a program that creates jobs? And that 
is our one mission, community and economic development. We make 
long-term loans, fixed rate loans, low cash down. We do the 
things that the banks--maybe they can do, maybe they can't. We 
do them every day.
    Ms. Velazquez. Thank you, Mr. Crawford.
    Mr. Gast, we keep hearing from the administration that 
PRIME is duplicative of other SBA programs. Without taking 
anything away from the other programs, would you please explain 
to us why PRIME is different from SCORE, SBDCs, microloans, and 
the Women's Business Centers.
    Mr. Gast. Sure. I am sure all the members of the Committee 
are aware that small businesses are extremely diverse. It takes 
a different type of service to work with someone who might be 
extremely skilled in a particular area like carpentry, like 
light manufacturing but may have no knowledge of business who 
wants to strike out, start their own business, and create jobs.
    That is what we specialize in. We specialize in building 
businesses from the ground up. We will spend 10 or 15 hours 
because that is the level of effort it takes to build these 
businesses. And what we found is it is not only cost effective, 
it is cost efficient. It is the right way to do it because the 
end benefit works.
    Ms. Velazquez. Thank you.
    Mr. Wilkinson, we heard from Mr. Barreto their interest and 
focus in terms of increasing the amount of small business 
loans, and yet they cut the funding level for the Microloan 
Program.
    Mr. Wilkinson. That does seem a little odd that they would 
do that. If they really want small loans, I think they would 
fund both.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Chairman Manzullo. Mr. Bartlett.
    Mr. Bartlett. I am sorry, I was called away and couldn't 
hear your testimony.
    Let me ask you one question that may help us more than any 
other question I could ask you to understand your concerns and 
what we ought to be doing. Had you been on the panel--let me 
ask each of you to tell us, had you been up here, what question 
would you have asked Mr. Barreto or what observation might you 
have made for Mr. Barreto's benefit? If we could just go down 
the line quickly and tell us that one question or that one 
observation.
    Mr. Wilkinson. The big question would be why the 7(a) 
program was not adequately funded. Their 9.3 level is 
significantly insufficient for next year. We are on pace to do 
between 11 and a half and $12 billion this year, and we think 
we need a $12.5 billion program next year.
    Mr. Bartlett. Thank you.
    Mr. Wilson. Mr. Chairman, I think the major question is to 
ask why the budget does not compare to the rhetoric. There is a 
dramatic decrease in the funding for management assistance 
programs at a time when the need is the greatest. SBA knows--
OMB has the data--that an investment in management and training 
assistance programs returns a positive return to the Treasury, 
and yet they say there is not enough money. Small business 
people understand that when you invest in a profit center, you 
are going to get more than you put into it. We have 
demonstrated year after year that the rate of return is two to 
one, three to one and better.
    Now if I am making a budget, and I do every year for my 
organization, I understand where you put your money. You put 
your money into things that are making you money. Right now, 
everybody is concerned about the size of the deficit. The 
reason we have a deficit is that people are not working. And 
all of these programs that you hear up--that you have heard 
from create jobs. The data is overwhelming, where the jobs come 
from and who helps them create jobs, and yet this 
administration--unfortunately, it has been going on for a 
number of years, declining amounts to these job creation 
programs that provide a positive rate of return to the 
Treasury.
    Mr. Bartlett. Mr. Gast.
    Mr. Gast. That answer just stole my thunder. How you can 
cut these programs that are doing just that, providing a 
positive rate of return, particularly completely eliminating 
programs that focus on very low-income people and minorities 
where sometimes there is the greatest return to be gained.
    Mr. Mercer. My question would relate to the availability of 
capital. In the economic conditions we are in right now, the 
banks have pulled back so that non-SBA-related loans have 
contracted significantly. Obviously, we are happy with our 
section of the budget, but SBICs, when they invest in a 
company, as you know, there is going to be more senior debt 
required for that company to grow. And to the extent that the 
senior debt that is represented by some of the other programs, 
whether it is 7(a) or 504 that would be senior to SBIC 
financing, to the extent that data is not available, sometimes 
an SBIC literally cannot make the investment. If it can't see 
where the senior debt is coming from, there is no ability to 
finance the company.
    Mr. Crawford. I would like to know why the administration 
wanted to sacrifice $100 million of borrower income to save one 
year of subsidy on the econometric model.
    Mr. Bartlett. Sorry you couldn't have been up here to ask 
the questions. Next time, prompt us so we will ask them for 
you.
    Thank you very much, Mr. Chairman.
    Chairman Manzullo. If we had had time in the way we run our 
hearings here, you would have had an opportunity to ask the 
questions of Mr. Barreto. We got interfered with the voting, 
plus we had a really good turnout of people here with a lot of 
good questions.
    I want to thank you all for coming. We have a lot of work 
ahead to do.
    There are some bright spots out there. I was with the 504 
people. Chris, was it yesterday? I just happened to be at the 
wrong hotel. But I made it. I made it on time. It was the wrong 
Marriott over in Crystal City. But we were hearing some--you 
know, when times get tough, Americans always put their 
ingenuity to work.
    There are four--two furniture factories closed up shop in 
Vermont, and the 504 people stepped in, and now they are 
about--I just talked to Bernie Sanders on this. There are about 
20 of the former employees there that have formed this wholly-
owned company. And is it Middlebury College in Vermont? And 
Middlebury College has stepped in. I don't want to say it is a 
partnership or a consortium, but they are adding their business 
knowledge and know-how. So this little town is fighting back to 
regain some of those manufacturing jobs.
    You know, I think that is what we are going to have to do. 
It is going to have to take some new type of thinking--perhaps 
that is the appropriate word--in order to revitalize the 
businesses that have been wiped out.
    I know you guys have marvelous backgrounds. One of the 
things I would like to do is to invite Mr. Barreto in a very 
informal setting with the people from the industry--because he 
is really good at this. He is extremely bright, and he really 
wants to help out--and come up with some new models on how 
these businesses could be helped out.
    Let me give you an example. You know, the Economic 
Development Administration comes in and they can provide some 
infrastructure, et cetera. Somewhere along the line maybe 
somebody ought to take a look at whether or not there could be 
some type of program to help offset communities that want to 
give a tax incentive to keep a business operational, but 
because of the impact it has on the base for funding the 
schools it becomes very difficult to do that. What I am saying 
is that we are going to have to think differently in the way 
companies do business, the whole idea of employee-owned 
businesses, the guys and ladies that are left behind when the 
industries close being able to come together.
    Perhaps there should be a different type of tax structure 
in areas that are severely impacted by manufacturing losses. 
Perhaps there should be a way that they could operate their 
business as a co-op and be not--you know, be a for-profit but 
in a cooperative method which would be in a special taxing 
bracket.
    I don't know the answer to it, except that we are going to 
have to think very, very differently than we have in the past 
because of these new models that have to be invented.
    Lee, did you have a comment?
    Mr. Mercer. No, I just want to tell you, there is some 
forward-looking confidence in manufacturing. Over the past 5 
years, SBICs just in the direct NAICS codes have invested an 
average each year of about 30 to 32 percent of all--in dollars 
have gone to manufacturing companies. Then if you add indirect 
and related NAICS codes, you are probably talking somewhere 
around 33 percent. So there is--so the money managers are 
betting on some of these young manufacturing companies being 
able to find a new way to do the business.
    Chairman Manzullo. Well, what Austin Westrand did in Byron, 
they make a custom trailer leg. They make the only round 
trailer leg. You know the big 18-wheelers where you have to 
jack it up? Everyone makes a square one. They make a round one, 
and they are exporting those to Mexico, and soon they are going 
to be exporting those to China. This is a union shop, but they 
found a market in there somewhere.
    Because 504 is long-term, looks at increasing jobs in a 
community and is very much interested in economic development. 
The studies go on to determine the market in a very intensive 
way. What we are doing back home is we formed a consortium with 
Northern Illinois University and a manufacturing council to 
bring together the best minds in the area to take a look at the 
whack that we are getting hit with in the fastener industry, 
the tool and die industry, and the molding industry, and to try 
to assess how we can do it.
    For example, a lot of U.S. manufacturers have moved 
overseas. And Matt Szymanski, who is the chief of staff of our 
Small Business Committee, is going back to China for the sixth 
time in 13 months with two manufacturers from the district I 
represent and two manufacturers from the Speaker's district--
our districts touch. One is a mirror image of the other, and he 
is being wiped out also in manufacturing jobs--and we have had 
to turn to Chinese companies--Chinese companies--because they 
are taking the long view of what is going on in America and, as 
chairman of the American Chinese Interparliamentary Exchange, 
meeting with my counterparts.
    Chinese understand that their recovery depends upon the 
U.S. recovery. They have a workforce of 450 million people. It 
grows by 10 million each year. They need 7 percent increase in 
GDP just to stay even.
    But what the Chinese are telling us is that if American 
manufacturers continue to pull out and continue with the loss 
of jobs in America, there won't be anybody in America left with 
high-paying enough jobs to buy the stuff that is being made in 
China. So the Chinese are looking very long range, and the 
American companies aren't.
    So what we are trying to do with the American companies 
involved in manufacturing overseas is to get them at the 
minimum to still use U.S. molds and use tools and dies that can 
be easily serviced in China and around the world. So that is 
part of----.
    You know, it is amazing where you have to go to try to turn 
the corner on this. When we were in China in January, we were 
in Shenzhen at the invitation of Wal-Mart. Wal-Mart came to me 
and said, Chairman, could you help us export more U.S. 
products? And, also, could you find more U.S. products to be 
sold in the American stores? American Wal-Mart stores.
    It just sucked all the air out of me. I said, these people 
understand. Wal-Mart has about 2,300 stores in the United 
States. Half are in small towns. Those small towns have as an 
anchor an industry, and Wal-Mart is smart enough to realize 
that if that industry gets wiped out, half of their stores are 
going to be in dire distress because the jobs will have left.
    So it is a--you know, this thing is very difficult to get 
our arms around it, but I think it can be done. And we are 
asking American companies to simply step up. I mean, Emerson 
moved everything to China. Everything. All their manufacturing, 
their sales force, their research, everything went to China. 
But at least Emerson can still use American molders for part of 
their manufacturing.
    Just some of the things to think about. In our hearings 
that we are going to have on manufacturing, we are going to be 
bringing in people to talk about the change in nature of 
corporate responsibility. I am not talking about a social 
program here. We are going to try to--we are inviting Warren 
Buffett to come. Warren Buffett, a major shareholder in Coke. 
Coke has stopped making estimates or making comment on 
quarterly earning estimates. Pepsi-Cola stopped. The new 
president and CEO of AT&T stopped it. The stock fell 22 percent 
the next day. But we are seeing corporate executives stepping 
up to the plate and saying that because the longest range plan 
in America is only 3 months, this is disaster to America's 
companies, especially the small businesses which are the subs 
and the sub-subs of the larger ones.
    I talked to a professor from Harvard Business School 
yesterday, wrote an astounding article on ethics in the Harvard 
Business Journal. She was astonished that we had read it. And 
we invited her to come and testify, also. What she does is she 
has a flow chart on the thinking process for what a corporation 
should go through, and she makes the one statement: Is it 
ethical? The first statement is, well, obviously, is it legal? 
And then from there, if it is legal--obviously, then you--if it 
is not legal, you stop. If it is legal, the next question is: 
Does it enhance shareholder value? But she doesn't stop there. 
And that is where most Americans stop. Because she goes to 
another level that says: If it enhances shareholder value, is 
it ethical? In other words, does the impact on the consumers, 
the environment, the workforce, the supplier offset the 
increase in shareholder value? It is astounding.
    Then we hope to bring in a fellow by the name of Allen 
Kennedy who wrote a book called The End of Shareholder Value, 
written in 1999, where he talks about this race to increase the 
value of stock, and the next 30 days--the next 90 days will 
lead to overinflation of the stock, disaster in the market, and 
nothing but greed taking place. Because when long-range 
planning is gone, there is nothing to build upon, and you will 
find the collapse of our industries.
    So it is going to be a lot of fun. I look forward to your 
work in it. We will be tasking you with a tremendous amount of 
responsibility to help us in these models.
    This hearing is adjourned.
    [Whereupon, at 5:14 p.m., the Committee was adjourned.]



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