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




HOW DOES THE PRESIDENT'S FY 2005 BUDGET REQUEST AFFECT SMALL BUSINESS?

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

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                   WASHINGTON, DC, FEBRUARY 11, 2004

                               __________

                           Serial No. 108-52

                               __________

         Printed for the use of the Committee on Small Business


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house


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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           ENI FALEOMAVAEGA, American Samoa
SAM GRAVES, Missouri                 DONNA CHRISTENSEN, Virgin Islands
EDWARD SCHROCK, Virginia             DANNY DAVIS, Illinois
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               BRAD MILLER, North Carolina
STEVE KING, Iowa                     [VACANCY]
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 V., U.S. Small Business Administration......     4
Mercer, Mr. Lee, National Association of Small Business 
  Investment Companies...........................................    18
Pilcher, Mr. David, Ted R. Sanders Moving & Storage..............    20
Wilson, Mr. Donald, Association of Small Business Development 
  Centers........................................................    21
Crawford, Mr. Chris, National Association of Development 
  Companies......................................................    23
Wilkinson, Mr. Anthony, National Association of Government 
  Guaranteed Lenders.............................................    24
Pegg, Mr. Phill, Jr., 4D Solutions...............................    25
Sprague, Mr. John, Everglades Adventures.........................    27
Moses, Mr. Elliot, Daco Enterprises, Inc.........................    29

                                Appendix

Opening statements:
    Manzullo, Hon. Donald A......................................    43
    Velazquez, Hon. Nydia........................................    46
    Bordallo, Hon. Madeleine Z...................................    48
Prepared statements:
    Barreto, Hon. Hector V., U.S. Small Business Administration..    50
    Mercer, Mr. Lee, National Association of Small Business 
      Investment Companies.......................................    56
    Pilcher, Mr. David, Ted R. Sanders Moving & Storage..........    69
    Wilson, Mr. Donald, Association of Small Business Development 
      Centers....................................................    70
    Crawford, Mr. Chris, National Association of Development 
      Companies..................................................    80
    Wilkinson, Mr. Anthony, National Association of Government 
      Guaranteed Lenders.........................................    87
    Pegg, Mr. Phill, Jr., 4D Solutions...........................    92
    Sprague, Mr. John, Everglades Adventures.....................    95
    Moses, Mr. Elliot, Daco Enterprises, Inc.....................    97
Follow-up letter requested at hearing by Committee:
    Bedell, Mr. Anthony R., U.S. Small Business Administration...   104

                                 (iii)

 
 HOW DOES THE PRESIDENT'S FISCAL YEAR 2005 BUDGET REQUEST AFFECT SMALL 
                               BUSINESS?

                              ----------                              


                      WEDNESDAY, FEBRUARY 11, 2004

                  House of Representatives,
                                Committee on Small Business
                                                   Washington, D.C.
    The Committee met, pursuant to call, at 2:20 p.m. in Room 
2360, Rayburn House Office Building, Hon. Donald Manzullo, 
[chairman of the Committee] presiding.
    Present: Representatives Manzullo, Bartlett, Kelly, Akin, 
Franks, Bradley, McCotter, Vel zquez, Udall, Ballance and 
Majette.
    Chairman Manzullo. Good afternoon. The Committee will come 
to order.

    I will ask unanimous consent that my full statement be made 
part of the record. At this time, I will just summarize the 
high points.
    Today, we examine the President's fiscal year 2005 budget 
request as it affects small business. Generally, the 
President's proposed budget is helpful to small business 
owners. Given the budgetary constraints, with a few exceptions, 
small businesses should be pleased.
    I am especially heartened at the President's request to 
make permanent the tax relief Congress has already passed, 
including phasing out the punitive estate or death tax and the 
lowered rates on capital gains, stock dividends and small 
businesses so as to create incentives for job creation.
    It is important to remember that 85 percent of small 
businesses pay taxes on an individual basis, so the rate cuts 
Congress passed into law in 2001 and accelerated in 2003, in 
addition to increased expensing and bonus deprecation, have 
provided critical assistance to our small businesses.
    With increased confidence in the economy, it was only 
natural that small businesses seeking access to credit would 
use the guaranteed lending and venture capital investment 
programs of the SBA more than in past years. In addition, the 
number of self-employed are growing dramatically. These newly 
self-employed need the SBA guaranteed lending and venture 
capital programs now more than ever.
    However, as the Committee and industry predicted, the 7(a) 
program experienced a cash flow crunch last month and is 
currently hobbling along. We need to fix this program now. That 
is why I was so pleased in the effort of Administrator Barreto 
to find another way to solve the 7(a) problem that does not 
involve raising borrower fees or requiring more appropriations 
or reprogramming accounts within the SBA.
    My goodness. We have a full house here today. That is nice. 
It is good to have all of you here. Hector, why do you not come 
every day? Maybe that is why we have a full house.
    Mr. Barreto. I would be happy to, Mr. Chairman.
    Chairman Manzullo. Thank you.
    This plan centers around raising the loan level from the 
SBA Express program so we will achieve the same goal--a zero 
subsidy rate--without having to raise fees. If we make this 
change apply now, it will also allow the SBA to restore the 
7(a) program to its full statutory level.
    The rest of the President's budget request for the SBA 
remains sound and reasonable, given the budgetary constraints, 
with a few exceptions. I have concern about the particulars of 
the President's proposal as it affects the SBIC issue.
    I am also concerned about zeroing out SBA's contribution to 
the USEAC network. Each $1 appropriated to the SBA's export 
finance specialists in the USEAC since 1999 has supported loans 
generating over $200 in export sales, a sound return on any 
investment. We encourage the Administration to revisit its 
position on withdrawing support from the SBA for the USEAC 
system.
    Thank you, and I now yield for an opening statement from 
the Ranking Minority Member, Representative Nydia Vel zquez of 
New York.
    [Chairman Manzullo's statement may be found in the 
appendix.]
    Ms. Velazquez. Thank you, Mr. Chairman.
    With the fiscal year 2005 Bush budget for the Small 
Business Administration, we have a proposal before us that 
represents the deconstruction of the only agency with the sole 
purpose of assisting our economy's most important sector--small 
business.
    At a time when the economy continues to struggle and job 
creation lags, we should be investing in these programs, not 
turning our back on them. Not since the days of Reagan budget 
director David Stockton when elimination of the agency was 
proposed have we seen such a destructive plan.
    At least in the early 1980s, the Administration was honest 
about its intentions. The current one, which is looking for the 
same outcome, is not being forthcoming; instead, hiding behind 
fake budget numbers and proposals that will never work.
    Clearly, the worst is how this budget will deprive 
entrepreneurs of the capital they need to start their 
businesses. It is unbelievable that in this budget not a single 
dollar goes to the SBA loan programs. Not a single dollar. Not 
a single dollar for the general loan program. Not a single 
dollar for the micro loan program. Not a single dollar for the 
venture capital.
    Adding insult to injury, the plan here is to pay for all 
these programs by hiking up the fees for borrowers. Even after 
we listened to this Administration harp on the need for the 
agency to make more small loans, it then turns around and 
eliminates the micro loan program, which does exactly that. It 
makes no sense.
    The proposal now on the table to fix the 7(a) loan program 
is too little too late. It proposes to lower the guarantee fee 
to 50 percent of loans of $250,000 and below, eventually 
extending that up to $1 million. This would harm the very small 
businesses the program was created to help by blocking avenues 
of credit and will also deprive lenders out of the program 
altogether. This fix was either poorly thought out or it is an 
intentional way to destroy the program once and for all.
    Another area where this budget falls short is in helping 
businesses access the federal marketplace. President Bush put 
this at the top of his small business agenda in 2002, but we 
have been told time and time again that the resources just are 
not there to back it up. This budget is no exception.
    There are no enforcement dollars to hold agencies 
accountable for missing their small business goals. There is no 
funding for the women's procurement program that was made law 
four years ago. There is no money to ensure small businesses 
get their fair share of federal contracting dollars.
    This budget has an unprecedented number of cuts to SBA 
programs. The rationale behind these cuts is to channel 
remaining funds to the agency's core programs, discarding those 
that are deemed duplicative. The problem is that the SBA's core 
program have been flat funded for three years now. When you 
account for inflation, this amounts to a more than $10 million 
cut. It is one thing to expect an agency to do more with less. 
It is another thing to expect it to make something out of 
nothing.
    It is a shame because these programs help small business to 
stay afloat, expand and create jobs. They help to save 
taxpayers money and then even generate tax revenue. The failure 
to invest in them is completely shortsighted. It puts our 
nation's small businesses and our economy as a whole in 
jeopardy.
    I believe in these programs. My Democratic colleagues 
believe in these program. It appears that the Administration 
does not. Even though President Bush spends a lot of time 
talking about the important role small businesses play in our 
economy, he went to Missouri. He went to New Hampshire. He 
visited a manufacturing plant in New Hampshire and Missouri. 
That is all it is. Talk. Let me tell you. Talk is cheap.
    If this Administration really wanted to assist small 
businesses, it would have made the SBA budget whole. Without 
putting so much needed resources into small businesses, we 
simply cannot have a vibrant economy. We cannot put Americans 
back to work by creating jobs. We cannot spur economic 
development in our local community.
    I would like to ask the Bush Administration where are its 
priorities? Where is its commitment? It is certainly not with 
small businesses.
    Thank you, Mr. Chairman.
    [Ranking Member Velazquez's statement may be found in the 
appendix.]
    Chairman Manzullo. Thank you.
    Mr. Barreto, who has been one of the longest serving SBA 
administrators, now into his third year, and a person who was 
raised in small business and whose father started the Hispanic 
Chamber of Commerce appears again before us.
    Based on your background and your experience, I have every 
confidence that SBA is in good hands. I look forward to your 
testimony.

   STATEMENT OF THE HONORABLE HECTOR V. BARRETO, U.S. SMALL 
                    BUSINESS ADMINISTRATION

    Mr. Barreto. Thank you very much, Mr. Chairman, Ranking 
Member Vel zquez, Members of the Committee. Thank you for 
inviting me here today to talk with you about the Small 
Business Administration's 2005 budget and our strong commitment 
to continue to offer the very highest quality services to 
America's small business owners.
    A lot has happened over the last few years both in 
America's small business community and at the SBA. When I 
became the SBA administrator almost three years ago, I wanted 
to change the culture of the SBA. I wanted to create a new 
environment at the agency and a new environment for America's 
entrepreneurs.
    That meant not sticking to the status quo. That meant not 
doing things the way that we have always done them. That is 
what I would like to talk to you about today. The SBA is ready 
to send legislation to Congress that could add as much as $3 
billion to our 7(a) lending program this year, while 
simplifying the application process and moving the program 
toward a permanent zero subsidy rate.
    The President and I believe that this proposal provides a 
clear, long-term vision for a better, more successful 7(a) 
program, a bold, new 7(a) that addresses the real issues of the 
new economic times.
    The plan calls for the expansion of the successful SBA 
Express program, which accounted for a remarkable 33,000 SBA 
loans in 2003 and has proven effective in reaching underserved 
and rural markets. Our proposals will move the 7(a) to a lower 
guarantee rate, allowing the agency to increase lending 
authority by 34 percent and remove the cap on 7(a) loans.
    It will also allow lenders to use their own forms and 
procedures to apply for 7(a) loans, reducing the burden of 
excessive paperwork and making 7(a) more accessible for rural 
and community banks and their customers. This plan also helps 
move the 7(a) program towards our goal of a zero subsidy rate. 
There is also a long-term potential for reducing fees on 
lenders and borrowers.
    But there is more. I am proud to say that the budget we are 
submitting also increases the 7(a) lending authority for fiscal 
2005 by 30 percent. Thirty percent. That will allow us to reach 
thousands--perhaps tens of thousands--more entrepreneurs than 
we ever have before. There is an added benefit to these 
proposals because we are moving toward a zero subsidy rate for 
7(a).
    These tremendous increases in loan authority come hand in 
hand with tremendous savings for America's taxpayers. What is 
more, zero subsidy for 7(a) also translates into long-term 
stability for the 7(a) program, something our partner lenders 
will appreciate.
    But that is not all we are doing. I am also extremely proud 
that this budget strengthens the SBA core service delivery 
system. We are investing in the successful delivery systems 
that we know get results for our customers--$88 million for 
small business development centers, $5 million for the Service 
Corps of Retired Executives, $12 million for women's business 
centers, $750,000 for National Women's Business Council, 
$750,000 for veterans outreach, $1.5 million for 7(j) technical 
assistance.
    These proposals are part of our commitment to a new SBA 
with new ideas and new ways of serving our customers, new ways 
of reaching out like our Spanish language web portal, 
negocios.gov, and our business matchmaking events, new ways of 
fighting for things that small business owners need like less 
burdensome regulations and association health plans, new ways 
to help create an environment of success for small business.
    That is the culture I want at the new SBA, and I am proud 
of the progress we have made. In 2003, the SBA approved 74,169 
loans in our two major loan programs, more than ever before in 
our 50-year history, and almost a third of those loans went to 
minority business owners. In 2003, 2.1 million entrepreneurs 
received business counseling and technical assistance through 
SBA's counseling and training programs.
    In 2003, the SBA's Office of Advocacy saved small 
businesses $6.3 billion in regulatory costs. In 2003, the SBA 
website recorded more than 54 million visits. In that same 
year, the SBA's disaster assistance loan program made almost 
26,000 loans.
    Now, those are real results, and that is what matters the 
most. Let me tell you why. At a business matchmaking event in 
Houston a few months ago, a businesswoman came up to me with 
tears on her cheeks. She said to me Mr. Administrator, I am not 
a statistic. I am a real, living, breathing business owner, and 
I want to thank you. After 9-11, it was an SBA disaster loan 
that keep my business open, and now I am here learning and make 
connections to make my business grow.
    That is what is important. That reminds us of what our job 
really is. This is about real people and real lives. Our 
responsibility is great. I am proud of these proposals because 
I believe that they live up to that responsibility. I believe 
that they reflect an SBA that understands what is at stake. It 
is not about programs and statistics. It is about results 
measured by the success of our clients. I hope we can work 
together to get those results and help usher in more of that 
success for even more American entrepreneurs.
    I want to thank you again for having me here. I would be 
glad to answer any questions you may have. Thank you.
    [Administrator Barreto's statement may be found in the 
appendix.]
    Chairman Manzullo. Thank you, Administrator. The 
President's agenda for small business affects more than just 
the SBA, does it not? Could you explain what other parts of the 
President's budget request help small businesses?
    Mr. Barreto. Absolutely, Mr. Chairman, and I thank you for 
that question.
    You know, we have had a wonderful opportunity this year to 
go around the country. In fact, I just came off of a trip where 
we did a regional event in Reno, Nevada. We did a business 
matchmaking event in Anaheim, and I flew in last night.
    I want to tell you some of the things that we have been 
hearing all around the country. First of all, the small 
businesses are thanking us, this Administration, for creating 
the right environment for them to succeed. One of the things 
that they mention to us often is the appreciation for the Jobs 
and Growth package.
    You know, a lot of people still do not understand that that 
Jobs and Growth package returned $10 billion into the hands of 
small businesses. Eighty percent of that benefit accrued to 
small business simply by lowering the top marginal tax rate.
    We also quadrupled business deductions for those small 
businesses, and that helped a lot in getting that confidence 
going back up again and really started creating those jobs that 
we have been needing in our economy and those purchases that 
were not being made by small businesses.
    I have to tell you that the top issue that we hear out 
there all across the country is association health plans. They 
still want access to affordable health care. They still feel 
that they have too many cumbersome regulations. They want us to 
do something about tort reform. They want us to do something 
about opening up new markets and new opportunities, unbundling 
contracts. There is a lot that is on small businesses' minds.
    This budget helps us to advocate on behalf of those small 
businesses. We understand that they appreciate our programs and 
services, but they also expect us to be a champion for them. 
They want us to get it. They want us to understand what they go 
through every single day.
    That is what we are hearing, and that is one of the reasons 
I am proud to present this budget to you because I really 
believe that it is going to help us to continue the momentum 
that we have built over the last year.
    Chairman Manzullo. Okay. Thank you.
    We will keep the questions to five minutes, but, Mrs. Vel 
zquez, I am going to give you 10 minutes. I will double the 
clock on that for you.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Barreto, can you please list for the Committee the 
names of the programs that you asked for an increase in funding 
over last year's budget?
    Mr. Barreto. Well, the first program that we are looking at 
making a significant increase in, as you know, is the 7(a) loan 
program.
    Ms. Velazquez. That is not an increase. You zeroed out. You 
did not ask for any money.
    Mr. Barreto. As you know, Congresswoman, we have several 
very important programs--the 504 program, the SBIC program--
that also have zero subsidy.
    Ms. Velazquez. Why did you mention 7(a)? You know quite 
well that that is not the case. Tell me about the women's 
business centers, the BDCs, venture capital, micro loan.
    Mr. Barreto. Sure. I would be happy to.
    Ms. Velazquez. Let me go to the next question.
    Mr. Barreto. Absolutely.
    Ms. Velazquez. In your January 8 response to the Senate, 
you wrote, and I quote, ``Once SBA is able to reopen the 
program, we will take steps to ensure that every application is 
treated equally and fairly.'' You also stated that you look 
forward to working with us to rapidly resolve this issue.
    Well, Mr. Barreto, many of those loans--over 750,000--were 
submitted on time before the cap was implemented, and yet they 
were returned by your agency. Three small businesses that are 
in this very situation will testify here today.
    What can you tell these people, these small businesses that 
have traveled here to Washington in hopes of finding relief to 
assure them that the SBA will resolve their situation quickly 
and fairly?
    Mr. Barreto. I am very excited to tell them that we brought 
today a very important proposal that will help us greatly 
achieve many of the objectives that you just mentioned. This 
proposal that we are submitting today to expand the SBA Express 
program will mitigate a lot of the problems that you reference.
    Ms. Velazquez. Mr. Barreto, please answer my question.
    Mr. Barreto. Yes, ma'am.
    Ms. Velazquez. My question is based on a response that you 
provided to the Senate where you said that you will deal with 
those applications that were submitted on time before the cap 
restriction was invoked,----
    Mr. Barreto. Yes.
    Ms. Velazquez [continuing]These people made plans to expand 
their businesses, and they have been put on hold. So what are 
you going to tell them, that they have to wait until you submit 
a proposal? What do you know about the outcome of that 
legislative proposal here in Congress?
    Mr. Barreto. First of all, I am sorry. I want to make sure 
that I am very, very clear on your question.
    First of all, we did have to return back applications that 
we received simply because we ran out of money. As you know, we 
were on continued resolution for the second year in a row. In 
other words, we did not have our budget approved, which would 
have helped us to be able to make some of those loans. We 
basically ran out of money.
    The good news is that most of those loan applications have 
already come back to us. Most of those loan applications have 
already been approved.
    I want to mention one other thing, Mrs. Vel zquez, 
Congressman Vel zquez. This is very, very important. Ninety-
five percent of the loans that the SBA does are under $750,000. 
Only five percent of those loans are over the $750,000 cap. 
Unfortunately, those larger loans, which often times are for 
real estate and fixed assets, eat up a third of the money.
    I am happy to tell you that now that we have a budget, we 
are not going to have a problem serving 95 percent of the small 
businesses that apply for loans at the SBA.
    Ms. Velazquez. What are you going to do with those 
applications over $750,000 that were submitted before the 
restriction? I have an answer for you. I have a solution.
    Mr. Barreto. First of all, we have already processed most 
of those applications. They have already come back to us.
    One of the things I want you to know is that as soon as we 
opened up the program, our lenders contacted us and said look, 
those applications that got sent back, can we send those back 
to you? We said absolutely, yes.
    Many of those have already come in and have been processed. 
We work on that every single day to make sure that that backlog 
has already been dealt with, and it has been dealt with.
    Ms. Velazquez. Okay. There are three business people that 
are here today. You are telling me that their situation will be 
resolved?
    Mr. Barreto. Congresswoman Vel zquez, I am not sure of the 
specific cases that you reference, but in every case we will do 
everything that we can to make the loan.
    You know, one of the good things about the SBA is that it 
not only has a 7(a) loan program. We also have other loan 
programs as well that can accommodate those larger real estate 
loans.
    Ms. Velazquez. It is quite simple. Their applications are 
for loans above $750,000.
    Mr. Barreto. We have a cap right now of $750,000.
    Ms. Velazquez. But they were submitted on time. What are 
you going to do with those?
    Mr. Barreto. You know, one of the things is I think we have 
a chart here that I would like to show you. You know, one of 
the things that nobody could have anticipated is the spike in 
demand that we received during the holidays.
    You see, for us usually we will see $25 million in a normal 
day. You can see from this chart here the incredible swings 
that we saw there at the break. We had some days where we were 
over $80 million, $100 million.
    Ms. Velazquez. Excuse me. Excuse me. He gave me 10 minutes, 
and I have a lot of questions.
    Mr. Barreto. Okay.
    Ms. Velazquez. For these three people, why can you not 
reprogram funding into the 7(a) program?
    Mr. Barreto. Well, one of the things that we did, 
Congresswoman Vel zquez, is we looked at the possibility of 
reprogramming some dollars, but, unfortunately, what we found 
out is because of the rules and the limitations we were not 
able to reprogram enough to get us to the level that we needed 
to be at to be able to absorb a lot of those larger loans.
    It is one of the reasons why we still have a cap on the 
loans right now, and it is one of the reasons why we feel so 
strongly about the proposal that we have submitted today. You 
see, if Congress acts on that proposal we will be able to take 
that cap off immediately and be able to help those small 
businesses.
    Ms. Velazquez. So, Mr. Barreto, your solution to this SBA 
created problem is to make this small business start the 
process all over again, go to the back of the line and repay 
application fees?
    Mr. Barreto. Absolutely not.
    Ms. Velazquez. Lenders have already stated that under your 
new proposal they would not be able to make this type of loan, 
so a small business owner would be left to search for a new 
bank that is willing to provide them a loan. How is this fair? 
This is a non-starter, Mr. Barreto. This proposal is a non-
starter. I can tell you that.
    Mr. Barreto. Well, I would like to explain because I think 
there may be some misunderstandings about the proposal.
    You see, if this proposal is able to be enacted, we will be 
able to do some of those large loans because we are going to 
get about another $3 billion in budget authority, so I think 
there may be some confusion, especially in the short term, of 
our ability to do some of those larger loans.
    Ms. Velazquez. Well, you have a lot of work to do because a 
lot of the banks are saying that they will not agree with it.
    Mr. Chairman, this proposal would be submitted to us. We 
will have to conduct hearings, and we will have to mark it up.
    Mr. Barreto. I would be happy to continue to provide any 
information around this. We spent a lot of time thinking about 
this.
    By the way, one of the reasons that we came up with this 
proposal is because of the things that the industry was telling 
us. They were telling us look, we need to do something to 
remove that cap. We need to do something that is going to make 
this program consistent and will be immune to these spikes in 
volume. We need to do something so that this program can grow 
this year; not only next year, but this year. This proposal 
allows us to do all those things.
    Ms. Velazquez. This is a problem that was created by SBA. 
Quite clear, the Members of this Committee told you in your 
last budget that the funding that you were requesting was 
inadequate--you said no, it is fine--that you would be running 
out of money, and this happened. Now we are punishing small 
business for that.
    Mr. Barreto. One of the things I did was I brought a chart 
with me as well--I wanted to be prepared for these questions--
that really shows you what the level of lending has been over 
the last five years.
    You see, over the last five years, we have never had the 
kinds of volumes that we have had this last year. In a way, we 
are kind of a victim of our own success, but the reason that we 
had the problem is not because we decided to close down the 
program. The reason that we had the problem is we were on a 
continuing resolution because we did not have a budget approved 
for the second year in a row.
    The reason that we had the problem is because five percent 
of the loans eat up a third of the budget authority, and that 
is why this proposal------.
    Ms. Velazquez. Do you not have a budget now? Do you not 
have a budget now?
    Mr. Barreto. We do have a budget now.
    Ms. Velazquez. But you still have a problem.
    Mr. Barreto. We are open for business now, and 95 percent 
of the loans are being made.
    Ms. Velazquez. Let me go to the next question. Prior to the 
release of the budget, Mr. Barreto, could you explain to us at 
what point during your testimony before the Committee, during 
our negotiations with the SBA over the reauthorization or in 
any communication, either formal or informal, have either you 
or the Administration advocated allowing the claimed fee 
structure for the 7(a) loan program to lapse?
    Mr. Barreto. First of all, I want to be very clear on that 
point as well, Congresswoman Vel zquez. We are not increasing 
the fees. What is happening is the legislation that Congress 
put in is expiring at the end of this fiscal year. All we are 
doing is going back to the original fee structure.
    My understanding is the reason that legislation was put 
forward was to be able to incentivize these kinds of loans and 
to be able------.
    Ms. Velazquez. What about the 504? Did it not expire too?
    Mr. Barreto. The fee structure on the 504?
    Chairman Manzullo. Talking about expiring, the time has 
expired.
    Ms. Velazquez. Are you going to do the same with that?
    Mr. Barreto. I am sorry. With regards to the 504 program?
    Ms. Velazquez. Yes.
    Mr. Barreto. We have actually a tremendous opportunity with 
the 504 program because we have $2 billion of additional budget 
authority that we never spent in the 504 program.
    In fact, what is happening now is more of those larger real 
estate loans that were in that 7(a) portfolio are moving over 
to the 504 loan program, so we think that is a very important 
opportunity to help small businesses with the real estate and 
fixed asset loans.
    Chairman Manzullo. Mr. Bradley?
    Mr. Bradley. Thank you very much, Mr. Chairman. It is 
certainly a pleasure to be here and certainly a pleasure to see 
you, Mr. Barreto.
    I would like to just start out, first of all, by thanking 
you personally for intervening during this crisis time several 
weeks ago and making sure that a constituent of mine was given 
prompt treatment. It was an emergency closing and a lot of 
money at stake for him as it was a small business and a lot of 
personal savings.
    Without your help and the help of your staff, it would have 
been a very real problem, so thank you. I know that given the 
budget situation and how we are waiting for the omnibus to 
pass, it was a very difficult situation. I just wanted to thank 
you.
    As we look at difficult budget decisions and as certainly I 
have traveled around New Hampshire and there has been a lot of 
attention to New Hampshire recently, the small business owners 
I have been talking to have emphatically indicated to me that 
the bonus depreciation, the greater expensing limits, the 
reduction of the top individual rate which the small business 
owner pays, are critically important to their economic health.
    Perhaps you would like to comment on that and how, you 
know, these incentives, these tax incentives for businesses 
that are hiring, that are trying to keep employees, are 
critically important, as well as the loan program and that we 
have to have a balance of both and that scarce resources cannot 
just be focused in one area.
    Mr. Barreto. Absolutely, Congressman Bradley. It is an 
honor to be able to help your constituent.
    By the way, I would be happy to help those other 
constituents that are in this room to personally discuss their 
situation with regards to the 7(a) loan. If I could have their 
names and numbers, I will personally make sure that we follow 
up with them.
    I appreciate your question and your comment, congressman, 
because you are absolutely right. A lot of people do not 
understand that small businesses shoulder some of the highest 
tax burdens. You know, sometimes when you hear people talk 
about this tax relief it is like they do not understand that 23 
million small businesses in the United States will get a tax 
relief of about $2,209.
    Now, for some that may not seem like a lot, but for that 
small business who is trying to keep pace with the health 
insurance premiums or give an employee a raise or buy a 
software program, it is huge. You throw on top of that when you 
quadruple that business deduction, those kinds of purchases 
that were not being made before are being made now.
    It is not an accident that the economy is starting to 
increase. You know, the President says all the time that small 
business is the engine that is fueling that because they are 
buying equipment. They are buying vehicles. They are buying 
technology. They are creating jobs. That did not happen by 
accident. It happened because this Congress, this President, 
worked together to create the environment for those small 
businesses to succeed.
    If we really believe in small business, then we will give 
them back more of their hard-earned money because we know what 
they will do with it. They will put it back to work, and that 
is what we should be doing. That is what small businesses tell 
us, and that is what they tell the President of the United 
States.
    You know, when the President of the United States goes 
around the country and meets with small businesses, he is not 
the one who is doing all the talking. He is talking to these 
small businesses and asking them the questions, and these are 
the kinds of things they are telling him.
    I could not agree more with you. I think that we need to 
make the tax relief permanent for the small businesses so they 
can continue to fuel the economy forward.
    Mr. Bradley. Thank you very much.
    Chairman Manzullo. Thank you, Congressman.
    From the land of enchantment, Congressman Udall.
    Mr. Udall. Thank you. Thank you very much, Chairman 
Manzullo.
    Chairman Manzullo. From the Prairie State.
    Mr. Udall. From the land of enchantment. That is right.
    Administrator Barreto, let me just begin by saying, and I 
think this in a way echoes what our Chairman and our Ranking 
Member just said, that we are very disappointed, I think, in 
certain respects with this SBA budget. I mean, you are talking 
about $120 million below what was requested last year, a 10 
percent decline in program funding, zeroing out micro loan, 
7(a), prime, business link, SBIR, rural outreach. I mean, these 
are significant changes in programs that I think many of us 
believe up here are good ones that help businesses.
    Let me, first of all, just focus on one of those. In May of 
last year, a hearing was held on SBIR FAST, that program and 
the MEP program. In testifying about the FAST program, the SBA 
said, and I am quoting here. This is in the testimony. ``The 
result is a strong knowledge base backed up by a network of 
professionals who support small businesses to become expert 
researchers and innovators and commercialize their 
innovations.''
    This testimony from your agency, this testimony certainly 
implies that SBIR FAST program is successful. What happened in 
the intervening months that led you to believe that the SBA 
should not request funding for this program?
    Mr. Barreto. Thank you for the question, Congressman. It is 
not really what happened in the last few months. It is really 
what has been happening over the last couple of years.
    You see, we do believe in these programs, but one of the 
things that has been so difficult for us is that sometimes we 
will request funding for these programs and they will get 
zeroed out, and yet we still have the responsibility and there 
is an expectation that we are going to run these programs with 
no funding.
    As you know, the SBIR program is an important program, and 
all agencies of government participate. This is a set aside 
program for research and development grants. Our part of it is 
really to help facilitate those opportunities, to really inform 
and educate small businesses how these programs work, and we 
are going to continue to do that through our incredible network 
that we have.
    So, our commitment to the program is not necessarily going 
to end, but one of the things that we had to do is just face 
the reality that often times the appropriations for some of 
these programs are not there, and yet we need to continue to do 
the job for the small businesses that they expect us to do.
    Mr. Udall. The reality, Administrator Barreto, is that the 
appropriations were there. You did not ask for the money, and 
that is the fact of it.
    A recent report of your Inspector General highlighted that 
the SBA had not provided sufficient measurable outcomes for 
FAST grant recipients. Further, the IG pointed out that the SBA 
had yet to receive performance reports from several grant 
recipients.
    How do you respond to my concern that any failure of the 
FAST program has more to do with the failure of the SBA to 
implement the program adequately rather than any failure of the 
program itself?
    Mr. Barreto. You know, we work very closely with the IG. 
They obviously put out a lot of reports that we can be doing 
better. You know, a lot of times what we realize is that they 
are not aware of some of the things we are doing, so we have to 
sit down with them and make sure that we educate them on the 
deliverables and the results that we have accomplished on these 
programs.
    Again, it is not to say that we are not committed and do 
not believe that there is benefit. You know, small businesses 
can play a very important role in the research and development 
that the government needs, remembering that 97 percent of all 
research and development that the government does is not part 
of the SBIR program and can still go to small businesses.
    Mr. Udall. The other part of this that you mentioned in 
your earlier testimony is the issue of continuing resolution. 
You have said several times here we have had no budget approved 
for the second year in a row, and we were on a continuing 
resolution and how it hurt your agency. Basically I think what 
you would probably tell me is a continuing resolution is a hard 
freeze. It hurts our ability to plan. We cannot move out and do 
things.
    I think there are many of us on this Committee that are 
very disenchanted with our budgeting process, the fact that we 
are going into the fiscal years and not giving you a budget and 
then having that kind of thing happen.
    You should know that that disenchantment is out there by 
many of us I think on this Committee, and I think we would be 
wise if we believed in SBA programs to fund these at the start 
of the fiscal year and give you the ability to plan.
    Mr. Chairman, I just want to ask you to put my opening 
statement in the record and with that yield back and thank you 
very much.
    Chairman Manzullo. Without objection. I appreciate that.
    Dr. Bartlett?
    Mr. Bartlett. Thank you.
    Mr. Secretary, I would like you to know that your 
stewardship of the programs is recognized and appreciated. 
Thank you very much for your hard work and great successes. I 
have a couple of questions that deal with some of the detail of 
the budget and your program.
    As you know, I, along with most of my colleagues on this 
Committee, are very supportive of the HUB Zone program. As 
America transitions through the so-called jobless economic 
recovery, far too many Americans are without work. The HUB Zone 
program targets the poorest areas of every state and brings 
good jobs and economic develop where we need it most.
    That is particularly true in my district where in a very 
economically depressed area we have brought some jobs of very 
high calibre where they are being paid three and four times the 
average wage in that community, so it is a very successful 
program.
    In my district, 36 HUB Zone certified firms produce more 
than $60 million in goods and services each year. These firms 
represent the job engines that create jobs where we need them 
most. Unfortunately, your 2005 budget submission cuts HUB Zone 
funding by nearly seven percent from 2004 levels, while 
increasing 8(a) funding by eight percent and increasing small 
disadvantaged business program funding by more than six 
percent.
    Even more significant are the absolute numbers in these 
programs. The 8(a) program will receive $37 million in 2005, 
while the HUB Zone will receive less than $7 million, and that 
is in spite of the fact that there are 8,800 certified HUB Zone 
firms and only 7,300 8(a) firms.
    For the past five years, the federal agencies have only 
achieved a small fraction of the statutory required minimum 
level of contracts for HUB Zones. Why will the Administration 
not adequately fund the HUB Zone program, which is an 
enormously successful program?
    Mr. Barreto. Thank you very much for that question, 
Congressman Bartlett.
    First of all, let me say that we agree with you that the 
HUB Zone program is a very important program. What this budget 
does is it incorporates the funding that we would have for HUB 
Zone and puts it where we believe that it should have been all 
along--inside the government contracting and business 
development line item.
    We are very proud of the increases that we are seeing in 
HUB Zones. We work very closely with HUB Zone firms and the HUB 
Zone association. One of the things that we were concerned 
about is that sometimes that funding was going to be zeroed out 
altogether, and so to prevent that, to mitigate that, we have 
included the funding that we will put in HUB Zone inside of our 
GCBD area. That is included in there.
    We think it is fantastic that there is more HUB Zone firms 
that are being signed up all the time. We think it is great 
that there are 8(a) firms that are being signed up all the 
time. As you know, we consider both of those programs at 
parody, not one more important than the other, even though 8(a) 
has been around a lot longer, the contracting is much larger 
there, even though there are less firms. One of the reasons 
there are less firms is the process of being certified for 8(a) 
takes a lot longer and is a little bit more cumbersome.
    We are seeing some very good signs, Dr. Bartlett. Last 
year, the most recent figures available, we did an extra $1 
billion to HUB Zone firms than the year before, and we see that 
trend continuing.
    We work very closely with the industry. Yesterday I was in 
Anaheim at a business matchmaking event, and the HUB Zone 
organization was represented. HUB Zone firms were there meeting 
with buyers at the federal level and corporate level to get 
access to those contracts.
    I want you to know that we are committed to this program. 
It is an important program for small business.
    Mr. Bartlett. Are you saying that you really have not cut 
the funding; you have simply moved some of it to another 
category?
    Mr. Barreto. That is right.
    Mr. Bartlett. Okay. You need to do two things. One is tell 
the world, the HUB Zone world, how much total money is 
available; that you really have not cut their budget if it is 
true that you have not cut their budget.
    Mr. Barreto. Right.
    Mr. Bartlett. The money is really there, and the program is 
being even better supported now than it was before. Will you 
provide us with the documentation for that, because our HUB 
Zone people are very concerned?
    Mr. Barreto. Yes, sir.
    Mr. Bartlett. Second question. If time runs out, you may 
submit this for the record.
    Why was Mr. Maurice Swinton, who had strong support from 
small business technology companies, transferred from the 
Office of Technology where he managed the federal SBIR program 
to the Office of Management and Technical Assistance?
    Is the transfer temporary and voluntary? If not, why not? 
Why is Mr. Swinton being transferred to a program that he may 
have little or no experience with?
    Mr. Barreto. First of all, Maurice Swinton has done a very 
good job for us in that program. One of the things that we have 
been doing over the last couple of years is moving people 
around. This is part of our transformation effort, our new SBA.
    You know, the SBA is very fortunate to have some very 
talented individuals that can do a number of different things. 
One of the things that we have been very focused on is 
succession planning. We cannot always expect the people to 
always have to carry the load. We need to be able also to train 
people and make sure they can do a variety of different things.
    The bottom line is we really needed Maurice in another 
program, and we were fortunate enough to have two individuals 
that could trade roles, if you will, to help us out. We 
appreciate the service that Maurice has given us. He has done a 
fine job. His replacement will do a fine job as well.
    Please understand that this is no reflection on our 
commitment to that program.
    Chairman Manzullo. Mr. Akin?
    Mr. Akin. Thank you. Thank you, Mr. Chairman.
    I think what I am picking up is that part of what we are 
seeing here in your proposal is an attempt to streamline the 
operation and to be able to deliver services more efficiently 
without the red tape and the hassle to the people that we are 
really serving with this sector of the budget.
    Is that, first of all, an accurate summary of what you are 
trying to accomplish?
    Mr. Barreto. That is absolutely correct, Congressman Akin, 
and I appreciate the comment.
    This is what SBA has been doing now for a long, long time. 
It is incredible, and I do not think that part of the story 
gets out. SBA has been doing incredible things, and yet it has 
been streamlining now for over a decade.
    We break records every single year because we have good 
people, we have good programs, and we just do it better than we 
have ever done it before. We believe that we have not hit 
capacity yet. We can still do a lot more with this budget.
    Mr. Akin. With your track record of number of loans, in 
that way you are doing a better job. You are taking a look with 
this proposal at being able to do not only more loans, but more 
loans with less hassle and less paperwork.
    To some degree, just because of the legislative process we 
create these stovepipe special programs. What you are saying is 
we can service those markets. We can do a good job for those 
people, but we are just not going to put it all into these 
stovepipe programs. We are going to put it all together and 
manage it more efficiently. I think that is what I hear you 
saying.
    Mr. Barreto. That is absolutely correct, Congressman. You 
know, with the small businesses, and we talk to thousands of 
them every year. They do not pay attention to the stovepipe. 
They do not care about the stovepipe. They just want to know is 
it going to be easier for me to get a loan, and, by the way, I 
may not need $1 billion. I may need $50,000 or $100,000. They 
want to know if they can get technical assistance when they 
want it, not when we want them to have it.
    Last year we trained 2.1 million people. They want to know 
if we are bringing more opportunities to them, not something 
that is in a stovepipe, but maybe a new initiative like 
business matchmaking or some of the things that we are doing on 
line.
    Mr. Akin. In the case of these loans, are they pretty well 
distributed across the country in terms of geographically so it 
is not all just loans to Washington, D.C. business, but it is 
kind of a spread?
    Is there good mix also in terms of the larger and smaller, 
the range, so that we are not just doing everything right at 
the max because it is easier from an administrative point of 
view to just do maximum loans?
    Do we have good variety both geographically and in size of 
the scale of the loans?
    Mr. Barreto. That was one of the things I was the most 
proud of last year, Congressman Akin. We did more everywhere. 
We did 30 percent more loans to all American small businesses, 
but we did 38 percent more to minority small businesses.
    There is a chart right here that I would like to share with 
you. Across the board, we did more to minorities and the 
African-American community last year. We did something in 
excess of 75 percent more loans. Yellow is the last year that 
we did. You can see how that spikes up over the previous two 
years. Hispanics, we did about 45 percent more loans. Asians, 
30 percent more loans than the year before. We did more Native 
American. Women, 30 percent. Veterans, 20 percent.
    We did more everywhere, and we got our average loan size 
down. When I first came on board, the average loan size at the 
SBA was a quarter of a million dollars. The average that a 
small business needs for working capital is $50,000 if you 
believe Inc. Magazine and their studies of it. That does not 
mean that we cannot do large loans. By the way, we did 20 
percent more in our 504 loan program last year than ever 
before.
    These changes that we have made are working, not because we 
say they are working, but because the outcomes we are getting 
for small business are so great, and the customers are telling 
us that.
    Mr. Akin. I really appreciate what you are saying, and I 
appreciate your taking an aggressive, and it may be that it is 
somewhat misunderstood because everybody has their little pet 
thing, but if the bottom line is you are able to do this kind 
of performance, you are getting more loans and it is for a 
diversity of different kinds of markets, a diversity of sizes 
of loan requirements, I think that is what we are all about. I 
really appreciate your good management.
    Ms. Velazquez. Would the gentleman yield?
    Mr. Akin. No. You can go ahead and have your next 10 
minutes if you would like, but I think my five are done.
    Ms. Velazquez. It is still yellow. I just want the record 
to reflect that----
    Chairman Manzullo. There are 30 seconds left. Go ahead.
    Ms. Velazquez [continuing]The 7(a) loan program did $200 
million less.
    Mr. Barreto. That is misunderstood, Congresswoman. Did you 
know what happened to those $200 million? A lot of the 
minorities that were getting those $200 million, they wanted 
larger loans. They wanted real estate loans. They wanted fixed 
asset loans. The $200 million went to the 504 loan program. We 
did $200 million more to minorities in the 504 loan program, so 
that is a little bit of a misnomer.
    That $200 million did not disappear. The good news is we 
helped more minorities than ever before. We are very proud of 
that.
    Chairman Manzullo. Mrs. Kelly?
    Mrs. Kelly. Thanks. Nice to see you here. Thank you very 
much for being here.
    Mr. Barreto. Thank you, Congresswoman.
    Mrs. Kelly. I have really just one question, and that is in 
your budget I want to know if you have done anything that can 
help our returning service people.
    When you are in the National Guard, if you are the owner of 
a small business and maybe you employ two or three people, when 
you go your business is gone. Is there something in there that 
is going to help those people reenter the business market as an 
entity?
    Mr. Barreto. Thank you very much for that question, 
Congressman Kelly.
    You are absolutely right. I mean, we know this more than 
ever before. The people that are sacrificing the most for us 
right now are serving us in the armed forces. We have taken a 
very proactive, aggressive approach to making sure that they 
understand what their benefits are, what the opportunities are.
    I will give you a couple of examples. We put a program 
together that we call MREIDL, military reservists economic 
injury disaster loans. It is a mouthful, but those are loans, 
low-interest loans for those businesses where an owner of a 
company is serving in the armed forces or maybe one of the 
employees are.
    We did a tremendous amount of marketing and outreach. We 
did a lot of interviews on TV, radio. We are doing more than 
that. We are working very closely with the Department of 
Defense, with the Veterans Affairs. We have put in the hands of 
all returning veterans--not just the ones that we think are in 
business; all returning veterans--an SBA kit with all of the 
information on all of our programs and a couple of little 
mementos that we put in there. We have distributed 250,000 of 
those kits.
    We are working right now with the Department of Defense to 
put kits together for 500,000 more service personnel, so this 
is very, very important to us. Last year we reversed a trend, a 
seven year trend of declining veterans loans. Last year we had 
an increase in veterans loans, and we are going to have an 
increase this year as well. It is one of the most important 
things that we can do.
    If we are asking so much of these people right now in 
serving our country, protecting us, protecting our homeland 
security and fighting international terrorism, then we have to 
be there for them when they come back. I pledge to you the SBA 
will be there for them.
    Mrs. Kelly. Thank you. I really want to applaud you on the 
business matchmaking program because I have found in my 
district and in other places where I have been small businesses 
get themselves certified, and then they do not know how to get 
in on the bid contracts. It is one of the reasons I have real 
problems with bundling.
    I would applaud your efforts on that, and I hope that what 
you have done here is extend more toward educating the small 
businesses of America how they, too, can get in on the federal 
contract bids and win those bids. I think that is very 
important.
    Mr. Barreto. Thank you very much, Congresswoman.
    Mrs. Kelly. Thank you.
    Chairman Manzullo. Thank you. We will take about a five 
minute break and then have the second panel.
    Mr. Barreto. Thank you.
    [Recess.]
    Chairman Manzullo. The Committee is called to order.
    The first witness will be Lee Mercer, president, National 
Association of Small Business Investment Companies. The red 
light, you know how it works. When it gets to yellow, you have 
one minute. When it gets to red, you are done.
    Lee, I look forward to your testimony. There you are, right 
in the middle.
    Mr. Mercer. In the middle of the group.
    Chairman Manzullo. If you could talk very closely to the 
mike, that would help.
    Mr. Mercer. How is that? Am I being picked up now?

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

    Mr. Mercer. Mr. Chairman, Ranking Member Vel zquez, Members 
of the Committee, the point I want to stress today is that the 
Participating Security SBIC program, by far the most active 
part of the SBIC program as a whole, will end effective October 
1, 2004, if the Administration's proposal is adopted by 
Congress. We agree legislation must be passed. A restructuring 
must occur, but not the proposal of the Administration.
    Today's hearing is the beginning of a critical path for the 
Participating Security program. My goal is to help the 
Committee understand why SBA's proposal will not work and why 
the proposal we have filed with the Committee will work for all 
stakeholders.
    The Participating Security program is critical to the 
success of the SBIC program as a whole. Over $7.4 billion in 
Participating Security investments have been made since the 
start of the program in 1994. During the past 17 months, a 
critical period as U.S. business fought to recover from the 
recession, Participating Security funds invested $2.8 billion, 
a full 47 percent of the $6 billion invested by SBICs during 
the period.
    Through January 23 of this fiscal year, Participating 
Security SBICs have accounted for 55 percent of all SBIC 
investments. Twenty-six of the 36 new SBICs licensed by SBA in 
fiscal year 2003, a full 72 percent, were Participating 
Security funds.
    Clearly, the program is providing the equity capital 
Congress intended when it created the program in 1992 and 
increasingly so. NASBIC supports the $4 billion in 
Participating Security leverage authority for fiscal year 2005 
that is proposed by SBA. However, NASBIC strongly opposes the 
program restructuring proposed by the Administration. That 
proposal simply will not work for talented management teams and 
knowledgeable investors. I cannot say it more plainly.
    The current structure has worked for the private sector 
because there is a potential, and it is only a potential, for 
substantially enhanced returns to private investors investing 
in Participating Security funds versus non-SBIC funds if, and 
it can be a big if, the SBIC performs above an annual 12 
percent level of profitability.
    That potential for significant enhancement in the current 
structure is required to offset the many negatives associated 
with the program. Not the least of these are substantial up 
front fees paid to SBA, substantial risk posed by capital 
impairment and restricted operations regulations, SBA's 
preference in any liquidation event and the very real fact that 
private investors fare substantially worse than they would in a 
non-SBIC if the level of profitability falls below 12 percent.
    S.B.A.'s proposal would destroy the balance of the current 
program in the following ways: First, SBA's proposal would 
require a current pay interest charge that is unheard of in 
funds making 100 percent equity investments, investments that 
provide the fund with no cash flow to pay current interest. The 
resulting mismatched cash flows is what got the SBIC program in 
trouble in the 1980s, leading to the creation of the current 
program.
    S.B.A.'s proposal would result in UBTI, unrelated business 
taxable income, for tax exempt institutional investors, driving 
away the very investors SBA should want in the program. SBA's 
proposal would substantially increase the up front fees and 
preferred payments made to SBA before any payments to private 
investors. It would raise the level of profitability required 
for private investors to break even to at least 18.3 percent 
per year. The hurdle rate is a non-starter.
    S.B.A.'s proposal would substantially reduce the percentage 
of remaining profits that went to private investors. Thus, 
SBA's proposal would increase all negative elements in the 
program while substantially reducing benefits for private 
investors.
    N.A.S.B.I.C. proposed a restructuring that is simplicity in 
itself, prorata sharing of all profits and losses by all 
economic interests in the fund, including SBA. Based on 20-year 
venture capital industry returns and Treasury rates, this would 
work for all parties.
    Structured as we propose, the new Participating Security 
program would stimulate investment in small businesses to the 
greatest extent possible during times of scarce capital 
availability. It would accomplish the mission at no cost, 
likely a gain to the government, attract the largest possible 
percentage of knowledgeable private investors and high-quality 
fund management professionals and create no distortion in 
private capital markets.
    Chairman Manzullo. With that, we are out of time.
    Mr. Mercer. I am done.
    Chairman Manzullo. Thank you.
    Mr. Mercer. I just did not get to read my thank you 
paragraph.
    Chairman Manzullo. That is okay. That is okay. I will note 
that for the record.
    [Mr. Mercer's statement may be found in the appendix.]
    Chairman Manzullo. I am going to recognize Congressman Jim 
Cooper, who will introduce his constituent, David Pilcher from 
Nashville. Mr. Pilcher will then be the next witness.
    Mr. Cooper. Thank you so much, Mr. Chairman. I appreciate 
this opportunity. I think that this Committee and this Congress 
can benefit from the testimony that you are about to hear.
    David Pilcher is a fine man and a fine small businessman 
who has been seriously mistreated by the recent changes in the 
SBA 7(a) program. Mr. Pilcher is CFO of a 109-year-old, family-
owned small business, a moving and storage company, a typical 
American firm. They were in the process of getting one of these 
loans when not only was the program capped, as you all are well 
aware of, but they outlawed piggybacking.
    To me, two other very insulting and harmful things 
happened. Number one, as I understand it, this announcement was 
made at 5:00 in the evening of December 23, 2003. Now, is that 
a coincidence? No. I think that is an injustice. It is a slap 
in the face of every small business in this country that they 
could abuse the Christmas holiday to take away a valuable 
program like this.
    Moreover, it is my understanding this company--you know, 
these SBA loan applications are not short and simple. It is a 
stack about six inches high. A lot of work goes into that 
material. They have not even been able to get the application 
back.
    They applied for the loan. All this stuff happens. It is 
not their fault at all. We are going to lose the opportunity to 
create jobs in the Nashville area, and then they will not even 
give them their application back. This is a terrible injustice.
    I know that this Committee is working hard to improve the 
program, to get the funding that it needs, but I am just 
embarrassed that this happened anywhere in America, much less 
in the Nashville, Tennessee, area.
    Mr. Pilcher is here to give his outstanding testimony, and 
we appreciate that very much.
    Chairman Manzullo. Mr. Pilcher, we look forward to your 
testimony. If you could move that mike as close to you as 
possible? With the lights, when it is yellow you have one 
minute. Is this your first time testifying before Congress?
    Mr. Pilcher. Yes, it is.
    Chairman Manzullo. You have a total of five minutes.
    Mr. Pilcher. Thank you, sir.
    Chairman Manzullo. Thank you. You thought I said a total of 
one minute?

  STATEMENT OF DAVID PILCHER, TED R. SANDERS MOVING & STORAGE

    Mr. Pilcher. Thank you, Representative Cooper, for that 
introduction.
    Chairman Manzullo, Ranking Member Vel zquez and Members of 
the House Small Business Committee, thank you for this 
opportunity to address you today regarding the SBA funding cap 
and related matters.
    My name is David Pilcher, and I am the financial officer of 
Ted R. Sanders Moving & Warehouse, Inc., an agent of Allied Van 
Lines. We are a family run business, as you heard, with active 
participation by most of the owner's family, and we employ 
approximately 30 to 40 people. In fact, this will be, as he 
said, the family's 109th year in the business.
    I joined the company about a year and a half ago. Shortly 
after that, we realized we could significantly improve our cash 
flow by refinancing the mortgage on our building. We were 
halfway through the 10-year term of our current mortgage, and 
interest rates were and continue to be very favorable.
    After talking to several lending institutions without 
success, we contacted the SBA division of U.S. Bank in 
Nashville. We met with them and spent many hours accumulating 
the required paperwork. The outlook appeared positive for us.
    In mid December, after doing virtually everything asked of 
us and within the required timeframe, we were told our 
application looked good and would receive approval for a new 
mortgage in the amount of about $1.5 million through the SBA 
7(a) program.
    Suddenly, in January, we learned that everything had been 
put on hold because of the SBA shutdown. Worse, when the 
program resumed, there was a cap of $750,000 with no additional 
participation or piggybacking allowed to make up the needed 
difference. That was only half of what we needed.
    I cannot adequately express to you how devastating this bad 
news was for our company, but I am going to try. In effect, the 
rug had been pulled out from under us. Because this was a 
refinance, no alternative is currently available to us, 
including the 504 program. This SBA guaranteed loan would have 
freed up over $7,000 per month of real cash flow, almost 
$85,000 a year at the present interest rate.
    To a small business like ours, this is a very significant 
amount of money. This money could be used in several ways--to 
improve and grow our business, which is hiring additional sales 
people, hiring labor staff, upgrading and adding to our truck 
fleet so we could bring in new business or upgrading our 
warehouse facilities.
    I do not have to explain to you that this growth would also 
generate new tax dollars as well. Small business, as you know, 
is the lifeblood of this country, and it needs to be supported 
in positive ways wherever possible.
    I realize we are not alone in this struggle. In one of our 
local papers, I read last week about a businessman who was 
trying to close an SBA loan also in a timely manner in order to 
purchase and remodel a building for a new business. I believe 
the reporter is here or was earlier. It was reported that he 
might lose a six figure downpayment because of these delays. 
That is a lot of money.
    On behalf of Ted R. Sanders Moving & Warehouse and all the 
small businesses throughout this country, we urge you to 
restore the full funding for this program, restore the cap to 
the $2 million loan level and especially lift the piggyback 
prohibition.
    Thank you for your time and attention, and I will answer 
any questions.
    [Mr. Pilcher's statement may be found in the appendix.]
    Chairman Manzullo. Thank you for your testimony.
    Our next witness is Don Wilson, president and CEO, 
Association of Small Business Development Centers. I look 
forward to your testimony.

   STATEMENT OF DONALD WILSON, ASSOCIATION OF SMALL BUSINESS 
                      DEVELOPMENT CENTERS

    Mr. Wilson. Mr. Chairman, we appreciate being back with you 
again. On behalf of the 5,000-plus Small Business Development 
Center counselors and trainers around the country, we are very 
grateful for this opportunity.
    I could not help but be struck by the comments of the 
Administrator, in which he kept talking about the struggles 
that SBA had in dealing with the continuing resolution--how 
being frozen at last year's levels or the previous year's 
levels was a burden that posed for them. Astoundingly, they are 
now proposing a budget that will allow them to spend even less.
    It is shocking, in my opinion, to see the downgrading in 
funding for management and technical assistance programs at a 
time when the demand is greater than ever. The issue, Mr. 
Chairman, is really jobs and who creates them.
    The reason we have a budget deficit is because people are 
not working. If they are not working, they are not paying 
taxes. Congress is absolutely strapped in how to fund 
education, health and so forth because for three consecutive 
years revenues to the Treasury have declined. That is the first 
time since the 1920s.
    Now, if small business generates 52 percent of the GDP and 
nearly two thirds of the new jobs, and we do not have jobs for 
people to pay taxes so you have the dollars to appropriate, why 
do we keep cutting programs for small business? Small 
businesses are appreciative of the tax cuts that they receive. 
But if they cannot afford to buy $25,000 worth of equipment, 
raising the expensing allowance to $100,000 really does not do 
them much good.
    Look at the numbers in my statistics that I provided in the 
testimony. I ask that my complete testimony be included in the 
record. Look at the small business sector of this economy 
compared to the world economies, and then look what we are 
investing in small business.
    The Administrator spoke of the tremendous increase in loans 
that the SBA is making. Where do you think people go to get 
help filling out the forms that Congressman Cooper was just 
talking about? They go to the SBDCs and the Women's Business 
Centers. SBDCs are being cut. Women's centers are being level 
funded.
    The New York SBDC, the Missouri SBDC, the Ohio SBDC, the 
Indiana SBDC, the Illinois SBDC-- They have dramatically less 
funding today than they did in 2002, and now we are proposing 
to cut them again.
    SBDCs are flattered that we are viewed as one of the core 
programs, but as we watch management and technical assistance 
programs being eliminated, who is going to take up the slack?
    Take, for example, Congressman Bradley's District. The SBDC 
in New Hampshire has not had a funding increase since 1997. 
There are 14 SBDCs in this country, including Delaware and the 
District of Columbia, which are here in the audience today. 
They have not had a funding increase since 1997, and SBDCs are 
expected to pick up the slack? We are closing centers and 
laying off counselors.
    Two million Americans have been jobless for 26 months or 
more, the highest level of long-term unemployment in two 
decades. These people are out of desperation turning to self-
employment. They do not know how to start a business. They may 
have a skill, and they are coming to the SBDC. Our productivity 
levels are the highest we have ever seen. We cannot continue to 
do more with less. We have been doing that for the last six 
years.
    This Committee is the only committee that can get the 
attention of the budgeters and say you are simply not 
allocating enough for small business. It is not a matter of 
whether we get a tax cut. The issue is what is small business 
getting out of the dollars that are going into the Treasury. 
Every year, they are declining. We would submit that is the 
wrong message to send to small business in this country.
    Mr. Chairman, we implore you and this Committee to speak to 
the budgeters. Ask for a fairer allocation of funding for 
management and technical assistance programs, so that those men 
and women who are unemployed, and those men and women who are 
trying to keep their businesses alive in the face of higher 
energy costs and higher health insurance costs can survive and 
create the jobs this economy must have.
    Thank you very much.
    [Mr. Wilson's statement may be found in the appendix.]
    Chairman Manzullo. Thank you, Mr. Wilson.
    Our next witness is Mr. Chris Crawford, executive director 
of National Association of Development Companies. I look 
forward to your testimony.

     STATEMENT OF CHRIS CRAWFORD, NATIONAL ASSOCIATION OF 
                     DEVELOPMMENT COMPANIES

    Mr. Crawford. Thank you, Mr. Chairman. Good afternoon. I am 
pleased to provide a comprehensive written statement on the 
SBA's 2005 504 program budget request and ongoing performance 
objectives. I would like to comment this afternoon on 504's 
desperate 2004 reauthorization situation.
    N.A.D.C.O., CDC members and first mortgage partners 
provided nearly $8 billion in long-term capital to job creating 
small businesses last year representing a 27 percent increase 
from 2002. This is a clear tribute to the growing demand for 
the SBA 504 program and the capital needs of America's small 
businesses.
    Our industry thanks Chairman Manzullo and Ranking Member 
Vel zquez for your support by temporarily reauthorizing the 504 
program until March 15 of this year. Your actions have kept our 
program open. Our program receives no appropriation and is 
solely dependent on fees which must be reauthorized or we will 
be shut down on the 15th.
    The number one issue for the 504 industry is House passage 
and enactment of the SBA reauthorization bill. Mr. Chairman, we 
understand that your negotiations with the staff of the 
Government Reform Committee have proved successful and that all 
the issues have been concluded on the contract bundling 
question.
    We urge you to work directly with Chairman Davis to 
finalize the deal and then move the bill to the Floor under an 
open rule if necessary to ensure its timely passage to keep 504 
alive.
    Thank you.
    [Mr.Crawford's statement may be found in the appendix]
    Chairman Manzullo. Thank you.
    Our next witness is Anthony Wilkinson, president, National 
Association of Government Guaranteed Lenders.
    Anthony, you have an apartment out here now?
    Mr. Wilkinson. I am working on it.
    Chairman Manzullo. You are working on it. We look forward 
to your testimony.

    STATEMENT OF ANTHONY WILKINSON, NATIONAL ASSOCIATION OF 
                 GOVERNMENT GUARANTEED LENDERS

    Mr. Wilkinson. Thank you, Mr. Chairman, Ms. Vel zquez, for 
having me back. As you know, I testified before this Committee 
a couple of weeks ago about the SBA shutdown of the 7(a) 
program and how many applicants have been adversely impacted by 
the actions taken by the Administration.
    Since that hearing, basically nothing has changed. There 
are still many, many small businesses who cannot access capital 
due to the lending restrictions on the 7(a) program. You have 
already heard from one, and you are going to hear from three 
other small businesses who have been harmed by the 7(a) program 
restrictions.
    I want to personally thank all of them for taking the time 
away from their families and businesses and coming to 
Washington to represent small businesses. Their stories will 
put in real life terms just what the unfair actions taken by 
the Administration have done to them. They are very, very 
interesting stories.
    These businesses are from all over the country. They are 
different types of businesses, but the one thing they have in 
common is that they needed SBA assistance to meet their 
financing needs, and the SBA, who we thought was there to help 
them, is now not there.
    Rather than cover my written testimony, I thought I would 
take the balance of my time and just respond to some of the 
statements made by the SBA Administrator. He said that the 
industry has said we need to get the cap lifted, that we need 
to get restricted lifted. He is exactly right. There are 
borrowers all over this country who do not have access to 
capital, and we need to find a solution quickly so that we can 
get the loan cap lifted and the piggyback restriction lifted 
and we can get back to meeting their financing needs.
    The Administrator also said: ``We had to return loans.'' 
That is simply not true. There have been other funding 
shortfalls in the past. The SBA never returned the loan 
applications. They simply would process them up to the final 
point of approval, put them in a queue and as funding became 
available start funding those loans in the order that they were 
processed.
    The Administrator said that we processed all loans that 
have been resubmitted. I can tell you that there are some folks 
sitting at the table with me today whose loans were not 
processed.
    The Administrator said we never had volume like this. There 
was no way to anticipate the kind of loan volume we had. Mr. 
Chairman, from their website it says they did $11.3 billion in 
lending last year, and there was a $500,000 loan cap in place 
for five months. They probably would have done close to $12 
billion last year, so, yes, they knew what loan volume was.
    There was some talk today about a new proposal being rolled 
out. We have not been briefed, nor were we consulted about what 
impact the changes in the proposal might have. I am beginning 
to wonder if this was an attempt to deflect any kind of heat 
that the Administrator might have gotten because their fiscal 
2004 budget was a bust and the fact that the actions taken by 
the SBA earlier this year have financially harmed many small 
businesses. We cannot get away from the fact that many small 
businesses have been financially harmed by the actions taken by 
the Administration.
    The Administrator said five percent of the number of loans 
or 30 percent of the dollars fall in loans of $750,000 or more. 
That number would have been higher had we not had a loan cap in 
place this year and for the five months in last year.
    The Administrator said the new proposal is a savings for 
the taxpayer. From the fiscal year 2005 budget information, you 
will see that borrowers and lenders in the 7(a) program have 
been overcharged $1.2 billion--that is B for billion--in this 
program since the start of credit reform.
    This program has been in effect at a zero subsidy rate for 
quite some time. Before we consider alternatives to address the 
funding shortfall, I think we need to take a look at the 
subsidy model. I am under the impression that Congress had 
asked GAO to validate and do a study of the econometric model 
to make sure that it was statistically valid, to make sure that 
it was fair, that it was reasonable.
    Last I heard, the SBA had not been cooperative in providing 
the information that GAO needed. I know that Senator Snow's 
staff had to contact the White House asking them for help in 
getting SBA to turn over the data necessary for them to do 
their study.
    I think before we discuss any options, we need to make sure 
that the model is validated, that it is fair and it is 
reasonable.
    Mr. Chairman, I would be happy to respond to any other 
questions.
    [Mr. Wilkinson's statement may be found in the appendix]
    Chairman Manzullo. Thank you very much. You know, Anthony, 
that I held the SBA Administrator and the head of OIRA hostage 
here to bring about a resolution on an issue that involved 
disaster loans to travel agents.
    We have always considered ourselves to be a very active 
organization here. The budget parameters are there. Stuff is 
going to be moved around within the budget itself, okay, so 
nothing is set in stone just based upon the President's budget 
itself. It is simply a guideline.
    The next witness is Mr. Phil Pegg, Jr. from 4D Solutions in 
Boyertown, Pennsylvania.
    Mr. Pegg. Thank you, Mr. Chairman.
    Chairman Manzullo. We look forward to your testimony.
    Mr. Pegg. Thank you, Mr. Chairman.
    Chairman Manzullo. Thank you.

           STATEMENT OF PHIL PEGG, JR., 4D SOLUTIONS

    Mr. Pegg. Good afternoon, distinguished Members of the 
House Small Business Committee. On behalf of 4D Solutions and 
the small business workforce of the United States, I appear 
before you in a time of crisis seeking your assistance; a 
crisis that has originated from the very government 
administration which was formed to support and protect the 
small business community.
    As you know, the SBA has imposed a recent cap on the 7(a) 
loan guarantee program. This imposed cap will have devastating 
consequences for small businesses like ours. Please allow me to 
explain in the hope that this cap may be immediately repealed.
    We have three specialized export working capital program 
loan guarantees through the SBA's U.S. Export Assistance Center 
located in Philadelphia, Pennsylvania, as well as an SBA 
disaster loan. For the last seven years, the SBA has told us 
that we could renew our loans as many times as necessary. We 
subsequently built our business model around that 
understanding.
    Two of these loans were signed and approved for renewal on 
January 4, 2004, and had received a loan number. It was only 
after we had received approval that the SBA informed us that 
there was a cap, and we would not be renewed. We were told that 
SBA upper management decided to cap the 7(a) loan program to 
$750,000. Our loans exceed the $750,000 cap.
    It is one thing to give borrowers a 12 month warning and a 
fighting chance. It is something entirely different when you 
present companies with no warning at all. The manner in which 
this cap has been imposed is effectively designed to hurt or 
mortally wound those small businesses that currently hold loans 
that are in excess of $750,000.
    In other words, if these loans cannot be renewed due to the 
cap, they would subsequently become unguaranteed, and the 
lenders would undoubtedly call them in, effectively putting us 
out of business.
    The EWCP loans have been the lifeblood of our firm. For 
over seven years, 4D has worked with the SBA, from the firm's 
inception to one of our crowning achievements, being presented 
in Harrisburg with the Pennsylvania Governor's Exporter 
Excellence Award for 2001. 4D has even been used repeatedly by 
the SBA as a success story in their own newsletter.
    Our firm provides mission critical, interactive computer 
based training to the Royal Saudi Air Force. Most of these 
contracts are 18 to 24 months in duration and worth in excess 
of $1.5 million. Our solutions have been chosen over Lockheed-
Martin and British Aerospace, just to name a few.
    Make no mistake. The larger companies still have a huge 
advantage. They have money to spend in up front costs of 
developing and training programs for a major military aircraft. 
The SBA leveled that playing field. Without them, we could have 
never borne the initial start up or operating cost from one 
contract to another.
    Now the irony is overwhelming. The SBA, who was so 
instrumental in our growth and success, in one stroke will be 
responsible for our demise and certainly many others like us.
    Everyone knows that small businesses are the number one job 
creator in this country. Our business is located in Boyertown, 
Pennsylvania, a community that survives on small businesses 
just like ours. We hire people and buy goods and services all 
within 20 miles of our office. There is little doubt that this 
cap will impact our community and others.
    This cap also sends a clear message to the Saudis we work 
with that the United States is pulling back on their financial 
support of international business relations with Saudi Arabia. 
It has taken us years to build up a track record of trust with 
them.
    We examined all the other options, including EX-IM Bank, 
but they cannot legally finance military projects. As a result, 
my bank and the SBA are my only resource. I must add that our 
track record as a borrower has been excellent. We pride 
ourselves on being responsible corporate citizens, and today 
our firm has never missed a loan payment or by our own action 
put in jeopardy one of our guaranteed loans to the SBA.
    In conclusion, at a time when America is losing its 
isolationist way of doing business and expanding our great 
economy globally, it just does not make logical sense to drop 
the funding to a program that has made a huge impact on my 
firm's ability to expand internationally.
    Therefore, I ask you to immediately remove this newly 
imposed cap and expedite the funding of the SBA's 7(a) program, 
as well as the funding of the Division of International Trade 
and USIACs across the country.
    Thank you.
    [Mr. Pegg's statement may be found in the appendix]
    Chairman Manzullo. Thank you very much.
    The next witness is John Sprague, managing partner, 
Everglades Adventures at Pahokee, Florida.
    Mr. Sprague. Yes, sir. Pahokee means grassy waters.
    Chairman Manzullo. It means grassy waters?
    Mr. Sprague. Yes, sir.
    Chairman Manzullo. We look forward to your testimony.

        STATEMENT OF JOHN SPRAGUE, EVERGLADES ADVENTURES

    Mr. Sprague. Chairman Manzullo and Ranking Member Vel 
zquez, thank you very much for the opportunity to testify 
before this House Small Business Committee.
    I am a managing partner of Everglades Adventure Company, 
LLC, that is based in Pahokee, Florida. To give you a little 
bit of quick background, this is in Palm Beach County's other 
coast. It is basically rural glades. We rely primarily on 
agriculture, a lot of sugar.
    The city itself has a population of about 6,000. It is a 
poverty level of 29.4 percent of the population, a per capita 
income of $10,346. The mayor and city council felt that the 
only saving grace that the city may have to be able to pull 
itself up from this poverty is its location on Lake Okeechobee. 
Because it did not have the expertise to develop the 
waterfront, it did an RFP to bring a company in. We came and 
answered that.
    What we are attempting to do is build a first-class 
recreational resort on the edge of Lake Okeechobee and bring 
tourists as the dollars needed for the city to build the city 
back up to what it was at one time. We have been doing very 
well in the development. It is ahead of schedule. However, one 
slight problem has arisen.
    We are located on state lands. When you go for conventional 
financing, you cannot encumber state lands, which means the 
normal finance package for us we cannot obtain through 
traditional banks.
    The SBA 7(a) program was the program that fit exactly what 
we needed. Our loan for $1,709,000 would have pretty much put 
the project very close to completion and additionally on toward 
doing 25 direct full-time jobs and 90 created in total in the 
area.
    However, to give you an idea if we could get the other 
financing based on the $750,000 cap, our payments for that 
$1.709 million under the 7(a) program would be about $11,807 
per month. If we did it with a $750,000 cap and went to 
conventional based on the short terms we would get, those 
payments now climb to $24,057 a month, which basically makes 
the project untenable and unprofitable to do.
    We are very concerned that this type of action by the 
Administration at this point is very harmful to business aside 
from our individual project. It affects minorities. It affects 
actually the City of Pahokee to be able to pull itself out of 
its economic condition and bring it back to the area where so 
many of its residents presently are not on subsidies.
    Secondly, it is very important to the State of Florida. 
Governor Bush has given us economic grants, along with Palm 
Beach County. Of course, he spearheaded the project in getting 
us the permission to do it on state lands and also waived all 
of their fees so the City of Pahokee would be a 25 percent 
profit maker as part of our company.
    The project is coming along fine. We are hoping that 
everybody on both sides of the aisle, as well as the 
Administration, looks at this program and says you know, we 
might have made a mistake here. This is actually harming small 
business. It is harming minorities. It is harming companies all 
over this country.
    Then to have us find out that really there is no subsidy to 
this program, that the overpayment in fees has made it self-
supporting, definitely I believe would make it a reason that 
you need to relook at this program and put it back to where it 
was before so my company, along with the rest of them around 
the country that need this kind of funding to be able to 
provide the jobs for our towns and our cities and allow people 
that live in poverty to pull themselves up to a decent wage can 
continue to happen in this country.
    Also, I would like to say that Mayor J.P. Sasser has come 
with me, and if possible I would like to give him a minute.
    Chairman Manzullo. Why do you not have him stand up so we 
can recognize him? There you are. Thank you.
    Mr. Sprague. Would it be possible, Mr. Chair, to have him 
just speak for a minute from a city perspective?
    Chairman Manzullo. You have 50 seconds left. Come on down. 
State your name and spell it for the record, Mayor.
    Mr. Sasser. Okay. I am Mayor J.P. Sasser, and that is S-A-
S-S-E-R. I want to thank you for this opportunity.
    What Mr. Sprague said is very true. We are a very small 
city, predominantly African-American and Hispanic. Our primary 
employer is sugar, and the 90 jobs that Mr. Sprague will offer 
have just been offset by U.S. Sugar laying off 97 people this 
past week.
    What we are doing is we are sinking, and we are sinking 
fast. We have hitched our wagons, so to speak, on our 
development of our marina and campground, and we are hoping our 
downtown redevelopment and our economic revitalization will be 
successful because of that.
    Thank you very much.
    [Mr. Sprague's statement may be found in the appendix]
    Chairman Manzullo. Mayor Sasser, thank you very much for 
adding to the testimony.
    Our next witness is Mr. Elliot Moses, CEO of Daco 
Enterprises, from Sandy, Utah. We look forward to your 
testimony.

          STATEMENT OF ELLIOT MOSES, DACO ENTERPRISES

    Mr. Moses. Thank you, Mr. Chairman, Congresswomen, 
Congressmen, ladies and gentlemen. Thank you for this 
opportunity to tell my story. I hope this effort will result in 
areas of change and possibly even some rectification of the 
issue for my company.
    My wife and I had been nearly a year in negotiations to buy 
Daco Enterprises, Inc. We had a letter of intent, and we were 
very close to signing the final deal. Applications were made at 
several banks for $1.3 million. Our presentations were very 
strong, showing over $1.5 million of equipment and collateral 
plus a sizeable amount of cash that we were injecting.
    Funding proposals were entertained, and we down selected to 
two. One was an SBA 504 and the other an SBA 7(a) loan 
guarantee. By mid December of 2003, we had everything together 
and submitted to the commercial loan officer. It was processing 
through Bank One's preferred lender program. This program 
expedites the processing since the bank's approval criteria has 
been preapproved by the SBA to meet the SBA's underwriting 
requirements.
    We were told that the SBA's stated service level agreement 
to provide a funding number is 24 hours. On December 23, the 
SBA notified Congress of their intent to establish a loan cap 
for loans approved by the SBA on or after January 8, 2004. This 
is 15 days, as required by Congress. The choice to include so 
many holidays in this notice period is unmistakable.
    On the 26th, Bank One approved our application for SBA 
eligibility. The final SBA application package was sent to Utah 
for our signatures on December 30. Four business days later, on 
January 5, the originals arrived at the Tempe, Arizona, Bank 
One loan coordinator's desk. She requested the SBA 
authorization number, and the SBA faxed back a control number 
the same day indicating they had received the package and it is 
in their funding queue.
    Based on the assurances that funding would indeed be there, 
we closed on the business on January 8. The next morning, we 
received the shocking news of what the SBA did. On January 6, 
the SBA shut down funding. On the 8th, the SBA faxed a notice 
dated January 5 to Bank One with a control number indicating 
that the funding had been stopped, that the application package 
would be returned to Bank One and removed from the SBA queue.
    It is very strange that the notice would be dated January 
5. It is not clear whether that was inadvertent or deliberate. 
If the latter, it conflicts directly with congressional 
mandate.
    By being bumped out of the queue, it is the SBA's intent to 
delay the dissipation of their funds, but in actuality it 
denies us legitimate opportunity to funding due to the loan cap 
which we no longer fit under.
    In order to rescue our deal, we obtained bridge funding for 
the full amount. The concept was that the full authorization 
bill would restore funding and the old caps. The bank incurred 
and advanced us the funds. When the bridge funding is due to be 
paid back in less than three months, we must either have new 
funds in place or be foreclosed upon. I understand that we 
cannot apply under the 504 program because we have received 
bridge financing.
    In the worst case, this will mean 25 persons will be out of 
work. We will be financially ruined, if not totally bankrupted. 
The previous owner does not have the funds to step in in front 
of the bank and also stands to lose a sizeable sum in deferred 
payments, thereby decimating his retirement plan.
    In the best case, Congress will cause the SBA to remedy the 
effects of their misapplied funding curves or, even better, 
raise the funding caps to allow more significant business 
formation than ever before.
    For ourselves, we wish the SBA would place us back in the 
queue where we originally were and simply fund that which we 
were mere hours from funding. This is the fair and correct 
method that should be applied in what I am to understand is 
about 200 cases. The lower funding cap should apply to those 
that apply on or after January 8, as Congress intended the 
notification method to operate.
    Let me tell you a little bit about Daco with the spare 
moments remaining. We are located about 15 minutes from 
downtown Salt Lake City, Utah, in a high tech corridor that has 
invented television and the first implanted artificial heart. 
It has also been the birth of WordPerfect and Novell and many 
other companies.
    Therefore, it is no surprise that Daco is a high tech, high 
tolerance machine company with laser welding and engraving 
capabilities. We serve the aerospace, electronics and primarily 
the medical industry. Your next x-ray may come from equipment 
with our parts in it. Your relative's chemotherapy may come 
from an implant we machined. The Air Force can get some parts 
only from us.
    Our employees make good skilled labor wages. None of our 
employees are paid less than $10 an hour. We have the benefits 
in the top five percent of our state. We added one new employee 
last month and are adding another this month. Our backlog has 
already jumped 25 percent this year. We are looking to spend 
more than $100,000 on new equipment this year and half a 
million dollars over the next two or three years, all financed 
conventionally.
    We and companies like us are the ones putting jobs into 
this recovery. Well, that is, unless things are allowed to 
remain as the SBA has made them.
    I beseech you, the Members of this Committee, the SBA and 
all Members of Congress to allow businesses like ours to do 
what we do best, which specifically includes creating new jobs, 
paying significant taxes and growing our economy further with 
capital spending. Many countries would like to have these 
manufacturing jobs. Please do not make another reason to send 
them there.
    I thank you for this opportunity to address this Committee 
and thank the staff for their most kind treatment.
    [Mr. Moses' statement may be found in the appendix]
    Chairman Manzullo. Ms. Vel zquez, I am going to let you ask 
the questions here because we are going to run out of time.
    Ms. Velazquez. Why can we not go vote and come back here?
    Chairman Manzullo. We can come back, but why do you not go 
ahead?
    Ms. Velazquez. I would prefer for Mr. Ballance to go first.
    Chairman Manzullo. Mr. Ballance?
    Mr. Ballance. Thank you very much, Mr. Chairman and Ms. Vel 
zquez.
    Gentlemen, I did not hear all of your testimony, but I 
think I know the issue. Some have told us that you can get this 
money from regular channels, regular banks. Is that true? You 
do not need the SBA 7(a) program.
    Mr. Sprague. In our particular case, sir, we cannot because 
we are located on state lands. You cannot encumber state lands. 
Therefore, normal banks will not do most of the things that we 
need to do there--infrastructure, buildings, sewer extensions, 
the kinds of things that we need to do to expand the building. 
Where normally you could finance that conventionally, they will 
not do it.
    Mr. Wilkinson. I would venture a guess that none of these 
gentlemen would be here today if they could have gotten 
conventional financing.
    Mr. Ballance. Well, that is my thought. How do you feel, 
and I am just going to ask a couple of general questions. How 
do you feel that you have been treated in terms of getting 
notice regarding the cutbacks and the cutouts and the fact that 
the loans would not be available?
    Mr. Sprague. Putting this project together has been very 
lengthy because we are also located on the dike or the U.S. 
Army Corps that surrounds the dike, so we had to go through 
months and months of engineering for the Corps to make sure 
that we would not in any way cause any breaks or whatever in 
their dikes.
    This process of putting everything together with grants, 
with Florida, Palm Beach County, getting approvals, permits and 
everything else, of course, has gone through a very long 
process. Of course, the final designs could not be completed 
until we knew what permits and how exactly we could design and 
what we could do. We had to go through that process before we 
could even apply to SBA.
    I have been a Republican my whole life. I just never 
thought in my entire life cycle that what I believed stands for 
that we support small business, that they would look at a 
program that actually hurt small business. I just never thought 
that anything would happen with this program. It is a good 
program. It fits a niche need in this country that you cannot 
necessarily get with conventional financing.
    It came as a total surprise, and I will say the number of 
days with Christmas probably is not the way to treat free 
enterprise and additionally that they would need that short--I 
mean, they must have known that they were headed for problems. 
I would say that they could have given a lot further notice 
than what they gave business.
    Mr. Ballance. Let me ask one specific question. I did not 
hear your testimony, but as an exporter could you elaborate on 
why financing from the Export-Import Bank is not an option for 
4D Solutions?
    Mr. Pegg. Yes, of course. EX-IM Bank will not allow us to 
produce any kind of military training, military product and 
export it within their financing guidelines.
    Mr. Ballance. I am getting a little help from my staff 
here. Mr. Pilcher, how will not receiving this loan affect the 
long-term viability of your company? Is the 504 program an 
alternative for Sanders Moving? What about a conventional loan?
    Mr. Pilcher. Well, for starters, the 504 program does not 
even apply to our situation because it is a refinancing, so we 
do not even meet the guidelines for 504.
    This time of the year is traditionally a slow time for the 
moving industry, the moving and storage industry. We were 
really counting on this loan being in place last month because 
it would have made this month a lot more bearable than it has 
been and it is going to be.
    As I indicated earlier, every month of delay is costing us 
over $7,000 that we are having to spend maintaining our current 
loan situation. That is money that could be used to add new 
employees, to add a truck, put another crew on the road, take 
on new business and help make our company more profitable.
    Mr. Ballance. Thank you.
    Chairman Manzullo. We are going to have to break and then 
come back here. We live by the bells here. We hope to be back 
in about 15 minutes.
    [Recess.]
    Chairman Manzullo. Mrs. Vel zquez?
    Does anybody here have to catch a plane right away?
    [No response.]
    Chairman Manzullo. All right. Go ahead.
    Ms. Velazquez. Tony, people assume that if you are a 
successful business, small business, you do not need the 7(a) 
loan program. Can you tell us why successful businesses do need 
the 7(a) loan program?
    Mr. Wilkinson. Yes, ma'am. There would be a host of 
reasons. It could be that it is financing of collateral that 
will have a very specific nature like a single purpose facility 
or collateral that would not be readily liquidated if it was 
repossessed.
    It is businesses where they are doing well, but they have 
some kind of credit deficiency that the lender turns to the SBA 
and that guarantee that the SBA provides to mitigate whatever 
the risk might be.
    Yes, we hope they are successful businesses because that is 
why we are financing them. We use the SBA guarantee to mitigate 
the risk in the transaction.
    Ms. Velazquez. Thank you. The Administrator said SBA's 
solution will permit the small businesses that are here today 
to get their loans approved.
    I know you do not know the details of the proposal or the 
particulars of these businesses' applications, but can you tell 
us from what you know today whether these businesses will get 
their loans approved?
    Mr. Wilkinson. With a 50 percent guarantee, I would bet at 
least two of them would be denied. Again, I do not know all the 
details of the application.
    Ms. Velazquez. What is the percentage?
    Mr. Wilkinson. Two of the four.
    Ms. Velazquez. Two of the four?
    Mr. Wilkinson. I think a third one could have perhaps been 
served if the piggyback restriction had been lifted and they 
could have gotten a piggyback first mortgage even with the cap 
in place.
    Ms. Velazquez. Thank you.
    Mr. Sprague, it is my understanding that your community was 
designated as an area for economic development by the State of 
Florida, and they contributed a significant amount of resources 
to this project.
    What was the state's response when they found out that the 
federal government was pulling funding?
    Mr. Sprague. They do not know. I am meeting with Governor 
Bush's staff on Monday in Tallahassee. I think this has been 
one of the best kept secrets at this point.
    I think it is a matter that a lot of the Members just do 
not understand this is going on, number one, because they just 
have not looked through all the budget at this point. Secondly, 
even if you read something, unless you are familiar with the 
program you may not necessarily understand the impact. I think 
it is a matter of educating both sides of the aisle on this 
issue.
    We have a declaration that Pahokee is an area of critical 
economic concern, and they have helped us the best they can. 
The county has done the same thing. I am quite sure that when 
the Governor's office finds out about it, hopefully we will be 
soliciting his help.
    Ms. Velazquez. Maybe the Governor of Florida knows someone 
here in Washington.
    Mr. Sprague. I am going to ask him that question.
    Chairman Manzullo. Mr. Moses?
    Mr. Moses. Yes?
    Ms. Velazquez. If you were to lose SBA financing for your 
project, what are the chances that some of your customers will 
look elsewhere and take their business to some of your foreign 
competitors?
    Mr. Moses. Without the financing from the SBA, we will not 
have the working capital available to buy the machines that we 
plan on buying. We are talking about some pretty sophisticated, 
high tech machines. They are very close tolerance. They are 
multi-axis machines. We try and buy American wherever possible. 
Sometimes the stuff is not available.
    I will tell you. There are foreign countries that would 
love to have that kind of equipment and that kind of stuff 
located in their country and produce it there. We are trying to 
make it American made.
    Ms. Velazquez. Mr. Moses, can you please elaborate on why 
you are not eligible for the 504 program?
    Mr. Moses. Being caught between closing and pulling the 
funding right thereafter, we had to do something quick because 
we were in the middle of the contract period. We had to fund 
the purchase.
    The 504 program does not allow for the bridge financing 
that we received. It would then be determined to be a 
refinance.
    Ms. Velazquez. So if you do not receive the funding through 
the 7(a) loan program, what effect will this have on your 
employees?
    Mr. Moses. In the worst case, we would have to shut down. 
We would lose 25 employees. If we were able to find some other 
financing of some nature, it is not going to look nearly as 
good.
    The cost on our working capital would probably eliminate 
our entire capital budget. We would not be buying any more 
machine tools and doing any more business, and we probably 
would also have to do some layoffs because we may not have the 
equipment to replace other equipment and continue producing 
what we produce.
    Ms. Velazquez. You mentioned that this was a unique 
product. Can you please explain to the Committee why a 
conventional loan would not work?
    Mr. Moses. With a conventional loan, they rate buyouts as 
much more risky, and they assign a much higher interest rate to 
them. We also get much shorter payback terms.
    One of the things we were looking for from the 7(a) program 
was the generous payback period. That payback period made the 
difference between growing or shrinking if we had to go even 
partial conventional, which a 50 percent guarantee program 
would do as far as weighting of the components.
    Ms. Velazquez. Mr. Sprague, can you please explain to the 
Committee why a conventional loan would not work for you?
    Mr. Sprague. There are two parts to that. The biggest part 
is that the infrastructure which we are expanding in all areas 
in cabins and buildings and sewer connections and electrical 
and upgrades to the marina, building buildings, our development 
is spread over many, many facets. Part of them we have pieces 
of grants for and whatever, so it is kind of complicated, 
number one.
    Number two and the biggest reason is when we turned to 
conventional financing they looked at the project. They looked 
through our paperwork. They looked at our balance sheets. They 
looked at income, our business plan, and said you are 
excellent. Wait a minute. You are on a lease. You are on state 
lands. I am sorry. We cannot do your loan.
    Here is who can. The federal government has a loan program 
which is really designed for this type of thing. That is where 
you need to go because we are unable to fund you.
    Ms. Velazquez. The small business people that are here who 
applied for a 7(a) loan and have not been able to successfully 
get it because of the unique circumstances, are your employees 
aware of what is going on? What is the morale?
    Mr. Pegg. Our employees have just become aware, and they 
think we are going out of business.
    Mr. Pilcher. Our rank and file employees are not aware of 
the refinancing activities we are trying to do. We have a very 
small office staff, and I am sure just about everybody in the 
office knows what is going on.
    Three-fourths of the people in the office are related, 
family related, so they are all aware of it. As I mentioned 
earlier, in addition to the owner there are four sons who work 
in the business, and we are all on the same management team. 
They are all aware of it.
    I spent the better part of my first year with the company 
trying to arrange conventional refinancing. We just could not 
get the terms we needed. In some cases they would not even talk 
to us at all.
    You know, this really was going to be a life saver program 
for us. The monthly payment is about two-thirds of what our 
current payment is. As I mentioned in the testimony, we are 
going to have to refinance it anyway in a few years.
    We could possibly struggle along for another four years, 
but this really would have helped us grow the business and get 
out of some of the problems that we are in.
    Mr. Sprague. In our case, most of the employees have not 
been hired yet. It is not just our employees. All the 
businesses downtown and the building owners are all expecting 
our project to be the catalyst for the city.
    It is not just whether or not how our employees feel. It is 
that this was the catalyst for the whole downtown of the city. 
If we cannot generate the catalyst, what is the impact to the 
city, to all the residents of the city? It has major impacts at 
the end of the day.
    Mr. Pegg. I would like to add one thing for the record. We 
approached several lending institutions over the last seven 
years and discussed with them other more traditional options.
    The 7(a) program, as I put down in our testimony, has been 
critical to our company because our company is built on 
knowledgeable capital. We do not have smokestacks. We do not 
have plants. We do not have lots of capitalized equipment. We 
have lots of very smart, hard working people that get together 
and design and put together these projects and deliver them in 
an interactive, multimedia format to the people of Saudi 
Arabia.
    That said, these projects in their nature, in their very 
nature, take anywhere between 18 and 24 months to complete. The 
sheer amount of expense that it takes to ramp up, getting 
everybody together, traveling over there, collecting the data, 
shooting the video, creating the graphics, creating the 
animation. We become this organization of highly motivated, 
hard working people, but again we are in a very plain building, 
and we wait for these large milestone payments at the end.
    Every traditional lender that we have ever talked to says 
go to the SBA. You have a contract. Go to the SBA. The SBA will 
guarantee it. Then we will lend you the money. We cannot 
possibly survive if we do not have that guarantee.
    If we do not have that loan, this next payment that we get, 
you know, we will not be able to draw it back down because our 
renewal has not been funded. We will go out of business, and we 
will default on this project.
    Ms. Velazquez. Thank you, Mr. Chairman.
    I want to thank all of you for coming here and sharing your 
experience and your pain. I am sorry that the federal 
government is failing you. It really saddens me that the 
Administrator could come here before this Committee, and he is 
so committed to small businesses that he did not stay to listen 
to your stories. He did not stay so that you could tell him 
that he knew darned well last year they would be running out of 
money.
    Mr. Chairman, I think that you understand that this is a 
real crisis for small businesses in this country, and I hope 
that pretty soon you conduct a hearing on your proposal that 
has been submitted by the Administration and co-sponsored by 
you.
    Chairman Manzullo. Thank you, Mrs. Vel zquez.
    Ms. Velazquez. Are you going to have a hearing?
    Chairman Manzullo. Give me a chance to think about it. 
Obviously if we have legislation, we will have a hearing.
    Ms. Velazquez. We will? Thank you.
    Chairman Manzullo. Anthony, with regard to piggybacking 
loans, walk us through that.
    Mr. Wilkinson. How it works?
    Chairman Manzullo. Yes.
    Mr. Wilkinson. A piggyback is where a lender makes some 
piece of the financing transaction in a first lien position and 
then the SBA 7(a) loan comes behind in a second lien position. 
It is really basically the 504 type of loan structure where 
there is a private sector lender in the first and then SBA in 
the second. That is what a piggyback structure is.
    Chairman Manzullo. So the reason that the SBA eliminated 
the piggyback is that the budget authority has to show the 
first position as part of the budget authority?
    Mr. Wilkinson. I believe the reason that they gave for 
eliminating piggybacks was a simple effort to lower loan 
demand.
    Chairman Manzullo. SBA still allows SBA taking a first 
position and anybody coming in afterwards. Is that correct? 
That is still allowed?
    Mr. Wilkinson. That does not happen. A lender would not put 
itself in a second lien position.
    Chairman Manzullo. Let us talk about the responsibility of 
some banks around here. Mrs. Vel zquez and I sit on the Banking 
Committee, and I am really tired of these giant lending 
institutions only making ``safe'' loans and not making 
character loans and you guys having to go to the federal 
government time after time after time again being subject to 
the appropriations process.
    Here you have people, Mr. Pegg. We have two manufacturers 
out of four people that are suffering. I spent about 85 percent 
of my time on manufacturing. In fact, I just gave an interview 
to CNN calling for the resignation of the chairman of the 
President's Council on Economic Advisors who is thrilled with 
the offshoring of the high value white collar jobs and does not 
think that any job in this country has been lost to China.
    When I see people like you, Mr. Pegg, who are fighting back 
and you, Mr. Moses, in manufacturing, where are the banks? You 
have track records. Why do they not get involved in this thing?
    Mr. Moses. Would you like me to answer that?
    Chairman Manzullo. Yes, sir.
    Mr. Moses. My bank that I am working with--in fact, I was 
working with several of them. They were all willing to take 
their share of the risks with the program. They are right ahead 
of me in the risk amount.
    I am taking the greatest risk. The bank was actually taking 
the next greatest risk, and then came the government taking the 
third greatest risk.
    Mr. Pegg. I would just say in our situation that there was 
no incentive for the bank to take the risk. We have cleared 
up------.
    Chairman Manzullo. What is the incentive? Meaning what?
    Mr. Pegg. Well, why should they take more risk? We have 
been operating through this SBA program for seven years.
    Chairman Manzullo. Through that same bank?
    Mr. Pegg. Through the same banks, yes.
    Chairman Manzullo. Which bank is that? A local bank?
    Mr. Pegg. M&T. It was All First. Before that it was Penn 
Business.
    Chairman Manzullo. Different names?
    Mr. Pegg. Penn National. All the same people we have been 
working with.
    Chairman Manzullo. Okay.
    Mr. Pegg. There is no need to fix it because it is not 
broken. It has been working fantastic.
    Chairman Manzullo. Maybe they should understand that it is 
broken, and they have an obligation as the local lender to come 
in there and help save some jobs.
    Mr. Pegg. If anything, they have actually communicated to 
us that there have been rumblings that they were going to do 
less SBA type loan activity, but there was absolutely no 
verbiage, no conversation whatsoever that indicated that they 
would do any kind of traditional lending with us.
    Chairman Manzullo. Have you asked them to factor your bill 
of lading or your payments?
    Mr. Pegg. We presented them with contracts, Mr. Chairman.
    Chairman Manzullo. That is not enough?
    Mr. Pegg. No. They look at us, and they will say how big is 
your home? What does your private asset portfolio look like?
    Chairman Manzullo. That is the problem in America today. No 
one lends on the basis of somebody's integrity, even years and 
years and years of track record.
    There is a problem with the SBA. We talked a year ago about 
the fact that there would not be enough money. It is very 
distressing, extremely distressing. This hearing did not have 
to take place with this.
    Let me say this. There are people here from the SBA that 
have stayed the entire program. Karen Haas, Deputy Assistant 
Administrator, Office of Congressional Legislative Affairs.
    Karen, why do you not raise your hand back there? Could you 
introduce some of the other folks from SBA that have sat 
through the hearing to make sure they listen to the testimony?
    Ms. Haas. John Whitmore.
    Chairman Manzullo. John Whitmore. Okay.
    Ms. Haas. Brian Worth.
    Chairman Manzullo. Brian. Okay.
    Ms. Haas. Emily Murphy, Will Meade.
    Chairman Manzullo. Karen, thank you.
    Mr. Sprague, have you looked to the Department of 
Agriculture? There are certain types of loans that are 
available in low economic areas.
    Mr. Sprague. To be honest, no, sir. You know, this whole 
thing came down pretty recently, as you know. We got the phone 
call. I forget when my partner called me and said do you want 
today's bad news.
    Chairman Manzullo. Okay.
    Mr. Sprague. No, sir. First, we really believed that at the 
end of the day that the Members of both sides of the aisle 
would say at least the 7(a) needs to be taken back.
    Chairman Manzullo. It would take a special supplemental 
appropriation of $30 million in order to restore it.
    Mr. Sprague. $30 million in the realm of the----
    Chairman Manzullo. I understand.
    Mr. Sprague[continuing]Federal budget is pretty small.
    Chairman Manzullo. We said that last year.
    Karen, if I could be so bold? Could Mr. Sprague meet with 
you afterwards and any of the other folks that are here?
    Go ahead, Karen. Perhaps you could help them because maybe 
there is money available through Agriculture on it.
    Mr. Wilkinson. Could we set up times for the other 250 
applicants that are in the same boat?
    Chairman Manzullo. Anthony, if you did not ask that 
question I would have been disappointed. Listen, you guys have 
been great.
    Do you have any more questions over there, Frank?
    Mr. Ballance. I did have one that I think I will ask Mr. 
Pegg. Do you do international business?
    Mr. Pegg. Yes, sir.
    Mr. Ballance. What would happen to your business, and I 
guess others who are in small business can consider this 
question, if you did not get the loan and you had to say go 
under? I am hoping that will not happen to you, but you are 
fulfilling a demand obviously. What is going to happen to that 
demand?
    Mr. Pegg. We typically compete with not only other U.S. 
prime contractors that have offices in the Kingdom of Saudi 
Arabia, but also a whole host of other international 
competition primarily coming out of the U.K., coming out of 
France and Germany.
    I would guess that on any given contract we probably have 
anywhere between six and a dozen competitors that are ready to 
jump in and take care of that work.
    Mr. Ballance. Are any of those American businesses, or are 
most of them foreign?
    Mr. Pegg. Most of them are foreign.
    Mr. Ballance. How many of your jobs are on this side?
    Mr. Pegg. Fifteen people.
    Mr. Ballance. I represent a rural area, Mr. Chairman. SBA 
has always been looked upon as an agency that would help 
businesses who were either struggling or who were trying to get 
started or who maybe did not have a track record.
    The banks, as you point out, are there. They do not promise 
to create jobs, at least the ones I have talked to. I am just 
wondering if any of you are from rural areas what the impact 
might be in terms of just that fact alone.
    Mr. Sprague. Pahokee is definitely rural. It is 6,000 
people. It is stuck out kind of by itself on the other side of 
Palm Beach County.
    Let me take one example of that. We have been putting in 
rental boats, and part of that is we want to do guide service 
and eco tours. We have had a maintenance man, a young, black 
guy, a really neat guy. As a matter of fact, I am going to hate 
to lose him on maintenance, but he really took an interest in 
the boats so Jim decided let us bring a captain teachers course 
out to Pahokee, and let us see if we can get enough people in 
Pahokee who would actually study and become captains.
    This young man studied very, very hard. We gave a bunch of 
it on our time. Anyway, he has passed, and he has his captain's 
license. He will be the first black captain, as far as I know, 
in all of the Glades to ever receive his captain's license.
    He is so happy that he would like I think us to take his 
diploma and blow it up and put it on a billboard, but that is 
what we are trying to do. We are trying to give people a 
different alternative than going out in the fields and picking 
agriculture or sugar or whatever it is and raise the standard 
of living through bringing recreation to Pahokee, Florida.
    You know, we are going to have all kinds of jobs that we 
are going to create. It is going to raise the standard from 
$10,000 to what we believe is going to be the median of about 
$26,000 within the city when we do this project.
    I hope that answers your question.
    Mr. Ballance. I just think there is a tremendous need for 
this program. We just have to put the hammer down and see if we 
can find the money.
    Chairman Manzullo. Congresswoman Majette, do you have any 
questions? Congresswoman Vel zquez has a question.
    Ms. Majette. Okay.
    Chairman Manzullo. Let me go with her, and then we can 
bounce to you if you have a question.
    Ms. Velazquez. Thank you. Thank you. Tony, it seems that 
there is a sense here of some people, some Members, that this 
situation is for the banks to be blamed. Can you comment on 
that?
    Mr. Wilkinson. Well, that is interesting. First of all, 
there have been shutdowns in the past. One of the shutdowns, 
the first one I remember, prompted the legislation that now 
requires a 15-day notice because the SBA at this particular 
time just closed the program and did not accept applications.
    Well, as all these applicants will tell you, you do not 
just put that application together overnight. It takes a while 
to put the application together. You spend lots of time and 
money getting to that point. To have the rug jerked out from 
underneath you just was not fair, so we suggested to Congress 
that we put in a notification requirement giving folks an 
opportunity to finish their application and hence the 15-day 
requirement was passed.
    Since then there have been a couple more shutdowns. Every 
time the SBA announces that a loan cap is coming they have a 
spike in demand. That demand comes from the applicants who are 
in the middle of their application process. They hurry and get 
it finished and get it submitted before the deadline.
    It is not surprising. It has happened in the past. SBA knew 
that there would be a spike in demand when the cap was 
announced. It is just the way it works.
    Ms. Velazquez. So if they wanted to, they could have held 
the applications and waited until the money was available?
    Mr. Wilkinson. Absolutely. That is what they have done in 
the past. These applications should have been retained and put 
in a queue and funded as money became available rather than 
returning the applications, and in some cases where the 
applications are like Express and PLP faxed applications, those 
applications were physically destroyed, run through a shredder.
    Ms. Velazquez. Mr. Pegg, in your testimony you mentioned 
that you have a disaster loan, right?
    Mr. Pegg. Yes.
    Ms. Velazquez. Could you please tell us what will happen to 
this disaster loan if you cannot renew your capital line?
    Mr. Pegg. We will probably default on the disaster loan 
because we will be out of business.
    Ms. Velazquez. Has the SBA offered to defer the payments 
until this problem is worked out?
    Mr. Pegg. No.
    Ms. Velazquez. Maybe you can meet with SBA today and 
discuss that.
    Mr. Pegg. That would be great. Thank you.
    Chairman Manzullo. Congresswoman Majette, did you have a 
question?
    Ms. Majette. Yes.
    Chairman Manzullo. Okay. Go ahead, please. You have to turn 
on your microphone.
    Ms. Majette. Thank you, Mr. Chairman, and thank you, 
gentlemen, for being here.
    My question is for Mr. Sprague. I understand that you have 
had some challenges. Can you tell me? Is there a reason why 
your company would not be able to refinance through other non-
SBA sources?
    Mr. Sprague. Yes, ma'am. We have a multifaceted project. It 
is infrastructure, sewer, water. It is buildings, swimming 
pools, fixtures, cabins, boats, rehabbing bathrooms. I mean, it 
is multifaceted.
    We looked at everything we needed to complete and do this 
project, some of it immediately. We have finished the plans. 
The engineering is done. We have gone through the very 
intricate process with the Army Corps because we are on their 
dike so it is not the normal permitting process. We have to go 
through all kinds of additional hoops.
    We got the package for it, and we went through to 
conventional financings with what we needed with the 
explanation that they went through the package, thought we 
looked real good. They went through our balance sheets, our 
business plan, profit and loss, everything, where we have been 
since we have been there.
    Then they learned that we are sitting on state lands, and 
you cannot encumber state lands. Therefore, we do not fit in 
their financing box. They suggested we have the perfect program 
for you. It is SBA 7(a).
    We started working on our SBA 7(a) documents, and we got 
that completed. We submitted it. I want to say we submitted it 
on the 6th, not even knowing that there was already happened in 
December. We were not even aware of that.
    We turned it in because my partner is pretty good about a 
complete package. I believe that we had everything in our 
package when it was completed and given to them. Then we 
received a telephone call. He gave me the news a few days later 
about the SBA.
    I do not believe at this point--the Chair said that we may 
be able to. There may be some Agricultural money. I do not 
know. I mean, the government has helped us a lot because it is 
a public/private partnership that we are doing with the city. 
We are an area of economic critical concern, and we have all 
these designations.
    We are willing to do whatever we can, but we believe, and 
as has been shown to us by the banks, that this 7(a) program is 
perfectly designed for our type of facility. Unfortunately, we 
need a fair amount of money because it is not a little project.
    Ms. Majette. Has this change in circumstance cost you 
personally or cost the company? How has it affected you?
    Mr. Sprague. Well, every day. My partner and I have gone 
two and a half years without drawing a paycheck because we want 
to make sure everything we do goes back in. Somewhere my wife 
says, you know, there should be a paycheck coming our way one 
of these days.
    What it does, though, is it slows the whole project down. I 
do not know how we are going to do this now. Some of it is 
grants. We have to look at those kind of dates. We are going to 
have to see how this thing goes together.
    It is not just us. It is the whole downtown redevelopment 
because we are that catalyst for bringing people. This one will 
open that little shop, and this one will have a breakfast and 
lunch. This one will do this, and that one will do that. All 
these closed businesses will hopefully start reopening.
    It is not just waiting to see how we are going to put our 
project back together and figure out how this is going to work 
and how many years it is going to slow us down in trying to 
achieve where we have to go and what is going to happen at the 
end of the day.
    It is a whole bunch of other people that are sitting and 
waiting because they had high expectations that all of a sudden 
everything was coming together. It was all coming together. I 
mean, this thing came out of nowhere.
    Ms. Majette. So your project really is the linchpin----
    Mr. Sprague. Yes, ma'am.
    Ms. Majette[continuing]In terms of development in that 
entire area?
    Mr. Sprague. Yes, ma'am.
    Ms. Majette. Sort of dropping the pebble in the pond, and 
the ripples would continue to go around.
    Mr. Sprague. That is it. The city council has been good. I 
mean, they have now looked. All right. The center of town down 
from the project. What do we need? We need parking. They have 
just gone out and committed that they are going to buy this 
property around here and commit parking for all the businesses 
down there.
    We have people coming. Now, the businesses do not have 
parking. There will be public parking. You know, everybody is 
planning all going on here, and now all of a sudden somebody 
pulled the rug out from under everything.
    Ms. Majette. Is there any way that you can break up the 
financing to be able to------.
    Mr. Sprague. The problem is, I do not know. I am not saying 
that there are not a few pieces that we can do. In other words, 
like if we go like I just needed a front endloader. Yes, we 
went out and did conventional financing on it. Not a problem. 
You know, if we do not pay the payments, they have something 
they can grab.
    A lot of what we are doing is not grabbable as far as the 
banks are concerned, or it is multifaceted. You know, it is a 
little bit here and a little bit there, and it is hard to go 
out and get that kind of stuff.
    At this point we do not know how it is going to work. My 
partner is back, and that is his main penance I call it is to 
work on this kind of stuff. That is his half. He is trying to 
figure out where we are going to go. When I get back, I guess 
we will try to figure out where we proceed from now.
    Ms. Majette. I guess the Everglades adventure has become a 
misadventure.
    Mr. Sprague. It is still an adventure. I am not sure it is 
a misadventure yet, but it definitely got a little more 
adventuresome than it was.
    Ms. Majette. More adventurous than you intended it to be?
    Mr. Sprague. Yes.
    Chairman Manzullo. They need some venture capital.
    Mr. Sprague. Yes.
    Ms. Majette. Thank you. Thank you for your testimony.
    Mr. Sprague. Yes, ma'am.
    Chairman Manzullo. I want to thank all of you for coming.
    Mr. Sprague and Mayor, I would suggest the EPA has all 
kinds of grants for wastewater treatment facilities, for 
drinking water. There is a tremendous amount of resources that 
are out there. If you pay taxes, I guess you are eligible to 
apply for these grants and loans if they are there.
    Karen, you could help them and guide them into other 
programs that are available with the staff that is available? 
Thank you very much. We want to thank the SBA and their staff 
for being here.
    We want to thank the witnesses, especially those of you who 
have come from long distances to be here.
    Is this your first time to testify before Congress, David?
    Mr. Pilcher. Yes, it is. I will be here all day tomorrow, 
so I can meet with you as long as you would like.
    Mr. Moses. Likewise for me also.
    Mr. Pegg. Us too.
    Chairman Manzullo. Listen, I understand. You need to talk 
to the guys at the SBA. I would also suggest that you talk to 
your Senators and your U.S. Representative.
    In our district we have a person that does full-time 
economic development. We are savaged with double digit 
unemployment in my district. It is getting worse because we 
have a heavy manufacturing base, and, Mr. Sprague, we have a 
good portion of the Mississippi River in our district. We are 
in the process of trying to develop things similar to what you 
are doing, so that is why I have a particular interest in what 
you are doing.
    To all of you, thank you for coming here. It is a real 
privilege to be Members of Congress and to have people who are 
impacted by these government programs to come and testify 
before us.
    The hearing is adjourned.
    [Whereupon, at 5:15 p.m. the Committee was adjourned.]

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