[Senate Hearing 108-452]
[From the U.S. Government Publishing Office]
S. Hrg. 108-452
SBA REAUTHORIZATION:
PROGRAMMING FOR SUCCESS
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS
AND ENTREPRENEURSHIP
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
JUNE 4, 2003
__________
Printed for the use of the Committee on Small Business and
Entrepreneurship
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COMMITTEE ON SMALL BUSNIESS AND ENTREPRENEURSHIP
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
OLYMPIA J. SNOWE, Maine, Chair
CHRISTOPHER S. BOND, Missouri JOHN F. KERRY, Massachusetts
CONRAD BURNS, Montana CARL LEVIN, Michigan
ROBERT F. BENNETT, Utah TOM HARKIN, Iowa
MICHAEL ENZI, Wyoming JOSEPH I. LIEBERMAN, Connecticut
PETER G. FITZGERALD, Illinois MARY LANDRIEU, Louisiana
MIKE CRAPO, Idaho JOHN EDWARDS, North Carolina
GEORGE ALLEN, Virginia MARIA CANTWELL, Washington
JOHN ENSIGN, Nevada EVAN BAYH, Indiana
NORMAN COLEMAN, Minnesota MARK PRYOR, Arkansas
Mark E. Warren, Staff Director and Chief Counsel
Patricia R. Forbes Democratic Staff Director and Chief Counsel
C O N T E N T S
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Page
Opening Statements
Snowe, The Honorable Olympia J., Chair, Committee on Small
Business and Entrepreuneurship and a United States Senator from
Maine.......................................................... 1
Testimony
Barreto, The Honorable Hector V., Administrator, Small Business
Administration, Washington, DC................................. 3
Alphabetical Listing and Appendix Material Submitted
Barreto, The Honorable Hector V.:
Prepared opening statement................................... 8
Answers to Committee questions............................... 38
Kerry, The Honorable John F.:
Prepared opening statement................................... 98
Landrieu, The Honorable Mary:
Prepared opening statement................................... 108
Levin, The Honorable Carl:
Prepared opening statement................................... 110
Comments for the Record
Wilson, Donald, President, Association of Small Business
Development
Centers, Washington, DC........................................ 113
SBA REAUTHORIZATION:
PROGRAMMING FOR SUCCESS
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WEDNESDAY, JUNE 4, 2003
United States Senate,
Committee on Small Business and Entrepreneurship,
Washington, DC.
The Committee met, pursuant to notice, at 2:05 p.m., in
Room SR-428A, Russell Senate Office Building, Hon. Olympia
Snowe, Chair of the Committee, presiding.
Present: Senator Snowe.
OPENING STATEMENT OF HON. OLYMPIA SNOWE, CHAIR,
SENATE COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP, AND A
UNITED STATES SENATOR FROM MAINE
Chair Snowe. The hearing will come to order.
I want to say how much I welcome the Administrator here
this afternoon to our hearing on the reauthorization of the
Small Business Administration and its programs. I welcome you,
Mr. Barreto, here today to join in the discussion on some of
the issues as we prepare for the reauthorization process.
This is the last in a series of hearings, as well as
roundtables, that the Committee has been holding to examine the
entire range of SBA programs that are designed to serve the
needs of America's small businesses and the entrepreneurs of
tomorrow.
In March, we began this endeavor by focusing on the SBA's
contracting programs and the problem of contract bundling. We
heard testimony about the nearly $235 billion in federal
contracts awarded in Fiscal Year 2001. While this figure
overall represents an 11 percent increase over the amount spent
5 years earlier, there have been a steady decline in the number
of small businesses receiving new contract awards. Since 1991,
the pool of small business contractors receiving new contract
awards has declined by more than 50 percent.
So the testimony was clear that significant changes needed
to be made if federal agencies are to meet the goal of ensuring
that at least 23 percent of the value of federal contracts go
to small enterprises.
In April and May, we conducted a thorough review of the
agency's various programs through a series of roundtables. On
April 9th we heard about the impressive track record of the
SBA's Office of Advocacy, which is an invaluable voice for
small business within the Administration, and has produced an
estimated $21 billion in regulatory cost savings for small
businesses in Fiscal Year 2002.
Our roundtable also examined the individual entrepreneur
development programs the SBA offers to small businesses, the
Small Business Development Centers, the Women Business Centers,
the Service Corps of Retired Executives, and a host of other
programs that assist small firms and individuals to try to
create their own small businesses.
We are also looking carefully at the SBA's Government
contracting and business development programs which assist
small businesses in competing for the business of the Nation's
largest consumer, which of course is the Federal Government.
The conclusion is while there are some programs that are
working well at SBA, there are insufficiencies that we can
address to ensure that small businesses get the assistance that
they require through start up and operations. Once operating,
these small businesses should be assured that the SBA can
deliver solid Government contract assistance through
experienced SBA personnel.
Finally, in our two roundtables that were held on April
30th and May 1st, we focused on the SBA's lending and
investment capital programs. The 7(A) and 504 loan programs are
two of the most useful and critical resources the agency has to
offer small businesses that continue to seek capital to operate
their businesses as well as to grow and expand.
I was pleased to learn that the SBA is continuing to
improve these programs through new initiatives like the
SBAExpress Program. These loan programs have a solid record of
helping small businesses create and retain more than 2 million
jobs, and I plan to build upon the success by working through
the reauthorization program to make these programs more
efficient, more user-friendly for small businesses that seek
capital to strengthen their enterprise.
Similarly, the SBA's investment capital programs have been
significant sources of long-term capital for small enterprises.
The past few years have been a difficult time for businesses
seeking venture capital. But these programs have kept venture
capital at far greater levels than would otherwise have been
the case.
The SBIC program alone has made more than 16,000
investments in small businesses since the start of Fiscal Year
1999 totaling almost $17 billion. Moreover, these investments
have supported approximately 481,000 jobs in small businesses.
With a significant record on the SBA's program, their
strengths and weaknesses already in hand, today we complete our
fact-finding with a final hearing and a special guest, the SBA
Administrator. Throughout the past 3 months, our focus has been
on the agency's success stories, what has been helping small
businesses the most, why it has worked, and how can that
success be applied to other programs.
This afternoon I certainly look forward to listening to the
Administrator about the SBA's proposals for improving the
agency's ability to respond to the many challenges facing
existing small businesses and the increasing number of new
startups. I know the SBA has offered a package of legislative
proposals over the next several years and I am eager to hear
about those proposals and how they will enable SBA to build
upon its record of success, particularly this year when the SBA
celebrates its 50th anniversary.
So Mr. Barreto, we are very pleased to have you here this
afternoon. This is an important hearing because it will help us
to work through some of the issues that are important to the
agency and highlight the leadership that you have provided to
the agency. I want to commend you for that. We want to work
with you throughout this reauthorization process to succeed in
reaching some decisions on those programs that have really
worked well for small businesses and to see what we can do
better in the future.
So I welcome you, Mr. Barreto. You can begin and I will
submit your full testimony in the record.
STATEMENT OF HON. HECTOR V. BARRETO, ADMINISTRATOR,
U.S. SMALL BUSINESS ADMINISTRATION
Administrator Barreto. Thank you very much, Madame Chair.
Thank you for inviting me here today to discuss the
President's budget request and reauthorization package for the
U.S. Small Business Administration for Fiscal Year 2004.
As you know, President Bush and his Administration are
dedicated to serving and protecting America's small businesses.
The President appreciates the enormous contributions that small
business makes to our country and his domestic policy agenda
reflects that appreciation. The Jobs and Growth Act was a good
example of how the President is working to help small business.
From the rate reductions that will help small business owners
who file their business income on their personal returns to
quadrupling the expensing limits for business equipment, small
business owners are one of the main beneficiaries of the Jobs
and Growth Act.
The budget request and reauthorization package for the SBA
also reflects the President's faith in small business and this
Administration's desire to serve the small business community.
To support the President's small business agenda, the SBA is
focusing on three strategic goals. First, SBA is championing
small business by minimizing the regulatory burden, providing
easily accessible information about regulatory compliance and
ensuring that regulatory process treats small businesses
fairly.
Second, SBA is empowering entrepreneurs by increasing
access to capital and information, technical assistance and
counseling, as well as increased access to procurement
opportunities.
Third, SBA is continuing to play a vital role in helping
businesses and families recover from disasters.
When I testified before Congress last year, I testified
about the challenges facing SBA. Today, I am pleased to report
that this Administration has met those challenges and has
significant accomplishments to report to you. For example, our
new econometric model for the 7(A) Loan Guarantee Program will
enable SBA to allocate resources more effectively, determine
program costs more precisely, and increase its ability to
target loans to aspiring entrepreneurs. The model improves the
Government's ability to forecast loan performance by accounting
for a wider range of economic factors, as well as a wider
variety of loan characteristics.
We are also changing the way that SBA delivers services to
its customers. Today, we are implementing our transformation
efforts with a 3-district pilot program. We have worked hard to
ensure the success of SBA's transformation efforts and to
address the concerns raised by our congressional partners in
formulating this plan.
SBA has also taken steps towards a more modern oversight
system for our lending partners. SBA contracted with Dun &
Bradstreet to develop a new loan monitoring system that meets
our needs for lender oversight. I believe we have made great
strides in these areas and others, and I respectfully ask for
your support of the President's Fiscal Year 2004 budget request
for the SBA.
The President's plan proposes a total Fiscal Year 2004
appropriation of $797.9 million. It maintains the spending
level proposed for Fiscal Year 2003 and would provide
substantial levels of credit, capital, procurement, and
entrepreneurial development assistance to small businesses.
This fiscally sound budget would provide more than $20.8
billion in small business loans, loan guarantees, and venture
capital, and more than $760 million in new disaster loan funds
for victims of natural disasters. It includes funding for $9.3
billion in guaranteed loans under the 7(A) program, as well as
more than $115 million for the agency's technical assistance
programs.
This budget proposal demonstrates that SBA, under the
President's management agenda, is seeking ways to serve the
Nation's small businesses more efficiently and ensure economic
security by creating jobs. A prime example of this comes in the
request for the 7(A) Loan Guarantee Program, SBA's flagship
program. Earlier in Fiscal Year 2003, to deal with the effects
of lowered fees on 7(A) loans, SBA instituted a cap of $500,000
per 7(A) loan. The emphasis on smaller loans enabled us to
leverage resources and provide an increased number of loans to
emerging markets. This put SBA ahead of its 7(A) lending goals
in every category for Fiscal Year 2003, including 35 percent
ahead to women-owned businesses, 65 percent ahead to African-
American owned businesses, 39 percent to Hispanic-owned
businesses, and 31 percent to veteran-owned businesses.
By focusing on smaller average loan size, we are assisting
more small businesses and creating more jobs. In 2002, we
estimate that our Capital Access Programs helped create or
retain 573,000 jobs. Historically, we calculated the job
creation and retention by estimating one job created or
retained for every $32,000 lent. Using our portfolio data, we
found that loans under $50,000 give the greatest return in job
creation, with $14,700 in loan dollars creating one job,
whereas loans between $1 million and $2 million require
$140,000 to create one job. Smaller loans have a true win-win
track record.
To date SBAExpress and smaller loans in general tend to
have lower default rates than larger loans. The growth of
SBAExpress, a program offering efficiency that is attractive to
borrowers and lenders alike, is a testament to its value to our
private sector partners. Lenders want to help budding
entrepreneurs, and SBA is committed to working with them to
accomplish that goal.
We will also promote smaller loans by expanding the lending
program to allow 1,500 credit unions to join our network of
lenders, a potential increase of some 30 percent in the number
of outlets for capital for small businesses.
The budget request will enable SBA to provide $4.5 billion
in loans through the 504 Certified Development Company Program
with no cost to taxpayers. The 504 program, which was
established to increase long-term fixed asset funding, has
always had a job creation goal and SBA recognizes the need to
increase access to 504 loans.
The budget request includes $8.8 million to continue
implementation of SBA's transformation efforts. These efforts
are crucial to the agency's continued relevance in its second
half century. In recent years, SBA's program delivery has
changed dramatically, but SBA has not adapted to these changes.
Through transformation, SBA will shift field office efforts
from administrative functions such as loan purchases and
liquidation functions to more direct relationships with
customers and resource partners. This new approach will empower
SBA to serve more small businesses.
SBA carefully negotiated the implementation of the pilots
with its union and they are currently underway. We will
evaluate the results of these pilot programs and incrementally
expand the successful practices to more offices until all of
the SBA has been transformed.
The transformation plan is linked with SBA's implementation
of the President's management agenda which emphasizes better
management of the Federal Government through five key areas:
human capital, competitive sourcing, E-government, integration
of budgets and performance, and improved financial management.
The budget requests $16.5 million, including $8.8 million
for the transformation plan, to support the agency's execution
of the President's management agenda.
SBA requests $2.3 million to streamline business processes
to reduce costs and to improve customer service and $1.7
million to support SBA's information technology infrastructure.
SBA's Fiscal Year 2004 budget request includes level
funding for entrepreneurial development programs, SCORE and the
SBDC, the women's business centers, and business information
center networks. It is often said that access to information is
the key to small business success.
The budget request includes continued funding for the
agency's Disaster Assistance Program. SBA works closely with
the Federal Emergency Management Agency to assist small
businesses and individuals directly affected by disasters to
get them back on their feet in times of trouble.
At the SBA, we are proud of what we have accomplished over
the past year and over the past 50 years. While we take pride
in our achievements, we are not going to rest on our laurels.
We continue to look ahead, and SBA's Fiscal Year 2004 budget
request offers an opportunity for us to work together with you
to ensure that SBA continues to assist small businesses into
the next half-century.
I would now like to address the first part of our
legislative proposal for reauthorization. We are asking
Congress to extend the reauthorization of SBA's programs to a
6-year cycle. Over the years, our private sector partners have
spoken about the problems they face due to crises of confidence
in the public sector. There is no surer sign of the
Administration's confidence and support than our proposal.
This is something our SBIC partners can show the markets
and allow CDCs time to plan further into the future. It will
not affect the oversight authority of Congress, which has been
exercised many times over the years regardless of program
authorization.
Specifics of our legislative proposal, explained in greater
detail in my submitted written testimony, are as follows. We
propose changes to update SBDC assistance by encouraging new
technologies, creating a virtual SBDC, analyzing local economic
development needs, and increasing the capacity of the SBDC and
Women Business Center clearinghouses. This will significantly
expand sharing of SBDC information, leverage resources, and
support the integration of entrepreneurial development
programs.
Because of our strong support for women business centers,
we do not believe the reauthorization of sustainability is the
best way to serve them. The pilot requires SBA to spend 30.2
percent of the women's business center budget on sustainability
grants. After funding existing centers and the sustainability
requirement, little is left for new centers, ideas, or for
outreach. Sustainability locks in the status quo.
With the funding currently dedicated to sustainability, the
SBA estimates that an additional 24 centers could be opened.
Currently, there are no centers in Nevada or Delaware or the
city of Los Angeles. Sustainability is preventing the WBC
program from reaching women in more than a dozen cities.
Madame Chair, I appreciate your work on S. 1154. Our staffs
have been talking and I look forward to working on this program
with you.
SBA is also proposing competition for the SBDC program. The
process would be phased in with strong performing centers
flourishing and underperforming centers working to improve
their performance and prove their value to the small business
community. Women business centers compete, why should SBDCs
remain a monopoly, under a system that prohibits other
potential service providers from even offering their services.
SBA is also proposing changes to the 7(A) program to
clarify SBA's approach, authority to regulate small business
lending companies, and carry out the SBA's fiduciary
responsibilities. Currently, SBLCs have no federal regulator,
yet carry out approximately 20 percent of all SBA lending.
We have proposed two changes to the Microloan program, one
regarding eligibility requirements for participation, and the
second repealing the current limits on the use of technical
assistance funds. This will allow additional qualified
intermediaries into the program, and we propose to give them
flexibility to best serve microborrowers.
SBA is also proposing changes to the loan loss reserve for
the 504 Premier Certified Lending Program. The original formula
requires loss reserves that financially strain CDCs. SBA's
proposal is less restrictive to a risk-based system that will
encourage CDCs to participate in PCLP lending.
SBA proposes a statutory modification to increase fees for
the SBIC Participating Securities Program to maintain the
program's zero subsidy. This change is not due to any failure
of the program but due to a drop in the Treasury rates
reflecting in reduced participation agreement returns. If this
change is not enacted, the program will require an
appropriation.
SBA also proposes changes to allow participating security
SBICs to make increased distributions to the SBA and to allow
SBICs the flexibility to invest idle funds in securities.
Madame Chair, this concludes my testimony and I am happy to
answer any questions you might have at this time. Thank you
very much.
[The prepared statement of Mr. Barreto follows:]
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Chair Snowe. Thank you, Mr. Barreto. I appreciate your
comments here this afternoon.
First of all, I want to applaud you for applying the
econometric model to the 7(a) program, because I think that
certainly does expand the value of the portfolio and the
ability to be able to lend more money. Then, in addition to
that, it ultimately responds in a greater number of jobs
created.
Do you have any estimate on how much additional loan
authority the model will create? Again, we are talking about
$1.4 billion in additional funding, ability to loan.
Administrator Barreto. We believe that is going to take our
lending authority to almost $11 billion.
Chair Snowe. Do you have any idea how many jobs that
potentially could create?
Administrator Barreto. Again, it depends on the size of the
loans that we end up doing. As I mentioned before, we believe
that the smaller loans can create jobs with as little as
$14,700 in loan amount. So obviously, at the track that we are
currently on with the SBAExpress and some of the percentage
increases that we are seeing in our loan volume, we believe
that it could be significant. But we would be glad to put some
numbers together for you on that.
Chair Snowe. I appreciate that. And I think it is important
because certainly it illustrates the value of being able to
expand some of these loan programs because I believe that there
is a demand. If we can expand these programs to meet that
demand, it will create more jobs.
We depend on small businesses to generate job creation in
this country. And basically, we are wholly dependent on small
businesses to create jobs.
So anything we can do to expand that potential is really
essential. I think the SBA ought to be advertising that. I
think that is one of the issues. I do not think that you do
enough--you, the agency, not you personally--but you, the
agency, touting those numbers. In each of the programs in
where--for as little amount of money that can be invested per
job essentially really does make a profound difference.
Administrator Barreto. I could not agree with you more. We
have a great resource in our networks and we have, as you know,
offices in every State of the union. We have 70 major program
offices. But we have this other great network, which is our
resource partners. We have something in excess of 7,500 lending
partners. More and more are signing up every day, especially
for the SBAExpress Program. And they are a great vehicle for us
to get the word out, to do the outreach.
Of course, we have wonderful outreach partners in our
technical assistance partners. I also mentioned in my testimony
that we have also opened our programs up to credit unions which
oftentimes do those small loans that create those jobs. We have
opened it up to at least 1,500 potential credit unions that
could take advantage of our programs. We will continue to do
that.
But I agree with you, it is our responsibility to get the
word out, to do the outreach, and to really talk about how
these tools can really help small business grow.
Chair Snowe. I think the outreach is important. It's
important to make known the availability of these programs,
through the district offices, out in the various parts of the
country.
I had a roundtable recently, during the recess, and I was
so amazed because I do not think there is enough awareness
about the SBA's programs and the available resources for
somebody to expand their business or to start a business.
I think we are just going to have to do a better job at
expanding and expounding on these programs, because I really do
think they are very, very critical to the future success of our
economy.
Administrator Barreto. I agree 100 percent. We are doing
two things in particular that I would like to draw your
attention to. One of them is that we are continuously enhancing
the information that we provide on the Internet. We have
recently relaunched our website and we are currently averaging
about 1.5 million visitors--not hits, but visitors--to the
website every single week. And of course, they have access to
all of the information on all of our programs and we will
continue to use that as an important tool to reach small
businesses.
Also, as you mentioned, this is our 50th anniversary. So we
are going to take that as an opportunity to not only talk about
what the SBA has accomplished over those 50 years, but really
talk about where the SBA is going and what the future
opportunities are. We will be doing events all across the
country culminating in a major conference we will do here in
Washington DC. where we will have businesses and centers of
influence from all across the country.
The reason I mention these events is that we want to use
them as opportunities to continually reinforce all of the
resources that SBA can bring to bear.
In fact, as you know, we are doing matchmaking events this
year. At every matchmaking event we have all of our resource
providers and representatives from all of our programs there to
not only help small businesses get access to contracts, but
also help them to get access to capital and access to technical
assistance. Thus far, that has been working very well.
Chair Snowe. You mentioned the transformation initiative
that is underway at SBA. I would like to explore some of those
issues with you because I think the Committee would be
interested in the progress that is being made in implementing
this transformation initiative. I know there has been a request
for funding, which is what, $16 million?
Administrator Barreto. Yes, ma'am. It is a total of $16.5
million.
Chair Snowe. $15 million? You had a chart that showed
$17,400,000.
Administrator Barreto. There are different elements to it.
When you break it all down, you can put all of this under the
transformation category but there is money there for training
and development, for restructuring our office space, for the
expansion of our current pilots. We want to study the
commercial activities that we do, and where we can, centralize
some of our functions; and where possible, possibly outsource
some of the functions. So there is a lot of stuff in there.
Also, the upgrade in our technology and the modernization
of our systems. All of this kind of goes under the
transformation banner. But it is approximately $16 million,
maybe a little bit more than that.
Of course, you know that we had asked for that money in our
budget last year, and unfortunately, we were not able to
receive it. The President has asked for the money again this
year, and we are very hopeful because we think it is critically
important to really position the SBA for our next 50 years.
Chair Snowe. Has the agency spent any money on this
initiative?
Administrator Barreto. Very little when you talk about
these major investments that we need to make.
Chair Snowe. Have you made any progress on the initiative?
Administrator Barreto. We have. We have started the
initiative by beginning with three pilot offices currently
underway. We are looking at them. We are benchmarking them. We
are really studying.
One of the things that we know is that not every SBA office
is exactly the same with the same kinds of needs. So this
really gives us an opportunity to really customize our
approach. But at the end of the day what we want to try to do
is free employees up. One thing that we are very aware of is
the workforce of the SBA has declined significantly over the
last 10 years. We are not planning on losing any more of our
employees, but we also know that it is not that likely that we
are going to receive a lot more employees. So what that makes
us do is to operate as efficiently and as effectively as
possible.
As you know, one of the things I did last year was I
visited almost 40 of my 70 districts. I went to 30 of the 50
States. They kept telling me the same thing. They kept saying
``Look, you keep giving us more and more work, but there are
only so many of us. We can only do so many jobs.'' They said
``What we want to do is, we want to help small businesses. What
we want to do is, we want to be out in those small communities
and develop partnerships and refer people.''
We need to be freed up from a lot of the process and the
bureaucracy that we are saddled with. So that is one of the
things that we are really focusing on, unshackling some of
these offices to do what they really want to, which is to help
more small businesses.
Chair Snowe. So there has been very little money that has
been spent to date in implementing this initiative? So really
it is contingent upon this request for $15 million?
Administrator Barreto. Absolutely. In order for us to be
successful with transformation there is no doubt that we are
going to need the resources to invest in being able to do this.
There is no doubt in my mind that we will get significant
return on investment, especially if our return on investment is
helping more businesses get started, get access to capital, and
technical assistance.
Chair Snowe. The three pilot programs, are they underway at
this point?
Administrator Barreto. Yes, they are. We have already begun
pilots in Miami, Florida; Phoenix, Arizona; and Charlotte,
North Carolina.
Chair Snowe. How long will it take to determine the results
of those pilot programs?
Administrator Barreto. Well, it is on an ongoing basis.
Chair Snowe. Do you plan to expand the pilot programs?
Administrator Barreto. We do. We want to expand this pilot
program. We have a number of our district offices that are
begging us to be part of the transformation pilot. So we would
definitely expect and plan on expanding it. However, we need
the resources to be able to do that.
We felt it so important to begin this process, even though
we did not get an appropriation for it. We were not able to do
it is aggressively as we would have been able to do it
otherwise. Again, we think that this is critically important to
the future of the SBA.
Chair Snowe. So these offices would ultimately be involved
in outreach and marketing, for example? So they would be
involved in promoting SBA's programs?
Administrator Barreto. Absolutely. All district offices do
that already. What has happened is that by removing some of the
liquidation processes, and some of the other loan monitoring
processes that they currently were tasked with, it has freed
them up. Maybe they only had a fraction of their folks that
were able to do that. Now that they have freed up a lot of
people from doing those activities, now it is like they have a
whole new workforce.
When I would go out there, they would say ``We need more
people to do this marketing and outreach.'' But really what
they needed is to better utilize the people that they had. That
is what transformation is allowing us to do.
I will tell you that we are starting to see some great
results. Miami is up double digits in their loans, technical
assistance, and the events that they are doing. Phoenix is
showing some very strong signs, too. Charlotte is coming
around, as well.
So it is working, and we want to fast-forward the progress
across our whole network.
Chair Snowe. Would you be able to share with the Committee
some of the results of those pilot programs anytime soon?
Administrator Barreto. Absolutely. I would be more than
happy to document exactly, because, in working with them, we
have come up with some very aggressive, substantive, specific
goals on how many loans we want to be doing in those areas, how
many training sessions that we can do for small businesses,
partnership agreements, we can and do provide opportunities for
procurement. We have some very specific benchmarks in all those
areas and I would be happy to provide you with those for each
one of those district pilots and the progress we are making in
achieving those goals.
Chair Snowe. So in making that shift, do they have funding
for the additional responsibilities? I know that you said that
they do some of it, but like for outreach and marketing and
promotion?
Administrator Barreto. All district offices receive a
budget to be able to do that, absolutely. But some of these
activities do not necessarily require a significant amount of
resources to do the marketing. In other words, if we had
somebody that was processing forms for 8 hours a day and now
they do not have to do that anymore, they can go out in the
field and they can network with Chambers of Commerce and
business associations, explore partnership agreements, et
cetera. That is not going to necessarily cost us a significant
amount of money to allow them to do that. It just frees up the
time for existing employees.
Now, a key thing that we need to do is we need to train
them and transition them into these new activities. We do not
expect that one day somebody will be processing forms and the
next day they will be a master marketer.
Also, it is not to say that every single person will be
involved in marketing. There are a lot of activities related to
directly assisting small businesses and that is really we want
to do.
As I said, when I talked to the district offices, many of
our employees would say ``I never get to talk to a small
business because I am always stuck behind a desk or have all of
this paperwork I have to do. So I never get out to reach
them.''
Chair Snowe. I know that there are some problems that you
also inherited with respect to accounting problems. I know the
SBA auditors, after being informed by the GAO of their findings
regarding the loan asset sales, withdrew their unqualified
clean opinions for SBA financial statements. I wanted to
explore some of these issues with you today because obviously,
if SBA does not have a clean opinion it is going to be very
difficult to engage in loan asset sales. It affects the
disaster loan programs.
This has occurred for three consecutive Fiscal Years, 2000,
2001, and 2002. I know that SBA has contracted with a private
company to examine the SBA's financial accounting systems and
to recommend improvements. What has occurred as a result of
this work conducted by the private contractor? How long do you
think it is going to take before they will finalize and
complete some examination so the SBA can receive an unqualified
opinion?
Because otherwise, that is going to be a continuous
problem. That impacts the overall agency. I am just wondering
how long it is going to take to rectify this issue so that it
does not repeat itself?
Administrator Barreto. Absolutely. I agree with you. When
we first came in, the SBA actually--what we had been told is
that we had received very good opinions on all of our
financials. It was only last year, I believe, that we found out
that some of those opinions now had to be changed.
The good news, if we can say that, is that we were able to
discover this issue and this problem well before the GAO
report. In fact, we are working very closely with GAO and
others in the Administration to make sure that we have the best
financial statements possible. This really speaks to our
integrity. I agree with you, it is very, very important for the
agency to have its integrity and to be an agency that is
credible in everything that it does.
One of the things that we did immediately is to make some
changes in our chief financial officer and some of the folks
that were responsible for these financial reports. We also are
working very closely with our auditor.
We do not have the full answers yet, but we have made
significant progress in looking at this issue and looking at
this problem. I can't give you a specific date, I promise to
follow up on that. But I want to tell you that it is going to
be very soon, sooner than later. They have had a very
aggressive timetable in being able to resolve these issues.
The issue gets somewhat complicated because a lot of what
it has to do with is how the subsidy rate is applied to some of
these measurements and whether the subsidy rate currently
applied to disaster loans is even an accurate subsidy rate.
That is something that we are going to have to determine. We
are working very closely with our outside contractor and with
our new chief financial officer to make sure that this is not
only clarified, but that safeguards are put in place to prevent
this from ever happening again.
Again, this is something that is a top priority for me
because I understand that once you do lose that credibility, or
if there is any doubt whatsoever--especially when you are
dealing with the private sector and the markets--that would be
something that would be very undermining to our mission. Of
course, we will do everything that we can to prevent that from
happening.
Chair Snowe. Obviously, it is the systems in place that are
resulting in a persistent problem. That is why I think it is
important to correct them.
Administrator Barreto. I agree.
Chair Snowe. And I know that you have taken steps to do so
and hopefully it is going to be a permanent correction, because
I know that money has been spent over the last 6 years--for
example, the loan monitoring system--that obviously were
overestimates. And that has created huge problems and
ultimately it undermines the entire program.
So I do think it is something that needs to be corrected
sooner rather than later. And I know you understand that. I
just hope that it can be done.
Administrator Barreto. It will be done and I want to commit
to you that it----
Chair Snowe. Will it be done in the next few months?
Administrator Barreto. I will give you an exact date on it.
I want to tell you that we have, as you know, hired a
contractor. In the end, I believe that we are going to have not
only a system that works well and does what it is intended to
do, but that we will have come a long way from where we
started. There is no doubt that a lot of money was spent,
probably unnecessarily and unwisely, in the past to get a
system that we never got and never worked. We did not make the
problem, but we are going to fix the problem. I assure you that
we will get you a specific report on our progress to date on
the loan monitoring system.
Chair Snowe. We would appreciate that, because ultimately
it casts a shadow if these problems do not get corrected. And
ultimately, it is costing money, let alone eroding the
integrity of the programs. It is fundamental. I hope that we
can correct it as soon as possible. So would you give a report
to this Committee on the progress?
Administrator Barreto. Yes, ma'am.
Chair Snowe. The same is true for the loan monitoring
system, and I know this has been a problem since before 1997. I
understand the SBA has entered into a contract with Dun &
Bradstreet, is that correct? Is it to establish a loan
monitoring system?
Administrator Barreto. Yes, that is right.
Chair Snowe. What do you expect to result from that
contract? When do you think they will set up a loan monitoring
system? Because again, this also seems to be a persistent
problem. I understand $12 million has been spent since 1997
internally. And now I know SBA has had to hire an outside
contractor to get the job done. That contract is worth more
than $9 million, with a contractor; is that correct?
Administrator Barreto. Yes.
The main thing that we expect is to have a loan monitoring
system that works and to also make sure that it is as cost-
effective and efficient as possible. I believe that is what we
are embarking upon.
We have always had a loan monitoring system at the SBA, but
we always felt that we needed to have something that was even
more thorough, more effective than what it is that we had
before. I think that we will have that once our contractor
finishes the work.
And again, this is something that I will include in the
report in terms of the timetable.
I also want to state that this has been something that we
have taken a very hard look at. This is something that we
realized very early-on was going to be a challenge for the SBA
if we did not get not only our financial situation resolved and
corrected, but also have an effective loan monitoring system.
It is one of our highest priorities.
I want to commend the work our folks have done since those
problems have been identified. The new team that is in place
that has really carried the ball very, very far with regards to
making progress on this. I will not be satisfied until both of
those issues are corrected and are beyond reproach.
Chair Snowe. Were all of the SBA's loan guarantee programs
included in this contract with Dun & Bradstreet? Or were some
excluded?
Administrator Barreto. I do not believe that it includes
every one of the loan programs, but I will double check on
that.
Chair Snowe. Would there be a reason why some would be
excluded?
Administrator Barreto. I want to verify that, whether the
disaster loans and the 7(A) loans might be separate. But I will
definitely check on that.
Chair Snowe. I hope that there will be a way in which to
ensure the accuracy of the whole system and to make sure that
the information that goes into the system is accurate, because
I understand that also can be a problem.
Administrator Barreto. Absolutely.
Chair Snowe. Because the kind of information that you
provide to Dun & Bradstreet is going to be critical in
determining the success of establishing this program. It has to
be the most up-to-date information, the most accurate
information.
Administrator Barreto. The integrity of the information is
key to being able to get the proper reports and the proper
opinions, and so we will definitely ensure that that happens.
Chair Snowe. So that effort is underway as well?
Administrator Barreto. Yes, it is.
Chair Snowe. Is that something that is recognized by your
agency?
Administrator Barreto. Absolutely.
Chair Snowe. I would like to turn our attention to some of
SBA's programs. I have had a chance to review some of the
budget and legislative proposals, and you mention the 7(A)
program. I know it is basically the same request, based on
historic levels, of $9.3 billion, I gather.
During the course of our roundtables, we have had some
recommendations, obviously by lenders, to expand the program
because they estimate that there is an increase in demand and
that demand will exceed the program's capacity.
What is your opinion about this? I know that you have
obviously made your recommendation. But do you also think that
if we were to expand this loan capacity for the 7(A) program
that it might result in greater number of requests for and the
demand may exceed even $11 billion? We heard that consistently
in these roundtables, that there really is a big demand out
there for these type of loans.
Administrator Barreto. There has definitely been a big
demand for SBA loans this year and we are excited about that.
Let me just put it a little bit in perspective.
First of all, we are not concerned about running out of
money in Fiscal Year 2003, even before we made our announcement
yesterday about the expansion of our budget authority because
of the econometric model that we applied.
Compared to this point last year, SBA has reached 10,000
more small businesses, yet used fewer dollars. Loan approvals
right now are averaging $40 million a day. We would need to do
$54 million a day for the rest of the Fiscal Year to run out of
lending authority, and we do not believe that is going to
happen.
Our projections are based on historical lending and we
think that is very much in line with the usage manifested over
our recent history. We feel pretty good about where we are at.
Now, is it possible that we could get a huge uptick in
demand? Yes, and we hope that happens. But right now, I think
we are doing pretty well.
One of the things I mentioned in a previous hearing is the
fact that we were actually concerned prior to the SBAExpress
Program really taking off because we had about 13 percent of
our borrowers absorbing 50 percent of our budget authority. In
other words, one of the reasons that we would have run out of
money is the fact that so many large loans were coming out of
the 7(A) loan program. It does not mean that we do not want to
do large loans in the 7(A) program, but we have other programs
like the 504 program, which are very well situated to do those
larger real estate loans.
As of right now, we feel that we are in a pretty good place
and we monitor the situation daily. So it is not something that
would sneak up on us.
Chair Snowe. So you do not believe that a higher program
level would lead to different behavior or greater demand?
Administrator Barreto. It just has not, again, over the
last few years. We are having a banner year this year, but we
just do not see it. I think that historically we have been
running in that $9 billion to $10 billion level. That is where
we will be at this year. I think it is pretty safe to say that
we will probably be there next year, as well.
Chair Snowe. What I have also noticed is that there is a
difference between the assessments made by the industry and
those made by SBA. Is there reason? What accounts for that
discrepancy? It just seems to be a major difference in
assessments about what will result.
Administrator Barreto. One of the things that we were very
excited about was that when we talked about making these
changes to the SBAExpress Program and making it easier for
lenders to participate in this program, many people said to us
``Well, it is not going to happen, the lenders are not going to
be interested, they will not do the smaller loans, et cetera.''
The exact opposite has happened. We are getting tremendous
response from the lenders saying that they really like the
SBAExpress Program. They like being able to do these smaller
loans. They do not mind--in fact, they like the changes that we
made in the SBAExpress Program.
By the way, these changes did not come out of SBA's great
ideas office. We do not have a great ideas office. It came from
doing lender roundtables. It came from talking to the lenders
and asking them what they wanted. What they told us that they
wanted was what we provided them. And you know the old saying
``the proof is in the pudding.'' They are really responding to
it.
Chair Snowe. How do you assess the growth in demand? What
tools do you use to make that estimate, especially now? I was
just thinking that given the state of our economy and the fact
that small business really is responsible for 75 percent of the
job growth in America, and continues to really be the engine
that drives the economy.
So would it not be wise and prudent to invest more in
expanding the loan capabilities of SBA programs because
ultimately they will lead to greater job creation?
Administrator Barreto. I agree with that, but I also agree
with the advice you give us about doing more outreach because
that is what will create the demand. We do not have that level
of demand right now, but we want to get that level of demand.
One of the things that we think will be vitally important, is
to enlarge our network--in other words, if we have more people
that are offering SBA loans, I think that is going to generate
more demand.
That is why we made the changes to SBAExpress--to attract
more lenders--lenders that we did not have before, especially
small lenders, community lenders, rural lenders. We thought
that was very important. We thought the change we made to our
regulations to allow 1,500 potential new distributors of SBA
products, credit unions, was important. That is a new change
and we are working with the credit unions to get more and more
of them involved.
But I think it is also going to be necessary to create the
awareness. That will create the demand for our products and
services.
A lot of times, I like to say small businesses do not know
what they do not know. It is not their fault, they are busy. So
we need to get out there and make sure that they are aware of
that.
Once we make them aware of what the SBA does and how it can
help them, they also need to have confidence in us. A lot of
times when we have talked to small businesses they have a
perception that it is going to take a long time, it is going to
cost a lot of money, it is going to be very complicated. ``I
can take a `yes,' I can take a `no,' but the `maybe' kills
me.''
We are trying to change that perception. I think the
experience we are seeing right now at the SBA with our loan
activity, percentage increases in every major demographic,
especially the fastest growing segments of small business,
reflects on our future and our ability to be successful in all
of our loan programs.
Chair Snowe. What if you are so effective in the outreach
and you do not have the loan capacity to meet that demand?
Administrator Barreto. That has not happened to us yet.
Chair Snowe. You do not think it is going to happen? I know
it is the chicken and the egg, you do not know if having money
there is going to make the difference in being able to attract
more lenders and participants in the program. Or the fact that
you do not have the moneys creates a deterrent.
Administrator Barreto. We have a program called the 504 CDC
Program. It is a great program. We have budget authority for
$4.5 billion. We believe that many, many small businesses could
take advantage of that program as well.
But every year we leave a couple of billion dollars in
budget authority for the 504 Program on the table. What that
tells us is we have got to restructure the way that we
distribute 504s. We have to change the way that we communicate
about that program. We have to make it easier for people to
take advantage of that program. We need to make it a win-win
situation for our partners. It is a perfect example.
One of the things that I am very confident of is that the
SBA has never run out of money to make these loans, and I do
not believe that we will. We will work very closely with you
and monitor the situation so if it does become a situation
where we do need to expand the budget authority, we can.
Chair Snowe. I agree with you on the SBAExpress Program. I
have heard a lot of positive feedback on that program. I think
again, it goes back to being innovative and streamlining the
program and making it easier.
One of the things that we did hear in the roundtables was
the burden of paperwork under the 504 Program. And people just,
in fact, demonstrated this burden by bringing in the amount of
paperwork necessary to fill out. I agree, it does become a huge
handicap to participate in some of these programs. So where we
can enhance and expand efficiencies, we ought to. So I applaud
you for doing that.
Is there any improvements we can make in the 7(A) loan
processing program, drawing on lessons from the SBAExpress
Program?
Administrator Barreto. We are definitely looking at
different things that we can do there. Again, anytime that we
can minimize the process we will try to do so--by the way, this
is one of the things the lenders told us. They said ``Look, we
would be willing to take less of a guarantee if you could allow
us to do these loans quicker because time is money for us.'' So
we did that with the SBAExpress Program.
But we are looking at all of our loan programs to see if we
have the ability to be able to do that, to make them much more
streamlined and easier. It needs to be a win-win situation for
our partners. We depend on our partners to be able to
distribute these products. We cannot do it without them.
So, on all of our programs we will continue to take a very
hard look at what we can do to get better. We are not satisfied
we are even close to being done with improvements that can be
made to our programs.
Chair Snowe. I am going to ask you several more questions.
We have a vote and since I am the only one here, I will finish
up.
But there are several more questions here. The women-owned
business program is one of my interests in trying to create
very coordinated, cohesive programs. And my legislation is
seeking to address that as well.
And also, to put it on the same model as the Small Business
Development Centers Program. I have introduced legislation that
will ensure that we can have some continuity, especially with
the expiration of the sustainability grants.
I hope that you would look at that approach. I want to work
with you because I do think we should be making sure that all
of these programs are cohesive and they work well together.
Administrator Barreto. We would definitely look forward to
not only working with you, but really coming up with some very
good solutions on behalf of women business owners. This is
something that is very important to us.
Women business owners are the fastest growing segment of
small business. They are already 40 percent of all businesses
and they are doing some incredible things. So we want to make
sure that we are doing everything that we can to surround them
with all the tools that they need to succeed.
I know that our staffs are working closely together on
this. I believe there are some meetings coming up tomorrow and
the next day. And you have our commitment that we will work
closely with you to come up with the best solutions for women
business owners.
Chair Snowe. I appreciate that and am looking forward to
working with you on it because I want to ensure that they are a
permanent part of the landscape for small business. They truly
do work well in providing counseling and the resources and
support and it is something we ought to encourage since they
are the fastest growing segment of our economy, women-owned
businesses. So it truly is important to the future of our
economy.
On contract bundling, and on the issues of contracting in
general--and there are a lot of issues there, however, I will
not get into all of them today.
Suffice it to say that there are some issues that we need
to explore on that front. But I know one of the issues that
came up during the course of the March 2003 hearing was the
issue that some of these large companies that received
contracts having been certified as small businesses, and during
the course of the contract ended up becoming a large company
and they still happen to be on the federal database as small
businesses.
In fact, the same companies that were reviewed by GAO
continue to be listed on PRONet in the central contractor
registration database.
Why is it that they continue to be on that list when they
no longer qualify as a small business?
Administrator Barreto. This is also a very important issue,
because I think it has become a perception problem and we are
very concerned about this perception, that big businesses are
taking contracts away from small businesses--we want the exact
opposite to be happening. We want small businesses to get more
access to the $230 billion procurement pie. And we are working
very hard to ensure that with a number of our initiatives.
What happens is I think it gets a little complicated in the
sense that sometimes folks may misperceive what the PRONet
system is intended to be. It is a directory, not a
certification program.
Having said that, one of the other things that we
experienced is that when the PRONet and CCR got merged together
late last year, there were some glitches. There were some large
companies that ended up appearing in there.
I will tell you that we have removed 600 of those
companies. Now there are approximately anywhere from 180,000 to
200,000 firms that are listed on the PRONet directory. We are
constantly looking at it and scrubbing it.
But this issue is very important. In fact, we sent a letter
very recently to all of the procurement departments of each
federal agency, letting them know of this issue.
This is also something that we have now put on our website
as a warning to those large businesses that put themselves on
there, explaining what the ramifications and applications will
be.
Another one of the reasons it gets complicated is sometimes
a small business will be registered on the PRONet and they will
qualify as a small business for certain types of procurements.
However, there are other types of procurements where these
businesses are no longer considered small business.
Also, sometimes a small business will go on PRONet, get a
contract, and the next day will not be a small business based
on our standards.
We are putting a number of different measures in place, not
only to police it, but to make sure that the information that
is on PRONet is accurate and responsible.
Chair Snowe. Are there any penalties involved, at this
point? Because I think there is something to be said about
creating incentives so this does not occur.
Administrator Barreto. There are a number of different
penalties, again depending on what the actual infraction is. If
it is a large business that has purposely and willfully
misrepresented themselves, there could be criminal penalties.
But oftentimes what will happen to a small business, if they
are doing it on a regular basis, they may be delisted and never
be allowed on the register, and prohibited from doing any kind
of procurement.
When I was in business, one of the best policing methods is
other business owners banning together. If you are going up
against a contract with a big business and you lose out to that
big business, believe me, the small business will protest and
make it known that they lost this contract to a big business.
Again, the purpose of PRONet is not to certify that these
are small businesses. It is to list them. There are auto-
certifications, self-certifications that are going on there.
Having said that, we are being very vigilant about removing
any large businesses that should not be there, and we have
already removed 600.
Chair Snowe. Is it true that federal regulations generally
permit a company to remain as a small business, I mean to be
certified as a small business, through the life of the contract
even though they now have become a larger business?
Administrator Barreto. One of the things that we have done
is we have submitted a proposed regulation to mitigate that. It
is true for some small businesses, especially with what has
happened in procurement reform over the last 10 years. In the
old days, I guess, it was not so common to see these 10- and
20-year contracts. However, our own regulation has not kept
pace with the changes that have occurred in procurement.
One of the things we find is a small business has been
awarded a contract, and maybe they were small before and now
they are large, that agency will not be able to get credit for
small business goals if that business is no longer a small
business.
Chair Snowe. I appreciate it, Mr. Barreto, for your
willingness to be here today and I am looking forward to
working with you during this reauthorization process, with you
and your staff, and doing all that we can to ensure that we can
improve upon the programs and making sure that they continue to
serve small businesses for the year to come.
I know that you have also expressed a desire to expand the
authorization from 3 to 6 years. Obviously, I have some
concerns about that because of our responsibilities with
respect to conducting oversight on these programs. So it is
something we will weigh.
But generally, the 3 years seems to be a reasonable period
of time in which to be able to examine some of these programs.
Whereas you get 6 years, and it becomes far more difficult to
make the kind of changes that may be necessary during such a
longer period of time, doing the authorization. But that is
something we can continue to discuss.
I am looking forward to working with you and all the
stakeholders involved in developing these programs and the
reauthorization. We hope to move forward with this legislation.
The record will remain open for an additional week, to June
11th, for anybody who has additional questions or comments. We
certainly invite them to be submitted within the record.
I appreciate all of your cooperation, Mr. Barreto, and I am
looking forward to working with you and to make sure that we
can be very efficient and expeditious throughout this
reauthorization process and be hopefully concluded in a timely
basis. That is certainly my intention and I am going to do
everything that I can to make sure that that process works.
Administrator Barreto. Thank you very much, Madam Chair.
Chair Snowe. I thank you very much for your cooperation.
Administrator Barreto. I appreciate your leadership and
your support of small businesses. Thank you very much.
Chair Snowe. Thank you. This hearing is adjourned.
[Whereupon, at 3:06 p.m., the hearing was adjourned.]
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