[Senate Hearing 109-578]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-578
 
   NOMINATION OF STEVEN C. PRESTON TO BE ADMINISTRATOR OF THE SMALL 
                               BUSINESS 
                             ADMINISTRATION

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

                                HEARING

                               BEFORE THE

            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 21, 2006

                               __________

    Printed for the Committee on Small Business and Entrepreneurship


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            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                       ONE HUNDRED NINTH CONGRESS

                              ----------                              
                     OLYMPIA J. SNOWE, Maine, Chair
CHRISTOPHER S. BOND, Missouri        JOHN F. KERRY, Massachusetts
CONRAD BURNS, Montana                CARL LEVIN, Michigan
GEORGE ALLEN, Virginia               TOM HARKIN, Iowa
NORMAN COLEMAN, Minnesota            JOSEPH I. LIEBERMAN, Connecticut
JOHN THUNE, South Dakota             MARY LANDRIEU, Louisiana
JOHNNY ISAKSON, Georgia              MARIA CANTWELL, Washington
DAVID VITTER, Louisiana              EVAN BAYH, Indiana
MICHAEL B. ENZI, Wyoming             MARK PRYOR, Arkansas
JOHN CORNYN, Texas

                    Weston J. Coulam, Staff Director
                 Naomi Baum, Democratic Staff Director


                            C O N T E N T S

                              ----------                              

                           Opening Statements

                                                                   Page

Bond, The Honorable Christopher S., a United States Senator from 
  Missouri.......................................................     1
Snowe, The Honorable Olympia J., Chair, Committee on Small 
  Business and Entrepreneurship, and a United States Senator from 
  Maine..........................................................     6
Kerry, The Honorable John F., a United States Senator from 
  Massachusetts..................................................    16
Coleman, The Honorable Norm, a United States Senator from 
  Minnesota......................................................    18
Vitter, The Honorable David, a United States Senator from 
  Louisiana......................................................    23
Durbin, The Honorable Richard J., a United States Senator from 
  Illinois.......................................................    23

                               Witnesses

Preston, Steven C., nominee to be Administrator of the Small 
  Business 
  Administration.................................................    24

          Alphabetical Listing and Appendix Material Submitted

Allen, George
    Prepared statement...........................................    90
 Bond, The Honorable Christopher S.
    Opening statement............................................     1
    Prepared statement...........................................     3
    Letter from Deputy Director for Extramural Research, NIH to 
      the Director, Natural Resources and Environment, GAO re: 
      SBA's eligibility rules for Small Business Innovation 
      Research (SBIR)............................................     4
Coleman, The Honorable Norm
    Opening statement............................................    18
    Prepared statement...........................................    20
Durbin, The Honorable Richard J.
    Opening statement............................................    23
Kerry, The Honorable John F.
    Opening statement............................................    16
Landrieu, Mary L.
    Prepared statement...........................................    93
Preston, Steven C.
    Testimony....................................................    24
    Prepared statement...........................................    27
    Response to written questions submitted by:
        Hon. George Allen........................................    30
        Hon. John Cornyn.........................................    32
        Hon. Mary L. Landrieu....................................    33
        Hon. John F. Kerry.......................................    37
    Endorsement Letters:
    Steven VanDenberg, President/CEO VVV Corporation.............    49
    Steven Arcieri, President Arcieri & Associates...............    50
    Daniel Kenary, President and Co-Founder, The Harpoon Brewery.    53
    Association of Graphic Communications........................    55
    National Association of Federal Credit Unions (NAFCU)........    56
    NFIB praises Steve Preston's appointment as SBA Abministrator    57
    U.S. Chamber of Commerce press statement.....................    58
    Credit Union National Association (CUNA).....................    59
    Carpet and Rug Institute of America..........................    60
    Herbert Hess, President and CEO North America Management 
      Company....................................................    61
    Luis Iza of Iza Brothers, Inc................................    63
    James N. Hallene, Capital Concepts Holdings, LLC.............    64
    Charles P. McCarsker, Patriot Capital, L.P...................    65
    Illinois Delegation, U.S. House of Representatives...........    66
    R. Bruce Josten, Government Affairs..........................    68
    Trevor Price, Nature Technologies, Inc.......................    69
    Michael Isakson, Service Master Clean........................    71
    Congressman Harold Ford, Jr., U.S. House of Representatives..    72
    Daniel A. Mica, Credit Union National Association............    73
Snowe, The Honorable Olymphia J.
    Opening statement............................................     6
    Prepared Statement...........................................    10
Vitter, The Honorable David
    Opening statement............................................    23


   NOMINATION OF STEVEN C. PRESTON TO BE ADMINISTRATOR OF THE SMALL 
                        BUSINESS ADMINISTRATION

                              ----------                              


                        WEDNESDAY, JUNE 21, 2006

                               U.S. Senate,
    Committee on Small Business & Entrepreneurship,
                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:30 a.m., in 
room SR-428, Russell Senate Office Building, the Honorable 
Olympia Snowe (Chair of the Committee) presiding.
    Present: Senators Snowe, Bond, Coleman, Thune, Isakson, 
Vitter, Kerry, and Pryor.
    Senator Snowe. The hearing will come to order and before I 
give my opening statement I am going to turn to Senator Bond 
who was the former Chair of this Committee and provided 
outstanding leadership on behalf of the small business 
community throughout America. I know he has a very tight 
schedule this morning with so many conflicts, so I would like 
to turn to him before I give my opening statement.

   OPENING STATEMENT OF THE HONORABLE CHRISTOPHER S. BOND, A 
              UNITED STATES SENATOR FROM MISSOURI

    Senator Bond. Thank you very much, Madam Chair. It is great 
to be back and see lots of old friends again and I thank you so 
much for allowing me to go out of order, because I do have a 
bunch of things backed up today as we all do. I have a longer 
statement for the record which I will relieve you of hearing, 
however, I do want to say that I have had the pleasure of 
meeting Mr. Preston and talking with him over 2 weeks ago and I 
have received numerous letters of support saying what a good 
choice he is, and I believe that he will do an excellent job as 
the new Administrator.
    He has had 25 years experience in leadership at 
ServiceMaster, First Data, and Lehman Brothers, and I think 
this is going to give him the necessary business and financial 
knowledge and skills to really do something for the small 
business community that is still the driving force and the 
generator of new jobs in the economy. We do not need Government 
control, but where Government can assist through the SBA, I 
think it is a vital role and the people who commented to me 
about Mr. Preston say he has a reputation as a sensible, 
results-oriented leader with a high level of integrity and 
determination to work tirelessly. So I am strongly supportive 
of him and I hope this Committee will report him out and then 
we will get him confirmed quickly to get him on the job, 
because I have something I would like to ask of him.
    On June 16th the Deputy Director for extramural research at 
the National Institutes of Health sent a letter to the Director 
of Natural Resources and the Environment at the GAO regarding 
the SBA eligibility rules for small business innovation 
research. This is something that concerns me a great deal 
because we have heard from too many people in the biotech area 
and other areas, that the rules of the SBA are unnecessarily 
restrictive. And that letter states that the rules for grants 
are unduly restrictive and still exclude some business concerns 
that may contribute to important medical research, particularly 
in the biotech sector. NIH believes the impact of current 
eligibility rules presents a significant roadblock in our 
technology development pipeline and ultimately in the speed in 
which important products to improve health are brought to the 
market.
    I will leave a full copy of the letter for the record and 
ask that Mr. Preston, when you have an opportunity to review 
it, that you review the letter and the suggested remedies that 
they have and that you notify this Committee because this is 
something we have been working on for a long time. Madam Chair, 
thank you very much for your time. I really appreciate the 
consideration.
    [The prepared statement of Senator Bond and the information 
referred to follows:]

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    Senator Snowe. I thank you Senator Bond and I appreciate 
your comments and we will include your entire statement and the 
letters and follow-up information in the record without 
objection. Thank you.

  OPENING STATEMENT OF THE HONORABLE OLYMPIA J. SNOWE, CHAIR, 
SENATE COMMITTEE ON SMALL BUSINESS, AND A UNITED STATES SENATOR 
                           FROM MAINE

    Senator Snowe. Mr. Preston, I want to welcome you and your 
wife Molly to the Committee on Small Business and 
Entrepreneurship, and I also want to thank Senator Kerry for 
working with me to arrange this nomination hearing this morning 
so that we can move expeditiously to provide the leadership at 
the Small Business Administration at a crucial time. We intend 
to work closely as a Committee with the SBA in the upcoming 
months as we move forward with the reauthorization process of 
the SBA programs.
    In every Presidential Administration it can be remarkably 
difficult to attract the best and the brightest to serve in 
important Government jobs and we are very pleased that Mr. 
Preston is making a sacrifice by leaving his business and his 
profession for the opportunity to lead the Small Business 
Administration, which is certainly a vital component of 
economic growth in America.
    Certainly the numbers speak for themselves when you know 
that small businesses represent 99.7 percent of all employer 
firms, employ half the private sector employees in the country, 
as well as generating two thirds of all net new jobs that are 
created in America on an annual basis. So our Nation of small 
businesses deserve a true champion--one who is a megaphone for 
small businesses and reflects the deep and unwavering 
commitment to the success of America's 25 million small 
businesses.
    The next Administrator will be assuming enormous challenges 
that the agency has faced especially in the areas regarding the 
SBA's disaster response. The SBA's response to Hurricanes 
Katrina and Rita was subpar, leaving some disaster victims 
waiting 3 months or more for loans to be processed. This 
Committee consistently demanded more effective relief in hiring 
additional employees to process loans and coordinating with 
local resource partners. Significantly, the SBA waited 2 months 
before taking action when it should have been the moment for 
the SBA to shine and showcase its' abilities to contribute 
substantially to the rebuilding.
    Certainly the SBA was the lifeblood in the reconstruction 
of the economic infrastructure in the Gulf region. Now, while 
over 99 percent of all the applications have been resolved and 
over $10 billion in loans approved 10 months later, it is 
deeply disturbing that only 20.52 percent of the money has been 
disbursed. If the disaster victims do not receive the vital 
disaster loan funding, the rebuilding of the Gulf Coast region 
cannot continue and it certainly cannot be sustained.
    Looking forward it is essential that SBA collectively 
develop a comprehensive and flexible disaster plan, find a 
remedy for every problem that prevented or delayed the agency's 
front-line employees working in the disaster zone from aiding 
victims and be aggressive in responding to future disasters to 
assist America's small businesses and disaster victims.
    It is also essential that the next SBA Administrator is 
fully committed to supporting the agency's mission ``to assist, 
counsel, and protect the interests of small business''. Given 
the clear importance of small businesses to maintaining a 
strong and vibrant economy, strong leadership is clearly 
required at the SBA to advocate for the innovators and risk 
takers of the Nation.
    While the challenges affecting the SBA are significant, we 
are confronted with new beginnings--a chance to improve and 
revitalize the Small Business Administration and its programs 
and confirm a new administrator. We must take advantage of the 
opportunity to build a new vision through the rebirth of the 
Small Business Administration.
    For example, since 1999, the SBA has helped to create or 
retain over 5 million jobs. While this is a tremendous 
contribution to our economy, we must collectively ask how we 
can improve the SBA to assist more businesses, to create more 
jobs and eliminate the many roadblocks entrepreneurs face.
    Yet, for Fiscal Year 2007, I am truly disappointed by the 
Administration's weak budget proposal of $634 million. The SBA 
has continued a dangerous trend of reducing its budget by an 
astounding 37 percent since 1999. Moreover, it concerns me that 
the SBA failed to include the agency it has helped to create 
and retain over the last year. Needless to say, this does not 
recognize the tremendous investment that SBA has been able to 
return on investment and has not obviously been amplified in 
any respect. This is especially true when you consider the 
SBA's return on investment versus the agency's budget that is 
less than 3/100 of 1 percent of the total Federal budget.
    With the uncertainly in the economy, the problems facing 
small businesses are substantial and the SBA unquestionably 
must be at the forefront in providing the financial and 
business development tools for the success of entrepreneurs and 
small businesses across the United States.
    In 2005, the SBA programs disbursed record-breaking totals 
of loans to small businesses, both in the number of loans and 
total dollar value provided to small businesses. During the 
last fiscal year, the SBA guaranteed over $24 billion in loans 
and venture capital for small businesses, the highest level of 
capital ever provided. SBA loan and investment programs have 
produced success story after success story, which included 
founding the Intel, Staples, America Online, Federal Express, 
Outback Steakhouse, Ben & Jerry's, Callaway Golf, as well as 
thousands of other successful businesses.
    In April, I chaired a hearing that will lead to 
reauthorization of the SBA's finance and entrepreneurial 
development programs. The next SBA Administrator will be an 
integral part of that process. I hope the reauthorization will 
lead to a renewed SBA that is completely dedicated to fostering 
small business ownership in America and, if confirmed, I look 
forward to working closely with you, Mr. Preston, in this 
effort.
    The Administrator of the SBA has the ability to be not only 
a spokesperson, but also an advocate for small businesses and 
their issues.
    In Maine and throughout the country, small business owners 
have repeatedly told me that their primary concern is the cost 
of health insurance. This crisis is real and an undue burden on 
entrepreneurs throughout America and requires bold solutions. 
We have been working on small business health insurance plans, 
but regrettably, we have not been able to resolve that issue on 
the floor of the U.S. Senate--hopefully, we can at some point, 
before we adjourn this session and also the tax incentives to 
provide employers with small firms with quality health 
insurance at an affordable cost.
    Mr. Preston, I know you understand our tax code is overly 
complicated and time-consuming, and it certainly is expensive 
for all Americans, and most especially for our Nation's small 
businesses. Despite the fact that small businesses are the real 
job creators for our nation's economy, the current tax system 
places an entirely unreasonable burden on them as they seek to 
satisfy their tax obligations. The Administrator of the SBA can 
weigh in on these issues to promote solutions that benefit 
small businesses.
    The SBA Administrator must also uncover, monitor and 
correct managerial mistakes, avoid lax implementation of laws, 
and prevent the waste, fraud, and abuse of taxpayer funds. If 
confirmed, this will require your urgent attention as well.
    Looking at access to capital, I hope, Mr. Preston, that you 
will join this Committee in rejecting any attempt to charge 
additional fees on small businesses in the 7(a), 504, and SBIC 
programs. The SBA has proposed a fee increase on small 
businesses to raise $7 million in revenue, which will be used 
for the SBA's administrative costs. Increasing fees paid by 
small businesses is not the way for the Administration to be 
balancing the budget. These small businesses are already paying 
fees and taxes to fund the Agency and it is unacceptable to 
make it more costly for them to access financing. There are 
already zero subsidy programs and they have already paid their 
price and now they are imposing additional fees and costs to 
small businesses to access the lifeblood of SBA programs that 
are so important to spurring economic growth in America.
    We have seen what can happen without vigilant and precise 
leadership which was epitomized by the December 2005 SBA 
Inspector General's report that found eligibility could still 
not be determined for 85 percent of the September 11th STAR 
loans reviewed. The SBA must do everything possible to prevent 
a similar bureaucratic fiasco.
    Similarly, given recent discoveries of small businesses 
losing prime contracting opportunities to large businesses due 
to poor oversight of contracting laws, it is absolutely 
essential for the next SBA Administrator to guarantee that 23 
percent of the Federal contracts are given to small businesses, 
which is required by law.
    For an incoming SBA Administrator, these are only a few of 
the challenges and problems that must be managed successfully. 
And certainly I know we have had this discussion, Mr. Preston, 
on a variety of these issues, but I really do think that there 
are a wide array of challenges facing you as an SBA 
Administrator; first and foremost, the disaster loans and the 
response to the Gulf region and the hurricanes last fall and 
the onset of another hurricane season. We have a lot of issues 
that we are going to have to reconcile above and beyond the 
budgetary and the authorization issues questions that I think 
have undercut significantly these programs that have tremendous 
value, not just to small businesses, but to America.
    So, I am looking forward to working with you and appreciate 
your energy and your sincerity and enthusiasm for moving 
forward on these questions, and obviously we will explore them 
further with you in this hearing. With that I will turn to the 
Ranking Member of this Committee, Senator Kerry.
    [The prepared statement of Senator Snowe follows:]

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  OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY, A UNITED 
                   SENATOR FROM MASSACHUSETTS

    Senator Kerry. Thank you very much, Chair Snowe. I 
appreciate your comments and want to thank you and your staff 
for working with us as always on this nomination and on other 
issues. We look forward to continuing to work in a bipartisan 
fashion on this and othe Committee-related issues that come 
before us. Senator Durbin is here; sometimes he's the one who 
sits up here and hears the opening statements from the other 
side, or provides them. I will try to keep my statement brief, 
because I know he is busy and we want to get to the matter 
ahead.
    I think the Chair has made a very important and 
comprehensive statement that really reinforces what we talked 
about when we met with Mr. Preston. There really is a 
bipartisan consensus here on this Committee. There are not a 
lot of labels by either party attached to most of our concerns. 
Our work is about small business and many of the businesses in 
America are small, and most of the big businesses started in a 
garage or in the back seat of a car or some similar placewhere.
    Mr. Preston, we welcome you here today. We are glad you are 
willing to take on this difficult task, made difficult not just 
because of the issues, but frankly made difficult because of 
some of the internal struggles you will face within the 
Administration. We welcome your wife here and we are delighted 
she is prepared to share with you this public effort.
    We have talked about a number of the issues facing the new 
Adminstration and I just would like to run through a few of 
these issues publicly today. I certainly look forward to 
hearing in a little greater detail how you plan to do a number 
of things if confirmed.
    Mr. Preston, you are a serious nominee and I think you are 
an impressive nominee compared to some we have seen who come 
from a more political background. I welcome your nomination. I 
think you bring terrific business acumen. You bring a wealth of 
management experience to an agency that is woefully in need of 
real, solid management.
    Chair Snowe talked about the disaster loan program. 
Everybody on this Committee, though they are not all here 
today, shares an enormous concern about the oversight of 
Federal contracting and the disaster program. Here we have seen 
the SBA falter badly. Ten months since Hurricane Katrina and 
the delays in getting victims the loan money they badly need, 
as the Chair mentioned, is critical. I am not going to spend 
much time on that.
    Deep budget cuts have taken place--37 percent--the deepest 
experienced by any Federal agency in this Administration, and 
they have left key programs understaffed. Efforts to eliminate 
key programs, like the Micro-Loan program, the PRIME and the 
New Markets Venture Capital program, have undermined access to 
capital and business counseling for small businesses, 
especially the smallest of firms who are most in need.
    The morale at the SBA is frankly at an all-time low--it is 
certainly as low as it has been at anytime in the 21 years I 
have been on this Committee, and capable employees have moved 
on. There is a great deal to be done to invigorate this Agency. 
I am confident from our conversation that you intend to be an 
aggressive advocate for small business. I hope you will be true 
to that intention. There has been too much politics and too 
little effort at marshaling a bipartisan consensus to help make 
good things happen. My sense is you do not come to this 
appointment with a political agenda and I urge you to trust 
your instincts to do the right thing on behalf of small 
business.
    This Agency needs to live up to its full potential; with 
the investment and counseling and intervention capacity that it 
has, it can make a huge difference in people's lives all across 
the country, particularly with this amazing transition that is 
taking place with globalization. Americans are increasingly 
becoming involved with startup cottage industry type efforts, 
and the SBA can play a role in this transition.
    It is also important that you fight for a realistic budget. 
Every Member of this Committee is exasperated from seeing these 
budgets that are driven by OMB and frankly, by a lack of 
commitment and respect for the SBA. It is clear that there is 
an ideological disbelief in what the SBA does and that this 
Administration is content to watch it wither on the vine. As 
the SBA is choked of funding, the SBA Administrator has spent 
his time traveling around the country, advocating 
administrative proposals that often do not reflect the real 
needs of small business.
    What small businesses really need is an Administrator who 
will consider the impact of budget cuts on small businesses and 
disaster victims, who will vigorously fight for a budget that 
fully funds SBA programs against budgets that propose 
unprecedented administrative fees on small business loans. When 
you raise fees that high, you make it difficult for this agency 
to do what it was set up to do, which is to help provide a 
cushion for some of the lending that will not happen normally 
in the private sector. As fees continue to increase, the loans 
become comparable to those in the private sector. By raising 
the fees, we are eliminating the differential that is at the 
fundamental purpose of the Agency itself.
    Small businesses also need you to be a watchdog when it 
comes to Federal contracting, a point I made privately during 
our meeting. The record of the last few years is just plain 
appalling. There has been an overstating of Federal small 
business contracting numbers that is dishonest. The SBA has 
closed its office dedicated to veteran's contracting, which is 
hard for me to believe when we have so many veterans coming 
back from Iraq and Afghanistan. Implementation of the Women's 
Contracting Program continues to be delayed. It has been 
delayed now for 6 years. The SBA IG reports and the GAO reports 
reveal a real pattern of neglect, a pernicious pattern of 
neglect when it comes to SBA's oversight of Federal contracting 
to assure fair access to small firms.
    I hear it all over the country when I meet with small 
firms. They keep telling us that they are getting squeezed out, 
that contracts are either bundled for large firms or they go to 
a firm that did not really qualify. Report after report 
indicates that the SBA needs more staff to oversee Federal 
contracting. When this Committee requests accurate data on 
small business contracting numbers, it is rebuffed.
    Contracting oversight is a serious problem and I would like 
a commitment from you today, sir, to press for better data and 
be willing to acknowledge that the Agency has got to step up 
and provide greater oversight. Above all, what we really are 
asking is that you do not to come back here and repeat the 
mantra of the last few years, which is that the SBA finds it 
possible to do more with less. For a year or so that may have 
been true, but at some point, and I believe we have reached 
that point, it is just not possible. The mantra is worn out. 
Small Business Development Centers have had to reduce services. 
Many have waiting lists for small businesses just to meet with 
a counselor. Some of our womens' business centers are on the 
verge of shutting down, and lending to minorities has been 
generally flat or has gone down, particularly dollars loaned to 
African-Americans and women.
    The SBA has a unique role to play in fostering 
entrepreneurship, and I am confident you will be confirmed. As 
I said, we welcome the strengths you bring to this job. In the 
21 years that I have been on this Committee, I have never seen 
the SBA in as great a state of crisis and disarray as it is 
today.
    My final comment is this: Whatever that ideology is that 
has been driving this starvation policy, it is misplaced. The 
Chair listed a number of the businesses that have been 
successful and started with small business lending, and chief 
among them are companies like Intel, FedEx, Callaway Golf, and 
so forth. The entire budget of the SBA, pre-cuts, has been paid 
many times over by the taxes paid by the companies they have 
loaned to that have been successful. It is so shortsighted, 
particularly in this new globalized marketplace that 
entrepreneurs are trying to compete in. You know a lot about 
that. So we welcome you. We look forward to your service and we 
hope to have, frankly, a different era in the 2 years that 
remain of this Administration, to really see the SBA turn the 
curve and do what it is capable of doing. Thank you.
    Senator Snowe. Thank you, Senator Kerry. You can see there 
is a lengthy agenda awaiting you, Mr. Preston.
    Senator Coleman, do you care to make any remarks?

   OPENING STATEMENT OF THE HONORABLE NORM COLEMAN, A UNITED 
                 STATES SENATOR FROM MINNESOTA

    Senator Coleman. With respect to the Assistant Democratic 
Leader, I will keep my remarks very brief and ask that they be 
submitted for the record.
    Just two observations: One to Chairman Snowe, what you 
articulated about the importance of an advocate, about the 
importance of a champion and that is all very clear. And then I 
think it is clear that Katrina was not one of the shining 
moments of the SBA and the hurricane season is on us again. Let 
us learn from our experience.
    I have a deep concern about the micro-loan program; we tout 
it internationally that this is a great thing, yet at home we 
are continually rebuffing efforts to get rid of it. It is 
important and we need to continue moving forward in that 
regard.
    And last, we have a special concern about rural 
development. Rural small business is important and I would hope 
that you would explore this in further questioning, that we do 
not kind of turn a blind eye to some of the needs and 
opportunities in the rural communities. With that I look 
forward to supporting this nomination and I appreciate your 
commitment to serve and the skills you bring, but there are 
certainly challenges ahead and we need to work together to 
resolve them. Thank you.
    [The prepared statement of Senator Coleman follows:]

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    Senator Snowe. Senator Vitter.

   OPENING STATEMENT OF THE HONORABLE DAVID VITTER, A UNITED 
                 STATES SENATOR FROM LOUISIANA

    Senator Vitter. Thank you, Madam Chair. I will be very 
brief as well. Obviously coming from Louisiana, my primary 
concern with regard to this nomination to the SBA is disaster 
response. Mr. Preston and I had a very good meeting focused 
primarily on that and I was quite frankly very impressed by his 
ideas, what he said with regard to that, and with regard to 
management and reform of the Agency overall. I thank you, Mr. 
Preston, for really exhibiting a very real eagerness to have a 
very hands-on management approach--really personally get your 
hands around these management issues which have been so 
frustrating, particularly through Hurricanes Katrina and Rita. 
I very much look forward to working with you in that effort of 
really getting your hands around these management issues, both 
disaster response and all other aspects of making the SBA fully 
effective. Thank you, Madam Chair.
    Senator Snowe. Thank you very much, Senator. Now we welcome 
our colleague, Senator Durbin, who is here to introduce our 
nominee Steven Preston, and who is a resident of Hinsdale, 
Illinois. I welcome you, Senator Durbin, and any comments you 
care to make in introducing Mr. Preston.

 STATEMENT OF THE HONORABLE RICHARD J. DURBIN, A UNITED STATES 
                     SENATOR FROM ILLINOIS

    Senator Durbin. Senator Kerry, Senator Coleman, Senator 
Vitter and Madam Chair, thank you for the opportunity to 
introduce Steve Preston to the Small Business Committee.
    When a tornado struck in my hometown of Springfield, 
Illinois earlier this year, in fact, two tornados in about a 3-
week period, I saw first hand how crucial it was that the Small 
Business Administration respond with disaster relief loans 
quickly and efficiently. Particularly as we approach another 
hurricane season, I am sure Senator Vitter can speak to this 
issue better than any of us, it is essential that the SBA 
remains ready and able to help on an emergency basis.
    The SBA needs the best leadership to meet its goals of 
helping as many entrepreneurs as possible in my home State of 
Illinois and across the Nation, to help this country grow more 
jobs as quickly as possible. Second, to provide disaster loans 
to businesses and communities when they need them.
    Thirty years ago, Madam Chairman, to confess my conflict of 
interest here, I applied for and received an SBA loan to open a 
little restaurant in Springfield, Illinois. It never made 
franchise status, but it survived for 5 years and it did 
because the SBA believed in us and gave us our chance. My story 
can be repeated thousands if not millions of times over across 
the United States.
    Steve Preston comes before you today with the right 
experience to lead this critical Agency at this moment in 
history. He graduated from two great Illinois schools, first 
from Northwestern University and then an MBA from the 
University of Chicago. He has worked as an investment banker on 
Wall Street before returning to Illinois to become Executive 
Vice President of ServiceMaster, based in Downers Grove outside 
of Chicago, one of the most respected corporations.
    Steve has spent nearly his whole career bringing effective 
management to business operations, and we need his 
organizational expertise at the SBA now more than ever and your 
opening statements demonstrate that. We need an Administration, 
with Steve's leadership, that will help America's small 
business entrepreneurs to continue to create good jobs in our 
Nation.
    Finally, let me say to Mr. Preston, what you have heard 
this morning from Chairman Snowe, as well as Ranking Member 
Kerry and others, makes it clear that this Committee and our 
commitment to small business are bipartisan, and we are 
dedicated to promoting ownership and entrepreneurship without a 
political agenda. I am confident this Committee will give you a 
fair hearing, I believe they will support your nomination and I 
hope that they will become a valuable partner as you do your 
important work at the SBA. Thank you, Madam Chair.
    Senator Snowe. Thank you very much, Senator Durbin, for 
your comments.
    Rule 3 of our Committee requires that the witness during a 
confirmation hearing has to give testimony under oath, so would 
you please stand and raise your right hand.
    [Witness sworn.]
    Senator Snowe. I would like to welcome you to the 
Committee, Mr. Preston, and would you care to introduce your 
family members who are here, I know your wife, Molly, is here. 
I understand you had a wedding anniversary on Monday; is that 
true?
    Mr. Preston. That is true.
    Senator Snowe. See, no better way to spend your 
anniversary.

 STATEMENT OF STEVEN C. PRESTON, NOMINEE TO BE ADMINISTRATOR, 
                 SMALL BUSINESS ADMINISTRATION

    Mr. Preston. I would like to thank you, Chair Snowe, 
Ranking Member Kerry and the Members of the Committee on Small 
Business and Entrepreneurship for meeting with me today. I 
would also like to thank all of you who met with me or whose 
staff met with me. Those meetings were very beneficial to me in 
understanding your perspectives on how to increase the impact 
that the SBA has had on the constituencies it serves. I would 
also like to thank President Bush for nominating me to this 
position and the many legislators, trade organizations and 
individuals who have been kind enough to endorse my nomination. 
Finally, I would like to thank Senator Durbin for his kind 
introduction and his support.
    Many of you have asked why I would like to be a candidate 
for this position. Very simply, I believe in the value of 
public service and would like the opportunity to serve in a 
capacity that is relevant, that I am passionate about, and that 
draws on the competencies I have developed over almost 25 years 
in financial and operational leadership positions.
    It is easy to get excited about serving small businesses. 
Small businesses help drive our economy, transform communities, 
create jobs, and enable people to realize their dreams. It is 
through small business that we see innovation thrive and grow 
to become companies like the two that you mentioned, Senator 
Kerry, FedEx and Callaway Golf who have received SBA support. 
Small businesses take risks that others just will not take, 
because they have a vison and because that every dollar that 
they put into that business will be matched with $10 of sweat 
equity.
    Small businesses are often the first to venture into 
neighborhoods needing renewal or rebuilding. In recent 
conversations with a Member of this Committee, I recalled a 
striking example of that in New Orleans when I visited there 
this past spring and spent several hours touring the 
devastation down there. After leaving the Lower Ninth Ward and 
seeing almost no activity whatsoever for miles, we came upon 
one conspicuous anomaly--a small independent grocery store, 
freshly painted white, with sparkling windows and a bright sign 
out front. Several people were at work scrubbing the sidewalks 
in front, stocking the shelves and cleaning the floor, 
apparently in preparation for a re-opening. As I looked at the 
empty houses all along this lonely sight, I could not help but 
wonder who would come to shop, would the venture be successful, 
and how much of the owners' lives were invested in that store. 
During the same trip I was also fortunate to hear from several 
small business owners about the challenges they have in trying 
to claw their way back to viability and a number of them are 
relying on the SBA to help them in that process.
    Some of you have wondered about my experience with small 
business. I have been in the middle of small business activity 
my entire professional life. I have worked with investors in 
the portfolio companies on strategic and operational issues. I 
have worked as investment banker with successful small 
businesses who are now big enough to tap the capital markets. I 
have worked with small business owners in a major franchise 
network to become more effective through training and funding 
and business support. In some ways, I think the most impactful 
experiences I have had have been in rolling up my sleeves to 
advise friends and family members on the issues that they face 
everyday as small business owners.
    As a result, I have seen firsthand how small businesses 
evolve from an idea, to a fledgling operation, to a sustainable 
enterprise, to a growing force and I understand the type of 
support they need each step of the way. I have also witnessed 
what happens when a small business person with an idea and all 
the energy in the world to pursue it, lacks funding, lacks 
training, and lacks good advice and that is an opportunity lost 
for all of us.
    I have listened to the stories of small business people who 
seek more affordable health care, who are confounded by a 
regulatory environment the disproportionately burdens small 
business, and who would sell goods and services to the Federal 
Government, but are so daunted by the difficulty and cost in 
becoming qualified to do so that they just give up. I know how 
important it is for them to have a strong advocate.
    In addition to my commitment to small business, I believe 
my background is well suited to lead the SBA because it is deep 
in finance strategy and operational change, with experience 
investment banker, treasurer of a major financial and 
technology services organization, and later as the Chief 
Financial Officer and Leader of Operational Change at a company 
with about 40,000 employees, multiple operating units and 
thousands of locations. I hope to bring relevant competencies 
to the SBA.
    If I am confirmed, I will be taking on the leadership of a 
large organization with thousands of employees, millions of 
customers and billions of dollars in financial risk. The SBA is 
like a big business that serves the needs of small businesses 
and it is an organization that requires sophisticated financial 
management, operational responsiveness, and a customer service 
culture among the workforce. None of this happens by accident. 
It requires dogged focus to move the ball forward each and 
every day.
    I also believe that to be an effective leader, one needs to 
paint a compelling vision and be a tenacious champion of the 
vision, willing to be outspoken and lead on principle. In 
addition, my leadership style promotes respect, openness, 
honesty, accountability, and collaboration. If I am confirmed, 
I plan to work hard to drive these operating principles into 
the organization and to be a visible advocate for the interests 
of small business.
    Finally, and very importantly if I am confirmed, I look 
forward to having a close and open relationship with the 
Members of this Committee, with its' staff and to building and 
enduring relationship between the Agency and the Congress. This 
relationship, which I believe can be a collaboration, will be 
vitally important in realizing the opportunities before us.
    So thank you once again Chair Snowe, Ranking Member Kerry 
and other Members of the Committee for your openness, for your 
honesty throughout the process, and I would welcome your 
questions at this time.
    [The prepared statement of Mr. Preston follows:]

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    Senator Snowe. Thank you, Mr. Preston. We appreciate your 
statement and the last point that you made with respect to 
communication and collaboration are key ingredients, I think, 
they are critical to the success of the Agency. That is one of 
the things that we try to impart in working with the Agency is 
to work together on the issues. We are all moving in the same 
direction--we would like to move in the same direction as you 
have heard here today. The wide-ranging concerns that exist 
with the failure of the SBA to prominently elevate these 
programs and be an advocate for these programs that have been 
so instrumental to the success of economic growth in this 
country and a single greatest contributor to job growth in 
America.
    So, there are a wide array of challenges and as I said 
earlier, there is a lengthy agenda awaiting you. You have 
already been down to the Gulf, you understand the dimensions of 
the problems where SBA failed to respond in a very quick, 
expeditious, and efficient way. I will not go through chapter 
and verse as we did in the conversation that we had in respect 
to what went wrong. Suffice it to say, that it was an 
unprecedented event that required an unprecedented response. 
This was SBA's moment to shine and to showcase all it could 
provide in one critical dimension of rebuilding the economy in 
the Gulf region.
    So, with that, tell me, in hearing all the challenges you 
have heard today and obviously through your discussions with 
Members of this Committee, how do you intend to begin your 
leadership with the Agency and where will you begin, what first 
will you do?
    Mr. Preston. Thank you for your question. I think there are 
a couple of things; I know disaster assistance is job No. 1. I 
was fortunate enough to speak with Senator Vitter and Landrieu, 
as you have mentioned, I have been down there and I know it is 
absolutely critical that we serve the needs of those Americans 
in their dire time of need effectively and responsively.
    Senator, I heard a comment a little earlier about some 
earlier issues--I was across the street from the World Trade 
Center in 1993 when the first terrorist bomb went off, and I 
have lived in many parts of this country that suffer from 
tornados, so I feel like this is something that is very 
important to me. What I need to do is dig very deep in 
understanding the issues behind this problem. The process of 
making a disaster loan is multi-faceted and has steps all along 
the way and it is a classic opportunity to dig deep with good 
business solutions.
    I also know from the limited conversations I have had with 
people at the Small Business Administration that a lot of work 
has been done on the technology side and otherwise, but I 
really need to get in there and kick the tires. I also need to 
understand, and we all do, whether or not the private sector 
can be effective in helping us out, because there are 
situations--we have heard many situations where the SBA has 
done well. Senator Durbin mentioned a situation in Illinois. I 
have heard from other people on the Committee where they did do 
well. This obviously is a type of disaster we need to be 
prepared for and we need a plan in place and we need to be able 
to accommodate all kinds of disasters. So this is job No. 1.
    The other thing I would like to say is very quickly after 
coming through the door, if I am confirmed, I need to get out 
on a listening tour. I need to spend time with our employees, 
the employee morale issue is gravely concerning to me. The SBA 
is a service organization, it has got a terrific mission and we 
need to have an employee base that is driven by that mission 
every day to fulfill the needs of those customers, and that is 
tough to do with low morale. So I have got to get out there and 
talk to the employees. I have got to get out there and listen 
to the people we serve. I have got to spend time with people on 
your staffs to really build a picture to make sure that we are 
effective. And I would like to say in noting that, I think 90 
percent of the good ideas in how to improve an organization are 
generally out there, they just need to be captured and 
crystalized.
    Finally, I think I need to get deep into some of those 
pragmatic evaluations and understand where they are effective 
and where they are not and how we can bring good solutions to 
them.
    Senator Snowe. I appreciate that because obviously this is 
an agenda that is laden with some serious concerns and serious 
issues. When we receive reports that list all the agencies, SBA 
is basically in last place when it comes to the level of 
morale. Frankly, I think it gets back to the original issues 
that many of us raised, and Senator Kerry as well, and that is 
the undercutting of so many of these prime programs and 
resources. Granted there are agencies that can do more with 
less, but how much less? When you are really handicapped by 
shortages of resources and personnel, and as we say on the 
front lines in a disaster area as large and as great as in the 
Gulf region that went on for months on end, that is seriously 
troubling at a time which this Agency should have been at the 
forefront and should have been able to move immediately to 
weigh in to provide that front level and that front line 
support to rebuilding the economic infrastructure.
    Can you tell this Committee what, in your views, what 
corrective actions could take place with respect to how to 
respond and how we complete this process in the Gulf region? 
From here on out, what should the Agency be doing to fix this 
as efficiently and as quickly as possible. Since we are only at 
20 percent of disbursed loans, which never should have 
happened, there is so much lag time involved in all of this, it 
was just no sense of urgency given the level and depth of the 
disaster in the Gulf region, and yet they just did not step up 
to the plate quickly and for many months there was hesitation 
and procrastination.
    Mr. Preston. When I was down in the Gulf I had a chance to 
speak with several business owners who were in the process of 
getting disaster loans. It was very helpful for me to see 
firsthand what their stories were and the issues they had. What 
I understand of the disaster lending process, it is a multi-
step process which involves, reaching out to people, bringing 
them in, taking them though a credit approval process, taking 
them through a closing process, taking them through a 
disbursement process and any step- line. That way, there are 
multiple steps within each one of those and there is an 
opportunity for a failure point. It is a highly complex set of 
business processes.
    So I think we need to get very deep operationally to 
understand exactly whether there are failure points along that 
way, whether those processes can be redesigned, whether we can 
leverage the private sector in some way to accelerate the 
process along the way. With respect to the disbursement side 
specifically, I think I will need to understand much more 
deeply what the root causes are there. I know some of them may 
be within the SBA process, some of them might be outside the 
SBA with respect to people getting insurance or building 
permits.
    When I look at that I wonder, cannot we be helpful in 
understanding what those problems are outside the SBA in 
working to help the people in need even if it is collaborating 
with other agencies or other people in the private sector? So, 
my view is I need to get very deep very quickly and work with 
the people and get this along the way of becoming a much more 
effective process.
    The other thing I would like to say Senator, is the process 
has to be sized for a lot of different kinds of events and I 
think it is important that we think about something like 
Katrina as being a surge event, where you have just a 
tremendously dramatic need and it is almost like an emergency 
plan in place that you have. We have to look at what we can do 
at different levels of activity and how we perform up to 
standard at those different levels.
    Senator Snowe. I appreciate that and one of your first 
duties when you are confirmed is having to deliver a report to 
Congress on how SBA intends to respond to having a disaster 
response in place for the 2006 hurricane season as well.
    Senator Kerry.
    Senator Kerry. Mr. Preston, some concerns have been raised 
by members of the small business community that given your 
history with ServiceMaster and ServiceMaster's history with the 
Committee itself and the Comp/Demo program, that you may find 
yourself in a perceived conflict of interest when you are 
confirmed with regard to the SBA policy on franchises. There is 
now a proposal in the Manzullo reauthorization Bill out of the 
House, which changes the definition of a franchise with respect 
to the Small Business Act. That provision gives the 
Administrator pretty broad discretion. I am wondering, should 
you be confirmed, if you see a need to recuse yourself from 
situations such as that where there may be a perceived sense of 
conflict of interest.
    Mr. Preston. First of all, let me just say, Senator, that 
if I am confirmed, when I walk through that door I am the chief 
advocate of small business, period. I have no concern about 
whether or not I will be able to fully advocate on their 
behalf. I think it would be very important for me when these 
types of issues come up, to seek the advice of conflict 
counsel. But in terms of my commitment to the small business 
cause, it will be unwavering.
    Senator Kerry. Well, what is your view then, about this 
issue of franchises? For years franchises that tend to be 
wholly owned and have significant support structures from the 
very large corporate entities with significant flow of capital 
have not been considered small businesses. Do you see anything 
that merits the notion that all of a sudden they should be 
qualified for SBA assistance? Should they be defined as small 
businesses?
    Mr. Preston. I think there are a lot of flavors of 
franchises and there are a lot of different ownership 
structures, Senator. My experience has been that the franchise 
organization I am associated with, almost entirely enables them 
to become prime contractors in any situation, even if we are 
helping them out in a business situation. So I think I would 
need to take into consideration the structure of those entities 
and specific intent of those laws.
    Senator Kerry. What would guide you as you do that? What 
would your concern be with respect to whether or not franchises 
should qualify as small businesses?
    Mr. Preston. My concern would be whether or not it truly 
fosters the small business community and small business growth.
    Senator Kerry. Would the concern extend beyond that to a 
longer list of criteria about what kind of financial support 
structure they may have, what the nature of the franchise is--
and I do not disagree with you, there are different kinds of 
franchises in principle. Would you be guarded about this 
concept?
    Mr. Preston. I think we would have to take all those issues 
into consideration and I am not especially close to the 
legislation you are discussing; I know it is relatively recent. 
But certainly I would feel the need to get very deep in 
understanding those relationships.
    Senator Kerry. Did you play any role yourself personally as 
Vice President of ServiceMaster with respect to formulation of 
ServiceMaster's history and the comp/demo program?
    Mr. Preston. No, I really learned about comp/demo in the 
process of this nomination, and have been briefed on it to some 
degree since then.
    Senator Kerry. So that is not a policy that you have 
personally developed and/or taken a position on with respect to 
any public advocacy?
    Mr. Preston. I would say even further, Senator, it is not 
even something that I was aware of or understood until 
recently.
    Senator Kerry. Good. I assume you will look carefully at 
this question of any perceived conflict of interest with 
respect to franchising issues?
    Mr. Preston. Yes.
    Senator Kerry. Commit to the Committee that that is an 
advice from counsel that you will seek?
    Mr. Preston. Are you commenting on a potential recusal on 
my part or conflict of interest?
    Senator Kerry. Yes.
    Mr. Preston. I would need to seek the advice of counsel on 
whether or not to recuse myself and would certainly need to 
abide by that advice.
    Senator Kerry. Also ServiceMaster has a history with the 
Committee of lobbying to put an end to small business set-
asides in industries such as landscaping and pest control in 
the Defense Department comp/demo program. What is your position 
on ServiceMaster's efforts to include those industries in a 
small business demonstration program?
    Mr. Preston. Once again, this is for the part and parcel of 
the issue that I became aware of in the process of my 
nomination. I do not fully understand the potential impact of 
that change in the set-aside requirements on small business, 
and what I would like to do is understand it more fully. I know 
that--my understanding is there are a lot of different views on 
the impact of that legislation on small business, but frankly, 
I do not feel like I have the depth of understanding or the 
data to understand really what the impact is at this point.
    Senator Kerry. You cannot tell us at this point whether or 
not you would support the small business community in its 
efforts to end the program? The Small Business Committee, as a 
whole, is seeking to do that. Since you are going to be an 
advocate for the small business community, are you going to 
stand with them on that effort, which is contrary to what 
ServiceMaster did?
    Mr. Preston. I would absolutely seek the input of the small 
business community on any legislative issue and work hard to 
understand their needs and view myself as their chief advocate. 
Once again, I do not view any history that I have had as being 
contrary to the interests of small business and in fact, it has 
given me a gateway to understand their needs and concerns.
    Senator Kerry. With respect to contracting, one of the most 
egregious failures of recent years at the SBA is the failure to 
insure that agencies are meeting their contracting goals. The 
SBA is supposed to be a watchdog in that effort. IG reports 
reinforce the need for more staffing, and last year's IG report 
indicated that a significant amount of small business contracts 
went to large firms and not small businesses. So my question to 
you is, under your leadership, do you commit to meeting what 
are already deemed to be, both by Congress and the executive 
branch, reasonable goals for underserved communities?
    Mr. Preston. Yes, and let me comment on your question. I 
think if there is inappropriate activity occurring anywhere in 
here, it is unacceptable. I want to thank you all for 
confirming the IG and I think that group is going to be a very 
important partner of mine in insuring that the operations of 
the SBA are moving forward effectively. I know it is our job to 
work with the other agencies to meet their contracting goals 
and my view is we have tools available to us to help them do 
that and it is our job to help them as fully as we can to meet 
those goals.
    Senator Kerry. I see a vote has started, so I am going to 
end my questioning. I understand we will have until Friday of 
this week to submit questions in writing?
    Senator Snowe. Yes.
    Senator Kerry. Thank you Chair Snowe.
    Senator Snowe. Recognizing Senator Coleman.
    Senator Coleman. Thank you, Madam Chair.
    Mr. Preston and I talked a little bit about the micro-
lending program and this Committee has expressed very strong 
support for that program in the past, the Administration keeps 
coming back with wanting to cut the program. Can you give me 
your general views on micro-lending?
    Mr. Preston. The micro-lending industry overall is 
absolutely critical for serving the tier of businesses that do 
not have access to capital otherwise. It is a tier of 
businesses that serve a vital role in the economy. In fact, as 
an aside, we see micro-lending taking hold in developing 
economies and a way to drive them forward. So it is an 
absolutely vital capital source. I also know that the market 
for small loans in the private sector has grown dramatically 
over the number of years and the SBA provides small business 
loans through a number of its programs. I absolutely believe in 
the value of small business loans. I understand that this issue 
with respect to the micro-loan program at the SBA has been a 
concern for many members in the Committee, and I would 
absolutely look forward to digging in more deeply if I am 
confirmed.
    Senator Coleman. What we need you to do here is have the 
courage and strength to go back to OMB and one, clearly express 
the views of the Committee. We would try to express it 
personally, but you are in a position where you have to 
articulate the Administration's position, we understand that, 
but this is one where I would hope that you would go back and 
consistently keep in mind the Committee's strong support for 
micro-lending.
    I serve on foreign relations--these are the programs we 
tout internationally. This is one of the great opportunities 
for development in Africa, and Latin America, and Asia. I would 
just hope that the message that is coming from this Committee 
is loud and clear, and though I understand the responsibility 
for presenting the Administration's positions, I think there is 
also responsibility that you need to go back and not to simply 
meekly accept it, but to articulate what their concerns are.
    Let me just say a little bit about rural development. Can 
you give me a little sense--have you given much thought to what 
the SBA--what more they can do, what role they play in rural 
development. Oftentimes rural communities are struggling, 
regional incentives are very strong, the SBA can play a vital 
role. There is a lot going on now and with the use of 
technology in rural communities, things we are seeing with 
ethanol and the possibilities of developing there, 
biotechnology, etc., I think there is a real role for SBA here 
and I would like to get your sense, or have you given much 
thought to the rural aspect of it and how you would further 
develop it.
    Mr. Preston. Senator, as you know I grew up in Wisconsin, 
my parents live in a town of about 1,500 people and a fact that 
you did not see on my resume is I was the treasurer of the 
Future Farmer's of America in high school. So rural America is 
sort of an important part of my roots. One of the things that I 
think is most exciting about the opportunities the SBA can 
bring to people is the opportunity both to work with people in 
both urban and rural settings where there is a dramatic need 
for businesses, a dramatic need for job creation, and to do so 
in innovative ways. I was encouraged when I spoke with Senator 
Burns about a business in his home State called Printing for 
Less. One of the things that struck me about it was, here is a 
business in rural America that has been enabled through the 
Internet and through the advancement of the logistic industry.
    So even while we are seeing transition in rural areas that 
is impacting in the negative ways, I think the business 
infrastructure in our economy is available to help them in very 
positive ways to transform. And I would very much look forward 
to spending time with you and people in your home State and a 
number of people on this Committee who have very strong rural 
interests, to understand how we can be more effective in 
serving rural communities.
    Senator Coleman. I share that optimism. I share that sense 
of possibility. There is opportunity out there, but SBA can and 
must be a part of it. I look forward to working with you on 
that. Thank you.
    Mr. Preston. Thank you.
    Senator Snowe. Senator Vitter.
    Senator Vitter. Thank you, Madam Chair.
    Mr. Preston, going back to disaster loans and disaster 
recovery, will you be completely open to new and significant 
roles possibly for local private financial institutions, 
particularly in a surge situation like Katrina and Rita clearly 
are, to not only help administer the program but conceivably 
maybe even be direct lenders with a guarantee versus SBA being 
direct lenders?
    Mr. Preston. Senator, I really think we need to be open to 
all possibilities and the bigger the disaster I think the more 
creative we have to be in serving the needs of disaster 
victims. I know that you have spent a tremendous amount of time 
with people in Louisiana dealing with this issue. I would very 
much look forward to spending time with you and the people that 
you think understand this issue the best in crafting the right 
solutions for the disaster recovery effort. So this is 
something I care very deeply about and as you and I discussed, 
I intend to spend a very significant amount of my time in 
addressing the issue.
    Senator Vitter. Great. I am also very interested in the 
small business innovation research program and we touched on 
that when we met. As you know right now, that program reserves 
2.5 percent of R&D budgets for small business, and I quite 
frankly, would like to increase that, I would personally like 
to double that 5 percent. As we reauthorize that program and 
you go into the SBA, will you be open to that--looking at that 
small business innovation research program?
    Mr. Preston. Yes, this is actually an interesting issue 
because as I have come into this process, I know there are a 
number of issues and concerns that people have that deal with 
the amount that goes to the program, it deals with the 
ownership of the companies that are engaged in the program, it 
goes with the geographic focus of the program. One message I 
have gotten very strongly from Members of this Committee is 
that is something I need to give my attention to and to help 
understand, really, how to serve the needs of the business 
community most effectively in this program. I would look 
forward to spending time with you and hearing from you in that 
process.
    Senator Vitter. Great. And a final question for me, and 
this goes back to the hurricanes and one of our biggest 
frustrations, at least on this Committee, is some of the no-bid 
mega contracts that are sort of thrown out there as FEMA was 
trying to play catch-up after the fact and get some things 
done. In most of those cases, what happened is you had multiple 
layers of subcontractors built up under a huge mega contract. A 
good example is the Blue Roof contract, at least in Louisiana, 
there were so many layers of subs beneath the pond that the 
folks actually putting the tar on roofs--two things were 
happening; one, the amount we were paying per square to the 
pond was more than it takes to put a permanent roof on houses. 
Mine is not a shoddy roof, but the roof on my house was less 
expensive than that square of blur tar.
    Secondly, the person actually putting on the roof was 
getting on order of literally 3 percent of the pond contract 
funds. Now it takes something to manage a lot of subs, a big 
geographic area, to do paperwork, to do reports--it takes 
something to do that. It should not take 97 percent of the 
contract price to do that.
    I have introduced a bill to create a whole new model to 
avoid those layers. Other Members have similar ideas to create 
a new model to avoid those layers. Will you be actively engaged 
in that discussion, looking at my legislation, looking at other 
legislation, helping lead a discussion in the Administration 
because it does--it is probably not primarily in SBA, there is 
a broader issue, but it certainly impacts small business.
    Mr. Preston. I would love to dig into that with you all. I 
think that when we address this problem more broadly, we have 
to understand that there needs to be a mechanism in place that 
contemplates something very large, and I am sure in this 
process we have seen people who wanted to be responsive, but 
their best intentions of trying to serve people--and we find 
ourselves in situations like this because they are expeditious. 
In looking forward, I think we need to pre-contemplate what 
could happen and what mechanisms need to be in place to enable 
the outcomes that we hope will be there ultimately. I would 
look forward to spending time with you and anybody else who is 
engaged in this issue because I think it is a very important 
one for us to understand.
    Senator Vitter. Thank you, Madam Chair.
    Senator Snowe. Thank you, Senator Vitter.
    Senator Pryor.
    Senator Pryor. Thank you, Madam Chair. I just have a few 
questions, I know we are on a time crunch on a vote. Large 
businesses that acquired small businesses before the end of 
2004, according to current SBA guidelines, the small business 
that has been acquired is allowed to keep their status as a 
small business for up to 20 years. The IG has looked at this 
and they conclude that this needs to be fixed, that there 
should be an annual recertification; do you agree with that 
recommendation?
    Mr. Preston. Senator, I have not spent enough time with the 
IG to understand the basis of the recommendation and what 
alternatives were looked at. I do think this is a very 
important issue to the Committee, it relates to that, it 
relates to small businesses that become big businesses, and it 
relates to other ways in which, I guess, small businesses can 
get small business contracts. I know that I will have to spend 
time on this issue and understanding it.
    Senator Pryor. That is an area--that whole little realm 
there is an area we ought to spend some time on. Given what you 
know right now about the SBA, do you see any programs that need 
to be eliminated or scaled back in the SBA?
    Mr. Preston. I come in, to a degree, with the presumption 
that in large part what the SBA does, that its programmatic 
structure is valid and important, so to a degree, I come in 
with a focus on how to be more effective with those programs in 
serving the objectives. Are we reaching out to the right 
people? When they come in the door, are we treating them well 
and helping them, and at the other end, are we producing the 
outcomes that we hope to produce?
    So, I do not come in with the presumption that 
programmatically we have got big issues, but I do know that I 
need to understand the differences out there around these 
programs.
    Senator Pryor. One program that we have discussed is the 
Women's Business Centers which I think is an initiative that 
has had a lot of success, but they are really starved for 
funding now. It may be too early to ask you if you plan to 
restore that funding or work to restore that funding, but I 
would strongly encourage you to do that. Also, that raises a 
larger question about your intention as it stands today, of 
fighting for dollars for SBA. I am convinced that when you put 
Federal dollars into SBA programs that are structured correctly 
and that actually work--and most of them have great track 
records--that it can have a huge positive ripple effect in the 
economy. So I would just like to hear your intentions of 
whether you will go to bat for your Agency with OMB and the 
White House to try to make sure that you have adequate funding 
to get things done, that Congress wants you to get done.
    Mr. Preston. My job, Senator, is to work very hard to 
deliver this service of the SBA as effectively and fully as 
possible and to the extent that that requires budgetary issues, 
I have to be all over it.
    Senator Pryor. Thank you, Madam Chair.
    Senator Snowe. Thank you, Senator Pryor.
    Senator Thune.
    Senator Thune. Thank you, Madam Chair. I know we have to go 
vote; so I will keep this brief, but I appreciate your being 
here, Mr. Preston, and entertaining the idea of public service 
which I think is a very high calling. It seems to me that your 
past experience in finance as a CFO will serve you very well in 
managing the multiple loan programs that exist at the SBA. Of 
course, in recent years, SBA is always being asked to do more 
with less, you know, more loans, more disaster response, more 
business development assistance, all with fewer dollars. So you 
have a big challenge ahead of you and we want to be helpful and 
work with you as much as we can to make sure you have the 
resources and the manpower to undertake and serve the purpose 
and the mission for which SBA was created.
    I am also interested, as my colleague from Minnesota, Norm 
Coleman mentioned, in what we can do to develop economic 
opportunity in rural areas of the country. We see increasing 
out-migration. There are some silver linings--I should not say 
silver linings, but there are some opportunities there for 
economic development particularly in the area of renewable 
fuels and we have seen a considerable amount of success with 
ethanol and bio-fuels and those sorts of things that are 
creating jobs in rural areas, but we want to continue to pursue 
those sorts of opportunities in order to keep young people in 
rural areas of the country.
    Let me just, in the interest of time, propose one question, 
if I might, and if we have others I will submit them for the 
record as well, Madam Chair. Some of the critics of the SBA at 
times voice concern over the lack of any clear indicators for 
effectiveness when it comes to loan programs currently 
administered beyond simply the number of loans approved. I am 
wondering if you have any thoughts about measurements that 
could be taken to see how those SBA loan programs are helping 
small businesses succeed and are they helping the economy at 
large, are they creating jobs, are there better ways we can 
measure that?
    Mr. Preston. I have spent a lot of my time in the matrix 
world, as you can probably appreciate, that is sort of what I 
have had for breakfast most of my life. I think it is very 
important when we look at these programs to think about the 
outcomes that we are generating. Once again, are we reaching 
the right people, are we helping them get access to our 
programs, and once they get access, are we producing the right 
outcomes? And many times, statistics really do not tell you 
that. I have always loved the phrase from a prior chairman at 
the company I am with right now, he says, ``Did you hear the 
story about the man who drowned crossing the river with an 
average depth of 3 feet?'' You know, somehow it sounds that it 
is shallow, but you have got a problem along the way 
potentially.
    Looking at the right information and looking at the right 
outcomes is very important to understanding our success. Then 
taking that and advocating and communicating it on behalf of 
the people we serve is very important. So I understand the 
issue and it is something I think I will be devoting a lot of 
time to if I am confirmed to this position.
    Senator Thune. I appreciate that. I think the good work 
that the Agency does sometimes does not get recognized. Part of 
it is communication and part of it is figuring out how better 
to measure some of those statistics that I think give evidence 
to that good work. We look forward to working with you on that, 
as well, as on focusing those programs on the outcomes, on the 
results that you have mentioned and that we all want to see 
achieved. These programs are really impacting and making a 
difference in the economy, helping small businesses grow and 
expanding great jobs which is what this Committee is interested 
in and I think it is what the purpose of the Agency is and we 
welcome the opportunity to work with you to that end.
    Thank you for your willingness to serve and we anticipate 
and look forward to moving your nomination forward.
    Senator Snowe. Thank you, Senator Thune. We have another 
vote pending on this, and I am going to recess. I have a few 
more questions, Mr. Preston, so if you can bear with us a few 
more moments, I will cast two votes and I will be right back.
    [Recess.]
    Senator Snowe. The hearing will come back to order. I am 
sorry for the interruption. I just have a few more questions 
about some of the several key issues, as I mentioned in my 
opening statement, concerning the lending program and the fees 
that had been recommended by the Administration, additional 
fees beyond the fact that there are no zero subsidies and they 
are now recommending in this latest budget for increased fees 
in 7(a) and 504.
    So I would like to hear your views on how you intend to go 
about it because I really see this as moving in an entirely 
different direction in terms of supporting the core programs 
that are so essential. It seems to me it is a contradiction to, 
on one hand, tout SBA and its programs, and yet on the other 
hand, I think moving in a direction that ultimately undercuts 
the value of these programs that going to make it so much more 
expensive for small businesses to access these programs.
    So I see it as contradictory and counterintuitive when we 
should be elevating these programs and at the very least, not 
imposing additional costs on the very businesses we are trying 
to help. So I would like to have your views on this approach 
because this is entirely new. It is one thing to go to zero 
subsidy, but this is now going even further, that represents 
additional and very expensive costs to small businesses who 
want to take advantage of these SBA programs.
    Mr. Preston. I know that every dollar counts for the small 
business person and every dollar is valuable when you are 
looking at paying your employees and your vendors and moving 
your business forward. This is something I know I will have to 
spend some time on and hear from you and other Members of the 
Committee on your views, and also really understand the impact 
these have on the programs. I also think much more broadly, I 
need to dig into the programs to understand whether or not we 
are reaching enough people, and if there are other ways that we 
can expand participation to programs, whether we have the right 
vehicles in place to reach people, and through the program and 
serving their needs and producing the outcomes on the other 
side.
    So I look at this, Senator, as being the issue that you 
brought up and additionally, I look at it as a broader issue to 
see how we can serve people more effectively.
    Senator Snowe. I appreciate that and I think that you 
really should examine what the impact is going to be on 
requiring these additional fees. The Administration has not 
exactly indicated yet how they intend to go about--who they are 
going to impose these fees on, the lenders or the borrowers. 
That is another dimension to this question. You have critical 
lending programs and to now impose these additional fees, in 
fact, look at the 7(a), 504 and the SBIC programs, on the 7(a) 
program, the fee would be 4/100 of a percent or about $623 per 
loan; the 504 the fee would be 11/100 or up to $11,000 per 
loan, maximum $10 million under that program, and finally, the 
SBIC programs 64/100 of a percent for an average of $45,360.
    So these additional burdens are over and above what small 
businesses already pay. They have not issued a program yet in 
terms of who will be paying these fees, but again, I think in 
the final analysis, someone is going to bear the cost that 
ultimately has an impact on these programs and the vitality of 
these programs. I think this especially conflicts with the 
notion that you were trying to help people who cannot access 
financing elsewhere. That, I think, even makes it more 
difficult and creates another barrier.
    So I see it moving entirely in the opposite direction from 
what we should be espousing when it comes to the three very 
important core programs to the Small Business Administration. 
So I hope you can examine that very carefully because as we 
move ahead on the reauthorization process, it is going to be 
even more critical to get your input and see if we can work 
through some of these issues because it is clearly not 
something that I intend to accept at this point, and I know 
that it is a view shared by other Members of the Committee as 
well.
    On the budget, and you have heard that from other Members 
of the Committee, it is just that it has been consistently a 
declining budget over the past 6 years to the point now it 
represents a 37 percent decrease from 2001. Even the disaster 
loan programs have declined more than 25 percent over the past 
6 years. We are seeing not much support from the Administration 
in terms of reinvigorating the SBA programs where we really get 
more bang for the buck. There is no question about it; the 
leveraging of jobs--we do not tout the leveraging of jobs which 
is something I have recommended.
    We need to include in the budget of the SBA, the number of 
jobs that these programs create. The fact that since 1999 we 
have created more than 5 million jobs, is not something that we 
celebrate, herald, or anything. And yet, probably very few 
agencies or programs are the equivalent of what the SBA has 
been able to generate in terms of job creation, in terms of its 
value in producing a dividend for our Government and for the 
economy.
    So I would be interested in what your views are and how you 
intend to look at these budgetary issues as you move forward.
    Mr. Preston. One of the things I mentioned earlier is the 
importance of my getting out there on a listening tour. I need 
to hear the comments of the people we serve and I need to hear 
the comments of the people in our field offices. These are the 
people on the front line touching constituents everyday and I 
need to understand the people on the Committee more deeply, 
because obviously, when we look at putting together a budget 
and presenting it, there are a number of aspects of that 
budget. It is going to be my job to deliver a budget to this 
Committee and to the Senate that I believe meets the objectives 
of the Agency.
    Senator Snowe. In lieu of hearing your letter, if have not 
already seen it, that was sent to the Senate Subcommittee on 
Commerce that indicated--it was signed by all 18 Members of the 
Small Business Committee, reflecting our concerns with the 
proposed SBA budget request that included all the cuts and 
imposition of fees that I just talked about. These concerns 
were increasing fees to the 7(a), 504 and SBIC that I 
mentioned, changes to disaster loan interest rates, which I did 
not even get into today, but again, at a time in which people 
are in desperate straights needing disaster assistance, the 
Administration's proposing increasing the interest rate.
    Elimination of the Micro-Loan program is also of interest. 
The program is strongly supported in this Committee and 
certainly by me, and this program is another way in which I 
think that should spur economic growth and job creation, can do 
so much with so little and it just really works very well and 
very effectively. Proposed elimination by the Administration is 
lower funding for the programs at the Women's Business Center 
that you heard about, the Small Business Development Centers 
and the Veterans' Business Development Program and SCORE. For 
the first time in 5 years, the Administration is proposing a 
decrease in funding for the SCORE program which provides 
invaluable assistance and counseling for thousands of small 
business owners across the country.
    Clearly we are moving totally in a contradictory direction, 
at a time in which we should be making greater investments in 
programs and this kind of assistance because it creates jobs. 
The net result is it creates jobs, it is definitive and we have 
seen the end result of these programs. Again, we are moving in 
the opposite direction.
    And finally, the removal of the line-item request for 
HUBZone Programs and the U.S. Export Assistance Tax. The 
HUBZone Program, here again, is a great way of being able to 
utilize what--the Federal Government already spends money on 
for example, on contracting programs. I know that is the main 
reason the staff was up there in, I think, in December, 
conducting seminars on how we could make available to small 
businesses, in the key areas that are effected by high 
unemployment, to make available some of the money that is 
available for the contracting process on which the Federal 
Government spends $350 million, another way of creating a win-
win situation in areas that are adversely affected by declining 
economy and losing jobs.
    So, I would hope you would review that letter, but most 
importantly, the programs and the budget requests that are made 
by the Administration in this regard. This is something that we 
are deeply concerned about here on the Committee.
    Mr. Preston. Thank you. I do not have the letter, but I 
look forward to reading it and spending time with your staff 
and understanding it fully, Senator.
    Senator Snowe. I appreciate that and we will have, 
obviously, further discussions regarding these budget requests. 
And finally, I know that when we had flooding in Southern 
Maine, it really came home again, just as in the Gulf region, 
that you need people on the ground. It is so much more 
effective. I do not see why it makes sense to centralize all 
these people in Washington, DC when they should be out there 
trying to tout these programs, make them available to small 
business owners and in the case of disaster, evermore critical 
to have field and resource people on the ground to assist them 
on a daily basis and make sure of the working system to get the 
loans and the assistance that they desperately need at that 
time.
    And so again, the direction that we are moving in simply 
does not make sense to me. Why we would want to centralize all 
of those resources here in Washington, DC when it can do so 
much more out in the field in conducting outreach to the people 
who obviously need the support of these programs.
    Mr. Preston. Certainly this type of issue is one that 
businesses face all the time. What can you centralize to be 
more effective and efficient through better training and sort 
of critical mass, and at what point do you lose sensitivity to 
the person you are serving by not being physically there. One 
of the things that strikes me in this regard is the SBA, as you 
have noted, has not only its own network, but a number of other 
networks that it partners with, certainly it has the ability to 
partner with local organizations. One of the things that will 
be important for me to understand is, how do you get those 
touch points out there with the people you need to service when 
they need the service? And how do you be effective in 
delivering at the back end? I think that this is something 
certainly, Senator, that I want to dig into and understand more 
broadly, how to be effective in those situations.
    Senator Snowe. I appreciate that and again that is 
something we will follow-up with you on as well. It gets back 
to the issues you raised in your opening statement about 
collaboration and communication. It really can work well and 
resolve a lot of issues and it certainly would help to buttress 
the very programs of people we want to serve. If we could be 
working together to the extent possible on some of these 
issues, I think in terms of the disaster loan assistance, we 
worked mightily to move a block of legislation in the U.S. 
Senate on the unanimous consent basis to help address and 
mitigate the problems in the Gulf region.
    One of the components of that bill was a bridge loan to 
assist small businesses until they could actually get their 
loan. But they needed to get started and we heard that from so 
many small business owners down in the region, we heard it from 
representatives of the government both state and local, we 
heard it through testimony here during the course of our 
hearing, and yet we could not get the Administration and the 
SBA Administrator to agree to support the bridge loan, yet they 
said that that was one of the things they needed in order to 
bridge the gap until small business owners could actually get 
the loans and get going. Yet, they would not give support to 
the idea of giving bridge loans. It was an unprecedented 
disaster, yet on the other hand they were not willing to seek 
the tools or advocate the tools that would have been so vital 
to getting the job done. And still, it is in limbo today. It is 
mystifying to me because it makes so much sense, it would 
certainly simplify the process and ease the burdens of the 
people we were trying to help.
    On small business investments, the SBIC programs, this is 
an area that also enjoys broad support here on the Committee. I 
have introduced legislation to rebuild the participating 
securities dimension of the SBIC. Again, why is the SBIC 
program and the participating securities part of it, is so 
critical that it benefits, especially the manufacturing sector, 
in providing venture capital, but otherwise would not be 
available through the conventional lending process. The program 
invested over $17 billion in small businesses since 1999, so it 
has had the result of creating thousands of jobs.
    I have introduced legislation to continue this program, to 
improve it, to address some of the problems that did develop 
over the last few years. But what is interesting about it is, 
the SBA recommended in 2005 $4 billion, and then this year and 
next year, zero. So it went from $4 billion to zero. Again, we 
were not able to make any headway with SBA on this program and 
they did not obviously, include it in their future budget of 
2007. So they are really not committed to continuing this 
program.
    I just wanted to know if you have any opinions on the whole 
notion of providing venture capital to small businesses, and 
second, having your commitment to work through it with the 
Committee to at least see what can be done to restore this 
program because, otherwise, there is a dimension of our economy 
when it comes to manufacturing, that basically will not get the 
kind of access to capital that is so essential, and in fact, 4 
percent of the funding went to those in the manufacturing 
sector important to my area of the country, and so many areas 
of the country. It is otherwise a sector of the economy that 
does not get help through the conventional lending process.
    Mr. Preston. Certainly, the venture capital industry 
overall, Senator, is a critical source of capital in our 
economy and I think a very important drive for both job 
creation and in innovation, which was really birthed in our 
country. I also think that the SBIC program probably has 
enabled SBIC investors to stretch harder. I spoke with a number 
of people who are SBICs and I had a chance to chat with them to 
ask what impact this has on your ability to invest?
    I know, as I am sure all of you have noticed and are 
concerned about, the degree of loses in the existing program 
and that is why there is a new proposal out there. My hope is 
as I dig into this, having a background in finance and 
specifically having a lot of exposure to the venture capital 
industry, I am hopeful that I will be able to bring some good 
thinking to that opportunity, but certainly I will need to 
spend time with you, your staff, and other people who are 
interested in advancing a new program to understand what your 
views are.
    Senator Snowe. I appreciate that and certainly we will be 
working with you on the dimension of the issues and concerns 
that have been raised here at the Committee today by myself and 
so many of the Committee Members. I know that you have had a 
number of letters of endorsement on behalf of your nomination 
and I will include those in the record.
    Mr. Preston. Thank you.
    Senator Snowe. Also, your resume is indeed impressive and 
given your wide range of business experience, that certainly 
will serve to benefit the Small Business Administration at a 
crucial time and at a critical juncture in terms of the type of 
leadership advocacy that it requires and necessitates to 
bolster one of the most invaluable programs within our Federal 
Government in terms of producing benefits for the overall 
economy.
    So, I appreciate your testimony here today and the record 
will remain open until Friday, June 23rd for any additional 
questions that may be presented to you and for any additional 
testimony and information to be submitted for the record. So 
with that, this hearing is adjourned.
    Mr. Preston. Thank you.
    [Whereupon, at 12:24 p.m., the Committee was adjourned.]

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