[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]




 
                     FULL COMMITTEE HEARING ON THE
                    SMALL BUSINESS ADMINISTRATION'S
                      BUDGET FOR FISCAL YEAR 2008

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

                   HOUSE COMMITTEE ON SMALL BUSINESS
                 UNITED STATES HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                            February 8, 2007

                               __________

                          Serial Number 110-2

                               __________

         Printed for the use of the Committee on Small Business


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



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                   HOUSE COMMITTEE ON SMALL BUSINESS

                NYDIA M. VELAZQUEZ, New York, Chairwoman


JUANITA MILLENDER-McDONALD,          STEVE CHABOT, Ohio, Ranking Member
California                           ROSCOE BARTLETT, Maryland
WILLIAM JEFFERSON, Louisiana         SAM GRAVES, Missouri
HEATH SHULER, North Carolina         TODD AKIN, Missouri
CHARLIE GONZALEZ, Texas              BILL SHUSTER, Pennsylvania
RICK LARSEN, Washington              MARILYN MUSGRAVE, Colorado
RAUL GRIJALVA, Arizona               STEVE KING, Iowa
MICHAEL MICHAUD, Maine               JEFF FORTENBERRY, Nebraska
MELISSA BEAN, Illinois               LYNN WESTMORELAND, Georgia
HENRY CUELLAR, Texas                 LOUIE GOHMERT, Texas
DAN LIPINSKI, Illinois               DEAN HELLER, Nevada
GWEN MOORE, Wisconsin                DAVID DAVIS, Tennessee
JASON ALTMIRE, Pennsylvania          MARY FALLIN, Oklahoma
BRUCE BRALEY, Iowa                   VERN BUCHANAN, Florida
YVETTE CLARKE, New York              JIM JORDAN, Ohio
BRAD ELLSWORTH, Indiana
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania

                  Michael Day, Majority Staff Director

                 Adam Minehardt, Deputy Staff Director

                      Tim Slattery, Chief Counsel

               Kevin Fitzpatrick, Minority Staff Director

                                 ______

                         STANDING SUBCOMMITTEES

                    Subcommittee on Finance and Tax

                   MELISSA BEAN, Illinois, Chairwoman


RAUL GRIJALVA, Arizona               DEAN HELLER, Nevada, Ranking
MICHAEL MICHAUD, Maine               BILL SHUSTER, Pennsylvania
BRAD ELLSWORTH, Indiana              STEVE KING, Iowa
HANK JOHNSON, Georgia                VERN BUCHANAN, Florida
JOE SESTAK, Pennsylvania             JIM JORDAN, Ohio

                                 ______

               Subcommittee on Contracting and Technology

                      BRUCE BRALEY, IOWA, Chairman


WILLIAM JEFFERSON, Louisiana         DAVID DAVIS, Tennessee, Ranking
HENRY CUELLAR, Texas                 ROSCOE BARTLETT, Maryland
GWEN MOORE, Wisconsin                SAM GRAVES, Missouri
YVETTE CLARKE, New York              TODD AKIN, Missouri
JOE SESTAK, Pennsylvania             MARY FALLIN, Oklahoma

        .........................................................

                                  (ii)

  
?

           Subcommittee on Regulations, Health Care and Trade

                   CHARLES GONZALEZ, Texas, Chairman


WILLIAM JEFFERSON, Louisiana         LYNN WESTMORELAND, Georgia, 
RICK LARSEN, Washington              Ranking
DAN LIPINSKI, Illinois               BILL SHUSTER, Pennsylvania
MELISSA BEAN, Illinois               STEVE KING, Iowa
GWEN MOORE, Wisconsin                MARILYN MUSGRAVE, Colorado
JASON ALTMIRE, Pennsylvania          MARY FALLIN, Oklahoma
JOE SESTAK, Pennsylvania             VERN BUCHANAN, Florida
                                     JIM JORDAN, Ohio

                                 ______

            Subcommittee on Urban and Rural Entrepreneurship

                 HEATH SHULER, North Carolina, Chairman


RICK LARSEN, Washington              JEFF FORTENBERRY, Nebraska, 
MICHAEL MICHAUD, Maine               Ranking
GWEN MOORE, Wisconsin                ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York              MARILYN MUSGRAVE, Colorado
BRAD ELLSWORTH, Indiana              DEAN HELLER, Nevada
HANK JOHNSON, Georgia                DAVID DAVIS, Tennessee

                                 ______

              Subcommittee on Investigations and Oversight

                 JASON ALTMIRE, PENNSYLVANIA, Chairman


JUANITA MILLENDER-McDONALD,          LOUIE GOHMERT, Texas, Ranking
California                           LYNN WESTMORELAND, Georgia
CHARLIE GONZALEZ, Texas
RAUL GRIJALVA, Arizona

                                 (iii)

  
?

                            C O N T E N T S

                              ----------                              

                     STATEMENT BY COMMITTEE MEMBERS

                                                                   Page

Velazquez, Hon. Nydia M..........................................     1
Chabot, Hon. Steve...............................................     2

                            OTHER STATEMENTS

Statement by the The Honorable Steven Preston, Administrator, 
  U.S. Small Business Administration.............................     3

                                APPENDIX


Prepared Statements:
Velazquez, Hon. Nydia M..........................................    41
Chabot, Hon. Steve...............................................    43
Altmire, Hon. Jason..............................................    45
Preston, Hon. Administrator Steven C.............................    46

                                  (v)

  


                       FULL COMMITTEE HEARING ON
                           THE SMALL BUSINESS
                      ADMINISTRATION'S BUDGET FOR
                            FISCAL YEAR 2008

                              ----------                              


                       Thursday, February 8, 2007

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:00 a.m., in Room 
2360 Rayburn House Office Building, Hon. Nydia M. Velazquez 
[Chairwoman of the Committee] presiding.
    Present: Representatives Velazquez, Jefferson, Shuler, 
Gonzalez, Larsen, Bean, Cuellar, Moore, Altmire, Braley, 
Clarke, Ellsworth, Johnson, Sestak, Chabot, Graves, Musgrave, 
Fortenberry, Gohmert, Heller, Davis, Fallin, Buchanan, Jordan.

           OPENING STATEMENT OF CHAIRWOMAN VELAZQUEZ

    Chairwoman Velazquez. Good morning. I call this hearing to 
order. I want to thank Administrator Preston for being here 
today. While this is only his first appearing before this 
Committee, it is clear that with his almost 25 years of 
experience in financial and operational leadership positions he 
is dedicated to serving the small business community. I 
appreciate Administrator Preston's openness and thoughtfulness 
and I look forward to work with him on behalf of entrepreneurs 
in this country.
    Today we will review the FY 08 budget for the Small 
Business Administration. This request continues a trend that 
has seen a systematic decline in this critical program that 
helps entrepreneurs. Over the past six years the Bush 
Administration has continually made cuts to the agency. This 
year the cuts might be different but the results are the same.
    We hear time and time again how small businesses are the 
drivers of the economy and create the majority of jobs. 
However, under this budget no program receives a substantial 
increase leaving small businesses without the resources they 
need to succeed.
    What I am so pleased to see the enthusiasm Administrator 
Preston has for working on behalf of our nation's entrepreneurs 
it also takes adequate funding to run these programs. Of SBA's 
core programs 75 percent of these are cut, terminated, or flat-
funded. One example of this is the Women's Business Center. The 
Administration plans to eliminate funding for at least seven 
Women's Business Centers. With the face of business changing 
cutting the one program whose sole goal is to help the fastest 
growing sector of the small business community makes no sense.
    In addition, Microloan, one of the only programs that 
provides small loans to low-income communities will now be self 
financed forcing start-up businesses to pay thousands of 
dollars more. These changes are completely contrary to 
fostering a successful business model for these entrepreneurs. 
At a time when we need to be showing small businesses that we 
are committed to their growth and expansion, the Administration 
continues to treat small businesses as an afterthought.
    Year after year we see more and more programs for 
entrepreneurs getting cut and under-funded. This budget request 
is no different. When you compare SBA's core budget request to 
overall federal spending, it is the lowest it has ever been 
during the Bush Administration. These are all valuable programs 
that have contributed to some of the greatest entrepreneurial 
success stories in the country. They have opened the door for 
so many small business owners to pursue and achieve their dream 
of running a business.
    What is most concerning is that the Administration is 
acutely aware of the problems and yet still proposes 
insufficient funding. The reality is that if you do not supply 
more resources you simply cannot effectively run these 
programs. This is why we have seen 9/11 loans used for the 
wrong purpose, the problems during Katrina, and an agency 
unable to detect fraud in the loan programs.
    To correct this only one percent of the budget is dedicated 
to address these challenges. That is short-sighted and would 
allow this problem to persist. It is clear that since 2001 
there has been a failure to provide the resources needed at the 
SBA. For that reason it has been frustrating to continue to 
hear how things are getting better for entrepreneurs.
    What we have before us does nothing to reverse the 
shortcomings of previous year's budgets and is just more of the 
same. We need to provide proper funding for SBA core programs 
so they not only run efficiently but expand and help even more 
small business owners. This nation's 26 million entrepreneurs 
cannot succeed in this economy alone.
    I look forward to working with Mr. Preston and Mr. Chabot 
to ensure that the SBA has the funding it needs in the future. 
If we want to invest in small businesses and boost our economy, 
then we have to do more than what is being proposed today.
    Now I would recognize the ranking Republican Mr. Chabot for 
his opening statement.

                OPENING STATEMENT OF MR. CHABOT

    Mr. Chabot. Thank you, Madam Chairwoman. Thank you for 
holding this important hearing today. I want to welcome SBA 
Administrator Steve Preston to our hearing. While he is not 
brand new to the job this is his first time appearing before 
this Committee so we welcome you, Mr. Administrator.
    At the heart of the President's spending plan is the goal 
of balancing the budget in five years, I would hope in less 
than five years. This is an ambitious and necessary goal that 
will require Congress to make some tough spending decisions and 
to act in a more fiscally responsible way than it has been 
acting sometimes over the years.
    I believe such spending discipline is long overdue. Keeping 
that in mind, it is important to ensure that the Small Business 
Administration has the tools it needs to fulfill it's mission 
to help small businesses, the backbone of our nation's economy 
to prosper. Small businesses are the primary job creators in 
our economy creating 60 to 80 percent of America's new jobs 
annually over the last decade. They need access to capital to 
succeed.
    They also need to have a seat at the table when Government 
is handing out contracts and they deserve to be given just 
consideration when a federal agency proposes rules and 
regulations that could adverse affect them. I look forward to 
working with Chairwoman Velazquez on these critical issues.
    This hearing is about the SBA's budget request for Fiscal 
Year 2008 but it is important to point out that the President's 
budget request for small business is more than just the SBA. 
The President has proposed making the 2001 tax cuts permanent 
including the repeal of the estate or death tax which its small 
businesses transitioning their business from one generation to 
the next particularly hard.
    The President's individual rate reduction is also very 
important to small business because over 85 percent of small 
businesses pay their taxes on an individual basis as opposed to 
filing corporate tax returns. These tax cuts returned on 
average $3,641 to the typical small business owner in 2006 last 
year. The President's budget request proposes realistic funding 
levels and it would strengthen budget authority levels for the 
primary SBA financing programs.
    The budget request proposes to cut fees, hire more 
procurement center representatives to help more small 
businesses obtain federal contracts and increase services to 
veterans. It is also important to highlight what the budget 
does not do. The request does not repeat many of the mistakes 
of previous budget requests. It does not call for elimination 
of the Microloan Program.
    It does not call for higher interest rates charged to 
disaster loan borrowers. It does not call for charging higher 
fees in SBA's financing program to cover administrative 
expenses. It does not call for charging small business 
development center clients counseling fees.
    With that said, not everything in the SBA fiscal year '08 
budget request is perfect. I believe that many of the 
entrepreneurial development programs at the SBA should have 
received at least an inflationary increase. If the SBA can 
receive more than an inflationary increase to pay for higher 
staff salary cost and rent, I believe that small business 
development centers and women business centers also deserve a 
similar increase because they face identical pressures.
    I know we all look for ward to working with the 
Administrator, the Chairwoman, and the Budget Committee and the 
Appropriations Committee to see what can be done in these areas 
and I yield back the balance of my time.
    Chairwoman Velazquez. Thank you, Mr. Chabot.
    Mr. Preston, you are welcome to start your testimony.

STATEMENT OF STEVEN C. PRESTON, ADMINISTRATOR OF THE U.S. SMALL 
                    BUSINESS ADMINISTRATION

    Mr. Preston. Thank you, Chairwoman Velazquez. Thank you for 
your openness with me and my staff, for your commitment to 
small business, and to the agency. I really do appreciate your 
support and look forward to working closely with you and your 
team.
    Ranking Member Chabot, thank you also for your support. We 
have spent less time together given your newness here in the 
role but we value that time. We appreciate your support and 
thank you for your comments.
    Chairwoman Velazquez, Ranking Member Chabot, members of the 
Committee, thank you also for inviting me here today to discuss 
the Small Business Administration Fiscal Year 2008 Budget 
Request. For those who I have not had the pleasure of meeting, 
I am Steve Preston. I have been on the job almost seven months. 
I along with our new Deputy Administrator Jovita Carranza who 
is behind me here who joined in December, we both look forward 
to working closely with this Committee on issues that support 
the backbone of America's economy, small businesses.
    The importance of small business to our country is clear. 
There have been more than seven million new jobs created in 
this country over the past three years, just over the past 
three years, more than all other industrialized nations 
combined helping to reduce our unemployment rate to 4.5 percent 
which is below the average rates of the last four decades.
    Two-thirds of those new jobs were created by small 
business. Small businesses drive innovation. That keeps our 
country competitive. They provide opportunity to millions of 
Americans who may not find it elsewhere, and they enable 
transformation in communities in our country that desperately 
need economic revitalization.
    The SBA's 2008 budget request reflects the continued 
commitment we have to America's small businesses and the vital 
role they play in our economy and in our society. Enactment of 
this request will enable us to continue serving the small 
business community while being a good steward of taxpayer 
dollars.
    Since joining the SBA I have spent a significant amount of 
time listening to employees, partners, and, most importantly, 
customers. I have reviewed many of the agency's programs in 
order to identify how to build on our success and to address 
the areas that need improvement.
    When I came to the agency many of our critical positions 
were vacant. I continued to work to build a team of competent 
leaders and managers which will be essential in addressing our 
challenges going forward. One area of great progress the agency 
faces right now is the Disaster Assistance Program.
    I think we will be talking to this Committee about that 
next week in a separate hearing and I look forward to sharing 
some of the great successes we have had there which have been 
very much based in operational initiatives that we have 
undertaken in that. It has significantly increased the amount 
of money in people's hands in the Gulf, significantly improved 
our responsiveness to the customers.
    We are applying the same kind of operational reforms that 
we had in that business to other areas of the agency. That is 
grounded in the belief that we can improve the effectiveness 
and the impact of SBA's programs and activities markedly and, 
therefore, our impact on small business by employing important 
management principles, by focusing on the needs of our 
customers, by driving outcomes that are important to our 
country, and by running a compliant, efficient, and transparent 
organization.
    In addition, it is critical that we understand any service 
organization's success is based on the quality and motivation 
of its work force. These are principles that we have used to 
guide us in our plans for the future and in this budget 
request. It reflects both a vision for the agency's new 
leadership team and the dedication to the fiscal responsibility 
the agency has demonstrated over the past five years.
    It will also allow us to build the agency's success and 
provide us resources to make much needed improvements. We are 
requesting $464 million in new budget authority. This is a 5 
percent increase above the enacted 2006 level excluding 
disaster and Congressional initiatives. We also request $329 
million in carryover balances to fund disaster assistance, 
funds SBA has on hand already from the $1.7 billion in 
supplemental funding we received in 2006.
    Finally, it includes $21 million in reimbursements for e-
gov, business gateway, STB certification, as well as lender 
oversight. This totals $814 million in overall budget 
authority. This budget will enable SBA to carry out its core 
functions and begin a number of reforms and improvements.
    These resources will support a total of $28 billion in 
small business financing through the 7(a)/504 and SBIC 
debenture programs. For 7(a) SBA request $17.5 billion in 
lending authority. We also request $7.5 for the 504 program. 
Furthermore, SBA request an SBIC venture capital debenture 
program level of $3 billion.
    Because of the strength of our loan portfolios I am also 
pleased to request fee decreases for 7(a)/504 loans and SBIC 
debentures. In this budget 7(a) annual fees go down 5.6 basis 
points from 55 to 49.4. The 50 basis point up-front fee in our 
504 program would be completely eliminated and the annual fee 
would increase very, very slightly, .3 basis points, which is 
really pennies a day on a typical loan. The SBIC debenture 
annual fee would decrease 18.9 basis points.In addition, the 
budget support to disaster volume of $1.064 billion dollars is 
supported once again by carryover from our current disaster 
funds.
    For counseling and training to small business through SBA's 
network of resource partners we request $87.1 billion for 
SBDCs, $11.8 for Women's Business Centers, and $4.9 for SCORE. 
In terms of our work force our budget request will support and 
increase 2,123 FTEs. That is 86 new positions which would be 
added in '07 and '08.
    These additional resources are in part replacements for 
attrition at the agency in recent years, but they will also 
support a number of initiatives. Among other things, stronger 
loan processing, lender oversight, greater support of small 
businesses in our Government contracting operations, better 
employee training and career support, and a much greater focus 
on automation and outreach.
    We have become a growing manager of financial resources. 
Our portfolio has increased 56 percent over the past five years 
and we now have over $78 billion to oversee. To meet that 
responsibility our budget request includes funding for human 
capital and information technology.
    We have already made important advances in this area, 
specifically in the risk management area. We have expanded loan 
and lender monitoring systems. We have instituted lender 
monitoring system that incorporates credit performance metrics 
for our portfolio. Credit information combined with the SBA 
lender's current historic performance allows us to assign risk 
ratings to lenders and play quantitative risk-based methods to 
evaluation. It dramatically improves our sophistication as an 
oversight agency.
    Through our lender portal lenders now have access to the 
risk ratings and performance metrics through that portal. That 
makes it transparent to them to see how they are rated, how 
they compare to their peers, and how they can get on with the 
job of improving if they need to.
    We have also initiated and planned specific funding 
requests regarding the loan portfolio and investment portfolio 
which include a $4.1 million investment in the loan operation 
system upgrade. That would allow us to proceed with 
implementation of a system to replace our current loan 
information system for both regular loans and disaster loans. 
It is a very significant undertaking and it would take us along 
a path to get that completed by 2012.
    We have also asked for $1.5 million to support our SBIC 
operation to support evaluation contracts, liquidation 
planning, and examination of those contracts. As many of you 
realize, that program historically is sitting on a large 
portfolio of investments that need to be liquidated and that 
would help us extract the greatest value out of those.
    Government contracting, federal contract dollars are 
projected to increase by 64 percent over 2001 to small 
business. As I mentioned before, the small business share is 
expected to increase to a total of $84 billion. Our 
responsibility is to ensure that small businesses have fair 
access to procurement opportunities.
    As I have told people before, it is not just an issue of 
fairness. It is a matter of competitiveness and good business. 
Small businesses perform well as suppliers of goods and 
services. Their size makes them flexible, makes them 
innovative, and often cheaper than large companies. It does, 
however, take a bit more effort to find the right small 
business to fit the bill so we are asking for an additional 
$500,000 to look at how best to serve 8(a), Hub Zones, small 
disadvantaged business communities, as well as women and 
veterans.
    The agency must improve the management of these programs, 
particularly the 8(a) program, and these resources will allow 
us to assess what business process re-engineering needs to be 
done either through staff alignment or training or technology 
improvements. We want to make it easier for small businesses to 
find contracts so they can bid on them successfully. We want to 
make it easier for federal contracting officers to find the 
right small business for their contracts.
    We are also proposing adding nine new procurement center 
representatives in '07 and '08 that would expand the base by 16 
percent. These new PCRs would help build our presence in the 
federal marketplace. In addition, we are looking at how they 
spend their time and working with them to spend more of their 
time specifically with contracting officers to make them more 
effective.
    Finally, we are also working to reform contracting goaling 
and reporting. We recognize that there have been errors in the 
FPDS-NG system. Congresswoman Velazquez, your staff has been 
very focused on these issues. We appreciate that focus and 
thank you for your support. We in corporation with the Office 
of Federal Procurement Policy are redoubling our efforts to 
ensure that federal agencies provide accurate data on small 
business procurements and we have developed a score card for 
rating their agency compliance in corporation with their 
mandates.
    We are also looking for $500,000 to expand our veterans 
outreach. With the nation's current engagement in Iraq and its 
presence in Afghanistan the number of vets returning from 
active duty will continue to increase. Our Office of Veteran's 
Business Development plans to increase its efforts to educate, 
to provide programs and services to veterans and active duty 
personnel in three main areas, access to capital, management 
and technical assistance, and procurement programs.
    Even though we have made tremendous progress in disaster, 
we are committed to lasting reforms that are geared toward 
future disasters. We continue to refine our progress in doing 
so. In order to compliment the re-engineered process that we 
have already completed we have implemented a number of 
productivity and other metrics to track application status and 
the performance of our employees. It also provides management 
with critical information to identify problem areas and 
implement timely corrective actions.
    We are developing organizational planning measures to 
improve SBA's disaster response and these include the 
development of models to rapidly forecast loan volume, resource 
requirements to better position the agency to respond to larger 
scale disasters. We are also nearly the completion of a 
protocol to leverage our field network as well to improve local 
coordination.
    We expect to implement an Internet based electronic loan 
application that would allow our borrowers to submit required 
information quickly and accurately. That would accelerate SBA's 
ability to determine loan eligibility. It also compliments our 
investment in the computer system already which has increased 
our capacity four fold over the last year.
    We have also been evaluating options to access the private 
sector either through specific products or resources to help us 
handle catastrophic disasters.
    Finally, one of my highest priorities as an administrator 
is to improve the work being done to reach under-served markets 
in our country. In areas where we see high unemployment and 
lower wage rates like many of the rural and inter-city areas of 
our country providing effective support to new and growing 
small businesses can provide much needed jobs, economic 
activity and rejuvenation to places in our country that need it 
most.
    In order to reach these markets SBA has included the 
following proposals in our budget: broadening lender and 
counselor participation in the community express pilot so we 
can expand this program which reaches into many of our under-
served markets and provides borrowers with a double benefit of 
capital and training; expanding the urban entrepreneur 
partnership to additional cities so aspiring urban small 
business owners have better access to capital and services that 
make them successful; establishing seven more alternative work 
sites which will allow the agency to make itself more 
accessible to rural small businesses; and expanding the reach 
of our Microloan Program by moving the program to zero subsidy.
    In 2006 it cost 85 cents for each dollar loaned to a 
Microloan intermediary. In 2006 $13 million was spent to 
provide technical assistance to somewhat over 2,500 micro 
borrowers. At the same time there are approximately 13,000 
counselors we already have through our various ED partners. We 
also have 68 district offices. Together they provide services 
to a million and a half small businesses a year.
    Our aim is to meet more micro borrowers through expanded 
capital and support them with our extensive training and 
development network on a zero subsidy basis.
    As I said before, I believe this is a sound budget. It 
gives the SBA the funds necessary to operate and oversee our 
core financial programs more effectively, to re-engineer and 
improve our Government contracting programs, and to continue 
our work with our counseling and our training partners. It will 
enable us to provide more effective outreach, be easier for our 
customers and partners to work with through better automation, 
and fill key staff positions in areas where we are clearly 
lacking the necessary manpower.
    Thank you for your consideration and I look forward to 
answering any questions you might have.
    [The statement of Mr. Preston may be found on page 46 of 
the Appendix.]
    Chairwoman Velazquez. Thank you, Mr. Administrator.
    Mr. Chabot. Madam Chair, can I ask unanimous consent if the 
members on both sides want to present written opening 
statements they could do so.
    Chairwoman Velazquez. Without objection.
    Mr. Chabot. Thank you very much.
    Chairwoman Velazquez. And I would like to announce that 
members will have five minutes to ask their questions. We are 
going to try to keep this to the limit since we want to give 
participation to every member who is here. But I will give 
latitude since we have only one witness here.
    Mr. Preston, thank you so much for your testimony. My first 
question is you stated that this is a very different budget 
than what you have seen in recent years, but you are proposing 
a budget for SBA that constitutes the smallest percentage of 
the overall federal budget under President Bush. The SBA budget 
proposed to cut or flat-fund 17 or 25 core programs. This is 
exactly the type of budget submission we have come to expect. 
How is this budget different from previous budgets?
    Mr. Preston. I think from a number of perspectives. I 
think, first of all, we are asking for a very important 
expansion of people in our agency and this would add 86 people 
from '06 through the end of '08. Those people will be focused 
on very important activities to the agency. Specifically better 
staffing in our loan processing centers and for lender 
oversight. This is very important given the $78 billion 
portfolio we have in place. It will allow us from now until the 
end of '08 to expand our PCRs--I know that is an area we have 
certainly heard from you on, Chairwoman Velazquez--by 16 
percent. That would add another nine PCRs. And then in a number 
of core areas in our field where we just think we need better 
staffing for outreach.
    Chairwoman Velazquez. Well, let us talk about one of the 
programs, the Microloan Program. In your testimony you 
mentioned the focus of your team will be to help low-income 
areas, especially women entrepreneurs. The Microloan Program is 
a very important program for low-income communities. Yet, it is 
going to be basically flat-funded, eliminated, and it is going 
to be brought into a subsidy rate, zero subsidy rate.
    Take one aspect of the Microloan Program, another aspect of 
the Microloan Program, and that is the TA, technical 
assistance. This is a very important part of the Microloan 
Program. One of the reasons why since the inception of the 
program only two loans have defaulted. The SBA budget proposal 
will terminate the TA grant and shift that responsibility to 
the SBDCs and the Women's Business Centers.
    But seven Women's Business Centers will be eliminated so 
this change comes at a time when they are struggling with their 
own budget challenges. SBDCs which have been flat-funded for 
the last six years are seeing counseling. As you can see in 
that chart, hours dropped not because of a lack of demand but 
because of a lack of resources. The SBA budget proposes to 
terminate seven Women's Business Centers, as I mentioned 
before.
    Mr. Preston, I have consistently stressed the need to be 
realistic when we talk about resources and this is just another 
example of the agency spreading itself too thin. What generally 
happens next is what we saw after 9/11, Katrina, contract 
miscoding and loan fraud. How at a time when the SBA is flat-
funding programs and cutting centers can the SBA expect the 
same level of service as the current TA program provides?
    Mr. Preston. There are a lot of questions in there so let 
me start off with Microloans. Obviously those are all very 
important and valid concerns. First of all on the microlending 
side. I just want to say that I believe microlending is a very 
important tier capital in our country. Microlenders perform an 
important service. I hope you all know that this is the first 
time in, I think, four years that the agency has even come 
forward with any kind of Microlend program. We have moved from 
recommending the elimination of the program to embracing the 
concept but trying to do so in a way that is on a zero subsidy 
basis.
    What I would say is the amount of money that we spend in TA 
on that program relative to the scale of that program is very 
significant. We have made, I think, just over 2,500 microloans 
last year and spent $13 million in TA. We had this vast network 
of TA providers already in place. This is 2,500 loans relative 
to a million and a half people that they counsel so we are 
looking to leverage that network. Some of these microlenders 
already do leverage that.
    Chairwoman Velazquez. They are not for profit, Mr. Preston. 
Now they are going to be faced with increasing fees and these 
are the people and the organizations that provide technical 
assistance. As I mentioned to you before, the fact is that in 
order to help lower-income communities and those who want to 
start up their businesses in areas where they don't have the 
skills, technical assistance is an important component. This is 
why only two loans have defaulted since that program started.
    Mr. Preston. I agree that technical assistance is essential 
and we are hoping to support that technical assistance through 
our resource partners, through our district offices which 
already handle a dramatically higher volume already.
    I also do want to point out that isn't the only program we 
have. In fact, most of our other programs that reach into these 
communities are dramatically larger so 7(a) loans, Community 
Express, these are all much bigger and have much greater 
volume. I do agree that these microlenders do reach people in 
many cases that the banks don't. But I think we also have very 
important services into those communities.
    Chairwoman Velazquez. Small Business Centers, SBDCs, they 
are funding has been flat-funded. Already they do not have the 
resources to be able to provide the counseling for the people 
that come into their centers. Now they are going to also 
provide counseling and provide technical assistance for 
microborrowers?
    Mr. Preston. Let me comment on that because that was also 
inherent in your previous questions. The SBDC program, Women's 
Business Centers and SCORE are all the cornerstone of our 
training and educational programs. They are critical partners 
for the SBA to provide a terrific service and we couldn't do 
what we do without them.
    I also want to state, I think, we are developing an 
increasingly good relationship with those people in 
acknowledging that. The funds we provide those organizations 
provide a foundation for them to hire and maintain staff and 
operating class. They do leverage what we do and do most of 
their fund raising outside of what we give them. It is 
important for them to develop that funding base outside of the 
agency.
    We are also working with them. In fact, we have got a 
series of meetings set up with people from the Women's Business 
Centers to see if we as an agency can help them be more 
effective in bringing best practices and fund raising to the 
agencies or do the SBDCs.
    Chairwoman Velazquez. Mr. Preston, I hear what you are 
saying. They are great partners but your budget submission 
doesn't reflect that.
    Let us move now to one of the proposals in your budget, to 
reduce the 7(a) lender's fee. Given your remarks from last 
week's State of the SBA Address you indicated that lenders are 
not particularly concerned with higher fees so explain to me 
why did your agency choose to reduce the fees for lenders 
instead of for small business borrowers? This is, in fact, the 
Small Business Administration. I would have thought if you have 
a chance to reduce program costs, that we would start by 
reducing the fees for business owners. Why did you choose not 
to do that?
    Mr. Preston. First of all, I do think that these matter to 
lenders. I think what I probably implied in that statement, and 
this is something that we've learned time and again, it is not 
only fees that matter to people. It is all of the other 
challenges they face in doing business with us so being simpler 
to do business, automating processes, that type of thing is 
very important.
    When we looked at making an adjustment in this fee, as you 
know, the up-front fee to borrowers is a very complex tiering 
of fees going from 2 percent to, I believe, 3.5. We thought 
this was the simplest most effective way to convey a fee 
benefit and also as an incentive to bring more lenders into the 
system.
    Chairwoman Velazquez. But this program already is too 
costly for borrowers. My question to you is why do you choose 
to reduce the fee to the lenders and not to the borrowers?
    Mr. Preston. As I said, we wanted to provide an incentive 
for new borrowers to come in. What we have found is there are 
many borrowers out there who don't participate in many of our 
programs and we want to--Madam Chairwoman, one of the 
observations I have had in the agency is when you look at our 
programs and who is lending the money. There are pockets of 
banks in each one of these product areas.
    Chairwoman Velazquez. I understand.
    Mr. Preston. We need to get better engagement in the 
distribution for us to reach more small businesses.
    Chairwoman Velazquez. Mr. Preston, how could by imposing 
higher fees represent an incentive for borrowers? Explain.
    Mr. Preston. This is reducing the fees to the borrowers. I 
am sorry. I may be misunderstanding your question.
    Chairwoman Velazquez. Well, you are reducing the fees to 
the lenders.
    Mr. Preston. I am sorry, to the lenders. I misspoke. I am 
sorry.
    Chairwoman Velazquez. Now I will yield to Mr. Chabot for 
his questions.
    Mr. Chabot. Thank you, Madam Chairman.
    A few questions. Would discuss, Mr. Administrator, the 
relationship between the tax cuts and especially making them 
permanent and the effect on the small business community and 
the economy overall?
    Mr. Preston. I think, you know, one of the wonderful things 
about this job is getting out there and meeting hundreds of 
small businesses. I have had many town hall forums for small 
businesses just to come and tell me their concern because I 
don't think I can tap into it any other way.
    This is a huge issue for them. They cannot pass on their 
businesses to their heirs effectively if the tax cuts in place 
don't survive. They are typically people who are running 
businesses on a shoestring often. Every dollar of tax money 
takes away from dollars that they can invest in their business. 
Taxes are right on the top. The other thing, I will tell you, 
that is right on the top is healthcare.
    These come out of the pockets of these people and they 
impair their ability to invest in growth in providing services 
and providing healthcare to their employees. It is felt very 
robustly by all small businesses. How significantly would it 
affect the small business community do you think if we failed 
to make the tax cuts permanent? I don't have statistics for 
you, Congressman, but I would certainly be happy to get back to 
you on that. Our advocacy group does terrific work in 
evaluating these types of issues. I think it would be 
unrealistic to say that we would have as many small businesses 
in business if the tax burden on them increased.
    Mr. Chabot. And a significant number of the jobs that are 
created nowadays in the small business community.
    Mr. Preston. Absolutely.
    Mr. Chabot. Thank you. Next, what are you ideas for 
increasing lending in under-served areas both in cities and in 
rural areas and what ideas do you have to increase capital 
access for small businesses?
    Mr. Preston. I think it really has to do with two primary 
things. It is the product that we offer to make it attractive 
to the borrower and it is the distribution of that product and 
that is engaging the bank network. What I started to say before 
I got a little tongue-tied is when you look at each one of our 
products they are attractive to different people and they are 
used by different banks.
    If we have a rural product we need to make sure that rural 
lenders engage with it and then reach rural customers. We need 
to do two things. We need to do some work on the product 
development side. We are looking hard at a veteran's product 
that would be within the structure we have right now a better 
rural outreach opportunity as well as what we have in the 
inter-city.
    Then we are also talking to our banks about adopting or 
beginning to market those products more effectively and 
determining which banks go to rural areas, go to urban areas, 
and making sure that they are either providing the right 
distribution for those products.
    Mr. Chabot. Thank you. What can you and what do you intend 
to do to reduce the opportunity for fraud in the SBA's lending 
programs?
    Mr. Preston. Well, you know, you are probably referring to 
a recent fraud that came up that was detected a few weeks ago. 
I want to make a few comments on that. First of all, this was a 
fraud that the loans associated with those frauds happened a 
number of years ago. Since that time the agency has moved very 
far along in establishing an Office of Lender Oversight. That 
was done a few years ago. Expanding that office and bringing 
more sophisticated mechanisms to review all of our lenders.
    The other thing I would say is, that having been said, we 
are working closely in light of this recent fraud to see if 
there are things we should be doing that we aren't. We are 
bringing outside help into the agency to make sure they are 
looking at our analytical techniques, are we referring the 
right kinds of things to our IGs, do we have the right systems 
in place to support that.
    Mr. Chabot. Thank you. My final question, because I want to 
make sure I am not taking up too much time so all colleagues 
will have an opportunity to speak as well. Could you comment 
briefly on the value and the involvement of small businesses 
and exports? You probably don't have access to these at this 
point but if you could provide to the Committee dollar and 
percentage values of exports by small businesses, both 
agriculture and nonagricultural exports.
    Mr. Preston. We do have those numbers. I don't have them 
handy. What I would tell you is export is increasingly 
important. We provide support for that and we can give you some 
very good information there.
    Mr. Chabot. Thank you very much. I yield back.
    Chairwoman Velazquez. I recognize Mr. Jefferson.
    Mr. Jefferson. Thank you, Madam Chairlady. Every year when 
agencies are preparing budgets and making submissions to OMB 
and the rest, they put together their own numbers and have a 
vision for what they want to see the agency accomplish. Does 
the budget that we have here today reflect the recommendations 
that your agency made originally in the budgeting process?
    Mr. Preston. Obviously that is a fairly interactive 
process. What I would tell you is I think this budget reflects 
what we believe is necessary to take the agency forward.
    Mr. Jefferson. So this budget reflects your 
recommendations?
    Mr. Preston. This budget reflects my recommendations.
    Mr. Jefferson. You had no higher ones in no area at all? 
Everything you wanted got done here?
    Mr. Preston. I wouldn't say that.
    Mr. Jefferson. Where did they miss taking care of what you 
wanted?
    Mr. Preston. What I would tell you, Congressman, is we 
worked within the Administration to bring forward a budget that 
we thought provided us what we need to take the agency forward 
in the context of the overall federal budget which obviously 
has got fairly significant spending needs for military, for 
your area of the country.
    Mr. Jefferson. I understand. I am sorry to cut you off. I 
only have a little time. It is fair to say that you had 
recommendations that were different from what we see now in 
some areas. We will find out what those are maybe a little bit 
later on. Has there been less demand for the services provided 
by your agency in the most recent years and now in this current 
one and the ones you see coming up or has the demand grown for 
the agency services?
    Mr. Preston. I think demand has continued to grow for 
agency services.
    Mr. Jefferson. So if demand is continuing to grow, how can 
we justify a budget that cuts back in so many different areas? 
Let me just tell you what is happening back home with us. Seven 
years ago we had 27 employees in our office back home. Now we 
have nine. I think four of these are clerical people, too, who 
are just filing and trying to keep up with things.
    The demand is certainly growing down there. With the new 
challenges we have with the disaster there they are even more 
significant.
    How can you expect this budget to work when the demand is 
growing not only in our area but all over the country and they 
are operating with a third of the staff they had seven years 
ago?
    Mr. Preston. The agency overall is not operating with a 
third of the staff but the field has become smaller. We are 
operating in a fundamentally different operating model than we 
did several years ago. We used to do loan processing in 
branches. We used to do all sorts of things in branches that we 
don't do today. I think going forward, sir, what we need to do 
is make sure that our branches--our district offices, excuse 
me, are focused on effective outreach and effective counseling 
for people in the field. They are doing a lot of things today 
that they shouldn't be doing and we want to make them better at 
spending all their time serving small business.
    Mr. Jefferson. The top three positions that are unfilled in 
our office back home are the Deputy District Director to the 
Loan Officer, the Head of Government Contracting. You can't 
hire these people because there isn't any money there. I don't 
know how efficient he can be if he's doing all four jobs and 
getting this done. I think it is happening not just in my area 
but across the board but I do know our area best.
    Let me ask another thing if I have anymore time here. There 
is a carryover of $329 million, I think, for the disaster loan 
program. How much of that and does any of it represent loans 
that are already in process there may be some obligation on? Do 
you know?
    Mr. Preston. What it does is any loans that have already 
been--there are two pieces to that, Congressman. There is a 
portion of that which pays for a subsidy on the loan itself and 
there is a portion of it that pays for administrative cost to 
service that loan over time. Any loans that have already been 
obligated would not be in that number. To the extent, for 
example, that we have loans from hurricane Katrina disaster 
that are serviced along the way, the administrative portion of 
that would support the ongoing service of those funds.
    Mr. Jefferson. Do you think the amount of $329 is 
sufficient to meet the disaster loan needs that you see coming 
up in the next year?
    Mr. Preston. We estimate it is sufficient to meet the need 
for just over a billion dollars worth of disaster loans. Now, 
if there is a very significant catastrophe, and obviously this 
isn't the kind of thing we can project, what has happened 
historically is Congress has provided supplemental funding 
specifically to meet the needs of that disaster. But this is a 
very obviously somewhat of an intermittent process based on the 
need.
    Mr. Jefferson. My concern is that this may be just an 
illusionary number because there is such a demand in this 
program and we still have many loans out there pending. I 
suspect the pending looking at this money already from last 
year and for maybe even years before that and we are acting as 
if it is totally free and unobligated.
    Mr. Preston. Any dollars that are already committed in the 
Gulf are included in the prior budget. It just helps us service 
those going forward.
    Mr. Jefferson. Thank you, Madam Chair.
    Chairwoman Velazquez. Mr. Jefferson, next week Mr. Preston 
will be back here and we will be discussing the disaster loan 
program in detail.
    I would like to recognize Congressman Buchanan.
    Mr. Buchanan.  Thank you, Madam Chair.
    Mr. Preston, I want to go back to Madam Chair's question on 
fees. The fees that we are talking about with banks, how much 
does that cost us by reduction of all those fees? Do you have 
any sense of that? What do you think it's going to cost?
    Mr. Preston. I don't have the dollar number off the top of 
my head but it is on a portfolio of just over $40 billion so it 
would be 5.5 basis points on $40 billion over time. I don't 
have that calculation for you.
    Mr. Buchanan.  Okay. Well, you say 5.5 basis points. I 
thought you said 55 basis points.
    Mr. Preston. I'm sorry, on 17.5. It is on new loans only.
    Mr. Buchanan.  Okay. You are talking about three different 
sources of fees. It says 55 basis points you brought up and a 
50 basis point fee that was going to go out of sight.
    Mr. Preston. I was talking about two separate programs. We 
have something called the 7(a) program which is our primary 
small business lending program. There is an up-front fee and 
then there are annual fees in that program. That program we are 
having a 5.5 basis point reduction of the annual fee. In the 
504 program which is primarily a real estate financing program 
we are seeing a reduction in the up-front free which is very 
dramatic. The reason for that is it reflects the credit 
experience in those two different portfolios.
    Mr. Buchanan.  But when I look at banks and talking to 
banks in our region, it seems like there is very little effort 
or marketing on behalf of the organization calling on banks. 
What do you do about that? How do you track banks? The second 
question is what size banks participate in the program? Are 
these small $100 million asset banks? Are you dealing with 
large banks or what size banks?
    Mr. Preston. It is really the entire spectrum. What happens 
is we have different products and then we also have different 
processing methodologies with the banks that are adaptable for 
the kind of bank. For example, if it is a very large bank with 
a lot of IT capacity, they will tend to use a more automated 
process. If it is a small regional bank that might make three 
or four loans a year, they don't want to invest in an automated 
process so they will do a lot more of it kind of by hand. We do 
have an entire network of thousands of banks that work with us 
and we would be happy to show you kind of who they are and 
where they lend and that type of thing.
    Mr. Buchanan.  Being on bank boards it doesn't seem to me 
that banks that participate in SBAs usually are not motivated 
as much by a little bit of reduction in fees, especially if we 
are looking for additional revenues. Either they want to do it 
or they don't. That is my sense of it. Obviously I am new to 
this process but it is something I want to kind of look into.
    Mr. Preston. You are on to a very important issue and let 
me just take two seconds on it. I think as much or more than 
the fee is the ease of distributing the product and the ease of 
doing business with us. A lot of what we are focusing on is 
that relationship and we have begun to engage banks to help us 
understand how to simplify it for them.
    Mr. Buchanan.  I think if you get a minute I would like to 
know what collectively all these fees that we are discounting 
to banks what is that costing us or costing the program because 
I don't think it is as much the reduction of fees, I might be 
wrong, as it is just the marketing and working with the banks.
    Mr. Preston. I think you are right. I think you are right. 
These fees all keep the program at zero subsidy so basically we 
look at the portfolio going forward based on what our 
experience has been and we need to make the fees fit the zero 
subsidy in the program and that is why these fee reductions are 
occurring.
    Mr. Buchanan.  Thank you, Madam Chair.
    Chairwoman Velazquez. Thank you. I will recognize 
Congressman Shuler.
    Mr. Shuler. Thank you, Madam Chair.
    Mr. Preston, thank you for your presence today. I would 
just like to reiterate as my colleague, Mr. Buchanan, I would 
agree. It is not so much the loan as the percentage that the 
banks will be losing, It really gets to more of an educational 
process with the banks and with the small businesses that they 
are actually available living in a rural district that those 
funds could be available for them so I think it goes far and 
beyond just cutting the fees. We have to do a much better job 
of educating the public and educating the smaller banks. Not 
necessarily the large institutions but the smaller more 
community private banks that are in the District.
    I would also like to follow up. We have certainly talked 
about this and Madam Chair has done a great job of showing her 
passion with the Women's Business Center Program. I understand 
there is re-evaluations or evaluations going with the funding 
and how those programs would be funded. I have a center 
obviously in a rural district, a micro-center.
    I would just like to make sure that there is going to be 
adequate funding after the first five years and in looking at 
that to make sure that after the five years that the SBA is 
developing a funding formula that will be factoring in these 
unique challenges in the rural districts for these private fund 
raising programs. Are you seeing that as part of the re-
evaluation or evaluation of the funding?
    Mr. Preston. I do. I really think we have to crack this 
issue. We have had 17 centers graduate from the program after 
10 years. Sixteen are continuing operation, many of them doing 
well. I believe one of them did not continue to operate without 
the SBA funding.
    As we have engaged with people in the industry, what we are 
trying to do is work with them to see given that there is a lot 
of experience for success how can we help them be more 
effective in transitioning from full Government funding to 
partial Government funding to being sustained all by their own.
    In fact, we will have a number of representatives from the 
Women's Business Centers in town next week to work through some 
of these issues with us but we would be happy to spend time 
with you in your office or anybody else on the Committee 
because I do understand the issue. These are terrific people 
who serve a terrific need.
    Mr. Shuler. I would like to follow-up with one other 
question. Yesterday the Office of Veteran's Affairs was 
supposed to be working with the Veteran's Corporation. Are you 
aware of any coordination between the two groups?
    Mr. Preston. Between which two groups?
    Mr. Shuler. The Veteran's Affairs Office and Veteran's--
    Mr. Preston. We are working right now on how to coordinate 
with the VA to reach veterans more effectively. There are a lot 
of small business owners in the veteran's community with so 
many of them coming back in the near future, we all hope so we 
really need to make sure we have not only the right programs in 
place but the right outreach and we think through the VA and 
also through DOD we may be able to reach them more effectively 
so we are working with them.
    Mr. Shuler. Thank you.
    Chairwoman Velazquez. I recognize Mr. Gohmert.
    Mr. Gohmert. Thank you, Madam Chairwoman.
    I appreciate you being here today and testifying. I am 
delighted that I am going to be able to bring up a matter that 
both Mr. Buchanan and Mr. Shuler did and that is bring up rural 
lending so you get three of those in a row. That is an area 
close to my heart. What are your ideas for increasing lending 
in under-served areas specifically in rural America?
    Especially some of us have areas in which there are 
agricultural entities, state and federal that are moving in 
different places, consolidating their offices, and leaving for 
the first time some areas even more under-served which might be 
a good opportunity for an SBA office. I am curious about if you 
have looked at that aspect.
    Mr. Preston. I joke with people but I was the Treasurer of 
the Future Farmers of America in Janesville, Wisconsin area. My 
high school is surrounded by farms on three sides so this is 
something that is sort of in my blood. First of all, our 
lending to rural has gone up dramatically and continues to go 
up dramatically. It is being driven by some of the larger banks 
who are pushing hard into those areas. It appears to be driven 
less by community banks.
    The Chairwoman has often reminded us that we used to have a 
product called Low Doc that was very effective in reaching 
rural areas. We, unfortunately, had very high delinquency rates 
in that particular product. What we are trying to do is look at 
why people like the product and how we can work with the 
concepts that worked in that product but do it in a more 
effective way.
    I think we need to look at do we have a product that serves 
the needs of that community, both for the borrower and for 
those community banks. For the community banks it is going to 
be easy to do business with so we have to simplify the process 
for them.
    The other thing we are doing is we are asking for more 
funding for seven more alternative work sites. I was just out a 
few months ago. These are sort of one woman/one man offices 
where people can come in, get introduced to the agency, often 
get introduced to other agencies, state, local, or federal 
through our SBA people to help them understand how to get 
support they can leverage the power of the whole agency if they 
have bank relationships.
    So a little bit onsite presence, a better product, and 
better outreach to those community banks. Our district network 
is very excited about moving forward more aggressively in rural 
markets so I think when we get something they are going to 
really grab onto it.
    Mr. Gohmert. Has there been any coordination, not that I 
want to propose something that is just an anathema in Federal 
Government but coordination between departments? Has there been 
any coordination between the SBA and the Department of 
Agriculture in that regard to work for opportunities?
    Mr. Preston. What you find is our local offices do a very 
good job of coordinating with other federal agencies in those 
local areas and they do trade off when they understand, for 
example, if there is somebody from EDA in Commerce in an area 
where we have an office. Sometimes we are even co-located but 
what I would not say is there is sort of a coordinated 
initiative with the Department of Agriculture to design a 
product right now. Certainly if you have ideas in that regard 
or would like to talk more about it, we would be happy to 
engage with you on that.
    Mr. Gohmert. Just one final suggestion. Something that I 
ran into is there is such a hunger in rural America to take 
advantage and work and grow. We see so many Government 
entities, both state and federal that say, ``Gee, I have an 
opportunity for an office there. Let's go build a building. 
Let's go rent the nicest thing we can get,'' when you have 
courthouses and city halls that are ready to give you space for 
free if you will just set up an office there.
    Mr. Preston. Sir, we are a scrappy little organization and 
we take advantage of that already.
    Mr. Gohmert. I would encourage even more of that because I 
see great opportunity.
    Mr. Preston. We really do. I appreciate that.
    Mr. Gohmert. Thank you, Madam Chairman.
    Chairwoman Velazquez. Thank you.
    Now I recognize Mr. Ellsworth.
    Mr. Ellsworth. Thank you, Madam Chairman.
    Mr. Preston, thank you. When I came to Congress I didn't 
think I was going to do this but after reading the New York 
Times this morning I ask my questions based on newspaper 
articles.
    Mr. Preston. That makes them easier.
    Mr. Ellsworth. I didn't want it to be that way. There was 
something that caught my eye this morning in one of the 
articles and it was talking about some of your quotes and Mr. 
Stamler. I don't guess he is here but it was talking about the 
downsizing in your budget. One particular paragraph says, ``Mr. 
Stamler also said that although the budget documents show the 
agency's budget dropping from $533 down to $460 million in 2008 
almost $90 million of the 2006 funds were what is known as 
earmarks.'' Earmarks always make my hair stand up on the back 
of my neck.
    My question is that of that $90 million that he is talking 
about, and I don't know if you read the article or not because 
you have only been there seven months, is that money that came 
out of the SBA budget that could have gone to other things? Do 
you have any knowledge if that $90 million in earmarks was 
related to benefiting small businesses? Is that enough to go 
on?
    Mr. Preston. Oh, it is more than enough. First of all, I 
could not get on the list of that earmark with you 
intelligently right now so I apologize. We could easily provide 
that to your office and let you know kind of what the purposes 
of those were and how we used those.
    It is very important to understand that there are three 
components to our budget and each one of them is slightly 
different. No. 1, core operating needs to run the place. No. 2, 
core needs to run the disaster program. No. 3, congressional 
initiatives. As we have these discussions about running the 
agency we typically focus on the first and the second one.
    Now, what I can't tell you is back in that budget what the 
give and pull was in proposing a budget without congressional 
initiatives and then how much it affected our programs. I just 
don't have that number for you. But certainly when we bring 
forward this budget, which does not include any type of 
initiative like that, we are very strongly requesting that we 
have the core funding we need to run the agency and to the 
extent that we are asked to administer any other initiatives 
that they not jeopardize what we need to run the place.
    Mr. Ellsworth. For the record, the people that sent me here 
don't like it when earmarks are tagged. If it is a small 
business earmark and it helps the small business of this 
country and we put it in there in a transparent manner, I think 
they would be fine with that. Throwing something in just 
because they have some dollars there, that hurts our Committee 
and I think we need to work to clean that up.
    My second question would be if you had the magic wand and 
you found a pot of gold in the budget process or all of a 
sudden you found a drawer with a lot of money in it, where 
would you put your dollars? We are cutting and we know we have 
to be tight. We know we are going to make sacrifices here. Pick 
me three areas that you say need to be increased, you know, FY 
'07 loans, microloans.
    Mr. Preston. You know what? There is a message I have given 
consistently and I am not sure that people always appreciate 
it. Part of it is all we come with our own biases and our own 
backgrounds. After spending 25 years in the business world in 
financial and operational roles I see a lot of opportunity to 
be more effective just by operating better by making sure we 
have funding to support outreach, by making sure we have 
funding to automate processes.
    We still have a lot of things where we see stacks of paper 
like this in our warehouses with loan forms. Now, we have come 
a long way but we have a long way to go. In that process I 
think we become much more responsive to customers, much easier 
to do business with the banks, and it just enables the flow of 
our advice, our capital, and our support much better. I would 
continue to invest in the operational effectiveness of the 
agency because I think that is where we can really become much 
more effective.
    Mr. Ellsworth. I just hope we are doing that and that we 
are being efficient. If the money is type that we look in our 
houses first for places we can--I am not saying you don't. I 
would bet that this Committee if we find examples that we are 
not we will call attention to it as I expect them to do that to 
me, too. I appreciate your time and I would yield any time I 
have left.
    Chairwoman Velazquez. Thank you. Now I recognize Mr. 
Fortenberry.
    Mr. Fortenberry. Thank you, Madam Chair. I appreciate your 
leadership in holding this Committee hearing today.
    Mr. Preston, welcome. Nice to see you.
    Mr. Preston. Thank you.
    Mr. Fortenberry. One of the responsibilities of this 
Committee obviously is to have oversight of your agency. It is 
very quick to get immersed in the details and I want to do that 
myself but I want to back out for a moment and say I think you 
have one of the best jobs in the Federal Government. You call 
yourself a scrappy little organization. That is perhaps true 
but you can be a scrappy big cheerleader for one of the most 
important aspects of life in society.
    I mean, small business is where most people are working 
hard to try to get a little bit ahead in life to provide for 
their families. For us to think together as to how we overcome 
the barriers to entry and help more people perhaps engage in 
the opportunity for ownership or expansion, particularly those 
that are vulnerable is an extraordinary privilege.
    I just learned that you have only been here seven months 
but, again, I think you have a tremendous opportunity to 
cheerlead on behalf of what really is a new frontier and that 
is an entrepreneurial vision in society that allows 
particularly younger people who are rethinking the whole work 
model to have a chance to use their gifts, apply themselves, to 
take risks when it is possible to bring a good product to 
society and to in turn receive the full fruits of their labor. 
As we discuss all of the nuances of policy and the frameworks 
that have been set up by other people who have come before us, 
I just hope we keep a vision that upholds those ideals but I 
appreciate you being here.
    In that regard, let me ask you something specific. 
Basically the budget is flat but at the same time you point out 
that your loan portfolio has expanded by 56 percent in the last 
five or six years. I think that is a good indication that you 
are leveraging limited resources in a more efficient manner and 
I think that is a positive trend. If you want to comment on 
that you can, but I do have something specific I would like to 
ask you in regards to the new market tax credit pilot.
    Mr. Preston. Yes.
    Mr. Fortenberry. There is a sentence here that summarizes 
the program and I would like you to translate it for me and 
unpack it a little bit and then show examples of how this is 
currently working or how you envision this to work. The 
sentence says that, ``The pilot program allows certain 
community development entities to purchase up to 90 percent of 
the gross loan amount of SBA express or community express 7(a) 
loans up to $150,000 made to NMTC-qualified businesses in low-
income communities.''
    Help me out here. Let's translate that a little bit better. 
Let's unpack that and how you envision that to be one of the 
new methodologies in which you further leverage your resources 
to help people in particularly vulnerable areas. The other 
thing is define economically distressed.
    Mr. Preston. Okay. Great. Economically distressed we are 
talking primarily about rural markets and inner city markets 
where we see higher unemployment and lower wage rates. There 
are a number of different federal designations like LMI, Hub 
Zone, New Markets. We are doing a lot of analysis right now to 
understand how those designations map to where the greatest 
need is and how much of the population they cover, etc., etc., 
etc.
    On the new markets tax credit, in fact, Congresswoman Moore 
was with us in Milwaukee when we announced that pilot. What 
happens is the Treasury has this new market tax credit program 
which provides community development and the investors in those 
entities with tax credits for investments that entity makes. 
Typically it is more heavily focused on real estate right now 
and some other investment types.
    What the pilot does is it enables those community 
development entities to buy SBA loans from banks so they now 
buy the loans. They get a tax credit for the purchase of those 
loans. It does two things. It frees up capital at the bank so 
they can make more loans to small businesses and it allows them 
to purchase it in a way that provides a financial incentive. 
Hopefully through that whole chain of events we would see value 
accrue to the ultimate borrower.
    Now, there are some very complicated technical aspects to 
how loans are structured, how these tax credits are structured, 
and how these CDEs are structured that we are working through. 
What I would say is I don't expect that pilot to be a home run. 
I expect it to provide some incremental benefit and I expect it 
to be a very important learning experience for us in how we can 
convey tax benefits to get more capital to people who need it 
the most.
    We are working right now with banks to understand how we 
can make that more effective. Does that make sense? I 
appreciate that it is a very complicated set of concepts.
    Mr. Fortenberry. We will have to spend a little more time 
working our way through that. Fair enough. Perhaps we can work 
more directly with you in understanding that. Just because you 
are from Janesville I hope there is not a bias toward having 
new pilot projects just in Milwaukee. Nebraska has a need, too.
    Mr. Preston. The Packers are on the television in both 
cities.
    Chairwoman Velazquez. Time has expired.
    Mr. Fortenberry. Thank you.
    Chairwoman Velazquez. I recognize Ms. Clarke.
    Ms. Clarke. Thank you very much, Madam Chair. Mr. 
Administrator. I just wanted to ask two questions. One in the 
line of what our Chairwoman, Nydia Velazquez, has spoken to you 
about and that has to do with the Microloan Program. For many 
communities, particularly urban communities like mine in 
central Brooklyn we see that as the ground floor of the 
escalator that really stimulates the economy for distressed 
communities.
    And you state that you are planning on raising the interest 
that the Microloan subsidies pay SBA to offset the cost of the 
Microloan Program but you are zeroing out the funding for 
Microloan technical assistance. Can you detail for us how you 
expect to really be effective with the program if the technical 
assistance component is not married to real effective on-the-
ground assistance to folks, one.
    Then, secondly, there is a position that has been vacant 
since the beginning of your tenure which is the Associate 
Administrator for Government Contracting. This goes to the 
heart of women in minority owned business enterprises and their 
ability to really access over 24 different federal agencies. I 
would like to know the status of that position because that 
goes a very long way in really stimulating economies in 
communities like mine.
    Thank you, Madam Chair.
    Mr. Preston. Okay. Let me start with your last question 
first. There are a number of vacancies in that area which we 
are working hard to fill. It concerns me because we have a very 
big job to do. It is an absolutely critical function that we 
undertake and those jobs have been posted. We are looking at 
candidates and there are a few critical jobs there.
    One of my colleagues just reminds me that they are actually 
reviewing candidates on a panel next week for this specific 
job. I appreciate your concern. If we don't move quickly on it, 
you can continue to push us and you will be back and I thank 
you for that and that is your job and I appreciate it because 
we need to fill those jobs.
    The Microloan Program what we are proposing to do is move 
the technical assistance from the microlender to our network of 
thousands of counselors that are already in place that already 
meet a million and a half small businesses a year. We make a 
little over 2.5 thousand loans a year in microlending and we 
have thousands of counselors in our preexisting network so we 
are asking for support from those people.
    It is a minuscule addition to their volume. We are actually 
asking for more money to lend to microlenders. We have put out 
between $18 and $19 million to microlenders last year. We are 
asking for authority to be able to lend $25 million which would 
allow us to put more capital out there.
    I will say the capital would be somewhat more expensive 
because today we lose money on every dollar we put out. We are 
asking to break even on every dollar we put out and that is the 
difference in the loan amount. It is not always an issue of 
cost. It is also an issue of access to capital so we would like 
to expand our reach.
    Chairwoman Velazquez. Will the gentlelady yield?
    Ms. Clarke. Yes.
    Chairwoman Velazquez. Yes, Mr. Preston, it is a matter of 
cost. Microloans for low-income people by bringing this 
microlending out to a zero subsidy it means that some people 
might have to pay as much as $4,000 for the life of their loan. 
If this is the way we are going to help borrowers from rural 
America and urban centers in low-income communities?
    Mr. Preston. I think it is important to recognize that this 
is one product of many products that reach into those markets. 
I think there are also a number of microlenders out there that 
lend that money much more efficiently who cover their cost 
structure more effectively and for whom having more capital 
would allow them to lend those dollars cheaply.
    Madam Chairwoman, I do recognize it is entirely possible 
that there are going to be situations out there where the cost 
would go up. For the borrowers who are probably the least 
credit worthy, that is going to be a burden for them and would 
have an impact on their ability to repay that.
    Chairwoman Velazquez. How are we going to fix it?
    Mr. Preston. I think what we continue to do is expand 
capital out there and expand opportunity, expand resources 
through all of our lending program to continue to try to reach 
these markets, but this one for the amount of money we are 
lending comes at a very, very expensive price to the taxpayer.
    Chairwoman Velazquez. Before I move to Mr. Davis, let me 
remind you that year after year of budget submissions coming 
from SBA you try to cut the Microloan Program and year after 
year we put it back and we will.
    Now I recognize Mr. Davis.
    Mr. Davis. Thank you, Madam Chairlady. I appreciate the 
opportunity.
    Thank you, Mr. Preston, for being here. My question goes 
about understanding that most of the jobs that are created in 
the American economy today are coming from small business. I am 
really more concerned about the small business owners and the 
jobs they create back in my district and across America than I 
really am the Government infrastructure and the amount of 
federal employees that we have and the amount of regulation and 
burden that puts on small business owners.
    I know you have worked in the private industry as well as 
the public sector. Thank you for your leadership in both. My 
question comes to the point the small businesses across America 
do you think they are more concerned with spending at the 
federal level in bigger Government or do you think they are 
more concerned with lower taxes and less regulation? Which 
helps them the most?
    Mr. Preston. I think it is clearly the latter. I think we 
are talking a lot obviously about our programs very importantly 
because we are talking about a budget but these macro issues 
are critical to them. I think we all understand small business 
owners are often the CEO, the head of marketing, the head of 
finance, and the person that is filling out all those 
regulatory forms. More regulation is a very significant burden 
I hear consistently in the field. The tax dollars come out of 
their pockets, it comes out of their ability to reinvest in 
their business which creates jobs which enables growth and 
allows them to be competitive. I appreciate your concerns and I 
think it is as you implied by your question.
    Mr. Davis. I think the small business owners I talked to 
are not as interested about how many employees we have in 
Washington. They are more concerned about how many employees 
they can hire in their local community to help our economy. 
Thank you for your comments.
    Mr. Preston. Thank you.
    Chairwoman Velazquez. Now I recognize Mr. Sestak.
    Mr. Sestak. Thank you. Thank you, sir, for your time. I 
appreciate your comments on the tax cuts. The fact is in my 
Delaware County, 85 percent of which is my district, we have 
lost 607 small businesses in the last three years.
    As I kind of looked at the administration over the last 
four years and saw 200 percent increase in the cuts of programs 
that affect small businesses across all the Government over the 
last three years and watched one out of five small 
manufacturing establishments disappear from Delaware County, 85 
percent of my district in the last three years, I sit back and 
hear you talk about all the increase of jobs that have been 
done. I guess it was 3.5 million.
    At least in Pennsylvania, and I believe it is the same 
state wide, when you compare the jobs that were lost the first 
couple years of the administration and the median income of 
those and those that have come back, the median income of the 
jobs that have come back is below that of median incomes that 
were lost.
    When I sit back and ask what the Government is doing for 
small businesses as far as access to capital and to 
entrepreneurial assistance in the sense of technical advice and 
all, I guess my question is first for small SBDCs. There is 
only, I think, 18 in Pennsylvania and I just established one 
not in my district nearby in January. I met with the president 
of Widener University last weekend.
    I guess my question comes as I watch the decrease that has 
occurred and the monies that come to Pennsylvania SBDCs. Have 
you given up on believing in the demand for entrepreneur 
developmental services, particularly with the viewpoint of a 
wonderful district that has lost 607 small businesses and with 
an administration that has a 200 increase in those same years 
and cuts of small business programs across the administration?
    Mr. Preston. Specifically with the SBDC program we think 
those people do very important work. I think the comment I made 
before--
    Mr. Sestak. I know they do good work but the amount of 
money coming in has decreased and we have kind of flat-funded 
it.
    Mr. Preston. If we have flat-funded it, we are not their 
primary source of funding. We provide a base level of funding 
and then all those SBDCs then go outside and raise funding from 
any number of other sources. That is where they get their 
funding growth from. What I mentioned before is we are 
beginning to do this with Women's Business Centers. We would 
welcome the opportunity for SBDCs as well to work with them on 
bringing best practices to how they can be better fund raisers 
and more effective in getting funds from sources other than the 
Federal Government.
    Mr. Sestak. Could I ask then another question on USEACs. 
Again, there isn't one nearby but there is one inside 
Philadelphia so I met with him about three weekends ago and my 
view has always been particularly in a globalized world that 
you would think that improving market opportunities in such a 
globalized world would be something.
    When I met with him I asked what are the opportunities and 
are they being missed. The Director said, ``Yes, they are.'' He 
is putting together an economic summit now for us in a few 
weeks to bring people together.
    I guess my thing is that it appears as though the FY '08 
budget anticipates that the cost for the international trade or 
assistance programs are actually going to decline. Again, my 
question is why aren't we boosting the SBAs or USEACs or for 
the 504 CDCs or the 7(a) loans that are zero subsidies if it 
really is a globalized effort, particular knowing that 607 
businesses have gone away?
    Mr. Preston. We would expect the 7(a) and 504 programs to 
continue to expand. Those are zero subsidy programs so they are 
free to continue to grow and we are hoping continue to grow. 
There is better outreach, better products and we are beginning 
to work with our banks on any number of initiatives to do that.
    With respect to the export assistance, frankly, this is an 
area we have to get into deeper in the agency. It is an area 
that is an important area. I am not convinced we are doing 
enough for America's small businesses on the export side. 
Frankly, I don't have a great answer for you right now. It is 
something that is going to require some time and effort.
    Mr. Sestak. Do I have time for one more question? In fiscal 
year '08 the SBA proposed a loan level for its primary business 
loan levels basically the same as last year. Does that indicate 
you believe that the demand for these loans for small 
businesses will not increase?
    Mr. Preston. The request for last year there is a 
significant cushion in that amount. We would expect to have an 
ability to grow quite dramatically and still be within that 
with the authorization request that we are asking for. Last 
year we had the same authorization request but there is still a 
whole lot of cushion within that for continued growth.
    Mr. Sestak. Thank you for your time.
    Chairwoman Velazquez. Since we don't have anymore members 
from the other side here, I will recognize Mr. Chabot for any 
other questions.
    Mr. Chabot. Thank you, Madam Chair. I won't do it after 
every one of your people. I'll take some now if I can. I'll try 
not to be too long.
    Mr. Administrator, has the SBA considered whether there is 
some duplication with respect to the entrepreneurial 
development partners and programs? For example, is there some 
overlap among the SBDCs and the WBCs, SCORE, veteran's 
programs, and the Office of Native American Affairs? Are there 
some efficiencies that could be implemented that might benefit 
all of those various programs?
    Mr. Preston. We are digging into efficiency opportunities 
there right now and I don't have a great answer for you in 
terms of how those will look. What I would say is those three 
networks provide similar services in many cases. They do, 
however, often serve different populations. The Women's 
Business Centers often go into more urban areas and will deal 
with a group of people that might not be comfortable going into 
a small business development center which is in a university.
    My view is there is probably some overlap there but, for 
the most part, I think the three programs expand their reach by 
their uniqueness. We also see typically businesses in different 
levels of their life stage in each one of those groups as well.
    Mr. Chabot. Thank you. I said three questions. The second 
one is should the faith-based initiative, the President's 
proposal that he has been pushing for some years now, should it 
focus on greater coordination with microlenders and microloan 
borrowers?
    Mr. Preston. I think that is a very interesting concept 
and, I mean, there are faith-based organizations out there. 
What I would say is I am not informed enough to be able to give 
you a good response but I think that would be a thoughtful area 
of investigation. We would be happy to talk to you about it.
    Mr. Chabot. Thank you. Finally, some believe that the 
common redesign, kind of a continual process is my 
understanding, of the SBA web site sometimes makes it difficult 
to find items. For example, public information on activities by 
bank lending partners cannot be found by a link on the SBA 
homepage. Another example is it is difficult, if not 
impossible, to find out who is the acting general counsel on 
the web site and there is no link to the general counsel's 
office. Can the SBA design a homepage with intuitive links to 
all those items that are available on the web site? In other 
words, can you improve the web site?
    Mr. Preston. We have, in fact, probably two months ago 
launched an entire redesign of that web site. It is 
dramatically more user friendly. It is much easier to get where 
you need to go. I get on it and look for stuff myself to see. 
Interestingly enough I was looking for lending partners 
recently and had a hard time finding it so it is going to take 
an evolution. But it is an improving process and it is 
dramatically better than it was just a few months ago. Any 
issues or suggestions that you all have, or anyone on this 
committee, we would love to hear them because I think it is 
going to give us the ability to continue to improve it.
    Mr. Chabot. Thank you.
    Thank you, Madam Chair. I yield back.
    Chairwoman Velazquez. Thank you.
    I recognize Mr. Altmire.
    Mr. Altmire. Thank you for coming for us, Mr. Preston. This 
Committee has taken a look at the matchmaker program for which 
you provide $6.6 million in funding for 2008. Over the last 
four years SBA has allocated in excess of $20 million for this 
program to generate $34 million in small business contracts. 
Less than 5 percent of the participants even get contracts.
    With funding for the agency so scare, and I believe that 
chart will show a 60 percent reduction in funding since 
President Bush took office, wouldn't it make more sense to 
redirect this funding to one or more of the programs that have 
been cut or flat-funded for 2008 such as Prime, the Microloan 
Program, Women's Small Business Centers, or the Small Business 
Development Centers?
    Mr. Preston. I think it is a very fair question. I don't 
know that we do--in fact, I don't think we do a great job of 
capturing the whole benefit of that program. That is an 
enormously popular program with small businesses, with large 
businesses, and with people in the districts where we have had 
them. A lot of those small businesses walk away with contracts 
from other big businesses that never show up. I think the 
program has a much broader impact that is implied by those 
numbers but I appreciate the question and I would look forward 
to talking with you more about that.
    Mr. Altmire. Okay. Different subject. It is our 
understanding that SBA approves nearly 2,000 companies into the 
Hub Zone Program each year but only 600 program examinations 
actually occur each year. At this rate how is the agency going 
to keep up ensuring that all companies receive examinations?
    Mr. Preston. Well, we continue to cycle through those 
examinations. The intent of that program isn't that every 
single business gets reviewed in a short period of time. it is 
more of a structure where you dip in periodically to ensure 
that there is compliance there. There are other programs where 
we have annual reviews for every company. It is very expensive. 
I'm not sure in the Hub Zone Program you would see the benefit 
of that additional workload.
    Mr. Altmire. Okay. I am sure you understand that SBA Zone 
IG has raised concerns about the program. Nearly 60 percent of 
companies are not eligible after their program examination. 
Eighty percent aren't eligible even three years after approval. 
When this happens companies like those in my district lose 
contracts to program participants who aren't even eligible so I 
would suggest that some more oversight is needed. Given that 
only $2 million is requested for the program while the cost 
have averaged more than $7 million, doesn't this just 
exacerbate the fraud that the IG has already pointed out?
    Mr. Preston. I think that the numbers you are referring to 
have to do with line items. I think the investment net program 
is a bigger number and you see that, I think, in table 8. There 
is an allocated cost number that will give you the full view of 
the program. Historically we have had a line item for Hub Zone 
which didn't reflect all the money we were spending in Hub 
Zone.
    Mr. Altmire. Thank you.
    Chairwoman Velazquez. I recognize Mr. Gonzalez.
    Mr. Gonzalez. Thank you very much, Madam Chair.
    Welcome, Administrator Preston. A couple of questions I had 
but actually as a result of questions posed by my colleagues, 
there was a remark you made that said regarding making the 
President's tax proposals permanent that small businesses 
cannot pass on business to their heirs. I think that is what 
you said and I just wanted to make sure that is what you meant.
    Mr. Preston. I don't remember my exact words but to the 
extent there is a significant estate tax on small business 
owners, it is very expensive for them to pass on business to 
their children.
    Mr. Gonzalez. Do you have specific examples of a small 
business, small farm, small ranch rendered incapable of passing 
on to their heirs?
    Mr. Preston. I don't have any today but I think all you 
have to do is think about the cost, the value those businesses, 
apply a tax rate, and you will get a pretty clear picture of 
what the cost will be.
    Mr. Gonzalez. I understand theoretically but we have had 
this debate over a number of years and I guarantee you that my 
colleagues on the other side of the isle every time we have an 
estate tax debate and they are talking about the small 
business, the small farmer, the small ranchers, they can't seem 
to come up with an example. Let me put it this way.
    On our side of the isle we have always wanted to extend, 
expand, increase the cap on which an estate would be exempt 
which I think is the reasonable approach rather than 
eliminating it totally. When I have administrators come from 
the Administration and tell me and represent and continue to 
represent that it is hurting small businesses, all I am asking 
is for the proof. If you can give me specific examples, show me 
Farmer Brown, show me Mrs. Jones' small business, and we will 
have a good faith discussion. I am just really concerned when 
we have representatives from the Administration coming in on 
that particular issue.
    The other question I have is when I have met with my 
lenders in San Antonio that participate in Small Business 
Administration sponsored programs, and I understand they have 
to basically protect their investments and such, but what they 
tell me is if you make it less attractive for them, it is 
possible that you will have fewer lenders participating in the 
programs.
    As you contemplate changing the whole scheme to the lenders 
as to what their profit margin may be and so on, are you also 
anticipating that it may cause as a consequence fewer lenders 
participating in a SBA loan program?
    Mr. Preston. I don't think we are changing the cost margin. 
I probably don't understand your question but we are not doing 
anything to change the margins.
    Mr. Gonzalez. In the past on 7(a), and this is what the 
lenders were telling me, that as you approach them that there 
were repercussions to any change in the program. My 
understanding is that there are monies being made available, 
that it is a subsidy and so on. I am just saying that may not 
be the only program. It may not be the only product that these 
lenders are engaged in. There are consequences to everything we 
do. That is my only observation that I wanted to make.
    Mr. Preston. We are, in fact, reusing those fees this year 
to the lender in the 7(a) program. I appreciate the concern. 
Certainly if you have any examples, specific examples, 
Congressman, we would love to understand those because we learn 
from those.
    Mr. Gonzalez. Now I just want you to try to reconcile 
something for me. I will show you the newspaper article in a 
minute. What is the difference in the budget request for SBA in 
2008 from 2007? Is it an increase? Is it a decrease? I have got 
newspapers reporting that, ``The next SBA budget calls for a 30 
percent cut in funding.''
    Then I have got, ``SBA's fiscal year 2008 budget request 
reflects the President's commitment to American small 
businesses and the role they play in our economy,'' which is 
your statement that, in fact, is this Administration and in 
this budget and is the SBA actually reducing budget requests? 
How do you reconcile that this represents a commitment by the 
Administration to small business?
    Mr. Preston. We are asking for an increase in the budget 
for the operations of the agency which is what we use to 
administer our programs, our 1,000 person field network, the 
2,000 plus people at the agency to do the good work of the SBA 
every day. That represents 86 more people from '06 to the end 
of '08. For that portion of the budget we are asking for an 
increase. For the disaster budget we are asking for funds based 
on an average experience of disasters in this country.
    That money does not show up as a line item in the budget 
because it has already been appropriated by Congress but it is 
in a different bucket. We are asking for it to be moved so we 
can use it for administrative expenses. That is how those two 
components work. When I think about what we have to run this 
agency, I think of it as an increase which is after years of 
reductions at the agency.
    Mr. Gonzalez. My time is running out. Regarding 
administrative cost and personnel and such, we do have a 
situation in San Antonio that is, in my opinion, reaching a 
crisis level. I know this is parochial in nature but I have 
heard other members of the Committee actually refer to it. 
``Chambers upset with SBA delay.'' I have my Chambers of 
Commerce, I have got my mayor all upset because we don't have a 
Director in SBA in the office there for some time.
    I know you are going through all sorts of gyrations 
attempting to find someone but I would really suggest that you 
check with the business community and business leaders, elected 
officials at the city level to see where the talent really lies 
within your offices when you are looking for the search.
    Madam Chair, am I out of time? Thank you very much.
    Chairwoman Velazquez. Mr. Gonzalez, the Administrator 
forgot to mention that 17 out of the 25 core programs have been 
either cut or flat-funded or eliminated from 7(a), 7(j), 
Business Link, Hub Zone, Microloan, Microloan Technical 
Assistance, New Markets, Prime, SBDC, SBDIC Debentures, and so 
on.
    Now I would recognize Mr. Jordan.
    Mr. Jordan. Madam Chair, I am fine, Thank you.
    Chairwoman Velazquez. Thank you.
    Ms. Moore.
    Ms. Moore. Well, thank you, Madam Chair.
    Thank you, Administrator Preston, for giving this time. The 
list of programs that have been cut or flat-funded that the 
Chairwoman just articulated really feeds right into my 
question. My question is as I reflect upon your testimony, I 
was very excited to see on page 2 where you said the agency has 
a renewed focus on insuring that its products and services are 
accessible to entrepreneurs in the nation and most under-served 
markets and those with higher rates of unemployment and 
poverty, lower rates of economic progress, and that the budget 
reflects that renewed focus on these populations.
    Then as I look through all the programs that have been cut 
or flat-funded, and you have heard other members talk about the 
zero subsidy program and intermediaries who have a higher 
interest rate just aren't going to be able to do these 
programs. They are simply not going to be able to use this 
product. No technical assistance. The exchange you had with Mr. 
Gonzalez, in fact, the SBA has cut its work force by a third. 
The New Market Venture Capital Program no funding. Program for 
Entrepreneurs, no funds requested. SBIC totally on fees. The 
8(a) not having been modernized since 1988.
    Then further in your testimony you talk about SBA 
implementing a rigorous state of the art risk management 
program based on industry standards which to me means you are 
more conservative, not taking risks, not really being able to 
help that category of businesses that can't get capital on the 
industry standards. 7(a) Program mentioned here, your largest 
guaranteed program with no budget authority, zero subsidy, fee 
increases for both lenders and borrowers.
    Then when you say you are consolidating all of your 
guaranteed programs, that tells me that there are fewer dollars 
per program to mitigate that risk. I don't understand what the 
tie-out is between this renewed commitment to low-income 
communities and entrepreneurs and the very, very conservative 
approach that the budget takes. Thank you for your patience in 
listening to my question, Mr. President.
    Mr. Preston. I think we are doing a lot of things that are 
going to be very important for those communities. Obviously, 
Congressman, you are close to the UEP. You were instrumental in 
getting it launched in Milwaukee and thank you for that. This 
is a terrific outreach opportunity for the agency and for 
related support groups. We are looking right now at a broad 
role out of that and how we can do that very cost effectively.
    Ms. Moore. The SBA is not putting one dime into the UEP. 
None. My earmark for UEP got wiped out but that is another 
story for another hearing. The SBA is not putting a dime into 
the UEP.
    Mr. Preston. What I would say in a lot of these areas like 
when we talk about having a product that will work better for 
communities in the cities, when we talk about having more 
effective outreach in our district offices, our SBICs actually 
do a lot of investing in under-served markets. A lot of this 
has to do with a couple of things, making sure we have the 
right products, the right outreach.
    We have over 1,000 people in the field that we direct on 
the most important activities every day. We can expand, I 
believe, that UEP by helping local areas use the same 
technology backbone that some of the UEPs are using to have a 
good network in place, by working toward district offices to 
coalesce business partners, to enable urban entrepreneurs to 
get the support.
    I think there are a lot of things that we are doing and can 
do that don't always translate into dollars in the budget. That 
is the focus which we are looking at, doing the best we can as 
creatively as possible by operating the place more effectively 
and renewing our focus on those opportunities.
    Ms. Moore. Are you saying you are just relying on the 
private sector to generate economic activity in our 
communities? I mean, I will yield to the Chairwoman.
    Chairwoman Velazquez. Time has expired.
    Ms. Moore. I thought you were motioning for time.
    Chairwoman Velazquez. We will do a second round.
    Ms. Moore. Okay.
    Chairwoman Velazquez. We will come back to you.
    Now I would like to recognize Mr. Braley.
    Mr. Braley. Thank you, Madam Chairwoman.
    Mr. Preston, as someone who has been a small business owner 
and who has represented a number of small businesses I look 
forward to working with your agency to improve opportunities 
for small business. My question is very specific. In fiscal 
year 2005, which is the most recent year for which data is 
available, Iowa ranks number 49 of all states for the total 
dollar value of Government contract dollars awarded to small 
businesses in a particular state.
    Yet, Iowa has one of the highest percentages of small 
business and this is particularly dire for women-owned 
businesses which receive only 1.1 percent of federal 
contracting dollars awarded to Iowa companies despite the fact 
that they represent 25 percent of the small businesses in Iowa. 
You testified previously that the SBA wants to fill these nine 
procurement center representatives who are responsible for 
helping small businesses get contracts. There aren't any in 
Iowa. Is the SBA going to place one there?
    Mr. Preston. We don't have all of the locations planned 
yet, Congressman, and we would be happy to talk with you in 
your office about that possibility and where would it best be 
located if it were in Iowa.
    Mr. Braley. I will look forward to that opportunity. Along 
that same line, can you identify three initiatives that the SBA 
has taken or plans to undertake to increase Government 
contracting opportunities for small businesses in my state?
    Mr. Preston. I can address the issue more broadly. Frankly, 
I think we are doing a lot. We have just announced a couple of 
months ago tighter recertification rules which diminish the 
number of larger businesses that are getting small business 
contracts. We are instituting score cards for all the federal 
agencies which we will be rolling out shortly which provide 
much greater transparency into the performance of all the 
federal agencies in meeting your procurement targets.
    We are working hard with all the federal agencies to scrub 
their data to make sure that truly small businesses are coded 
as small businesses in the federal procurement system to ensure 
that small businesses are getting those contracts. We are 
working on a number of projects right now to simplify the 
process of putting small businesses and federal contractors 
together in addition to hiring the new PCRs. I believe all 
these things will be very beneficial to small businesses trying 
to get Government contracts.
    Mr. Braley. Going back to your first point about re-
certification and the point you made in follow-up about greater 
transparency, is that re-certification process going to result 
in increased transparency or the public to become aware that 
there is no abuse of that system by large businesses who are 
certifying as small businesses?
    Mr. Preston. The re-certification will tighten up the rules 
so that, for example, small business that is acquired by a 
large company can no longer be a small business in a contract 
that it already has. What I believe will provide more 
transparency is getting the data from the federal agencies 
cleaned up and we intend to make that data public.
    In addition what I think will increase transparency is by 
scoring every one of the federal agencies on their performance 
on small business contracting and making that data public. 
Transparency, I think, will be very important in moving forward 
in this whole area.
    Mr. Braley. As the Chair of the Subcommittee--
    Chairwoman Velazquez. Will the gentleman yield?
    Mr. Braley. Yes.
    Chairwoman Velazquez. Mr. Preston, when is the data going 
to be made public?
    Mr. Preston. The data will be made public as soon as we get 
it clean. We have gotten it from a number of federal agencies. 
As you can appreciate, Madam Chairwoman, there are millions of 
entries into this system and I don't have all the clean data at 
this point. OMB and I jointly sent this letter to all the 
agencies. We are working actively with the small business 
procurement people in those agencies.
    Chairwoman Velazquez. Mr. Preston, we did this. We did it 
with a staff of 10 people. Why is it that you can't do it?
    Mr. Preston. I think what your team did is you took a look 
at what was in there and you highlighted businesses that were 
obviously large. We are asking the agencies to go back to all 
of their procurements, many of which I think probably wouldn't 
be on the radar screen if you just looked at them so we are 
really looking for clean data there.
    Mr. Braley. Thank you. Mr. Preston, as the Chair of the 
Contracting and Technology Subcommittee I have got concerns 
about the Office of Technology because I think it is so 
critical to the success of small business owners, especially in 
rural parts of this country and in areas that are under-served 
by access to technology. One of my concerns relates to the fact 
that the separate S&E line item for the Office of Technology 
was not included in the 2008 budget request.
    There is a lot of support on this Committee for the small 
business innovation research program but some of us have 
concern that the Office of Technology does not have the 
resources it needs to adequately direct that program and to 
reach out to small firms throughout the country. This is based 
on these factors. The SBA has not altered the size of the SBIR 
grants to reflect economic adjustments and programmatic 
consideration since it was directed to do so by the SBIR 
Enactment Act of 1992.
    The Committee staff was not able to confirm the completion 
on a searchable database that Congress directed the SBA to 
develop specifically for the Government's work use. We believe 
that more work needs to be done to encourage small businesses 
in this country to apply for SBIR grants. In light of those 
factors, do you believe that the SBA has enough resources 
devoted to the Office of Technology?
    Mr. Preston. First of all, I think the SBIR Program is 
something that is very important to us. It gets important 
dollars, I think, both for the benefit of the Federal 
Government and for the small businesses it supports. I would be 
happy to take up those specific concerns with you to determine 
whether or not we should be doing something. I would like to 
leave it at that.
    Mr. Braley. Would you be willing to return for a 
Subcommittee hearing where we talk about the Office of 
Technology and these technology related issues?
    Mr. Preston. Sure. Absolutely.
    Mr. Braley. I would very much appreciate that.
    Chairwoman Velazquez. I recognize Mr. Johnson.
    Mr. Johnson. Thank you, Madam Chair.
    Mr. Preston, I am a brand new member of the Congress and 
this is my first Committee meeting of the Small Business 
Committee. The other day I had the occasion to attend a meeting 
of this Committee where we were kind of putting together our 
Subcommittee assignments and that kind of thing. In my being 
naive I asked a question and the question was what is a small 
business so there was some discussion about that.
    I find that question begs for an answer. I understand that 
since 2004 your SBA Office of Science Standards has been 
undertaking an overhauling of the size standards methodology. 
This with an eye towards establishing some ground rules as to 
what is a small business because if you don't have that, then, 
of course, large businesses can come in and get small business 
contracts. Can you tell me when will your office complete this 
overhaul?
    Mr. Preston. I think coming into this role I shared your 
confusion over what a small business is.
    Mr. Johnson. I don't have a lot of time. I just want to ask 
you to give us a date as to when that will be completed.
    Mr. Preston. We continually look at the size standards and 
we have some size standards that we are looking at right now. I 
have a meeting, I know, with my staff next week on particular 
industries right now that are under review.
    Mr. Johnson. Because you realize that with no size 
standards then it is like a big loop hole the size of the Grand 
Canyon that allows for businesses other than small businesses 
to feed at the trough, if you will.
    Mr. Preston. There are size standards in place for all 
industries in federal contracting. The issue is, is it the 
right size given the industry it is in and that is the work 
that we continue to do. We continue to refine that.
    Mr. Johnson. So you are saying that is just a continuing 
process?
    Mr. Preston. Because you have so many different industries. 
Some of them might be fine and some of them might be a little 
off.
    Mr. Johnson. I will tell you, another concern of mine has 
been the fact that there have been surveys conducted of small 
business owners who are not satisfied. They have a low level of 
satisfaction with the Small Business Administration and their 
ability to get relief. While large businesses have continued to 
move employees off shore and small business has been the 
economic mainstay of our employment base here in America and in 
the 4th District of Georgia, which is what I represent, the SBA 
has continued to since 2001 cut its employees. In 2001 there 
were 3,017 employees nationwide in this vast country of ours 
but 2008 projection is just 2,000. Does this reduced work force 
reduce the productivity of your agency?
    Mr. Preston. I think the 2,123 people we are asking for for 
2008 is an 86 person increase over '06 so we are looking to go 
back up in the number of people we have. It is lower than where 
the agency was a few years ago. I think that is primarily 
attributed to the centralization of a lot of activities that 
were heavily processing based.
    Mr. Johnson. Has this diminution in your employee base cut 
your productivity as far as delivering services to small 
business?
    Mr. Preston. Our services have all gone up. I mean, our 
loan volume has gone up, the counseling sessions throughout the 
network, the number of Government contracts we support.
    Mr. Johnson. That is great news. It will be surprising to 
many. Let me ask one last question. Your procurement center 
representatives who examine bundled contracts for opportunities 
for small businesses, do we have enough of those?
    Mr. Preston. We are asking to add nine which we think will 
provide us with a 16 percent increase in the number of PCRs out 
there. We are looking forward to getting those people on board 
and having them be productive because they perform a very 
important service and they will help us get after many of the 
issues that you are focusing on.
    Mr. Johnson. Thank you.
    Chairwoman Velazquez. Now I recognize Mr. Larsen.
    Mr. Larsen. Thank you, Madam Chair.
    Administrator Preston, thanks for taking some time with us 
this morning. I wasn't here earlier to hear testimony but I 
will review it at some point in the future. Hopefully I am not 
repeating some questions that were asked. I just have really 
two sets of questions, questions on two separate topics. The 
first is regarding the SBDCs. Certainly in Washington State I 
would argue they have a very successful track record. Not only 
in the state but in my district a great track record in helping 
small businesses.
    I think in response to Mr. Sestak's question, I think you 
answered part of my question that I have. The question was why 
are you cutting funding for SBDCs. What I heard you say 
essentially, that kind of question, was that the federal 
dollars are not the primary source for the small business 
development centers. Is that correct?
    Mr. Preston. Well, yeah. First of all, the funding would be 
flat and it is not the primary source of funding.
    Mr. Larsen. The idea would be that they continue to raise 
additional dollars to support other activities outside the 
dollar allocation they receive from the SBA?
    Mr. Preston. That is correct.
    Mr. Larsen. And then you wanted to help increase their 
capacity to do that? Did you say that as well?
    Mr. Preston. We are specifically working right now and we 
are at the front end of this with Women's Business Centers on 
how to bring best practices to bear. That may be a model that 
we can then take to SBDCs. The SBDC network is much more 
developed and has resources and that type of thing so it may 
not be necessary but, yes.
    Mr. Larsen. It begs the question what is the appropriate 
split between raising outside funds and providing services to 
entrepreneurs? As you go through this consider that because 
spending some of your time on trying to raise outside money you 
are not spending that time on providing services to small 
businesses and entrepreneurs.
    The argument I can understand you are making. I can 
understand your argument. All the dollars are from the Federal 
Government, SBA. I appreciate that you need to get outside 
funds but there is a balance for these folks because they are 
busy trying to do their work to help people create work and 
create wealth for others. I hope you take that into 
consideration as you are analyzing the outreach.
    Mr. Preston. Thank you.
    Mr. Larsen. I am full of great advice. You are going to get 
lots more. Don't worry about that. It is also unclear to me 
what the funding request is for SBA's Office of International 
Trade. I think you discussed again in response to Mr. Sestak's 
questions some things about expert assistance centers but can 
you give me an overview of all OIT will be funded? Is there a 
cut or programmatic changes?
    Mr. Preston. I think the number for '06 is $4.3 million. 
The number for '08 is $5.2 million so that is about a $900,000 
increase in that office.
    Mr. Larsen. Okay. That is good to hear. Last year I 
introduced a bipartisan bill, a friend of mine from Illinois, 
Mr. Kirk, the US-China Engagement Act. One of the things that 
we are asking for is some additional help for small and median-
sized businesses to encourage export promotions, specifically 
to China. There is obviously a lot of talk around about China 
and China and trade. Certainly there are a lot of concerns 
about that.
    Also being from the most trade-dependent state in the 
country, Washington State, I want to take another view on that 
a little bit and try to promote and find ways to get our 
products out of the country into the hands of the Chinese for 
their consumption, not so they can steal intellectual property 
associated with it. Part of that, I think, is export promotion 
for small and medium-sized businesses in this country. As we 
move forward on reintroducing that bill this year, I hope to 
touch base with you and see what we can do to improve a section 
on that as well.
    Mr. Preston. We look forward to talking to you. We just 
signed a MOU with China to work with them to open up their 
borders for small business export to China so we look forward 
to engaging with you on that.
    Mr. Larsen. Excellent. Thank you very much.
    Thank you, Madam Chair.
    Chairwoman Velazquez. Well, how we are going to go into the 
second round of questions. If members wish to stay, then you 
will be able to ask more questions. Mr. Chabot.
    Mr. Chabot. Thank you very much, Madam Chair. I will be 
brief. First, Mr. Administrator, what happens if an office in 
the SBA doesn't meet its performance goals? What do you 
generally do in that circumstance?
    Mr. Preston. Well, what we typically do, we are in the 
process right now, first of all, of looking forward to what 
those performance standards are in all these program offices. 
The answer is a little premature because we are beginning to 
look more at what they need to be doing.
    To the extent that we don't meet those objectives, what we 
need to do is dig down and understand why? Are there 
operational processes? Is it a funding issue? Is it because we 
don't have the right relationships with our bankers or other 
people outside the agency that we work with and get on with the 
business of rectifying those issues.
    Mr. Chabot. Do you believe there is a gap in the market? 
Does it exist for start-up equity capital? If so, what can be 
done about that?
    Mr. Preston. I think there is a very robust market out 
there for start-up equity capital. That having been said, I 
think our SBIC program does expand that market. As such, I 
think they support a critical need that may not be supported if 
they weren't there.
    Mr. Chabot. Finally, I know being in your seat it sometimes 
feels like you are in a trial and you are being cross-examined. 
There have been a lot of questions. Are there any questions 
that you would like to elaborate on or anything that you wanted 
to maybe give a more complete answer than you were able to 
give?
    Mr. Preston. No. I think you all have been very kind in 
little we talk pretty fully. What I would say is there are a 
number of things we are trying to do that we don't think are 
entirely budget dependent and there are other things that we 
are trying to do that are budget dependent. I think it is 
important for me to send a message that we are trying to 
continue to operate the agency more effectively and expand our 
impact in that way in addition to what we need budget for. I 
think that is a very important focus of the agency going 
forward.
    The other thing I would like to do is just encourage people 
to meet with us informally to see how we are advancing the 
agency because I think we have a lot of good news to report 
today and we will have a lot more good news in the future.
    Mr. Chabot. Thank you. I yield back.
    Chairwoman Velazquez. Mr. Johnson, do you have any other 
questions?
    Mr. Johnson. No questions.
    Chairwoman Velazquez. Mr. Preston, I do have more 
questions. I would like to talk to you about the massive 
problem with small business contracts being awarded to large 
businesses in FY 2005. As an example, some of the entities 
counted as small were Microsoft, Pitney Bowes, Rolls Royce and 
the U.S. Air Force. To deal with this problem SBA proposed a 
regulation to require companies to re-certify their business 
size every five years and to prohibit agencies from taking 
credit for them if they were no longer small.
    This solved only 20 percent of the problem leaving 80 
percent of the problem, most notably, large businesses. Those 
businesses that were small and grew or were acquired that 
represents only 20 percent. Why did SBA choose not to address 
the biggest problem of awards to large businesses?
    Mr. Preston. I think, first of all, we have had many 
conversations with the other agency about this issue. I think 
there is a significant amount of miscoding in those numbers. 
The first line is to get them to go back clean up their data, 
get the right data put together, and in the future ensure that 
when they submit those numbers that indicate small business 
contracts, they are right the first time. I don't think we can 
tolerate that level of data inaccuracy.
    Chairwoman Velazquez. What you are saying is that you are 
giving us a commitment that you are going to be checking the 
contract coding data before it goes out?
    Mr. Preston. I am giving you a commitment that I am going 
to make it public to the extent that I can do that. It is 
public right now in FPDS-NG.
    Chairwoman Velazquez. But that you will make sure that they 
are not large corporations or ineligible to get the contracts 
intended to go to small business?
    Mr. Preston. I think the responsibility of that data needs 
to lie with the other federal agencies who are submitting it. 
They are the ones that are responsible for it. They are working 
very hard on getting it right. I would not commit to you at 
this point that we are going to go and audit all of the small 
business contracting data.
    Chairwoman Velazquez. Then you will say that you will 
qualify the data as estimated instead of the usual stand of 
stating as fact that small businesses receive a certain amount 
of contract awards making it clear that there might be some 
errors?
    Mr. Preston. We had not considered that route, Madam 
Chairwoman, but we would be happy to talk to you about that.
    Chairwoman Velazquez. Sure. I know that the SBA is not 
licensing any new SBIC participating security firms. However, 
by not providing existing participating security firms with the 
maximum leverage that the SBA had agreed to provide, many SBIC 
will be unable to fulfill their initial business plans. This 
could impair the SBICs and also adversely affect the small 
businesses that these SBICs have invested in. What is the 
agency doing to assist these SBICs that are expecting and need 
additional leverage?
    Mr. Preston. First of all, to my understanding we are 
meeting all our contractual commitments there. Any initial 
commitment letters we made we communicated heavily with the 
agency to let them know what that meant. Now, on future 
commitments for these participating securities SBICs we are 
working right now with the industry to see if there is a 
solution that would allow them to get additional capital that 
they need.
    In fact, we were on the phone with representatives of the 
industry yesterday. Hopefully we can support them in a way that 
works for all of us. I do want to highlight we are not 
breaching any contractual commitments in this and I think we 
communicated well with the industry as these agreements were 
expiring.
    Chairwoman Velazquez. Okay. Let us talk about the Women's 
Procurement Program. It was created on December 21, 2000, 2,238 
days ago. As you know, the U.S. District Court for the District 
of Columbia has already found more than a year ago that the SBA 
has unreasonably delayed the Women's Procurement Program. My 
first question is when will the study of under-represented 
industries be done?
    Mr. Preston. Okay. First of all, I appreciate the concern. 
It has taken too long. I am committed to getting the job done. 
We spoke with the RAND Corporation yesterday. They expect to 
have the final report to us in 10 weeks.
    Chairwoman Velazquez. Ten weeks?
    Mr. Preston. I will make that report public even if it is 
before any final rule is proposed. You will have the ability to 
see it as well as everyone else.
    Chairwoman Velazquez. When will the regulations be done?
    Mr. Preston. We will begin working on those regulations 
when we think that we have enough preliminary data. We have 
gotten a long way on the procedural aspects of it. We need to 
see the data to determine under-represented industries. I can't 
give you a hard time line right now until I see that.
    Chairwoman Velazquez. How about an estimate of how long?
    Mr. Preston. I would expect to be in the interagency 
regulatory process prior to the publication of that report. At 
that point we would hope once it gets published we would like 
to make it an interim final rule so people would have the 
ability to see what it is before it goes final.
    Chairwoman Velazquez. Would it be fair to say June?
    Mr. Preston. June is a possibility. Maybe a little bit 
longer. As I said before, I am committed to move this along as 
expeditiously as possible and to share with you our progress 
along the way.
    Chairwoman Velazquez. So when will the program be up and 
running?
    Mr. Preston. I am hoping we will be through this regulatory 
process this summer.
    Chairwoman Velazquez. Summer? Fall?
    Mr. Preston. This summer I am hoping to be through the 
regulatory process. The only--
    Chairwoman Velazquez. The program up and running?
    Mr. Preston. What do you mean the program up and running?
    Chairwoman Velazquez. Contracts.
    Mr. Preston. Obviously those contracts are to the agencies 
to provide but we will have a framework in place. I As I 
mentioned starting out, it has taken me a very long time. I 
committed to the Senate when I did my hearings. I have 
committed to various women's groups to put my energy behind 
this and get it done and do whatever I can to move the process 
along.
    Chairwoman Velazquez. It was passed into law in 2000 and 
women contractors are losing out. Mr. Preston, in November of 
last year along with the new re-certification regulation SBA 
and OMB announced the agency score card. Each agency will be 
graded traffic-light style by OMB and SBA. My first question is 
will there be measurable standards for evaluation or will they 
be subjective and would you please outline what those standards 
will be?
    Mr. Preston. I think there will be both. I think there will 
be measurable standards which have to do with numerical targets 
both for small business procurement over all and in each one of 
the preference groups. There will also be other targets that 
will require agencies to show progress in areas like enforcing 
subcontracting, data quality, and commitment from the top to 
show a strategy to meet small business objectives. I think it 
is an important merging of both.
    Chairwoman Velazquez. Mr. Preston, one of the biggest 
obstacles to small businesses in trying to do business with the 
federal market place is contract bundling. My question is why 
doesn't the score card look at the agency's propensity to 
bundle contracts?
    Mr. Preston. I think the score card will take into account 
a number of factors that would lead agencies to do bundling but 
we will be looking at their hitting their numbers, their taking 
specific actions to improve small business procurement. The 
score card is fairly all encompassing and my hope is that it 
would discourage bundling. I would also say with our additional 
PCRs and some of the technologies we are putting in place I 
hope the agency will be able to look at more bundles to 
determine whether or not they are going to be effective.
    Chairwoman Velazquez. I have here a copy of a score card. 
No place here do you mention contract bundling.
    Mr. Preston. It talks about strategies to get small 
business contracts, to grow small business contracts. It talks 
about tone at the top. It talks about any number of other 
factors that will get contracts to small business which 
should--
    Chairwoman Velazquez. It would be nice to recognize the 
number one issue facing small firms with the federal market 
place, contract bundling. Another element in the score card is 
whether or not the agency has implemented a strategy to 
increase the number of competitively awarded contracts to small 
businesses. A number of small business programs rely on sole 
source contracts. This seems to penalize agencies that use 
programs such as 8(a), Hub Zones, and service disabled veterans 
because agencies wouldn't get credit for using these businesses 
in the score card. Why are these programs not included?
    Mr. Preston. Madam Chair, my understanding was that the 
score card encouraged the use of procurement from all small 
business categories so if there is some confusion in that score 
card or if I misrepresented something, I would love to talk to 
you about it and see how we can adjust it.
    I do also think it is important that this score card be 
something that evolves over time to meet the needs of the small 
business community. If we see that there are shortfalls in it, 
for example, if bundling isn't addressed firmly enough, we 
should consider whether or not any adjustments need to be made.
    Chairwoman Velazquez. My guess is that you need to go and 
revisit this because you have here that the agency will look if 
the agency has implemented a strategy to increase the number of 
competitively awarded contracts to small businesses. It doesn't 
include set-asides.
    Mr. Preston. The procurement targets would allow set-asides 
to be included, I think. Let us talk about that. I welcome your 
input. Thank you.
    Chairwoman Velazquez. We need to make it clear.
    Mr. Preston. Okay. Thank you.
    Chairwoman Velazquez. Lastly, the proposed score card will 
measure top-level agency commitment. Many agencies will argue 
that this will mean that if they hold a lot of small business 
conferences regardless of whether companies get contracts or 
not, that then they have demonstrated commitment. Can you 
briefly explain how commitment will be evaluated?
    Mr. Preston. I think commitment will be evaluated in a 
number of ways including actual actions they take, 
communications that they make to their contract and work force 
to encourage those actions, measures they are taking to get 
those contracts in place.
    Chairwoman Velazquez. Why not if companies are getting 
contracts?
    Mr. Preston. I think big companies are getting contracts. 
Data accuracy is in there so if big companies are getting small 
business contracts, that will be a penalty on the score card.
    Chairwoman Velazquez. Okay. Well, Mr. Preston, let me just 
bring this so that we can clear this transparency issue with 
the agency. Last July the Committee issued a report identifying 
$12 billion in contracts that were misquoted and went to large 
businesses that were intended to go to small businesses. The 
first move of the administration after that report wasn't the 
re-certification regulation.
    Rather, it was to conceal portions of the main database 
used to determine whether companies are large or small. We are 
constantly hearing the need for transparency in Government. In 
fact, the SBA has claimed that transparency is one of the 
reasons for the new regulation. Explain to me how concealing 
this type of information gets us closer to solving this 
problem?
    Mr. Preston. I am not sure what you are referring to in 
terms of information being concealed.
    Chairwoman Velazquez. We don't have access anymore to the 
size of the companies. It was taken off.
    Mr. Preston. I will have to look into that offline. I am 
sorry but I am not familiar with the issue.
    Chairwoman Velazquez. We can't do our job of oversight if 
we don't have access to the data so we need to work with your 
staff to make sure that is available.
    Mr. Preston. We look forward to doing that.
    Chairwoman Velazquez. Thank you. Mr. Chabot, do you have 
any other questions?
    Mr. Chabot. No, thank you.
    Chairwoman Velazquez. Let me thank you again. I have to say 
this has been one of the most open and honest participation of 
an Administrator defending the budget that you are submitting 
so thank you for your openness.
    Mr. Preston. Appreciate it. Thank you very much.
    Chairwoman Velazquez. I look forward to continuing to work 
with you in making sure that the Small Business Administration 
continues to do your job providing the assistance to small 
business so that they can continue to grow and expand. We will 
do our part here to make sure that you have the resources.
    Mr. Preston. Thank you very much.
    Chairwoman Velazquez. Thank you. Hearing adjourned.
    [Whereupon, at 12:17 p.m. the Committee adjourned.]

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