[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
DISASTER SAVINGS ACCOUNTS:
PROTECTIONS FOR SMALL BUSINESSES
DURING A DISASTER
=======================================================================
HEARING BEFORE THE
SUBCOMMITTEE ON FINANCE AND TAX
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
HEARING HELD
SEPTEMBER 17, 2008
__________
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
Small Business Committee Document Number 110-112
Available via the GPO Website: http//www.access.gpo.gov/congress/house
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HOUSE COMMITTEE ON SMALL BUSINESS
NYDIA M. VELAZQUEZ, New York, Chairwoman
HEATH SHULER, North Carolina STEVE CHABOT, Ohio, Ranking Member
CHARLES GONZALEZ, Texas ROSCOE BARTLETT, Maryland
RICK LARSEN, Washington SAM GRAVES, Missouri
RAUL GRIJALVA, Arizona TODD AKIN, Missouri
MICHAEL MICHAUD, Maine BILL SHUSTER, Pennsylvania
MELISSA BEAN, Illinois MARILYN MUSGRAVE, Colorado
HENRY CUELLAR, Texas STEVE KING, Iowa
DAN LIPINSKI, Illinois JEFF FORTENBERRY, Nebraska
GWEN MOORE, Wisconsin LYNN WESTMORELAND, Georgia
JASON ALTMIRE, Pennsylvania LOUIE GOHMERT, Texas
BRUCE BRALEY, Iowa DAVID DAVIS, Tennessee
YVETTE CLARKE, New York MARY FALLIN, Oklahoma
BRAD ELLSWORTH, Indiana VERN BUCHANAN, Florida
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania
BRIAN HIGGINS, New York
MAZIE HIRONO, Hawaii
Michael Day, Majority Staff Director
Tim Slattery, Chief Counsel
Kevin Fitzpatrick, Minority Staff Director
______
SUBCOMMITTEE ON FINANCE AND TAX
MELISSA BEAN, Illinois, Chairwoman
RAUL GRIJALVA, Arizona VERN BUCHANAN, Florida, Ranking
MICHAEL MICHAUD, Maine BILL SHUSTER, Pennsylvania
BRAD ELLSWORTH, Indiana STEVE KING, Iowa
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania
(ii)
?
C O N T E N T S
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OPENING STATEMENTS
Page
Bean, Hon. Melissa, Chairwoman................................... 1
Buchanan, Hon. Vern.............................................. 2
WITNESSES
Brown, Mr. Charles G., CEO Insignia Bank, Sarasota, FL........... 3
Murphy, Ms. Cynthia, Pies & Plates Prepped & Ready, Punta Gorda,
FL............................................................. 6
Mize, Ms. Maryann, CCIM, Sr. Vice President, Charlotte State
Bank, Port Charlotte, FL....................................... 8
Grayson, Ms. Kate, Owner, Steelgate, Inc., Bradenton, FL......... 10
APPENDIX
Prepared Statements:
Bean, Hon. Melissa, Chairwoman................................... 18
Buchanan, Hon. Vern.............................................. 20
Brown, Mr. Charles G., CEO Insignia Bank, Sarasota, FL........... 23
Murphy, Ms. Cynthia, Pies & Plates Prepped & Ready, Punta Gorda,
FL............................................................. 27
Mize, Ms. Maryann, CCIM, Sr. Vice President, Charlotte State
Bank, Port Charlotte, FL....................................... 30
Grayson, Ms. Kate, Owner, Steelgate, Inc., Bradenton, FL......... 37
(iii)
DISASTER SAVINGS ACCOUNTS:
PROTECTIONS FOR SMALL BUSINESSES DURING A DISASTER
----------
Wednesday, September 17, 2008
U.S. House of Representatives,
Committee on Small Business,
Washington, DC.
The Subcommittee met, pursuant to call, at 2:00 p.m., in
Room 1539 Longworth House Office Building, Hon. Melissa Bean
[chairwoman of the Subcommittee] presiding.
Present: Representatives Bean and Buchanan.
Chairwoman Bean. The recent onslaughts of hurricanes in the
southeast, wildfires in California, and floods in the Midwest
have served as stark reminders that natural disasters have the
ability to devastate local economies. These catastrophes have
wreaked significant fiscal havoc, particularly on America's
small businesses. For entrepreneurs with tight profit margins,
natural disasters can have very serious financial consequences.
Small businesses are the backbone of our economy, creating
over 60 percent of our nation's jobs, and it's important that
they are able to stay afloat following a natural disaster. Yet,
an estimated 40 to 60 percent of small businesses fail to
recover from natural disasters. Today's hearing will examine
one potential method of mitigating small business risk.
The first 48 hours following a natural disaster are
critical. They determine whether a small business will be able
to mitigate losses, or be forced to close their doors. The SBA
plays a critical role in this disaster recovery process. SBA's
disaster loan program, for example, provides low interest loans
and working capital for businesses. This loan plan has been a
lifeline for hundreds of thousands of entrepreneurs. By
providing the resources necessary for both long and short-term
repairs, SBA loans give small businesses the tools they need to
get back up and running.
As invaluable as SBA's loans are, some feel that there are
occasions when additional assistance is needed, and it would be
helpful to have a supplement to SBA's program. In today's
hearing, we'll examine the role that Disaster Savings Accounts
could play in providing such resources.
Proponents contend that by encouraging small businesses to
prepare for future emergencies, Disaster Savings Accounts are a
viable means of bridging the gap between disaster and relief.
According to advocates, Disaster Savings Accounts could cover
both preexisting and future disaster-related expenses, as well
as preventative measures, such as hurricane-resistant doors or
windows.
The SBA already provides entrepreneurs with a number of
essential disaster resources. Today we will discuss whether or
not those services should be augmented. And, if so, by what
means.
I'd like to thank our witnesses for coming here to share
your personal experiences and perspective on these issues, look
forward to your testimony. And now I'll yield to Ranking Member
Buchanan for his opening statement.
[The prepared statement of Chairwoman Bean is included in
the appendix at page 18.]
Mr. Buchanan. Thank you, Madam Chair. Good afternoon. I
want to thank our friends from southwest Florida. It's a region
of the country that we deal with these things every year.
Growing up in Michigan, you never thought much about hurricanes
and these other things, but you had tornadoes. But I appreciate
you coming here and being here today.
We want to take the time--I know you've been busy,
appreciate you taking the time out of your busy schedules to
come before this Subcommittee. I know all of you have traveled
a long distance, so we're grateful for that.
I'd like to thank Chairwoman Bean for this opportunity for
us to focus on some of these challenges small business face in
the wake of natural disasters.
At this very moment, the Gulf Coast region of our country's
cleanup following Hurricane Gustas and Ike, and the cost and
torment of the damage inflicted has yet to be finally realized.
Let's not fool ourselves into thinking that to recover from
these or other natural disasters will be easy, or that every
business will escape foreclosure or failure. The hurricanes
that have engulfed our nation will undoubtedly lead to a flood
of applications of SBA disaster loans, but even this lifeline
for many might be too little too late.
Today we meet to discuss ways to bridge that gap, to hear
the testimony of those who have actually endured the worst
nature has to offer, and to add some of their own thoughts to
this discussion. From my personal experience, both as a small
business owner in this area, and as a representative of
thousands of Florida's small business entrepreneurs that have
been devastated by Charley, I believe one of the most practical
solutions would be to enable small business owners to plan
ahead by investing in a Disaster Savings Account.
I envision these accounts as a rainy day fund administered
by the state of the Federal Charter Banks with tax deferred and
interest deferred accruals similar to that of health savings
account, the 529 qualified education savings account, or
401(k). So when disaster strikes the money will be there for
you, not waiting, not wondering, not worrying, because many
times people get in and never make it out of the business.
The estimate that I read is 40 to 60 percent of businesses
fail after a disaster, so it's a big thing. That's what we were
talking about today at lunch, is if you didn't have the
support, you wouldn't even be here today. That is completely
unacceptable.
Today we can take an important step in empowering small
businesses to meet the challenges of the unexpected with
confidence. The establishment of a Disaster Savings Account
seems to be a common sense mechanism that has numerous
advantages, and very few distractions. It's one of those things
that when you hear about this, you think about why not, why
didn't we do it sooner?
I do want to just say personally, myself having businesses
in that area, as you know more than anybody, because a lot of
you worked in the Charlotte County area, I was on vacation
actually outside of Washington traveling, and I remember that
storm Charley coming up in our region. It was a Category 2, I
remember, on the Weather Channel. It went to a Category 4 like
that. And then it was supposed to go into Tampa, north of
Sarasota-Bradenton, and it came right into Charlotte Harbor,
where nobody was really as prepared as they needed to be. So
these things--and growing up in Michigan, I always thought to
myself it hits the shores, but as many of you know, it went all
the way up through Arcadia and up to Orlando. It went all the
way across the state, so they have a big impact.
So, again, I just want to thank you for the opportunity to
come and visit today, and I, Madam Chair, yield back.
[The prepared statement of Mr. Buchanan is included in the
appendix at page 20.]
Chairwoman Bean. Well, I think we're now going to move to
testimony from our witnesses. Each of you will have five
minutes to deliver prepared statements. The timer begins when
the green light is illuminated, and when one minute of time
remains, the light will turn yellow, and then the red light
will come on when your time is up. And I'll yield back to Mr.
Buchanan to introduce and recognize our witnesses.
Mr. Buchanan. Thanks. Charlie Brown comes to us from
Sarasota Florida. He's also for quite a while in Charlotte
County, so he knows that area very well, as well. You're south,
maybe, what, 50 miles south of Sarasota or so. But he serves as
Chairman and CEO of Insignia Bank. Mr. Brown's previously
served as Chairman of Tier II Banks for the Florida Bankers
Association. He's been Chairman of the Florida Bankers
Education Foundation. He's a frequent speaker on the topic of
disaster recovery plans, and we appreciate the opportunity for
you to be here today. And I'm excited about having two banks,
because I think community banks could have the biggest impact,
positive impact to help small business get back on your feet. I
know that's been the way you've led in terms of your banks over
the years. So thank you, Mr. Brown, for being here today.
STATEMENT OF CHARLES G. BROWN, CHAIRMAN AND CEO OF INSIGNIA
BANK, SARASOTA, FLORIDA
Mr. Brown. First of all, I want to applaud the Committee. I
think as Chairwoman Bean mentioned in her opening statement, in
these very unusual economic times, but also in unusual times as
it pertains to natural disasters, this ought to be something
that ought to be first and foremost on our mind.
Secondly, from a tax incentive standpoint, I'm a big
believer in using tax incentives to create positive behavior.
And especially as it pertains to things like savings accounts.
There's a tremendous multiplier effect that takes place when
that money is re-loaned into the community. It's just a
positive thing for economic stimulus, not to mention in this
case, it would be a fantastic safety net.
Small businesses, I know I'm preaching to the choir here,
but I'm just a big fan. I think we all know when we walk into a
small business, you see the passion in the eyes of the small
business owner, typically resulting in a very positive customer
service experience. And when I ask-I have a habit as a banker
asking the other customers in that room what do you think about
this business? Why do you come here? And it always has
something to do with the owner being very involved.
With that HSA, or with the DSA product in mind, though, I
think the devil is going to be in the details. And, again, this
is part of the process to find out what the initial reaction
might be from the business community.
I still believe as a banker our number one challenge with
small businesses is funding. You can call it capital, depending
on what form it takes, or debt. We all know a lot of businesses
use home equity loans to the extent they were still available,
and credit cards, but one of the things that I've experienced
in the past has been profitability models that will, I guess,
entice lenders, whether they be banks or private lenders, to
lend to small businesses, and to assist them in situations like
this. So, as an aside, I just encourage the Committee to
consider things like tax incentives for lenders to small
businesses.
We were a large SBA lender, one of the largest in the state
back in the early `90s. And back then, we were discussing this
today, the funding just flowed very freely by using the SBA
program, but there was a tax of source that was put in place to
share in some of that revenue. And, sure enough, we closed up
all of our loan production offices and pulled out of the
program. In fact, Mrs. Mize, who is testifying today, was my
successor in that program, did a great job of running it. So,
as with anything, I'd encourage you to look at what the
profitability would be to the small business, but also to those
that might be providing the service.
With something like a DSA, anything that we put in place is
going to have to be regulated and monitored. We know that. That
is a fact of life. The one issue in the package that I received
from the Committee that did a wonderful job, by the way, of
outlining what you had in mind here, that concerned me was the
reference to HSA, Health Savings Accounts.
I would implore the Committee not to follow the structure
of HSAs. If you dig into HSAs a little bit further, you're
going to find that the regulatory burden that had been placed
on the banks, and I realize there was also a statement in the
package that said it would not be on the banking industry,
rather, the small business owner. But the HSA regulatory burden
has literally shut down many community banks from even getting
into the programs. And I think if you were to go do some
research in that area, you'd find that across the board.
Again, it's back to that profit motive. When they looked at
what the penetration rate of that product might be, versus the
regulatory, I guess, burden that comes with it, it just didn't
make sense any more.
One other aspect I'll mention, and I would encourage you to
get a banking regulatory official in here, because if you will,
especially in these times right now, imagine an account that
has been earmarked for disaster. A disaster, we'll go ahead and
use hurricanes because that's what we're talking about, comes
through town. The entire group of funding would then be used
immediately from the banking system. And my concern there is,
and I'm not quite sure what the answer to it is, that it might
be considered something a little bit different than your
typical deposit. So I think it would be very important for the
banking industry to weigh in on that.
The other aspect is this; if 35 percent of the businesses
are using business interruption insurance, we need to make sure
that this product would penetrate at a much higher level. So I
would encourage focus groups and surveys to business owners
laying this plan out, and finding out from them how much of
them would actually use it.
So, in addition to that, promoting the program, and maybe
even the name of the program might be something that would be
under consideration. I understand DSA, HSA works in Washington
to get bills approved, but it may not be as favorable when it
comes to marketing, as I found products with the word
``disaster'' in them don't typically do as well.
So what do I think the solution is? These are some of the
challenges. I believe one of the solutions is the Bridge Loan
Program that I saw work exceptionally well in Florida
immediately after the hurricane. And the reason it worked well
was it was a local program, using local resources through the
EDC and local bankers.
I would encourage the Committee to take a look at that
program as a beta, if you will, on something that could be
rolled up to a federal level. And if you look at the math and
the economics that come along with that program, I think you
might find that the funding requirement is very minimal, if
anything, after all the numbers have been run.
So I know I've taken my time, but I'd be more than happy to
help with this process in the future. As a small bank with less
than 40 employees, I have great passion for my business, for
small business, and most importantly, for our country. So thank
you very much.
[The prepared statement of Mr. Brown is included in the
appendix at page 23.]
Mr. Buchanan. Thank you, Mr. Brown.
Ms. Murphy, I'm excited that you're here, because you
represent really small business of America. I know when my
experience with the Sarasota Chamber in our area, we had 2,400
businesses, a lot of them, 90 percent were 50 employees or
less.
But Ms. Murphy is an owner of a unique gourmet store in
Punta Gorda, Florida called Pies & Plates. Cindee has a
Bachelor's degree from the University of Florida in Public
Relations, and a Marketing Minor, a law degree from the
University of Florida. Before opening her business, Cindee
practiced law for 12 years, was board certified in two
different specialities. Appreciate you coming in and giving
your real world experience about really what happens when you
get hit by a storm like Charley.
STATEMENT OF CYNTHIA MURPHY, OWNER OF THE BUSINESS "PIES &
PLATES", PUNTA GORDA FLORIDA;
Ms. Murphy. Thank you. It's been a rough week for much of
the U.S., the last couple of weeks, I guess, with Hurricane
Fay, Hannah, and Ike, or Gustav, Hannah, and Ike, four
hurricanes hitting the U.S., and also heading at some point in
time for the State of Florida, not all of them hitting
directly, some of them skirting by.
But, Madam Chairwoman, and Members of the Committee, thank
you for inviting me to speak here today. My name is Cindee
Murphy. My husband, Dennis, and I own a retail store and
restaurant in Punta Gorda called Pies & Plates.
On August 13th, 2004, Hurricane Charley devastated our
community, and seriously damaged our home and business.
Hurricane Charley caught us by surprise, as you mentioned. We
expected it to pass miles off shore. It was going to be a
Category 2. We were expecting just windy, rainy weather that
day. And, of course, it turned into a Category 4 and slammed
right into us head-on, devastating our community. Over the next
six weeks, Florida would suffer direct hits from Hurricanes
Frances, Ivan, and Jean, four major hurricanes in a row.
Damages from the 2004 storms exceeded, I think, $42
billion. I'm not 100 percent that's the accurate figure, but
it's close to that. And since then, Florida has been ravaged by
hurricanes Dennis, Wilma, and Fay.
I have to tell you that we were one of the lucky ones. We
had windstorm insurance. There were a lot of businesses who
didn't. And we were treated pretty fairly by our insurance
company, even though it took 90 days before we received our
first check, and took many more months to fully settle our
claim. Except for the nearly $15,000 in deductibles, we were
pretty much made whole.
What I did not have that I desperately needed immediately
after the storm was readily available cash. My business was
young. We'd only been open for 16 months, and we had invested
most of our savings into it. I had not set up a line of credit
at the bank yet, because I hadn't needed one.
My business was damaged, our home was damaged, my mother's
home was totally destroyed. I had homeless employees that
needed assistance from us. Bills kept arriving in the mailbox
even though there was no income flowing into the business. But
the Good Lord was looking out for us. About four days after
Charley hit, two women from Sun Trust Bank walked into my
business and asked me if I wanted to apply for a Florida Small
Business Emergency Bridge Loan.
They right then and there sat down with the application,
helped me apply, and with just in the matter of maybe 48 hours
or so I had a check for $25,000 in my hand. It was incredible.
It was far from what I needed, but it was a good start.
I don't know what we would have done without those funds.
I'm not even sure that our business would have survived if we'd
to wait on insurance proceeds and conventional loans. The funds
enabled us to reopen the restaurant part of our business, not
the retail part, but the restaurant part in just 18 days.
Coffee therapy was badly needed in Punta Gorda, and we became a
gathering spot for people seeking emotional support in our
community.
The importance of restoring small businesses like mine
quickly after a disaster can't be overstated. Small businesses
are the life blood of the community. Not only do we provide
needed goods and services, but we also provide employment, and
help retain residents in the community. Hurricane Katrina has
shown us that when residents are forced to leave a community,
recovery is very slow.
So I'm here to tell you that I think Disaster Savings
Accounts are a good idea. The concern that I have is that in
today's economy, small businesses like mine can't afford to set
aside money for a rainy day. Our purse strings are stretched to
the limit. For many small business, it's already raining. Until
we finish weathering this financial storm, it may be hard for
businesses to set aside funds for a disaster that may or may
not happen.
That doesn't mean you shouldn't pursue this legislation.
Sunnier times are ahead of us, our economy will recover. My
only request, as a small business owner, is that you make this
legislation user-friendly. Allow me to pay for the installation
and removal of storm shutters, even if the storm threatens, and
then quietly passes us by. Don't make the use of the funds
contingent upon a national or state disaster declaration. Allow
me to use the funds to replace food damaged by hurricane
outages, to purchase generators and gasoline to run them. Allow
me to use my savings account to hire a public adjuster or
attorney to negotiate my insurance claim. Let me buy portable
hard drives, or pay for off-site digital storage that I can
protect my business and financial records. Keep it simple and
reasonable.
A good rule of thumb, in my opinion, would be that if it's
an expenditure that I would not have made at that time but for
the disaster, or the threat of the disaster, the expenditure
should be allowed.
Finally, don't make the amount that I can set aside so
small that it's not worth bothering with, and don't make it
difficult for me to prove my expenses, or require me to
complete an onerous amount of paperwork. Remember, I'm a small
business. I do my own books. The IRS scares me. Keep it simple.
Thank you for conducting this hearing and listening to the
voice of a small business owner. I'd be happy to answer
questions.
[The prepared statement of Ms. Murphy is included in the
appendix at p. 27.]
Mr. Buchanan. Thank you. I think the IRS scares all of us.
Ms. Mize, we've got a unique opportunity, we were talking
at lunch, is that you had the opportunity to work with so many
businesses after Charley, so I'm interested in what you've got
to say. It was interesting today at lunch. But I wanted to
mention Ms. Mize is from Punta Gorda. She's Senior Vice
President and Senior Credit Officer for Charlotte State Bank,
was right in the middle of Charley right after that. She
graduated from Florida Southern College, and LSU graduate in
banking. She's been an active participant in the community,
many community organizations, such as Special Olympics in
Charlotte County, the Technical Center, and served as past
President of the Charlotte Chamber of Commerce. Thanks for
being here, and I look forward to your testimony.
STATEMENT OF MARYANN MIZE, SENIOR VICE PRESIDENT AND SENIOR
CREDIT OFFICER FOR CHARLOTTE STATE BANK, FLORIDA
Ms. Mize. Thank you. It's a pleasure.
Dear Members of the Committee, I'm deeply honored to be
here to speak on the topic of Disaster Savings Account. This is
an especially appropriate discussion in light of the riveting
images of Hurricane Ike slamming into Texas over the past
weekend.
With that destruction of Hurricane Ike, I am reminded of
our own 2004 Hurricane Charley coming through our community
with a Category 4. It cut a 10-mile swath of destruction
through our community. There were over 16,000 homes in its
path, and blue tarps were everywhere, and 13,000 residential
roofs needed replacing.
The backdrop of my remarks will be based on the experience
in the aftermath of that catastrophic event personally. My
remarks will also have the imprint of my active role in three
facets of our business community; number one, commercial real
estate lender. I've been with a local hometown community bank
for 19 years. Number two, Chamber of Commerce involvement as
the President of our Charlotte County Chamber of Commerce in
the immediate aftermath of the hurricane. And, by the way, I
applaud Mr. Buchanan for his efforts with Chambers of Commerce,
and the role that they play, important role they play in our
business community. And, thirdly, the CCIM designation. I'm a
commercial real estate practitioner that has that designation,
so you will see the imprint, commercial real estate lender,
Chamber, and CCIM designation in my remarks and feedback.
Disaster Savings Accounts are innovative and a good idea.
And I offer the following enhancements for the Committee's
consideration. And it's just two points; it's, number one, size
limitations. The current size limitation at $15,000 simply
seems too low, and it may not be a relevant safety net for the
challenges faced by many individuals and businesses.
Another important point about limits, is how to ascertain
the balance limits: consider taking into consideration
insurance deductibles, percentage of gross sales, or income.
These avenues might provide a better benchmark, and provide a
more relevant safety net.
How about bench marking annual increases to the limit, and
the annual deposits? Right now it's a static limit. Consider
bench marking annual increases to both the dollar limit and the
annual contributions based on the CPI. This will help insure
that the program keeps place with inflation.
The second point is broadening the program. In addition to
small businesses, include individuals, and small real estate
investors in commercial real estate. The success of a small
business works hand and glove with the owners as individuals,
and the landlords of their business.
To illustrate these points, I offer just one of many
examples of the complexities in the post-hurricane recovery
environment, and to support those recommendations. Let me tell
you the story of Jeff Fehr. Jeff Fehr is a respected local
appraiser, owns his own building where his business is located.
He's also the owner of a small commercial strip center, and he
leases that space to small businesses. The hurricane impacted
every facet of his life. His home was uninhabitable, his
building where his business was located was uninhabitable, and
the commercial strip center was also destroyed.
I'll never forget the first business day after the
hurricane, Jeff stopped into the bank to see how we were doing.
And after some nice pleasantries, we asked how he was doing,
and then we learned the sad truth regarding the scope of his
devastating losses. Despite this, Jeff remained focused and
outlined his plan to immediately rebuild. And that's exactly
what he did, and he did it because he had access to capital, he
had set aside reserves.
When I asked Jeff what he thought about DSAs, his immediate
response was, ``I will be an early adopter, and I will
encourage others to do likewise.''
Jeff's story illustrates the importance of including
individuals and commercial real estate investors in the
program. Please, number one, don't forget, human capital is the
most important asset of a business. Employees need to have
their basic needs met before they can be productive. They also
need to recognize the importance of saving for a disaster, or
that rainy day, as Mr. Buchanan mentioned.
Don't forget our small commercial real estate investors.
Many small businesses are located in leased space. Access to
capital for these investors, their DSAs would speed the
recovery of their buildings, and de facto will help small
businesses recover.
Conclusion. In conclusion, thank you for the honor of
letting me share my thoughts. I applaud this Committee for
their innovative concept. I support Disaster Savings Accounts.
A frequently heard quip in Florida to remind citizens to make
the right decision in preparing for a storm is, ``Be smart. Be
safe'', and to that I add save. Having funds set aside for a
disaster is critical to individuals and businesses, and
Disaster Savings Account is a great way to accomplish that
goal. Thank you very much.
[The prepared statement of Ms. Mize is included in the
appendix at p. 30.]
Mr. Buchanan. Thank you.
We have another young lady that's a successful business.
Ms. Grayson is from Bradenton, Florida north of Charlotte. She
founded her own company in 1994. Kate has been a consultant in
the pharmaceutical and biotechnological industry, specializing
in project management, process re-engineering and systems
auditing. In response to the needs of her clients and the
industry she supports, Kate launched Steelgate, a cryogenic
firm in 2001. Kate's previous experience including systems
operations management, management consulting. And I appreciate
you coming today. And you had mentioned if a storm hit and you
lost your electricity, you'd be out of business, and the
importance of having something as a backup, so I look forward
to your testimony. Thank you. Thanks for coming.
STATEMENT OF KATE GRAYSON, PRESIDENT AND CEO OF STEELGATE,
INC., LONG ISLAND, NEW YORK.
Ms. Grayson. Good afternoon. My name is Kate Grayson. I am
President and CEO of Steelgate, Inc., a cryogenic specimen
repository storing frozen specimens, such as blood, on behalf
of clients engaged in biomedical research. I founded Steelgate
in 2002 in Long Island, New York. And in 2004, we relocated my
corporate headquarters to Bradenton, Florida.
I am honored to sit before this distinguished panel today
as a representative of Florida's Manatee County small
businesses, and appreciate the opportunity to share my insights
regarding the proposed Disaster Savings Account.
Given the sensitive nature of my business, and the need to
maintain uninterrupted power for specimen preservation,
disaster preparedness is a subject with which I have extensive
experience. Steelgate was built upon a foundation of system
redundancy that is only one part of a dynamic multi-layered
business continuity plan. This plan is routinely tested and
enhanced, and also subject to a thorough audit by each client
looking to store specimens with Steelgate. Such rigorous
preparation is what enabled Steelgate to face down the infamous
power outage of 2003 that struck the Northeast, Midwest, and
parts of Canada, as well as the overactive 2004 hurricane
season in Florida that some of my colleagues here have
discussed.
But Steelgate is not alone in having to anticipate threats.
Every year thousands of businesses throughout the United States
face a whole host of natural disasters that include tornadoes,
earthquakes, floods, forest fires, mud slides, and every summer
for those of us who live and work in Florida, hurricanes.
However, developing and implementing a disaster plan
represents a financial investment that too often for a small
business can be a burdensome expense that they choose not to
incur. The irony being that it might be the one investment that
could help insure business continuity should a disaster strike.
And it always strikes, as we have seen, from this very active
hurricane season.
Despite ongoing efforts to assess the impacts from
Hurricanes Gustav, Hannah, and Ike, the 2008 hurricane season
only just hit its peak on September 10th, with 74 more days
remaining. However, if history is any indication, hundreds of
small businesses will have suffered devastating losses from
which they may never recover. Such losses affect not only the
business owners, but extend to its employees, clients, vendors,
not to mention the lost tax revenues that underwrite state,
local, and federal programs.
Therefore, I, along with other small businesses applaud
this Committee's proactive efforts to launch a program to help
mitigate the devastating effects of post-disaster business
interruption and closure. A Disaster Savings Account could be
the one incentive that motivates small businesses to consider
disaster planning.
I know that as a self-funded small business, the potential
for a tax deferred or tax-free plan to further enhance my
company's disaster planning would be very enticing. It aligns
with the entrepreneurial spirit, and get it done attitude
embodied by so many small business owners, and could also
relieve the government of having to provide greater resources
for a post-disaster bailout.
To succeed, the guidelines or regulations of the Disaster
Savings Account need to be written in a concise and easily
understood way, further encouraging the widest possible
adoption. As a small business owner wearing many hats every
day, the plan must avoid being overly complex, and offer clear
benefits. It should not require a specialist to interpret, nor
require an excessive amount of a business owner's time to
implement. Additional benefits may derive from insurance
company's offering discounted premiums for businesses with
Disaster Savings Accounts.
It is clear that establishing a Disaster Savings Account
could offer wide-ranging benefits to all those who are affected
when disaster strikes.
I'm appreciative of the time you have given me today, and
will, as a courtesy to this Committee's time, conclude my
testimony. I would, however, make myself available for further
questions, either here or at another date. Thank you very much.
[The prepared statement of Ms. Grayson is included in the
appendix at page 37.]
Mr. Buchanan. Thank you. I yield back, Madam Chair.
Chairwoman Bean. Thank you for your testimony. I have a
couple of questions, and then I'll come back to you.
First, I wanted to talk to Mr. Brown. You talked about the
SBA loan programs that you participated in. And then when the
fees went up, you essentially closed down the shop, and stopped
making those available, which is unfortunate. The Committee on
a bipartisan basis has been very supportive of trying to reduce
the fees on both borrowers and lenders to encourage building
those programs, and making capital more available, because at
this time, economically following the credit crunch, the
greater necessity to make capital available for our businesses.
So I was glad to hear your testimony on that.
But I think it's also interesting that you're here to move
beyond that, and say that even though SBA has had disaster
assistance loans available since 1953, that we should be
considering moving further and extending other options. So I
appreciate your comments on that. And I also liked your caution
about regulatory burden associated with the HSAs, so that's
very helpful testimony.
I also wanted to comment to Ms. Murphy, to hear the
positive story that you were able to share about how a local
bank came in and brought to your attention what available
resources that you were able to utilize, and potentially keep
your business alive today to tell us about it.
Sadly, this Committee heard testimony following Katrina
from a number of multi-generational businesses who've been
around for a long time in New Orleans, and their experience was
entirely different than that, and they didn't have access to
SBA programs. And we heard a lot about FEMA fallout, and where
the agency had fallen short, but we really didn't hear in the
media what we heard in testimony in this Committee about how
they weren't returned calls to businesses who were seeking
loans, because as you indicated, their businesses were
literally under water, not just financially. And their
employees were out of homes, so I was glad to hear that we have
made some progress, and that the response time was quicker, and
there were available resources for you to assist what you're
doing.
Really, I didn't have a specific question. I just wanted to
tell you that your testimony is very helpful to us, and I'll
yield to Ranking Member Buchanan.
Mr. Buchanan. Thank you, Madam Chair.
You had mentioned about tax incentives for banks maybe to
give these, it keeps the cost for the government maybe down,
but you said a lot more money would probably flow out if there
were some incentives, especially in times like this where
capital is tight, and we've got all these national disasters.
I think about the disaster we've got kind of in New York
and the country financially, and then what happened in Houston
last week, so both of these are very real. But I just, if you
could comment a little bit more on what your thought is on
that. Mr. Brown.
Mr. Brown. Sure. The parallel I was driving to the SBA
program that Chairwoman Bean had just referenced, was the fact
that the SBA program in the early `90s was driven by the margin
of profit. And that's just a fact of the program.
If you correlate that to tax incentives, and some of the
tools that were available back then are no longer available,
but if you were to correlate that to tax incentives, think, if
you will, municipal bonds. When a municipality is issuing a
bond, the investor in that bond is able to garner that income,
or that interest income tax free, so this is now a tax-adjusted
yield, if you will.
If we are looking for a way to increase capital flow to
small businesses, I think one of the ways you might be able to
do it, and it might be a total or partial tax incentive to
whoever the lender might be, to increase the yield on that
instrument. So if I were lending to Cindee Murphy's business at
6 percent, but part of that, or all of that interest income to
the bank was tax-free, you would end up with a 10 percent yield
on it.
Now, lending to small businesses takes an enormous amount
of overhead. The truth is, it takes as much time to make a
$50,000 loan as it does a $500,000 loan, and we're all in the
business of managing fixed overhead. So if all of a sudden you
can take a business that once yielded 6 percent to the lender,
and now it's going to yield 10 percent, a couple of things are
going to happen.
First of all, you're going to see lenders flooding into the
small business market, especially to get away from some of the
commercial real estate market that we're all aware of right
now. The second thing going to happen is good old-fashioned
competition, and that 6 percent rate that Cindee now gets, it
will go down, 5-1/2, 5, because the competition will start to
chip away at it.
I think that would be an amazing tool for us to consider in
some form. And, again, I certainly don't know what all the
math, and what all the implications would be, but I think you
have a department for that here in the Office of Management
Budget.
Mr. Buchanan. Well, part of my thought on that was just
simply, is to have the incentives for businesses that are
struck by disaster, or banks, not necessarily all over the
country. It might not be a bad idea, because there's no
liquidity now in the country for a lot of small business,
especially as it relates to a disaster area like what happened
there.
What's your thinking of what, I guess, two things. One is
SBA, we talked about a little bit what Florida did. They had
the quick $25,000, you got in 48 hours. Just as bankers, I
guess, either of you, were you able to access, were small
businesses able to access any SBA money? Or, if they could, how
long would it take? Because, obviously, you can't six months to
get the money. What was your experience?
Mr. Brown. Well, the story that Cindee Murphy just shared
was actually the Bridge Loan Program that she was referencing,
not the SBA program.
Mr. Buchanan. But I'm talking about the SBA program.
Mr. Brown. Right. The SBA took quite a while to be able to
put those funds in place. And, again, I think the difference
between the two programs is that the Bridge Loan Program is
locally run through EDC, using local lenders. Where if the SBA
has to bring in contractual employees to try to now operate in
a completely foreign environment. So, again, back to my
suggestion; if there is a way, whether it be through the SBA,
or through some other entity, to mimic, or to emulate the
Bridge Loan Program at an SBA level, I think you will have a
home run.
And, again, I don't know that the other states have such a
thing, but I know the one in the State of Florida worked
amazingly well.
Mr. Buchanan. Do you know what the repayment back was to
the State of Florida?
Ms. Mize. I have it.
Mr. Brown. Maryann does.
Ms. Mize. Yes, I have those statistics. For Hurricane
Charley, we checked with the State of Florida, and the
repayment was approximately 96 percent recovery of all those
funds that were lent. In Charlotte County, $4 million was lent,
and 96 percent of it was returned.
Getting back to Mr. Brown's comment, that's a pretty good
repayment, and those funds were back to help another community
that would be stricken with a catastrophe.
Mr. Buchanan. When they put the funds out, what did they
pay, what was the interest on the loan?
Ms. Mize. Zero.
Mr. Buchanan. Zero?
Ms. Mize. Zero percent for the first six months. It was a
very effective tool. The delivery system was our small
community banks with the EDC, setting up a little nucleus kind
of like a SWAT team, where we would actually--there was no
phones, imagine no phones, no electricity. How do we find the
other lenders in the community? We knocked on their door, we
know where they lived. And so we got feet on the street
delivering the information to business owners like Cindee
Murphy so that they could have immediate access to capital.
Within 48 hours of application, we were meeting as a team in
the dark with no electricity, with no air conditioning in that
heat, and delivering checks, approving loans, and delivering
checks to small businesses.
Mr. Brown. You had banks fighting over wanting to be
involved in this, because they wanted to do something for the
community. And I can guarantee you were getting some of the
best lenders' minds around that table in the dark, so it was
quite a positive experience.
Mr. Buchanan. What happens after the six months, interest
only for six months, and then what happens the next six months?
Ms. Murphy. Well, that was one of the things that was good
about it. I mean, the two ladies who came and explained the
whole program to me were very emphatic about this being a
short-term solution, and then I would need to take further
steps, because after six months, I think the interest rate went
up to about 12 percent. And if you still had that loan after a
year, it would be 18 percent. And, of course, then they made
themselves available in case we needed to apply for SBA loans,
or conventional loans. And really, I paid mine back before I
got to the point where we were reaching the six month point,
but I suspect that if I had not, that they would have been in
contact with me again, reminding me that I needed to take
action on that. And that's part of it being sort of handled on
a localized level.
Mr. Buchanan. Ms. Murphy, what do you think, if you
wouldn't have got the $25,000, what would have happened?
Ms. Murphy. Well, I'm not sure that we would have stayed in
business. It took so long for us to get our insurance money,
and the funds that we did have, we had only been opened for
business for 16 months when the storm hit. And a lot of our
savings had been tied up in the business. We had so many other
competing needs among family members and things, it was really
hard to take money that we needed to live and protect our
family, and pile it back into the business. So, for us, it was
critical, and it was critical to be able to open really, really
quickly, because it developed a synergy that kept us going, and
kind of moved us forward.
We needed a fairly significant amount; that $25,000 was
absolutely a minimum of what we needed to sort of kick-start
our business, so that we could then be ready when season hits,
and prepared to continue our business.
Mr. Buchanan. And you mentioned the insurance business.
What was your experience about getting money when you filed
your claim from the insurance company? How long did it take?
Ms. Murphy. Well, I think I was really one of the lucky
ones, compared to others in the community, because we did have
a check within 90 days. It took probably another four or five
months after that. As a result of Hurricane Charley, there were
so many businesses and individuals who were not getting claims
quickly, I think that new legislation was passed at that time
that now makes it so that the insurance company has to respond
within, I don't know if it's a 60-day or 90-day period, so
that's been put in place. At that time, that was not there, and
there were some businesses and individuals who were going a
year, 18 months before they were getting any satisfaction from
insurance companies.
But it takes a while to process a claim, and in the event
of a hurricane, my insurance adjuster showed up at my door with
a stack of photocopies of the front of 200 policies. He was
brought in from another state. I think he was from Missouri.
That's all he was provided with from the company, was just that
page one had my address and my policy limits, and had to
process 200 claims.
It was overwhelming to them, and a lot of the ability to
get funds back quickly depended on the ability of the business
owner to recover records. And that was difficult for a lot of
Charlotte County businesses, because they didn't expect the
storm to hit. They weren't as prepared as they should have
been. So it does take a while.
Mr. Buchanan. Ms. Mize, I was going to ask you, following
Hurricane Charley, in your estimate, how long did it take the
community or businesses to get back to some sense of normalcy?
What was the experience in the community? How long did--and
some businesses probably never came back. But the businesses
that did, was it a week, a month, six weeks, six months? How
long was it? I'm sure it was a little different, because you
dealt with, my understanding, a lot of businesses in that
community right after that.
Ms. Mize. Yes, we did. There were 700 commercial buildings
in the path of the hurricane. Of those 700 commercial
buildings, 12 percent of them were destroyed, 77 were damaged,
so the recovery is going to be directly in relationship to
whether or not they had a building to be in, or whether they
could find another building in order to relocate and re-
establish. So based upon that, I would say that Cindee was
actually probably one of the more exceptional folks in terms of
her ability to get back up and running within 18 days.
What we were told was there's three parts to a disaster.
First it's relief, then it's recovery, and then it's rebuild.
And right now, we're in year four of a five-year plan.
Mr. Buchanan. So you guys are still working on it. What do
you find from small businesses is their biggest concern, or
their number one issue in terms of working with banks to get
back on their feet?
Ms. Mize. I think access to capital is a real serious
issue. And I'm going to defer also to the other banker on our
panel here, Mr. Brown. Access to capital is critical for the
small business, and for the individuals, because of all the
myriad of demands on that limited capital in a disaster. You're
trying to put your house back in order, you're trying to put
your business back in order. Access to capital.
Those folks that had liquidity did the best. What do you
think?
Mr. Brown. Absolutely, I would agree.
Mr. Buchanan. That's why we're looking at one possibility,
is to have--I know that small businesses are being taxed, and
don't have any excess capital, a lot of them are not even able
to pay their bills. But the thought is, is that as these things
get turned around back on their feet, maybe they'd have a fund
where they could draw down, but have something set aside.
Because I've always heard, and people told me like 30 years
ago, always try to have one-year's living expenses. Now, that
doesn't happen with a lot of people, but have some kind of
reserve set aside. If we could do that on a tax deferred or
something, would give some opportunity.
Kate, I just wanted to ask you, your business is obviously
a little different, unique than a lot of businesses in our
area. How does this--what's your thoughts on how this would
affect you if you had a direct hit in a hurricane, that type of
thing?
Ms. Grayson. Well, hopefully, with all our preparedness,
and our testing, and our enhancements that we do on a regular
basis, we won't be that much affected. But I see it also
affecting the vendors that support me, the smaller businesses
that are not in the business of doing disaster preparedness,
and detailed plans, and testing the plans.
I have a number of local vendors that I use, everything
from my air conditioner vendor, to my freezer maintenance, my
generator maintenance. The list is very long, and I use all
local small businesses to support me. Where we would run fine;
however, the services that I depend on, the local vendors would
be--I'd be creative to find alternate solutions. So this, I
think, could encourage them to just think of the recovery
disaster plan, and take more time to put money aside where they
might not have.
As part of my plan, I have to take that into consideration,
and make sure I do have additional working capital. It could
help me with adding better, or doing different planning if I
had additional tax-free funds available to me. So I think in
two parts it could help.
Mr. Buchanan. Is there anything else based on what you've
heard today that we could make it better? What do you think
about this? I'm open to any idea, but I like kind of what the
state is doing, what the state did. It seemed like it was a
very successful program. Maybe there's a lot of partnerships
federal and state has, and maybe that also can be a
partnership. And maybe instead of $25,000, you said
proportionality, maybe if a business has got 83 employees, it's
different than having eight, that maybe they can get up to 250,
or something like that, because they need more capital.
But my thought is, is that, Charlie, do you have
Mr. Brown. I did have a thought on that for you. The SBA
has done a good job of what is considered a small business by
industry. You can start there, because that's based on sales,
typically.
The other thing that you can do when you devise these
limits is there's a margin of profit, the RMA, Robert Morris &
Associates tracks by industry. And you just made me think about
it, when you talked about a year's worth of reserve. You might
target by industry 90-days worth of operating expenses. And you
might end up with something where this type of business would
be eligible for that much in dollar, for a different dollar
amount across the business. Mathematically, you could work your
way back into this very easily, using data that's already
available.
Mr. Buchanan. Yes.
Ms. Grayson. I was just going to add to that, that I think
it is very important to assess the need, and how you'll measure
that is key because my business and how I operate, and the
amount of funds I would need to get going, I mean, to replace a
generator, or to carry certain operating costs, would be
significantly larger than a smaller restaurant, or something
like that. And if you went, I think, by industry, or somehow to
measure, I think that's very important in the analysis. And
also keeping it simple, that some of the panel members has
made. If it takes too much to put in place, I'm not going to
have the time to do it, unless it's a good benefit.
Mr. Buchanan. Just on my behalf, I just want to thank all
of you for coming in. It's important. I know that as we look
towards what's happened in New York and our country and the
financial crisis, I mean, we're talking about it's like a
dumbbell, a barbell, one side we've got a lot of big businesses
under a lot of pressure, but our small businesses that make up
a lot of the job creation, and really our vitality in this
country, and I think the future, the way we compete with China
and India, we've got to find a way with these big storms. I
mean, going into Houston, God only knows. I mean, our community
is a little bit smaller, but you look at a metro area, New
Orleans, and Houston. We've got to figure out a way to get
these people back on their feet.
So, again, I appreciate. I like the idea, the government
got paid 96 percent back or whatever that percentage was. And I
know the Chairwoman, we both want to find a way to help
businesses get back on their feet, help them recover quicker.
And I think the federal government has definitely a role to
play. And the sooner we can get you back to work, and start
generating money, then we get more receipts up here, so it's a
good thing. It's a win-win for everybody.
But, again, I want to thank you, especially being from our
area, our district, for coming in, and appreciate your
discussion. And I know you've taken time out of your schedule.
So thanks, and we'll look forward to visiting with you a little
more in the future. Thanks.
Chairwoman Bean. I want to thank you, as well, for not only
sharing your perspective, but speaking on behalf of all the
small businesses out there who could experience the same type
of challenges you faced.
I ask unanimous consent that members will have five days to
submit statements and supporting materials for the record.
Without objection, so ordered. This hearing is now adjourned.
[Whereupon, at 2:57 p.m., the Committee was adjourned.]
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