[Senate Hearing 110-51]
[From the U.S. Government Publishing Office]


                                                         S. Hrg. 110-51
 
                THE PRESIDENT'S FISCAL YEAR 2008 BUDGET
                     REQUEST FOR THE SMALL BUSINESS
                             ADMINISTRATION

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

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                          AND ENTREPRENEURSHIP
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               ----------                              

                           FEBRUARY 28, 2007

                               ----------                              

      Printed for the use of the Committee on Small Business and 
                            Entrepreneurship


            THE PRESIDENT'S FISCAL YEAR 2008 BUDGET REQUEST

                 FOR THE SMALL BUSINESS ADMINISTRATION


                                                         S. Hrg. 110-51

                THE PRESIDENT'S FISCAL YEAR 2008 BUDGET
                     REQUEST FOR THE SMALL BUSINESS
                             ADMINISTRATION

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

                                HEARING

                               BEFORE THE

                      COMMITTEE ON SMALL BUSINESS
                          AND ENTREPRENEURSHIP



                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 28, 2007

                               __________

      Printed for the use of the Committee on Small Business and 
                            Entrepreneurship


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


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            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                 JOHN F. KERRY, Massachusetts, Chairman
CARL LEVIN, Michigan                 OLYMPIA J. SNOWE, Maine
TOM HARKIN, Iowa                     CHRISTOPHER S. BOND, Missouri
JOSEPH I. LIEBERMAN, Connecticut     NORMAN COLEMAN, Minnesota
MARY LANDRIEU, Louisiana             DAVID VITTER, Louisiana
MARIA CANTWELL, Washington           ELIZABETH DOLE, North Carolina
EVAN BAYH, Indiana                   JOHN THUNE, South Dakota
MARK PRYOR, Arkansas                 BOB CORKER, Tennessee
BENJAMIN L. CARDIN, Maryland         MICHAEL B. ENZI, Wyoming
JON TESTER, Montana                  JOHNNY ISAKSON, Georgia

                 Naomi Baum, Democratic Staff Director
                     Wallace Hsueh, Staff Director


                            C O N T E N T S

                              ----------                              

                                                                   Page

                           Opening Statements

Kerry, The Honorable John F., Chairman, Committee on Small 
  Business and Entrepreneurship, and a United States Senator from 
  Massachusetts..................................................     1
Snowe, The Honorable Olympia J., a United States Senator from 
  Maine..........................................................     4
Levin, The Honorable Carl, a United States Senator from Michigan.     6
Coleman, The Honorable Norm, a United States Senator from 
  Minnesota......................................................     7
Landrieu, The Honorable Mary L., a United States Senator from 
  Louisiana......................................................    11
Thune, The Honorable John, a United States Senator from South 
  Dakota.........................................................    16

                           Witness Testimony

Preston, Steven C., Administrator, U.S. Small Business 
  Administration, Washington, DC.................................    22

          Alphabetical Listing and Appendix Material Submitted

Bond, The Honorable Christopher S.
    Post-hearing questions posed to Steven C. Preston and 
      subsequent 
      responses..................................................    81
Coleman, The Honorable Norm
    Opening statement............................................     8
    Prepared statement...........................................     9
Kerry, The Honorable John F.
    Opening statement............................................     1
    Post-hearing questions posed to Steven C. Preston and 
      subsequent 
      responses..................................................    60
Landrieu, The Honorable Mary L.
    Opening statement............................................    11
    Prepared statement...........................................    12
    Post-hearing questions posed to Steven C. Preston and 
      subsequent 
      responses..................................................    84
    SBA Disaster Assistance Program submitted for the record.....    91
Levin, The Honorable Carl
    Opening statement............................................     6
    Prepared statement...........................................     7
    Post-hearing questions posed to Steven C. Preston and 
      subsequent 
      responses..................................................    83
Preston, Steven C.
    Testimony....................................................    22
    Prepared statement...........................................    27
    Responses to post-hearing questions from:
        The Honorable John F. Kerry..............................    60
        The Honorable Christopher Bond...........................    81
        The Honorable Carl Levin.................................    83
        The Honorable Mary L. Landrieu...........................    84
        The Honorable David Vitter...............................    90
Snowe, The Honorable Olympia J.
    Opening statement............................................     4
Thune, The Honorable John
    Opening statement............................................    16
    Prepared statement...........................................    17
Vitter, The Honorable David
    Post-hearing questions posed to Steven C. Preston and 
      subsequent 
      responses..................................................    90

                        Comments for the Record

Almeida, Ann Marie, president & CEO, Association of Women's 
  Business Centers, statement....................................   420
Luz, Amy McKenna, Chief executive officer, Association for 
  Enterprise 
  Opportunity (AEO), statement...................................   416
Women Impacting Public Policy (WIPP), statement..................   424


THE PRESIDENT'S FISCAL YEAR 2008 BUDGET REQUEST FOR THE SMALL BUSINESS 
                             ADMINISTRATION

                              ----------                              


                      WEDNESDAY, FEBRUARY 28, 2007

                      United States Senate,
                    Committee on Small Business and
                                          Entrepreneurship,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:05 a.m., in 
room 428-A, Russell Senate Office Building, the Honorable John 
F. Kerry (Chairman of the Committee) presiding.
    Present: Senators Kerry, Levin, Landrieu, Snowe, Coleman, 
Thune, and Isakson.

  OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY, CHAIRMAN, 
COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP, AND A UNITED 
                      STATES SENATOR FROM 
                         MASSACHUSETTS

    Chairman Kerry. The Committee will come to order. Good 
morning. Welcome. Mr. Administrator, welcome. We are glad to 
have you back here.
    I am delighted to have an opportunity to take a look at the 
President's funding request for the SBA for fiscal year 2008. 
We are glad to have you back. We appreciate the much improved 
working relationship between the SBA and the Committee and we 
thank you for your personal efforts to try to help to make that 
happen. I think it has made a difference and we appreciate it. 
I know you are struggling with some of the boxes that the OMB 
and the Administration themselves put you in, so we are not 
here to hold you responsible for all parts of it, but there are 
obviously some important issues about the SBA's ability to be 
able to perform its statutory functions and also its creative 
goals, so we want to take a look at that a little bit.
    I am disappointed. I know there is an increase, quote, ``of 
5 percent overall,'' but it nevertheless can't mask, I think, 
the disappointment that all the Members of the Committee feel 
about the overall funding level that has been proposed for the 
agency. Even your testimony notes that the request of $464 
million in new budget authority still represents more than a 30 
percent decrease in funding for the agency over the last 6 
years. And while the Administration portrays this as positive, 
I think most of us on this Committee continue to view it as 
troublesome, problematic in a lot of different ways.
    Borrowers and lenders are picking up the costs of SBA loans 
and we clearly are not reaching as many businesses as there are 
that need the counseling and the technical assistance to be 
able to break into the mainstream, also to help them break into 
the very lucrative $370 billion-a-year Federal contracting 
marketplace.
    So while the budget adds nine procurement specialists, I 
think we feel very strongly that a lot more are really needed 
to make a difference. There is only one in my State of 
Massachusetts. That one is supposed to cover and oversee a full 
$9.5 billion worth of contracts in our State each year. That is 
a pretty difficult task for one person to properly perform.
    The Administration also, I think, takes some creative math 
to work out its 5 percent figure. Disaster loan funding in 
particular is left out. But the extra funding doesn't go to the 
services, the counseling or the contracting component of the 
mission of SBA, and that is really what our businesses need. 
Instead, it goes to administrative expenses.
    So, if you really look at the budget, which is on page 20 
in Table 4, the non-credit programs got $127 million in fiscal 
year 2006, but the President is proposing $106 million for 
fiscal year 2008. That is a 16 percent decrease. So again, we 
are wrestling with this issue in the budget, whether it gets to 
or doesn't get to the fundamental mission and tasks that we 
want to accomplish.
    We certainly appreciate that the budget this year does not 
directly eliminate the SBA microloans, Mr. Administrator, but 
we are troubled that, again, this is one of those sleight of 
hand issues. The budget proposes to make the program self-
funding, and to eliminate the complementary business counseling 
or technical assistance grants, sending those borrowers to the 
SBA's other counseling programs. The problem is, those programs 
were either cut or held flat. So you shift the responsibilities 
to people who are already taxed, and are going to be even more 
so with this additional responsibility.
    So how do we expect the SBA to ask the SBDCs and the 
Women's Business Centers to counsel these borrowers when these 
centers haven't gotten additional funding to help them do that? 
I think taking inflation into account, the SBDC funding is 19 
percent less today than in 2001. Now, you can quibble around 
the edges of that, but the bottom line is that any way you cut 
it, it is less, and it is difficult.
    There is also no incentive there for the SBA's microlenders 
to make loans. They have to pay back the SBA. So why are they 
going to take the financial risk if they don't get money to 
counsel their borrowers? We need to provide the funding for 
those loans, for the complementary technical assistance, and 
for the microentrepreneurship counseling that is provided 
through PRIME.
    I am also troubled by the effort to portray the SBA's 
proposal to back $28 billion in 7(a) and 504 loans and the SBIC 
debenture deals as a capacity to lend 40 percent more. I think 
I am quoting you folks. These are the same levels that were 
authorized last year. So, you have the exact same lending 
capacity as before, especially since nothing is being done to 
increase the outreach and actually expand the lending pool to 
underserved communities.
    Let me say, Mr. Administrator, that it is good news to see 
that the Administration wants to reduce the fees on 7(a) and 
504 loans and SBIC debenture deals. We support that. But we 
also would ask why the proposal is only to lower the fees on 
7(a) lenders and not to provide some relief to the borrowers, 
which is something we have continually argued here is sort of 
the bottom of the food chain, if you will, and the place where 
you most want to see some of that help. I am not sure how you 
get a fee reduction in the SBIC debenture program and keep it 
at zero subsidy without having to touch other fees, and that is 
something we have to take a look at.
    Today, I suspect we will want to discuss a little bit of 
the implementation of the funding resolution for 2007. I am 
concerned about a memo from OMB regarding the Administration's 
interpretation of that resolution. I would like to make sure we 
are clear on how Congress intended the SBA programs to be 
funded.
    As of yesterday, we had not received the legislative 
package; so I hope we can get a little bit of a sense today 
about what the priorities would be from that package.
    Again, Mr. Administrator, I want to thank you for the 
efforts you have made to work with us in an open way. I think 
it has been terrific, and I am hopeful that that will extend to 
the SBA reauthorization process. Let me just say a quick word 
about it.
    There really is no reason why we can't reauthorize SBA's 
programs this year, and I hope the Administration will not 
engage in the practice we went through in the last few years 
where rolling holds--different Senators putting a hold on, you 
remove one, you get one sort of point of contention resolved, 
and then there is another one that appears. I think it would be 
more important just to have an open give-and-take session. If 
we could sit down and sort of work together, negotiate, we 
could find some reasonable way of achieving an agreement. But I 
don't think it is a negotiation to come up here, have a 
discussion, get everybody to agree on something, and then all 
of a sudden the holds aren't removed and we continue down the 
same road.
    The most urgent unresolved legislation remains the reform 
of the SBA's Disaster Loan Program. I know you have taken an 
interest in clearing out the backlog of that. We congratulate 
you on that. I think you have shown real leadership in doing 
that, Mr. Administrator. But there are some concerns that have 
been raised to me and to others about the agency now trying to 
push numbers over the quality of service for those who lost 
everything in Katrina and I would like to work with you to get 
to the bottom of those charges so we can obviously address 
those questions.
    So we look forward to working with you, Mr. Administrator. 
I hope that we can continue to make progress in that regard, 
and we look forward to your testimony.
    [Attachment to the statement of Senator Kerry follows:]

                 TABLE 4.--FY 2008 Congressional Submission (Uses of Funds; Salaries & Expenses)
                                             [Dollars in Thousands]
----------------------------------------------------------------------------------------------------------------
                                                                       FY 2007                       FY 2008 vs.
                                                   FY 2006   --------------------------   FY 2008      FY 2007
                                                    Actual      Request     Cont. Res.    Request      Request
----------------------------------------------------------------------------------------------------------------
Salaries & Expenses Budget:
  Office Operating Budgets.....................      $62,036      $66,066      $37,317      $70,943       $4,877
  Agencywide Costs.............................       45,644       47,279       47,624       47,870          591
  Compensation & Benefits......................      211,125      225,655      225,655      241,811       16,156
                                                ----------------------------------------------------------------
      Subtotal, Agency Operating Budget........      318,805      339,000      310,596      360,624       21,624
  Non-Credit Programs..........................      127,101      106,426      119,990      106,426            0
  Congressional Initiatives....................       89,838            0       20,000            0            0
  Reimbursable Expenses........................       12,859        9,692        9,692        6,388      (3,304)
                                                ================================================================
      Total....................................      548,603      455,118      460,278      473,438       18,320
Office Operating Budget Detail:
  Executive Direction..........................        8,428        6,800        3,841       12,043        5,243
  Capital Access...............................       13,088       10,865        6,137       17,991        7,126
  Gov Contr/Business Development...............        1,559        4,865        2,748        4,253        (612)
  Entrepreneurial Development..................        1,304        1,992        1,125          772      (1,220)
  Management and Administration................       10,745       10,412        5,881        9,317      (1,095)
  Chief Information Officer....................       22,478       26,089       14,736       21,905      (4,184)
  Regional and District Offices................        4,434        5,043        2,849        4,662        (381)
                                                ----------------------------------------------------------------
      Total....................................       62,036       66,066       37,317       70,943        4,877
----------------------------------------------------------------------------------------------------------------


    Senator Snowe.

 OPENING STATEMENT OF THE HONORABLE OLYMPIA J. SNOWE, A UNITED 
                   STATES SENATOR FROM MAINE

    Senator Snowe. Thank you, Mr. Chairman, and I, too, want to 
welcome Administrator Preston to his first budget hearing, 
first hearing since his confirmation in June. We appreciate all 
that you have accomplished in your short tenure of 7 months in 
making your primary mission to promote small business 
development through the technical assistance, financial 
assistance, government contracting programs. Also to create a 
more innovative approach in renewing and in reinvigorating the 
agency and making it more robust because I think that that is 
absolutely essential, and obviously more responsive.
    There had been a number of problems across the spectrum 
that I know you are coming to grips with, and most especially, 
as the Chairman indicated, with respect to the disbursement of 
the loans in the Gulf region. I understand that under your 
leadership great strides have been made in disbursing or 
partially disbursing more than 98 percent of the loans to a 
total of 5.1 billion. And also that you have been traveling the 
country to reinvigorate the agency in terms of the morale of 
the employees. I think that that is absolutely essential and 
pivotal to the future of the agency. So I commend you for your 
dedication and enthusiasm in trying to turn the agency around.
    It still mystifies me, however, and I know the 
Administration has taken this approach, but I regret that you 
have to come before the Committee to propose a budget that, 
once again, is one in a series of declining budgets since 2000. 
The small business community throughout this country has been 
singularly responsible for job creation, as you well know. As 
we heard up in Maine, and I thank you as well for coming to 
Maine last week and participating in my Small Business 
Manufacturing Forum. It was very beneficial to have you there 
and very helpful to the small business community and small 
business owners up there, and manufacturers, in particular, who 
have been hard hit in the globalization of this economy. To 
hear from you personally and firsthand, I think was very 
helpful.
    As we heard, some of the small business programs across the 
board, whether it is 7(a), 504, the HUBZone programs, Microloan 
Programs, all were very useful and instrumental. It is 
unfortunate and disappointing that we have to confront, once 
again, a budget request that represents a net decrease of 28 
percent. Now obviously this is a $814-million budget proposed. 
But when you consider the facts in looking at the numbers, the 
true request is really for $464 million because it is 
essentially for the core programs, and that is a 28-percent 
decrease from the SBA's proposed 2007 new budget authority. The 
reality is that we have a carryover of $329 million from 
disaster assistance that was provided, the more of $1.7 billion 
in three different supplementals that Congress enacted to 
address the disasters in the Gulf region.
    So in a sense, we have a budget once again that is 
declining, and as I said, it is one in a series of about 7 
budgets over the last 7 years. As I was looking at the numbers, 
frankly, when I was going back to 2001, the SBA budget was $899 
million. Today, the request essentially for the core programs 
is $463 million. Then you could add the $329 million, and that 
is, of course, the disaster loans. But then again, that doesn't 
do anything to rebuild the core programs within the SBA.
    That is where we are, and that is the unfortunate part. I 
know in your short tenure there is probably not much within 
your control, in that respect. Obviously, we are going to do 
our part here to transform that, as we have in the past, 
because I, frankly, think it is short-sighted for the 
Administration to consider that the SBA is not useful in 
rebuilding this economy. I mean, it is the one agency and 
program that really is essential and central to our job 
creation in this country. We get much in return and it pays 
great dividends and it is unfortunate we are in the position 
that we are today in looking at a declining budget. It 
represents three-and-one-hundredths of a percent of the total 
Federal budget, so it is mystifying to me that we are in a 
position to consider major reductions once again when these 
programs have created or retained 5.3 million jobs since 1999.
    Finally, it is what is also affected throughout the budget, 
and that is reductions in the Small Business Development 
Centers, the Women's Business Centers, in the SCORE program. 
Also, I appreciate your efforts on the Microloan Program, which 
is very important, not only to Maine, but to America. It is the 
one way you can nurture entrepreneurship in many of the rural 
economies that have been devastated by the loss of 
manufacturing jobs. And this is one way of helping to 
reinvigorate rural economies that have been hard hit.
    For example, in Maine, we just loss Moosehead 
Manufacturing, in a very rural area, a 60-year-old furniture 
manufacturing company. It has a brand name, excellent work 
ethic, great product, and we have lost 90 jobs there because 
they cannot compete in the global economy. So we have all these 
resources in the SBA where the government should consider its 
primary interest to support and to increase, if anything, but 
not to decrease the programs.
    But the Microloan Program is now become proposed by the 
Administration as a zero subsidy program, transferring the 
technical assistance to the SBDCs, Women's Business Centers, 
and SCOREs who are already going to be experiencing reductions 
in those programs, as well. Now we are asking them to take on 
the technical assistance requirements under the Microloan 
Program. Well, when I was looking at the numbers last year, you 
are talking about 2,395 loans and each borrower is required to 
receive technical assistance, so that is adding, I think, a 
great burden to all the programs that are also going to be 
reduced under this proposed budget.
    I think we have much work to do in that score. We are 
looking forward to working with you on a number of these issues 
because I think it is critically important. I also hope we can 
work on the Federal contracting. We have available Federal 
contracts of more than $400 billion within the Federal 
Government and, I think that the SBA is absolutely the one 
agency that can help small business pave the way for access to 
these contracts. We know the resistance and the intransigence 
on the part of so many agencies to allow small business to 
participate in the Federal contracting process, another way of 
reinvigorating rural economies across America.
    So I think we have to fix and address the regulatory 
loopholes that were identified by the GAO recently as ones that 
allow large contractors to essentially identify themselves as 
small businesses and take advantage of the set-asides that are 
essentially targeted for small businesses. So we have to make 
sure that we can close those loopholes so they are not taking 
advantage of these set-asides that are targeted for small 
businesses.
    I appreciate your efforts in your short tenure, Mr. 
Administrator. We have to do everything we can to make sure we 
can bridge this success for small business through SBA 
resources and programs. Frankly, it is not only a benefit to 
the small business owners in America, it is a benefit to our 
Nation's economy.
    Thank you, Mr. Chairman.
    Chairman Kerry. Thank you, Senator Snowe, for an important 
and comprehensive statement. I think, Mr. Administrator, what 
you see gives you a sense of the sort of non-partisan nature of 
the comments and observations here. I think that is strongly 
held by the Committee.
    Normally, I would not do openings across the board, but if 
my colleagues have a quick comment they want to make--Senator 
Levin.

        OPENING STATEMENT OF THE HONORABLE CARL LEVIN, 
             A UNITED STATES SENATOR FROM MICHIGAN

    Senator Levin. Very briefly, Mr. Chairman. I want to 
associate myself with the Chairman and Ranking Member's 
comments. Regarding the reduction in small business budget--if 
you include the disaster funding cuts since 2001, it is a 45-
percent reduction in the SBA budget. I think that is totally 
unacceptable and intolerable given the fact that small 
businesses are the engine of growth in our economy. Where I 
come from, they are not only the major engine of growth, they 
are almost the only engine of growth in our economy, and yet we 
see these reductions in the budget.
    That includes the impact on the Microloan Program with zero 
Federal funding, proposing to fund it based on fees. To cap 
that program at a lower level than the level of microloans 
which were made last year, to me, makes utterly no sense.
    The budget cuts the Small Business Development Centers, 
which is often the first organization that the small 
entrepreneurs come to for assistance with their businesses. It 
terminates for the fourth year in a row the SBIR Rural Outreach 
Grant Program, and the SBIR Fast Grants. It makes other 
significant reductions in other parts of the budget that I will 
not repeat other than to say that I am confident that we will 
this year do what we have done in many years, and that is to 
restore the cuts, to improve the situation from the perspective 
of small business, for the economy as a whole, and that means 
jobs for a lot of people who otherwise will go without jobs.
    I would ask, Mr. Chairman, that my entire statement be made 
part of the record. I commend you and Senator Snowe for the 
bipartisan approach that you are taking to this, and I have 
confidence in you and other Members of this Committee, that we 
are going to restore a number of the cuts that have been made 
by this proposed budget.
    Chairman Kerry. Thank you very much, Senator Levin. We 
appreciate your many years of experience on this Committee and 
I thank you, as the Chairman of the Armed Services Committee, 
for taking time to be here.
    [The prepared statement of Senator Levin follows:]
Statement of Senator Carl Levin, Senate Committee on Small Business and 
    Entrepreneurship, Hearing on SBA 2008 Budget, February 28, 2007
    Small businesses have a proven track record of creating jobs even 
when larger businesses may be cutting jobs. When small businesses are 
growing and thriving, the overall economy is growing and thriving. I'd 
like to see the Federal Government do more to give small businesses the 
tools they need to expand and grow, not cut the resources available to 
them. It's totally unacceptable that this Administration has cut SBA's 
budget by 45 percent since 2001, including disaster loan funding.
    SBA's Microloan program provides small loans and technical 
assistance to startup and emerging businesses that conventional banks 
are unable to serve. Over the years, the SBA has financed more than 
23,500 Microloans worth $280 million creating more than 64,000 jobs at 
the cost of only about $4,400 per job. That's a pretty good return on 
investment if you ask me. I'd like to see this program grow.
    At a time when the Nobel Peace prize was recently granted to an 
international innovator in micro-credit we should be celebrating the 
fact that the United States government runs an extremely effective 
microloan program out of the SBA.
    Unfortunately, the Administration's budget request fails to fund 
SBA's Microloan program for the 4th year in a row. This year the 
Administration proposes paying for the Microloan program through 
increased costs to its lenders and at the same time zeros out the 
technical assistance component of the program that was designed to work 
hand in glove with the Microloan program. The technical assistance 
component of the program works to ensure that borrowers can actually 
pay back their loans by p oviding them with business management 
counseling. In addition to providing no funds for the Microloan 
program, the budget request also proposes capping the program at $25 
million. For comparison, it made $32 million in Microloans last year.
    Since one of the biggest hurdles facing small business 
entrepreneurs is finding the capital to get started, expand, or just 
stay in business, we ought to be growing a program that gets capital to 
the very smallest of small businesses, not zeroing out Federal support 
for the program which would effectively kill the program.
    I'm disappointed in other parts of SBA's budget request as well. It 
continues to eliminate all funding for the 7(a) and SBIC participating 
securities programs, requiring fees to support those programs. This 
budget also cuts funding for the Small Business Development Centers 
which are often the first organization that small entrepreneurs turn to 
for assistance with their businesses. It would also terminate for the 
4th year in a row funding for SBIR Rural Outreach grants and SBIR FAST 
grants whose purpose is to increase SBIR participation.
    Fortunately, the Committee has a bipartisan history of supporting 
and funding SBA's programs even when the Administration proposes cuts. 
Last year this Committee passed a reauthorization bill that was not 
acted on by the House. That bill included a provision I authored, the 
Small Business Intermediary Lending Pilot Program, that would establish 
a program to make patient, low-interest loans through Community 
Development Corporations to small businesses that have outgrown SBA's 
Microloan program but are unable to qualify for conventional bank 
loans. I hope the Committee will include this provision again as part 
of this year's SBA reauthorization bill and Administrator Preston, I 
hope the SBA will support the provision.

    Chairman Kerry. Senator Coleman.

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

    Senator Coleman. Thank you, Mr. Chairman. I certainly want 
to get to the Administrator, so just very, very briefly, I 
think we are all singing off the same page here. I thank the 
Administrator for his reaching out. He was in Minnesota last 
year. I again applaud you for your commitment to reaching out.
    But I share and associate myself with the concerns that 
have been raised. In particular, we talked about the Microloan 
Program. Thanks for not eliminating it. On the other hand, the 
shifts in the funding, I think are going to have a very, very 
negative impact on the opportunities that are out there.
    I have concerns about SBA and its role in trade and the 
need to fill some positions to move that forward. SBA should be 
one of the advocates for small business to participate in the 
global economy. I have deep concerns about rural lending and 
some of the declines that we are seeing there.
    I think these are bipartisan, non-partisan levels of 
concern that have been raised to make sure that the engine of 
growth in this country, small business, continues to be able to 
do that. There is a role for the SBA to play and the levels of 
funding will make it difficult for that role to be played in 
the appropriate manner. So I associate myself with the concerns 
that have been expressed by my colleagues on both sides of the 
aisle here.
    Chairman Kerry. Thank you, Senator Coleman. I appreciate 
it.
    [The prepared statement of Senator Coleman follows:]

    [GRAPHIC] [TIFF OMITTED] T5303.325
    
    [GRAPHIC] [TIFF OMITTED] T5303.326
    
    Chairman Kerry. Senator Landrieu.

 OPENING STATEMENT OF THE HONORABLE MARY L. LANDRIEU, A UNITED 
                 STATES SENATOR FROM LOUISIANA

    Senator Landrieu. Administrator Preston, I want to 
associate myself with the remarks of the Chair and the Ranking 
Member and again say that this Committee is united in helping 
you to build a better SBA, one that works in regular times, 
under regular circumstances, because the small businesses of 
this country deserve to have a real friend in Washington and 
someone that is looking out for their interests and understands 
that because they are small, they simply don't have the 
resources that large companies have, which is SBA's role to 
serve as an advocate for them because it means jobs for the 
country and strength to our economy.
    But number two, I want to thank you for stepping in in a 
very difficult situation and actually taking a job which not 
many people might have wanted, given the consideration that has 
happened along the Gulf Coast, where we lost 18,000 businesses 
in Louisiana alone, and they look to you for their lifeline
    But I want the Committee to know that while this Chairman 
and Ranking Member have put together several packages with our 
full support, they have yet to pass these bills because the 
Administration generally drags its feet on reform. I am hoping 
that through your position, you can push for a better loan 
processing system, which I think you will testify on today, 
more loss verifiers in a region when there is a disaster, 
better partnerships with local banks that could process loans 
much more quickly in a disaster, and I have a long list of 
additional priorities. But, suffice it to say, that the cuts 
that are in this budget are going to make our recovery even 
harder, and I will ask directly about some of these issues in 
my questioning time. Thank you.
    [The prepared statement of Senator Landrieu follows:]

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    Chairman Kerry. Thank you very much, Senator Landrieu.
    Senator Thune.

        OPENING STATEMENT OF THE HONORABLE JOHN THUNE, 
           A UNITED STATES SENATOR FROM SOUTH DAKOTA

    Senator Thune. Thank you, Mr. Chairman, and Administrator 
Preston, welcome. Thank you for your service. Of course, in my 
State, most of the jobs created are created by small 
businesses. It is what I think drives the economy in this 
country. So we do want to make sure that we have an agency that 
is responsive, that is taking the steps which it can to 
continue to provide credit and assistance and other ways that 
will help our small businesses thrive and prosper.
    There are a couple things that I think are going to be 
really important in the days ahead. One is making sure that we 
keep the individual tax rate low, because that is the rate that 
a lot of small businesses pay, and I think that is going to be 
important for our small businesses.
    Obviously, a big concern of mine is the cost of health 
care. That is something that this Committee has attempted in 
the past to address and clearly a tremendous impact on small 
businesses, many dropping coverage, putting more people into 
the ranks of the uninsured. In most cases, that is a cost 
issue, so I am anxious to hear your thoughts, too, about how we 
can lower health care costs for small businesses. I think that 
is something that we as a Congress have to be focused on, as 
well, Mr. Chairman.
    I would also say that in terms of my own State of South 
Dakota, I won't get into it in my opening statement, but we 
have a concern with the Microloan Program. We haven't had one 
issued there in 2 years. So credit availability, particularly 
in rural areas, is of great concern to me, and I am also 
interested perhaps in your thoughts about--as we have more 
veterans coming back from Iraq and Afghanistan--about the 
things that we can be doing to help them start small 
businesses. I know that is a role that SBA has played in the 
past.
    We welcome your testimony today. We look forward to 
partnering with you on creating an environment out there that 
is conducive to greater expansion of small businesses, 
hopefully the start of new small businesses, and we can keep 
this economic growth and the good things we have seen happening 
in our economy in the last few years to continue to move 
forward.
    Thank you for being here today, and Mr. Chairman, I 
appreciate the chance to have the Administrator here to speak 
about the budget. I understand there are some budget proposals 
that are somewhat different from the ones we have seen in the 
past, and I look forward to discussing those and hearing more 
about them. Thank you.
    Chairman Kerry. Thank you very much, Senator Thune.
    [The prepared statement of Senator Thune follows:]

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    Chairman Kerry. Mr. Administrator, thank you for listening 
to each of our colleagues here, not as if you had much choice, 
but nevertheless----
    [Laughter.]
    Chairman Kerry. It is important, I think, for you to get a 
sense of the unanimity here, and I am confident that it has had 
some kind of impression on you.
    The one thing I would add, as I introduce your testimony, 
is that having sat on this Committee now for a long time 
together with Senator Snowe and some others here, I remember 
when we had a fight about whether or not the SBA ought to be 
eliminated, zero funded. I think it was in the 1980s. There was 
a clear ideological notion that somehow government shouldn't be 
involved in small business initiatives. I guess I am left 
believing that whoever is making the final cut on some of these 
choices right now is pursuing that same course differently, 
sort of a starvation diet, because it is very hard to draw a 
conclusion that there is a real commitment or understanding of 
what Senator Snowe was talking about, about the ways in which 
the SBA can actually grow the economy, leverage jobs, help us 
compete, help a lot of small businesses get into the 
international marketplace, and so forth. I think it is a huge 
missed opportunity that is being guided by a kind of tunnel 
vision belief. I don't know who has it, or who is dictating it, 
but I am confident that you don't agree with all of it. 
Somehow, we have to find a way to change that, because that 
starvation diet is going to reach a tipping point, if you will, 
of missed opportunities. So we welcome your testimony and we 
look forward to seeing how we can change this.

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

    Mr. Preston. Thank you very much, Mr. Chairman. I have met 
all of you----
    Chairman Kerry. Your microphone is not on. If you would 
push the button on the bottom there----
    Mr. Preston. That was by design.
    [Laughter.]
    Mr. Preston. Sorry. But thank you very much. I just want to 
state right off the bat, I have really appreciated the sense of 
collaboration from so many people on this Committee--openness. 
I get a sense that our staff is working very well with all of 
your staffs, and I have said it many times. If any of you ever 
get the sense to the contrary, please let me know, because I 
don't really know any other way to operate than with an open 
dialogue.
    I also want to thank you so much for moving so quickly on 
confirming the deputy. She is terrific. She is jumping in with 
both feet. She brings tremendous background to this agency. So 
I am thrilled to have her on board, and I want to thank you for 
moving so expeditiously to get her on board.
    Obviously, I share all of your commitments and comments 
relating to the importance of small business. We have seen 
enormous job growth in this country, over 7 million new jobs 
over the last 3.5 years, and we know that most of those are 
coming from new businesses. I think our 2008 budget request 
reflects a continued commitment by this, certainly on my part, 
to America's small businesses and that important role that they 
play in our economy and in our society. I think the budget will 
enable us to continue serving the small business community 
while also being a good steward of taxpayer dollars.
    Since coming here, I have spent a tremendous amount of time 
out in the field listening to employees, to our partners, to 
many of you. I reviewed a lot of the programs at the agency in 
order to identify how we can build on the agency's successes 
and also look to address many areas, I think, frankly, that 
need improvement.
    Also when I came to the agency, many of the positions we 
had, critical positions, were vacant. We are making a lot of 
progress building a competent team. I can't underestimate how 
important that is to all of us.
    As many of you know, one of the first things I did coming 
in was focus heavily on the disaster program. I got that 
message loud and clear, back in June, when I sat before this 
body. I think we have made a tremendous amount of progress 
there, once again, after digging in with our customers, our 
employees, and looking deep into our processes. We have gone 
from about 120,000 people--over 120,000 people in that process 
this summer, to just over 20,000 right now, and 98 percent of 
borrowers from the 2005 hurricanes have gotten all their funds, 
some of their funds, or chosen not to borrow. So we now have 
over $5 billion in the hands of the people in the Gulf.
    We still have a ways to go in this operation. There is no 
doubt about it. The changes we have made have been pretty 
dramatic and I think, frankly, when you make change like that, 
it uncovers things that you didn't know were there. I think we 
are beginning to uncover policy inconsistencies, certainly a 
greater need for better training and also stricter enforcement 
of certain standards down there. Some of that comes to our 
attention through our employees, which if you talk to our 
employee base, they all have my e-mail. They frequently use it, 
and it is a tremendous source of input for me. And we are 
working with our IG in that operation to understand any issues 
we might have there better, but I think it is a much better 
operation than it was 6 months ago, and 6 months from now, it 
will be better still.
    We are applying the same kind of reforms that we instituted 
down to other parts of the operation, and we are consistently 
starting with listening to our customers, understanding what 
outcomes are trying to drive those changes. We are working very 
hard to ensure that we have a compliant, efficient, accountable 
organization, and as I believe is always extremely critical; we 
need to understand that in any service organization, your 
success is based on your people, and we have to ensure that we 
have a well-trained, high-quality, motivated workforce that is 
encouraged to provide input on how to improve the agency.
    Getting now to the numbers, we are requesting $464 million 
in new budget authority. That is a 5 percent increase above the 
level enacted in 2006 which excludes disaster and Congressional 
initiatives. We are asking for $329 million in carryover 
balances to fund disaster, funds that we have on hand from the 
$1.7 billion of supplemental funding from 2006. It also 
includes $21 million in reimbursables from the E-Gov gateway 
initiative as well as SBDC certifications. So all that totals 
$814 million in overall budget authority.
    We think it will enable us to carry out our core functions, 
begin a number of reforms and improvements. These resources 
will support a total of $28 billion in financings through 7(a), 
504, and SBIC. For the 7(a) program, we are asking for $17.5 
billion in lending authority, for 504, $7.5 billion. And for 
the SBIC venture capital program, $3 billion.
    We are also proposing to reduce fees in our primary finance 
programs. The 7(a) annual fee would go down 5.6 basis points, 
from 55 to 49.4. The 504 up-front fee is totally eliminated, 50 
basis points. And the SBIC annual fee decreases almost 19 basis 
points. And then, finally, it supports a disaster loan volume 
of $1.064 billion.
    For counseling and training, we are asking for $104 million 
for our resource partners, $87.1 for the SBDCs, $11.8 for 
Women's Business Centers, and $4.9 for SCORE.
    In terms of our workforce, it will allow us to increase the 
workforce to 2,123 FTEs. That would provide 86 new positions 
through 2007 and 2008, which we are very excited about, and 
those resources will be used in part to replace attrition at 
the agency, but we think it will also allow us to provide 
stronger loan processing and lender oversight, which is 
critical with our growing loan volume, greater support for 
small business in our government contracting area, better 
training and career support, and a continuing improvement in 
the automation at the agency, which I think is important not 
only for efficiency, but in terms of being able to get people 
to use our services more simply.
    In the financial operation, the budget includes over $4 
million to invest back into the loan operations for a system 
upgrade. That is a multi-year initiative and we are really 
beginning to kick that one off. For SBIC oversight, we are 
asking for $1.5 million to support contract evaluation, 
liquidation planning, and examination of contracts. That is 
very important for helping us minimize the challenges we are 
having in the participating securities program. And also, we 
would expect to see continuing improvement in our lender 
oversight.
    In government contracting, obviously, it is essential that 
we ensure small businesses have fairer access to procurement 
opportunities. I like to tell people it is not just a matter of 
fairness, it is a matter of competitiveness. I strongly believe 
small businesses perform well as suppliers of goods and 
services. Their size makes them flexible and innovative and 
often cheaper than large companies, but it does take a little 
bit more work sometimes to find the right small business, and 
it is our job to help people do that.
    We are asking for $500,000 to help us look at processes 
underlying a lot of our preference programs so we can be more 
effective in reaching out to small business and supporting them 
along the way. We are asking to add in 2007 and 2008 nine new 
procurement center representatives, which would increase the 
number by 16 percent. And we are working to reform the contract 
goaling and reporting process and redoubling our efforts, 
frankly, to ensure that the Federal agencies provide accurate 
data on all small business procurement so that we make sure 
that when we are looking at the data, it is the right data and 
it is the best representation of small business.
    On the veterans side, Senator Thune mentioned veterans. We 
have requested another $500,000 to expand our veterans outreach 
program. Obviously, with our current engagement in Iraq and our 
presence in Afghanistan, the number of veterans returning from 
active duty will continue to increase. Our Office of Veterans 
Business Development plans to increase its effort to educate 
and provide programs and services to veterans and active duty 
personnel in a number of areas, including access to capital, 
management and technical assistance, and procurement assistance 
programs to support them.
    In wrapping up, on the disaster program, even though we 
have made a lot of progress, we are committed to lasting 
reforms so that we make sure that we are fully prepared for 
future disasters, whatever the size might be, and we continue 
to refine our processes to do that. We are working very hard 
right now to develop organizational planning tools and detailed 
documented escalation plans that will improve our response. 
Those plans will include models to rapidly forecast loan 
volume, resource requirements, and our coordination 
requirements to position the agency to respond effectively.
    In 2008, we expect to implement an Internet-based 
electronic loan application to enable borrowers to submit their 
required information quickly and accurately. That will 
accelerate our ability to be responsive to them. We have also 
been evaluating options to assess the private sector's skills 
and resources when dealing with catastrophic disaster events, 
and I know many of you have focused on this issue and we look 
very much forward to working with you as you consider 
legislation in that regard.
    Finally, a very high priority of mine is to improve the 
work that is being done to reach underserved markets in our 
country, and I know specifically many of you have concern 
because some of the programs that have been designed to do that 
aren't getting the kind of funding that they have historically. 
But I do believe in areas where we see high unemployment and 
low wage rates, like our rural areas and many of our inner city 
areas, providing effective support to new and growing small 
businesses can provide much-needed jobs, economic activity, and 
rejuvenation to places in our country that absolutely need it 
the most.
    So we are doing a number of things. We are looking to 
broaden lender involvement in our Community Express Program. I 
like to say that adds sort of the one-two punch of capital and 
technical assistance, and we think there is a large opportunity 
for us to expand that. We are looking right now to expand the 
Urban Entrepreneur Partnership, where we partner with local 
inner city organizations, primarily the Urban League, to help 
inner city entrepreneurs get the support they need through the 
network of services available in their area. We would like to 
establish seven more alternative work sites, which will allow 
the agency to make itself more accessible to rural customers. 
And we are hoping to expand the reach of the Microloan Program 
by moving the program to zero subsidy and hopefully expanding 
the amount of actual capital we put out there, albeit we do 
understand it may be at a somewhat higher cost.
    So as I said before, I believe this is a sound budget. I 
think it gives the SBA funds necessary to operate and oversee 
our core financial programs more effectively, to reengineer and 
improve our government contracting programs, and to continue 
our work with counseling and training partners. It will enable 
us to provide more effective outreach, be easier for customers 
and partners to work through better automation, and also fill 
very important key staff positions in areas where we are 
clearly lacking the necessary manpower right now.
    So thank you. Thank you for your consideration. I look 
forward to addressing your questions.
    Chairman Kerry. Thank you, Mr. Administrator.
    [The prepared statement of Mr. Preston follows:]

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    Chairman Kerry. What I am going to try to do is keep the 
first round of questions limited so everybody gets a shot 
fairly quickly at getting their priority questions out there. I 
have set a 5-minute limit, with a little bit of flexibility, if 
necessary, but we will try to get everybody in here at least in 
the first round.
    Mr. Administrator, are the budget numbers that you are 
proposing to this Committee now a reflection in each category 
of what you asked for from the Administration?
    Mr. Preston. You know, Senator, I think probably we all 
appreciate that there is a give and take in this process, but 
this is the budget that I am proposing. I think we can achieve 
the goals that we have in front of us with this budget. I 
think----
    Chairman Kerry. My question to you is, are there areas 
where you sought additional funding over which you have?
    Mr. Preston. This is a somewhat different budget than I 
proposed. It is what I would say, once again, after significant 
consideration, I think this is a budget that acknowledges the 
challenges we have, gives us funding to address those, and also 
acknowledges, I think, across the Federal Government the fact 
that we----
    Chairman Kerry. I am not trying to go through the budget 
that you wish you had, I just wanted to establish, and I think 
we have, that it is not the budget that you would have hoped 
for, but it is the one you have to put up with.
    With respect to the 2007 appropriations, we passed a 
continuing appropriations resolution where we said that the 
agencies and their programs are to be funded at the 2006 
levels. Does the SBA plan to fund the non-credit programs at 
the levels provided in the line items for $128.5 million?
    Mr. Preston. I am not specifically familiar with the 128 
number, but I expect that that is what we would do, but I--I 
hope I didn't----
    Chairman Kerry. Will you find out for certain and perhaps 
you can report to us with specificity?
    Mr. Preston. Yes.
    Chairman Kerry. Do you plan to designate 41 percent of the 
total Women's Business Center funding for centers in 
sustainability status?
    Mr. Preston. Well, I think at this point, I would look 
forward to working with you all on that. My understanding is 
sustainability is determined Congressionally, and so what we 
have proposed is a level of funding for that----
    Chairman Kerry. We specifically have designated the level 
of funding. My question to you is whether you plan to live up 
to that 41 percent.
    Mr. Preston. Senator, I will have to get back to you on the 
specific percentage for sustainability.
    Chairman Kerry. Have you seen them?
    Mr. Preston. Have I seen what?
    Chairman Kerry. The budget levels that we appropriated.
    Mr. Preston. Yes, I have seen the budget levels and I know 
we have a number of Women's Business Centers graduating from 
the program this year and a number of them moving from the----
    Chairman Kerry. The conference agreement specifically 
included language allowing Women's Business Centers that are in 
sustainability status to continue to receive grants and 
designates 41 percent of the total funding for those centers in 
that status.
    Mr. Preston. You are talking about centers that are more 
than 10 years----
    Chairman Kerry. In sustainability status.
    Mr. Preston. I know right now, what we are proposing----
    Chairman Kerry. My question to you is, do you intend to 
designate that funding accordingly?
    Mr. Preston. Right now, the intention is centers that are 
graduating from sustainability graduate. Centers that are 
moving from that first 5 years into sustainability grants move 
into that sustainability phase.
    Chairman Kerry. That is different from, I guess, the 
question I am asking for those that are in the status now, not 
those that will move into it, but those that are in the status. 
Those that will move into it will move into it according to the 
process.
    Mr. Preston. Right.
    Chairman Kerry. But those currently in it, we specifically 
designated 41 percent of the total WBC funding for those 
centers and we are trying to make certain that they are going 
to be funded accordingly. It should be a yes or a no.
    Mr. Preston. Well, if they go beyond that 5 years of 
sustainability status, no, they wouldn't, which means that they 
will have been out there more than 10 years.
    Chairman Kerry. Well, if they are still in sustainability 
status, they should qualify, shouldn't they?
    Mr. Preston. Senator, I will have to get back to you on the 
details.
    Chairman Kerry. Would you please?
    Mr. Preston. I think----
    Chairman Kerry. What about the $1.5 million for the 
National Veterans Business Development Corporation? Do you plan 
to designate that accordingly?
    Mr. Preston. I am advised that that is not under our 
account, Senator. That was not--that is not funded through the 
SBA, is what I am told.
    Chairman Kerry. I think the business development piece, 
didn't we put that under there? Let me just verify.
    Mr. Preston. Are you referring to the advisory committee?
    Chairman Kerry. Here it is. The conference agreement 
includes $1.5 million for the National Development Corporation 
as proposed by the House via transfer from Small Business 
Administration salaries and expenses. Well, again, this is in 
the conference report. It is in the CR. It is what is the law, 
and I just want to make sure we are not going to run into a 
struggle on it. You all can figure that out and perhaps report 
back to us.
    Mr. Preston. Right. It sounds like we need to also connect 
with your staff to make sure we are talking about the same 
issues.
    Chairman Kerry. Well, we are. For better or worse, it was 
designated as a transfer from SBA salaries and expenses and 
that is the language of the conference report, so we will 
follow up on it.
    Quickly, because I don't want to abuse my time here, you 
mentioned the health care issue, which we had a hearing on 
recently. You hear this everywhere. I am sure you haven't 
traveled anywhere in the country that small business owners 
aren't talking about the health care. You have suggested that 
the health association plans are the answer, which as you know, 
we are sort of divided a little bit in this Committee still 
about what is the best manner of dealing with the adverse 
selection issues and other issues that accompany that. But one 
thing that could be done very quickly is we have 9 million 
children who are uninsured and recently the Urban Institute 
found that 2 million of these kids are eligible for the SCHIP 
program. They are already eligible. People whose families are 
self-employed or who work for small firms, small businesses, 
are far less likely to be enrolled when qualified. So SBA could 
team with HHS, as well as leaders in the private sector without 
a lot of expenditure of money and without having to spend the 
money to actually inform people about this and I wonder if you 
would be agreeable to posting a link on the SBA Web site for 
businesses to access information and contact experts regarding 
SCHIP eligibility as a way of helping people get coverage.
    Mr. Preston. I don't see any reason why we wouldn't. We 
will follow up with you on that.
    Chairman Kerry. Would you please?
    Mr. Preston. Yes.
    Chairman Kerry. That would be terrific.
    Senator Snowe.
    Senator Snowe. Thank you, Mr. Chairman.
    You mentioned in your testimony that there will be $500,000 
provided for the Office of Veterans Business Development, and 
that is to be applauded. However, we don't see any line item 
within the budget for that. So how would there be essentially a 
guarantee or assurance that that will be the case? I am 
reintroducing a package of initiatives to help the National 
Guard and Reservists, veterans and disabled veterans, as well, 
service-connected disabled veterans. So I want to make sure 
this is providing this additional assistance that would 
complement that package. It is not reflected in the line item 
within the budget.
    Mr. Preston. No. You know, I think when you look in the 
budget, we have had more line items historically. What we find, 
for example, in many of these areas is we have a much larger 
budget for an item that has a designated line item, and HUBZone 
is a great example of that. I commit to you that we will be 
using that $500,000 and we are spending a lot of effort right 
now in working through whether or not we can come out with a 
targeted loan product for veterans. I was speaking to the 
Network of State VA Leaders last week. We are working with them 
to get the message out. A lot of this, Senator, will be used 
for outreach in the field to help them get out and work with 
the VA and veterans locally, and we also have added some 
staffing to the Office of Veterans Affairs.
    Senator Snowe. So we can be assured that that $500,000----
    Mr. Preston. Yes.
    Senator Snowe [continuing]. Will be provided?
    Mr. Preston. Yes.
    Senator Snowe. OK. So there is not any kind of 
discrepancy----
    Mr. Preston. No, that is very important for us. It is not a 
lot of money, but it will go a long way.
    Senator Snowe. Now, you mentioned with respect to the 
budget that there is a 5 percent increase. Albeit that is true 
from the previous year, I mean, setting aside the disaster loan 
money that is carried over from the previous years from the 
supplementals that were enacted by Congress, it represents a 5 
percent increase, but it doesn't do anything to bolster or 
reinforce any of the existing programs, the core programs. It 
is all going for staffing, as I understand it. Is that correct?
    Mr. Preston. It is going for staffing, it is going for 
technology, and in some cases, it is going for outreach.
    Senator Snowe. But nothing to increase any of the core 
programs, which is also--I mean, that is the underlying concern 
essentially of the Committee because there has just been 
systematic reductions in all these programs. It really is a 
dramatic reduction in the budget overall. I mean, if you look 
back to 2001 to where we stand today, it really is stunning.
    Mr. Preston. I do want to emphasize that it will provide us 
with more support, for example, for government contracting 
programs in the field, as well as the PCRs. So it will allow us 
to do better business development support. It will help us with 
lender outreach. I agree that it doesn't--the programs in terms 
of separately funded programs like the resource partners, you 
are absolutely right. It is flat funding for those.
    Senator Snowe. Well, in looking at the procurement center 
representatives in your budget, obviously, it is commendable 
that you are increasing the numbers, and still, even with those 
increases, the SBA will still be two PCRs short of its 1993 
staffing level. At that time, the Federal contracting budget 
was $93 billion less than it is today. I mean, we have a $400 
billion contracting budget.
    In fact, I received a letter from the OMB Deputy Director, 
Clay Johnson, last August and he said, we agree with you that 
more aggressive steps can and must be taken to increase small 
business access to the Federal marketplace and aggressively 
exploring ways to increase the number of SBA's procurement 
center representatives in recognition of the important role 
that they play in implementing the President's contract 
bundling initiative.
    But we are never going to be able to have a successful 
endeavor in that part, if we don't provide the kind of support 
necessary to small businesses. I mean, the agencies have been 
intransigent, most especially the Department of Defense. And so 
we are still--I mean, to make the PCR staffing proportionate, 
you would have to hire 30 additional representatives in order 
to accommodate where we stand today in the overall Federal 
contracting process and ensuring--and that is where we stand.
    Mr. Preston. Yes.
    Senator Snowe. I mean, that is, unfortunately, trying to 
make up for lost ground, given the dramatic reductions in all 
respects in these budgets over the years.
    Mr. Preston. Yes. I think we are working with the PCRs to 
give them better tools and technologies to do--to be able to 
seek more volume, to be able to support a larger workload, and 
to work more effectively with the agencies in getting the right 
type of access to the small businesses. I will be looking very 
hard at the people that we add as we add them to see their 
productivity and how well they enhance this whole process.
    To the extent that we have capacity--obviously, we are an 
agency with several thousand people--to reallocate along the 
way, if we see that these are very productive and very 
beneficial to this, we will be looking at that, as well.
    Senator Snowe. Finally, on the Microloan Program, it is 
still difficult for me to understand why the Administration has 
been so resistant to this program. I mean, it is beneficial. 
These microloans go to entrepreneurs that otherwise would not 
have any access to capital whatsoever, and so essentially, we 
are going to be raising their interest rates, making it more 
difficult for them to have access to this lending, because 
microlenders are not going to--they are either going to have to 
raise their rates or they are not going to bother with them at 
all. I think that that is regrettable given the role that they 
play in our Nation's economy, especially in rural America.
    For the small amount of money, and yet the dividends it 
produces, the economic benefits that it provides, it is hard to 
understand why there has been such difficulty within the 
Administration with respect to this program. I mean, there have 
been $280 million worth of loans, 23,500 microloans issued 
since 1991 when the program was created, creating 64,000 jobs 
in areas that otherwise jobs would not be created for 
entrepreneurs and small businesses that otherwise would not 
have access to any financing. Now we are imposing an inordinate 
burden on them, not to mention the fact that it is not likely 
it is going to happen, and transferring the technical 
assistance to other programs within the SBA that ultimately, 
you know, are facing disproportionate burden of additional 
responsibilities with additional cuts in their funding, as 
well.
    Mr. Preston. Well, first of all, I want to acknowledge that 
this is a very important tier of capital in our economy, and I 
do agree with that. I think this is the first time we have had 
anything on the Microloan Program in the budget for a number of 
years. So I would like to say we have moved to embracing the 
concept of microlenders. We have seen a dramatic increase in 
small loans in our other programs, but I also agree that these 
microlenders are reaching people that the banks don't, and they 
are important people to reach.
    We are hoping to be able to bring something forward that 
doesn't provide an additional cost but still allows us to get 
capital in the hands of microlenders, and the $25 million that 
we are seeking authorization for is a good bit more than we put 
out there last year. So I think what it would enable us to do 
is get more money out there, albeit there would be a higher 
cost, especially for microlenders that maybe rely on a greater 
spread here.
    Now, on the TA side, I guess the way I look at it is this, 
we touch about 1.5 million people in that network and we make 
2,500 new microloans a year. So the network we have in place is 
vast and the microloan lenders that we have in place, it is a 
relatively small community. So I am actually less concerned 
about the ability of our resource partners to take on a little 
bit extra load because it is not that large relative to their 
overall scope. And we have also done sort of zip code overlays 
and we see that 94 percent of the microlenders have resource 
partners in their area. But I do have to acknowledge that there 
is an additional cost to it.
    Senator Snowe. Thank you.
    Chairman Kerry. Thank you, Senator Snowe.
    Senator Landrieu.
    Senator Landrieu. Thank you. I have so many questions, it 
would take me all morning, but I know I only have 5 minutes, so 
let me just begin on a national issue which is health care for 
small business. I was very disturbed this morning when I read 
the Metro section of the Washington Post. I am sure that some 
of the Senators saw this, as well as people in the audience. 
This 12-year-old, Deamonte Driver from Prince George's County, 
died Sunday from a toothache, and he had a toothache for 8 
weeks and couldn't see a dentist because his family doesn't 
have insurance. After a few weeks, the bacteria that was in his 
mouth went to his brain, and after spending weeks in a 
hospital, he died on Sunday.
    So when Senator Kerry and Senator Snowe continue to bring 
up in this Committee, year after year, the fact that there are 
children in this country in which this happens to all the time, 
and so the suggestion that anything that small business can do 
to help, I don't know if this young child's mother was working, 
but obviously she had no insurance. Maybe she was working, but 
she could have been a small business owner that doesn't 
qualify. So these issues are not issues that we do in a 
haphazard or insincere way because it truly is life and death. 
So anything that the SBA can do to help find a workable 
solution on this issue would be appreciated.
    Number two, Mr. Administrator, I finally, after 18 months, 
got my hands on the SBA disaster plan. I asked for it for 
months following Hurricanes Katrina and Rita. We lost 18,000 
businesses and I thought if I could get at least the plan, I 
could help them figure out why everybody was having so much 
difficulty with the SBA. The Committee did not have this plan. 
This was given to me, and you all didn't submit it, the 
Committee couldn't get it. I finally got it shortly before the 
former Administrator left SBA, so I am going to turn it in to 
the Chairman for the record of this Committee.
    It really isn't worth getting, however, because I just want 
to read a couple of things about what our business people went 
through. Just to clarify, this is the playbook in place for 
Katrina. This is the disaster preparedness playbook. When you 
have a disaster, you are supposed to read this to make sure 
that the loan that you are giving to the small business person, 
that just had 20 feet of water in his business, works.
    This is on page 15 of the playbook: ``You must prepare all 
reports and other documents in either blue or black ink. You 
must not use white-out or similar materials to make 
corrections. Instead, you must mark through the entries to be 
corrected with a single line and reenter the corrected 
information. You must initial and date all corrections.''
    And then it goes on to talk about in another section 
criminal arrest: ``It is not in the public interest of the SBA 
to extend financial assistance to individuals who are not of 
good character.'' I understand that and I applaud it. The 
problem is, the law says if you have been arrested, or if you 
are under indictment, or you have a conviction for any criminal 
offense, which could be shoplifting 15 years ago, you are no 
longer entitled to a disaster loan. I mean, I don't know how 
many people in Florida or Mississippi or Alabama or Louisiana 
might have been picked up or arrested when they were 15 years 
old. Now they have a home worth $400,000, but they can't get a 
loan from the SBA.
    Mr. Administrator, you have only been on the job a few 
months. This is not your problem, but I tell you, it is our 
problem and it is a serious problem. I could spend the next 10 
years of my life bringing down the Members of this Committee to 
the Gulf Coast. I actually walked through New Orleans literally 
with the Chairman of this Committee not that long ago, Senator 
Kerry, and I can say as I have said publicly, and he wouldn't 
mind, he was visibly shaken by what he saw, business after 
business after business in New Orleans East. Many of these are 
businesses that came to us for help. They have basically given 
up.
    So, I am just going to submit my questions for the record, 
but I tell you, we have had bills filed since Katrina and Rita. 
I don't know what else it is going to take. I don't know how 
bad a storm has to be. I don't know how high the water has to 
be. I don't know how many people have to declare bankruptcy. 
Now, these are people who--I am just going to end with this--
have paid taxes their entire life, people who have risked their 
entire financial future to build a business, to hire 10 people, 
and they are proud people. They never ask for help. They most 
certainly don't ask for charity. But they do ask for a playbook 
that actually gives them a chance to play. They don't have 
that.
    So I will suggest this Committee has a long way to go. I 
thank the staff, the Republicans and Democrats, for trying to 
help, but we clearly have a long way to go, and I am going to 
submit the rest of my questions for the record.
    Mr. Preston. Thank you, Senator. I hope that you have 
sensed not only a willingness, but a dogged commitment to 
getting after these issues on my part, and if you haven't, we 
should talk more. I am not familiar with the document you have, 
but I can promise you that if you looked at our processes a 
year ago or even 7 months ago, that would be a partial 
reflection of the challenge. I think we have come a 
tremendously long way. I think we have a long way to go. But I 
can promise you, we are in a dramatically better position than 
we were not that long ago, and even though we have people that 
we are still working through, we have worked very hard and, we 
have spent thousands of man hours to improve these processes 
and get money into the hands of people down there.
    Senator Landrieu. I know, but let me just say, I understand 
that, but this was the playbook that was on the shelf for 
Katrina. It doesn't make sense. It is full of red tape. It is 
full of ridiculous requirements. And I just finished reading a 
book that I am going to recommend to everyone in the Senate 
called Disaster, and one line stuck out with me. One of our 
Homeland Security guys resigned about 2 weeks ago. He is my 
hero. I am going to find out who he is and call him and go have 
lunch with him. But he is quoted in the book as saying--and he 
resigned in protest, and he said, ``I am resigning because you 
all have been taught to serve a bureaucracy instead of serving 
disaster victims, and I was trained to serve disaster victims 
and that is what I intend to do, and because you all have been 
trained to serve the bureaucracy, I quit.'' He is my hero.
    Now, I am not going to quit being a Senator, but I promise 
you, we are going to serve disaster victims. We need to serve 
people on the normal days when the sun is shining, but when 
their business is under 20 feet of water and their kids can't 
go to college because they can't get this loan, we have a 
serious problem in this country and it is intolerable.
    So that is for the record, Mr. Chairman, and I hope this 
Committee--you have got a bill in to require them to write a 
better one, and when I get it, it better be less than 10 pages.
    Chairman Kerry. This is pretty--you ought to take a look at 
this. I am dizzy after about 2 minutes. Without objection----
    Mr. Preston. I do want to invite any one of you, any one of 
your staffs, any one of you to come down to our disaster 
center, meet with our employees. You can talk to people on the 
front line. I would love to give you an introduction to the 
progress we are making here. But Senator, I can't--I will take 
a look at this document and I fully am aligned with your view 
that we need to make this easy, streamlined, and accessible for 
people.
    Chairman Kerry. Let me just say, this document will be made 
part of the record following Senator Landrieu's questions.
    [The SBA Disaster Assistance Program submitted by Senator 
Landrieu and referenced above, appears in the Appendix Material 
Submitted on page 91.]
    Chairman Kerry. I am going to come right over here to 
Senator Coleman, but let me just say that since Katrina struck, 
Members of this Committee have engaged in an arduous, long, 
bona fide, bipartisan effort to put together a comprehensive 
disaster reform bill. Senator Snowe, Senator Landrieu, Senator 
Vitter, myself, all joined in drafting a bill to provide for 
greater coordination between the agencies and a faster response 
and improve the tools, all of this. Eighteen months of 
negotiations, Mr. Administrator. Broad bipartisan support in 
the Congress. We reported it out of the Committee unanimously 
last summer as part of the bipartisan SBA reauthorization bill. 
You testified in front of the House Committee that you want a 
constructive ongoing dialogue and so forth, but the 
Administration continues to block this bill from passing the 
full Senate.
    Now, you have also said you don't think this may be 
necessary to fix the disaster loan program, but you hear 
Senator Landrieu here today. Something is necessary.
    So let me just say quickly, and I want to go a bit further, 
will you commit to working with the Committee in a serious way 
so that we get this out of the Senate? If there is an 
objection, state it publicly, not in a manner that is 
clandestine. That is part of what I was talking about earlier.
    Mr. Preston. Well, I am absolutely committed to working 
with you, and I am not sure who would have ever quoted me as 
saying I don't think we need a solution here. I am very open 
and very honest about the challenges----
    Chairman Kerry. No, I didn't say you don't want a solution, 
but you think that legislation may not be necessary to fix the 
disaster loan program.
    Mr. Preston. I think my comments are taken out of context, 
Senator.
    Chairman Kerry. OK.
    Mr. Preston. I think there are very important things that 
are addressed in many of the different packages----
    Chairman Kerry. Well, 18 months, I mean, this is making all 
of us pretty frustrated, and frankly, it makes the Congress 
look pretty stupid as well as the Administration.
    Mr. Preston. Right.
    Chairman Kerry. Eighteen months to respond to a disaster 
loan program that clearly needs reform. It ought to be 
codified. And the Administration is blocking it. Now, how is 
Senator Landrieu supposed to go back to people in New Orleans 
and say we are serious about this?
    Mr. Preston. Well, like I said before, I would very much 
look forward to working with you all on the legislation----
    Chairman Kerry. I hope we can get this done, and I am going 
to push this within the Committee and see again if we can get 
it out and get it done.
    Senator Coleman.
    Senator Coleman. Thank you, Mr. Chairman.
    Mr. Administrator, I need a little help in understanding 
something, and that is in regard to rural lending. I was 
looking at the statistics. From 1990 to 1999, the percentage of 
urban lending versus rural in Minnesota was, for rural lending, 
over 50 percent every one of those years. At the high point in 
1995, 56 percent of loans were in rural areas versus 43 percent 
in urban areas. In 1999, 53 to 47. Last year, close to 63 
percent were urban and only 37 percent were rural, and it is a 
decline almost every year. I am not sure whether this is a 
Minnesota problem. I presume if it were Minnesota, in is also 
happening in South Dakota. I am not sure of the reasons why. 
But it certainly raises a great deal of concern.
    So Mr. Administrator, I would like your help in helping me 
understand what is going on here, whether there are factors 
that the SBA believes are responsible for this. I am thinking 
about the LowDoc program which has been replaced by the SBA 
Express. There is some question about whether the Express 
Program works as well in these communities. I don't have the 
answer to this, but I am looking at a trend here that is deeply 
disturbing----
    Mr. Preston. Yes.
    Senator Coleman [continuing]. And what I would like from 
you is a commitment to better understand and figure out a way 
to correct it.
    Mr. Preston. Yes. I can tell you some of what is happening, 
in fact. Now, overall rural lending has gone up very 
dramatically, actually, more than our overall lending program. 
But what we are seeing is a migration to some of these 
simplified products like the Express product. As an outcome of 
that, we are seeing more of the rural lending, I believe, move 
to big banks.
    I don't think we have an effective enough outreach to 
community banks. LowDoc was a very popular program because it 
simplified what they do, the paperwork with this and it gave 
them a nice guarantee and they were able to process it well. 
The challenge was it had very, very high losses. I believe some 
of that was challenges we had in how we operated the program.
    We are looking right now to see if there is a new program 
that we should be able to roll out specifically designed to 
reach out to the rural community that would be attractive to 
those community banks, because I think we need to win them 
back.
    The other thing we are doing is we continue to expand our 
alternative work sites--those are all in rural areas--so that 
we have a better on-site presence out there. So those are just 
two things I would mention in that regard.
    Senator Coleman. So rural communities, if they face great 
stress in health care delivery, in economic vitality, we need 
the SBA to be a player there, and at least as I look at the 
data----
    Mr. Preston. Yes.
    Senator Coleman [continuing]. It shows some disturbing 
trends. So I would appreciate your focus and attention to that.
    Let me turn to the new market tax credit pilot, which is an 
important program. I commend the SBA for establishing the 
pilot. My question is, and again, correct me if I am wrong with 
the data, it is my understanding that the SBA has yet to make 
one loan under this program, and so I am wondering, are there 
program restrictions? Are there problems? You have a great 
concept there, but if it is not being used, then we have a 
problem.
    Mr. Preston. Yes. I am not sure if that is still the case, 
Senator, but there has not been a significant adoption of it in 
any case. The way this program works is banks who have made the 
loans have the ability to sell those loans to community 
development entities and in that process avail themselves--the 
investors of those entities avail themselves of a tax credit. 
We are working both with banks as well as people in the tax 
credit community to understand how to get better adoption of 
it. It is all in the detail, which is frequently the case, and 
has to do with the need for an investor to have a 7-year 
investment when many of these loans are a different term. So we 
think there are ways that we can get better adoption, but I 
think there are some technical challenges there right now.
    Senator Coleman. Two other areas of concern in the time 
that I have. One, a number of my colleagues talked about the 
role that the SBA can do as an advocate for small business in 
trade and trade opportunities. We deal in a global economy and 
small business is an important part of that. SBA has the 
position of Associate Administrator for International Trade, my 
understanding is, and I think it is important that we move 
quickly to fill this position. Is that position still vacant?
    Another position is the small business representative 
position at USTR. Do you know if this position is still vacant, 
and can you give me a sense, if it is, about how quickly SBA 
can fill it?
    Mr. Preston. The first one is somebody who just left last 
week, and we are out there with a search right now. That is a 
very important position. We are looking for a strong candidate 
there.
    The second one, we have somebody designated for the USTR 
position and we are just working through the details.
    Senator Coleman. OK.
    Mr. Preston. And a very talented individual who is coming 
from the agency.
    Senator Coleman. My time is up. I want to again associate 
myself with the concerns raised by the Ranking Member in regard 
to the Microloan Program. SCORE and the other programs, they 
are great, but they are usually in response to folks coming to 
them, and with the microloan, what you have are these 
institutions who are going to be raising costs and they have 
been geared to reaching out. So strictly on paper, it may look 
like, well, we are shifting something over to folks who are 
capable of doing things, but the whole mindset is different.
    The Nobel Peace Prize is given internationally to the 
creator of microloan programs. I travel all over with the 
Foreign Relations Committee with the Chairman, travel around 
the world, and microloans are seen as one of the great avenues 
of opportunity to get capital in the marketplace, and it just 
seems like we keep squeezing it here. So I appreciate that we 
are beginning to recognize it, but I still think that we have 
too many limitations on something that internationally we 
applaud, but domestically, we seem to have a problem fully 
embracing.
    Thank you, Mr. Chairman.
    Chairman Kerry. Thank you very much, Senator. I think we 
all agree with you about the Microloan Program.
    Senator Isakson.
    Senator Isakson. Thank you, Senator Kerry. I apologize that 
I missed your testimony. I came in the middle of Senator 
Snowe's questions on microloans and I am following Norm Coleman 
on microloans, so why don't we keep talking about microloans 
for a minute, because in trying to catch up and read the 
briefing paper that I have here, if I am right, the last 3 
years, the Administration zeroed out the Microloan Program, is 
that right?
    Mr. Preston. That is correct.
    Senator Isakson. And this year, you are recommending not 
zeroing it out, but you are recommending going to a zero-
subsidy program?
    Mr. Preston. Recommending going to a zero-subsidy program 
with authorization to lend up to $25 million.
    Senator Isakson. OK, and that zero subsidy is accomplished 
through the increase in fees and the change in the interest 
rate?
    Mr. Preston. It is almost entirely accomplished by asking 
our resource partners to provide the training and counseling 
services that are now in a grant to the microlenders. It is 
about a $15 million----
    Senator Isakson. That is on the technical assistance side?
    Mr. Preston. Technical assistance side. Of that $15 million 
or so, just over 1 million of it is in the interest--between $1 
and $2 million is in the subsidy. So it is primarily the 
technical assistance that is the cost factor.
    Senator Isakson. So you are asking the Development Centers 
and the women's advisory groups to take over technical 
assistance?
    Mr. Preston. That is correct.
    Senator Isakson. And reduce your budgetary responsibility 
in that area?
    Mr. Preston. That is exactly right.
    Senator Isakson. All right. What is the increase in the 
fees to the microloans?
    Mr. Preston. The increase in the cost to the microlender 
has to do with what we lend them money at, and that would go up 
from this year to next just over 2 percent. Right now, we 
provide them funding at a below Treasury level----
    Senator Isakson. Two below Treasury to 1.6 above?
    Mr. Preston. It is about a point below Treasury to a little 
over a point above.
    Senator Isakson. But that ends up being----
    Mr. Preston. 1.6----
    Senator Isakson.--just under 6 percent, right?
    Mr. Preston. Yes.
    Senator Isakson. On the 5-year----
    Mr. Preston. It would still be under 6 percent.
    Senator Isakson. Which is 2.5 percent below the prime rate, 
or two-thirds of the prime rate.
    Mr. Preston. Right.
    Senator Isakson. I came in late and I know I am getting 
ready to ask for trouble. What is wrong with that? What was the 
negative about that?
    Mr. Preston. Well, it is what we are proposing, so we think 
it would provide microlenders funding at a rate that is 
significantly better than they could get in the private market.
    Senator Isakson. I was in the real estate business and the 
housing business, I was not in the SBA business or small 
business, but these microloans are designed to reach people 
that aren't reached by traditional sources, is that correct?
    Mr. Preston. Yes, they are.
    Senator Isakson. In fact, aren't the only sources they have 
otherwise generally the B, C, and D lenders, who charge 
exorbitant rates?
    Mr. Preston. Yes, I think in some cases. I think also in 
some cases the banks are increasingly getting into these 
markets, but they are reaching people that other people don't 
reach today.
    Senator Isakson. So as a comparison to--I like the 
Microloan Program. I was reading in here your default rate is 1 
percent, is that right?
    Mr. Preston. The default rate is very low, yes.
    Senator Isakson. And 50 percent, 45 percent of the 
beneficiaries are women or minorities.
    Mr. Preston. Yes.
    Senator Isakson. I commend you for going the opposite way 
on zeroing it out. Obviously, the cost of these programs to the 
borrower or to the microlender who passes on costs are an 
important question, but I will just say from my experience, 6 
percent is not an unreasonable rate of interest at an 8.5 
percent prime rate, and if it sustains the program at a zero 
cost, it seems like a win-win for the potential borrowers and 
for the government.
    Mr. Preston. Thank you.
    Senator Isakson. That is the only thing I had to say. Thank 
you, Mr. Chairman.
    Chairman Kerry. Thank you, Senator Isakson. We appreciate 
it. We appreciate the observation.
    I just have a few more questions. The record is going to 
remain open and we are going to submit some questions in 
writing from other colleagues and I will also do so.
    But just following up quickly on the microloan things, 
since that is the topic, I notice that the Administration as 
part of its economic development program for Iraq is to use 
microloans. It is interesting that they think it works there, 
and we are not willing to use it in some of our communities 
here, so I will just make that observation very quickly. I know 
it is above your pay grade as a major decision, Mr. 
Administrator, but----
    Mr. Preston. Well, I also think, Senator, there is a very 
well extensively developed micro lending industry here, aside 
from what we fund. So micro lending is not just what we fund. 
There are many microlenders in the economy outside of this 
program. And we only represent a portion of their funding, as 
well.
    Chairman Kerry. Well, there are some outside of it. I mean, 
I understand that, but there is much greater demand than there 
is supply, would you not agree?
    Mr. Preston. I don't have any demand statistics in front of 
me, but the larger microlenders, I mean, go up to $1 billion in 
assets, and our----
    Chairman Kerry. What is the total we are putting into micro 
lending through the SBA now?
    Mr. Preston. Last year, we put roughly $18 million.
    Chairman Kerry. Eighteen million?
    Mr. Preston. Yes.
    Chairman Kerry. And I believe that the Administration has 
suggested we need to eliminate about $20 million from micro 
lending?
    Mr. Preston. Well, our authorization request is up to $25 
million, so it would allow us to expand that number.
    Chairman Kerry. Do you know how much we are sending to 
Iraq?
    Mr. Preston. Do I know----
    Chairman Kerry. For micro lending?
    Mr. Preston. No, I don't.
    Chairman Kerry. We are, American taxpayer dollars----
    Mr. Preston. I don't know.
    Chairman Kerry. Two-hundred-million. Two-hundred-million 
for micro lending in Iraq, and we are cutting for lending here. 
So I think you can understand the frustration of Members of the 
Committee with respect to that.
    Let me just come back to what I wanted to ask you. There 
was this loan fraud issue out in Michigan and I just want to 
ask you quickly, can you explain how that kind of repurchasing, 
the $28 million of repurchasing out of one office by one 
lending officer? The SBA's IG suggested that we examine the 
centralization of liquidation functions a few years ago and I 
think that you have described in your testimony that the loan 
monitoring system is state of the art. Where is the gap here?
    Mr. Preston. I think it is a fairly complicated issue. The 
first thing I would tell you is most of these loans were done 
in the 2001-ish timeframe, so at that point, we were just 
beginning to institute an Office of Lender Oversight, which has 
since that time been dramatically expanded and we continue to 
improve the methodology which we have to look at behavior in 
those portfolios.
    I will say, however, though, for the most part, our 
lenders, the process we have in place is to go in there, look 
at the quality of their processes, provide them oversight, look 
at the behavior in their portfolios, but we don't look at every 
loan that they make. They make the loan. We guarantee it. In 
many cases, it is an automated process.
    Chairman Kerry. Have you changed the system now to respond 
to that particularly?
    Mr. Preston. Yes. The system is dramatically better than it 
was back then already. What we are doing right now is, and I 
think any time something like this happens, it is incumbent 
upon us to understand what went wrong, why it went wrong, and 
whether or not we need to improve our processes as a result of 
it. So we are working with the IG. We are speaking with people 
from the FDIC----
    Chairman Kerry. Are you looking beyond that sort of one 
circumstance----
    Mr. Preston. Absolutely.
    Chairman Kerry [continuing]. To see whether or not there--
--
    Mr. Preston. Absolutely, because it is really two things. 
It is understanding the quality of the portfolio and it is our 
role as a regulator of these entities.
    Chairman Kerry. OK. Now, on the Small Business Development 
Centers, they are going to get--I mean, as Senator Snowe has 
raised, there is just this massive reduction. The average SBDC 
is going to get approximately 19 percent less Federal funding 
in 2008 than it got in 2001. The effect is felt nationwide. 
SBDCs are closing centers, cutting back on services. The 
counseling clients numbers have decreased steadily since 2004. 
Counseling hours overall have been decreasing. Are you worried 
about the decline in services provided by SBDCs?
    Mr. Preston. First of all, Senator, I want to look at that 
data more in detail because they have moved from tracking 
primarily number of businesses counseled to long-term 
counseling sessions, and so I don't know specifically what data 
you are looking at, but I would want to dig into it more and I 
would commit to do that with your staff.
    Chairman Kerry. I would like you to do that, and maybe you 
could do that before we close this record in a couple of weeks. 
I would like to have that response as part of the record.
    Mr. Preston. OK.
    Chairman Kerry. You know, SBDC clients generate $2.82 in 
revenue for every dollar that is spent by the U.S. Government 
on the program. It sounds like a pretty good investment to me.
    Mr. Preston. Well, they are terrific partners and they do a 
great job----
    Chairman Kerry. Why are we cutting it?
    Mr. Preston. We are not their primary funding source. We 
provide a base level of funding and then they have the ability 
to expand beyond that by going to private sources or other 
sources. We are actually working right now with the Women's 
Business Centers and we will be talking to the SBDCs about 
putting in place best practices for fundraising externally and 
we are dedicating our staff to help them be more effective to 
expand their funding sources.
    Chairman Kerry. Well, again, just from a large policy point 
of view, and I know you probably fought for this and I am sure 
you asked for money, or I hope you did, but I just want the 
record to reflect that it is unbelievably myopic to be reducing 
an investment that returns greater revenue to the Federal 
Government. It just is such a no-brainer that we are going in 
the wrong direction and, I think, shortchanging ourselves. That 
brings up the last question I want to ask, at least on the 
record publicly today, which is about the agency morale.
    The morale at the agency was ranked, I think, as low or the 
lowest or the second lowest of any agency in the government. I 
think it was lowest, as a matter of fact. Where is agency 
morale today and how do all these reductions continue to make 
your job difficult?
    Mr. Preston. Well, I haven't gotten a complete briefing, 
but you will also find that the 2006 survey, which was as of 
June, will reinforce what you may have been referring to, and 
the 2004, as well. I think we have made terrific strides there. 
We have taken a hard look at the causes for morale, the low 
morale. They are very concerning to me. The last thing we want 
in a service organization is low morale. We have surveyed our 
employees additionally. I have spent many, many hours with 
people and I can comment on it now, but I would want to spend 
time sharing with your staff what we are doing.
    I have to tell you, I think if you walked into any one of 
our offices, or you are welcome to call any district office in 
the SBA and ask them if morale has changed in the last 6 
months, and I would feel very good about what you would hear.
    I will also be changing the goals of the agency, and we 
will be having goals in place in our district offices and the 
headquarters that focus on the items that I believe are driving 
the low morale. So it is something I am terribly concerned 
about, but I do think we are making a lot of progress there and 
I appreciate your concern on that.
    Chairman Kerry. Well, we are concerned about it, and 
obviously all of the questions here asked by all of the Members 
go to some of the reasons for that morale problem and we are 
going to try to address them in whatever ways we can here on 
the Committee.
    Let me just correct myself. I am going to leave the record 
open for 1 week because we have another hearing coming up next 
week on the impact of global climate change on small business, 
and so we will put you under the gun a little, but I promise 
not to flood you with a lot of ridiculous, extraneous, overly 
burdensome requests.
    Senator Snowe.
    Senator Snowe. Thank you, Mr. Chairman. Just a couple more 
questions.
    One on government contracting. You mention in your 
testimony a $500,000 request to say how to reengineer the SBA's 
government contracting and technology programs, including 8(a), 
HUBZone, Small Business Disadvantaged Program, women-owned 
small business, and service-disabled veterans small business 
program. But since 2003, the SBA Government Contracting and 
Development Office has been evaluating 21 different reports. 
The SBA Inspector General, the GAO has issued numerous reports 
on the contracting issues, issued advisory opinions, and many 
of the recommendations remain unimplemented.
    I don't know if you have had a chance to review some of 
those recommendations. I would recommend that you look at them 
very carefully and try to initiate as many as you can. For 
example, GAO's 2004 recommendation is the SBA expedite 
publishing of a best practices guide on unbundling Federal 
contracts. The GAO's and the IG's 2005-2006 recommendation is 
that the SBA scrutinize the 8(a) mentor protege program for 
funding by large businesses. And the IG's 2003 recommendation 
is that the SBA have sufficient information from companies 
certifying themselves as small businesses.
    So we have so many recommendations and proposals that have 
been evaluated time and again. We know what the problems are. I 
would hope that you would move aggressively on this front. 
Furthermore, I think what is disconcerting, and I have 
introduced legislation on this question, but it is still 
amazing to me that it is--if SBA does not object to a contract 
to a large company that fronts as a small business within 10 
days, that award goes forward. I mean, it is totally 
unacceptable. It is unconscionable. So we are obviously going 
to have to address that question.
    But I think that this is an area in which I believe you 
should move vigorously and aggressively to put in place as many 
as you can on a regulatory basis, and we likewise will do it on 
a legislative basis, because this bundling of contracts, the 
fronting by large businesses, we are replete with examples of 
how large companies have confiscated these set-asides because 
they masquerade as small businesses. So I think it is really 
something that we have to get a handle on. I mean, I am just 
telling you, there are so many reports out there. There have 
been so many GAO reports, I mean, advisory opinions galore. So 
we ought to be able to move to implement some of those 
recommendations, and those that you can't, we will and we 
should.
    But this is one area that should be beneficial to small 
businesses. I mean, you are talking about $400 billion worth of 
Federal contracts. Clearly, we should reinforce this as an 
avenue for small businesses to create jobs and retain jobs.
    I am concerned about HUBZone programs, for example. I 
understand that--you mentioned in your budget that the interest 
in HUBZone contracting programs has been declining among 
Federal contracting officials and companies alike, and your 
budget further states that Federal agencies are not using the 
HUBZone programs. Here is another avenue for access to the 
contracting programs, and yet it is not being utilized. It is 
underutilized. I know it is in my State and it is across the 
country for a variety of reasons. I don't think we are doing 
sufficient outreach, frankly. I mean, you have to assist 
companies to be certified as HUBZone eligible. But more than 
that is agencies are lethargic when it comes to helping small 
businesses and opening the doors for small businesses and the 
opportunities their agencies could otherwise present.
    I think that we have to address some of the enforcement 
actions that are essential in these categories. Do you have any 
ideas or suggestions? Have you evaluated any of these 
recommendations?
    Mr. Preston. Yes. You have rightfully acknowledged, 
Senator, that there is a long list of opportunity and we have 
begun getting after a number of those items. I know, for 
example, on the issue with objecting within 10 days, we have 
already proposed that we be able to hold our State contracts 
under protest, and so that is something we have made some 
progress on.
    We are also trying to drive a lot more transparency into 
this process by getting accurate data from the agencies, 
ensuring that it is right, and driving scorecards that are 
good, honest reflections of their progress. We intend to make 
those public. I think I have got a very good working 
relationship with Paul Denett, who is the head of OFPP, and I 
think together, we are going to make some good progress here. 
But there is a lot of good historical guidance here and it is a 
long list, and I think we will make a lot of progress, but 
there is a lot of work to do.
    Senator Snowe. Well, I would ask you if you would report to 
the Committee on the progress that you are making in this area, 
because I do really think it is essential and imperative that 
we aggressively pursue the kind of changes that are going to 
make a difference in the contracting process that otherwise 
will not occur, frankly.
    Mr. Preston. Yes.
    Senator Snowe. I think that the SBA has to be the advocate 
and the ombudsman in many ways for small businesses throughout 
the agencies and I think the more aggressive you are and the 
employees within SBA, I think the more likely things will turn 
about with the agencies. Otherwise, it is just the path of 
least resistance and that is what is happening in many of these 
agencies. Either by default or otherwise, it happening. I think 
that that is one easy solution to helping small businesses. I 
mean, the $400 billion is going to be spent, so why not benefit 
the entrepreneurs of America.
    One other question. Our staffs traveled in October to visit 
the SBA disaster processing center in Fort Worth, Texas, and 
tour the facility and witness the accelerated disaster 
initiative that has enabled the agency to more efficiently 
process many of the disaster loans, and it is certainly making 
progress, as I said in my opening comments, that the agency has 
already disbursed under your leadership $5.2 billion of the 
$10.9 billion approved following the hurricanes of 2005. Why is 
there such a gap?
    Mr. Preston. Yes.
    Senator Snowe. I mean, many have canceled their loans, and 
I think it speaks to the question that Senator Landrieu was 
referring to about the 20,000 businesses that have just sort of 
closed down.
    Mr. Preston. Yes.
    Senator Snowe. Why is there a gap between those approved 
and those disbursed? What is happening there?
    Mr. Preston. I think there are a couple of reasons. First 
of all, you start at about $10.8 billion. I think about $7.2 
billion is what ultimately represents people that are asking 
for disbursements. The difference is people who have either got 
insurance proceeds, not needed all the loans, canceled for some 
reason. Many of those people are canceling because they have 
other resources or insurance money.
    I cannot--I have to say, if a small business hasn't gotten 
a loan for a year, there is a possibility that they would have 
had challenges or had to get the money elsewhere. So I can't 
say in good faith that none of those people left us because 
they couldn't get their money in time. I think that was 
probably an issue. So being more responsive in the future is 
critical to getting that money into their hands.
    But I do have to say, it is very common to have a high 
level of cancellations, because legally we don't lend where 
people get insurance proceeds. They get insurance proceeds 
along the way and then that cancels the loan.
    So we are really down to about $1.8 billion that is yet to 
be disbursed, and what we are finding is--that is about 22,000 
people. Almost 19,000 of those people have already begun 
getting money, so they are rebuilding. They are in the process 
somewhere. But we still, I have to tell you, and Senator 
Landrieu knows this chapter and verse, a lot of people can't 
get contractors. A lot of people can't afford insurance right 
now. There are all sorts of other impediments, and we are 
really down to that core that is just having a terribly 
difficult time moving ahead. Thank you.
    Senator Snowe. Thank you. I appreciate it. Thank you, Mr. 
Administrator. I hope you will look at this program. I don't 
know, has this pamphlet been updated since--have you seen this?
    Mr. Preston. There is a lot of progress that has been made 
beyond that document, but I do look forward to seeing that to 
make sure that we understand what Senator Landrieu has been 
looking at. Yes.
    Senator Snowe. Thank you.
    Chairman Kerry. Thank you very much, Senator Snowe.
    When would you report back to the Committee on what Senator 
Snowe has asked on the progress?
    Mr. Preston. On the progress on the government contracting 
issues?
    Chairman Kerry. Correct.
    Mr. Preston. Let me--if you could give me a couple days to 
get back to you and look at those specific items, I will give 
you a timeframe within 48 hours.
    Chairman Kerry. Thank you. And just two quick wrap-ups. The 
fiscal and transfer agent contract for servicing 7(a) loans 
expired and has been extended twice. The central servicing 
agent contract for the 504 loan program has expired and been 
extended four times. When will the Request for Proposal for 
each of those be published so that bids can be submitted?
    Mr. Preston. I don't have a date for you right now, but I 
will get that for you, also.
    Chairman Kerry. If you would get back to us.
    The budget does not provide funding for the SBA's largest 
loan program, and the Administration characterizes this--I am 
quoting you, as savings of approximately $100 million to the 
taxpayer. But the funding of this program comes from lenders 
and borrowers who pay fees. They are also people who pay taxes. 
How do you reconcile those statements? I mean, is it a savings 
to the taxpayers if it comes out of the taxpayers' pocket, just 
a more limited group of them? I mean, isn't that a 
mischaracterization that it is, in fact, a savings to the 
taxpayers? It is a savings to some taxpayers, but it is a 
burden to others.
    Mr. Preston. Senator, I think when you look at the context, 
look at these fees in the context of the overall program, the 
cost a borrower incurs to lend money for a number of years, 
they are both very--it is a very low cost relative to the 
overall cost of a loan when you look at what has been 
subsidized historically. I would also note that we fund over 
$100 million in administrative costs that we don't pass 
through. Historically, when the funding has run out in these 
programs, it has been very detrimental to the banks' ability to 
market them.
    Chairman Kerry. What you are talking about is justifying 
the rationale for doing what you are doing. I am not trying to 
argue the rationale with you, I am trying to argue the 
characterization. It seems to me incorrect to be claiming a 
savings to the taxpayer when, in effect, the taxpayer is paying 
for what you are saying is savings.
    Mr. Preston. I think the taxpayer would fund $100 million 
if we subsidize this.
    Chairman Kerry. Say that again?
    Mr. Preston. I think it is a cost to the taxpayer.
    Chairman Kerry. If you are shifting that cost, the so-
called savings to the taxpayer is in effect being charged off 
against the business and others as a fee----
    Mr. Preston. It is a fee to cover the delinquencies in the 
program rather than a tax----
    Chairman Kerry. But the lenders and borrowers are paying 
it, correct?
    Mr. Preston. The lenders and borrowers pay the fees that 
cover the cost of the program that they are taking----
    Chairman Kerry. That formerly was covered in the direct 
subsidy. You say that is a savings to the taxpayers. My point 
is it is a savings only to some taxpayers. I just don't think 
the characterization is a fair characterization.
    Mr. Preston. Point well taken.
    Chairman Kerry. I think it is cost shifting and it is 
something that the Committee has been concerned about for some 
time, that the very people that we are actually trying to help 
are in effect being helped less than they might be, and the 
program is therefore being more narrowly made available than it 
might be because of the cost addition. We are not going to 
resolve that now, but it is fundamental to sort of the 
Committee's feeling as a whole that these costs have been 
counter to what we intended and what the program was intended 
for.
    Mr. Preston. I will tell you, it is my opinion that there 
are many other things we could do that would have a much 
greater impact on our ability to expand our reach in these 
programs than a slight reduction in the fees.
    Chairman Kerry. And they will be, and we would be happy to 
work on identifying those and on trying to figure out how to 
augment them. I mean, it would be good to do. Whatever the 
least cost, most effective way of doing it is, we are all for 
that. So it would be good.
    Mr. Administrator, we will leave the record open. We 
appreciate your being here today.
    Mr. Preston. Thank you very much.
    Chairman Kerry. Thank you very, very much.
    The Committee is adjourned.
    [Whereupon, at 11:42 a.m., the Committee was adjourned.]

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                        COMMENTS FOR THE RECORD
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