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


 
  FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 
                               YEAR 2008

                              ----------                              


                         FRIDAY, MARCH 9, 2007

                                       U.S. Senate,
           Subcommittee of the Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 8:50 a.m., in room SD-138, Dirksen 
Senate Office Building, Hon. Richard J. Durbin (chairman) 
presiding.
    Present: Senators Durbin, Bond, and Allard.

                  COMMODITY FUTURES TRADING COMMISSION

STATEMENT OF HON. REUBEN JEFFERY III, CHAIRMAN
ACCOMPANIED BY:
        MIKE DUNN, COMMISSIONER
        WALT LUKKEN, COMMISSIONER


                 statement of senator richard j. durbin


    Senator Durbin. Good morning and welcome. I'm going to 
start a few minutes early, which is totally atypical of Capitol 
Hill but it's an indication of the fact that we are going to 
have a rollcall vote at about 9:30 and I have a dual 
responsibility of chairing this important subcommittee and 
serving as majority whip on the floor. So I'll have to be there 
right as the rollcall begins and we'll have to interrupt this 
hearing for a brief time, as two votes are taken. So I 
apologize to those who may be a little bit surprised by a 10-
minute earlier start but I hope that we can get this underway, 
make some progress, break for the votes and return and 
conclude.
    I'm pleased to welcome those who are in attendance to the 
first in a series of public hearings we're going to conduct to 
consider the funding requests of several of the dozens of 
Federal agencies within the jurisdiction of this new 
Appropriations Subcommittee on Financial Services and General 
Government.
    I appreciate the willingness of those who are in attendance 
to accommodate their scheduling to the date, time, and 
location. I'm glad you're all here. I welcome my colleagues who 
will join me, I'm sure, as the subcommittee hearing is 
underway. This morning, we will be hearing from two 
distinguished panels of witnesses.
    First, I'm pleased to welcome Chairman Reuben Jeffery of 
the Commodity Futures Trading Commission (CFTC). I believe 
Commissioner Mike Dunn is here. I don't know if Mr. Lukken is 
in attendance at this point but he may join us a little later.
    Our second panel will feature testimony from Steven 
Preston, Administrator of the Small Business Administration 
(SBA). To a casual administrator, these two agencies may seem 
quite dissimilar and oddly matched. Certainly their assigned 
missions and obligations are distinctive yet both of these 
agencies occupy pivotal positions at the forefront of 
stimulating economic growth in our country.
    The Commodity Futures Trading Commission, created in 1974, 
is responsible for fostering the economic utility of futures 
markets by encouraging their competitiveness and efficiency, 
their integrity and protecting market participants against 
manipulation, abusive trade practices and fraud. That oversight 
and enforcement mission becomes tangible when you consider that 
the prices established by the futures market directly or 
indirectly affect the lives of all of us. Futures prices impact 
the prices we pay for necessities of life--our food, clothing, 
shelter, fuel for vehicles, and heat in our homes. Moreover, 
since the agency's inception, there has been a remarkable 
transformation in this futures industry. Thirty years ago, the 
vast majority of trading occurred in the agricultural sector. 
Today, novel, highly complex financial contracts based on such 
things as foreign currency, interest rates, Treasury bonds, 
weather, real estate, economic derivatives, stock market 
indices--the list goes on. But that list has gone far beyond 
the original mission of agricultural contracts.
    Financial derivatives now comprise approximately 82 percent 
of all exchanged derivative activity, 8 percent for 
agriculture. Ever expanding complexities pose ever demanding 
challenges. I'm proud to have the two largest futures exchanges 
in the United States, the Chicago Mercantile Exchange (CME) and 
the Chicago Board of Trade (CMBOT) headquartered in Illinois 
and one of CFTC's three regional offices located there as well. 
These exchanges recently set an all-time total daily trading 
volume record of 24,915,515 contracts cleared through CME, 
CMBOT Clearing Agreement.
    The President's budget proposes $116 million in funding for 
the CFTC for the next fiscal year. This sum represents a hike 
of 18 percent over the $98 million provided for fiscal year 
2007 under our continuing resolution. It is 9 percent below the 
$127 million level the President sought in fiscal year 2007.
    Now the Small Business Administration will follow after the 
CFTC. It was established in 1953. We know its general mission 
to promote and protect the viability of America's 
entrepreneurs, innovators, and small business owners. In my 
home State of Illinois, the contributions of the estimated 
1,087,700 small businesses are critical to our economy, 
creating over 2.6 million jobs in my State. Our Nation depends 
on the SBA to ensure that capital assistance is available for 
those who need it the most.
    Like the CFTC, the SBA has experienced dramatic growth in 
the programs it offers. SBA's programs now include financial 
and Federal procurement, management assistance, specialized 
outreach to women, minorities, and Armed Forces veterans.
    For the Small Business Administration, the President seeks 
$464 million in new budget authority for the next fiscal year. 
No new budget authority is requested for disaster loan 
programs, since there are sufficient carryover balances to 
operate them. The amount requested is a reduction from the last 
fiscal year's continuing resolution of $108 million. This can 
be attributed to the fact that funding was provided in that 
continuing resolution for disaster loan administrative expenses 
and no new funds are requested for that purpose.
    There are many questions that I will raise about the SBA as 
we get into it, particularly about the microloan program but in 
the interest of moving this forward, I would like at this point 
to introduce Chairman Jeffery and welcome him to this new 
subcommittee of Appropriations, the first inaugural hearing and 
say that the floor is yours and I'd invite you to proceed with 
your testimony.


                     STATEMENT OF CHAIRMAN JEFFERY


    Mr. Jeffery. Thank you very much, Mr. Chairman. It's an 
honor to be here today to testify on behalf of the Commodity 
Futures Trading Commission. Today, I'd like to discuss the 
impact of the commodity futures and options industry on the 
everyday lives of Americans, the mission and program 
responsibilities of the agency and finally, our fiscal year 
2008 justification for the $116 million funding level requested 
by the administration.
    This proposed funding level will enable the Commission to 
address two major needs: staff increases and technology 
investment.
    During the past 10 years, as can be seen in figure 1 on the 
screen to my left, trading volume on U.S. futures exchanges has 
quintupled. Today, in a single day of trading, markets will 
move more than $5 trillion of notional value. The industry, as 
you, Mr. Chairman, correctly and very eloquently pointed out, 
has grown from largely agricultural product hedging risks to a 
broad array of complex products related to both physical 
commodities and financial instruments.
    At the same time, however, Commission staffing levels have 
fallen to 458 full-time employees. This compares with 497 
employees in 1976, the Commission's first full year of 
operation. Commission employees work hard. They work smart and 
they use technology effectively. But they are severely 
stretched.
    While the daily business of CFTC can appear from the 
outside looking in to be somewhat obscure and highly technical 
in nature, the mission of the agency is quite clear and two-
fold: First, to protect the public and market users from 
manipulation, fraud and abusive practices and second, to 
promote open, competitive and financially sound markets for 
commodity futures.
    This is important because the futures markets are used in 
the price discovery process, affecting the price of a bushel of 
wheat, the cost of a gallon of gas, the interest rate on a 
student loan. If the futures markets fail to function properly, 
all consumers are affected.
    The CFTC is the sole Federal regulator responsible for 
overseeing these futures markets. Through effective oversight, 
the CFTC enables the futures markets to better serve their 
vital function in the Nation's economy, providing an effective 
marketplace for price discovery and risk management.


                   RECORD GROWTH IN FUTURES INDUSTRY


    To achieve these goals, the Commission employs a well-
trained and dedicated staff who work within three major 
programmatic areas: market oversight, clearing and intermediary 
oversight, and enforcement. Market oversight ensures that the 
markets are operating efficiently and without manipulation and 
fraud. One workload indicator is the number of actively traded 
contract types on U.S. exchanges. As can be seen in figure 2, 
the number has more than quintupled in the past decade, with 
particularly significant growth seen in the last 5 years. In 
fact, by next year, the number of actively traded contracts is 
anticipated to climb to nearly 1,600, a record high. There is 
every indication that this significant growth in new and novel 
products will continue.
    The CFTC must maintain a sufficient level of specialized 
expertise to review and analyze a very diverse group of 
instruments and products to ensure that they are economically 
viable and not susceptible to manipulation.
    Clearing and intermediary oversight ensures the financial 
integrity of transactions on the futures markets. The CFTC 
oversees the principle clearing operations associated with the 
major commodity exchanges in Chicago, in Kansas City, and in 
New York. And the agency oversees market intermediaries, 
including some 200 futures commissions merchants, the ranks of 
which include banks and broker dealers with specialized futures 
and commodities operations as well as stand-alone futures 
trading houses.
    Figure 3 shows that the amount of customer funds held by 
futures commissions merchants in segregated accounts has 
quadrupled over the past decade, meaning that more and more 
Americans are investing in the futures markets, either directly 
or indirectly through their participation in pension funds, 
mutual funds, or other institutions.


                              ENFORCEMENT


    Turning to enforcement, this is an area in which the CFTC 
takes great pride. The CFTC polices the markets through strong 
enforcement, going after unscrupulous firms and individuals, 
both on and off exchange. Manipulation, fraud, and other 
violations undermine the integrity of the market and confidence 
of market participants.
    Figure 4 has some statistics related to the Commission's 
recent enforcement activity in the areas of foreign currency 
and energy over the past 5 years. In the FX markets, 93 cases 
have been filed resulting in judgments approximating $500 
million. In the energy area, the CFTC has brought 35 cases 
resulting in over $300 million of civil sanctions.
    With the demand for enforcement resources, however, 
exceeding capacity, the CFTC must make hard choices every day 
on how to prioritize scarce investigative and litigation 
efforts.


                      INCREASED FUNDING FOR AGENCY


    We are grateful for the administration's recognition of the 
need for increased funding for the agency. The 2008 President's 
budget request as depicted in figure 5, is for an appropriation 
of $116 million and 475 employees--an increase of approximately 
$18 million and 17 people over the fiscal year 2007 continuing 
resolution level.
    Specifically, compared to 2007, the key changes in the 2008 
budget are roughly $3 million to provide increased compensation 
and benefit costs for the existing staff of 458, another $3 
million to cover the salary and benefits related to the 17 
additional full-time employees and $12 million for increased 
operating costs associated with information technology 
modernization, lease-hold expenses and other services.
    This funding increase provides the Commission with the 
financial wherewithal to hire additional staff and to invest in 
technology. In staffing, the CFTC must compete for talent not 
only with the private sector but also with other financial 
regulators. Four years ago, the Congress improved the CFTC's 
ability to compete, granting the agency comparable pay 
authority with other financial agencies, so-called pay parity 
through Federal Institutions Reform, Recovery, and Enforcement 
Act of 1989 (FIRREA). For this authorization, which leveled the 
compensation playing field, all of us at the CFTC are deeply 
grateful. It's been a huge help. However, the agency has not 
yet been fully funded to the level of comparable FIRREA 
agencies.
    Second to human capital, technology is the single most 
effective tool in assisting those professionals who oversee the 
markets. Budgetary constraints have required the Commission 
over several years to put new systems development initiatives 
and hardware and software investment on hold, as indicated in 
figure 6. That's not a trend of which we are particularly 
proud.
    CFTC analysts rely primarily on two proprietary computer 
systems for visibility into the markets. One gives us the 
ability to see who is trading in the markets and who is 
building leverage in the market or becoming a large trader, 
thus developing a position that may influence market 
conditions. The second allows us to pull in all transactional 
data from traditional exchanges to identify trading patterns 
that might be indicative of inappropriate or manipulative 
trading activity.
    These two systems are unique in their ability to provide 
transparency into cross-market trading activity across all 
futures markets under the Commission's jurisdiction. Their 
importance to ensuring market integrity cannot be overstated.


                           PREPARED STATEMENT


    In conclusion, all of us at the CFTC take great pride in 
our work. I can assure you that we are working diligently and 
efficiently to fulfill the important responsibilities with 
which the Congress and the American people have entrusted us. 
Thank you again for the opportunity to appear before you today 
on behalf of the agency and I'd be happy to attempt to answer 
any questions that you might have.
    [The statement follows:]

                Prepared Statement of Reuben Jeffery III

    Thank you, Mr. Chairman and members of the subcommittee. I am 
pleased to be here to testify before you on behalf of the Commodity 
Futures Trading Commission, and I appreciate the opportunity to discuss 
issues related to the Commission's 2008 budget request.
    Today I would like to discuss the impact of the commodity futures 
and options industry on the everyday lives of Americans, the mission 
and program responsibilities of the agency and, finally, our fiscal 
year 2008 congressional justification for the $116 million funding 
level requested by the administration. This proposed funding level will 
enable the Commission to address its two major needs--staff increases 
and technology investment.
    During the past 10 years, as can be seen in figure 1, trading 
volume on U.S. futures exchanges has quintupled. Today, in a single day 
of trading, our markets will move more than $5 trillion. The industry 
has grown from largely agricultural product hedging to a broad array of 
complex instruments related to both physical commodities and financial 
instruments. Trading volume, measured by numbers of contracts traded, 
has more than tripled in just the past 6 years. At the same time, 
Commission staffing levels have fallen to 458 full-time employees. This 
compares with the 497 FTEs 30 years ago in 1976--the Commission's first 
year of operation. Commission employees work hard, work smart, and use 
technology effectively, but given the complexity of the markets we 
oversee, they are stretched.




        Figure 1.--Growth of Volume of Contracts Traded and FTEs

                         MISSION OF THE AGENCY

    While the daily business of the CFTC can appear from the outside 
looking in to be somewhat obscure and highly technical in nature, the 
mission of the agency is very clear: (1) to protect the public and 
market users from manipulation, fraud, and abusive practices and (2) to 
promote open, competitive and financially sound markets for commodity 
futures. This is important because the futures markets are used in the 
price discovery process affecting the price of a bushel of wheat, the 
cost of a gallon of gas, and the interest rate on a student loan. If 
the futures markets fail to work properly all consumers are impacted.
    Congress created the CFTC in 1974 as an independent agency with the 
mandate to regulate commodity futures and option markets in the United 
States. The Commission's mandate has been periodically renewed since 
then. In December 2000, Congress reauthorized the Commission through 
fiscal year 2005 with passage of the Commodity Futures Modernization 
Act of 2000 (CFMA).

                          COMMISSION STRUCTURE

    The CFTC is the sole Federal regulator responsible for overseeing 
the futures markets by encouraging competitiveness and efficiency, 
ensuring market integrity, and protecting market participants against 
manipulation, abusive trading practices and fraud. Through effective 
oversight, the CFTC enables the commodity futures markets better to 
serve their vital function in the Nation's economy--providing an 
effective marketplace for price discovery and risk management.
    To achieve these goals, the Commission employs a well-trained and 
dedicated staff who work within three major programs--market oversight, 
clearing and intermediary oversight, and enforcement.
Market Oversight
    Market oversight ensures that the markets are operating efficiently 
and without manipulation and fraud. One workload indicator is the 
number of actively traded contracts trading on U.S. exchanges. As can 
be seen in figure 2, the number has more than quintupled in the last 
decade, with particularly significant growth seen in the last 5 years, 
or since the passage of the CFMA. Prior to 2000, the number of contract 
types traded was relatively stable at a level of around 250. By next 
year in fiscal year 2008, the number of actively traded contracts is 
anticipated to climb to nearly 1,600, a record high. There is every 
indication that this significant growth in new and novel products will 
continue. 



               Figure 2.--CFTC Actively Traded Contracts

    The CFTC must maintain a sufficient level of specialized expertise 
to review and analyze a very diverse group of instruments and products 
to ensure that they are economically viable and not susceptible to 
manipulation. The types of new products run the gamut from traditional 
commodity areas, such as new agricultural and energy futures, to novel 
financial derivatives based on credit risk, weather-related occurrences 
and effects, pollution allowances, real estate, and instruments having 
characteristics of both securities and commodities. Our analysts employ 
various methods to ensure an understanding of how the markets are 
functioning to develop a flexible, effective regulatory response to 
market conditions.

Clearing and Intermediary Oversight
    Clearing and intermediary oversight ensures the financial integrity 
of all transactions on the markets that we regulate. The work of the 
staff is to ensure that the intermediaries managing these funds are 
properly registered, perform appropriate recordkeeping, have adequate 
capital, employ fair sales practices, and fully protect the funds their 
customers invest. The principal clearing operations are associated with 
the major commodity exchanges in New York, Chicago and Kansas City. 
Intermediaries overseen by the CFTC include some 200 futures commission 
merchants, the ranks of which include banks and broker-dealers with 
specialized futures operations, as well as stand alone futures trading 
houses.
    In figure 3, one can observe that the amount of customer funds held 
by futures commission merchants has quadrupled over the past decade--
meaning more and more Americans are investing in futures markets 
directly or indirectly through their participation in pension funds, 
mutual funds, and other institutions. 



               Figure 3.--Customer Funds in FCM Accounts

Enforcement
    The CFTC prides itself on its vigorous enforcement operation. 
Through strong enforcement, CFTC polices the markets--going after 
unscrupulous firms and individuals both on and off-exchange. 
Manipulation, fraud and other violations undermine the integrity of the 
market and the confidence of market participants.
    Figure 4 presents the results of the Commission's recent 
enforcement activity in the foreign currency and energy areas 
respectively. In the foreign currency or FOREX markets, 93 cases 
involving 354 entities or persons were filed with over $292 million in 
sanctions levied and $182 million in restitution. Since the collapse of 
Enron, CFTC brought 35 cases involving energy markets and charged 55 
entities or persons with manipulation, attempted manipulation, and/or 
false price reporting. The collective civil monetary sanctions levied 
exceed $302 million in these matters.

------------------------------------------------------------------------
 Actions Taken Since Passage of the CEMA in
               December 2000                   Foreign Currency Markets
------------------------------------------------------------------------
Number of Cases Filed or Enforcement                                  93
 Actions...................................
Number of Entities/Persons Charged.........                          354
Number of Dollars in Penalties Assessed:
    Civil Monetary Penalties...............                 $292,042,098
    Restitution............................                 $182,471,571
------------------------------------------------------------------------


------------------------------------------------------------------------
  Actions Taken Since Enron Bankruptcy in
               December 2001                        Energy Markets
------------------------------------------------------------------------
Number of Cases Filed or Enforcement                                  35
 Actions...................................
Number of Entities/Persons Charged.........                           55
Number of Dollars in Penalties Assessed:                    $302,863,500
 Civil Monetary Penalties..................
------------------------------------------------------------------------


      Figure 4.--Spotlight on Foreign Currency and Energy Markets

    With the demand for enforcement resources exceeding capacity, CFTC 
must make hard choices every day on how to prioritize our investigative 
and litigation efforts.
Mission Support
    The three major Commission programs are complemented by other 
offices, including our Office of the Chief Economist, Office of the 
General Counsel, Office of International Affairs and Office of 
Proceedings. The Commission's Executive Direction is comprised of the 
chairman's and Commissioners' offices providing agency direction, and 
stewardship over CFTC's human capital, financial management, and 
information technology resources.
    The Commission is headquartered in Washington, DC, and maintains 
regional offices in Chicago, New York, and Kansas City. In recent 
years, budgetary considerations led to the decision to close the Los 
Angeles and Minneapolis offices.
    When looking at the increased volume of activity across all areas 
of the CFTC mission, and the scope of the industry change since 2000, 
the resulting increase in specialized workload is demonstrable. 
Accordingly, it is critical that the CFTC have sufficient resources to 
hire and maintain requisite skilled talent, as well as provide a steady 
stream of technology investment commensurate with the agency's 
expanding and evolving mission.

              FISCAL YEAR 2008 PRESIDENT'S BUDGET REQUEST

    We are grateful for the administration's recognition of the need 
for increased funding for our agency.
    The fiscal year 2008 President's budget request, as seen in figure 
5, is for an appropriation of $116 million and 475 staff-years, an 
increase of approximately $18 million and 17 staff-years over the 
fiscal year 2007 continuing resolution appropriation of $98 million 
which supports a level of 458 staff-years.



    Figure 5.--Fiscal Year 2008 Budget Request Provides for Current 
                    Services and 17 Additional FTEs

    Compared to the fiscal year 2007 continuing resolution 
appropriation, key changes in the fiscal year 2008 budget are:
  --$2.8 million to provide for increased compensation and benefit 
        costs for a staff of 458 FTEs;
  --$3.0 million to provide for salary and expenses of 17 additional 
        full-time equivalent staff-years;
  --$12.1 million to provide for increased operating costs for 
        information technology modernization, lease of office space, 
        and all other services.
    This funding increase provides the Commission with the financial 
wherewithal to hire additional staff and to invest in technology. In 
staffing, the CFTC must compete for talent not only with the private 
sector, but also with the SEC and other Federal financial regulators. 
Four years ago, the Congress improved our ability to compete, granting 
the CFTC comparable pay authority with other financial agencies (so 
called ``pay parity'' through FIRREA). For this authorization to level 
the compensation ``playing field'' all of us are deeply grateful. 
However, the agency has not yet been fully appropriated to the level of 
comparable FIRREA agencies.
    Second only to our human capital, technology is the single most 
effective tool in assisting those professionals who oversee the 
markets. Budgetary constraints have required the Commission over 
several years to put new systems development initiatives and hardware 
and software purchases on hold, as indicated in figure 6. 



                    Figure 6.--Technology Investment

    CFTC analysts rely primarily on two proprietary computer systems 
for visibility into the markets. One gives us the ability to see who is 
trading in the markets and who is building leverage in the market or 
becoming a large trader--thus developing a position that may influence 
market conditions. The second allows us to pull in all transactional 
data from traditional exchanges to identify trading patterns that might 
be indicative of inappropriate or manipulative trading practices. These 
two major systems are unique in their ability to provide transparency 
into cross-market trading activity across all futures markets under the 
Commission's jurisdiction. Their importance to ensuring market 
integrity cannot be understated.
    The Commission respectfully requests the proposed funding increase 
for mission-critical investments in people and technology in order to 
keep up with the dynamic commodity futures and options industry. While 
relatively small in dollar terms this funding increment is necessary to 
ensure that CFTC continues to be able to fulfill its statutory mandate.
    All of us at the CFTC take great pride in our work. I can assure 
you that we are working diligently and efficiently to fulfill the 
important responsibilities with which the Congress and the American 
public have entrusted to us.
    This concludes my formal testimony. Thank you for the opportunity 
to appear before you today on behalf of the CFTC. I would be happy to 
answer any questions you may have.
    An electronic version of the Commodity Futures Trading Commission 
``FY 2006 Performance and Accoutability Report'' is available on the 
Internet at www.cftc.gov/cftc/cftcreports.htm.

    Senator Durbin. Thank you very much. I note the presence of 
Commissioner Walt Lukken. Thank you for joining us and I'd say 
to Senator Bond, I started a few minutes earlier with my 
opening statement because of the vote we face at 9:30 but I'll 
give you a copy to read on the plane back to St. Louis.
    Senator Bond. I can't wait.
    Senator Durbin. I know you can't. Thank you for joining us 
this morning. Let me ask you a few questions, Chairman Jeffery 
and then turn to my colleague.
    Your current staff level is 450. It's the lowest in the 
history of the CFTC Commission as I understand it. The graph 
you presented at the outset depicted the surge in industry 
volume growth and it's a sharp contrast with stagnated staffing 
levels. It makes a compelling case as to whether or not you are 
prepared to really meet this vast increase in the volume of 
activity and the increased sophistication of the trading 
mechanisms that are at hand.
    I'm informed the CFTC lost 58 experienced employees in 
fiscal year 2006, 23 more to date in fiscal year 2007. The 81 
staff that have departed include 26 attorneys, 7 economists, 8 
futures trading specialists, 9 division office directors, 2 
commissioners, 15 executive and management support and 14 staff 
in other job categories. Moreover, since October 2005, you've 
been operating under a hiring freeze.
    I also have jurisdiction in the subcommittee over the 
Securities and Exchange Commission. It is interesting to note 
what is going on there. In 1976, there were 2,054 employees at 
the Securities and Exchange Commission. By 2006, the number was 
up to 3,549, a 73-percent increase in staffing at the 
Securities and Exchange Commission, which has a similar 
responsibility as the CFTC. While their staffing went up 73 
percent, in the period of time here, yours has gone down by 
about 10 percent while the volume of trading and activity, as 
we mentioned earlier, has increased dramatically.
    Let me ask you this. Is the $17.9 million increase in 
funding that the President seeks adequate for you to meet your 
responsibility to protect those who were involved in this 
marketplace?
    Mr. Jeffery. Thank you, Mr. Chairman, for that excellent 
question. The $17 million--let me put that into perspective. Of 
that $17 million, $14 to $15 million is simply to maintain 
current levels of operating activity. That pays for built-in 
cost-of-living increases, salary increases, et cetera, 
leasehold increases, and other operating expense increases of a 
normal course nature. Only $3 million of that number is for an 
increase in service, if you will. That will allow us to hire an 
additional 17 full-time equivalent employees. I would say 
that--were Congress to approve, to appropriate $116 million for 
the CFTC this year--in our view, it would help maintain current 
levels, modestly increase our capability in certain areas but 
it should be viewed as a beginning not an end point of 
addressing what has been, as you correctly point out in your 
observations, a steady erosion in our capabilities over the 
course of the past several years.
    Senator Durbin. In the 1980s banking crisis, Congress 
passed FIRREA, the Financial Institutions Reform, Recovery, and 
Enforcement Act of 1989, which replaced the Federal Home Loan 
Bank Board with the Office of Thrift Supervision and also 
provided pay parity, which you referred to in your testimony, 
among Federal financial regulatory agencies. You noted in your 
testimony that you were glad that you were given the authority 
to pay at equal levels to similar operations in the Federal 
Government but you also noted that you weren't given the money 
to raise the pay at your agency so that you could reach parity. 
Is this, do you believe, part of the reason that you've lost so 
many staff people in the last 1\1/2\ years?
    Mr. Jeffery. Thank you, Mr. Chairman. There are a number of 
reasons for the staff level reduction, most significantly, 
budgetary. I should also add that at the CFTC, like many areas 
of the Federal Government, we're managing what one could 
describe as a difficult sort of demographic development where 
there are any number of employees who started at the Commission 
really at the time of inception, going back 25, 30 years who 
have now reached that period in their careers, in their lives, 
where they are eligible to retire in the normal course.
    With respect to pay parity, I believe we have funded pay 
parity to a large extent. Based on the best data we have 
available today, we're probably about 85 percent fully funded. 
In other words, on the average and on the whole, our people are 
at the 80 to 85 percent level relative to their peers at other 
pay parity agencies that are fully funded. This increment to 
the budget will allow us to continue to close that gap. I 
should stress again on pay parity, the importance of having 
that flexibility for our agency in retaining people who might 
otherwise be attracted to another U.S. Government financial 
regulatory agency, let alone the private sector.

                     STUDENT LOAN REPAYMENT PROGRAM

    Senator Durbin. Chairman, a few years ago I tried to 
reinvigorate or invigorate, I should say, a student loan 
repayment program, to recruit high quality individuals to 
Federal service who might otherwise be discouraged by Federal 
pay and student debt. I'd like to know if your agency is using 
student loan repayments to help attract skilled employees?
    Mr. Jeffery. Senator, I don't believe so, Mr. Chairman but 
I would like to come back to you for the record with a proper 
and correct answer to that question.
    [The information follows:]

    The Commission has not had the opportunity to develop the 
Student Loan Repayment Program as a recruitment tool. Funding 
constraints have required the Commission to make significant 
reductions in operating accounts and to place a freeze on the 
hiring new staff since October 2005. The few limited exceptions 
to the hiring freeze have been to fill behind key critical 
losses in hard to fill and one of a kind positions. This 
limited number of hires has been at the upper levels of 
management, which is generally not the target beneficiary group 
of the Student Loan Repayment Program. We understand and 
appreciate the recruitment benefit of the Student Loan 
Repayment Program and given the financial flexibility to fill 
our ranks with more junior talent would look to such a benefit 
as a key recruitment tool.

                CRITICAL INFORMATION TECHNOLOGY SYSTEMS

    Senator Durbin. My last question relates to technology, 
which was, I think, your last graph. I understand that two of 
the Commission's three critical information technology systems, 
market surveillance, and trade practice, are becoming 
antiquated. I've been advised that $4 million in investments in 
these systems and other crucial technology has been deferred, 
due to your budget challenges. What impact is this situation 
having on your ability to keep pace with the rapid, explosive 
technological, and global growth evolution of the markets, 
which you have the responsibility to supervise? I think we're 
all aware that this marketplace has not only changed 
internally, it's changed externally. We're now in global 
competition and the technology that is available for around the 
clock trading around the world is a challenge not only to the 
markets in the United States but to others and to your agency. 
So have you been able to keep up in terms of technology 
changes? Do you have the tools to do your job effectively?
    Mr. Jeffery. Mr. Chairman, technology, as you correctly 
note, is an extremely important tool to all of us who work in 
the Federal Government, particularly to a financial market 
regulatory agency. The $116 million budget request has within 
it a technology spend level of approximately $17 million, which 
is more than double our spend on technology in the current 
fiscal year. That allows us to continue to operate our existing 
systems with some degree of efficacy but it does not allow us 
to modernize those systems in the way that we believe will be 
essential for us to continue to be able to fulfill our 
responsibilities in the years to come as these markets continue 
to evolve.
    They are working currently but we are at risk of them, at 
some point, becoming outdated if we don't continue to invest in 
technology and particularly in the two critical systems, trade 
practice and market oversight, which I described in my 
testimony.
    Senator Durbin. I'll just conclude and turn to my colleague 
here by saying that I think that the competitive edge for 
America in futures trading is the efficiency and integrity of 
our marketplace. Your agency has the responsibility to make 
certain that we do everything in our power to protect that 
competitive edge and to protect those who are participating in 
the marketplace. When I see the staffing levels that you're 
struggling with, in comparison even to other agencies of our 
Government with similar responsibilities, and when I see the 
problems that you face in developing the technology and 
capability to keep up with market changes, I'm very concerned. 
I think that if you are going to be the cop on the beat, you 
need to have the tools to make sure that you can enforce the 
laws and catch those who are violating them and I'm worried 
that this budget will not give you that capability. So we'll 
take a close look.
    Senator Bond.
    Senator Bond. Thank you very much, Mr. Chairman. It's a 
pleasure to be with you on this newly formed subcommittee and I 
look forward to working with you and Senator Brownback and the 
other members of the subcommittee. I share your interest and 
the views that you have expressed and the importance of 
adequate and effective regulation by the CFTC. I know the 
chairman has a specific interest in things going on in Chicago 
as I have an interest in things going on in Kansas City. So we 
will look forward to working through this subcommittee to 
provide, try to provide you the assistance that you need to do 
an effective job in regulation.
    And speaking of parochial matters, I noticed that Josh 
Kinney underwent Tommy John surgery, putting the Cardinals 
bullpen at risk for this season but I will save my comments for 
Mr. Preston because I have a particular area of interest there 
and I will await his appearance to make my statement about 
that. Thank you.
    [The statement follows:]

           Prepared Statement of Senator Christopher S. Bond

    Mr. Chairman, Senator Brownback: I am pleased to be with 
you at the first meeting of the newly formed Subcommittee on 
Financial Services and General Government. It is an honor to be 
a member of this Subcommittee. I look forward to working with 
both of you and other Subcommittee members during the coming 
months.
    Welcome Mr. Jeffrey and Mr. Preston; we are pleased to have 
you with us.
    With all due respect to Mr. Jeffrey, in the interest of 
time, I will focus my comments on the Small Business 
Administration.
    Mr. Preston, congratulations to you and Ms. Carranza on 
your successes. SBA under your leadership is a revitalized 
agency. I am hearing very good things about the agency. So 
please keep up the good work.
    That said, there are a couple of areas of the SBA's 
Performance Budget that I am concerned about.
    With respect to procurement, the Performance Budget states 
that there will be a review of the Small Business Innovative 
Research (SBIR) and Small Business Technology Transfer (STTR) 
programs and ``based on these reviews, SBA will recommend 
legislative, and proposed regulatory, changes.'' The 
Performance Budget goes on to state ``The SBA will continue to 
improve oversight and evaluation of SBIR and STTR Programs.''
    As we all know, the SBIR and STTR programs function as more 
than simply procurement programs. The SBIR program was created 
by Congress in the early 1980s to provide new contracting 
opportunities for small companies and to foster innovation and 
commercialization of innovative products by small companies.
    The NIH SBIR program, for example, helps small medical 
device, biotechnology and diagnostic firms to access critical 
early stage capital. These funds help companies get a product 
off the drawing board and, after a great deal of time and 
significant additional private funding, to the marketplace.
    I continue to be concerned that the SBA is stifling 
innovation in cutting edge companies in biotechnology and other 
industries that rely heavily on venture capital funding.
    The biotech industry is like no other in the world because 
it takes many years and intense capital expenditures to bring a 
successful product to market.
    According to a study by the Tufts Center for the Study of 
Drug Development, it takes roughly 10-15 years and $800 million 
for a company to bring just one product to market.
    For 20 years--until 2004--the Small Business 
Administration's Small Business Innovation Research program was 
a catalyst for developing America's most successful companies, 
helping to fund the critical start-up and development stages of 
a company.
    But then, the SBA decided that small businesses relying 
heavily on venture capital research funding no longer qualified 
for the SBIR program.
    The arbitrary change in eligibility standards inequitably 
penalized biotech firms and has delayed--maybe even prevented--
lifesaving drugs and life-enhancing medical innovations from 
reaching patients and consumers.
    Last year I offered legislation to correct this situation 
which restores the original interpretation of eligibility and 
allows more biotech and medical device companies again to 
compete for funding under the SBIR program.
    My amendment was included in the Small Business 
Administration's reauthorization bill, which unfortunately fell 
victim to late session realities at the end of last year.
    I am also concerned about the Administration's lack of 
enthusiasm for the HUBZone program.
    Ten years ago, as Chairman of the Small Business Committee, 
I wrote the legislation authorizing the Historically 
Underutilized Business Zone, or HUBZone program.
    Enacted in 1997, the program provides an incentive for 
companies to locate and provide jobs in the nation's inner 
cities and depressed rural areas by giving them a government 
contracting preference.
    Last time I checked, there was still a need for good jobs 
in the distressed areas of our big cities and small towns.
    I look forward to working with you on these and other small 
business issues.
    Thank you, Mr. Chairman.

    Senator Durbin. Thank you, Senator Bond and I also note for 
the record, this is the 99th anniversary of the last World 
Series appearance of the Chicago Cubs.
    Senator Bond. That's why I'm glad you're also a Cardinal 
rooter.
    Senator Durbin. He knows my roots.
    Senator Bond. I hate to blow your cover.
    Senator Durbin. He knows my roots in east St. Louis, 
Illinois. I just--I'll close by thanking you for being here. We 
will work informally with you beyond this hearing to talk about 
your staffing and technology needs. I really have a special 
interest in this because I know how important these markets are 
to the United States and to my home State of Illinois and I 
know the people there want to make sure that your agency has 
the tools and the resources to be effective. Chairman Jeffery, 
thank you for testifying today.
    Mr. Jeffery. Thank you very much, Mr. Chairman. It's a 
pleasure.

                     ADDITIONAL COMMITTEE QUESTIONS

    Senator Durbin. As I mentioned at the outset, for those who 
weren't here, we have a 9:30 vote and I'll have to--it was 
originally scheduled for 9:15. I think it was changed to 9:30. 
We'll double-check on that and so I may have to break and leave 
here to tend to my responsibilities on the floor and then 
return.
    [The following questions were not asked at the hearing, but 
were submitted to the Commission for response subsequent to the 
hearing:]

              Questions Submitted by Senator Sam Brownback

    Question. Some members of Congress have introduced legislation 
placing additional regulations on energy derivatives and the over-the-
counter (OTC) markets? Do you think these proposals are necessary?
    Answer. We believe that the CFTC has adequate authority to address 
fraud and manipulation on the regulated futures exchanges subject to 
CFTC oversight. In regard to transactions on Exempt Commercial Markets 
(ECM) or bilateral over-the-counter (OTC) transactions, the CFTC 
supports legislation that would clarify the Commission's fraud 
jurisdiction in certain principal-to-principal energy transactions 
under the Commodity Exchange Act (CEA). The CFTC requested the 
enactment of such legislation during the reauthorization proceedings 
conducted in the 109th Congress. We support this clarification that the 
CFTC has the authority to bring anti-fraud actions in off-exchange 
principal-to-principal transactions, such as those connected with Enron 
Online. These provisions were included in the House-passed 
reauthorization bill last year and the bill reported out of the Senate 
Agriculture Committee.
    In regard to legislation directed at ECMs, it is important to note 
that in recent months the CFTC has exercised its existing ``special 
call'' authority under the CEA to obtain market information from the 
electronic ECM operated by Intercontinental Exchange (ICE) in Atlanta. 
The CFTC has utilized this authority to request trader position data on 
an ongoing basis related to those ICE natural gas contracts that are 
directly linked to NYMEX contracts. Compliance with these special calls 
by ICE is mandatory, not voluntary. These special calls have enhanced 
the CFTC's surveillance of the NYMEX contracts by providing a better 
window into this marketplace. In regard to the trading of futures 
contracts based on NYMEX crude and heating oil contracts traded on 
ICE's London subsidiary, a foreign board of trade fully regulated under 
U.K. law, the CFTC also has stepped up its coordinated surveillance 
efforts with the Financial Services Authority in the United Kingdom and 
is receiving position information on those contracts on an ongoing 
basis as well.
    In regard to bilateral OTC energy transactions, legislation 
proposing additional regulation could confront significant practical 
obstacles due to the absence of a centralized marketplace. Under 
existing enforcement authority, though, the CFTC's Division of 
Enforcement has committed significant resources to combating problems 
in the energy arena, and has achieved significant success in 
prosecuting manipulation and false price reporting cases. During the 
last four fiscal years, the CFTC has filed actions charging more than 
50 defendants with false reporting, attempted manipulation, or 
manipulation in the energy sector and has obtained over $300 million in 
penalties. These cases have been based on well-established CFTC cash 
market enforcement authority that has been clearly recognized by the 
courts.
    Since the passage of the CFMA in 2000, the futures markets continue 
to rapidly evolve and grow, domestically and globally--and the CFTC is 
always monitoring these developments.
    Question. It is my understanding that some companies use these 
over-the-counter (OTC) trading markets to hedge their energy risk and 
that some of the proposals may provide a disincentive for companies to 
use these markets. Would a decrease in participants in the OTC markets 
lead to less transparency?
    Answer. There are a number of different kinds of over-the-counter 
markets, all of which have different levels of transparency. They 
include cash spot and forward physical markets, bilateral OTC swaps and 
options markets, and ECMs. It is possible that regulations aimed at 
increasing transparency in some OTC markets generally could discourage 
some traders from participating in these markets, resulting in their 
trading positions being moved to venues not visible to U.S. regulators. 
However, transparency to the regulator will not necessarily be less 
than is currently the case. For example, as discussed in the answer to 
question number one above, transactions moved to ICE in London actually 
became more transparent to foreign regulators and the CFTC. Finally, it 
is important to note that exchange markets under CFTC jurisdiction are 
among the most transparent in the world for both market participants 
and the regulator.
    Question. I am concerned with the recent regulatory direction that 
the Commission has taken, in apparent conflict with the spirit and 
intent of the Commodity Futures Modernization Act of 2000 (``CFMA''). 
As you know, the CFMA eliminated prescriptive regulation in favor of 
Core Principles that provide exchanges flexibility in determining the 
best method for achieving compliance with each such guiding Principle. 
An example of my concern with your regulatory direction is the 
Commission's final rules regarding acceptable practices for safe harbor 
compliance with Core Principle 15 pertaining to conflicts of interest 
in self-regulatory organizations. While there are a few provisions 
within this final rule that I have concerns with, one in particular is 
the definition of a ``public director'' which by its literal reading 
would appear to exclude almost everyone in corporate America and 
academia. The test of $100,000 of payments from the exchange or any 
member or affiliate thereof collectively will result in not only a 
requirement difficult if not impossible to test for, but will eliminate 
nearly everyone an exchange could draw from for public director 
service. How do you expect exchanges to cope with such a wide reaching 
``public director'' definition that eliminates almost all qualified 
possible public director candidates?
    Answer. The CFTC is strongly committed to both the spirit and 
intent of the CFMA. The CFTC believes that its new Acceptable Practices 
for Core Principle 15--safe-harbors which exchanges may choose to 
implement--are an important indicator of that commitment. The 
Acceptable Practices promote the flexibility inherent to all Core 
Principles while simultaneously offering the specificity necessary for 
effective, ``pre-approved'' regulatory safe-harbors.
    With respect to the definition of ``public director,'' the CFTC has 
determined that it is important to offer all exchanges a clear 
articulation of those director relationships that may interfere with a 
director's ability to deliberate objectively and impartially. The 
definition of ``public director'' adopted by the CFTC reflects that 
determination, and is consistent with Core Principle 15's instruction 
that exchanges must minimize conflicts of interest in their decision-
making processes. The CFTC is confident that qualified, competent 
public directors are available and can be readily identified by all 
exchanges.
    At the same time, as sometimes is the case with legislative text or 
rule making, the Commission recently proposed certain technical 
amendments to the definition of ``public director'' in the Acceptable 
Practices to correct a drafting error and clarify ambiguities. Among 
other things, the proposed amendments would clarify, with respect to 
the $100,000 payments from the exchange test, that ``payments'' means 
compensation for professional services. The amendments also provide 
that, consistent with the Acceptable Practices as originally proposed, 
entity affiliates of members are not included as payment providers for 
purposes of the $100,000 payments test. The Commission believes that 
these amendments should facilitate the inclusion of public directors on 
exchange boards while maintaining the strong level of public director 
independence intended by the Acceptable Practices.
    The proposed amendments to the definition of public director will 
be published in the Federal Register and will be open for a 30-day 
public comment period.
                                 ______
                                 
               Question Submitted by Senator Wayne Allard

    Question. CFTC is currently the only federal financial regulator 
that is not supported by fees paid by the entities it regulates. 
Accordingly, the budget proposes a new transaction fee to fund the 
commission. Can you please describe how this fee would work? How would 
the fee be paid and at what level would it be set? What would be the 
impact in the marketplace of adding a new transaction fee?
    Answer. In the President's Budget for fiscal year 2008, the 
Administration included a user fee based on its view that it is 
appropriate for futures markets to at least partially offset or 
contribute toward the cost of providing those programs which provide 
clear benefits to market participants. Unlike last year's proposal, 
this year's budget recommendation is not dependent on the Appropriators 
enacting the fee proposal.
    If enacted, the proceeds from the fees would be returned to the 
general fund of the Treasury, to be used to offset the deficit impact 
of continuing to fund the CFTC's operations through direct 
appropriations. They would not impact the discretionary spending 
allocations for the relevant Appropriations subcommittees. The fees 
would be set at a level equal to the costs to the taxpayer of funding 
Market Oversight and Clearing & Intermediary Oversight functions, about 
$86 million during 2008. The Office of Management and Budget in the 
Administration has not provided us with final details as to how exactly 
the fee would work or at what level it would be set.
    The CFTC has not studied the impact of a transaction fee, nor is it 
aware of any executive branch agencies that have done so. The 
Congressional Research Service prepared a report entitled ``The 
Proposed Transaction Fee on Futures Contracts'' in April 2006 (RS2241).

                     SMALL BUSINESS ADMINISTRATION

STATEMENT OF HON. STEVEN PRESTON, ADMINISTRATOR
    Senator Durbin. But at this time, I'd like to ask the 
Administrator of the Small Business Administration, Steve 
Preston, to please come to the table.
    I started a few minutes early, Mr. Preston and said a few 
words about your agency and the budget request so if you'd 
like, I'd invite you now to give us your opening statement.
    Mr. Preston. Great, thank you. I'd hoped to start on a high 
note but after your comment about the Cubs, I'm a little 
depressed. So I'll try to regroup here.
    Thank you, Chairman Durbin and Senator Bond, for inviting 
me here to talk about our 2008 budget and I'd also like to 
thank you for the support you all gave us in getting through 
the 2007 process. We're very excited about the funds that we 
have for this year and we think we can do a lot with them.
    As of tomorrow, I will have been on the job for 8 months. I 
also want to thank you for approving our Deputy, who was 
confirmed in December. She is a terrific addition to our team, 
with 30 years of business experience.
    Our 2008 budget request reflects continued commitment to 
America's small business and the vital role they play in our 
economy and in our society. Enactment of this request will 
enable us to continue serving the small business community 
while also being a good steward of taxpayer dollars.
    The SBA's 2008 budget requests $464 million in new budget 
authority. This is a 5-percent increase over the enacted level 
in 2006--that's including disaster and congressional 
initiatives. The budget also requests the use of $329 million 
in carryover balances to fund disaster assistance, funds that 
SBA has on hand from the $1.7 billion in supplemental funding 
from fiscal year 2006. Finally, it includes $21 million in 
reimbursable expenses for E-Gov, Business Gateway and SDB 
certifications as well as lender oversight. All told, that is 
$814 million in overall budget authority.
    The budget will allow the SBA to carry out its core 
functions and begin a number of reforms and improvements. These 
resources will support a total of up to $28 billion in small 
business financing through the 7(a), 504, and SBIC Venture 
programs. For the 7(a) program, we're asking for $17.5 billion 
in lending authority. For the 504, $7.5 billion and then for 
the SBIC Venture Capital, the Debenture program, $3 billion.
    Because of the strength of our portfolios, I'm pleased to 
request fee decreases for the 7(a), 504 and SBIC Venture 
programs. In this budget, the 7(a) annual fee will go down 5.6 
basis points, from 55 to 49.4 basis points. The 50 basis point 
up-front fee for the 504 program is totally eliminated and the 
SBIC Venture annual fee decreases 18.9 basis points. These fee 
reductions are significant. They reflect the success of the 
zero subsidy program in all of our loans. As you can see from 
the fee history table that we provided, the 7(a) upfront loan 
fees for 2005 and 2006 are consistent with those throughout the 
past decade except for the 2003/2004 timeframe. In a reaction 
to the economic impact of 9/11, Congress cut the fees for that 
period of time.
    Unfortunately, the result of cutting the fees was to 
increase the rate at which the SBA subsidy was used, which 
ultimately shut down the program and required additional 
appropriation. Zero subsidy has avoided those types of shut 
downs while the 7(a) program has continued to flourish.
    For disaster loans, our proposed 2008 budget supports a 
loan volume of $1.064 billion. That funding comes from carry 
over from our current disaster funds.
    For counseling and training to small business through SBA's 
network of resource partners, in small business development 
centers, SCORE, and women's business centers, we're asking for 
a total of $104 million.
    In terms of our workforce, the budget will support an 
increase to 2,123 FTEs through the salary and expenses budget. 
That would include 86 new positions to be added in 2007 and 
2008. These additional resources are, in part, replacements for 
attrition at the agency in recent years but they will also 
support other things like stronger loan processing and lender 
oversight, greater support of small business in our Government 
contracting operations, better employee training and career 
support, as well as a greater focus on automation and outreach.
    SBA has a growing responsibility as a financial manager. 
Our portfolio has increased 56 percent over the past 5 years 
and we now have almost $78 billion in financing to oversee. To 
meet that responsibility, our budget has requested funding for 
human capital and information technology.
    The budget includes $4.1 million for investment in the loan 
operations system upgrade, to provide implementation of a 
system to replace our current loan information system for both 
regular loan programs and the disaster servicing program. This 
major agencywide undertaking began in 2006 and is on track to 
be completed by 2012.
    It also includes expanded SBIC oversight with $1.5 million 
to support evaluation contracts, liquidation planning, and an 
examination contract. This investment will help maximize 
recoveries and minimize losses.
    We also continue to improve our lender oversight process, 
which enables us to be more effective in managing credit risk.
    Federal contracting dollars are projected to increase by 64 
percent over 2001 and as I mentioned before, small businesses 
share is expected to grow. We expect that to be $84 billion in 
2008. Our responsibility is to ensure that small businesses 
have fair access to procurement opportunities. What I like to 
tell people is it's not just a matter of fairness, it's also a 
matter of competitiveness. Small businesses perform well as 
suppliers of goods and services. Their size makes them 
flexible, innovative, and often cheaper than large companies. 
It does, however, take a bit more effort to find the right 
small business to fit the bill.
    So in our 2008 budget, we are requesting about $500,000 to 
help improve our service to the 8(a) HUBZones, STB, as well as 
women's and veteran's communities. We're proposing to add nine 
new procurement center representatives in 2007 and 2008, which 
is an expansion of 16 percent. In addition, we're working to 
reform the contract goaling and reporting processes and we're 
redoubling our efforts to ensure that Federal agencies provide 
accurate data on small business procurements.
    For 2008, we are also requesting an increase of $500,000 to 
expand our veteran's outreach. With the Nation's current 
engagement in Iraq and our presence in Afghanistan, the number 
of veterans returning from active duty is going to continue to 
increase. Our Office of Veteran's Affairs plans to increase its 
efforts to educate and provide programs and services to 
veterans and active duty personnel in three major areas: access 
to capital, management and technical assistance, and 
procurement assistance.
    Even though we've already made many reforms in our disaster 
assistance program, we're committed to lasting reforms geared 
toward future disasters, whatever their scale might be. We're 
developing organizational tools and a detailed documented 
escalation plan, which we think will improve our response. 
These plans will include models to rapidly forecast loan volume 
resource requirements and coordination requirements to position 
the agency to respond effectively to large-scale disasters.
    We are also working to implement an Internet-based 
electronic application tool to enable borrowers to submit 
information electronically, quickly and accurately, to 
accelerate our ability to access their loan eligibility.
    The agency is also evaluating options to access the private 
sector skills and resources when dealing with catastrophic 
disaster events.
    Finally, one of my highest priorities as the Administrator 
is to improve the work that we are doing to reach underserved 
areas of our country. In areas where we see high unemployment 
and lower wage rates, like many rural and inner-city areas of 
our country providing effective support to new and growing 
small businesses can provide much-needed jobs, economic 
activity and rejuvenation in places in our country that need it 
the most. In order to reach these markets, SBA has included the 
following proposals in our budget: broadening lender 
involvement in the Community Express Pilot Program so we can 
expand this program, which reaches into many of our underserved 
markets and provides borrowers with a double benefit of capital 
and counseling; expanding the Urban Entrepreneur Partnership to 
additional cities so aspiring urban and small business owners 
have better access to capital and services that will make them 
successful; establishing seven more alternative work sites, 
which allows the agency to make itself more accessible to rural 
customers; and expanding the potential reach of the microloan 
program by moving the program to zero subsidy.
    As I said before, I think this is a sound budget. It gives 
the SBA the funds necessary to oversee and operate our core 
financial programs more effectively, to re-engineer and improve 
our Government contracting programs and to continue our work 
with counseling and training partners. It will also enable us 
to provide more effective outreach, be easier for our customers 
and partners to work with through better automation, and fill 
key staff positions in areas that are clearly lacking in 
necessary manpower.

                           PREPARED STATEMENT

    So thank you for your consideration and I look forward to 
answering any questions you might have.
    [The statement follows:]

                  Prepared Statement of Steven Preston

    Chairman Durbin, Ranking Member Brownback, distinguished members of 
the Committee, thank you for inviting me here today to discuss the 
President's fiscal year 2008 budget request for the U.S. Small Business 
Administration (SBA).
    First, I would like to thank you all for assisting us in obtaining 
the additional funding for disaster and other agency administrative 
needs for fiscal year 2007. The added general agency administrative 
funding will allow us to appropriately address our staffing and other 
administrative priorities for the remainder of fiscal year 2007. The 
disaster administrative funding should ensure that the Agency will be 
able to effectively operate the disaster loan program until late July, 
barring any unforeseen major disasters. We look forward to working with 
you to obtain the remaining $26 million needed for fiscal year 2007 
disaster administration in the upcoming supplemental appropriations 
bill. We appreciate your commitment and understanding of the vital role 
small business plays in the American economy.
    President Bush has been an unwavering supporter of America's small 
businesses, and his leadership has ensured that they have played a 
vital role in our economic growth. There have been more than 7.4 
million new jobs created since August 2003. We know that the majority 
of those jobs were created by employers in the small business 
community. In fact, analysis by the Bureau of Labor Statistics shows 
that small businesses generated 65 percent of the net employment growth 
between September 1992 and March 2005. This growth has helped reduce 
the unemployment rate to 4.5 percent, the lowest rate of the past four 
decades. By reducing the tax rates small business owners pay and 
increasing expensing tax provisions on investments, small businesses 
have more capital available to hire new workers and expand their 
businesses.
    The President is also committed to helping small business owners 
provide health insurance to their employees by supporting association 
health plans, allowing small businesses to get the same discounts on 
health insurance as big businesses. Further, the Administration is 
working tirelessly to ensure that small businesses are able to grow, 
and expand opportunities for their workers, by providing regulatory 
relief and opening markets abroad to ensure that America's trading 
partners play by the rules and make it possible for our small 
businesses to export their products.
    SBA's fiscal year 2008 budget request reflects the President's 
commitment to America's small businesses and the vital role they play 
in our economy. Enactment of this request will enable SBA to continue 
serving the small business community while ensuring stewardship of 
taxpayer dollars. The fiscal year 2008 budget request provides 
resources will total an estimated $814 million. This amount includes 
$464 million in new Budget Authority, $329 million in spending from 
carry-over balances for the Disaster Loan program, and $21 million in 
reimbursable services.
    This budget request reflects both the vision of the Agency's new 
leadership team and the progress the Agency has made over the past five 
years in delivering its programs more efficiently. Since 2001, SBA has 
achieved major growth in nearly all of its programs while 
simultaneously streamlining processes and developing more cost-
effective budget strategies. Fees for all of the Agency's non-disaster 
loan products have been lowered and for the first time ever the 
borrower fee for 504 loans has been completely eliminated while 
continuing to operate the program with no loan subsidy from the 
taxpayer.
    The new management team will continue to pursue this expansion in 
services to the small business community while aggressively pursuing a 
Reform Agenda to ensure the Agency's programs are customer-focused, 
outcome-driven and fiscally responsible and sound. In addition, further 
enabling our employees to fulfill SBA's mission is an essential element 
in achieving our objectives in this budget.

                             REFORM AGENDA

    I am pleased to be heading the new SBA management team that 
includes Deputy Administrator Jovita Carranza, who was just confirmed 
in December. SBA's agenda is grounded in the belief that the Agency can 
improve the effectiveness and impact of its programs and activities 
markedly, by employing important management principles. These 
principles will seek to ensure that the Agency is driven by clear 
outcomes, is focused on serving its customers effectively, enables its 
employees, and operates a compliant and accountable organization.
    The Agency also has a renewed focus on ensuring that its products 
and services are accessible to entrepreneurs in the nation's most 
underserved markets--those with higher rates of unemployment and 
poverty and lower rates of economic progress. This budget request 
highlights SBA's progress to date and describes the Agency's plans for 
achieving the vision of the new management team in fiscal year 2008.
    In 2001, SBA began a drive to deliver more value to the Nation's 
small businesses while lowering costs to the taxpayer. By restructuring 
key Agency operations and reengineering its largest loan programs, SBA 
has achieved record program growth of 56 percent in the loan portfolio, 
while reducing its total cost by 31 percent since 2001 through 
increased operational efficiencies and core program improvements. The 
most important factor in this cost savings has been the 7(a) loan 
program's operation at zero subsidy. With Congress' support we were 
able to change the 7(a) program in fiscal year 2005, saving the 
taxpayers approximately $100 million in subsidy and allowing the 
program to operate without interruption. In years past the program had 
run out of available subsidy funds which shut the program down until a 
new appropriation could be approved. With the zero subsidy operation in 
place the program has been able to expand without the threat of a shut 
down. Zero subsidy is good stewardship of taxpayers' money while 
creating a more stable loan program for small businesses.
    Through its ongoing restructuring and business process 
reengineering, SBA has improved and will continue to improve the 
effectiveness of the taxpayers' dollars supporting small business 
development. Because of these improvements, SBA will be able to serve 
record numbers of small businesses in fiscal year 2008 with this budget 
request.
    The principles of SBA's Reform Agenda have already resulted in a 
dramatic improvement in the Agency's Disaster Loan program. The 2005 
Gulf Coast hurricanes resulted in SBA's largest disaster response in 
its 53-year history. More than 420,000 loan applications from 
Hurricanes Katrina, Rita, and Wilma (three times the level for the 
second largest disaster, the Northridge earthquake of 1994) left the 
Agency struggling to meet its loan processing standards and frustrated 
many.
    Almost immediately after being sworn in as SBA Administrator in 
July, 2006, I spearheaded a fundamental reengineering of the disaster 
loan processing operation that has dramatically shortened response 
times, improved quality, and increased borrower support. Backlogs were 
virtually eliminated and feedback on the new approach has been 
overwhelmingly positive. We, however, are not finished with the long-
term redesign of the disaster process, and are working aggressively to 
do so in the coming months.
    SBA is bringing the same principles used in disaster assistance 
reform to administering its business guaranty programs as well. 
Reengineering of the loan servicing process is underway and will result 
in better customer service and less operational redundancy. Building 
upon its success in consolidating 7(a) loan liquidation functions from 
almost 70 district offices to a single location, SBA is also finalizing 
plans to consolidate 7(a) loan processing, 504 loan liquidation, and 
Disaster loan liquidation. These changes ensure that loans are managed 
more consistently and efficiently. In the case of 7(a) loan 
liquidation, considerable budgetary savings were also realized.
    Modernizing agency operations is challenging, but it is essential. 
The Nation's taxpayers expect SBA to operate using the techniques and 
practices of sound fiscal and operational management. Through its 
proactive efforts to improve productivity and performance, while 
reducing cost, the SBA has demonstrated its commitment to deliver ever 
better products while improving efficiencies.
    With a guaranteed and direct loan portfolio of over $78 billion, 
SBA has a critical role as a steward of taxpayer dollars. While the 
portfolio has grown at a record pace in recent years, during that time, 
SBA has been implementing a rigorous, state-of-the-art risk management 
program. By using industry data and technology, the Agency is replacing 
the old, primarily manual processes for reviewing lender performance 
with automated, quantitative risk-based methods to identify problems 
earlier and more effectively. This approach is improving oversight 
while there continues to be a period of strong growth in the loan 
portfolio.

                    HIGHLIGHTS OF THE BUDGET REQUEST

    SBA's budget request represents an increase of 5 percent for fiscal 
year 2008 above our enacted level in fiscal year 2006 (excluding the 
Disaster program and earmarks). The overall request is for $814 million 
in proposed Budget Authority. This includes $464 million in new Budget 
Authority and $329 million funded out of carryover balances from the 
$1.7 billion in supplemental funding received in fiscal year 2006 for 
the Disaster Program. Some critics have misinterpreted this request by 
dismissing the $329 million to be carried over from overages in the 
disaster loan subsidy account. The creation of State grant and loan 
programs, the influx of insurance payments previously thought to be 
uncollectible and other factors have shifted the needs of Hurricane 
victims. The result is that they need less loan authority than 
estimated in 2006 but the constant changes and delays in rebuilding 
require more administrative and staffing needs until the borrowers can 
actually rebuild. Currently, there is sufficient carryover balance in 
the disaster loan subsidy account to cover the additional Katrina 
related administrative costs as well as those for a normal disaster 
year in 2008. Therefore we have asked for transfer authority from the 
overage in disaster subsidy to cover administrative costs.
    These resources will support a total of $28 billion in lending 
authority for small business financing, which represents a potential 40 
percent increase over business lending for fiscal year 2006, through 
the 7(a), 504, and SBIC debentures programs. For its flagship 7(a) 
program, SBA requests authority for $17.5 billion--a 27 percent 
increase over the fiscal year 2006 lending level. SBA also requests 
authority for $7.5 billion for the 504 program, a 32 percent increase 
over loans made in fiscal year 2006--a record year for 504 lending. 
Finally, SBA requests an SBIC Debenture program of $3 billion.
    In addition, this budget will support the following:
  --A disaster loan volume of $1.064 billion (the Agency's ten-year 
        average based upon fiscal year 1996-2005 average activity, 
        excluding the WTC disaster, adjusted for inflation).
  --Counseling and training to small business people through SBA's 
        network of resources partners in Small Business Development 
        Centers (SBDC), Service Corps of Retired Executives (SCORE), 
        and Women's Business Centers.
  --Assist federal agencies targeting a total of $84 billion in prime 
        federal contracting dollars to be awarded to small businesses 
        in fiscal year 2008.
  --Investing in the Agency's human capital through job skills 
        training, mentoring programs, succession planning, proactive 
        recruitment of highly qualified staff, and implementation of an 
        automated personnel records system.
  --Maintaining employee security through continued implementation of 
        Presidential Homeland Security Directive #12 and support of 
        major security improvements in the headquarters building.
  --Continuing the process of implementing a loan operations system to 
        replace the current outdated system in order to better track 
        payments as well as increase the Agency's loan portfolio 
        oversight.
  --Enhancing SBIC oversight and recoveries.
  --Providing a cost effective microloan program.
  --Continuing efforts to make it easier and faster for small 
        businesses to comply with government regulations.
  --Improving SBA products, services and delivery.
    SBA's budget request will support 2,123 FTE through the Salaries 
and Expenses budget. This staffing level is an increase over both the 
fiscal year 2006 actual level and the fiscal year 2007 requested level. 
SBA has been able to reduce its budgetary requirements and staffing 
levels over recent years, but these increases are necessary to support 
critical oversight and portfolio management functions. Nevertheless, 
SBA has managed significant administrative savings while increasing 
financing, counseling, and government contracting opportunities for 
small businesses. SBA has been streamlining its operations and 
eliminating costly and inefficient programs, including the following 
examples:
  --The Agency centralized its financial processing operations. As a 
        result, 7(a) loan liquidations cost approximately $18 million 
        less in fiscal year 2006 than fiscal year 2003.
  --The Agency created an alternative to the LowDoc program for 7(a). A 
        part of our SBAExpress program, Community Express is 20 times 
        less expensive than LowDoc ($4,771 per loan approved for LowDoc 
        vs. $227 for SBAExpress). Lenders still have access to the 
        higher 85 percent guarantee for smaller loans formerly 
        available through LowDoc but benefit from the improved process 
        under other 7(a) products, such as Community Express.
  --SBA continues to seek opportunities to reduce rented space. The 
        initiatives we have implemented from fiscal year 2004-2006 
        resulted in $3.8 million in annual rent savings.

                                DISASTER

    In the summer of 2006, we initiated the Accelerated Disaster 
Response Initiative to identify and implement process improvements to 
help the Agency respond more rapidly in assisting small businesses and 
homeowners seeking financial assistance after a disaster. As a result, 
the Agency fundamentally reengineered its disaster loan processing 
operation to shorten response times, improve quality, and provide 
greater borrower support. Based on customer feedback, the Agency rolled 
out an ``integrated team'' model. Each team comprises 15-18 employees 
with legal, financial, and other required competencies to ensure 
timely, coordinated loan processing. Customers are assigned to a case 
manager on the integrated team so they have a single point of contact 
that is responsible for guiding them through the loan process and 
ensuring that SBA is responsive to their timing and other requirements.
    Under the new model, case managers now proactively contact 
applicants to determine what impediments exist to closing loans and 
making disbursements. In addition, in order to complement SBA's 
reengineered process, the Agency has implemented numerous metrics to 
track application status and performance of employees. All applications 
are categorized by processing status and type of outstanding issue. 
This provides management with the necessary information to identify 
problem areas and implement corrective actions. Further, productivity 
is monitored to identify areas that require management intervention. 
These strategies are the foundation for improved responsiveness to 
borrower needs. For example, the time needed for loan modifications 
that averaged more than 2 months in July, 2006, now averages 8 days, 
and continues to decline. In addition, the backlog of loans for 
modification has declined over 90 percent since July.
    Additional organizational planning measures to improve SBA's 
disaster response include development of models to rapidly forecast 
loan volume and resource requirements (financial, human capital, and 
logistics) to better position the Agency to respond to large scale 
disasters when they strike. Moreover, SBA is nearing completion of a 
protocol to leverage its field network to improve local coordination 
and communication with citizens and other local authorities.
    By 2008, SBA expects to implement an internet-based electronic loan 
application process to ensure that borrowers' required information is 
provided to assess loan eligibility. This complements SBA's investment 
in the disaster computer system that has been tested to support a four-
fold increase in concurrent user capacity to 8,000 users. The agency is 
also evaluating options to access the private sector's skills and 
resources when dealing with catastrophic disaster events.

                 COMPLIANT AND ACCOUNTABLE ORGANIZATION

    Listed below are the actions SBA has initiated and planned along 
with specific funding requests regarding its loan and investment 
portfolio:
  --Investment in technology for the loan operations system upgrade of 
        $4.1 million in S&E (to be complemented by about $4.2 million 
        in disaster funding) for project management support, and to 
        acquire and begin implementation of a system to replace our 
        current loan information system for both regular loan programs 
        and disaster loan servicing. Currently, the Agency's business 
        loan operation runs on a Cobol-based system which limits 
        technological advancement opportunities and security. The older 
        system is also significantly more costly to maintain. SBA is 
        making good progress on this major Agency-wide undertaking, 
        which began in fiscal year 2006, and is on track to be 
        completed by 2012. Requested funds for fiscal year 2008 will 
        enable SBA to finalize the business vision, develop the project 
        management plan, and finalize technical and functional 
        requirements.
  --Expanded SBIC Oversight with $1.5 million in S&E to continue the 
        valuation contract, develop a liquidation plan, and implement 
        an examination contract. This investment will help maximize 
        recoveries on the $1.5 billion in the Office of Liquidation, 
        and minimize losses on the currently $10.3 billion in 
        outstanding leverage and commitments in the Office of 
        Operations.
  --Loan and Lender Monitoring System and Lender Reviews--SBA's Office 
        of Lender Oversight (OLO) has a state of the art loan and 
        lender monitoring system that incorporates credit history 
        metrics for portfolio management. The credit information, 
        combined with SBA lenders' current and historical performance, 
        allows the Agency to assign risk ratings to lenders. Such 
        ratings provide both an assessment and a monitoring tool for 
        the most active SBA lenders, and are the primary basis by which 
        lower volume lenders are evaluated. High risk lenders are under 
        direct oversight of OLO rather than the program office. In 
        addition, OLO is responsible for conducting on site lender 
        reviews and examinations. Through fiscal year 2006, the Agency 
        has not had resources to conduct as many reviews as we believe 
        are necessary. However, because the Agency recently received 
        authority for reimbursement for the cost of these reviews, SBA 
        plans to conduct additional reviews in fiscal year 2008.
  --Portfolio Analysis Committee--Senior Capital Access and CFO 
        Managers meet monthly to review and assess portfolio trends and 
        identify opportunities for program improvements. This committee 
        is an important component of SBA's risk management program. The 
        committee assesses the risk of the 7(a) and 504 loan programs 
        and performance trends. Based on analysis and management 
        direction resulting from these meetings, program changes, 
        operational initiatives, and other actions are generated. For 
        example, in addition to providing support for the elimination 
        of the LowDoc program, the committee's review efforts resulted 
        in the initiative to reduce the backlog in liquidations and 
        charge-offs in our 7(a) portfolio.
  --Lender Oversight Committee--Senior managers meet bi-monthly to 
        review lender trends and review corrective actions for poor 
        performing lenders. As mentioned, Lender Oversight has 
        introduced risk ratings to monitor and evaluate SBA lenders. 
        The committee is also provided results and performance metrics 
        on lender oversight activities such as examination reports, and 
        corrective action plans for lenders under OLO's direct 
        oversight. SBA has placed several lenders under corrective 
        action plans and continues close monitoring to improve 
        performance.
  --Lender Portal--Lenders now have access to their risk ratings and 
        performance metrics through our lender portal, making it 
        transparent to lenders what they are rated on and how they 
        compare with their peers. It allows lenders to address data 
        quality issues to improve their risk ratings, which the Agency 
        believes will ultimately result in significant improvements in 
        data quality. The information is also available to SBA's 
        district offices to help identify training opportunities for 
        lenders.
  --SBIC Liquidations--SBA currently oversees approximately $1.5 
        billion in SBIC leverage in its Office of Liquidation and $10.3 
        billion in leverage and commitments in its Office of 
        Operations. Collecting on the large amount of leverage 
        outstanding in the Office of Liquidation continues to be of 
        great concern. The staff has developed a comprehensive strategy 
        for liquidating this portfolio of investments. As part of this 
        strategy, several pilot initiatives for liquidating SBIC assets 
        are being pursued to ascertain the most cost efficient means of 
        disposing of this significant portfolio. With $2.4 billion in 
        estimated losses in the Participating Securities (PS) program, 
        oversight on the $10.3 billion in outstanding leverage and 
        commitments for those SBICs (of which almost $7.2 billion 
        pertains to the PS program) remains of high importance.
    In addition, SBA is taking the lead, along with the Office of 
Management and Budget's Office of Federal Procurement Policy, to work 
with the contracting agencies to ensure accuracy and transparency of 
the data in the Federal Procurement Data System-Next Generation (FPDS-
NG). The agencies are in the process of validating their fiscal year 
2005 data to identify the reasons for coding discrepancies and to 
correct any errors that occurred.
    In fiscal year 2007 we expect that all agencies' subcontracting 
information will be available in the Electronic Subcontracting 
Reporting System.

                           CUSTOMER-ORIENTED

    The following are highlights of SBA's plans to focus its products 
and services on underserved markets:
  --Expansion of the Community Express pilot.--This pilot was designed 
        to reach underserved markets and combines both capital and 
        technical assistance to increase the viability of the 
        businesses it serves. The Agency is working to broaden lender 
        participation in the product and will seek involvement from its 
        counseling and training partners: SBDCs, SCORE, and Women's 
        Business Centers.
  --Expansion of the Urban Entrepreneur Partnership.--The Urban 
        Entrepreneurial Partnership (UEP) initiative is a community-
        based referral program located in an urban setting. The Agency 
        has been working to expand the initiative to additional cities 
        that will create a local network of small business resource 
        providers serving urban and inner-city communities 
        (UEPNetwork), as initially outlined by the President in a 
        presentation to the National Urban League in 2004.
  --Expansion of Alternative Work Sites.--One way the Agency has made 
        itself more accessible to small business is to locate certain 
        district office staff away from single urban centers to 
        locations closer to our customers. Currently, there are 22 such 
        alternative work sites in operation. Another 2 are planned by 
        the end of fiscal year 2007. SBA is seeking $100,000 to set up 
        7 additional sites in fiscal year 2008.
  --Business Process Reengineering for the Office of Government 
        Contracting and Business Development (GCBD).--SBA's request 
        includes $500,000 to examine how to best serve the 8(a), 
        HUBZone, and Small Disadvantaged Business communities as well 
        as women and veterans. We recognize the Agency can improve the 
        management of these programs, particularly the 8(a) program, 
        and will use these resources to determine how to best serve 
        them--whether through staff realignment and training, or 
        technology improvements.
  --New Markets Tax Credit Pilot.--In October, the Agency launched the 
        New Markets Tax Credit Pilot Loan Program to provide financial 
        assistance to small businesses in economically distressed urban 
        and rural areas, or ``New Markets.'' The pilot program allows 
        certain Community Development Entities (CDE) to purchase up to 
        90 percent of the gross loan amount of SBAExpress or Community 
        Express 7(a) loans up to $150,000 made to NMTC ``qualified'' 
        businesses in low-income communities. Administered by the 
        Treasury Department's Community Development Financial 
        Institutions Fund, the New Markets Tax Credit program permits 
        investors to receive credits on their federal taxes of up to 39 
        percent of investments made in investment institutions called 
        Community Development Entities.
      The SBA pilot program, which is only available to 7(a) lenders 
        making new loans through advance-purchase commitments with 
        CDEs, waives a regulation that limits an SBA lender's ability 
        to sell any portion of an SBA guaranteed loan to anyone other 
        than another SBA lender. The waiver allows CDEs with New 
        Markets Tax Credit allocations to purchase up to 90 percent of 
        SBA Express or CommunityExpress 7(a) loans up to $150,000 made 
        to NMTC ``qualified'' businesses in low-income communities. The 
        New Markets Tax Credit Program is expected to spur 
        approximately $16 billion in investments into CDE investment 
        institutions.
      These new loans are guaranteed by the SBA. By leveraging the 
        SBA's resources with the Treasury's NMTC program, the pilot 
        will provide additional access to loans and technical 
        assistance to both start-up and existing small businesses in 
        New Markets. Under the program, Community Express lenders will 
        assist CDEs to provide small business borrowers with a package 
        of services including mentoring, coaching and counseling.
  --Zero Subsidy Microloan Program.--Small business loans under $35,000 
        provide a critical level of capital to certain sectors in our 
        economy, many of which are in underserved communities. Our 
        regular 7(a) program reaches many members of this community. In 
        fiscal year 2006, 42,730 loans, representing 44 percent of all 
        7(a) loans, were made at the microloan funding level ($35,000 
        or less). However, additional businesses in target markets can 
        be reached through non-bank micro lenders.
      The Microloan program as currently structured is costly to the 
        taxpayer. In fiscal year 2006 it cost approximately 85 cents to 
        the government for each dollar loaned to a Microloan 
        intermediary. Therefore, the Agency is proposing a zero subsidy 
        microloan program. By raising the very preferential rate at 
        which intermediaries borrow from 3.77 percent (below the 
        government's cost of funds) in fiscal year 2008 to 5.99 percent 
        (SBA's all-in cost), the Agency can eliminate the subsidy cost 
        of this program and greatly expand funding for microloan 
        intermediaries. Intermediaries will continue to receive a 
        better than market rate of interest on loans and SBA will be 
        able to offer loans to any eligible intermediary.
      Furthermore, SBA is proposing that rather than asking for 
        Microloan Technical Assistance funding, SBA should leverage the 
        skills of technical assistance resource partners, including the 
        Small Business Development Centers and Women's Business Centers 
        located throughout the country, to train and counsel micro 
        borrowers. This has the potential of tripling the number of 
        outlets providing training to micro-entrepreneurs for micro 
        enterprise training and will save almost $13 million in fiscal 
        year 2008.
  --Expanding the Veterans' Outreach Program.--The SBA requests an 
        additional $500,000 for the Office of Veterans' Business 
        Development (OVBD) in fiscal year 2008. With the Nation's 
        current engagement in Iraq and its presence in Afghanistan, the 
        number of veterans returning from active duty will continue to 
        increase. SBA's Office of Veterans Business Development (OVBD) 
        plans to increase its efforts to educate and provide programs 
        and services to veterans and active duty personnel in three 
        major areas: access to capital, management and technical 
        assistance, and procurement assistance programs through SBA, 
        other government agencies, and the private sector. The Agency 
        will accomplish this through existing loan programs, the 
        disabled-veteran-owned business government contracting program, 
        a redesigned website populated with a broad range of programs 
        and services available to veterans, the development of training 
        and mentoring programs for veterans by veterans, and funding 
        District Offices to grow veteran-owned business capacity.
    Other customer-focused plans include:
  --Helping businesses with compliance through the 24/7 anywhere 
        accessible Business Gateway. SBA requests $4.8 million in 
        reimbursable budget authority for the E-Gov initiative for 
        which SBA is the managing partner and $425,000 in S&E for the 
        project management office (SBA's contribution as managing 
        partner). Business Gateway will provide the Nation's businesses 
        with a single, internet-based access point to government 
        services. It will simplify and improve businesses' ability to 
        locate and submit government forms and reduce the time and 
        effort needed to comply with government regulations. Each year, 
        Business Gateway will increase the time saved by business 
        accessing information and forms by 50,000 hours over fiscal 
        year 2006.
  --Increase access to Federal procurement opportunities by adding 9 
        new Procurement Center Representatives in 2007 and 2008. With 
        total Federal contract dollars projected to increase by 56 
        percent over fiscal year 2001, the small business share is 
        expected to increase to a total of $85 billion. SBA's 
        responsibility is to ensure small business retains access to 
        these opportunities.
      SBA will also continue the development of the Electronic 
        Procurement Center Representative System. During fiscal year 
        2006, SBA began working on an Electronic Procurement Center 
        Representative (EPCR) System to allow PCRs more timely 
        information about contracting opportunities for small business. 
        It also worked with the Department of Defense to integrate EPCR 
        functional requirements with the DOD's capture of additional 
        pre-solicitation information, and explored possible expansion 
        of existing shared systems in the Integrated Acquisition 
        Environment (IAE). The Agency will prepare a business case and 
        will pursue systems design and development in fiscal year 2008. 
        SBA has put into production automated systems for 8(a), Small 
        Disadvantaged Businesses, and HUBZone applications, and will 
        soon finalize the electronic review and certification 
        processes.
  --Expanding the reach to the eTran system, which provides a web-based 
        portal for loans guaranteed through the flagship 7(a) loan 
        program. Seventy percent of our 7(a) loans come in through this 
        portal. Expanding the functionality of eTran will further 
        automate lender interactions. In addition, SBA is working with 
        lenders to identify and address other cumbersome processes, 
        which can deter lenders from marketing certain of SBA's 
        products. The Agency is currently developing a web-based system 
        expected to be used by both surety bonding companies and the 
        small businesses seeking bonding.
  --Enhancing its Entrepreneurial Development Management Information 
        System (EDMIS), used by its technical assistance partners, to 
        simplify the system's use and capture better information.
                            employee enabled
    The following are actions to keep our employees safe and able to 
fulfill the Agency's mission:
  --Professional guard services.--$1.1 million in S&E to support 
        professional guard services, operation of a magnetometer for 
        the building, and training for the guards, in order for the 
        Agency to increase security to the level recommended by the 
        Federal Protective Service.
  --Implementation of government-wide biometric security cards.--
        $600,000 in S&E (complemented by about $600,000 in Disaster 
        funding) for the full implementation of Presidential Homeland 
        Security Directive #12, which requires the development and 
        implementation of a government-wide standard for a secure and 
        reliable new identification card issued to Federal employees 
        and contractors. The overall goal of HSPD-12 is to achieve 
        appropriate security assurance by verifying the identity of 
        individuals seeking physical access to Federally controlled 
        government facilities and electronic access to government 
        information systems.
  --Centralized training efforts.--$550,000 (similar level to fiscal 
        year 2006) for a skills gap assessment for mission critical 
        occupations; an electronic learning tool; learning management 
        systems; management and leadership development training; a 
        mentoring program; succession planning; and a program to help 
        staff balance the demands of their professional and personal 
        lives.
  --Training for Risk-Related Activities.--$140,000 to keep procurement 
        and business development staff current on complex changes; 
        $235,000 for training of Regional and District administrative 
        officers authorized to commit funds on behalf of SBA; and 
        $90,000 for training of staff involved in acquisition 
        activities, which are inherently high-risk, Agency-wide.
  --Proactive recruitment.--$123,000 to attract the necessary skilled 
        personnel needed for succession planning. By 2009, 34 percent 
        of SBA's workforce will be eligible to retire.
  --District Office program oversight staff.--$100,000 to ensure 
        continued monitoring and oversight of SBDC grant and policy 
        issues, adherence to procedures and knowledge of the program 
        announcement.
  --Enterprise human resources integration system.--$800,000 to 
        integrate SBA's personnel record keeping into this government-
        wide record keeping system covering the entire life cycle of 
        Federal employees to replace the current Official Personnel 
        Folder.

                            OUTCOMES DRIVEN

    To fulfill its mission, it is critical that the SBA understand how 
to drive outcomes aligned with that mission. SBA is proud of its work 
on budget and performance integration which has allowed the Agency to 
maintain a green rating in both status and progress since fiscal year 
2004.
    The Agency recognizes it still has work to do, particularly in 
defining our programs' outcomes. As such, SBA has contracted with the 
Urban Institute to analyze our business loan programs with results due 
in fiscal year 2007. In addition, the Agency is analyzing penetration 
of its lending products into various place-based and people-based 
groups to understand their impact more fully.
    In Spring fiscal year 2007, the Agency will complete a major review 
of its Strategic Plan. The review will incorporate information from 
SBA's financial assistance programs' evaluation, as well as the new SBA 
leadership team's vision. In addition, reporting, measurement, and goal 
attainment is being designed to align the most critical outcomes the 
Agency is working to achieve.

                               CONCLUSION

    In closing, this is a good budget for America's small businesses 
and America's taxpayers. I look forward to working with you to enact 
this budget and to help entrepreneurs start, build and grow their small 
businesses. Again, thank you for inviting me here today and I will be 
glad to answer any questions.

    Senator Durbin. Thank you very much. I stated at the 
beginning of this hearing that we have a rollcall, which begins 
at 9:30. I'm going to ask a few minutes of questions and then 
turn to my colleagues, Senator Bond and Senator Allard and 
then, after they've asked those, we will recess until after the 
rollcall votes when I will return with a longer list of 
questions, probably around 10:15. I apologize for the 
interruption but this is beyond our control at this point.

                   SMALL BUSINESS DEVELOPMENT CENTERS

    So let me just say first that I'm concerned, Mr. Preston, 
about the small business development centers and the amount of 
money that is being requested in this budget, if this turns out 
to be a pretty good investment for Federal taxpayers. We spend 
about $87 million nationwide and according to SBA statistics, 
we create small businesses that generate five times that amount 
in Federal tax revenues. So for every dollar that we invest in 
these centers, businesses are created employing Americans and 
generating tax revenues at a rate of 5 to 1. That's a pretty 
good investment.
    And yet, there are suggestions here that we are going to 
cut back on the small business development centers. I'd like 
for you to address this in terms of whether we are, in fact, 
going to squander an opportunity here to help a lot of people 
who need help at the expense of business creation. Also, from a 
minority perspective, we're very concerned about the creation 
of minority businesses. According to studies commissioned by 
the SBA, small businesses are the greatest source of net new 
employment in inner cities comprising more than 99 percent of 
establishments and 80 percent of the employment in inner 
cities. However, the 4-year survival rates of minority-owned 
businesses are lower than the survival rates of non-minority 
owned businesses. More than one-third of the people who come in 
to these development centers are minorities. As we cut back, it 
reduces opportunities for minority expansion for cities and as 
I mentioned earlier, it reduces the opportunity for businesses 
to be created, generating tax revenues.
    Do you think this is a good choice of expenditures at the 
Federal level?
    Mr. Preston. Well, let me just start out by saying two 
things. Number one, they are a very important part for us. In 
fact, the small business development centers as well as the 
women's business centers and our SCORE network are really the 
cornerstone of our business training and counseling effort at 
the SBA. And I also acknowledge the criticality of certain 
minority businesses; in fact, a lot of what we're focusing on 
strategically right now is how to reach deeper and more 
effectively into that community because driving small business 
ownership in the inner city as well as in some of the rural 
markets where we see difficulty, we think can be an absolute 
game-changer. So I appreciate the question.
    The SBDCs--we are not the primary source of funding for 
them. We are a core tier of funding that gives them the 
stability to run a core level of operation, provide overhead, 
provide hiring to a certain degree but then they also have 
external fundraising efforts and we encourage them to do that. 
We are working, in fact, right now with women's business 
centers on a trial basis to help them become more effective in 
external fundraising and to bring best practices to bear and we 
would like to have that type of a dialogue with the SBDCs as 
well.
    So I guess, Senator, I look at it as we are a very 
significant layer of funding to them. We enable them to go and 
do things that they might be able to do otherwise but we would 
like to work with them and encourage them to expand their 
external funding sources because we do think that expanding 
their reaches is important.
    Senator Durbin. I know that you've testified to that before 
but I think that you're overlooking the fact that that Federal 
investment is an incentive for non-Federal sources and as we 
back off of it, I hope that you're right but we may be wrong, 
at the expense of a lot of opportunities. I'm going to leave at 
this point and turn it over to Senator Bond and you'll have a 
5-minute clock and then turn it over to your colleague, Senator 
Allard and Senator Allard, if you could stay that long, if 
you'd be kind enough to recess the hearing at the end of your 
question and we'll resume at about 10:15.
    Senator Bond [presiding]. Thank you, Mr. Chairman. Senator 
Allard can run faster than I can so we will--you're younger and 
in better shape.
    Congratulations, Mr. Preston, to you and Ms. Carranza, on 
the successes. I'm hearing very good things about the SBA under 
your leadership and the revitalization.
    Mr. Preston. Thank you.

                   SMALL BUSINESS INNOVATIVE RESEARCH

    Senator Bond. But there are a couple of areas I want to 
highlight very quickly with respect to procurement. The 
performance budget states there will be a review of the small 
business innovative research, SBIR, and the small business 
technology transfer, STTR programs. Based on these reviews, SBA 
will recommend legislation and propose regulatory changes. It 
goes on to state the SBA will continue to improve oversight and 
evaluation of SBIR and STTR. As we all know, they function more 
than simply as procurement. SBIR was created in the 1980s, to 
provide new contracting opportunities for small companies and 
to foster innovation and commercialization of innovative 
products by small companies.
    The National Institutes of Health SBIR program, for 
example, helps small medical device, biotech, and diagnostic 
firms access critical early-stage capital to get the product 
off the drawing board and I continue to be concerned that SBA 
is stifling innovation in biotechnology and other industries 
relying heavily on venture capital. Biotech industry is heavily 
dependent upon capital expenditures, 10 to 15 years, $800 
million for a company to bring just one product to market.
    For 20 years until 2004, your agency was a catalyst for 
developing America's most successful companies, helping to fund 
startup and development. But then SBA decided that small 
businesses was relying heavily on venture capital no longer 
qualified for SBIR and that inequitably penalized biotech firms 
and has delayed, maybe even prevented life-saving drugs and 
life-enhancing medical innovations and I believe in certain 
circumstances, has driven them abroad.
    Last year, I offered legislation to correct it. It was 
included in the SBA reauthorization, which fell victim, like 
everything else, to the delays and filibusters at the end of 
the session. I might also note, I'm equally concerned about 
this administration's continuing lack of enthusiasm for the 
HUBZone program. Ten years ago as chairman of the authorizing 
committee, I wrote the legislation authorizing the historically 
under-utilized Business Zones or HUBZones, to provide 
incentives for companies to locate and provide jobs in the 
Nation's inner cities and depressed areas by giving them a 
Government contracting preference. As you yourself have just 
said, there is still a great need for good jobs in the 
distressed areas of big cities and small towns and I'll look 
forward to working on that with you.
    But one point I want to make. I have this chart that came 
from NIH and it shows the base application rates for the SBIR 
program and the RO1 program. This is significant because it 
shows when the new regulations were applied to a specific 
company, Cognetixs, in 2003 but the agencies did not fully 
implement them until 2004. So it's fair to say that these 2005 
and 2006 numbers where the application rates fell off 
significantly in percentage terms, are a result of the venture 
capital rules. And the chart also includes the RO1 
applications, the largest NIH grant program for universities 
and academia. So while the SBIR program was falling off, it 
shows that applications for the RO1 grants continued to 
increase. I think this makes a very strong case to show that 
the decrease in SBIR applications is specific to the SBIR 
program and not a result of scientific trends. Would you agree 
with that?
    Mr. Preston. Well, I would certainly want to dig into the 
data further, Senator, to understand what it implies. One of 
the things we have, we are waiting right now, is a study from 
the National Academy of Science that looks at the whole SBIR 
program and the value of it, et cetera, et cetera. I do agree, 
it's a critical program for getting capital to companies that 
are involved in the commercialization stage that are small. 
Venture capitalists can own up to 49 percent. I think your 
point is based on the need of the funding. It may need to go 
over that.
    What we're trying to do here is balance the need to get 
money to small businesses that are viable and have great ideas 
with ensuring that we get the kind of value out of the program 
that you're talking about.
    Senator Bond. I look forward to discussing that with you 
further and I'll leave my further questions for the record and 
turn you over to the tender mercies of the Senator from 
Colorado.
    Mr. Preston. Thank you.
    Senator Allard [presiding]. Thank you, Senator Bond. I 
appreciate it. I ask unanimous consent that my full statement 
be a part of the record.
    Senator Bond. Without objection.
    [The statement follows:]

               Prepared Statement of Senator Wayne Allard

    I would like to thank Chairman Durbin for holding the first hearing 
of the new Subcommittee on Financial Services and General Government. I 
was fortunate to work with him as my Ranking Member on the Legislative 
Branch Subcommittee during the previous Congress, and I look forward to 
continuing to work with him in this new capacity.
    I am pleased to be a member of this new subcommittee. These 
agencies are of a particular interest to me, as I am ranking member of 
the authorizing subcommittee with similar jurisdiction. I appreciate 
this opportunity to become more involved in their budgetary matters as 
well.
    Coming from an agricultural state like Colorado, I have a keen 
interest in the Commodities Futures Trading Commission. I will be eager 
to hear how the CFTC is changing with the financial markets.
    I hope Chairman Jeffery will also be making a few comments on the 
topic of competitiveness. Following the release of the Paulson report 
and the Schumer/Bloomberg report, competitiveness of the capital 
markets has become the primary topic of discussions in the financial 
markets. While most of the discussion focuses on more traditional 
securities, I am curious to hear more about how futures, options, and 
the CFTC fit into the picture.
    I also hope that Chairman Jeffery will discuss the proposed new 
transaction fees. This would be a major shift, and I believe it is 
important to fully understand all aspects of the proposal.
    I also look forward to hearing from Administrator Preston of the 
Small Business Administration. I started and owned a small business, so 
I am well aware of the challenges faced by small businesses. Once an 
entrepreneur is able to overcome the hurdle of raising the necessary 
start up capital, the new business owner faces daunting rules and 
regulations. The SBA is an important resource for help with both.
    It is important that we continue to promote the start up and growth 
of small businesses in America, since they are a significant sector of 
the economy.
    Small firms
  --Represent 99.7 percent of all employer firms.
  --Employ half of all private sector employees.
  --Pay more than 45 percent of total U.S. private payroll.
  --Have generated 60 to 80 percent of net new jobs annually over the 
        last decade.
  --Create more than 50 percent of nonfarm private gross domestic 
        product (GDP).
    I would like to thank Chairman Jeffery and Administrator Preston 
for appearing before the subcommittee today. Your perspective will be 
very helpful as we move forward with your budgets, and I look forward 
to your testimony.

                             LOAN OVERSIGHT

    Senator Allard. I have two quick questions. You have an 
inspector general report where it says the agency does not have 
sufficient controls to detect fraud and prevent unnecessary 
losses. What is your response to that critical statement?
    Mr. Preston. I think the agency does have sufficient 
resources. We've significantly increased our lender oversight. 
We've expanded that group. We've expanded the statistical tools 
that we use to analyze our lenders. We actually continue to see 
improvements in the improper payment numbers and I think we've 
got a great working relationship with our inspector general on 
these issues. So I think we continue to improve. In fact, right 
now----
    Senator Allard. Are you watching your loans on your 
businesses and being careful--being sure they don't get in some 
of these exotic loans that we're seeing in the housing market?
    Mr. Preston. Senator, our loans are set up in very specific 
programs. So there are only certain kinds of loans we can make.
    Senator Allard. They are 50 year, 30 year standard payoff 
loans.
    Mr. Preston. They generally are even shorter than that.
    Senator Allard. Okay.
    Mr. Preston. But mostly they are bank loans that have to 
fit into a particular framework.

                                  PART

    Senator Allard. Okay. Very good. The other thing, too is I 
take a lot of interest in the PART program. Do you know what 
I'm talking about? It deals with setting goals and objectives 
that are measurable and examining outcomes.
    Mr. Preston. Exactly.
    Senator Allard. There are a few programs under your purview 
that I don't think quite made the grade on that PART program, 
maybe just one or two or three. Do you want to comment on that?
    Mr. Preston. I probably prefer to work with your staff to 
find out specifically which programs you're considering but we 
do have PART goals on all of our programs, you're correct, yes.
    Senator Allard. I'm one that follows that.
    Mr. Preston. I think that's very important.
    Senator Allard. I say that just to alert you that whenever 
you show up in front of me, I'm liable to ask you about the 
PART program. If you have some programs in there that are 
lagging in that regard, you'll get some questions from me on 
that.
    Mr. Preston. Great.
    Senator Allard. So you need to be prepared because I think 
the Government Performance and Results Act has got the right 
tone that we need to bring accountability to our agencies. I'm 
one that believes in that so you'll hear some questions from me 
on that.
    Mr. Preston. That's great. I agree with you fully. Thank 
you.
    Senator Allard. Very good. You know, I'm not sure you've 
got any but it seemed like there might have been one or two 
there. But if not, don't worry about it. If there is, I'd like 
to get a response to my staff on where you are on those 
particular programs.
    Mr. Preston. Great.
    Senator Allard. I need to go down to the floor and catch 
this vote, so I'm going to put the subcommittee in recess.
    Mr. Preston. Great. Thank you.

                               MICROLOANS

    Senator Durbin [presiding]. Sorry for the delay and I thank 
you for your patience, Mr. Preston. We got a few things done on 
the floor. I'm sorry if some of this area, some of these 
questions have been covered but I'd like to ask, if I might, 
why your budget request this year proposes that the microloan 
program be operated through higher interest rates and with zero 
subsidy. You also proposed to eliminate all technical 
assistance funding for microloans. Explain to me if you can, 
how the SBA came up with the statement that it cost 85 cents to 
make a $1 microloan and whether that calculation takes into 
account the ongoing cost of intermediaries providing technical 
assistance and support to businesses and their portfolio?
    Mr. Preston. It does, it takes into account two things. It 
takes into account the technical assistance piece, which is 
really the primary on it there. I believe the technical 
assistance piece is $13 million of the cost and then a much 
smaller portion, somewhat over $1 million, represents the 
subsidy that we currently pay on the loans that we make to the 
microlenders. So in other words, that's the degree to which the 
Government subsidizes those loans because we offer them below 
the Treasury rate.
    Senator Durbin. What is the total dollar amount the SBA 
currently has in outstanding loans to microlending 
intermediaries?
    Mr. Preston. Outstanding--I don't have that number at the 
top of my head. I know last year we made about $18 million in 
new loans. I can get that for you in a second.
    Senator Durbin. Do you know what the average amount of a 
microloan is?
    Mr. Preston. In that program, I believe it's $13,000. It 
maxes out at $35,000.
    Senator Durbin. Could you kind of describe the typical 
recipients?
    Mr. Preston. The typical recipients of ours, in many ways, 
are our target group. They are heavily represented by 
minorities. They reach into the inner cities as rural markets. 
And there is a heavy representation of women as well.
    Senator Durbin. Which, if I remember from your other 
testimony, is a high priority for the SBA.
    Mr. Preston. Exactly. Yes, it is.
    Senator Durbin. So I asked you earlier about the small 
business development centers, which we understand are used not 
exclusively but disproportionately by minorities and now we 
find the microloan program, which is being cut back. Do you 
see, from my side of the table, that it looks like you're 
stating your goal is to reach out to these people and yet your 
budget says that you won't?
    Mr. Preston. Well, I think what we're trying to do is 
expand the capital that we can get out there and try to do it 
on a cost-effective basis. We're asking for authorization of up 
to $25 million--I think last year, we put about $18 million out 
there and what we'd like to do is be able to put more money out 
there but put it out there on a most effective basis.
    Senator Durbin. I'm interested in that cost effective 
phrase that you just used. If you don't offer as much in 
microlending, is it not true that those who are seeking the 
loans will turn to the commercial side, which may be more 
expensive?
    Mr. Preston. I think by increasing our cost to the 
microlender, there will be some increased cost to the borrower. 
I also think though, there are a lot of microlenders out there 
that don't take--avail themselves of our funds and we're hoping 
that by expanding the capital available to microlenders, we'd 
actually be able to get more capital in the hands of people.
    Senator Durbin. But isn't technical assistance a critical 
part of this?
    Mr. Preston. It's absolutely critical.
    Senator Durbin. To make sure the microloans are based on a 
good business plan, executed well, monitored carefully?
    Mr. Preston. Yes, it's a necessary component. It's critical 
but we, Senator, already provide technical assistance to about 
1\1/2\ million people a year. We have 13,000 counselors in our 
network and this is 2,500 loans each year. So we're looking to 
leverage that network to provide that technical assistance to 
these people. It is a fraction of 1 percent relative to the 
volume that we already undertake.
    Senator Durbin. I understand you have many people who are 
involved in small business development centers, SCORE 
volunteers and SBA technical assistance providers, who step in 
to assist businesses that receive loans from microlending 
institutions. I'm not convinced though, that these other 
technical assistance providers can really provide the same 
intensive and personalized assistance that microlenders 
currently provide their own borrowers. Unlike a lot of the SBA 
technical assistance providers, microlending intermediaries 
reach out to their borrowers and proactively check to see if 
they need assistance and what needs they might have. The SBDCs 
and SCORE volunteers respond to businesses that contact them 
seeking help. So it's a much different relationship. It's a 
proactive relationship with the microlending intermediaries and 
one that is more passive when it comes to these other sources.
    Mr. Preston. I think that is a fair representation of the 
majority of the people they work with. I don't know that I 
would concur that a lot of these people don't reach out and 
honestly, I've spent many, many days in the field, talking to 
small businesses that have worked both with our district 
offices and with the SBDCs and other volunteers and the tight 
relationship, the consistent interaction, in many cases, is 
there.

                             DISASTER LOANS

    Senator Durbin. Let me move to another topic, disaster 
loans. What is your estimate for disaster loan activity in the 
next fiscal year?
    Mr. Preston. We've got $1.064 billion in our budget 
request.
    Senator Durbin. And how did you arrive at that estimate?
    Mr. Preston. That is derived from a 10-year average. Ten-
year average, accepting the outlayer years, which is, I 
believe, primarily Katrina.
    Senator Durbin. In the recently passed continuing 
resolution, we provided the SBA an additional $113 million for 
disaster loan administrative costs for 2007.
    Mr. Preston. That's right.
    Senator Durbin. How long do you project the program can 
operate with that amount of additional funding?
    Mr. Preston. Based on the estimate for a typical disaster 
year, which never actually occurs, obviously, that would take 
us well into July, which would leave us short for the last few 
months. If we would have a year where there was somewhat 
lighter disaster activities, it's conceivable we could get 
through the year and certainly if it's a heavier year, that 
would be an issue.
    Senator Durbin. So what happens if you run out of money in 
that area in July?
    Mr. Preston. If we run out of--if we purely run out of 
money in July, we don't have money to fund new disaster loans 
in the program and I just want to mention, the money that we 
have that came through the continuing resolution is less than 
what we requested in the process. I believe we requested $140 
million, which we thought would take us through the full year.
    Senator Durbin. To your knowledge, will there be an 
additional request on the supplemental?
    Mr. Preston. I know we are working with your people on the 
supplemental.
    Senator Durbin. Okay. Your budget justification talks about 
the fundamental re-engineering of the disaster loan program and 
the creation of a disaster reserve. What do you have in mind?
    Mr. Preston. Well, we've already made a tremendous amount 
of progress and I would invite you or anyone on the 
subcommittee to send staff down to our processing center and 
we'll take you through in detail what we've done. But we have 
fundamentally restructured the operational processes around how 
loans are distributed and closed and we continue to drive kind 
of a--it's a very deep re-engineering, Senator, so it's--I 
don't want to get in the weeds too much but effectively to put 
in place processes to make our people more responsive, to give 
them better customer service along the way, to get loans and 
approvals processed much more quickly. And it really gets into 
digging very, very deep into the operational processes and 
basically fixing some things that were broken.

                            AGENCY STAFFING

    Senator Durbin. I wanted to ask for a moment about agency 
staffing levels. We understand your staffing levels have 
declined significantly over the past several years, though 
you've only been there 8 months so some of this precedes your 
arrival. Can you provide us with a chart for the record, 
showing the agency staffing levels by year for the past 5 
years?
    Mr. Preston. We can do that.
    [The information follows:]

                                               EMPLOYMENT SUMMARY
                             [Headcount: Based on the HCM Employment Summary Report]
----------------------------------------------------------------------------------------------------------------
                                                                                                         Fiscal
                                                                                                          year
                                             9/30/02   9/30/03   9/30/04   9/30/05   9/30/06  12/31/06    2008
                                                                                                         budget
----------------------------------------------------------------------------------------------------------------
Headquarters:
    Executive Direction...................       239       257       249       248       230       231  ........
    Management and Administration.........        95        92        92        94        95        94  ........
    Chief Information Officer.............        53        53        53        53        48        52  ........
    Capital Access........................       159       157       137       132       129       133  ........
    Entrepreneurial Development...........        46        49        45        43        42        41  ........
    Government Contracting/Bus Dev........        91        89        74        69        73        72  ........
                                           ---------------------------------------------------------------------
      Total headquarters..................       683       697       650       639       617       623  ........
                                           =====================================================================
Field:
    Field Support to Headquarters \1\.....       257       258       253       250       246       340  ........
    Field Servicing Centers...............        86        83       150       151       158       164  ........
    Regional Offices......................        23        26        27        32        31        29  ........
    District Offices \2\..................     1,674     1,581     1,294     1,053     1,002       899  ........
                                           ---------------------------------------------------------------------
      Total field.........................     2,040     1,948     1,724     1,486     1,437     1,432  ........
                                           =====================================================================
      Total SBA funded employees..........     2,723     2,645     2,374     2,125     2,054     2,055     2,123
                                           =====================================================================
Inspector General.........................       108        98        97        94       102       104  ........
Disaster Loan Making......................       854       733     1,855     2,240     4,083     3,460  ........
Disaster Loan Servicing...................       205       159       142       115       101        98  ........
                                           ---------------------------------------------------------------------
      Total SBA employment................     3,890     3,635     4,468     4,574     6,340     5,717  ........
----------------------------------------------------------------------------------------------------------------
\1\ Field Support to Headquarters includes Legal staff in District Offices, the Denver Finance Center, and
  Regional Advocates plus others. A complete listing is available upon request.
\2\ The decrease in headcount reflects a reclassification of 91 legal staff from District Offices to Field
  Support to Headquarters.

    Senator Durbin. Are you concerned that staffing levels have 
dropped too far, where you can't meet your statutory 
obligations?
    Mr. Preston. I'm not. I want to tell you once again, we're 
particularly heartened by the work you all have done with us 
for 2007 and with the budget in 2008 because that will allow us 
to add about 86 people, which I think will be very important 
for us. We are at a tight level right now but I'm not concerned 
about our ability to meet statutory requirements.
    Senator Durbin. The Office of Personnel Management (OPM) 
Survey of Government Employees indicated that a significant 
number of SBA employees felt they didn't have sufficient 
resources to do their jobs. How will your budget request 
provide adequate resources?
    Mr. Preston. Unfortunately it showed a lot more than that, 
many of which--many of the items showed that we have a lot of 
work to do in our employee base. Our people are not trained 
well enough right now. They are not all allocated to the right 
activity and we are going through an extensive review right 
now. We're about to roll out extensive training programs. We're 
clarifying roles and responsibilities of people throughout the 
agency to make them more effective in meeting the needs of the 
agency. And all of that is very specifically responsive to the 
OPM tool as well as some surveying that we've done on the side. 
I also have personally been to many of our district offices and 
talked with our people.
    Senator Durbin. I just wanted to say--you mentioned at one 
point in your budget justification a morale problem among the 
employees.
    Mr. Preston. Pardon me?
    Senator Durbin. You mentioned a morale problem among 
employees.
    Mr. Preston. Yes. It was in the 2004 survey and it was 
validated by the 2006 survey that was completed in June. So I'm 
getting a little ahead of things here but in the coming year, 
every one of our district offices will be goaled on people 
initiatives, which will include career planning, training, GAP 
assessments, reviews--all sorts of things that I think are 
critical. The last thing you want in a service organization is 
bad morale. So this is something we have to nail and something 
frankly, I take very personally.

                          CONTINGENCY PLANNING

    Senator Durbin. I have a series of questions I'd like to 
submit to you for the record but I want to close by asking you 
about some of the concerns expressed by the inspector general's 
office. Concerns were expressed about whether the SBA has 
devoted sufficient resources to develop comprehensive 
contingency planning so that it will be able to respond in a 
quick and effective manner to large-scale disasters, similar to 
gulf hurricanes. What resources does the SBA budget request 
allocate toward large-scale disaster planning?
    Mr. Preston. Well, we are--that is an ongoing 
responsibility of the senior leadership team for the disaster 
business but right now we have a very significant team focused 
both on re-engineering the process, which I mentioned earlier 
as well as building a detailed sort of disaster search plan 
that would effectively be like a playbook that you could--that 
we would be working with to show exactly how we ramp in a major 
disaster. So I believe the budget we have in place is 
sufficient to be able to do that but clearly, if a significant 
disaster hit, we would need to come back for additional funding 
to handle the scale of the volume.
    Senator Durbin. I understand that part. Funding may be 
necessary but I guess the question is whether you have a 
contingency plan so that if you--in the Hurricane Katrina 
situation, we had some warning. Not much but some and I think 
it really put all the Federal agencies on notice if they have 
to respond to a disaster, to think large. Be prepared. Have you 
done that?
    Mr. Preston. Yes, we have and I think a lot of the capacity 
expansion has already happened. The systems capacity is 
threefold to fourfold what we used in Katrina. We're building a 
very significant reserve force, which are people that are pre-
trained. We will be rolling out in the next couple of months, a 
training program that will go across all of our district 
offices, which currently don't exist--don't work with the 
disaster business. So a lot of the money we have in training 
and some other areas will be used to support that.

                     ADDITIONAL COMMITTEE QUESTIONS

    Senator Durbin. I thank you very much and thanks for your 
patience. I'm sorry we had to interrupt the hearing and glad 
that we got the questions in. We'll be working with you on next 
year's budget, trying to make sure that we provide you the 
resources the Small Business Administration needs. Thank you.
    [The following questions were not asked at the hearing, but 
were submitted to the agency for response subsequent to the 
hearing:]
            Questions Submitted by Senator Richard J. Durbin
    Question. Mr. Preston, as you see it today, what are the most 
significant problems currently facing the SBA?
    Answer. Since joining SBA I have spent a significant amount of time 
listening to employees, partners, and most importantly, customers. I 
have reviewed many of the Agency's programs in order to identify how to 
build on SBA's successes and address the areas needing improvement. 
When I came to the Agency, many of our most critical positions were 
vacant, and some key management processes were broken. I continue to 
work to build a team of competent leaders and managers, which will be 
essential in addressing our challenges and opportunities.
    My views are grounded in a belief that we can improve the 
effectiveness and impact of SBA's programs and activities markedly, and 
therefore our impact on Small Business, by employing important 
management principles: Focusing on the needs of the customers; Driving 
outcomes important to our country; and Operating in a compliant, 
efficient and transparent manner.
    Question. To what extent does your 2008 budget request enable you 
to address these problems?
    Answer. The fiscal year 2008 budget request provides ample funding 
to reform and refocus the Agency so that SBA is able to fulfill its 
mission to help America's entrepreneurs start, build and grow their 
small businesses. This funding will support:
  --Continued reengineering of the loan servicing process, resulting in 
        better customer service and less operational redundancy. 
        Further, consolidation of 7(a), 504 and Disaster loan 
        liquidations will ensure that loans are managed more 
        consistently and efficiently;
  --Sharpened focus on the country's most underserved communities 
        through expansion of the Community Express pilot, the Urban 
        Entrepreneur Partnership, business process reengineering for 
        the Office of Government Contracting and Business Development 
        (GCBD), expansion of Alternative Work Sites, and expanded 
        veterans' outreach, among other priorities.
  --A more accountable, efficient and transparent organization through 
        centralized loan operations, operational assessments, an 
        improved loan liquidations process, enhanced lender oversight, 
        and other important initiatives.
    Question. To what degree does SBA depend on contracts with 
information technology providers to administer its disaster loan 
program? Are you confident that your agency's oversight of these 
contractors is sufficient?
    Answer. There are two primary IT support contracts supporting the 
Office of Disaster Assistance for its mission critical IT system, the 
Disaster Credit Management System. The total contract staff represents 
approximately 50 percent of the ODA's resources performing IT functions 
at our DCMS Operations Center. SRA, International provides IT support 
and resources for maintenance of software, network, applications, 
database, help desk, and project management. IBM is under contract for 
critical system hosting services with service level agreements for 
system and network availability and security.
    Contract oversight of the service providers by SBA management is 
proactive and adequate to achieve the objectives of the mission. 
Planned improvement to system functionality and reliability are on-
going activities. The results are consistently successful 
implementation of these enhancements within the schedule and budget 
allocated.
    Question. Legislation has been introduced in this Congress to allow 
banks to make SBA-guaranteed disaster loans. What is your agency's 
position on this legislation?
    Answer. SBA is working with banks and other entities to develop a 
role in the private disaster lending arena. While the current language 
being proposed is much improved as it gives SBA more flexibility in 
crafting a workable proposal, we are continuing our discussions with 
the banking industry. It is important to understand that this would 
require a solid plan that balances the needs of disaster victims, the 
role of the private sector and the Agency's duty to manage the risk to 
taxpayer funds.
    Question. What is the size of your current outstanding loan 
portfolios in your various programs?
    Answer. The table below reflects outstanding principal balances for 
all of SBA's large loan programs including pre-credit reform era loans 
as of September 30, 2006.

             OUTSTANDING PRINCIPAL BALANCES AS OF 9/30/2006
------------------------------------------------------------------------
                                                             Amount
------------------------------------------------------------------------
7(a) Business Loans..................................    $46,137,567,613
504 CDC..............................................     16,736,723,758
SBIC Participating Securities........................      4,818,789,740
SBIC Debentures......................................      1,988,225,000
All other programs...................................      1,484,135,591
                                                      ------------------
      Total..........................................     71,165,441,702
                                                      ==================
Disaster.............................................      6,806,142,230
Microloan Direct.....................................         92,330,700
                                                      ------------------
      Total Portfolio................................     78,063,914,632
------------------------------------------------------------------------

    Question. What procedures are used to provide oversight of lenders 
and monitor loan performance for your guaranteed loan portfolio? Do you 
think these procedures and your capacity are adequate?
    Answer. In fiscal year 1999, SBA formally recognized the need for 
greater oversight and risk management of SBA's lenders and loan 
portfolios, creating SBA's Office of Lender Oversight (OLO). Since that 
time, OLO has implemented numerous procedures to provide oversight of 
7(a) Lenders and Certified Development Companies and to monitor loan 
performance of the 7(a) and 504 guaranteed loan programs. In Today, OLO 
continues to implement and improve SBA's monitoring and oversight 
processes.
    The procedures OLO has put in place have taken several forms. The 
following is a highlight of key procedures. OLO has established a 
system of risk management through the development of an off-site 
monitoring and review system for all 7(a) and 504 loans and SBA Lenders 
that has been recognized as an ``industry best practice.'' OLO has also 
strengthened on-site reviews and exams of SBA's larger SBA Lenders. OLO 
has increased interoffice coordination and communications on oversight 
of high-risk SBA Lenders, though formation of interoffice lender 
oversight and portfolio analysis continues. Finally, OLO is in the 
process of implementing other initiatives that will add to its 
oversight capabilities a more detailed discussion of SBA's Lender and 
loan oversight procedures and processes follows.
    Loan and Lender Monitoring.--System Off-site monitoring is provided 
through the OLO's Loan and Lender Monitoring System (L/LMS). OLO's L/
LMS system was originally developed and implemented in fiscal year 
2003. L/LMS enables OLO to perform off-site monitoring of SBA Lenders 
by providing periodic credit quality and portfolio performance 
assessments of individual lender portfolios, as well as the overall 
7(a) and 504 loan portfolios. L/LMS also uses current and historical 
performance data to generate predictive measures of future performance. 
These performance data and predictive measures form the basis of OLO's 
Lender Risk Rating System.
    Risk Rating System.--The Risk Rating System is an internal tool to 
assist SBA in assessing the risk of each SBA lender's loan operations 
and loan portfolio. The Risk Rating System enables SBA to monitor SBA 
Lenders on a uniform basis and identify those institutions whose loan 
operations and portfolio require additional monitoring or other action.
    Risk-based Reviews and Examinations.--OLO has also implemented 
several measures to improve the quality of on-site SBA Lender reviews 
and examinations. On-site reviews have been expanded from purely 
compliance-based reviews into more comprehensive, risk-based reviews. 
The new risk-based approach was put into operation in fiscal year 2005-
06. It includes a review of the SBA Lender's portfolio, its SBA 
management and operations, and an assessment of the SBA Lender's credit 
administration policies, in addition to a compliance review. Reviews 
are generally performed on larger 7(a) lenders and the largest 
Certified Development Companies (CDCs). Small Business Lending 
Companies (SBLCs) may receive a more rigorous safety and soundness 
examination, similar to those performed by federal financial 
institution regulators. These safety and soundness examinations include 
more detailed analyses of some of the same components of the risk-based 
review; however, the examinations also focus extensively on the 
financial condition of the SBLC, as measured by the institution's 
liquidity, capital and earnings strength.
    The reviews and examinations are performed by contractors with 
significant audit experience. Reviews and examinations follow SBA's On-
Site Lender Reviews/Examinations SOP. This SOP, published in fiscal 
year 2006, details review components, procedures, and issues that may 
lead to review findings. The SOP is available to all SBA Lenders to 
enable them to understand the review process and help them comply with 
the requirements of the loan programs SBA contractors receive periodic 
training covering SBA's on-site and off-site review and monitoring 
policies and procedures contained in the SOP.
    Lender Portal.--The Lender Portal allows SBA Lenders to view their 
portfolio data online, and compare their performance to the averages of 
their peers and the overall portfolio. The Lender Portal allows SBA 
Lenders access to the same information OLO uses to measure risk, and 
enables the SBA Lenders to be proactive in addressing performance 
issues rather than reacting to problems after they are contacted. By 
becoming more proactive in correcting portfolio performance problems, 
SBA Lenders can reduce SBA's portfolio and SBA Lender risk. Having the 
Portal information available also assists SBA Lenders in managing their 
SBA operations and managing their SBA portfolio risk, and can be an 
important part of their decision to expand their presence in the SBA 
market.
    Corrective Action Plans.--OLO has implemented a corrective action 
process whereby SBA Lenders work with SBA to address problems and 
deficiencies identified by OLO through on-site reviews, off-site 
monitoring and referrals. SBA Lenders are requested to respond to the 
issues identified and to provide a corrective action plan that 
addresses the problems. If the institution fails to correct the 
problem, SBA may then pursue enforcement actions.
    Lender Oversight Committee.--Through delegations of authority 
published in fiscal year 2005, SBA created a Lender Oversight Committee 
(LOC). The LOC is composed of senior SBA management, as well as OLO 
management, and meets on a regular basis. Among other activities, the 
LOC reviews the performance of individual SBA Lenders, and will 
determine whether to impose certain enforcement actions, as necessary.
    Portfolio Analysis Committee.--OLO has also instituted monthly 
Portfolio Analysis Committee (PAC) meetings. The PAC is comprised of 
senior and mid-level managers. The PAC reviews overall 7(a) and 504 
portfolio performance, trends, and characteristics. The PAC helps 
ensure that offices throughout SBA are aware of performance activity 
and potential trends that could affect either loan program.
    Coordination with Office of Chief Financial Officer.--As part of 
the credit subsidy modeling process, the Office of the Chief Financial 
Officer (OCFO) monitors on a quarterly basis and annually updates 
purchase and recovery rates for all loan programs. The impact on 
subsidy rates from changes in purchase and recovery rates are recorded 
in an analysis of change document that is maintained for all of SBA's 
loan programs. The CFO attends the monthly PAC meetings. The CFO also 
provides an analysis of the impact of proposed program changes on the 
subsidy rates and assists in identifying ways to reduce losses and 
increase recoveries.
    In conclusion, OLO believes that all of the processes and 
procedures described in this response indicate that SBA has in place a 
comprehensive system of lender oversight and portfolio monitoring that 
will reduce the Agency's risk in the 7(a) and 504 loan programs. While 
capacity in a program of oversight involving over 5,000 SBA Lenders and 
a portfolio of over $60 billion is always a challenge, SBA is assisted 
with contract support. SBA has the statutory authority to charge 7(a) 
lenders fees to cover the cost of oversight including contractor 
support. This current fee authority along with the CDC fee authority, 
if enacted should fully support SBA's ability to conduct oversight. SBA 
has requested similar fee authority for the DCS in the 504 program to 
ensure that there are adequate resources available to oversee this 
program as well.
    Question. The 7(a) program makes loans available to borrowers who 
cannot obtain credit at reasonable terms from the private sector 
without the federal guarantee. Specifically, what borrowers are you 
trying to reach? How is this purpose affected by the presence of a zero 
subsidy for the 7(a) program? Would returning to a positive subsidy 
help you meet your policy objectives?
    Answer. The 7(a) loan program is designed for those borrowers who 
are credit-worthy (the lender's analysis concludes that the loan will 
repay in a timely manner and not default based on historical 
performance and credit histories) but that either do not meet the 
lender's collateral requirements, require a longer repayment term than 
the lender gives to non-guaranteed borrowers for the same use of 
proceeds, or are for new businesses with an unproven track record.
    When SBA under the Bush administration converted the 7(a) loan 
program to a zero subsidy loan program for fiscal year 2005, the fees 
supporting the 7(a) program were returned to their pre-September 11 
levels. (After September 11, 2001, fees for the 7(a) program were 
reduced for fiscal years 2003 and 2004 in the hopes of stimulating the 
economy that suffered from the terrorist attack.) Prior to that, the 
fees had been the same since December, 2000. Before December, 2000, the 
fees under the Clinton administration were higher. Since the 7(a) 
program became a zero subsidy program, the only fee that has been 
adjusted slightly upward has been the on-going annual fee paid by the 
lender. That fee increased by only 4.5 basis points from 0.50 percent 
to 0.545 percent during fiscal year 2006. For fiscal year 2007, the fee 
is 0.55 percent, an increase of only one-half of 1 basis point. And for 
fiscal year 2008, the fee will decrease to 0.494 percent which will 
bring the fees for 7(a) below those charged pre-11 when the 7(a) 
program was subsidized.
    SBA believes that for the 7(a) loan program, zero subsidy is still 
the best policy for the long term stability and growth of the 7(a) loan 
program. Since the 7(a) program went to zero subsidy, SBA has had two 
record-breaking years of lending.
    Volume during fiscal year 2005 (the first year that the 7(a) 
program was a zero subsidy program) was 95,900 loans--an increase of 
more than 18 percent over 2004 when the program was subsidized. Volume 
during fiscal year 2006 maintained this trend and actually increased by 
another 1,390 loans. Fiscal year 2007 YTD continues to maintain the 
strong demand by growing another 9 percent as of March 16, 2007.
    Question. What is your default rate in the basic 7(a) program?
    Answer. The default rate, as a percent of disbursements, for the 
2008 budget submission is 6.96 percent.
    Question. What is the default rate in the disaster loan program?
    Answer. The default rate, as a percent of disbursements, for the 
2008 budget submission is 24.10 percent.
    Question. On page 10 of the budget justification, you make this 
statement: ``the agency's entire business loan operation runs on a 
Cobol-based system developed in-house. Parts of this system are over 50 
years old. The system is operated on an expensive mainframe that is 
dependent on obsolete technology . . .''. What are you doing to address 
this situation?
    Answer. We have initiated the Loan Modernization Program to address 
this situation. We have formed a Steering Council and assigned a 
Program Manager. We have also submitted the business case (Exhibit 300) 
for fiscal year 2008 to OMB. The fiscal year 2008 Budget request 
includes $8 million to start acquiring the solution. Currently, we are 
in the process of developing the acquisition strategy to identify and 
implement the solution that will replace the Cobol-based legacy 
systems.
    Question. What other significant information technology (IT) 
systems are currently under development in the agency and what stage 
are they in?
    Answer.
    Loan Management and Accounting System (LMAS).--As described in 
response to the previous question, the LMAS will support FSIO (JFMIP) 
compliant loan Origination, Servicing, and Liquidation. The project 
scope includes an Integrated Financial Management System to support 
FSIO compliant Loan Accounting. LMAS is a financial management, mixed 
lifecycle system with the bulk of its development costs scheduled to 
occur in fiscal year 2008.
    Business Development Management Information System ``e-
application''.--The BDMIS e-application will allow the Office of 
Business Development's 8(a) and Small Disadvantaged Businesses to 
submit applications for certification electronically via the WEB. This 
is an enhancement to an existing Business Development system. BD-MIS is 
mixed lifecycle system and features the e-application within its 
development segment.
    Disaster Credit Management System, E-Loan Application (ELA).--
During fiscal year 2007-08, SBA's Office of Disaster Assistance (ODA) 
is developing an Electronic Loan Application that will integrate with 
DCMS. One of the ODA's Strategic Management Goals is to offer disaster 
victims accessible, easy-to-use and time saving services through the 
electronic filing of disaster loan applications. By using the Internet, 
ODA plans to transform loan-making into a virtual loan process that 
provides efficient and timely loan decisions to disaster victims. DCMS 
is a mixed lifecycle system; ELA represents an enhanced set of 
capabilities within the development segment of DCMS.
    E-Gov Business Gateway.--This is one of 25 E-Gov projects within 
the President's Management Agenda for E-government. The Business 
Gateway provides a government-wide one stop website for use by 
businesses and entrepreneurs. SBA and partner agencies develop tools to 
assist small businesses seeking to comply with laws and regulations, 
locate government forms and obtain relevant government information. 
Business Gateway is currently a mixed lifecycle system planned to be 
out of the development stage in fiscal year 2008.
    Contract Management System (CMS).--CMS will be an information 
system enabling SBA to perform end-to-end electronic processing of its 
internal contracts, bringing the Agency into conformance with OMB's E-
Procurement guidance. CMS is a mixed lifecycle system planned to be out 
of the development stage in fiscal year 2008.
    Question. The Office of Inspector General's management challenge #1 
also identifies flaws in the procurement system that allow large firms 
to obtain small business awards and agencies to count contracts 
performed by large firms towards their small business goals. What 
resources is the agency committing to allow SBA to fulfill a bigger 
role in ensuring the accuracy of reporting on small business 
contracting and limiting errors by contracting personnel and fraud by 
contractors?
    Answer. The integrity of the data reported to Congress and the 
Public is crucial to provide for the confidence in the Federal 
contracting system. SBA recognizes this, and is taking the lead, along 
with the Office of Management and Budget's Federal Procurement Policy 
to work with agencies to ensure their past numbers a scrubbed and 
future numbers are accurate. The agencies are currently in the process 
of validating their fiscal year 2005 data to identify the reasons for 
coding discrepancies and to correct any errors that occurred.
    Question. The Office of Inspector General has issued a management 
challenge finding serious problems with the SBA 8(a) minority 
contracting program. What resources is the Agency committing to improve 
this program and address these problems?
    Answer. Because the 8(a) Program is a business development 
program--not a contracting program--it is intended to foster the 8(a) 
firm's growth (through various forms of technical, management, 
procurement and financial assistance) and viability during the nine 
year term. The 8(a) BD Program is for socially and economically 
disadvantaged entrepreneurs (which include non-minorities) who meet the 
eligibility criteria.
    SBA is committed to improving the 8(a) BD Program and has committed 
several resources that are aimed at refocusing the Program to emphasize 
``business development.'' On September 30, 2006, SBA engaged a contract 
to conduct a review/assessment of the business processing functions of 
the 8(a) BD Program (i.e. those processes related to initial 
certification, continuing eligibility, management and technical 
assistance, legislative and regulatory requirements) and design a plan 
consisting of both short and long term methodologies for re-engineering 
and improving those functions.
    Specifically, this process improvement plan will:
  --Identify and define each program element and the requirement(s) 
        related to the delivery of the 8(a) BD Program;
  --Identify significant issues and problems that exist;
  --Identify key issues in the 8(a) BD Program and processes and 
        systems that need to be updated; and
  --Review/assess programmatic requirements to ensure relevance and 
        consistency with legislative and regulatory compliance.
    In addition, the Office of Business Development conducts monthly 
training sessions (via teleconferencing) for BD field staff in SBA's 
district offices. This training (which covers various programmatic and 
regulatory issues) is designed to improve 8(a) Program delivery and 
ensure consistency and uniformity as it relates to servicing 8(a) 
firms.
    Finally, SBA is considering various other changes to the program to 
promote its integrity and efficiency, and the Agency intends to issue a 
proposed rule to amend its regulations in the near future.
    Question. In particular, one of the actions that the OIG has called 
upon SBA to take is to exert greater oversight over 8(a) contracts 
issued by procuring agencies since SBA has now delegated authority to 
those agencies to monitor compliance by 8(a) contractors with SBA 
regulations and requirements. What resources is SBA devoting towards 
conducting adequate oversight to ensure that procuring agencies are 
fulfilling their responsibilities?
    Answer. In an effort to ensure greater oversight as it relates to 
8(a) contracts issued by procuring agencies, SBA's Office of Business 
Development has revised the language in the Partnership Agreements 
(between SBA and the procuring agencies) to clarify roles and 
responsibilities. The revised Partnership Agreements specifically 
require the procuring agencies to monitor 8(a) firms' compliance with 
contract performance. In February 2007, the Office of Business 
Development began conducting training for the procuring agencies with 
regard to rules and regulations governing the 8(a) Program and the 
revised language in the Partnership Agreements. This training is 
intended to ensure that contracting officers and technical 
representatives are adequately advised of their responsibilities 
concerning 8(a) contract compliance.
    Question. The Office of Inspector General issued an Audit Report in 
May, 2005 on contract bundling. Excessive contract bundling by agencies 
limit the opportunities for small businesses to obtain government 
contracts. That report found that SBA had not reviewed 87 percent of 
the reported contract bundling by procuring agencies even though SBA 
has a statutory duty to do so, and had not developed a data base to 
track bundling activity. The report also determined that there was a 
lack of resources in that the Agency had only 43 Procurement Center 
Representatives in the entire country to monitor over 2,000 procurement 
locations for the Federal Government, and that a large percentage of 
government contracts were not being reviewed by PCRs. What resources is 
SBA devoting towards addressing these issues?
    Answer. The integrity of the data reported to Congress and the 
Public is crucial to provide for the confidence in the Federal 
contracting system. SBA recognizes this, and is taking the lead, along 
with the Office of Management and Budget's Office of Federal 
Procurement Policy to work with agencies to ensure their past numbers 
are scrubbed and future numbers are accurate. The agencies are 
currently in the process of validating their fiscal year 2005 data to 
identify the reasons for coding discrepancies and to correct any errors 
that occurred.
                                 ______
                                 
              Questions Submitted by Senator Sam Brownback

    Question. Currently the microloan program costs $0.85 for every 
dollar loaned. Why is it so costly to administer such loans? How will 
the program change if it were shifted to zero subsidy as proposed in 
the President's fiscal year 2008 budget?
    Answer. The technical assistance component is a significant factor 
in the cost of the Microloan program. Subsidized interest rates are 
another extremely high cost. In addition to Subsidy costs, overhead 
costs are high since SBA makes direct loans to each microloan 
intermediary and must continue to process and administer the loan, 
including additional loan disbursements. The Administration's proposed 
change in the Microloan program increases the interest rate charged on 
the loan from 3.77 percent to the microlender to 1.06 percent above the 
5-year Treasury rate (estimated in OMB's economic assumption at 4.93 
percent). SBA would also eliminate the technical assistance funding for 
SBA microborrowers, but would provide technical assistance through the 
Agency's Entrepreneurial Development (ED) resources (SBDCs, SCORE, and 
WBCs)
    The Administration's proposed change in the Microloan program 
increases the interest rate charged on the loan from SBA to the 
microlender from 1.25 to 2 percent less than the 5-year Treasury rate 
(depending on the microlender's average microloan size) to 1.06 percent 
above the 5-year Treasury rate (estimated in OMB's economic assumption 
at 4.93 percent).
    Question. The fiscal year 2008 budget proposes $484 million in new 
budget authority. How would this benefit SBA programs? And 
specifically, what benefits would be passed along to the American Small 
Business owner?
    Answer. SBA's fiscal year 2008 budget request reflects the 
President's commitment to America's small businesses and the vital role 
they play in our economy. Enactment of this request will enable SBA to 
continue serving the small business community while ensuring 
stewardship of taxpayer dollars.
    These resources will support a total of $28 billion in lending 
authority for small business financing, which represents a potential 40 
percent increase over business lending for fiscal year 2006, through 
the 7(a), 504, and SBIC debentures programs. For its flagship 7(a) 
program, SBA requests authority for $17.5 billion--a 27 percent 
increase over the fiscal year 2006 lending level. SBA also requests 
authority for $7.5 billion for the 504 program, a 32 percent increase 
over loans made in fiscal year 2006--a record year for 504 lending. 
Finally, SBA requests an SBIC Debenture program of $3 billion.
    In addition, this budget will support the following:
  --A disaster loan volume of $1.064 billion (the Agency's ten-year 
        average based upon fiscal year 1996-2005 average activity, 
        excluding the WTC disaster, adjusted for inflation).
  --Counseling and training to small business people through SBA's 
        network of resources partners in Small Business Development 
        Centers (SBDC), Service Corps of Retired Executives (SCORE), 
        and Women's Business Centers.
  --Assist federal agencies targeting a total of $84 billion in prime 
        federal contracting dollars to be awarded to small businesses 
        in fiscal year 2008.
  --Investing in the Agency's human capital through job skills 
        training, mentoring programs, succession planning, proactive 
        recruitment of highly qualified staff, and implementation of an 
        automated personnel records system.
  --Maintaining employee security through continued implementation of 
        Presidential Homeland Security Directive #12 and support of 
        major security improvements in the headquarters building.
  --Continuing the process of implementing a loan operations system to 
        replace the current outdated system in order to better track 
        payments as well as increase the Agency's loan portfolio 
        oversight.
  --Enhancing SBIC oversight and recoveries.
  --Providing a cost effective microloan program.
  --Continuing efforts to make it easier and faster for small 
        businesses to comply with government regulations.
  --Improving SBA products, services and delivery.
    Question. What is the $100 million savings to taxpayers stemming 
from the 7(a) loan program being changed to zero subsidy derived from? 
Are there other benefits to the zero subsidy program?
    Answer. The $100 million savings is an estimate based on the last 
year (2004) the 7(a) program had a subsidy rate. If the 7(a) program 
had a zero subsidy rate that year it would have saved the taxpayers 
about $100 million.
    SBA believes that for the 7(a) loan program, zero subsidy is the 
best policy for the long term stability and growth of the 7(a) loan 
program. Since the 7(a) program went to zero subsidy, SBA has had two 
record-breaking years of lending--years not hampered by slowdowns as a 
result of moving beyond the projected levels prescribed by Congress 
legislatively.
    Question. What is the potential cost to the taxpayers of reducing 
or eliminating fees on 7(a)?
    Answer. Assuming a loan level of $17.5 billion the cost to the 
taxpayers would be $590 million if all 7(a) fees were eliminated. At 
the same loan level, the cost to the taxpayers would be $236 million 
only if the ongoing fee were eliminated and $354 million if only 
upfront fees were eliminated.

                                          7(A) BUSINESS LOANS FOR 2008
----------------------------------------------------------------------------------------------------------------
                                                            Subsidy appropriation needed if:
        Various Program Levels        --------------------------------------------------------------------------
                                        No Annual/Ongoing Fees      No Upfront Fees              No Fees
----------------------------------------------------------------------------------------------------------------
$17,500,000,000                        $236,250,000...........  $353,500,000...........  $589,750,000
$16,500,000,000                        $222,750,000...........  $333,300,000...........  $556,050,000
$16,000,000,000                        $216,000,000...........  $323,200,000...........  $539,200,000
$15,500,000,000                        $209,250,000...........  $313,100,000...........  $522,350,000
$15,000,000,000                        $202,500,000...........  $303,000,000...........  $505,500,000
----------------------------------------------------------------------------------------------------------------

    Question. Does the success of the 7(a) change to zero subsidy have 
any bearing on the fiscal year 2008 proposal for the microloan program 
to go to zero subsidy?
    Answer. The success of the 7(a) loan program at zero subsidy has 
influenced this decision, especially since the 7(a) Community Express 
program has surpassed the Microloan program in loans of $35,000 or less 
(the definition of a microloan).
    Not only does zero subsidy save taxpayers approximately $.85 for 
every dollar lent under the current microloan program but it expands 
the opportunities to reach more microborrowers and provide them with 
more options for counseling and training.
    Question. Can you describe in more detail how the new microloan 
program would work and its benefits (cost and non-cost related)?
    Answer. SBA would amortize each microlender's loan at a rate of 
1.06 percent above the 5-year Treasury rate (estimated in OMB's 
economic assumption at 4.93 percent). SBA would also rely on the 
Agency's ED resource partners (SCORE, Women's Business Centers, Small 
Business Development Centers) to provide counseling and assistance 
instead of providing additional grant money to Microlender 
Intermediaries for technical assistance which represents a savings of 
$13 million over fiscal year 2006 while actually encouraging a wider 
variety of entrepreneurial development opportunities. Moving to a zero 
subsidy in the program would also enable SBA to reach out to a larger 
number of microborrowers across the country. Microlending 
intermediaries can still access the numerous other Federal, State and 
Local grant programs for technical assistance and more intermediaries 
will be able to leverage the more rare lending program offered by SBA. 
Currently only 172 of the total 600 microlending intermediaries are 
registered with the SBA microloan program. This proposal would allow 
SBA to offer lending opportunities to other qualified intermediaries 
and reach a wider geographic area and market.
    Question. How many microlenders are in close proximity, or co-
located, with other small business counseling centers receiving federal 
funding?
    Answer. SBA doesn't have information on the locations of all small 
business centers receiving federal funding, but based on an analysis of 
the locations of the centers that SBA funds, almost all (about 95 
percent) of the Agency's microloan intermediaries are located within 
close proximity to an SBA ED resource partner, which include SBDCs, 
WBCs, and SCORE. In addition, SBA believes the approximately 10 
intermediaries not located in close proximity to an SBA small business 
counseling center could be served by circuit rides established by SBA's 
existing resource partners.
    Question. Do microlenders receive funds from other sources? If so, 
what are they and how much of their funding comes from government 
sources?
    Answer. SBA has not evaluated the alternative funding sources 
available to SBA's microloan intermediaries or to the microloan 
industry as a whole. However, according to 2005 information developed 
by the Association for Enterprise Opportunity, the leading trade 
association for the industry, in association with the Aspen Institute, 
there are about 18 federal sources of funding for the microloan 
industry and undoubtedly a number of state sources.
    Question. How would Senators Kerry, Snowe, Landrieu and Vitter's 
proposal for a private guaranteed lending programs for the regular 7(b) 
loan program in S. 163 affect the disaster subsidy rate and funding 
needs?
    Answer. CBO estimated that an identical proposal in S. 3778, that 
the estimated subsidy rates for the different types of business loans 
and loan guarantees offered by SBA currently range from zero for 7(a) 
and section 504 programs to about 17 percent for the NMVC program. 
Incorporating program amendments in this bill and using historical 
demand and default rates for those loan programs, CBO estimates that 
the subsidy costs for the authorized levels of guaranteed and direct 
business loans would be $23 million in 2007 and about $128 million over 
the 2007-2011 period.
    Question. How much would the Energy Emergency Loan Program in S. 
163 cost?
    Answer. Section 402, Small Business Energy Emergency Disaster Loan 
Program.--Based on the information provided, and the proposed loans are 
funded within SBA's existing Disaster Assistance direct loan program, 
it appears this proposal will not impact the subsidy rate.
    Section 403, Agricultural Producer Emergency Loans.--It appears 
USDA would provide funding for the proposal but the legislation does 
not provide sufficient information to estimate the impact on SBA's 
Disaster Assistance program subsidy rate.
    Question. How much would the Energy Emergency Loan Program in S. 
163 cost? CBO says it would cost approx. $85 million (subsidy and 
admin) 2007-2011.
    Answer. We estimate that the administrative cost would be 
approximately $50 million.
                                 ______
                                 
           Questions Submitted by Senator Christopher S. Bond

    Question. With respect to the SBIR program: As I mentioned earlier, 
I am concerned that we are shooting ourselves in the foot by limiting 
biotechnology companies' access to this program. We recently received 
this data chart from NIH. It shows that for the last 2 consecutive 
years, the number of applications to NIH's SBIR program has decreased. 
This is significant because the new SBIR rules were first applied to a 
specific company (Cognetix decision) in 2003, but the agencies (such as 
NIH) did not fully implement them until 2004. So it is fair to say that 
the 2005 and 2006 numbers represent the first 2 years that the new 
restriction on venture capital financing has been fully in effect. Look 
at the impact on applications at NIH.


    The chart also includes figures for R01 applications. I am told 
that it is the largest NIH grant program to universities and academia. 
So while applications for NIH's SBIR program fell significantly in 2005 
and 2006, applications for R01s continued to increase (albeit at a 
slower rate than previously). Would you agree this makes the case that 
the decrease in SBIR applications is specific to something going on 
with the NIH SBIR program and not a result of scientific trends or some 
other outside factor?
    Answer. The Small Business Administration is currently reviewing 
the issue of venture capital investment in firms that compete for SBIR 
awards. The National Academy of Sciences is conducting a study on the 
SBIR program and expects to issue its report in the coming months. This 
is an important issue concerning the SBIR program. As such, the Agency 
will review as it addresses this issue.
    Question. Mr. Preston, as you evaluate the SBIR program with an eye 
toward regulatory or legislative changes, I urge you to look at ways to 
ensure that the most innovative small firms--including those that raise 
private funds, such as venture capital--are able to participate in the 
program. The SBIR authorizing statute listed the raising of private 
funds by a company as a positive factor that agencies should take into 
account when awarding SBIR Phase II grants. Congress viewed raising 
private research funding as a good thing in 1982; that has not changed.
    As America's high-technology companies compete for funding in an 
increasingly global marketplace, the ability to attract and retain 
capital has become more important than ever. The SBA should not 
discriminate against good science by small entrepreneurial companies 
simply because they have been successful in raising venture capital.
    Are you willing to work with us to address this problem 
administratively, so that a legislative fix will not be necessary?
    Answer. We would be happy to discuss this issue with you prior to 
making a final determination.
    Question. With respect to the HUBZone program: Our agencies have 
never achieved the 3 percent minimum mandatory HUBZone contracting 
level, yet the fiscal year 2008 funding for the HUBZone Program has 
been reduced to $8.79 million from an fiscal year 2007 level of $9.077 
million. Why are the funds for this vital program that focuses on the 
underserved areas of our Nation continually reduced?
    Answer. The bulk of the HUBZone Program's funding request is spent 
on support provided by the SBA district office staff. The services 
these district office personnel, known as liaisons, provide is twofold. 
They conduct marketing outreach to the local community and execute the 
in-depth program examinations that ensure only qualified firms receive 
HUBZone benefits. Program examinations are executed on approximately 
five percent of the portfolio and supplement the program's alternate 
continuing eligibility tool--HUBZone recertification.
    A smaller portion of the request ($2 million) supports the 
Headquarters staff who are responsible for policy development, 
certification and eligibility, adjudication of protests as well as 
maintenance and technological advancement of the HUBZone system. What 
these funds produced most recently are two online systems dedicated to 
increasing HUBZone contracts. One system scrubs each day the contracts 
listed in FedBizOpps and, if it identifies a suitable non-HUBZone 
contract, a letter is sent to the responsible contracting officer 
asking that the contract be reclassified as a HUBZone set-aside. The 
second system, when fully deployed will allow HUBZone certified 
concerns to generate requests to contracting officials that contracts 
contemplated in the near-future be reserved for HUBZone firms. It is 
anticipated that these two internet based tools will increase 
contracting opportunities for HUBZone firms and assist agencies in 
achieving the 3 percent statutory goal.
    The HUBZone Office is continuing to enhance its multiple systems 
through the use of high-end technology. The cost savings brought about 
by the efficient application of technology is reflected in the 
Administration's ability to decrease the fiscal year 2008 budget 
request.
    Question. The SBA 2008 budget eliminates the separate line item for 
HUBZone funding. Why is this no longer a priority program for the 
Administration?
    Answer. As seen in Table 6 of SBA's fiscal year 2008 budget 
request, Note 2 states that funding for the HUBZone program is included 
in the GCBD Operating Budget. This is the same method of budgeting used 
for the 8(a) program. For HUBZones, SBA is seeking $888,000 plus a 
staff cost of $1.1 million each year. Our overall financial spending on 
the HUBZones program is approximately $9 million. SBA has proposed 
eliminating a line item that does not accurately reflect our commitment 
to the program and inhibits the agency from exercising flexibility in 
its budget. The SBA considers HUBZones a vital part of overall 
procurement effort.
                                 ______
                                 
            Question Submitted by Senator Richard C. Shelby

    Question. I know there were problems with the Small Business 
Administration conducting its normal loan business, while addressing 
loan needs stemming from the impact of Hurricane Katrina. Has this 
issue been resolved?
    Answer. The 2005 hurricanes which hit the Gulf Coast were the 
largest natural disaster in the history of the SBA. This required an 
unprecedented response from the Office of Disaster Assistance as well 
as the dedicated staff throughout the Agency. In response to the Gulf 
Coast hurricanes, SBA processed over 420,000 loan applications for 
homes and businesses.
    During the same time period, the SBA guaranteed a record number of 
loans under its two primary small business loan programs, setting 
records for both the number of loans and the dollars loaned.
    So while the Agency certainly experienced some strains and was 
stretched thin to respond to the overwhelming disaster caused by 
Hurricanes Katrina, Rita and Wilma, it is safe to say the team at SBA 
worked hard to overcome these and focus their efforts on serving our 
small business customers.

                          SUBCOMMITTEE RECESS

    Mr. Preston. Thank you very much.
    Senator Durbin. Thanks to all your people who are with you 
here today. This meeting of the subcommittee stands recessed.
    [Whereupon, at 10:35 a.m., Friday, March 9, the 
subcommittee was recessed, to reconvene subject to the call of 
the Chair.]
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