[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
PROFESSIONAL SERVICES: PROPOSED CHANGES TO THE SMALL BUSINESS SIZE
STANDARDS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ECONOMIC GROWTH, CAPITAL ACCESS AND TAX
of the
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
HEARING HELD
MAY 5, 2011
__________
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
Small Business Committee Document Number 112-012
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HOUSE COMMITTEE ON SMALL BUSINESS
SAM GRAVES, Missouri, Chairman
ROSCOE BARTLETT, Maryland
STEVE CHABOT, Ohio
STEVE KING, Iowa
MIKE COFFMAN, Colorado
MICK MULVANEY, South Carolina
SCOTT TIPTON, Colorado
CHUCK FLEISCHMANN, Tennessee
JEFF LANDRY, Louisiana
JAIME HERRERA BEUTLER, Washington
ALLEN WEST, Florida
RENEE ELLMERS, North Carolina
JOE WALSH, Illinois
LOU BARLETTA, Pennsylvania
RICHARD HANNA, New York
NYDIA VELAZQUEZ, New York, Ranking Member
KURT SCHRADER, Oregon
MARK CRITZ, Pennsylvania
JASON ALTMIRE, Pennsylvania
YVETTE CLARKE, New York
JUDY CHU, California
DAVID CICILLINE, Rhode Island
CEDRIC RICHMOND, Louisiana
GARY PETERS, Michigan
BILL OWENS, New York
BILL KEATING, Massachusetts
Lori Salley, Staff Director
Paul Sass, Deputy Staff Director
Barry Pineles, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
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Page
OPENING STATEMENTS
Hon. Joe Walsh................................................... 1
Hon. Kurt Schrader............................................... 3
WITNESSES
Mr. Walter J. Hainsfurther, FAIA, President, Kurtz Associates
Architects, Des Plaines, IL.................................... 5
Mr. John Woods, Woods Peacock Engineering Consultants,
Alexandria, Virginia........................................... 13
Mr. Roger Jordan, Vice President, Professional Services Council,
Arlington, Virginia............................................ 25
Mr. Odysseus Lanier, Partner, McConnell Jones Lanier & Murphy
LLP, Houston, TX............................................... 35
APPENDIX
Question for the Record:
Hon. Yvette Clarke........................................... 55
Responses for the Record:
Mr. Walter J. Hainsfurther, FAIA, President, Kurtz Associates
Architects, Des Plaines, IL................................ 61
Mr. John Woods, Woods Peacock Engineering Consultants,
Alexandria, Virginia....................................... 56
Mr. Roger Jordan, Vice President, Professional Services
Council, Arlington, Virginia............................... 59
Mr. Odysseus Lanier, Partner, McConnell Jones Lanier & Murphy
LLP, Houston, TX........................................... 60
Statements for the Record:
American Institute of CPAs Firm Segment Revenues Letter...... 44
American Society of Landscape Architects..................... 63
Additional Materials for the Record:
Chairman Walsh letter to Dr. Khem R. Sharma, Chief of the
Size Standards Division of the U.S. Small Business
Administration............................................. 67
HEARING ON PROFESSIONAL SERVICES: PROPOSED CHANGES TO THE SMALL
BUSINESS SIZE STANDARDS
----------
THURSDAY, MAY 5, 2011
House of Representatives,
Committee on Small Business,
Subcommittee on Economic Growth,
Capital Access and Tax,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:00 a.m., in
Room 2360, Rayburn House Office Building. Hon. Joe Walsh
[chairman of the Subcommittee].
Present: Representatives Walsh, Schrader, Clarke, Chu,
Cicilline, Mulvaney.
Chairman Walsh. Okay. Good morning, everyone. Thank you for
joining us. The hearing will now come to order. Welcome.
The issue before the Subcommittee this morning lies at the
core of small business issues. Who exactly is a small business?
The answer determines whether a company is eligible for capital
or entrepreneurial assistance from the SBA and whether the
company can compete as a small business in the $500 billion
government contracts market. SBA is trying to take an objective
and analytical approach to this question and is revising all of
its size standards over the next five years.
Today we are looking at the size standards SBA is proposing
for the scientific, technical, and professional services
industries. These include the legal services, accounting, and
tax preparation services; architectural and engineering
services; computer systems; related services; management
services; and advertising today. There is a joke that if you
ask any business, they will tell you that they are definitely
small but that their next largest competitor is clearly large.
The difference between being small and large in the government
contracting market has very real consequences.
In 2010, over $150 billion in federal prime contracts were
awarded in the professional services industries, over a quarter
of all federal contracts. Over 32 billion of these dollars went
to small businesses. That is nearly one-third of the $109
billion in prime contracts awarded to small businesses that
year.
Clearly, determining who a small business is in these
industries is very important. SBA's proposed rule would
increase the number of small businesses in this category by
9,450 firms, which represents 1.2 percent of total firms in the
affected industries. While this may seem like a small number in
some industries, such as architecture, over 98 percent of
businesses would qualify as small. Indeed, some small
businesses would see their size standard increase by 400
percent. That is massive growth.
It is my understanding that some of our witnesses today are
going to talk about what that will mean to their industry. In
contrast, firms in the computer systems design industries are
only seeing an increase of two percent, even though those
industries have seen major changes in the past few years. I am
looking forward to our witnesses' comments on these issues as
well.
Another topic I hope our witnesses will address is whether
the SBA should proceed with its proposal to reduce the number
of size standards. Currently, SBA has 41 size standards based
on receipts, number of employees or other industry-specific
factors. Thirty of the current standards, including the
standards we are discussing today, are receipt-based. When the
SBA proposes a size standard, it looks at industry factors,
such as average firm size, start-up costs, entry barriers,
industry competition, distribution of firms by size, and
success in the government contracting marketplace. The
resulting number then would become one of its size standards.
SBA is now proposing that there only be eight receipt-based
standards and that each industry be put in the closest
appropriate standard. These new standards would range from $5
million up to $35.5 million. Since the old standards started at
$755,000 and went to 35.5 million, I am curious as to whether
the new standards really fit all of the industries as well as
the old size standards did. We seem to have cut out the truly
small size standards. Will limiting the number of size
standards simplify the size standard process or will it unduly
constrain SBA and keep them from developing industry-specific
size standards? If moving to a set number of size standards is
a good idea, are these the appropriate standards? Likewise, SBA
is proposing grouping related industries into common size
standards.
I know that two of our witnesses today, being architects,
would now be sharing a size standard along with seven other
industries. Does this make your life simpler? Presumably,
smaller businesses are less likely to participate in more than
one industry so such a proposal might favor larger businesses.
However, given that the industries are so closely related,
removing the confusion as to which code is appropriate may
assist small businesses attempting to identify federal
contracting opportunities. Additionally, a single industry
standard would not allow contracting officers to choose a code
in order to include or exclude certain companies. So this would
reduce the number of protests filed over the incorrect NAICS
code being used.
Finally, I want to hear how changes are being managed in
the size standard program. I know that SBA is required by law
to review all of its size standards in the next five years, but
I do not want to see changes rushed at the expense of small
businesses. I understand that some of the witnesses here today
believe they need more time to study the effects of this
proposed rule and I would like to learn more about that.
I look forward to hearing from our witnesses today. I am
especially pleased to welcome another Illinoisan, Walter
Hainsfurther of Kurtz Associates Architects, who is testifying
on behalf of the American Institute of Architects.
I also want to welcome John Woods of Woods Peacock
Engineering Consultants, testifying on behalf of the American
Council of Engineering Companies. And Roger Jordan, vice
president, the Professional Services Council. I am certain you
will help us all have a better understanding of these issues.
I now would like to recognize Ranking Member Schrader for
his opening statement.
Mr. Schrader. Thank you, Mr. Chairman. I appreciate it.
Comprising the vast majority of employer firms and creating
two-thirds of new jobs, small businesses are critical to our
United States economy. Recognizing the importance of small
firms' growth and job creation, Congress has created a lot of
programs--federal programs, set-asides, tax preferences, and
SBA loan programs--to help these small businesses succeed.
However, as a result of that it has led to a very heated debate
over what actually constitutes a small business. What is the
appropriate size as the chair indicated?
The federal benefits at stake are substantial. Last year,
small business firms accessed over $15 billion in capital
through the SBA's loan programs. Many entrepreneurs used these
loan proceeds to keep their doors open in these tough times,
retain employees, and hopefully, start to create some new jobs.
The SBIR and STTR programs provide billions to small firms
involved in cutting edge research to develop the next new
innovative technology for our great country.
The SBA's entrepreneurial programs and other technical
assistance can help firms develop a business plan and hopefully
find some new customers. How we define a small business even
affects the regulatory process and what they are subject to.
The Regulatory Flexibility Act requires agencies to assess
whether the rule they are contemplating would have significant
economic impact on a substantial number of small entities. If a
business is not considered small, agencies are under no
requirement to review the impact that regulatory changes would
have on small firms.
Since SBA's inception, it has struggled to find a numerical
definition for small businesses on an industry-by-industry
basis. On five separate occasions, as the chair alluded to,
between 1980 and 2008, the Agency has proposed a comprehensive
revision of its size standards. However, these proposals were
never fully implemented due to concerns that the changes would
unfairly strip many small businesses of their eligibility. In
these budget-limited times, perhaps we have a different
problem.
So the result has been a confusing, sometimes unfair,
patchwork of regulations. The current system consisting of the
42 different levels covering over 1,000 different industries is
complex. Thirty-one of these size levels are based on average
annual receipts, eight count a firm's number of employees,
while three rely on other metrics altogether. In addition, the
SBA has established 11 other size standards for its financial
and procurement programs. Multiple industry groups have raised
concerns that the complexity of the current size standards
result in legitimate small businesses losing federal
opportunities. I think again in these budget-limited times with
less dollars available probably in the SBA budget it is time to
revisit the issue.
Under the authority of the Small Business Jobs Act of 2010
passed in the last Congress, the SBA has issued proposed
standards changes for a number of industries in the
professional services, architect, and engineering section. In
the proposal, the SBA has taken a number of steps to streamline
and simplify the standards, theoretically to help firms and
federal agencies determine who qualifies for a small business
loan accurately and quickly. These changes include reducing
number and size limits from 31 to 8. The proposal also groups
industries, as the chair said, under a common size standard.
And while there is a lot of consensus on improving the system,
the question is are these the right ways to improve it?
Today we will examine how current size standards are
applied in the real world, hopefully as a result of this panel.
We will also hear from industries that will be directly
affected by SBA's proposed changes and help guide our
decisions. It is my hope the SBA has learned from past failures
and taken industry as well as congressional concerns into
account when drafting the proposal. And I imagine I will hear
that here.
In advance of the testimony I want to thank all the
witnesses who have traveled here for their participation and
insights on this important topic.
STATEMENTS OF WALTER HAINSFURTHER, PRESIDENT, KURTZ ASSOCIATES
ARCHITECTS ON BEHALF OF THE AMERICAN INSTITUTE OF ARCHITECTS;
JOHN WOODS, OWNER, WOODS PEACOCK ENGINEERING CONSULTANTS, ON
BEHALF OF THE AMERICAN COUNCIL OF ENGINEERING COMPANIES; ROGER
JORDAN, VICE PRESIDENT, PROFESSIONAL SERVICES COUNCIL; ODYSSEUS
LANIER, PARTNER, MCCONNELL JONES LANIER AND MURPHY, LLC, ON
BEHALF OF THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC
ACCOUNTANTS
Mr. Schrader. And do you want me to introduce the other
witness at this time, Mr. Chair?
Chairman Walsh. Yes, do. But let me also say how pleased I
am to have Mr. Lanier here, as well.
Mr. Schrader. It was my job to introduce you, Mr. Lanier.
The chair did not forget you.
Chairman Walsh. We both want to introduce you. And you can
when we get to him.
If Committee members have an opening statement prepared, I
ask that they be submitted for the record. You will each have
five minutes to testify. Do your best to keep it to five
minutes, though I will be as lenient as I can be. So welcome to
all four of you.
We will begin with our first witness, again, Mr.
Hainsfurther, who is testifying on behalf of the American
Institute of Architects. He is the president of Associates
Architects, a seven-person firm based in Des Plains, Illinois,
and former national vice president of the American Institute of
Architects.
Mr. Hainsfurther, I look forward to your testimony.
STATEMENT OF WALTER HAINSFURTHER
Mr. Hainsfurther. Thank you, Mr. Chairman.
Chairman Walsh, Ranking Member Schrader, and members of the
Committee. My name is Walter J. Hainsfurther, FAIA. I am
president of Kurtz Associates Architects, a seven-person
architectural firm based in Des Plains, Illinois, and a former
national vice president of the American Institute of
Architects.
As I mentioned to the chair on the way in, I have also over
my 30 years of practice done a number of projects not only in
the chairman's district but throughout the Chicago area. I want
to thank you for the opportunity today to testify on behalf of
my firm and the 76,000 members of the American Institute of
Architects.
The current economic crisis has affected every American but
as this Committee knows all too well, it has hit small
businesses, like mine, particularly hard. Billings at my
company are down 80 percent from two years ago. I have gone
from a firm of 25 architects five years ago down to five
architects today. I personally have not taken a salary in two
years so that I can keep the lights on and pay my employees.
Architects are, by and large, small business people.
Ninety-five percent of U.S. architecture firms employ 50 people
or less. In fact, the vast majority practice in one or two
person firms. They are truly the engine that drives the design
and construction industry.
The AIA wants to work together with the SBA to help
American small businesses come out of this recession. When the
SBA makes changes to its small business standards, AIA members
pay attention. The SBA's goal is to ease the administrative
oversight by limiting the number of exemptions from standards
and reduce the number of levels that they have for small
business. The SBA also wants to increase the number of
businesses that qualify as a small business and has proposed to
increase the size standards accordingly. Their analysis states
that it will increase the number of businesses that qualify for
SBA programs from 35 percent to 41 percent, but for our members
it has a far different effect.
The AIA estimates that over 91 percent of architecture
firms fall under the current $4.5 million standard. If the
standard is raised to $19 million, over 97 percent of the firms
will qualify as a small business. The proposed standard is
being increased 322 percent, which would encompass not just a
majority but almost every architectural firm in this country.
In short, the SBA is asking firms that have five employees,
like mine, to compete against those that have over 50. As you
can see, the SBA's goal of increasing participation in the
architectural market is too broad and their proposal has
overreached.
The consensus is clear among AIA members that the proposed
increase in the threshold is high. The AIA is continuing to
gather comments from our members on the proper recommendation
to make to the SBA. However, the AIA represents over 76,000
architects, intern architects, and allied professionals, and
many will be impacted by these changes. To find the best
recommendation for SBA, we ask the Committee to join with us in
encouraging the SBA to extend the response period. We would
appreciate at least another 60 days to continue to gather and
compile information from our members so that the SBA can make
the best decision using the most accurate data possible.
We have two requests outside of the size standards for the
Committee. The first is the review of the revenue calculation
for architecture firms. In the past, AIA members have stated
that over 50 percent of their gross revenue can be attributed
to payments that flow through to subcontractors. Those payments
affect the firm's gross revenue number but are not actually
part of the firm's revenue. The second issue is whether SBA's
use of receipts is appropriate for architecture firms.
As you can tell, architecture firms can be extremely small,
and in fact, in the recession, more small firms are created
instead of consolidating. As people lose their jobs, they hang
out their shingles. Net receipts may not accurately represent
this situation as well as the number of employees. We believe
that net receipts for these two reasons may not be the best
metric to determine small businesses sizes. We ask the
Committee for further review.
In conclusion, I would like to thank Chairman Walsh,
Ranking Member Schrader, and the members of the Committee for
giving me the opportunity to testify before you today. I want
to commend you for your dedication to the problems that small
businesses face in this economy and for your leadership in
advancing legislation that helps small businesses drive the
economy. The challenges that we as small business people face
are serious, but so is our commitment to play a leading role in
rebuilding and renewing our country. Thank you very much.
[The statement of Mr. Hainsfurther follows:]
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Chairman Walsh. Thank you, Mr. Hainsfurther.
Our second witness is John Woods, testifying on behalf of
the American Council of Engineering Companies. Mr. Woods is the
founder and principal of Woods Peacock Engineering Consultants,
Inc., a service-disabled veteran-owned small business that
provides structural engineering services in Alexandria,
Virginia.
Welcome, Mr. Woods. I look forward to your testimony.
STATEMENT OF JOHN WOODS
Mr. Woods. Thank you, Chairman Walsh, Ranking Member
Schrader, and members of the Subcommittee. I appreciate the
opportunity to testify before you today about the changes to
small business size standards, particularly the unique
considerations of A&E services. I will also address factors
that must be considered when SBA proposes changing the small
business size standard by 400 percent.
I represent the American Council of Engineering Companies,
the voice of America's engineering industry, with almost 6,000
member firms employing more than 500,000 engineers and other
professionals responsible for $500 billion of private and
public works annually. Over 70 percent of these 6,000 firms are
small businesses with less than 30 employees.
As ACEC members are working as we speak to better
understand the rationale behind the SBA proposal, it has become
very apparent that we need an extension of more than the
present two months and the comment period identified by SBA. We
must review their 16-month analysis to develop alternative
approaches and consider the effects on future competition, QBS
use, and current small firm finances and contracting
opportunities.
ACEC asks for your consideration and support of a September
30, 2011, extension. We would like to draw your attention to a
number of key issues. First, the actual use of engineering
firms of varying sizes is unknown. If the proposed rule is put
into place using the demographics of ACEC membership, more than
90 percent of the nation's engineering industry, up from 70
percent from now, would be classified as small business. Data
needs to be collected to better aggregate firms of various
sizes doing responsible work based on many requirements,
including licensure, regardless of contracting tier.
A second key point, the size standard, ACEC policies of
encouraging small firm participation in the federal sector
should reflect the fact that small firms are an integral part
of teams submitting on federal work and selected under QBS for
their capabilities. The qualifications and responsibilities of
each firm member are clearly delineated in the proposal they
submit to the Agency when competing for contracts.
A&E firms provide services in the very technical
disciplines of architecture, mechanical, electrical, civil,
structural, and other engineering. All states require
professional licenses for the individuals performing this work,
as well as for their firm. Like my Commonwealth of Virginia,
the majority ownership of the firm must be licensed in the
Commonwealth.
Firm size and capabilities are also controlled by the
interests of professionals and their firm business model as by
the opportunities available to them. Many firms remained
specialized and small for decades by intent. Selection boards
consider all capabilities of all team member firms like ours
when ranking firms under the qualifications selection. The team
selected is required to perform the work with the proposed team
individuals under contract.
A third key point, these responsible roles are not
reflected in small business goal achievement by federal
agencies and revenue data is not available to SBA for assessing
government small business utilization when analyzing size
standards, for engineering services, team formation, and
responsible roles go far beyond tracking prime contract awards
with only census data. The size standard discussion is
influenced by the impact of increased costs and pass-through
revenues for small firms serving federal clients. The SBA
proposal also does not take into account small business size
standards under other regulations, such as labor, family leave,
health insurance, defense contracting auditing, to name a few.
A fourth key point, more effective small business
utilization would be achieved through the development and
retention of a contracting work force that understands A&E's
services and procurement rules. The insufficient number of
contracting personnel often without experiencing in procuring
A&E services or the industry has created a basis for large
contracts that require full service, large national firms to
win and perform the work.
Finally, the current small business program establishes
subcontract goals for small businesses based on a percent of
work subcontracted. A better approach would be to establish the
business subcontracting goals based on a percentage of funded
prime contract dollar value, which would keep the proposed
roles and easily resolve usage if all roles were not used. The
change would eliminate the absorption of functions by the prime
contractor resulting in no work for the tier small contractor.
I thank the Subcommittee for the privilege and opportunity
to address the A&E industries with the proposed size standards
and I welcome any questions.
[The statement of Mr. Woods follows:]
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Chairman Walsh. Thank you, Mr. Woods.
Our third witness is Roger Jordan of the Professional
Services Council. The Professional Services Council is the
national trade association of the government professional and
technical services industry.
Mr. Jordan, we look forward to your testimony.
STATEMENT OF ROGER JORDAN
Mr. Jordan. Chairman Walsh, Ranking Member Schrader, and
members of the Subcommittee, thank you for the invitation to
testify and the opportunity to discuss small business size
standards today.
When debates about industry size standards occur, often
there is very little agreement. Very small businesses tend to
advocate for lower size standards, companies operating in the
middle of their industry size standards tend to advocate for
status quo, and companies that are approaching are slightly
above their size standard seek a higher level.
The reason for the varied opinions is simple. Companies
have a keen interest in maximizing their ability to compete for
and win federal contracts that are exclusively set aside for
small business competition. Given the significant increase in
federal spending on services over the past decade there is much
to be gained competitively from qualifying as a small business.
Adding fuel to the debate around size standards is the fact
that the federal government lacks policies regarding
contractors operating in the mid-tier. That is, firms that were
once eligible to receive small business set-asides but whose
revenues now exceed the size standard if even by only one
dollar. If SBA policy is not only to create federal contracting
opportunities for small businesses but also to ensure long-term
success and a sustainable growth pattern, then the plight of
small businesses that graduate from their industry size
standard should not be ignored and Congress should explore
operations that will alleviate this binary approach and
incentivize contracting opportunities for mid-tier businesses.
During its evaluation, SBA relied on five equally weighted
major factors to determine the proposed size standards, one of
which is the impact on federal contracting and SBA loan
programs. However, PSC recommends that greater weight should be
given to the impact on federal contracting. In addition, SBA
should broaden its evaluation of the federal contracting market
to examine barriers to entry into the federal marketplace, not
just the commercial space. This, in fact, might encourage SBA
to reconsider the merits of adopting separate size standards
for the purposes of federal contracting. The adverse impact on
small businesses of a single size standard that covers federal
procurement and all other SBA programs is documented in SBA's
own methodology in which it acknowledges that the disparity
between small business federal market share and industry-wide
share may be attributed to a variety of reasons, such as
extensive administrative and compliance requirements associated
with federal procurement, the different skill sets required by
federal contracts, and the size specific contractor
requirements of federal customers.
That said, our members have not widely reported significant
heartburn with many of the proposed increases to the size
standards as many size standards were increased from 7 to
either 10 or 14 million, which will provide much needed
flexibility for small firms to mature. There are, however,
proposals for two areas, architectural engineering services and
computer-related services, that require greater scrutiny.
As my fellow panelists have already highlighted, the
proposed size standard for A&E ballooned, which begs the
question of what has changed so dramatically in that specific
industry over the years to warrant a quadrupling of the size
standard. In contrast, computer-related services have undergone
significant changes over the last 20 years, yet SBA proposed
raising size standards for those categories only by $500,000.
In addition, SBA established common size standards for
industries that share similar characteristics. According to the
SBA, these common size standards reflect cases where many of
the same businesses operate in multiple industries. This led
SBA to establish a common size standard for a number of
computer-related industries, even though the industry data
supported a distinct size standard for each industry. For
example, SBA analysis shows the computer facilities management
services had a calculated industry-specific size standard of
35.5 million. Yet, by establishing a common size standard
containing this category and other computer-related categories
at a level of 25.5 million, SBA has eliminated legitimate small
businesses from being able to qualify.
In summary, PSC recommends the following. With specific
regard to the size standard proposal, PSC recommends that SBA
give more weight to the impact on federal contracting factor
and broaden its analysis with specific federal market dynamics
that distinguish the federal market from the commercial space.
Taking this recommendation further, SBA should consider
creating a completely separate set of size standards to be used
for federal procurement purposes only. In addition, SBA should
review its policies regarding the creation of common size
standards. Under the proposed rule, the use of common size
standards will eliminate small businesses from competition;
whereas if the individual industry size standard had been
adopted, then all small businesses would be able to compete.
Beyond the common rulemaking process, SBA and Congress
should support new and ongoing initiatives to incentivize
contracting opportunities from mid-tier businesses to ensure
that growing small businesses are provided at minimum some
protection before having to always compete with large
businesses.
Lastly, Congress should provide a necessary oversight of
SBA to ensure that it is abiding by the provisions enacted in
last year's Small Business Jobs Creation Act that require SBA
to review and update the size standards every five years at
minimum.
Mr. Chairman, this concludes my testimony. Thank you for
inviting PSC to testify today and for your attention to this
important matter. I would be happy to answer any questions that
you may have.
[The statement of Mr. Jordan follows:]
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Chairman Walsh. Thank you, Mr. Jordan.
I now yield to Ranking Member Schrader, who will introduce
our next witness.
Mr. Schrader. Thank you, Mr. Chairman.
It is my pleasure to introduce Mr. Odysseus Lanier, one of
the four founding partners in McConnell Jones Lanier and
Murphy, LLP. Over 180 full-time employees. That is great. Three
office locations. Mr. Lanier's firm is the third largest
African-American-owned accounting and consulting firm in the
United States. Mr. Lanier also--I hope I am getting the name
correct. Am I close enough?
Mr. Lanier. You are correct.
Mr. Schrader. Thank you. I hate to keep repeating the wrong
name.
Mr. Lanier. You are okay. You are okay.
Mr. Schrader. Mr. Lanier leads the firm's Federal Services
Group, which specializes in working with federal, state, and
local government agencies, much needed service by providing
strategic planning, financial management, and operations review
and support services. With more than 33 years of professional
experience, he has extensive knowledge of federal, state, and
local procurement policy, procurement strategies, contracting
processes, and process improvement projects. So we look forward
to your comments in particular. Welcome, Mr. Lanier.
STATEMENT OF ODYSSEUS LANIER
Mr. Lanier. Thank you very much. Good morning, Chairman
Walsh, Ranking Member Schrader, and members of the
Subcommittee.
Thank you for the opportunity to appear at today's hearing.
My name is Odysseus Lanier and I am a CPA. I am a partner with
the firm of McConnell Jones Lanier and Murphy, located in
Houston, Texas. As Ranking Member Schrader has stated, there
are 180 professionals in my firm and we have annual revenues of
$17 million. I lead my firm's Federal Services Group and
specialize, as you said, in working with federal, state, and
local government.
I am here--I am pleased today to be testifying on behalf of
the American Institute of Certified Public Accountants, of
which I am a member. I am specifically here though to discuss a
suitable small business size standard for NAICS's 541211,
Offices of Certified Public Accountants, and 541219, Other
Accounting Services, as they most directly affect the work
performed for the federal government by CPA firms.
We comment the SBA for undertaking a comprehensive review
of the existing small business size standards and
thoughtfully--I want to emphasize thoughtfully--applying a
statistically valid methodology which would raise the current
standard from $8.5 million to $14 million in receipts.
During a recent meeting I attended with representatives of
the AICPA, other CPAs, and the SBA Size Standard team, it
became evident that the data used by the SBA did not adequately
reflect the accounting profession. As a result of that meeting,
the American Institute of CPAs provided the SBA alternative
data compiled from surveys of CPA firms conducted by the AICPA
and an industry publication. Taking the AICPA's data and using
the SBA's size standard methodology, I calculated that a more
appropriate standard would be at a minimum $19 million in
receipts.
Beyond these objective data-driven calculations warranting
an increase from $14 million to $19 million, the AICPA proposes
increasing the small business size standard to $25.5 million to
compensate for other secondary factors in the middle market
that affect the ability of small accounting firms to
effectively compete for contracts in the federal marketplace.
Importantly, two of those factors are primarily driven by
discussions and suggested changes over the years in federal
government procurement policy, an acquisition policy to reduce
the number of vendors and increase the size of federal
procurements. As you know, we are talking about reducing
government.
And also, the current use of the sources sought and request
for information notices to literally determine if contractors
are qualified prior to issuing an RFP as part of an acquisition
planning strategy. Importantly, to fully capture the small
accounting firms that have the adequate resources in
infrastructure, personnel, and cash flow to properly perform
services in the federal arena reserved for just small business
contractors, we believe the size limit would need to be raised
to $25.5 million. This higher limit is necessary to promote
growth of these small accounting firms and to avoid this
arbitrary cutoff in the middle of the market segment where a
firm would quickly outgrow a lower size standard and be forced
to compete most likely and most unsuccessfully with the largest
firms. And the nuance in our business is the largest firms are
the big four, which average about $6.8 billion in revenue.
Seventeen million dollars does not compete with 6 billion
dollars when you classify it as large.
Let me talk a moment about my own firm as an illustration.
When my partners and I formed our firm in 1999, having begun
our businesses on the proverbial kitchen tables several years
earlier, we had 28 full-time employees, no federal contracts,
and a single-minded focus to build one of the largest African-
American-owned accounting and consulting firms in the United
States. In 2003, we were awarded our first federal contract,
had 42 employees, and only $4.5 million in revenue. Over that
time, we have not taken money out. We have made substantial
investments in business development and back office
infrastructure and technology, and proudly serve the federal,
state, and local government markets.
But, by 2008, we exceeded the SBA's $8.5 million size
standard limit. Since then we have had to complete for federal
contracts as a large business and have not been nearly as
successful because the infrastructure required to support our
$14 to $16 million in revenues pales in comparison to the
infrastructure of our competitors; firms, who have from $358
million to $10 billion in revenue and are 20 to 500 times
larger than we are. Not surprisingly, our firm and other small
firms like ours are finding it virtually impossible to compete
in a federal market unless the SBA implements a significantly
larger small business size standard.
I encourage the Subcommittee to urge the SBA to revisit the
small business size standard for NAICS 541211, Offices of
Certified Public Accountants, and 541219, Other Accounting
Services, and consider the factors I have discussed. It is
widely recognized, as we all know, that small business is an
important component in the economic health of our country. It
is the engine that drives this economy. Why would you want to
cut out a segment of the industry that would be able to provide
value to the federal government as a small business? An
increase in the small business size standard to $25.5 million
will result in more opportunities for small accounting firms to
provide federal agencies with high quality, value-added
services, while at the same time fueling our economy.
Thank you again for the opportunity to come and testify at
today's hearing. And I look forward to your questions.
[The statement of Mr. Lanier follows:]
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Chairman Walsh. Thank you, Mr. Lanier. We are actually
going to have to go run and vote on the floor. It looks like
about--it looks like a couple votes. So why do not we adjourn
for about 30 minutes and we will reconvene after the votes.
[Recess.]
Chairman Walsh. Okay. We are back. We just voted to save
the world. Now we are back. The Committee will reconvene. I
will begin my five minutes of questioning and then I will yield
to the ranking member.
My first question is really directed to the entire panel.
This is a complicated issue and each of your industries has
unique issues and problems. Give me your sense, as you have
been approaching these issues, as to how the SBA has been to
work with. Have they been receptive to your concerns, your
comments?
Mr. Lanier, let us start with you and we will work our way
down.
Mr. Lanier. Okay. I will be glad to answer that question.
You know, in my testimony I indicated that we had had a
meeting with the SBA Size Standard office, and I will tell you
they have been receptive to our comments. And in fact,
encouraged us to follow the entire rule-making process and make
sure that we got them back the data concerns that we had.
Because the primary issue that we had was that the census data
did not reflect the industry standards and publications that we
use to determine exactly what the size of firms are in our
industry, as well as the dispersion within our industry. So
they have been very receptive to that, and quite frankly, I
have--it has been a pleasure working with them to this point. I
can personally vouch for that myself.
Chairman Walsh. Mr. Jordan.
Mr. Jordan. Yeah. I would sort of echo those comments. I
mean, this is an extremely big challenge and the SBA is in the
unenviable position of no matter where they set the size
standards there are going to be certain groups that are going
to be unhappy.
SBA has had an open door policy as far as we are concerned.
They have come out and spoken with us. They have asked us for
more information. I thought that that was a very transparent
process by publishing the methodology well in advance. In
addition, they outline a number of questions directly related
to their proposals in which they are seeking specific industry
feedback, and I think that in a lot of cases they hit on the
right questions.
Chairman Walsh. Great. Mr. Woods.
Mr. Woods. I cannot add a whole lot to that. The problem is
from my industry, we are engineers; not economists and
statisticians. SBA gave us, in fact, advance warning. Gave us a
schedule of everything. Every time they changed it. But it took
them 16 months to figure this out and they are asking us to
figure it out as engineers in two. So that is the only issue.
Chairman Walsh. Mr. Hainsfurther.
Mr. Hainsfurther. I would agree with that.
AIA has a longstanding, positive relationship with the SBA.
You know, for instance, a few years ago we had a major issue
with retainage on contracts and the SBA actually championed
that issue in getting the rules changed. So we appreciate that.
And we are happy to note that Major Clarke is here today, and I
believe also one of the gentlemen in charge of the standards is
here today from the SBA. So we know they are open to comment
and working with us. We just need a little more time to
increase that collaboration and make the standards work for
everybody concerned.
Chairman Walsh. Great. Mr. Woods, let me ask you a quick
question. In your statement, you referred to the various
disciplines encompassed by engineering firms, such as
mechanical, electrical, civil, structural, etcetera. The
current size standards do not distinguish between these. And in
the proposed new size standards these would be wrapped up into
the combined architectural and engineering services size
standard. Given the different characteristics, do you think the
SBA should propose individual size standards for each
engineering subspecialty?
Mr. Woods. No. Very simply. It works well to group those
together.
Chairman Walsh. Okay.
Mr. Woods. Our problem with the engineering thing is the
statistics that are being used, because they are very, very
large firms. And I will say somebody like Boeing or Lockheed-
Martin provide engineering services. And if they provide them
in the same NAICS code that I provide structural engineering
services in, that is a real misnomer as to who is doing the
work.
Chairman Walsh. Great. Let me ask one more quick question
at this point and then I will yield to my ranking member.
Mr. Jordan, for the computer facilities management services
you pointed out that the calculated industry-specific size
standard is 35.5 million. Before SBA adopts the common size
standard and reduces it to 25.5 million, can you explain to the
Committee what this will mean for a business with average
receipts of 30 million?
Mr. Jordan. Absolutely. Simply put, they will be shut out
from small business competition. It stems from the problem of
creating these common size standards in which they want to keep
like industries grouped together. In certain cases it makes
sense, but where the size standards differ significantly, they
ought to consider breaking those up, or at the very least they
have got to go with the higher size standard to avoid
eliminating small businesses from being able to compete.
Chairman Walsh. Okay. Great. Let me stop right there and I
will yield to Mr. Schrader for his questions.
Mr. Schrader. Thank you, Mr. Chairman.
I guess I am concerned a little. There is this balance
going on out there about how we do this but let us start with
hopefully a fairly easy question. I guess each panelist just
respond. And the goal has been to decrease the number of
categories--one of the goals has been to decrease the number of
categories, i.e., make it simpler. I assume that means not just
simpler for SBA but simpler for different businesses to figure
out do they qualify or not. Is the general consensus here that
it is good to reduce the number of different categories? Mr.
Lanier.
Mr. Lanier. Yeah. Let me take a stab and answer that
question.
I think it is because--I will use my firm as an example.
When we got sized out of the small business arena with the
federal government, we had to make a strategic business
decision to move into what we call related categories. Related
NAICS codes. Okay? And we moved into some related NAICS codes
that were potentially horizontally integrated into our
business. So we created a weapon systems engineering and
logistics business underneath our consulting group in the
accounting firm. Had we not done that, we would be on the
street right now because we could not compete in our core
competency. And our core competency stretches across industry
codes. It is 541611 as well. That size standard down there is
$14 million. That is consulting services. Okay? 541219, that is
Other Accounting. 541211, that is CPA. We cut across all those
and it makes sense to group the like industries together based
on the way your industry does business and how you provide
these services to the various sectors of the economy.
Chairman Walsh. Mr. Jordan.
Mr. Jordan. Yeah, I think again, it comes down to what the
actual numbers attributed to each of those categories are. Take
engineering and architecture, for example. Those numbers are
vastly different, and so grouping them together just does not
make a whole lot of sense.
Chairman Walsh. Okay. Mr. Woods.
Mr. Woods. I agree with it. Yeah, I think that, you know,
size standards can be confusing. Obviously, oftentimes simpler
is better but you have to look at whether the correct
standards, not just the size and, you know, as Mr. Jordan
pointed out, I think that perhaps we are going a little too
far. What we need is more time, really, to give it an honest
answer about that.
Chairman Walsh. It sounds like everyone agrees on that.
I am a little concerned in that we, in this budget-limited
environment that we are in, it is likely the SBA is going to
have probably less money rather than more money to work with in
terms of backing loans and what have you. And with that in
mind, one of the ways to look at this is with less money you
should be decreasing the size of small businesses available to
compete. And while that is not necessarily a great thing for
those mid-size companies, how should we respond to that? Are a
Congress and we are facing a situation of very little money.
Who really should be getting the money? Should we create a mid-
size type of category? Not all small businesses are small and
there has been a lot of discussion about it is not the very
small businesses that create the jobs that pull us out of this
recession. So I am sensitive to both sides of the discussion.
And we are going to have very little money going forward, and
who should we be targeting? The small businesses or the mid-
size businesses given that? Let us go this way. Mr.
Hainsfurther.
Mr. Hainsfurther. Ranking Member Schrader, obviously, we
are all small businessmen, and in our practices almost all of
the firms within architecture, more than 80 percent of them are
under five employees. And so we have a very different
perspective I would say because architects, you know, they
generate, I think, about eight additional jobs for every
architect job in the world. So we need that capital focused on
truly small practices because that is our world and that is the
vehicle that we live in.
Obviously, let us say if I was a contractor, my size would
be tremendously different because the needs to perform that
work are different. The capital needs are more intensive. So we
get by with very little capital, you know, pen and paper
basically and a computer. So I think that it is going to depend
on what industry you are in and it is going to vary all over
the place.
Mr. Schrader. I am assuming that we still have different
categories, obviously, with different size or employee receipt
size standards involved. So given that, you know, with less
money what should we do?
Mr. Hainsfurther. Well, as I said, most of our members, you
know, what is happening is they are becoming more small firms.
So that need is even greater. Access to capital, obviously, if
you do not have a track record, is very hard to come by.
Mr. Schrader. Sure.
Mr. Hainsfurther. So as the smaller firms start to blossom,
because they will, we know that, they need the access to
capital as opposed to a mid-size firm which has got a track
record, they have built a record of success, and they will have
better access to capital. And so if the purpose of a SBA loan
or a small business set-aside is to start moving these smaller
firms to make them more successful, it really needs to be
targeted for that purpose if that is the purpose that you are
trying to achieve.
Mr. Schrader. Thank you.
Mr. Woods. I made the statement that part of the issue is I
am very sympathetic to the mid-size firms because in the
architectural engineering business we are a specialized group
and we are selected on the QBS, which is very important.
Therefore, we end up needing the most qualified team members.
But if the contract says that we have got to subcontract out 35
percent of it and leave 65 percent to the prime, that is very
difficult in many cases for a mid-size firm to participate.
If you did it on the basis of--and it would not take 35
percent, but if we had a $10 million contract and it was based
on awarded dollars that the small business had to receive 10
percent of it, a million dollars, and that is the criteria,
then it would not make any difference to the mid-size firms.
You could have two or three mid-size firms that could team and
perhaps be qualified.
It works very well. The Metropolitan Washington Airport
Authority actually uses the percentage of dollars rather than
the percentage of subcontracted out. So nobody in our business
wants to outgrow small. And I have got colleagues who have done
that but they have returned to small business because they
could not get any work as a mid-size.
Mr. Schrader. Interesting.
Mr. Jordan. With regards to the loan programs, SBA did an
analysis and its current revision. When they looked at the
impact on the loan programs, they determined that in the 54
category it was only the micro firms that were applying for
those types of loans. Therefore, an increase in the size was
not really having an impact on those loan programs.
With regard to the mid-tier, you know, I do not know that
we need to create a separate category, but certainly we need to
explore ways and potential opportunities to provide them with
some opportunities.
Mr. Schrader. As they grow.
Mr. Jordan. Absolutely.
Mr. Schrader. Yeah.
Mr. Lanier. From my perspective, the nuances of the
accounting industry are totally different. The barriers to
entry are very, very low. You do not have to have a lot of
capital. I venture to say right now if you look at the SBA loan
programs, you have very few, if many at all, CPA firms that go
and apply for loans, except at the micro-level that Mr. Jordan
is talking about here.
So I think that we need to have the ability for capital for
that sector, but when you get to the mid-size, yes, you need to
take a look at that as well because if you cannot get access to
the capital by normal means in the capital markets, such as
going to your banks and having your past performance to do
that, there may need to be some look at that to see if there
are loan programs that could potentially help those firms. But
at the same time, a broad program, it would really affect only
the smallest businesses in our sector for sure.
Mr. Schrader. Very good. Thank you. I yield back, Mr.
Chair.
Chairman Walsh. Thank you. Let me recognize my colleague
from California, Ms. Chu, for some questioning.
Ms. Chu. Thank you, Mr. Chair.
Mr. Woods, in your testimony you pointed out that the same
size firms operating in states or localities within high cost
of living may show inflated revenues which could cause them to
be penalized in a size standard definition. Since I represent
the Los Angeles area, my ears perked up when I heard that. This
issue is of importance to contractors in my district,
obviously, and so how could we develop fair standards for
businesses in areas where there is a high cost of living
without creating more bureaucracy and confusion in the system?
Mr. Woods. Well, that is one of the reasons that ACC is,
quite frankly, not opposed to raising the size standard for our
industry $8 to $10 million. I am very appreciative of your
constituents. I know some of them well. We actually have the
same problem in the Metropolitan Washington area as they do in
New York City and perhaps even in Chicago.
If you looked at it though from my firm, if you use 30
people in a firm and you used revenue--because all we sell is
time and expertise--if the revenue per employee was $200,000
per employee, for a 30-person firm you would be talking about a
$6 million size standard. If you increase that to $10 million,
then you provide not only for some subcontracting pass-through
but you also provide some additional leverage for higher cost
areas.
Ms. Chu. Very good. Thank you.
Mr. Lanier, your firm exceeded the small business size
standard for accounting and consulting firms. As you stated in
your testimony, your $14 to $17 million in revenue pales in
comparison to the firm's $358 million to $10 billion in revenue
and so you find yourself competing with firms that are 20 to
500 times larger than yours.
Other than continuously adjusting the size standards to
accommodate firms that are growing and therefore, ineligible
for small business contract opportunities, what are things that
the SBA and Congress can do to support the mid-tier firms who
have outgrown the small business definition so that they can
continue to grow?
Mr. Lanier. Yeah. I think the first step is to make sure
that we continue to level the playing field by making sure that
the size standards continue to be reviewed on an ongoing basis.
I think the Senate put some legislation out through Senator
Landrieu's committee that requires those standards to be
reviewed on a continuing basis.
Now, the other thing that we can do is look at federal
procurement policy at the same time. If you are going to look
at mid-tier firms, allow us to go up to a level so that we will
not be squeezed out of the middle market and then restrict some
of the contract bundling exercises that some of the agencies do
to try to constrict the number of contracts out there. I am
sorry, constrict the number of vendors and then increase the
size of the contracts. So you have to take a look at all those
variables at that mid-market level to make sure the
opportunities are still there for the mid-tier small
businesses.
Ms. Chu. Mr. Jordan, do you have any thoughts on this?
Mr. Jordan. No. I would largely agree. And on his last
comment, we have seen instances where you are seeing rather
large contracts being set aside for small businesses. And that
has some real implications. It presents real risk to the small
businesses to be able to perform that work. And really what we
ought to be advocating for is that the federal acquisition
workforce is rightsizing contracts for companies of all sizes
so they each have their individual opportunities.
Ms. Chu. Yes, Mr.----
Mr. Lanier. Could I come back and follow up with that for
one second? One of the things that I think we need to look at
is, is this entire infrastructure issue associated with being
able to support those size contracts? If you are going to have
the large contracts and you have an acquisition policy that
qualifies the House--and I mean qualifies the House, doing
procurement planning--the acquisition professionals tend to
send out sources sought notices and RFIs that ask for the
capability and the capacity to be able to do those--perform
those large contracts.
If you do not move the standard up such that mid-tier firms
can demonstrate the ability to handle that work, you have a
procurement official that manages three kinds of risk. They
manage cost risk, schedule risk, and technical risk. All of us
come from a profit-oriented environment, but the government
manages risk.
And when you are managing technical risk, the first thing
you are looking at is capacity and past performance. And if you
do not have the ability to demonstrate that you have handled
some of those larger procurements, and you cannot do that at
$8.5 million where we are right now, you are completely shut
out and the first thing an acquisition official will do is
take--is mitigate that risk by putting that procurement in full
and open competition. And that is a double-edged sword because
it hurts the industry, I mean, the Agency for Mitsubishi to be
able to get that 23 percent small business goal. And it hurts
those of us who have to end up competing now with the Big Four
firms and the firms who are, like I said, you know, 20 to 500
times larger than we are. So that is the area that we really
need to focus on here because that discussion has been going on
for the last 10 years. And what you need to do is it is time
address that at this point.
Ms. Chu. Thank you. I yield back.
Chairman Walsh. Mr. Hainsfurther.
Mr. Hainsfurther. Could I just add something to that?
Obviously, in architecture and engineering it is a slightly
different process because it is a qualification-based selection
process. But they still look for that track record in that, you
know, I would disagree slightly with the term managing risk.
They are almost trying to avoid risk in many cases. And so they
are looking for the firms that have a big track record, which
many times a small firm does not necessarily have to do--have
behind him.
But, for instance, I would not want to go compete and let
us say, submit qualifications for a federal office building,
you know, in downtown Chicago but I very well would like to do
the OSHA office that is right next door to my office in my
suburban office building. So we have to maintain that kind of
perspective I would say, that qualification-based selection
does not necessarily mean what I would call quantity-based
selection, which means I have done 100 of them just like this,
but that I have that ability to do it and to do it correctly is
very important. And so, you know, as long as you try and
maintain those opportunities, I think it levels that playing
field as Mr. Lanier mentioned.
Thank you.
Chairman Walsh. Thank you Mr. Hainsfurther. Thank you to my
colleague from California.
I only have two other real quick questions, actually coming
right back at you, Mr. Hainsfurther. You stated that for the
average AIA member, over 50 percent of their representative can
be attributed to payments that flow through to subcontractors.
What does this mean in terms of a receipts-based size standard?
And how would you like SBA to address this issue when creating
that size standard.
Mr. Hainsfurther. Currently, the SBA does account for pass-
throughs. And that is going to subconsultants, like Mr. Woods's
firm and his members. It goes to vendors that supply us with
printing and other resources. So the issue with that as far as
we are concerned is that if they continue to maintain that
pass-through and recognize, that would be just fine with us
because it is not a clear picture of what the revenue really
is. The other opportunity, of course, is to look at net revenue
and see what is actually flowing directly into the aspect of
the firm.
Chairman Walsh. Great. Thank you. Mr. Lanier.
Mr. Lanier. Yes, sir.
Chairman Walsh. Given that the definition of a small
business according to the Small Business Act is one that is
independently owned and operated and which is not dominant in
its field of operation, do you feel that this proposed rule
adequately considers dominance in the field of operations?
Mr. Lanier. I am going to make that industry-specific to
the accounting industry.
Chairman Walsh. Please do.
Mr. Lanier. It does not consider dominance--it does
consider dominance in the field but it considers dominance in
the field using data from a source that is not industry
recognized in terms of who is our oligopoly. Who constitutes
our oligopoly? Our oligopoly is constituted by four firms. If
you look at the census data that the SBA used in the
calculation for 2007, that says those firms have $5.2 billion
average revenues. Okay? Well, when you look at the data from
Accounting Today, which is our publication that lists the top
100 firms every year in our industry, that number is $6.8
billion average among those four.
Now, let us talk about that for a second. Okay? The two
most sensitive variables in the primary factors for calculating
size standards represent, number one, the four firm
concentration ratio that is in the industry dominance category,
and number two, the distribution of firms by size. X-number of
firms by classification have X-number of receipts in the
industry. Those are the two most sensitive variables in the
calculation. So if you use data that is not reflective of the
industry, your numbers are skewed. So, yes, I do believe that
industry dominance is taken into effect, but you just have to
have the correct data.
Chairman Walsh. Thank you.
Mr. Lanier. Okay.
Chairman Walsh. I am through with my questioning. Mr.
Schrader.
Mr. Schrader. I have no more.
Chairman Walsh. Great. Thank you all for participating
today. As this Committee continues to focus on creating
opportunities for small businesses, we will keep working on the
issues of who is a small business.
Following today's hearing I will be sending a letter to the
Small Business Administration to share what we have heard
today, and I will request that the SBA keep the rule-making
open longer so that small businesses can provide substantive
comments. We will ensure that your voice is heard and will
support policies to help you create jobs and spur investment.
I ask unanimous consent that members have five legislative
days to submit statements and supporting materials for the
record. Without objection, so ordered.
Thank you again all very much. The hearing is now
adjourned.
[Whereupon, at 11:05 a.m., the subcommittee was adjourned.]
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