    [Senate Hearing 114-616]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 114-616

                        HOW THE HIDDEN COSTS OF FEDERAL
                      REGULATIONS IMPACT SMALL BUSINESSES
                              AND ECONOMIC GROWTH

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

                                 FIELD HEARING

                                   BEFORE THE

                          COMMITTEE ON SMALL BUSINESS
                              AND ENTREPRENEURSHIP
                              UNITED STATES SENATE

                        ONE HUNDRED FOURTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 MARCH 30, 2015

                                   __________

        Printed for the Committee on Small Business and Entrepreneurship

    [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

             Available via the World Wide Web: http://www.fdsys.gov

                                   __________

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               COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                        ONE HUNDRED FOURTEENTH CONGRESS

                                  ----------
                       DAVID VITTER, Louisiana, Chairman
                  BENJAMIN L. CARDIN, Maryland, Ranking Member
    JAMES E. RISCH, Idaho                MARIA CANTWELL, Washington
    MARCO RUBIO, Florida                 JEANNE SHAHEEN, New Hampshire
    RAND PAUL, Kentucky                  HEIDI HEITKAMP, North Dakota
    TIM SCOTT, South Carolina            EDWARD J. MARKEY, Massachusetts
    DEB FISCHER, Nebraska                CORY A. BOOKER, New Jersey
    CORY GARDNER, Colorado               CHRISTOPHER A. COONS, Delaware
    JONI ERNST, Iowa                     MAZIE K. HIRONO, Hawaii
    KELLY AYOTTE, New Hampshire          GARY C. PETERS, Michigan
    MICHAEL B. ENZI, Wyoming
                      Zak Baig, Republican Staff Director
                     Ann Jacobs, Democratic Staff Director

                                C O N T E N T S

                                  ----------

                               Opening Statements

                                                                       Page

    Vitter, Hon. David, Chairman, and a U.S. Senator from Louisiana..     1
    Graves, Hon. Garret, a U.S. Representative from the State of
      Louisiana......................................................    14

                                   Witnesses

    Johnston, Charlotte, Owner, 3South Companies, Baton Rouge, LA....     6
    Overton, John, President and Co-Founder, Turn Key Solutions,
      Baton Rouge, LA................................................     9
    Campbell, Jr., J.H., President and CEO, Associated Grocers, Baton
      Rouge, LA......................................................    14
    Kennedy, Preston, President and CEO, Bank of Zachary, Zachary, LA    20

                              Alphabetical Listing

    Campbell, Jr., J.H.
        Testimony....................................................    14
        Prepared statement...........................................    17
    Graves, Hon. Garret
        Opening statement............................................    14
    Independent Community Bankers of America
        Report titled ``Plan for Prosperity''........................    38
    Johnston, Charlotte
        Testimony....................................................     6
        Prepared statement...........................................     8
    Kennedy, Preston
        Testimony....................................................    20
        Prepared statement...........................................    22
    Overton, John
        Testimony....................................................     9
        Prepared statement...........................................    12
    Vitter, Hon. David
        Opening statement............................................     1
        Prepared statement...........................................     4

                        HOW THE HIDDEN COSTS OF FEDERAL.
                      REGULATIONS IMPACT SMALL BUSINESSES.
                              AND ECONOMIC GROWTH

                                  ----------

                             MONDAY, MARCH 30, 2015

                        East Baton Rouge Parish
                                       Council Chamber,
                                                       Baton Rouge, LA.
        The Committee met, pursuant to notice, at 10:00 a.m., at
    the East Baton Rouge Parish Council Chamber, 222 St. Louis
    Street, Room 348, Hon. David Vitter, Chairman of the Committee,
    presiding.
        Present: Senator Vitter.

     OPENING STATEMENT OF HON. DAVID VITTER, CHAIRMAN, AND A U.S.
                         SENATOR FROM LOUISIANA

        Chairman Vitter. Good morning. Thank you for joining me for
    the Senate Small Business Committee's Field Hearing to discuss
    how the hidden costs of federal regulations impact small
    businesses and economic growth. The most costly and complex
    regulations have come from laws that represent the largest
    federal takeover in two major industries: health care and
    banking.
        Today we will focus our discussion on how ObamaCare and the
    Dodd-Frank ``Too Big to Fail'' regulations impact our
    communities and small businesses and the economy, as well as
    the actions I am taking in Congress to pass regulatory relief
    for small businesses.
        During the ObamaCare debate, then House Speaker Nancy
    Pelosi was certainly correct when she said, ``We have to pass
    the bill to find out what is in it.'' The 2,000-plus page bill
    has yielded more than 14,000 pages of regulations from the
    Department of Health and Human Services, Labor, Treasury,
    Social Security Administration, and more.
        What's even more worrisome is that the unelected
    bureaucrats in Washington are the ones who issue these
    regulations as if the world is flat and people will just accept
    the growing demands of health care law, but these regulations
    have real consequences.
        Louisianans constantly question if they can keep their
    health insurance coverage, doctor, and their job.
        The 30-hour workweek is a prime example of an increased
    regulatory burden on businesses that hurts workers and hinders
    economic growth. Starting in 2015, employers with 100 or more
    full-time workers will be subject to the employer mandate using
    2014 workforce data. In 2016, employers with 50 or more full-
    time workers will be subject to the employer mandate and all of
    the related reporting requirements.
        The ACA defines a full-time employee as an individual who
    is employed an average of at least 130 hours per month (30
    hours per week). Large employers must then offer minimum
    essential coverage to full-time employees and their dependents
    for a corresponding 6 to 12-month stability period if an
    employee averages full-time hours during the look-back
    measurement period.
        If an employer chooses not to offer minimum coverage to
    full-time employees and their dependents, they will pay
    employer mandate penalties, which will be calculated monthly.
        As a result, many businesses are cutting hours to prevent
    workers from going over the 30-hour workweek, laying folks off
    to stay under 50 employees or choosing not to hire more workers
    to prevent future employer mandate penalties.
        In a previous hearing in Shreveport, I was alarmed to hear
    one of the witnesses say, for the first time in her lifetime,
    small businesses were choosing not to expand.
        While Republicans in Congress fight for a full repeal of
    ObamaCare, and its burdensome mandates, we will also work to
    pass legislation that restores the 40-hour workweek. The
    ``Forty is Full-time Act'' will provide much needed relief for
    businesses by simplifying the reporting requirements and
    complex accounting measures that seek to raise compliance costs
    and taxes on job creators.
        Another piece of legislation I have opposed was the Dodd-
    Frank ``Too Big to Fail'' legislation. Under the guise of
    painful financial crisis, Dodd-Frank became a huge taxpayer-
    funded bailout for large financial institutions, while
    community banks became too small to save, ignoring major issues
    community banks continue to face in a stagnant economy.
        Not only does Dodd-Frank fail to effectively address the
    root problems that caused the crisis, but it has since
    increased legal and regulatory compliance burden and created
    more barriers for small community banks to continue providing
    niche services and generate loans for small businesses to
    access capital.
        As you will learn in today's hearing, community banks
    provide most of the small business loans for our neighbors, and
    it comes as no surprise that lending went down as compliance
    costs went up during the enactment of Dodd-Frank.
        I am fully invested in providing full regulatory relief for
    community banks. I have authored a bipartisan bill that would
    reduce major impediments for small banks and thrifts to raise
    capital or pay dividends. This will unleash community banks'
    ability to lend to small businesses so they can grow their
    businesses, offer more goods and services to the community, and
    grow the economy.
        Small businesses are often on the front lines of seeing the
    impact of government regulations. They generally don't have
    highly paid, well-connected lobbyists fighting for back room
    deals in Washington.
        That is precisely why, as Small Business Committee
    Chairman, I believe it is important we do these field hearings
    and bring Washington out of the beltway bubble in order to hear
    from hard working constituents we represent.
        I look forward to today's discussion and plan on bringing
    their suggestions and reforms back to Washington to roll back
    the impact of government regulations on our community,
    businesses, and the economy.
        I'm going to begin by introducing our first expert witness.
    That's Charlotte Johnston. Charlotte is the owner of 3South, a
    small business based here in Baton Rouge. Her business model
    provides research and equipment solutions for first responder
    clients in Louisiana and around the country so they can stay
    mission-focused, which is saving lives and protecting property
    in all of our communities.
        Charlotte wrote into my office last year to discuss how
    ObamaCare has hurt her and her business with the cost of
    providing health care to her family first, and also by
    increasing the cost of expanding her business and hiring more
    workers.
        Charlotte, welcome.
        [The prepared statement of Chairman Vitter follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    STATEMENT OF CHARLOTTE JOHNSTON, OWNER, 3SOUTH COMPANIES, BATON
                               ROUGE, LA

        Ms. Johnston. Good morning. David has already introduced
    me, but I started 3South in June of 2011. I've worked for large
    companies, Fortune 500 companies over the course of 20 years,
    all very good companies, but one of my clients approached me,
    several actually, approached me because they were frustrated.
    They weren't getting the attention or technical support that
    they needed after the sale, and these are folks like Office of
    Homeland Security, fire, police departments, et cetera.
        So together with some of my manufacturers that I worked
    with, I found somebody who was willing to back me initially
    financially. I'm a single mom with two boys. I was a little
    nervous about going off on my own without that support.
        So, began the company and did very well and kind of had in
    mind how I needed to grow the company once the sales dictated
    it. I did not realize just how expensive getting general
    liability insurance and health care insurance would be. I knew
    going into the private, you know, health care for my family
    what that would cost and, actually, I got a very similar
    product to what I had when I was with a larger company. It cost
    me about $687 a month. That would provide health care, life
    insurance, short-term, long-term disability, dental and vision.
    So it was very encompassing much like my prior plan had been.
    It was a little higher deductible, but still very reasonable.
        But once I began to start my company, and get a little bit
    more into it, I knew that the Affordable Care Act was coming
    down the road and so I sat down and met with someone and talked
    to them from my health care company, Blue Cross Blue Shield, to
    find out what kind of impact that would have on my business.
        Initially I was told, and as somebody who has worked really
    hard, I mean, there are times I might work 100 hours a week. If
    that's what it takes to get the grant money projected and
    worked out for my clients, that's what I'm going to do. Because
    I don't want them losing any grant money because of my lack of
    ability to time spend on the project.
        But when I sit down and the first thing they tell me is,
    you know, if you need to, you can just get subsidies from the
    Federal government to pay your health care. And that was
    extremely frustrating to me because I thought, I'm not working
    100 hours a week for somebody to bail me out. I mean, I either
    can make this business a success and pay my way or I can't, but
    I'm not going to get a subsidy. That's not why I work hard. I
    don't want to teach that to my kids, to look for somebody to
    help me out. Either I can make money in business or I can't.
        And so when I asked about the impact, I said, let's say I
    don't take the subsidy, because I'm not going to, what is the
    impact on my business? They told me it would be, at the most,
    $200 more a month. I thought that's a lot of money. If I want
    to hire people, because I'm getting to the point where I'm
    starting to grow, now I'm going to bring somebody on, I have to
    come up with another 800 bucks for their family insurance. If I
    don't offer that, that's going to significantly eliminate a lot
    of people that might want to come out for the job to work with
    us.
        When I got my actual premium, it was not $200 more, it was
    $990 for me and my family, and I was told if I brought anybody
    on, with family insurance, it would probably be about the same.
    That did not include--that included health care, did not
    include dental, did not include vision, did not include short-
    term and long-term disability, did not include life insurance.
    It was purely the health care portion. If I wanted to add
    dental or vision, that could be another 100 to $200.
        So I realized at that point I was kind of at a stalemate.
    My company is growing. Clients come to me and recommend me to
    other people and I'm getting frustrated because I know I can
    only do 100 to 120 hours a week for so long. I can only get two
    and three hours of sleep. I need to add people to be able to
    continue to provide that customer service.
        Right now I spend $1,000 on general liability and a $1,000
    on health care. That's more than 50 percent of the cost of
    running my business. So how do I now add another $1,000 for
    each person? They would have to generate hundreds of thousands
    of dollars in sales for me to be able to justify that. It's
    very frustrating. I want to pay my way. I want to do what's
    right in my business. But if I thought that I was getting
    greater value, that would be one thing, but my deductible with
    that $687 policy was $300 for my family, $100 per person. For
    my business, I pay $2,500 deductible and $7,500 for my family.
        I mean, I just don't know who can afford to be in a small
    business nowadays without taking that into account. It needs to
    be fixed. It just needs to be tweaked. You can't tell me
    there's not a way to repair it. I was in medical sales for 15
    years prior to starting my business. I know just simple
    solutions that could happen.
        So to me, if something is broken, sit down at a table and
    figure out where it needs to be tweaked. That's really what
    needs to happen.
        [The prepared statement of Ms. Johnston follows:]
        [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

        Chairman Vitter. Thank you very much, Charlotte. Very
    compelling testimony. And Charlotte will be followed now by
    John Overton. John is the owner and CFO of Turn Key Solutions,
    a company in it's 16th year, headquartered here in Baton Rouge,
    serving the IT infrastructure, security, and business
    continuity needs of two big markets: health care and small
    business. John has 12 employees, and he will be discussing the
    impacts of ObamaCare on his business and the businesses he
    works with, as well as IRS regulations that hinder small
    business growth.
        John, welcome.

     STATEMENT OF JOHN OVERTON, PRESIDENT AND CO-FOUNDER, TURN KEY
                       SOLUTIONS, BATON ROUGE, LA

        Mr. Overton. Good morning, Chairman Vitter and also
    Congressman Graves. Thank you for inviting me here to testify.
    Big thanks also to all the other small business owners in the
    audience and employees of small business owners.
        When the President infamously told the nation of small
    business owners that ``You didn't build that,'' the National
    Federation of Independent Businesses, they responded in a lot
    of meaningful ways, but also in kind of a whimsical supportive
    message. They sent a bumper sticker out to all of the members
    and said, ``I built my business.'' I'm not a bumper sticker
    guy, but I held on to that one. I thought that's good. That's
    good.
        This Administration takes credit for a lot of the stuff
    that small business owners do with investing our heart and soul
    into our businesses, but the reality is that the Administration
    fails to take credit for a lot of the negative impacts of the
    mounting regulations. Regulations that have to be overcome just
    to stay in business let alone grow.
        And so it got me thinking, when I looked at this bumper
    sticker, I thought maybe the Administration needs their own
    bumper sticker that says, ``We killed your business.'' Because
    that's the reality. The cost of complying with regulations both
    in terms of time and money is crippling, like Charlotte
    related.
        My father recently closed his clinic due to the
    impossibility of a small pediatric practice keeping up with the
    ever-growing Federal regulations while trying to serve his
    patients.
        Another ominous impact of these regulations is on aspiring
    entrepreneurs. People with a dream, they have put together a
    team of like-minded people, they have built a business plan,
    but then when they realize the regulatory environment that they
    are going to start that business in, it kills their dream
    before it even gets a chance to come to life.
        Just this weekend I spoke to a veterinarian who was really
    excited about starting his own practice, but then when he
    realized that with all the small business regulations and just
    the incredible cost of providing health care to the team that
    he wanted to recruit, he wouldn't be able to do it. So he
    decided to keep his job with the state.
        So I thought, you know, there's another bumper sticker this
    Administration needs for their limos and, perhaps, for the golf
    carts is, ``We aborted your business.'' So many businesses,
    before they even get a chance to get off the ground.
        So according to David Burton, a Senior Fellow in Economic
    Policy at the Heritage Foundation, business exits now exceed
    new business formations. That's not my America. That's not the
    land of opportunity. There's something wrong here when we have
    more businesses closing their doors than we have businesses
    opening up. That's a sign that the American dream is going the
    wrong direction.
        Here's some concrete examples of regulations that have
    affected me. The IRS Section 179, the big issue for small
    businesses is how do we plan capital expenditures, investing in
    the growth of our company when the Section IRS 179 limits on
    deducting capital expenditures were finally renewed just weeks
    before the end of the calendar year. How do you plan investing
    in the growth of your company when you're holding on to the
    last minute to see if, hey, is this limit going to be expanded
    again. I know a lot of fellow small business owners and small
    business clients found it very difficult.
        Of course, there's ObamaCare. For many small businesses the
    cost of providing health care to our staff is in our top five
    expenses. For me, it's right behind the cost of paying my
    staff. Our rates right now are more than double what they were
    before this president took office. So you have got not only
    that, but then you have co-pays and deductibles that are
    several times higher. And our rates are also going to keep
    going up because we are subsidizing the Affordable Care Act.
        The reality is where the rubber meets the road is I'm not
    paying my staff twice what I was in 2008, so where does an
    employee come up with an additional 8 to 12 grand a year to
    cover their family? Where does the small business owner like
    me, I cover 80 percent of my employees' portion of medical,
    dental, and vision, how do I make up my increased overhead? Can
    I put that on the back of my clients by increasing rates and
    still stay competitive with my regional or national
    competitors? And am I going to keep my employees if I don't
    offer coverage?
        So, you know, when they said, ``John, you have got 12
    employees. You don't have to do that.'' I said, okay, I'm an IT
    company. I will just go tell my staff of technicians, ``Good
    news, guys. We are under 50 full-time employees, so you can go
    out on the least secure website on the planet, you can put in
    all your personal private information out on the healthcare.gov
    and you can sign up there.'' And realize how difficult that
    would be for me with a staff of highly trained security and
    data security experts. So that went over like a ton of bricks.
        So we can't measure our success in just turning back the
    clock, how far can we turn back the clock. Small business
    owners, we still want to take care of our staff. We still want
    the same thing, we want affordable health care that is quality
    coverage, and ObamaCare went the opposite direction.
        So it's not just enough to get us back to where we were in
    2007. We still need the same thing. So there are other things
    that vex small business owners like pretty much anything NLRB
    does, but these are two pretty good examples. Uncertainty
    hurts. ObamaCare hurts. These are things that put businesses
    out of business and keep new aspiring entrepreneurs from
    starting their business.
        So in the spirit of entrepreneurship, if the NFIB wants my
    prototype bumper stickers, I'm happy to give them if they want
    to distribute those to a few folks in D.C. Don, I have got some
    prototypes for you. Thank you again for the opportunity.
        [The prepared statement of Mr. Overton follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Vitter. Great. Thank you very much, John. Now,
    Congressman Graves will introduce our next two witnesses.
        Representative Graves. Next witness we have is J.H.
    Campbell, Jay Campbell, with Associated Grocers. He has been
    with Associated Grocers for more than four decades, as
    President and CEO for more than 20. They are located in Baton
    Rouge, and in May of this year will be celebrating their 65th
    year in business here in Baton Rouge.
        The testimony that Mr. Campbell will be offering will be
    focused on retail and wholesale grocery business and the
    effects it has on the associated companies or grocery stores
    affiliated with his business, but also on the consumers that
    utilize those facilities.
        Mr. Campbell.

    STATEMENT OF J.H. CAMPBELL, Jr., PRESIDENT AND CEO, ASSOCIATED
                        GROCERS, BATON ROUGE, LA

        Mr. Campbell. Thank you, Chairman Vitter, Congressman
    Graves. Thank you for inviting me to this field hearing.
        Let me give you a little history about Associated Grocers.
    It was founded in 1950 by 17 individuals, and it has grown to a
    membership of over 200 retail outlets in three states,
    Louisiana, Texas, and Mississippi. But all of these businesses
    are family owned.
        So family-owned businesses own Associated Grocers, and we
    have over 700 employees, and we remain committed to our
    mission, which is the support and success of the independent
    retail grocer.
        Federal regulations and their compliance requirements are
    having a great financial impact on our company and their
    companies and our ability to fulfill our mission. With a
    targeted 1 percent net margin, every mandate and directive
    impacts our cost of operations and therefore consumer prices.
        I'm going to go through a variety of Federal regulations
    for you to kind of give you an inkling of that. The first is
    Country of Origin Labeling, often referred to as COOL. When
    COOL was passed by Congress in 2002, the industry was already
    voluntarily engaged in extensive efforts to provide interested
    consumers with the origin information for the food items that
    they purchased.
        The industry spent tens of millions of dollars in
    unnecessary compliance costs and yet Canada and Mexico brought
    a complaint to the WTO claiming that COOL violated our
    country's trade commitments, which it did, and they won.
        Now wholesalers and retailers will once again spend
    resources necessary to change their systems to meet the new
    regulations. This program now means nothing to consumers.
    Absolutely nothing. And it will require us to tell consumers
    where their meat was born, raised, and slaughtered. You will
    have more DNA on your food products than you know probably
    about your family.
        Second, in Louisiana, the WIC program. We have been, in
    Louisiana, under a moratorium that prevents any new stores or
    any stores who change in ownership to be eligible for a permit
    authorizing them to be a WIC food dealer. If you don't know
    what WIC is, it's for low-income individuals who have women,
    infants, and children. It's a very vital program for people.
    It's a safety net.
        Government should not be penalizing stores and consumers
    who did nothing wrong, but should merely punish the violators
    in the system. Only three states in our country are affected by
    this moratorium, which was unilaterally put into place by the
    USDA, who is in charge of WIC.
        Which means for us, plans for new stores, acquisitions of
    stores or outlets are being postponed or canceled right now.
    The placing of such an indefinite moratorium on new licenses
    without any notice of time frame makes it very challenging for
    anyone to plan for new locations or for low-income citizens to
    locate a store where they can easily redeem their benefits.
    There is also a significant need to automate the WIC program
    very similar with the EBT technology being used for SNAP
    benefits.
        Now it's my turn to talk about the Affordable Care Act,
    which is not a cost containment act at all. It's a coverage
    act. It did nothing but cover people. It did nothing to make
    care affordable.
        We are concerned about the definition of full-time
    employees and the mandatory auto-enrollment requirements. Full-
    time status should be defined as 40 hours per week and the
    means of verification and tracking employees should be made
    simple, and easy to comply.
        The companies that are fully insured or the ones that are
    self-insured, like our companies, should be allowed to make
    needed plan changes without losing grandfathering status. You
    may not know, we cannot make any changes in our plan. If we do,
    we lose grandfathering.
        The fact that our company and many others were providing
    coverage well prior to ACA for their employees should be proof
    that we were doing the right thing before ACA was passed.
        Next is menu labeling. In the ACA act, in the Affordable
    Care Act of 2,000 pages, there were four words that were added
    that will cost the industry hundreds of millions of dollars.
    Those four words are ``similar retail food establishments.''
    Supermarkets with over 20 outlets will now have to create ways
    to display, analyze, and keep records on calorie count,
    complete nutritional information, and provide a succinct
    statement regarding how this is measured for a 2,000-calorie
    diet. All of these requirements have to be accomplished by
    December 1 of this year. Totally unworkable.
        The Food Safety Modernization Act passed in the 111th
    Congress in 2011 is the largest piece of food safety
    legislation passed in over 70 years. The law makes expansive
    changes which includes new enforcement authorities, new program
    activities, and increased inspections.
        On the screen, you should have for you that. That is the
    list of seven major proposed rules that we have to comply with
    for which the regulations have not been promulgated, and each
    of these has over 500 pages in length already.
        Other concerns we have, that's on the next slide. The Fair
    Labor Standards Act and its various limitations which restrict
    our ability to provide incentives to hourly employees and the
    Department of Labor's desire to change the definition of
    primary duty, and the salary threshold.
        The rule-making authority of the National Labor Relations
    Board and their attempts to make unionization easier. Truck
    driver hours of service, and the unrealistic and unpractical of
    nature of rules limiting the ability of drivers to work and to
    be behind the wheel. They have now come up with a BMI and a
    sleep apnea test.
        Interchange and swipe fees. Our concern over the ever-
    increasing cost which raises the cost to consumers. GMO
    labeling, which is Genetically Modified Organisms, we need one
    definition for the country. Estate tax, the survival and
    transferability of privately owned businesses in America and
    the need for real corporate and individual tax reform.
        In closing, the Federal government and its regulatory
    agencies assume that the regulated are guilty until proven
    innocent. I think that you know that is unlike our criminal
    justice system where you are innocent until proven guilty.
        As you can tell, I went through this very quickly and I
    listed only a few of the regulations that we are concerned
    with. I will be happy to try to answer any questions you might
    have. Thank you.
        [The prepared statement of Mr. Campbell follows:]
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Vitter. Great. Thank you.
        Representative Graves. Thank you, Mr. Campbell.
        Last witness we have today is Preston Kennedy, who is the
    President and CEO of Bank of Zachary, a bank that was
    established in 1904 and has three offices in Louisiana today.
    The bank has about 46 employees, and importantly, their role is
    largely serving as a community bank, an entity that lends funds
    to other small businesses in the State of Louisiana.
        Mr. Kennedy is going to be talking sort of from the
    community bank perspective, representing thousands of other
    community banks across the United States, and discussing the
    difficulties that community banks are having in complying with
    Dodd-Frank, which was the legislation designed to address banks
    ``Too Large to Fail,'' and I think, without putting words in
    your mouth, perhaps the disproportionate compliance challenges
    associated with community banks under this Federal legislation.
    Mr. Kennedy, thank you for being here.

       STATEMENT OF PRESTON KENNEDY, PRESIDENT AND CEO, BANK OF
                          ZACHARY, ZACHARY, LA

        Mr. Kennedy. Congressman Graves, Chairman Vitter, members
    of the committee, thank you for having this hearing. I testify
    today on behalf of the Louisiana Bankers Association, as well
    as the Independent Community Bankers of America, and the more
    than 6,000 community banks that they represent nationwide.
        With that said, I'd like to recognize you, Chairman Vitter,
    for your legislation to ensure community bank representation on
    the Federal Reserve Board. Thanks to your persistence, that
    legislation is now law. And you have also done important work
    on the problem of Too Big to Fail banks. On behalf of my bank
    and all community banks, thank you for that.
        Bank of Zachary was founded in 1904. It's a $200,000,000
    community bank. We have deep roots in Zachary and the other
    communities that we serve. As Congressman Graves said, we have
    3 offices and 46 employees, and we are a small business, and we
    lend to other small businesses.
        The Bank of Zachary is typical of more than 150 community
    banks across Louisiana. Community banking is a time-tested
    business model that built this country and has worked for
    generations. Community banks are prodigious small business
    lenders. Though we hold less than 20 percent of U.S. banking
    assets, we hold a much greater share of small business loans,
    55 percent. The viability of community banks is linked to the
    success of our small business customers.
        The partnership between community banks and small business
    is at risk today from the exponential growth of regulation. In
    a few short years, the nature of community banking has
    fundamentally changed from lending to compliance. Banks need
    more scale to accommodate the expense of compliance, which
    includes hiring, training, software, and other costs.
        I believe new regulatory burden has contributed
    significantly to the loss of over 1,300 community banks since
    2010. With fewer community banks, small businesses have less
    access to credit. The local bank may be replaced by an out-of-
    market bank less willing to make a loan. The good news is that
    there are readily available solutions to this pending crisis.
        ICBA's Plan for Prosperity is a regulatory relief agenda
    that will allow Main Street to prosper. A copy of that plan is
    attached to my written remarks.
        While the plan includes nearly 40 recommendations covering
    major threats to community banking, I want to focus my comments
    on the plan's mortgage reform provisions. New regulations are
    changing the economics of this line of business. What's more,
    there is a direct link between mortgage lending and small
    business. Home equity is often an entrepreneur's greatest
    source of capital, and they should be able to tap it to start
    or expand a business.
        However, it is often hard for self-employed individuals to
    document their income as required by the CFPBs qualified
    mortgage or QM rule. QM is a safe harbor that shields a lender
    from new draconian litigation risk. For most community banks,
    QM effectively puts a tight box around underwriting and loan
    terms because it is inflexible and does not give a banker
    discretion to use his own judgment. QM is cutting off small
    business credit.
        You hear the same story again and again from community
    bankers all over the country. We believe any mortgage a
    community bank holds in portfolio should be a qualified
    mortgage. When a lender is exposed to 100 percent of the credit
    risk in a portfolio loan, he has every incentive to ensure the
    loan is well underwritten and affordable to the borrower.
        While we have other recommendations, this provision alone
    would go a long way toward repairing the damage of the new
    rules and helping small business owners. We're encouraged by
    the bills introduced in the Senate and House so far.
        The senate bill that best represents the scope of the Plan
    for Prosperity is the CLEAR Act, S.812, sponsored by Senators
    Jerry Moran and John Tester. S.812 includes the portfolio QM
    provision that I described. It would also provide that any
    mortgage held in portfolio by a community bank is exempt from
    costly escrow requirements. Again, the portfolio lender holds
    all the risk. Last, it would exempt community banks from
    expensive and redundant internal control assessment mandate of
    Sarbanes-Oxley 404(b).
        ICBA also support the Financial Institutions Examination
    Fairness and Reform Act, S.774, introduced by Senators Moran
    and Joe Manchin, and the Privacy Notice Modernization Act,
    S.423, introduced by Senators Moran and Heidi Heitkamp. We
    encourage you to co-sponsor these important bills, and we look
    forward to additional bills embodying plans for prosperity.
        Thank you again for the opportunity to testify, and I look
    forward to questions.
        [The prepared statement of Mr. Kennedy follows:]
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        Chairman Vitter. Great. Thank you all very, very much for
    your testimony, and now we are going to go into discussion and
    questions and comments.
        Let me kick that off by asking any or all of you about
    thoughts and any direct personal experience in terms of your
    companies with two key provisions of ObamaCare that we have
    talked about. One is the line of 50 employees or more. Once you
    cross that line, you have an employer mandate. So although
    certainly I take the point that John made, it's not like
    everybody below that line is somehow unaffected. You're
    certainly affected by cost increases. But in addition, above
    that line, you have all the employer mandates of ObamaCare. So
    what does that do to small businesses hovering right around
    that line?
        Second issue that we have touched on is the 30-hour full-
    time workweek rule. So not to get into the weeds too much, but
    basically, the way ObamaCare counts full-time personnel, they
    define 30 hours or more as full-time, and that has clearly
    encouraged a lot of businesses to cut hours of a lot of people
    below 30 hours.
        So in many cases, folks are being cut more than a quarter
    of their hours, more than a quarter of their take-home pay. If
    any or all of you have any personal experience with those two
    categories. Jay.
        Mr. Campbell. We have obviously, our company was well
    beyond the 50, but a lot of our owners had less than 50 or
    borderline to 50, and so the concern was, first of all, how do
    you calculate full-time equivalence? And the calculation was
    quite cumbersome. It still is quite cumbersome and very
    difficult. That's one of the comments I made. It needs to be
    made very easy, very simple, very straight-forward where
    anybody can understand either you are full-time or you're not.
    And that either you are in compliance or you're not or you have
    to be covered with the employer mandate.
        So many of them were trying to just figure this thing out,
    and they had deadlines they had to meet to do the calculations.
    It was quite awkward to do. And so many of them just kind of
    threw up their hands and said, ``We going to do coverage
    anyway,'' because they were providing coverage for most of
    their people anyway. It wasn't a real coverage issue as much as
    who is going to be covered, who is going to defined.
        We have been of the opinion that the hourly determination
    of full-time 30 is too low. We believe 40 has been the standard
    that everybody talked about is 40 hours, which is 2,080 hours
    in a year. Now people are going to fall below that. So should
    they be penalized for that? Then you determine full-time
    equivalency. But something needs to be done to define that
    critically and make it easier to compute so it's not such a
    burdensome process.
        More importantly, we should look at employers who before
    ACA were providing coverage to their employees anyway, they
    should be exempt from the mandate because they were doing it
    anyway.
        Chairman Vitter. Right. Any other comments including about
    the 50 employee line?
        Mr. Overton. I have less than 50 employees, but a lot of my
    clients are small businesses, and one of the challenges that
    they are looking at is, especially those who are right at that
    threshold, then they start to have to navigate, well, if we are
    going to grow, how do we grow without having to do a lot more
    research and spend a huge amount of time trying to figure out
    what an FTE is. And so it shifts some of that workforce to
    lesser quality jobs, to 1099 contractors, and everybody that
    I've ever interviewed for a job and has come from a position as
    a contractor, they just can't wait to become a full-time
    employee.
        So you have a large part of the workforce that is being
    kind of pushed into contracting as opposed to full-time
    employees because of that limit.
        Chairman Vitter. Right. Okay. Anybody else? Garret.
        Representative Graves. Thank you. My first question, and I
    will go ahead and give you a heads up and talk for a minute and
    give you time to think about it. I'm curious, at the 100,000-
    foot level, if you're king for the day, in your unique
    businesses, if you had the ability, again, be king for the day,
    or perhaps President Obama, what is the one thing you would do
    that would allow you to hire more employees? I will give you a
    minute to think about it and talk about a few things.
        It's interesting, in Louisiana, I noted earlier that we
    have nearly 900,000 jobs that are based upon small businesses
    in Louisiana. Yet in the first quarter of 2014, we had about
    4,100 new small businesses that were established, yet 4,400
    small businesses that shut down. That's obviously not the
    direction that we'd like to see the state or this country move
    into.
        I noted earlier that compliance costs or regulatory
    compliance costs are somewhere in the $8 to $10,000 per
    employee for businesses in the United States. If those costs
    were lower, what would happen in regard to the ability to hire
    more employees?
        And I will give one example. I was talking to a small
    business here in--I don't know if they are a small business or
    not, but I will say a business here in Louisiana that many of
    you know and talking to them about their business planning.
    They were telling me as a result of changes in overtime rules
    and the ACA, their costs, staffing costs were going to increase
    by 30 percent above their projected costs in the next years.
    How do you plan for a business if you're going to have that
    type of growth in your staffing cost?
        And it's important, and in answering this question, keep in
    mind, the world has become much smaller. It's no longer a big
    deal to think about a company relocating to Mexico, to India,
    to Brazil, to China, or many other countries as opposed to the
    United States if the regulatory compliance costs are so high
    here and they can compete, have a competitive advantage by
    locating in another country. I hoped I filibustered long enough
    to give you time to think about it, but I'd like to hear your
    response.
        Ms. Johnston. Didn't take me long. For me, my business is
    so small, I'm well below John's company because it's me and I
    1099 for the very reason he said because I can't afford to take
    on this type of health care yet, and really I feel like it's
    unnecessary. If we fix it correctly, I just think with some
    tweaks here and there, it would make it easier for small
    businesses to add folks.
        But I guess to me, the key characteristics that make a
    small business so great, and it doesn't replace large business,
    it's just a good complement to it, is we tend to be a little
    more agile. Whereas large business tends to take them a little
    bit longer to move or make decisions, we tend to be a little
    bit more fast on our feet.
        For me to be able to add somebody, as a full-time employee,
    I just need to know, kind of keep it simple, stupid. I grew up
    knowing that. If you make things fairly simple and transparent,
    then it's easier for a small business to plan. And I want to be
    able to know if I'm hiring somebody, that I don't really have a
    lot of confidence that that thousand will stay a thousand. I
    don't know if two years down the road the Affordable Care Act
    isn't going to cost me three times as much. I just don't have
    the confidence in it.
        For me, you know, the IRS is a whole nother set of issues,
    but just focusing on the health care portion of this, I need to
    have the ability to add full-time employees because if there's
    a huge project, I can't gauge and say, that person is only
    going to have to work 40 hours this week. It might be 60 hours
    if we are on a major project. So I need a little bit of
    flexibility from the government when it comes to health care
    that let's say I can either 1099 or if somebody already has
    health care with their spouse that they can come on and if I
    end up growing to 50 employees and they don't--that that's not
    a mandate. That that person can be covered by their spouse.
    There just needs to be more flexibility for small business, I
    believe.
        Representative Graves. Thank you.
        Mr. Kennedy. I appreciate your question, what one thing
    would you do. Banking is highly regulated. Unfortunately, there
    is no one thing that we could do. Last quarter alone there were
    79 regulatory changes, and that was a light quarter. In the
    second quarter, it was 75, third quarter 85. Over 4,000 pages
    of regulation added in the fourth quarter of 2014 alone.
        So it's not one thing that is crippling the community
    banks, it's death by a thousand cuts. It just comes in waves.
    And if there were any one thing that would make our lives
    easier, it would make, I know Bob Taylor, the CEO of Louisiana
    Bankers' job easier, because he could focus all his energies on
    that; however, it's so widespread, and it affects every aspect
    of our business.
        So it's not the one thing, it's the attitude that exists
    that everything needs to be put in a box. Everything needs to
    be standardized, and everything needs to be made one size fits
    all that is really crushing the community banks.
        Representative Graves. Thank you. Mr. Overton.
        Mr. Overton. I think at the heart of every small business
    owner is to be the master of our own destiny. We treasure our
    staff. We treasure our clients. Those are our greatest assets
    and to be able to take care of them, to take our dream and run
    with it, and make an impact with it, whether you're the
    aspiring entrepreneur and getting into--just you're focusing on
    your idea and your team and putting together your business
    plan, but then to step into the harsh reality of, like Pres
    said, the death by a thousand cuts, the regulatory environment
    in which we have to operate our businesses is soul crushing.
        It makes it where I spend so much of my time--got audited
    by the IRS. I was right. I didn't end up paying anything, but I
    spent hundreds of hours, instead of running my business,
    recruiting people, recruiting clients, providing reams of
    paperwork back years and years ago to prove that we didn't
    screw up.
        And you know, that type of thing, the Affordable Care Act,
    the NLRB, the micro-unions, all these different things that are
    telling me how I have to run my business and it just takes it
    out of our heart and I can understand why people say, ``Why
    would I go in business? I will work for the state. I don't want
    to deal with all that.'' So it really attacks the heart of what
    it means to be an entrepreneur, just the burden of regulations.
        Representative Graves. Mr. Campbell, you want to add
    anything?
        Mr. Campbell. Well, since I would be king, I would have
    more than one thing I'd want to fix. You did say that, right?
        Representative Graves. Correct.
        Mr. Campbell. On the health care front, there's no question
    about it, the way this was done was improper. The better way to
    do it is, say, define what a base health coverage is. If you're
    better than that, you can do whatever you want with the plan.
    Here's the base coverage we'd like to see for every American in
    this country. Here's the base coverage, and if a company
    provides better than that, so be it. But if you provide the
    base, then we can determine what the cost is going to be for
    people to allow people to make the change if they want, if it
    fits and suits their needs.
        Access to capital for small business people is critical.
    When you have a dream, you need capital to make that dream come
    to fruition. But you also need a stable, predictable tax
    environment, which we do not have. It's a constantly changing
    thing with these budget rules. The last thing would be
    employment rules and regulations need to be consistent but
    realistic for the workforce so that you understand what the
    rules of the game are and they don't change halfway through the
    game.
        Chairman Vitter. Great. Thank you all. Preston, let me ask
    you, moving to the banking sector and community banks. Since
    2008, since Dodd-Frank, what do you think the overall
    compliance costs of Bank of Zachary have done? What sort of
    percentage growth, roughly?
        Mr. Kennedy. I have been asked this question before, so we
    have done some research into it. And a pretty accurate number,
    ours is about $10,000 a month that goes into strictly
    compliance. That's about one-and-a-half full-time equivalents.
    Since 2008, we--we have always had a compliance officer. That
    used to be a part-time job for somebody in a bank our size,
    then it became a full-time job. Now we added a risk manager
    whose job is not only compliance but all the other risks in our
    bank. So the cost grows just every day because, like I said,
    these 79 regulatory changes in one quarter. It requires
    everyone's attention to keep up with.
        So to answer that question, in our case, about $10,000 per
    month. That is consistent with the industry.
        Chairman Vitter. That's now?
        Mr. Kennedy. That's now, yeah.
        Chairman Vitter. And what, roughly, would that figure have
    been before the crisis, before Dodd-Frank?
        Mr. Kennedy. Probably less than half that.
        Chairman Vitter. So it's more than doubled.
        Mr. Kennedy. I have every confidence in saying it's more
    than double. And that is consistent throughout the industry.
    Typical bank, 350 million community bank, and they are spending
    about the same amount, $30,000 a quarter is the general figure
    we are--that's just our experience.
        Chairman Vitter. Now, what really concerns me about that is
    we have a great system in America and pretty unique history of
    having a financial sector with all sorts of size players,
    including a lot of community banks. That's very different from
    Europe. That is very different from Canada historically. And it
    seems to me this crushing increase of a burden is a burden to
    everybody, but it's a heck of a lot bigger burden for a
    community bank because of your size compared to a Chase or a
    Citi.
        And I've seen the numbers which are resulting from this,
    which is a big gobbling up of smaller institutions, big
    consolidation mergers, institutions being bought up. What is
    your general observation of that in Louisiana and how it's
    changing the landscape in Louisiana?
        Mr. Kennedy. Well, you're absolutely correct. We had, and I
    think Congressman Graves mentioned that in the remarks, how
    many banks we have lost. Just in my career, when I became a
    banker, there were 18,000. Then before Dodd-Frank, I think
    there were--or mid 2000s, around 8,000. And now we are down to
    less than 6,500 and certainly burden of regulation is the
    biggest driver with that because, like you said, it's harder
    and harder to keep up with.
        And the people who are charged with doing that, they wear
    out. Boards of directors get worn out at community banks.
    Because the regulators come in and say, ``If you don't do this,
    you're going to pay civil money penalties. You may even go to
    jail.'' And what we see on the Too Big to Fail level is they
    pay a fine and keep on going. So that alone, that sense of
    helplessness is helping to drive that consolidation.
        And I have to say it's not from the predatory bigger banks
    coming in and saying, ``I want to buy your institution.'' It's
    more from the institution saying, ``Who can we sell to? We are
    tired. We have had enough. We want to get out.'' And that's
    just fed up since Dodd-Frank.
        So what will that be? In a lot of small towns, there's only
    one community institution. If you take away that bank that
    probably founded the Chamber of Commerce in that town, probably
    is the President of the Rotary Club, donates to the Little
    League, they are always the go-to institution in that town, you
    take that away and make it a branch of another community bank,
    well, it's not their community bank and that community loses
    something.
        The small businesses lose something because that banker
    used to be the guy sitting next to them at PTA meetings, or at
    church. Certainly not going to do anything that's not in their
    best interest because he's a neighbor. So that opportunity to
    go to that community member for the capital for your business
    is disappearing.
        We fight to keep that from happening, but in those
    instances where ownership has just had enough and one too many
    examiners come in and said, you know, ``You're going to go to
    jail because you--you're not overseeing the Bank Secrecy Act by
    one of your tellers,'' you know, they say, ``This is just too
    much sugar for a dime. I'm out of here.''
        Chairman Vitter. Well, again, that clear trend really
    concerns me because the small town you're describing, the rural
    parish you're describing, is most of Louisiana. And, look, no
    offense to big banks, but you can't convince me that a branch
    of Chase has that same presence and impact or would have in the
    future that same presence and impact as the community bank
    founded there, lived there that you're describing, too. So
    that, I think, is a real worrisome trend directly related to
    this overregulation.
        Garret.
        Representative Graves. Mr. Campbell, getting a little more
    specific in this case. It's my recollection that the Department
    of Labor is scheduled to come up with a new overtime regulation
    in the spring. The US Department of Labor will be promulgating
    a new regulation pertaining to overtime.
        Specifically in your industry, as I recall, it has the
    potential or is believed to actually define the duties of a
    store manager and potentially even salary and other parameters
    of that job.
        Can you comment from an employer perspective in having the
    Department of Labor that intimately involved in your business
    and, perhaps, an alternative.
        Mr. Campbell. That is one of our very big concerns is the
    discussion is about changing the definition of the duties and
    responsibilities of the manager such that if they don't make a
    certain wage rate or a certain salary rate, they are going to
    have to be hourly and then be paid overtime. This would
    prohibit some people from even making manager status in a lot
    of retail supermarket business. If you really started making
    very possibly the bag boy or somebody in the store and they
    elevated themselves to be department manager, then maybe
    assistant manager to the store, and then a manager over all of
    the store. And when you become a salaried employee, and you
    have managerial responsibilities, which is hiring and firing,
    it's very clear that you can be a salaried individual.
        They are talking about changing that and using an
    artificial dollar amount and saying if they don't make at least
    this dollar amount, then they can't be viewed as a salaried
    employee, they have to be an hourly employee, which does change
    the dynamic as it relates to overtime, calculation of overtime.
    And the problem you have with that is not only that, you can't
    incentivize an hourly worker without this extraordinarily
    elaborate calculation to put an incentive out there for hourly
    workers. The whole process the Department of Labor is looking
    at is really designed to control the working environment rather
    than letting the employer control the working environment.
        We don't have sweat shops here in this country. It's absurd
    to even conclude that. There are other laws and mechanisms in
    place to protect workers and employers in that environment and
    in that relationship. But what they are trying to do is to
    artificially set and determine who can be a manager and who
    can't.
        Representative Graves. Thank you.
        Chairman Vitter. Okay. We are going to wrap up. First of
    all, I want to thank Congressman Graves for co-hosting this
    today. Garret, thank you very, very much. And I want to thank
    our four witnesses. They provided exactly what I wanted, which
    is a real life, real world perspective from the small business
    sector about all of these challenges we are talking about of
    overregulation. So thank you all very much for your testimony.
        I also want to thank the city and parish for hosting us
    here today and I want to thank all of you. Your direct
    participation, starting with your comments and questions, was
    absolutely essential as well. So thanks very much for that. We
    got to as many as we could. Obviously, we couldn't cover
    everybody's. If you have follow-up questions, concerns,
    suggestions, please get them to us.
        In my case, you have a handout for today, and on the left-
    hand side of that handout is a blue column with all of my
    contact information, our website, which has a lot of good
    information on this and other topics. There's easy e-mail
    access through the website, and all of my state offices,
    including here in the capital region, with our phone numbers.
        So please keep that handy and please use it, use it
    regularly to send me and my staff your comments and suggestions
    and questions. And we will certainly be following up with a lot
    of additional forums and town hall meetings like this.
        With that, thank you all very, very much. Have a great rest
    of the day.
        [Whereupon, at 11:05 a.m., the hearing was adjourned.]

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