[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
    
   
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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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