[Senate Report 109-49]
[From the U.S. Government Publishing Office]



109th Congress                                                   Report
                                 SENATE
 1st Session                                                     109-49
_______________________________________________________________________

                                     


                         SUMMARY OF LEGISLATIVE

                        AND OVERSIGHT ACTIVITIES

                       DURING THE 108TH CONGRESS

                               __________

                              R E P O R T

                                 of the

            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                          UNITED STATES SENATE




                 March 30, 2005.--Ordered to be printed

          Filed under authority of the order of March 17, 2005
            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
                      one hundred eighth congress

                              ----------                              
                   OLYMPIA J. SNOWE, of Maine, Chair
            JOHN F. KERRY, of Massachusetts, Ranking Member
CHRISTOPHER S. BOND, of Missouri     CARL LEVIN, of Michigan
CONRAD BURNS, of Montana             TOM HARKIN, of Iowa
ROBERT F. BENNETT, of Utah           JOSEPH I. LIEBERMAN, of 
MICHAEL ENZI, of Wyoming                 Connecticut
PETER G. FITZGERALD, of Illinois     MARY LANDRIEU, of Louisana
MIKE CRAPO, of Idaho                 JOHN EDWARDS, of North Carolina
GEORGE ALLEN, of Virginia            MARIA CANTWELL, of Washington
JOHN ENSIGN, of Nevada               EVAN BAYH, of Indiana
NORMAN COLEMAN, of Minnesota         MARK PRYOR, of Arkansas
                    Weston J. Coulam, Staff Director
    Patricia R. Forbes, Democratic Staff Director and Chief Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
   I. Overview.........................................................
  II. Oversight of the Small Business Administration (SBA)............1
      A. Reauthorization of the Small Business Administration....     1
      B. Access to Credit for Small Businesses...................     3
      C. Small Business Revitalization Act (S. 2193).............     5
      D. Other Efforts to Improve Small Businesses' Access to 
          Capital................................................     8
      E. The SBA's Accounting Issues.............................     9
      F. Government-Wide Audit Issue, and GAO and CBO Reports....    10
      G. SBIC Program............................................    11
      H. Oversight of the 7(a) Program...........................    13
 III. Tax Issues.....................................................14
      A. Small Business Expensing................................    14
      B. Modification of the Unrelated Business Taxable Income 
          Rules..................................................    15
      C. Manufacturing Tax Deduction.............................    15
      D. Modifications to the New Markets Tax Credit.............    16
      E. Cash Method of Accounting (S. 2675).....................    16
      F. Investigation of the Tax Code...........................    16
      G. Notification of Small Businesses of Erroneous AMT 
          Payments...............................................    18
  IV. Women's Business Center........................................18
      A. Women's Small Business Programs Improvement Act of 2003.    18
      B. Women's Small Business Center Preservation Act of 2003 
          (S. 1247)..............................................    19
      C. The Women's Sustainability Recovery Act of 2004 (S. 
          2267)..................................................    19
      D. SBA's Women's Business Center Program Grants for FY 2004    19
   V. SBA Transformation.............................................20
      A. Implementation of SBA's Transformation Initiative.......    20
      B. SBA's Buyout Announcement Regarding Agency 
          Transformation Plans...................................    20
      C. SBA's Plans to Improve and Transform the 504 and 7(a) 
          Liquidation and Purchasing Activities..................    21
  VI. SBA's International Trade Program: Funding Constraints for U.S. 
      Export Assistance Centers (USEACs).............................22
 VII. The SBA Budget and Appropriations for Fiscal Year 2005.........23
      A. Fiscal Year 2005 View and Estimates letter to Senators 
          Nickles and Conrad.....................................    23
      B. Amendment to S. Con Res. 95.............................    23
      C. Fiscal Year 2005 Appropriations letter to Senators Gregg 
          and Hollings...........................................    23
VIII. SBA Reauthorization--Expiration of SBA Programs................24
  IX. Procurement Issues.............................................24
      A. Small Business Procurement Opportunities, Title IV of S. 
          1375, the Small Business Administration 50th 
          Anniversary Reauthorization Act of 2003................    24
          1. S. 1375 Procurement Provisions......................    24
      B. Amendments to the Ronald W. Reagan National Defense 
          Authorization Act for FY 2005..........................    27
          1. Amendment No. 3399 (Feingold-Snowe).................    27
          2. Amendment No. 3273 (Snowe-Coleman-Kerry)............    28
          3. Amendment No. 3246 (Snowe)..........................    28
          4. Amendment No. 3434 (McConnell-Snowe)................    28
          5. Amendment No. 3344 (Byrd-Snowe-Allen-Coleman-Kerry).    29
      C. Procurement Provisions in S. 2821, the Small Business 
          Reauthorization and Manufacturing Assistance Act of 
          2004...................................................    29
      D. HUBZone and Section 8(a) Improvements in the Small 
          Business Reauthorization and Manufacturing Assistance 
          Act of 2004, Division K of the Consolidated 
          Appropriations Act for FY 2005.........................    30
      E. SBIR Legislation to Facilitate the Intent of Congress 
          for the Small Business Innovation Research Program.....    34
      F. Investigation of the SBA's Contracting Practices........    35
      G. Contract Bundling.......................................    35
          1. Oversight of Contract Bundling Practices in the War 
              on Terrorism.......................................    35
          2. Oversight of Contract Bundling in Commercial 
              Satellite Telecommunications Services for the 
              Military...........................................    36
          3. Oversight of Contract Bundling in Information 
              Technology Procurements by the US Air Force 
              Information Technology Commodity Council...........    36
      H. Oversight of Contracting Practices Pursuant to the Small 
          Business Innovation Research Program...................    37
      I. Government-wide Mentor- Protege Program Review..........    37
      J. SBA's Proposed Revision of Size Standards...............    38
      K. Small Business Prime Contracting and Subcontracting at 
          the U.S. Department of Energy..........................    38
          1. Joint Inquiry with the Senate Committee on Energy 
              and Natural Resources and the Comprehensive GAO 
              Studies............................................    38
          2. Small Business Prime Contracting Requirements in 
              Division C (Energy and Water Appropriations) of the 
              Consolidated Appropriations Act for FY 2005........    40
          3. Requirements for Production of Small Business 
              Contracting Plans of the Department of Energy and 
              of Related Views of the Small Business 
              Administration in Section 312, Division C (Energy 
              and Water Appropriations) of the Consolidated 
              Appropriations Act for FY 2005.....................    40
   X. Manufacturing and Small Business...............................42
      A. Small Manufacturers Assistance, Recovery, and Trade 
          (``SMART'') Act........................................    42
      B. Small Business Manufacturing Forum in Brewer, Maine.....    43
      C. Manufacturing Extension Partnership (MEP)...............    43
          1. Letter to Commerce Department to Transfer $8.5 
              Million in Funds to the MEP........................    43
          2. Recompetition of the MEP............................    44
          3. Chair Snowe and Senator Lieberman Lead Group of 
              Senators in A Letter Requesting Restored MEP 
              Funding in FY 2005.................................    44
  XI. Veteran Issues.................................................44
      A. Small Businesses Affected by Military Deployments.......    44
          1. CBO Study on the Affects of Military Deployments on 
              Small Businesses...................................    44
          2. Letter to Administrator Hector Barreto Concerning 
              the SBA's Role in Assisting Small Businesses 
              Affected by Guard and Reserve Deployments..........    45
      B. Veteran and Service-Disabled Veteran Small Businesses...    45
          1. Advisory Committee on Veterans Business Affairs.....    45
          2. Reconfirming that the National Veterans Business 
              Development Corporation is a Private Entity........    45
 XII.  Association Health Plans (AHPs)...............................46
      A. S. 545, ``Small Business Health Fairness Act of 2003''..    47
XIII. Regulatory Issues..............................................47
      A. S. 818, ``Independent Office of Advocacy Act of 2003''..    47
      B. S. 2834, ``The Small Business Compliance Assistance 
          Enhancement Act''......................................    48
      C. Equal Access to Justice Act Revision for OSHA...........    48
 XIV.  Miscellaneous.................................................49
      A. Small Business & China's Currency Manipulation..........    49
          1. GAO Study on the Effect of China's Currency 
              Manipulation on U.S. Exporters.....................    49
          2. Letter to Secretary of Treasury John Snow...........    49
          3. Letter to the U.S. Trade Representative and the 
              Department of Commerce.............................    49
  XV. Appendixes.....................................................50
      A. Hearings of the 108th Congress, First Session...........    50
          February 5, 2003: Hearing--The Small Business 
              Healthcare Crisis: Possible Solutions..............    50
          March 18, 2003: Hearing--Small Businesses Continue to 
              Lose Federal Jobs By the Bundle....................    52
          April 9, 2003: Roundtable--SBA Reauthorization: Non-
              Credit Programs....................................    55
          April 30, 2003: Roundtable--SBA Reauthorization: Credit 
              Programs (Part I)..................................    58
          May 1, 2003: Roundtable--SBA Reauthorization: Credit: 
              Programs (Part II).................................    60
          June 4, 2003: Hearing--SBA Reauthorization: Programming 
              for Success........................................    62
          October 9, 2003: Field Hearing--Small Business 
              Manufacturing in a Global Market...................    65
      B. Hearings of the 108th Congress, Second Session..........    68
          February 12, 2004: Hearing--The President's FY2005 
              Budget Request for the SBA.........................    68
          February 16, 2004: Field Hearing--Accessing Capital and 
              Business Assistance: Are Current Programs Meeting 
              the Needs of Rural Small Businesses?...............    70
          February 19, 2004: Field Hearing--Small Business 
              Assistance In Arkansas: Access To Capital And 
              Service Delivery...................................    73
          February 19, 2004: Field Hearing--The Role Small 
              Business Should Play In Maintaining Forest Health..    76
          April 28, 2004: Hearing--Impact Of Stock Option 
              Expensing On Small Businesses......................    78


109th Congress                                                   Report
                                 SENATE
 1st Session                                                     109-49

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



 
   SUMMARY OF LEGISLATIVE AND OVERSIGHT ACTIVITIES DURING THE 108TH 
                                CONGRESS

                                _______
                                

                 March 30, 2005.--Ordered to be printed

          Filed under authority of the order of March 17, 2005

                                _______
                                

 Ms. Snowe, from the Committee on Small Business and Entrepreneurship, 
                        submitted the following

                              R E P O R T

                              I. Overview

    During the 108th Congress, the Committee's agenda 
concentrated on the highest priorities of the small business 
community. The Committee focused on concerns such as 
entrepreneurial development, healthcare, small business 
manufacturing, the reauthorization of the Small Business 
Administration, access to capital, and stock option expensing. 
The Committee received testimony and information about these 
topics from small business owners, employees, and experts from 
across the United States. This report summarizes the 
legislative and oversight activities of the Committee on these 
key issues of concern and interest to small businesses.

        II. Oversight of the Small Business Administration (SBA)


        A. REAUTHORIZATION OF THE SMALL BUSINESS ADMINISTRATION

    At the end of the 108th Congress, Congress approved 
comprehensive legislation reauthorizing the SBA for Fiscal 
Years 2005 and 2006. The SBA reauthorization was included in 
Division K of the Consolidated Appropriations Act for 2005 (the 
Omnibus Appropriations Act, Public Law 108-447) that was 
approved by Congress in December 2004, and signed by President 
Bush on December 9, 2004. The provisions of Division K reflect 
the significant amount of information that the Committee 
collected from the hearings, roundtable and discussions held 
throughout the 108th Congress, and had its origins in a non-
comprehensive piece of legislation (S. 1375) previously adopted 
by the Committee and the Senate. The Committee's objectives 
were to single out the SBA programs that worked well, identify 
the reasons for their superior performance, and apply those 
principles to programs that need improvement.
    While not all of the provisions of S. 1375 are contained in 
the Omnibus, Division K of H.R. 4818 includes updated 
authorization levels, improvements to the SBA's lending and 
technical assistance programs, and new initiatives to assist 
America's 21st Century entrepreneurs. Almost all of the 
provisions in Division K originated in several bills previously 
introduced by Senator Snowe, as detailed below.
    Before December 2004, the last time that Congress passed 
legislation providing a comprehensive reauthorization of the 
SBA was in 2000. That previous legislation covered Fiscal Years 
2001, 2002, and 2003, and expired on September 30, 2003. In 
early 2003, at the beginning of the 108th Congress, the 
Committee began the process of reauthorizing the SBA for Fiscal 
Year 2004 and subsequent years. The Committee held two 
roundtables in 2003 regarding SBA financing programs. The first 
roundtable was on April 30, 2003, and addressed the SBA's 7(a) 
Business Loan program and the SBA's Microloan Program. The 
second roundtable was held on May 1, 2003, and considered the 
SBA's 504 Loan Program, Small Business Investment Company 
(SBIC) Program, and New Markets Venture Capital Program. Chair 
Snowe chaired these roundtables and heard commentary about the 
SBA's budget proposals, and about the condition of the SBA's 
financing programs, from a wide range of program participants, 
small businesses, SBA employees, and financing experts.
    The Committee also held a hearing, chaired by Senator 
Snowe, on June 4, 2003, that included testimony from SBA 
Administrator Hector Barreto regarding the agency's 
reauthorization. This hearing provided an additional 
opportunity for the agency to respond to issues raised during 
the previous roundtable discussions, discuss the legislative 
package that the SBA had submitted to the Committee for review, 
and comment on the President's Fiscal Year 2004 budget 
submission.
    As a result of the roundtables, hearing, and extensive 
preparatory work done in conjunction with small businesses, 
small business trade groups, and industry experts, Chair Snowe 
introduced the ``Small Business Administration 50th Anniversary 
Reauthorization Act of 2003'' (S. 1375), which commemorated the 
50th anniversary of the SBA and provided for a three-year 
reauthorization of the Agency, through Fiscal Year 2006. The 
bill had provisions that set out authorization levels for SBA 
programs, improved the operation of the programs, and provided 
for many improvements to the internal structure and activities 
of the SBA. The Committee held a mark-up for S. 1375 on July 
12, 2004. The Committee reported the bill out of the Committee 
unanimously (19-0), and it was sent to the entire Senate for 
consideration. S. 1375 was unanimously approved by the Senate 
on September 26, 2003, before the SBA's then-current 
authorization expired on September 30, 2003.
    S. 1375 was not taken up by the House, however, during the 
108th Congress, and the House was also unable to pass the 
comprehensive SBA reauthorization bill, H.R. 2802, that was 
reported out of the House Small Business Committee in 2003. 
Therefore, the Senate and the House approved several short-term 
extensions of the SBA's authorization to enable the SBA to 
continue functioning, and to allow the SBA's programs to 
continue to be used by small businesses. These extensions 
continued throughout Fiscal Year 2004, as the House attempted 
to pass its SBA reauthorization bill.
    On September 21, 2004, Chair Snowe and Senator Bond 
introduced the ``Small Business Reauthorization and 
Manufacturing Assistance Act of 2004'' (S. 2821), which was co-
sponsored by Senator Roberts. This bill would have reauthorized 
the SBA for Fiscal Years 2005 and 2006, and would have improved 
SBA programs and the management structure of the SBA. The bill 
contained some provisions from S. 1375, some provisions from S. 
2724, a bill that Chair Snowe and Senator Bond had introduced 
to assist small manufacturers, and which passed the Senate by 
unanimous consent on July 22, 2004, a few provisions from H.R. 
4062, which had been approved by the House in March 2004, and 
by the Senate in April 2004, and had become law on April 5, 
2004, and finally a few provisions from H.R. 2802, the SBA 
reauthorization bill reported out of the House Small Business 
Committee, which had never come up for a vote by the full 
House.
    The SBA objected to provisions in S. 2821 that continued 
into Fiscal Year 2004 lower 7(a) borrower fees. These lower 
fees were first established in H.R. 4062, passed by Congress 
and enacted into law in April 2004, which had been enacted to 
allow the 7(a) program to operate through Fiscal Year 2004, 
even in the face of demand for loans that in 2004 far exceeded 
the SBA's original predictions. The SBA opposed the 
continuation of lower fees because those fee levels would 
require some appropriations for the 7(a) program. The Senate 
Committee on Appropriations and a majority of the Members of 
the House supported appropriations and lower fees for the 7(a) 
program, but the SBA supported making the program a zero-
subsidy program, with no appropriations.
    S. 2821 did not come up for a vote in the full Senate 
before the 108th Congress ended. As a result, the SBA's 
authorization had to be extended again at the end of Fiscal 
Year 2004, in the Continuing Resolution that provided a short-
term extension for most federal agencies. Subsequently, House 
Small Business Committee members and industry groups conceded 
the issue of zero-subsidy for the 7(a) program and higher fees 
for 7(a) borrowers, and struck a deal with the SBA to support a 
particular package of provisions for the Omnibus Appropriations 
Bill (P.L. 108-447). That compromise was primarily based on the 
provisions of S. 2821, but Chair Snowe negotiated with the SBA 
to improve the package of provisions. The final product of 
those negotiations was included as Division K of the Omnibus 
Appropriations bill. The final package of provisions contained 
almost all of the provisions of S. 2821 (and hence it contained 
many provisions from S. 1375, because those sections had 
provided the foundation of S. 2821). In addition, Division K 
included sections that derive from S. 1977, the Small 
Manufacturers Assistance, Recovery, and Trade (``SMART'') Act, 
introduced by Senator Snowe on November 25, 2003.

                B. ACCESS TO CREDIT FOR SMALL BUSINESSES

    Small businesses consistently mention access to affordable 
credit as one of their primary concerns. The SBA has several 
financing programs that seek to help small businesses obtain 
the credit that the businesses need to operate, grow, and hire 
more employees. Through the Small Business Investment Company 
(SBIC) program the SBA guarantees up to 66 percent of the 
financing of approximately 443 SBICs, which are venture capital 
firms that must invest all of their funds into small 
businesses. The SBICs obtain a portion of their funds from 
private investors and then obtain the SBA-guaranteed portion of 
their funds either through the sale of securities (in the 
Participating Securities SBIC program) or through the sale of 
debt (in the Debenture SBIC program).
    In the 7(a) Business Loan Guaranty Program, which is 
organized under Section 7(a) of the Small Business Act, the SBA 
guarantees a portion of a loan that a commercial lender makes 
to a qualified small business (the guaranteed portion is 50 
percent, 75 percent, or 85 percent of the total loan value, 
depending on the type of loan). Loans may be up to a maximum of 
$2 million, and the maximum guarantee is $1 million. To receive 
a 7(a) loan a small business must be unable to obtain 
comparable credit elsewhere from a non-SBA loan. Loans made 
under this program are most often for working capital, real 
estate, expansion, or other business expenses.
    In 2004, the SBA guaranteed 76,143 7(a) loans, with a total 
value of approximately $12.5 billion. This was an increase of 
23 percent over the 2003 total of 61,832 loans, for a total of 
$11.2 billion. The 7(a) program has several sub-programs or 
pilot programs in which loans have different features and are 
designed to respond to different types of financing needs. In 
the 7(a) Express pilot program, loans receive only a 50 percent 
guarantee and must be $350,000 or less, but the loan 
application is simpler than an application for a general 7(a) 
program loan. In 2003, 30,562 loans were made in the Express 
program, and in 2004 the number of Express loans increased by 
39 percent to 42,458 loans.
    One important sub-program within the 7(a) program is the 
International Trade Loan Program, in which small businesses can 
receive slightly larger guarantees, up to a maximum of 
$1,750,000, for loans that either support international trade 
or respond to competition from overseas competitors. In 2003, 
1,583 loans were made in the International Trade Loan Program, 
and in 2004 the number of this type of loan increased by 38 
percent to 2,177 loans.
    In the Certified Development Company (CDC) loan program, 
also known as the 504 Loan Program (it is organized under 
Section 504 of the Small Business Investment Act of 1958), the 
SBA guarantees 40 percent of a financing package supplied to a 
small business to purchase either real estate or capital 
equipment. To obtain a 504 loan, a small business works with a 
CDC, a non-profit community development organization, to 
construct an appropriate financing package. The CDC provides a 
loan for 40 percent of the total financing package, and the SBA 
guarantees 100 percent of this portion of the total package; a 
commercial bank, separate from the CDC, provides a commercial 
loan thatfunds 50 percent of the financing package, and the SBA 
guarantees no portion of this commercial loan. Finally, the small 
business is required to contribute 10 percent of the total financing 
package. In Fiscal Year 2003, 5,542 loans were made in the 504 loan 
program, for a total of $3.14 billion, and in 2004 the program 
increased in size by 26 percent, with 7,769 loans being approved, for a 
total of $3.9 billion, according to the SBA.
    One focus of the SBA during the 108th Congress was to 
increase the number of SBA-guaranteed loans made to minorities 
and to women. From 2003 to 2004, among women and minority 
entrepreneurs, total 7(a) and 504 loan volumes increased by 27 
percent. In 2003, women entrepreneurs received 14,221 SBA 
loans. In 2004, the numbers increased by 25 percent to 17,829 
SBA loans. The increase was dramatic among loans to minorities 
as well. In 2003, African Americans received 3,482 SBA loans. 
In 2004, the number increased by 30 percent to 4,530 SBA loans. 
In 2003, Hispanics received 5,525 SBA loans. In 2004, the 
number increased by 30 percent to 7,157 SBA loans. In 2003, 
Asian Americans received 8,743 SBA loans. In 2004, the number 
increased by 30 percent to 11,349 SBA loans. In 2003, Native 
Americans received 737 SBA loans. In 2004, the number increased 
by 2 percent to 753 SBA loans.
    In order to improve the SBA programs, Chair Snowe included 
in S. 1375 and in the Omnibus Appropriations Bill many 
provisions that would enhance the accessibility, 
attractiveness, and convenience of the financing programs for 
small business borrowers and for lenders. Of particular note is 
a provision that increased the maximum loan size for 504 loans, 
so as to allow small businesses, especially those in 
manufacturing that wish to purchase expensive machinery, or 
those located in regions in which real estate prices have 
increased dramatically, to obtain larger loans that reflect the 
increased costs of doing business.

             C. SMALL BUSINESS REVITALIZATION ACT (S. 2193)

    The ability of small businesses to access credit through 
the SBA's 7(a) program during Fiscal Year 2004 was hampered by 
a funding shortfall in the program. During Fiscal Year 2003 
approximately $11.2 billion in 7(a) loans were approved (when 
$1.8 billion in STAR loans are included). The SBA's budget 
request for Fiscal Year 2004 was only for a program size of 
$9.3 billion, a reduction of almost $2 billion from the 
previous year. The SBA's Administrator, Hector Barreto, 
testified at the Committee's June 4, 2003 hearing on the SBA's 
Budget request for Fiscal Year 2004. In response to questioning 
from Chair Snowe regarding the potential inadequacy of the 
SBA's budget request for the 7(a) program, Mr. Barreto 
testified that the Administration felt its budget request would 
be sufficient to meet demands in the 7(a) program, both for 
large loans and for small loans. Moreover, at the Committee's 
April 30, 2003, roundtable on the 7(a) program, the SBA 
representative, the employee responsible for administering the 
SBA's Office of Capital Access, which manages the 7(a) program, 
assured the Committee that the Agency was confident that its 
Fiscal Year 2004 budget request was sufficient, even though 
7(a) lenders at the roundtable insisted the demand would be 
much greater than the requested budget could finance.
    On the express assurance of Administrator Barreto and the 
SBA, therefore, the appropriations bill that Congress enacted 
for Fiscal Year 2004 contained only enough funds for a 7(a) 
program of up to $9.55 billion in loans (in fact, the SBA had 
requested only enough funds to provide for a program of $9.3 
billion, but Congress allocated more than was requested, thus 
allowing a program of $9.55 billion). Congress appropriated $79 
million to the SBA for 7(a) guarantees in Fiscal Year 2004, and 
also allowed the SBA to carryover from Fiscal Year 2003 to 
Fiscal Year 2004 $22 million in funds and to apply the carried-
over funds to 7(a) guarantees in the latter year. With this 
total amount of $101 million, and with a subsidy rate at the 
beginning of Fiscal Year 2004 of 1.06 percent, the program 
began the year with a total capacity of $9.55 billion. In 
Fiscal Year 2004, however, demand continued at the same pace it 
had reached in Fiscal Year 2003; thus, it was immediately clear 
that demand would outstrip available resources in the program, 
notwithstanding the SBA's predictions.
    On December 23, 2003, the SBA informed the Senate and House 
Small Business Committees that the SBA would be instituting a 
$750,000 cap for 7(a) loans, effective January 8, 2004. The SBA 
informed the Committees on Tuesday, January 6, that the SBA was 
immediately shutting down the 7(a) loan program, for an 
undetermined amount of time.
    On January 8, 2004, Chair Snowe sent a letter to 
Administrator Barreto in which she noted that the SBA had 
provided notice to the Committee on December 23, 2003, of its 
intention to impose a cap on 7(a) loans as of January 8, 2004. 
This notice of December 23, 2003 was required under Section 
7(a)(24) of the Small Business Act, which provides that the SBA 
must notify the Committee at least 15 days before ``making any 
significant policy or administrative change affecting the 
operation of the loan program under this subsection.'' The 
letter of January 8, 2004 noted that the SBA had violated this 
statutory requirement by shutting down the program on or around 
January 5, 2004. Chair Snowe also noted that, while 
regrettable, the violation should not stand in the way of an 
immediate resumption of the program.
    The SBA stated that between 500 and 1,000 loan applications 
were rejected because of the shutdown, with a total value of 
approximately $1 billion. Of these applications, approximately 
250 were for loans larger than $750,000. The SBA sent these 
applications back to the small businesses that submitted them, 
and told the small businesses to re-submit the applications 
when the program re-opened. Those applications above $750,000 
were then rejected by the SBA. Thus, at least 250 small 
businesses had loan applications rejected simply because the 
SBA moved the deadline for larger loans forward by several 
days.
    The SBA claimed that it was required to shut the program 
down because the OMB would not allow the SBA to exceed $3.33 
billion in 7(a) loan guarantees by January 31, 2004 until 
appropriators authorized additional funds. The SBA stated that, 
as of December 22,2003, it had already approved $2.8 billion in 
7(a) loan guarantees since the beginning of Fiscal Year 2004, and that 
between December 23, 2003, and early January 2004, it had received more 
than $500 million in applications, putting the program at the level of 
$3.33 billion at the beginning of January.
    After the SBA reopened the 7(a) loan program on January 14, 
2004, following its temporary shutdown, the SBA prohibited any 
loans larger than $750,000, instead of the normal $2 million, 
and prohibited ``piggyback'' loans, which combine commercial 
and 7(a) portions.
    Small businesses and lenders stated to the Committee that 
the loan restrictions significantly hindered the ability of 
small businesses to obtain sufficient capital, and they 
expressed their strong desire to remove the loan restrictions.
    In spring 2004 the SBA submitted a legislative proposal to 
Congress that, if enacted, would have given the SBA the 
authority to annually set the fees in the 7(a) program and to 
set the guarantee rates for 7(a) loans, i.e., the percentage of 
each loan that is guaranteed. Currently, a 7(a) loan of any 
size (normally, up to $2 million, if no additional loan cap is 
in place) may have a 75 percent guarantee, and loans of up to 
$350,000 can be made either at a 75 percent guarantee or a 50 
percent guarantee. Loans of $150,000 or less may have a 
guarantee of up to 85 percent. The 50 percent guarantee loans 
are ``SBA Express'' loans.
    SBA personnel explained that, although the details were not 
specified in the SBA's proposed legislation, the SBA would 
phase-in a requirement that, by FY 2007, every 7(a) loan would 
have to be made with a 50 percent guarantee (e.g., as SBA 
Express loans). The SBA would also increase fees for lenders 
and borrowers, at the SBA's own discretion, to give the 7(a) 
program a zero subsidy.
    The Committee believed the language the SBA provided was 
significantly flawed because, among other things, (1) the SBA 
would have unfettered authority to set fees and guarantee 
rates; (2) small businesses with lesser credit quality could be 
excluded from the program by the lower guarantee percentage; 
and (3) the 15-day notice provision would be eliminated, so 
that the SBA would have no requirement to notify Congress.
    Lenders use Express loans, with a 50 percent guarantee, 
primarily for loans of under $100,000; like credit card loans, 
these loans can be made by the lenders by reference to the 
borrower's credit score, rather than an evaluation of the 
borrower's collateral. Collateral is generally used for larger 
loans, which therefore are not made based on credit scores. The 
evaluation of collateral make the larger loans more work-
intensive for lenders. Thus, lenders generally do not use 
Express for loans larger than $100,000.
    Lenders informed the Committee that, if the SBA were to 
require that all loans up to $2 million were made at a 50 
percent guarantee, the lenders would generally not make loans 
larger than $100,000, except for the small businesses with the 
best credit. The lenders stated that changing the guarantee 
rate from 75 percent to 50 percent would exclude a large number 
of small businesses, those with lesser credit quality or those 
that are just starting and do not have a credit history, from 
the program.
    The Committee held a roundtable meeting of approximately 25 
representatives of small businesses and lenders on February 25, 
2004, to discuss the SBA's proposal. Every participant at the 
meeting, except the SBA, expressed concerns about the SBA's 
proposal. Some of these were strong objections: the 
representatives of community bankers stated that the proposal 
would be a ``nonstarter'' for the 5,000 U.S. community banks, 
and the American Bankers Association and other 7(a) lenders, 
represented by the National Association of Government 
Guaranteed Lenders (NAGGL), also stated that they were strongly 
opposed to the SBA's proposal. The small business 
representatives, especially the U.S. Chamber of Commerce, 
stated they were opposed to the proposal. No participant in the 
meeting, other than the SBA, supported the SBA's proposal.
    In response to the loan cap that the SBA had established, 
and to the prohibition on piggyback loans, Chair Snowe 
introduced a bill, the ``Small Business Loan Revitalization 
Act,'' (S. 2193), on March 10, 2004, to adjust fees paid by 
lenders so as to allow the remaining appropriated funds in the 
7(a) program to be used to fund an increased program size for 
the remainder of Fiscal Year 2004. Instead of a program size of 
$9.55 billion, S. 2193 would have allowed the 7(a) program to 
have a maximum size of approximately $12.5 billion for the 
year. An almost identical bill, H.R. 4062, was introduced in 
the House on March 30, 2004. S. 2193 was not passed in the 
Senate, so after H.R. 4062 was passed in the House on March 31, 
2004, Chair Snowe called up H.R. 4062 for consideration in the 
Senate, and it was passed by the unanimous consent of the 
Senate on April 1, 2004. After being signed by President George 
W. Bush, it became law on April 5, 2004. The new law allowed 
the 7(a) program to have a program size of $12.5 billion for 
Fiscal Year 2004, and allowed the $750,000 loan cap to be 
removed, and piggyback loans to be permitted. Until January 
2004, the SBA had permitted piggyback loans, but had never 
charged an additional fee for those loans. H.R. 4062 re-
instituted piggybacks and, for the first time, imposed an 
additional fee that applied to piggybacks.

    D. OTHER EFFORTS TO IMPROVE SMALL BUSINESSES' ACCESS TO CAPITAL

    Chair Snowe, along with Senator Bond and Senator Pryor, 
also introduced a bill to improve small businesses' access to 
credit by increasing the amount of financing available to small 
businesses, and by improving the terms of the financing that is 
available. This bill, the ``Small Business Credit Liquidity Act 
of 2003'' (S. 1713), was introduced on October 3, 2003. The 
bill would have allowed the SBA to examine whether it wished to 
develop a program to authorize private-sector loan poolers to 
pool small business loans and securitize the loans. The loans 
thus pooled would not have been loans that already had partial 
or full SBA guarantees; they would have been made, originally, 
outside of the SBA's own loan and venture capital programs.
    In addition, the bill specifically noted that it was not 
requiring the SBA to implement such a program, but was merely 
authorizing the SBA to examine the feasibility of such 
aprogram, and to report back to Congress before implementing any such 
program. If the SBA wished, it could then implement a program to 
achieve these goals. The use of Federal appropriations to fund any such 
program was specifically forbidden by the legislation; any such program 
would have had to have been self-supporting, through fees charged in 
the program.
    This proposal was first suggested by the SBA in its Budget 
Proposal for Fiscal Year 2004, but after provisions allowing 
the SBA to examine the possibility of beginning such a program 
were included in S. 1375, the SBA switched course and opposed 
the idea (in other words, the Agency opposed even being given 
the authority to examine the issue). The provision was removed 
from S. 1375 before S. 1713 was introduced. S. 1713 was 
referred to the Committee, but was not passed during the 108th 
Congress.
    Chair Snowe and Senator Hagel introduced S. 1967, the 
``Interest on Business Checking Act of 2003'', on November 25, 
2003. This bill would have allowed financial institutions to 
pay interest on business checking accounts, which has been 
prohibited since the Great Depression. It would have benefited 
small businesses, who currently do not receive interest for the 
funds they hold in checking accounts, and would also have 
benefited small depository institutions, which would be better 
able to compete with larger depository institutions.
    The bill did not progress through the Senate Banking 
Committee during the 108th Congress, but the House approved, by 
a 418-0 vote, an amendment to H.R. 1375, a regulatory-reduction 
bill in the House, that was almost identical to the text of S. 
1967.

                     E. THE SBA'S ACCOUNTING ISSUES

    The General Accounting Office (GAO), which is now named the 
Government Accountability Office issued a report in January 
2003 (``Small Business Administration: Accounting Anomalies and 
Limited Operational Data Make Results of Loan Sales 
Uncertain'') that identified serious deficiencies in the SBA's 
accounting for its sales of loans. These accounting problems 
affected more than just the loan sales; because the SBA did not 
properly account for the loans that had been sold in the sales, 
or for the Agency's loan loss reserve accounts, many of the 
Agency's financial accounts were inaccurate.
    After the GAO's report identified errors in the SBA's 
accounting, the SBA's outside auditors, Cotton & Co., admitted 
that their audit opinions regarding the SBA for fiscal years 
2000 and 2001 might be ``materially incorrect.'' Cotton & Co. 
withdrew their prior certification that the SBA's accounting 
was satisfactory, or accurate, for those two fiscal years. The 
SBA hired outside consultants to analyze the SBA's accounting 
errors.
    Chair Snowe, along with Rep. Todd R. Platts, the Chairman 
of the House Subcommittee on Government Efficiency and 
Financial Management, Rep. Edolphus Towns, the Ranking Member 
of that Subcommittee, and Rep. Marsha Blackburn, the Vice-Chair 
of that Subcommittee, sent a letter to the GAO on May 21, 2003 
concerning the SBA's loan sales program. The letter asked that 
the GAO, in light of its report on the loan sales, summarize 
the recommendations provided to the SBA by the outside 
consultants, assess whether the recommendations would be likely 
to result in reliable subsidy cost estimates for the SBA's 
accounts, determine whether the SBA was implementing the 
recommendations, and provide quarterly reports on the SBA's 
progress in fixing its accounting problems until such time as 
the SBA and the GAO ``agree that all necessary corrective 
measures have been effectively implemented.''
    In late July 2003, the SBA requested that the GAO delay the 
beginning of its study until ``late August/early September 
2003'' because pertinent SBA personnel were occupied with other 
tasks. Along with the other requestors of the study, Chair 
Snowe reluctantly granted this request because the duration of 
the delay was not substantial and the SBA insisted that its 
accounting personnel were too busy to work with the GAO at that 
time.
    In October 2003 the SBA requested that the start of the 
GAO's study be delayed again until December 1, 2003. The SBA 
stated this further delay was necessary because SBA's 
accounting personnel were occupied working on preexisting 
tasks, including the Fiscal Year 2003 financial statements, 
Fiscal Year 2005 budget, the migration of the agency's 
financial accounting system to a new contractor, and three 
other GAO studies (of the SBA's loan monitoring system, 7(a) 
loan program econometric model, and workforce transformation).
    The House Subcommittee members agreed to delay the GAO 
study until, at the latest, December 1, 2003, so long as the 
SBA committed to allow the GAO full access to SBA personnel and 
documents. On November 20, 2003, the SBA informed the GAO that 
it did not intend to provide the GAO access to SBA accounting 
documents and personnel until after the OMB had approved the 
new disaster loan accounting model, which would not be until 
January 2004.
    As a result, Chair Snowe wrote Mr. Barreto on November 24, 
2003 stating that the GAO study (first requested in May 2003) 
was essential to Congress's decision-making responsibilities, 
and requesting that the study be allowed to begin immediately.
    The SBA did not immediately reply to the letter, but in 
early January 2004 the SBA insisted that delaying GAO's 
commencement of the study until January 2004 was necessary 
because the new disaster loan models would not be completed and 
approved by the OMB until then. The SBA denied that the earlier 
requests for delays, in July 2003 and October 2003, were 
because SBA personnel were ``too busy'' at that time; the SBA 
claimed that its earlier requests to Congress for delays were 
based upon the financial models not being ready yet. The GAO 
continues to work with the SBA to examine these accounting 
issues.

        F. GOVERNMENT-WIDE AUDIT ISSUE, AND GAO AND CBO REPORTS

    The GAO is required to do a government-wide audit of all 
agencies each year, and its audit of the SBA was delayed many 
times in 2003 and 2004 by the SBA's refusal to allow the GAO 
access. After discussions with the Committee, the SBA agreed to 
provide more access to the GAO, and the latter completed its 
audits for 2003 and 2004.
    On July 22, 2003, Chair Snowe sent a letter to David M. 
Walker, the Comptroller General, requesting that the GAO 
conduct a study of the SBA's contract with Dun & Bradstreet 
regarding the monitoring of the SBA's loan portfolio. To 
improve its ability to monitor its 7(a) and 504 loan 
portfolios, the SBA awarded a contract to Dun and Bradstreet, 
in association with Fair Isaac Corporation, to provide 
information from a computer-based loan monitoring system. The 
SBA's monitoring of potential risks associated with its loan 
portfolios and its management of information technology are 
both critical in ensuring that the SBA's primary business loan 
programs are fulfilling their intended goals of providing 
credit to eligible small businesses, and in ensuring that SBA 
lending partners follow lending requirements.
    In a December 2002 report (Small Business Administration: 
Progress Made but Improvements Needed in Lender Oversight, GAO-
03-90, Dec. 9, 2002), the GAO reported that the SBA needed to 
improve its lender oversight process to adequately measure the 
financial risk lenders pose to the SBA. In discussions with 
Committee staff in April 2003 about the status of the SBA's 
response to the GAO's recommendations for improvements in 
information technology management, the GAO reported that the 
SBA had decided to revise its approach to loan-monitoring after 
dedicating several years of effort and approximately $12.7 
million towards development of an in-house loan monitoring 
information system.
    In her July 2003 letter, Chair Snowe requested that the GAO 
conduct a study of the SBA's contract with Dun and Bradstreet 
in order to determine (1) what data is necessary to adequately 
monitor the 7(a) and 504 loan portfolio, (2) how the SBA 
intends to achieve the goal of developing or obtaining 
information that will meet the agency's needs, (3) the extent 
to which the contract addresses the SBA's longstanding data 
integrity problems, (4) to what degree the contract will 
improve the SBA's loan monitoring capability, and (5) how 
closely the SBA's intended future loan monitoring capability 
will resemble best practices of private U.S. banks.
    The GAO analyzed these issues and completed its report in 
June 2004 (Small Business Administration: New Service for 
Lender Oversight Reflects Some Best Practices, but Strategy for 
Use Lags Behind, GAO-04-610). The GAO determined that the new 
loan monitoring system would be comparable in quality to those 
used in the private sector, but that the SBA had not yet 
developed comprehensive plans for utilizing the system to 
improve and monitor SBA programs. The SBA responded that it was 
still in the process of developing those plans. The Committee 
is continuing to work with the Agency on this vital issue.
    On October 30, 2003, Chair Snowe sent a letter to Dr. 
Douglas Holtz-Eakin, the Director of the Congressional Budget 
Office (CBO), requesting that the CBO conduct a study on the 
effect on small businesses of the call-up to active duty of 
military reservists who are employees of small businesses. This 
is an issue of significant importance to thousands of small 
businesses, who may have lost their owners, managers, or key 
employees because those persons were reservists who were called 
up to active duty. The CBO is still conducting the study, and 
the Committee will examine its findings when the study is 
completed.
    In October 2004, Chair Snowe and Senator Enzi requested 
that the GAO begin a study of the effects on small businesses 
of the Sarbanes-Oxley Act. The GAO has not yet completed the 
study, which will examine whether there have been positive and/
or negative developments for small business accounting 
practices, costs, and access to capital as a result of the 
Sarbanes-Oxley Act.

                            G. SBIC PROGRAM

    Small Business Investment Companies (SBICs) provide equity 
investments, long-term loans, and management assistance to 
small businesses. SBICs are privately owned and managed, 
investing in small businesses with the prospect of sharing in 
the profits as they grow. SBICs may be financed either by the 
sale of equity securities (Participating Securities) or debt 
instruments (Debentures). To be licensed by the SBA, each SBIC 
must raise private capital. The SBA then matches the private 
capital with government-guaranteed capital, by guaranteeing the 
SBIC's sale to investors of equity securities (or bonds, in the 
case of debenture SBICs). The SBIC program is a zero-subsidy 
program; the fees charged to SBICs pay for the SBA guarantees.
    The SBIC program began in 1958, and has been a major 
contributor to the venture capital industry in the United 
States. SBIC investing peaked in 2000 at $5.4 billion, but then 
declined to $4.5 billion in Fiscal Year 2001, $2.7 billion in 
Fiscal Year 2002, $3.5 billion in Fiscal Year 2003, and $2.6 
billion in Fiscal Year 2004. The decrease in SBIC investments 
during this period is less drastic than the decrease in private 
venture capital investments over the same period, and thus the 
relative importance of SBIC investments in the venture capital 
field is greater now than during the late 1990s. The SBA has 
estimated that one job is created for every $36,000 invested in 
a small company under the SBIC program. There are currently 
approximately 443 SBICs nationwide.
    Since its beginning in FY 1994, the Participating 
Securities SBIC program has had impressive results: More than 
$4.7 billion in private capital has been raised by the 221 
privately managed Participating Securities funds, and more than 
$7.4 billion has been invested by Participating Securities 
funds in U.S. small businesses during the period.
    In 2004 the SBA indicated that the Administration's 
projections for the future of the Participating Securities SBIC 
Program (but not the Debenture SBIC Program) predicted that the 
program would operate at a substantial loss for the Government. 
Theseprojections were based upon the program's past performance 
and the economic events of the period 1994-2004; they may also have 
contained some predicted results for the performance of SBICs in the 
future. The SBA indicated that this projected loss could exceed $1 
billion. In response to this expectation, the SBA submitted to Congress 
a legislative proposal to change the Participating Securities SBIC 
program by increasing the fees charged to SBICs, and increasing the 
government's share of an SBIC's profits. In a series of meetings, 
representatives of SBICs strongly opposed the Administration's 
proposal, arguing that it would effectively end the program by 
rendering it completely unpalatable for venture capitalists.
    On June 25, 2004, Chair Snowe and Senator John Kerry sent a 
letter to SBA Administrator Hector Barreto that contained draft 
legislative text regarding the SBIC program. The legislative 
proposal, which was constructed by SBICs and suggested to the 
Committee, would have amended the Small Business Investment 
Company Act of 1958, under which the SBIC program is organized, 
and would have increased the SBA's profit participation in the 
SBIC program by promising the SBA a profit participation in 
each SBIC equal to the percentage of financing in that SBIC 
that the SBA had contributed. The Senators requested a section-
by-section analysis of the draft legislation.
    On July 8, 2004, Ronald E. Bew, the SBA's Associate Deputy 
Administrator for Capital Access, sent Chair Snowe and Senator 
Kerry a letter stating that, in the SBA's view, the draft 
legislation did not satisfy the requirements of the Credit 
Reform Act and, if the draft legislation were to satisfy that 
Act, it would have a positive subsidy rate of approximately 
21%. Mr. Bew's letter also contained a statement, without 
explanation, indicating that the proposed draft legislation 
would ``shift'' a budgetary cost from the U.S. Treasury to the 
SBA.
    On July 12, 2004, Chair Snowe and Senator Kerry sent 
another letter to Administrator Barreto requesting that Mr. 
Barreto explain in more detail the SBA's conclusion that the 
draft legislation sent on June 25, 2004, did not satisfy the 
Credit Reform Act of 1990, and how, in contrast, the current 
law governing the program does satisfy that Act. The senators 
also reiterated their request for a section-by-section analysis 
of the draft legislation. The letter also asked that the SBA 
identify what aspect of the proposed draft legislation would 
``shift'' a budgetary cost from the U.S. Treasury to the SBA. 
Finally, the letter asked the SBA to explain in greater detail 
the manner in which the SBA calculated that the draft 
legislation, if scored under the credit reform standards as 
debt, would still have an estimated subsidy rate of 21%. The 
letter requested a reply by July 19, 2004.
    On July 27, 2004, Chair Snowe, Senator Kit Bond, Senator 
Judd Gregg, Senator James Talent, and Senator Norm Coleman sent 
a letter to Joshua Bolten, Director of the Office of Management 
and Budget (OMB), regarding the SBIC program. The letter noted 
that the private investment community, the Administration, and 
Congress all agree that the program needs a legislative 
solution. The letter also mentioned that the private sector 
participants in the program had testified before Congress in 
opposition to the Administration's proposal, and had indicated 
that the flow of private capital into the program would stop if 
the Administration's recommended changes were enacted. The 
Senators stated that they are attempting to construct an 
alternative approach that would achieve the following 
objectives: (1) maintain incentives necessary to continue to 
attract private investment in SBICs; (2) eliminate taxpayers' 
exposure by maintaining a zero subsidy rate for the program; 
and (3) maintain strict licensing procedures to ensure only 
qualified venture capital managers are allowed to participate. 
The Senators requested that the OMB engage with congressional 
staff and industry representatives in the effort to design 
legislation to improve this program. Subsequently, OMB 
personnel have communicated with Congressional staffers 
regarding the program, and that process is still on-going.

                    H. OVERSIGHT OF THE 7(A) PROGRAM

    On September 9, 2004, Chair Snowe sent a letter to 
Administrator Barreto requesting he provide her with (1) 
information regarding an email that was apparently sent in late 
August 2004 from the District Director of the SBA's San Diego 
District Office, as well as the Deputy District Director and 
the chief loan officer in that District Office, to many of the 
lenders participating in the 7(a) loan program in that region; 
and (2) information regarding any similar messages that might 
have been sent in other SBA Districts. The email sent to 
lenders encouraged lenders to submit as many 7(a) loan 
applications during Fiscal Year 2004 as possible, and mentioned 
that in order to find additional applications to submit lenders 
might wish to consider changing the credit thresholds the 
lenders used to determine loan applicants' eligibility for 
loans. The letter requested that Mr. Barreto examine the 
circumstances under which the SBA officials sent the email to 
lenders, and also asked Mr. Barreto to determine whether other 
SBA district offices had made similar communications to lenders 
in other regions. Chair Snowe requested a reply by September 
15, 2004.
    On September 14, 2004, Donald R. Swain, the Director of the 
SBA's Executive Secretariat, sent Chair Snowe a letter 
informing her that the SBA expected to reply to her inquiry 
``fully within 14 days.'' Administrator Barreto sent Chair 
Snowe a letter on October 8, 2004, informing her that the 
messages in the August 2004 email to lenders were not in 
conformance with SBA policy, and that the SBA had informed the 
employees in question that they should refrain from such 
messages.

                            III. Tax Issues


                      A. SMALL BUSINESS EXPENSING

    The Committee was extremely active throughout the 108th 
Congress in terms of improving the ability of small businesses 
to deduct more of their costs in acquiring capital used in 
their business in the year of purchase. On January 14, 2003, 
Chair Snowe introduced S. 158, The Small Business Expensing Act 
of 2003. In short, this bill wouldhave extended the then 
$25,000 expensing limit to $75,000 and the then $200,000 phase-out to 
$325,000. The bill would have made the changes permanent.
    Although never passed, this bill played a large role in the 
small business expensing modifications that were included in 
the Jobs and Growth Tax Relief Reconciliation Act of 2003 
(JGTRRA), which Congress passed and the President signed on May 
30, 2004. JGTRAA provided that the $25,000 expensing limit 
would be increased to $100,000 and the $200,000 phase-out would 
be increased to $400,000.
    These increases, however, became effective only until the 
end of tax year 2005. As such, absent further legislation, the 
levels would revert back to their respective $25,000 and 
$200,000 amounts beginning in 2006.
    On October 22, 2004, the President signed H.R. 4520. One of 
the measures included in that bill is a provision to extend the 
expensing limits enacted by JGTRRA for an additional two years. 
Accordingly, the current $100,000 expensing limit and $400,000 
phase-out will remain in effect through the end of tax year 
2007.
    Chair Snowe also offered an amendment to the Senate version 
of H.R. 4520 (S. 1637) during the Finance Committee mark-up 
that would have modified the small business expensing rules. 
This amendment would have changed the rate upon which the 
taxpayer's expensing amount would phase-out to allow more 
companies to qualify. Currently, the taxpayer's expensing 
benefit phases-out dollar-for-dollar, but Chair Snowe's 
amendment would have altered that rate so that the amount that 
would otherwise qualify for expensing would be phased-out by 
only one half of the amount by which the cost exceeds the 
phase-out limit. Although this amendment was included in the 
Senate's bill, it was not included in the Conference Report.

     B. MODIFICATION OF THE UNRELATED BUSINESS TAXABLE INCOME RULE

    On April 10, 2003, the Committee introduced S. 885--The 
Small Business Investment Company Act of 2003. This bill would 
have amended the unrelated business taxable income rules to 
provide that tax-exempt entities would not be subject to paying 
unrelated business taxable income from investments made in 
debenture small business investment companies.
    Although Congress never passed S. 885, Chair Snowe was 
successful in including the provisions in the Senate passed 
version of H.R. 4520. The Conference Report to H.R. 4520 (P.L. 
108-357) contained a modified provision to address the problem. 
In general, the measure contained in H.R. 4520 modifies the 
debt-finance property provisions in the unrelated business 
taxable income rules in the code by excluding from the 
definition of acquisition indebtedness any indebtedness that a 
small business investment company licensed under the Small 
Business Investment Act of 1958 that is evidenced by a 
debenture issued by such company under section 303(a) of such 
act and held or guaranteed by the Small Business 
Administration. The exclusion will not apply, however, if any 
exempt organization owns more than 25 percent of the capital or 
profits interest in the small business investment company, or 
exempt organizations own, in the aggregate, 50 percent or more 
of the capital or profits interest of the small business 
investment company. This exclusion applies to small business 
investment companies licensed after October 22, 2004.

                     C. MANUFACTURING TAX DEDUCTION

    H.R. 4520 provides an income tax deduction that domestic 
manufacturers are able to claim in order to increase their 
competitiveness abroad. The deduction is from taxable income 
(or, in the case of an individual from adjusted gross income) 
that is equal to a portion of the taxpayer's qualified 
production activities income. For taxable years beginning after 
2009, the deduction is equal to nine percent of the lesser of 
(1) the qualified production activities income of the taxpayer 
for the taxable year, or (2) taxable income (determined without 
regard to this provision) for the taxable year. For taxable 
years beginning in 2005 and 2006, the deduction is three 
percent of income, and the deduction is six percent of income 
for taxable years beginning in 2007, 2008, and 2009. The 
deduction is limited, however, to 50 percent of the wages that 
the taxpayer pays during the calendar year that ends in such 
taxable year.
    Chair Snowe worked diligently both during the Senate 
Finance Committee mark-up as well as during the Conference 
negotiations to ensure the deduction would not be limited to 
only certain types of entities. The deduction enacted under 
H.R. 4520 is not entity-specific and applies to those 
manufacturers that pay wages. Consequently, not only are 
corporations eligible to claim the deduction, but so too are 
shareholders in a sub-chapter S corporation eligible for the 
deduction as well as partners in a partnership.

             D. MODIFICATIONS TO THE NEW MARKETS TAX CREDIT

    The Committee was extremely influential in modifying the 
application of the new markets tax credit program in terms of 
making it accessible than more taxpayers than under current 
law.
    Specifically, Chair Snowe worked as a conferee to H.R. 4520 
to modify the low-income test for high migration rural 
counties. As provided under the bill, in the case of a 
population census tract located within a high migration rural 
county, low income is defined by reference to 85 percent 
(rather than 80 percent) of statewide median family income. For 
this purpose, a high migration rural county is any county that, 
during the 20-year period ending with the year in which the 
most recent census was conducted, has a net out-migration of 
inhabitants from the country of at least 10 percent of the 
population of the county at the beginning of such period.

                 E. CASH METHOD OF ACCOUNTING (S. 2675)

    On July 15, 2004, Chair Snowe introduced S. 2675 to expand 
the availability of the cash method of accounting for small 
businesses. Currently, the general rule under the tax code is 
that only those small businesses that generally earn less than 
$5,000,000 in annual gross receipts are able to use the cash 
method of accounting in determining their federal income tax 
liability. Chair Snowe's bill would increase this threshold to 
$10,000,000.
    Chair Snowe's bill also permits those taxpayers that have 
inventory to potentially qualify for the cash method of 
accounting. Currently, if a taxpayer otherwise satisfies the 
requirements for using the cash method of accounting but also 
has inventory in its business, it cannot use the cash method. 
Chair Snowe's bill provides an exception for those taxpayers 
that have inventory by permitting them to account for those 
costs as if they are an incidental material supply, which is a 
standard that exists under current law.

                    F. INVESTIGATION OF THE TAX CODE

    Chair Snowe, in her role as Committee Chair requested 
several GAO reports related to the tax code. One report 
reviewed the Internal Revenue Service's management of its 
Schedule K-1 Document Matching program, which the IRS began in 
2002 to compare the information that certain tax flow-through 
entities, such as partnerships and S-corporations, provide on 
their IRS form K-1 to what their respective owners report on 
their individual income tax returns. Regrettably, during the 
first year of this program, a significant number of taxpayers 
received notices from the IRS questioning the accuracy of their 
reported income and requiring them to prove that they had, 
indeed, filed their returns correctly.
    In light of these problems, Chair Snowe and Senator Bond 
requested that the GAO determine the extent to which this 
program burdened compliant taxpayers and the steps that the IRS 
should take to improve the program. The GAO report, entitled 
``Changes to IRS's Schedule K-1 Document Matching Program 
Burdened Compliant Taxpayers'' (GAO-03-667), explains that 
although the IRS intended originally to focus on only two 
categories of income that are easily identified on tax returns, 
namely interest and dividends, the IRS determined during the 
testing of the program that this approach was not optimal 
because it could not separate underreported K-1 interest and 
dividend income from the other underrreported income such as 
the income that banks pay. Because the IRS expanded the 
matching program to cover additional categories of income and 
in the process thereof sent thousands of under-reporting 
notices to thousands of taxpayers who were eventually found to 
have met their tax obligations, the report concluded that the 
expansion of the matching program created an unnecessary burden 
for those compliant taxpayers and that this expansion also 
reduced the IRS' already limited enforcement resources.
    Although encouraged that the IRS recognized the 
shortcomings in implementing the matching program for 2002 and 
took steps towards improving the program's efficiency and 
accuracy for 2003, Chair Snowe and Senator Bond wanted to 
ensure that the IRS continued to implement the suggestions and 
conclusions made in the Report. Accordingly, Chair Snowe and 
Senator Bond sent a letter to IRS Commissioner Everson on July 
9, 2003 to applaud the IRS for its work in this area and stress 
the importance of acting on the GAO's conclusions.
    Chair Snowe and Senator Bond also requested a GAO report 
that reviewed the Workforce Planning initiative within the 
Taxpayer Education and Communication Unit (TEC) of the IRS. The 
purpose of this Report (GAO-03-711) was to determine whether 
the IRS has begun to develop a strategic workforce plan for TEC 
that incorporates the critical elements that should be in a 
typical workforce plan and to determine how the IRS should 
proceed with the plan's development.
    The Report concluded that while both the IRS and the Small 
Business/Self-Employed (SB/SE) division have begun to develop 
this strategic workforce plan, TEC, since its inception in 
October 2000, has operated with a short-term staffing plan that 
does not meet the critical elements for what a strategic 
workforce plan should include.
    Concerned with this conclusion, Senators Snowe and Bond 
sent a letter to IRS Commissioner Everson and IRS SB/SE 
Commissioner Hart on July 18, 2003. While the letter commended 
the IRS for recognizing the need to develop and institute a 
strategic workforce plan for TEC, it stressed the importance of 
implementing the GAO's recommendations concerning the plan's 
element for a proper strategic workforce.
    An additional GAO Report that Chair Snowe requested focused 
on the compliance burden that the Federal tax system imposes on 
small businesses and the self-employed. Chair Snowe made this 
request because of her interest in alleviating any unnecessary 
burden that federal tax requirements impose on small 
businesses.
    The GAO's report (GAO-04-304) concluded that the expenses 
that small businesses reported on schedules C and F of their 
tax returns varied widely across and within expense categories 
for tax year 2001. Specifically, the Report concluded that 
there was a wide variation in both median dollar amounts and 
ranges of the expenses, and the expenses varied greatly within 
the categories of expenses, such as the expenses for wages that 
taxpayers reported on Schedule C.
    The final GAO report that Chair Snowe requested focused on 
the substantiation of business expenses by small business 
taxpayers and whether changing the rules that taxpayers must 
follow in meeting their tax obligation would actually improve 
taxpayer compliance.

 G. NOTIFICATION TO SMALL BUSINESSES OF ERRONEOUS ALTERNATIVE MINIMUM 
                           TAX (AMT) PAYMENTS

    On May 29, 2003, Chair Snowe sent a letter to Commissioner 
Everson regarding the number of small corporate taxpayers that 
erroneously paid the Alternative Minimum Tax (AMT). The letter 
stemmed from a report that the Treasury Inspector General for 
Tax Administration (TIGTA) issued titled ``Significant Actions 
Were Taken to Address Small Corporations Erroneously Paying the 
Alternative Minimum Tax, but Additional Actions are Still 
Needed'' (Reference Number 2003-30-114). In general, the Report 
concludes that the IRS failed to contact all of the small 
corporations that erroneously paid the corporate AMT in 2001 
and failed to identify those taxpayers that might have 
erroneously paid the corporate AMT for tax periods after 
November, 2000.
    Chair Snowe's letter stressed the necessity of improving 
this oversight. For example, many of these small corporations 
likely have a limited cash flow--meaning they could have 
reinvested this tax liability that they were not required to 
pay into their business rather than with the Federal 
Government. Moreover, subjecting these taxpayers to the AMT 
imposes additional administrative costs and burdens that 
otherwise would not have been required. Consequently, Chair 
Snowe urged Commissioner Everson to implement the 
recommendations of TIGTA's report to ensure that small 
corporations that erroneously paid the AMT are notified of 
their mistake and issued a prompt refund.

                      IV. Women's Business Center

    According to the Center for Women's Business Research, in 
2004 there were 10.6 million women-owned businesses, generating 
almost $2.5 trillion in revenues and employing more than 19 
million Americans. With women entrepreneurs making significant 
contributions to the economy and growing at twice the rate of 
all other firms, Chair Snowe wanted to ensure that programs 
such as the SBA's Women's Business Center program continued to 
help these women succeed. During the 108th Congress, she 
introduced three bills related to improving programs and 
services for women in small business.
    In addition, Chair Snowe sent several letters to 
Administrator Barretto in an effort to resolve the funding 
shortfall with the Women's Business Center Program.

       A. WOMEN'S SMALL BUSINESS PROGRAMS IMPROVEMENT ACT OF 2003

    On May 23, 2003, Senator Snowe, along with Senators Bond 
and Burns introduced S. 1154, the Women's Small Business 
Program Improvement Act of 2003. This bill was designed to 
improve the programs and services that the SBA delivers across 
the nation for women business owners through the Office of 
Women's Business Ownership, the Women's Business Centers 
Program, the National Women's Business Council, and the 
Interagency Committee on Women's Business Enterprise. The bill 
provided consolidation, direction and integration of existing 
programs that have previously been created to offer 
opportunities for women through their entrepreneurial 
endeavors. Additionally, the bill made the Women's Business 
Center Program a permanent program for existing eligible 
Centers so that women can depend on the experienced services of 
long-term counseling and small business education and training. 
These Centers have proven to be a great value to the 
communities they serve and this bill ensures that these 
programs and services continue to be available.

     B. WOMEN'S BUSINESS CENTER PRESERVATION ACT OF 2003 (S. 1247)

    On June 12, 2003, Chair Snowe introduced S. 1247, the 
Women's Business Center Preservation Act of 2003. This bill 
modified the percentage of funds for the Women's Business 
Centers (WBC) Program that the SBA can use for sustainability 
grants in Fiscal Year 2003. Under section 29(k) of the Small 
Business Act, funding for the WBC Program is split between 
initial grants for new Women's Business Centers and 
sustainability grants for Centers that have completed their 
original grant. As a result of this allocation, only 30.2 
percent of the program's $12 million in appropriated funds 
could be used for sustainability grants. The bill modified this 
allocation by increasing the percentage for sustainability 
grants to 36 percent in order to address the funding shortfall 
that put a number of WBCs in jeopardy in Fiscal Year 2003. S. 
1247 was limited only to Fiscal Year 2003 and pertained only to 
funds already appropriated to the SBA for the WBC program.

      C. THE WOMEN'S SUSTAINABILITY RECOVERY ACT OF 2004 (S. 2267)

    On April 30, 2004, the Senate unanimously passed S. 2267, 
the Women's Sustainability Recovery Act of 2004, a bill 
introduced by Chair Snowe and included a bipartisan co-
sponsorship of 14 Senators. This legislation, similar to S. 
1247, the Women's Business Center Preservation Act of 2003, 
assured that each of the existing eligible women's 
sustainability centers had the opportunity to compete for a 
sufficient pool of funds. For Fiscal Year 2004, the SBA was 
appropriated $12.5 million for the Women's Program. Under 
outdated legislation, only 30.2 percent of the appropriated 
funds was available for sustainability. Because the SBA 
increased the number of awards to women's business centers over 
the past 3 years, the reserve which was legislatively mandated 
for the sustainability centers was inadequate for the growing 
number of centers. The bill increased the percentage reserved 
for sustainability centers to 48 percent of the programs 
appropriated funds for Fiscal Year 2004 sustainability grants.

  D. SBA'S WOMEN'S BUSINESS CENTER PROGRAM GRANTS FOR FISCAL YEAR 2004

    On April 14, 2004, Chair Snowe and Ranking Member Kerry 
sent a letter to SBA Administrator Barreto requesting the 
agency's plans for funding new, regular and sustainability 
women's business centers. The SBA opened the application period 
forFiscal Year 2004 Women's Business Center (WBC) grants on 
April 1, 2004. The SBA's intentions at the time were to renew 35 
regularly funded women's business center grants, renew 32 of the 
sustainability center grants, and award 21 new, regularly funded 
women's business center grants. However, Chair Snowe and Senator 
Kerry's concern was that the agency's most experienced women's business 
centers will be insufficiently funded. Under the current formula, 53 
sustainability centers in 39 states would be competing for a pool of 
funds that only provides for 32 full sustainability grants. As a 
result, many of the most effective and experienced centers that have 
been the source of business development in their communities and States 
were in jeopardy of closing.
    On June 30, 2004, Chair Snowe was joined by 12 other 
Senators in sending a letter to Administrator Barreto 
requesting that the SBA assist in advocating for compromise 
language that increased the percentage reserved for 
sustainability grants from 30.2 percent to 48 percent. With the 
SBA's assistance, a new compromise bill was drafted that 
addressed the immediate women's business center funding issue 
for Fiscal Year 2004. However, the SBA still made plans to make 
women business center grant awards without the implementation 
of the compromise language. Under the funding formula, 53 
sustainability centers in 39 states would be competing for a 
pool of funds that only provides for 32 full sustainability 
grants. Therefore, the agency's most experienced women's 
business centers would be insufficiently funded and in jeopardy 
of closing.

                         V. SBA Transformation


          A. IMPLEMENTATION OF SBA'S TRANSFORMATION INITIATIVE

    Recognizing the need to transform the agency and its 
workforce to meet the modern demands of small businesses, the 
SBA announced a 5-year workforce transformation initiative in 
July 2002. On July 23, 2003, the SBA delivered an incomplete 
and basic outline of their upcoming plans to move into the 
second phase of the agency's transformation initiative. The 
plan included: strategic human capital planning and 
organizational alignment through the centralizing of 
liquidation functions thereby, removing this function from the 
district office; and improving services to small business 
customers by focusing the staff on partner management and 
outreach. On August 1, 2003, Chair Snowe, sent a letter to SBA 
Administrator Hector V. Barreto requesting detailed information 
on the SBA's plans to centralized the loan liquidation and 
purchase guarantee functions.
    The first phase of the plan began in March 2003, as a pilot 
program in three district offices in North Carolina, South 
Florida, and Arizona. The pilot included an initial training 
period followed by the centralization of 7(a) liquidation and 
purchase activity in Santa Ana, California, and of the 
equivalent 504 program activity in Sacramento, California. 
Although it was clear that the SBA needed to address and solve 
its management and programmatic inefficiencies, Chair Snowe 
wanted to ensure that the SBA had designed a complete plan 
before moving forward with the next phase. On August 8, 2004, 
the SBA responded to Chair Snowe's request for additional 
details on the agency's transformation plans.

   B. SBA'S BUYOUT ANNOUNCEMENT REGARDING AGENCY TRANSFORMATION PLANS

    On September 9, 2003, the SBA and the AFGE Council 228 
signed a memorandum of understanding (MOU) that established and 
staffed a liquidation center in Herndon, Virginia. This MOU 
included an agreement that the SBA district office staff who 
reported performing liquidation functions during 25% or more of 
their time in the agency's cost allocation survey would be 
directly reassigned to the liquidation center or to the 6 most 
severely understaffed district offices: New York, Newark, 
Atlanta, Chicago, San Francisco, and Los Angeles. Otherwise, 
the SBA employees identified would have to choose the option of 
early retirement or a buy-out.
    On September 10, 2003, 180 SBA district office employees 
received letters identifying them as being responsible for 
liquidation work. Those employees were given 7 calendar days to 
accept a buy-out option, or choose to stay and be directly 
reassigned without knowledge of where that assignment would be 
located. Those employees choosing to accept a buy-out were 
required to separate from Federal service no later than 
September 30, 2003. Although the Committee was aware of the 
SBA's intentions to eventually reposition staff, there was no 
notification to the Committee of these plans prior to 
implementation.
    As a result of the SBA's decision to offer buyouts and 
direct reassignments to SBA personnel, on September 15, 2003, 
Chair Snowe, again sent a letter to Administrator Barreto 
requesting additional information on the agency's 
transformation plans. The SBA had determined that a significant 
portion of its workforce was not well positioned geographically 
to meet the goals that the current Administration wants to 
achieve--reaching more small businesses directly. As a result, 
part of the transformation plan was designed to move personnel 
to locations in need of staffing. In addition, the agency 
expected to down-size its workforce and to free up limited 
salary and expense resources. As indicated in the letter, Chair 
Snowe's concern regarding the buyouts was that if necessary 
personnel were removed, many States would face tremendous 
challenges in providing SBA programs and services where current 
staffing was already minimal.

     C. SBA'S PLANS TO IMPROVE AND TRANSFORM THE 504 AND 7(A) LOAN 
                 LIQUIDATION AND PURCHASING ACTIVITIES

    On October 30, 2003, Chair Snowe sent a letter to 
Administrator Barreto supporting the agency's new plan to 
streamline and modernize the loan liquidation program. 
According to the SBA's plans, by streamlining the workforce the 
agency would be able to improve loan processing functions, 
reduce personnel costs, and improve marketing and outreach. 
Additionally, the SBA expected to receive an even smaller 
operating budget for Fiscal Year 2005. Understanding the 
realities of the appropriation, and realizing that the 
agencymust find ways to do more with less funding, this new 
transformation initiative was a step towards accomplishing the SBA's 
mission to serve more small businesses with limited funding.
    The agency's new transformation plan contained three key 
components to effectively deliver services and assistance to 
small businesses through better management of the SBA's 
workforce including: increasing the number of employees in the 
field offices that directly assist small businesses; reducing 
the cost of operations not directly related to assisting small 
business, thereby providing more resources for assisting small 
businesses; and ensuring that key positions in all the field 
offices are filled with the most capable and qualified staff.
    The final results of the pilot centralization involving 
three District Offices--Phoenix, Arizona, Charlotte, North 
Carolina, and Miami, Florida, showed some success.
    The centralization of the 504 loan application processing 
decreased the processing time for these loan applications from 
more than two weeks to an average of two days. Through this 
pilot, 631 applications were submitted and nearly 500 were 
approved. By reducing the processing time for these loan 
applications, small business owners could move forward with 
construction of a new facility or purchase necessary machinery 
quicker. The results of reducing the processing for these loans 
allows new capital flows into the economy sooner and small 
businesses are able to create and retain more jobs sooner 
helping to spur job growth.
    Additionally, the centralization of the SBA's 7(a) loan 
liquidation and guarantee purchase activities showed similar 
results. The processing time for these activities was reduced 
to an average of 60 days from a national average of over 500 
days. The SBA modeled its approach after commercial banks and 
lenders and the SBA's lending partners eventually would absorb 
all of SBA's liquidations functions as the agency continued to 
streamline these processes.
    Based on these results and understanding the SBA's plan as 
it was presented, Chair Snowe provided her support for the 
initiative.

  VI. SBA's International Trade Program: Funding Constraints for U.S. 
                   Export Assistance Centers (USEACS)

    On September 23, 2003, Chair Snowe sent a letter to SBA 
Administrator Barreto of the SBA expressing her concern that 
the agency was in jeopardy of being withdrawn from the U.S. 
Export Assistance Centers (USEACs). USEAC's are one-stop shops 
located in major metropolitan areas throughout the United 
States that promote trade and provide small or medium sized 
businesses with local export finance assistance. USEACs work, 
in partnership with the U.S. Department of Commerce and the 
U.S. Export-Import Bank, is the only partner that offers loans 
that are geared toward small businesses developing or expanding 
in the export market.
    As a result of the SBA not paying its portion of overhead 
costs for the USEACs, the SBA faced the possibility of being 
withdrawn from these centers based on a Memorandum of 
Understanding (MOU) with the Department of Commerce and the 
Export-Import Bank. To meet the interagency agreement in Fiscal 
Year 2002, the SBA absorbed the salaries and the agency's share 
of operating and facility costs. However, for Fiscal Year 2003 
the agency only allocated enough money for salaries with no 
funds obligated for operating and facility costs. As a result 
of Chair Snowe bringing the matter to the attention of the 
Administrator, the SBA responded immediately and fulfilled 
their obligation under the MOU agreement.

      VII. The SBA Budget and Appropriations for Fiscal Year 2005


 A. FISCAL YEAR 2005 VIEW AND ESTIMATES LETTER TO SENATORS NICKLES AND 
                                 CONRAD

    On February 20, 2004, Chair Snowe sent a letter to Budget 
Committee Chairman Don Nickles and Ranking Minority Member 
Senator Kent Conrad regarding her views on the President's 
Fiscal Year 2005 budget request for the SBA. Chair Snowe's 
letter listed concerns regarding the request for zero 
appropriations and recommended funding levels for the 7(a) loan 
guaranty program, microloan program, microloan technical 
assistance, Federal and State Technology Partnership program, 
and U.S. Export Assistance Centers. In addition, Chair Snowe 
requested an increase in appropriations for the Small Business 
Development Center, SCORE and the office of the National 
Ombudsman. Overall, Chair Snowe's total request was $121 
million over the FY2004 appropriations to provide adequate 
funding levels for the SBA's key lending and technical 
assistance programs.

                    B. AMENDMENT TO S. CON. RES. 95

    On March 11, 2004, the Senate agreed to amendment SA 2839 
offered by Chair Snowe to increase the budget authority for the 
SBA in the Senate Budget Resolution for Fiscal Year 2005. By 
increasing the SBA's budget authority the agency would 
effectively be able to provide its lending and technical 
assistance resources to our nation's small businesses. The 
President's proposed budget for the SBA was 15 percent lower 
than budget proposed last year and included zero funding for 
many of the agency's programs including the SBA's 7(a) program, 
HUBZone program, and U.S. Export Assistance Centers. With the 
SBA helping to create or retain more than 6.2 million jobs 
during the last five years, this amendment provided necessary 
funds that would aid the agency in its efforts to revitalize 
our nation's economy. The amendment increased the SBA's budget 
$121 million over Fiscal Year 2004 appropriations and provided 
the Appropriations Committee with the ability to provide 
funding for programs such as the 7(a) loan guaranty program, 
the Microloan program and Small Business Development Centers.

C. FISCAL YEAR 2005 APPROPRIATIONS LETTER TO SENATORS GREGG AND HOLLING

    On May 10, 2004, Chair Snowe sent a letter to Chairman Judd 
Gregg and Ranking Member, Senator Ernest Hollings of the 
Subcommittee of Commerce Justice State and the Judiciary 
requesting that they utilize the additional funding available 
in the Fiscal Year 2005 Senate passed budget resolution. The 
request included funding for the Microloan program, U.S. Export 
Assistance Centers, Federal and State Technology Partnership 
Program and the Rural Outreach Program. Additionally, Chair 
Snowe requested increasing funds for Small Business Development 
Centers, SCORE and the Office of the National Ombudsman. The 
letter also requested to continue appropriated funds for the 
7(a) program. The SBA requested zero appropriated funds in 
Fiscal Year 2005 for the program with plans to raise fees on 
lenders and borrowers and reduce the guarantee rates to 
substitute for appropriations. With this proposal raising 
several concerns, Chair Snowe requested that necessary 
appropriations continue until a solution that would most 
effectively reduce the programs subsidy rate was constructed so 
that small business growth would not be hindered.

         VIII. SBA Reauthorization--Expiration of SBA Programs

    On July 26, 2004, Chair Snowe sent a letter to SBA 
Administrator Barreto requesting information on SBA's programs 
that have suffered a full lapse in authority and may be 
partially restricted or altered because of the continued 
expiration of SBA programs. In particular the letter addressed 
the Women's Business Center Program, the 7(a) loan guaranty 
program, the Preferred Surety Bond Program and the Small 
Disadvantaged Business Program. The Senate had unanimously 
passed S. 2700, a bill introduced by Chair Snowe to temporarily 
extend through September 17, 2004, certain programs under the 
Small Business Act and the Small Business Investment Act of 
1958. However, this bill did not pass the House of 
Representatives before the Congress recessed and, as a result, 
small businesses would not receive the valuable assistance 
provided by many of the SBA's programs until Congress returned 
in September to reconsider the bill.

                         IX. Procurement Issues


 A. SMALL BUSINESS PROCUREMENT OPPORTUNITIES, TITLE IV OF S. 1375, THE 
 SMALL BUSINESS ADMINISTRATION 50TH ANNIVERSARY REAUTHORIZATION ACT OF 
                                  2003

    For over half a century, the Small Business Act has been 
directing the Federal Government to provide a fair portion of 
prime contracts and subcontracts to small businesses. 
Therefore, procurement matters have figured prominently in 
Chair Snowe's efforts to reauthorize the Small Business 
Administration. Numerous contracting-related provisions were 
favorably reported by the Committee and unanimously approved by 
the Senate on September 26, 2003 as part of the earliest SBA 
reauthorization bill, S. 1375. S. 1375 was never voted on by 
the House. The descriptions of these provisions contained in 
Senate Report 108-124 are reprinted below.

S. 1375 Procurement Provisions

    Sec. 401: Contract consolidation--Section 401(a) replaces 
the definition of `bundled' contracts with `consolidation of 
contract requirements' to mean the use of a solicitation to 
obtain offers for a single contract or a multiple award 
contract to satisfy two or more requirements previously 
provided or performed, or of a type that is capable of being 
provided or performed by small business for that department or 
agency under two or more separate contracts smaller in cost 
than the total cost of the contract for which the offers are 
solicited.
    Section 401(b) amends Section 15(e) of the Small Business 
Act and complements the intent of the original contract 
bundling legislation. It sets forth the procedures to be 
followed by Federal agencies and the SBA with regard to 
consolidation-of-contract requirements.
    This section also limits the authority of Federal agencies 
to execute an acquisition strategy that includes a 
consolidation-of-contract requirement with a total value in 
excess of $2 million ($5 million for the Department of Defense) 
unless the agency demonstrates that the consolidation is 
necessary and justified based on market research. In addition, 
agencies must identify alternative contracting approaches that 
would involve a lesser degree of consolidation of contract 
requirements.
    When an agency contemplates a consolidated procurement 
above $5 million ($7 million for the Department of Defense), 
this section requires the agency to conduct a more extensive 
review that includes the estimated benefits of the proposed 
consolidated contract requirements and how such benefits were 
calculated. Additionally, this section requires an agency to: 
(1) assess the specific impediments to participation by small 
business concerns as prime contractors that will result from 
the consolidation; (2) specify actions designed to maximize 
small business participation as prime contractors, including 
provisions that encourage small business teaming; (3) specify 
actions designed to maximize small business participation as 
subcontractors (including suppliers) at any tier under the 
contract or contracts that may be awarded to meet the 
requirements; and, (4) identify alternative strategies that 
would reduce or minimize the scope of consolidation and justify 
the rationale for not choosing the alternatives.
    Section 401(c) modifies Section 15(p)(4)(B) of the Small 
Business Act to require the SBA to collect procurement 
strategies that have been successful in maximizing small 
business prime and subcontracting opportunities. It requires 
the SBA to include in its annual contract bundling report to 
the Congress a section that identifies and describes these best 
practices.
    Section 401(d) amends Section 15(l) of the Small Business 
Act to provide for at least one Procurement Center 
Representative (PCR) in each state. In addition, this section 
directs the Administration to ensure there is not less than one 
PCR assigned at each majorprocurement center. This subsection 
also clarifies that these individuals shall be independent of, and have 
responsibilities independent from those of, SBA Breakout Procurement 
Center Representatives and Commercial Market Representatives.
    Section 401(e) makes technical corrections to Section 15(k) 
of the Small Business Act, and Section 401(f) makes conforming 
amendments to Section 15(p) of the Small Business Act.
    Section 401(g) requires the GAO to conduct a study by June 
30, 2004, of the feasibility of establishing contract 
consolidation thresholds based on industry categories.
    Sec. 402: Agency accountability--Section 402 makes numerous 
changes that hold agencies accountable for small business 
utilization goals. Subsection (a) amends Section 15(g)(2) of 
the Small Business Act to require agency heads to identify, in 
their strategic plan and their annual budget submission to 
Congress, a specific portion of their budget requests that will 
be awarded to small businesses; and, to report on these amounts 
as part of the Government Performance and Results Act (GPRA) in 
their Annual Performance and Accountability reports.
    Additionally, the head of an agency may also be required to 
provide a complete report to the agency's congressional 
appropriators on the agency's small business utilization at the 
next appropriations cycle.
    This section also directs agency senior procurement 
executives to communicate to subordinate employees the 
importance of achieving small business goals. In addition, it 
directs agencies to include in the annual performance 
evaluation for senior procurement and program office employees, 
a factor that measures the success of that senior executive in 
small business utilization.
    For agencies that fail to achieve their small business 
achievement goals, this section would permit, where 
appropriate, a percentage of the performance bonus for that 
agency's senior procurement and program office employees to be 
withheld.
    Section 402(b) amends Section 15(k)(3) of the Small 
Business Act to ensure that all Directors for the Office of 
Small and Disadvantaged Business Utilization report to the head 
of the agency.
    Section 402(c) amends Section 10(d) of the Small Business 
Act to require, in addition to the Department of Defense, all 
Federal agencies represented on the President's Management 
Council to submit annual small business achievement reports to 
the Committees and the Committee on Small Business of the House 
of Representatives showing the amount of funds appropriated 
that have been expended, obligated, or contracted to be spent 
with small business.
    Sec. 403: Small business participation in prime 
contracting--Section 403(a) amends Section 15(g) of the Small 
Business Act to establish a government-wide goal for 
participation by small businesses of the dollar value of awards 
placed against multiple award schedule contracts at not less 
than 23 percent.
    Subsection (b) amends Section 15(j) of the Small Business 
Act to ensure that the small business reserve threshold is 
adjusted for any increase to the simplified acquisition 
threshold. This subsection further amends Section 15(j) to 
include Federal Supply Schedule orders within the small 
business reserve.
    Sec. 404: Small business participation in subcontracting--
Section 404(a) makes several changes that hold prime 
contractors responsible for the validity of subcontracting 
data. It amends Section 8(d)(6) of the Small Business Act to 
require the chief executive officer of large prime contractors 
to certify the accuracy of the firm's subcontracting report 
under penalty of law. It also requires large prime contractors 
to certify that they will use small business subcontractors in 
the amount and quality used in preparing their winning bid or 
proposal unless such firms no longer are in business or can no 
longer meet the quality, quantity or delivery date.
    Subsection (b) amends Section 16(f) of the Small Business 
Act to impose penalties for false certifications of past 
compliance with small business subcontracting.
    Sec. 405: Evaluating subcontract participation in awarding 
contracts--Section 405 amends Section 8(d) of the Small 
Business Act to provide for the consideration of proposed small 
business participation as subcontractor and suppliers as part 
of the process of selecting among competing offerers for any 
contract award that includes significant opportunity for 
subcontracting. It also provides for recognition of a prime 
contractor's past performance in supporting small business 
subcontracting participation in other Federal contracts.
    This section requires the SBA to share subcontracting 
compliance review data with Federal contracting officers and to 
update a national centralized government-wide database with 
prime contractor past performance specifically related to 
subcontracting plan compliance.
    It also requires contracting officers to withhold prime 
contractor payment until the prime contractor provides the 
agency with complete and accurate subcontracting reports.
    If a subcontracting violation is found to constitute a 
material breach of contract, this section requires such 
material breaches to be referred to the Inspector General of 
the affected agency for investigation.
    Sec. 406: Direct payments to subcontractors--Section 406 
amends Section 8(d) of the Small Business Act to establish a 
pilot program in certain agencies to test direct payment to 
small business subcontractors. This program shall remain in 
effect until September 30, 2006.
    Sec. 407: Women-owned small business industry study--
Section 407 amends Section 8(m)(4) to direct the GAO to conduct 
a study by December 31, 2003, to identify industries in which 
small businesses owned and controlled by women are 
underrepresented with respect to Federal procurement.
    Sec. 408: HUBZone authorization--Section 408 amends Section 
31(d) of the Small Business Act to extend authorization of 
funding levels for the HUBZone program through Fiscal Year 
2006.
    Sec. 409: Definition of HUBZone; treatment of certain 
former military installation lands as HUBZones--The section 
amends Section 3(p) of the Small Business Act to designate 
military installations undergoing closure as HUBZones.
    Sec. 410: Definition of HUBZone small business concern--
Section 410 amends Section 3(p) of the Small Business Act to 
modify the ownership requirements for HUBZone small businesses 
to include any small business investment company, specialized 
small business investment company, New Markets Venture Capital 
company, or other similar investment company, provided such 
ownership does not exceed 15 percent of the small business 
concern.
    Sec. 411: Acquisition regulations--Section 411 establishes 
a deadline for procurement regulations to be issued no later 
than 180 days after the date of the enactment of this bill.

 B. AMENDMENTS TO THE RONALD W. REAGAN NATIONAL DEFENSE AUTHORIZATION 
                            ACT FOR FY 2005

    The annual DoD Authorization Act traditionally contains a 
number of provisions affecting access of small business to 
government contracts as well as integrity of procurement 
programs. During consideration of H.R. 4200 and its Senate 
companion, S. 2400, Chair Snowe took a stand for small business 
by filing a series of amendments to the bill. The Senate 
unanimously adopted four Snowe amendments:
    1. Amendment No. 3399 (Feingold-Snowe)--Amendment No. 3399 
required that, as part of pre-separation counseling, veterans 
receive counseling on procurement opportunities available to 
veterans and service-disabled veterans. It also permitted the 
Department of Veterans Affairs (VA) and the Department of 
Defense (DOD) to allow such counseling on their facilities 
through the SBA, VA Outreach Centers, Small Business 
Development Centers, and other government agencies. It also 
required the General Accounting Office to conduct a new study 
to determine what improvements in veteran pre-separation 
counseling, including procurement counseling, will be needed to 
better serve the nation's veterans.
    Although the House-Senate conferees chose not retain the 
counseling provisions except the GAO study provision, on 
October 21, 2004 President Bush quickly moved to issue the 
Service Disabled Veterans Executive Order No. 13360, which 
implemented the substantive changes to service-disabled 
veterans procurement counseling sought by Chair Snowe. The 
Committee will exercise oversight over implementation of this 
Executive Order by working with Executive Branch agencies and 
with the GAO.
    2. Amendment No. 3273 (Snowe-Coleman-Kerry)--Amendment No. 
3273 was meant to better protect the interests of small 
businesses on the Office of Federal Procurement Policy's 
(OFPP's) Advisory Panel on Review of Acquisition Law and Policy 
by requiring the panel to make recommendations on assuring 
competition and small business participation, and providing for 
review of its report by both the Senate and the House Small 
Business Committees. The amendment was meant to apply President 
Bush's Executive Order 13272 on consideration of small business 
interests to the formulation of federal procurement policy. In 
her June 17, 2003 letter to the White House, Chair Snowe asked 
the OFPP to implement the substantive policies of the 
Amendment.
    On July 12, 2003, Acting OFPP Administrator Robert Burton 
wrote to the Committee to announce the Administration's intent 
to implement the policies of the Amendment by placing a senior-
level SBA official on the panel and requiring the panel to 
consider small business prime and subcontracting issues. 
Despite such support from the Bush Administration, the House-
Senate conferees chose not to include this Amendment into the 
final bill. Nevertheless, the Committee is pleased with the 
commitment of the Bush Administration concerning the panel.
    3. Amendment No. 3246 (Snowe)--Amendment No. 3246 expanded 
the DOD's Mentor-Protege Program to include service-disabled 
and HUBZone small business concerns in order to boost contract 
participation by these groups as DOD suppliers and 
subcontractors. The National Defense Authorization Act for FY 
1991 established the pilot Mentor-Protege Program to provide 
reimbursements and other incentives for major DOD contractors 
to furnish disadvantaged small businesses assistance to enhance 
their capabilities and increase their participation as 
subcontractors and suppliers on DOD contracts. Four years ago, 
Chair Snowe worked closely with Chairman Warner to extend the 
benefits of this successful program to women-owned small 
businesses. This Amendment was retained in the final version of 
the Act and signed into law.
    4. Amendment No. 3434 (McConell-Snowe)--Amendment No. 3434 
set forth the sense of the Senate to protect, in any future 
adjustments for inflation, the dollar value of contract awards 
required to be reserved for small businesses to include those 
valued from $2,500 to $100,000. Existing law allows procurement 
officials to forego full and open competition on many contracts 
worth less than the simplified acquisition threshold of 
$100,000. This amendment, which was introduced by Senator Mitch 
McConnell (R-KY) at the behest of Chair Snowe, also directs the 
Administrator of Federal Procurement Policy to ensure that 
appropriate government-wide policies and procedures are in 
place to monitor data on purchases made by federal agencies 
using government purchase cards and to encourage the maximum 
practicable number of those purchases be made from small 
businesses. Small Business Act provisions set a government-wide 
statutory goal of23 percent of all prime contract awards to be 
awarded to small businesses. The government purchase card program has 
been around since 1989, when it was created as a way for agencies to 
streamline purchases of low-cost goods and services. Initially about 
10,000 employees were issued cards. In the first year, they made only 
2,000 transactions. In Fiscal Year 2002, they accounted for more than 
$15.2 billion in government expenditures and 25 million 
transactions.\1\ The sense of the Senate provision was not retained in 
the final version of H.R. 4200.
---------------------------------------------------------------------------
    \1\ Fiscal Year 2002 Federal Procurement Report, Federal 
Procurement System, General Services Administration, p. 13.
---------------------------------------------------------------------------
    The GAO recently reported (at the Committee's request) 
difficulties, with the collection of demographic data and has 
recommended specific action to improve data collection. GSA 
states they are making advances in collecting data on purchase 
card expenditures with small businesses, including minority and 
women-owned firms, but additional improvements are needed. The 
parity provision was retained in the final version of the bill 
and signed into law.
    5. Amendment No. 3344 (Byrd-Snowe-Allen-Coleman-Kerry)--
Amendment No. 3344 intended to expand the Commission on the 
Future of National Technology and Industrial Base by adding 
small business concerns for participation in and consideration 
by the Commission and to require that it study shortages of 
critical technologies and raw materials. The Senate unanimously 
approved this provision, although the Conference Committee 
chose not to create the Commission.

       C. PROCUREMENT PROVISIONS IN S. 2821, THE SMALL BUSINESS 
        REAUTHORIZATION AND MANUFACTURING ASSISTANCE ACT OF 2004

    Chair Snowe continued her efforts to address important 
procurement matters as part of the second SBA reauthorization 
bill, S. 2821. That legislation contained 2 contracting 
provisions: Section 502, Procurement Center Representatives, 
which duplicated Section 401(d) of S. 1375, and Section 501, 
Women-owned Small Business Concerns. Section 501 directs the 
Administrator to conduct a study, within 90 days of enactment 
of this legislation, to identify industries in which small 
businesses owned and controlled by women are underrepresented 
with respect to Federal procurement; and conveys special 
authorities to the Administrator in carrying out the Small 
Business Act. This provision was originally in H.R. 2802 and 
was reported out of the House Small Business Committee, but 
left pending in the House.
    Chair Snowe, along with Senator Bond and Senator Allen, 
also sponsored an amendment concerning the HUBZone and the 
Section 8(a) programs. The amendment was later incorporated 
into the third and final SBA reauthorization bill which passed 
as a part of the Consolidated Appropriations Act for FY2005.

    D. HUBZONE AND SECTION 8(A) IMPROVEMENTS IN THE SMALL BUSINESS 
        REAUTHORIZATION AND MANUFACTURING ASSISTANCE ACT OF 2004

    The HUBZone Program continues to provide a valuable 
opportunity to reach out to small business owners who have not 
participated in government contracting in the past. The success 
of the program, however, will depend on addressing several 
unforseen issues that have arisen in the past year, as well as 
taking steps to strengthen the program's focus.
    New questions about eligibility and program implementation 
have arisen. In response, Chair Snowe, Senator Allen, Senator 
Bond, Senator Murkowski, Senator Gregg, and Senator Talent 
crafted legislation to reform the HUBZone program that was 
included into the Small Business Reauthorization and 
Manufacturing Act, Public Law No. 108-447. An excerpt from the 
Explanatory Statement filed By Chair Snowe in the Congressional 
Record on November 19, 2004 concerning these, is reprinted 
below.
    Streamlining And Revision Of Hubzone Eligibility 
Requirements--The Historically Underutilized Business Zone 
(HUBZone) program was designed to direct portions of federal 
contracting dollars into areas of the country that in the past 
have been out of the economic mainstream. HUBZone areas, which 
include qualified census tracts, poor rural counties, and 
Indian reservations, often are out-of-the-way places that the 
stream of commerce passes by, and thus tend to be in low or 
moderate income areas also characterized by comparatively high 
unemployment. These areas can also include certain rural 
communities and tend generally to be low-traffic areas that do 
not have a reliable customer base to support business 
development. As a result, businesses have been reluctant to 
move into these areas and expend the necessary funds to develop 
the infrastructure for creation of jobs.
    The HUBZone program seeks to overcome these problems by 
providing the means for Federal procurement activities to 
become customers for small businesses that locate in HUBZones. 
In past years, the HUBZone program has encountered issues 
relating to the statutory requirement that a HUBZone firm be 
entirely owned and controlled by individual U.S. citizens. This 
requirement means that all HUBZone applicants need to be owned 
by human beings directly and not human beings organized as 
business entities. However, many small business owners and 
small business investors prefer to take advantage of various 
corporate forms in order to limit the personal liability for 
themselves and their families. Exceptions for Alaska Native 
Corporations, Indian tribal governments, and community 
development corporations were added by the Small Business Act 
reauthorization legislation in 2000. Even with those changes, 
the presence of a corporate entity or a limited liability 
company with an ownership stake in a small business would have 
automatically disqualified an otherwise eligible firm from 
participation in the HUBZone program. Small agricultural 
cooperatives, which already maintain presence in rural 
HUBZones, would have faced similar restrictions. These rules 
unnecessarily impede the flow of capital to the very areas that 
need it the most and create compliance conflicts with other 
small business procurement programs.
    Section 151 addresses this problem through streamlining and 
revision of the eligibility requirements for HUBZone small 
businesses to include small businesses that are 51 percent 
owned by United States citizens, as well as to include small 
businesses which are small agricultural cooperatives or are 
owned and controlled by small agricultural cooperatives.
    In addition, HUBZone firms owned by the Indian tribes have 
been facing peculiar challenges due to statutory requirements 
that they must hire a certain percentage of its workforce 
performing a federal contract or subcontract from Indian 
reservations or adjacent areas. These requirements, while 
motivated by the desire to spur economic development of the 
tribes, over time had the unintended consequence of putting 
tribally-owned firms at a disadvantage in comparison with all 
other HUBZone concerns by imposing a geographic restriction on 
the kinds of contracts that tribally-owned HUBZone firms could 
perform. Geographic restrictions also impeded business 
synergies between tribally-owned HUBZone firms and Alaskan 
Native Corporations. To remedy this disparity, the Act is 
providing tribally-owned HUBZone concerns the option of 
qualifying for the program based on locating in, and hiring 
workers from, either Indian reservations or any other HUBZones 
on the same terms as available to other HUBZone firms. Congress 
notes that the Indian tribes, as owners of the HUBZone firms, 
will be receiving expanded economic benefits from new 
contracting opportunities.
    Expansion Of Qualified Areas--Congress observes that the 
HUBZone area qualifications are also in need of improvement. 
Paradoxically, economically distressed rural communities in 
states with high unemployment--among the neediest of needy 
areas--currently do not qualify for the HUBZone program because 
rural areas currently must qualify in relation to the statewide 
unemployment average. As an example, in calendar year 2003, 
Alaska had a statewide unemployment rate of 8.0 percent. To 
qualify as a HUBZone area, it was necessary for an Alaskan 
rural community to have an 11.2 percent unemployment rate. But, 
in 25 of the 50 states, a rural community could have qualified 
as a HUBZone with an unemployment range of 7.8 percent or less.
    Section 152 addresses this problem by modifying the 
definition of a ``qualified non-metropolitan county'' to 
provide the option of comparing the unemployment statistic for 
that area to the statewide average or to the national average. 
The new statutory HUBZone definition should give the Small 
Business Administration flexibility to address both national 
and state-wide unemployment disparities without hurting the 
states that have comparatively low unemployment overall, but 
with pockets of serious unemployment.
    Congress recognizes the drastic economic ramifications of 
military base closures and that the HUBZone program can 
uniquely harness the strength and the creativity of the private 
sector by providing incentive for small businesses to relocate 
to areas suffering such ramifications. According to 
congressional research, more than 300 military bases closed or 
realigned between 1988 and 2003 and more than 50 percent of 
these bases were located outside of a designated HUBZone. 
Therefore, Congress intends that, upon the later of the 
enactment of this act or the date of final closure, existing as 
well as future military base closure areas be designated as 
HUBZones for a period of five years in order to reinvigorate 
the productive capacity of such areas and leverage existing 
local customers and a skilled workforce. Congress believes that 
new businesses and new jobs created through the HUBZone small 
firms mean new life for areas affected by base closure.
    Additionally, Congress notes the existence of numerous 
complaints that the current definition of HUBZone qualified 
areas based on census income data, in conjunction with the 
definition of HUBZone qualified redesignated areas, fail to 
provide adequate time to recoup a return on investment. These 
concerns appear justified. Congress observes that the HUBZone 
program is relatively young, and the federal government is not 
even close to meeting its statutory prime contracting goal of 3 
percent. Because the HUBZone program was enacted into law in 
1997, the initial HUBZone areas were designated on the basis of 
the 1990 Census. However, the federal government conducted 
another census in 2000. As a result, many areas were 
redesignated after only 3 years of the program's existence. The 
statute currently grandfathers the redesignated areas into the 
program for 3 years.
    Congress notes that, at the time of the last redesignation, 
the small business community received comparatively few 
benefits from the HUBZone program despite the substantial 
workforce recruitment, compliance, and business development 
efforts that must be expended by each of the HUBZone firms. 
These small businesses, which made business decisions to pursue 
the HUBZone strategy by locating in a HUBZone, adjusting their 
ownership structure, and recruiting HUBZone residents are in 
danger of being penalized for the federal government's slow 
initial implementation of the HUBZone program. Further, 
anecdotal evidence indicates that it may take a long time for a 
new firm to secure a federal contract, and that multiple-order 
contracts commonly envision task orders over a number of years. 
In these circumstances, a 3-year grandfather clause would 
appear not to provide sufficient time for a small business to 
generate a return on the HUBZone investment. By comparison, 
companies under the 8(a) program can maintain such a 
designation for 9 years, and a general small business 
designation can be maintained indefinitely. Therefore, Congress 
imposes a moratorium on HUBZone area redesignations by 
providing for an extension of the redesignation period until 
the conclusion of the 2010 Census. No certified HUBZone firm 
shall be decertified as a result of either the redesignation 
process based on the 2000 Census data or any revised 
unemployment data subsequent to December 21, 2000, the date of 
passage of enactment of the HUBZone in the Native America Act. 
It is the intent of Congress to have the Small Business 
Administration reinstate any HUBZone firm previously 
decertified based on these two criteria.
    Congress also finds that, concurrently with the moratorium, 
a study on the effectiveness of the HUBZone area definitions, 
including the redesignation period, must be conducted by the 
Office of Advocacy of the United States Small Business 
Administration. The Office of Advocacy is chosen to conduct 
this study for its particular expertise in small business 
procurement, rural small business development, and general 
small business matters. Congress directs the Office of Advocacy 
to examine the impact andeffectiveness of the HUBZone 
definitions on small business development and jobs creation, and 
expects that the Office of Advocacy will periodically consult with 
congressional small business committees on matters concerning this 
study. Findings and recommendations of the study must be reported to 
congressional small business committees by May 1, 2008.
    Price Evaluation Preference--With regards to the 
application of existing HUBZone price preferences to 
international food aid procurements conducted by the United 
States Department of Agriculture (USDA), Congress concludes 
that the preferences as they currently stand are hindering the 
goals of U.S. foreign humanitarian food assistance programs. 
This view is supported by extensive consideration of market 
data from the Kansas City auction office of the USDA Farm 
Service Agency, the structure of auction tenders and other 
auction processes, as well as data supplied by the industry. It 
appears that there is a risk of various unintended and 
undesirable consequences to applying the current HUBZone 
mandate to international food aid acquisitions. In particular, 
it appears that, in the context of food aid tender auctions, 
the claimed job gains fostered by the current price preference 
are offset by job losses in other communities, the non-HUBZone 
small businesses attempting to compete may experience undue 
harm, and the competitive supplier base may atrophy. In turn, 
this may undermine USDA's capacity to secure adequate 
foodstuffs for malnourished persons and increase the costs to 
the food aid programs without realizing adequate jobs creation 
and business development benefits.
    The HUBZone price preference alternative adopted in this 
act (a 5 percent price evaluation preference on 20 percent of 
the contract) would alleviate these potentially damaging 
effects on the U.S. food aid system. Congress believes that 
this approach would preserve the HUBZone program's goal of 
providing HUBZone-eligible companies with a meaningful 
opportunity to compete while ensuring that the USDA has an 
adequate capacity of supply from which to draw to deliver 
emergency food aid in catastrophic situations. This approach 
would also eliminate the current HUBZone program's application 
problem which directly penalizes non-HUBZone small businesses 
due to the nature of the food aid auctions. The potential for 
job losses in other communities would be limited. Importantly, 
this approach also reflects the cornerstone of America's 
efforts to provide food assistance to the world's neediest 
people through competitive markets.
    According to President Dwight D. Eisenhower and 
Congressional architects of the Small Business Act, an 
overarching purpose of small business procurement programs is 
to assure a vibrant, competitive supplier base for the Federal 
Government. Price preferences are employed to further this 
purpose, and should be structured accordingly. Congress notes 
that, in general, price preferences have been a valuable tool 
for encouraging a more robust supplier base. Nevertheless, 
Congress believes that, in these very special circumstances, it 
is important to encourage competition by keeping multiple 
vendors actively bidding in our food assistance programs to 
secure the lowest cost procurement and emergency supply chains 
in the case of humanitarian crisis. This approach builds on the 
current small business 10 percent set-aside by an additional 20 
percent allocation of every tender to small businesses and 
HUBZone applicants. It guarantees full and open competition, 
including competition pursuant to the Small Business Act, in 
food aid procurement tenders to assure that U.S. food aid 
programs do not suffer consequences inconsistent with the 
intent of the price preference program. The approach in this 
legislation safeguards the dual interests of a vibrant small 
business presence in federal procurements and robust food aid 
programs.
    HUBZone Authorizations--Congress notes that the Federal 
Government has failed to meet its statutory HUBZone contracting 
goals every single year these goals have been in effect. 
Continuous, dedicated authorization of the HUBZone program is 
essential to continue the effort to bring economic 
opportunities to the HUBZone areas. Therefore, Congress extends 
the current authorization of appropriations of $10,000,000 for 
the SBA's HUBZone program through Fiscal Year 2006.
    Participation In Federally Funded Projects--Section 155 
removes the burdensome paperwork requirements for additional 
certification by firms seeking to perform any State, or 
political subdivision projects that utilize federal dollars if 
they are currently certified, or otherwise meet the applicable 
qualification requirements, for participation in any program 
under 8(a) of the Small Business Act.
    This change will: (1) provide federally certified 8(a) 
small businesses with access to all State and local projects 
funded in whole or in part by the Federal Government; (2) 
eliminate the burden of requiring 8(a) small businesses to get 
certifications from the State or local government or both in 
addition to their federal certification under 8(a); and, (3) 
decrease certification costs and eliminate time delays 
associated with the burden of receiving additional State or 
local government certifications for businesses authorized to 
participate in program established by Sec. 8(a) of the Small 
Business Act.

E. SBIR LEGISLATION TO FACILITATE THE INTENT OF CONGRESS FOR THE SMALL 
                  BUSINESS INNOVATION RESEARCH PROGRAM

    In establishing the Small Business Innovation Research 
Program, Congress sought to encourage government agencies to 
use their research and development money to provide development 
funding for innovative research by small businesses where there 
is a strong potential for commercializing the research results 
and creating appropriate production capacity. A key indicator 
of commercial potential is availability of non-governmental 
funding.
    Recently, administrative law judges at the SBA Office of 
Hearings and Appeals issued a series of decisions which, for 
the first time in over 20 years, excluded majority venture-
backed firms which were otherwise small from participation in 
the SBIR Program. It appears that the OHA opinions do not 
represent the final decision of the SBA, as they may be 
overruled by the Administrator. Nontheless, these decisions had 
serious adverse implications for many companies, especially 
those in the biotechnological field, and for agency programs 
that encourage commercialization, like the DOD's Phase II Plus. 
At stake is the continuous inflow of investment capital for 
small companies that developlife-saving drugs and products 
critical to national defense and to the advancement of innovation.
    Chair Snowe and two other members of this Committee, 
Senator Bond and Senator Bennett, along with Senator Kennedy, 
introduced a bill, S. 2834, designed to restore the status quo 
prior to the OHA decision. Following in-depth discussions with 
industry and among member staffs, the Committee is considering 
a substitute bill as well as activities to study this issue 
further. Committee staff has been in discussions with the 
National Academy of Sciences, which has been directed by law to 
study the SBIR Program, concerning possible workshops or other 
study activities on this issue.

          F. INVESTIGATION OF THE SBA'S CONTRACTING PRACTICES

    As part of the Committee's oversight role, Chair Snowe has 
been working with the Inspector General of the SBA to review 
the integrity of the SBA's own procurement processes and reduce 
their vulnerability to waste, fraud, and abuse. The Committee 
will continue this work in the 109th Congress in order to 
ensure that the SBA leads other acquisition agencies by 
example.

                          G. CONTRACT BUNDLING

    Last March, a hearing of the Small Business Committee was 
called to learn more about the President's plan to unbundle 
contracts for small business. During the hearing Administration 
officials assured the Chair that appropriate metrics would be 
put in place to track progress in implementing the plan. Since 
that time, however, the Committee learned that several agencies 
were not complying with certain requirements of the plan.
    Chair Snowe sent letters to the OMB's Office of Federal 
Procurement Policy to request information on the metrics they 
have put in place to monitor agency progress. In addition, 
letters were sent to each of the agency's on the President's 
Management Council to request their progress in addressing 
contract bundling concerns.
    1. Oversight of Contract Bundling Practices in Acquisition 
of Translation and Interpretation Services for the War on 
Terrorism--As Chairs of the Senate Committee on Small Business 
and the Senate Committee on Governmental Affairs, Senator Snowe 
and Senator Collins have taken a keen interest in the 
acquisition planning of the Army Intelligence and Security 
Command (INSCOM) for reprocurement of translation services. 
Existing contract, originally awarded to BTG, Inc. for 75 
translators, was novated to Titan Corporation as a result of a 
merger and acquisition of the awardee and ballooned to over 
4,000 contractor personnel. Traditionally, small boutique firms 
full of experts in particular languages, translation 
techniques, and substantive subject matter vocabularies have 
been the backbone of the translation services industry. Titan 
did not specialize in translation services at the time of its 
merger with BTG. Media reports suggested that Titan was forced 
to rely on hiring taxicab drivers and random local individuals 
off the street in order to accommodate the growing demands of 
the military in the war on terror. The Committees received 
information suggesting that the apparent result of such 
practices has been loss in professionalism, and Titan 
translation staff recently made the news due to alleged 
involvement into the Abu Ghraib prison abuse scandal.
    The Central Contractor Registry lists over 1,000 small and 
HUBZone small businesses which offer translation services to 
the government, including companies such as World Wide Language 
Resources of Maine. INSCOM's original strategy would have 
excluded these companies from prime contracts by creating a 
mega-contract for worldwide translation services in all 
languages and translation assignment management for the 
military and civilian agencies.
    Chair Snowe and Senator Collins have written Michael Wynne, 
the Acting Under Secretary of Defense for Acquisiton, 
Technology, and Logistics and asked him to take all necessary 
actions to unbundle this procurement and to prevent wholesale 
delegation of inherently governmental functions to Titan. The 
SBA also opined that INSCOM's approach implicated bundling 
concerns. In the name of administrative convenience, the Army's 
choice to exclude small businesses from translation prime 
contracts would have discarded a large, qualified supplier base 
precisely at the time when our military forces are in need of 
quality, responsible translation providers. Chair Snowe was 
pleased that the Army withdrew its solicitation.
    Acting Under Secretary Wynne, who is also the nominee for 
that post, has written Chair Snowe with assurances of INSCOM's 
plans to comply with bundling regulations. As part of the 
Senate's advice and consent responsibilities, Committee staff 
will continue to provide oversight on this important issue by 
seeking further clarifications and commitments for 
implementation of Congressional and Presidential contract 
bundling initiatives from the Acting Under Secretary.
    2. Oversight of Contract Bundling in Commercial Satellite 
Telecommunications Services for the Military--In the Ronald W. 
Reagan National Defense Authorization Act, Congress directed 
the Secretary of Defense to conduct a study of commercial 
satellite telecommunications acquisitions by the DOD. These 
services were originally procured through a large-business 
contract known as MTC. However, subsequently the DOD 
implemented a small business IDIQ contract structure known as 
DSTS-G. Under DSTS-G, small businesses act as value-added 
resellers, making large providers to compete for each task 
order. It was the largest DOD small business procurement in 
history at the time of the award, and provided a strong 
demonstration of the ability of small businesses to be a strong 
presence in the high-technology fields.
    Chair Snowe has written a letter reminding the DOD that 
analysis of contract bundling and consolidation must be 
conducted prior to any changes in the existing DSTS-G 
procurement strategy. Chair Snowe also requested the 
Administrator of the SBA to appeal any decision to bundle this 
contract. In response, Lt. General Harry Raduege, DISA 
Director, assured the Committee that DISA will comply with all 
applicable contract bundling and contract consolidation 
regulations in any further actions taken with regard to the 
DSTS-G contract. The Offices of Small and Disadvantaged 
Business Utilization for the DISA and the DOD also provided 
valuable assistance in addressing this matter.
    3. Oversight of Contract Bundling in Information Technology 
Procurements by the U.S. Air Force Information Technology 
Commodity Council--Congressional and Presidential initiatives 
to combat contract bundling have been facing a number of 
implementation hurdles due to some agencies' undue emphasis on 
the so-called ``enterprise buying'' acquisition strategies. 
Enterprise buying may provide the benefit of volume discounts 
to the government, but, just as likely, may saddle the 
government with limited technical options and higher costs by 
artificially excluding innovative small business suppliers and 
subsidizing higher overhead of large contractors.
    On June 9, 2004, Chair Snowe and Senator Allen wrote to 
Marvin Sambur, Assistant Secretary of the Air Force for 
Acquisition, with concerns over the plans of the Air Force 
Commodities Council (ITCC), Headquarters Standard Systems 
Group, to exclude small businesses, especially small 
manufacturers, from participating in the competition for 
service-wide desktop/laptop/server blanket purchase agreements 
(BPAs). In response, Assistant Secretary Sambur advised the 
Committee that the Air Force set aside three out of seven BPAs 
to small businesses, one for an Original Equipment Manufacturer 
(OEM) and two for Value-Added Resellers (VAR). The small 
business VAR BPAs represent the entire reseller market under 
this acquisition. The Air Force recently made awarded the OEM 
BPA to NCS Technologies, Inc. of Virginia.

   H. OVERSIGHT OF CONTRACTING PRACTICES PURSUANT TO THE SBIR PROGRAM

    Small businesses participating in the SBIR Program's 
rigorous Phase I and Phase II grant competitions often do so in 
reliance on the possibility of receiving a sole-source Phase 
III contract award as well as on the statutory and regulatory 
protections for their data rights. The SBA's Office of 
Technology has appellate authority in instances where agencies 
award contracts for technologies subject to the SBIR Program to 
non-SBIR companies. The Office of Technology is also 
responsible for government-wide data rights protection policy. 
Committee staff has been working with the SBA to strengthen the 
exercise of its appellate authority and to strengthen the 
agencies' compliance with the SBIR Program requirements.

            I. GOVERNMENT-WIDE MENTOR-PROTEGE PROGRAM REVIEW

    Many federal agencies operate mentor-protege programs based 
on section 637 of the Small Business Act, which authorizes 
agencies to provide subcontracting incentives for small 
business. The Department of Defense currently operates a 
statutory pilot program to encourage mentoring arrangements 
between mentor firms, typically large firms with demonstrated 
capability, to provide technical assistance to small business 
protege. The DOD program authorizes reimbursements and other 
incentives.
    While mentor-protege is not directly related to bundling, 
it can help protege firms overcome its effects. Getting 
technical assistance and developing business infrastructure can 
help a small firm manage larger contracts than it would 
otherwise be able to handle. Thus, it prepares smaller firms to 
stay in the Federal procurement market that is increasingly 
skewed toward larger contracts.
    Chair Snowe sent a series of letters to government agencies 
concerning their mentor-protege programs in order to assess 
best practices before introducing government-wide mentor-
protege legislation. Committee staff is in the process of 
analyzing the agencies' responses.

              J. SBA'S PROPOSED REVISION OF SIZE STANDARDS

    The SBA's proposed change of size standards is the single 
most controversial procurement policy matter for small business 
today. On March 19, 2004, the SBA published the Proposed Rule 
to change the current system of small business size standards 
used, among others, for small business government contract 
programs. The current system employs both revenue- and 
employee-based standards, and provides over a thousand 
standards tailored to various industries. The new system 
attempted to create a few across-the-board employee-based 
standards, with some exceptions. The ostensible goal of the 
change was to simplify size determinations and contracting 
processes.
    Comments voiced by the industry at various roundtables 
organized by the SBA have been almost uniformly negative. It 
was pointed out that the proposed rule would have the effect of 
depressing the creation of jobs by creating artificial payroll 
ceilings for companies, that the data used to convert revenues 
standards into employee-based standards is almost 7 years old, 
and that small businesses would face greater bias in contractor 
responsibility standards set forth by the Contracting Officers. 
In addition, the Committee received information that the change 
in standards would render over 34,000 businesses no longer 
small, denying them overnight the ability to participate in 
government contracts pursuant to the Small Business Act or to 
qualify for SBA loans and small business regulatory assistance.
    Chair Snowe opposed this change and, in a statement on July 
1, welcomed the SBA's decision to withdraw its proposed rule 
and called for agency consultations with Congress on this 
issue. The Committee plans to work closely with the SBA during 
the publichearings the agency is planning to conduct on size 
standards, and intends to conduct close oversight of the revision 
process.

  K. SMALL BUSINESS PRIME CONTRACTING AND SUBCONTRACTING AT THE U.S. 
                          DEPARTMENT OF ENERGY

    1. Joint Inquiry with the Senate Committee on Energy and 
Natural Resources and the Comprehensive GAO Studies--With over 
90 percent of its budget spent on contracts, the U.S. 
Department of Energy (DOE) is a leader among federal agencies 
in terms of overall contracting activity. In fact, DOE prime 
contract awards amounted to over $19 billion in Fiscal Year 
2003. However, data collected by the Federal Procurement Data 
System (FPDS) show that for FY '03 DOE, nonetheless, ranked 
dead last among the 15 Executive departments required to comply 
with the government-wide statutory small business contracting 
goal of 23 percent, awarding only about 4 percent of its prime 
contracts to small businesses. By contrast, the top ranking 
agency, the department of Housing and Urban Development, 
awarded 54 percent of its prime contracts to small businesses 
during the same year. The DOE's low goaling achievements came 
into focus after 199, when the OFPP, upon advice of this 
Committee's then-Chairman Kit Bond and Ranking Member John 
Kerry, directed the DOE to abandon the accounting fiction of 
including first-tier small business subcontracts together with 
its actual small business prime contracts.
    On May 18, 2004, the Senate Committee on Energy and Natural 
Resources held hearings concerning the small business prime 
contracting and subcontracting practices at the DOE. At that 
hearing, a GAO representative testified that, despite a 
contracting plan prepared by DOE's Office of Small and 
Disadvantaged Business Utilization, it was unclear whether the 
DOE made an actual Department-wide commitment to the 
Congressionally-mandated small business goal, and whether it 
has established a consistent long-term strategy for achieving 
that goal. The Energy Committee also received information that 
the DOE was considering to simply novate existing small 
business subcontracts by making them prime contracts on paper, 
but continuing to make large contractors responsible for 
management and oversight responsibility for these small 
business prime contracts. Concerns have also been raised that 
the uncertainties in the DOE's approach to small business 
contracting may have adverse impacts on other legitimate agency 
objectives.
    In written testimony before the Energy Committee, Chair 
Snowe reaffirmed this Committee's view that prime contract 
goals are a vital indicator of whether small businesses have 
fair and meaningful access to business opportunities at the 
DOE, and that accurate accounting for prime contracting goals 
must be reflective of the actual awards made to small 
businesses by the DOE. Chair Snowe also emphatically stated 
that small businesses not only do not hinder good management, 
but provide significant value to the government. Chair Snowe 
called for a reform of the DOE's internal acquisition processes 
and strengthening of the DOE's acquisition workforce, its 
Office of Small and Disadvantaged Business Utilization, and its 
Office of Inspector General.
    On November 19, 2004, this Committee and the Committee on 
Energy and Natural Resources announced a joint inquiry into 
small business prime contracting and subcontracting practices 
at the Department of Energy. The Chairs and Ranking Members of 
the two Committees wrote to Comptroller General David Walker 
requesting that the GAO conduct comprehensive studies of DOE 
procurement policies and practices. ``Given the challenge 
facing DOE to dramatically increase its small business prime 
contracting, we want to assure that DOE utilizes appropriate 
practices and has the necessary tools to aggressively expand 
prime contracting to small businesses while also ensuring the 
success of their other mission requirements,'' Chair Snowe and 
her colleagues wrote in their request to GAO.
    The Committee's letter of request included the following 
questions:
    a. What steps is DOE taking, or planning to take, to 
increase its level of prime contracting with small businesses? 
What criteria does the department use to identify work 
performed by its facility management contractors that could be 
set aside for a prime contract with small business while 
adequately assuring mission accomplishment, safety, and 
security?
    b. What are the federal government's ``best practices'' in 
increasing small business prime contracting which adequately 
assure mission accomplishment, safety, and security 
considerations for other agencies? Is DOE following the ``best 
practices'' used by other federal agencies that share similar 
national security or safety challenges as those faced by DOE, 
or any applicable guidance of the SBA or the OFPP, for 
increasing their small business prime contracting?
    c. What challenges or barriers exist to DOE increasing its 
level of small business prime contracting, and what is the 
department doing to address these challenges? For example, does 
the DOE have sufficient resources, acquisition workforce, and 
internal processes to fully implement a small business prime 
contracting program that complies with small business 
contracting goals and federal contracting competition 
requirements, as well as the capabilities to administer its 
large and small prime contracts with sufficient oversight to 
assure mission accomplishment, safety, and security 
considerations?
    d. What are the typical small business subcontracting 
requirements imposed by the DOE on its facility management 
contractors?
    e. What are the frequently occurring concerns and 
challenges experienced by DOE small business subcontractors, 
and what are potential approaches to assure that the facility 
management contractors address or mitigate these concerns and 
challenges?
    The staff of both Committees has been working with the GAO 
to develop, adjust, and monitor audit objectives as well as the 
methodology for the studies. Two studies, one on prime 
contracting and the other on subcontracting, are expected.
    2. Small Business Prime Contracting Requirements in 
Division C (Energy and Water Appropriations) of the 
Consolidated Appropriations Act for FY 2005--In response to the 
testimony of the GAO and other reports on DOE's small business 
procurement practices, this Committee began to work together 
with the Senate Committee on Energy and Natural Resources as 
well as with the Subcommittee on Energy and Water Development 
of the Senate Committee on Appropriations to correct some of 
the improprieties in the procurement process and to strengthen 
the small business acquisition planning process. Just like the 
joint inquiry, the Committees' legislative work was motivated 
by the desire to attack the problems in DOE's practices rather 
than the symptom of the problems, i.e. the DOE's low goaling 
achievements for small business prime contracts.
    Sections 312 and 313--The Energy and Water Appropriations 
Act contained provisions to mandate that the Energy 
Department's break-out efforts proceed through the existing 
consultative process with the Small Business Administration's 
breakout procurement center representative (PCR) or designee 
for considering breakout strategies in light of the 
Department's mission objectives. Ordinarily, the PCR 
consultative process is discretionary under the Federal 
Acquisition Regulation (FAR). Section 312 merely removes this 
discretion from the DOE and the SBA, and Section 313 reiterates 
the existing prohibition on performance of inherently 
governmental functions by private contractors as set forth in 
the FAR.
    3. Requirements for Production of Small Business 
Contracting Plans of the Department of Energy and of Related 
Views of the Small Business Administration in Section 312, 
Division C (Energy and Water Appropriations) of the 
Consolidated Appropriations Act for FY 2005--In the course of 
facilitating the joint inquiry with the Senate Committee on 
Energy and Natural Resources, Chair Snowe requested Ms. Allegra 
McCullough, SBA Associate Deputy Administrator for Government 
Contracting and Business Development, to produce to this 
Committee the DOE's FY2005 official goaling plan and related 
SBA documents. In response, Ms. McCullough sent a letter to 
Chair Snowe contending that the responsive documents were 
privileged from production as pre-decisional and deliberative. 
The SBA Office of General Counsel also attempted to claim these 
privilege assertions on behalf of the Department of Energy.
    The SBA's refusal to cooperate in the process of improving 
small business contracting opportunities at the DOE has been 
unfortunate. The Committee does not believe that Ms. McCullough 
and the SBA Office of General Counsel asserted a valid 
privilege from production by characterizing requested documents 
as pre-decisional and deliberative materials. To begin with, 
the DOE's official small business plan is not pre-decisional, 
since the DOE already reached its decision prior to sending 
this plan to the SBA. The precedents that addressed the 
deliberative process privilege recognized that it is neither 
Constitutional (unlike the Congressional oversight power) nor 
absolute. Rather, this privilege is commonly asserted in cases 
brought by private litigants and gives way to a countervailing 
public interest. This is because the deliberative process 
doctrine is rooted in the common law evidentiary principles and 
in the Freedom of Information Act, which do not bar 
Congressional inquiries. Moreover, the United States Court of 
Appeals for the District of Columbia Circuit, the location of 
the SBA headquarters, held on more than one occasion that 
Congress created for itself special access to materials 
otherwise protected by the deliberative process privilege 
against disclosures to private parties. The Committee is aware 
of no reported precedent--and the SBA cited none--upholding a 
deliberative process privilege against disclosures to Congress. 
Since the small business goaling process, and especially the 
agency plan, is a creature of the Small Business Act, there is 
a strong public interest in adequate Congressional oversight of 
the agencies that implement Congressional small business 
policies. Furthermore, any deliberative process privilege has 
been overridden since the 1950s by Section 10(e) of the Small 
Business Act, 15 U.S.C. 639(e), which states that the SBA 
``shall retain all correspondence, records of inquiries, 
memoranda, reports, books, and records . . . and shall at all 
times keep the same available for inspection and examination'' 
by ``duly authorized representatives'' of the Senate Committee 
on Small Business and Entrepreneurship.
    Accordingly, Chair Snowe and Chairman Domenici included 
into the Act specific documents production requirements 
directing the Department of Energy to submit a report to 
Congress including its small business contract goaling plans 
required by Section 15(h) of the Small Business Act together. 
The goaling plans are normally established by the DOE Office of 
Small and Disadvantaged Business Utilization within the Office 
of the Secretary of Energy, and are either approved or rejected 
by the SBA (or, in case of an appeal, by the OFPP). The Act 
does not change this practice, but places the overall 
responsibility for the report on the Secretary of Energy. In 
addition, the Act makes clear that the Secretary of Energy must 
request and address in the report the views of both the DOE 
Office of Small and Disadvantaged Business Utilization and of 
the Small Business Administration. Therefore, the Act gives the 
SBA a date certain by which it must provide its position on the 
DOE's small business goals as part of the report of the 
Secretary of Energy to Congress.
    As the President has signed the Consolidated Appropriations 
Act for Fiscal Year 2005 into law, Therefore, the Committee 
expects that the Small Business Administration and the 
Department of Energy will follow the law and produce to 
Congress the documents to which it is rightfully entitled. The 
Committee expects that, in the future, the Small Business 
Administration and other agencies will be working together with 
Congress to facilitate the policies of the Small Business Act 
and will fully cooperate with Congressional inquiries. The 
Committee will not hesitate to use appropriate tools at its 
disposal to vindicate the authorities and the Constitutional 
oversight prerogatives of the Legislative Branch.

                  X. Manufacturing and Small Business

    Manufacturing employment in the United States has declined 
since its historic peak in 1979 and the loss has accelerated in 
recent years. The problem is particularly troubling because 
manufacturing jobs tend to pay a higher average hourly total 
compensation than jobs in other sectors of our economy.
    Small business manufacturers constitute over ninety-eight 
percent of our nation's manufacturing enterprises. It is 
impossible to overstate small manufacturers' role within the 
overall manufacturing industry and our nation's economy.
    Chair Snowe has placed a high priority on trying to 
resuscitate our nation's small business industrial base because 
she understands the importance it plays in preserving our 
economic and national security.

 A. SMALL MANUFACTURERS ASSISTANCE, RECOVERY, AND TRADE (``SMART'') ACT

    On November 25, 2003, in response to what she learned from 
manufacturers throughout the country, including from those who 
testified at the ``Small Business Manufacturing in a Global 
Market'' field hearing, Chair Snowe and original co-sponsor 
Senator George Voinovich introduced S. 1977, the Small 
Manufacturers Assistance, Recovery, and Trade (``SMART'') Act.
    The SMART Act contains numerous provisions to benefit small 
manufacturers. Among those provisions are ones that would: (a) 
increase the amount of capital available to small manufacturers 
through the Small Business Administration's loan programs; (b) 
establish an Assistant Secretary for Manufacturing within the 
Department of Commerce, who will be responsible for identifying 
and addressing manufacturers' concerns; (c) create an 
Interagency Manufacturing Task Force--to coordinate the efforts 
and resources of numerous Federal agencies, spur interagency 
cooperation, and provide recommendations to assist 
manufacturers; (d) create a Small Business Manufacturing Task 
Force within the Small Business Administration to ensure that 
the Agency focuses a proper level of attention to 
manufacturers' concerns and that it promotes its manufacturing 
related services and programs; and (e) increase the number of 
SBA representatives at U.S. Export Assistance Centers.
    Several key SMART Act provisions have either been enacted 
through legislation, or implemented directly by the 
Administration. For instance, Albert Frink has been appointed 
as the Administration's first Assistant Secretary of Commerce 
for Manufacturing and Services; the Commerce Department has 
agreed to form an Interagency Working Group on Manufacturing, 
and the Consolidated Appropriations Act of 2004 included SMART 
Act language, increasing manufacturers' access to capital and 
creating a Manufacturing Task Force within the SBA.

         B. SMALL BUSINESS MANUFACTURING FORUM IN BREWER, MAINE

    On February 17, 2004, Chair Snowe held a ``Small Business 
Manufacturing Forum'' (the Forum) in Brewer, Maine. The Forum 
brought small manufacturers together with various organizations 
and agency representatives (hereafter ``resource providers'') 
who specialize in offering small business assistance. The 
manufacturers were provided the opportunity to express the 
problems and barriers they face and to provide concrete 
examples of steps they have undertaken to remain successful. 
The resource providers explained the various programs and 
services available to small manufacturers, and a breakout 
period during the Forum allowed the manufacturers time to meet 
with the resource providers to obtain their assistance.

              C. MANUFACTURING EXTENSION PARTNERSHIP (MEP)

    The MEP is a nationwide network of not-for-profit centers, 
whose sole purpose is to provide small and medium-sized 
manufacturers with help in implementing the most advanced 
manufacturing technologies and processes to succeed. The MEP 
was originally intended to be comprised of 12 federally 
supported centers, with federal funding ending after six years. 
In its 15 years of operation, the program has expanded away 
from this original design to include 400 locations, and 
Congress has removed the sunset provisions.
    In a recent National Institute of Standards and Technology 
survey of MEP clients served during FY 2003, over 5,000 
companies across the country reported that, as a result of MEP 
services, they: created or retained 35,028 jobs; increased $953 
million in sales; retained sales of $1.84 billion; realized 
$681 million in cost savings; and invested $940 million in 
modernization, including plant and equipment.
    The FY 2004 Omnibus Appropriations Conference Report 
drastically cut MEP funding from a previous level of $106 
million to $39.6 million. The FY 2004 funding cut, coupled with 
potential shortfalls in FY 2005 funding, threatened to severely 
curtail the MEP's ability to assist the nation's manufacturers 
at a time when they most need assistance.
    1. Letter to Commerce Department to Transfer $8.5 million 
in funds to the MEP--On May 13, 2004, Chair Snowe, along with 
five colleagues, sent a letter to Secretary of Commerce Donald 
Evans requesting that he reprogram and transfer Commerce FY 
2004 funds to support the MEP program. The letter signed by 55 
Senators expressed the belief that the MEP's appropriation 
level was insufficient to maintain the existing network of MEP 
centers. The failure to increase funding would lead to these 
centers having to close, or drastically reduce services, 
resulting in small manufacturers being unable to receive the 
assistance that helps them stay competitive in the global 
marketplace.
    Thankfully, the Commerce Department responded by 
transferring $8.5 million from its Advanced Technology Program 
to the MEP.
    2. Recompetition of the MEP--On July 30, 2004, Chair Snowe 
and Senator Kohl, Senator Lieberman, Senator Reed, Senator 
DeWine, Senator Schumer, Senator Levin, and Senator Bayh sent a 
letter to Phillip Bond, Under Secretary of Commerce for 
Technology, Department of Commerce, urging that he reconsider a 
system-wide recompetition for U.S. MEP centers.
    The recompetition would have required that individual MEP 
centers justify their funding. This process, at a time when the 
MEP was operating under a severely reduced budget, threatened 
to divert the MEP's time and resources away from its mission of 
assisting our nation's small manufacturers. Such a hasty 
recompetition may have also dismantled the network of effective 
state and local partnerships that took over fifteen years for 
the MEP to build.
    Fortunately, the Commerce Department responded 
appropriately by deciding to forego a system-wide recompetition 
during the MEP's time of crises.
    3. Chair Snowe and Senator Lieberman Lead Group of Senators 
in a Letter Requesting Restored MEP Funding in FY 2005--On 
March 31, 2004, Chair Snowe and Senator Lieberman, Co-Chairs of 
the Senate Task Force on Manufacturing, led a group of 56 
Senators in a bipartisan letter to the Commerce-Justice-State 
(CJS) Appropriations Subcommittee requesting that the MEP's 
funding be restored in FY 2005. On September 15, 2004, Senate 
Appropriators approved their CJS Appropriations bill (S. 2809) 
by a vote of 27-0. The bill included $112 million for the MEP 
for FY 05. The Consolidated Appropriations Act of 2004 provides 
$109 million for FY 05 for the MEP program.

                           XI. Veteran Issues


          A. SMALL BUSINESSES AFFECTED BY MILITARY DEPLOYMENTS

    1. Congressional Budget Office Study on the Affects of 
Military Deployments on Small Businesses--Our country is 
profoundly indebted to our nation's Guard and Reserve members 
for their contribution to our national defense. There are more 
than 170,000 Guard members and Reservists deployed around the 
globe serving our nation's interests. These individuals leave 
their families, friends, and civilian careers, behind to answer 
the call of duty.
    The current trend toward longer and more frequent Guard and 
Reserve deployments, imposes an especially profound burden on 
small businesses that employ Guard members and Reservists. This 
problem is further magnified when the business owner themself 
is deployed. It is often extremely difficult for small 
businesses to continue operations during deployments, or 
restart a venture after a deployment.
    In response to these concerns, on October 30, 2003, Chair 
Snowe formally requested that the Congressional Budget Office 
(CBO) analyze the impact of reserve component call-ups on small 
businesses and examine the potential costs and effectiveness of 
options to alleviate hardships without weakening our national 
defense.
    Since requesting the CBO study, Chair Snowe has 
collaborated with the CBO to ensure that its report will be 
comprehensive and helpful to lawmakers interested in assisting 
small businesses negatively affected by Guard and Reserve 
deployments.
    2. Letter to Administrator Hector Barreto Concerning the 
SBA's Role in Assisting Small Businesses Affected by Guard and 
Reserve Deployments--On May 11, 2004, Chair Snowe sent a letter 
to SBA Administrator Barreto recognizing the SBA's efforts to 
assist small businesses negatively impacted by Guard and 
Reserve deployments. In that letter, Chair Snowe encouraged the 
SBA to be vigilant in efforts to respond to small businesses 
impacted by the deployment of Guard members and Reservists, and 
to reach out to veterans to provide them with the benefits and 
services they have earned.

        B. VETERAN AND SERVICE-DISABLED VETERAN SMALL BUSINESSES

    In 1992, the Census Bureau's Economic Census, 
Characteristics of Business Owners (CBO92-1), estimated that 
approximately 4.2 million American small businesses were owned 
by veterans, including approximately 313,000 small businesses 
owned by disabled veterans. More current data will be available 
with the Bureau's release of its 2002 Survey of Business Owners 
and Self- Employed Persons.
    Despite the lack of accurate data on the number of veteran 
and service-disabled veteran small businesses in the United 
States, it remains apparent that the courageous men and women 
that own and work for these businesses face unique challenges 
in maintaining and expanding strong enterprises. Chair Snowe 
has taken numerous steps to help these businesses overcome 
those challenges.
    1. Advisory Committee on Veterans Business Affairs--
Congress has determined that the Federal Government must 
provide better assistance and support to veterans in their 
efforts to form and expand small businesses. In 1999, as part 
of this effort, Congress established an Advisory Committee on 
Veterans Business Affairs. Its responsibilities included 
providing advice to Congress and the SBA on policy initiatives 
that would promote entrepreneurship by veterans. Those duties 
were to be taken over by the National Veterans Business 
Development Corporation on October 1, 2004. The Advisory 
Committee's role is sufficiently beneficial that it should not 
be subsumed within the National Veterans Business Development 
Corporation. As a result, on July 8, 2003, Chair Snowe, and 
original cosponsorand Ranking Member Senator John Kerry, 
offered S. 1375, the SBA 50th Anniversary Reauthorization Act of 2003, 
which included a provision to authorize an extension of the Advisory 
Committee as a separate entity to continue its functions through 
September 30, 2006. This language was subsequently included in the 
Consolidated Appropriations Act of 2004.
    2. Reconfirming that the National Veterans Business 
Development Corporation is a Private Entity--The National 
Veterans Business Development Corporation (the ``Veterans 
Corporation'') was established by Public Law 106-50. The 
Veterans Corporation is responsible for expanding and improving 
access to technical assistance regarding entrepreneurship for 
the Nation's veterans, and is charged with assisting veterans, 
including service-disabled veterans, with the formation and 
expansion of small businesses by working with and organizing 
public and private resources, including those of the Small 
Business Administration, the Department of Veterans Affairs, 
the Department of Labor, the Department of Commerce, the 
Department of Defense, the Service Corps of Retired Executives, 
the Small Business Development Centers, and the business 
development staffs of each department and agency of the United 
States.
    During the 108th Congress, a ruling by the Department of 
Justice concluded that the Veterans Corporation was a federal 
agency and thus subject to, among other things, federal 
administrative, personnel, and procurement laws. Congress, when 
it created the Veterans Corporation, never intended for it to 
be considered a federal agency. The legislation mandated 
sufficient fund-raising by the Veterans Corporation that would 
eliminate the need for federal funding. If the Veterans 
Corporation is held to the vast requirements of a federal 
agency, it will likely fail to ever become self-sufficient, or 
to provide the level of services to veterans that Congress had 
envisioned.
    To honor Congress's original intent concerning the status 
of the Veterans Corporation, on July 22, 2004, Chair Snowe 
introduced S. 2724, originally co-sponsored by Ranking Member 
John Kerry, and Senator James Talent. S. 2724, which passed the 
Senate by unanimous consent, would reconfirm that the Veterans 
Corporation is to be considered and treated as a private entity 
and not an agency or instrumentality of the federal government. 
The language from S. 2724 was included in the Consolidated 
Appropriations Act of 2004.

                  XII. Association Health Plans (AHPS)

    Much progress was made during the 108th Congress on 
Associated Health Plans (AHPs). On February 5, 2003, the 
Committee held a hearing to explore opportunities by which to 
reduce the number of uninsured Americans. In her opening 
statement, Chair Snowe began by outlining the contradiction 
that plagues the nation's small business sector: although small 
businesses play a significant role in the American economy, 
their well-being, and that of their employees, is consistently 
undermined by exorbitant health insurance costs.
    Two-thirds of all Americans rely on their employer for 
health insurance and insurance premiums have been increasing 
rapidly for almost two decades. This rising cost acts not only 
as an anchor on company growth, but also prohibits businesses 
from providing adequate health coverage. In fact, the number of 
employers that cannot provide any health insurance is growing. 
Small businesses in particular are affected because they are 
forced to pay higher premiums than larger businesses--a 
debilitating comparative disadvantage. The created AHP 
legislation allows small businesses to negotiate better terms 
for small group health plans by utilizing the same group 
bargaining principles employed by unions and big businesses. 
This would be the first step to leveling the playing field and 
protecting millions of our nation's families and small 
businesses.
    AHPs have gained increasing support and recognition. 
President Bush addressed his support of AHPs in his State of 
the Union address in January, 2004. In addition, President Bush 
continued to publicly urge passage of AHPs by the Senate 
throughout 2004, as did Secretary of Labor Elaine L. Chao. 
There is also growing bi-partisan support of the issue. Senator 
Frist has expressed his support and Senator Byrd co-sponsored 
S. 545, the Small Business Fairness Act of 2003. AHPs have also 
been included in the Senate Task Force on Uninsured's Report.

       A. S. 545, ``SMALL BUSINESS HEALTH FAIRNESS ACT OF 2003''

    The Committee introduced this bill on March 6, 2003. This 
bill will amend Title I of the Employee Retirement Income 
Security Act of 1974 to improve access and choice for 
entrepreneurs with small businesses with respect to medical 
care for their employees. This bill was similar to a bill 
passed by the House. The bill was read twice and referred to 
the Senate Committee on Health, Education and Labor. This Bill 
has not passed the Senate.

                        XIII. Regulatory Issues


       A. S. 818, ``INDEPENDENT OFFICE OF ADVOCACY ACT OF 2003''

    This Committee introduced this bill on April 8, 2003. This 
bill was introduced for several reasons. Excessive regulations 
continue to burden U.S. small business concerns and Federal 
agencies are reluctant to comply with the requirements of 
chapter 6 of title 5, United States Code, and continue to 
propose regulations that impose disproportionate burdens on 
small entities. The Office of Advocacy of the Small Business 
Administration (referred to in this Act as the ``Office'') is 
an effective advocate for small entities, including small 
business concerns, that can help to ensure that agencies are 
responsive to small business concerns and that agencies comply 
with their statutory obligations under chapter 6 of title 5, 
United States Code, and under the Small Business Regulatory 
Enforcement Fairness Act of 1996 (Public Law 104-121; 106 Stat. 
4249 et seq.). Theindependence of the Office is essential to 
ensure that it can serve as an effective advocate for small business 
concerns without being restricted by the views or policies of the Small 
Business Administration or any other executive branch agency. The 
Office needs sufficient resources to conduct the research required to 
assess effectively the impact of regulations on small business 
concerns, and the research, information, and expertise of the Office 
make it a valuable adviser to Congress as well as the executive branch 
agencies with which the Office works on behalf of small business 
concerns.
    S. 818 was designed to ensure that the Office has the 
statutory independence and adequate financial resources to 
advocate for and on behalf of small business concerns. It 
requires that the Office report to the Chairmen and Ranking 
Members of the Committees on Small Business of the Senate and 
the House of Representatives and the Administrator of the Small 
Business Administration in order to keep them fully and 
currently informed about issues and regulations affecting small 
business concerns and the necessity for corrective action by 
the regulatory agency or the Congress. It would provide a 
separate authorization for appropriations for the Office and 
would authorize the Office to report to the President and to 
the Congress regarding agency compliance with chapter 6 of 
title 5, United States Code. This bill has not passed the 
Senate.

  B. S. 2834, ``THE SMALL BUSINESS COMPLIANCE ASSISTANCE ENHANCEMENT 
                                 ACT''

    The Small Business Compliance Assistance Enhancement Act 
(S. 2834) was originally developed as a regulatory reform 
component for the Republican Minimum Wage alternative package, 
and then was introduced late in the 108th Congress. Key 
components of this bill were drawn from shortcomings in current 
law identified in a GAO report #GAO-02-172, ``Regulatory 
Reform: Compliance Guide Requirement Has Had Little Effect on 
Agency Practices'', which described the poor job agencies have 
done in meeting the requirements of SBREFA, Section 212, which 
direct agencies to produce small entity compliance assistance 
guides for regulations that trigger a Final Regulatory 
Flexibility Analysis, essentially those that will have a 
significant economic impact on a substantial number of small 
entities. The GAO report showed that agencies all but ignored 
this provision, and when they did try to meet it, their efforts 
were meager at best.
    The bill clarifies the terms of Section 212 such as when a 
compliance guide is required, what is meant by compliance 
assistance, the time frame for producing such a guide, and how 
the guide must be published. In addition, the bill makes 
explicit that while these guides may include suggestions for 
procedures to comply with the regulations, such suggestions are 
not to be the basis for enforcement. This bill has not passed 
the Senate.

            C. EQUAL ACCESS TO JUSTICE ACT REVISION FOR OSHA

    The House passed the Occupational Safety and Health Small 
Employer Access to Justice Act (H.R. 2731), which would allow 
small employers to be awarded attorneys' fees and court costs 
when they contest OSHA citations and prevail in court. Current 
law (The Equal Access to Justice Act, EAJA) only allows small 
businesses to recover attorney's fees in cases against the 
government if they win, and they can establish that the 
government's case was not ``substantially justified.'' This has 
proven to be a difficult requirement for small businesses to 
overcome. H.R. 2731 eliminates this requirement, only as it 
applies to cases involving OSHA. At the same time, H.R. 2731 
also reduces the number of small businesses who can recover 
their fees. EAJA allows small businesses up to 500 employees 
and $7 million net worth to seek recovery of their legal fees 
if they win their case and can prove the government's case was 
not ``substantially justified.'' H.R. 2731 reduces the size of 
businesses eligible to only 100 employees and a net worth of $7 
million. Therefore, it targets the relief to those who are 
truly in need of it and limits the impact on the government's 
ability to pursue their case.
    Testimony at hearings held on this legislation in the House 
Committee on Education and the Workforce, revealed that it can 
easily cost $20,000 or more to litigate a challenge to an OSHA 
citation that is for $8,400. When presented with that choice, 
many small businesses will choose to settle, regardless of 
whether they think the citation is valid. This calculation 
undermines the fundamental principle of American law that an 
accused is innocent until proven guilty. If they knew that they 
would be able to recover their costs if they can win their 
case, small businesses would likely be more willing to 
challenge OSHA citations they did not think were valid. Under 
current law, small businesses must win their case, and then 
prove in a subsequent proceeding that the government's case was 
not ``substantially justified.''
    A review of the current EAJA statistics shows that since 
its enactment (1981-2003), only 111 small businesses have filed 
EAJA claims for OSHA cases, and of these, only 37 have been 
granted. This bill has not passed the Senate.

                           XIV. Miscellaneous


           A. SMALL BUSINESS & CHINA'S CURRENCY MANIPULATION

    Through the practice of pegging its currency to the dollar, 
China artificially maintains the yuan at 8.28 per dollar. 
Economists estimate that the yuan is undervalued by between 
fifteen and forty percent. The undervaluation makes Chinese 
manufactured goods cheaper in the U.S. while simultaneously 
making U.S. manufactured goods more expensive in China.
    China's currency manipulation has greatly contributed to 
our nation's trade deficit, which we must get under control. As 
noted by the U.S.-China Economic and Security Review Commission 
in 2003, ``. . . [t]he U.S. trade deficit with China 
constituted 23.2 percent of the total U.S. goods trade deficit 
and China was the largest single country component of the 
overall deficit.''
    The manufacturing sector, which is the sector most impacted 
by international trade, has experienced severe job losses in 
recent years as a direct result of China's unfair 
tradepractices. Chair Snowe is deeply concerned with the affect that 
China's currency practice is having on U.S. small businesses. 
Throughout the 108th Congress, Chair Snowe took numerous steps, some of 
which are described below, to address this important issue.
    1. GAO Study on the Effect of China's Currency Manipulation 
on U.S. Exporters--On July 23, 2003, Chair Snowe and 
Congressman Manzullo, Chairs of the Senate and House Small 
Business Committees, requested that the United States General 
Accountability Office conduct a study concerning China's 
currency practice and its affect on our nation's economy. The 
report has not yet been released.
    2. Letter to Secretary of the Treasury John Snow--On June 
15, 2004, in response to the U.S.-China Economic and Security 
Review Commission's 2004 Report to Congress, Chair Snowe sent a 
letter to Treasury Secretary Snow highlighting the findings in 
the Report, and urging Treasury to take speedy and decisive 
action to address the China currency situation. Chair Snowe's 
letter stated that China should take active steps to reform its 
banking system and financial markets so it can progress toward 
the goal of a market-based evaluation of its currency, and that 
it is imperative that in the interim the yuan be substantially 
revalued upward against the dollar.
    3. Letter to the United States Trade Representative and the 
Department of Commerce--On June 15, 2004, Chair Snowe also sent 
letters to Secretary of Commerce Donald Evans and U.S. Trade 
Representative Robert Zoellick in response to the U.S.-China 
Commission's 2004 report, strongly encouraging the 
Administration to utilize, in conjunction with diplomatic 
efforts, all U.S. and International trade laws to the full 
extent possible in protection of U.S. trade interests. Chair 
Snowe's letter addressed a number of areas in which China needs 
to improve to ensure fair U.S.-China trade. Chair Snowe's 
letter highlighted:
    a. international property rights, including the rampant 
piracy of copyrighted U.S. material and its cost to U.S. 
industries;
    b. China's direct and indirect subsidies to Chinese 
producers;
    c. reports of forced transfer of U.S. technology in return 
for market access and regulatory approval; and
    d. China's currency manipulation.

                             XV. Appendixes


              A. HEARINGS OF THE COMMITTEE, FIRST SESSION

``The Small Business Healthcare Crisis: Possible Solutions'', 
        Washington, D.C., February 5, 2003

    On February 5, 2003, the Committee held a hearing to 
explore opportunities by which to reduce the number of 
uninsured Americans. In her opening statement, Chairwoman Snowe 
began by outlining the contradiction that plagues U.S. small 
businesses: although small business plays a significant role in 
the American economy, their well-being, and that of their 
employees, is consistently undermined by exorbitant health 
insurance costs. Snowe pointed to a chart showing that two-
thirds of all Americans rely on their employer for health 
insurance and that insurance premiums have been increasing 
rapidly for almost two decades. This rising cost acts not only 
as an anchor on companies growth, but it also prohibits 
businesses from providing adequate health coverage. In fact, 
the number of employers that cannot provide any health 
insurance is growing. Small businesses in particular are 
affected because they are forced to pay higher premiums than 
larger businesses--a debilitating comparative disadvantage. 
Snowe made it clear that creating legislation that allows small 
businesses to negotiate better terms, as unions and big 
businesses do, would be the first step to leveling the playing 
field and protecting millions of our nation's families and 
small businesses.
    The hearing consisted of four panels. The first panel was 
made up of the Honorable Elaine L Chao, Secretary, U.S. 
Department of Labor. She provided the Committee with the 
President's proposals to address health care costs and lack of 
access. These included making medical savings accounts more 
available, medical malpractice reform, individual tax credit, 
and associated health plans (AHPs).
    Secretary Chao focused on AHP's as the tool to break down 
many of the barriers that discourage small employers from 
offering health plans, namely cost, legal and market barriers, 
and the threat of fraud. Under AHP's, small businesses would 
enjoy greater bargaining power, economies of scale, and 
administrative efficiencies as well as the benefits of a 
uniform Federal regulatory structure. To combat fraud, AHP's 
would have to meet Federal certification standards and comply 
with the Department of Labor's ongoing oversight. Secretary 
Chao assured the Committee that the Department was adequately 
equipped to handle all oversight responsibilities.
    After Secretary Chao's testimony, Senator Levin presented a 
letter from the Blue Cross-Blue Shield of Michigan which 
expressed concern that AHPs would increase cherry-picking and 
adverse selection. Secretary Chao recognized this possibility 
and felt that a final draft of AHP legislation would need to be 
crafted to avoid those particular consequences.
    The second panel consisted of the Honorable Hector Barreto, 
Administrator, U.S. Small Business Administration. 
Administrator Barreto emphasized the cost of health care 
insurance as the major deterrent to small business employers' 
ability to provide coverage. Without being able to offer 
affordable, comprehensive plans, small employers are at a 
serious competitive disadvantage when trying to hire or retain 
employees from larger companies. However, Administrator Barreto 
felt that by removing legal barriers and allowing AHPs to 
flourish, small businesses would begin to see substantial cost 
savings-administrative costs would decrease and resultant 
prices would reflect the discounts brought on by high volume 
purchasing. He went on to address the impact thathealth care 
costs have had specifically on the Hispanic population and other 
minority small employers.
    The third panel consisted of six witnesses. The first two 
were small employers from Maine: Kathie M. Leonard, Co-founder 
and President, Auburn Manufacturing, Inc.; and Anne Valentine, 
President, SmartCatalog. Both witnesses decried the steady 
trend of rising health insurance premiums and how they led to 
decreasing coverage and higher co-pays for their employees. Ms. 
Leonard believed that immediate action was required and to stem 
the tide of swelling costs AHPs need to be introduced. Still, 
she argued that more far-sighted approaches need to be 
developed.
    Ms. Valentine related to the Committee that she had created 
an association of small businesses through which to purchase 
health insurance but that it was too small to be effective. She 
looked forward to the passing of AHPs because it would be good 
for her business as well as her employees. Outrageous insurance 
premiums demand so much money that small employers cannot 
afford to invest in their businesses and cannot retain or hire 
good employees who usually opt to work for a company that can 
offer decent, affordable health benefits.
    The next three panelists were Jack Faris, President and 
Chief Executive Officer, National Federation of Independent 
Business; Terry Neese, President and Co-Founder, Women 
Impacting Public Policy; and Harry Alford, President and Chief 
Executive Officer, National Black Chamber of Commerce. All 
three witnesses felt that this insurance emergency required 
government intervention and looked forward to the passing of 
AHP legislation. Mr. Faris condemned the current administration 
costs associated with health insurance along with the ever-
growing list of state mandates that increased costs for working 
families. Mr. Neese agreed and added that the cost of insurance 
to both employers and employees ate up disposable income that 
could otherwise be invested in ones business or be spent in 
other sectors of the economy thereby fueling growth for the 
whole nation. Mr. Alford added his support for AHP's right 
before the panel's last witness, Cliff Shannon, President, SMC 
Business Councils, representing the National Small Business 
United and SMC Business Councils, aired his suspicion.
    Mr. Shannon, although he felt the concept of AHPs were a 
worthy pursuit, wasn't an advocate for the current legislation 
because it had weaknesses that made it harmful overall. 
According to him, the current AHP bill would allow for adverse 
risk selection, less coverage, and increased costs under state-
regulated insurance panels.
    The fourth and final panel consisted of three witnesses. 
The first was Judith L. Lichtman, President, National 
Partnership for Women and Families. Although she stated that 
women were disproportionately affected by the health insurance 
problems, she did not back AHPs as a solution. She felt that 
they would drive up premiums, decrease coverage, and increase 
fraud as tough consumer protection laws were replaced with 
minimal government oversight and solvency standards. She 
suggested small employer tax credits, an FEHBP or state 
employee pool, and allowing Medicaid and SCHIP and Medicare to 
cover the uninsured.
    Next was Sandy Praeger, Commissioner for Insurance, State 
of Kansas, representing the National Association of Insurance 
Commissioners. According to Ms. Praeger, AHPs do not protect 
consumers against plan failures and fraud and cherry picking, 
nor do they reserve patients' rights. AHPs would also 
destabilize the states' small group markets which she wanted to 
expand.
    The final panelist was Len Nichols, Vice President, Center 
for Studying Health System Change. Mr. Nichols claimed that 
AHPs were not worth the risk when there were other viable 
options. He felt that buying into existing pools like a state 
employee pool, FEHBP, Medicaid, or SCHIP was much safer and 
more effective. It would minimize administration costs, the 
enrollment apparatus would be simple, and the risk pool would 
be stable over time. He also suggested that the most efficient 
way to increase health insurance coverage would be to subsidize 
low-income workers directly and let them buy insurance on their 
own.
    In closing, Snowe noted that since the advent of AHPs, the 
health care problem has turned into a crisis and the time to 
act on behalf of small employers, their employees, and the 
uninsured was now. She recognized that AHPs are not the 
exclusive option in the fight for affordable health care and 
encouraged the participants to remain involved as the Committee 
worked to provide a solution for the uninsured.

``Small Businesses Continue To Lose Federal Jobs by the Bundle'', 
        Washington, D.C., March 18, 2003

    On March 18, 2003, the Committee held a hearing to explore 
the issues surrounding contract bundling. Chairwoman Snowe said 
that despite the Administration and Congress's efforts over the 
past several years to increase small businesses' access to 
federal procurement contracts, there has been a disturbing 
trend in the opposite direction. In effect, America's small 
businesses are being eroded by Federal agencies' practice of 
contract bundling which diminishes the role of small business 
in government projects. The Federal government does want to 
support small businesses it also has the contradictory goal of 
cutting costs and becoming more efficient. The challenge is to 
reconcile these two policy objectives of saving government 
funds and saving small businesses. The hearing sought to 
attract greater attention to the contract bundling issue, to 
examine the administration's actions concerning it, and to 
identify positive, constructive change that will ensure the 
Federal government continues to provide contracting 
opportunities for our small businesses while addressing the 
obstacles that remain. In her opening, Snowe specifically 
mentioned the Administration's e-government program as a means 
to make the government operate more efficiently and effectively 
by using best practices among government procuring offices to 
purchase goods and services faster and cheaper.
    The first panel consisted of four witnesses. Hector 
Barreto, Administrator, U.S. Small Business Administration, led 
off by faulting the contract reforms of the mid 1990s for 
exacerbating an already difficult situation for small 
employers. Repercussions existfor the country as well, 
Administrator Barreto told the committee, because small business 
participation is necessary for innovation, cost-savings, and increased 
employment.
    Improvements to the procurement environment, however, are 
being made thanks to the Administration's leadership and 
initiative. The SBA recently participated in an OMB report to 
the President that outlined a nine step strategy for increasing 
contracting opportunities for small businesses and for 
mitigating the effects of necessary contract bundling. This 
report proposed changes for the SBA and the FARC's respective 
regulations. The details of the report were submitted for the 
record.
    Finally, to highlight other efforts the SBA takes to 
minimize the effects of bundling, Administrator Barreto listed 
some of their existing programs and informed the Committee of 
some new ones that included a matchmaking program, the 
establishment of the Small Business Procurement Advisory 
Council, and on-line procurement academies.
    Following Administrator Barreto was Ms. Angela B. Styles, 
Administrator for Federal Procurement Policy, Office of 
Management and Budget. Administrator Styles agreed with many of 
the points made prior and she reiterated the detrimental 
effects contract bundling has on small business and the 
government and the taxpayers. In reference to the OMB report, 
she said that the nine strategic points can be grouped into 
three categories: promoting leadership and accountability; 
closing regulatory loopholes; and mitigating the effects of 
necessary and justified contract bundling. In response to the 
goals of this report, Administrator Styles stated that agencies 
are now reporting on a quarterly basis to the OMB on their 
actions to implement the report's nine recommendations and the 
OFPP has drafted a new set of bundling regulations for FARC and 
the SBA that will undo loopholes that previously allowed 
contracts to escape reform. Administrator Styles also expressed 
that oversight of each agency would best be handled by each 
agency's designated personnel.
    The third witness was Ms. Deidre Lee, Director, Office of 
Acquisition, Department of Defense. Director Lee testified that 
due to the acquisition reform of the mid 1990s and the 
increased demands on the DOD, contract bundling does occur but 
only if market research and a benefit analysis indicate 
substantial benefit by doing so. Even still, she assured the 
Committee that in cases where contracts are bundled the DOD 
seeks to maximize small business participation. She pointed out 
that the number of small business prime contractors performing 
DOD contracts increased in the last year--evidence of the 
department's commitment to small firms and the Administration's 
goals. Concerning the recent OMB report, she said that the DOD 
puts emphasis on five areas: Orders previously placed under GSA 
schedules or other contracts which were not in the definition 
must be focused on; early involvement of small business 
specialist; find alternatives to bundling; suggested changes to 
the Office of Small and Disadvantaged Business; and strengthen 
the compliance with small business subcontracting plans.
    In addition, the DOD prepared a supplemental policy letter 
to the OFPP report that stressed the need to emphasize those 
five points plus one extra: the accountability of senior agency 
membership to small business interests.
    The panel's final witness was David E. Cooper, Director, 
Acquisition and Sourcing Management, U.S. General Accounting 
Office. Director Cooper told the Committee that the GAO 
supported the President's plan addressing contract bundling in 
theory but was skeptical about successfully implementing it. 
Specifically, the GAO would like to see a clearly established 
system of measuring of an agency's efforts to achieve the 
objectives of the plan and to hold senior managers accountable 
for those results.
    Director Cooper was also concerned that the SBA and agency 
offices of the SDBU would not be able to meet the added 
responsibilities that the plan gives them. This belief was 
founded on prior GAO reports. Consequently, the GAO recommends 
that the SBA strategically assess, evaluate and plan their 
staff needs in order for them to prepare for and carry out the 
administration's plan.
    The second panel was made up of four witnesses as well, the 
first one being Mr. Eric Adolphe, Chief Executive Officer, 
OPTIMUS Corporation. As the owner of a small business, Mr. 
Adolphe knew first hand the obstacles to growth that contract 
bundling sets before small firms. He noted in particular that 
even though many large omnibus contracts are awarded partly on 
the pledge to subcontract a certain amount of work to small 
businesses, there is no legal recourse for small contractors 
when the pledges are not upheld. Also, small businesses are 
being shut out of many Federal contracts of a size that once 
went to small firms and they aren't being compensated for their 
bid and proposal expenditures. He then spoke out for the 
government and its taxpayers who he feels often receive lower 
quality goods and services at a higher price due to bundled 
contracts. Mr. Adolphe ended more positively by recognizing the 
improvement in the contracting best policies by the FAA and 
GSA.
    The Committee then heard from Paul Murphy, President, Eagle 
Eye Publishers. His company had recently completed a study on 
contract bundling. Their findings showed that contract bundling 
was costing small business billions of dollars and making it 
increasingly difficult for small employers to compete and 
survive in the Federal marketplace. The service sectors i.e. 
manufacturing, R&D, and construction were the primary engine of 
growth for bundled contracts; and GSA schedules, multi-award 
contracts, BOAs, and indefinite delivery/indefinite quantity 
contracts were the most frequently used contract vehicles for 
bundling. The report concluded that in order to more accurately 
depict bundling activities, bundling's definition needed to be 
broadened to include the process of accretive bundling.
    Testifying next was Michael Robinson, Defense Logistics 
Manager, Massachusetts Manufacturing Extension Partnership. He 
contrasted the Administration's plan to reduce contract 
bundling with S. 2466 introduced by Senator John Kerry. The 
bills' major difference was their proposed thresholds at which 
a contract was required to undergo unbundling actions. Mr. 
Robinson applauded both bills' effort to increase the quantity 
and quality of teaming arrangement opportunities, a necessary 
goal to satisfy the broad range of DOD procurement 
requirements. He continued byunderscoring the DOD's 
responsibility in maintaining a healthy, domestic manufacturing sector. 
Many U.S. manufacturers are not only small businesses, but they account 
for a significant portion of this country's employment and it is 
essential that this sector has the capacity to support U.S. warfighters 
at all times.
    The hearing's last witness was Ms. Carol Kuc, Women 
Impacting Public Policy. She reminded the Committee that the 
aim of PL 106-554, to assist agencies in awarding at least 5% 
of Federal contracts to women-owned businesses, had not been 
achieved. Keeping us from the objective were, Ms. Kuc thought, 
agencies structured to keep out small business contractors, and 
an anti-women's small business culture among contracting 
officers. To overcome this she recommended that the OFPP 
publish a monthly scorecard on awards to small businesses, and 
reward prime contractors who use small businesses or influence 
their subcontractors to seek out small business subcontractors. 
Other suggestions included: give SBA and OSDBUs the authority 
and resources to review contracts; clean up the CCR, Pro-net, 
and GSA small business databases to verify who is still a small 
firm; review contracts over $100,000 for small business 
participation; and federal certification should be created and 
accepted by states and localities.
    In closing, Snowe thanked the witnesses and communicated 
that although she felt improvements had been made concerning 
contract bundling, more were needed. She hoped that the SBA 
reauthorization process would offer an opportunity to enact 
some of the suggestions given at the hearing. She assured the 
witnesses that she would continue to fight for the terms 
initiated by the administration on behalf of small business.

Roundtable Entitled ``SBA Reauthorization: Non-Credit Programs'', 
        Washington, D.C., April 9, 2003

    On April 9, 2003, the Committee held a roundtable to 
discuss the status of the Small Business Administration's non-
credit programs with respect to the agencies 50th anniversary 
reauthorization. According to Chair Olympia J. Snowe, this 
roundtable was to provide information for the Committee, the 
Members, and the staff as they prepare for the reauthorization 
and continue the Committee's oversight of the agency. 
Specifically, the focus of the roundtable was on the SBA's 
Office of Advocacy, entrepreneurial programs, and government 
contracting assistance.
    In her opening statement, Chair Snowe stressed the need to 
level the playing field for small business and make sure that 
it has opportunities in the Federal marketplace. The SBA's non-
credit programs aid in achieving this goal by helping to cut 
regulatory costs, offering avenues for entrepreneurial 
development and assisting with government contracting 
opportunities. Chair Snowe stated the importance of improving 
these and other SBA resources and in keeping an active 
discourse concerning SBA programs. The roundtable discussion 
was intended to bring to light many key issues affecting the 
SBA's non-credit programs.
    Tom Sullivan, Chief Counsel, SBA Office of Advocacy, 
started the discussion by giving a brief summary of operations 
and staff levels. The Office of Advocacy pursues an independent 
small business agenda in three ways: (1) through regional 
advocates that work at the street level to gather and 
prioritize issues facing small businesses; (2) a research team 
made up of economists and researchers who gather data on small 
business; and (3) a legal team that provides solutions and 
perspective from small business into the rulemaking process, 
which in FY 2002 resulted in a savings of $21 billion in fore 
gone regulatory costs. Staffing was adequate at the moment.
    Following Mr. Sullivan, a number of participants voiced 
their feelings on S. 818 for the independence and nonpartisan 
workings of the Office of Advocacy. It was of general consensus 
that the Office of Advocacy should receive a separate line item 
for its budget, but that it should not function completely 
independent of the Administration. Giovanni Coratolo, U.S. 
Chamber of Commerce, commented that a line item would allow 
small business groups to defend the organization and encourage 
funding. Andrew Langer, NFIB, mentioned that a line item would 
create greater transparency for budgets. Jere Glover, Small 
Business Technology Commission, pointed out that it is good 
that the Office of Advocacy is part of the Administration; it 
allows Advocacy to educate decision makers and influence 
decisions. It was accepted that one-foot-in the Administration 
and one-foot-out would allow for more affective policy debate 
with the White House and Senior Administration.
    The second section of the roundtable concentrated on the 
SBA's entrepreneurial programs. Karen Street, Office of 
Entrepreneurial Development, SBA, gave a brief overview of the 
SBA's entrepreneurial programs as a backdrop for the 
discussion. In 2002, the SBA's entrepreneurial programs, which 
include SCORE, SBDCs, Women's Business Centers, Business 
Information Centers and the new Native American Economic Impact 
Program, assisted 1.5 million clients. Ms. Street marked 
sustainability funding for Women's Business Centers, as well 
as, restructuring SBDCs to allow for broader competition of 
centers and ideas as major issues.
    Susan Au Allen, US Pan Asian American Chamber of Commerce, 
raised the issues of how to increase the number of small and 
minority owned businesses that benefit from the SBA's programs, 
and how these firms can sustain business over time. She listed 
difficulty in replacing incumbent businesses and a lack of 
ample mentoring in management, financial processes and 
strategic alliances with other companies as key concerns.
    Anne Sullivan, Women Impacting Public Policy, was worried 
that the SBA did not offer enough guidance on expansion and 
would also like to see sustainability grants beyond a five-year 
funding period. Ellen Golden, Association of Women's Business 
Centers, voiced caution in removing SBA grants or restructuring 
programs. She believed that: (1) SBA funding gives programs 
credibility and helps these programs to receive additional 
funds; and (2) that it takes time to become knowledgeable, gain 
trust in a community and create an affective infrastructure, 
which could be lost by restructuring.
    Marilyn Nelson, National Women's Business Council, brought 
up the topic of reauthorizing the Women's Business Council. Ms. 
Nelson wanted to work to include language that would allow for 
the replacement of members when they leave their seats, along 
with allowing the Council to meet with Federal agency 
representatives to inform them of activities instead of 
reconstituting the Committee on Women's Enterprise. Ms. Nelson 
also would like to see more data and research done on women's 
business and offered the NWBC as a facilitator.
    Pete Homer, National Indian Business Association, discussed 
funding for Native American Businesses. He drew issue with the 
SBA delivery of service provider and the SBA central 
administrative office for the program. SBDCs have not affective 
for NIBA. They would much rather have the SBA use the SBA 
Tribal Business Programs for funding, while having the SBA 
Washington, D.C. office and the Native American Affairs 
Committee oversee the programs.
    Ken Yancy, SCORE, reported that SCORE would like to expand 
relationships with minorities, is increasing its recruiting, 
and is providing better Internet counseling.
    Zach Gast, Association for Enterprise Opportunity, spoke on 
PRIME. These are very-low income clients and the investment 
focus to assist these clients should go towards human capital 
to help these businesses succeed.
    Donald Wilson, ASBDC, concluded the second section of the 
roundtable stating that restructuring of the SDBCs should not 
be a viable option and that it would be like pulling the rug 
out from under these centers.
    At the conclusion of this section Senator John Kerry added 
a few remarks relating to the independence of the Office of 
Advocacy and the restructuring of the WBCs and SBDCs. He echoed 
much of the sentiment regarding the independence of the Office 
of Advocacy and believed that change to the WBCs and SBDCs 
should be done very carefully.
    The final section for discussion centered on government 
contracting and business development programs. Steve Denlinger, 
LAMA, first addressed the 8(a) program with particular focus on 
the artificially low entry criteria of $250,000 net worth. 
Suggestions were made that a study be conducted and new 
reasonable net worth criteria be created for each respective 
industry. Second, he spoke on the 7(j) program, believing it to 
be lacking in definition and funding, and stretched on a number 
of special programs. Thirdly, he proposed the resurrection of 
the advance payments program to support the growth and 
nourishment of minority enterprises just getting into the 
Federal-contracting arena. Next, the need for more PCRs was 
raised. Finally, Mr. Denlinger discussed size standards. He 
suggested a tiered approach to competing contracts, with levels 
of $1 to $10 million, $10 to $25 million, and $25 to $100 
million.
    James Turpin, American Subcontractor Association, 
questioned the government practice of bid shopping or reverse 
auctioning. He also mentioned that Federal pay protection 
should be expanded to include work done under Federal grants. 
One final concern addressed contract bundling; in particular, 
businesses have little knowledge as to who enforces the 
bundling and unbundling of contracts.
    Major General Charles Henry, Veterans Corp, was wary of 
competition of contracts for competition sake, but felt it was 
effective to supply contractors with clear metrics. 
Discretionary authority of contracting officers was also a 
concern, in that the government wide goals have not been met 
because the goals have no teeth. A possible remedy being that 
if you do not meet your budget, you do not receive funding.
    Ron Newlan, HUBZone Contractors National Council, offered a 
brief background of the HUBZone program. The design aspects of 
the program appeared to be solid, but implementation of the 
program has been quite flawed. The program is authorized $10 
million annually, yet during its highest year of funding, only 
$2 million was appropriated in the SBA budget for the HUBZone 
program management and oversight. Duly noted, were concerns for 
inadequate funding of business certification oversight, and 
agencies failing to comply with contracting goals.
    Some participants commented on reducing GSA scheduled 
paperwork to help small businesses. Others added that 
businesses should begin to look elsewhere for funding outside 
the Federal government.
    Sen. Mike Enzi concluded the discussion with his statement, 
embracing the Technical Rural Outreach Program, anticipating 
comments regarding the SBDCs, and placing special interest in 
addressing government contracting issues and furthering the 
SBIR program.

Roundtable Entitled ``SBA Reauthorization: Credit Programs (Part I)'', 
        Washington, D.C., April 30, 2003

    On April 30, 2003, the Committee held the first in a series 
of two roundtables on the reauthorization of SBA credit 
programs. This initial gathering focused primarily on the 7(a) 
Loan Guarantee Program, a program Chairwoman Snowe said ``has 
had a profound effect on America.'' Over the last three years, 
7(a) lenders were responsible for $28 billion in loans to 
start-up and existing businesses. Regardless, however, of the 
program's successes and past improvements, i.e., the reduction 
of fees and the burden of paperwork, Snowe called on the 
participants to provide ideas for new improvements as well as a 
report card on the old ones.
    Tony Wilkinson, President and CEO of the National 
Association of Government Guaranteed Lenders (NAGGC), started 
the discussion by saying that the Administration's 2004 budget 
request of $9.3 billion for the 7(a) program was insufficient 
and if no more funds were allocated, steps to limit loan volume 
would have to be taken next year. Mr. Bews, speaking on behalf 
of the SBA, and the only dissident, disagreed with Mr. 
Wilkinson and said that $9.3 billion was an adequate amount and 
it agreed with historical numbers. Mr. Wilkinson replied by 
saying that the historical numbers are no longeraccurate 
because current loan caps of $500,000 keep down lending activity and 
the incidents of September 11, 2003 have dramatically increased loan 
volume.
    Mr. James Ballentine of the American Banker's Association 
stated that more lenders were joining the program and 
consequently more loans would be made. He pointed out that such 
a situation calls for more money if we want to avoid loan caps 
that will make funds available to only smaller borrowers while 
neglecting the needs of the larger ones. In defense, Mr. Bews 
repeated his earlier statement and added that smaller loans 
generate more jobs, therefore more small loans at the expense 
of larger ones was acceptable--especially in today's 
environment of high unemployment. Mr. Ballentine countered that 
job retention is as important as job creation and often 
requires larger loans. The 7(a) program is a long-term credit 
program and, in particular, manufacturers use it to buy 
expensive specialty equipment that requires larger loans.
    Concerning the Preferred Lender Program (PLP) and the 
Express Program (EP), Mr. Byrnes, a small business lending 
manager from Maine, spoke first. He was advocating for the 
expansion of both programs. Since the latter program's 
introduction in 1998, SBA loans have increased more than 
tenfold. This is because the EP reduces paperwork, streamlines 
the loan process, and significantly decreases the closing 
costs. Mr. Bew elaborated on some of the recent changes made to 
the EP, especially those that have resulted in increased 
minority lending, such as the making available of smaller 
loans.
    Deryl Schuster, Business Loan Express, was not so pleased 
with the PLP, or more specifically, with the administering of 
its expansion and membership renewal. He felt that the 
expansion and renewal processes currently drove good lenders 
from SBA loan participation, discouraged lenders from 
committing resources to loan programs, and made it very 
difficult to maintain approval as a PL. His suggestion, one 
that others supported, was to create a national PLP that had 
stringent standards. Ms. D'Agostino, GAO, reminded all present 
that it was important to have strong oversight of the PLP 
because it lends out a very large sum of money each year. In FY 
2002 it lent $7 billion in government guaranteed loans which 
amounts to significant exposure for the taxpayer. The GAO 
conducted a study to evaluate SBA's oversight and found that 
the program does not adequately focus on the 7(a) portfolio 
risk at both bank lenders and the SBLCs. The GAO has made 
several recommendations that the SBA agrees with. The GAO is 
also studying the new 7(a) credit subsidy model and SBA's 
transformation initiatives.
    Another issue raised concerned the Microloan Program (MP). 
Mr. Corbet, Executive Director, Go Connection, felt that the MP 
is underfunded. The current allocation doesn't meet the AEO's 
recommendation to the Committee, especially for the MP's 
technical assistance. Collectively, MP businesses owe the 
government $96 million and many will go out of business without 
technical assistance. The allotted amount also threatens the MP 
itself, a program that has created 34,000 jobs in four years 
and offers capital to a type of borrower that no one else lends 
to. Even the Community Express Plan, a supposed cheaper 
alternative to the MP, will not aid these microborrowers. Mr. 
Corbet also expressed concern about the consolidation of 
technical assistance programs.
    If the MP has to share a budget, they will not be able to 
provide the level of aid necessary as their concerns get less 
priority. Mr. Bew responded by saying that the MP needed to 
become more efficient and productive. Blake Brown, CFO, Coastal 
Enterprises, agreed with Mr. Corbet's funding concerns and also 
expressed a desire for a more uniform interest rate among loans 
and the elimination of state funding restrictions. Others 
continued to extol the work of the MP and its unique and 
powerful affect on communities and the economy as a whole. For 
the exception of Mr. Bew, all lobbied for increased funding for 
the program that earns over two dollars for every one spent on 
it.
    Paul Merski, Independent Community of Bankers, spoke about 
the current fees for banks who work with SBA loans. Mr. Merski 
represented all participants when he said that the fees could 
not be raised. This was one of the points that David Bartram, 
President of the SBA Division, U.S. Bank, highlighted from 
NAGGL's ten point legislative package. The reason for this is 
that SBA loans are only marginally profitable and any raise in 
the fees would eliminate any incentive for banks to take part 
in the programs.
    Mr. Hearne, Credit Union National Association, wanted to 
cheer the recently adopted rule allowing credit unions more 
lending participation. He felt that with more lenders it would 
increase access to capital for the public. Mr. Merski was not 
so enthusiastic. The entrance of credit unions may raise the 
default rates on loans because credit unions have little to no 
experience in commercial lending. He requested that a database 
be kept on the default rate for credit unions versus current 
program lenders.
    Greg Feldman, Gryphon Capital Advisors, promoted the idea 
of loan pooling. He illustrated the problems facing community 
bankers and how they are dealing with low levels of deposits 
due to bank consolidation and are thus struggling to find money 
for loans. He said that the SBA should add a compliment to the 
7(a) program, a limited forum of guaranteed loan lenders, that 
would allow poolers and aggregators of small business loans to 
purchase those loans from the community banking system, sell 
them into the capital markets, and over a period of time have 
business loan category become much like the asset-backed 
categories of mortgages and auto loans. Mr. Bew said that the 
SBA had been exploring this option.

Roundtable Entitled ``SBA Reauthorization: Credit Programs (Part II)'', 
        Washington, D.C., May 1, 2003

    On May 1, 2003, the Committee held the second and final 
roundtable on the reauthorization of SBA credit programs. This 
event focused on the following programs: 504, Disaster Loan, 
and venture capital. Chairwoman Snowe opened by touting the 
programs' successes and hailed them as a source of growth for 
our economy and small businesses. In the last three years, 
Snowe cited, the 504 program created 325,471 jobs and SBICs 
invested over $17 billion in small businesses that in turn 
created and retained about a half-million jobs. She also 
pointed out the improved efficiency of the disasterassistance 
program's loan application process which was able to provide timely 
funds to many businesses affected by the terrorist attacks of September 
11th.
    The discussion began with Christopher Crawford, Executive 
Director, National Association of Development Companies 
(NADCO), a 504 trade association. He stressed the importance of 
the 504 program saying that over its lifetime it has created 
over a million jobs and the demand for its loans are growing. 
Loan volume grew 22 percent this year and 15 percent last year. 
He also expressed a dislike for the Administration's proposal 
to reauthorize the program every six years. Mr. Crawford 
reasoned that business lending is too dynamic a process to go 
unchanged for six years and needs to remain on its current 
reauthorization schedule of three years. There was a general 
consensus on these points.
    Mr. Crawford also started debate about the subsidy model 
and the centralization pilot program. He felt that the subsidy 
model is inaccurate because it forecasts a lowly seventeen 
percent recovery rate on defaulted loans. He referenced a study 
that NADCO did where Certified Development Companies (CDCs), 
not the SBA, did their own liquidations. The result was a 
better than fifty percent average recovery on outstanding, 
guaranteed loans. The study also found that the SBA's Portfolio 
Management staff had workloads seven times greater than that of 
commercial banks' staffs. In the 106th Congress the committee 
authorized a liquidation pilot that allowed CDCs to do their 
own recoveries but we are still awaiting the regulations on 
that pilot that would make the program available to all 
qualified CDCs. Ron Bew, Associate Deputy Administrator, Office 
of Capital Access, SBA, said he would look into why that has 
not been done.
    Concerning the centralization pilot, Mr. Crawford said that 
where it has been tried it has reduced loan processing time 
from 14-40 days down to 2-3. In support, Sally Robertson, 
Executive Director, Virginia Asset Financing Corporation, 
displayed the enormous amount of paperwork required for 
applying and closing a loan. She ventured that all CDCs are in 
favor of centralized processing. Others added that the 
paperwork adds to the costs of a business, delays getting money 
when its needed, and puts great administrative demands on both 
lender and borrower.
    Julie Cripe, President/CEO, Omnibank, brought up that many 
daycare centers have a hard time getting 504 loans due to their 
non-profit status, even though she and Ms. Robertson have never 
had a daycare default on a loan of theirs. Ardith Wieworka, 
Commissioner, Massachusetts Office of Child Services, also 
wanted 504 loans to be made available to daycares because not 
only would such loans accomplish the spirit of the loans--
provide jobs and allow others to seek jobs--but communities and 
children depend heavily on daycare services and these 
businesses need to be able to expand and accommodate 
communities' needs. Mr. Bew replied that, by statute, 504 loans 
are for for-profit companies only. Mr. Crawford added that 
lenders are wary of loaning to non-profits because if the 
establishments lose money then the lending prices go up and 
demand for loans goes down. He was willing, though, to support 
a pilot program.
    With respect to the Disaster Loan Program, Davi D'Agostino, 
Director, Financial Markets and Community Investments, GAO, 
remarked positively that the program approved a tremendous 
amount of loans for 9/11 victims in a short amount of time, and 
that their performance goals were succeeded. And, although she 
recognized that the SBA was conducting a customer service 
survey to find areas in which they need to improve, she listed 
where GAO thought they needed to work on: protection of 
borrowers whose loans are being sold to the private sector, 
tracking of these borrowers' complaints, accounting of 
operational benefits achieved from loan sales, and explaining 
the significant decline in the subsidy allowance account for 
disaster loans. She mentioned that the SBA is addressing some 
of these suggestions and the progress of their actions was 
discussed.
    Snowe raised the question if there was a need for 
distinguishing between the 7(a) and 504 programs? Although Mr. 
Bew pointed out that there was some overlap, the others agreed 
that the two programs serve their own unique purposes.
    Snowe was forced to leave toward the end of the roundtable 
but her staff director, Mark Warren, took over in her stead. 
Mr. Warren began by addressing investment capital programs and 
he asked Lee Mercer, President, National Association of Small 
Business Investment Companies, to list the main issues. Mr. 
Mercer said that they hope to: maintain a zero subsidy rate, 
keep three year authorizations, clarify the SBA's intention in 
capital impairment, change the participating security 
distribution laws which will positively impact the subsidy 
rate, maintain the leverage cap, and take away the statutes 
that say all SBICs must invest 20 percent of their money in 
smaller funds because for larger SBICs it forces them to invest 
in far more portfolio companies than they have personnel to 
handle.
    Mr. Warren followed up by posing the question whether the 
SBIC and NMVC programs were virtually the same? Participants 
answered no. They said that SBIC focuses more on funding small 
businesses while NMVC tries to fund low-income communities. 
Many felt that the strength of NMVC was that it reached under 
invested areas more effectively than SBIC but Mr. Mercer 
reminded those present that SBICs have supplied loans to a 
surprisingly diverse amount of areas, low-income included. 
Another difference in the programs is that NMVC provides a 
level of technical assistance the SBIC doesn't.

``SBA Reauthorization: Programming for Success'', Washington, D.C., 
        June 4, 2003

    On June 4, 2003, the Committee held a hearing on the 
reauthorization of the Small Business Administration (SBA) and 
the programs it supports. Chair Senator Olympia Snowe and SBA 
Administrator Hector Barreto discussed the successes and 
challenges facing the SBA. Chair Snowe also explained that the 
Reauthorization hearing was one is a series of hearings 
convinced by the Committee to examine SBA programs. She then 
reviewed those hearings.
    In March 2003, the Committee held a hearing on contract 
bundling that outlined significant changes federal agencies 
need to make in order to meet the goal of 23 percent of federal 
contracting dollars going to small businesses.
    Then, in April and May, the Committee conducted a series of 
roundtables to review different SBA programs designed to help 
individuals start small businesses including, the Small 
Business Development Centers (SBDC), Women Business Centers 
(WBC) and the Service Corps of Retired Executives (SCORE). The 
roundtable concluded that the SBA's Office of Advocacy is an 
invaluable voice representing small businesses with the 
Administration. But, there are some SBA program insufficiencies 
that need to be addressed to help small businesses start up 
operations and receive assistance once operating, including 
access to SBA personnel with experience in government 
contracting.
    Roundtables on April 30th and May 1st focused on SBA's 
lending and capital investment programs. These programs help 
small businesses to grow and expand through loans and capital 
investing. These programs have created and retained over 2 
million jobs. Chairman Snowe stated that the Senate Small 
Business Committee hopes to work with the SBA to make SBA 
programs more user-friendly and efficient. She also observed 
that she looked forward to hearing how SBA Administrator Hector 
Barreto would respond to the challenges facing existing small 
businesses as well as working with him during the 
reauthorization process.
    Mr. Barreto testified about the many different initiatives 
and programs undertaken by the SBA to strengthen small 
businesses, stating that the SBA's three strategic goals are, 
minimizing the small business regulatory burden, empowering 
entrepreneurs by increasing access to capital and information, 
and helping businesses recover from disasters. Mr. Barreto then 
listed a series of SBA accomplishments including; improvements 
in the econometrics model for the 7(a) loan program, changes in 
the way the SBA delivers services to customers, and a contract 
with Dun & Bradstreet to develop a more modern oversight system 
for SBA's lending partners.
    For FY 2004, the President proposed that $797.9 million be 
appropriated for the SBA, maintaining spending at 2003 spending 
levels. The budget allocated $4.5 billion in 504 Certified 
Development Company Programs loans. The budget requested level 
funding for SCORE, SBDC, WBC and business information networks 
and continued funding for Disaster Assistance Programs. This 
budget would provide $20.8 billion in small business capital, 
and $760 million in new disaster loans for natural disaster 
victims.
    The budget proposal aimed to serve small businesses 
efficiently and assist job creation. Some examples given of 
serving small businesses more efficiently include changes in 
the 7(a) Loan Guarantee Program to reduce the program's fees 
and an emphasis on smaller loans achieved through capping 7(a) 
loans at $500,000 per loan. Because of these caps the SBA 7(a) 
program, in FY 2003, had lower default rates, and assisted more 
small businesses while also creating more jobs. The 7(a) 
program was also to expand to include credit unions as lenders.
    The SBA legislative proposal for reauthorization asked 
Congress to make the re-authorization a six year cycle and to 
make changes to existing programs permanent including the 
clarification of the SBA's authority over the 7(A) loan 
program, changes to the Microloan program regarding 
eligibility, changes to the 504 Premier Certified Lending 
Program's loan loss reserves, and statutory changes to the SBIC 
participating securities program that increases fees in order 
to maintain the program's zero subsidy and allow SBICs to 
invest idle funds in securities.
    The budget also sought to update and increase the capacity 
of SBDC and WBCs. The SBA proposes using competition in the 
SBDC program, like the competition measures already used WBCs, 
so that the strongest most successful centers remain, while 
weaker centers are closed. The SBA also wanted to use the 
budget proposal to expand the number of WBC centers available 
to serve business women.
    Mr Barreto explained how SBA programs creates jobs, and the 
success of different lending programs like SBAExpress in 
creating jobs on smaller loan amounts. He concurred with Chair 
Snowe that the resources available through the SBA are not 
sufficiently well known or understood within the small business 
community. He stated that the SBA intends to use the SBA's 50th 
anniversary as a reason to increase its marketing and outreach 
to small businesses.
    The budget includes $8.8 million for SBA transformation 
with transformation focusing on helping the SBA field offices 
give more attention to their relationships with customers and 
resource partners. This transformation plan is linked to the 
President's management agenda with five areas of focus: human 
capital, competitive sourcing, E-government, integration of 
budget with performance, and improved financial management. As 
part of the transformation request the SBA asked for $2.3 
million dollars to streamline its internal business procedures 
and improve the technology infrastructure.
    The purpose of the SBA transformation initiative is to free 
SBA employees from the increasing bureaucracy and 
administrative duties. The SBA's goal is to work more with the 
small business community helping business owners access more 
capital and technical assistance. The SBA transformation would 
train existing employees, who previously spent time doing 
paperwork, to network with small businesses, their local 
Chambers of Commerce and industry organizations.
    Separate from the budget issues, Chair Snowe and 
Administrator Barreto discussed concerns about the SBA's 
accounting. Specifically, the SBA disaster loan programs had 
three consecutive years, 2000, 2001, 2002 of unfavorable 
opinions on financial statements and loan asset sales. To fix 
the problem the SBA changed the CFO in charge of these 
financial reports and is working with the GAO to improve the 
credibility of these financial statements. Administrator 
Barreto also testified that theSBA is working to implement a 
permanent correction that fixes problems in the existing internal 
systems. The Agency hopes to accomplish this through an effective loan 
monitoring system designed by Dunn and Bradstreet.
    Chair Snowe was concerned that the $9.3 billion dollars 
worth of funding for the 7(A) loan program would not be enough 
to service the demand for small businesses loans. Administrator 
Barreto explained that though in 2003, the 7(a) program ran 
short of loan money, in 2004, the SBA's focus on smaller loans 
would prevent a similar year end funding shortfall. He 
explained that by making smaller loans to more businesses, 
through the SBA Express Program, the SBA has reached 10,000 
more small businesses year to date.
    Ordinally, many predicted that banks would not participate 
in the SBA Express Program offering these reduced 7(a) small 
business loans. But, small lenders like credit unions, 
community lenders and rural lenders were able to use SBA 
Express to make the program a success. These lenders are 
considered an important part of the SBA's outreach and 
marketing plan to drive up small businesses demand for SBA 
lending.
    Administrator Barreto discussed the SBA actions on contract 
bundling. When the ProNet and CCR contracting databases were 
merged, some companies, that were no longer small businesses, 
were still listed on the ProNet database. These glitches and 
other problems created the perception that large companies were 
taking contracting opportunities away from small businesses. 
The SBA scrubbed the database trying to eliminate large 
businesses, but found that sometimes business qualify as a 
large business in one contracting category and a small business 
in another. The SBA is policing the database, pursuing criminal 
charges for abusers, as well as fines and other penalties. 
Small businesses are also encouraged to help monitor the 
database to assure that only small business compete for small 
business government contracts.
    Finally, in closing, Chair Snowe noted her preference for a 
three-year reauthorization time line for SBA programs over 
Administrator Barretos proposed, six-year reauthorization. She 
thanked Administrator Barreto for his testimony and stated she 
looked forward to working with him on the reauthorization 
process.

``Small Business Manufacturing in a Global Market'', Lewiston, Maine, 
        October 9, 2003

    Chair Olympia Snowe, after welcoming the attendees, 
emphasized how important reviving the manufacturing industry 
was to her as a Senator from Maine, and the Chair of the Senate 
Small Business Committee and Co-Chair of the Senate Task Force 
on Manufacturing. Her opening remarks addressed many of the 
difficulties Maine's small manufacturers face. She stated that 
a healthy manufacturing sector is essential to our national 
security. But, that unfair trade practices, including China's 
manipulation of its currency, threatened the U.S. manufacturing 
base and manufacturing jobs. She also explained how two pending 
Senate measures, the reauthorization of the Small Business 
Administration (SBA) and efforts to reform the FSC/ETI export 
tax, would help small manufacturers.
    The Honorable Michael H. Michaud made a brief statement. He 
explained how the closure of large- and medium-sized businesses 
can have devastating economic consequences on Maine as small 
manufacturers lose jobs and capacity. He emphasized the need 
for an Assistant Secretary of Commerce for Manufacturing, and 
bipartisan work, to create policies that address the forces 
hurting the manufacturing industry.
    Grant Aldonas, the Commerce Department's Under Secretary 
for International Trade discussed the President's efforts to 
create a strong economic environment for small- and medium-
sized manufacturers. He explained that the U.S. needs to ``keep 
our side of the street clean,'' by addressing rising health 
care and pension costs and the pervasiveness of personal injury 
suits that reduce small business profitability and viability. 
He also addressed concerns he heard during meetings with small 
manufacturers on how regulatory and tax burdens reduce the 
competitiveness of domestic small businesses.
    Under Secretary Aldonas talked about international trade 
and the lack of economic growth abroad. He also addressed 
manufacturers' concerns about export trade with China, 
explaining how the Administration is pressuring China to 
correct structural issues that create unfair trade practices, 
such as pegging the yuan to the dollar.
    He said that the Administration is taking the most vigorous 
stance he has seen in dealing with trade issues. He wants to 
address trade problems before an industry is harmed. He 
believes the U.S. should act aggressively to protect domestic 
manufacturers. He expressed that trading partners should decide 
if they want to comply with U.S. trade rules and play fair, or 
not trade with the United States.
    In her testimony, Pamela Olsen, Assistant Secretary on Tax 
Policy for the Treasury Department discussed current tax issues 
affecting small business manufacturers in a global market. She 
explained that small businesses' role in global manufacturing 
has steadily increased since the 1960s and that many small 
businesses are directly or indirectly engaged in exporting 
their goods abroad. She asserts U.S. tax policy must raise 
revenues in a way that creates as little burden on tax payers 
as possible. She stated that among the Administration's tax 
goals are plans to ease small businesses' tax burden and 
streamline the tax process.
    Assistant Secretary Olsen outlined how the Administration's 
legislative tax agenda would benefit small businesses and 
manufacturers. These initiatives include making the research 
and development tax cuts permanent, reviewing the current 
system of tax deprecation to assure that small businesses 
invest in their most productive endeavors, reforming the 
corporate Alternative Minimum Tax (AMT), simplifying corporate 
accounting rules, and simplifying tax regulations.
    During the question and answer period many issues related 
to manufacturing, China, taxation and competitiveness were 
discussed. Chair Snowe asked Grant Aldonasabout China, and how 
long China would be allowed to be noncompliant with WTO rules. She 
explained that one of the primary concerns she heard from manufacturers 
is that China is violating it's fair trade obligations. She urged the 
Administration to take a firm stance against unfair trade practices.
    Mr. Aldonas explained that the United States needs to 
convince China that it is in their best interest to work with 
the U.S. under a model of openness and enforcement of trade 
agreements. He reiterated that he believes that the 
Administration is taking strong action against China.
    Mr. Aldonas also addressed other domestic issues that 
affect U.S. competitiveness. He observed how many small 
manufacturers will reduce their costs and increase their 
profitability only to see those savings eroded by increasing 
health care and energy costs. He talked of Commerce Department 
Initiatives that aimed at helping small businesses find niche 
markets to compete. He explained how declines in the U.S. 
shipping industry hurt U.S. manufacturers and Maine's economy.
    Assistant Secretary Olsen discussed the impact of U.S. 
taxes on the competitiveness of U.S. industries. She used the 
example of the U.S. shipping industry's decline after the 
1960's imposition of taxes on world wide earnings to show how 
tax policy can negatively impact. She observed that, because 
other major world economies are stagnant, the world currently 
relies on the U.S. economy for both growth and consumption.
    During his testimony, Bruce Pulkkinen, President and CEO of 
Windham Millwork Inc., outlined the difficulties facing small 
manufacturers. He stated that small manufactures have fifty 
percent of their profits eaten up by state, local and federal 
taxes. This reduces the money companies have to invest in 
growth. Additionally, manufacturers must continuously become 
more competitive to compete with countries that use unethical 
trading practices. He believes that if the trade deficit 
between the U.S. and China continues to increase, U.S. small 
manufacturers will be eliminated within five years.
    Mr. Pulkkinen stressed the importance that the 
Manufacturing Extension Partnership's (MEP) program to be fully 
funded, so that it can continue to help small manufacturers. He 
explained that manufacturers take inexpensive natural resources 
and by adding value, create wealth. If the U.S. imports more 
goods than it exports it builds other countries wealth, not 
domestic wealth. He believes that tax changes, advancements in 
technology and leaders who understand the issues facing 
manufacturers are necessary to reinvigorate the manufacturing 
sector.
    Mr. Thom Labrie, President of former Augurn Machinery, 
Inc., stressed the importance of protecting U.S. manufacturers' 
intellectual property rights. Mr. Labrie testified that while 
at trade shows, foreign competitors would view his company's 
products in an effort to illegally copy their technology for 
their own use.
    In her testimony, Lolisa Bonney, the CFO and general 
manager for Winderosa Gaskets, discussed how her company 
competes in the world market and the difficulties they face. 
She explained that companies like hers demonstrate the 
potential, positive impact international trade can have on 
remote communities. She explained the importance of the MEP in 
helping her business be competitive internationally and the 
need for schools to educate students on how to work in the 
manufacturing industry.
    In his testimony, Rodney Rodrigue, the President and CEO of 
the Maine MEP, testified about the importance of technology 
transfer from the government and universities to small 
businesses. He explained that government should strive to 
eliminate barriers to technology transfer and help small 
manufacturers compete by focusing its resources into a single 
program that is designed to support and reinvigorate 
manufacturing.
    In his testimony, Randy Cousineau, owner and president of 
Cousineau Inc., explained the difficulties faced by Maine's 
lumber and paper mills. He explained that his company incurs 
many costs that his foreign competitors do not have to pay, 
including workers compensation insurance, higher per unit cost 
of electricity and the unsubsidized costs of machinery 
upgrades. He explained that low cost lumber from Russia and 
Asia decreases his company's orders.
    In his testimony, Allen Cairns, managing partner for 
Creative Mold Company explained the difficulties U.S. 
manufacturers face as they compete with lower cost labor 
abroad. U.S. manufacturers have used automation, computers and 
other means to make their manufacturing process more efficient. 
These processes have been exported overseas, reducing the 
technological competitive advantage of U.S. companies and 
reducing competitiveness to costs of labor. He argues that when 
companies compete on labor cost alone, U.S. companies loose.
    In his testimony, John Wentworth, the president of 
Moosehead Manufacturing, addressed different issues affecting 
domestic wood furniture manufacturers. He explained that the 
cost of regulations, like those created by OSHA, the EPA and 
the Consumer Product Safety Commission, force small companies 
to spend their limited resources on regulatory compliance, 
reducing their profitability and survivability. He talked about 
the negative affects of increasing healthcare costs and China's 
dumping of wood furniture in the U.S. market on his business.
    In his testimony, Bernard Featherman, Chairman of the 
Biddeford-Saco Chamber of Commerce, testified about the 
difficulties facing Maine small businesses. He explained that 
small business owners need more federal grants to train workers 
for manufacturing jobs. Like many panelists, he was concerned 
about the high cost of healthcare. He suggested that the 
government should address questions of liability reform, tax 
code revisions and a national energy policy. He also sought 
government attention to small business financing and capital 
assistance.

              B. HEARINGS OF THE COMMITTEE, SECOND SESSION

``The President's FY2005 Budget Request for the SBA'', Washington, 
        D.C., February 12, 2004

    On February 12, 2004, the Senate Small Business Committee 
held a hearing to review and make recommendations to the Small 
Business Administration's (SBA) budget proposal for fiscal year 
2005. In her opening statement, Chair Olympia J. Snowe examined 
the critical role the SBA's lending and technical assistance 
programs have played in aiding America's small businesses 
during a time of economic recovery. With two-thirds of all new 
jobs created by small businesses, the SBA continues to prove 
its investment in America's economic future, having created or 
retained more than 6 million jobs since 1999.
    The agency's budget proposal represented a 15 percent 
decrease from the Administration's budget proposal submitted in 
fiscal year 2004. In order to assure that vital job creating 
programs were not sacrificed, Chair Snowe stressed the success 
of programs such as the 7(a) loan guarantee program, the Small 
Business Investment Company Program, and SBA's Technical 
Assistance Programs.
    The Honorable Mike Crapo, U.S. Senator from Idaho provided 
in his opening statement that while he supports balancing the 
budget, he does not believe the SBA is a good place to start 
making cuts, especially with small business being the center of 
job creation in this country.
    The Honorable Mark Pryor, U.S. Senator from Arkansas, in 
his opening statement expressed his concern for that the SBA 
budget did not include funding for the 7(a) guaranty program, 
the Microloan program and cut funding for both the Women's 
Business Center program and Small Business Development Centers. 
He acknowledged the important role the SBA plays with small 
businesses, and in turn the role that small businesses play in 
our economy and job creation.
    The first witness to testify before the Committee was the 
Honorable Hector V. Barreto, Administrator, U.S. Small Business 
Administration. He briefed the Committee on the SBA's Fiscal 
Year 2005 Legislative Proposal and Budget Request, which 
included increasing the 7(a) loan guarantee authority to $12.5 
billion. More importantly, Barreto spoke about the SBA's goal 
to move the 7(a) program to a zero subsidy level, thereby 
decreasing the SBA budget by $100 million, and minimizing the 
time it takes for businesses to complete the application 
process. Additionally, Barreto spoke about the budget requests 
for other SBA programs including: $88 million for Small 
Business Development Centers, $5 million for the Service Corps 
of Retired Executives, $12 million for Women's Business 
Centers, $750,000 for Veterans Outreach, and $1.5 million for 
7(j) Technical Assistance.
    During the question period, Mr. Barreto explained to Chair 
Snowe that the shutdown of the 7(a) program in January was due 
to the volume of large-scale loans at the end of 2003, which 
used up the remaining budget money while the agency was under a 
Continuing Resolution. Chair Snowe expressed concern regarding 
the low amount requested for 7(a) loan guarantee authority. By 
not requesting the $16 billion provided in legislation, the 
agency was taking a chance of exhausting its funding and 
capping business growth. In response, Mr. Barreto made the case 
that the program consistently provided approximately $9 billion 
in loans and the requested $12.5 billion loan cap was actually 
an increase.
    Senator Pryor questioned Mr. Barreto regarding the SBA's 
transformation initiative and its effect on the SBA's loan 
program. Mr. Barreto explained that the relocated employees 
were liquidators and not employees giving loans. Furthermore, 
the transformation process will reduce the time it takes for 
businesses to complete this process.
    Other issues discussed included fees on 7(a) loans, the 
Microloan program, and the HUBZone program. Mr. Barreto 
concluded his testimony by addressing the SBA's plans to reach 
zero-subsidy for the 7(a) program and that the change would 
make it even more possible for small businesses to secure 
loans.
    The first member of the second panel to testify was Mr. 
Tony Wilkinson, President and CEO of the National Association 
of Government Guaranteed Lenders. Mr. Wilkinson cited the 
recent House Small Business Committee hearing in which business 
owners testified that the 7(a) program shutdown did not allow 
them to receive loans that were approved. Furthermore, these 
applicants were unable to resubmit for their loan because the 
amount exceeded the loan cap of $750,000. His testimony 
discussed that capping loans, prevented small business from 
participating in the loan program which could negatively impact 
the number of jobs they can create. Mr. Wilkinson also 
indicated that the shutdown could have been avoided, if the SBA 
increased its lending authority to $12.5 billion which was the 
predicted lending volume for Fiscal Year 2004.
    Next to testify was Mr. David Coit, Chairman, National 
Association of Small Business Investment Companies. Mr. Coit 
called on the committee to consider NASBIC's proposal to 
continue the Participating Securities Program. The proposal 
seeks to remove elements that discourage institutional 
investors and will subsequently bring additional sources of 
capital to the program.
    Ms. Mary Mathews, former board chair of the Association for 
Enterprise Opportunity, provided testimony supporting the SBA 
Microloan program and PRIME. She argued that loans covered 
under the Microloan program would not be picked up by the 7(a) 
program as Mr. Barreto suggested, and that theses types of 
loans were too risky for banks to approve under the 7(a) 
program.
    The final member of the panel to testify was Ms. Ellen 
Golden, Association of Women's Business Centers. Ms Golden 
stated that the President's budget request of $12 million for 
the Women's Business Center program was insufficient. Under the 
budget request, the centers were being expected to provide 
additional services, including trainingSBA personnel to assist 
Native American communities and provide Microloan technical assistance, 
with no additional funding. Ms. Golden indicated that $14.5 million for 
Fiscal Year 2005 would be an appropriate funding level. Additionally, 
Ms. Golden expressed concern that the Women's Business Center 
Sustainability Pilot program is expected to expire without 
reauthorization, and two-thirds of the most experienced centers would 
not have the ability to renew their grants.

``Accessing Capital and Business Assistance: Are Current Programs 
        Meeting the Needs of Rural Small Business?'', Coeur d'Alene, 
        Idaho, February 16, 2004

    On Thursday, February 19, 2004, Senator Mike Crapo presided 
over a field hearing, in Coeur d'Alene, Idaho entitled 
``Accessing Capital and Business Assistance: Are Current 
Programs Meeting the Needs of Rural Small Business?'' for the 
Committee on Small Business and Entrepreneurship. Senator Crapo 
stated that the findings of a recent SBA study were disturbing 
and worrisome for small businesses. The study showed that 80 
percent of all small business lending occurs in urban areas, 
although loans to rural businesses are increasing at a faster 
rate than loans to urban businesses. Unfortunately, the study 
also shows that a significant problem remains. Small businesses 
in rural areas nationwide (20 percent of all small businesses) 
have less access to credit than those operating in urban areas. 
Senator Crapo hoped that by raising some important questions 
this meeting would result in helpful responses and actions.
    The SBA's recent decision to suspend, cap and restrict its 
flagship 7(a) loan program has caused a lot of problems and 
raised a lot of questions. SBA programs may be putting small 
business lending in rural America, and elsewhere, in jeopardy 
of obtaining access to capital necessary for the beginning and 
expanding of their business. There are four main areas of 
concern: funding, restructuring of existing rules and 
procedures, centralization of loan processing, and the possible 
elimination of SBA-supported consulting services.
    The funding of the SBA loan programs seems to be an issue 
almost every year, especially for Robert Beck, the Vice 
President of Mountain West Bank. He believes the funding crisis 
could be avoided if the SBA would form a dialogue with their 
lending partners and other experts in the field such as NAGGL. 
The current budget of $9.5 billion will probably not be 
sufficient and will, in all likelihood, be $3 billion short for 
the fiscal year 2004.
    Caps of $500,000 and $750,000 have been put in place in 
recent years and, in addition, the recent elimination of the 
piggyback loans is causing problems. Constituents suggested 
that the piggyback loan structure be put back in place 
immediately and the maximum of the $2 million loan be 
reinstated as quickly as possible.
    The SBA is beginning to get a reputation of on again and 
off again. Consistency and integrity is a must. Lending 
partners must be willing to explain to small business owners 
clearly and precisely the rules and regulations. It is 
important to immediately reestablish what the SBA loan 
guarantee program is about providing capital to small 
businesses that would otherwise not be able to get funding and 
business assistance without an SBA loan guarantee.
    The SBA recently proposed to fully fund the program but 
only by providing much less of a guarantee and charging less 
than guarantee fees. This will have a dramatic effect of 
reducing capita to small businesses. Lending partners will be 
unwilling to lend the less of a guarantee due to lack of 
collateral especially with start-up businesses or expanding 
businesses that have less than adequate liquidation values to 
support the loan.
    Many who work with the SBA believe that the agency is 
planning to centralize all loan processing; eliminating 138 
loan officers in favor of 36 centralized loan decision makers. 
Even though local banks participate in the Preferred Lending 
program, many constantly rely on the district office to provide 
guidance and answer questions. It is important to preserve our 
SBA loan office so they can continue to provide service to 
small businesses as well as lending partners.
    Many bank policies preclude lending to small businesses 
without that 2-year historic debt service. Without the aide of 
the U.S. Small Business Administration loan programs, many of 
these small businesses would not be able to obtain their 
financing that they would need to create these jobs that are so 
needed in our economy. The Small Business Administration 
lending programs are indispensable for this country's economic 
health. It is common knowledge that the majority of all jobs 
are created from the small businesses.
    In most years, the SBA loan program has been able to meet 
the needs of both the lenders and the businesses. The recent 
shutdown of the SBA's 7(a) loan program, many banks, many 
businesses, estimated at about 200 have been caught in the 
middle with no place to go. This shutdown and this subsequent 
capping of the loans at $750,000, along with the first-time 
ever prohibiting the piggyback loans, has caused the SBA to 
slam the door on at least $1.3 million loan requests as of 
December 30, 2003. Many of these small business owners do not 
qualify for other loan programs. But when they contact the SBA 
office they are told to find a 504 lender.
    The 7(a) program is a huge asset for North Idaho and it's 
especially good for the small community banks that cannot 
afford the risk and also need the ability to sell loans to 
provide capital for their other borrowers. The 7(a) program 
also allows restructure and consolidation. These requests are 
not allowed in any of our other PAC programs.
    The SBA is changing the character of the Certified 
Development Companies, the CDCs, that originate and service the 
SBA 504 loans. The CDCs were established originally with a 
given geographical area, a local board, a local loan committee 
to address local needs. Recent changes are allowing CDCs to 
cover the entire state and also allow large CDCs to cross state 
lines. These changes do not require local boards, or at least 
local committees. This change will enable the large CDCs to 
``cream'' the loans and only go to the areas where they're 
going to see larger volume and tend to loan to more risk-
freebusinesses. It's very hard for rural CDCs to meet production goals 
with their limited resources. Many more CDCs will disappear in the 
rural areas. These smaller CDCs also rely on the servicing income from 
the large 504s to fund the staff that also administers the smaller 
micro and USBA loans. Competition for the USDA Rural Development Loan 
pool money is also difficult for smaller economic development groups. 
Performance points used to be adequate to obtain the money.
    The administration says the microloan can be replaced by 
use of the SBA Community Express. However, the Community 
Express program does not pay for technical assistance, even 
though the SBA web site recognizes that this assistance is 
crucial to the success of a new business. Borrowers must 
receive pre- and post-closing technical assistance from non-
profit providers or the lender. This assistance is to be paid 
for by that Community Express lender. But, how will non-profits 
carry this cost burden and are banks willing to do so for a 
modest sized loan.
    The biggest challenge facing the Small Business Development 
Center is to try and meet the increasing demands for our 
services, according to John Lynn, the Director. Grant funding 
from the SBA has been flat since 1997. But they request more 
services every year and the number of people we see and the 
number of training hours that we deliver. Our rural outreach, 
being an important part of the SBDC mission, is becoming 
increasingly difficult to provide SBDC services to rural North 
Idaho that has an economic development impact.
    Our challenge is to try to leverage our resources with 
other economic development organizations to provide business 
development services outside of Kootenai County. Infrastructure 
needs to be developed, access to capital needs to be improved, 
and a concentrated and coordinated effort must be developed 
between the economic development service providers.
    Our office works very closely with the various banks and 
loan funds and economic development agencies in the Idaho 
Panhandle; and without the SBA loan programs, the 7(a) program 
in particular and the microloan program, access to capital for 
start-up for existing small businesses would be nonexistent. 
Well over 90 percent of our clients that receive loans have an 
SBA guarantee associated with it in some way or another.
    The SBDC program in Idaho is being required to meet ever-
increasing milestones from the SBA without any increase in 
resources. Rural businesses face challenges that simply aren't 
imposed on urban or suburban businesses. However, when a rural 
business seeks capital for operating challenges or expansion, 
they're credit-scored against a standard established primarily 
by urban businesses. The financing standards therefore compound 
the challenges faced by rural businesses.
    Additionally, in a recent move by the SBA to eliminate the 
community aspect of 504 lending, this may cause a reduction of 
this program's availability to rural businesses. The new ruling 
simply has removed the requirement of local credit involvement; 
and in fact, encourages large, multi-state certified 
development companies, without any local interest, to dominate 
the 504 markets. The multi-state development companies will 
have to concentrate on urbanized areas for efficiency and for 
the great availability of deals. The result may be that the 
rural areas will be ignored or can't compete against the credit 
scoring or urban deals.
    The SBA has the responsibility to operate their programs as 
efficiently as possible; and with the idea of only having to 
deal with a few large multi-state certified development 
companies, that's an appealing prospect. However, the potential 
loss of service to rural communities can have a significant 
impact on the availability of rural businesses, availability of 
capital for rural businesses.
    The Small Business Intermediary Loan Pilot program 
addresses a capital gap that we see in our lending by filling a 
niche not currently served by the SBA microloan, 7(a) 
guarantee, Express, or 504 programs in terms of underwriting 
criteria. The pilot would enable community-based lenders like 
Panhandle Area Council to provide loans between $35,000 and 
$200,000 that would be more flexible in terms of collateral and 
general underwriting requirements.
    Senator Crapo raised the point that over the last 4 years, 
the SBA budget has gone down about 24 percent. However, of all 
of the Federal agencies, there are only four other Federal 
agencies in the entire Federal Government over that same 4-year 
period of time that have had their overall budgets reduced. The 
others have all continued to grow, although maybe at a lower 
rate than they would like to have grown. Of those five 
agencies, including the SBA, that have actually gone down in 
size, none of the other four have approached the 24-percent 
reduction that the SBA has seen. That is a concern given the 
fact that small business is the engine driving jobs in this 
country,
    There are problems and it is important to identify what is 
needed in rural communities nationwide and those areas where 
the Federal Government can properly play a role. Infrastructure 
is the important first step, to make certain everything is in 
place. It is also important to work on the development of 
adequate access to capital and the communication between those 
capital providers. Hopefully when those areas are improved, 
small businesses in the rural communities will flourish.

``Small Business Assistance in Arkansas: Access to Capital and Service 
        Delivery'', Little Rock, Arkansas, February 19, 2004

    On February 19, 2004, the Senate Small Business Committee 
held a field hearing in Little Rock, Arkansas, Senator Mark 
Pryor presided. In his opening statements Senator Pryor thanked 
those who set up the hearing, Chair Snowe, and the people who 
came to testify. He commented that in 2003 economic and job 
growth were sluggish and that he disagreed with the direction 
the Administration's FY 2005 budget would take the Small 
Business Administration (SBA). He was concerned with the SBA's 
consolidation of loan liquidation staff to Herndon, Virginia, 
and the elimination of SBA employees in Arkansas regional 
offices and in other states. He expressed his concern about the 
zero appropriations level for the 7(a) loan program and the 
elimination of the micro-loan program. He stated his belief 
that eliminating SBA programs that stimulate the economy, would 
hurt job creation and economic growth.
    Mr. Joe David Watts, a former liquidation officer for the 
SBA in Conway, Arkansas testified about the SBA buyout. In 
December 2003, he received notification of his selection for 
reassignment to Herndon, Virginia. Initially, he accepted the 
reassignment, but in January 2004, he withdrew his acceptance 
and decided to resign from the SBA. He was concerned that the 
reorganization left the Arkansas district without a district 
Director.
    Mr. Keith Grimes, a commercial loan officer for Pine Bluff 
National Bank of Arkansas testified about the effects of the 
SBA consolidation of liquidation loans on his bank, and small 
business lending in general. He stated that the SBA did not 
inform his bank about the loan reorganization, and that the 
lack of coordination delayed many loan liquidations. Mr. Grimes 
said delays would force some banks to write fewer SBA 
guaranteed loans. He urged the SBA to staff the new National 
Liquidation Guaranty Purchase Program as quickly as possible.
    Janet Roderick, the State Director of the Arkansas Small 
Business Development Center (SBDC), testified about the SBDC's 
positive effect on Arkansas' economy. She stated that over the 
last five years the SBDC created over 4,000 new jobs and helped 
small businesses obtain over $200 million in funds. She 
discussed the many ways the Arkansas SBDC worked to increase 
results with decreasing resources. These innovations included 
consolidating their service area from twelve offices to seven, 
and the early adoption of a website offering small business 
owners online resources, including the ability to download 
information on how to start a small business.
    Eduardo Gomez, owner of Adina Cafe and Coffee Roastery 
LLC., explained how he started his small businesses, and the 
difficulties he experienced getting SBA loans. He explained 
that many small entrepreneurs lack the business experience 
needed to qualify for SBA loans. He said the willingness of the 
owner to invest ``sweat equity'' along with their desire and 
business acumen are what make small businesses successful. He 
stated that small business start up loans are the key to 
entrepreneurship, and that certain parts of the U.S. business 
community provides peer-managed loans that focus on small 
business owners with motivation and drive when making lending 
decisions. He suggested this was a model that the SBA consider 
for lending.
    During the question and answer period panelists answered a 
range of questions. They explained that, because of the amount 
of paperwork required by the lender and the seller, for 
nonperforming SBA loans, the average liquidation time is around 
150 days. Panelists reiterated how necessary and important they 
thought local SBA employees are to small business success. They 
emphasized how important it is to have hands on, one on one 
time with business owners. They also stated that they have had 
difficulty dealing with the SBA's new Herndon Liquidation 
office. Panelists were unsure if the SBA would dedicate 
specific representatives to working with liquidating loans in 
Arkansas. They do not believe a one size fits all strategy is 
helpful to small businesses. They also stated that government 
loans can help revitalize rural areas and are a good return on 
the government's investment.
    Daniel Blair, the General Manager of Daniel Utility 
Construction of Little Rock, Arkansas, testified about his 
difficulty getting a 7(a) loan to help with company cash flow 
issues. He explained that his company laid off workers in 2003. 
When the economy picked up in 2004 he applied for a 7(a) loan 
to help his expand. Originally, he applied for a loan of about 
1 million dollars. He expects to grow 50 employees over the 
next year, but will have difficulty with cash flow because his 
loan fell through. He believes there are many other small 
businesses like his that are ready to take off but lack the 
funds to do so.
    C. Sam Walls, Chief Operating Officer of Arkansas Capital 
Corporation, testified about the banking and business 
community's need to understand the SBA's direction and 
intentions. He explained that lenders need to be able to rely 
and plan on the SBA acting in a predictable way. He explained 
that in Arkansas small and medium size businesses have the 
highest potential for economic growth. He expressed his concern 
that small businesses can not afford a lending holiday or 
further cuts to the 7(a) program.
    Phillip Knight, the Executive Vice President for Small 
Business Lending at Arkansas National Bank, explained how 
current changes to the SBA may discourage local community banks 
from lending to small businesses. He mentioned a number of 
recent SBA actions that hurt small businesses and cause them to 
question the SBA's credibility and stability. Among the actions 
he mentioned were: the instability of the 7(a) loan program, in 
which caps and the suspension of lending had detrimental 
effects on small business borrowers, the consolidation of loan 
liquidations to Herndon, Virginia SBA employees' reluctance to 
answer questions on liquidated portfolios, and the future 
reduction in the percentage guarantee for community lenders 
making SBA loans.
    Kevin Hester, Executive Vice President of the First State 
Bank of Conway and a member of the National Association of 
Government Guarantee Lenders, spoke about the need for the 
Administration and Congress to support the SBA's 7(a) lending 
program. He observed that if the administration wanted to 
support the 7(a) loan program, and capital lending to small 
businesses, it would request up to the 7(a) authorized limit of 
$16 billion dollars for the program.
    Samuel W. Hinton, the Small Business Executive of 
Metropolitan National Bank in Little Rock, Arkansas, testified 
about the human factor's importance when dealing with the SBA. 
He said he understands why the SBA wants to pursue economies of 
scale and processing efficiencies, he doesn't feel that 
reducing human interaction with the SBA helps small business 
owners. He wants the SBA to understand that unexpected changes 
in the 7(a) loan program hurt small business owners. He doesn't 
believe the cutting of the Micro-loan program will be as 
detrimental as losing the 7(a) program.
    Odies Wilson III, the Intergovernmental Relations Manager 
for the city of Little Rock, testified about the importance of 
SBA programs to small minority businesses. He explained how he 
works with different programs of the SBDC to enhance business 
development practices for minority and other business owners. 
He spoke about the importance of micro-lending programs in 
developing small businesses with receiptsunder $10,000 per year 
and the need for personal support and help for individual 
entrepreneurs.
    Samuel L. Harris III, the Executive Vice President of 
Arkansas National Bank of Springdale, explained why he feels it 
is very important for the SBA to keep a district office in 
Little Rock, Arkansas. He explained that having high quality 
SBA people in Little Rock allows the Agency to make solid 
lending and servicing decisions and leads to fewer loans 
losses. He believes that decisions made locally, by locally 
based professionals, help the SBA and the government earn a 
greater return on the money invested in the programs.
    Tyronne Davis, owner of Davis Oil and Petroleum, testified 
about how the SBA helped him start his small business. He also 
participated in SCORE and used a program called the Small 
Business Academy in which local graduate students helped him 
develop a strategic business plan. He asked Senator Pryor to do 
all that was possible to save the local SBA district office.
    Charles King, Executive Director of the Arkansas Regional 
Minorities Supply and Development Council, explained how this 
private organization develops business opportunities between 
minority businesses, corporations, and government agencies. The 
organization helps produce qualified certified minority 
businesses. He believes that minority businesses need 
assistance learning how to access available resources as much 
as they need access to capital. He requested that the SBA, and 
SBA programs, not be eliminated by the administration so that 
the work of these important programs can continue.
    During the question and answer period the panelist 
commented on the partnership relationship that lenders have 
with the SBA. They were concerned that a new zero subsidy rate 
loan program even with new higher fees, would be unable to fund 
itself. They also commented on the viability and importance of 
the micro loan programs for developing entrepreneurs and the 
fact that the micro-loan program in Arkansas has a zero default 
rate. They talked about the need and the importance of the 7(a) 
loan program and how it promotes economic growth and provides 
loans to businesses that would have a difficult time getting 
loans if not for the SBA loan guarantee.
    In the second part of her testimony, Ms. Roderick explained 
how the 7(a) freeze affected small businesses. She explained 
that when the freeze happened they quickly surveyed their 
businesses and found that twenty-five businesses, with a little 
over $8 million dollars in pending loans, had applications 
frozen. When the freeze was lifted, clients who previously 
qualified for loans above the $750,000 no longer qualified for 
their loans, forcing these businesses to put expansion and 
development plans on hold. Additionally, she explained how the 
SBA lowering of the guarantee rate on 7(a) loans to fifty 
percent would negatively impact small business lending in rural 
Arkansas. She explained that local rural banks would not be 
able to finance start up businesses with only the fifty percent 
guarantee rate. She worried that the effect of this lower 
guarantee level for small business financing would force 
businesses to use their credit cards to pay for start up costs 
or accept loan terms that may jeopardize their company's 
future.

``The Role Small Business Should Play in Maintaining Forest Health'', 
        Cody, Wyoming, February 19, 2004

    On Thursday, February 19, 2004 the Committee held a field 
hearing, in Cody, Wyoming entitled ``The Role Small Business 
Should Play in Maintaining Forest Health,'' Senator Mike Enzi 
presiding. The hearing examined the influence that federal land 
management agency decisions have on the success of Wyoming's 
small business community--particularly as those decisions apply 
to the management of the State's federal forest lands. It 
established that we need more partnerships between federal 
agencies and local small businesses to restore our forests to a 
point where all of the many uses of our forest lands can exist 
free of the significant threat of destruction by catastrophic 
wildfire.
    The hearing put to rest the notion that using our forest 
products industry to restore our forests to a state of health 
creates a conflict with any other use. The reality is that our 
forest products industry is not in conflict, but is in fact one 
of our best tools to maintain and preserve the entire forest 
ecosystem.
    There are more than 100 million acres of Federal 
forestlands that now exist under an unnaturally high risk of 
catastrophic wildfires and large scale insect and disease 
outbreaks because of unhealthy forest conditions.
    Catastrophic wildfires not only cause damage to the forests 
and other lands, but place the lives of firefighters at risk, 
pose threats to human health, personal property, sustainable 
ecosystems, and air and water quality. Both our forests and our 
communities are ripe for destruction, our forests by fire, and 
our communities by economic decline.
    This problem wasn't always as bad as it is now. There was a 
time when Mother Nature and Native Americans took care of 
thinning our forests by regularly starting wildfires. Because 
the fuel loads weren't allowed to grow as dense as they are 
today, the fuel ladder didn't reach all the way up to the big 
trees. Fires would burn up the tinder and thin out the 
intermediate and dead and dying trees. This promoted 
biodiversity, kept the intensity of the forests down and, in 
times of drought the competition for limited water resources 
was dramatically less than it is today. We now have forests 
that historically had 40 or 50 tree stems per acres that are 
now over 200 stems per acre. This is a 300 percent increase.
    When a fire starts in forests this dense it quickly climbs 
the fuel ladders and races out of control. These crown fires 
are all but impossible to stop. The heat generated from all 
rungs burning at once sterilizes the soil and leaves nothing 
but desolation in its wake. This is only made worse with the 
added factor of drought. By adding to the mix stands ofdead 
trees that are as dry and volatile as the tinder on the forest floor 
you can just imagine the threat this kind of fire could have on the 
forests and their surrounding communities.
    It is a much better conservation practice, therefore, to 
step in and duplicate the effect historic, healthy fires had on 
our forests by using what is called mechanical thinning. This 
is a practice where our land management agencies can hire 
experienced timber companies to remove the dense underbrush and 
carry out the smaller and intermediate trees thereby leaving a 
forest that is healthier, more bio-diverse, more fire resilient 
and with a better mix of older and younger trees.
    If we are going to save our forests we must increase our 
number of timber sales. There is no reason, however, that these 
sales cannot be structured to improve forest health by 
including in the terms of the contracts a requirement to thin 
out the underbrush and leave our forests in a healthier, more 
sustainable condition.
    The hearing demonstrated that in Wyoming, US Forest Service 
timber sales should be restructured to improve the forest 
thinning process. Wyoming's small businesses have the 
flexibility and the capacity to create innovative solutions to 
any problems that may arise on Wyoming's challenging landscape. 
But their innovation could just as easily be forced to leave 
the state to find other regions to develop. There is a larger 
role that can and should be played by our small businesses as 
we strive to create healthier forests.

``Impact of Stock Option Expensing on Small Businesses'', Washington, 
        D.C., April 28, 2004

    On April 28th, 2004, the Committee met to discuss the 
Financial Accounting Standards Board's (FASB) rule 123 (FAS 
123). Senator Enzi opened the meeting by acknowledging FASB's 
importance. He worried, however that small businesses would 
find it difficult to implement FASB's stock option expensing 
rule and that the rule would negatively affect small 
businesses. He further commented that it was likely that small 
business concerns would not be addressed during FASB's proposed 
bi-annual advisory committee meetings. The Senator expressed 
his displeasure with the amount of lobbying in favor of stock 
option expensing done on behalf of FASB. Senator Enzi noted 
that FASB failed to explain how stock option expensing would 
affect the stocks of 1.4 million small businesses. Finally, 
Senator Enzi acknowledged the need to limit executive 
compensation. He argued, however, that because executives would 
find a way around FASB restrictions, the ruling would hurt 
small businesses without solving the original problem it 
intended to fix.
    In his opening statement, Senator Levin argued that stock 
options can be valued and that they are often valued in order 
to take tax deductions. He expressed his concern that, because 
companies do not have to list stock options as an expense, 
Enron was allowed to report large profits without paying taxes 
on these profits. He went on to point out that only 3% of small 
businesses use stock options, and only publicly traded 
companies must follow Generally Accepted Accounting Principles.
    In his opening statement, Senator Allen explained that 
giving workers a direct interest in the success of their 
company by using stock options was ``a great idea.'' He 
explained that FASB's rule could have adverse affects on the 
productivity of all companies regardless of their business 
size. Senator Allen challenged the idea that company stock 
options can be given a value. He explained that these options 
are not freely traded and there is no way to predict the 
stock's price at the unknown point in the future when the 
option may be exercised.
    In his opening statement, Senator Bayh explained the 
tremendous impact that changes to the accounting rules for 
expensing stock options could have on the economy. He 
emphasized the importance of creating policies that balance the 
need for business transparency with the need for stock 
incentives that reward risk taking and produce business growth.
    In his opening statement Senator Ensign made it clear that, 
because the available methods of stock option valuation are 
inaccurate, he did not agree with the expensing of stock 
options. He argued that FASB sets companies up for future 
litigation by making public companies choose between these 
flawed expensing options.
    On panel one, Robert Herz, Chairman of the FASB, spoke 
first. Mr. Herz made the position of FASB clear by saying that 
the exception for fixed-plan employee stock options to not be 
expensed results in reporting that ignores the economic 
substance of those transactions and distorts reported earnings, 
profitability, and other key financial performance metrics. 
This also makes companies, both domestically and 
internationally, financially incomparable when they choose to 
compensate their employees in different ways.
    Another FASB board member, George Batavick, spoke on the 
special provisions of FASB's proposal for small businesses, of 
which there were three. First, most small businesses will be 
able to measure compensation costs with a simpler, less costly 
intrinsic value method, rather than the fair-value-based 
method. Second, most small businesses would have a less costly 
prospective transition to the new requirements and lastly, the 
effective date for the proposed standards would be delayed a 
year for non-public enterprises.
    The last speaker on panel one was Dr. Douglas Holtz-Eakin, 
Director, Congressional Budget Office. He highlighted the three 
main points of the CBO's recently released study on the 
economic implications of accounting for stock options. The 
first point was that expensing stock options brings accounting 
closer to the economic reality of total firm expenses and net 
income as the granting of stock options is a cost to the firm. 
The second point was that although valuing stock options is 
more difficult than valuing many other costs, this does not 
preclude the recognition of their fair value. The final point 
was that if FASB's proposal was enacted, the only channel for 
any real economic effect would be changes in investors' 
valuations of firms.
    The first of seven panelists on panel two was Dr. Keith 
Carron, Founder & President, CC Technology, who sought to 
explain the role of stock options in thedevelopment of his 
company and why FASB's proposal would be detrimental to his business. 
Dr. Carron related that in a start-up business cash is short but much 
needed to run the business and to recruit qualified employees. One way 
to preserve cash is to replace cash incentives with stock options. But 
by expensing stock options, the company's profitability is reduced, 
thus making the grantee less likely to exercise their options and 
invalidating the notion that the company has incurred an expense.
    Also, start-up companies rely on their profitability to 
attract working capital which they need to grow. Expensing 
stock options reduces their profitability and endangers their 
ability to raise capital. The failure rate for start-ups is 
already high; FAS 123, according to Dr. Carron, will increase 
that rate.
    The second panelist was Mr. Stephen Diamond, Law Professor, 
Cornell University. His main argument was that there is a 
conflict of interest between option holders and shareholders. 
There is the assumption that options motivate their holders to 
run a company in such a way that is good for the company as a 
whole and this includes shareholders. However, this assumes 
that options are like stock. Options often represent, in 
comparison to stock, a shorter-term interest and options often 
get paid for by shareholders in the form of debt. So, there is 
an antagonism and mistrust between option holders and stock 
holders. In the interest of fostering a better relationship 
between investors and companies, expensing stock options is a 
good idea and could lead to increased investment.
    Following Mr. Diamond was Mr. Jere Glover, of Brand & 
Frulla. Mr. Glover characterized FAS 123 as an unnecessary 
regulation on small businesses that would ultimately impact 
their ability to grow, innovate, and create jobs. His reasons 
were that many companies would simply stop using stock options 
and thus not be able to attract valuable employees. Second, the 
cost of compliance will be very high. Thirdly, many companies 
would show negative net worths and it will make it extremely 
difficult for them to qualify for loans, attract other capital, 
and bid for government contracts.
    Mr. Glover argued that the controversy surrounding FAS 123 
could have been avoided had FASB paid more attention to the 
particular concerns of small businesses.
    Mr. Marc Jones, President & CEO, Visionael Corp., of Palo 
Alto, California, testified that FASB's stock option expensing 
proposals may eliminate small business owners' ability to use 
options as an incentive to attract employees. He explained 
that, because of the possible negative affects of stock option 
expensing on small business owners' access to capital etc, most 
small business owners are opposed to expensing of stock options 
on their financial reports.
    In his testimony, Mr. John Kavazanjian, the President and 
CEO of Ultralife Batteries Inc., explained how stock option 
expensing will disproportionally hurt small businesses, while 
not solving the problems of excessive executive compensation. 
He argued that stock option expensing will make it more 
difficult for investors to analyze the financials of small 
companies' stock and discourage them from investing in small 
companies. He further argued that stock option expensing will 
make it difficult for small companies to attract new talent, to 
innovate and create new jobs.
    Mr. Christopher Schnittker is the Senior Vice President and 
CFO of Cytogen Corporation, an oncology research company. In 
his testimony he explained that his company, and many other 
small companies, use stock options to motivate and retain 
highly qualified and in-demand employees. He feared that stock 
option expensing will deny small companies one of the only 
financial incentives they have that levels the playing field 
between large companies and small companies when attracting 
talented employees.
    In contrast to the previous statements, Mr. Robert Mendoza, 
Chairman, Integrated Finance Ltd., spoke next in favor of FAS 
123. He argued that options are undeniably an expense and thus 
should be accounted for more explicitly. He further stated that 
the rule would benefit small businesses and encourage start-ups 
by attracting more capital because investors would be better 
able to judge their potential investment return by having a 
more accurate valuation of each company.
    Senator Enzi ended the hearing by issuing a warning that if 
FASB proceeds with the potentially harmful stock option 
expensing regulations, many small businesses may be lost before 
the rules can be changed to save them. Before thanking all the 
participants for their time and adjourning the hearing, Senator 
Enzi expressed his concern that FASB appeared to have already 
decided on its course of actions and was not paying attention 
to the way the proposed expensing rule would negatively affect 
small businesses.

                                  
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