Hearing of the Committee on Small Business and Entrepreneurship on The President's FY2006 Budget Request for the Small Business Administration

Hearing of the Committee on Small Business and Entrepreneurship on The President's FY2006 Budget Request for the Small Business Administration

STATEMENT OF HON. JOHN F. KERRY, A UNITED STATES SENATOR FROM MASSACHUSETTS

Senator Kerry. Thank you very much, Madame Chair.

First of all, let me say that I think that is a very important statement that you just made. I think it is a very fair, even gentle, assessment of where we find ourselves. And I welcome the non-partisan and I think thoughtful assessments on
what the small business interests are and where we ought to be going. I think the Chair has accurately put her finger on a
number of different concerns and I share many of those concerns and I will talk about them in a minute.

First, if I may as a point of personal privilege, I would like to just take a moment to say to all of the Members of the
Committee that we are losing for retirement one of the really superb staff members in the U.S. Senate.

Patty Forbes has worked at this Committee for a long period of time. She has worked in the SBA. I cannot think of many
people who have contributed as selflessly, as competently and in as wonderfully a bipartisan fashion as she has.

I think Senators on both sides of the aisle have grown to respect her expertise, her commitment to small business, her
unfailing devotion to duty, if you will, the way in which she has always welcomed people from every walk of life on every
issue and tried to find the compromise, tried to find the middle ground to make things work.

I think this Committee has been blessed to have her. And I just want to say, for my own part, how grateful I am for her
service. I think we all thank her.
[Applause.]

Senator Kerry. Madame Chair, I would like to submit letters and my full testimony for the record, as well as some testimony
from other folks.

Chair Snowe. Without objection, so ordered.

Senator Kerry. Thank you very much.

It is hard to know where exactly to begin. I know that an Administrator is put in a position of carrying out the will of
an administration. There are budget chiefs and the President himself and others who will dictate what will happen. So I am
going to try to recognize that as I direct comments at you, Mr. Administrator, and at the Administration. I do not want to slay
the messenger, so to speak.

But I have to say that this budget is just really disturbing. Just look at the fundamentals that the Chair has
put up there. I have spent 22 years here now. I spent a lot of those years on this Committee. Our job is to try to help small
business. Our job is to try to create jobs in America. This is not a partisan Committee. This is probably one of the least--
this and the Intelligence Committee--are the two least partisan committees in the Senate. We exist for the purpose of helping
98 percent of the businesses in America to be able to create jobs and to grow America. There are some time-honored, proven
ways in which we do that.

The success stories of lending programs by the SBA, those companies that have been successful, have themselves repaid the Nation in taxes and salaries paid many times more than the budget of the SBA. There is no debit here that has to be made
up somehow.

And yet you are cutting. You are undoing and destroying programs that work. You are destroying them, the morale of the
Agency as well. You may assert otherwise, but we know otherwise.

The fact is, in the small business community, people are really struggling to be able to make things work.

The Administration, in 4 years and a bit now, has yet to create one new net job in America. One new net job. And it is
small business that creates those jobs.

I would think you guys would be trying to find ways to grab whatever you can and go out there and excite innovation and
incubation in small business.

I know you come in here and you are going to say to us, as you did in the House and elsewhere, that you have this rosy
scenario. You are doing more with less. You are saving taxpayer money, zero funding for loans and so forth. But the fact is you
have shifted costs to borrowers and lenders through higher fees. And those higher fees put loans out of reach for the
neediest small business borrowers in America. A lot of us in this room understand that the SBA is now taking credit for
things that Congress did, that rescued the SBA, like the 7(a) running out of money and bringing people together. There is a
long story here of biting off your nose to spite your face.

The SBA's plan to save money by zero funding its largest loan programs, you have admitted two key facts about the plan.
No. 1, it only works because you have shifted cost to the borrowers and lenders through the higher fees. And second, we
are going to have people who testify and you can talk to small business people, and they will tell you how much harder it is
to get that kind of lending, which is what this is for. I do not believe the proposed program levels are adequate
to meet the likely demand for these loans. And that demand, in my judgment, is essential to responding to America's need to
create jobs here in this country and to incubate.

In addition, I disagree with the proposals to eliminate the Microloan program and the SBA participating securities program.
Each of them serve a financing gap in the marketplace and that is why we are here. I know there are some who ideologically
resist the notion that the Government ought to do anything with respect to marketplace. But history has proven over 220-plus
years that intervention is often necessary. We have the Federal Reserve. We have the various lending programs. We have a
commerce clause. We have certain rules that we have to play by and there are certain regulations and interventions that are
necessary to leverage behavior.

Those particular financing mechanisms provide for a gap in the marketplace, which is why this Committee, in bipartisan,
non-ideological fashion, helped put them there in the first place. We all know that traditional lending institutions and
venture capitalists often look for the fastest return on investment or the safest return on investment or a combination
of the two and that does not always work for some kind of options.

When I was Lieutenant Governor, I sat on the board of something called the Massachusetts Technology Development
Corporation. We actually funded the companies that fell through the gaps. The minute they began to take off and turn
successful, we got the heck out of it because we did not want the Government involved. But we put big companies on the big
board in New York that otherwise would not have gotten there. Jobs were created and people became successful and it more than paid for itself. Why we turn away from these obvious success stories is absolutely beyond me. And I think the
Administration's budget is shortsighted with respect to the economy.

In the Microloan program, in all the years since its inception in 1992, there have been only one or two defaults. It
creates jobs at a bargain rate, less than $4,000 a job versus the $33,000 of the SBA's other programs. And it meets the SBA's
goals of more startups. Why are we not building it instead of reducing it?

The 7(a) Community Express program, while a good program for more established small businesses, is not a substitute for
the Microloan program. Your budget for this year, just like last year, continues your assault on entrepreneurial
development programs that help low-income, minority, home-based, rural and women entrepreneurs.

I oppose the cuts to these programs. I am particularly concerned about what you are doing to the Women's Business
Center and PRIME programs. The PRIME program has no substitute. You have praised it, Mr. Administrator. You have talked about how important it is. I could quote you here. ``It has no substitute and it helps a sector of our economy that needs it
the most.''

With regard to the Women's Business Center program, you have repeatedly said that you are not going to support
sustainability grants which allow the most experienced and productive centers to continue receiving matching funding. That
program has enjoyed strong bipartisan and bicameral support, including Chairwoman Snowe, Senator Talent when he chaired the House Small Business Committee, and most of the Members of this Committee. But you are going in the opposite direction.

Repeated requests from the women's business community and strong support from many of us in Congress have kept this
program going. But last year's extension, which passed as part of the Appropriations Bill, only funded the program through
fiscal year 2005. And without a new authorization about 60 percent of the Women's Business Centers are going to be forced
to close. Is that a good idea?

Madame Chairwoman, I am deeply concerned with the Administration's ongoing strategy that limits transparency and
reduces the oversight authority of this Committee by removing program funding from line items in the budget and incorporating
them into the operating budgets of managing offices, which given the experience we have been through, is a way of saying
we are in for trouble down the road.

I am especially concerned with the elimination of the line item for advocacy research and the lack of independence that
would result from such a transfer of budget authority.

So I thank you, Madame Chairwoman, for having this hearing.

I might add, on the association health plans, here we come again. No bigger issue did I run into across the country than
health care. That is America's crisis, not Social Security. Social Security is a problem. It is a problem that we can deal
with, and we will deal with it, just as we have the past.

The crisis is health care. And the President and the Small Business Administration ought to be leading on it. Of all of
the people in the world to be leading on something, small business. It is small business people who cannot provide their
care. They are the ones being crushed under the costs of health care.

And the Congressional Budget Office has said that the association health plans will raise the cost of doing business
for four out of five of the premiums that are paid. That is the CBO. It is non-partisan. It is just an assessment of what is
going to happen. Four out of five small business workers and their families' premiums are likely to go up under that plan.

We have a plan where premiums could go down. With a reinsurance plan, you could actually stopgap costs for all
businesses in America. You could lower the premiums for everyone in America and begin to get a breathing spell and
reduce costs in the country. But you have to make a different set of choices than this Administration is willing to make.

So I am disappointed by the budget. I know that is not going to come as a surprise to you, but it is not a partisan
disappointment. It is not prompted by anything to do with ideology. It is practical. It is based on sound experience of
this Committee. It is based on what we know works. It is based on good business practices. And most importantly, it is based
on the pleas and needs of small business people all across this country, whether they are Republicans, Independents or
Democrats.

I think your budget is out of touch with them and with the needs of the country, and I regret that.

So I look forward to the hearing and we will see what we can do to try to cobble something together that makes sense.

BREAK IN TRANSCRIPT

Senator Kerry. Madame Chair, thank you.

I apologize ahead of time because I am going to have to step out after these questions. But I want to--let me start by
making the point, Mr. Administrator, that there is some revisionism going on here and there is a certain amount of
credit taking on your behalf that belies the record of what you sought and what you wanted to do.

The fact is that you requested $12.5 billion. That was the Administration request. We put it up to $16 million. You are
sitting here taking credit for a whole bunch of loans that you did not want to make. That is number one.

Number two, the funding mechanism that you put in place with these higher fees was opposed by the U.S. Chamber of
Commerce. It was opposed by the ABA, by Women Impacting Public Policy, by most of the groups involved in this lending or whose members need the loans. The only reason they accepted it finally was not because they thought it was going to do a
better job for lending and growing the program the way the Chairwoman has said, but because they thought there would be no
program at all.

If you think that is great management and leadership, that is your choice. I do not, and I do not think the Chairwoman
does either.

The issue here is why we are not taking success and building on it. Dell is the last computer manufacturer left in
this company. They used to do TVs and radios. We are struggling as to where the job base is going to be in America.

I come back to my opening comment, which is, you ought to be exciting that entrepreneurship. You say we are making more
loans. It is somewhat over your resistance that you are making more loans and we are glad you are making more loans, but you are not making as many loans as you could be, and they are more expensive than they ought to be. And you are not reaching some of the targeted audience that you should be.

Those are the standards here, not are you doing more. But are we doing what we ought to be doing, and are we reaching the people that we are seeking to reach.

I will give you an example. The Office of Advocacy recently reported that 44 firms received over $2 billion in Federal
contracts in fiscal year 2002, but were misreported as small. These were not small firms. My question is: Does your $65
billion reported to have gone to small firms in 2003 stand up to the same test for accuracy that was applied to the 2002
achievement? Are they small?

Administrator Barreto. You are referring to the----

Senator Kerry. Are you sure the $65 billion went to small firms as it did not, as we saw in 2002 contracting?

Administrator Barreto. First of all, let me take one step back. I do not wish to take credit for all of the great things
that are happening in the small business community. I think that credit belongs to our partners, our lenders, our resource
providers and the small businesses themselves. Our job is to be able----

Senator Kerry. But you are. You are sitting here and saying we are making more loans. You did not want to make more loans. Congress gave you the power to make more loans.

Administrator Barreto. I am saying the SBA, through our programs and our resource partners, is making more loans. Those
are just the facts. That is what we are doing right now.

I would also say that what we have tried to do when we analyze what to ask for, is see what we have done in the past.
Last year we did $12.7 billion. This year we think we can do closer to $16 billion. Next year we are raising it to $16.5
billion.

With regards to these businesses that you reference, sometimes what is happening with these small businesses is they
get a contract and then over time they grow and they go outside of the size standard. That is a good thing. We want those small businesses to be successful. Sometimes they are so successful that they merge with another enterprise and now obviously that would not be considered a small business.

Before the Advocacy study came out----

Senator Kerry. That is not what I am talking about.

Administrator Barreto. Those are the cases that when we have gone back and reviewed them, most of the cases fall into
those categories. This is not a wholesale practice of large businesses taking contracts from small businesses. I do believe
that most of that $65.5 billion went to small businesses. We do not have a large amount of data representing that these
contracts are going to large businesses.

By the way, that is why we put out a regulation last year that is novation rule. When these small business contracts are
being transferred to larger enterprises, it is their responsibility to recertify again. So that will take care of a lot of the issues that were dealt with in the advocacy study.

One of the best ways to police this are the small businesses themselves. When they are going after a contract and
they are a small business and they realize somebody else got that contract, believe me, they are going to let us know and
they are going to petition that contract be overturned.

So we do not see this as something that is happening on a wide basis.

Senator Kerry. I hope not, obviously. When you see such problems, such as the accounting for the 7(a) loan program's
subsidy rate, which was 70 percent out of whack, where you overcharged some $42 million to small businesses just on that,
would you consider that efficient?

Administrator Barreto. You are referring to the subsidy rate calculation?

Senator Kerry. Yes, the subsidy rate calculation.

Administrator Barreto. One of the things that obviously we have been tasked with, that this Committee asked us to look at,
was the subsidy rate this problem has been something that has been dogging this program for years. We have steadily made progressin reducing that subsidy rate down to zero. Obviously, the subsidy rate is not static. It depends on what is happening
in the portfolio. As new information comes, sometimes we are able to lower that. Sometimes it is going to raise a little
bit.

Senator Kerry. We went through this model. We have had this discussion over the years about the modeling and how you set it. I think a lot of people have made constructive suggestions.

Administrator Barreto. GAO has verified it, Ernst & Young has verified. A number of different entities have reviewed this
modeling and said that it is appropriate for what it is that we are trying to accomplish.

Senator Kerry. So you think a 70 percent error rate is acceptable?

Administrator Barreto. I am not sure it is a 70 percent error rate. But one of the things that happens with these
programs is that if they are not operating efficiently, the people who participate in them vote with their feet. The
lenders will not make these loans. Small businesses will not seek these loans. And we have not seen that to be the case.

Senator Kerry. You get the gist of my point. I do not want to go back and forth with you and I know you are going to
defend it. But I do not think 70 percent is acceptable. And I think we ought to try to find a way to narrow that down. It
ought to be the error to your side, not to theirs. That is number one.

Administrator Barreto. I agree.

Senator Kerry. Let me get back to something else. This is the second year in a row that you want to try to eliminate the
Microlending program. Now, some of the justifications that you give for that actually make sense. When you say you want to
serve more women and minorities compared to other programs and so forth. The problem is it is filled with contradictions.

Compared to other programs, proportionately you say they do already get more than any other program. You say you want to
reach the underserved areas. But currently 40 percent of Microloans go to rural business. You say you want to reach more
startups. Currently 40 percent of all Microloans go to startups and they exceed the SBA's goal.

So your goals are contradicted by the realities of what is already happening, number one.

Number two, you say that the SBA Microloan program can be substituted for by the Community Express program. But that
program does not loan to startups, only established businesses. So you have eliminated a whole category right up front. You say you want jobs created and the SBA's Microloan program creates jobs for $3,500, as I mentioned, versus a much larger amount. The program is so well designed with its loan loss reserve and technical assistance program that a spokesperson from the SBA said in a recent article in the Wall Street Journal that the Mircroloan program has a ``minuscule'' default rate, `miniscule.'' And I mentioned the one or two defaults earlier.

So how, given these problems, do you justify moving off into this arena, where you cannot do the things that it does
today and does successfully? I do not understand that.

Administrator Barreto. And obviously we talked about this last year, as well, and nothing that has changed over the last
year has really changed from our perspective. Last year we did 2,425 Microloans, those under $35,000 in the United States.

At the same time, we did 24,000 loans under $35,000 in the SBA Express program. Many of those were in the Community
Express program, which also provides training to them. In addition, there are 600 lenders, non-Government microlenders in
the United States, that do a much better job at this than we do, reach many more people.

In fact, I would agree with you that the Microloan program has created a market for many other private sector entities to
be making these same types of loans to these same types of communities.

Senator Kerry. That does not address the startup issue and it does not address the rural issue.

Administrator Barreto. Again, a third of those loans that are made inside of the SBA Express program are going to
emerging markets, are going to minority communities, are being made out in the rural communities.

Senator Kerry. Established businesses.

Administrator Barreto. And many of those are new businesses, very new businesses in the minority communities,
for example. The thing for us is it costs us a lot of money to make a Microloan. It costs us a dollar for every dollar that we
put out. Last year we put out $33 million in the Microloan program and at the same time we put out $375 million of these
smaller loans in the 7(a) program.

Three years ago we were not making many small loans. The average loan size at the SBA in 2001 was almost a $250,000. And a lot of those small businesses came to us and said look, I need to be able to get these small loans. We need to do it
across the board, not just in the Microloan program. That is where we made a lot of those changes to the SBA Express
program.

Senator Kerry. This committee, I think, began the whole effort to try to reach those lower level years ago, long before
you came here. So the Committee has been long pushing for Microlending and smaller lending and so forth. What is
happening is I think you are going to shut out a very important market for these kinds of startups, which runs contrary,
incidentally, to the whole value system about work and work ethic which we are trying to instill in certain communities.

Administrator Barreto. The Community Express program does do the startups. That is part of the 7(a) portfolio. The SBA
Express will be dealing with a little bit more established companies, but Community Express will do startup loans.

Senator Kerry. I am just being shown, this is apparently from a 7(a) Community Express Lender questionnaire on small
business lending which says: Can I use this loan to buy a business or start a new business? And the answer the Community
Express Lender put out is: No, at this time all of our business loans are meant for existing businesses.

So I would just ask that this be put in the record.

Chair Snowe. Without objection.

Senator Kerry. We can figure it out as we go forward.

Madame Chair, I have gone on longer than I should, but I would like to ask permission to have the record extended and to
submit some questions in writing.

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