[Senate Hearing 109-492] [From the U.S. Government Printing Office] S. Hrg. 109-492 THE EFFECTIVENESS OF THE SMALL BUSINESS ADMINISTRATION ======================================================================= HEARING before the FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, AND INTERNATIONAL SECURITY SUBCOMMITTEE of the COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS UNITED STATES SENATE ONE HUNDRED NINTH CONGRESS SECOND SESSION __________ APRIL 6, 2006 __________ Printed for the use of the Committee on Homeland Security and Governmental Affairs U.S. GOVERNMENT PRINTING OFFICE 28-236 WASHINGTON : 2006 _____________________________________________________________________________ For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800 Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001 COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS SUSAN M. COLLINS, Maine, Chairman TED STEVENS, Alaska JOSEPH I. LIEBERMAN, Connecticut GEORGE V. VOINOVICH, Ohio CARL LEVIN, Michigan NORM COLEMAN, Minnesota DANIEL K. AKAKA, Hawaii TOM COBURN, Oklahoma THOMAS R. CARPER, Delaware LINCOLN D. CHAFEE, Rhode Island MARK DAYTON, Minnesota ROBERT F. BENNETT, Utah FRANK LAUTENBERG, New Jersey PETE V. DOMENICI, New Mexico MARK PRYOR, Arkansas JOHN W. WARNER, Virginia Michael D. Bopp, Staff Director and Chief Counsel Joyce A. Rechtschaffen, Minority Staff Director and Chief Counsel Trina Driessnack Tyrer, Chief Clerk FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, AND INTERNATIONAL SECURITY SUBCOMMITTEE TOM COBURN, Oklahoma, Chairman TED STEVENS, Alaska THOMAS CARPER, Delaware GEORGE V. VOINOVICH, Ohio CARL LEVIN, Michigan LINCOLN D. CHAFEE, Rhode Island DANIEL K. AKAKA, Hawaii ROBERT F. BENNETT, Utah MARK DAYTON, Minnesota PETE V. DOMENICI, New Mexico FRANK LAUTENBERG, New Jersey JOHN W. WARNER, Virginia MARK PRYOR, Arkansas Katy French, Staff Director Sheila Murphy, Minority Staff Director John Kilvington, Minority Deputy Staff Director Liz Scranton, Chief Clerk C O N T E N T S ------ Opening statements: Page Senator Coburn............................................... 1 Senator Carper............................................... 9 Prepared statement: Senator Levin................................................ 47 WITNESSES Thursday, April 6, 2006 Hon. Sue Kelly, a Representative in Congress from the State of New York....................................................... 6 Hon. Hector Barreto, Administrator, U.S. Small Business Administration................................................. 14 William B. Shear, Director, Financial Markets and Community Investment, U.S. Government Accountability Office.............. 25 Veronique de Rugy, Resident Fellow, American Enterprise Institute 27 Jonathan J. Bean, Professor of History, Southern Illionois University..................................................... 29 David Bartram, Chairman, National Association of government Guaranteed Lenders............................................. 31 John Pointer, Small Business Owner............................... 33 Alphabetical List of Witnesses Barreto, Hon. Hector: Testimony.................................................... 14 Prepared statement........................................... 55 Bartram, David: Testimony.................................................... 31 Prepared statement........................................... 128 Bean, Jonathan J.: Testimony.................................................... 29 Prepared statement........................................... 112 de Rugy, Veronique: Testimony.................................................... 27 Prepared statement with attachments.......................... 85 Kelly, Hon. Sue: Testimony.................................................... 6 Prepared statement........................................... 53 Pointer, John: Testimony.................................................... 33 Prepared statement........................................... 134 Shear, William B.: Testimony.................................................... 25 Prepared statement........................................... 62 APPENDIX Charts submitted by Senator Coburn for the Record: SBA Mission Statement:....................................... 49 Who Benefits From the 7(a) Program?.......................... 50 Estimated Outlays vs. Actual Outlays 2002-2006............... 51 Big Companies Get Small Business Contracts................... 52 Letters submitted by Senator Levin for the Record from: Noel Cuellar, President, Primera Plastics, Inc............... 143 Chris F. Willis, CEO, Media 1 Interactive, Inc............... 144 Michael T. Fox, President, Quality Air of Midland, Inc....... 146 Lee and Betty Williams, Magic Kitchen & Catering............. 147 Keith Brophy, President, Business Development, NuSoft Solutions, Inc............................................. 148 Bambi L. Straebel, Bambi's by Java Dave's.................... 149 Jim Pilgrim, CTO, Pilgrim Technology, LLC.................... 150 Doreen Bolhuis, President, Gymco............................. 151 Peter Wong, President/CEO, Roy Smith Company................. 152 Heidi N. Jacobus, founder and CEO, Cybernet Systems.......... 153 Barry Cargill, Vice President for Government Relations of the Small Business Association of Michigan..................... 155 Marc Keys, constituent....................................... 157 Questions and responses for the Record from: Mr. Barreto.................................................. 158 Mr. Shear.................................................... 165 Ms. de Rugy.................................................. 167 Mr. Pointer.................................................. 170 THE EFFECTIVENESS OF THE SMALL BUSINESS ADMINISTRATION ---------- THURSDAY, APRIL 6, 2006 U.S. Senate, Subcommittee on Federal Financial Management, Government Information, and International Security, of the Committee on Homeland Security and Governmental Affairs, Washington, DC. The Subcommittee met, pursuant to notice, at 2:30 p.m., in room SD-342, Dirksen Senate Office Building, Hon. Tom Coburn, Chairman of the Subcommittee, presiding. Present: Senators Coburn and Carper. OPENING STATEMENT OF SENATOR COBURN Senator Coburn. The hearing of the Federal Financial Management Subcommittee of the Homeland Security and Governmental Affairs Committee will come to order. This is the 31st hearing that we have had on government agencies looking at spending, waste, and every other area that we can, to try to make the government more efficient, to make sure we are good stewards of the money that has been transferred to our care. Before I get to the substance of the hearing, I would like to take a moment to just address the events leading up to our consideration of the Small Business Administration. I have not only been surprised, but profoundly disappointed by the negative reaction that some people have had to the mere mention of a subcommittee holding an oversight hearing on the efficiency of a government agency and particularly the Small Business Administration. Before the hearing was publicly announced, I heard from countless numbers of people asking what business this Subcommittee had to look at the SBA, worse yet, demanding that we not hold a hearing at all. I just returned from China. You can't criticize your government in China without going to jail. The fact that people who may have a different point of view should not have the ability to express their point of view in this country not only harms our future, but does not bode well for freedom in this country. Unfortunately, it has also come to my attention that some of this, and not with the knowledge of the Director or his staff within the Small Business Administration, of which e- mails that I have in my possession that came from SBA offices were involved in that. That type of illegal lobbying is unacceptable. It will be dealt with accordingly, and I have already had a discussion with Administrator Barreto on those areas and I know that this was not from the Director or his office. It was done not under the direction of anybody in charge of the SBA. Contrary to what has been said, I believe it is Congress' duty to do more oversight, not less, and this certainly includes the SBA. There is a perception out there that to be for the SBA is to be for small business and to be against the SBA is to be against small business. While the SBA's charge is to help small business, the interest of small business and the interest of SBA are only synonymous if and when the SBA is achieving its mission effectively and efficiently. That is why there is no group that should be more interested in the effectiveness of the SBA than small businesses, and advocating for that effectiveness is advocating for their interests. If we find out that agencies don't cooperate effectively, then we take actions to try to fix those. That is where the authorizers come in and the appropriate subcommittee that deals with the authorization of the SBA. The only constituencies that could be affected would be those who profit from business as usual at the SBA. If the SBA has areas that are not running efficiently, it is certainly not the small business sector that benefits from maintaining the status quo, but rather those who tend to profit from what the SBA does. Like every hearing this Subcommittee holds, this one will be fair, which means we will be tough on everybody. We will ask appropriate questions. Congressional hearings should not be pep rallies for business as usual. Small business deserves better. Free enterprise deserves better. Now, more than ever, it is urgent to discharge our oversight duties in light of the fact that in 2007 this country will spend more money on government than at any time in our 230-year history. When all receipts are totaled, we will have spent nearly $3 trillion on everything from national defense and health care to sculpture gardens and countless other earmarked projects amounting to more than $9,000 per man, woman, and child in this country. Last year, after raiding Social Security, the Federal Government borrowed $538 billion. This year, we again expect to borrow another $500 billion to pay for all Federal programs. All of this will be paid for, with interest, not by us but by our children and our grandchildren. There is almost no area of life left untouched by Federal dollars and Federal intrusion. Behind all of this out-of- control spending is the not-so-subtle notion that government never met a problem it couldn't solve. So when faced with a problem, Congress always does what it does best, spend your money. Today, the Subcommittee will look at the SBA, which portions are set to expire this year until reauthorized by Congress. SBA has a surprisingly large impact on the national economy as well as the Federal fiscal outlook. Its budget for 2007 is $624 million, yet it oversees a loan portfolio of $70 billion. Even to Congress, $70 billion is a big amount. More strikingly, though, is SBA's impact on the budget is quite often much larger than its initial estimates. You will see from this chart what the initial estimates were and then what they actual were.\1\ Much of that is related to emergency and disasters, but nevertheless, it is a large component of the Federal budget. --------------------------------------------------------------------------- \1\ The chart appears in the Appendix on page 51. --------------------------------------------------------------------------- The SBA was established primarily to help small business, but it is its disaster relief functions that have made the news lately. Unlike many of SBA's critics in this area, I want to commend SBA on the job they have done. We have never seen such a disaster in our country, and the fact that they geared up-- nobody could have anticipated this. Even though they have taken criticism for not anticipating enough, the fact is they did get down there, they did hundreds of thousands of loans and are continuing to do it. Even though the waiting period might be longer than what we want, the fact that they responded in a way that met people's needs is amazing to me. It is not good enough, we know that. But the fact that they went from where they were to what they got accomplished should be noted as exemplary in terms of responding. SBA was also established as the agency to which small business can turn if they are unable to make it on their own. Small businesses can turn to SBA for getting loans, getting government contracts, or help getting access to capital. SBA is also instrumental in representing the interests of small business throughout the process of issuing Federal regulations. One particular area of concern for me, though, is that the Federal agency created to help small business only helps some small business, not all. The unfortunate result is that small businesses that do not have the benefit of SBA assistance are left to compete on their own against those that do. Injustice is bound to occur when government picks winners and losers in the marketplace. Advocates may ask, what is the harm in helping a few businesses down on their luck? After all, isn't it good for our economy and for a compassionate government to help failing businesses stay afloat? We are not here to ask the existential questions of whether the government should be intervening in the marketplace. We already have an agency that we have established for that. But we will have and continue to have hearings on the role of the Federal Government. SBA does exist to fulfill a mission and it utilizes taxpayer dollars to do that. We want to examine the evidence today of whether that mission is being achieved. The problem: The 7(a) loan program is designed to guarantee loans for businesses with such bad credit that no private lender will give them a loan. A business in this situation can turn to the Federal Government for a low-interest loan courtesy of the American taxpayer. While a small fraction of businesses and private lending institutions profit, these loans help the few at the expense of many who don't get them. The question today, though, is not whether we should help those companies with bad credit, it is whether intervention results in a measurable impact on the small business sector of the economy that wouldn't have been realized without taxpayer help. In other words, is SBA intervention in the marketplace making a measurable difference in that marketplace, and if so, is it better for those they help and those they don't? The most fundamental mission of the SBA, though, for me is to help small business, and that is through regulation reform and the cost of regulation reform. The fact is, if you are a business with 20 employees or fewer in this country, it costs you almost $7,600 a year per employee, based on the footprint of the Federal Government's regulations. That number has increased, although the rate of increase is decreasing, and that is in real dollar terms. So to me, one of the biggest jobs for the SBA is decreasing the burden of the Federal Government on small businesses so that they can become competitive. We will also ask several other questions relating to the granting of contracts and whether or not we actually see that those are going to small businesses, and I look forward to talking about the definition of small business, because as we have looked at this, what we have found is several large businesses with billions of dollars in sales and billions of dollars in profits are actually getting help from the SBA, which I believe is not the direction in which the Congress intended. [The prepared statement of Senator Coburn follows:] PREPARED STATEMENT OF SENATOR COBURN Before I get to the substance of this hearing, I would like to take a moment to address the events leading up to our consideration of the Small Business Administration. I have been not only surprised, but profoundly disappointed, by the negative reaction of some of the mere mention of this Subcommittee holding a hearing on the Small business Administration. Before the hearing was publicly announced, I had heard from countless numbers of people asking what business we had looking at the SBA, or worse yet demanding that we not hold the hearing at all. Unfortunately, it has come to my attention that some of this may have originated within the Small Business Administration itself. I have seen emails from SBA employees to organizations sent seemingly for the purpose of undermining our hearing before it even began. This type of illegal lobbying is unacceptable and will be dealt with accordingly. I would like to state for the record that I do not believe Administrator Barreto, here with us today, had anything to do with these lobbying efforts. But, now that he is aware of these incidents, I will be following up with him to resolve the matter once and for all. Contrary to what has been said, I believe that it is Congress' duty to do more oversight, not less, and this certainly includes the Small business Administration. There is a perception out there that to be for the SBA is to be for small business, and to be against the SBA is to be against small business. While the SBA is supposed to help small business, the interests of small business and the interests of SBA are only synonymous if and when the SBA is achieving its mission effectively and efficiently. That's why there is no group that should be more interested in the effectiveness of SBA than small businesses, and advocating for that effectiveness is advocating for their interests. If we find out that the agency isn't operating effectively and we take action to try to fix the problem, which is, of course, our Constitutional duty, it's certainly not small business that would be hurt. The only constituencies that could be affected would be those who profit from business-as-usual at SBA. If SBA is broken, it's certainly not the small business sector that benefits from maintaining the status quo at the agency, but rather the bankers and big corporations who are currently profiting from SBA, among others. Like every hearing this Subcommittee holds, this one will be fair, which means we are tough on everybody. Congressional hearings should not be pep rallies for business-as-usual. Small businesses deserve better. Introduction Now, more than ever, it is urgent to discharge our oversight duties in light of the fact that in 2007, this nation will spend more money on its Federal Government than at any time in our 230 year history. When all receipts are totaled, we will have spent nearly 3 trillion dollars on everything from national defense and healthcare to sculpture gardens and countless other earmarked projects--amounting to more than $9,000 per person. Last year, after raiding Social Security, the Federal Government $538 billion in borrowed money. This year, we again expect to borrow another $500 billion to pay for all Federal programs. All of this will be paid for, with interest, by our children and grandchildren. There is almost no area of life left untouched by Federal dollars and Federal intrusion. Behind all of this out-of-control spending is the not-so-subtle notion that government never met a problem it couldn't solve. And so, when faced with a problem, Congress always does what it does best: Spends your money. Fiscal Impact of SBA Today, the Subcommittee will take a look at the Small Business Administration, of which portions are set to expire this year unless reauthorized by the Congress. SBA has a surprisingly large impact on the national economy as well as the Federal fiscal outlook. Its budget for 2007 is $624 million,yet it oversees a loan portfolio of nearly $70 billion. Even for Congress $70 billion is not pocket change, and it is even less so to taxpayers whoa re on the hook for that money should the bill come due. More strikingly, though, SBA's impact on the budget is quite often much larger than its initial estimates to Congress. Between 2002-2006, SBA's beginning-of-year spending estimates have amounted to $3.5 billion. But, after all receipts were totaled, SBA spent more than $9.8 billion--nearly three times more than was initially estimated. And so, like every hearing we have on any agency, this hearing is intended to ask a very simple set of questions regarding what taxpayers are getting in return for SBA spending. Mission of SBA The SBA was established primarily to help small businesses, but it is its disaster relief functions that have made the news recently. Unlike many of SBA's critics in this area, I would like to commend SBA for a job well done in many respects following the hurricanes in the Gulf Coast. They were on the ground making many more loans than anyone thought they could do in a short period of time. But SBA was also established as the agency to which small businesses can turn if they are unable to make it on their own. Small businesses can turn to the SBA for help getting loans, help getting government contracts or help getting access to capital. SBA is also instrumental in representing the interests of small business throughout the process of issuing Federal regulations. One particular area of concern for me, though, is that the Federal agency created to help small businesses only helps some small businesses, not all. The unfortunate result is that small businesses that do not have the benefit SBA assistance are left to compete on their own against those that do. Injustice is bound to occur when the government picks winners and losers in the marketplace. Advocates for the Small Administration may ask, ``What's the harm in helping a few businesses down on their luck? After all, isn't it good for our economy and for a compassionate government to help failing businesses stay afloat?'' We're not here today to examine the existential questions of whether the government should be intervening in the already crowded marketplace. This subcommittee has had, and will continue to have, hearings on the role of the Federal Government. The fact is, SBA does exist to fulfill a mission, and it utilizes taxpayer dollars to do it. We're simply here to examine the evidence for whether that mission is being achieved. The Problem For example, the 7(a) program is designed to guarantee loans for businesses with such bad credit that no private lender will give them a loan. A business in this situation can turn to the Federal Government for a low-interest loan, courtesy of the American taxpayer. While a small fraction of businesses and private lending institutions reap the profits, these loans help the few at the expense of the many that don't get them. The question today, tough, is not whether we should help those companies with bad credit. Its whether our intervention results in a measurable impact on the small business sector of the economy that wouldn't have been realized without taxpayer help. In other words--is SBA intervention in the marketplace making a measurable difference in that marketplace, and if so, is it better for those they help and those they don't? The most fundamental mission of the SBA, though, is to help small business. Unfortunately, though, small businesses are not only the only ones that get helped--big businesses are getting rich by taking advantage of SBA programs. In February of 2005, the SBA Inspector General reported that government contracts set aside for small businesses are actually going to large businesses with some frequency. For example, in 2002, the following companies all received millions of dollars each in small business awards.
Northrop Grumman Hewlett-Packard General Dynamics Oracle These are all great companies that are helping our vibrant economy and are doing billions of dollars of work for the Federal Government. But no one would argue that they are small. It is doubtful to me, though, that any of them are in great need of government help, especially an agency that helps small business. How does the $2 billion spent in FY2002 on these and other large companies help SBA achieve its mission? Finally, I am deeply concerned about the high costs facing small business in complying with Federal regulations. As a small business owner myself, I know first hand how hard it is to afford paying for all kinds of regulations saddles on small businesses. SBA reports that small business owners pay on average more than $2,000 per employee every year than large companies for regulatory compliance. Each year the burden of regulation increases for small businesses. Yet, this year, SBA plans to use less than 2 percent of its budget on regulatory assistance for small businesses. In fiscal year 2007, SBA plans to spend 15 times as much money on program administration than on regulatory assistance. I am concerned that this program gets far too little attention from the SBA, yet this is the one thing SBA does that truly effects all small business owners. Conclusion All of these examples bring me back to the central purpose of this hearing, which is to take a look at the effectiveness of the Small Business Administration at achieving its stated mission. By the end of this hearing, I hope to have answers to some important questions, such as: Does SBA intervention in the loan market improve outcomes for small businesses? Is the SBA rigorously evaluating its programs against measurable outcomes and reporting those results to Congress? How do SBA programs affect businesses not helped by the SBA? Is that impact positive, negative or neutral? I look forward to getting answers to these and other questions during today's hearing. Senator Coburn. I am very pleased to welcome to our Subcommittee a friend of mine, somebody I have known for 12 years, and I value her insight. It is Representative Sue Kelly from New York. We asked her to testify based on her experience and background in this area. Congresswoman Sue, thank you for being here. Your complete testimony will be made part of the record and please let us hear from you. TESTIMONY OF HON. SUE KELLY,\1\ A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW YORK Ms. Kelly. Thank you. First, Senator, let me associate myself with great approval of your concern and interest of making sure that every single taxpayer dollar that comes to Washington, DC, is carefully shepherded in a way that we get the maximum use of those precious tax dollars that we take from the American public. So thank you for your concern there. --------------------------------------------------------------------------- \1\ The prepared statement of Ms. Kelly appears in the Appendix on page 53. --------------------------------------------------------------------------- I thank you for the opportunity to testify here today. The success of our local economy in New York's Hudson Valley, where I represent, is especially dependent on the success of small businesses. Let me begin by telling you a story about a small business owner in my Congressional district named Mandy Villodas. Mandy operates the English Rose Day School in Washingtonville, New York. It is located in Orange County. She began her child care business in her home. Later, she rented space from a church and she operated her child care business from there for a few years. Then she began working with the Small Business Administration to expand her small business and build a permanent child care center. With the help of an SBA-guaranteed loan, Mandy was not only able to expand her child care services, she preserved 15 existing jobs and created five new jobs for local residents. The English Rose Day School has been operating very successfully ever since. Without the help of the SBA, Mandy wouldn't be where she is today. Her small business would not be having such a profound impact on the lives throughout our local area. Let me give you a couple of examples. Mandy's success in getting the construction money through SBA resources helped provide additional work for local contractors. Remember that many of them are small businesses. Her school is a happy, safe environment for parents to leave their children in good care while they go out and work hard in both large and small businesses. Those parents earn money that they turn around and spend in many aspects in our local communities in our small businesses. Successful small businesses have a very positive ripple effect through so many aspects of our local communities. This is the ideal example of the importance of government's investment in small businesses to boost job creation. The resources that Congress and the SBA devote to help small businesses grow and succeed are imperative to the growth and success of our economy. When times are tough, small businesses revitalize our workforce and our communities. For instance, IBM operates a very large facility in southern Dutchess County, where I represent. While IBM had to downsize, particularly during the 1990s, New York's industries, governments, unions, nonprofits, worked together to rebuild the employment infrastructure in Dutchess County through small business growth. It has diversified where it was mostly based on IBM economy. Dutchess County economic development records show that 33 new firms opened their doors in Dutchess County between February 1994 and February 1996. This alone created more than 3,000 new local jobs at a very critical time when IBM was cutting them. That trend continues today, not only in Dutchess County, but in every other county in New York's Hudson Valley. Increasing numbers of new small businesses are creating increasing numbers of new local jobs. The numbers show that without the help of the SBA funding and resources that were relied on by the Small Business Development Center in mid- Hudson, small businesses in our area would not have made it. The lack of support for our small businesses translates back into jobs for residents in our local communities. The SBDC Mid-Hudson has worked directly with 12,338 businesses, helping them invest $363 million in the local area economy. These efforts created and saved 10,429 jobs. Small businesses in Orange County tell me that the 504 loan product available through the SBA has been absolutely critical in meeting their needs. These small businesses say that banks are simply unwilling to do business with them often. So when a bank shuts its doors on a small business, it leaves them with no other source of any financial assistance. The SBA programs then provide them with the millions of dollars in financing to preserve the business, to grow the business and preserve local jobs. SBA programs like the 504 loan program have enabled lenders and borrowers to have a dialogue that never would exist otherwise. In ways like these, the SBA can play a critical role in the livelihood of our local communities. Here in Washington, we need to give them more than lip service because they create seven out of every 10 new jobs. We can't pat small businesses on the back for supplying the new jobs and then stifle their access to capital. The effective SBA programs that are working need to have our continued support here in Congress, just as much as small businesses need continued support provided through those programs. In fact, there are some additional steps that the SBA and Congress really ought to be taking to encourage small business growth. One group that particularly needs our attention in the next few years is America's veteran population. New York is one of the States with the largest deployment of reservists to Iraq and Afghanistan. Every month, reservists are coming back to New York and other States and their previous jobs are not always waiting for them when they return. Some are returning to find that the small businesses that they owned or the small firm where they worked has suffered dramatically in their absence. Some of those doors have closed. But there are doors that have opened. It leaves our veterans, though, hard- pressed to make ends meet and in dire need of capital if they want to start their own business or they need other forms of assistance. We need the SBA to be increasingly pushing veterans' business opportunities. At one time, the SBA used to offer veterans lending assistance at a discount, but currently, other than some procurement programs, there are very few areas where the SBA can give our veterans any preference at all. At a time when new veterans are coming back to our country after serving us in the war on terror, we need to provide the SBA with the support that it needs to work with our veterans and to do them proud when they return. I feel that we need to equip the SBA and its affiliates with the resources that they need to work with reserve offices, to visit veterans who are hospitalized on their return, and to provide veterans every opportunity to start a small business on their own. In other words, the SBA should be even more of a resource for our local residents and communities in the future instead of less of a one. Our economy needs small businesses. Small businesses need the SBA. We need for the SBA to be with us for our small businesses in a continuingly increasing way at the very local level. I thank you very much. It is a great pleasure to be able to testify before you, Mr. Chairman. I appreciate your giving me the opportunity here today. I would be glad to answer any questions. Senator Coburn. Thank you. Senator Coburn. My Ranking Member is here, Senator Carper, and I will give him an opportunity for an opening statement and then we will go to questions for the Congresswoman. OPENING STATEMENT OF SENATOR CARPER Senator Carper. I look forward to having a chance to ask a question or two of Representative Kelly. I don't think we have ever met before. Welcome. We are glad you are here. Thank you. Senator Coburn. Thank you. Representative Kelly, in your statement, you said that evidence shows abundantly that without SBA in Dutchess County, that you wouldn't have seen that. What is the evidence that shows that? Is there an economic study that showed there was a shortage of capital? What is the evidence that showed that the SBA was needed to supply capital for that, or the evidence shows that there was not available capital for small business in Dutchess County? Ms. Kelly. When I took office, IBM had canceled 14,700 jobs. GM had moved a factory that resulted in 7,000 more jobs being lost. So there was a huge job loss during the time period that I quoted in my testimony. If the SBA had not been able to insure loans by our local banks--because of the enormity of the job loss, the banks themselves were feeling some loss--without the SBA stepping in to ensure that small businesses could get those loans, the small business diversity that we have would never have occurred because the banks were unwilling to issue loans. In many instances, the people who were furloughed out of those jobs, in fact, picked up pieces of the IBM, the old system that was there and created small businesses with ideas that they had for making that particular piece of the former IBM business better, doing it more economically and so on. They absolutely had to have loans and the loans that they were able to receive are, I believe--I don't know if I can tell you for sure that the SBA has absolute documentation that they produced the jobs, but I can tell you that working with the Chambers of Commerce and the NFIB and NAM, they can tell you that we moved along in a much more diversified and much better economic situation than we ever would have been and we did it much more rapidly because the SBA was there to help. Senator Coburn. OK. My question wasn't meant to dispute that. I was looking for the evidence of the shortage of capital. You have addressed that somewhat because of the fear of the increased risk of the capital market to supply that, and what you are saying is this was all advanced on a faster pace because of the guarantees of the SBA. Ms. Kelly. Exactly, because the SBA was willing to make those very small loans. Senator Coburn. OK. Ms. Kelly. It takes an employee just as much time to process a large loan as it does a small loan. In this instance, the SBA was there and they were willing to process the smaller loans and do it on a fairly rapid ramp-up, so we got the businesses up and going. Senator Coburn. You have recently put out a call for a five-point plan to help small business with an emphasis upon lower regulation and taxes as a centerpiece. Would you comment for the record on that for us? Ms. Kelly. Well, for one thing, small businesses--I will just take the tax piece alone--small businesses pay more taxes in many ways than large businesses do and the cost per employee for small businesses is greater than it is for a large business. Large businesses have banks of people in the back room that do all of their economic form filling out. A small business owner who employs one to ten people has to do that themselves. They do it on their kitchen table. Someone who is slightly large, a mid-size business, they, too, are working to try--most of these people will have maybe one accountant, maybe two, but it costs them money. The large businesses, if you are selling stock in your business, you figure all of that in. If you are a small business, you can't figure it in because you are the only owner of that stock. So it is your bottom line that it affects when you have to hire people to fill out all these tax forms. We need to lower the taxes on small businesses. We need to make sure that people who are the sole owner of a business-- those people who have small businesses should not be double- taxed. In some instances, they take their salary from the small business and then the business itself is also taxed. These double-taxation structures are very difficult. So there are a lot of different pieces of the tax burden alone that need to be addressed to help small businesses. They will and they want to pay their fair share, but they cannot do it if it is a constant outreach from the Federal Government reaching into their pockets for more taxes. As far as some of the other things that I am proposing, I believe very strongly that our small businesses need to have some of the other tax structures fixed. Our small businesses can't plan. Many small businesses don't get through the third generation. My family owns a small business. We are in our third generation and I hope my children can inherit the blood, sweat, and tears my husband and I and his father and his mother put into the business, but it often happens that the tax man comes in and takes the small business and the farms because the families can't afford to pay all the taxes because we have not made the death tax permanent. Senator Coburn. Let me ask you one other question. One of my concerns about SBA is less than 2.5 percent of its budget goes to regulation reform, the very thing that you are talking about in terms of such a burden. Is it your feeling that more of their budget ought to go to regulation reform? Ms. Kelly. I would not tell the SBA how to do that, but I do think that regulation reform, cutting red tape, I have had a bill that was signed into law. I never could get the money. Perhaps you can help me get the money to put an office in the GAO to take a look---- Senator Coburn. I am trying not to spend any money anywhere. It is a hard sell with me, but maybe---- Ms. Kelly. Maybe we can work together to do that, but we need to absolutely stop this red tape that is harming the small businesses of this Nation. Our small businesses are subject to so many rules and regulations that they--and there is so much redundancy and overlap, we need to have the SBA's help in helping us stand down some of that, and if the SBA can do that by removing regulations of their own, so be it. We need to get the regulations off the back of small business. They must be allowed to grow. Senator Coburn. Senator Carper. Senator Carper. Thanks, Mr. Chairman, and welcome. It is great of you to come. And you are from New York, correct? Ms. Kelly. Yes. Senator Carper. When were you elected to the House? Senator Coburn. Nineteen-ninety-four. Ms. Kelly. Nineteen-ninety-four. Dr. Coburn and I are classmates. Senator Carper. No kidding. It is a scary thought, isn't it? [Laughter.] Ms. Kelly. We have also worked together on a number of issues, so---- Senator Carper. Where is the 19th District? Ms. Kelly. Just north of New York City, Hudson River Valley. Senator Carper. I think you probably said this in your statement. Do you serve on the Small Business Committee? Ms. Kelly. Yes, I do. I have for 12 years. Senator Carper. You must be pretty senior. Are you one of the most senior members now? Ms. Kelly. Yes. Senator Carper. Are you chair yet? Ms. Kelly. No. Senator Carper. Someday? Ms. Kelly. Hopefully. Senator Carper. Soon? Ms. Kelly. I hope. [Laughter.] Senator Carper. All right. I left the House 2 years before you got there. Mike Castle filled my shoes more than ably and I have tried to fill his as governor back in Delaware. SBA does a real nice job in Delaware, and I think one of the reasons why is because we have some very good people that are involved in working with our businesses in our State. A friend of mine likes to say that programs don't change people, people change people. I think, really, the same is true with respect to the effectiveness of whether it is a Federal program or it is SBA. The programs are oftentimes only as good as the people that are there administering and running the programs. We are blessed in Delaware with some very able people. Do you all have Small Business Development Centers in your State? Ms. Kelly. We do have Small Business Development Centers. Senator Carper. We have them in each of our counties. We only have three counties. We have, in some cases, more than one in each county, but we are big believers in SBDCs. The idea that somebody can walk into really kind of a storefront operation, if they need help on finding access to capital, you would help them figure out how to incorporate, pay taxes, do a business plan, do a marketing plan. We have our SCORE people right there so they are able to hook up. We have sometimes folks from some of our banks that are there. It is really kind of a one-stop shop for helping small businesses. I just want to ask, how do the SBDCs work in your State? Ms. Kelly. The SBDCs work fairly well. I represent five counties and in those five counties, we do not have an office in every one of the counties, but there is an availability for anyone from any of the surrounding counties to get to the offices that we do have, and the SBA has been working very well. It is extremely important when a small business needs a loan to enlarge their business. When you are moving up a step, those 504 loans are critical to so many small businesses. I had a small business owner come to me and say, ``I am trying to get a 504 loan. I need a piece of equipment. It is a million-dollar piece of equipment, but I think I can really pay this back.'' We helped him. He was able to get this equipment and he has now more than paid his business back for it. He could not have done it without that loan because he is in a tiny little area where the local bank was able to do it and they knew him, but from what their bank regulations demanded, it was too big a loan for them to handle without some kind of assurance. The SBA came in and gave them the assurance. Senator Carper. I arrived just as you were wrapping up your testimony. Let me just ask you if you would just repeat for me, and I apologize for getting here after you had started, just repeat for me some of the one or two major thoughts you would have us take away from your comments. Ms. Kelly. One or two major things? Senator Carper. Yes. If you don't remember anything else, what would you have us remember? Ms. Kelly. If you don't remember anything else, stay focused on helping the SBA make the smaller loans to the small and mid-sized corporations. Those are the ones that truly need the help. Larger corporations most often have other places where they can go. It is extremely important that we help those small businesses get those loans because that is where our job growth is. Senator Carper. Do you have anyone in your district who is doing these micro-loans, maybe under $1,000, not so much SBA or commercial banks, but do you have anyone who is doing that kind of thing? Ms. Kelly. We very well may have, but I don't know about it if we do. Senator Carper. We have some faith-based organizations working, a program called Nehemiah Gateway and they are doing a really nice job with micro-loans and they are doing a nice job with helping folks with their taxes to figure out whether people are truly eligible for an income tax credit. It is something that we commend to you. Ms. Kelly. That is something that I have been actually talking with some local people about. I have been looking at bridging loans because these 504s sometimes are--you can't qualify and there are other reasons. If you can get a loan to bridge you over into a larger--into expanding your business, it is a good way to go. I applaud you if you have micro-loans. Micro-loans are wonderful, especially for women. When I went into the bank to get my first loan for my first small business, the bank officer--and I had enough money in the bank actually to cover the loan, I just was trying to be as economical as I could be about the way I was doing business-- the bank officer said, ``Of course, we will give you the loan. Come back with your husband.'' Senator Carper. Is that how you met your husband? Ms. Kelly. No. [Laughter.] He was already my husband when I asked him to go---- Senator Carper. You walked up the street. You were looking for a guy. No, I am just kidding. [Laughter.] All right. There is a gentleman right over your right shoulder who handed you a note or something. Does he work for you? Ms. Kelly. Yes, he does. Senator Carper. You might just want to note, Nehemiah Gateway and a woman named Mary Dupont in Wilmington, Delaware, who runs, among other things, their ITC program and their micro-loan program. We always steal good ideas from New York, and maybe this is one you all could steal from us. Thanks. Welcome. Nice to have met you. Ms. Kelly. Thank you. Senator Coburn. Congresswoman, thank you for your testimony. We may have a few other questions for you that we might submit for the record. If you would be so kind as to respond to those, I would appreciate it. Ms. Kelly. Of course, I will. Thank you so much for letting me testify. Senator Coburn. It is a pleasure. Thank you. Before our next panel comes up, I just want to make a couple of comments. Some of the questions that need to be asked, and the reason I asked Congresswoman Kelly, is evidence of lack of capital is an important question in SBA. We also have heard and we will hear about job growth, and there is some significant economic dispute over where job growth creation comes from. We should not be afraid to have that debate in Congress, because policy based on the truth of where job growth comes on should be directed so that we incentivize the best job growth and we incentivize the capital markets in the best way. Let me welcome Hector Barreto. He is the Administrator of the SBA. He has been in that position since 2001. He recently led his agency through the unprecedented disaster in the Gulf Coast. Prior to his work in government, Mr. Barreto was a business owner and served as Chairman of the Board of the Latin Business Association in Los Angeles. Administrator, thank you so much for being here. Senator Carper. Mr. Chairman, before he speaks, you were good enough to offer me a chance to make an opening statement-- -- Senator Coburn. Sure. Senator Carper [continuing]. And I passed up on it. Let me just say, welcome, Mr. Barreto. It is nice to see you again. Mr. Barreto. Thank you, Senator. Senator Carper. One of the things that you probably heard me say before, and I would just like to say it here on the record, government has many roles. I like what Lincoln used to say, ``The role of government is to do for people what they cannot do for themselves.'' I thought that summed it up pretty well. The role of government is not to be a lap dog for business, for big businesses or small businesses, but I think a major role of government is to provide a nurturing environment for job creation and job preservation. We do that in a variety of ways with respect to making sure that we have a world class workforce, that the people who are coming out of our high schools and colleges have the kind of skills that our employers are looking for to try to make sure that the health care costs are not as outrageously expensive as they are today, to try to make sure we have decent transportation systems, a measure of safety in our communities and our workplaces and our homes. Those are just some of the things that--access to decisionmakers, reasonable regulation, bearable tax and that kind of thing, but also access to capital is real important. And frankly, for businesses, especially small businesses, access to good advice, to good counsel. I applaud the work that many of the folks who work with you and are part of your team. We are really blessed in Delaware with the folks who serve on your team in our state and we are grateful for all that they do. They really see themselves as servants and their job is to help nurture particularly small businesses and folks who are trying to make a go of it and we are grateful for their help. We like partnering with them and I just want to say that for the record. Mr. Barreto. Thank you, Senator. Senator Coburn. Welcome, Administrator. Your complete written testimony will be made part of the record and you are free to testify. We would like for you to limit it to 5 minutes, but you don't necessarily have to. We want you to get your message out. TESTIMONY OF HON. HECTOR BARRETO,\1\ ADMINISTRATOR, U.S. SMALL BUSINESS ADMINISTRATION Mr. Barreto. I will talk as fast as I can. Thank you, Senator. Chairman Coburn, Ranking Member Carper, Members of the Subcommittee, thank you for inviting me to testify about the U.S. Small Business Administration and its programs. At the risk of repeating information, let me mention some small business facts. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Barreto appears in the Appendix on page 55. --------------------------------------------------------------------------- The U.S. Census Bureau reports that 98 percent of businesses have less than 100 employees. Economists from the SBA's Office of Advocacy report that America's more than 24 million small businesses employ over half of all Americans and create more than 50 percent of American non-farm GDP. The most recent report from the Bureau of Labor Statistics states that from September 1992 through March 2005, firms with fewer than 500 employees accounted on average for about 65 percent of quarterly net employment growth, representing 13.5 out of 20.6 million net jobs created by the private sector. Nobody is more supportive of small business than President Bush. The President asked me to do this job because I know from personal experiences the challenges they face as well as the opportunities they create and the contributions they make. My task was and is to make SBA a more relevant, more productive, more efficient and effective organization, one we are proud to tell you about today. The role of the SBA is to counsel and assist entrepreneurs and small businesses by providing tools that will help them to survive and thrive. When I became Administrator in 2001, SBA guaranteed roughly $14 billion in loans to 42,000 small businesses at a cost of over $110 million in subsidy. Four years later, in fiscal year 2005, SBA guaranteed over $19 billion at no subsidy cost to the American taxpayer, and over 98,000 small businesses received financing at terms they could not have found otherwise. At that time, small businesses were awarded only about $50 billion in Federal contracts. Now, for two consecutive years, the Federal Government reached its 23 percent contracting goal for small business with nearly $70 billion in Federal contract awards in fiscal year 2004. That is a 40 percent increase. Finally, our technical assistance partners trained or counseled over 1.1 million small businesses in fiscal year 2005. By restructuring key operations and reengineering loan programs, the SBA has achieved record program growth while operating more efficiently. SBA's fiscal year 2007 budget request is more than 30 percent less than its regular fiscal year 2001 appropriation, but that fiscal year 2007 budget request allows us to offer $28 billion in financial assistance and maintain the zero subsidy. That is a record in loan-making authority. Moving to zero subsidy allowed the agency to continue to meet the financing demands of small businesses without a taxpayer subsidy. For the first time in several years, the SBA stabilized the 7(a) loan program and offered financing without loan caps or temporary suspensions of program availability. In addition, it focuses agency resources on enhanced oversight of the portfolio in order to maintain a zero subsidy rate. With improved efficiencies and technological enhancements, Federal procurement dollars going to small businesses have grown, as well. In fiscal year 2004, small businesses received contracts totaling over $69 billion of the approximately $300 billion in Federal contracts, $20 billion more than in fiscal year 2000, supporting an estimated 156,000 jobs. Additionally, there were an estimated $45 billion in subcontracts awarded to small businesses. SBA's Office of Entrepreneurial Development offers assistance in various aspects of business planning through our resource partners, those Small Business Development Centers, the Women Business Centers, and SCORE, who trained and counseled over 1.1 million clients in fiscal year 2005. Additionally, 311,000 clients registered for our 23 online courses, and one million accessed the SBA website. Let me give you an example of how SBA programs work together. Last year, Bob Layton and James Gardner, both veterans and experts in the oil field business from Oklahoma, went to our resource partner, the Small Business Development Centers, looking for assistance to launch their business. After being turned down for commercial lending options, they received financing through our 7(a) loan guarantee programs. In September 2005, 3 months after they started HOFSS--that stands for Horizontal Oil Field Supply Systems--they won a FEMA contract to apply their oil field technology to pump 169 million gallons of water out of New Orleans, something that would have taken much longer without taxpayers' initial support. What a great story. In conclusion, Chairman Coburn, Ranking Member Carper, and Senators, SBA is today assisting more small businesses at less cost to the taxpayer. I am proud of our achievements and the efforts by SBA's employees to make this possible. There is still more work to do, but we are committed to delivering greater results for the American taxpayer. However, SBA programs alone cannot drive small business growth. President Bush's small business agenda making enacted tax cuts permanent, eliminating unneeded regulation, passing an association health plan bill, and opening international markets to American goods and services are vital. Mr. Chairman, I thank you again for the opportunity to testify in front of your Subcommittee and I look forward to answering your questions. Senator Coburn. Thank you, Administrator. A couple of things, let us get out of the way. What is the SBA's definition of small? Mr. Barreto. Well, there are a couple of definitions that are very well known. If you are trying to do business with the government, in other words, going for Federal procurement, it is a revenue size standard depending on your industry, and different industries have different size standards, but an average is $5 to $6 million in revenue a year. If you are a manufacturing firm, it could be companies that have 500 or less employees. The reality is that more than 90 percent of businesses aren't anywhere close to that. Most small businesses are very small. Senator Coburn. But should a firm that has $8, $9, $10, or $20 million in revenues or profits and 500 employees--you are calling that small. I think that is big. Mr. Barreto. Again, it depends on what you are referring to---- Senator Coburn. Well, if you look at the distribution of the number of employees in facilities, a manufacturing facility with 500 is in the upper range of what we see in this country. Mr. Barreto. Right. Senator Coburn. So that is not small by any definition in terms relative to the mix of what we have. Mr. Barreto. It depends on how you define it. Senator Coburn. That is why I asked the question. Mr. Barreto. And the reason is that most manufacturing companies, as you know, most of the revenue that they make goes right back into the company. If you have 500 employees and you are a manufacturer, depending on what industry, that may not be a very profitable company. There is a lot of money that goes into capital expenditures, infrastructure, and those employees, and that is why we have two definitions. If you are trying to go after a government contract, you may only have a few employees, but if you exceed the revenue size standard in that area, you are considered large by our definition. Senator Coburn. OK. Well, look at this chart over here that I have up.\1\ General Dynamics, net income was $1 billion---- --------------------------------------------------------------------------- \1\ The chart appears in the Appendix on page 52. --------------------------------------------------------------------------- Mr. Barreto. We don't consider that small. Senator Coburn [continuing]. And $13 billion in revenues, and they have $30 million worth of contracts under the restricted contracting program. Titan Corp., they obviously aren't making much money, but their revenues are greater than $1 billion, they have 10,000 employees, and they have $540 million in restricted access contracts. Raytheon, everybody around Washington knows Raytheon, a $16 billion company, 76,000 employees, and $126 million in contracts. I am asking that question---- Mr. Barreto. Sir---- Senator Coburn [continuing]. Because I know you can't screen all of this out, and that isn't my point. My point is we know what the statute says in terms of your direction---- Mr. Barreto. Right. Senator Coburn [continuing]. And what you are trying to do in terms of the 23 percent. One of my questions on the data-- and what was the name of the ombudsman or the advocacy office of the firm they hired? Eagle Eye. They talked about that it is really not 23 percent because there are some contracts that are so big that they are taken out of the mix, and since the denominator is made smaller, it raises the percentage. So is the 23 percent number accurate as far as you are concerned, and has the denominator been lowered because some contracts aren't available to SBA-eligible firms? Mr. Barreto. We think the 23 percent is pretty accurate. Look, there are some things, for example, the Department of Defense is the largest procurement agency in government and if they are buying an aircraft carrier or the new jet fighter, there is probably not a small business that is going to be able to provide that to them. So there are some things that are going to be taken out of the mix. But also, I want to refer to your chart. I think there is a misunderstanding, and the Eagle Eye study tried to clarify that misunderstanding. We don't have an incidence where we have these large companies that are going in there, taking contracts away from small businesses. What we do have is that sometimes a small business will get a contract when they are small and then they will outgrow the size standard. Now, they still have that contract, but they didn't get the contract when they were large. And sometimes a small business will grow and become successful after they have gotten small business procurements and they will be purchased by a larger company--a Raytheon, a General Dynamics. But Raytheon and General Dynamics didn't go after a small business contract. What they did is they purchased a small business who had a small business procurement in their portfolio. Senator Coburn. Which probably explains most of this, is that correct? Mr. Barreto. We believe it does explain most of it. Senator Coburn. So when they are buying, they are buying an advantaged position in contracting with the Federal Government. Mr. Barreto. Usually, that is not why they are buying the company. Usually, they are buying the company because they are trying to acquire some kind of technology or some kind of patent. Large companies have discovered that it is much more cost effective for them to let a small business develop the innovation, the technology, and then purchase that. I think you see that every day from some very large companies. There are announcements in the paper every day about that. Senator Coburn. I don't doubt their motivation, but the fact still remains that they have bought an advantage over somebody else who now would be a small competitor and now they own it. So the question is, what happens? Is there any attempt to change those rules so that you go out and you can knock off a market---- Mr. Barreto. Right. Senator Coburn [continuing]. You are keeping another small business from competing for that same thing because it is now owned by a giant. Mr. Barreto. Yes. That is a good point. Before the Eagle Eye study came out, the SBA put forward a regulation that requires a small business that is selling their company and selling those small business procurements to a larger company to certify that they are going to a larger company. That is very important. I think that will mitigate a lot of what you are referring to. Senator Coburn. Has anybody done a study that would compare capital market availability without the 7(a) program? Mr. Barreto. Sure. There are lots of studies out there. There are organizations, for example, like the Greenlining Coalition. You may have heard of them before. They have done a lot of work in this area, and they claim that without SBA programs, without SBA filling that gap, many communities, especially the emerging markets, the fastest-growing segments of small business in the United States, which are minority businesses, 40 percent of all businesses are owned by women, would be prevented from accessing a lot of this procurement. You don't have to go very far. You can go anywhere in the country and if you ask small businesses, what is one of their biggest challenges, they are going to tell you it is accessing capital. This is a common complaint from small businesses. Senator Coburn. I am just going to take another 30 seconds. Is there a point in time when a small business shouldn't have capital and some other small business should and one of them fail and one of them succeed? Mr. Barreto. I am not sure I completely understand that question. What I will tell you is that small businesses are pretty savvy consumers. Oftentimes, they are getting an SBA loan because there is no way for them to get the loan without the guarantee. It doesn't mean they are a bad business. It doesn't mean that they won't be successful. It may mean that they don't have a long track record. It may mean that they need a loan for a longer term than a lender can offer them. But when that business becomes---- Senator Coburn. It may mean that they can get a lower rate if they have got an SBA---- Mr. Barreto. They don't get a lower rate. They get competitive interest rates, and after they pay the fees that the lenders pay, they get a larger--it costs them more to get an SBA loan. Senator Coburn. But your comparison is against an unknown sample. You are saying they can't get capital. Mr. Barreto. I am saying---- Senator Coburn. So how can you contrast against the very premise that says somebody cannot get capital and saying that they are not getting the rate? If you cannot get capital, there is an infinite interest rate. Mr. Barreto. They can get capital, but they are not going to get capital at those rates. Senator Coburn. That is right. That is exactly my point. Mr. Barreto. They can get capital through a factor. They can get capital from a credit card company. They can get capital from some unsavory sources who are going to ask for a huge, onerous---- Senator Coburn. I am talking about legitimate---- Mr. Barreto. Yes, apples-to-apples comparison, a lot of times, the only chance that they get, the only chance they are going to get is if they get that loan guarantee, because in a lot of those cases, that borrower is very close, but that lender might say, look, I want to do the deal, I believe in your company, but if we could get the guarantee from the SBA, I think we can do this deal, and I think that is what happens in a lot of the cases. Senator Coburn. OK. I want to cover one last point, the President's PART Management System. Mr. Barreto. Yes. Senator Coburn. You all are still in the red on financial performance. Mr. Barreto. Well, we have actually made significant progress over the last few years. We got a clean opinion on our audit last year. We have a tremendous amount of controls that have been put in over the last couple of years. We have a loan monitoring system for the first time in a long time. So I agree with you. We are not totally satisfied we are there yet, but, of course, we have worked very closely with GAO. We have taken a lot of their recommendations. In fact, they have told us, and I believe that you are going to have some testimony, that they like the direction that we are going on the implementation of a lot of those. Senator Coburn. You are--and I want to give the President and his Administration credit. This is the first time ever in our history that good, transparent management systems have been installed, and even though you are not there yet, you are making progress. But it is still in the red, which means if you were an agency--anybody trading publicly in this company, you would be in hock with the SEC big time and you would not be traded right now. Mr. Barreto. Right. Well, I think one of the reasons we might be traded is the fact that even though our budget has gone down 35 to 40 percent, the production of the agency has doubled over the last 4 years. And also, we are very proud of the President's management agenda where we are currently green in three out of the five areas and green on progress on every one of those areas. Senator Coburn. You are. One last thing, and you don't have to comment on it, but we are going to be submitting a lot of questions for the record on default rates---- Mr. Barreto. Sure. Senator Coburn. For example what the American people are actually exposed to, because that is not talked about often in terms of the SBA, and several other questions. I will defer now to Senator Carper. Senator Carper. Thank you. Let me go back to a question that the Chairman asked about the two businesses trying to vie for credit, and one maybe has a more meritorious idea than the other and whether or not one could get credit maybe, or the company with the less meritorious idea or business plan or business model. Sometimes if you or I are a company or small business and the administrator here is the banker and I know him because we went to high school together, or I know him because my wife and his wife are friends and there is a relationship that exists outside of the merits of the business, there are those kinds of advantages that come to bear here, as well. Personal relationships do matter. Sometimes good ideas don't get funded in the private sector simply because of those relationships. That is just kind of a fact of life. You mentioned your budget is down, what did you say, 30 percent? Mr. Barreto. Approximately 35 percent over the last few years from where we were. Senator Carper. What is going on with the funding for Small Business Development Centers over the last 3 or 4 years? Mr. Barreto. Funding for SBDCs has been pretty level. I mean, that is pretty much--I think we put $90-plus million into it. With what they raise on their own--remember, it is a match. It is a dollar-for-dollar match. But oftentimes, they exceed that match. That is really close to a $200 million program. Senator Carper. Where does the match have to come from? Mr. Barreto. Well, it comes from a variety of different sources. As you know, Senator, many of those SBDCs are located at universities and community colleges, so oftentimes the partner is that educational institution. But they are not always there. Sometimes they are sponsored by a State agency. Sometimes there are nonprofits that contribute to it. They may be getting money from the private sector. But most of the time, you are going to see it come from a university system or a State budget. Senator Carper. When you look at the Administration's request for SBDCs, say in 2006 or 2007 compared to, say, 2001 or 2002, what does it look like? Mr. Barreto. Well, it has been pretty flat. Senator Carper. I know that is where we have ended up in terms of appropriations, but I am asking about requests. Mr. Barreto. Well, every year we work together with the SBDC organization. In fact, this year, they met with the Office of Management and Budget directly, which we were very glad that we could facilitate that, because it is important for them also to be able to state their case. As what has already been said, every dollar that goes---- Senator Carper. Would you try and answer my question? It is not a trick question or anything like that. My recollection is the Administration comes in each year and asks for less and less for SBDCs---- Mr. Barreto. No. Senator Carper [continuing]. And we end up going ahead and restoring the funding---- Mr. Barreto. We pretty much ask for the same amount every year. What happens, though, is the SBDCs come in and ask for more every year and we feel that the amount of money that we are already investing in that program and the amount of money that is leveraged against that should also go into the equation. Senator Carper. OK. Let us talk about New Orleans. The Chairman and I are going to go down to New Orleans and have a field hearing on Monday and we will be talking with folks from businesses large and small there and the folks that are trying to rebuild levees and all. Just take just one minute and talk to us about New Orleans and what you all are doing down there, what we need to be mindful of as we go down. Mr. Barreto. One minute. Seven-and-a-half billion dollars so far. That is almost twice as much as ever has been guaranteed in U.S. history. We processed pretty close to 400,000 applications. We are dealing with an area that is 90,000 square miles wide. We are dealing with five States, millions of people. And I just tell you this---- Senator Carper. Do you have any posters or any visuals? It looks like there might be something right here. Mr. Barreto. Well, these are the average days to a billion. It took us 88 days to do a billion dollars. We did the second billion in 28 days. We did the third billion in 17 days. We did the fourth in 16 days. We did the fifth in 21 days. And the last billion, we did in 13 days, and that is pretty much what we are running right now. I think the key that people need to understand is it truly has been an unprecedented disaster. I am glad that you are going to be down there. I have been down there five times---- Senator Carper. But what should we be looking for? Mr. Barreto. Well, I think we should be realistic on the conditions on the ground and what it is going to take for these folks to get back on their feet. I mean, it is just--it is truly devastating. I mean, two-thirds of the people are still gone. There are parts of the city that still haven't been decided about if they are going to rebuild. The customer base is gone. The worker base is gone. There are huge difficulties to rebuilding that the small businesses and the homeowners are still facing down there. In fact, I think there was an article this week in either The Washington Post or The New York Times that was talking about people who have already got loans who are saying, ``I don't even know with the loan if I am going to be able to rebuild.'' Senator Carper. OK. You mentioned in your testimony, you talked about association health plans. Mr. Barreto. Yes. Senator Carper. I think I mentioned in my comments the access to affordable health care and that the rising cost of health care in this country is killing us. Mr. Barreto. Yes. Senator Carper. And whether you happen to be businesses large or small, and we look at the government itself and the funding for Medicare and Medicaid, it is killing us as taxpayers, as well, because we end up borrowing all that money from overseas to help fund programs like Medicare and Medicaid. Our friends Senator Enzi and Ben Nelson have tried to get together and improve, if you will, the association health plan legislation. They are offering that, I think, when we maybe come back in a couple of weeks. We are going to have a chance to take up and debate on the floor AHPs with a real focus on what they are doing. Senator Blanche Lincoln of Arkansas has proposed, along with several of us, a different kind of idea, and I just want to mention it to you. I think it is one with merit. You know how we have the Federal Employee Health Benefit Program, where we sort of allow all of our Federal agencies, little ones and big ones, to kind of pool their purchasing powers to ask insurers to come in and offer us health care plans, and given that kind of massive purchasing power, we get pretty good rates and fairly good variety of plans. What we are trying to do is to get the Office of Personnel Management to play a similar function for small businesses and allow a little business where you have 10 employees or 100 employees to act almost as Federal agencies, small Federal agencies, and to pool together their purchasing power. I think that is an idea that has merit, as well. You have probably heard about it, and I just wanted to---- Mr. Barreto. I have definitely heard about it. Senator Carper [continuing]. Lay it on the table. Mr. Barreto. Well, that is the whole concept between association health plans. We want small businesses to be able to pool together across State lines, develop their own pools, decide what kind of insurance they want, and be able to negotiate better rates and better benefits from the private sector. Senator Carper. If you could just sort of critique for me, if you will, the plan put forth by Senator Lincoln. What do you like about it? Any reservations about it? Mr. Barreto. Well, I think that small businesses get really concerned when we start talking about a government-wide program, a government-wide health program. They start thinking about some of the other large bureaucracies in government and how those work and what the customer service is and what the flexibility is and I think they get nervous about it. They get worried about it. What they would rather have is they would rather be empowered themselves. What they can't understand is why they are the only group in America that doesn't have access to affordable health care. If you work for a large corporation, you have it. If you are a member of a union, you have it. If you are a government employee like I am now, you have it. But if you are a small business owner, good luck. You are going to get double-digit increases on your health insurance every year whether you use it or not. There is less choice now. I remember when I---- Senator Carper. I don't mean to be rude, but my time has expired and I am just going to---- Mr. Barreto. Oh, you said one minute, I am sorry. Senator Carper [continuing]. Interrupt you, if I may. What we are trying to do with Senator Lincoln's proposal is to give the small businesses, frankly, the opportunity to get the kind of health care that we do. You mentioned a reluctance on the part of small businesses having these country-wide or nation- wide programs. Mr. Barreto. Yes. Senator Carper. You actually administer several of those-- -- Mr. Barreto. Yes, I do. Senator Carper [continuing]. And they are, for the most part, I think, a good thing for small businesses. Mr. Barreto. Yes. Senator Carper. The last thing I want to bring up, my staff is good enough to hand me this question. It says, a question for SBA and/or GAO, and since I am not going to be here when our friends from GAO testify, I just want to take a moment and share it with you. I am told that we will hear testimony from another witness later in the afternoon, Ms. de Rugy, that small business, including minority and female-owned businesses, may not have as much of a problem accessing credit as most people might believe. I believe this witness will note at one point that 80 percent of small businesses in a recent survey used some kind of credit and more than 71 percent, she says, use non- traditional forms of credit, much of it credit cards. Here is my question. Have you seen any research comparing the success of businesses that can get bank loans and those that might depend on some of these non-traditional forms of credit? Mr. Barreto. Well, there have been a lot of different research. I don't know if it has been specific to that. You know, we have an Office of Advocacy that does a lot of research on it. One of the things they are going to tell you is that 50 percent of small businesses don't make it past 5 years. They go out of business. They don't go out of business because they want to. They don't go out of business because they didn't work hard. They don't go out of business because they are not creative and innovative. They go out of business because they don't have the tools that they need to succeed. At the top of the list is access to capital. But they also need other things that we provide. They need technical assistance. A lot of times, they don't know what they don't know. It is not their fault. They are good at one thing and they may not be good at something else. They need access to opportunities. They need access to Federal contracts, to contracts with the private sector. In all of those areas, SBA provides a critical role. I will tell you that the fastest growing segment of small business are those minority businesses. All you have got to do is pick up the newspaper. Last week, the Census Bureau reported that Hispanic business, for example, is growing three times the national average. Women are the fastest overall group. And if you listen to them, they will tell you a very different story. When I was in business, I learned a long time ago, if you listen to your customers, they will tell you everything you need to know about what they need to be successful, and these groups are very vocal and adamant that there is not a level playing field yet, they are not there yet, they still need assistance. They are not asking for a handout, they want a hand up. They want an opportunity to get in the game and they will do the rest. I think that is one of the things that has made our country the greatest country in the world. I will tell you that we get countries coming into our agency every day asking us to please help them duplicate the programs of the SBA, and we are proud to do that. Senator Carper. All right. Good. Thanks very much for being with us today and for your leadership. Mr. Barreto. Thank you, Senator. Senator Carper. Thanks. Senator Coburn. We will be submitting multiple questions for the record for you, Administrator. Just to give you a heads up, right now, your testimony is that 7(a) and 504 operate without a subsidy, but that is kind of Washington-speak because your numbers are $675,000. Subsidy rate is zero percent, but the number is $675,000. It doesn't fit into a percentage, but there actually is money---- Mr. Barreto. Right. The cost of producing the loans, it doesn't cost the U.S. taxpayer any money. But does money go into our capital access program for employees and for office? Yes, we have money that goes into that. Senator Coburn. So there is a cost? Mr. Barreto. Well, there is a cost to oversee the program and to be able to interface with the 6,000 lenders that we have as part of our delivery system. Senator Coburn. Why wouldn't we want the cost of those programs to pay for that, as well, since we are going to be in a declining budget? I mean, if we say there is zero subsidy, we ought to say there is zero subsidy. Mr. Barreto. Well, what I am saying is that when a loan defaults, the U.S. taxpayer doesn't, as before, used to put up $110 million to cover those. They don't put up that $110 million anymore. So the fees that---- Senator Coburn. So no subsidy for the loan default risk? Mr. Barreto. That is right. Senator Coburn. But there is still a subsidy for the loans. Mr. Barreto. Well, there is an appropriation that goes to the SBA to run our programs, yes. Senator Coburn. And so the point is the SEC, their appropriation is part of what they collect. All I am trying to do is make a point---- Mr. Barreto. Right. Senator Coburn. Could the SBA be like the SEC and not take any taxpayer dollars? Mr. Barreto. Of course, we do a lot more than just do loans, but I hear your point. Senator Coburn. OK. The other thing we will be talking about is if at any point in time you find this is not to be the case or you are amenable to changing your rates, to make sure it stays that way. Mr. Barreto. You are talking about the zero subsidy? Senator Coburn. Yes. Mr. Barreto. Absolutely. I mean, we are committed to it. It is one of the reasons that every year that we have been there-- well, the last couple of years, we have broken every record in SBA history. Senator Coburn. Yes. Mr. Barreto. So a zero subsidy works and we are committed to it. Senator Coburn. And we are going to give you a great opportunity to directly refute Ms. De Rugy's testimony---- Mr. Barreto. Great. Senator Coburn [continuing]. And that will be one of the questions we will ask you. Mr. Barreto. Wonderful. Senator Coburn. OK. Mr. Barreto. Thank you, Senators. I appreciate it. Senator Coburn. Thank you so much for being here. Mr. Barreto. Thanks a lot. Senator Coburn. Our next panel is panel number three. First is William Shear, Director of Financial Markets and Community Investment at the Government Accountability Office. He received his doctorate in economics from the University of Chicago. Veronique de Rugy is the Research Fellow at the American Enterprise Institute. Third is Jonathan Bean, a professor at Southern Illinois University. He received his doctorate in business history from Ohio State University. He has been published extensively on issues relating to small business and the Small Business Administration. David Bartram is the President of U.S. Bank's SBA Division, Chairman of the National Association of Guaranteed Lenders. His organization represents approximately 80 percent of lenders that issue SBA loans. And then finally is John Pointer. He is a former NFL linebacker and small business owner. He received help through a SBA program and is here to share his experiences. I would like to thank each of you for being here. Your full written testimony will be made a part of the record and you will be recognized in the order in which I introduced you. Mr. Shear, if you would start, please. Thank you. TESTIMONY OF WILLIAM B. SHEAR,\1\ DIRECTOR, FINANCIAL MARKETS AND COMMUNITY INVESTMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE Mr. Shear. Thank you very much, Mr. Chairman, Senator Carper, and Members of the Committee. It is a pleasure to be here this afternoon to discuss the evaluations we have made at the Small Business Administration. My testimony is based on a number of reports that we have issued since 1998. These reports have focused on how well SBA has administered its programs in carrying out its mission. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Shear appears in the Appendix on page 62. --------------------------------------------------------------------------- SBA's purpose is to promote small business development and entrepreneurship through business financing, government contracting, and technical assistance programs. In addition, SBA's Office of Disaster Assistance makes loans to households to repair or replace damaged homes and personal property and to businesses to help with physical damage and economic losses. Significant changes in SBA's management of its loan programs, its information technology, human capital, and financial resources have occurred, and we have studied various aspects of these changes. Today, I will discuss, first, changes in SBA's oversight of the 7(a) business loan program; second, steps SBA has taken to improve its management of information technology, human capital, and financial reporting for its business loans; and third, SBA's administration of its disaster loan program after the September 11 terrorist attacks and the recent Gulf Coast hurricanes. In summary, since the mid-1990s, when we found that SBA had virtually no oversight program for its 7(a) guaranteed loan program, SBA has, in response to our recommendations, established a program and developed some enhanced monitoring tools. The oversight program is led by its Office of Lender Oversight, which was established in 1999. Although we have not comprehensively reviewed the 7(a) program in some time, over the years, SBA has implemented many of our recommendations for lender oversight and continues to make improvements toward addressing others. With respect to other management challenges since the late 1990s, SBA has experienced mixed success that affects its ability to manage the 7(a) program. While the agency was unsuccessful between 1997 and 2002 in developing its own information technology for a loan monitoring system, it awarded a contract in April 2003 to obtain loan monitoring services. This service allows SBA to carry out off-site monitoring of its 7(a) lenders to help evaluate risk and other loan characteristics. The agency has made good progress in response to our recommendations addressing financial management issues, but there are still some that remain. There are still challenges that remain in all these areas. Now, I will turn to SBA's administration of its disaster loan program. After the 9/11 terrorist attacks, we found that SBA followed appropriate policies and procedures for disaster loan applications in providing approximately $1 billion in loans to businesses and individuals in the disaster area, as well as to businesses nationwide that suffered economic injury. We are now evaluating the agency's response to the 2005 Gulf Coast hurricanes. Our preliminary findings indicate that SBA's workforce and new loan processing system were overwhelmed by the volume of loan applications. We have identified three factors that have affected SBA's ability to provide a timely response to the Gulf Coast disaster victims. First, the volume of loan applications far exceeded any previous disaster. Second, although SBA's new disaster loan processing system provides opportunities to streamline the loan origination process, it initially experienced numerous outages and slow response times in accessing information. And third, SBA's planning efforts to address a disaster of this magnitude appear to have been inadequate. In summarizing, I want to make one more statement about the Gulf Coast hurricanes and what has happened to our Gulf Coast residents based on our experience in visiting the region. Our hearts go out to the victims, and I think, Senator Coburn, as you have been in the region and all of us that have gone there, our hearts just have to go out to the victims of this and our hearts are with helping those victims get their lives back. I will also say that there have been a number of people who have worked for the SBA in this region who have been very dedicated on a daily basis. We might have some questions about the leadership that has come in this effort, the planning efforts and other characteristics of the response of SBA, but we have certainly seen an awful lot of dedicated public servants really put out tremendous effort in trying to help these victims recover. With that, I would be happy to answer any questions that you may have. Senator Coburn. Well, you obviously, Ms. de Rugy, are the one that has raised all the stir and controversy over this hearing. People don't want to hear an opposite viewpoint from what has been expressed many times. I want to welcome you to our Subcommittee and tell you we value every opinion, especially learned opinions of people who actually study capital markets. The comments that have been made because you have written on this in the past would lead me to believe that there is something more in terms of problems with the SBA than what we have had because of the tremendous overreaction. I just want to tell you, I welcome you here. I welcome your testimony. And anybody who truly supports the SBA ought to welcome any criticism there can be because that will hone it to be better and make us better. So I want to defend your right to say what you are going to say. I want to defend the excellence that I have seen that comes out of AEI and other research that you have done. I think it is great for us to hear from you and I welcome you. Take the time that you need. TESTIMONY OF VERONIQUE DE RUGY,\1\ RESIDENT FELLOW, AMERICAN ENTERPRISE INSTITUTE Ms. de Rugy. Thank you, Mr. Chairman. Chairman Coburn, Ranking Member Carper, who is gone, Members of the Committee, it is an honor to appear before you today to discuss the effectiveness of the Small Business Administration. The promotion of small business is a cornerstone of U.S. economic policy. There are about 25 million small business firms in the U.S. employing almost 50 percent of all workers. --------------------------------------------------------------------------- \1\ The prepared statement of Ms. de Rugy appears in the Appendix on page 85. --------------------------------------------------------------------------- The particular area of concern for policymakers is whether, in the free market, small businesses can access sufficient credit. The imperfection of credit markets, particularly for small businesses, is often used as the quintessential illustration of a market failure that necessitates government intervention. Encouraging lending to small businesses is one of the primary purposes of the Small Business Administration. Its main program to achieve that goal is the SBA's flagship loan guarantee program, the 7(a) loan. But are these SBA loan guarantees desirable? Is there, in fact, a market failure that justifies government intervention via the SBA? If there is a market failure, are the SBA programs well designed to address the problem, or if there is no market failure, does the SBA help achieve policy goals important enough to justify its meddling in a well-functioning market? First, my work concludes that there seems to be no failure of the private sector to allocate loans efficiently. There might have been 53 years ago, but today, it is not true. A large and growing body of research has challenged the widely- held belief that credit rationing makes it difficult for small businesses to obtain capital. A series of papers by de Meza and Webb conclude that government intervention is not necessary and may actually be detrimental to entrepreneurship. The theoretical arguments are confirmed by an increasing number of empirical studies. However, if for the sake of argument we assume that there is a market failure that prevents small businesses from receiving adequate credit, we can show that the SBA's loan programs are not an effective way to combat the problem. Basically, if there is a gap between the supply and demand of loans, the SBA is irrelevant in trying to fill it. Looking at the flow of SBA's 7(a) loans, we find that, one, no more than 1 percent of all small business loans are SBA loans each year. The private sector finances most loans without government guarantee, and hence, the SBA is largely irrelevant in the capital market. Two, each year, 75 percent of SBA's 7(a) loans go to helping a very small fraction of small businesses in mainstream service, retail, and wholesale sectors, and even in those sectors most likely to receive SBA loans, only 1 percent of all firms do. Three, each year, in the 25 sectors receiving the largest share of 7(a) loan guarantees, less than 0.5 percent of small businesses receive the guarantees. Four, there is no shortage of firms or new start-ups in America. The data suggests that new businesses would be started at the same rate without SBA's 7(a) loan program. Five, in 2004, 29 percent of 7(a) loan guarantees went to minority business owners, but the SBA accounted for only 3 percent of all loans to minority firms. The same trend is true for women-owned firms. Six, the market is functioning well in the sectors that account for 75 percent of SBA lending. There are an overwhelming number of firms, a large amount of competition, and no empirical evidence that the market is being underserved in these areas. Seven, since the small distribution of SBA loans is in highly competitive sectors, it is unlikely to greatly improve the prices and products available to consumers or significantly bolster economic growth. The primary effect of the SBA loan guarantees is to create an unlevel playing field and hurt non- SBA firms. All the evidence points in one direction. The SBA's 7(a) loan guarantee program is not having a significant positive effect on the market. But you would never know this from the SBA's evaluations of its program. The SBA does not publish or even try to measure the gain, economic or social, of its program. In fact, the SBA's only measure of success amounts to stating how many loans have been guaranteed in a given year or how much it has spent on small business rather than measuring the return on these dollars. Measuring the performance of SBA loans should include their effect on economic growth. It is possible, for instance, that even though a large share of SBA borrowers default on their loans, costing a lot of taxpayer money, the economic growth triggered by the other borrowers compensates for this loss, but you still have to measure it. And on that front, the results of my studies show that it is very unlikely that SBA loans create enough value to compensate for the risk taken by taxpayers. First, there is the high level of default among SBA borrowers. Second, the SBA cannot point out success stories, other than marginal examples, that would compensate for the costs to taxpayers. In addition, for each SBA success story, we can point out thousands of examples of firms that became great stories, great entrepreneurial American stories, and that did it without the help of the government. The SBA's case rests mainly on anecdotes of small firms staying afloat thanks to its program, yet that is a very weak case for the program, especially considering the large literature showing that average weekly wages, which are highly correlated to productivity and economic growth, increase with the size of the establishment. To conclude, most of the nation's 25 million small businesses are funded and grow without government subsidies. Entrepreneurship is definitely one thing that Americans know how to do without the help of the government. Thank you, Mr. Chairman. Senator Coburn. Mr. Bean, welcome. TESTIMONY OF JONATHAN J. BEAN,\1\ PROFESSOR OF HISTORY, SOUTHERN ILLINOIS UNIVERSITY Mr. Bean. Thank you, Chairman. I brought a book for you on the history of the Small Business Administration, and since the Ranking Member has left, I will have to send him his copy. Thank you for inviting me here to speak on a subject I have studied for some 15 years, which culminated in my book, ``Big Government and Affirmative Action: The Scandalous History of the Small Business Administration.'' --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Bean appears in the Appendix on page 112. --------------------------------------------------------------------------- I have a written statement for the record and I have also prepared a few brief words on the effectiveness of the Small Business Administration. I will offer a 5-minute assessment of the program, and then hopefully during questions and answers, I have six concrete ways to eliminate what you call waste, fraud, and abuse in SBA programs. In a word, the SBA was and is unwanted, unknown, and unneeded. First, it was the unwanted orphan of the Reconstruction Finance Corporation, RFC, a huge government lending agency established during the Great Depression. In 1953, a new Republican President and Congress carried through on their pledge to eliminate the corrupt RFC, but created the SBA as a stop to small business advocates in Congress. Since then, however, nearly every President I studied sought to eliminate the ineffective, scandal-ridden SBA or merge it into another government agency, usually the Commerce Department. It has survived because it serves the interests of Congress, not the small business owner. Second, the SBA is the, ``great unknown'' among small business owners. Very few ever come into contact with it, and any support is a football field wide and an inch deep. Congress and bankers are the prime constituencies keeping it alive. Indeed, the SBA has been called by more than one author, ``a creature of Congress.'' Third, the SBA is unneeded. Government reformers have proposed sunsets for legislation so that Congress will periodically revisit the effectiveness of laws that may have outlived their usefulness. The sun set on the SBA a long time ago, yet Congress has failed to follow through on decades of studies, many of them by the GAO, highly critical of the agency's various programs. There is little fear, however, about sunsetting the Small Business Administration. If the SBA fell dead in the economic forest, few people not on its door would hear it crash. What are some of the problems with the SBA? And I do have solutions later, if you are interested. First, it represents an unstated back-door industrial policy, a notion discredited by the experience of the past quarter century. That is the notion of the government picking winners in the economy, or gazelles as they are called in small business literature, just as they did in Europe and Japan. The U.S. economy, proponents argued in the 1980s, was lagging behind Japan and Europe because government and business were not intertwined. Twenty years later, we see that the industrial policy model has failed in the long run, vindicating the American path of growth through deregulation and tax reform, so-called climate policies. Yet the latest rationale for the SBA is that it picks winners, though no evidence to back that up, helping small firms create jobs and spawning technological innovations. Second, the SBA doesn't help the truly small or disadvantaged business. Those are groups that are never adequately defined by the agency. Moreover, when it did try, the SBA's efforts to wage war on poverty or create start-up businesses in high-unemployment areas failed miserably. There were additional policy failures in lending with taxpayers cosigning the loans and absorbing the risk bankers should themselves take, contracting preferences to small and not-so- small businesses, affirmative action originally targeted at African Americans which collided with immigration reform, making Asians and Hispanics the unintended beneficiaries of billions set aside for disadvantaged firms. Last, the SBA's history is uniquely scandalous in the modern era. Neither party escapes blame. The Eisenhower Administration turned the SBA into a huge pay dirt plum, under Kennedy, an SBIC venture capitalist dealt in their own firms, minority programs have fostered unending scandals involving fronts, cronyism, and governmental corruption, the most spectacular examples being Wedtech under Reagan and Whitewater under President Bill Clinton. I asked former SBA Administrator Bernie Boutin why scandals keep sticking to the SBA and he said, ``Any time you have money, you will immediately find the mugs. It draws them like flies.'' I might add that it is other people's money. I have one last short paragraph. Let me end with several quotes by Senator William Proxmire, longtime nemesis of the SBA, best known for his Golden Fleece Awards for government waste. In the 1960s and 1970s, Proxmire characterized the SBA as ``a medium-sized or even a big business administration,'' not dedicated to the truly small businessman and one that only helped a minute number of businesses. He put the SBA on a short list of wasteful, useless agencies--his term--that should be abolished. Others included the Selective Service and the Interstate Commerce Commission, agencies that have passed away. In 1979, this maverick Democrat, joined by a growing chorus of critics, stated, ``The Federal Government is too big, spending is excessive, the SBA, which has lost its way and outlived its usefulness, is the place to start cutting.'' And later, in 1985, Proxmire labeled the SBA one of Washington's ten worst boondoggles. This Congress has an opportunity to carry through on Proxmire's legacy and eliminate this distraction from the real problems facing small business. Senator Coburn. Mr. Bartram. TESTIMONY OF DAVID BARTRAM,\1\ CHAIRMAN, NATIONAL ASSOCIATION OF GOVERNMENT GUARANTEED LENDERS Mr. Bartram. Mr. Chairman, I appreciate the opportunity to testify today on the effectiveness of the SBA's 7(a) program, SBA's largest and oldest guaranteed loan program. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Bartram appears in the Appendix on page 128. --------------------------------------------------------------------------- The SBA 7(a) program fills a critical gap for small businesses that need access to long-term loans. In fact, the SBA in partnership with private sector lenders who use the 7(a) and 504 loan programs account for about 40 percent of all long- term loans to small businessmen throughout this country. This means SBA is the single largest provider of long-term loans to U.S. small businesses. Conventional sources, like conventional banks, typically make short-term loans to match short-term deposits, and this leaves small business with a credit gap for long-term loans. Therefore, the SBA loan programs are where small businesses and the private sector lenders turn to bridge this gap. This is especially true for new business start-up ventures and early or younger companies. An important note is that the SBA's 7(a) loan program is self-funding. It receives no Federal appropriations for credit losses, to clarify your previous point. Instead, fees paid by the borrowers and lenders alike keep the 7(a) subsidy rate or net present value cost to the government at zero. It is also important to note that according to the Administration's fiscal year 2007 budget submission, over the last 10 years, fees paid by the borrowers and lenders have been excessive. More than $800 million in excess fees have flowed back to the Treasury. This means that the SBA has collected far more than necessary to cover predicted costs of the SBA's 7(a) program. In short, the SBA 7(a) program has been a profit- maker, not only through the fee income but also through tax revenues paid by small businesses, their owners, and their employees. Small businesses benefit from a SBA loan in three ways. First, the SBA provides access to capital on reasonable, market-rate terms that these SBA borrowers cannot find conventionally. Many bank loan policies do not allow conventional financing of new start-up or early-stage companies--and this is true at my bank, U.S. Bank, we are the sixth-largest bank in the country--where our banks do not allow us to lend to a company that is 18 months old or less. The SBA loan program is the only option for many of these small businesses. So there are countless numbers of small businesses that simply would not be in business today if it were not for the SBA loan programs. Next, the SBA guarantee allows a small business to appropriately finance long-term assets with long-term loans if they are going to buy commercial buildings, long-term equipment, and such. According to Federal statistics, the typical 7(a) loan has an average maturity of 12 years. A significant majority of conventional loans to small businesses made by commercial banks have an original maturity of 3 years or less, with the average being less than 1 year. Because of the longer maturities, the third benefit is that the borrower has significantly lower monthly payments with an SBA loan than they would have with a conventional loan. Again, this is especially critical for new businesses or younger companies. Over the past several years, the SBA loan program has experienced tremendous growth. Just for the last fiscal year, more than 100,000 small businesses received financing through both the 7(a) and the 504 program. These loans totaled $25 billion. For the current fiscal year, it is estimated that the combined programs will reach $30 billion. Again, no appropriations are provided for credit subsidies, meaning that the program users, the ones that actually use it, are lenders and small businesses actually cover the losses associated with this program. Over the last several years, the SBA has also worked to streamline the program so the lending process for us, the lender, has been reduced, reducing our cost. It means that the red tape that the customer has to go through to get these loans is also less. The results are clear. Record lending in both the 7(a) and 504 program, this public-private partnership has been and still is a shining example of what can be achieved when the private sector and the Federal Government work together. I would certainly be glad to answer any questions that you might have. Thank you again. Senator Coburn. Thank you so much for your testimony. Mr. Pointer, I read with interest your testimony 3 or 4 days ago and the thought that shot through my mind is, if you had never seen the SBA and had a loan outside of the SBA, you would probably still have that business. Mr. Pointer. That is correct. Senator Coburn. So I am looking forward to your testimony. TESTIMONY OF JOHN POINTER,\1\ SMALL BUSINESS OWNER Mr. Pointer. Thank you very much, Senator. I really appreciate this opportunity to come and speak to you as well as the Subcommittee Members. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Pointer appears in the Appendix on page 134. --------------------------------------------------------------------------- Senator Coburn. Everybody should know you are an Oklahoman. I just want to make sure everybody knows that. Mr. Pointer. Well, I am from Tennessee. [Laughter.] I am very disappointed at this point in time. I want to go on record that Chief Administrator Barreto is not here to listen to my presentation today. Again, it is truly an honor to be invited to give my testimony regarding my experiences with the Small Business Administration, the SBA. My presentation today will acknowledge my expertise in small and minority business development and full understanding of SBA's various programs. I have submitted today a written documentation for the record. Most recently, I have been the liaison for Hurricane Katrina recovery for small and minority business development on behalf of the State of Mississippi under their agency, Mississippi Development Authority. Before I advise you today of my dealings with the SBA, I want to give you briefly, Chairman, just a little bit about who I am and why I am here today, thanks to you. I would like to give you an insight of my background and my strong moral beliefs. My brother, Reggie, who is here today, we grew up in a small town in Tennessee, in Columbia, just 50 miles outside of Nashville. We were taught Christian values and we also were taught how to utilize the golden rule, treat people the way you would like for them to be treated and for you to be treated, as well. My mother was a schoolteacher prior to the segregation in the South as well as after. She taught school for 37 years. My father was the first African American store manager with Atlantic and Pacific. As we all recall, that was A&P Food Stores. I stand here today before you with Washington insiders who have proclaimed me as the nation's largest minority whistleblower in the history of Federal programs designed by Congress and Senate to assist women and minority businesses and their development. Just as I am proud of my actions to stop waste, fraud, and abuse, Chairman, I still stand disillusioned after over a decade of fighting the SBA due to their misuse of Federal regulatory power, depravity of facts, and improper use of illegal maneuvers regarding the laws of Federal and State courts, all the while under the watch of Chief Administrator Barreto. In 1989, as a small business owner to the State of Tennessee's No. 1-rated minority business, I alerted the SBA of criminal wrongdoing of their Specialized Small Business Investment Corporation, the SSBIC, and also my company was Pointer Oil Company. I was a petroleum distributor. There was blatant illegal acts such as illegal wire transfers, forgery of tax documents, and check fraud. For years, sir, the SBA denied my company and my family protection from wrongful misuse of SBA's regulatory acts as well as refusing to honor our original SBA business loan of $250,000, although, sir, they acknowledged that they would replenish the $250,000 during the criminal investigation. The Department of Justice, along with the SBA's investigation team, worked in the State of Tennessee starting in 1989 after 5 days, sir, of me notifying the Atlanta office that there was misuse and possibly criminal use of their investment company. It started in 1989 and the official criminal request was in 1993. So all those years, sir, I was trying to still maintain an existing business, a business that was doing business or serving products with Martin Marietta, the company who developed ammunition and was servicing Desert Storm. I was supplying fuel for that plant in West Tennessee, and unfortunately, I had to shut down due to bankruptcy causes. The U.S. Federal Court eventually found the SBA's fraudulent investment firm and owner guilty of Federal fraud to the SBA and to some of the various portfolio firms, such as Pointer Oil Company. Even my sole testimony, sir, gave the SBA the opportunity to be granted the receivership in the State of Tennessee, but nevertheless, after they were granted receivership, they took my attorney and my family on a 7-year journey of trying to find out what kind of claims do we truly have against now the SBA's receiver company, the investment firm. Also, the former owner died eventually while waiting on his Federal prison sentence. So, Chairman, can you imagine now you have got the SBA, the SBA receiver, you have got the estate of the former owner now teaming together and fighting me in Federal court as well as in State and local courts in the State of Tennessee, denying me the rights of getting just a simple restitution. The SBA was granted $3 million of liquidated losses. Now, mind you, I want to back up and say, Chairman, that the investment company had been in existence 10 years prior to my notification. So, therefore, the U.S. Small Business Administration had put a Federal suit out against the estate of Walter Cohen, the former owner, and his investment company of over $22 million. So the bottom line is that they received $3 million, requested in their Federal final order that the Federal judge at that time request that all documentations be destroyed, sir, and they brought back here to Washington $3 million. Whoopee. Can you imagine, sir, the amount of legal payments for attorneys here within the SBA and attorneys they used in the State of Tennessee and all their travels? I mean, that was $3 million that was used in all of that process. So I stand here today, sir, willing to answer any questions not only about my personal concerns, but my existence at this point in time. I want to say this. I am no longer with the State of Mississippi. Just as I am proud of your letter you sent me, and I submitted that to my officials at the State of Mississippi, they began signing papers to terminate my effectiveness down in the State of Mississippi. The retaliations have been unreal and I hope the SBA officials will give that information back to Chief Administrator Barreto and I thank you for the time. Senator Coburn. Mr. Pointer, thank you. I just want to assure you that I asked the Administrator to have people here. He does have several people here, and I wanted to make sure he was aware of your situation. Every agency has a horror story. Mr. Pointer. Yes, sir. Senator Coburn. That has happened because of the size of the government. Is it your experience to suggest that this is a symptom of a larger problem within the SBA? Mr. Pointer. I think it is, sir. I think there is a concern, just as Chief Administrator Barreto was very proud to talk about small businesses, you and I both know, as well as Congressmen and Senators here in Washington, they are talking about larger small businesses. What about the one- to ten- employee operations that are desperately needing these business opportunities? What about the legitimate, and I want to talk about this since I am no longer with the State of Mississippi. Mr. Barreto talked about how proud of the loans that had been submitted down in the Gulf Coast, sir. We did a survey while I was employed, effective in January 2006. Prior to my coming on board, they did a market survey just in the Gulf Coast area of Mississippi and they found out over 500 firms that were in that distressed county areas, the majority of them were SBA minority-certified and a lot of the white females testified it was their husbands' companies. And also we found out in market surveys that they had applied for bridge loans. The State of Mississippi had submitted their bridge loans. They were happy. The SBA, even as far as just a few weeks ago, had not--they had not received their SBA loans. So I think it is a hypocrisy as far as the Chief Administrator to proudly talk about what is going on down in Katrina. Larger businesses are doing very well. They are getting their loans, sir. They are getting SBA contracts also. I was sitting in--I was part of a meeting with veterans, disabled veterans down on the Gulf Coast and they talked to the SBA Regional Administrator on the fact that there is not any preference opportunities. We also know that there are also sham companies that are using disabled veterans as fronts. I did not see that Administrator, sir, say, well, listen, we have a district office here. Here is the contact. Here is a phone number. Or, sir, let me take down that information. I will pass it on. Or, here is our toll-free number. For us to keep looking away, everything that is on your tripod over there, there is no accountability, nothing but just a proud order to come and tell Senators and Congressmen here that they are doing a great job. Senator Coburn. Thank you. Ms. de Rugy, was it your testimony that 29 percent of the private capital loans were to minorities and small business? Ms. de Rugy. No, the Small Business Administration---- Senator Coburn. Through the Small Business Administration? Ms. de Rugy. For the 7(a) loan. Senator Coburn. For the 7(a), 29 percent. Ms. de Rugy. Yes. Senator Coburn. And then you said the private market was-- -- Ms. de Rugy. No, I said but it is still going, so their claim that without them, minorities couldn't do it, because there is this huge gap. And I say, well, it is surprising because it is true that a large share of all the 7(a) loans go to minorities, 29 percent, which is a great increase in the last 10 years. However, they are still serving only percent of minority-owned businesses, which is quite irrelevant. Senator Coburn. So 97 percent of minority-owned businesses can get capital? Ms. de Rugy. Can get capital either through traditional bank loans or through credit cards or non-traditional loans. Senator Coburn. It has been said you are anti-small business by critics who take shots at you or criticism. Does one have to be for SBA programs to be anti-small business, or small business pro? Ms. de Rugy. Well, actually, it seems that someone has to be pro-government subsidy of all sorts to be in favor of small businesses. This is what people are blaming me for, is that I called for the abolishment of small business subsidies because they were inefficient and, in fact, they were probably hurting small businesses, and that enraged everyone because it seemed that people misunderstand attacking the government for attacking small businesses. Senator Coburn. It is a great advocacy when you can do that. I want to get these---- Ms. de Rugy. I have also been called anti-American. Senator Coburn. I don't think you are that. Ms. de Rugy. No. Actually, in fact, I guess I am the only one who chose to live here. Senator Coburn. Ninety-nine-point-five percent of all small businesses finance outside of the SBA, is that right? Ms. de Rugy. Yes. The number I have for 2004 is the private sector issued 15.3 million small business loans, and if you add the roughly a little over 100,000 loans issued by SBA, that is less than 1 percent. Senator Coburn. And I want to ask your opinion. If loans don't cost the Federal Government any money, and I am not certain that they don't because we are exposed to $70 billion right now, but if they don't, why shouldn't we just have the SBA loan everybody all the money? Ms. de Rugy. I think the relevant question is why should the Federal Government be doing that business when the private sector seems to be doing it perfectly well. Are they really costing nothing to the taxpayer? And I think you are wise to be skeptical. For one thing, I think the experience of the last 10 years, or the last 5 years, where small businesses who have overpaid fees is the proof that the SBA and OMB are unable to estimate what fees are needed, based on what the economy is going to be, to actually make it a zero subsidy. Senator Coburn. Are you saying with low interest rates and readily available capital today, the private capital market in many ways for some of these firms could be cheaper than through the SBA when you take a total cost---- Ms. de Rugy. Yes. Senator Coburn [continuing]. Associated with that? Ms. de Rugy. Yes. It is also important for the record to say that not everyone who wants to start a small business actually should if they are not willing to pay the price. I mean, the market provides a great indicator and also a great service, which is to eliminate people who are not willing to-- who are not able to provide a service at a cost that people are willing to pay for. And asking taxpayers to back up people who still want to do that is quite irresponsible. But to go back to your zero subsidy question, when the economy was growing, obviously the SBA and the OMB were not able to estimate the kind of fees that were needed for it to run a successful program. Actually, they were over-successful. They measure their zero subsidy and the fee that goes with it right now based on an estimate of what the economy is going to be. The economy is booming. The economy is doing really well. And these fees are probably in check right now and we don't really have enough years to actually really measure. In fact, their own Inspector General is actually challenging that idea that it is really that great of a new model. But what is going to happen when the economy goes south? That is when even more people are going to default. That is when our budget, because of unemployment, is going to actually go up. And that is when the SBA is going to have to turn over a lot of taxpayers' money to lenders. Senator Coburn. That is right. OK. Thank you. Mr. Bartram, we went to your website and I want to ask you a couple of questions about it. Your website indicates that the SBA's 7(a) program in particular is a great tool for lenders to expand their client base and make a good return on investment. How much money do banks and lending institutions make off 7(a) loans? Mr. Bartram. Well, I can only speak somewhat to what U.S. Bank does, because that is the bank that I do work for. I represent the trade association as the Chairman as a volunteer type of a position. But if I could, too, I would also like to answer the subsidy question, if you would give me an opportunity after I answer this. Senator Coburn. Sure. I will be happy to, and if I don't, remind me to. Mr. Bartram. OK. As to the program itself, these are loans made to companies that need longer terms. So there is an incentive to the lender to use the 7(a) program to match up a proper term with the company's need. That way, the company has a better chance for success. If you look at a 3-year loan versus a 10-year loan, there is a savings of about 40 percent in the cash flow that the small business would experience. So, therefore, the company has a greater chance to succeed with that type of term. As far as the profitability---- Senator Coburn. You are increasing their short-term working capital. Mr. Bartram. Correct. Senator Coburn. OK. Mr. Bartram. As far as the profitability, we can be as profitable in a 7(a) loan program as we are in our conventional lending if done correctly, and done correctly meaning that we are prudent as to how we approve credits. We are going to have higher delinquencies with a 7(a) loan than we would have with a conventional loan, but we share in the risks, so our losses should be similar to that of a conventional loan. That is the role---- Senator Coburn. You are markedly decreasing the risk, correct? Mr. Bartram. We have a 25 percent exposure, let us say, rather than a 100 percent exposure. Senator Coburn. Right. Mr. Bartram. But these are also loans that we would not do on a conventional basis. So that is the enhancement that we have to utilize the 7(a) program. Senator Coburn. Well, what about the other 95 percent of the people that are small business who finance a 10-year, $4 million loan for their equipment? Where are they getting their loans? Mr. Bartram. Well, I think that you are assuming, and I think you are referring to the $25 million---- Senator Coburn. No, I am talking about the testimony that you gave that you said. You talked about the fact that these people would not be able to get--but it is less than 5 percent of the people out there that require a capital loan that is a small business. Ninety-five percent of them do it without an SBA loan. I am wanting to know, where do they finance? Mr. Bartram. I think that you are assuming, though, that every small business is actually looking for financing, which is not true. Additionally, according to Dunn and Bradstreet, 80 percent of the small businesses have revenues of $100,000 or less. So those companies probably have very small needs. So I think you have to cut that sample size down to see what the effectiveness is. Senator Coburn. OK. That is a good point. Mr. Bartram. If you look at financial call reports that banks have to provide and you look at small businesses that are contained within these call reports as they are compiled, loans of 3 years or more, the SBA makes up 40 percent of all those loans made. So that is really the target group that the SBA hits upon. Not every small business out there, but companies that need long-term financing---- Senator Coburn. Let me re-ask my question in a different way, then. You said they supply 40 percent. Well, where do the other 60 percent get their capital? Mr. Bartram. Well, basically, banks still make conventional loans to small businesses. Some business loans---- Senator Coburn. But if I was a bank and I thought I could get the government to be on the hook for 75 percent and me only 25 percent, why wouldn't I go the other way? Which comes back to the point that there is no cost to the taxpayers of this country except for the possibility of default in a recession, which is real. If there is no cost, why shouldn't all the capital to small business be run through the SBA and be guaranteed by the government? Mr. Bartram. Because small business wouldn't stand for it. It is more expensive for them to get an SBA loan than it is to get a conventional loan. We charge a lesser rate of interest on our conventional loans than we do on SBA loans. There is also a large up-front fee that the SBA requires that pays for the program that we wouldn't charge the customer if they were to get a conventional loan. Senator Coburn. But we are---- Mr. Bartram. We are not allowed to put a company---- Senator Coburn. But if they had the ability to repay but yet were higher risk, their interest rate would go up, right? So when you make those loans, you discount them and resell them in the market, correct, most of them? Mr. Bartram. No, we---- Senator Coburn. Well, that is what you all say on your website. Mr. Bartram. There are some--that is the trade association's website---- Senator Coburn. Right. Mr. Bartram [continuing]. And there are some lenders, about 40 percent of the loans, SBA loans that are made, the SBA portion is sold. Banks still service it, though. Senator Coburn. Let me get this into the record. Here is what your trade association says, and I think it is important because I think--I am not critical of where we are, but I think it is important that SBA's policies are about helping small business, not helping the people who help small business. Mr. Bartram. I would agree. Senator Coburn. So here is what it says. The SBA's flagship 7(a) program provides loans to small businesses unable to secure financing on reasonable terms through conventional credit channels. That is Ms. de Rugy's complaint with it, is that maybe there is not a market there. But let us take her away for a minute and say that there is. For lenders, the 7(a) loan program has the potential to increase profitability. Return on assets of SBA loans can easily exceed 5 percent, and return on equity can exceed 70 percent. That is a pretty good term for a bank. That is as good as credit cards. Increase the size of your portfolio. Provide Federal guarantees as high as 90 percent. Increase liquidity. Seven(a) loans can be readily sold on the program's healthy secondary market. Increased competitiveness. Ability to offer terms as long as 25 years gives you more desirable products to offer prospective and existing customers. My point is how much of--if this is a policy of the Federal Government to incentivize the aiding of small business if, in fact, there is a capital shortage--we will discount Ms. de Rugy's comments for a minute--how much of that profit should--I mean, 70 percent return on equity annualized is a pretty healthy return. There are not a lot of businesses other than what some would say about the oil industry today that can do that. So why shouldn't that rate even be lower to small business if, in fact, there is 70 percent return on equity on turning SBA loans? Mr. Bartram. Well, basically, if you were to sell the SBA guarantee portion, now you have only 25 percent of direct exposure on your bank's books---- Senator Coburn. Right. Mr. Bartram [continuing]. So that is the reason why there is a leveraging power there. That is the reason why the loan can be profitable. However, there still is a larger risk of loss to an SBA customer than there would be to a conventional client. So it is basically risk versus returns. So the lender is taking---- Senator Coburn. OK, but when I go and look at Citibank's return on investment, return on invested assets, there are not anywhere close to 70 percent. They are not anywhere close to 40 percent. They are not anywhere close to 20 percent. So you are having one-fourth exposure. My point is this, and I am not critical of the market that you all have developed. I am not saying it is not fair. But what I am saying is, as a policy question, if there is that kind of return on equity in being involved in 7(a) loans in the SBA, then the rates ought to go down some to better reflect, even with the increased risk, your return would seem to me to be highly excessive compared to what you can do in the commercial market outside of SBA. And if I am wrong, are you making 90 percent equity on businesses that aren't SBA guaranteed? No. This is a higher-end business because it has got a Federal guarantee to it, right? Mr. Bartram. Correct. Senator Coburn. OK. Now, you had wanted to answer a question earlier and I have forgotten what it was. Mr. Bartram. About the subsidy rate. Senator Coburn. Yes. Mr. Bartram. We talked a lot about that today, and my understanding is that there are rules and basically laws under credit reform that actually dictate how that is done and how that is calculated. But effectively, the fees of the program that are charged go to the Treasury and there is a loan loss reserve set up just like a bank would have a loan loss reserve, and as the economy turns down, those costs have already been covered, and with a new budget coming out, fees would go up to cover those costs. So there is no taxpayer risk of future SBA loans or loans made today. Those costs are either already covered through the loan loss or they would be charged higher fees in subsequent years. Senator Coburn. The fact is if we were to have a severe recession tomorrow and we have a $70 billion exposure, there is not the money in a reserve form at the Treasury, even taking all nets coming from the SBA, to cover anywhere close to 20 percent of that. The last numbers I saw, I can't remember what they were, but there is not anywhere--and I guess it would be good to ask GAO that question. The fact is if tomorrow, $35 billion went up delinquent, 75 percent of it or 80 percent of it being Federal Government's share, is the money sitting in the Treasury to pay for that? Mr. Shear. No, it isn't. Senator Coburn. Yes. Mr. Shear. I think that what you have here is a budget accounting system, which does its best whenever loans are originated in a year of estimating what is the present value of those future payments. So you could almost think of it, on average, what do we expect to happen? And so you are posing a very good question in terms of why would anybody participate in this program if there is no subsidy involved, and then you get into certain questions as far as there is a certain exposure that lenders take when there is no subsidy involved and what happens if there is a very severe recession, either nationally or in a region of the country where there is a concentration of 7(a) loans. So it is a distinction between what is used for budget accounting purposes and whether there is still a real economic subsidy involved. It is a little hard to believe that you could have participation in a program, large participation in the program in the absence of a real economic subsidy, and then you are raising also a very good question, what do we get for that economic subsidy that is involved? Obviously, when the budgetary cost was larger, when you had a ``positive subsidy program,'' it was costing more both in terms of budget terms and in terms of economic subsidy. But nonetheless, there is some economic subsidy involved. Senator Coburn. Right. And is it true that actually the people who borrow this money are the ones that are actually paying that subsidy? Mr. Shear. That is a difficult question but, again, you are posing very good questions. What does it mean that there is a market failure? Certain times, we have all been exposed to the claim that if some borrowers pay interest rates that somehow just are considered too high in the view of somebody's value judgment, is it a market failure or is it a response to the riskiness of providing a loan to that individual? So it is--to say that the borrowers are paying too high a rate is difficult to say because the borrowers and the lenders participating in a program see it in their advantage. Senator Coburn. But ultimately, the fees associated with these loans and the interest rate that is charged and the net profit that whoever the lender is, whether they roll and sell it in the secondary market or they keep it themselves, those fees are consumed as a part of the cost of doing business one way or the other, and it is either a lessened profit or a higher profit that is figured in. Most businessmen know what their costs are and figure those costs as they roll the thing. The fact is, if there is a subsidy--I guess the other policy question is, if there has to be a subsidy, should it be the borrowers paying it or should it be the American taxpayer? I guess that is the policy question. If there has to be a subsidy for it, should it be the American taxpayer or should it be the group of borrowers? I am not advocating one way or the other. I am raising the policy question. Mr. Shear. I think the policy question there becomes one for those who participate in the program, they probably see some advantage of participating in the program. They are probably borrowers, as was intended, that are higher-risk borrowers, and the question from the standpoint of the exposure of the American taxpayer is that what are we getting for that, either in terms of serving those borrowers, the businesses, the jobs they are creating, the general welfare of the local economies they are operating in. These are the types of questions we have to ask. Somewhere there is an exposure of the American taxpayer. Senator Coburn. OK. Mr. Pointer. Senator, may I add something on that? Senator Coburn. Sure. Mr. Pointer. I want to comment on the fact that, privately, as you mentioned, and as a private businessman on the front end of this, having a college degree, having post-graduate degrees, working with the small business that had been working with Fortune 500 companies prior to my starting my own business, you are so correct on the fact that when I looked at the SBA, after being turned down initially by several banks in the State of Tennessee, to know that, hey, here is a program. Yes, I am a minority, but the fact is that when you are sucked into that program, seeing, well, it is a few points below prime for me to enter, and yes, I could be classified as a small disadvantaged business, knowing that I wasn't economically or socially disadvantaged, those are the sort of taste buds that are out there that attracts people into this program. If it is legitimate, if it means something to the people, especially the small disadvantaged businesses, then it has to stand for it. It cannot just be a token program. And I ask that you guys mandate that the SBA really looks into this, and I ask that you guys, when you go to New Orleans, you will find that there are not a lot of certified--and I ask for you to look at the State of Louisiana's certification process as well as the SBA's process down there to see who is legitimately certified, either federally or in the State requirements, that are women- owned and minority-owned and veteran-owned to see how many of them are actually doing business in Katrina. Just don't get a fluff number, Senator, and bring it back. I think you will be disillusioned. And the last thing I want to add, sir, I ask and I pray--I brought my daughter here, Danielle, who is 16 years of age--you were talking about accountability and regulatory misuse. When my wife was in her birthing room 16 years ago to bring forth this wonderful child, the SBA were even in there trying to get us to sign affidavits and for me to wear live wire tapes and everything as far as with their concerns, but yet they could care less about how I was going to get restituted. Senator, I think these are issues that really need to be looked at. Senator Coburn. I would just--anybody that is hearing this testimony would do well to read the record of Mr. Pointer's full testimony. It doesn't speak well for our government and what has happened in the past and the lack of responsiveness, and I will leave it at that. I am going to come to you in just a second, Mr. Bean. Mr. Bartram, you all have access to profitability information about your members that is available only to your members, correct? Mr. Bartram. No. Basically, the only thing we could provide is what they would publicly disclose. But no, we don't have anything that would be of any kind of private information publicly. Whatever they have through---- Senator Coburn. You all haven't combined data associated with your association? Mr. Bartram. Nothing to do with---- Senator Coburn. No combined data at all associated with your association on profitability? Mr. Bartram. No. Senator Coburn. Mr. Shear, I want to ask you one question. In the GAO look at the SBA, do they measure economic outcomes according to real data or do they measure measurements that aren't associated with true economic outcomes? What does the GAO--I am saying, we see the number of loans, we see this and this. What is the economic impact of that and are they measuring the right thing? Mr. Shear. We haven't evaluated the effectiveness or economic impact of the programs in general. Senator Coburn. Has anybody? Mr. Shear. This is an area where there are certain data out there, none of which I would say are very convincing, on economic impact. It is clear that one can state who is--the characteristics of certain borrowers who receive these loans. In terms of saying what activity does it crowd out or who gets the loan, one business gets the loan rather than another. And let me go even further back, before there was any sense of monitoring the lenders and what they were giving out Federal guarantees for. We really didn't know, was it just somebody that was trying to leverage an investment further rather than a person that might have been able to put up the collateral? So the ``what if'' questions, what would happen if these borrowers did not get these loans, what would be the impact on those specific borrowers, but even what would be the impact in those local economies where those borrowers are operating? It gets to your question that why are there so many businesses, so many small businesses that don't rely on SBA? Well, one reason could be the zero subsidy or low subsidy, but part of it could be the absence of any information. What happens when somebody walks into the bank between what they have to do to get a conventional loan or an SBA loan? What happens there and how does that affect the economy? There is nothing that we have seen that is convincing. Senator Coburn. So your testimony, there is nothing out there in the literature that measures outcomes, that measures economic outcomes--in other words, the whole part of the PART system and the whole part of us in terms of our government ought to be if we have a purpose in mind and we fund a program in mind, there ought to be an end point at which we see and then we ought to measure it to see if we are getting there. And what I guess my question is, has anybody ever measured to see if we are getting there? We have some disputed testimony here today. There is no question about it. All I am asking is, where is the science? Where are the studies that would show, and has GAO ever been asked, what are the program's goals and is it meeting its goals? Is there an economic impact? Mr. Shear. We haven't been asked and---- Senator Coburn. Get ready. You are getting ready to be asked. Mr. Shear. OK. We like to serve the Congress, and you are asking good questions. Senator Coburn. I have to ask Comptroller General Walker first, but I will ask. Mr. Shear. OK. But I am sure we would welcome it and I am sure the Comptroller General would welcome questions like that of trying to establish, if not, trying to resolve the controversies, but at least of trying to identify what would be good indicators or good comparisons---- Senator Coburn. Measures. Mr. Shear. What are good benchmarks to use to try to evaluate what the economic impact of the 7(a) and other programs are? Senator Coburn. And nobody should want to object that you would want to measure that to see if it is accomplishing what it says it is supposed to, right? Mr. Shear. I would hope not. Just as we said in the late 1990s, Congress and SBA and others should know how this Federal guarantee is being administered by private lending institutions, I am sure there were some that objected to that, but I think this is part of what we do to serve the Congress. Senator Coburn. That is fine. Thank you. Mr. Bartram, I asked the question wrong, so I apologize. On your website, you claim to have ready access to the following data: A list of the top 30 SBA lenders by dollar and volume, 1998 to present; SBA's total loan portfolio for both 7(a) and 504 programs, 2004 to present; 7(a) and 504 loan volume by State, 1998 to present; 7(a) and 504 loan volume by industry, 2004 to present; how often 7(a) and 504 loans failed by industry; and 7(a) program loss reports, 1975 to present. You all do have that data? Mr. Bartram. Correct. Senator Coburn. Can you share that with the Subcommittee? Mr. Bartram. Certainly. I don't see any objection. Senator Coburn. Thank you. That is what I was looking for. I misstated the question. Mr. Bartram. OK. Senator Coburn. And now, finally to Mr. Bean. You gave in your---- Mr. Bean. Before, just to add one thing, Mr. Chairman, in 1967 in a hearing much like this, I asked for the same data on measuring impact. The SBA coughed up some tables. I asked what the data was and then said they couldn't locate it. So the question was asked in 1967 and you are probably the first one-- -- Senator Coburn. Mr. Bean, I have a reputation of not taking no for an answer, and I assure you, if we ask, we will get the information. You had some suggestions to eliminate waste, fraud, and abuse associated with the SBA. Would you share those with us, and we will finish up after this. Mr. Bean. Sure. I am glad to be here with Veronique and with my friend, John Pointer. The SBA has dodged some very fundamental issues which I think make waste, fraud, and abuse systemic in many of its programs, particularly contracting, Section 8(a), but not exclusively those. We start with definitions. There were attempts in the past to reform size standards. You asked SBA Administrator Barreto, how large is a small business, and he gave you an answer. He whipped up a number. He has no idea where those numbers came from. They were concocted not by an economist, but by a bureaucrat in the 1950s and 1960s and are encrusted in SBA code. They are arbitrary. There is a mismatch between the man-in-the-street definition of small business, which is family-owned, locally- owned, independently owned and operated, and the SBA's statistics as a result are absolute junk, which I think Veronique implied, but I will state more forcefully. It relies on self-certification, as Mr. Barreto noted, and self- certification. So the agency needs to take a real hard look at the definition of small business because it has policy consequences which turned up in one of your previous charts with affiliates and subsidiaries of large corporations receiving benefits that they shouldn't. The same with the definition of disadvantaged. Most people think of a disadvantaged person as being poor. The net worth of the typical disadvantaged business enterprise receiving a Section 8(a) contract is greater than the average American, and we hear disadvantaged and minority used interchangeably. The U.S. Civil Rights Commission has asked the SBA and other agencies to come up with race-neutral alternatives to get in conformance with civil rights law. So the SBA has gotten on this wave of getting credit for creating minority jobs. These programs were originally intended, rightly or wrongly, to help people like Mr. Pointer, African Americans who had a history of discrimination. The statistics that Veronique discussed, 29 percent of the loans went to minorities, I saw almost two-thirds of those went to Asians. Throw in Hispanics, you have 11 percent go to African Americans. So there is a great deal of support for these programs based on a rather dubious definition of disadvantaged. So I think that SBA needs to look at the Civil Rights Commission's report on redefining disadvantaged. Second, in terms of reporting, they can't rely on self- policing. It needs to measure impact. I work at a university. We have to measure impact. We have to produce data on graduation rates for our students. We follow cohorts. If you are not going to do it for all small businesses, do it for cohorts. Find some way to do it. The rest of the world has to do it. Third, the SBA is a conglomerate agency with many different missions. It is stretched far too thin. It has 3,300 employees, I believe, which was the number it had in 1965. I am not arguing for a massive increase in the SBA bureaucracy. On the contrary, I think it should be stripped of certain functions. They wouldn't say this publicly, but in interviews with me, since they were now retired, prior SBA administrators said that they wanted to have disaster lending removed from their purview because it was a people-eater during times of crisis, so that would be one concrete suggestion, to consider removing and relocating disaster lending. Privatize SCORE, Service Corps of Retired Executives, which has the loosest connection with the SBA. Spin off the SBDCs, which are affiliated with universities, to the Department of Education. This is a small agency which does a great deal of harm in some cases to certain small businesses and profits others, particularly bankers. There are good people at the SBA doing good work, but they cannot police a vast small business community and that is why we have this rampant fraud continually in small business certification, in 8(a) certification. I just got on the Internet, the SBA Inspector General has another report on fraud, 8(a) contracting, an Asian Indian woman, $500 million in contracts because she is disadvantaged. That doesn't resonate with the American people and the SBA shouldn't get away with it. Senator Coburn. All right. Mr. Bean. Oh, and one last suggestion--two last suggestions. To deal with situations like John Pointer's, give the SBA more teeth, the ability to fine or to bar fraudulent contractors or large corporations from further contracting. They have done that at the municipal level to deal with minority fraud. They can do it at the Federal level. And offer some protection and compensation for whistleblowers like John Pointer, who may not be in the government but have information. And last but not least, I believe you are a doctor, is that correct? Senator Coburn. I am. Mr. Bean. I think it was the classical version of the Hippocratic Oath that said, first, do no harm. The Congress should be the watchdog of small business when it formulates its legislation, not the SBA, which is a bureaucratic mosquito. I hope that Congressmen and women, when they frame laws, will think of the intended consequences and not rely on the SBA. Senator Coburn. Well, I want to thank each of you for being here. The purpose of this hearing is to make the government efficient, to look and see if we are achieving the goals that we need to be achieving, do we have measurement techniques and processes in place, and to hear all viewpoints. I think we got to do that today. You each will receive some written questions from us, which we would very much appreciate you answering in a timely manner. I want to thank you for taking the time to prepare testimony and also the time to be here to give it, and I am sorry this hearing lasted so long. Thank you so much. The hearing is adjourned. 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