[Senate Hearing 109-492]
[From the U.S. Government Printing Office]

                                                        S. Hrg. 109-492



                               before the

                         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

28-236                      WASHINGTON : 2006
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                   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

                         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:
    Senator Coburn...............................................     1
    Senator Carper...............................................     9
Prepared statement:
    Senator Levin................................................    47

                        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


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



                        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.


    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 
    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 
    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 
    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 
    [The prepared statement of Senator Coburn follows:]


    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 
    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 


    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 
    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
      General Dynamics

    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 
    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.


    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 

      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 
      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.

                   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 
    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 
    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 
    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 
    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.


    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 
    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 
    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 
    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 
    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 
    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 
    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.


    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 
    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 
    The reality is that more than 90 percent of businesses 
aren't anywhere close to that. Most small businesses are very 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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.


    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.

                      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 
    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 
    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.


    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.


    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 
    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 
    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.


    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 
    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 
    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 
    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 
    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) 
    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 
    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 
    Senator Coburn. You are markedly decreasing the risk, 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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.
    [Whereupon, at 4:45 p.m., the Subcommittee was adjourned.]

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